T.C. Mem o. 2 01 4- 57

UNITED STAT ES TAX COURT

ANTONIO E DWARDS AND CARMEN S. EDWARDS, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 20 23 8- 09
. Fi le d Ap ril 1, 2 01 4.

Ant on io Edward s an d C arm enS. Edward s, p ro se. LaurenN. May

an d J . Spe nc er Hi tt , for

res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION PARIS , Ju dg e: On Jun e 1 , 20 09 , res po nd en t i ss ue d t o p et it io ne rs a no ti ce o f de fic ie nc y

fortax y ear 2 00 7, d et erm in in g ade fic ie nc y inFed eral in co m e ta x o f- 2 -

[* 2] $3 3,9 80 an d a n a ccu racy-rela te d p en al ty und er s ect io n 6 66 2( a) of $ 6,7 96
. 1 On Au gu st24 , 20 09 , pet it io ne rs fil eda pe ti ti on inth is Co urt fo r red et erm in at io n of th e al le ge d d efi ci en cy . Res po nd en t fi le d a n a m en de d a ns wer as se rti ng , pu rs ua ntto sec ti on 62 14 (a), tha t p et it io ne rs were l iabl e fo r anin crea se d F ed eral in co m e ta x d efi ci en cy

of $ 10 3,7 05 an d a n i nc reas edaccu racy-rela te d p en al ty un de r se ct io n 6 66 2( a) o f $2 0,7 41
. Befo re tria l, the pa rti es ag reedto so m e o f th e am ou nt s atis su e in a st ip ul at io n o f se tt le d i ss ue s fi le d M arch 4, 2 01 3, an d s up pl em en te d M arch7, 2 01 3. The parti es als o m ad e a num be r of ag reem en ts an d c on ces si on s attri al . On Apr il 22 an d 2 5, 2 01 3, re sp on de ntfil edanam en dm en t t o h is am en de d a ns wer an d a n am en de d a m en dm en t t o h is am en de d a ns wer ref le ct in g the se ag reem en ts an d
co nc es si on s an d a sk in g t o c on fo rm th e p le ad in gs to th e ev id en ce. On the ba si s o f th es e am en dm en ts , res po nd en t as se rte d a n a dju st ed de fic ie nc y

inFed eral in co m e ta x o f $9 1,8 87 an d a n a ccu racy-rela te d p en al ty und er se ct io n 6 66 2( a) o f $1 8,3 77 fortax y ear 2 00 7. Aft er the pa rti es ’ co nc es si on s, the
rem ai ni ng is su es forde ci si on are:

Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o the Int ern al 1 Rev enue Co de (Co de ) fo r th e y ear a t i ss ue , andall Ru le refe ren ces are t o the Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e.- 3 -

[* 3] (1 ) whe th er p et it io ne rs fai le d t o re po rt o n S ch edul e C, Pro fitor Lo ss Fro m Bu si ne ss , $2 02 ,48 4 i n g ro ss rece ip ts or s al es fortax y ear 2 00 7; (2 ) whe th er p et it io ne rs are en ti tl edto de du ctva rio us Sch edul e C b us in es s ex pe ns es fortax y ear 2 00 7; an d (3 ) whe th er p et it io ne rs are l iabl e fo r th e acc ur acy-rela te d p en al ty und er se ct io n 6 66 2( a) fo r ta x year 20 07
. FINDINGS OF FACT So m e o f th e fac ts ha ve be enst ip ul at edan d a re s o fo un d. Th e st ip ul at io n o f fact s an d the ex hi bi ts rece iv edinev id en ce ar e in co rp or at edhe rei n b y th is refe ren ce. Pet it io ne rs res id edinIll in oi s wh enth ei r pe ti ti on was fi le d. Dur in g t ax y ear 2 00 7 p et it io ne r Ant on io Edward s o wne d a ndop erat eda co ns ul ti ng firm

do in g b us in es s as Opu s Vi va , LLC, the Opu s Gro up , Ltd ., and Opu s USA, LLC (co ll ect iv el y , Opu s) . Alth ou ghMr. Edwa rd s o pe rat edth is bu si ne ss un de r m

ul ti pl e n am es , he r ep orte d fo r ta x p ur po se s as a si ng le so le pr op rie to rs hi p. Whil e p et it io ne rs res id edinCh ic ag o, Il li no is , th e p rin ci pa l p la ce of bu si ne ss forOpu s was Trin id adan d To ba go . Mr. Edwar ds tra ve le d fr eque nt ly be twee n C hi cag o andTrin id adan d To ba go , in cu rri ng si gn ifi can t ex pe ns es inth e pr oc es s. Mr . Edward s al so co m pl et edhi s M .B.A. fro m

Nort hwe st ernUni ve rs ity du rin g t ax y ear 2 00 7.- 4 -

[* 4] Dur in g t ax y ear 2 00 7 Op us pro vi de d c on su lt in g s erv ic es ex cl us iv el y for
co m pa ni es lo cat edinTrin id adan d To ba go . Mr. Edwar ds hi reda nu m be r of in de pe nd en t co ns ul tant s wh om he pa idon a co nt ractba si s t o wo rkwith c ert ai n cl ie nt s. In it ia ll y , Mr. Edward s re nt eda li vi ng sp ace i n Tri ni da d andTob ag o i n whi chhe setup a ho m e o ffi ce wi th all th e requi si te bu si ne ss equi pm en t t o o pe rat e hi s b us in es s. InFeb ru ary 20 07 Mr. Edwa rd s b eg anren ti ng de di cat edbu si ne ss sp ace i n Tri ni da d a ndTob ag o fo r Opu s’ op erat io ns . Opu s m ai nt ai ne d asi ng le ba nkacco un t wi thres pe ctto it s b us in es s act iv it ie s. Th is acco un t was m ai nt ai ne d a t RB TT Bank , Ltd ., inTrin id adan d Tob ag o a ndwas h el d o pe n u nd er the na m e “ The Opu s Gro up Cari bb eanLim it ed ” (Op us acco un t). Du rin g the y ear a t i ss ue Mr. Edwa rd s d ep os it edth e in co m e earn edan d re cei ve d i n c on ne ct io n wi th th e o pe rat io n o f Opu s i nt o the Opu s acco un t. Ad di ti on al ly, Mr. Edward s m ai nt ai ne d abu si ne ss li ne of c red itth ro ug h Ch as e Ban k a ndtes ti fie d a t tria l tha t s om e o f th e m on ey en te rin g the Opu s ac co un t was th e res ul t o f wire tra ns fers fro m th is li ne of c red it
. Mr. Edward s k ep t o nl y

m in im al bo ok s an d re co rd s t o d oc um en t the se de po si ts an d d idno t re co rdth e p reci se am ountof i nc om e earne d b y Opu s i n t ax y ear 2 00 7. Si m il arl y , Mr. Edward s m ai nt ai ne d i nc om pl et e rec or ds of Op us ’ li ne of cred itan d a ny wire tran sf ers or p aym en ts m ad e in co nn ect io n the rewi th . At- 5 -

