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

UNITED STATES TAX COURT
FAITH LYNN BRASHEAR AND HENDEL N. THISTLETOP, Pet i t io n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

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. Fi l edAu gu s t 1 9 , 2 0 2 0
.

Fai th Ly n n Bras h ear an dHen d el N. Th i s t l et o p , p ro s es e. Dav i dJ . W arn er an d Em

m a S. W arn er, fo r res p o nd en t
.

M EM ORANDUM FINDINGS OF FACT AND OPINION CARLUZZO, Ch i ef Sp eci al Tri al J u d g e: Ina n o ti ce o f d efi ci en cy d at ed M arch 2 1 , 2 0 1 3 (n o t i ce), res p o n d en td et erm i n edd efi ci en ci es i n p et i t i o ners ’- 2
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[* 2 ] Fed eral i n co m e t ax , s ect i o n 6 6 5 1 (a)(1 ) 1 ad d i t i o ns t o t ax , an ds ect io n 6 6 6 2 (a)
accu racy -rel at edp en al ti es as fo l l o ws : 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 0 9 $ 12 ,8 4 4 $ 1,7 4 0 .7 5 $ 2 ,5 6 8
. 8 0 2 0 1 0 1 3,7 9 6 1 ,3 5 3 .2 5 2 ,6 7 9.6 0 2 0 1 1 6 ,2 3 2 -0 - 1 ,2 4 6.4 0 Aft er co n ces si o ns , 2 th e i s s u es fo r d eci si o n are wh et h er p et i t i o n ers : (1 ) are
en t i t l edt o v ari o us d edu ct io n s cl ai m edo n Sch edu l es C i n cl u d edwi th th ei r 2 0 0 9 , 2 0 1 0 , an d2 0 1 1 Fed eral i n co m e t ax retu rn s; (2 ) u n d ers t at edg ro s s recei p ts b y $ 3 ,9 0 9 o n th e Sch edu l e C at t ach edt o th ei r 2 0 1 1 Fed eral i nco m e t ax return ; (3 ) recei v edb ut fai l edt o rep o rtwag es o f $ 4 , 2 1 8 th at M rs . Bras h ear (p et i ti o n er) recei v edfro m

Ban ko f Am eri ca Nat i on al As s o ci at io n (Ban k o f Am eri ca) i n 2 0 10 , as h ad been rep ort ed t o res p on den to n a Fo rm W -2 , W ag e an dTax St at em en t , i s su edb y Ban ko f Am eri ca; (4 ) are en t i t l edt o a $ 2 3 ,3 8 4 d edu ct i o n fo r a n et

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 (Co d e) o f 1 9 86 , 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 Res p o n d en tco n ced es th atp et it i on ers are en t it l edt o d edu ct i o n s cl ai m edo n Sch edu l es C, Pro fi t o r Lo ss Fro m Bu s i n es s , fo r co n tract l ab o r ex p en s es o f $ 2 2 ,7 0 8 an d $ 3 0 ,2 5 2 fo r 2 0 0 9 an d2 0 1 0 , res p ect i v el y . Pet i t io n ers co n ced e t h atth ey recei v edan dfai l ed t o rep orti n t eres ti n co m e o f $ 46 fro m Ch as e Ho m e Fi nan ce, LLC, fo r 2 01 0
.- 3
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[* 3 ] o p erat i n g l os s (NOL) carry o v er fro m 2 0 0 8 t o 2 0 0 9 ; (5 ) are l i ab le fo r t h e ab o ve referen cedad d i t i o n s t o t ax ; an d (6 ) are l i ab l e fo r s ect i o n 6 66 2 (a) accu racy rel at ed p en al t i es fo r an y

y ear i n i ss u e. 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. Wh en the p et i t i o n
was fi l ed , p et i t i o n ers res i dedi n Cal i fo rn i a. Du ri n g th e y ears i n i ss u e p et i t i o n er was s el f-em pl oy edas a real es t at e b ro k er. Th e real es tat e b ro kerag e b u s i n es s o p erat edfro m a s p ace i n p et i t i o n ers ’ Co ro n a, Cal i fo rn i a, res i den ce (Co ro n a res i d en ce) al th o u g h p et i t i o n ers d i dn o t
res i de t h ere at al l t i m es du ri n g th e y ears i n i s su e. Du ri n g 2 01 1 p et i t i o n er recei v ed a $ 4 ,8 7 5 p aym en t fro m T ay l or M o rri s o n Cal i fo rn i a, LLC, an da $ 2 ,4 4 4 p aym en t fro m Th em l so nl i n eco m . Bo th p aym en t s rel at edt o h er real es t at e b ro k erag e b u s i n es s an deach p aym en t was ev i d en cedo n Fo rm s 1 09 9 -M ISC, M i s cel l an eo u s In co m e. Ap p aren t l y , o n ly p o rt i o n s o f t h es e p aym en t s are i n cl u d edi n t h e i n co m e rep o rt edo n p et i t i o n ers ’ 2 0 1 1 Fed eral i n co m e t ax retu rn . Acco rd i ng t o p et it i on er, wh i l e l i v i ng i n the Co ro na res i d en ce s h e was i n v o l v ed i n a real es t at e d ev el o p m en tp ro j ecti n h er n ei gh b o rh o o d
. Pet i t i o n er referred t o th i s act i v i ty

as th e J am es o n p ro

ject . Th e d et ai l s s u rro u n di n g t h e n atu re
o f t h e J am es o n p ro

j ect o r p et it i o n er’ s i n v o lv em en twi th i tare l es s th an cl ear. Th i s- 4
-

