T.C. M em o . 2 0 1 8 -5 2

UNITED STATES TAX COURT
TING CAI, Pet i ti o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 1 0 2 70 -1 6
. Fi l edAp ri l 1 6 , 2 0 1 8
.
Ti n g Cai , p ro s e. Ad am B. Lan dy , Th o m as R. M ack i n s o n , an dJ as o n T. Sco t t , fo r res p o n d en t .

M EM ORANDUM FINDINGS OF FACT AND OPINION VASQUEZ, Ju d ge: Res po n d en td et erm i nedd efi ci en ci es i np et i ti o n er’ s Fed eral i nco m e t ax o f $ 9 ,1 5 0 an d$ 1 5 ,5 4 9 an d accu racy -rel at edp en al t i es o f $ 1 ,8 3 0 an d$ 3 ,0 92 fo r 2 0 13 an d2 0 1 4 , res pect i v el y .- 2
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[* 2 ] Aft er co n ces si o ns , 1 th e i s s u es fo r d eci si o nare wh et h er p et i t i o n er i s : (1 )
en t i t l edt o Sch edu l e C d edu ct i o n s cl ai m edfo r t ax y ears 2 0 1 3 an d2 0 1 4 an d(2 ) l i ab l e fo r s ect io n 6 6 6 2 (a) accu racy -rel at ed p en al t i es . 2 FINDINGS OF FACT So m e o f t h e fact s h av e b een s ti p u lat ed an dare s o fo u n d. Th e s t ip u l at i o n o f fact s an dth e at t ach ed ex h i b i ts are i n co rp o rat ed b y th is referen ce. Pet i t i o n er
res i dedi n Cal i fo rn ia wh en h e fi l edh i s p et i t io n . Pet i t i o ner i s a s o ft ware d es i g n er. He recei v edan u n d erg raduat e d eg ree i n
co m p u t er s ci en ce fro m

San J o s e St at e Un i v ers i ty an dan M .B.A. fro m

Ho u s t o n Bap ti s tUn i v ers i ty . Pet i ti on er wo rk edas a d at a s ci en t i s tfo r eBay , In c., fro m 2 0 1 1 t o 2 0 1 5.

1 Attri al res p o n d en targ u edth at p et it i on er’ s 2 0 13 d edu ct i o n s cl ai m edo n Sch edu l e C, Pro fi to r Lo s s Fro m Bu s i nes s , s h o u ldb e d i s al l o w edas s t artup ex p en s es u n d er s ec. 1 9 5 . Ho wev er, n ei th er o f t h e t wo n ot i ces o f d efi ci en cy m en t i o n s s ec. 1 9 5 , an dres p o n d en t fai l edt o m ak e t h es e arg um en t s i nh i s an s wer o r o n b ri ef. Acco rd i n g ly , we co n s i d er t h i s i s s u e co n ced ed . See M en d es v . Co m m i s s i o n er, 1 2 1 T.C. 3 0 8 , 3 1 2 -3 1 3 (2 0 0 3) (h ol d i n g th atarg u m en t s n o t ad dres s edo n b ri ef m ay

b e co n si d ered ab an d on ed ); Dav is v . Co m m i s s io n er, 1 1 9 T.C. 1 , 1 n .1 (2 00 2).

