United States Tax Court

T.C. Memo. 2023-4

KYLE D. SIMPSON AND CHRISTEN SIMPSON,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 16923-16. Filed January 9, 2023.

—————

Bryan W. Caddell and Rain L. Minns, for petitioners.

Ann L. Darnold and Vassiliki Economides Farrior, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

JONES, Judge: Pursuant to section 6213(a), Kyle Simpson (Mr. 

Simpson) and his wife, Christen Simpson (Mrs. Simpson), seek 

redetermination of deficiencies in federal income tax determined by the 

Internal Revenue Service (IRS) totaling $12,874, $18,866, and $18,359 

for taxable years 2011, 2012, and 2013, respectively.1 After concessions, 

the issues for decision are (1) whether certain deductions claimed by 

petitioners’ wholly owned S corporation, Getify Solutions, Inc. (Getify), 

are properly deductible at the corporate level or, alternatively, as 

expenses incurred by Mr. Simpson in his capacity as Getify’s employee; 

(2) whether items underlying petitioners’ claimed deductions have been 

substantiated; (3) whether petitioners substantiated Getify’s basis in 

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

Revenue Code (Code), Title 26 U.S.C., in effect at all relevant times, all regulatory 

references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all 

relevant times, and all Rule references are to the Tax Court Rules of Practice and 

Procedure. All monetary amounts are rounded to the nearest dollar unless indicated 

otherwise.

Served 01/09/23
2

[*2] South Austin Co-Working, LLC (Co-Working), so as to justify their 

purported loss deductions associated with that entity for taxable years 

2011 and 2012; (4) whether petitioners are liable for accuracy-related 

penalties under section 6662(a) with respect to taxable years 2011, 2012, 

and 2013; and (5) whether petitioners are liable for additions to tax

associated with their failure to timely file tax returns under section 

6651(a)(1) with respect to taxable years 2012 and 2013.

We hold that (1) the deductions at issue are properly deductible 

by petitioners as unreimbursed employee expenses, reportable on 

Schedules A, Itemized Deductions, of their Forms 1040, U.S. Individual 

Income Tax Return, and subject to the two-percent limitation of section 

67(a); (2) with the exception of petitioners’ business use of the home 

expenses for taxable year 2012, petitioners have failed to substantiate

the expenses underlying their claimed deductions beyond what 

respondent has allowed; (3) petitioners did not substantiate their basis 

in Co-Working and are, therefore, limited to the loss deductions

respondent allowed; (4) petitioners are liable for accuracy-related 

penalties under section 6662(a) for taxable years 2011, 2012, and 2013; 

and (5) petitioners are liable for additions to tax associated with their 

failure to timely file tax returns under section 6651(a)(1) with respect to 

taxable years 2012 and 2013.

FINDINGS OF FACT

This case was tried on October 1, 2021, during the San Antonio, 

Texas, remote trial session (via Zoomgov).2 The Stipulations of Facts, 

including the jointly stipulated Exhibits contained therein, are 

2 This case was originally tried before Judge Carolyn P. Chiechi in September 

2017. On October 19, 2018, Judge Chiechi retired from the Tax Court. On October 25, 

2018, the Court issued an order informing the parties of Judge Chiechi’s retirement 

and proposing to reassign this case to another judicial officer of the Court for purposes 

of preparing the opinion and entering a decision based on the record of trial or, 

alternatively, allowing the parties to request either a new trial or to supplement the 

record. On November 9, 2018, respondent filed a response consenting to the 

reassignment of the case and requested that a decision be entered based on the record 

of trial. On December 4, 2018, petitioners filed a Motion for a New Trial objecting to 

the reassignment of the case and requesting a new trial. On February 8, 2019, the 

Court ordered that the case was no longer submitted to Judge Chiechi and granted 

petitioners’ Motion for a New Trial. The new trial was scheduled for the Court’s San 

Antonio session slated to begin on May 4, 2020, but because of concerns about COVID19, the trial session was canceled and the case was restored to the general docket.
3

[*3] incorporated by this reference. When Mr. and Mrs. Simpson timely 

filed the Petition, they resided in Texas. 

I. Background

Mr. and Mrs. Simpson are equal shareholders in Getify, a wholly 

owned S corporation. Through Getify, Mr. Simpson developed opensource software and sought “to help other developers be better in [his] 

industry” by gathering “useful information” and making it available to 

them. In the early stages of developing Getify, Mr. Simpson was 

employed by three different software development companies: Oasis, 

Mozilla, and Zynga. However, in 2011, as Getify grew more successful, 

Mr. Simpson started phasing out his other work. The company’s 

newfound success also provided Mr. Simpson with the opportunity to 

speak at conferences, teach classes, and write books. Getify maintained 

a corporate checking account, a corporate savings account, and two 

corporate credit cards. 

Mr. Simpson also participated in the formation of Co-Working, a 

business that rented office space to be communally shared by people 

working in the Austin area. Mr. Simpson, acting as Getify’s agent, 

caused Getify to join with two other entities to form Co-Working; each 

member contributed $2,500 in cash to Co-Working’s business bank 

account at the company’s outset in July 2011. Getify served as CoWorking’s operating manager and as the company’s registered agent 

with the Texas Secretary of State. Unlike Getify, however, Co-Working 

did not achieve success; the business was not able to cover its expenses 

and it ultimately failed.

II. Years at Issue

A. Tax Year 2011

Mr. and Mrs. Simpson timely filed a joint Form 1040 for their 

taxable year 2011. The return included Schedule E, Supplemental 

Income and Loss, with respect to petitioners’ involvement in Getify and 

Co-Working. Mr. and Mrs. Simpson reported losses of $47,950 from 

Getify and $12,541 from Co-Working, for a total loss of $60,491, as 

reflected on their respective Schedules K–1, Shareholder’s Share of 

Income, Deductions, Credits, etc. 

On its Form 1120–S, U.S. Income Tax Return for an 

S Corporation, for taxable year 2011, Getify reported $6,450 in gross 

receipts (line 1b); $297 in interest expenses (line 13); $15,510 in 
4

[*4] depreciation expenses (line 14); $3,343 in advertising expenses (line 

16); and $35,250 in “other deductions” (line 19). The “other deductions” 

reported on line 19 were itemized as follows: 

Expense Amount

Auto and Truck $5,140

Bank Charges 372

Gifts 2,800

Meals 4,200

Office Expense 252

Postage 100

Supplies 1,713

Telephone3 6,904

Travel 2,090

Home Office Rent4 5,630

Professional Education 161

Domain 288

Medical Expenses 5,600

B. Tax Year 2012

Mr. and Mrs. Simpson filed a joint Form 1040 for their taxable 

year 2012 on August 12, 2014.5 It included a Schedule E with respect to 

petitioners’ involvement in Getify. Mr. and Mrs. Simpson reported 

income of $57,910 from Getify, as reflected on their respective Schedules 

K–1. 

On its 2012 Form 1120–S, Getify reported $114,576 in gross 

receipts (line 1a); $5,210 in cost of goods sold (line 2); $6,359 in other 

ordinary loss (line 5); $4,210 in interest expenses (line 13); and $40,887 

in “other deductions” (line 19). The “other deductions” reported on line 

19 were itemized as follows: 

3 Petitioners included their home internet expenses within the “Telephone” 

expense item for each of the taxable years at issue.

4 In the Stipulations of Facts, the parties have chosen to recharacterize this 

item as a “business use of the home” expense for each of the taxable years at issue.

5 There is conflicting evidence in the record regarding the filing date, but the 

parties stipulated a filing date of August 12, 2014. As discussed infra note 24, we will 

hold the parties to the stipulation.
5

Expense Amount

Accounting $600

Auto and Truck 4,242

Bank Charges 369

Dues and Subscriptions 797

Miscellaneous 825

Office Expense 180

Outside Service 12,052

Postage 189

Supplies 385

Telephone 6,808

Travel 9,125

Home Office Rent 5,315

For taxable year 2012, Getify also reported an ordinary loss of 

$6,360 and a section 1231 loss of $19,701, both of which were associated 

with its alleged partnership interest in Co-Working. 

C. Tax Year 2013

Mr. and Mrs. Simpson filed a joint Form 1040 for their taxable 

year 2013. The return was filed on April 28, 2015.6 The return included 

a Schedule E with respect to petitioners’ involvement in Getify. Mr. and 

Mrs. Simpson reported income of $114,162 from Getify, as reflected on 

their respective Schedules K–1. 

On its 2013 Form 1120–S, Getify reported $192,849 in gross 

receipts (line 1a); $200 in advertising expenses (line 16); and $78,488 in 

“other deductions” (line 19). The “other deductions” reported on line 19 

were itemized as follows:

6 There is conflicting evidence in the record regarding the filing date, but the 

parties stipulated a filing date of April 28, 2015. As discussed infra Opinion Part VI, 

we will hold the parties to their stipulation.