[* 4 ] l acko f cl ari ty

i s co n s i s t en twi th p et i t i o ners ’ ev i d en ce o ffered i n s up p o rto f al l
o f t h e i s su es i n thi s cas e. In o r aro u n d2 00 8 p et i t i o n ers m o v edfro m th e Co ro n a res i d en ce t o a h o m e i n the Seat tl e, W as h i ng t o n , area i n o rd er fo r M r. Th i s t l et o p t o o b t ai n m ed i cal treat m en t . Acco rd i n g t o p et i t i o n er, s o m et i m e t h ereaft er s he b eg anth e “ Zero l et p ro ject ”, wh i ch s h e d es cri b edattri al as a wh o l e h o u s e, was t e m an ag em en ts y st em * * *
. It ’ s b as i cal l y a h o u s e m an ag em en ts y st em th atwo u ldco n vert h u m an was t e i n to , b as i cal l y , du s tb y

al l owi ng y o ut o tu rn th e p ro ces s i n t o a g ray wat er s y s t em , an dth e g ray

wat er s y st em

can b e u s edas a s eco n d ary fi lt rat i o n s y s t em , i n o rd er t o [i n au d i b l e] an di rri g at e t h e s u rro u n di ng areas wi th o u th arm i n g t h e en v i ro n m en t
. In ad d i t i o n t o h er real es t at e b ro kerag e b u s i nes s , p et i t i o n er al s o wo rk edfo r Ban k o f Am eri ca du ri n g th e y ears i n i s s u e. Th e d et ai l s s u rro u n d in g h er
em pl o y m en twi th Ban ko f Am eri ca are al s o l es s t han cl ear. As b es twe can t el l , p et i t i o n er’ s em

p lo ym en t wi th Ban ko f Am eri ca en d edi n earl y 2 0 1 0. Sh e earn ed wag es o f $ 4 ,2 1 8 fro m

Ban ko f Am eri ca du ri n g th at y ear, an dth o s e earn i ng s are refl ect edo n a Fo rm

W -2 b u tare n o t i n cl u d edi n th e i n co m e rep o rt edo n p et i t i o n ers ’ 2 0 10 Fed eral i n co m e t ax return . Pet i t i o ners ’ u n t i m el y

jo i n t2 0 0 9 Fed eral i n co m e t ax retu rn was fi l ed o n Oct o b er 3 , 2 0 1 1 ; th ei r u nt i m el y jo i n t2 0 1 0 Fed eral i n co m e t ax retu rn was- 5
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[* 5 ] el ect ro n i cal l y

fi l ed o n Au gu s t 3 1 , 2 0 1 1 ; an dth ei r 2 01 1 jo i n t Fed eral i n co m e t ax return was el ect ro n i cal l y fi l edo n o r b efo re t h e d at e i t was du e. Fo r each y ear i n i ss u e p et i t i o n ers ’ Fed eral i nco m e t ax retu rn was p rep aredb y a p ai d i nco m e t ax retu rn p rep arer. Each retu rn i n cl u d es o n e Sch edu l e C i d en t i fy i n g p et i t i o n er as th e
s o l e p ro p ri et o r o f h er real es t at e b ro k erag e b u s i n es s . Th e n am e o f t h atb u si n es s i s
s h o wnas “ TBD Di v ers i fi ed ”. Th e i n co m e an dd edu ct i o n s at tri b u t ab l e t o TBD Di v ers i fi edare s h o wn o n th e Sch edu l es C as fo l l o ws : 2 0 0 9 2 0 1 0 2 0 1 1 In co m e: Gro s s recei p t s o r s al es $ 2 3,6 08 $ 3 1 ,7 5 2 $ 3 ,4 1 0 Gro s s i n co m e 2 3 ,6 0 8 3 1 ,7 5 2 3 ,4 1 0 Ex

pen s es : Ad

v ert is i n g 4 ,2 0 0 4 , 5 0 0 9 ,5 0 0 Car an d t ru ck-0 - -0 - 9 ,5 3 5 Co n tract l ab o r 2 2 ,7 0 8 3 0 ,2 5 2 -0
- Dep reci at i o n an d s ec. 1 7 9 1 ,4 3 8 5 8 9 3 5 1 Leg al an d p ro fes s i o n al s erv i ces 5 ,0 00 5 ,0 00 5 ,1 71 Offi ce ex pen s e 2 , 8 0 0 2 ,3 0 0 9 ,9 38 Rento r l eas e o th er b u si n es s p ro p ert y 2 0 , 2 00 2 0,2 92 -0
- Rep ai rs an dm ai n t en an ce -0 - -0 - 4 , 6 4 4 Su