2 Un l es s o th erwi s e i n d i cat ed , al l s ect i o nreferen ces are t o th e In t ern al Rev enu e Co de (Co d e) i n effect fo r t h e y ears ati s s u e, an dal l Ru l e referen ces are t o th e Tax Co u rt Ru l es o f Pract ice an dPro cedu re.- 3
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[* 3 ] In 2 0 1 3 p et i t i o n er b eg an d ev el o p i n g fi el d p ri ci n g s o ft ware fo r g as s t at i o n
co n ven i en ce s t o res . Pet i t i o n er s o l ici t edi nv es t m en t s fo r h i s s o ft ware, co urt i n g o ne p o t en t i al i n v es t o r i n p art i cu l ar, J u nDi n g . Pet i t i o n er d is cu s s edh i s co m p an y wi th M r. Di n g du ri n g s ev eral m eet in g s i nl o cat io n s s uch as Cal i fo rn i a, Las Veg as , Ch i na, an d Hawai i . M r. Di n g al s o i n tro du cedp et i t i o n er t o o th er p o s si b l e i n v es t o rs du ri n g th es e t ri p s . Ho wev er, M r. Di n g d eci d edn o tt o i n v es ti np et i t i o n er’ s
co m p an y . Ad di t i o n al l y , p et i t i on er’ s two p o ten t i al cu s t o m ers fo u ndth at th e
s o ft ware d i d n o tfi t th ei r b u si n es s es . In 2 0 1 4 p et i t i o n er s h ift edh i s fo cu s t o edu cat io n al s o ft ware. He d es ig n ed
n ew s oft w are t hatt au g h tch i l dren h o w t o p ro g ram co m pu t ers . Th i s s o ft ware was a
co m p u t er-b as edi n t eract i v e l earn i n g t o o l th atrep l aced th e s t an d ardl i v e-t each i n g
s o ft ware m o d el
. In o rd er t o g et a s en s e o f t h e edu cat i on al fi el d an dt es th is n ew s o ft ware, p et i t i o n er ren t eds p ace fro m Green Ap p l es Edu cat i o nan d o ffered free cl as ses t o i t s
s tud en t s . M an y ch i l dren s i gn edup fo r t h e cl as s es , b u tp et i t i o ner fo u n dth ath i s i n i t i al m o d el was u ns u cces s fu l ; cu s t o m ers p referred a l i v e-t each i n g m od el , an d th e p ri ce o f t h e s o ftware was t o o h i g h
. Th u s , i n Oct o b er 2 0 1 4 p et i t i o n er ch an g edh i s i n i ti al s o ft ware m o d el t o a l i ve-t each i n g m o d el . Th i s n ew s o ft ware was s i m i lar t o a web in ar: Hi s co m p an y- 4
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[* 4 ] h i redl o cal i n s tru ct o rs an dco n n ect edth em wi th s tu d en t s v i a t h e i n t ern et . Pet i t io n er al s o m o v edh i s o ffi ce t o San Bru n o , Cal ifo rn ia, wh ere t h e ren twas l es s
ex p en s i v e an dthe l o cat i o n was m o re co n v en i en tfo r t he l ocal i n s tru ct o rs h e h i red
. Pet i t io n er’ s l i v e-t each i n g m o d el h as i n creas edh i s rev en u es s ig n ifi can t l y , an dh e h as s t art edh i ri n g i n s tru ct ors fro m acro s s th e co u n try . Pet i t i o ner en g ag edSh irl ey Zh an g, a cert i fi ed p ub l i c acco u n t an tem p l o y ed b y Nat i o n wi d e Tax an d Acco u n t i n g Serv i ci n g, t o p rep are h is 2 0 13 an d 2 0 1 4 Fed eral i nco m e t ax return s. Pet i t i o n er was referred t o M s. Zh an g b y a fri en dan d h e p ro vi d ed h er wi th rel ev an t i n fo rm at io nreg ard i n g h i s b us i n es s an dex p en s es , i n cl u d i n g b an kan d cred i tcards t at em en t s . M s . Zh an g p rep aredSch edul es C fo r th es e ret urn s , o n wh i ch pet i t i o ner cl ai m edv ari o u s d edu ct i o ns fo r 2 0 1 3 an d2 0 1 4
. Res po n d en ti s su edp et it io n er n o t i ces o f d efi ci en cy fo r b o th y ears , d i s al lo wi n g
s ev eral d edu ct io n s i n th ei r en t i ret y . Res p o n d en t ’ s d i s al l o wan ces are as fo l l o ws :- 5
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Ex p en se Tax ab l e y ear A m o u n t Trav el 2 01 3 $ 7 ,0 3 6 Offi ce 2 01 3 7 ,5 7 0 Car an d t ru ck 2 01 3 1 8 ,0 2 7 Ren t/ l eas e– o ther b us i n es s p ro p ert y 2 01 4 5 0 ,2 0 0 Dep reci at i on an d s ect i o n 1 7 9 2 01 4 1 0 ,6 7 6 Co m m is s i o n s an d fees 2 01 4 6 ,6 7 1 Pet i t i o ner t i m el y

p et it i o n edth i s Co u rt , an da t ri al was h el d i nSan Fran ci s co , Cal i fo rn i a. OPINION I. Bu rd en o f Pro o f As a g en eral ru l e, the Co m m i s s i on er’ s d et erm i nat i o no f a t ax p ay er’ s l i ab i l i ty i n a n o ti ce o f d efi ci en cy

i s p res u m edco rrect , an dth e t ax pay er b ears th e b urd en o f p ro v in g th atth e d et erm i n at io n i s i n co rrect . Ru l e 1 4 2 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3 ). Dedu ct i o n s are a m at t er o f l eg i s l at i v e g race, an dth e t ax p ay er g en eral l y

b ears th e b u rd en o f p ro v i n g en t i t l em en tt o an y d edu ct i o n [* 5 ]- 6
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[* 6 ] cl ai m ed
. 3 Ru l e 1 42 (a); INDOPCO, In c. v . Co m m i s s io n er, 5 0 3 U.S. 7 9, 8 4 (1 9 9 2); New Co l o n i al Ice Co . v . Hel v eri n g, 2 9 2 U.S. 4 3 5 , 4 4 0 (1 93 4 ). II. Bu s i n es s Ex p en s e Dedu ct i o ns Sect io n 1 6 2 (a) p erm it s a t ax p ay er t o d edu cto rd i n ary an dn eces s ary
ex p en s es p ai d o r i n cu rredi n carry i n g o na t rad e o r b u s i n es s . See Co m m i s s i o n er v . Li n co l n Sav
. & Lo an As s ’ n , 4 03 U.S. 3 4 5 , 3 5 2 (1 97 1 ). A trad e o r b u s in es s
ex p en s e i s o rd i n ary

