T .C. Su m m ary Op i n io n 2 01 9 -2 2

UNITED STATES TAX COURT

J ASPER J . NZEDU AND VIVIAN A. NZEDU, Pet it i on ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 2 9 7 34 -1 5 S. Fi l edAu gu s t 2 1 , 2 0 1 9
.

J as p er J
. Nzedu , p ro s e. Ry an Z. Sarazi n , fo r res p o n d en t
.

SUM M ARY OPINION CARLUZZO, Ch i ef Sp eci al Tri al J u d g e: Th i s cas e was h eardp u rs u an tt o th e p ro v i s i o n s o f s ect i o n 7 4 6 3 1 o f th e In t ern al Rev enu e Co d e i n effect wh enth e

1 Un l es s o th erwi s e i nd i cat ed , s ect io n referen ces are t o t h e In t ern al Rev en u e Co d e o f 1 9 8 6 (Co d e), as am en d edan d i n effect fo r t h e rel ev an tp eri o d . Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re.- 2
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p et i t i o n was fi l ed . Pu rs u an t t o s ect i o n 7 4 6 3 (b ), the d eci s i o n t o b e en tered i s n o t
rev i ewab l e b y

an y o ther co u rt , an d t h i s o p i n i o n s h al l n o tb e t reat ed as p reced en t fo r an y o th er cas e. In a n o t ice o f d efi ci en cy d at edSep t em b er 4 , 2 0 1 5 (n o t i ce), res p o nd en t d et erm i n edd efi ci en ci es i n p et i t i o n ers ’ Fed eral i n co m e t ax , an ad d i t i o n t o t ax , an d
an accu racy -rel at edp en al ty as fo l l o w s : Ad d i t i o n t o t ax Pen al ty Year Defi ci en cy s ec. 6 6 5 1(a)(1 ) s ec. 6 6 6 2 (a) 2 0 1 2 $ 1 7 ,3 4 8 --- $ 3,3 5 5 .8 0 2 0 1 3 3 5 ,0 30 $ 8 4 3 .7 5 --- W i th th e ex cep t i o n o f p et i t i o n ers ’ en t i tl em en t t o a $ 6 6 ,9 5 0 p as s th ro ug h l o s s d educt i o n cl ai m edo n t h ei r 2 01 2 Fed eral i n co m e t ax retu rn an dth e ab o ve-l i s t ed ad d it i o n t o t ax an d accu racy -rel at edp en al ty , i s s u es rel at i ng t o ad ju st m en t s m ad e i n th e n o ti ce h av e b een res o l v edb y th e p art i es . Th e rem ai n i n g i s s u es ad dres s edan d d eci d ed in th is o p i n i on ari s e fro m d edu ct i o n s cl ai m edo n a 2 01 2 am en d ed Fed eral i n co m e t ax retu rn an d2 01 3 Fed eral i n co m e t ax retu rn p et i t io n ers s ubm i t t edt o
res p o n d en t aft er t h e n o t ice was i s s u ed . Aft er co n ces s i o n s , 2 tho s e i s s u es are wh et h er p et i ti o n ers are: (1 ) en t i t l edt o d edu cta $ 6 6 , 9 5 0 l o s s i n cu rredb y

2 Am o n g o th er co n ces s io n s , p et i t io n ers co n ced e t hatth ey u n d errep o rt ed t ax ab l e i n t eres t b y

$ 7 2 0 fo r 2 0 1 2
.- 3
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W as h i n g t o n Tax As s o ci at es , In c. (W TA), i n 2 0 1 2 , wh i ch d ep en d s o n wh et h er t h at
co rp o rat i o n p ro p erl y el ect eds ub ch ap t er S s t atu s b y fi l i n g a p ro p er Fo rm