[*5]
6

Expense Amount

Accounting $500

Auto and Truck 5,415

Bank Charges 3,450

Dues and Subscriptions 4,403

Insurance 144

Legal and Professional Fees 96

Meals 1,446

Miscellaneous 637

Office 1,364

Postage 367

Supplies 12,083

Telephone 236

Travel 35,627

Home Office Rent 5,271

Mobile Phone 4,418

“Multi Media” 3,031

III. Examination and Notices of Deficiency

In 2012, the IRS began an investigation of Spectrum Financial 

(Spectrum), the provider of tax services that prepared Getify’s corporate 

returns and petitioners’ personal returns. The IRS’ investigation of 

Spectrum encompassed examinations of Spectrum’s clients’ returns, 

including Getify’s corporate returns and petitioners’ personal returns. 

Co-Working’s returns were not selected for audit. Upon conclusion of the 

examinations, the IRS issued to petitioners two notices of deficiency, 

both dated May 3, 2016. 

The first notice of deficiency, regarding taxable years 2011 and 

2012, showed that respondent determined deficiencies in federal income 

tax of $12,874 and $18,866, respectively. Respondent also determined 

accuracy-related penalties under section 6662(a) of $2,575 and $3,773 

for taxable years 2011 and 2012, respectively, as well as a failure-totimely-file addition to tax under section 6651(a)(1) of $4,967 for taxable 

year 2012.

The second notice of deficiency, regarding taxable year 2013, 

showed that respondent determined a deficiency in federal income tax 

of $18,539. Respondent also determined an accuracy-related penalty 

under section 6662(a) of $3,672 and a failure-to-timely-file addition to 

tax under section 6651(a)(1) of $4,590. 

[*6]
7

[*7] IV. Amounts Still in Dispute

The parties have settled many of the originally disputed items. 

After concessions, the parties now primarily dispute whether 

petitioners’ claimed deductions are properly reportable on Getify’s 

Forms 1120–S or on petitioners’ Schedules A of Forms 1040.7

Consequently, the following items are still in dispute for the 2011, 2012, 

and 2013 taxable years:

2011

Expenses (and 

Losses)

Per 

Return

Per Notice of 

Deficiency

Respondent’s 

Position at Trial

Petitioners’ 

Position at 

Trial

Auto & Truck –

Getify 1120S 

(Schedule E)

$5,140 -0- -0- $5,001

Auto & Truck 

(Schedule A)

-0- -0- $5,001 -0-

Telephone & 

Internet – Getify 

1120S (Schedule E)

6,904 -0- 1,648 4,968

Telephone & 

Internet (Schedule 

A)

-0- -0- 2,786 -0-

Travel – Getify 

1120S (Schedule E)

2,090 $2,090 4,456 5,954

Travel (Schedule A) -0- -0- 1,034 -0-

Business Use of the 

Home

5,630 -0- -0- 2,586

Co-Working 

(Ordinary Loss)

(12,541) -0- (2,642) (12,541)

§ 6662(a) AccuracyRelated PenaltyN/A 2,575 2,575 -0-

7 The parties also disagree as to (1) whether some of petitioners’ reported

expenses have been adequately substantiated, see infra Opinion Part III.C, (2) whether 

Getify had a sufficient basis in Co-Working to justify petitioners’ reported ordinary and 

section 1231 losses from that business, see infra Opinion Part IV, and (3) whether 

petitioners are liable for penalties imposed under section 6662(a) and additions to tax 

imposed under section 6651(a)(1), see infra Opinion Parts V and VI.
8

2012

Expenses (and 

Losses)

Per 

Return

Per Notice of 

Deficiency

Respondent’s 

Position at Trial

Petitioners’ 

Position at 

Trial

Accounting $600 -0- -0- $600

Telephone & 

Internet – Getify 

1120S (Schedule E)

6,808 -0- $886 3,714

Telephone & 

Internet (Schedule 

A)

-0- -0- 2,524 -0-

Business Use of the 

Home – Getify 

1120S (Schedule E)

5,315 -0- -0- 2,500

Business Use of the 

Home (Schedule A)

-0- -0- 1,875 -0-

Co-Working (Section 

1231 Loss)

(19,701) -0- -0- (19,701)

§ 6662(a) AccuracyRelated PenaltyN/A $3,773 3,773 -0-

§ 6651(a)(1) Failureto-Timely-File 

Addition to Tax

N/A 4,967 4,967 -0-

2013

Expenses (and 

Losses)

Per 

Return

Per Notice of 

Deficiency

Respondent’s 

Position at Trial

Petitioners’ 

Position at 

Trial

Accounting $500 -0- -0- $600

Meals – Getify 

1120S (Schedule E)

1,446 -0- -0- 231

Meals (Schedule A) -0- -0- $231 -0-

Telephone & 

Internet – Getify 

1120S (Schedule E)

4,418 -0- -0- 3,649

Telephone & 

Internet (Schedule 

A)

-0- -0- 2,971 -0-

Business Use of the 

Home – Getify 

1120S (Schedule E)

5,271 -0- -0- 2,620

Business Use of the 

Home (Schedule A)

-0- -0- 2,620 -0-

§ 6662(a) AccuracyRelated PenaltyN/A $3,672 3,672 -0-

§ 6651(a)(1) Failureto-Timely-File 

Addition to Tax

N/A 4,590 4,590 -0-

[*8]
9

[*9] OPINION

I. Burden of Proof

The determinations in a notice of deficiency bear a presumption 

of correctness, see, e.g., Welch v. Helvering, 290 U.S. 111, 115 (1933), and 

the taxpayer generally bears the burden of proving them erroneous in 

proceedings in this Court, see Rule 142(a)(1). While section 7491(a)(1)

provides that, in general, when “a taxpayer introduces credible evidence 

with respect to any factual issue relevant to ascertaining the liability of 

the taxpayer for any tax imposed by subtitle A or B, the [Commissioner] 

shall have the burden of proof with respect to such issue,” petitioners 

did not argue that the burden of proof should be shifted to respondent

and failed to introduce sufficient evidence to shift the burden to 

respondent. Accordingly, section 7491(a) does not apply.

II. Deductions, Generally

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

expenses paid to carry on a trade or business during the taxable year.

An “ordinary” expense is one that is common and acceptable in the 

particular business. Welch v. Helvering, 290 U.S. at 113–14. Moreover, 

the main function of the word “ordinary” in section 162(a) is to clarify 

the distinction between currently deductible and capital expenses. 

Commissioner v. Tellier, 383 U.S. 687, 689–90 (1966). A “necessary” 

expense under section 162(a) is an expense that is appropriate and 

helpful in carrying on the trade or business. Heineman v. Commissioner, 

82 T.C. 538, 543 (1984).

Deductions are a matter of legislative grace, and the taxpayer 

bears the burden of clearly showing entitlement to any deduction 

claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Under 

that burden, the taxpayer must substantiate the amount and the 

purpose of the expense underlying the deduction. Higbee v. 

Commissioner, 116 T.C. 438, 440 (2001). A taxpayer must also maintain 

adequate records to demonstrate the propriety of any deduction claimed. 

Id.; see also § 6001.

Certain expenses otherwise deductible under section 162(a) are 

subject to heightened substantiation requirements under section 274(d); 

these include expenses for traveling and expenses with respect to any 

listed property under section 280F(d)(4). See § 274(d)(1), (4). No 

deduction is permitted for personal, living, or family expenses unless 

expressly permitted under the Code. See § 262(a).
10

[*10] If a taxpayer is unable to substantiate the amount of a deduction, 

the Court may nonetheless allow it (or a portion thereof) if there is an 

evidentiary basis for doing so. See Cohan v. Commissioner, 39 F.2d 540, 

543–44 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742–43 

(1985). In estimating the amount of an allowable expense under the 

Cohan rule, the Court bears heavily against the taxpayer whose 

inexactitude is of his own making. Cohan v. Commissioner, 39 F.2d 

at 544. The Cohan rule cannot be applied to deductions subject to the 

strict substantiation requirements of section 274(d). See Sanford v. 

Commissioner, 50 T.C. 823, 828 (1968), aff’d per curiam, 412 F.2d 201 

(2d Cir. 1969); Temp. Treas. Reg. § 1.274-5T(a) (flush language).

With these general principles in mind, we will address the 

correctness of petitioners’ claimed deductions associated with Getify and 

their purported losses associated with Co-Working.

III. Expenses Associated with Getify

A. Character of Expenses

A corporation is treated as a separate entity from its shareholders 

for tax purposes. Moline Props., Inc. v. Commissioner, 319 U.S. 436, 

438–39 (1943). While a shareholder may identify his interest and 

business with those of the corporation, they are legally distinct and, 

ordinarily, if he voluntarily pays or guarantees the corporation’s 

obligations, his expense may not be deducted on his personal return. 

Deputy v. du Pont, 308 U.S. 488, 494 (1940); Noland v. Commissioner, 

269 F.2d 108, 111 (4th Cir. 1959), aff’g T.C. Memo. 1958-60. Such 

payments, absent any fixed obligation for repayment, are generally 

regarded as a contribution to the capital of a corporation and are 

deductible, if at all, by the corporation. Rink v. Commissioner, 51 T.C. 