i f i t i s n o rm al o r cu s t o m ary wi th i na p art icu l ar t rad e, b u s i n es s , o r i n du s try , an di t i s n eces s ary i f i ti s ap p ro p ri at e an dh el pfu l fo r t h e d ev el o p m en t
o f t h e b u s i n es s . Co m

m is s i o n er v . Hei n in g er, 3 2 0 U.S. 4 6 7 , 4 71 (1 9 4 3 ); W el ch v . Hel v eri n g , 2 9 0 U.S. at1 1 3 -1 1 4
. A t ax p ay er m

u s t m ai n tai n ad equ at e reco rd s t o s ub s t an t i at e th e am o un t s o f h i s i n co m e an den t i t l em en tt o an y d edu ct io n s o r cred i t s cl ai m ed . Sec. 6 00 1 ; s ec. 1 .6 00 1 -1 (a), In co m e Tax Reg s . Wh en a t ax pay er es t ab l i s h es th ats h e p ai do r i n cu rreda d edu ct i b le ex pen s e b u td o es n otes t ab l i s h th e am ou n t o f t h e d edu ct i o n,

3 Sec. 7 4 9 1 (a) p ro v i des th ati f, i nan y co u rtp ro ceed i ng , a t ax p ay er i n tro du ces cred i b le ev id en ce wi th res p ectt o an y fact u al i s s ue rel ev an tt o as cert ai n i n g th e l i ab i l i ty

o f t h e t ax p ay er fo r an y

t ax i m po s edb y s ub t i t . A o r B an d m eet s o th er p rereq u i si t es , th e Secret ary s h al l h av e t h e b u rd eno f p ro o f wi th res p ect t o that i s s u e. Hi g bee v . Co m m i s s i o ner, 1 1 6 T.C. 4 3 8 , 4 4 0 -4 4 1 (2 0 0 1 ). Ho wev er, p et i t i o n er h as n ei th er cl ai m edn o r s h o wnth ath e s at i s fi edth e requ i rem en ts o f s ec. 7 4 9 1 (a) t o s h i ftth e b u rd en o f p ro of t o res p o n den t . Acco rd i n g l y , p et i ti o n er b ears th e b u rd en o f p ro o f. See Ru l e 1 4 2 (a).- 7
-

[* 7 ] we m ay

es ti m at e t h e am o un tal l o wab l e i n cert ai nci rcu m s t an ces (Co han ru l e). Co h an v . Co m

m i s s i o n er, 3 9 F.2 d5 4 0 , 5 4 3 -5 4 4 (2 dCi r. 1 9 3 0 ); Van i cekv . Co m m i s s i o n er, 8 5 T.C. 7 31 , 7 4 2 -7 4 3 (1 9 8 5 ). Th ere m u stb e s u ffi ci en tev i d en ce i n th e reco rd , h o wev er, t o p erm it u s t o co n cl u de t h ata d edu ct i bl e ex p en s e was p ai d
o r i n cu rredi n atl eas tth e am o u n tal l o wed . W i l l i am s v . Un i t edSt at es , 2 4 5 F.2 d 5 5 9 , 5 6 0 (5 th Ci r. 1 9 5 7 ). Fo r cert ai n k i n d s o f b u s i n es s ex pen s es , s ect i o n2 7 4 (d ) o verri des th e Co h an
ru l e. See San fo rd v . Co m m i ss io n er, 5 0 T.C. 8 2 3 , 8 2 7 -8 2 8 (1 9 6 8 ), aff’ d p er
cu ri am , 4 1 2 F.2 d2 0 1 (2 d Ci r. 1 9 6 9). Sect io n2 7 4 (d ) p ro v i d es th at n o d edu ct i o n i s al l o wed w i th res p ectt o t rav el , en t ert ai n m en t , o r l i s t edp ro p ert y (as d efi n edi n
s ect i on 2 8 0 F(d )(4 )) u n les s t h e t ax p ay er s ub s t an t i at es b y ad equ at e reco rd s o r b y
s u ffi ci en tev i d en ce co rro b o rat i n g th e t ax p ay er’ s o wns t at em en t (1 ) t h e am o u n to f
ex p en s e o r i t em ; (2 ) t h e t i m e an dp l ace o f th e t rav el , en t ert ai n m en t , o r ex p en s e; (3 ) th e b u si n es s p u rp o se o f t h e en t ert ai n m en to r ex p en s e; an d (4 ) t h e b u s i n es s rel at i o n s h i p t o th e t ax p ay er o f t h e p ers o n o r p ers o n s en t ert ai n ed . A t ax p ay er
s at i s fi es th e “ ad equ at e reco rd s ” t es ti f h e m ai n t ai n s an acco un t b o o k , a d i ary , a l o g , a s t at em en to f ex p en s e, t ri p s h eet s , o r s i m i l ar reco rd s p rep aredat o r n ear t h e t i m e
o f t h e ex p en d itu res thats h o w each el em en to f each ex p en d i tu re o r u s e. See s ec. 1 .2 74 -5 T(c)(2 ), Tem

