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

UNITED STATES TAX COURT

M ARLON G. DASENT AND KENDRA W ALCOTT-DASENT, Pet i t i o ners v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 1 6 0 03 -1 6
. Fi l edDecem b er 1 3 , 2 01 8
.

M arl o n G. Das en tan d Ken dra W al co t t -Das en t , p ro s es e. Ol i v ia H. Rem

b ach an d Am

y Dy ar Seal s , fo r res p o n d en t
.

M EM ORANDUM FINDINGS OF FACT AND OPINION ASHFORD, J u d g e: Res p o n d en td et erm in eda d efi ci en cy o f $ 65 ,2 3 5 i n p et i t i o n ers ’ Fed eral i n co m e t ax an dan accu racy -rel at edp en al ty p urs u an t t o s ect i o n 6 6 6 2 (a) o f $ 1 2,3 7 8 fo r the 2 01 4 t ax ab le y ear. 1 Aft er co n ces s i o n s , th e i s s u es

1 Un l es s o th erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al (co n ti n u ed ...)- 2
-

[* 2 ] rem ai ni n g fo r d eci s i o n are wh et h er p et i t io n ers (1 ) are en t i t l edt o d edu ct cert ai n ex p en s es th ey

rep o rt edo n th ei r Sch edu l e C, Pro fi to r Lo s s Fro m Bu s i n es s , (2 ) are en t i t l edt o a d edu ct i o n fo r t h e u n rei m b u rs edem

p lo y ee b u si n es s ex pen s es th ey rep o rt edo n th ei r Sch edu l e A, It em i zed Dedu ct i o ns , (3 ) are l i ab l e fo r th e 1 0 % ad d it i o n al t ax i m

p o s edb y s ect io n 7 2(t ) o n earl y

d i s tri bu t i on s fro m

qu al ifi ed ret i rem en tp l an s , an d(4 ) are l i ab l e fo r t h e accu racy -rel at edp en al ty . W e res o l v e th es e i ss u es i n fav o r o f res p o n den t
. FINDINGS OF FACT So m e o f t h e fact s h av e b een s ti p u lat ed an dare s o fo u n d. Th e s t ip u l at i o n o f fact s an dth e at t ach ed ex h i b i ts are i n co rp o rat ed h erei n b y th i s referen ce. Pet i t io n ers res i d edi n No rt h Caro l i n a atth e t i m e t h e p et i t i o n was fi l edwi th t h e Co u rt
. I. Pet i t i o ners M r. Das en ti s a co l leg e g radu at e, h av i n g recei v eda b ach el o r’ s d eg ree i n
m ech an i cal en g in eeri n g fro m th e Geo rg i a In s t i tu t e o f Tech n ol o g y i n 1 9 95 . Duri n g 2 0 1 4 h e wo rk edatBri t ax Ch i l d Safet y , In c. (Bri t ax ), as a p ro g ram m an ag er.

1 (...co n t in u ed ) Rev enu e Co de i n effect fo r t h e y ear at i s s u e, an d al l Ru le referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re. So m e m o n et ary am o u n t s are ro u n d edt o th e n eares td o l l ar.- 3
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[* 3 ] M rs . W al co t t -Das en t i s al s o a co l l eg e g radu at e, h av i n g recei v eda b ach el o r’ s d eg ree i n b u s i n es s ad m i n is trat i o n fro m th e Am eri can In t erco n t i n en t al Un i v ers i t y i n 2 0 0 3. Du ri ng 2 01 4 s h e wo rk edattwo d i fferen th u m an res o u rce co n s ul t i n g fi rm s --Ro b ertHal f Co rp . (Ro b ertHal f) an dRan ds t ad Pro fes s io n al s US LP (Ran d s t ad )--as a “ v i rtu al t al en trecru i ter”, p erfo rm in g h er wo rk s ol el y o u to f h er
an d M r. Das en t ’ s h o m e. Du ri n g 2 0 1 4 i n ad d i t i o n t o b ei n g a “ W -2 wag e earn er” fo r Ro b ertHal f an d Ran ds t ad , M rs . W al co t t -Das en tcl ai m edt o o p erat e an educat i o n co n s u lt i ng b u s i n es s , as s i s t i n g recen tco l l eg e g radu at es , m il i t ary p ers o n n el reaccl i m at i ng t o ci v i l i an l i fe, an dat -ri s k wo m en rejo in i ng th e wo rk fo rce wi th fi n di n g s u i t ab l e
em pl o y m en t . M rs . W al co t t -Das en th as n ev er ch arg eda fee fo r h er s erv i ces ; 2 th u s , fo r 2 0 1 4 s h e h adn o g ro s s recei p t s o r o th er i n co m e at tri b u t ab l e t o h er edu cat i o n
co n su l t i n g act i v i t i es ; s h e cl ai m edt o h av e i n cu rredo n ly cert ai n ex p en ses wh i ch , as d i s cu s s edb el o w, p et i t i o ners rep o rt edo n a Sch edul e C. Pet i t i o ners h av e t wo ch i ld ren wh o , du ri n g 2 0 1 4 , were i n co l l eg e: a d au g h t er
en ro l l edatW es t ern Caro l i n a Un i v ers it y (W CU) an da s o n en ro l l edatBel m o n t Ab b ey Co l l eg e (Bel m o n t Ab b ey ).

