United States Tax Court

T.C. Memo. 2023-140

KUNJLATA J. JADHAV AND JALANDAR Y. JADHAV,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 12520-19. Filed November 21, 2023.

—————

Dustin R. Jeffords and Philip M. Anthony, for petitioners.

Ardney J. Boland and Emile L. Hebert, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

VASQUEZ, Judge: Respondent determined deficiencies in 

petitioners’ federal income tax and section 6662(a) accuracy-related 

penalties for underpayments due to substantial understatements of 

income tax as follows:1

Year Deficiency Penalty

§ 6662(a)

2014 $265,990 $53,198.00

2015 204,817 40,963.40

2016 141,039 28,207.80

2017 50,727 10,145.40

1 Unless otherwise indicated, statutory references are to the Internal Revenue 

Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the 

Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and

Rule references are to the Tax Court Rules of Practice and Procedure.

Served 11/21/23
2

[*2] In an Amended Answer filed November 12, 2019, and a Second 

Amended Answer lodged October 21, 2020, respondent alleged increased 

deficiencies and section 6662(a) accuracy-related penalties for 2015, 

2016, and 2017 as follows:

Year Deficiency after increase Penalty after increase

§ 6662(a)

2015 $248,587 $49,717.40

2016 167,730 33,546.00

2017 157,078 31,415.40

After concessions,2 the issues for decision are whether

(1) petitioners may deduct a pension contribution for taxable year 2014,

(2) petitioners’ S corporation may deduct marketing fees for the years in 

issue, (3) petitioners’ S corporation may deduct rent paid (or purportedly 

paid) to petitioners during the years in issue, (4) petitioners and/or their 

S corporation may deduct travel expenses for the years in issue, and 

(5) petitioners are liable for section 6662(a) accuracy-related penalties 

for the years in issue.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. We 

incorporate the First Stipulation of Facts, First Supplemental 

Stipulation of Facts (as amended by the First Supplement to First 

Supplemental Stipulation of Facts), and accompanying Exhibits by this 

reference.3 Petitioners resided in Texas when the Petition was timely 

filed.

Business and family background

Petitioner husband, Jalandar Y. Jadhav, received a Ph.D in 

chemistry on a date not established by the record. At all relevant times 

he worked for Mobile Rosin Oil Co., Inc. (Mobile), as a salaried employee. 

As an executive for Mobile, petitioner husband was responsible for 

2 On May 18, 2020, the parties filed a Stipulation of Settled Issues. Therein 

petitioners conceded that (1) they had underreported gross receipts for the years in 

issue and (2) they had failed to report a taxable state income tax refund for 2014. The 

Stipulation of Settled Issues also includes partial concessions by the parties regarding 

petitioners’ S corporation’s “other” deductions for the years in issue. We address those 

concessions infra notes 9 and 13.

3 Respondent reserved objections to portions of stipulated Exhibits 20-P, 29-P, 

and 30-P, and we reserved ruling on the admissibility of those documents at trial. We 

overrule respondent’s objections.
3

[*3] increasing sales, developing new marketing ideas, and learning 

new areas of technology. During the years in issue Mobile paid him a 

yearly salary ranging between $154,000 and $159,000.

In addition to working for Mobile, petitioner husband owned and 

operated a sole proprietorship from 2006 to 2014. Doing business as 

“K J Marketing,” petitioner husband identified new markets for

chemical producers and connected them with potential customers. K J 

Marketing earned commissions on sales to the customers petitioner 

husband identified. For 2006 through 2014 petitioners reported K J 

Marketing’s income and expenses on Schedules C, Profit or Loss From 

Business. For reasons not explained by the record, petitioners named

petitioner wife, Kunjlata Jadhav, as the owner of K J Marketing on their 

tax returns. Petitioner wife, who did not testify at trial, worked as a 

substitute teacher until 2014.

K J Marketing maintained a section 401(k) retirement plan with 

Oppenheimer Funds (Oppenheimer). On April 10, 2015, petitioners

mailed Oppenheimer a $104,350 check payment to cover contributions 

to the accounts of petitioner wife and their two sons, Veerendra and 

Arjun Jadhav, for taxable year 2014. Petitioners instructed 

Oppenheimer to allocate the $104,350 payment as follows:

Petitioners viewed K J Marketing as a family business and 

wished to pass it on to Veerendra and Arjun. Petitioner husband started 

training his sons when they were in high school. While Veerendra and 

Arjun were in college, he assigned them research tasks and oversaw 

their work. Veerendra attended the University of Alabama in 
4

[*4] Birmingham, Alabama, from 2006 to 2015, and Arjun attended the 

University of South Alabama in Mobile, Alabama, from 2009 to 2015.

Petitioners’ residential properties

In 2005 petitioners purchased a residential property in Daphne, 

Alabama (Daphne property). Petitioners used the Daphne property as

their primary residence until 2014 when they moved to Spring, Texas.

In or about 2009 petitioners purchased a residential property in 

Birmingham, Alabama (Birmingham property). Veerendra resided at 

the Birmingham property while attending the University of Alabama. 

In November 2015 petitioners sold the Birmingham property.

In 2010 petitioners purchased a residential property in Mobile, 

Alabama (Mobile property). Arjun resided at the Mobile property while 

attending the University of South Alabama. In November 2015

petitioners sold the Mobile property.

In 2013 petitioners purchased a residential property in Spring, 

Texas (Spring property). Petitioners moved to the Spring property in 

2014, and it was their primary residence at the time of trial.

Income tax plan

By 2014 K J Marketing was generating substantial income.4 

Around that time petitioners engaged Capital Protection Services, LLC

(CPS), to evaluate their organizational structure, facilitate succession 

planning, and reduce their tax exposure. For $50,000 CPS provided 

petitioners a 183-page “Income Tax Plan” (Plan). After interviewing 

petitioners and reviewing their financial information,5 CPS estimated 

that petitioners’ “average tax rate” (ratio of tax to taxable income) was 

37%. CPS stated that, if petitioners adopted the recommendations in 

the Plan, they could reduce their “average tax rate” to 9%. According to

CPS, petitioners could achieve that goal by restructuring their business 

to facilitate greater tax deductions. CPS explained:

4 On their 2014 Schedule C petitioners reported gross receipts of $897,133 and 

net profit of $619,505.

5 CPS stated in the Plan: “We have reviewed your situation, and we have 

reviewed your 1040 income tax return for 2013. Additionally we personally met and 

discussed your situation. You are married. You have 2 children. The children work in 

the business.”
5

[*5] [M]arginal rates are important for measuring income tax 

saving from deductions. The marginal rate is the rate 

applied to the last Dollar [sic] earned. If a deduction can 

be created, that deduction will create income tax savings at 

the marginal rate. So if your marginal rate is 48.40%, for 

each $100 of deduction created, tax savings of $48 will 

occur.