po rary In co m e Tax Reg s . , 5 0 Fed . Reg . 4 6 0 1 7 (No v . 6 , 1 9 8 5 ).- 8
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[* 8 ] III. Di s al l o w edDedu ct i o n s fo r 2 0 13 A. Trav el Ex pen s es Pet i t i o ner cl ai m eda t rav el ex p en s e d edu ct i o n o f $ 7 ,0 3 6 fo r 2 0 13 . Th e
reco rdco n t ai n s recei p t s fo r g as 4 an dren t al cars , as wel l as ai r t rav el i t i n erari es . M o s to f t h es e ex p en s es rel at e t o h i s tri ps t o Las Veg as an d Sh an g h ai . Pet it i o n er d i dn o t k eep a t rav el l o g , an dh i s b ro adt es t i m o n y th at h e t rav el edt o recru i tM r. Di n g as an i n v es t o r i s i n su ffi ci en tt o es t ab l i s h th e b u s in es s p urp o s e o f each tri p as req u i redb y

s ect i o n 2 7 4 (d ). See Ol ag un juv . Co m

m i s si o n er, T.C. M em o . 2 0 1 2
- 1 1 9 , 2 0 1 2 Tax Ct . M em o LEXIS 1 1 8 , at* 18 -* 1 9 (h o l d i n g the t ax p ay er’ s b ro ad t es t i m o ny an d recei p ts i n s u ffi ci en tt o es t ab li s h th e b u si n es s p u rp o s e o f t rav el ). Pet i t io n er i s n o t en t i tl edt o a t rav el ex pen se d edu ct i o nfo r 2 0 1 3
. B. Offi ce Ex pen s es Pet i t i o ner cl ai m eda d edu ct i o no f $ 7 ,5 7 0 fo r o ffi ce ex p en s es fo r 2 0 1 3
. Pet i t io n er p ro du cedrecei pt s an dcred i t cards t at em en t s t o co rro b o rat e s o m e o f th es e ex p en s es . Th o s e d o cu m en t s i nth e reco rdth atwere l eg i b l e s ub s t an t i at e

4 Iti s u n cl ear wh et h er p et i t i o n er s ub m i t t edth es e recei pt s t o s ub s t an t i at e h i s trav el ex p en ses o r car an dtru ckex p en s es , b o th o f wh i ch are at i s s u e.- 9
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[* 9 ] $ 1 8 9 .0 6 o f o ffi ce ex p en s es fo r 2 0 13 , 5 an dp et i ti o n er i s en t i t l edt o a d edu ct i on i n thi s am o u n tfo r 2 0 1 3. 6 C. Car an dTru ckEx p en ses Becau s e au t o m o b i l es are l i s t edp ro p ert y , au t o m o b i le ex pen s es are al s o
s ub jectt o t h e s tri cts ub s t an t i at io nreq ui rem en ts o f s ect i o n2 7 4(d ). See s ecs . 2 7 4 (d )(4 ), 2 8 0 F(d )(4 )(A)(i ). Pet i ti o ner cl ai m ed a d edu ct i o no f $ 1 8,0 2 7 fo r car an d tru ckex p en s es fo r 2 0 1 3 . Pet i t i o n er d i d n o tk eep a m i l eag e l o g fo r t h es e ex p en s es .

5 Th e reco rdi n cl u d es ev i d en ce o f s ev eral ex pen d itu res thatp et i ti o n er l ab el ed“ g i ft s ”. Th e co sto f g i ft s m ay b e an o rd in ary

an dn eces s ary

b u s i nes s ex p en s e i f t h e g i ft s are d i rect l y rel at edt o th e t ax p ay er’ s g en erat i o n o f b u s in es s i n co m e. Bro wnv . Co m

m i s si o ner, T.C. M em o . 1 98 4 -1 2 0. Pet i t i o ner b ears th e b u rd eno f p ro vi ng t o wh atex t en tth e g ifti t em s co n tri b ut edt o h is i n co m e. See Su t t er v . Co m

m i s si o ner, 2 1 T.C. 1 7 0 , 1 7 3 -1 7 4 (1 9 53 ). Bu s in es s g i ftd edu ct i o n s p u rs u an t t o s ec. 1 6 2 are res tri ct ed t o $ 2 5 p er d o n ee p er t ax ab l e y ear an dreq u i re ad equat e s ub s tan t i at io n u n d er s ec. 2 7 4 (d ). Sec. 2 7 4 (b )(1 ). Al l o f t he ex p en s es p et i t i o n er l ab el ed “ g ift s ” are o v er $ 2 5 an d h av e n o tb een ad equ at el y s ubs t an t i at ed u n d er s ec. 2 7 4 (d ). Th erefo re, p et i t i o n er i s n o ten t i t ledt o a d edu ct i o nfo r t h es e i t em s . 6 Pet i t i o n er s ub m it t eda cred itcard s tat em en t th ats h o ws a p urch as e fro m Fry ’ s El ect ro n i cs l ab el ed“ o ffi ce s up pl i es ”. Ho wev er, we i n fer fro m p et i t i o n er’ s t es t i m o ny th atth i s p u rch as e was fo r co m p ut er eq u i p m en tfo r wh i ch h e al s o cl ai m eda d ep reci at i o n d edu ct i o nfo r 2 0 1 4. Bes i d es th e m at t er o f p et i t i o n er p o s s i b l y cl ai m i n g a d o ub le d edu ct i o n , th e s tri cts ub st an t i at i o nreq u i rem en t s o f s ec. 2 7 4 (d ) al s o ap p ly