746, 751 (1969). However, a corporate resolution or policy requiring a 

corporate officer to assume certain expenses indicates that those 

expenses are his rather than the corporation’s. Noyce v. Commissioner, 

97 T.C. 670, 683–84 (1991).

It is common in cases such as this for a taxpayer to improperly 

claim deductions on his individual return with respect to expenses that 

are properly classified as corporate. See, e.g., Noland v. Commissioner, 

269 F.2d at 110; Rink, 51 T.C. at 748–50. But petitioners argue that 

their reported expenses are properly deductible by their wholly owned 

S corporation, Getify, rather than by them. Respondent argues that the 

expenses are properly classified as unreimbursed employee expenses 
11

[*11] and should be treated as itemized deductions that are reportable 

on Schedules A of petitioners’ Forms 1040. 

Indeed, this Court has frequently held that being an employee 

constitutes a trade or business in and of itself, see Primuth v. 

Commissioner, 54 T.C. 374, 377 (1970), and that shareholders of a 

corporation may also be engaged in the trade or business of being an 

employee, see, e.g., Winslow v. Commissioner, T.C. Memo. 1983-158, 45 

T.C.M. (CCH) 1064, 1067 (stating that the Commissioner’s argument 

that a taxpayer “cannot be in the trade or business of being the employee 

of a corporation that he also owns is obviously without merit” since, for 

instance, the Court “must from time to time determine whether a bad 

debt is related to a taxpayer’s trade or business of being an employee 

where he is also a shareholder of the corporation”). Expenses of 

employment, if incurred under a reimbursement arrangement, are 

deductible in computing the employee’s gross income. See § 62(a)(2)(A). 

Employees that have unreimbursed expenses associated with their 

employment may deduct those expenses only as miscellaneous itemized 

deductions subject to the two-percent limitation of section 67(a). See 

§ 67(b). However, to the extent that any expenses are incurred to protect 

a shareholder-employee’s equity interest, those expenses are to be 

capitalized and are not deductible to the taxpayer in his capacity as an 

employee. Craft v. Commissioner, T.C. Memo. 2005-197, 2005 WL 

2078513, at *3. The character of such expenses—that is, whether they 

were incurred to protect the shareholder-employee’s equity interest or 

incurred as ordinary and necessary expenses associated with the 

shareholder’s employment with the entity—depends on the facts and 

circumstances of a given case. See Deputy v. du Pont, 308 U.S. at 496; 

see also United States v. Generes, 405 U.S. 93, 99 (1972).

Once again, the primary purpose of the word “ordinary” in section 

162(a) is to clarify the distinction between expenses that are currently 

deductible and those that are capital. Commissioner v. Tellier, 383 U.S. 

at 689–90. An expenditure must be capitalized when it (1) creates or 

enhances a separate and distinct asset, (2) produces a significant future 

benefit, or (3) is incurred “in connection with” the acquisition of a capital 

asset such that it is directly related to the acquisition. Lychuk v. 

Commissioner, 116 T.C. 374, 385–86 (2001).
12

[*12] In this case, without regard to any specific tax year, the following 

categories of expenses are at issue:8 (1) auto and truck; (2) travel; 

(3) meals; (4) accounting; (5) telephone and internet; and (6) business 

use of the home.9 While it is arguable that these expenses were incurred 

in connection with the advancement of Getify generally, petitioners have 

not proven (nor have they attempted to prove) that the expenses were 

incurred specifically for the purpose of acquiring or creating a capital 

asset or to produce a significant future benefit;10 instead, the expenses 

seem merely incidental to the nature of the business itself. See id.; 

see also INDOPCO, Inc. v. Commissioner, 503 U.S. at 87. To the extent 

that any benefit was created by virtue of petitioners’ incursion of the 

expenses, it appears to us that such benefit had a more immediate effect. 

See D’Angelo v. Commissioner, T.C. Memo. 2003-295, 2003 WL 

22413231, at *8. For example, petitioners appear to have incurred their 

telephone expenses for the purpose of effectuating instant 

communication between themselves and others, irrespective of the 

purpose of the communication. Similarly, petitioners’ accounting 

expenses were incurred for the purpose of filing their tax returns rather 

than for the purpose of procuring advice associated with the acquisition 

of a capital asset. Accordingly, all the expenses at issue are properly 

8 These categories of expense are at issue with respect to the party that is 

rightfully entitled to the deduction (i.e., petitioners in their individual capacity or 

Getify, petitioners’ wholly owned S corporation). As laid out further infra note 17, the 

parties have stipulated that petitioners have adequately substantiated $5,001 for their 

auto and truck expenses for taxable year 2011, $231 for their meals expenses for 

taxable year 2013, and $2,620 for their “business use of the home” expenses for taxable 

year 2013.

9 Each of the expense categories is at issue for at least one of the years at issue 

(i.e., 2011, 2012, or 2013), but they are not all at issue for each year.

10 Petitioners cite Cox v. Commissioner, T.C. Memo. 2001-196, 2001 WL 

848658, for the proposition that a taxpayer may increase his basis in an S corporation 

if he makes an economic outlay to or for the benefit of the S corporation. However, 

petitioners fail to acknowledge, in pertinent part, that an “economic outlay for this 

purpose is an actual contribution of cash or property by the shareholder to the 

S corporation or a transaction that leaves the S corporation indebted to the 

shareholder.” Id. at *4 (emphasis added). With respect to the expenses at issue, 

petitioners did not make an actual contribution of cash or property to Getify. Moreover, 

there is nothing in the record to indicate that Mr. Simpson and Getify entered into any 

loan agreement, nor does any distribution by Getify to petitioners during the taxable 

years at issue directly reflect the existence of such an agreement. Accordingly, 

petitioners’ basis in Getify was not increased by voluntarily undertaking these 

expenses.
13

[*13] characterized as ordinary expenses rather than capital 

expenditures.11

Further, it is evident that the expenses at issue, given their 

ordinary nature, were not incurred for the purpose of protecting Mr. 

Simpson’s shareholder interest in Getify. See du Pont, 308 U.S. at 496; 

Craft v. Commissioner, 2005 WL 2078513, at *3. Instead, it appears they 

were incurred to help12 Mr. Simpson in carrying on his trade or business 

as an employee of Getify. See O’Malley, 91 T.C. at 363–64. Consequently, 

all of the expenses at issue should be properly characterized as ordinary 

and necessary employee expenses.13 Since they are employee expenses, 

11 While we acknowledge that the disjunctive test used to determine whether 

an expenditure must be capitalized (delineated in Lychuk, 116 T.C. at 385–86) is not 

absolute, the test is nevertheless a helpful tool in assessing the distinctions between 

the types of expenditures that are capital and those that are currently deductible. See, 

e.g., Shiekh v. Commissioner, T.C. Memo. 2010-126 (holding that travel expenses 

incurred by a taxpayer who was investigating potential properties for acquisition must 

be capitalized, even though the taxpayer did not acquire the properties); D’Angelo v. 

Commissioner, 2003 WL 22413231 (holding that legal fees incurred in defense of a 

taxpayer’s business practices rather than to create a separate or distinct asset, produce 

a significant future benefit, or acquire a capital asset, were ordinary expenses and 

currently deductible); Winter v. Commissioner, T.C. Memo. 2002-173 (holding that 

legal and appraisal fees arising from the acquisition of a hotel are not currently 

deductible and should have been capitalized). Through this lens, we find that the 

relevant expenditures in the instant case are ordinary rather than capital in nature. 

But see Koree v. Commissioner, 40 T.C. 961, 965–66 (1963) (holding that a taxpayer 

who, as majority shareholder, paid rent obligations on behalf of a corporation, was not 

carrying on a trade or business and only made the rent payments to enhance his 

interest in a different, related entity that directly benefited from the success of the 

corporation; because the payments were made to enhance his interest in the related 

entity, the expenditures were required to be capitalized). The context of the taxpayer’s 

expenditures in Koree is not analogous to the instant case; Mr. Simpson did not incur 

the expenses at issue to enhance his interest in Getify, but rather to make providing 

services to Getify more convenient. Therefore, Koree is distinguishable.

12 For an expense to be deductible under section 162(a), it must also be 

“necessary.” Once again, a “necessary” expense is one that is appropriate and helpful 

in carrying on a trade or business. Heineman, 82 T.C. at 543. The record clearly 

indicates that the expenses incurred by Mr. Simpson that are at issue were appropriate 

and helpful in carrying out his duties as an employee of Getify. See id.; see also 

O’Malley v. Commissioner, 91 T.C. 352, 363–64 (1988); Craft v. Commissioner, 2005 

WL 2078513, at *3.

13 Notwithstanding this analysis, this Court has previously allowed a taxpayer 

to report mileage deductions for the use of a personal vehicle as a business expense of 

a wholly owned S corporation on the S corporation’s Form 1120S. Consequently, such 

expense flows through to the taxpayer’s Schedule E. See Powell v. Commissioner, T.C. 