p p l ies 9 0 0 1 ,0 5 0 4 , 2 5 0 Tax es an d l i cen ses 1 , 0 5 0 1 ,2 5 0 2 ,0 6 8 Trav el 4 ,0 10 1 ,1 72 1 ,4 1 9 M eal s an den tert ai nm en t4 5 0 5 5 0 2 ,9 2 5 Ut i l i t i es 7 05 7 15 5 ,8 9 2 Ot

h er ex p en s es 2 ,8 5 5 3 ,3 8 7 4 ,4 2 8- 6
-

[* 6 ] To t al ex p en ses 6 6,3 1 6 7 1 ,0 5 7 6 0 ,1 2 1 Net

p ro fi t (l o s s ) (4 2 ,7 0 8 ) (3 9 ,3 0 5 ) (5 6 ,7 1 1 ) As rel ev an t , th e 2 00 9 retu rn i n cl u des a $ 2 3 ,3 8 4 NOL carry o v er d edu ct i o n fro m 2 0 08 . Th e NOL i s s h o wno n p et i t i on ers ’ jo i n t 2 0 0 8 Fed eral i n co m e t ax retu rn , fi l edFeb ru ary

2 2 , 2 0 1 0
. Pet i t i o ners ’ Sch edu l e C fo r 2 0 1 1 i n cl u dedo n l y $ 3 ,4 1 0 o f t h e $ 7 ,3 1 9 o f i n co m e refl ect edo n th e Fo rm s 1 0 9 9 -M ISC t h atp et i t i o n er recei v edfro m Tay l o r M o rri s on Cal i fo rn i a, LLC, an dTh em l s on l in eco m fo r 2 0 1 1
. In th e n ot ice res p o n d en t : (1 ) d i s al lo wedth e Sch edu l e C d edu ct i o n s fo r
co n tract l ab o r fo r 2 0 0 9 an d2 0 1 0 ; (2 ) d i s al l o w edth e Sch edu l e C d edu ct i o n fo r trav el fo r 2 0 0 9; (3 ) d i s al l o wedth e Sch edu l e C d edu ct i o n s fo r ren to r l eas e o f o t h er b u s i n es s p ro p ert y fo r 2 0 0 9 an d2 0 1 0 ; (4 ) d i sal l owedth e Sch edu l e C d edu ct i o n s fo r l eg al an dp ro fes s i o n al s erv i ces fo r 2 0 0 9, 2 0 10 , an d2 0 1 1 ; (5 ) d i s al l o wedth e Sch edu l e C d edu ct i o n s fo r ad v ert i s i ng fo r 2 0 1 0 an d 2 0 1 1 ; (6 ) d i s al l o wedth e Sch edu l e C d edu ct i o n fo r u t i l i t i es fo r 2 0 1 1 ; (7 ) d i s al l o w edth e Sch edu l e C d educt i o n fo r m eal s an den tert ai n m en t fo r 2 0 1 1; (8 ) d i sal l o wedth e Sch edu l e C d educt i o n fo r rep ai rs an dm ai n t en an ce fo r 2 01 1 ; (9 ) d is al l o wedth e Sch edu l e C d educt i o n fo r car an dtru ckex p en s es fo r 2 0 1 1 ; (1 0 ) d is al lo wed a $ 2 3 ,3 84 NOL carry fo rwardd educt i o n fo r 2 00 9 ; (1 1 ) d et erm i n edth at p et i t i o n ers h adfai l edt o- 7
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[* 7 ] i n cl u d e i n t eres t o f $ 4 6 i n i n co m e fo r 2 0 10 ; (1 2 ) d et erm i n edth atp et i t i o n ers h ad fai l edt o i n cl u d e t ax ab l e wag es o f $ 4 ,2 18 th at p et it io n er h adrecei vedfro m Ban k o f Am eri ca i n 2 0 1 0 ; (1 3) i n creas edp et i t i o n ers ’ Sch edu l e C g ro s s recei p t s b y $ 3 ,9 0 9 fo r 2 01 1 ; (1 4) d et erm i n edth atp et i t i o ners were l i ab l e fo r ad di t i o n s t o t ax
u n d er s ect i o n 6 6 5 1 (a)(1 ) fo r 2 0 0 9 an d 2 01 0 ; an d(1 5 ) i m p o s ed a s ect i o n 6 6 6 2 (a)
accu racy -rel at edp en al ty

fo r each y ear i n i s s u e. Oth er ad ju s tm en t s m ad e i n th e
n o t i ce are co m

p u tat i o n al an dn eedn o tb e ad dres s ed
.