t o d edu ct i o n s fo r co m

p u t ers an dco m

p u t er-rel at edp eri p heral equ ip m en t . Secs . 2 7 4 (d )(4 ), 2 8 0 F(d )(4 )(A)(i v ). Pet i t i o n er h as n o tes t ab l i s h edth at th i s p u rch as e was fo r co m p ut ers an dp eri p h eral equ ip m en tex cl u d edfro m l i s t ed p ro p erty b y s ecs . 2 80 A(c)(1 ) an d2 8 0 F(d )(4 )(B). As d i s cu s s edi n fra IV.B., p et i t i o n er h as n o tm etth e s tri cts ub s t an t i at io ns t an d ard s o f s ec. 2 7 4 (d ) wi th reg ard t o thi s p u rch as e an di s n o ten t i t l edt o a d edu ct i o nfo r t h i s am o u n t .- 1 0 -

[* 1 0 ] Wh i l e h e d i dp ro du ce g as recei p t s , a car l o an s t at em en t, an da s pread s h eet wi th a t o t al am o un to f m i l es dri v en an dm ai n t en an ce ex p en s es , p et i t i o n er d i dn o t p ro v id e a b u s i n es s p u rp o s e fo r t h es e am o un t s . Th erefo re, p et i t i o n er h as n o tm et th e req u i rem en t s o f s ect i o n 2 7 4 (d ) fo r car an dtru ckex pen s es an dh e i s n o ten t i t l ed t o a d educt i o n fo r t h es e ex p en ses fo r 2 0 1 3
. IV. Di s al l o w edDedu ct io n s fo r 2 0 1 4 A. Ren t/ Leas e Ex p en s es Pet i t i o ner cl ai m eda d edu ct i o no f $ 5 0 ,2 00 fo r ren t/ l eas e ex p en ses fo r 2 0 1 4
. Pet i t io n er ren t eds p ace fro m Green Ap p l es Edu cat i o ni n Cup ert i n o , Cal i fo rn i a, fro m M ay th ro u gh Decem

b er 2 0 1 4 . He cred i b l y

t es t i fi edth ath i s ren ti n Cup ert in o
was $ 5,0 0 0 p er m o n th an d p ro du cedm o n th l y i n v o i ces fro m

Green Ap p l es Edu cat io n fo r t h es e am o u n t s . InOct o b er 2 0 1 4 p et i t i o ner al s o b eg an ren t i ng an
o ffi ce i n San Bru n o , Cal i fo rn i a, at$ 3 ,4 0 0 p er m o n th, wi th a d i sco u n t edfi rs t
m o nt h ’ s ren to f $ 3 ,1 73 .3 3 . Pet i t i o n er s ub s t an t i at edth es e am o u n ts wi th an acco u n t l ed g er fro m

th e San Bru n o p ro p ert y

m an ag em en tco m

p an y . Onth e b as i s o f p et i t i o n er’ s cred i b l e t es t i m on y , we are s at i sfi edth ath i s ren t al o f b o th s p aces was- 1 1 -

[* 1 1 ] o rd i n ary

an d n eces s ary

fo r h is s o ft ware d ev el o p m en tb u s i n es s . Thu s , p et i t i o n er i s en t i t l edt o a ren tex p en se d edu ct i o no f $ 4 9 ,9 7 3.3 3 fo r 2 0 1 4
. 7 B. Dep reci at i o n an dSect i o n1 7 9 Ex pen s es Sect io n 1 6 7 (a) al l o ws a t ax p ay er a d ep reci at i o nd educt i o nfo r t h e
ex h au s t i o n , wear an dt ear, o r o b s o l es cen ce o f p ro p erty u s ed i n t h e t ax p ay er’ s trad e
o r b u si n es s o r o f p ro p ert y h el dfo r t he p ro du ct io no f i n co m e. Sect i o n1 7 9(a) al l o ws a t ax p ay er a d edu ct i o n fo r t h e co s to f cert ai n ty p es o f p ro p erty

fo r t h e y ear th ey are p l aced i n s erv i ce. Sect i o n1 7 9 p ro p ert y i n cl u d es s ect i on 1 2 4 5 p ro p ert y wh i ch i s acq u i redb y

p u rch as e fo r u s e i nthe act i ve co n du cto f a t rad e o r b us i n es s th ati s ei th er (1 ) t an g i b l e p ro p erty t o wh i ch s ect i o n1 6 8 ap pl i es o r (2 ) co m p u t er
s o ft ware. Sec. 1 7 9 (d )(1 ). To s ub s t an t iat e en t i t l em en tt o a d ep reci at i o nd edu ct io n , a t ax p ay er m