[* 5] tri al , Mr. Edward s re pe at ed ly stre ss edth atbu si ne ss inTrin id adan d To ba go rel ie d h eav il y

on cas h d eal in gs an d tha t the fin an ci al rep orti ng st an da rd s wer e m uc h l es s s tri ng en t than tho se inth e Uni te d S ta te s. Pet it io ne rs ti m el y

fil edth ei r Fed eral in co m e ta x re tu rnfortax y ear 2 00 7. Att ach edto pe ti ti on ers ’ 20 07 Fo rm 10 40 , U.S. Ind iv idua l In co m e Tax Return, was a Sch edul e C rep orti ng gro ss rece ip ts of $ 30 ,00 0 a ndexpe ns es of $ 15 1,6 09 rel at ed to Opu s. As a res ul t, p et it io ne rs rep orte d ane t Sc he du le C lo ss of $ 12 1,6 09 for ta x year 20 07
. Pet it io ne rs ’ 20 07 Fed eral in co m e ta x re tu rnwas l at er s el ect edfor
ex am in at io n. Durin g the co ur se of t he ex am in at io n, p et it io ne rs subm it te d a pr op os edFo rm

10 40 X, Am en de d U.S. In di vi du al Inc om e Tax Return, fo r ta x year 20 07 . This pro po se d a m en de d re tu rnwas re cei ve d b y res po nd en t b utwas n ot si gn edby pet it io ne rs an d was no t fi le d a s a qua li fy in g a m en de d re tu rnfortax y ear 20 07
. Att ach edto th is pro po se d a m en de d re tu rnwas asubs ti tu te Sch edul e C 2 rep orti ng gro ss rece ip ts an d e xp en se s re la te d t o Op us for tax y ear 2 00 7. Th is Res po nd en t d idno t ac cep t the po si ti on s as se rte d i n thi s p ro po se d a m en de d 2 return. Itis in cl ud edinev id en ce as anex pr es si on of p et it io ne rs ’ cu rren t l eg al po si ti onas a do pt eddu rin g the se pro ceed in gs . To th e ex te ntth atth e am ou nt s rep orte d o n the pro po se d am en de d re tu rnare i n a gr eem en t wi thth e n ot ic e o f de fic ie nc y , su cham ou nt s ar e d eem edco nc ed edby pet it io ne rs . The p ro po se d am en de d re tu rnwas d at edApri l 2 , 20 09 , anddi d re fle cta pr ep arer ’s si gn atur e, bu t no t the si gn atur es of p et it io ne rs .- 6 -

[* 6] am en de d S ch edul e C i nc reas edth e o rig in al ly repo rte d g ro ss rece ip ts fro m $3 0,0 00 to rep orte d g ro ss rece ip ts of $ 17 8,8 00 . In ad di ti on , th e o rig in al ly rep orte d b us in es s ex pe ns es were i nc reas edfro m a to ta l o f $1 51 ,60 9 t o ato ta l o f $3 65 ,80 9 i n the fol lo win g c at eg or ie s: Ite m Am ou nt Adv ert is in g $7 ,50 0 Co nt ractlab or 15 9,0 00 In su ran ce 7,2 50 Leg al & p ro fes si on al servi ces 40 0 Offi ce ex pe ns es 18 ,80 0 Rep ai rs & m ai nt en an ce 3,3 55 Supp li es 7,7 80 Tax es & li cen se s 18 ,00 0 Trav el 22 ,57 9 Uti li ti es 2,4 70 Oth er ex pe ns es 11 8,6 75 Tot al 36 5,8 09 On the ir p ro po se d am en de d re tu rnpe ti ti on ers rep orte d ane t Sc he du le C lo ss of $1 90 ,60 9 fo r ta x year 20 07
. Res po nd en t’s re ve nu e ag en t d idno t co ns id er thi s p ro po se d a m en de d re tu rn du rin g the ex am in at io n b ecau se itwas u ns ig ne d a nddi d n otqu al ify as a v al id- 7 -

[* 7] am en de d re tu rnfor

tax y ear 2 00 7. In st ead , onJu ne 1, 2 00 9, re sp on de nt is su edto pe ti ti on ers a no ti ce o f de fic ie nc y fortax y ear 2 00 7 b as edso le ly on the
or ig in al Fo rm

10 40 . This no ti ce d et erm in eda de fic ie nc y inin co m e ta x o f $3 3,9 80
an d an a ccu racy-rela te d p en al ty und er s ect io n 6 66 2( a) o f $6 ,79 6. Th is de te rm in at io n was ba se d o n the di sa ll owa nc e o f de du ct io ns forpe ti ti on ers ’ Sch edul e C trav el ex pe ns es of $ 22 ,57 9 a ndSch edul e C ex pe ns es of $ 10 0,2 75 cat eg or iz edby pet it io ne rs as “ ot he r ex pe ns es ”. Pet it io ne rs fil eda ti m el y pe ti ti on with thi s C ou rt f

orred et erm in at io n o f th e al le ge d d efi ci en cy . Dur in g the pe nd en cy

of t he se pro ceed in gs , res po nd en t’s co un se l b ecame aware of p et it io ne rs ’ pr op os edam en de d re turnpre pa reddu rin g the ex am in at io n o f th ei r 20 07 tax return. Inad di ti on , res po nd en t co nduc te d aba nkde po si ts an al y si s on th e Opu s ac co un t an d fo un d tha t dur in g t ax y ear 2 00 7 d ep os it s wer e m ad e in Trin id adan d To ba go do ll ars inam ou nt s t ot al in g TT$ 1,4 56 ,50 1- -equa l t o USD$2 32 ,48 4. 3

The y earl y

av erag e ex ch an ge rat e to co nv ertTrin id adan d To ba go do ll ars 3 to U.S. do ll ars for

tax y ear 2 00 7 was .15 96 18 08 . This fig ur e wil l b e u se d i n co nv ert in g a ll am ount s t o U.S. d ol lars forth e p ur po se s o f th is op in io n.- 8 -

[* 8] As a re su ltof the se di sc ov eri es , res po nd en t fi le d a n a m en de d a ns wer o n Aug us t 2 2, 2 01 1, ass ert in g a n i nc reas edde fic ie nc y of $ 10 3,7 05 an d a n a dju st ed 4
accu racy-rela te d p en al ty und er s ect io n 6 66 2( a) o f $2 0,7 41 fortax y ear 2 00 7. The se in crea se s wer e b as edon th e fo ll owi ng m od ifi cat io ns to th e n ot ic e o f de fic ie nc y : (1 ) Sch edul e C g ro ss rece ip ts were i nc reas edby $20 2,4 84 on th e b as is of
res po nd en t’s b an k d ep os it s an al y si s; (2 ) res po nd en t al lo wed$5 ,75 8 o f Sch edul e C trav el ex pe ns es of t he $2 2,5 79 pr ev io us ly dis al lo wedinth e n ot ic e o f de fic ie nc y , res ul ti ng ina ne t ad jus tm en t t o ta xabl e in co m e o f $1 6,8 21 ; an d (3 ) res po nd en t al lo wed$3 4,4 54 inSch edul e C o th er ex pe ns es of t he $1 00 ,27 5 p rev io us ly dis al lo wedinth e n ot ic e o f de fic ie nc y , res ul ti ng ina ne t ad jus tm en t t o t ax ab le in co m e o f $6 5,8 21
. On M arch 4, 2 01 3, a p retria l co nf eren ce was he ldwith the pa rti es inwhi cha st ip ul at io n o f fac ts an d ast ip ul at io n o f se tt le d i ss ue s wer e subm it te d. Pu rs ua ntto th e p art ie s’ st ip ul at io n o f se tt le d i ss ue s, p et it io ne rs were al lo wedde du ct io ns for