Memo. 2016-111, aff’d, 689 F. App’x 763 (4th Cir. 2017). The instant case is very 
14

[*14] the next query we must answer to assess their deductibility is 

whether the expenses were reimbursed under an accountable plan. See 

§ 62(a)(2)(A). 

B. Lack of an Accountable Plan

Under section 62(a)(2)(A), an employee can deduct certain 

expenses incurred in connection with the performance of services for an 

employer under a reimbursement or other allowance arrangement. If 

these expenses are reimbursed by the employer pursuant to an 

“accountable plan,” then the reimbursed amount is excluded from 

income and is not considered wages or compensation. Treas. Reg. 

§ 1.62-2(c)(4). To qualify as an accountable plan, such a plan must meet 

the requirements of Treasury Regulation § 1.62-2(d)-(f), which, in 

pertinent part, provides: 

(d) Business connection— 

(1) In general.— . . . [A]n arrangement meets the 

requirements of this paragraph (d) if it provides advances, 

allowances . . . , or reimbursements only for business 

expenses that are allowable as deductions by part VI 

(section 161 and the following), subchapter B, chapter 1 of 

the Code, and that are paid or incurred by the employee in 

similar but distinguishable. For one, it does not appear that the Commissioner in 

Powell raised the issue of which party (i.e., the individual taxpayer or the S 

corporation) was entitled to the deduction. Instead, the primary issue in that case was 

whether the taxpayer substantiated the items underlying the deductions claimed. In 

the instant case, however, both respondent and petitioners agree that petitioners have 

substantiated $5,001 associated with the business use of their personal vehicles for 

taxable year 2011. 

The parties here disagree about who is entitled to the deduction. In assessing 

the analogy between Powell and the instant case, we consider the arguments advanced 

by the parties in each case. See United States v. Sineneng-Smith, 140 S. Ct. 1575 

(2020); Greenlaw v. United States, 554 U.S. 237, 243 (2008) (“In our adversary system, 

in both civil and criminal cases, in the first instance and on appeal, we follow the 

principle of party presentation. That is, we rely on the parties to frame the issues for 

decision and assign to courts the role of neutral arbiter of matters the parties 

present.”). Though we have indicated in dicta that the party presentation principle 

necessarily gives us wide latitude in the deficiency context, 901 S. Broadway Ltd. 

P’ship v. Commissioner, T.C. Memo. 2021-132, it does not appear that the issue argued 

before us in the instant case was presented to this Court in Powell. Accordingly, we 

find that case distinguishable. Thus, it would be inappropriate to extend the logic from 

Powell to the instant case.
15

connection with the performance of services as an employee 

of the employer. . . .

. . . .

(e) Substantiation— 

(1) In general. An arrangement meets the 

requirements of this paragraph (e) if it requires each 

business expense to be substantiated to the payor in 

accordance with paragraph (e)(2) or (e)(3) of this section, 

whichever is applicable, within a reasonable period of time. 

. . .

(2) Expenses governed by section 274(d). An 

arrangement that reimburses travel, entertainment, use of 

a passenger automobile or other listed property, or other 

business expenses governed by section 274(d) meets the 

requirements of this paragraph (e)(2) if information 

sufficient to satisfy the substantiation requirements of 

section 274(d) and the regulations thereunder is submitted 

to the payor. . . .

(3) Expenses not governed by section 274(d). An 

arrangement that reimburses business expenses not 

governed by section 274(d) meets the requirements of this 

paragraph (e)(3) if information is submitted to the payor 

sufficient to enable the payor to identify the specific nature 

of each expense and to conclude that the expense is 

attributable to the payor’s business activities. . . .

(f) Returning Amounts In Excess Of Expenses— 

(1) In general. . . . [A]n arrangement meets the 

requirements of this paragraph (f) if it requires the 

employee to return to the payor within a reasonable period 

of time any amount paid under the arrangement in excess 

of the expenses substantiated in accordance with 

paragraph (e) of this section. The determination of whether 

an arrangement requires an employee to return amounts 

in excess of substantiated expenses will depend on the facts 

and circumstances.

[*15]
16

[*16] Section 62(c) further clarifies that an arrangement will not be 

treated as a reimbursement or other expense allowance arrangement for 

purposes of section 62(a)(2)(A) if it (1) does not require the employee to 

substantiate the expenses covered by the arrangement to the person 

providing reimbursement or (2) provides the employee the right to retain 

any amount in excess of the substantiated expenses covered under the 

arrangement.

At trial, Ruth Hancock (Ms. Hancock), vice president of Spectrum 

and Mr. Simpson’s sister, testified that Getify had an unwritten 

accountable plan. Similarly, Mr. Simpson affirmed in his testimony 

that, although he may have discussed an accountable plan with his 

accountants, Getify “did not have any formal thing.” While an 

accountable plan does not necessarily have to be in writing,14 there must 

be, at the very least, some extrinsic evidence that indicates that such a 

plan exists.15 For example, if petitioners engaged in a formal process 

whereby they collected all relevant documentation to substantiate the 

purported expenses and then reimbursed themselves from the corporate 

account with the exact amounts associated with the expenses, such 

evidence might be sufficient to corroborate the existence of an unwritten 

accountable plan.16 The record here notably lacks any such occurrence.

14 Under Treasury Regulation § 1.62-2(c), an accountable plan qualifies as a 

“reimbursement or other expense allowance arrangement” if it meets the requirements 

of paragraphs (d), (e), and (f) of the regulation. None of those paragraphs requires that 

such an arrangement be in writing. See Treas. Reg. § 1.62-2(d)-(f). Under the omittedcase semantic canon, nothing is to be added to what a text states or reasonably implies; 

that is, a matter not covered is to be treated as not covered. See Antonin Scalia & Bryan 

A. Garner, Reading Law: The Interpretation of Legal Texts 93 (2012). Thus, the absence 

of text in Treasury Regulation § 1.62-2(d)–(f) requiring that an accountable plan be 

written leads us to conclude that there is no such requirement.

15 This Court is not obligated to accept a petitioner’s self-serving testimony. See 

Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). Moreover, even when no contradictory 

evidence is presented by the Commissioner, we are not required to be convinced by a 

taxpayer’s own evidence regarding his subjective intent. Fleischer v. Commissioner, 

403 F.2d 403, 406 (2d Cir. 1968), aff’g T.C. Memo. 1967-85.

16 It appears that this Court has never addressed the issue of whether (and 

under what circumstances) an unwritten accountable plan qualifies as a 

“reimbursement or other expense allowance arrangement” under Treasury Regulation 

§ 1.62-2. We have found, however, that other sorts of reimbursement plans may exist, 

even if they are not written, when (1) the relevant Treasury Regulation addressing the 

qualification of such a plan does not have an in-writing requirement, (2) the parties 

involved with such a plan behave in accordance with the existence of the plan, and 

(3) the behavior of the parties (or extrinsic evidence) with respect to the plan is in 
17

[*17] Aside from Mr. Simpson and his sister’s testimony regarding 

their subjective intent to establish an accountable plan, there is no 

evidence in the record to suggest that Getify required Mr. Simpson to 

substantiate his expenses or return any amounts received that exceeded

those expenses. See Treas. Reg. § 1.62-2(e). In fact, Mr. Simpson testified 

that with respect to instances in which he transferred money from Getify 

to his personal account, such occurrences could have been for a 

reimbursement as well as a distribution. Moreover, of the numerous 

documented transfers between Getify’s checking account and 

petitioners’ checking account, there are no records that identify the 

purpose of any specific transfer. See id. subpara. (3). Thus, there is no 

credible evidence in the record to indicate that Getify had an 

accountable plan that meets all the requirements of Treasury

Regulation § 1.62-2(d)–(f). Petitioners have failed to meet their burden 

of proof.

Because petitioners failed to establish that Getify had an 

accountable plan that meets the requirements of Treasury Regulation 

§ 1.62-2(d)-(f), all the expenses incurred personally by petitioners in 

connection with Mr. Simpson’s employment with Getify, and which the 

parties agree have been substantiated, are considered unreimbursed 

employee expenses.17 Unreimbursed employee expenses fall under the 

broader category of “miscellaneous itemized deductions,” which are 

allowed only to the extent that the aggregate of such deductions exceeds 

accordance with the requirements of the relevant Treasury Regulation. See, e.g., 

Giberson v. Commissioner, T.C. Memo. 1982-338 (affirming the existence and 

qualification of an accident and health reimbursement plan under section 105, despite 

it not being written). It is worth noting that the regulation contemplated by the Court 

in Giberson explicitly states that an accident and health reimbursement plan need not 

be in writing, see Treas. Reg. § 1.105-5, whereas the regulation in the instant case does 

not contain such language. In any event, we do not hold that, as a matter of law, an 

accountable plan need not be in writing; rather, we are merely pointing out that 

Treasury Regulation § 1.62-2 does not specifically call for accountable plans to be in 

writing and that there are examples of qualifying unwritten reimbursement 

arrangements (albeit, in a different context) elsewhere in this Court’s caselaw.