In accordance with the above strategy, CPS advised petitioners to 

(1) convert K J Marketing to an S corporation and (2) rent their 

residential properties to the S corporation “for business purposes at a 

reasonable per day rate supported by independent comparables.” Under 

the Plan, the S corporation would rent each of petitioners’ residential 

properties for a maximum of 14 days and deduct that expense on its 

income tax return. Petitioners, in turn, would exclude their 

corresponding rental income pursuant to section 280A(g).

CPS included a tax saving projection in the Plan. For purposes of 

that projection, CPS “assumed” that one of the residential properties

had a per-day rental rate of $2,500 and that each of the other three 

properties had a per-day rental rate of $2,000. Despite those 

assumptions, CPS warned petitioners that the rental rates “should be 

supported by independent comps [sic] within a 100 mile radius.” CPS 

also suggested that petitioners retain a professional appraiser to value 

the rental rate every three years.

Another component of the Plan was the creation of a

C corporation, which would provide “marketing” services to the 

S corporation. Under the Plan, the S corporation would pay the 

C corporation a yearly marketing fee, which “should not exceed more 

than 10%” of the S corporation’s gross income. The C corporation, in 

turn, would pay and deduct on its income tax returns the following 

expenses: (1) deferred compensation plan payments, (2) tuition for 

petitioners’ sons, (3) medical expenses and disability plans for 

petitioners’ family, (4) overtime and weekend meals for the employees, 

(5) meals for petitioners’ family “for the convenience of the employer,”

and (6) salaries to petitioners’ children. As for the nature of the 

marketing services, the Plan states: “The C Corporation should pay for 

marketing expenses for the benefit of the Operating Entity [the S 

corporation]. These expenses may be for items such as promotional

materials and little league sponsorships showing that this company is 

very active.”
6

[*6] The Plan also includes an unsigned legal opinion from attorney

T. Walton Dallas,6 stating: “We have determined that in the event that 

the taxpayer is challenged by the IRS, it is more likely than not that the 

taxpayer will be entitled to the income tax benefits described” in the 

Plan. That conclusion, however, had several caveats. For one, Mr. 

Dallas gave “no opinion as to the fair market value of any item for any 

deduction or credit taken.” Mr. Dallas also made “no representation as 

to the reasonableness of any item” and “assumed there is a substantial 

and proper business purpose for each component of the tax plan, the 

structure of any entities, and the participation of any persons.”

KJJJ Marketing, Inc.

In December 2014 petitioners organized KJJJ Marketing, Inc. 

(KJJJ), under the laws of Texas. Petitioners used KJJJ to conduct the 

business they had previously done as K J Marketing. Petitioner wife 

was the sole owner of KJJJ, which elected to be treated as an

S corporation for income tax purposes. During 2015, 2016, and 2017,

Veerendra and Arjun were employees of KJJJ.7

Before engaging CPS, petitioner husband used hotels and 

restaurants to conduct business meetings for K J Marketing. In 2014

petitioners moved those meetings to the Daphne, Birmingham, Mobile, 

and Spring Properties. After KJJJ’s incorporation, petitioners began 

charging rent to the S corporation for the use of those properties. 

Pursuant to the Plan, KJJJ rented each of their residential properties

for a maximum of 14 days. In 2014 petitioners invoiced KJJJ as follows:

Property Daily

rental rate

Days

rented

Total

rent

Daphne $2,500 14 $35,000

Birmingham 2,000 14 28,000

Mobile 2,000 14 28,000

Spring 2,000 14 28,000

 Total $119,000

6 CPS disclosed that Mr. Dallas (or his family) had a financial interest in its 

tax planning business and advised petitioners to ask their tax return preparer or 

separate legal counsel to review the Plan. Although Mr. Dallas is listed as one of 

petitioners’ counsel, he did not participate in the trial of this case. Petitioners also 

signed a conflict waiver, which we admitted into evidence at trial. See Rule 24(g)(1).

7 As of the trial date, Veerendra was still a fulltime employee of KJJJ.
7

[*7] In 2015 petitioners invoiced KJJJ as follows:

Property Daily

rental rate

Days

rented

Total

rent

Daphne $2,500 14 $35,000

Mobile 2,000 14 28,000

Spring 2,000 14 28,000

Total $91,000

In 2016 petitioners invoiced KJJJ as follows:

Property Daily

rental rate

Days

rented

Total

rent

Daphne $2,500 14 $35,000

Total $35,000

In 2017 petitioners invoiced KJJJ as follows:

Property Daily

rental rate

Days

rented

Total

rent

Daphne $2,500 14 $35,000

Spring 2,000 14 28,000

Total $63,000

Petitioners did not obtain any appraisals of their properties for 

purposes of valuing the above-described daily rental rates. Instead they 

used the rates CPS had assumed for purposes of making a tax saving

projection in the Plan.

JYJ Marketing, Inc.

In November 2014 petitioners incorporated their new 

“marketing” company, JYJ Marketing, Inc. (JYJ), pursuant to the Plan. 

Organized as a C corporation under the laws of Texas, JYJ issued 4 

shares of stock to petitioner husband, 48 shares to an unrelated

individual, and 48 shares to another unrelated individual.8 Petitioners, 

Veerendra, and Arjun (collectively, Jadhav family) were appointed 

directors and part-time employees of JYJ. At the initial meeting of 

shareholders and directors, the Jadhav family in their capacity as 

8 In the Plan, CPS advised petitioners against owning more than 50% of the 

C corporation for reasons not relevant to the resolution of this case. CPS recommended 

that petitioners find two unrelated individuals to hold 96% of the C corporation’s 

shares.
8

[*8] directors adopted several plans for the benefit of JYJ’s employees, 

including plans for (1) medical expense reimbursement, (2) overtime and 

weekend meal reimbursement, (3) meals furnished for the convenience 

of the employer, (4) mileage, (5) dwelling unit leasing, (6) tuition, and 

(7) fitness and country club expenses.

With respect to JYJ’s marketing activities, the minutes from the 

initial board meeting state:

A new Marketing Company has been formed and 

marketing activities are allocated by written agreement to 

the new Marketing Company. The Marketing Company 

conducts marketing events at the house of the Employee. 

Also employee meetings are now being held at the house of 

the Employee.