Fro m Apri l 1 3, 2 01 0, t o Au gu st15 , 20 11 , th is pro ceed in g was st ay ed 4 pu rs ua ntto th e au to m at ic st ay pro vi si on of t he Ban krup tc y Co de . See 1 1 U.S.C. se c. 36 2( a)(8 ) (2 00 6)
.- 9 -

[* 9] Sch edul e C co ntractlab or ex pe ns es of $ 16 ,48 8.5 5, Sc he du le C ot he r: b an k
ex pe ns es of $ 59 , andSch edul e C returns an d a ll owanc es of $ 9,4 97
. On M arch 7, 2 01 3, the tri al of t hi s ca se was h el d i n C hi cag o, Il li no is . At tri al pe ti ti on ers ad op te d the Sch edul e C g ro ss rece ip ts an d e xp en se s fo r ta x year 20 07 as r ep orte d o n the ir p ro po se d a m en de d re tu rnas t he ir p os it io n fo r tr ia l. 5 Furth erm or e, du rin g the tri al th e fo ll owi ng ad di ti on al co nc es si on s wer e m ad e: (1 ) pe ti ti on ers co nc ed edth atth ey were n oten ti tl edto de du ctth e $ 15 9,0 00 of Sch edul e C co nt ractlab orexpe ns es rep orte d o n the ir p ro po se d a m en de d re tu rn , m ai nt ai ni ng in st eadth atth ey are en ti tl edto de du ctSch edul e C co nt ractlab or ex pe ns es of $ 89 ,92 2. Re sp on de ntst ip ul at edth atpe ti ti on ers are en ti tl edto de du ct ad di ti on al co nt ractlab or

ex pe ns es be y on d the am ou ntall owe d i n the st ip ul at io n o f
se tt le d i ss ue s, re su lt in g i n ato ta l o f $2 2,4 73 .55 all owe d; (2 ) pe ti ti on ers co nc ed edth atth e am ou ntres po nd en t p rev io us ly allo wedin hi s amend edan swe r fo r Sch edul e C ren t was co rrec t; an d (3 ) th e p art ie s s ti pu la te d tha t p et it io ne rs are en ti tl edto de du ctSch edul e C pe rm it s an d l ic en se s o f $8 99 in st eadof t he $1 ,25 0 p rev io us ly clai m ed
. Pet it io ne r Carm enEdward s d idno t ap pe ar attri al bu t co ns en te d t o l etMr. 5 Edwar ds ap pe ar o n h er b eh al f an d s ig ne d the st ip ul at io n o f se tt le d i ss ue s, the supp le m en ta l s ti pu la ti on of s et tl edis su es , andth e st ip ul at io n o f fac ts . On Ja nu ary 23 , 20 13 , Mrs . Edward s fi le d aFo rm 88 57 , Reque stforInn oc en t Sp ou se Rel ie f, bu t the cla im

forsec . 60 15 rel ie f is no t s etforth inth e p le ad in gs of t hi s ca se .- 10 -

[* 10 ] On Apr il 22 an d 2 5, 2 01 3, re sp on de ntfil edanam en dm en t t o h is am en de d
an swe r an d a n a m en de d a m en dm en t t o h is am en de d a ns wer, res pe ct iv el y . Thes e do cu m en ts m em or ia li zedth e st ip ul at io ns an d c on ces si on s m ad e b y th e p art ie s du rin g the pe nd en cy

of the cas e an d a t tria l an d c on fo rm edth e p le ad in gs to th e ev id en ce. As ares ul t, i n h is am en de d a m en dm en t t o the am en de d a ns wer, res po nd en t d et erm in edth e upd at edto ta l d efi ci en cy fortax y ear 2 00 7 t o b e $9 1,8 87 with a n a ccu racy-rela te d p en al ty und er s ect io n 6 66 2( a) o f $1 8,3 77 .40
. The pa rti es ’ po si ti on s re ga rd in g the rem ai ni ng Sch edul e C ex pe ns es an d the
am ount s cu rren tl y

indi sp ut e can be su m

m ari zedas f

ol lo ws:
Ite m Pet it io ne rs ’

po si ti on at t ria l All owe d b y

res po nd en t 1 Am ou nt

atis su e Co nt ractlab or $8 9,9 22 $2 2,4 73 $6 7,4 49 Offi ce ex pe ns es 18 ,80 0 -0
- 18 ,80 0 Tax es & li cen se s 18 ,00 0 -0
- 18 ,00 0 2 Trav el , m eal s & ent ert ai nm en t 22 ,57 9 5,7 46 16 ,83 3 Oth er: Am orti zat io n 18 ,40 0 -0
- 18 ,40 0 Oth er: Ban k c ha rg es 27 5 59 21 6 Oth er: Deli ve ry 38 0 -0
- 38 0 Oth er: Dues & subs cri pt io ns 75 0 -0
- 75 0 Oth er: Furni tu re 15 ,00 0 7,7 14 7,2 86- 11 -

[* 11 ] Oth er: Int eres t exp en se 24 ,87 0 -0
- 24 ,87 0 Oth er: Pos ta ge 78 0 -0
- 78 0 Oth er: Telep ho ne 15 ,50 0 7,7 14 7,7 86 Oth er: Trans po rta ti on 9,0 00 -0
- 9,0 00 Oth er: Vehi cl e ex pe ns es 14 ,47 0 5,7 46 8,7 24 Res po nd en t’s p os it io n a s re fle ct edinth is tab le is th atex pr es se d i n 1 th e am en de d a m en dm en t t o the am en de d a ns wer. The se “ Tax es & li cen se s” are d is ti nc t fr om th e p rev io us ly sti pu la te d 2 “pe rm it s an d l ic en se s” di sc us se d abo ve . OPINION I. Gros s R ecei pt s It i s wel l es tabl is he d tha t the Co m m is si on er’s d et erm in at io ns , as e m bo di ed inhi s s ta tu to ry

no ti ces of d efi ci en cy , are g en eral ly pres um edco rrec t. Welch v. Helv eri ng , 29 0 U.S. 1 11 , 11 5 (1 93 3) . Non ethe le ss , th e b ur de n o f pr oo f wil l b e o n th e Co m m is si on er wh ere h e rai se s a n ew is su e in hi s p le ad in gs . See Ru le 14 2( a); Turn er v . Comm is si on er, 6 8 T.C. 4 8 (1 97 7) . As th e is su e o f un rep orte d g ro ss rece ip ts was ra is edinth e am en de d a ns wer an d n otinth e n ot ic e o f de fic ie nc y , res po nd en t b ears th e b ur de n o f pr oo f with re sp ectto th is is su e.- 12 -