17 Of the items that are still in dispute, the only items that the parties agree 

have been sufficiently substantiated (at least with respect to the amount claimed by 

petitioners), incurred in connection with Getify, and that we have determined to be 

reportable on petitioners’ Schedules A are (1) the “auto and truck” expenses for taxable 

year 2011, (2) the “meals” expenses for taxable year 2013, as well as (3) the “business 

use of the home” expenses for taxable year 2013. These deductions are properly 

characterized as unreimbursed employee expenses and are reportable on petitioners’ 

Schedules A. Discussion with respect to the substantiation of the amounts associated 

with the remaining expense items still in dispute may be found infra Part III.C.
18

[*18] two percent of adjusted gross income. See § 67; Temp. Treas. Reg. 

§ 1.67-1T(a). Notwithstanding any concessions made by respondent (or 

any agreements reached by the parties), such expenses are generally 

reportable on Schedule A of Form 1040.

C. Substantiation

To determine petitioners’ entitlement to any deductions, we must 

also determine whether the underlying expenses have been 

substantiated. In essence, petitioners assert that they have 

substantiated one amount with respect to an item and respondent 

asserts that petitioners have either failed to substantiate any amount 

or, at most, substantiated a lesser amount. These items are as follows: 

travel expenses (taxable year 2011); accounting expenses (taxable years 

2012 and 2013); telephone and internet expenses (taxable years 2011, 

2012, and 2013); and business use of the home expenses (taxable years 

2011 and 2012). We will take each of these expenses in turn. 

1. Travel Expenses (2011)

With respect to petitioners’ travel expenses for taxable year 2011, 

petitioners’ position at trial was that Getify was entitled to deduct 

$5,954. Respondent’s position at trial was that Getify was entitled to 

deduct $4,456, which flows through to petitioners’ Schedule E. Also, 

respondent averred that petitioners were entitled to deduct $1,034 as 

unreimbursed employee expenses, which falls under the category of 

“miscellaneous itemized deductions,” is subject to the two-percent 

limitation under section 67(a), and is reportable on petitioners’ 

Schedule A. By this, respondent signals that petitioners have 

sufficiently substantiated $5,490 worth of travel expenses for 2011. 

Accordingly, the parties dispute whether the discrepancy of $464 has 

been properly substantiated.

Travel expenses are subject to heightened substantiation 

requirements under section 274(d). Those requirements permit a 

deduction for traveling expenses only to the extent the taxpayer proves 

(1) the amount of each expenditure for traveling away from home, (2) the 

date of departure and return for each trip and the number of days spent 

on business, (3) the destination or locality of travel, and (4) the business 

reason for travel or the expected business benefit to be derived. See

Temp. Treas. Reg. § 1.274-5T(b)(2). Each element of a traveling expense 

must be substantiated through “adequate records” or by “sufficient 

evidence corroborating the taxpayer’s own statement.” See § 274(d) 
19

[*19] (flush language); see also Temp. Treas. Reg. § 1.274-5T(c)(1), (2), 

and (3).

Petitioners provided a spreadsheet of their 2011 travel expenses. 

The disputed expenses involve numerous small amounts associated with 

toll tag charges and parking fees. These expenses do not clearly 

correspond with the travel destinations on petitioners’ travel logs.

Moreover, when asked about several of these expenses at trial, Mr. 

Simpson did not provide testimony that corroborated the assertions 

made in petitioners’ travel logs.

We hold that petitioners failed to satisfy their burden of 

substantiating the full $5,954 in travel expenses for taxable year 2011 

in accordance with section 274 and the regulations promulgated 

thereunder. Mr. Simpson’s testimony regarding the disputed 

spreadsheet items lacks the specificity and detail required under 

Temporary Treasury Regulation § 1.274-5T(c)(3)(i)(A). Accordingly, 

petitioners are entitled to deduct only the amounts respondent allowed.

As laid out supra Part III.B, the amounts paid out of petitioners’ 

personal account(s) and not subject to an accountable plan are properly 

characterized as unreimbursed employee expenses. Thus, petitioners 

are entitled to deduct only what respondent has allowed: Getify may 

deduct $4,456, which flows through to petitioners’ Schedule E, and

petitioners are entitled to deduct $1,034 as unreimbursed employee 

expenses, which falls under the category of “miscellaneous itemized 

deductions,” is subject to the two-percent limitation, and is reportable 

on petitioners’ Schedule A.

2. Accounting Expenses (2012 and 2013)

With respect to petitioners’ reported expenses regarding their 

payment of accounting fees to Spectrum, petitioners argue that Getify 

should be entitled to a $600 deduction for taxable year 2012, as well as 

another $600 deduction for taxable year 2013. Meanwhile, respondent 

contends that the evidence presented to the Court regarding those 

payments is not credible and that the deductions should be disallowed 

completely.

Unlike travel expenses, accounting fees are not subject to the 

heightened substantiation requirements of section 274(d). Thus, the 

Court may allow a deduction even if the taxpayer is unable to 

substantiate the expense, assuming there is a proper evidentiary basis 

for doing so. See Cohan v. Commissioner, 39 F.2d at 544.
20

[*20] At trial, both Mr. Simpson and Ms. Hancock testified that the 

$600 accounting fee for taxable year 2012 was paid in cash at a family 

gathering held in Dallas, Texas, in March 2012. They further testified 

that the $600 accounting fee for taxable year 2013 was paid in cash at a 

family gathering in January 2013. The parties also stipulated the 

introduction of two exhibits, purportedly invoices from Spectrum, which 

indicated that the accounting fees had been paid by Mr. Simpson for the 

preparation of petitioners’ 2011 and 2012 tax returns.18 Each invoice 

shows two separate charges: $470 for the preparation of Getify’s 

corporate return and $130 for the preparation of petitioners’ joint 

return. The invoices were stamped “PAID” on April 14, 2012, and March 

13, 2013, respectively.

At trial, Ms. Hancock was asked to explain the discrepancy 

between the date Mr. Simpson paid the fees in cash and the date marked 

as paid on the invoice. Ms. Hancock testified that it “was a clerical 

oversight that it was marked paid on that date, but that doesn’t make 

the receipt false.” Ms. Hancock also testified that Spectrum uses a 

“point-of-sale system . . . through our accounting software that shows 

that [the invoice] is marked paid, and we [Spectrum] included that in 

the funds that we toted [sic] as taxable income.” Spectrum did not 

provide any ledgers or records directly corroborating this testimony.

Mr. Simpson was also asked in the new trial why, at the original 

trial heard by Judge Chiechi, he did not mention that he had paid the 

accounting fees in cash at each of the family gatherings, to which he 

testified that he “didn’t remember that at the time.” Moreover, when 

asked whether Getify ever paid any other expenses in cash, Mr. Simpson 

testified that he put “significant amounts of cash . . . on behalf of Getify 

into [Co-Working]” but he did “not have the records and the bank 

statements to support that.” 

We find Mr. Simpson and Ms. Hancock’s testimony regarding the 

cash payment of accounting expenses to be unpersuasive. The only 

documentary evidence petitioners put forth to substantiate the 

accounting expenses was two purported invoices, which indicated that 

the supposed payments were made at times that are not corroborated by 

18 The accounting expenses for the preparation of petitioners’ 2011 and 2012 

tax returns were allegedly incurred in taxable years 2012 and 2013, respectively 

(which comports with the general notion that a taxpayer’s return is typically prepared 

in the calendar year following the taxable year associated with the return).
21

[*21] the testimony.19 Moreover, petitioners supposedly paid for the 

preparation of returns in 2012 that were not filed until 2014. This 

evidence is not credible. As such, we hold that petitioners failed to 

substantiate the $600 in accounting expenses they reported for taxable 

years 2012 and 2013.

3. Telephone and Internet Expenses (2011, 2012, and 

2013)

For taxable year 2011, petitioners argue that Getify should be 

entitled to deduct $4,968 associated with petitioners’ cell phone and 

home internet usage that year. This amount appears to reflect 30% of 

petitioners’ cell phone bill and 80% of their home internet bill. 

Respondent contends that only $1,648 should be deductible by Getify 

and that $2,786 should be deductible by petitioners as unreimbursed 

employee expenses, subject to the two-percent limitation. The latter 

number reflects 30% of petitioners’ phone bill and 60% of their home 

internet bill. In essence, respondent agrees that petitioners have 

substantiated at least $4,434 of their reported expenses. Accordingly, 

the parties dispute whether the discrepancy of $534 has been properly 

substantiated.

For taxable year 2012, petitioners argue that Getify should be 

entitled to deduct $3,714 associated with petitioners’ cell phone and 

home internet usage that year. This amount appears to reflect 30% of 

petitioners’ cell phone bill and 80% of their home internet bill. On the 

other hand, respondent contends that only $886 should be deductible by 

Getify and that $2,524 should be deductible by petitioners as 

unreimbursed employee expenses, subject to the two-percent limitation. 