OPINION 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 n o f a t ax p ay er’ s Fed eral i n co m e t ax l i ab i l i ty

i n a n o t i ce o f d efi ci en cy

i s p res u m edco rrect , an dth e t ax p ay er b ears th e b urd en o f p ro vi ng th atthe d et erm i n at i on i s erro n eo us . 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). 3 I. Sch edul e C Dedu ct io 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 . Ru l e 1 4 2 (a); INDOPCO, In c. v . Co m m i s si o n er, 5 0 3 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

3 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) n eedb e ap p l i edh ere, an dwe p ro ceed as th o u g h th ey d o n o t
.- 8
-

[* 8 ] b u rd en req 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 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). To b e o rd i n ary th e ex p en s e m

u s tb e o f a co m

m o n o r freq u en t
o ccu rren ce i n t h e t y

p e o f b u s i n es s i n v o l ved . Dep u ty v . duPo n t , 3 0 8 U.S. 4 8 8 , 4 9 5 (1 9 4 0). To b e n eces s ary

an ex p en s e m

u stb e ap p ro p ri at e an d h el p fu l t o t h e t ax p ay er’ s b u s i n es s . W el ch v . Hel v eri ng , 2 90 U.S. at1 1 3 . Onth e o th er h an d
s ect i on 2 6 2 (a) g en eral l y

d i s al l o ws an y d edu ct i o n fo r p ers o n al , l i v in g , o r fam i l y
ex p en s es . Wh et her an ex p en di tu re s at i s fi es th e req u i rem en t s fo r d edu ct i bi l i ty- 9
-

[* 9 ] u n d er s ect i o n 1 6 2 i s a ques t i o n o f fact . See Co m m i s s i o n er v . Hei n in g er, 3 2 0 U.S. 4 6 7 , 4 7 5 (1 9 4 3 ). 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 . 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 9 8 5 ). W i th th es e fu n d am en t al p ri nci p l es o f Fed eral i n co m e t ax at io n i n m i n d , we
co n si d er p et i t i on ers ’ cl ai m s t o th e v ari o us d educt i o n s i n d i s p ut e. Pet i t i o ners cl ai m ed d educt i o n s fo r v ari o us ex p en s es o n each Sch edu l e C fo r 2 0 0 9 , 2 0 1 0 , an d 2 0 1 1. Od d l y en o u g h , acco rd i n g t o p et i ti o n ers th e d i s al l o wed d educt i o n s are n o tat tri b u t ab le t o TBD Di v ers i fi ed , p et i t i o ner’ s real es t at e b ro k erag e b u s i n es s , b u tt o ei th er t h e J am es on o r t h e Zero l etp ro ject
. As n o tedab o v e, t ax p ay ers m ay d edu cto rd i naryan dn eces s ary ex p en s es p ai di n co n n ect i o n wi th o perat i n g a t rad e o r b u s i nes s . Sec. 1 62 (a); Bo y dv . Co m m i s s i o n er, 1 2 2 T.C. at3 1 3. In co n s i d eri n g wh et h er a t ax p ay er’ s act i v i ty
co n st i tu t es a t rad e o r b us i nes s wi th i n th e m ean i n g o f s ect i o n 1 6 2(a), we ex am i n e- 1 0 -

[* 1 0 ] n o to n l y

the t ax p ay er’ s p ro fi tm o ti v e b u t al s o wh et h er t h e b u s i n es s was
co n du ct ed wi th co n t i n ui ty an dreg ul ari ty

an das a m ean s o f earn i n g a l i v i n g . See Co m m i s s i o n er v . Gro et zi n g er, 4 8 0 U.S. 2 3 , 3 5 (1 9 8 7 ). Nei ther p et i t i o ner’ s t es t i m o n y n o r an y o th er ev i d en ce i n cl u d edi n t h e reco rd rel at ed t o the J am es o n an dZero l etp ro ject s wo u l dal l o w fo r a fi n d i n g thatei th er p ro ject co n s ti tu t eda “ trad e o r b u s i n es s ” wi thi n th e m ean i n g o f s ect i o n 1 6 2 du ri n g
an y o f t h e y ears i n i s s u e. Pet i t i o n er’ s v ag u e, u n d is ci pl i n ed , an d s o m et i m es
co n trad i ct o ry

t es t im o n y

at t em p t i n g t o d es cri be t h es e p ro ject s m ak es u s wo n d er wh et h er ei th er p ro

jectactual l y

ex i s t ed b ey o n d h er o wni n t en ti o n s . Ev en i f ei th er d i d , p et i t i o n ers h av e fai l edt o s ub s t an t i at e t h e am o un t s cl ai m edo r es t ab l is h th at th e d i s al l o wed d educt i o n s rel at e t o o rd i naryan dn eces s ary ex p en ses o f ei th er p ro ject
. Acco rd in g l y , o th er th an th o s e res p o n d en t co n ced ed , 4 res p o n d en t’ s d i s al lo wan ces o f t h os e d educt i o n s are s u s t ai n ed
. II. NetOp erat i ng Lo s s Gen eral ly , an NOL i s th e ex ces s o f al l o wab l e d educt i on s o v er g ro s s i n co m e fo r a g i ven t ax y ear. See s ec. 1 7 2 (c). An NOL g en eral l y m u s t fi rs tb e carri edb ack 2 y ears an dth en carri edfo rward2 0 y ears . Sec. 1 7 2 (b )(1 )(A). A t ax pay er wh o