[* 12 ] Sect io n 6 1( a)(1 ) de fin es gro ss in co m e as all in co m e fro m what ev er s ou rce de riv edin cl ud in g c om

pe ns at io n fo r se rv ic es su chas wa ge s, s al ari es , andbo nu se s. See a ls o s ec. 1 .61 -2 (a)( 1) , Inc om e Tax Reg s. Tax pa y ers are re qu ire d t o m ai nt ai n bo ok s an d re co rd s s uf

fic ie ntto est ab li sh th e am ou ntof t he ir g ro ss in co m e. Sec. 60 01 . If th e ta xp ay er fa il s t o d o thi s, the n the Co m m is si on er m ay

reco ns tru ctth e ta xp ay er’s i nc om e th ro ug h the us e o f an y reas on ab le m etho d. Se e Hol landv. Uni te d S tate s, 3 48 U.S. 12 1 (1 95 4) ; Gi dd io v. Co m m is si on er, 5 4 T.C. 1 53 0, 1 53 2- 15 34 (19 70 ). The “ba nkde po si ts ” m etho d h as lo ng be enup he ldas areas on ab le m ean s o f de te rm in in g i nc om e whe re a t ax pa y er i s unwi ll in g o r un ab le to pro vi de ad equa te bo ok s an d re co rd s. DiLe o v . Comm is si on er, 9 6 T.C. 8 58 , 86 7 (1 99 1) , aff’d, 9 59 F.2 d 1 6 (2 d C ir. 1 99 2) ; Fi sh er v . Comm is si on er, T.C. Mem o. 1 99 7- 45 0. Ba nk de po si ts are d eem edpri m a fac ie ev id en ce o f th e rec ei ptof i nc om e b y th e ta xp ay er. Park s v . Comm is si on er, 9 4 T.C. 6 54 , 65 8 (1 99 0) (ci ti ng Tok ars ki v. Co m m is si on er, 8 7 T.C. 7 4, 7 7 (1 98 6) ). Dur in g the ex am in at io n o f pe ti ti on ers ’ 20 07 tax return re sp on de nt co nduc te d abankde po si ts an al y si s o f th e in co m e fl owi ng th ro ug h Op us . Thro ug ho uttax y ear 2 00 7 M r. Edwar ds was the own er an d o pe rat or of Op us an d
m ai nt ai ne d o nl y

on e b us in es s b an k a cco un t wi th res pe ctto th atbu si ne ss . Whi le- 13 -

[* 13 ] pe ti ti on ers rep orte d g ro ss rece ip ts of o nl y $3 0,0 00 on th ei r 20 07 Fed eral in co m e ta x re tu rn , res po nd en t’s an al y si s re ve al edth at$2 32 ,48 4 was de po si te d in to th e Opu s ac co un t dur in g t ax y ear 2 00 7. Th e b ur de n i s o n p et it io ne rs to pro ve th atres po nd en t’s d et erm in at io n o f un rep orte d i nc om e, co m pu te d u si ng th e b an k de po si ts m etho d o f rec on stru ct in g i nc om e, is in co rrec t. See Park s v . Co m m is si on er, 9 4 T.C. at65 8; see als o Ni ch ol as v. Co m mis si on er, 7 0 T.C. 1 05 7, 10 64 (19 78 ); Zarno w v. Co m m is si on er, 4 8 T.C. 2 13 , 21 6 (1 96 7) . Howev er, res po nd en t wi ll be ar the burd enof p ro vi ng an y ad di ti on al de fic ie nc y

or p en al ty am ount s ra is edinhi s p le ad in gs . See Ru le 14 2( a). On the pro po se d a m en de d re tu rnpe ti ti on ers no w ado ptas t he ir p os it io n a t tri al , pet it io ne rs rep orte d S ch edul e C g ro ss rece ip ts of $ 17 8,8 00 . Peti ti on ers no w as se rt t ha t thi s i s the co rrec t am ou ntof g ro ss rece ip ts forOpu s fo r ta x year 20 07
. Thi s i s a l arg e d ep artur e fro m th e p os it io n t ak enon th ei r or ig in al tax return fo r ta x y ear 2 00 7, yet st il l i n d is ag reem en t wi thres po nd en t’s d et erm in at io n tha t Op us ha d $2 32 ,48 4 i n re cei pt s fo r ta x year 20 07 . Res po nd en t as se rts th athi s b an k d ep os it s an al y si s an d s up po rti ng ev id en ce p res en te d at tria l ar e su ffi ci en t t o m eethi s bu rd enof p ro vi ng th is am ou nt . The Co urt ag rees an d fi nd s tha t p et it io ne rs no w be ar the bu rd enof p ro vi ng th atth ey di d n otha ve Sch edul e C g ro ss rece ip ts of $2 32 ,48 4 fo r ta x year 20 07
.- 14 -

[* 14 ] Pet it io ne rs ass ertth atth e d iff eren ce b etweenth e $ 17 8,8 00 ingro ss rece ip ts to whi chth ey

ag ree a ndth e $ 23 2,4 84 rev eal edby the ba nkde po si ts an al y si s i s at tri bu tabl e to no nt ax ab le tra ns fers fro m Opu s’ li ne of c red itwith C ha se Ban k. Pet it io ne rs po in t s pe ci fic al ly to a wi re tran sf er o f TT$3 68 ,95 4, o r USD$5 8,8 92 , in to th e Opu s ac co un t o n J un e 1 5, 2 00 7, as anex am pl e o f on e su chno nt ax ab le tra ns fer. Ho wev er, p et it io ne rs di d n otpro vi de su ffi ci en t d oc um en ta ti on to de ci si ve ly ind ic at e th atth e tr an sf er was pro pe rly attrib ut ab le to Opu s’ li ne of cred it . The b an k s ta te m en ts th em se lv es do no t i nc lu de a de sc rip ti on of t he ori gi n of th e fu nd s, n ordo th e st at em en ts in cl ud e an y wire tra ns fer i nf

orm at io n. Pet it io ne rs di d p ro du ce ev id en ce o f a Ch as e Ban k a cco un t fo r a b us in es s l in e o f cred itforOpu s, USA, LLC, whi chwas o pe ne d i n 2 00 6 wi th a cred itli mitof $1 00 ,00 0. Pet it io ne rs als o p ro vi de d s ta te m en ts fro m th atacco un t; ho wev er, the do cu m en ts th ey

pro vi de d wer e in co m

pl et e. The a cco un t s ta te m en t fo r Ju ne 20 07 in cl ud es on ly the fir stan d l as t p ag es forth e m on th ly stat em en t an d d oe s n ot pr ov id e an y

supp orti ng ev id en ce tha t the all eg edwire tra ns fer t oo k p la ce. The
on ly tran sf

er re fle ct edinth e d oc um en ta ti on fro m Ch as e Ban k o ccu rredintax y ear 20 06 . Con se qu en tl y , pet it io ne rs fai le d t o p ro du ce an y subs tant iv e ev id en ce tha t th e $ 58 ,89 2 d ep os iton Ju ne 15 , 20 07 , was fr om th e Ch as e Ban k l in e o f cre di t o r- 15 -