The latter number reflects 30% of petitioners’ phone bill and 60% of their

home internet bill. Thus, respondent agrees that petitioners have 

substantiated at least $3,410 of their reported expenses. Accordingly, 

19 Moreover, the invoices suggest that only $470 of each $600 charge was 

dedicated to preparing Getify’s corporate return. Petitioners contend that each $130 

payment dedicated to the preparation of their personal returns should also be deducted 

by Getify in its corporate capacity. However, in light of the foregoing conclusion, it is 

not necessary for us to decide whether fees paid for the preparation of a taxpayer’s 

individual return may be deductible by the taxpayer’s business. In fact, judicial 

restraint counsels us not to do so. See PDK Lab’ys Inc. v. DEA, 362 F.3d 786, 799 (D.C. 

Cir. 2004) (Roberts, J., concurring in part and concurring in judgment) (“[I]f it is not 

necessary to decide more, it is necessary not to decide more . . . .”).
22

[*22] the parties dispute whether the discrepancy of $304 has been 

properly substantiated.

Finally, for taxable year 2013, petitioners argue that Getify 

should be entitled to deduct $3,649 associated with petitioners’ cell 

phone and home internet usage that year. This number appears to

reflect 30% of petitioners’ cell phone bill and 80% of their home internet 

bill. Respondent contends that Getify is not entitled to any deduction 

associated with those expenses for 2013 and that petitioners may deduct 

$2,971 as unreimbursed employee expenses, subject to the two-percent 

limitation. This amount reflects 30% of petitioners’ phone bill and 60%

of their home internet bill. Accordingly, the parties dispute whether the 

discrepancy of $678 has been substantiated.

As a preliminary matter, these expenses are subject to the 

analysis supra Part III.A and B. Therefore, to the extent that we find 

that petitioners have substantiated their expenses beyond what 

respondent has allowed, any additional expense amounts will be 

deductible only as unreimbursed employee expenses (to the extent the 

deductions exceed two percent of petitioners’ adjusted gross income). In 

this respect, petitioners’ deduction of telephone and internet expenses 

at the corporate level is limited to what respondent has conceded. 

Moreover, since the parties agree that 30% of petitioners’ cell phone bill 

is deductible and disagree only as to the proper placement of that 

deduction on petitioners’ tax returns, that issue has already been 

resolved in favor of respondent in light of our analysis supra Part III.A 

and B. Thus, the issue that remains is whether petitioners are entitled 

to deduct either 60% or 80% of their home internet usage as 

unreimbursed employee expenses, subject to the 2% limitation of section 

67(a).

Internet services do not fall under the definition of listed property 

under section 280F(d)(4) and are not subject to the heightened 

substantiation requirements of section 274(d). Consequently, the Court 

may allow a deduction (or a portion thereof) even if the taxpayer is 

unable to substantiate it, so long as there is a sufficient evidentiary basis 

for doing so. See Cohan v. Commissioner, 39 F.2d at 544. In estimating 

the amount of an allowable expense under Cohan, however, the Court 

weighs heavily against the taxpayer whose inexactitude is of his own 

making. Id. Furthermore, section 262(a) expressly provides that no 

deductions are allowed for personal, living, or family expenses.
23

[*23] In taxable year 2011, Mr. Simpson was not engaged in work for 

only Getify but was also employed by other entities and performed 

services for Co-Working. Mr. Simpson discontinued his employment 

with two of his employers during that year. At the start of taxable year 

2012, Mr. Simpson continued his work with Getify, Co-Working, and the 

other employer20 but ultimately discontinued his work for the latter two 

at different points in the year. In any event, Mr. Simpson used his home 

internet service in his work for the other entities, as he testified that he 

would do at least some work for them from petitioners’ home.

Mr. Simpson testified that petitioners’ family would occasionally 

watch movies and television shows via the internet on Mrs. Simpson’s 

personal laptop but that such occurrences were infrequent. Mr. Simpson 

also testified that both he and his wife “definitely had [a] Facebook 

account” during the years at issue and that Mrs. Simpson “participated 

in Facebook groups with other new parents” following the birth of their 

youngest child. Furthermore, Mr. Simpson testified that petitioners’ 

oldest child would use “personal devices” in the home during the years 

at issue with unrestricted access to games and streaming services.

Petitioners did not maintain any records allocating the internet usage 

between Mr. Simpson’s work for Getify, the employers, Co-Working, or 

the family’s personal use.

Ultimately, there is nothing in the record that explains why 

petitioners should be entitled to deduct 80% of their home internet 

expense instead of 60%. In fact, it is evident from the record that there 

were other uses of the home internet service aside from Mr. Simpson’s 

work for Getify. Petitioners’ inexactitude is of their own making, see 

Cohan v. Commissioner, 39 F.2d at 544, and they have failed to meet 

their burden. Thus, petitioners’ deduction for home internet expenses is 

limited to what respondent has allowed.

4. Business Use of the Home (2011 and 2012)

For taxable year 2011, petitioners argue that Getify should be 

entitled to deduct $2,586 related to Getify’s business use of the home. 

Respondent’s position at trial for taxable year 2011 is that petitioners 

are not entitled to any deduction related to the business use of the home.

20 See infra Part III.C.4 regarding discussion of Mr. Simpson’s work for Zynga 

in taxable year 2012.
24

[*24] For taxable year 2012, petitioners contend that Getify should be 

entitled to deduct $2,500 associated with Getify’s business use of the 

home. Respondent’s position at trial was that petitioners are entitled to 

deduct only $1,875 as unreimbursed employee expenses. Accordingly, 

the parties dispute whether the discrepancy of $625 has been 

substantiated. 

Once again, as a preliminary matter, these expenses are subject 

to the analysis supra Part III.A and B. Therefore, to the extent that we 

find that petitioners have substantiated their expenses beyond what 

respondent has allowed, any additional expenses will be deductible only

as unreimbursed employee expenses, subject to the two-percent 

limitation.

As a general rule, taxpayers are unable to claim deductions with 

respect to the business use of a dwelling unit that is used by the taxpayer 

as a residence during the taxable year. § 280A(a). However, section 

280A(c)(1)(A) provides an exception to the general rule to the extent that 

a taxpayer, on a regular basis, uses a portion of the dwelling unit 

exclusively as the principal place of business for any trade or business of 

the taxpayer. The term “dwelling unit” includes houses. § 280A(f)(1)(A).

Before trial, the parties stipulated that petitioners’ residence is

1,891 square feet and that 198 square feet (10.5%) of the residence was 

used as Getify’s principal place of business during the years at issue. 

The parties also stipulated that, at most, the business’ portion of the 

rent, home insurance, and utilities for the taxable years at issue would 

be deductible (stipulated expenses). For taxable year 2011, 10.5% of the 

stipulated expenses totals $2,610. For taxable year 2012, 10.5% of the 

stipulated expenses totals $2,500.

During taxable year 2011, Mr. Simpson was not working 

exclusively for Getify; he also performed services for three other 

employers and Co-Working. At trial, Mr. Simpson testified that it was 

customary for him to do work associated with two of the other entities 

from the couch because he wanted to be around his family and that the 

office was used exclusively for his work with Getify. We do not find this 

testimony credible. Consequently, we hold that the disputed portion of 

the dwelling unit was not used exclusively for Getify. Thus, this expense 

does not fall under the exception of section 280A(c)(1), and petitioners 

are not entitled to deduct the business use of the home expenses for the 

2011 taxable year.
25

[*25] During taxable year 2012, Mr. Simpson was not working 

exclusively for Getify, as he also performed services on behalf of 

Co-Working and another employer. On posttrial brief, respondent 

indicated that the reason for the reduction for the allowable deduction 

associated with the stipulated expenses for 2012 from $2,500 to $1,875 

was the “months when [Mr. Simpson] worked at home for an employer.” 

Although Mr. Simpson also worked for Zynga for part of the 2012 

taxable year, he testified that his work for Zynga “was not done at [his] 

house at all because Zynga has a physical office,” that he did “virtually 

all of [his] work for Zynga at their physical office location,” and 

furthermore that he “couldn’t recall any work done for Zynga from 

home.” We find this testimony credible.

Given that respondent’s adjustment appears to be based on Mr. 

Simpson’s work for Zynga, we will treat this as a partial concession. 

Thus, we hold that Mr. Simpson used his home office exclusively in his 

work with Getify in taxable year 2012 and that petitioners are entitled 

to a $2,500 deduction for their business use of the home. However, this 

deduction is still subject to our analysis supra Part III.A and B, and we 

therefore hold that this expense is properly classified as an 

unreimbursed employee expense, subject to the two-percent limitation, 

and reportable only on petitioners’ Schedule A for taxable year 2012.

D. Summary

In sum, we hold that petitioners’ S corporation, Getify, may 

deduct only the specific expenses that respondent has expressly allowed. 

