T.C. Mem o. 2 01 6- 64

UNITED STAT ES TAX COURT

JAM ES E. PHILBRICK, Pe ti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 18 38 4- 12 . Fi le d Ap ril 13 , 20 16 . Ja m es E. Phi lb ric k, p ro se. Sco ttW . For

bo rd , forres po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION BUCH, Ju dg e: The Co m m is si on er i ss ue d ano ti ce o f de fic ie nc y de te rm in in g a$1 9,3 61 de fic ie nc y an d a$4 ,99 7 s ect io n 6 65 1( a)(1 ) ad di ti on to tax an d a$3 ,87 2 s ect io n 6 66 2( a) ac cu racy-rela te d p en al ty w it h re sp ectto James E.- 2 -

[* 2] Ph il br ic k’s Fe de ral in co m e ta x fo r 20 00 . The d efi ci en cy rel at es to expe ns es 1 rep orte d o n M r. Ph il br ic k’s Sc he du le C, Pro fitor Lo ss Fro m Bu si ne ss . The i ss ue s fo r co ns id erat io n a re wh ethe r Mr. Ph il br ic k m ay de du ctcert ai n S ch edul e C ex pe ns es ; wh ethe r Mr. Ph il br ic k i s l iabl e fo r a s ect io n 6 65 1( a)(1 ) ad di ti on to tax fo r fai lu re t o t im el y

fil e; an d wh ethe r Mr. Ph il br ic k i s l iabl e fo r a s ect io n 6 66 2( a) accu racy-rela te d p en al ty for anun de rp aym en t o f ta x a tt rib ut ab le to ne gl ig en ce, di sr eg ardof rul es or r eg ul at io ns , or asubs tant ia l u nd ers ta te m en t o f in co m e ta x. On t he ba si s o f th e ev id en ce p res en te d a t tria l, we fi ndth atMr. Ph il br ic k di d n otsat is fy

hi s b ur de n o f pr oo f fo r th e d is al lo wedSch edul e C ex pe ns e de du ct io ns . W e fi ndth atMr. Ph il br ic k i s l iabl e fo r a s ect io n 6 65 1( a)(1 ) ad di ti on to tax be cau se he fai le d t o t im el y fil e h is return a ndbe cau se he di d n otest ab li sh th athi s fa il ur e to ti m el y

fil e was du e to reas on ab le cau se an d n otwil lfu l n eg le ct . Lik ewis e, Mr. Ph il br ic k i s l iabl e fo r a s ect io n 6 66 2( a) ac cu racy-rela te d p en al ty for anun de rp aym en t o f ta x a tt rib ut ab le to a subs tant ia l und ers ta te m en t o f in co m e ta x be cau se th e Co m

m is si on er es tabl is he d t ha t M r. Ph il br ic k’s u nd ers ta te m en t ex ceed edth e g reat er o f 10 % of t he tax requi redto be sh own on th e return o r Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al 1 Rev enue Co de (Co de ) in effe ctforth e y ear i n i ss ue , andall Ru le refe ren ces are t o th e Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e. All m on et ary am ou nt s ar e ro un de d t o t he ne ares t d ol la r.- 3 -

[* 3] $5 ,00 0 andbe cau se Mr. Ph il br ic k d idno t es tabl is h t ha t h e h adreas on ab le cau se an d a ct edin go odfai thwith re sp ectto an y po rti onof t he un de rp aym en t. FINDINGS OF FACT In20 00 , th e y ear i n i ss ue , Mr. Ph il br ic k o pe rat eda bu si ne ss , Skyhawk Marke ti ng , whi ch he rep orte d o n S ch edul e C an d wh ic h s ol d c ab le an d i ns ta ll at io n se rv ic es insev enMi dwe st ernst at es . In 2 00 0 S kyhawkMark et in g’s ac co un ta nt an d a tt orne y , Pau l Geo rg ia , in co rp or at edSkyha wk M ark et in g a s Hawk ey e Cab le , In c. Mr. Ph il br ic k d idno t fi le hi s 2 00 0 F orm 10 40 , U.S. Ind iv idua l In co m e Tax Return, o n t he pre sc rib eddu e d at e. So m et im e aft er the return i n i ss ue was re qu ire d t o h av e b een fil ed , Mr. Geo rg iaem