[* 15 ] was a ttrib ut ab le to a no nt ax ab le tra ns fer. Pet it io ne rs ha ve li ke wis e fai le d t o m ak e a s ho win g b ey on d s ug ge st edex pl an at io ns as t o wh y res po nd en t’s de te rm in at io n o f Sch edul e C g ro ss rece ip ts fortax y ear 2 00 7 was in co rrec t. Acco rd in gl y , res po nd en t’s d et erm in at io n tha t Op us ha d $ 23 2,4 84 ingro ss rece ip ts fo r ta x year 20 07 is su st ai ne d. II. Sch edul e C Ex pe ns es Deduc ti on s ar e a m at te r of leg is la ti ve gra ce, an d the tax pa y er b ears th e bu rd enof p ro vi ng th athe is en ti tl edto an y de du ct io n c la im ed . Rul e 1 42 (a); INDOPCO, In c. v. Co m

m is si on er, 5 03 U.S. 79 , 84 (19 92 ); Ne w Col on ia l Ic e Co
. v. Hel ve rin g, 2 92 U.S. 43 5, 4 40 (19 34 ). Sect io n 6 00 1 re qu ire s t ax pay ers to
m ai nt ai n re co rd s s uf

fic ie ntto est ab li sh th e am ou ntof e ach de du ct io n. Se e al so se c. 1.6 00 1- 1( a), In co m e Tax Reg s. Sect io n 1 62 (a) a ll ows a de du ct io n fo r or di na ry an d n eces sa ry

ex pe ns es th at a ta xp ay er p ay s i n c on ne ct io n wi th th e o pe rat io n o f a trad e o r bu si ne ss . Boyd v. Co m m is si on er, 1 22 T.C. 30 5, 3 13 (20 04 ). To b e “ or di na ry ” th e ex pe ns e m us t b e of a co m m on or f reque ntoc cu rren ce i n the type o f bu si ne ss in vo lv ed . Depu ty v. du Po nt , 30 8 U.S. 4 88 , 49 5 (1 94 0) . To be “ ne ces sa ry ” anex pe ns e m us t b e

“ ap pr op ria te an d h el pf

ul ” to th e ta xp ay er’s b us in es s. Welch v. Hel ve rin g, 2 90 U.S. at 1 13 . Add it io na ll y , th e expe nd itur e m us t b e “ di rect ly con ne ct edwith o r- 16 -

[* 16 ] pe rta in in g t o the tax pa y er’s trad e o r bu si ne ss ”. Sec. 1 .16 2- 1( a), In co m e Tax Reg s. Sec ti on 26 2( a) d is al lo ws d educ ti on s fo r pe rs on al , li vi ng , or fa m il y ex pe ns es . If a t ax pa y er es tabl is he s tha t anex pe ns e is de du ct ib le , bu t i s u nabl e to subs tant ia te th e p reci se am ou nt , th e Co urt m ay est im at e th e am ou nt , bea rin g he av il y ag ai ns t the tax pa y er wh os e in ex act itud e is of h is ownm ak in g. Se e Co ha n v. Co m mis si on er, 3 9 F .2d54 0, 5 43 -5 44 (2dCir . 19 30 ). The t axpa y er m us t pr es en t s uf

fic ie ntev id en ce fo r th e Co urt t o fo rm anest im at e b ecau se witho utsu ch a b as is , any all owanc e wou ldam ou ntto un gu id edlar ge ss e. W il li am s v . Uni te d St at es , 24 5 F .2d55 9, 5 60 -5 61 (5th C ir. 1 95 7) ; Van ic ekv. Co m m is si on er, 8 5 T.C. 73 1, 7 42 -7 43 (19 85 ). Howev er, s ect io n 2 74 ov erri de s the Co ha n ru le with re ga rdto cert ai n ex pe ns es as i t re qu ire s s tri ct er s ub st an ti at io n fo r tr av el , m eal s, an d c ert ai n l is te d pr op erty su chas p as se ng er au to m ob il es . See San fo rdv. Co m m is si on er, 5 0 T.C. 82 3, 8 28 (19 68 ), aff’d p er curia m , 41 2 F .2d20 1 (2 d C ir. 1 96 9) ; s ec. 1 .27 4- 5T(a ), Tem po rary Inco m e Tax Reg s., 5 0 F ed . Reg . 46 01 4 (No v. 6 , 19 85 ). Sect io n 2 74 (d ) pr ov id es th atno de du ct io n s ha ll be all owe d u nl es s the tax pay er s ub st an ti at es , by ad equa te reco rd s o r by su ffi ci en t ev id en ce co rro bo rat in g the tax pay er’s o wn st at em en ts , th e am ou nt , ti m e an d p la ce, an d b us in es s p ur po se of t he ex pe ns e. See- 17 -

[* 17 ] Oswan de l v . Comm is si on er, T.C. Mem o. 2 00 7- 18 3; sec . 1.2 74 -5 T(c)(2 ), Tem po rary Inco m e Tax Reg s., 5 0 F ed . Reg . 46 01 7 (No v. 6 , 19 85 ). A. Trave l an d Tra ns po rta ti onExp en se s Sect io n 1 62 (a) a ll ows a de du ct io n fo r “ tra ve li ng ex pe ns es * * * wh il e away fro m ho m e in th e p ur su itof atra de or b us in es s” . For atax pa y er t o qua li fy forth is de du ct io n, thr ee co nd it io ns m us t b e m et : (1 ) th e ex pe ns es m us t b e o rd in ary an d
ne ces sa ry ; (2 ) th e ex pe ns es m us t h av e b eenin cu rredwhi le th e ta xp ay er was “ away fro m ho m e”; an d (3 ) th e ta xp ay er m us t h av e in cu rredth e ex pe ns es inpu rs ui t o f a tra de or b us in es s. Baro ne v. Co m m is si on er, 8 5 T.C. 4 62 , 46 5 (1 98 5) , aff’d witho utpubl is he d o pi ni on , 80 7 F .2d17 7 (9 th Cir . 19 86 ); Wil be rt v . Co m m is si on er, T.C. Mem o. 2 00 7- 15 2, af f’d, 55 3 F .3d54 4 (7 th Cir . 20 09 ); s ee al so Co m m is si on er v . Flo wers , 32 6 U.S. 4 65 , 47 0 (1 94 6)
. Inge ne ral , a tax pa y er’s “ ta x h om e” i s h is pri nc ip al pl ace o f bu si ne ss . See 6
As an ex cep ti on to th e g en eral rul e, a ta xp ay er m ay cla im hi s p ers on al 6 res id en ce as hi s t ax ho m e in si tu at io ns wher e th e ta xp ay er i s awa y fro m ho m e o n a te m po rary rath er tha n i nd efi ni te or p erm an en t b as is . Peurif oy v. Co m

m is si on er, 35 8 U.S. 5 9, 6 0 (1 95 8) ; Kro ll v. Co m m is si on er, 4 9 T.C. 5 57 , 56 2 (1 96 8) . A pla ce of bu si ne ss is tem

po rary if th e em

pl oym en t i s s uc h tha t t erm in at io n wi th ina sh ort pe rio d o f ti m e can be for es een . Mit ch el l v . Comm is si on er, 7 4 T.C. 5 78 , 58 1 (1 98 0) . Howev er, p et it io ne rs do no t al le ge th atMr. Edwa rd s’ em pl oym en t i n Trin id adan d To ba go was t em po rary, andth e rec or d i s co ns is te ntinest ab li sh in g th atOpu s i s a g oi ng co nc ernan d was in te nd edto be a so ur ce o f pe rm an en t em pl oym en t fo r Mr. Edward s.- 18 -

[* 18 ] Mit ch el l v . Comm is si on er, 7 4 T.C. 5 78 , 58 1 (1 98 0) ; Dal y v. Co m m is si on er, 72 T.C. 19 0, 1 95 (19 79 ), aff’d, 6 62 F.2d25 3 (4 th Cir . 19 81 ); Kro ll v. Co m m is si on er, 4 9 T.C. 5 57 , 56 2 (1 96 8) . The Co urt m us t the refo re co ns id er the