2 5 5 3 , El ect i o n b y

a Sm al l Bu s i n es s Co rp o rat i o n ; (2 ) en t i t l edt o v ari ou s d edu ct i o ns cl ai m edo n Sch edul e C, Pro fi to r Lo s s Fro m Bu s i n es s , i n cl u d edo n a 2 0 1 2
am en d edretu rn n o tp ro ces s edb y res p o n d en t(2 0 1 2 am en d edretu rn ) rel at in g t o Nat i o n al Tax As s oci at es , LLC (NTA); (3 ) en t i tl ed t o v ari o u s Sch edu l e C d educt i o n s rel at i n g t o NTA s h o wno n p et i t i o n ers ’ l at e-fi l ed 2 01 3 retu rn ; (4 ) l i ab l e fo r a s ect i o n 6 65 1 (a)(1 ) ad d i t i o n t o t ax fo r 2 0 1 3 ; an d(5 ) l i ab l e fo r a s ect i o n 6 6 6 2 (a) accu racy -rel at edp en al ty fo r 2 0 1 2
. Back gro u n d 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. Atth e t i m e t h e p et i t i o n was fi l ed , p et i t i o ners , wh o are m arri edt o each o th er, res i d ed i n Vi rg i n i a. M rs . Nzedui s a m ed ical d o ct o r. M r. Nzedu(p et i t i o n er) i s an at t o rn ey . Befo re t h e y ears i n i s s u e h i s ex p eri en ce i n cl ud ed p ract i ci n g l aw wi th th e l aw fi rm
o f Dewey Bal l an t i n e an d wo rk i n g i n th e fi n an ci al p ro du ct s d i vi s i o n o f t h e
acco u n t in g fi rm o f Ern s t& Yo u n g . Du ri n g 2 0 1 2 an d2 0 1 3 p et i ti o ner o wn edan do p erat ed J as p er At t o rn ey s & As s oci at es , PLLC (J as per At t o rn ey s ). Pet i t io n er al s o fo rm edtw o o th er b u s i n es s es
aro u n dth e s am e t i m e. Ono r aro u n dNo v em b er 1 4, 2 0 1 1 , p et i t i o n er i n co rp o rat ed- 4
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W TA, a co rp o rat i on o rg an i zedu n d er t h e l aws o f Vi rg i n i a. To th e ex ten tth atan y W TA s to ckh adb een i s s u ed , p et i t i o n er was th e s o l e o wn er o f i t . On o r aro u n d Decem b er 1 2 , 2 0 11 , p et i t i o n er fo rm edNTA, a Vi rg i n i a l i m i t edl i ab i l i ty co m p an y . Al th o u g h th e v ari o us en t erp ri s es were s ep arat e l eg al en t i t i es , th e fu n ct i o n s o f t h e b u s i n es s es , wh i le d i s t i n ct , ap p ear cl os el y i n t eg rat ed . As b es twe can t el l , W TA p ro v id edo n l i n e t ax s o ft ware wh i l e NTA o p erat ed as a t ax p rep arat i o n co m p an y . Th ro u g h o u tth e y ears i n i s s u e t h e o ffi ces o f J as p er At t o rn ey s , W TA, an d NTA were al l i n a s i ng l e o ffi ce s u it e i n Al ex an dri a, Vi rg in i a (Al ex an dri a o ffi ce). Pet i t io n er co n du ct ed al l o f h i s b u s i n es s act i v i t i es fro m the Al ex an dri a o ffi ce. Th e b u s i n es s es al l s h aredth e s am e u t il i t i es an do ffi ce equ i p m en t
. Du ri n g 2 0 1 2 an d2 0 1 3 W TA m ai n t ai n ed a b u s i n es s ch eck i n g acco u n tat Ban k o f Am eri ca, an dNTA m ai n t ai neda b u s i n es s ch eck in g acco u ntatVi rg i n i a Co m m erce Ban k . Al l o f t h e ch eck s drawn o n the NTA b u si n es s ch eck i n g acco u n t were wri t t en t o W TA. Paym en t s fo r wh atap p ear t o b e b us i n es s ex p en ses rel at edt o o n e o r t h e
o th er o f t h e th ree b us i nes s en t i t i es were m ad e fro m W TA’ s b u s i n es s ch eck i n g
acco u n t or fro m

p et i t i o n er’ s Di s co v er cred i t card , th e b al an ce o f wh i ch was g en eral l y p ai dfro m

W TA’ s b u s i n es s ch eck i n g acco u n t
.- 5
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Ap p aren t l y , i twas p et i t i o n er’ s b u s i n es s p ract i ce t o s can fi n an ci al reco rd s
an d s to re t hem d i g i tal l y

o n h is l ap t o p co m

p u t er. Acco rd i n g t o a Ci ty o f Al ex an dri a Po l i ce Dep art m en t rep o rt , o n Decem b er 1 7 , 2 0 13 , p et it i o n er rep o rt ed th ath i s Al ex an dri a o ffi ce was b u rg l ari zedo n No vem b er 2 5 , 2 0 1 3 , an dth ath i s l ap t o p co m

p u t er was s t o l eni n th e b u rg l ary . Pet i t i o ners ’ 2 0 1 2 s el f-p rep ared , jo in t Fed eral i n co m e t ax retu rn was t i m el y fi led on Au g u s t 2 6 , 2 0 1 3 (2 0 1 2 retu rn ). Th atretu rn i n cl u d es a Sch edu le C fo r J as p er At t o rn ey s. Th e 2 0 12 retu rn d i dn o t i n cl u d e a Sch edu l e C fo r NTA. Pet i t io n ers rep ort edth ei r s h are o f W TA’ s n etl o s s o f $ 66 ,9 5 0 as “ n o np as s i v e l o s s fro m Sch edu le K-1 ” o n a Sch edu l e E, Sup p l em en t al In co m e an dLo s s , at t ach edt o th e 2 0 12 retu rn . Ono r aro u n dJ u l y