u s ts h o w th atth e p ro p ert y was u s edi na t rad e o r b u s i n es s (o r o th er p ro fi t-o ri en t edact i v i ty ) an dm u s tes t ab l i s h th e p ro p ert y ’ s d ep reci ab l e b as i s b y
s ub s t an t i at i n g th e p ro pert y ’ s co s t , u s efu l l ife, an dan y p rev io u s l y

al l o wab l e d ep reci at i o n . Cl u ckv . Co m m i s s i o n er, 1 0 5 T.C. 3 2 4 , 3 3 7 (1 9 9 5 ). Th e h ei g h t en ed
s ub s t an t i at i o n req u irem en t s o f s ect i o n2 7 4 (d ) m u s tal s o b e m etfo r p ro v i n g th e b u s i n es s u s e o f cert ai n as set s , i n cl u d i n g “ l i s t ed p ro p ert y ”. See, e.g ., M ears v .

7 Pet i t i o n er d i dn otex pl ai nth e d i sp ari ty b et ween th e $ 4 9 ,9 7 3 .3 3 o f s ub s t an t i at edren t/l eas e ex p en s es an dth e $ 5 0 ,2 0 0 h e cl ai m edo nh i s 2 0 1 4 Sch edu l e C.- 1 2 -

[* 1 2 ] Co m

m i s si o n er, T.C. M em o . 2 01 3 -5 2, at* 2 2 (co n s i d eri n g s ect i on 2 7 4 (d ) req u i rem en t s wi th res p ectt o ap p l i cab l e s ect i o n1 6 7 d edu ct i on s ); Si n gh v . Co m m i s s i o n er, T.C. M em o . 2 0 0 9 -3 6 , 2 0 0 9 Tax Ct . M em o LEXIS 3 5 , at* 3 -* 4 (co n s i d eri n g s ect i o n 2 7 4 (d ) req u i rem en t s wi th res p ectt o an ap p l icab l e s ect i o n 1 79 d educt i o n ). Co m

p u t er an dco m

p u t er-rel at ed p eri p h eral equ i p m en t g en eral ly are l i st edp ro p ert y . Secs . 2 7 4 (d )(4 ), 2 8 0 F(d )(4 )(A)(i v ). Pet i t i o ner cl ai m eda d edu ct i o no f $ 1 0 ,6 76 fo r d ep reci at i on an ds ect i o n1 7 9
ex p en s es fo r 2 0 1 4 . Attri al , p et i t i on er t es t i fi edth atth i s d edu ct i o n was fo r equ ip m en t , an d t h at“ m os t ” o f t h e eq ui p m en twas co m pu t ers p u rch as edatFry ’ s El ect ro ni cs . Ho wev er, p et i t i on er t es t i fi edth ath e d i dn o th av e an y recei p t s fo r t h e p u rch as e o f t h i s equ i p m en t ; h e p ro du ceda cred i tcard s tat em en ts h o w i ng o n e p u rch as e atFry ’ s El ect ro n i cs , b u ti tb ears n o d et ai l s ab o u ti t em s p u rch as edo r t h e t i m e an dp l ace o f t h e eq u ip m en t ’ s u se. Becau s e p et i t i o n er h as fai l edt o s at i s fy the h ei g h t en eds ub s t an t i at io n req u irem en t s o f s ect i o n2 7 4(d ), we s u s t ai n res p on d en t ’ s d i s al lo wan ce o f h i s cl ai m edd edu ct i o n fo r d ep reci at i o nan d s ect i o n 1 7 9 ex p en s es . C. Co m

m is s i o n s an dFees Pet i t i o ner cl ai m eda d edu ct i o no f $ 6 ,6 7 1 fo r co m m i ss i o ns an d fees fo r 2 0 1 4
. Pet i t io n er d i dn o tp res en tan y ev i d en ce o f co m

m i s si o n s an dfees p ai di n2 01 4
. Th erefo re, h e i s n o ten t i t l edt o th i s d edu ct io n .- 1 3 -

[* 1 3 ] V. Accu racy -Rel at edPen al t ies Nex t , we ad dres s wh eth er p et i t i o n er i s l i ab l e fo r accu racy -rel at edp en al t i es . 8 Pu rs uan tt o s ect i o n 6 6 6 2(a) an d(b )(1 ), a t ax p ay er m ay b e l i ab l e fo r a p en al ty o f 2 0 % o n th e p o rt i o n o f an u n d erp aym en to f t ax at tri b u t ab le t o n eg l i g en ce
o r d i s reg ard o f ru les o r reg u lat io n s . Ho wev er, a t ax pay er i s n o tl i ab l e fo r t h e
accu racy -rel at edp en al ty

i f t h ere was reas on ab l e cau s e fo r t h e u n d erp aym en tan d th e t ax p ay er act edi n g o odfai th . Sec. 6 6 6 4 (c)(1 ); s ec. 1
. 6 6 64 -4 (a), In co m e Tax Reg s. Th e t erm