“ away fro m

ho m e” re qu ire m en t “ inli gh t o f th e fu rth er re qu ire m en t tha t the
ex pe ns e b e th e res ul t o f bu si ne ss ex ig en ci es .” Hant zi s v . Comm is si on er, 6 38 F.2d 24 8, 2 53 (1s t Ci r. 19 81 ), rev ’g T.C. Mem o. 1 97 9- 29 9. Where a ta xp ay er’s pr in ci pa l p la ce o f em

pl oym en t i s o th er tha n h is res id en ce an d h e ch oo se s n otto
m ov e h is res id en ce fo r pe rs on al reas on s, h is ad di ti on al li vi ng an d trav el ex pe ns es are ares ul t o f th atpe rs on al ch oi ce. Co m m is si on er v . Flo wers , 32 6 U.S. at47 0; Tuc ke r v. C omm is si on er, 5 5 T.C. 7 83 , 78 6 (1 97 1) ; M in ic k v . Comm is si on er, T.C. Mem o. 2 01 0- 12
. Pet it io ne rs co nt en d tha t the y sh ou ldbe ab le to de du ctMr. Edwa rd s’ air fare fo r tr av el be twee n C hi cag o a ndTrin id adan d To ba go as we ll as e xp en se s fo r a car se rv ic e th atdro ve Mr. Edwa rd s t o a ndfro m th e ai rp ort i n C hi cag o. Pe ti ti on ers li ke wis e co nt en d tha t the y sh ou ldbe ab le to de du ctlea se an d i ns ur an ce p aym en ts fo r th e b us in es s u se of o ne of t he ir p ers on al ve hi cl es inCh ic ag o. Pe ti ti on ers do
no t d is pu te th atMr. Edward s’ pri nc ip al pl ace o f bu si ne ss was i n Tri ni da d a nd Tob ag o a ndth eref

or e itis hi s ap pr op ria te “ ta x h om e” fo r th e p ur po se s o f se ct io n 16 2. Co ns eque nt ly, Mr. Edward s m us t the n h av e tr av el edto Ch ic ag o, h is- 19 -

[* 19 ] res id en ti al ho m e, in pu rs ui t o f hi s trad e o r bu si ne ss inord er fo r hi s re la te d tra ve l ex pe ns es to be de du ct ib le
. Inhi s b rie f Mr. Edward s co nt en de d fo r th e fi rs t t im e th athe pro vi de d
se rv ic es for

cli en ts inth e Uni te d S ta te s dur in g t ax y ear 2 00 7 andth eref or e h ada bu si ne ss pu rp os e fo r hi s trip s t o C hi cag o. Ho wev er, thi s as se rti on is di rect ly
co nt rad ic te d b y

Mr. Edward s’ owntes ti m on y at t ria l as well as h is st ip ul at io n tha t he di d n otha ve an y

cli en ts inth e Uni te d S tate s dur in g the y ear at i ss ue . Mr. Edwar ds ha s l ik ewis e p ro du cedno subs tant iv e ev id en ce o f ha vi ng cli en ts inth e Uni te d S tate s dur in g t ax y ear 2 00 7. Mr. Edward s al so all eg es inhi s re pl y bri ef tha t h e m ad e fre qu en t trip s t o the Uni te d S tate s t o p ro cu re b us in es s equi pm en t, fu rn itur e, an d s up pl ie s fo r Opu s. Si m il arl y th is cla im

is un supp orte d b y

an y tes ti m on y , m

uc h l es s d oc um en tary ev id en ce, as th e m erch an di se rece ip ts pro vi de d re fle ctit em s o rd eredno t fr om Ch ic ag o b utfro m

othe r lo cat io ns su chas Ne w Yorkan d Tex as . Accor di ng ly, pe ti ti on ers ha ve fai le d t o s ho w th atth e ex pe ns es in cu rredforair fare be twee n Ch ic ag o andTrin id adan d To ba go were i n p ur su itof atra de or b us in es s ra th er th anco m m ut in g e xp en se s re su lt in g fr om a pe rs on al ch oi ce t o m ai nt ai n h is
res id en ce i n C hi cag o. Pe ti ti on ers ha ve li ke wis e fai le d t o s ho w a bu si ne ss pu rp os e- 20 -

[* 20 ] forex pe ns es rel at in g t o the us e o f th ei r pe rs on al ve hi cl e an d the us e o f a car
se rv ic e to tra ns po rt M r. Edwar ds to an d fr om th e ai rp ort i n C hi cag o. Eve n i f pe ti ti on ers were fo un d t o h av e sa ti sf ie d the requi rem en ts to de du ct th ei r tr av el ex pe ns es un de r se ct io n 1 62 , th ey st il l h av e n otco m

pl ie d wi th th e he ig ht en edsubs tant ia ti on requi rem en ts of s ect io n 2 74 . As subs tant ia ti on of t he cl ai m edtra ve l ex pe ns es , Mr. Edward s i nt ro du cedha ndwrit te n c al en da r su m m ary st at em en ts of 2 9 a ll eg edfli gh ts to an d fr om un kn own de st in at io ns . Howev er, th es e st at em en ts were n otpre pa redco nt em po ran eo us ly w ith the tra ve l an d d o n ot in cl ud e p ert in en t i nf

orm at io n s uc h a s the da te , th e o rig inan d d es ti na ti on cit ie s, o r th e b us in es s p ur

po se of t he tra ve l. 7 Pet it io ne rs als o fa il edto pro vi de cred itcardst at em en ts forth e m ajor ity of th e fl ig ht s l is te d i n the su m m ary ex hi bi t t o s ho w th atth ey actua ll y in cu rredth es e ex pe ns es . The cre di t ca rdst at em en ts pro vi de d l ik ewis e d o n otsp eci fy th e o rig in
an d d es ti na ti on cit ie s o r th e n am es of t he pa ss en ge rs forany fli gh ts be y on d tho se res po nd en t al read y

all owe d fo r ta x year 20 07
.

Inad di ti on to tra ve l b etweenth e Uni te d S tate s an d Tri ni da d a ndTob ag o, 7 Mr. Edward s as se rts th atso m e o f th e tr av el ex pe ns es were fo r a trip to Hon g Ko ng th ro ug h h is Nort hwe st ernM.B.A. pr og ram . Peti ti on ers ha ve si m il arl y fai le d t o pr ov id e a b us in es s p ur