4 Res p o n d en t ’ s co n ces s i o n s rel at e t o am o u nt s p et i t i o n er p ai dt o a real es t at e ag en t wh o p ro v i d eds erv i ces i n co n n ect i on wi th p et i ti o n er’ s real es t at e b ro k erag e b u s i n es s .- 1 1 -

[* 1 1 ] m ak es an el ect i o n can wai v e t h e carryb ackreq ui rem en tan dcarryfo rward th e NOL d i rect l y . Sec. 1 7 2 (b )(3 ). Anel ect i on t o wai v e t he carrybackm u stb e
m ad e o n a t i m el y

fi l ed t ax retu rn fo r t h e y ear o f t h e NOL fo r wh i ch th e el ect i o n i s t o b e i n effect . Id .; s ee M oret t i v . Co m m is s i o n er, 7 7 F.3 d 6 3 7 , 6 4 7 (2 d Ci r. 1 9 9 6 ). Pet i t io n ers m ad e a p ro p er el ect i o n . Th e NOL m

u s tb e co n s u m edi n th e earl i es t y ear fo r wh ich th ere i s i n co m e
av ai l ab l e t o b e o ffs et b y th e l o s s . See s ec. 1 7 2 (b )(2 ). An y ex ces s NOL th ati s n o t
co n su m edi n o n e y ear i s carri edt o th e n ex t earl ies ty ear. Id . A t ax p ay er cl ai m i n g
an NOL m

u s tfi l e wi th h i s retu rn “ a co n ci s e s t at em en ts et t i ng fo rt h th e am o u n to f th e n eto p erat in g l o s s d educt i o n cl ai m edan dal l m at eri al an dp ert i n en t fact s rel at i v e t h eret o , i n cl u d i n g a d et ai l eds ch edul e s h o w i n g the co m p u t at io n o f th e n et
o p erat i n g l o s s d edu ct i on .” Sec. 1 .1 7 2 -1 (c), In co m e Tax Reg s . Onth ei r 2 0 0 9 Fed eral i n co m e t ax retu rnp et i t io n ers rep o rt ed a $ 2 3 ,3 8 4 NOL carry o ver d edu ct i o n fro m 2 0 08 . Pet i t i o n ers d i dn o tp ro v i d e an y t es t i m o n y ab o u t th e s o u rce o f t he NOL, n or d idth ey p ro v id e ev i d en ce t o s ub s t an t i at e t hei r cl ai m ed NOL fro m

2 0 0 8 . Al th o ug h p et i t i o n ers p ro v i d ed th ei r 2 0 0 8 Fed eral i n co m e t ax retu rn , wh i ch rep o rt s the cl ai m edNOL, th e ret urn al o n e can n o ts ub s t an t iat e t h e NOL. See W i l k in s on v . Co m m i s s i o n er, 7 1 T.C. 6 3 3 , 6 3 9 (1 9 7 9 ) (ex pl ai n i n g th ata t ax return i s m erel y

a s t at em en to f cl ai m

an d d o es n o tes t ab l i s h tru th o f m at t ers- 1 2 -

[* 1 2 ] s t at ed th erei n ). Itfo ll o w s th atp et i t i o n ers are n o t en t it l edt o th e n et
o p erat i n g l o s s carry o v er d educt i o n h ere i n d i sp u te, an d we s o h o l d
. III. Un rep o rt ed In co m e Sect io n 6 1 (a) p ro v i des th at“ g ro s s i n co m e m ean s al l i n co m e fro m wh at ev er
s o u rce d eri v ed ”. Res p o n d en t d et erm i n edth atp et i t i o ners fai l edt o rep o rti t em s o f i n co m e (wag es o f $ 4 ,2 1 8 fro m Ban ko f Am eri ca fo r 2 01 0 an dSch edu l e C g ro s s recei p t s o f $ 3 , 90 9 fo r 2 0 1 1 ) as ev i d en cedan drep ort edt o res po n d en t o n Fo rm W -2
o r Fo rm s 1 0 9 9 -M ISC i s s u ed b y v ari o u s p ay o rs . Th e am o u n t s s h own o n th es e i n fo rm at i o n retu rn s cl earl y co n s t i tu t e i n co m e, an dn o th i n g el s e n eedb e s ai do n th e p o i n t
. Sect io n 6 2 0 1 (d ) p ro v i d es th atth e Co m m i s s i o ner i n cert ai n ci rcu m s t an ces
can n otrel y