As the marketing activities are being conducted by a 

separate legal entity, the Operating Company is not liable 

for those activities. This allows more marketing events to 

be conducted as the Operating Company will be free from 

liqueur liability and slip and fall liability.

While all marketing decisions were made at the Operating 

Company level, now those decisions are being made at the 

Marketing Company level.

During the years in issue, KJJJ made yearly payments to JYJ for 

purported marketing services. The marketing fees were JYJ’s only 

source of income. KJJJ paid JYJ as follows:

2014 2015 2016 2017

Marketing fee $190,000 $170,000 $150,000 $110,000

JYJ used the marketing fees to pay several personal expenses of

the Jadhav family. It did not use any portion of the funds to pay KJJJ’s

marketing expenses. Nor did it host marketing or promotional events 

on KJJJ’s behalf, as the minutes of the initial board meeting had 

envisioned.

Tax reporting

Kenneth Walker, a certified public accountant (CPA), prepared

petitioners’ joint Forms 1040, U.S. Individual Income Tax Return, for 

the years in issue. Petitioners’ 2014 Form 1040 includes a Schedule C 
9

[*9] for K J Marketing. On that Schedule C petitioners claimed as a 

pension and profit sharing deduction their $46,850 contribution to their 

sons’ section 401(k) accounts. They also claimed a deduction of $68,063 

for travel expenses.

Petitioners selected Mr. Walker on a friend’s recommendation. 

They provided their new CPA information about the Plan and the

organizational changes to their business. After telling petitioner 

husband that he understood the Plan, Mr. Walker prepared income tax

returns for KJJJ and JYJ.

KJJJ filed Forms 1120S, U.S. Income Tax Return for an 

S Corporation, for the years in issue. For each year in issue, KJJJ 

deducted the rent petitioners had invoiced. We summarize KJJJ’s 

deductions for rent below:

2014 2015 2016 2017

Rent $119,000 $103,5009 $35,000 $63,000

KJJJ also claimed “other” deductions as follows:

2014 2015 2016 2017

Application fees $125 — — —

Insurance expense 165,195 $129,420 $106,197 $98,800

Marketing fees 190,000 170,000 150,000 150,00010

Conference expenses — 4,800 5,080 —

Contract labor — 11,200 5,800 —

Gifts — 7,600 3,600 3,600

Mileage reimbursement — 26,104 18,722 20,627

Office supplies — 43,700 22,890 8,250

Payroll processing fees — 657 1,274 —

Product development — 32,400 15,900 —

Professional fees — 12,994 9,743 3,040

Travel — 17,125 11,311 23,964

9 For 2015 KJJJ’s deduction for rent comprised $91,000 for the use of 

petitioners’ properties and $12,500 for the use of a mud pump. Respondent concedes

on brief that petitioners are entitled to a flowthrough deduction of $12,500 for the mud 

pump rental. 

10 There is a discrepancy between the reported marketing fee of $150,000 and 

the amount petitioners have substantiated, $110,000. We find that KJJJ paid JYJ

$110,000 in purported marketing fees in 2017.
10

Total $355,320 $456,000 $350,517 $308,281

 

After deducting its reported expenses, KJJJ reported ordinary 

business income of $10,945, $247,592, $104,944, and $268,563 for 2014, 

2015, 2016, and 2017, respectively. Petitioners reported those amounts 

on their Schedules E, Supplemental Income and Loss, for the years in 

issue. Petitioners also reported their rental income from KJJJ on their 

Schedules E but treated those amounts as excludable pursuant to 

section 280A(g).

JYJ reported the marketing fees it had received from KJJJ on 

Forms 1120, U.S. Corporation Income Tax Return, for its taxable years 

ending November 30, 2015, 2016, 2017, and 2018.11 Besides the 

marketing fees from KJJJ, JYJ did not report any income. It did not 

claim any deductions for officer compensation or wages but deducted 

several personal expenses of the Jadhav family including (1) out-ofpocket medical bills, (2) meals and entertainment, (3) petitioner 

husband’s mileage, (4) portions of Arjun’s and Veerendra’s tuition, 

(5) petitioners’ health club membership, and (6) lawn care.12 

Examination

In 2017 the Internal Revenue Service selected petitioners’, 

KJJJ’s, and JYJ’s returns for examination and assigned the case to 

Revenue Agent (RA) Kendria Vickers. With respect to KJJJ’s Forms 

1120S, RA Vickers fully disallowed the S corporation’s rent deductions 

for the years in issue. She also disallowed almost all of KJJJ’s “other” 

deductions. Of those items, only KJJJ’s reported marketing fees and 

travel expenses remain at issue.13

In a civil penalty approval form dated October 31, 2018, RA 

Vickers made an initial determination to assert accuracy-related 

11 On its initial Form 1120, JYJ elected a taxable year ending November 30.

12 CPS advised petitioners to treat the C corporation’s payment of several 

personal expenses as nontaxable fringe benefits, and petitioners appear to have 

employed that strategy. Respondent has not challenged petitioners’ treatment of the 

JYJ payments, so we need not address them further. 

13 RA Vickers allowed KJJJ’s 2014 deduction for application fees and its 2015 

and 2016 deductions for payroll processing fees. In the Stipulation of Settled Issues, 

respondent conceded that KJJJ may deduct its reported insurance expenses for the 

years in issue. Meanwhile, petitioners conceded that KJJJ is not entitled to deductions 

for conference expenses, contract labor, gifts, mileage reimbursement, office supplies,

product development, and professional fees.

[*10]
11

[*11] penalties for underpayments due to substantial understatements 

of income tax for the years in issue. RA Vickers’s then-immediate 

supervisor, Acting Group Manager Angela Harris, signed the civil 

penalty approval form on October 31, 2018.

On April 26, 2019, respondent issued petitioners two statutory 

notices of deficiency (SNODs) determining deficiencies and section 

6662(a) accuracy-related penalties for the years in issue.14 Respondent

increased petitioners’ passthrough income for the years in issue after

making the above-described adjustments to KJJJ’s rental and “other”

deductions. Because of clerical errors, however, the SNODs understate 

RA Vickers’ intended adjustments to petitioners’ passthrough income for 

2015, 2016, and 2017.

Respondent also made adjustments to petitioners’ 2014 

Schedule C in the SNOD for that year. Therein respondent disallowed 

petitioners’ Schedule C deductions for travel and pension and profit 

sharing expenses. 

With respect to JYJ, respondent did not determine any 

deficiencies against the corporation. Instead, respondent treated JYJ’s 

2015, 2016, and 2017 Forms 1120 as “sham” returns. Respondent 

refunded the amounts JYJ had paid as tax for those years.