po se rel ev an t t o Op us for th es e expe ns es .- 21 -

[* 21 ] W ith re sp ectto th e carservi ce, p et it io ne rs pro vi de d c red itcardst at em en ts sh owi ng pa ym en ts to a pr iv at e driv in g s erv ic e b ut , ou ts id e o f Mr. Edward s’ te st im on y , di d n otpro vi de an y lo g d oc um en ti ng th e ex pe ns es or d em on st rat in g a bu si ne ss pu rp os e fo r th em . Peti ti on ers als o fa il edto de m on strat e a b us in es s pu rp os e fo r th e u se of t he ir p ers on al ve hi cl e in Ch ic ag o, m uc h l es s an accu rat e lo g of th e v eh ic le ’s us e o r a cal cu la ti on of wh atpe rcen ta ge of i ts us e was de di cat edto bu si ne ss pu rp os es . Res po nd en t h as co nc ed edso m e o f th e tr av el ex pe ns es rel at edto ho te ls in Trin id adan d To ba go . The Co urt fi nd s tha t p et it io ne rs ha ve fai le d t o p ro vi de
su ffi ci en t s ub st an ti at io n wi thres pe ctto th e rem ai nd er. Acco rd in gl y , pet it io ne rs are n oten ti tl edto de du ctSch edul e C trav el ex pe ns es inanam ou ntgre at er tha n th atres po nd en t p rev io us ly allo wedfortax y ear 2 00 7. B. Co nt ractLabo r Exp en se s As s ta te d abo ve , sec ti on 60 01 requi res tax pa y ers to ke ep reco rd s s uf fic ie nt to est ab li sh th e am ount s o f th ei r de du ct io ns . See al so sec . 1.6 00 1- 1( a), In co m e Tax Reg s. Re cei pt s, ca nc el edch eck s, cr ed itcardst at em en ts , andco rro bo rat in g ba nkst at em en ts cansh ow tha t b us in es s ex pe ns es were p ai d. Se e Fl em in g v . Co m m is si on er, T.C. Mem o. 2 01 0- 60 . Furt he rm or e, th e Co urt h as co ns is te nt ly requi redtax pay ers to pro du ce re co rd s o r rec ei pt s t o s ub st an ti at e p aym en ts for- 22 -

[* 22 ] co ntractlab or . See, e.g ., Park er v . Commis si on er, T.C. Mem o. 2 01 2- 35 7; Bru ns v. Co m

m is si on er, T.C. Mem o. 2 00 9- 16 8. At tria l p et it io ne rs pro du ceda ha nd fu l o f ch eck s an d e m pl oym en t co nt ract s to subs tant ia te th ei r co nt ractlab orex pe ns es . For e ve ry co nt ractlab orex pe ns e fo r whi chpe ti ti on ers pro du cedbo thanem pl oym en t co nt ractan d e vi de nc e o f pa ym en t inacco rd an ce wi th th atco nt ract , res po nd en t al lo weda de du ct io n. Re sp on de nt al so all owe d d educ ti on s fo r co nt ractlab orex pe ns es wher e Mr. Edward s p ro du ced
ev id en ce o f pa ym en t t o a n i nd ep en de ntco nt ract oralo ng with c on tra ct s b etween Opu s an d the Gov ern m en t Hum anRes ou rces Co . of Tri ni da d a ndTob ag o, wh ic h refe rredto pa ym en ts to sai d i nd ep en de ntco nt ract or . W ith re sp ectto th e rem ai ni ng co nt ractlab orex pe ns es , Mr. Edward s o ffer ed
on ly unc orro bo rat edtes ti m on y . Mr. Edwar ds fai le d t o p ro vi de an y ad di ti on al
em pl oym en t co nt ract s s ho win g o bl ig at io ns to pay in de pe nd en t co ntract or s o r ch eck s s ho win g e vi de nc e o f actua l p aym en ts be y on d tho se forwhi chres po nd en t pr ev io us ly allo weda de du ct io n. Mo stof t he all eg edin de pe nd en t co nt ract or s M r. Edwar ds id en ti fie d i n h is tes ti m on y an d i n h is ev id en ti ary su m m ary were en ti rel y un co rro bo rat edby any

do cum en ta ti on at a ll
. Pet it io ne rs fai le d t o m ai nt ai n s uf fic ie ntreco rd s t o s ho w th atth e rem ai ni ng co nt ractlab orex pe ns es were ei th er i nc urredor p ai d. Pe ti ti on ers fai le d t o s ecu re- 23 -

[* 23 ] affi da vi ts or c al l an y of the all eg edem

pl oyees a s wi tn es se s t o c orro bo rat e th atth ey were i nd ep en de ntco nt ract or s o f Opu s o r th atth ey actua ll y rece iv ed pa ym en ts as s uc h. Acco rd in gl y , pet it io ne rs are n oten ti tl edto de du ctSch edul e C
co nt ractlab orex pe ns es inanam ou ntgre at er tha n tha t p rev io us ly allo wedfortax y ear 2 00 7 i n re sp on de nt ’s am en de d a m en dm en t t o h is am en de d a ns wer co nf orm in g the pl ead in gs to th e ev id en ce. C. Oth er Ex pe ns es On the ir p ro po se d am en de d re tu rnfortax y ear 2 00 7, p et it io ne rs cla im ed ad di ti on al de du ct io ns forex pe ns es no t re po rte d o n the ir o rig in al return. Pet it io ne rs lat er ad op te d the se po si ti on s i n the ir p le ad in gs . Thes e ad di ti on al cl ai m s ar e aff

irmativ e is su es rai se d b y

pe ti ti on ers , andco ns eque nt ly the y be ar the bu rd enof p ro of

. Rul e 1 42 (a); see als o Ack erm anv. Co m m is si on er, T.C. Mem o. 20 09 -8 0. Sp eci fic al ly pet it io ne rs rai se d a ffi rm at iv e is su es by clai min g a dd it io na l de du ct io ns foroff

ic e ex pe ns es , am orti zat io n, an d t ax es an d l ic en se s, as well as a n ad di ti on al de du ct io n fo r ch ari tabl e co nt rib ut io ns . At tri al Mr. Edwa rd s d idno t te st ify with sp eci fic ity

to an y of t he se ad di ti on al expe ns es , no r di d h e p ro vi de an y supp orti ng do cum en ta ti on . Accor di ng ly, pe ti ti on ers ha ve no t m etth ei r bu rd enof pr oo f with re sp ectto th e aff irmativ e is su es rai se d i n the ir p le ad in gs .- 24 -

[* 24 ] Inth e n ot ic e o f de fic ie nc y , res po nd en t s etforth hi s d et erm in at io ns with
res pe ctto a nu m

be r of de du ct io ns cla im edon pe ti ti on ers ’ or ig in al return fo r ta x y ear 2 00 7. Re sp on de ntdi sa ll owe d, co m pl et el y or i n p art , cla im edde du ct io ns for ba nkch arg es , del iv eri es , du es an d s ub sc rip ti on s, fu rn itur e, in te res t, p os ta ge , te le ph on e, an d v eh ic le ex pe ns es . As st at edbe fo re, p et it io ne rs be ar the bu rd enof pr ov in g tha t re sp on de nt ’s det erm in at io ns inth e st atut ory no ti ce o f de fic ie nc y

are in co rrec t. See W el chv. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ). Onc e ag ai n p et it io ne rs fai le d t o o ffertes ti m on y as t o a ny spe ci fic rep orte d
ex pe ns e in th is cat eg ory . Peti ti on ers in st eadpro du cedanun or ga ni zedco ll ect io n of rece ip ts witho utany

in di cat io n a s t o wh ic h e xp en se s the y were o ffer edto subs tant ia te . Peti ti on ers m ad e n o a tt em ptto m at chup rece ip ts with e xp en se s, m uc h l es s t o m ak e a s ho win g a s t o wh ethe r th es e ex pe ns es were o rd in ary an d
ne ces sa ry to th ei r bu si ne ss . Accor di ng ly, pe ti ti on ers are n oten ti tl edto de du ct th ei r rem ai ni ng rep orte d S ch edul e C ex pe ns es inam ount s g reat er tha n p rev io us ly al lo wedfor

tax y ear 2 00 7 i n re sp on de nt ’s am en de d a m en dm en t t o h is am en de d
an swe r co nf

orm in g the pl ead in gs to th e ev id en ce. III. Sec ti on 66 62 (a) Pe na lty Sect io n 6 66 2 i m

po se s an accu racy-rela te d p en al ty equ al to 20 % of t he po rti onof a n u nd erp aym en t at tri bu tabl e to any subs tant ia l u nd ers tate m en t o f- 25 -