“ n eg l i gen ce” i n cl u d es an y fai l u re t o m ak e a reas o nab l e at t em p tt o
co m p l y wi th th e p ro v i s i o n s o f t h e Co d e, an d “ d i s reg ard ” i n cl u d es an y carel es s , reck l es s o r i n t en t i o nal d is reg ardo f ru l es o r reg u l at i o ns . Sec. 6 6 6 2(c); s ec. 1 .6 66 2 -3 (b )(1 ) an d(2 ), In co m e Tax Reg s . A d i s reg ardo f ru l es o r reg u l at i o n s i s

“ carel es s ” i f t h e t ax p ay er d o es n o tex erci s e reas o n ab l e d i l ig en ce i nd et erm i n i n g th e co rrect n es s o f a retu rn p o s i t i o nth ati s co n traryt o a ru le o r reg u lat i o n . Sec. 1 .6 66 2 -3 (b )(2 ), In co m e Tax Reg s . A d i s reg ardi s “ reck l es s ” i f t h e t ax p ay er m ak es l i tt l e o r n o effo rtt o d et erm i n e wh et h er a ru l e o r reg ul at i o nex i s t s , u n d er ci rcu m s t an ces wh i ch d em o n st rat e a s ub s t an t i al d ev i at io nfro m th e s t an d ardo f

8 Whi l e p et i t i o n er d i dn otad dres s h i s l i ab i l it y fo r t he accu racy -rel at ed p en al ty i n h i s p et i t i o n, we fi n dth atth i s i ss u e was tri edb y co n s en t . See Ru l e 4 1 (b ).- 1 4 -

[* 1 4 ] co ndu ct th ata reas o n ab l e p ers o nwo u l do b serv e. Id . A d i s reg ardi s

“ i n ten t i o n al ” i f th e t ax p ay er kn o ws o f t h e ru l e o r reg ul at i o nth ati s d i sreg ard ed
. Id
. Th e Co m

m is s i o n er h as th e b u rd en o f p ro duct i o nwi th res p ectt o th e
accu racy -rel at edp en al ty . Sec. 7 4 91 (c). To m eetth i s b u rd en , th e Co m m i s s i o n er
m u stp ro du ce s u ffi ci en t ev i d en ce i nd i cat i n g th ati ti s ap p ro pri at e t o i m p o s e t h e p en al ty . See Hi g b ee v . Co m m i s s i o n er, 1 16 T.C. at4 4 6 . Th e Co m m i s s i o ner’ s b u rd eno f p ro du ct i o n u n d er s ect i o n7 49 1 (c) i n cl ud es es t ab l i s h in g co m p l i an ce wi th th e s up erv i s o ry

ap p ro v al req u i rem en to f s ect i on 6 7 5 1(b ). 9 Graev v . Co m m i s s i o n er, 1 4 9 T.C. _

_ _ , _

_ _ (s l i p o p . at1 4 ) (Dec. 2 0 , 2 0 17 ), s up p l em en t i n g
an d o v erru l i n g i n p art1 4 7 T.C. _

_ _ (No v . 3 0 , 2 0 16 ); s ee al s o Ch ai v . Co m m i s s i o n er, 8 5 1 F.3 d1 9 0 , 2 2 2 (2 dCi r. 2 0 1 7 ) (ci t i n g Hi gb ee v . Co m m i s s i o n er, 1 1 6 T.C. at4 46 ), aff’ g i n p art , rev ’ g i n p artT.C. M em o. 2 0 1 5 -4 2 . On ce th e Co m m i s s i o n er m eet s h i s b u rd en o f p ro du ct i on , th e t ax p ay er m u s t co m e fo rward wi th p ers u as i v e ev i den ce t h atth e Co m m is s io n er’ s d et erm i n at i o n i s i n co rrect . Ru l e 1 4 2 (a); s ee Hi g b ee v . Co m m i s s i o ner, 1 1 6 T.C. at4 4 7 . Th e t ax p ay er m ay
m eeth er b u rd en b y

p ro v i ng th ats h e act edwi th reas o n ab l e cau s e an d i n g o o dfai th

9 Sec. 6 7 5 1 (b ) req u i res wri t t en s up erv is o ry ap pro v al o f t h e i n i t ial d et erm i n at i o n o f cert ai n p en al t i es .- 1 5 -