be zzl edfro m

Sky ha wk M ark et in g a ndst ol e Mr. Ph il br ic k’s re co rd s, in cl ud in g t he bu si ne ss reco rd s fo r Sky ha wk M ark et in g. Al th ou gh Mr. Ph il br ic k m ad e v ari ou s at te m

pt s t o re tri ev e th e rec or ds , Mr. Geo rg iaha s n otreturne d t he m . Mr. Ph il br ic k fi le d h is 20 00 Fed eral in co m e ta x re tu rnon Octo be r 27 , 20 09 . Mr. Ph il br ic k u se d atax return p rep arat io n c om pa ny andpro vi de d i t wi th all do cu m en ts st il l i n h is po ss es si on . On h is 20 00 return M r. Ph il br ic k i nc lu de d aSch edul e C fo r Skyhawk Marke ti ng . Am on g o th er ex pe ns es rep orte d, M r. Ph il br ic k re po rte d l eg al an d- 4 -

[* 4] pr of es si on al ex pe ns es of $ 11 ,98 0, m eal s an d e nt ert ai nm en t ex pe ns es of $8 ,44 7, trav el ex pe ns es of $ 13 ,15 6, re pa ir a ndm ai nt en an ce ex pe ns es forhi s ve hi cl es of $ 11 ,29 4, an d c ar an d t ru ckex pe ns es of $ 15 ,07 4. The Co m m is si on er i ss ue d ano ti ce o f de fic ie nc y on Apri l 1 9, 2 01 2. Fo r la ck of subs ta nt ia ti on , th e Co m

m is si on er d is al lo wedde du ct io ns forleg al an d pr of es si on al servi ces , m eal s an d e nt ert ai nm en t, trav el , rep ai rs an d m ai nt en an ce, an d c ar an d t ru ckex pe ns es . The Co m m is si on er al so m ad e o th er co rrel at iv e ad jus tm en ts . Add it io na ll y , th e Co m m is si on er d et erm in eda se ct io n 6 65 1( a)(1 ) ad di ti on to tax forfai lu re t o t im el y fil e an d asec ti on66 62 (a) a ccu racy-rela te d pe na lty . Whi le res id in g i n Wis co ns in , Mr. Ph il br ic k t im el y pe ti ti on ed . OPINION I. Bu rd enof P ro of Inge ne ral , th e Co m

m is si on er’s d et erm in at io ns in a no ti ce o f de fic ie nc y are pr es um edco rrec t, an d atax pa y er b ears th e b ur de n o f pr ov in g o th erwi se . 2 Altho ug h t he bu rd enm ay sh iftto th e Co m

m is si on er und er s ect io n 7 49 1( a) i f cert ai n re qu ire m en ts are m et , Mr. Ph il br ic k h as no t cl ai m edth atth e b ur de n h as sh ift ed , andth e rec or d d oe s n otsupp ort s hi fti ng th e b ur de n t o t he Co m m is si on er. Ru le 14 2( a); W el ch v. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ). 2- 5 -

[* 5] The tax pa y er b ears th e b ur de n o f pr ov in g t ha t h e is en ti tl edto an y de du ct io n. Add it io na ll y , th e ta xp ay er m us t m ai nt ai n s uf

fic ie ntreco rd s “ to sh ow 3 whe th er o r no t s uc h p ers on is li ab le fortax ”. Andin so m e in st an ces , hei gh te ne d 4 subs ta nt ia ti on requi rem en ts m ay ap pl y . Reg ard le ss of wh ethe r th es e h ei gh te ne d

5 subs ta nt ia ti on requi rem en ts ap pl y , Mr. Ph il br ic k d idno t co m e fo rwardwith a ny ev id en ce t o s ho w th athe is en ti tl edto de du ctth e d is al lo wedSch edul e C ex pe ns es . Acco rd in gl y , we su st ai n t he Co m m is si on er’s d et erm in at io n t o d is al lo w a de du ct io n fo r th os e ex pe ns es . II. Add it io n t o Tax for Fai lu re To Fil e Sect io n 6 65 1( a)(1 ) im

po se s an ad di ti on to tax forfai li ng to ti m el y fil e a Fed eral in co m e ta x re tu rnun le ss itis sh own th atth e fai lure i s due to reas on ab le cau se an d n otdu e to wil lfu l n eg le ct . The Co m m is si on er b ears th e b ur de n o f pr oduc ti on forth is ad di ti on to tax be fo re the bu rd ensh ift s t o t axpa y ers to pro ve