2 8 , 2 01 6 , aft er t h e p et i t i o n h adb een fi led , p et i t i o n ers
s ub m i t t edth e 2 0 1 2 am en dedretu rn . Th e 2 0 12 am en dedretu rn was n o tp ro ces s ed b y res p o n d en t . Inad d it i o n t o th e Sch edu l e C rel at i n g t o J as p er At t o rn ey s , p et i t i o n ers at t ach eda Sch edu l e C rel at in g t o NTA t o thei r 2 0 1 2 am en d edretu rn . Onth e NTA Sch edu le C p et i t io n ers rep o rt edg ro s s recei p t s o f $ 3 ,6 5 1 an dt o t al
ex p en s es o f $ 57 , 6 1 4 , res u l t i n g i n a $ 5 3 , 9 6 3 n etl o s s . Pet i t i o ners ’ 2 0 1 3 retu rn , fi l edo n M arch 1 6 , 2 0 1 5, i ncl u d es a Sch edu l e C fo r J as p er At t o rn ey s an da Sch edu le C fo r NTA. Onth e J as p er At t o rn ey s Sch edu l e C- 6
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p et i t i o n ers rep o rt edg ro s s recei p t s o f $ 6 7 ,5 00 an d t ot al ex p en ses o f $ 9 2 ,3 1 8 , res u l ti n g i n a $ 2 4 , 8 1 8 n etl o s s . On th e NTA Sch edu l e C p et i t i o n ers rep o rt edg ro s s recei p t s o f $ 3 , 50 0 an dt ot al ex p en s es o f $ 2 9 ,7 7 9, res u l t i ng i n a $ 2 6 , 2 7 9 n etl o s s . In th e n ot ice res p o n d en td i s al l o wedth e $ 6 6,9 5 0 n o np as s i v e fl o wth ro u g h l o s s fro m W T A fo r 2 0 1 2 “ s i n ce i th as b een d et erm i nedth at* * * [W TA] i s a C Co rp o rat i o n , an das s u ch , th e co rp o rat i o n s [s i c] p ro fi t/ l o s s i s n otal l o wab l e as a fl ow-t h ru[s i c] i t em

atth e i n d i v i dual l ev el .” Res p o n d en tfu rt h er d et erm in edth at p et i t i o n ers were l i ab l e fo r an accu racy -rel at edp en al ty u n d er s ect i o n 6 6 6 2 (a) o n
v ari o u s g ro u n d s fo r 2 0 1 2 an d fo r t h e ad d i t i o n t o t ax u n d er s ect i o n 6 6 5 1 (a)(1 ) fo r 2 0 1 3 . Oth er ad

ju st m en t s m ad e i n the n o t i ce are co m p u t at i o n al o r h av e b een
co n ced edb y

o n e o r t h e o th er o f t h e p art i es an dn eedn o tb e ad dres s ed
.

Di s cu ss i o n I. W TA Sub ch ap t er S El ect i o n Sect io n 1 3 6 2 (a) p ro v i d es th ata “ s m al l b u s i n es s co rp o rat i o n ” m ay el ectt o b e t ax edas a p as s th ro u g h en t i ty u n d er s ub ch ap t er S o f t he Co d e. A s m al l b u s i n es s
co rp o rat i o n m ak es th i s el ect i o n (S el ect i o n ) b y fi l i n g wi th t h e In t ern al Rev en u e Serv i ce (IRS) a co m

p l et edFo rm

2 5 53 . Sec. 1 .1 3 6 2-6 (a)(2 ), In co m e Tax Reg s . Befo re an S el ect i o n i s v al i d, al l s h areh o l d ers as o f t h e d at e t he el ect i o n i s m ad e
m u stco ns en tt o t h atel ect io n . Sec. 1 36 2 (a)(2 ). A s h areh o l d er co n s en t s t o an- 7
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S el ect i o n b y

s i g n i n g an dd at i n g th e Fo rm 2 55 3 s ub m i t tedb y the S co rp o rat i o n , s ee s ec. 1 .1 3 6 2-6 (b )(3 )(i ), In co m e Tax Reg s., o r b y s ep arat el y

s ub m it t in g t o th e IRS a s ig n edco n s en ts t at em en twh i ch s et s fo rth cert ai n i n fo rm at i o n , s ee i d
. s ub p ara. (1 ). 3 Pet i t i o ner as s ert s th ath e p ers o n al l y p rep ared a Fo rm 2 55 3 i n 2 01 1 fo r W TA
an d th eng av e i t t o o ne o f h is em p l o y ees wi th i n s tru ct i o ns t o m ai l i tt o the IRS. Acco rd in g t o res p o nd en t , p et it i o n er d i d n o tm ak e a v al i dS el ect io n u n t i l 2 0 1 5
. Res p o n d en t ’ s reco rd s d o n o ts h o w th ata Fo rm 2 5 5 3 o n b eh al f o f W TA was recei v edi n 2 0 1 1 , n or h as p et it i o n er p ro v i d edan y p ers u as i v e ev i d en ce o f t i m el y
m ai l i n g Fo rm

2 55 3 o n b eh al f o f W TA wi th res p ectt o i t s 2 0 1 2 t ax y ear. Res po n d en td i drecei v e a Fo rm 2 5 5 3 o n b eh al f o f W TA effect iv e J an u ary 1 , 2 0 1 5
. Acco rd in g ly , we rejectp et i t i o n ers ’ cl ai m th ata Fo rm

2 5 5 3 was fi ledwi th
res p o n d en t o n b eh al f o f W T A fo r 2 0 1 2 . W TA d i dn o tqu al ify as an S co rp o rat i o n