2 M rs . W al co t t -Das en th as h el dh ers el f o u tas o perat i n g an edu cat i o n co n su l t i n g b u s i n es s fo r a “ co up l e o f y ears ” b efo re 2 0 14
.- 4
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[* 4 ] Du ri n g 2 0 1 4 M r. Das en t recei v ed d i s tri bu t i o n s t o t al i n g $ 2 5 ,6 2 2 fro m two d i fferen t i n d i v i du al ret i rem en t acco un t s (IRA)--No rt h ern Tru s tan d ADP Ret i rem en tServ i ces (ADP). As o f the cl os e o f th aty ear h e was u n d er 5 9 1⁄2 y ears
o f ag e. No rt h ern Tru s tan dADP s en t th e In t ern al Rev enu e Serv i ce (IRS) an dM r. Das en t Fo rm s 1 0 9 9 -R, Di s tri b u t i o ns Fro m Pen s i o n s, An n u i t i es , Ret i rem en to r Pro fi t -Sh ari n g Pl an s , IRAs , In s u ran ce Co n tract s , et c., fo r 2 0 1 4 , refl ect i n g d i s tri b u t i o n s o f $ 7 , 86 5 an d$ 17 ,7 5 7 , res pect i vel y , as earl y d i s tri b u t i o n s wi th “ n o kn o wn ex cep t i o n ”. Each fo rm al s o refl ect eda cert ai n am o un to f Fed eral i n co m e t ax wi th h el d
. II. Pet i t i o ners ’ Tax Rep ort in g an d t h e No t ice o f Defi ci en cy Pet i t i o ners p rep aredan dt i m el y fi l ed(u s i n g Tu rb o T ax ) a jo i n tFo rm 1 0 4 0 , U.S. In d i v i dual In co m e Tax Retu rn , fo r 2 0 1 4 (jo in tretu rn ). Onth e jo i n tretu rn p et i t i o n ers rep o rt edwag es t o t al i n g $ 1 6 2 ,8 2 3 fro m th ei r em p l o y ers , t ax ab l e refu nd s
o f $ 2 , 9 6 7 , an du n em

p l o ym en tco m

p en s at io n o f $ 4 ,5 5 0 . Th ey d i d n o t rep o rtM r. Das en t ’ s recei p to f t h e IRA d i s tri b u ti o n s. Th ey rep o rt eda $ 2 8 ,1 7 3 b u s i n es s l o s s fro m M rs . W al co tt -Das en t ’ s edu cat i o n co n s ul t i n g b u si nes s , wh i ch they d et ai l ed o n a Sch edu l e C at t ach edt o t h e jo i n tretu rn . Th ey al s o at t ach ed t o t h e jo i ntretu rn a Sch edu l e A, cl ai m i ng $ 4 2 ,0 6 7 o f i t em i zedd edu ct i o n s.- 5
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[* 5 ] Onth e Sch edu l e C p et i t i o n ers rep o rt edn o g ro s s recei p t s an d t o t al ex p en s es
o f $ 2 8,1 7 3 . Th e ex p en s es co n s i s t edo f $ 2 ,2 0 0 fo r ad v ert i s i n g , $ 1 1 ,8 3 4 fo r car an d tru ckex p en s es , $ 2 ,0 0 3 fo r d ep reci at i o n an d s ect io n 1 79 ex pen s es , $ 1 ,8 7 4 fo r l eg al
an d p ro fes s i o n al s erv i ces , $ 2 ,0 1 6 fo r o ffi ce ex p en s es , $ 8 90 fo r s up p l i es , an d $ 7 ,3 5 6 fo r u ti l i t i es . Onth e Sch edu l e A p et i t io n ers rep o rt ed , am o n g o th er i t em s , $ 2 3 ,9 3 1 o f
u n rei m b u rs edem

p l o y ee b us i nes s ex p en s es . Th e d et ai l s o f t hei r u n rei m b u rs ed
em pl o y ee b u s i n es s ex p en s es were s ho wn o n a Fo rm 2 1 0 6 , Em

p l o y ee Bu s i n es s Ex p en s es , an da Fo rm 2 1 0 6-EZ, Un rei m b u rs edEm

p l o y ee Bu s i nes s Ex pen s es , al s o at t ach edt o th e jo i n tretu rn . Th e ex p en s es co n si st edo f t h e fo l l o wi n g : fo r M rs . W al co t t-Das en ti n co n n ect io n wi th h er em p l o ym en twi th Ro b ertHal f an d Ran ds t ad : $ 6 ,3 5 8 fo r v eh i cl e ex p en s es , $ 4 ,1 70 fo r t rav el ex p en s es , $ 7 ,1 95 fo r
o th er b u s i n es s ex p en s es , an d $ 1 ,3 9 5 fo r m eal s an d en t ert ai n m en t ; fo r M r. Das en t i n co n nect i o n wi th h is em p l o ym en twi th Bri t ax : $ 3 2 0 fo r p ark i n g fees , t o l l s , an d tran s po rt at i o n , $ 2 ,2 2 0 fo r t rav el ex p en s es , $ 1 , 8 10 fo r o th er b u s i n es s ex p en s es , an d $ 4 6 3 fo r m eal s an den t ert ai n m en t. M rs . W al co t t -Das en t m ay recei v e rei m b u rs em en tfo r em

p l o y ee b u s i n es s ex pen ses fro m Ro b ertHal f an d Ran d s t ad , an d M r. Das en twas rei m b u rs edb y Bri t ax fo r th e m i l eag e h e d ro v e h i s p ers o n al
v eh icl e fo r wo rk -rel at edtri ps .- 6
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[* 6 ] Fo l l owi n g an ex am i n at i o n o f t h e jo i n t retu rn res p on d en td et erm i n edth atM r. Das en t ’ s IRA d i s tri b ut i o n s t o t al i n g $ 2 5 ,6 2 2 were t ax ab l e an ds ub jectt o th e
s ect i on 7 2 (t ) 1 0 % ad di t i o n al t ax , an d t h atp et i t i o n ers h adi n co m e o f $ 1 2 3 ,1 6 8 fro m th e can cel l at i o n o f d eb t
. 3 Res p o n d en tal s o d et erm i n edth atp et i t i o ners ’ Sch edu l e A d educt i o n fo r u n rei m

b u rs edem

p l o y ee b u s in es s ex p en s es o f $ 2 3 ,9 31 an dth ei r Sch edu l e C b u s i n es s l o s s d edu ct i o n o f $ 2 8 ,1 7 3 s h o ul db e d i sal l o wedfo r l acko f
s ub s t an t i at i o n . Fi n al l y , res p o n d en td et erm in edth atp et i t i o ners were l i ab l e fo r an
accu racy -rel at edp en al ty

fo r an u n d erp aym en tat tri b ut ab l e t o a s ub s t an t i al
u n d ers t at em en to f i n co m e t ax un d er s ect i o n 6 6 6 2(a) an d(b )(2 ). 4 Th e n ot i ce o f d efi ci en cy

m ai l edt o p et i t i o n ers o n M ay 4 , 2 0 1 6 , refl ect s th o se d et erm i n at io n s . Pet i t i o ners t i m el y

p et i t i on edthi s Co u rtfo r red et erm i n at i o n o f t he d efi ci en cy
an d th e p en al ty . 5