Ru le 14 2( a); INDOPCO, In c. v. Co m m is si on er, 5 03 U.S. 79 , 84 (19 92 ). 3 Sec. 6 00 1. 4 See, e.g ., sec . 27 4( d) ; s ee al so Fle m in g v . Comm is si on er, T.C. Mem o. 5 20 10 -6 0, 2 01 0 WL 12 22 27 6, at*2 -* 3; sec . 1.2 74 -5 T, Tem po rary Inco m e Tax Reg s., 5 0 F ed . Reg . 46 01 4 (No v. 6 , 19 85 ).- 6 -

[* 6] th atth e ad di ti on to tax sh ou ldno t ap pl y . Mr. Ph il br ic k fi le d h is 20 00 return 6 on Octo be r 27 , 20 09 . There fo re, the Co m m is si on er m ethi s b ur de n. A tax pa y er i s n otli ab le forth e ad di ti on to tax if h e sh ows th e la te ne ss was du e to reas on ab le cau se an d n otdu e to wil lfu l n eg le ct . Mr. Ph il br ic k d idno t 7 pr ov id e an y

ev id en ce tha t h is lat en es s was du e to reas on ab le cau se an d n otwil lfu l ne gl ect . Andth e th eftof h is reco rd s d oe s n otjus ti fy fil in g a n u nt im el y

return whe n, as he re, the reco rd s wer e st ol enaft er the return was du e. Acco rd in gl y , Mr. 8 Ph il br ic k i s l iabl e fo r a s ect io n 6 65 1( a)(1 ) ad di ti on to tax forfai lure t o t im el y fil e. III. Accu racy-Rel at edPen al ty Sect io n 6 66 2( a) an d (b ) im po se s a 2 0% a ccu racy-rela te d p en al ty on a ny po rti onof a n u nd erp aym en t o f ta x t ha t i s due to , am on g o th er thi ng s, an y ne gl ig en ce o r di sr eg ardof rul es or r eg ul at io ns or asubs ta nt ia l u nd ers ta te m en t o f in co m e ta x. Th e te rm

“ ne gl ig en ce” i nc lu de s an y fai lu re t o m ak e a rea so nabl e at te m ptto co m pl y with t he pro vi si on s o f th e Co de , andth e te rm “ di sr eg ard ”

See s ec. 7 49 1( c); Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 46 -4 47 (20 01 ). 6 Sec. 6 65 1( a)(1 ); Hi gb ee v . Comm is si on er, 1 16 T.C. at 4 46 -4 47 . 7 See C ha m

be rli n v . Comm is si on er, T.C. Mem o. 2 00 0- 50 , sl ip op . at 2 8, 8 aff’d, 1 4 F . App ’x 69 (2dCir . 20 01 ).- 7 -

[* 7] in cl ud es an y

care le ss , reck le ss , or i nt en ti on al di sr eg ard . An u nd ers ta te m en t 9 of in co m e ta x i s “ subs ta nt ia l” when th atun de rs ta te m en t ex ceed s the gre at er o f 10 % of t ax requi redto be sh own on th e return o r $5 ,00 0. 1 0 The Co m m is si on er b ears th e b ur de n o f pr oduc ti on forth es e p en al ti es be fo re th e b ur de n s hi fts to tax pa y ers to pro ve th atth e p en al ty sho ul d n otap pl y . Mr. 1 1 Ph il br ic k d idno t p res en t the Co m m is si on er wi than y

ev id en ce t o s ub st an ti at e h is di sa ll owe d e xp en se s, an d we s us ta in edth e Co m m is si on er’s d efi ci en cy . In d oi ng so , Mr. Ph il br ic k’s u nd ers ta te m en t ex ceed s 1 0% o f ta x re qu ire d t o b e sh own on th e return, wh ic h i s g reat er tha n $ 5,0 00 . There fo re, Mr . Phi lb ric k’s un de rs ta te m en t o f in co m e ta x i s s ub st an ti al . Accor di ng ly, th e Co m m is si on er h as m ethi s b ur de n o f pr oduc ti on fora subs ta nt ia l u nd ers ta te m en t o f in co m e ta x. 1 2