3 Th e co ns en ts t at em en t m u s ts etfo rt h th e n am e, ad dres s , an dt ax p ay er i d en t i fi cat i o n n u m

ber o f t h e s hareh o l d er, th e n u m ber o f s h ares o f s t ocko wn edb y th e s h areh o l d er, t h e d at e o r d at es o n wh i ch th e s t o ckwas acq u i red , th e d at e o n wh i ch th e s h areh o l d er’ s t ax ab l e y ear en d s , th e co rp orat i o n ’ s n am e, t h e co rp o rat i o n’ s t ax p ay er i den t i fi cat i o n n um b er, an d th e el ect i o n t o wh i ch the s h areh o ld er co n s en t s . See s ec. 1 .1 3 6 2-6 (b )(1 ), In co m e Tax Reg s .- 8
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fo r 2 0 1 2 o r 2 0 13 , an dp et i t i o ners are n o ten ti t l edt o d edu cta $ 66 ,9 5 0 p as s th ro u g h l o s s i n cu rredb y

W TA i n 2 01 2
. 4 II. Sch edu l e C Dedu ct i o n s As we h av e o b s erv edi n co u n tl es s o p i n i o n s, d edu ct i on s are a m at t er o f l eg i s lat i v e g race, an dthe t ax p ay er b ears th e b urd en o f p ro v i n g en t i t l em en tt o an y cl ai m edd edu ct i on . 5 Ru l e 1 4 2 (a); INDOPCO, In c. v . Co m m i ss i o ner, 5 03 U.S. 7 9 , 8 4 (1 99 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 40 (1 9 3 4 ). Th i s b u rd enreq u ires th e t ax p ay er t o s ub s t an t iat e ex p en s es u nd erl y i n g d edu ct i o n s cl ai m edb y

k eep i n g an dp ro du ci n g ad equ at e reco rd s th aten ab l e t h e Co m m i s s i o n er t o d et erm i n e t h e t ax p ay er’ s co rrect t ax l i ab i l it y . Sec. 6 0 0 1; Hrad es ky v . Co m m i s s i o n er, 6 5 T.C. 8 7, 8 9-9 0 (1 9 7 5 ), aff’ d p er cu ri am , 5 4 0 F.2 d8 2 1 (5 th Ci r. 1 9 7 6 ); M en eg u zzo v . Co m m is s i o n er, 4 3 T.C. 8 2 4 , 8 3 1 -8 32 (1 9 65 ). A t ax p ay er cl ai m i ng a d educt i o n o n a Fed eral i n co m e t ax return m u st d em o n st rat e t h atth e d educt i o n i s al l o wab l e p u rs u an tt o s o m e s t atu t o ry p ro v i s io n an dm u s t fu rt h er
s ub s t an t i at e t h atth e ex p en s e t o wh i ch the d educt i on rel at es h as b een p ai do r

4 As b es twe can d et erm i n e, t h ere was n o v al i dS el ect i o n m ad e fo r W TA u n t i l 2 0 1 5
.

5 Pet i t i on ers d o n o t cl ai m

an dth e reco rdd o es n o t o th erwi se d em o n s trat e t h at th e p ro v i s i o n s o f s ec. 7 4 9 1 (a) are ap p l i cab l e h ere, an d we p ro ceed as th ou g h th ey are n o t
.- 9
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i n cu rred . See s ec. 6 0 0 1 ; Hrad es ky v . Co m m is s i o n er, 6 5 T.C. at8 9 -9 0; s ec. 1 .6 00 1 -1 (a), In co m e Tax Reg s . Tax p ay ers m ay

d edu cto rd in ary

an dn eces s ary

ex p en s es p ai d i n co n n ect i o n wi th o perat i ng a t rad e o r b u s i n es s . Sec. 1 6 2 (a); Bo y dv . Co m m i s s i o n er, 1 2 2 T.C. 3 0 5 , 3 1 3 (2 0 0 4). Onth e o th er h an ds ect i o n 2 6 2 (a) g en eral l y d i s al l o ws an y d educt i o n fo r p ers o nal , l i v i n g, o r fam i l y ex p en ses . As a g en eral ru l e, i f a t ax p ay er p ro v i d es s u ffi ci en t ev i d en ce t h atth e t ax p ay er h as i n cu rreda t rad e o r b u s i n es s ex p en s e co n tem pl at edb y s ect i o n 1 6 2 (a) b u ti s u n ab l e t o ad equ at el y s ub s t an ti at e t h e am o u n t , th e Co urtm ay es t i m at e t h e
am ou n tan dal lo w a d edu ct io n t o th at ex t en t . Co h an v . Co m m i s s io n er, 3 9 F.2 d 5 4 0 , 5 4 3 -5 4 4 (2 d Ci r. 1 9 3 0 ). Ho wev er, i n o rd er fo r t h e Co u rtt o es t i m at e t h e
am ou n to f an ex pen s e, t h ere m u s tb e s o m e b as i s up on wh ich an es t i m at e m ay b e
m ad e. Van i cekv . Co m

m i s s i o n er, 8 5 T.C. 7 3 1 , 7 42 -7 4 3 (1 9 8 5 ). Oth erwi s e, an y al l o wan ce wo u l dam ou n tt o u n g u i d ed l arg es se. W i ll i am s v . Un i t edSt at es , 2 4 5 F.2 d5 5 9 , 5 6 0 (5 th Ci r. 1 9 5 7 ). Dedu ct i o n s fo r ex p en s es at tri b u tab l e t o trav el (“ i n cl u d i n g m eal s an dl o d g i n g wh i le awayfro m ho m e”), en t ert ai nm en t, g ift s , an d the u s e o f “ l i s t ed p ro p ert y ” (as d efi n edi n s ect i o n 2 8 0 F(d )(4 ) an di ncl u d in g p as sen g er au t o m o b il es ), i f o therwi se al l o wab le, are s ub

jectt o s tri ctru l es o f s ub s tan t i at i o n . See s ec. 2 7 4 (d ); San fo rdv .- 1 0 -