Proceedings in this Court

In response to the SNODs, petitioners timely petitioned this 

Court, and respondent filed an Answer. Thereafter respondent filed a 

Motion for Leave to File an Amended Answer, in which he asserted 

increased deficiencies and accuracy-related penalties for 2015 and 2016

on the basis of the above-described clerical errors. Petitioners had no 

objection to the Motion, which we granted.

This case was set for remote trial at the Court’s October 13, 2020, 

Winston-Salem, North Carolina, trial session. On September 22, 2020,

respondent filed a Pretrial Memorandum. Therein respondent asserted 

an increased deficiency and accuracy-related penalty for 2017. 

Respondent’s counsel explained that he had recently discovered a 

clerical error in the 2017 SNOD, the correction of which would increase 

the deficiency and accuracy-related penalty for that year. Although 

petitioners stipulated a revised computation for 2017, at trial they 

14 The first SNOD covers 2014, 2015, and 2016; the second covers 2017.
12

[*12] objected to the increased deficiency for that year. After trial 

respondent filed a Motion for Leave to File Second Amended Answer to 

Conform Pleadings to Proof (Motion for Leave), to which petitioners

objected.

OPINION

I. Respondent’s Motion for Leave

Respondent moved under Rule 41(b) to amend his pleading to 

conform to the evidence submitted at trial. Respondent lodged with his 

Motion a Second Amended Answer asserting an increased deficiency 

and accuracy-related penalty for 2017. Respondent alleges that he 

failed to account for KJJJ’s reported ordinary business income of 

$268,563 in calculating petitioners’ corrected passthrough income. 

Respondent attributes that failure to a clerical error, the correction of 

which would increase petitioners’ deficiency from $50,727 to $157,078 

and accuracy-related penalty from $10,145.40 to $31,415.40.

This Court has held on numerous occasions that it will not 

consider issues which have not been properly pleaded or otherwise 

preserved. Markwardt v. Commissioner, 64 T.C. 989, 997 (1975).

Nevertheless, Rule 41(b) provides a procedure whereby the pleadings 

may be amended to conform to the evidence presented at trial in 

appropriate circumstances. Rule 41(b) provides in part:

(1) Issues Tried by Consent: Issues not raised by the 

pleadings but tried by express or implied consent of the 

parties are treated in all respects as if raised in the 

pleadings. The Court, on motion of any party at any time, 

may allow any amendment of the pleadings as may be 

necessary to cause them to conform to the evidence and to 

raise these issues, but failure to amend does not affect the

result of the trial of these issues.

(2) Other Evidence: If a party objects to evidence on the 

ground that it is not within the issues raised by the 

pleadings, the Court may receive the evidence and at any 

time allow the pleadings to be amended to conform to the 

proof. The Court will do so freely when justice so requires 

and the objecting party fails to satisfy the Court that the 

admission of the evidence will prejudice that party’s 

position on the merits.
13

[*13] This Court, in deciding whether an issue was tried by implied 

consent within the meaning of Rule 41(b)(1), has considered whether the 

consent results in unfair surprise or prejudice to the consenting party 

and prevents that party from presenting evidence that might have been 

introduced if the issue had been timely raised. Phillips v. Commissioner, 

T.C. Memo. 2013-215, at *9–10; Bulas v. Commissioner, T.C. Memo. 

2011-201, 2011 Tax Ct. Memo LEXIS 202, at *2 n.2. When a party 

objects to the evidence relating to issues that the other party seeks to 

raise by amending a pleading, Rule 41(b)(2) determines whether an 

amendment to a pleading should be allowed. An amendment is to be

allowed under Rule 41(b)(2) only if (1) “justice so requires” and (2) the 

amendment would not prejudice the objecting party in maintaining his 

or her position on the merits. See Phillips, T.C. Memo. 2013-215, at *9–

10.

Allowing respondent to amend his Answer would not unfairly 

surprise or prejudice petitioners. Approximately three weeks before 

trial, respondent filed a Pretrial Memorandum disclosing the abovedescribed clerical error and asserting an increased deficiency and 

accuracy-related penalty. Petitioners were therefore on notice of the 

increased deficiency and penalty and had ample opportunity to plan a 

defense to those increases. Petitioners have neither claimed nor shown 

that they would have prepared differently for trial had respondent 

amended his Answer sooner.

Although petitioners objected to the increased deficiency and 

penalty, they did not make any related evidentiary objections. To the 

contrary, they stipulated a revised computation of the 2017 deficiency. 

Even if they had reserved an objection to that Exhibit, justice would

require allowing the amendment. Respondent is attempting to correct 

a clerical error that he discovered and disclosed several weeks before 

trial. The substantive issues in the case—petitioners’ and/or KJJJ’s 

deductions for pension contributions, travel expenses, rent, and 

marketing fees—are unchanged by respondent’s proposed amendment. 

We will therefore grant respondent’s Motion for Leave and allow 

respondent to assert an increased deficiency and penalty for 2017. 

II. Burden of proof

The Commissioner’s determination of a deficiency in tax is 

presumptively correct. Welch v. Helvering, 290 U.S. 111, 115 (1933). 

Generally, the burden of proof is on the taxpayer to show that the 

Commissioner has erred in his determination. Rule 142(a)(1). That 
14

[*14] presumption, however, applies only to the determinations in the 

notice of deficiency. If the Commissioner asserts an increased deficiency 

or new matter after the notice of deficiency is issued, then the burden of 

proof as to the increased deficiency or new matter is on him. Id.; Wayne 

Bolt & Nut Co. v. Commissioner, 93 T.C. 500, 507 (1989).

Where the increase in deficiency is based on a clerical or 

mathematical error in the notice of deficiency, the Commissioner bears 

only the burden of establishing the clerical or mathematical error. 

Raquet v. Commissioner, T.C. Memo. 1996-279, 1996 Tax Ct. Memo 

LEXIS 293, at *10. The taxpayer retains the burden with regard to the 

Commissioner’s determinations. Id. at *10–11 (first citing Estate of 

Applestein v. Commissioner, 80 T.C. 331, 347 n.5 (1983); then citing Beck 

Chem. Equip. Corp. v. Commissioner, 27 T.C. 840, 856 (1957); then 

citing Kiehl v. Commissioner, T.C. Memo. 1986-54; and then citing Holtz 

v. Commissioner, T.C. Memo. 1982-436). 