Sec. 6 66 2( c). 9 Sec. 6 66 2( d) (1 )(A). 1 0 See s ec. 7 49 1( c); Hig be e v . Comm is si on er, 1 16 T.C. at 4 46 -4 47 . 1 1 The ne gl ig en ce an d s ub st an ti al un de rs ta te m en t p en al ti es ap pl y in th e 1 2 al te rn at iv e. Sec. 1 .66 62 -2 (c), In co m e Tax Reg s. Hav in g d et erm in edth atth e subs ta nt ia l u nd ers ta te m en t p en al ty app li es , we nee d n otreac h t he is su e o f whe th er th e n eg li ge nc e p en al ty w ou ldap pl y in th e al te rn at iv e.- 8 -

[* 8] The pe na lt y

do es no t ap pl y

to an y po rti on of t he un de rp aym en t wh ere the ta xp ay er es tabl is he s t ha t h e h adreas on ab le cau se an d a ct edin go odfai th . All of 1 3 th e p ert in en t fa ct s an d c irc um st an ces are t ak enin to acco un t i n d et erm in in g whe th er the tax pa y er h adreas on ab le cau se an d a ct edingo odfai th . A tax pa y er 1 4 m ay est ab li sh th athe ha d re as on ab le cau se an d a ct edin go odfai th as ares ul t o f lo stor s to le n re co rd s. In St ewartv. Co m m is si on er, T.C. Mem o. 2 01 0- 18 4, the 1 5 Co urt fo un d t ha t the tax pa y er h adreas on ab le cau se an d a ct edingo odfai th as a res ul t o f lo stor s to le n re co rd s fo r th e p orti onof t he ex pe ns es wher e th e ta xp ay er m ai nt ai ne d p ro pe r rec or ds to subs tant ia te th e ex pe ns e, th e ta xp ay er re as on ab ly at te m pt edto retrie ve th e rec or ds , andth e ta xp ay er at te m pt edto reco ns tru ctth e reco rd s. Mr. Ph il br ic k d idno t h av e a rea so nabl e cau se or a ctin go odfai th . Altho ug h M r. Ph il br ic k t es ti fie d t ha t h e h adanacco un ta ntforSkyha wk M ark et in g an d t he acco un ta ntto okhi s re co rd s, h e d idno t d em on st rat e th athe m ai nt ai ne d

Sec. 6 66 4( c)(1 ). 1 3 Hig be e v . Comm is si on er, 1 16 T.C. at 4 48 ; s ec. 1 .66 64 -4 (b )(1 ), In co m e 1 4 Tax Reg s. St ewartv. Co m

m is si on er, T.C. Mem o. 2 01 0- 18 4, 2 01 0 WL 32 39 17 6, at 1 5 *1 0; see als o Al le m ei er v . Comm is si on er, T.C. Mem o. 2 00 5- 20 7, 2 00 5 WL 20 92 91 9, at*8 .- 9 -

[* 9] pro pe r rec or ds be fo re the reco rd s wer e st ol enor a tt em ptto reco ns tru cthi s reco rd s. Acco rd in gl y , Mr. Ph il br ic k i s l iabl e fo r a s ect io n 6 66 2( a) ac cu racyrel at edpe na lty . On t he reco rdbe fo re u s, we fi ndth atMr. Ph il br ic k fa il edto est ab li sh th athe is en ti tl edto de du cthi s Sc he du le C ex pe ns es . Mr. Ph il br ic k i s l iabl e fo r a s ect io n 66 51 (a)( 1) ad di ti on to tax be cau se he ha s n otest ab li sh edth athi s re turnwas l at e du e to reas on ab le cau se an d n otwil lfu l n eg le ct . Like wis e, Mr. Ph il br ic k i s l iabl e fo r a s ect io n 6 66 2( a) ac curacy-rela te d p en al ty becau se th e Co m m is si on er es tabl is he d t he re was a subs ta nt ia l u nd ers ta te m en t an d M r. Ph il br ic k d idno t es tabl is h t ha t h e h adreas on ab le cau se an d a ct edingo odfai th . To re fle ctth e fo reg oi ng , Deci si on wil l b e en te redfor res po nd en t.