3 Res p o n d en th as n ow co n ced edthe can cel l at i o n o f d eb ti s s u e. 4 Th e reco rdi ncl u d es a co m p l et edCi v i l Pen al ty

Ap p ro v al Fo rm

fo r t he s ub s t an t i al u n ders t at em en to f i nco m e t ax p en al ty fo r 2 01 4
. Th e fo rm

i n cl u d es a s i gn atu re o n th e l in e p ro v id edo n th e fo rm fo r “ Gro up M an ag er Ap p ro v al t o As s es s Pen al t i es Id en t i fi edAb ov e” d at edM arch 2 5 , 2 01 6 , b efo re t h e i s s u an ce o f th e n o ti ce o f d efi ci en cy .

5 Pet i t i on ers were rep res en t edb y co u n s el wh en th e p et i t i o n was fi l ed . Th e p et i t i o n s t at es th atp et i t i o ners co n ced e al l i s su es rai s edi n th e n o t i ce o f d efi ci en cy ex cep tfo r t h e can cel l at i on o f d eb tan d accu racy -rel at edp en al ty i s s u es . Befo re tri al th e Co u rtg ran t edth ei r co u n s el ’ s req u es t t o wi thd raw. Pet i ti o n ers p ro ceed ed (co n ti n u ed ...)- 7
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[* 7 ] OPINION I. Bu rd en o f Pro o f In g en eral , th e Co m

m i s s i o n er’ s d et erm i n at i o ns s etfo rt h i n a n o ti ce o f d efi ci en cy

are p res u m edco rrect an d , ex cep t fo r t h e b u rd en o f p ro du ct i o n i n an y
co u rtp ro ceed i ng wi th res p ectt o an i n d i v i du al t ax p ay er’ s l i ab i l i ty fo r an y “p en al t y , ad d it i o n t o t ax , o r ad d i t io nal am o u n t ”, s ee s ec. 7 4 9 1(c), t h e t ax p ay er b ears th e b u rd eno f p ro vi ng o therwi s e, s ee Ru l e 1 4 2(a); W el ch v . Hel v eri n g , 2 90 U.S. 1 1 1 , 1 1 5 (1 93 3 ). Th i s b u rd en o f p ro du ct i o n an d p ro o f rem ai n s o n the t ax p ay er ev en wi th res p ect t o th e ad d i t i o n al t ax u n d er s ect i o n 7 2 (t ) b ecau s e i ti s a “ t ax ” an dn o ta

“p en al ty , ad d i t i o n t o t ax , o r ad d i t i o n al am o u n t ” wi thi n th e m ean i n g o f s ect i o n 7 4 9 1 (c). See El v . Co m

m i s s i o ner, 1 4 4 T.C. 1 4 0 , 1 4 8 (2 0 1 5 ) (ci t i n g Ro s s v . Co m m i s s i o n er, T.C. M em o . 1 9 9 5 -5 9 9 , s l i p o p . at1 2 -1 5 ). Tax d edu ct i o n s are a m at t er o f l eg i s l at i v e g race, an dth e t ax p ay er b ears th e b u rd eno f p ro vi ng en ti t l em en t t o an y d edu ct io n cl ai m ed . Seg el v . Co m m i s s i o n er, 8 9 T.C. 8 1 6 , 8 4 2 (1 9 8 7 ). Th i s b u rd enreq u i res th e t ax p ay er t o d em o n s trat e t h at th e cl ai m edd edu ct i o ns are al l owab l e p urs u an t t o s o m e s t atu t o ry p ro v i s i o n an d t o

5 (...co n t in u ed ) t o tri al p ro s es e an dattri al d i s pu t edal l i s su es rai s edi n th e n o t i ce o f d efi ci en cy ex cep tfo r t h e recei pto f IRA d is t ri b u ti o ns i s s u e. Pet i t i o n ers co nced edi n a s t ip u l at i o n o f fact s an do n th e reco rdat tri al th atM r. Das en trecei vedIRA d i s tri b u t i o n s t o t al i n g $ 2 5,6 2 2 du ri n g 2 0 14
.- 8
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[* 8 ] s ub s t an t i at e t h e ex p en s es g i v i n g ri s e t o th e cl ai m edd edu ct i o ns b y
m ai n t ai n i n g an dp ro du ci n g ad equ at e reco rd s th aten ab l e th e Co m m i s si on er t o d et erm i n e t h e t ax pay er’ s co rrect l i ab il i ty . 6 Sec. 6 0 0 1 ; Hi g bee v . Co m m i s s io n er, 1 1 6 T.C. 4 3 8 , 4 4 0 (2 0 0 1 ); Hrad es ky v . Co m m i s s io n er, 6 5 T.C. 8 7 , 8 9 -9 0 (1 9 7 5 ), aff’ dp er cu ri am , 5 4 0 F.2 d8 2 1 (5 th Ci r. 1 97 6 ).