In his First and Second Amended Answers, respondent asserts 

increased deficiencies and accuracy-related penalties for 2015, 2016, 

and 2017 on the ground that the SNODs contain clerical errors for those 

years. In his Simultaneous Opening Brief, respondent described those 

errors and directed the Court to several Exhibits showing how they 

occurred. Besides disputing respondent’s Motion for Leave, petitioners 

did not address the clerical errors on brief. They have therefore 

conceded that the errors in the SNODs are clerical. See Mendes v. 

Commissioner, 121 T.C. 308, 312–13 (2003) (holding that arguments not 

addressed in posttrial brief may be considered abandoned); Leahy v. 

Commissioner, 87 T.C. 56, 73–74 (1986) (finding concession by failure to 

argue). Thus, having established clerical errors in the SNODs for 2015, 

2016, and 2017, respondent has met his burden as to the increased 

deficiencies. See Raquet, T.C. Memo. 1996-279.

With respect to respondent’s determinations in the SNODs, we 

decide this case on the preponderance of the evidence. Accordingly, we

need not further allocate the burden of proof as to the expense items at 

issue.15 See Estate of Turner v. Commissioner, 138 T.C. 306, 309 (2012). 

15 Section 7491(a) provides that if, in any court proceeding, a taxpayer 

introduces credible evidence with respect to any factual issue relevant to ascertaining 

the liability for tax and meets other prerequisites, the burden of proof rests on the 

Commissioner as to that factual issue. See Higbee v. Commissioner, 116 T.C. 438, 440–
15

[*15] III. Deductions

Section 162(a) allows a deduction for ordinary and necessary 

expenses paid or incurred during the taxable year in carrying on a trade 

or business.

Deductions are a matter of legislative grace, and a taxpayer

generally bears the burden of proving that he or she is entitled to the 

deduction claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 

84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). 

The taxpayer is required to maintain records that are sufficient to 

enable the Commissioner to determine the correct tax liability. See

§ 6001; Treas. Reg. § 1.6001-1(a). The taxpayer must demonstrate that 

the deduction is allowable pursuant to a statutory provision and must 

further substantiate that the expense to which the deduction relates has 

been paid or incurred. See § 6001; Hradesky v. Commissioner, 65 T.C. 

87, 89–90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); 

Hershberger v. Commissioner, T.C. Memo. 2014-63, at *7–8.

If the taxpayer can establish that he or she paid or incurred a 

deductible expense but cannot substantiate the precise amount, the 

Court may approximate the deductible amount of the expense. See

Cohan v. Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930). However, 

the taxpayer must present sufficient evidence to establish a rational 

basis for making the estimate. See id.; Vanicek v. Commissioner, 85 T.C. 

731, 742–43 (1985).

A. 2014 Schedule C

1. Pension and profit-sharing expense

On their 2014 Schedule C petitioners deducted as a pension and 

profit-sharing expense their $46,850 contribution to Arjun’s and 

Veerendra’s section 401(k) accounts. Disputing the deduction, 

41 (2001). Petitioners have not argued that they satisfied the requirements of section 

7491(a) to shift the burden of proof to respondent.

In their Simultaneous Answering Brief, petitioners suggested that 

respondent’s argument regarding KJJJ’s rent deductions was a new matter, which 

would shift the burden of proof to respondent. See Wayne Bolt & Nut Co., 93 T.C. at

507. Because we decide this case on the preponderance of the evidence, we need not 

resolve this issue. 
16

[*16] respondent contends that neither Arjun nor Veerendra was an 

employee of petitioners in 2014.

Section 404(a) allows an employer to deduct certain contributions 

to deferred compensation plans that are paid or accrued on account of 

an employee. Gaston v. Commissioner, T.C. Memo. 2021-107, at *26. 

Whether an employer-employee relationship exists is a question of fact. 

Air Terminal Cab, Inc. v. United States, 478 F.2d 575, 578 (8th Cir. 

1973); Pro. & Exec. Leasing, Inc. v. Commissioner, 89 T.C. 225, 232 

(1987), aff’d, 862 F.2d 751 (9th Cir. 1988). Courts typically apply a 

common law agency test to determine whether an employer-employee 

relationship exists. See, e.g., Nationwide Mut. Ins. Co. v. Darden, 503 

U.S. 318, 323–24 (1992); Cmty. for Creative Non-Violence v. Reid, 490 

U.S. 730, 751–52 (1989); Matthews v. Commissioner, 92 T.C. 351, 360 

(1989), aff’d, 907 F.2d 1173 (D.C. Cir. 1990). Moreover, where a family 

relationship is involved, close scrutiny is required to determine whether 

a bona fide employer-employee relationship existed and whether 

payments were made on account of the employer-employee relationship 

or on account of the family relationship. See Denman v. Commissioner, 

48 T.C. 439, 450 (1967); Haeder v. Commissioner, T.C. Memo. 2001-7, 

2001 Tax Ct. Memo LEXIS 6; Shelley v. Commissioner, T.C. Memo. 

1994-432.

In determining whether a person is an employee under the 

general common law of agency, we consider several nonexclusive 

factors.16 See Nationwide Mut. Ins. Co., 503 U.S. at 323–24; NLRB v. 

United Ins. Co. of Am., 390 U.S. 254, 258 (1968); Pro. & Exec. Leasing,

Inc., 89 T.C. at 232. Inevitably cases turn on the particular facts of each 

case, and no one factor is controlling. See Pro. & Exec. Leasing, Inc., 89 

T.C. at 232.

At trial petitioner husband credibly testified that he viewed K J 

Marketing (which later became KJJJ) as a family business. He also 

credibly testified that he wished to pass his business on to Veerendra 

16 This Court has enumerated the following factors in determining whether an 

employer-employee relationship exists: (1) the degree of control exercised by the 

principal over the details of the work; (2) which party invests in the facilities used in 

the work; (3) the opportunity of the individual for profit or loss; (4) whether the 

principal has the right to discharge the individual; (5) whether the work is part of the 

principal’s regular business; (6) the permanency of the relationship; and (7) the 

relationship the parties believe they are creating. Weber v. Commissioner, 103 T.C. 

378, 387 (1994), aff’d per curiam, 60 F.3d 1104 (4th Cir. 1995); Pro. & Exec. Leasing, 

Inc., 89 T.C. at 232; Simpson v. Commissioner, 64 T.C. 974, 984–85 (1975).
17

[*17] and Arjun. The record establishes that petitioners pursued that 

goal. Although Veerendra and Arjun were in college in 2014, petitioner 

husband credibly recounted assigning them research tasks and 

overseeing their work while they were in school. Upon KJJJ’s 

incorporation, Veerendra and Arjun became employees of the 

S corporation, which issued them Forms W–2, Wage and Tax Statement,

for 2015, 2016, and 2017. Veerendra was a full-time employee of KJJJ 

at the time of trial. These facts support a finding of an employment 

relationship, as they demonstrate petitioner husband’s control over his 

sons’ work, his investment in the business, a lengthy employment 

relationship, and an intention to create an employer-employee 

relationship. 