Co m m i s s i o n er, 5 0 T.C. 8 23 , 8 2 7 (1 9 6 8 ), aff’ d p er cu ri am , 4 1 2 F.2 d2 0 1 (2 dCi r. 1 9 6 9 ); s ec. 1 .2 7 4-5 T (a), Tem p o raryIn co m e Tax Reg s . , 5 0 Fed . Reg . 4 6 0 1 4 (No v . 6 , 1 98 5 ). W i th res p ectt o d edu ct i o n s fo r th es e t y p es o f ex pen s es , s ect i o n 2 7 4 (d ) req u i res th atth e t ax p ay er s ub s t an t iat e ei th er b y ad equ at e reco rd s o r b y s u ffi ci en t
ev 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 t he
ex p en s e, (2 ) t h e t im e an d p l ace t h e ex p en se was i ncu rred , (3 ) th e b us i n es s p u rp o s e
o f t h e ex p en s e, an d(4 ) i n th e cas e o f an en t ert ai n m en to r g i ftex p en s e, 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 each ex p en s e i n cu rred . Fo r “ l i s t edp ro pert y ”
ex p en s es , th e t ax p ay er m us t es t ab l i s h th e am o u nto f b u s in es s u se an dth e am o u n t
o f t o t al u s e fo r s u ch p ro p ert y . See s ec. 1 .2 7 4 -5 T(b )(6 )(i )(B), Tem p o raryIn co m e Tax Reg s ., 5 0 Fed . Reg . 4 6 0 1 6 (No v. 6 , 1 9 8 5). Sub s t an t i at i o n b y

ad equ at e reco rd s req u ires th e t ax p ay er t o m ai n t ai n an
acco u n t bo o k , a d i ary , a l og , a s t at em en to f ex p en s e, t ri p s h eet s , o r a s i m i l ar reco rd p rep aredco n t em

p o ran eo u s l y wi t h th e ex p en d i ture an dd ocu m en t ary ev i d en ce (e.g ., recei p t s o r b i l l s ) o f cert ai n ex p en d i tures . Sec. 1 .2 7 4 -5 (c)(2 )(i i i ), In co m e Tax Reg s.; sec. 1 .2 7 4 -5 T(c)(2 ), Tem p o raryIn co m e Tax Reg s . , 5 0 Fed . Reg . 4 60 1 7 (No v. 6 , 1 9 8 5 ). Sub s t an t iat i o n b y o th er s u ffi ci en tev i d en ce req u i res th e p ro duct i o n o f co rro bo rat i v e ev i d en ce i n s upp o rt o f t h e t ax p ay er’ s s t at em en t- 1 1 -

s p eci fi cal l y

d et ai l i ng th e req u i redel em en t s . Sec. 1 .2 7 4-5 T(c)(3 ), Tem p o rary In co m e Tax Reg s ., 5 0 Fed . Reg . 4 6 0 2 0 (No v . 6 , 1 9 8 5 ). Pet i t i o ners d i dn o ttreat NTA as a t rad e o r b u si n es s o n th ei r 2 0 1 2 retu rn b u t d i dtreat NTA as a t rad e o r b us i n es s o n th ei r 2 0 1 2 am en d edretu rnan d 2 0 1 3 retu rn . Pet i t io ners ’ 2 0 1 2 am en d edretu rn an d2 0 1 3 ret u rn were s ub m i t t edt o th e IRS aft er t h e n o ti ce h adb een m ai l ed . Onth e b as i s o f t h e s ub m i s s i o n o f t he 2 0 12
am en d edretu rn an dth e 2 0 1 3 retu rn , p et it i on ers n o w cl ai m th atth ey are en t i t l edt o d educt i o n s fo r b us i nes s ex p en s es rel at edt o NTA fo r 2 01 2 an d2 01 3
. Acco rd i n g t o p et i t i o n er, ex p en s es s h ared am o n g h i s b u s i n es s en ti t ies were al lo cat ed ap p ro p ri at el y