6 W e n ot e, an das we o b s erv eds up ra p . 6 , res p o nd en td et erm i nedth at p et i t i o n ers fai l edt o rep o rtcert ai n i n co m e. In an u n rep o rt edi n co m e cas e t h e IRS m u stp ro vi d e s o m e reas on ab l e fo u n d at i o n co n n ect i n g th e t ax pay er wi th the i n co m e-p ro du ci n g act iv it y . See W i l l i am s v . Co m m is s i o n er, 9 9 9 F.2 d7 6 0 , 7 6 3
- 7 6 4 (4 th Ci r. 1 9 93 ), aff’ g T.C. M em o . 1 9 92 -1 5 3 ; s ee al s o W ei m ers ki rch v . Co m m i s s i o n er, 5 9 6 F.2 d3 5 8 , 3 6 0 (9 th Ci r. 1 9 7 9 ), rev ’ g 6 7 T.C. 6 7 2 (1 9 7 7 ). On ce t h e IRS h as p ro du cedev i d en ce l in k i n g th e t ax p ay er wi th an i n co m e-p ro du ci n g act iv it y , th e b u rd en o f p ro o f s h i ft s t o th e t ax p ay er t o p ro v e b y a p rep o n d eran ce o f t h e ev i den ce t h atth e IRS’ d et erm i nat i on i s arb i trary o r erro neo u s . Hel v eri ng v . Tay l o r, 2 9 3 U.S. 5 0 7 , 5 1 5 (1 9 3 5 ). Si m i l arl y , u n d er s ec. 6 2 0 1 (d ), i f a t ax p ay er i n an y co u rtp ro ceed i n g as s ert s a reas o n ab l e d i s p ut e wi th res p ectt o an y

i t em o f i n co m e rep o rt edo n an i n fo rm at i o n retu rn , th e IRS s h al l h av e th e b u rd en o f p ro du ci n g reas o n ab l e an d p ro b at i v e i n fo rm at i o n co n cern i n g s u ch defi ci en cy , i n ad d i t i o n t o s u ch i n fo rm at i on retu rn . Res p on d en tco n ced edthat p et i t i o n ers d o n o th av e can cel l at i o n o f d eb ti n co m e, s ee s up ra n o t e 3 , an dwe s u s t ai n res p o n den t ’ s d et erm i nat i o n t h atp et i t i o n ers fai l edt o rep o rtM r. Das en t ’ s IRA d i s tri b u t i on s as i n co m e b ecau s e p et i ti o n ers ag ree t h atM r. Das en trecei v ed th i s i n co m e, s ee s up ra n o t e 5 . Pet i t i o n ers d o n o to th erwi s e co n t en dth atth e b u rd en o f p ro o f s h o u l ds h i ftt o res po n d en tu n d er s ec. 7 4 9 1 (a) as t o an y rel ev an ti s su e o f fact , n o r h av e t h ey

es t ab l i s h edth atthey

m et th e req ui rem en t s fo r s h i ft i ng th e b u rd eno f p ro of.- 9
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[* 9 ] II. Sect io n 1 6 2 Dedu ct i o n s Sect io n 1 6 2 al l o w s a t ax p ay er t o d edu ctal l o rd in ary an dn eces s ary ex p en s es p ai do r i n cu rred du ri n g th e t ax ab l e y ear i n carry i n g o n a t rad e o r b u s i n es s . Sec. 1 6 2 (a); s ec. 1 .1 6 2 -1 (a), In co m e Tax Reg s . Gen eral l y , th e p erfo rm an ce o f s erv i ces
as an em p l o y ee co n s t i tu t es a t rad e o r b u s i nes s . Pri m u th v . Co m

m is s i o n er, 5 4 T.C. 3 7 4 , 3 7 7 (1 9 7 0). Anex p en s e i s “ ord i n ary ” i f i ti s “ n o rm al , u s u al , o r cu s t o m ary ” i n th e t ax p ay er’ s trad e o r b u s i n es s o r ari s es fro m a t ran s act i on “ o f co m

m o n o r freq uen to ccu rren ce i n the t y p e o f b u s i n es s i nv o lv ed .” Dep u ty v . duPo n t , 3 0 8 U.S. 4 8 8 , 4 9 5 (1 9 4 0 ). Anex p en s e i s “ neces s ary ” i f i ti s “ ap p ro p ri at e an dh el p fu l ” t o the t ax p ay er’ s b u s i n es s , b ut i tn eedn otb e ab s o lu t el y es s en t i al . Co m

m i s s i o n er
v . Tel l i er, 3 8 3 U.S. 6 8 7 , 6 8 9 (1 9 6 6 ) (qu o t i n g W el ch v . Hel veri n g, 2 9 0 U.S. at 1 1 3 ). Anex p en s e fo r wh i ch th e t ax p ay er i s en t i tl edt o (b u t d o es n otcl ai m ) rei m b u rs em en tfro m

h is o r h er em

p l o y er g en eral l y

i s n o tco ns i d ered“ n eces s ary ”
an d th us i s n o td edu ct ib le u n der s ect i o n 1 62 . Orv i s v . Co m m is s i o n er, 7 88 F.2 d 1 4 0 6 , 1 4 0 8 (9 th Ci r. 1 9 8 6 ), aff’ g T.C. M em o . 1 9 8 4 -5 3 3; Po d em s v . Co m m i s s i o n er, 2 4 T.C. 2 1, 2 2-2 3 (1 9 5 5 ). Ad d i t i o nal l y , a t ax p ay er m ay n otd edu ct a p ers o n al , l iv i n g , o r fam i l y ex p en s e u n l es s th e In t ern al Rev en ue Co d e ex p res s l y p ro v id es o th erwi s e. Sec. 2 6 2 (a). Th e d et erm i n at i o n o f wh et h er an ex p en s e
s at i s fi es th e req ui rem en t s o f s ect i o n 1 6 2 i s a ques t i o n o f fact . Cl o u d v
.- 1 0 -