Respondent does not appear to dispute the classification of 

Veerendra and Arjun as employees—at least not for 2015, 2016, and 

2017. Rather, respondent disputes the timing of their employment, 

asserting that it did not commence in 2014. In support of his contention, 

respondent cites petitioners’ failure to file Forms W–2 for 2014. To be 

sure, the failure to file information returns may undermine the 

assertion of a bona fide employer-employee relationship. See Haeder, 

2001 Tax Ct. Memo LEXIS 6, at *33. In this case, however, petitioner 

husband’s credible testimony is supported by contemporaneous evidence

in the trial record. The Plan, which was prepared in 2014, states: “You

[petitioner husband] have 2 children. The children work in the 

business.” Thus, under the particular circumstances of this case, we 

find it more likely than not that Arjun and Veerendra were petitioners’ 

employees in 2014.17

Respondent does not dispute petitioners’ pension and profitsharing deduction on any ground besides Arjun’s and Veerendra’s 

17 Respondent contends that Veerendra and Arjun were absent from trial and

that he is entitled to a presumption that their testimony would be unfavorable to 

petitioners. See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 

(1946), aff’d, 162 F.2d 513 (10th Cir. 1947). But where both parties have equal access 

to the evidence, we do not apply an adverse inference. Jordan v. Commissioner, 134 

T.C. 1, 10 (2010), supplemented by T.C. Memo. 2011-243. Respondent could have 

subpoenaed Veerendra and Arjun; thus both parties had equal access to the potential 

witnesses. We therefore decline to draw a negative presumption against petitioners

on this issue. Even if we did, we would still find that the weight of the evidence favors 

petitioners here. See Diaz v. Commissioner, 58 T.C. 560, 564 (1972) (observing that 

the process of distilling truth from the testimony of witnesses, whose demeanor we 

observe and whose credibility we evaluate, “is the daily grist of judicial life”).
18

[*18] employment statuses. Having resolved that factual issue in 

petitioners’ favor, we hold that petitioners are entitled to the deduction. 

2. Travel expenses

On their 2014 Schedule C petitioners claimed a deduction of 

$68,063 for travel expenses. Respondent argues that petitioners have 

not substantiated these reported expenses.

The strict substantiation requirements of section 274(d) apply to

travel expenses. Under section 274(d), the taxpayer generally must 

substantiate either by adequate records or by sufficient evidence 

corroborating the taxpayer’s own statement (1) the amount of the 

expense; (2) the time and place the expense was incurred; (3) the 

business purpose of the expense; and (4) in the case of an entertainment 

or gift expense, the business relationship to the taxpayer of each expense 

incurred. For listed property expenses, the taxpayer must establish the 

amount of business use and the amount of total use for the property. See

Temp. Treas. Reg. § 1.274-5T(b)(6)(i)(B).

Substantiation by adequate records requires the taxpayer to 

maintain an account book, a diary, a log, a statement of expense, trip 

sheets, or a similar record prepared contemporaneously with the 

expenditure and documentary evidence (e.g., receipts or bills) of certain 

expenditures. Treas. Reg. § 1.274-5(c)(2)(iii); Temp. Treas. Reg. § 1.274-

5T(c)(2). Substantiation by other sufficient evidence requires the 

production of corroborative evidence in support of the taxpayer’s 

statement specifically detailing the required elements. Temp. Treas. 

Reg. § 1.274-5T(c)(3).

In support of their deduction for travel expenses, petitioners 

submitted reconstructions of purported travel logs and odometer 

readings. However, the record does not contain any documentary 

evidence or other direct or circumstantial evidence of the time, location, 

and business purpose of each reported travel expense. Petitioners’ 

failure to produce such evidence (which one would expect to be in their

exclusive possession or control) creates a presumption that it would not 

be favorable to them. See Wichita Terminal Elevator Co., 6 T.C. at 1165.

In the light of that presumption, and considering petitioners’ failure to

establish by adequate records or other sufficient evidence each element 

of their reported travel expenses, petitioners have not met the

requirements of section 274(d). We sustain respondent’s determination

on this issue.
19

B. 2014–17 Forms 1120S (KJJJ) 

We next consider whether respondent properly disallowed KJJJ’s 

deductions for marketing fees, rent, and travel expenses.18

1. Marketing fees

For the years in issue, KJJJ claimed deductions for marketing 

fees in accordance with the Plan. Having fully disallowed those 

deductions, respondent contends that the marketing fees were not 

ordinary and necessary under section 162. We agree. 

To be “necessary” within the meaning of section 162, an expense 

needs to be “appropriate and helpful” to the taxpayer’s business. Welch 

v. Helvering, 290 U.S. at 113. The requirement that an expense be 

“ordinary” connotes that “the transaction which gives rise to it must be 

of common or frequent occurrence in the type of business involved.” 

Deputy v. DuPont, 308 U.S. 488, 495 (1940). 

Having carefully reviewed the record, we are doubtful that the 

marketing fees were ordinary and necessary. The creation of JYJ was 

one of the tax reduction strategies CPS had recommended in the Plan. 

Pursuant thereto, KJJJ made large annual payments to JYJ, of which 

petitioners were shareholders and directors. JYJ did not make any 

marketing expenditures for KJJJ, as CPS had suggested it would in the

Plan. Nor did JYJ host meetings on KJJJ’s behalf, as envisioned in 

JYJ’s initial board minutes. Nevertheless, KJJJ paid large yearly sums 

to JYJ, which, in turn, used those sums to pay the personal expenses of 

the Jadhav family. In the light of these facts, we find it more likely than 

not that JYJ did not provide ordinary and necessary marketing services 

to KJJJ. 

18 If a business meets the requirements of section 1361, it may elect to be 

treated as an S corporation and generally avoid corporate tax. §§ 1362(a), 1363(a). An 

S corporation, like a partnership, is a flowthrough entity; its income and losses flow

through to its shareholders, who then pay income tax. See § 1363(b). Section 1366(a)(1) 

provides that an S corporation shareholder determines his or her tax liability by taking 

into account his or her pro rata share of the S corporation’s income, losses, deductions, 

and credits for the S corporation’s taxable year ending with or in the shareholder’s 

taxable year. We have jurisdiction to redetermine the deductions claimed by KJJJ. 

See Winter v. Commissioner, 135 T.C. 238 (2010); Berry v. Commissioner, T.C. Memo. 