o n i n fo rm at i o n return s al o n e t o es t ab l i s h u n rep o rt edi n co m e b u t“ s h al l h av e th e b u rd en o f p ro du ci n g reas o n ab l e an d p ro b at i v e i n fo rm at i o n” i n ad d i t i o n th eret o . Th i s p ro vi si o n ap p l i es o n l y wh ere t h e t ax p ay er “ as s ert s a reas o n ab l e d i s p u t e wi th res p ectt o an y i t em o f i n co m e rep o rt ed o n an i n fo rm at i o n ret u rn ” an d
o n l y i f “ th e t ax p ay er h as fu l l y co o p erat edwi th th e Secret ary ”. Id
. Th ere i s n o i n d i cat i o n th atp et i t i o n ers co o p erat edwi th res p o n d en t atan y
s t ag e o f t h is cas e. Pet i t i o n er i ni t i al l y t es t i fi edth at h er em

p lo y m en twi th Ban ko f Am eri ca en d edb efo re 2 01 0 b u tl at er co nced edth at s he d i dwo rkfo r Ban ko f- 1 3 -

[* 1 3 ] Am eri ca du ri n g 2 0 1 0 , wh i ch i s co ns i s ten twi th p et i t i o n ers ’ o th er ev id en ce
s h o wi n g wag es fro m Ban k o f Am eri ca d ep o si t edi n t o p et i t io n ers ’ b an k acco u n t
. Oth erwi s e, p et i t i o n ers o fferedn o t es t i m o n y o r o th er ev i d en ce s u g ges t i n g t h atth ey d i dn o t recei v e t h e i t em s o f i n co m e i n ques t i o n . Res po n d en t’ s ad ju s t m en t s reg ard i n g th e o m i t t edi t em s o f i n co m e are s u s t ai n ed
. IV. Ad d i t i o n s t o Tax Pet i t i o ners ’ 2 0 0 9 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 0 , b u t i t w as n o tfi l edu nt il Oct o b er 3 , 2 0 1 1 . See s ecs . 6 0 7 2(a), 7 5 03 . Pet i t i o n ers ’ 2 0 1 0 retu rn was du e t o b e fi ledo n o r b efo re Ap ri l 1 5 , 2 01 1 , b u ti twas n o t fi l edu n t i l Au g u s t3 1 , 2 0 1 1 . See s ecs . 6 0 7 2 (a), 7 5 0 3
. Co ns equ en t l y , res p o n d en t i m p o s eda
s ect i on 6 6 5 1 (a)(1 ) ad d it i o n t o t ax fo r each y ear. 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.- 1 4 -

[* 1 4 ] 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 s were n o t t 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 s t o t ax . To av o i dl i ab i l i ty

fo r t he ad d i t i o n s t o t ax , p et i t i o n ers wo u l dh av e t o s h o w th ateach fai l u re t o t im el y fi l e (1 ) d i dn o tres u l tfro m wi l lfu l n eg l ectan d(2 ) was du e t o reas on ab l e cau se. See Bo y le, 4 6 9 U.S. at2 4 5 -2 46 ; Cro ck er v . Co m m i s s i o n er, 9 2 T.C. 8 99 , 9 1 2 -9 1 3 (1 9 8 9 ); s ec. 3 0 1 .6 6 51 -1 (c)(1 ), Pro ced . & Ad m i n . Reg s. W i l l fu l n eg l ecth as b een d efi n edas a “ co n sci o u s , i n t en t i on al fai l u re
o r reck l es s i n d i fferen ce.” Bo y le, 4 6 9 U.S. at2 4 5 . Reas o n ab l e cau se ex i s t s wh ere th e t ax p ay er ex erci s edo rd i n ary b u s i n es s care an d p ru d en ce b u twas n ev erth el es s
u n ab le t o fi l e t he ret u rn b y th e d at e p res cri b edb y

l aw. Id . at2 4 6
. Th e ex is t en ce
o f reas o n ab l e cau s e o r wi l l fu l neg l ecti s a qu es t i o n o f fact . Id . at2 4 9 n .8
. Pet i t i o ners ex p l ai n t h atth ey fi l edth ei r retu rn s l at e b ecau se t h ey reg ard ed th e fi li n g d ead l i nes as es s en t i al l y i rrel ev an ts i nce t hey

d i d n otex p ectt o o we t ax fo r ei th er y ear. Pet i t i o ners d i dn o tci t e, n o r are we aware o f, an y au th o ri ty th at
wo u l dal l o w a t ax p ay er t o av oi ds ect i on 6 6 5 1(a)(1 ) l i ab i l i ty o n s u ch a b as i s . See
s ec. 3 0 1.6 6 5 1 -1 (c), Pro ced . & Ad m i n . Reg s .- 1 5 -