[* 1 0 ] Co m

m i s si o n er, 9 7 T.C. 6 1 3 , 6 1 8 (1 9 9 1) (ci t i n g Co m m i s s io n er v . Hei n i n g er, 3 2 0 U.S. 4 6 7 , 4 7 3 -4 75 (1 9 4 3)). A. Sch edu l e C Trad e o r Bu s i n es s Ex p en s es Wh et h er a t ax pay er i s en g ag edi n a t rad e o r b u s i n es s i s a qu es t i o n o f fact t o b e d eci d edo n the b as i s o f al l th e rel ev an tfact s an dci rcu m s t an ces . St an t on v . Co m m i s s i o n er, T.C. M em o . 1 9 6 7 -1 3 7 , aff’ d , 3 9 9 F.2 d3 2 6 (5 th Ci r. 1 9 6 8 ); s ee al s o Hi g gi n s v . Co m

m is s i o n er, 3 1 2 U.S. 2 12 , 2 17 (1 9 41 ). Ap p ly i n g th i s fact s an d ci rcu m s t an ces t es t , co u rt s h av e fo cu s edo n th e fo l l o wi ng th ree fact o rs i n d i cat i v e o f wh et h er a t rad e o r b u s i n es s ex is t s : (1 ) wh et h er t h e t ax p ay er’ s p ri m ary p u rp o s e i n
u n d ert ak i n g th e act i v i ty

was fo r i n co m e o r p ro fi t, (2 ) wh et h er t h e t ax p ay er i s reg u l arl y an dact i vel y

i n v o l v edi n th e act i v i ty , an d(3 ) wh eth er t he t ax p ay er’ s act i vi ty h as actu al l y

co m m en ced . J afarp ou r v . Co m m i ss i o ner, T.C. M em o. 2 0 1 2 -1 6 5 , s l i p o p . at 1 4 (fi rs tci t i n g Co m m i s s io n er v . Gro et zi n g er, 4 8 0 U.S. 2 3 , 3 5 (1 9 8 7); an dthen ci t i n g M cM anu s v . Co m m i s s io n er, T.C. M em o . 1 9 8 7 -4 5 7 , aff’ d wi th o u tp ub l i s hedo p i n i o n , 8 6 5 F.2 d 2 55 (4 th Ci r. 1 9 8 8 )); s ee al so s ec. 1 8 3 (g en eral l y

p ro v i di n g th ati f an act i v i ty i s n o ten g ag edi n fo r p ro fi t , th en n o d educt i o n at tri b u tab l e t o th at act i v i ty i s al l o wed ). Fo cu s in g o n th e fi rs tfact o r, th e t ax p ay er’ s p ro fi tm ot i v e, we acco rdg reat er wei g htt o o b ject i ve fact s th an t o- 1 1 -

[* 1 1 ] s ub ject i v e s t at em en t s o f i n t en t . Kean i n i v . Co m m is s i o n er, 9 4 T.C. 4 1 , 4 6 (1 9 9 0); s ec. 1 .1 8 3-2 (a), In co m e Tax Reg s. Pet i t i o ners o ffered n o cred i b l e, o b ject i ve ev i d en ce t o es t ab l i s h a p ro fi t
m o ti v e fo r M rs . W al co t t -Das en t ’ s edu cat i on co ns u lt i ng act i v i t i es . In d eed , s h e ack n owl ed gedattri al th ats h e d i dn o tch arg e a fee fo r t h e s erv i ces s h e p erfo rm ed i n 2 0 1 4 (o r i n an y

y ear i n wh i ch s h e h as h el dh ers el f o u tas o perat i n g an edu cat i o n
co n su l t i n g b u s i n es s , fo r t h atm at t er). Li k ewi s e, p et i t i o n ers d i d n otat t em p tt o reb u t th ei r retu rn p o s i t i o n fo r 2 0 1 4 co n cern in g M rs . W al co t t -Das en t ’ s educat i o n
co n su l t i n g act i v i t i es ; t o wi t , th ats h e h adn o g ro s s recei p ts o r o ther i nco m e an d
o n l y al l eg ed ly i n cu rredcert ai n ex p en s es . Th ey p ro du cedn o reco rd s --acco u n t i n g
reco rd s , i n vo i ces , an dth e l i k e--t rad i t i o n al l y as s o ci at edwi th a b u s i n es s o p erat i n g fo r p ro fi t. Onth e b as i s o f th e reco rd , l au d ab l e as h er act iv i t i es m ay b e, we
co n cl u d e th atM rs . W al co t t -Das en t was n oten g ag edi n carry i n g o n a t rad e o r b u s i n es s fo r p ro fi tu n d er s ect i o n 1 6 2 . Un d er s ect i o n 1 8 3(a) an d(b ) th e d edu ct i o n s at tri b u t ab l e t o M rs . W al co t t -Das en t ’ s edu cat i o n co n s u l t i n g act i v i ti es are l i m i t edt o th e g ro s s i nco m e s h e d eri v edth erefro m . Si n ce s h e d eri v edn o g ro s s i n co m e fro m th o s e act i v i t i es i n 2 0 1 4 , p et i t io n ers are en t i t l edt o n o d educt i o n s . 7

7 Sec. 1 8 3 (b )(1 ) al l o ws cert ai n ty p es o f d edu ct i on s th atd o n o treq ui re a p ro fi t m o t i v e. Pet i t i on ers fai l edt o es t ab l i s h thatan y o f t h ei r cl ai m ed d edu ct i o n s

(co n ti n u ed ...)- 1 2 -

[* 1 2 ] B. Sub s t an t i at i o n o f Sch edul e C Trad e o r Bu s i n es s Ex pen s es Ev en i f we were t o fi n d t h atM rs . W al co t t -Das en ten g ag edi n a t rad e o r b u s i n es s fo r p ro fi ti n 2 0 1 4, we wo u l du l ti m at el y d en y th e cl ai m ed Sch edu le C d educt i o n s fo r l acko f s ub s t an t i at i o n. As we i nd i cat eds up ra p p. 7 -8 , the b u rd en o f s ub st an t i at i ng ex p en s es res t s wi th th e t ax p ay er. To th i s en d , u n der t h e Co h an ru le, i f a t ax p ay er es t ab li s h es th at
an ex pen s e i s d educt i b l e b u t i s u n ab le t o s ub st an t i at e t h e p reci s e am o u n t, th e Co u rt
m ay es t i m at e th e am o u n to f t h e d edu ct i b le ex pen s e, b eari n g h eav i l y ag ai n s tth e t ax p ay er wh o s e i n ex act i tu d e i s o f h i s o r h er o wnm ak in g . See Co h an v . Co m m i s s i o n er, 3 9 F.2 d5 4 0 , 5 4 3 -5 4 4 (2 d Ci r. 1 93 0 ); s ee al so Van i cek v . Co m m i s s i o n er, 8 5 T.C. 7 31 , 7 4 2 -7 4 3 (1 9 8 5 ). In o rd er fo r t h e Co u rtt o es t i m at e th e am o un to f a d edu ct i b l e ex p en s e, t h e t ax p ay er m u s tes t ab l i s h s om e b as i s up o n