2018-143, at *6, aff’d, 828 F. App’x 431 (9th Cir. 2020); Alli v. Commissioner, T.C. 

Memo. 2014-15, at *17 n.11.

[*19]
20

[*20] Acknowledging that JYJ did not provide traditional marketing 

services to KJJJ, petitioners nevertheless contend that the fees were 

ordinary and necessary for purposes of risk mitigation. At trial 

petitioner husband testified that he used JYJ to develop new ideas, 

many of which would fail. According to petitioner husband, JYJ shielded 

KJJJ from the reputational risk of such failures. Petitioner husband 

testified that once an idea proved viable, KJJJ would market it to 

potential users. Although we found petitioner husband credible, he did 

not explain how the marketing fees were determined. It is also unclear 

from the record whether JYJ developed any ideas that warranted KJJJ’s 

payments of large annual marketing fees. The invoices in the record are 

vague, stating only that JYJ provided “[m]arketing and sale promotion.”

This Court has upheld disallowances of section 162 deductions in 

similar circumstances. For instance, in ASAT, Inc. v. Commissioner, 

108 T.C. 147, 174–75 (1997), we held that the taxpayer was not entitled 

to deduct consulting fees it had paid to an unrelated corporation where 

the taxpayer did not establish how the fees were determined, there was 

no written contract, the invoices provided almost no detail, and there 

was no evidence of the service provider’s skills that might warrant the 

consulting fees. See also Weekend Warrior Trailers, Inc. v. 

Commissioner, T.C. Memo. 2011-105 (sustaining the Commissioner’s

disallowance of management fee deduction where the evidence did not 

adequately establish the specific services performed and who performed 

them). For similar reasons, we hold that JYJ is not entitled to the 

marketing fee deductions for the years in issue. We sustain respondent’s 

determination on this issue. 

2. Rent

KJJJ also claimed deductions for rent paid to petitioners for the 

use of their residential properties during the years in issue. Having fully 

disallowed those deductions, respondent contends that KJJJ’s reported

rental expenses were not ordinary and necessary.19 See § 162. We agree.

Section 162 permits a taxpayer to deduct all ordinary and 

necessary expenses paid during the taxable year in carrying on its trade 

or business, including “rentals or other payments required to be made 

as a condition to the continued use or possession” of property. 

19 Respondent also contends that petitioners failed to substantiate some of the 

reported rent payments. Because we sustain respondent’s determination on other 

grounds, we need not resolve this issue.
21

[*21] § 162(a)(3). In determining whether the payments in issue are 

deductible under section 162, the basic question is whether the 

payments were in fact rent and not something else disguised as rent. 

Accord Levenson & Klein, Inc. v. Commissioner, 67 T.C. 694, 715 (1977);

see Place v. Commissioner, 17 T.C. 199, 203 (1951), aff’d per curiam, 199 

F.2d 373 (6th Cir. 1952). This is a question of fact, “and the character 

of the payments in question is to be judged in light of (1) all the terms 

and conditions of the agreement establishing the obligation to pay and 

(2) all the facts and circumstances existing at the time the agreement 

was made.” Audano v. United States, 428 F.2d 251, 256 (5th Cir. 1970); 

see Brown Printing Co. v. Commissioner, 255 F.2d 436, 440 (5th Cir. 

1958), rev’g T.C. Memo. 1957-37.

Only the portion of an expense that is reasonable qualifies for 

deduction under section 162(a). United States v. Haskel Eng’g & Supply 

Co., 380 F.2d 786, 788–89 (9th Cir. 1967); see also Fuhrman v. 

Commissioner, T.C. Memo. 2011-236, 2011 Tax Ct. Memo LEXIS 230, 

at *6. The reasonableness concept has particular significance in 

determining whether payments between related parties represent 

ordinary and necessary expenses. See Fuhrman, 2011 Tax Ct. Memo 

LEXIS 230, at *6–7 (citing Boris I. Bittker & Lawrence Lokken, Federal 

Taxation of Income, Estates, and Gifts, para. 20.1.5, at 20-18 (3d ed. 

1999)). Because petitioners wholly owned KJJJ, we must consider 

whether the rental arrangement between the two was reasonable.

Having carefully reviewed the record, we find it more likely than 

not that KJJJ’s payments to petitioners were unreasonable and

something other than rent. Petitioners’ rental arrangement with KJJJ 

was another tax reduction strategy CPS had suggested in the Plan. In 

making that suggestion, CPS advised petitioners to use a reasonable 

rental rate supported by independent comparables. CPS also suggested 

that petitioners retain a professional appraiser to determine fair rental

values for their properties. Petitioners did not follow that advice. 

Instead they charged KJJJ the daily rental rates CPS had assumed in 

its tax saving projection. Although petitioners contend that those rates

were based on independent comparables, no such comparables appear 

in the record.20 Their absence creates a presumption that they would be 

20 Petitioners’ contention also conflicts with Mr. Dallas’s legal opinion, which 

disclaims any opinion “as to the fair market value of any item for any deduction or 

credit taken.”
22

[*22] unfavorable to petitioners. See Wichita Terminal Elevator Co., 

6 T.C. at 1165.

Petitioners contend that respondent’s full disallowance of KJJJ’s 

rent deductions was arbitrary and capricious. According to petitioners, 

some portion of the rent must be deductible because the residential 

properties have fair rental values greater than zero. However, as 

explained above, the record establishes that KJJJ’s rental arrangement 

with petitioners was not reasonable. While we may approximate a fair 

rental value in appropriate circumstances, see Cohan v. Commissioner, 

39 F.2d at 543–44; Clem v. Commissioner, T.C. Memo. 1991-414, 1991 

Tax Ct. Memo LEXIS 463, at *17 (“[B]ased upon the well-established 

Cohan rule and its reasoning, we have done our best to approximate a 

reasonable fair market value.”), we must have some basis upon which to 

make an estimate, Vanicek, 85 T.C. at 742–43. Petitioners have not 

provided any expert testimony or other evidence of their properties’ fair 

rental values. Accordingly, we are unable to conclude that any portion 

of KJJJ’s reported rent was reasonable and, in turn, ordinary and 

necessary. We therefore sustain respondent’s determination on this 

issue.

3. Travel expenses

On its Forms 1120S, KJJJ deducted $17,125, $11,311, and 

$23,964 for 2015, 2016, and 2017, respectively. Respondent contends 

that petitioners have not substantiated KJJJ’s reported travel expenses. 

To substantiate those expenses, petitioners submitted 

reconstructed travel logs. For the reasons stated supra Part III.A.2, we

sustain respondent’s determination on this issue.