am o n g th o s e en t i t i es fo r i n co m e t ax rep o rt i n g p u rp os es . Acco rd i ng t o res p o nd en t , p et i t i o n ers h av e fai l edt o ad equ at el y s ub st an t i at e th e am o un tp ai do r o th erwi se es t ab l i s h th at th e ex pen s es rep o rt edo n th e NTA Sch edu l es C were n o trep o rt edo n th e 2 0 1 2 am en d ed return o r 2 01 3 retu rn b y o n e
o f p et i ti o n er’ s o th er b u s i n es s en t i t i es . Res p on d en tfu rt h er co n t en d s th att o th e
ex t en tp et i t i o n ers s ub s t an t i at edcert ai n p aym en t s , th o s e p aym en t s are n o t d educt i b l e o n th ei r jo i n t Fed eral i n co m e t ax retu rn s b ecau s e t h ey were p ai db y W TA. Un d er th e ci rcu m st an ces we ex p ectth atp et i t io n ers ’ p o s i t i o n o n th e p o i n t h as b een p ro m

pt ed , atl eas ti n p art , i n an at t em p tt o redu ce t h e 2 0 1 2 an d 2 0 1 3- 1 2 -

d efi ci en ci es d et erm in edi n th e n o t ice. Wh et h er i twas o r was n o t , fo r t h e fo l l o wi n g
reas on s we reject th ei r cl ai m s o f d edu ct i o n s fo r ex p en s es rep ort edo n th e NTA Sch edu l es C. Fo r m o sto f the b us i n es s ex p en s es , p et i t i o n ers fai l edt o m ai n tai n ad equ at e
reco rd s . To th e ex t en t p et i ti o n ers p ro du ceds ubs t an ti at i n g reco rd s , s u ch as b an k
reco rd s , recei p t s , cred i tcard s tat em en t s, an do th er d o cu m en t at i o n , th ey were d i s o rg an i zedan di n co m

p l et e. Pet i t i o n er’ s t es t i m o ny b ri ng s l it t le cl ari ty

t o th e p i ctu re. Pet i t i o ners ex p l ai n t h atth e l acko f d et ai l ed s ub s tan t iat i ng reco rd s i s du e t o th e t h efto f p et i t i o n er’ s l ap t o p. Acco rd i n g t o p et i t i o n ers , b ecau se t hey h av e i n tro du cedev i d en ce, i n th e fo rm o f p et it i on er’ s t es t i m o n y an do th er d o cu m en t s , s h o wi n g th e ex p en ses i n cu rred , th ey are en t i t l edt o th e d edu ct i on s as cl ai m edo n th e ret urn s . Wh en a t ax p ay er’ s reco rd s h av e b een d es tro y edo r l o s t b ecau se o f ci rcu m s t an ces b ey o n dth e t ax p ay er’ s co nt ro l , the t ax p ay er m ay s ub s t an t iat e h i s
ex p en s es b y

m ak i n g a reas o n ab l e reco n st ru ct i o n o f th e ex pen d i tu res o r u s e. See
s ec. 1 .2 7 4-5 T (c)(5 ), Tem p o raryIn co m e Tax Reg s ., 5 0 Fed . Reg . 4 6 0 22 (No v . 6 , 1 9 8 5 ). A t ax p ay er i s req ui red t o reco n s tru ctwh atreco rd s h e can . See, e.g ., Ch o n g
v . Co m m i s s i o n er, T.C. M em o . 2 0 0 7 -1 2 , s li p o p . at9 . Inthi s cas e, h o wev er, th e
ev i d en ce p res en t edd i s cl o s es a t an g l edweb o f s h aredex p en s es th ati s d iffi cu l tt o- 1 3 -

u n rav el . W e are u n ab l e t o d et erm i n e wh et h er ex p en s es rep o rt ed o n t h e NTA Sch edu l es C were al read y rep o rt edan dal l owedas d edu ct i o n s b y res p o nd en tb y
o n e o r t h e o th er o f p et i t io n er’ s o th er b u s i n es s es . No r i s th ere s u ffi ci en tev i d en ce i n the reco rdt o pro vi d e a b as i s fo r es t i m at i n g th e ex p en ses . See Co h an v . Co m m i s s i o n er, 3 9 F.2 dat5 4 3 -5 4 4 ; Van i cek v . Co m m i s s i o n er, 8 5 T.C. at 7 4 2 -7 4 3
. M o reo v er, p et i t i o n ers ’ reco rd s s h o w th atp aym en t s fo r p u rp o rt edNTA b u s i n es s ex p en s es were m ad e fro m W TA’ s b u s i n es s ch eck i n g acco u n t o r fro m p et i t i o n er’ s Di s co v er cred i tcard , th e b al an ce o f wh ich was g en eral l y p ai dfro m W TA’ s b u s i n es s ch eck i n g acco u n t . Acco rd i n g t o p et i t i o n er, h e p ai dNTA
ex p en s es fro m

th e W TA acco un tb ecau s e i twas “ m ore co nv en i en t* * * t o p ay
ex p en s es fro m

o n e acco u nt ” an dth en rei m b u rs e W T A . Th e reco rdcert ai n l y d o es
n o tal l ow u s t o fi n d th at W T A was rei m bu rs ed fo r t h e p aym en ts . No n et h el es s , h av in g el ect ed t o co n du ctth e W TA b u s i n es s i n co rp o rat e fo rm , p et it i o n ers are b o u n db y the Fed eral i n co m e t ax co n s equ en ces o f t hatel ect i o n . See Hi gg i n s v . Sm it h , 3 0 8 U.S. 4 7 3 (1 9 4 0). W TA’ s co rp o rat e ex i s t en ce can no tb e d i sreg ard ed fo r Fed eral i n co m e t ax p u rp o s es , s ee M ol i n e Pro p s ., In c. v . Co m m i s s i o ner, 3 1 9 U.S. 4 3 6 (1 9 4 3 ), an dthu s p et i t i o n ers are n o ten t i t l edt o d edu ctam o u n t s p ai db y W TA o n th ei r NTA Sch edul es C.- 1 4 -