7 (...co n t in u ed ) d o n o t req u i re a p ro fi t m o t i v e. See s ecs . 1 6 2 , 1 8 3 (c). Acco rd i n g l y , they d o n o t qu al i fy fo r d edu ct i o n s u nd er s ec. 1 8 3 (b )(1 ). W e al s o qu es t i o n wh eth er M rs . W al co t t-Das en t ’ s edu cat i on co n s u l t i n g b u s i nes s was ev en a g o i n g co n cern , i .e., wh et h er h er edu cat i o n co ns u l t in g b u s i n es s h adactu al l y co m m en cedi n 2 0 1 4 . See J ack s o n v . Co m

m i s s io ner, 8 6 4 F.2 d 1 5 2 1 , 1 5 2 6 (1 0 th Ci r. 1 9 8 9 ) (“ Al th ou g h th e fai l u re t o m ak e s al es i n a g iv en p eri o dd o es n o tp er s e p rev en t a t ax p ay er fro m carry i n g o n a b u si n es s , * * * [t h e fact th atth e] t ax p ay ers ‘ m ad e [n o ] l eg i t i m at e effo rt s t o l ocat e p ot en t i al b u y ers * * * i s fat al t o t ax p ay ers ’ cas e. M erel y p o s s es s i n g th e l eg al cap ab i l i ty t o s el l * * * b y o b t ai ni n g a l i cen s e fro m the i n v en t o r, wi tho u tactu al effo rt s t o s el l th e p ro du ct s , i s i n s u ffi ci en tt o co ns t i tu t e carry i n g o n a t rad e o r b u s i n es s fo r p u rp o s es o f s ect i o n 1 62 .”), aff’ g 8 6 T.C. 4 9 2 (1 9 8 6); s ee al so Ken ned y v . Co m m i s s i o n er, T.C. M em o . 1 97 3 -1 5
.- 1 3 -

[* 1 3 ] wh i ch an es t i m at e m ay b e m ad e. No rg aardv . Co m m i s s i on er, 9 3 9 F.2 d8 7 4 , 8 7 9 (9 th Ci r. 1 9 91 ), aff’ g i n p art , rev ’ g i n p artT.C. M em o . 1 9 8 9-3 9 0 ; Van i cekv . Co m m i s s i o n er, 8 5 T.C. at 7 4 2 -7 4 3 . Oth erwi s e an al lo wan ce wo ul dam o u ntt o

“ u n g u i d edl arg es s e.” No rg aardv . Co m m i s s i o n er, 9 3 9 F.2 dat8 7 9 (quo t in g W i ll i am s v . Un i t ed St at es , 2 4 5 F.2 d5 59 , 5 60 (5 th Ci r. 1 9 5 7 )). Th e Co h an ru l e, h o wev er, i s s up ers ed ed --th ati s , es t i m at es are n o t p erm i t t ed --fo r cert ai n ex p en s es s p eci fi edi n s ect i o n 2 7 4; t o wi t , trav el i n g ex p en s es (i ncl ud i ng m eal s an dl o d gi ng wh i le awayfro m h o m e), en t ert ai n m en tex p en s es , g i ft s , an d “ l i s t edp ro pert y ” (i n cl u d i n g p as s en g er v eh i cl e) ex p en s es . 8 Secs . 2 7 4 (d ), 2 8 0 F(d )(4 )(A)(i ); s ec. 1 .2 7 4 -5 T(a), Tem p oraryIn co m e Tax Reg s., 5 0 Fed . Reg
. 4 6 0 1 4 (No v . 6 , 1 9 8 5 ) (fl u s h l an g u ag e); s ee Bo y dv . Co m m is s i o n er, 1 2 2 T.C. 3 0 5 , 3 2 0 (2 00 4 ). In s tead , th es e t y p es o f ex p en s es are s ub

jectt o s tri cts ub st an t i at i o n
ru l es . San fo rdv . Co m

m i ss i o n er, 5 0 T.C. 8 2 3 , 8 2 7 (1 9 68 ), aff’ dp er cu ri am , 4 1 2 F.2 d2 0 1 (2 dCi r. 1 9 69 ); s ec. 1 .2 7 4-5 T(a), Tem p oraryIn co m e Tax Reg s ., s up ra. Th es e s tri cts ub s t an t i at i o n ru l es g en eral ly req u ire t h e t ax p ay er t o s ub s t an t i at e wi t h ad equat e reco rd s o r b y s uffi ci en tev id en ce co rro b o rat in g th e t ax pay er’ s o wn

8 A t ax p ay er m ay

d edu ct p as s en g er v eh i cl e ex p en ses b y u s in g ei th er act u al co s to r t he s tan d ardm i l eag e rat e, p ro v i dedh e s ub s tan t iat es th e am ou n to f b u s i n es s m i l eag e an dth e t i m e an d p u rp o s e o f each u s e. See s ec. 1
. 2 7 4 -5 (j)(2 ), In co m e Tax Reg s.; Rev . Pro c. 2 0 10 -5 1 , 2 0 1 0 -5 1 I.R.B. 8 8 3
.- 1 4 -