[* 1 5 ] wi th res pect t o th e u n d erp aym en t . See s ec. 6 6 6 4 (c)(1 ); s ee al s o Hi g bee v
. Co m m i s s i o n er, 1 1 6 T.C. at4 4 7; s ec. 1
. 6 6 6 4 -4 (b )(1 ), In co m e Tax Reg s . Th e d eci s i o n as t o wh et h er th e t ax p ay er act edwi th reas o n ab l e cau s e an d i ng o o dfai th d ep en d s up o n al l th e p ert i n en t fact s an dci rcu m s t an ces . Sec. 1 .6 6 6 4 -4 (b )(1 ), In co m e Tax Reg s . Gen eral ly , th e m os ti m p ort an tfact o r i s th e ex t en t o f th e t ax p ay er’ s effo rtt o as s es s h er p ro per t ax l i ab i l i ty . Hu m ph rey , Farri n g t o n & M cCl ai n , P.C. v
. Co m

m i s s i o n er, T.C. M em o . 2 0 1 3-2 3 ; s ec. 1 .6 66 4 -4 (b )(1 ), In co m e Tax Reg s . Go o d fai th rel ian ce o n th e ad vi ce o f an i n d ep en d en t, co m p et en tp ro fes s i o n al
as t o th e t ax treat m en to f an i tem m ay co n s t i tu t e reas o n ab l e cau se. Neo n at o l o g y As s ocs ., P.A. v
. Co m

m i ss i o n er, 1 1 5 T.C. 4 3 , 9 8 -9 9 (2 0 0 0 ), aff’ d , 2 9 9 F.3 d2 2 1 (3 dCi r. 2 0 0 2); s ec. 1 .6 6 6 4 -4 (b ), In co m e Tax Reg s .; s ee Es t at e o f Ral p h Ro b i n s o n
v . Co m m i s s i o n er, T.C. M em o . 2 0 1 0 -1 6 8 , 2 0 1 0 Tax Ct
. M em o LEXIS 2 0 4 , at* 1 2
-
* 1 3 ; s ee al so Un i t ed St at es v . Bo y l e, 4 6 9 U.S. 2 4 1 , 2 5 0 (1 9 8 5 ). Th i s Co u rth as
s t at edth atreas o nab l e cau s e an dg o o dfai th are p res en twh ere t he reco rd
es t ab l i s h es b y

a p rep o nd eran ce o f ev i d en ce th at : (1 ) t he t ax p ay er reas o n ab l y b el i ev es th atth e p ro fes s i o n al up o nwh o m the rel i an ce i s p l aced i s a co m pet en tt ax ad v is er wh o h as s u ffi ci en tex p ert i s e t o ju s t i fy rel i an ce; (2 ) t h e t ax pay er p ro v i d es
n eces s ary an daccu rat e i n fo rm at i o nt o th e ad v i s er; an d (3 ) t he t ax p ay er act ual l y- 1 6 -

[* 1 6 ] rel i es i n g o odfai th o n th e ad v i s er’ s ju d g m en t . Neo n at o l o g y As s o cs ., P.A. v
. Co m m i s s i o n er, 1 1 5 T.C. at9 9
. As s u m i ng (wi th o u t fi n d i n g ) t h atres p o nd en t h as m et h i s b u rd en o f p ro duct i o n i n th e i n s t an tcas e, we n ev ert h el es s co n cl u de t h atp et i t i o n er carri edh i s b u rd enwi th res p ectt o reas o n ab l e cau s e an dg o o dfai th
. 1 0 It is cl ear fro m

th e reco rdth atp et i t i o ner h as n o b ack g ro u n di nt ax at i o n . Wh i l e p et i t i o n er h as an M .B.A., h is ex p eri en ce an dkn owl ed ge l i e i ns o ft ware d es i g n . Pet i ti o n er t herefo re act edp ru d en t l y i ns ecu ri n g t h e s erv i ces o f M s. Zh an g , h i s return p rep arer. Gi v en th e p ro fes s i o n al qu al it y an dco m p l et en es s o f p et i t i o n er’ s t ax retu rn s , we are s at i s fi ed th atp et i t i on er’ s rel ian ce o nM s. Zh an g
was ju s t i fi ed . Fu rt h erm ore, p et i t i o n er es t ab l i sh edth at h e p ro v i d edM s . Zh an g wi th n eces s ary

an d accu rat e i n fo rm at i o n . Fi n al l y , p et i t i o n er’ s t es t i m o n y
es t ab l i s h es th ath e rel i edup o n h i s retu rn p rep arer i n g o o d fai th
. In s u m , th e reco rdas a wh o l e es t ab l is h es th atp et i t i o ner m ad e a g oo d -fai th effo rtt o as ses s h i s p ro p er t ax l i ab i l i ty an dreas o n ab ly

rel i edo nth e ad v i ce o f h i s retu rn p rep arer. W e t h erefo re h o l dth atp et i t i o n er i s n o tl iab l e fo r t h e accu racy rel at ed p en al t i es .

1 0 Becau s e we h o l dth atp et i t i o n er act edi ng o o d fai th an dwi th reas o n ab l e cau s e, we n eedn o td eci d e wh et h er res p o n d en tcarri edh i s b u rd en o f p ro du ct i o n u n d er s ec. 7 4 9 1 (c).- 1 7 -

[* 1 7 ] In reach i n g al l o f o ur h o l d i n g s h erei n , we h av e co n s i d eredal l arg u m en t s
m ad e b y th e p art i es , an dt o t h e ex t en tn o tm en t i o n edab o ve, we fi n d them t o b e i rrel ev an to r wi th o u tm eri t . Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5
.