[* 1 5 ] Pet i t i o ners al s o cl ai m th atth ei r fai l u res t o t im el y fi le were d u e t o “ ex trem e ci rcu m s t an ces ”, al th o u g h t h ey d i dn o tel ab o rat e o n th e n ature o f th os e ci rcu m s t an ces . W e s u sp ectb u tare n o ts u re, g i v en th e co nfu s i n g n atu re o f p et i t i o n er’ s t es t i m o n y , th atth e ci rcu m s t an ces rel at e t o M r. Th i st l et op ’ s m ed i cal
co n di t i o n du ri n g th e rel ev an tp eri o d
. Th e Co u rth as fo u n d reas o n ab l e cau se fo r fai l ure t o t i m el y fi l e a ret u rn wh ere t h e t ax p ay er o r a m em ber o f t h e t ax p ay er’ s fam i ly ex p eri en ces an i ll n es s o r i n cap aci ty

th atp rev en t s th e t ax p ay er fro m fi l i ng a t ax return . See, e.g ., Tab b i v . Co m m i s s i o n er, T.C. M em o . 1 9 9 5 -4 6 3 . Inco n tras tthe Co urth as n o t fo u n d
reas on ab l e cau s e wh ere t h e t ax p ay er d o es n o t t i m el y fi l e b u ti s ab l e t o co n t i n u e t o
co n du ct h i s o r h er b u s in es s affai rs d es p i t e t h e i l l n es s o r i n cap aci ty . See, e.g ., Ru g g eri v . Co m

m is s i o n er, T.C. M em o . 2 0 0 8 -3 0 0, s l i p o p . at7 -8 (an dcas es ci t ed th ereat ). Wh i l e we are s ym

p ath et i c t o p et i t io n ers ’ d i ffi cu l ti es , we are n o tp ers u ad ed th atth e ch al l en g es th ey

faced s at i s fy

th e reas o n ab l e cau s e req u i rem en to f s ect i on 6 6 5 1 (a)(1 ). To th e co n trary , an dd es p i t e t h o s e ch al len g es , p et i t i o ner was ab l e t o
en g ag e i n h er real es t at e b ro k erag e b u s i n es s du ri n g t h e rel ev an tp eri od
. Co n s equ en t l y , we co n cl u d e t h atp et i t i o n ers d i dn o t ex erci s e o rd i n ary b u s i n es s care
an d p ru d en ce an dth atth ey h av e n otes t ab l i s h edreas on ab l e cau s e fo r fai l i ng t o fi l e- 1 6 -

[* 1 6 ] th ei r 2 0 0 9 an d 2 0 1 0 t ax retu rn s t i m el y . Th ey are t h erefo re l i ab le fo r t h e ad d it i o n s t o t ax i m

p o s edb y s ect i on 6 6 5 1(a)(1 ) as res p o n d en t d et erm i n edi n th e
n o t i ce. V. Accu racy -Rel at edPen al t ies 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 an y o f t h e t h ree y ears i n i s su e. As rel ev an th ere,
s ect i on 6 6 6 2 (a) i m

p o s es a p en al t y

o f 2 0 % o f t h 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 l e t o th e t ax pay er’ s : (1 ) n eg l ig en ce o r d i s reg ardo f ru l es o r reg u l at i o n s o r (2 ) 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 . Sec. 6 6 6 2 (a) an d (b )(1 ) an d (2 ). “

Neg li g en ce” i n cl u d es an y fai l u re t o m ak e a reas o n ab 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, i n cl u d i n g an y fai l u re t o k eep ad equ at e b o o k s an dreco rd s o r t o s ub s t an t i at e i t em s p ro p erl y . See s ec. 6 6 6 2 (c); s ec. 1 .6 66 2 -3 (b )(1 ), In co m e Tax Reg s . A “ sub st an t i al u n ders t at em en t o f i n co m e t ax ” i s an y u n d ers t at em en to f i n co m e t ax th atex ceed s t he g reat er o f 1 0 % o f t h e t ax req u i redt o b e s h o wno n th e retu rn o r $ 5 ,0 0 0 . See s ec. 6 6 6 2 (d )(1 )(A); s ec. 1 .6 66 2 -4 (b ), In co m e Tax Reg s . Res p o n d en tb ears th e b u rd eno f p ro du ct i o n wi t h
res p ectt o t h e i m

p o si t i o n o f t h e s ect i o n 6 6 6 2 (a) accu racy -rel at edp en al t i es . See
s ec. 7 4 91 (c); Hi gb ee v . Co m m i s s i o n er, 1 1 6 T.C. 4 3 8 , 4 4 6 -4 4 7 (2 0 0 1 ).- 1 7 -