[* 1 4 ] s t at em en t(1 ) t h e am o u n t o f t h e ex p en s e, (2 ) t h e t i m e an dp l ace t he ex p en s e
was i n cu rred , an d(3 ) t h e b u s i n es s p u rp o s e o f t h e ex p en s e. Bal y anv . Co m m i s s i o n er, T.C. M em o . 2 0 1 7 -1 4 0 , at* 7 ; s ec. 1 .2 7 4-5 T(b ), Tem p o raryIn co m e Tax Reg s ., 5 0 Fed . Reg . 4 6 0 1 4 -4 6 0 1 5 (No v . 6 , 1 9 8 5 ). Fo r “ l i s t edp ro p ert y ”
ex p en s es , i n ad di ti o n t o t h e t i m e s u ch ex p en s es were i ncu rredan dth ei r b u s i n es s p u rp os e, t h e t ax p ay er m

u stes tab l i s h th e am o u n to f b u s i n es s u s e an dth e t o tal u s e
o f s u ch p ro p ert y . Bal y an v . Co m m i ss i on er, at* 7 -* 8 ; s ec. 1
. 2 74 -5 T(b )(6 )(i )(B), Tem p o raryIn co m e Tax Reg s ., 5 0 Fed . Reg . 4 6 01 6 (No v . 6 , 1 9 8 5 ). Sub s t an t i at i o n b y

ad equ at e reco rd s req u ires th e t ax p ay er t o m ai n t ai n (1 ) an
acco u n t bo o k , d i ary , l o g , s t at em en to f ex p en s e, t ri p s heet s , o r s i m i lar reco rd p rep aredco n t em

p o ran eo u s l y wi t h th e ex p en d i ture an d(2 ) d o cu m en t ary ev i d en ce,
s u ch as recei p ts o r p ai db i l l s , wh i ch t o g et h er p ro v e each el em en t o f an
ex p en d i tu re. Bal y an v . Co m m i s s i o n er, at* 8 ; s ec. 1 .2 7 4 -5 (c)(2 )(i i i ), In co m e Tax Reg s.; sec. 1 .2 7 4 -5 T(c)(2 ), Tem p o raryIn co m e Tax Reg s . , 5 0 Fed . Reg . 4 60 1 7 (No v. 6 , 1 9 8 5 ). Onth e Sch edu l e C at t ach ed t o th e jo i n t retu rn p et i t io n ers cl ai m eda d educt i o n fo r t h e fo l lo wi n g ex p en s es t o t al i ng $ 2 8 , 1 73 : ad v ert i s i n g , car an dtru ck
ex p en s es , d ep reci at i o n an d s ect i o n 1 7 9 ex p en ses , l eg al an dp ro fes s io n al s erv i ces ,- 1 5 -

[* 1 5 ] o ffi ce ex p en s es , s up p l i es , an du t il i ti es . Res p o n d en td i s al lo wedi n fu l l a d educt i o n fo r al l o f t h es e ex p en s es . Th e car an dtru ckex pen s es are s ub jectt o th e s tri cts ubs t an t i at i o n ru l es o f
s ect i on 2 7 4 (d ) an dth u s th ey can n o tb e es ti m at ed
. Pet i t i o ners p ro du ceda m i l eag e l o g fo r 2 0 1 4 p rep aredb y

M rs . W al co t t -Das en t . Th i s l o g rep o rt edo n l y th e m o n t h s
an d y ear o f h er t rav el , th e n am es o f t h e ev en t s s h e at t en d ed , the ci ti es o f d ep artu re
an d d es t i n at i o n , an dth e m i les s h e d ro v e. Itd idn o t i n cl u d e a b u si n es s p u rp o s e fo r th e t rav el o r t h e act u al d at es o f t rav el . Nei th er d i dp et it i o n ers ret ai n o r o th erwi s e p ro duce an y

d ocu m en tary ev i d en ce rel at i n g t o each ev en ts h e at t en d edi n 2 0 1 4
. Acco rd in g ly , we co n cl u d e th at p et i t io n ers h av e n o tes t ab l is hedfo r 2 0 14 th atth ey
are en t i t l edt o a d edu ct i o n fo r an y am o u n to f car an d tru ckex p en s es u n d er s ect i o n 2 7 4 (d ) ev en i f M rs . W al co t t -Das en th ad en gag edi n a t rad e o r b u s i n es s fo r p ro fi ti n 2 0 1 4 . See Fl em i n g v . Co m m i s s i o n er, T.C. M em o . 2 0 1 0 -6 0, s l i p o p. at7
. W i th res p ect t o th e o th er ex p en s es , we s i m i l arl y co n cl u d e o n th e b as i s o f t h e
reco rdth atp et i t i o n ers are n o ten t i t l ed t o d educt i o n s fo r th es e ex pen s es i n an y
am ou n tfo r 2 0 14 ev en i f M rs . W al co t t -Das en th aden g ag edi n a t rad e o r b u s i n es s fo r p ro fi t. Pet i t i o n ers p ro duced b an ks t at em en t s , m o n thl y ex pen s e s u m

m ari es , an d recei p t s fro m

v ari ou s co rp o rat i o n s an dco m p an i es . A rev i ew o f t h i s d ocu m en t ary
ev i d en ce s h o ws th atth ere i s n o d i s t i n ct io n b et w een p et i t i o n ers ’ p ers o n al l i v i n g- 1 6 -

[* 1 6 ] ex pen ses , ex p en s es M rs . W al co t t-Das en t i ncu rredi n co n n ect i o n wi th h er edu cat i o n co n su l t in g act i v i t i es , an dex pen s es s he i ncu rredi n co n nect i o n wi th h er
em pl o y m en twi th Ro b ertHal f an dRan d s tad . Infact , attri al p et i ti o ners were
u n ab le t o s p eci fi cal ly

i d en t i fy wh i ch o f t he n u m ero u s ex p en s es refl ect edi n th e b an k s tat em en t s , s u m

m ari es , an drecei p t s s h o u ldb e d edu ct i b l e u n d er s ect io n 1 6 2
. See Hal e v . Co m