IV. Accuracy-related penalties

Finally we consider whether petitioners are liable for accuracyrelated penalties for the years in issue. Section 6662(a) imposes a

penalty equal to 20% of any underpayment that arises from a 

substantial understatement of income tax. See § 6662(b)(2). An 

understatement is substantial if it exceeds the greater of 10% of the 

correct tax or $5,000. § 6662(d)(1)(A). Respondent contends that there 

is a substantial understatement of income tax for each year in issue.

Generally, the Commissioner bears the initial burden of 

production of establishing via sufficient evidence that a taxpayer is 

liable for penalties and additions to tax; once this burden is met, the 
23

[*23] taxpayer must carry the burden of proof with regard to defenses 

such as reasonable cause. See § 7491(c); Higbee, 116 T.C. at 446–47. 

However, the Commissioner bears the burden of proof with respect to a 

new penalty or increase in the amount of a penalty asserted in his 

answer. See Rader v. Commissioner, 143 T.C. 376, 389 (2014), aff’d in 

part, appeal dismissed in part, 616 F. App’x 391 (10th Cir. 2015); see also

RERI Holdings I, LLC v. Commissioner, 149 T.C. 1, 38–39 (2017), aff’d 

sub nom. Blau v. Commissioner, 924 F.3d 1261 (D.C. Cir. 2019); Bass v. 

Commissioner, T.C. Memo. 2023-41, at *19; Arnold v. Commissioner, 

T.C. Memo. 2003-259, 2003 Tax Ct. Memo LEXIS 258, at *11–12. As 

part of the burden of production, the Commissioner must satisfy section 

6751(b) by producing evidence of written approval of the penalty by an 

immediate supervisor, made before formal communication of the 

penalty to the taxpayer. See Graev v. Commissioner, 149 T.C. 485, 493 

(2017), supplementing and overruling in part 147 T.C. 460 (2016); see 

also Clay v. Commissioner, 152 T.C. 223, 246, 249 (2019), aff’d, 990 F.3d 

1296 (11th Cir. 2021).

We first address the proportionate increases to the accuracyrelated penalties asserted by respondent in the Amended and Second 

Amended Answers. Respondent’s burden includes showing written 

supervisory approval of the increases pursuant to section 6751(b)(1).

See Dynamo Holdings Ltd. P’ship v. Commissioner, 150 T.C. 224, 238 

(2018); Bass, T.C. Memo. 2023-41, at *20; Dynamo Holdings Ltd. P’ship

v. Commissioner, T.C. Memo. 2018-61, at *108. The record does not 

establish that respondent complied with section 6751(b)(1) in asserting 

increased penalties in the Amended and Second Amended Answers. 

Accordingly, respondent has not carried his burden regarding the 

increased penalties for 2015, 2016, and 2017.

As for the accuracy-related penalties determined in the SNODs, 

the initial penalty determination was made by RA Vickers on October 

31, 2018, and approved in writing by her then-immediate supervisor, 

Ms. Harris, that same day. Petitioners do not contend that respondent

failed to comply with section 6751(b)(1). We therefore find that 

respondent complied with all procedural requirements to assert the 

accuracy-related penalty under section 6662(b)(2) for the years in issue. 

Moreover, petitioners’ understatements of income tax likely exceed the 

greater of 10% of the amount of tax required to be shown on their returns 

or $5,000. Thus, if the Rule 155 computations show substantial 

understatements for the years in issue, respondent has satisfied his 

burden of production with respect to the penalties determined in the 

SNODs.
24

[*24] Since respondent likely has met his burden regarding the 

penalties (as initially determined), petitioners must come forward with 

persuasive evidence that the penalties are inappropriate. See § 7491(c); 

Higbee, 116 T.C. at 446–47. Petitioners may meet their burden by 

proving that they acted with reasonable cause and in good faith with 

respect to the underpayments. See § 6664(c)(1); see also Higbee, 116 T.C. 

at 447; Treas. Reg. § 1.6664-4(a). The decision as to whether a taxpayer 

acted with reasonable cause and in good faith is made on a case-by-case

basis, taking into account all of the pertinent facts and circumstances. 

Treas. Reg. § 1.6664-4(b)(1).

“Circumstances that may indicate reasonable cause and good 

faith include an honest misunderstanding of fact or law that is

reasonable in light of all of the facts and circumstances, including the 

experience, knowledge, and education of the taxpayer.” Id. Reliance on 

a tax professional demonstrates reasonable cause when a taxpayer 

(1) selects a competent tax adviser, (2) supplies the adviser with all 

relevant information, and (3) relies in good faith on the adviser’s 

professional judgment. See Neonatology Assocs., P.A. v. Commissioner, 

115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002).

Citing their reliance on Mr. Walker to prepare their and KJJJ’s 

returns, petitioners assert that they acted with reasonable cause.21 

According to petitioners, Mr. Walker was a qualified CPA who was 

independent of CPS. Respondent does not dispute those assertions. 

However, the fact that petitioners hired Mr. Walker to prepare their 

returns does not, by itself, establish that they acted with reasonable 

cause and in good faith. See id. at 99–100. They must also establish 

that they supplied him with all relevant information and relied in good 

faith on his professional judgment. See id. 

Petitioners have not established that they reasonably relied on 

Mr. Walker. To be sure, petitioners provided Mr. Walker information

about the organizational changes to their business as contemplated by 

the Plan. However, the record does not establish that petitioners alerted 

Mr. Walker to the nature of JYJ’s purported marketing services, which 

deviated from those described in the Plan. Nor does the record clearly 

establish what information, if any, petitioners provided Mr. Walker 

about their and KJJJ’s reported travel expenses, the items petitioners

have conceded, and the rental values of their properties. Because 

21 Petitioners do not contend that they reasonably relied on Mr. Dallas’s 

opinion letter. 
25

[*25] petitioners have failed to show that they provided Mr. Walker all 

relevant information, we cannot conclude that their reliance on him was 

reasonable. 

Accordingly, and assuming the Rule 155 calculations confirm 

substantial understatements of income tax, we sustain respondent’s 

determinations of accuracy-related penalties as reflected in the SNODs. 

However, we do not sustain respondent’s determinations regarding the 

proportionate increases to the penalties as reflected in the Amended and 

Second Amended Answers. 

In reaching our holdings herein, we have considered all 

arguments made, and to the extent not mentioned above, we conclude 

them to be moot, irrelevant, or without merit. 

To reflect the foregoing,

An appropriate order will be issued, and decision will be entered 

under Rule 155.