[* 1 7 ] 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 Secret ary
m ay d es i g n at e. Wri tt en ap pro val o f t h e i n it i al p en al ty d et erm i n at io n u nd er s ect i on 6 7 5 1 (b )(1 ) m

u s tb e o b tai n edb efo re t h e d at e wh en th e t ax p ay er i s fi rs ts en twri t t en
n o t i fi cat i o n o f t h e p en al ti es p ro p o s ed . Cl ay v . Co m m i s s i o n er, 1 52 T.C. 2 2 3 , 2 4 9 (2 0 1 9); s ee al so Ch ai v . Co m m i s s i o n er, 8 5 1 F.3 d1 90 , 2 2 1 (2 d Ci r. 2 0 1 7 ), aff’ g i n p art , rev ’ g i n p art T.C. M em o . 2 0 1 5 -4 2 . 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 he Co m

m i s s io ner’ s b u rd en o f p ro du ct 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 ub

jectt o s ect i o n 6 7 5 1 (b )(1 ) i s as s ert ed . Ch ai v . Co m m is s i o n er, 8 5 1 F.3 d at2 2 1
. Th e s ect i on 6 6 6 2(a) accu racy -rel at edp en al ti es d et erm i n edi n the n o t i ce were p ro perl y

ap p ro v edas req ui redb y

s ect i o n 6 7 5 1 (b )(1 ). Th e reco rdi n cl u d es a Ci v il Pen al ty

Ap p ro v al Fo rm

ap p ro vi n g i m

p o s i t i o n o f accu racy -rel at ed p en al t i es ag ai n s tp et i t i o n ers fo r t h e y ears i n i s s u e an dex ecu t edb y th e IRS t ax ex am i n er’ s i m m ed i at e s up erv i s o r at th e ap p ro p ri at e t i m e. Res p o nd en t h as p ro v en s u ffi ci en t fact s t o s at is fy th e b u rd en o f p ro du ct i on as t o th atreq u irem en t
.- 1 8 -

[* 1 8 ] Pet i t i o ners fai ledt o m ai n t ai n ad equ at e s ubs t an ti at i n g reco rd s fo r ex p en s es
u n d erl y i n g the d edu ct i on s cl ai m edo n thei r 2 0 0 9 , 2 0 1 0 , an d2 0 1 1 ret u rn s . Th erefo re, res po n d en th as m et h i s b urd en o f p ro du ct i o n wi th res p ectt o t h e i m p o s i t i o n o f s ect i o n 6 6 62 (a) accu racy -rel at ed p en al t i es . 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 . 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 s . See Hi g bee v . Co m m i s s io n er, 1 1 6 T.C. at4 4 9
. Rel i an ce o n p ro fes s i o n al ad v i ce wi l l ab s o lv e t h e t ax p ay er i f “ s uch rel i an ce
was reas o n ab l e an dth e t ax pay er act edi n g o o d fai th .” Sec. 1 .6 6 6 4 -4 (b )(1 ), In co m e Tax Reg s . Un der cert ai n ci rcu m s t an ces , a t ax p ay er’ s rel i an ce up o n p ro fes s i o n al ad v ice m ay

es t ab l i s h th e t ax p ay er’ s “ reas o n ab l e cau se” an d “ g o o dfai th ” wi th
res p ectt o an u n d erp aym en t o f t ax i f t h e t ax p ay er es t ab l i s h es th at : (1 ) t h e p ro fes s i on al was p ro v id edwi th co m p l et e an d accu rat e i n fo rm at i o n , (2 ) an i n co rrect return was a res u l t o f t h e p rep arer’ s m i st ak es , an d(3 ) t h e t ax p ay er- 1 9 -

[* 1 9 ] d em on s trat es g o o d-fai th rel i an ce o n a co m p et en tp ro fes s i o nal . See Es t at e o f Go l dm an v . Co m

m is s i o n er, 1 1 2 T.C. 3 1 7, 3 2 4 (1 9 9 9 ), aff’ dwi th o u tp ubl i s h ed
o p i n i o n s ub n o m . Sch u t t er v . Co m m i s s i o ner, 2 4 2 F.3 d3 9 0 (1 0 th Ci r. 2 0 0 0); s ee al s o Neo nat o l o g y

As s o cs ., P.A. v . Co m

m is s i o n er, 1 1 5 T.C. 4 3 , 9 9 (2 00 0 ), aff’ d , 2 9 9 F.3 d2 2 1 (3 d Ci r. 2 0 02 ). Al th ou g h thei r retu rn s were p rep aredb y a p ai di n co m e t ax retu rn p rep arer, p et i t i o n ers h av e n o t es t ab l i s h edth atth ey p ro v id edth e ret urn p rep arer wi th s o u rce d o cu m en t s u n d erl y i n g th e d edu ct i o n s an dth u s th ey h av e fai ledt o es t ab l i s h t h at th ei r rel i an ce up o n th e ret urn p rep arer co n s ti tut es “ reas o n ab l e cau s e” an d “ g o o d fai th ” wi th res p ectt o the u n d erp aym en t s o f t ax . M o reo v er, p et i t i o n ers fai l edt o
s ub s t an t i at e t h ei r Sch edu le C d educt i o n s, o r p ro v i d e an y ex pl an at i o n fo r t h ei r
o m is s i o n o f t h e u n rep o rt edi n co m e d et erm in edi n th e n o t i ce. Acco rd i ng l y , res p o n d en t’ s i m

p o s i t i on o f s ect i o n 6 6 6 2(a) accu racy -rel at edp en al ti es fo r t h e y ears i n i ss u e i s s u s t ai n ed
. 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
.