Moreover, except for the business use of the home expenses for taxable 

year 2012, petitioners are entitled to deduct only their unreimbursed 

employee expenses to the extent respondent allowed, subject to the twopercent limitation contained in section 67(a).

IV. Basis in Co-Working and Associated Losses

We must also determine whether petitioners have established 

that Getify, as a partner in Co-Working, had a sufficient basis to justify 

the share of Co-Working’s ordinary and section 1231 losses it deducted, 

as reflected on petitioners’ tax returns for taxable years 2011 and 2012. 

Petitioners argue that (1) they, on Getify’s behalf, made capital 

contributions to Co-Working beyond those respondent agrees have been 

substantiated and (2) the other members of the Co-Working venture 

intended to make gifts of portions of their interests in Co-Working to 

Getify and that their intentions are reflected in the equal distribution of 
26

[*26] partnership loss reflected on Co-Working’s tax returns and the 

partners’ Schedules K–1 for 2011 and 2012.

Co-Working is a limited liability company (LLC) organized under 

the laws of Texas and is treated as a partnership for federal tax 

purposes. See Treas. Reg. § 301.7701-3(b). Generally, a partner’s 

distributive share of income, gain, loss, deduction, or credit shall be 

determined by the partnership agreement. § 704(a). However, a 

partner’s distributive share of partnership loss (including capital loss) 

is allowed only to the extent of the adjusted basis of the partner’s 

interest in the partnership at the end of the year in which such loss 

occurred, and any excess of such loss over the partner’s adjusted basis 

shall be allowed as a deduction at the end of the partnership year in 

which such excess is repaid to the partnership. § 704(d).

A partner’s adjusted basis in a partnership is generally 

determined under section 705(a)(1), which provides that the partner’s 

basis shall be the basis determined under section 722 or section 742 and 

shall be increased by the sum of the partner’s distributive share of 

“(A) taxable income of the partnership as determined under section 

703(a), (B) income of the partnership exempt from tax under this title, 

and (C) the excess of the deductions for depletion over the basis of the 

property subject to depletion.” Moreover, the partner’s adjusted basis 

shall be decreased by distributions by the partnership as well as the 

partner’s distributive share for the taxable years and prior taxable years 

of “(A) losses of the partnership, and (B) expenditures of the partnership 

not deductible in computing its taxable income and not properly 

chargeable to capital account.” § 705(a)(2).

Section 722 provides:

The basis of an interest in a partnership acquired by 

a contribution of property, including money, to the 

partnership shall be the amount of such money and the 

adjusted basis of such property to the contributing partner 

at the time of the contribution increased by the amount (if 

any) of gain recognized under section 721(b) to the 

contributing partner at such time.

To be clear, a partner’s adjusted basis is not determined solely by his 

initial contribution; subsequent contributions of property also increase 

a partner’s adjusted basis. See id.; see also Nwabasili v. Commissioner, 

T.C. Memo. 2016-220, at *16; Haff v. Commissioner, T.C. Memo. 
27

[*27] 2015-138, at *5; Webster v. Commissioner, T.C. Memo. 1982-427, 

1982 WL 10720.

Alternatively, section 742 provides that the “basis of an interest

in a partnership acquired other than by contribution shall be 

determined under part II of subchapter O (sec. 1011 and following).”

Under section 1015, the basis of property acquired by gift is the same in 

the hands of the donee as it would be in the hands of the donor, unless 

the donor’s basis is “greater than the fair market value of the property 

at the time of the gift,” in which case the donee’s basis shall be the fair 

market value of the property for the purpose of determining loss. See

§ 1015(a). Thus, if a partner receives a portion of his partnership 

interest via gift, he is a donee, and his adjusted basis with respect to

that portion of his interest would be the same as the donor’s basis, 

assuming the donor’s basis did not exceed the fair market value of the 

interest at the time of the gift.

Furthermore, it should be noted that the value of services 

performed is not included in basis unless and until the value of those 

services performed has been subjected to tax. See Hutcheson v. 

Commissioner, 17 T.C. 14, 19 (1951); see also Tonn v. Commissioner, 

T.C. Memo. 2001-123, aff’d, 40 F. App’x 337 (8th Cir. 2002).

On June 9, 2011, Mr. Simpson, acting in his role as president of 

Getify, caused the certificate of formation for Co-Working to be filed in 

Texas. Getify served as Co-Working’s operating manager and registered 

agent. An “Initial Investment Agreement” was entered into between 

Getify, Niyolab, LLC, and Casey Software, LLC, whereby each entity

pledged $2,500 to be “co-equal partners” in the venture and that the 

funds could be used towards reasonable business startup costs. The 

agreement was entered into on July 22, 2011, and was binding until 

October 31, 2011.

At trial, Mr. Simpson testified that the other two partners made 

more financial contributions to Co-Working while he, acting as Getify’s 

agent, provided more sweat equity. He also testified that, at some point 

after the Initial Investment Agreement was signed, emails were sent 

between Co-Working’s partners that corroborated their supposed 

agreement concerning the other two partners’ intentions to gift portions 

of their interests in Co-Working to Getify. No emails or any other 

documentary evidence of this arrangement was entered into evidence 

nor was there testimony from a representative of either of the other two 

partners. 
28

[*28] Moreover, under Texas law, an LLC is required to keep (1) a 

current list that includes the percentage or other interest in the LLC 

owned by each member and (2) a written statement of the amount of a 

cash contribution and a description and statement of the agreed value 

of any other contribution made or agreed to be made by each member as 

well as the dates any contribution is made by each member (unless that 

information is contained within the company agreement).21 See Tex. 

Bus. Orgs. Code Ann. § 101.501(a)(1), (7) (West 2011). Petitioners 

provided neither the list of ownership percentages nor the written 

statement, and that information is not otherwise contained within 

Co-Working’s articles of organization.

Additionally, petitioners assert that, during taxable year 2011, 

they, on Getify’s behalf, made capital contributions to Co-Working of 

$2,250 beyond what respondent agrees has been substantiated. As 

evidence of $550 of these contributions, petitioners point to their own 

bank records, which indicate that checks were drawn on the account but 

do not make note of the checks’ recipient(s). The remaining $1,700 was 

supposedly a cash contribution made by petitioners, documentary 

evidence of which is limited to a bank statement showing a $1,700 cash 

withdrawal from petitioners’ checking account. Mr. Simpson testified 

that he was unable to provide additional documentary evidence to 

substantiate these contributions because he did not have permission to 

provide, among other things, Co-Working’s bank records.

This testimony is not reliable. Under Texas law, all entities are 

required to keep books and records of accounts. Tex. Bus. Orgs. Code 

Ann. § 3.151 (West 2011). Moreover, a member of an LLC or an assignee 

of a membership interest in an LLC, on written request and for a proper 

purpose, may examine and copy such records at any reasonable time. Id.

§ 101.502. Getify, and by association, Mr. Simpson, was Co-Working’s 

registered agent and manager. Consequently, Mr. Simpson did not need 

permission from the other partners or his accountant to access and use 

those records; under Texas law, he had the right to review and copy 

them at any reasonable time.

Where a party fails to introduce evidence within his possession 

which, if true, would be favorable to him, there arises a presumption 

that if the evidence was produced, it would be unfavorable. Wichita 

21 A “company agreement” means any agreement, written or oral, of the 

members concerning the affairs or the conduct of the business of an LLC. Tex. Bus. 

Orgs. Code Ann. § 101.001(1) (West 2011).
29

[*29] Terminal Elevator Co. v. Commissioner, 6 T.C. 1158 (1946). 

Although the necessary evidence to substantiate the alleged 

contributions and gifted interest arrangement may not have been in 

petitioners’ personal possession, it should have been readily accessible 

to Mr. Simpson as Getify’s agent. His failure to offer such records as 

evidence creates a presumption that such evidence would be unfavorable 

to petitioners. 

The documentary evidence that petitioners have put forth 

regarding both the gifted interest arrangement and the additional 

contributions is not enough for petitioners to meet their burden of proof 

or to warrant a finding that they had a sufficient basis in Co-Working to 

justify a share of the partnership’s losses beyond what respondent has 

already allowed. Even if the parties agreed to take an equal distributive 

share of profits and losses, as indicated in Co-Working’s “Initial 

Investment Agreement,” a partner’s distributive share of partnership 

loss is allowed only to the extent of the adjusted basis of the partner’s 

interest in the partnership at the end of the year in which the loss 

occurred. See § 704(d). As such, we hold that petitioners did not 

substantiate that Getify had a sufficient basis in Co-Working to justify 

their purported losses and that their losses related to Co-Working are 

limited to what respondent has allowed.

V. Accuracy-Related Penalties Under Section 6662(a)

Respondent determined section 6662(a) accuracy-related 

penalties against petitioners for taxable years 2011, 2012, and 2013. 

Section 6662(a) applies to the portion of any underpayment that is 

attributable to, among other things, any substantial understatement of 

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

exists if the amount of the understatement exceeds the greater of ten

percent of the tax required to be shown on the return or $5,000. 