[* 25 ] in co m e ta x o r to ne gl ig en ce o r di sr eg ardof rul es or r eg ul at io ns . Sec. 66 62 (a) and(b) (1 ) an d (2 ). Und er s ect io n 7 49 1( c), the Co m mis si on er h as th e bu rd enof p ro du ct io n t o s ho w th atth e im po si ti on of ape na lty

un de r se ct io n 66 62 (a) i s ap pr op ria te . The Co m m is si on er al so ha s the bu rd enof p ro of as t o any in crea se d p en al ty am ou nt s as se rte d i n h is pl ead in gs . See Ru le 14 2( a). Sect io n 6 66 2( d) de fin es a “ subs tant ia l u nd ers ta te m en t o f in co m e ta x” as a n un de rs ta te m en t tha t ex ceed s the gre at er o f: (1 ) 10 % of the am ou ntof t ax requi red to be sh ownon th e return o r (2 ) $5 ,00 0. “Neg li ge nc e” i nc lu de s an y fai lu re t o m ak e a rea so nabl e at te m

ptto co m pl y with the pro vi si on s o f th e Co de , and

“ di sr eg ard ” in cl ud es an y

care le ss , reck le ss , or i nt en ti on al di sr eg ardof rul es or reg ul at io ns . Sec. 6 66 2( c). Pet it io ne rs ’ in co m e ta x due fortax y ear 2 00 7, as up da te d i n re sp on de nt ’s
am en de d a m en dm en t t o a m en de d a ns wer, is $9 9,6 36 . On th ei r fi le d F ed eral in co m e ta x re tu rnfor20 07 , pet it io ne rs rep orte d t ax du e o f $7 ,74 9. Pe ti ti on ers ’
un de rs ta te m en t was th eref or e $ 91 ,88 7, wh ic h e xc eed s b oth 1 0% o f th e am ou nt requi redto be sh own on th e return (1 0% wo ul d b e $ 9,9 64 ) an d $ 5,0 00
. Res po nd en t h as m etbo th hi s b ur de n o f pr oduc ti oninsh owi ng th atsu cha pe na lty is ap pr op ria te an d h is bu rd enof p ro of with re sp ectto th e in crea se d p en al ty- 26 -

[* 26 ] am ou nt s as se rte d i n h is pl ead in gs . Accor di ng ly, pe ti ti on ers are l iabl e fo r th e accu racy-rela te d p en al ty und er s ect io n 6 66 2( a) u nl es s anex cep ti on ap pl ie s. No p en al ty w il l b e im

po se d u nd er s ect io n 6 66 2( a) i f th e ta xp ay er es tabl is he s th athe act edwith re as on ab le cau se an d i n g oo d fa ith. Se c. 66 64 (c)( 1)
. Ci rcu m st an ces th atin di cat e rea so nabl e cau se an d g oo d fa ith i nc lu de rel ianc e o n th e advi ce o f a t ax pro fes si on al or a n h on es t m is un de rs tand in g o f th e la w th atis
reas on ab le inli gh t o f al l the fact s an d c irc um st an ces . Sec. 1 .66 64 -4 (b ), In co m e Tax Reg s. Th e ta xp ay er h as th e b ur de n o f pr ov in g tha t h e act edwith re as on ab le
cau se an d i n g oo d fa ith. Ru le 14 2( a); Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 44 6- 44 7 (2 00 1) . Reg ul at io ns pro m ul ga te d u nd er s ect io n 6 66 4( c) fu rth er p ro vi de th atth e d et erm in at io n o f rea so nabl e cau se an d g oo d fa ith “ is m ad e o n a cas e-b y -cas e b as is , tak in g i nt o a cco un t al l p ert in en t fa ct s an d c irc um st an ces .” Sec. 1.6 66 4- 4( b) (1 ), In co m e Tax Reg s. At tria l p et it io ne rs all eg edth atth ey rel ie d o n the ir a cco un tantinco nn ect io n with the pre pa rat io n o f th ei r or ig in al Fed eral in co m e ta x re tu rnfortax y ear 2 00 7. Mr. Edward s as se rte d tha t h e to ldhi s ac co un tantth athe was n et ti ng hi s i nc om e bu t wan te d t o re po rt a ll ex pe ns es fro m Opu s. Mr . Edward s t es ti fie d: “ I to ldhi m th is was h ow m

uc h m on ey

I ne tt edfro m

th e b us in es s * * * I ha ve a co rp or at io n, th e co rp or at io n c ou ldpa y m e a s al ary, I to oka sa lary fro m th e co rp or at io n t o ru n- 27 -

[* 27 ] it . Everythi ng els e I, in anon go in g, i n ane w con cern , * * * i t was es se nt ia ll y

expe ns es * * * s o a s fa r as * * * [a cco un tant ] was co nc ern ed , m y sal ary fro m Opu s was $5 0,0 00 .” Howev er, thi s t es ti m on y is co nt rad ic te d b y

pe ti ti on ers ’ st ip ul at io n tha t the ir r eturn fo r ta x year 20 07 was s el f-p rep ared . Furt he rm or e, th e return i ts el f was si gn edele ctro ni cal ly by pe ti ti on ers as s el f-p rep ared
. 8 Eve n i f pe ti ti on ers ’ 20 07 tax return was pre pa redby the ir a cco un tantas al le ge d, thi s wo ul d n ot , inan d o f it se lf, e st ab li sh reas on ab le cau se an d g oo d fa ith fo r th e p ur

po se s o f se ct io n 6 66 2( a). Fo r a t ax pa y er t o s ho w reas on ab le cau se an d go odfai th du e to rel ianc e o n atax pro fes si on al , he m us t s ho w: (1 ) th e advi se r was a co m pe te ntpro fes si on al who ha d s uf fic ie ntexpe rti se to jus ti fy rel ianc e; (2) th e ta xp ay er p ro vi de d n eces sa ry an d a ccu rat e in fo rm at io n t o the advi se r; a nd(3) th e ta xp ay er ac tu al ly reli edingo odfai th on th e advi se r’s jud gm en t. Neo na to lo gy Ass oc s., P.A. v. C omm is si on er, 1 15 T.C. 43 , 99 (20 00 ), aff’d, 2 99 F.3d22 1 (3 d Ci r. 20 02 ). The t axpa y er b ears th e b ur de n o f pr oo f on th es e is su es . Id. At tria l p et it io ne rs off

eredno ad di ti on al witne ss es an d n o s ub st an ti ve ev id en ce b ey on d u nc orro bo rat edtes ti m on y to sh ow tha t the y

act edwith

Mo reo ve r, th ere i s n o e vi de nc e th atOpu s was actua ll y a co rp or at io n, an d 8 pe ti ti on ers rep orte d the Opu s n etin co m e as in co m e fro m sel f-em pl oym en t.- 28 -

[* 28 ] reas on ab le cau se an d g oo d fa ith i n re lying on a ta x p ro fes si on al
. Acco rd in gl y , th e p en al ty und er s ect io n 6 66 2( a) wi ll be su st ai ne d. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te red
un de r Ru le 15 5.