Fo r t h es e reas on s , p et i ti o n ers are n o ten t i t l edt o th e d edu ct i on s n ow cl ai m ed
o n th ei r NTA Sch edu l es C s h o wn o n th ei r 2 0 1 2 am en ded retu rn an d 2 0 1 3 retu rn . III. Sect i o n 6 6 5 1 (a)(1 ) Ad d i ti on t o Tax fo r 2 0 1 3 Pet i t i o ners ’ 2 0 1 3 retu rn was du e t o b e fi l edo n o r b efo re Ap ri l 1 5 , 2 0 1 4 , b u t i t w as n o tfi l edu nt il M arch 1 6 , 2 0 15 . See s ecs . 6 0 7 2 (a), 7 5 03 . Co n s equen t l y , res p o n d en t i m

p os eda s ect i on 6 6 5 1 (a)(1 ) ad d i t i o n t o t ax . Sect io n 6 6 5 1 (a)(1 ) au tho ri zes th e i m p o s i t io n o f anad d i t i on t o t ax fo r fai l u re t o fi l e a t i m el y

retu rn u n l es s th e t ax p ay er p ro v es th ats u ch fai l u re i s du e t o
reas on ab l e cau s e an di s n o tdu e t o wi l l fu l n eg l ect . See al s o Un i tedSt at es v . Bo y l e, 4 6 9 U.S. 2 4 1 , 2 4 5 (1 9 8 5 ); Harri s v . Co m m is si o n er, T.C. M em o . 1 9 9 8-3 3 2
. Sect i o n 6 6 5 1(a)(1 ) i m

p o s es an ad d i t i o n t o t ax o f 5 % o f t h e t ax req u i redt o b e
s h o wno n t h e ret u rn fo r each m o n th o r fract i o n th ereo f fo r wh i ch th ere i s a fai l u re t o fi l e, n ott o ex ceed 2 5% i n t he ag g reg at e. Res p o n d en t ’ s reco rd s d em o n s trat e t hatp et i t i o n ers ’ retu rn was n o tt i m el y fi led , an dp et i t io n ers d o n o td i sp u t e t he p o i n t . Res p o n d en t ’ s s ect i o n 7 4 9 1 (c) b u rd eno f p ro du ct i o n h as b een m etwi th res p ectt o th e i m p o s i t i o n o f t h e s ect i o n 6 6 5 1 (a)(1 ) ad d i t i o n t o t ax ; an db ecau s e p et i t i o ners h av e fai ledt o d em o ns trat e t h at th ei r fai l u re t o fi l e th ei r 2 0 1 3 retu rn t i m el y was du e t o reas o n ab l e cau s e,
res p o n d en t’ s i m

p o s i t i on o f a s ect i o n 6 6 5 1 (a)(1 ) ad d i t i o n t o t ax i s s u s t ai n ed
.- 1 5 -

IV. Sect i o n 6 6 6 2 (a) Accu racy -Rel at edPen al ty fo r 2 0 1 2 Las t ly , we co n s i d er wh et h er p et i t i o ners are l i ab l e fo r a s ect i o n 6 6 6 2 (a)
accu racy -rel at edp en al ty

fo r 2 01 2 . Rel y i n g up o n v ari ou s g ro u n d s , i n cl u di n g an
u n d erp aym en t du e t o a s ub s t an t i al u n d ers t at em en t o f i n co m e t ax , res p o n d en t arg u es th atth ey

are. See s ec. 6 6 6 2 (a)-(d ). Sect io n 6 6 6 2 (a) an d(b )(2 ) i m p o s es a p en al ty

o f 2 0 % o f t he p o rt i o n o f an
u n d erp aym en t o f t ax at tri b u t ab l e t o a s ub s t an t ial u n d ers t at em en to f i n co m e t ax . Anu n d ers t at em en t o f i n co m e t ax i s s ub st an t i al wi th i n th e m ean in g o f s ect i o n 6 6 6 2 i f, as rel ev an t h ere, t h e u n d ers t at em en tex ceed s $ 5 ,0 0 0 . See s ec. 6 6 62 (d )(1 )(A);
s ec. 1 .6 6 62 -4 (b ), In co m e Tax Reg s. Res p o n d en tb ears th e b u rd en o f p ro du ct i o n wi th res p ectt o th e i m p o s i t i o n o f th e p en al ty

i m po s edi n th e n o t i ce an d h ere i n d i s p u t e, s ee s ec. 7 4 91 (c), an d t h at b u rd enh as b een s at i sfi edb ecau s e t h e u n d ers t at em en to f i n co m e t ax ex ceed s $ 5 ,0 0 0 , s ee s ecs . 6 2 1 1 , 6 6 6 2 (d )(2 ), 6 6 6 4 (a). Sect io n 6 7 5 1 (b )(1 ) p ro v i d es th at , s ub j ectt o cert ai n ex cep t io n s i n s ect i o n 6 7 5 1 (b )(2 ), n o p en al ty