§ 6662(d)(1)(A). For any substantial understatement of income tax, 

section 6662(a) provides for the imposition of an accuracy-related 

penalty in an amount equal to 20% of the portion of the underpayment

of tax required to be shown on the return.

The Commissioner bears the burden of production with respect to 

the liability of an individual for any penalty. § 7491(c). To satisfy his 

burden, the Commissioner must present sufficient evidence to show that 

it is appropriate to impose the penalty in the absence of available 

defenses. See Higbee, 116 T.C. at 446. Once the Commissioner meets his 

burden of production on penalties, the taxpayer must come forward with 
30

[*30] persuasive evidence that the Commissioner’s showing is incorrect. 

Rule 142(a); Higbee, 116 T.C. at 447.

In the instant case, respondent determined deficiencies of 

$12,874, $18,866, and $18,359 for taxable years 2011, 2012, and 2013, 

respectively. In light of the parties’ concessions and our holdings above, 

the deficiencies appear to exceed ten percent of the tax required to be 

reported on petitioners’ original returns. Thus, the requirements of a 

substantial understatement for each year appear to have been met.22

Moreover, respondent has established that the managerial approval 

requirements of section 6751(b)(1) have been met, as the examiner’s 

supervisor signed the relevant Civil Penalty Approval Forms before the 

date when petitioners were first notified in writing that respondent 

proposed the assessment of the penalties. See Belair Woods, LLC v. 

Commissioner, 154 T.C. 1 (2020).23 Respondent has met his burden of 

production, and petitioners have not established any persuasive 

evidence showing that the determination is incorrect. See Rule 142(a); 

Higbee, 116 T.C. at 447. Consequently, we sustain respondent’s 

determinations with respect to the section 6662(a) accuracy-related 

penalties for taxable years 2011, 2012, and 2013.

22 A final determination must await the submission of computations under 

Rule 155, which we will order. Because the deficiencies respondent determined appear 

to represent a substantial understatement of income tax for each year by petitioners, 

we find it unnecessary to engage in an analysis with respect to section 6662(b)(1).

23 Appeal of this case would presumably lie in the U.S. Court of Appeals for the 

Fifth Circuit. § 7482(b)(1)(G); Golsen v. Commissioner, 54 T.C. 742 (1970), aff’d, 445 

F.2d 985 (10th Cir. 1971). Golsen stands for the proposition that this Court will apply 

the decision of the Court of Appeals that is “squarely in point where appeal from our 

decision lies to that Court of Appeals and to that court alone,” and, as a corollary, that 

this Court’s own view(s) will be given effect to the extent the relevant Court of Appeals 

has not expressed one. See Golsen, 54 T.C. at 757.

We recognize that there is a split among circuits as to whether written 

supervisory approval must be obtained before the IRS issues a formal communication 

of the penalty such as a notice of deficiency, Chai v. Commissioner, 851 F.3d 190, 221 

(2d Cir. 2017), aff’g in part, rev’g in part T.C. Memo. 2015-42, or merely before the 

assessment, Kroner v. Commissioner, 48 F.4th 1272, 1278–79 (11th Cir. 2022), rev’g in 

part T.C. Memo. 2020-73; see also Laidlaw’s Harley Davidson Sales, Inc. v. 

Commissioner, 29 F.4th 1066, 1074 (9th Cir. 2022) (holding that section 6751(b)(1) 

“requires written supervisory approval before the assessment of the penalty or, if 

earlier, before the relevant supervisor loses discretion whether to approve the penalty 

assessment”), rev’g and remanding 154 T.C. 68 (2020). The Fifth Circuit does not 

appear to have taken a clear stance on this issue. See PBBM-Rose Hill, Ltd. v. 

Commissioner, 900 F.3d 193, 213 (5th Cir. 2018).
31

[*31] VI. Additions to Tax for Failure to Timely File Under Section 

6651(a)(1) 

Finally, we address the additions to tax determined against 

petitioners for taxable years 2012 and 2013. Under section 6651(a)(1), 

when a taxpayer fails to file any required return on the date prescribed 

for filing:

[U]nless it is shown that such failure is due to reasonable 

cause and not due to willful neglect, there shall be added 

to the amount required to be shown as tax on such return 

5 percent of the amount of such tax if the failure is for not 

more than 1 month, with an additional 5 percent for each 

additional month or fraction thereof during which such 

failure continues, not exceeding 25 percent in the 

aggregate . . . . 

Petitioners’ 2012 tax return was, after extension, due on October 

15, 2013. There is conflicting evidence in the record as to when the 

return was filed. The IRS account transcript suggests the return was 

filed on April 23, 2014. Meanwhile, the return itself was stamped as 

received on August 12, 2014, and the parties stipulated that filing date. 

In either case, the return was delinquent by more than six months. On 

posttrial brief, petitioners concede that the late filing of the 2012 return 

should be subject to the maximum 25% addition to tax imposed under 

section 6651(a).

Petitioners’ 2013 tax return was, after extension, due on October 

14, 2014. As with petitioners’ 2012 return, there is conflicting evidence 

in the record regarding when the 2013 return was filed. The IRS Account 

Transcript suggests the return was filed on December 3, 2014. 

Meanwhile, the return itself was stamped as received on April 28, 2015, 

and the parties stipulated that filing date. On brief, petitioners allege 

that they did not timely file their 2013 return because the examination 

that was ongoing with respect to their 2011 return “could subject [them] 

to . . . penalties.”

There is nothing in the record to indicate that petitioners sought 

to prepare their 2013 return in accordance with respondent’s 

determinations from the examination of their 2011 return. In preparing 

their return for taxable year 2013, petitioners appear to have taken the 

same cavalier approach to deductions as they did when preparing their 

returns for the prior taxable years. Moreover, petitioners did not receive 
32

[*32] respondent’s examination report concerning the audits until 

October 20, 2015, months after they filed the return. Thus, regardless of 

whether the 2013 return was filed in December 2014 or April 2015, the 

assertion that the return was filed late on account of an effort to adjust 

to the results of the 2011 exam is not credible and there is no evidence 

in the record to support it. As such, petitioners did not prove that the 

tardiness of their filing was due to reasonable cause. See § 6651(a)(1).

While the discrepancy in the record regarding the filing date of 

the 2013 return is potentially problematic for the purposes of calculating 

how late it was (and thus, what the proper addition to tax should be 

under section 6651(a)(1)), the parties stipulated that the Form 1040 for 

the 2013 tax year was filed on April 28, 2015, and petitioners asserted 

in their posttrial brief that “the 2013 tax year Form 1040 was filed on 

April 28, 2015.” For purposes of resolving the timing issue, we will hold 

petitioners to the stipulation.24 Thus, petitioners’ 2013 tax return was 

filed more than six months late and should be subject to the addition to 

tax respondent determined in the notice of deficiency.

VII. Conclusion

We hold that (1) the deductions at issue are properly deductible 

by petitioners as unreimbursed employee expenses subject to the twopercent limitation of section 67(a), and are reportable on Schedules A of 

petitioners’ Forms 1040; (2) with the exception of petitioners’ expenses

for business use of the home for taxable year 2012, the expenses that

petitioners claim beyond what respondent has allowed have not been 

substantiated; (3) petitioners did not substantiate their basis in 

Co-Working and are limited to the losses respondent allowed; 

(4) petitioners are liable for accuracy-related penalties under section

24 Rule 91(e) provides: “A stipulation shall be treated, to the extent of its terms, 

as a conclusive admission by the parties to the stipulation, unless otherwise permitted 

by the Court or agreed upon by those parties.” Stipulations, like contracts, bind the 

parties to their terms. See McGivney v. Commissioner, T.C. Memo. 2000-224, 2000 WL 

1036364, at *1 (citing Stamos v. Commissioner, 87 T.C. 1451, 1455 (1986)). Although 

we may disregard a stipulation between parties if the evidence contrary to the 

stipulation is substantial or the stipulation is clearly contrary to facts disclosed by the 

record, see Loftin & Woodard, Inc. v. United States, 577 F.2d 1206, 1232 (5th Cir. 1978); 

Jasionowski v. Commissioner, 66 T.C. 312, 317–18 (1976), the parties’ stipulation 

regarding the filing date coincides with the date that the return was stamped as being 

received. Consequently, the stipulation regarding the filing date is not clearly contrary 

to the facts disclosed by the record. Moreover, we do not consider the date on the 

account transcript to be substantial evidence. We are therefore not inclined to 

disregard the stipulation.
33

[*33] 6662(a) for taxable years 2011, 2012, and 2013; and (5) petitioners 

are liable for additions to tax resulting from their failure to timely file 

tax returns under section 6651(a)(1) with respect to taxable years 2012 

and 2013.

We have considered all of the arguments made by the parties, and 

to the extent not mentioned above, we conclude that they are moot, 

irrelevant, or without merit. To reflect the foregoing,

Decision will be entered under Rule 155.