s h al l b e as s es s ed u n les s the i ni t i al d et erm i n at i o n o f t h e
as s es s m en ti s p ers o n al l y

ap p ro v edi n wri t i n g b y

th e i m m ed i at e s uperv i s o r o f t h e i n d i v i du al m ak i n g th e d et erm i n at i o n o r s u ch h i g h er l ev el o ffi ci al as the Co m m i s s i o n er m ay

d es i gn at e. Wri t t en ap p ro v al o f t h e i ni t i al p en al ty- 1 6 -

d et erm i n at i o n u n d er s ect i on 6 7 5 1 (b )(1 ) m u s tb e o b t ai n edb efo re t h e p ro p o s ed p en al ty i s fi rs tfo rm al l y co m m u n i cat edt o t h e t ax p ay er i n a wri t i n g th atal s o ad v is es th e t ax p ay er o f h i s ri g h t s t o ap peal th e p en al ty wi th th e IRS Offi ce o f Ap p eal s. Cl ay

v . Co m m i s s io n er, 1 5 2 T.C. _

_ , _ _ (s l i p o p. at4 4) (Ap r. 2 4 , 2 0 1 9 ). Co m p l i an ce wi th s ect i o n 6 7 5 1 (b )(1 ) i s p arto f t h e Co m m i s s i on er’ s b u rd en o f p ro duct i o n i n an y

d efi ci en cy cas e i n wh i ch a p en al ty s ubjectt o s ect i o n 6 7 5 1 (b )(1 ) i s as s ert ed . Ch ai v . Co m

m i s s io n er, 8 5 1 F.3 d1 9 0, 2 2 1 (2 dCi r. 2 0 17 ), aff’ g i n p art , rev ’ g i n p artT.C. M em o. 2 0 1 5 -4 2
. Th e s ect i on 6 6 6 2(a) accu racy -rel at edp en al ty d et erm i n edi n the n o ti ce was p ro p erl y ap p ro v edas req u i redb y

s ect i on 6 7 5 1 (b )(1 ). Th e reco rdi n cl u d es a Ci v i l Pen al ty Ap p ro v al Fo rm , ap p ro v i n g i m p o s it i on o f an accu racy -rel at edp en al ty ag ai n s tp et i t i o n ers fo r 2 0 1 2 an dex ecu t ed b y th e IRS t ax ex am i ner’ s i m m ed i at e
s up erv i s o r b efo re t he d at e t h e n o t i ce was i s su ed . As a res u l t , we fi n dth at
res p o n d en t m eth i s b u rd en o f p ro du ct i o n wi th res p ectt o th e n eg l i g en ce p en al ty . Th e accu racy -rel at edp en al ty d o es n o tap p l y

t o an y p art o f an u n d erp aym en t
o f t ax i f i ti s s h o wnth atth e t ax p ay er act edwi th reas o nab l e cau s e an di n g o o dfai t h wi th res p ect t o th atp o rt i o n . Sec. 6 6 6 4 (c)(1 ). Th e d et erm i n at i on o f wh et h er a t ax p ay er act edi n g oo dfai th i s m ad e o n a cas e-b y -cas e b as i s , t ak i n g i n t o acco u n t al l th e p ert in en t fact s an d ci rcu m s t an ces . Sec. 1
. 6 6 64 -4 (b )(1 ), In co m e Tax Reg s .- 1 7 -

Pet i t io n ers b ear t h e b u rd en o f p ro v i n g th at they h adreas o n ab l e cau s e an dact edi n g o o dfai th wi th res p ectt o the u n d erp aym en t . See Hi g b ee v . Co m m i s s i on er, 1 1 6 T.C. 4 3 8 , 4 4 9 (2 0 0 1 ). Pet i t i o ners co n ced edthatth ey recei v edb utfai l ed t o rep ort$ 7 2 0 i n i n t eres t i n co m e o n th ei r 2 0 1 2 retu rn an dh av e n o ts h o wnreas o n ab l e cau s e fo r o m it t i n g th e i n t eres ti n co m e. Th e rem ai ni n g p o rt i o n o f t h e u n d ers t at em en tres u l t s fro m p et i t i o n ers ’ rep ort i n g th ei r s h are o f W TA’ s n etl o ss o f $ 6 6 ,9 5 0 as “ n onp as s i v e l o s s fro m Sch edu le K-1 ” o n a Sch edu l e E at t ach edt o the 2 0 1 2 retu rn . Co n s i d eri n g p et i t i o n er’ s ex peri en ce, kn o wl ed g e, an dedu cat i o n , d edu ct i n g th e co rp o rat io n ’ s l o s s o n p et i t i on ers ’ 2 0 1 2 ret u rn was n o t reas o nab l e. Acco rd i n g l y , th ey are l i ab l e fo r a s ect i o n 6 66 2 (a) accu racy -rel at edp en al ty . To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5
.