m i s si o n er, T.C. M em o . 2 0 1 0 -2 2 9 , s l i p o p . at6 (s t at i ng th atwe
n eed no ts o rt th ro u g h a t ax p ay er’ s ev i d en ce “ i n an at t em p t t o s ee wh ati s , an dwh at i s n o t , ad equ at e s ub s t an t i at io n o f t h e i t em s” o n th e t ax p ay er’ s return s ). An dth u s , o n th e b as i s o f t h e reco rdb efo re u s , th e Co u rti s u n ab l e t o m ak e an es t i m at e o f th es e rem ai n i n g ex p en s es fo r 2 0 1 4 u n d er t h e Co h an ru l e. Acco rd in g l y , p et i t i o n ers h av e n o tes t ab l i sh edth atth ey are en t i t ledt o a d edu ct io n fo r an y am o u n to f t h e
rem ai n i n g ex pen s es . W e s u s t ai n res p o nd en t ’ s d i s al l o wan ce o f p et i t i o n ers ’ Sch edu l e C b us i n es s l o s s d edu ct i o n fo r 2 0 1 4
. C. Sch edu l e A Un rei m b u rs ed Em

p l o y ee Bu s in es s Ex p en s es Onth e Sch edu l e A at t ach edt o the jo i n t retu rn p et i t i o n ers rep o rt ed
u n rei m b u rs edem

p l o y ee b us i nes s ex p en s es o f $ 2 3 ,9 3 1 ($ 4 ,8 1 3 fo r M r. Das en ti n
co n nect io n wi th h i s jo b as a p ro g ram m an ag er at Bri t ax an d$ 19 ,1 1 8 fo r M rs . W al co t t-Das en ti n co n n ect io n wi th h er jo b as a v i rtu al t al en trecru it er atRo b ert- 1 7 -

[* 1 7 ] Hal f an dRan d s t ad ). M rs . W al co t t -Das en t ’ s ex pen s es co n s i s t edo f v eh i cl e
ex p en s es , trav el ex p en s es , o th er b u s i n es s ex p en s es , an dm eal s an den t ert ai n m en t
. M r. Das en t ’ s ex pen s es al s o co n s i s t edo f t rav el ex p en s es , o ther b u si nes s ex p en s es , an d m eal s an den t ert ai n m en t , as wel l as p ark i ng fees , t ol l s , an d tran s po rt at i o n . Al l b u tth e o th er b u s i n es s ex pen s es can n o tb e es t i m at edas th ey are s ub ject t o the s tri cts ubs t an t i at i o n ru l es o f s ect i o n 2 7 4 (d ). In s up p orto f t hei r v eh i cl e
ex p en s es p et i t io n ers attri al p ro du ceda l o g fo r o n l y M r. Das en twh i ch rep o rt ed t h e
m o nt h s an dy ear o f h i s wo rk -rel at edtrav el , th e b u s in es s p u rp o s e o f h is trav el , th e ci t i es o f d ep artu re an dd es t i n at i o n , an dth e m i l es h e d ro v e. Itd i dn oti n cl u d e t h e actu al d at es o f h i s trav el . Pet i t i o n ers d i d n o tret ai n o r o th erwi s e p ro du ce an y o t h er
reco rd s t o s ubs t an t i at e t h ei r Sch edu l e A u n rei m b u rs edem

p l o y ee b u s i n es s
ex p en s es . Fu rt h erm o re, t h e p art i es s t i p u l at ed th atM rs . W al co tt -Das en tm ay recei v e rei m

b urs em en tfo r em

p l o y ee b us i n es s ex p en s es fro m Ro b ertHal f an d Ran ds t ad . Nei ther d i dp et i t i o n ers p ro duce co p ies o f t h ei r res p ect i v e em p l o y ers ’ rei m b u rs em en tp o l i ci es o r o th erwi s e es t ab l i s h thatth e ex p en s es were n ot rei m b u rs edb y thei r em p l o y ers . 9 Infact , attri al M r. Das en tackn o wl ed g edth at

9 Attri al M rs . W al co tt -Das en tt es ti fi ed th ath er rep o rt edu n rei m b u rs ed em pl o y ee b u s i n es s ex p en s es were t h e ex pen s es fo r wh i ch s h e co u l dn o tg et rei m b u rs ed . Al th o ug h we fo un dM rs . W al co t t -Das en t(as wel l as M r. Das en t ) t o b e g en u i n e an dcan d i d , “ [a] s we h av e s tat edm an y t im es b efo re, t h is Co u rti s n o t

(co n ti n u ed ...)- 1 8 -

[* 1 8 ] Bri t ax rei m

b u rs edh i m fo r t h e m i l es h e d ro v e h i s p ers o n al v eh i cl e fo r wo rk tri p s i n 2 0 1 4
. W e s u s t ai n res p o nd en t ’ s d i s al l o wan ce o f p et i t i o n ers ’ Sch edu l e A d edu ct i o n fo r u n rei m

b u rs edem

p l o y ee b u si n es s ex p en s es . III. Ad d it i on al Tax U nd er Sect io n 7 2 (t ) Sect io n 7 2 (t ) i m

p os es a 1 0 % ad d i ti o n al t ax o n earl y d i s tri b ut io n s fro m

a qu al i fi edret i rem en t p l an (as d efi n edi n s ect i o n 4 9 7 4 (c)). See s ec. 7 2(t )(1 ). Th e 1 0 % ad d it i o n al t ax , h o w ev er, d o es n o t ap p l y t o cert ai n en u m erat edd is tri b u t i o n s . See s ec. 7 2 (t )(2 ). As rel ev an th ere, t h e ad d i t i o n al 1 0 % t ax d o es n otap p l y t o th e
ex t en tth atearl y

d i st ri b u t i o ns are u s ed fo r qu al ifi edh i gh er edu cat i o n ex p en s es o f th e t ax p ay er, h i s s p o u s e, o r h i s ch i ld ren i n th e y ear o f t h e d i st ri bu t i o n . See s ec. 7 2 (t )(2 )(E), (7 )(A). Qu al i fi edh i g h er edu cat i on ex p en s es g en eral l y i n cl u de
ex p en s es fo r tu i t i o n , fees , b o o k s , s upp l ies , equi p m en t, an d , i n l im i t ed ci rcu m s t an ces , ro o m

an db o ard . See s ecs . 7 2 (t )(7 )(A), 5 2 9 (e)(3 ). M r. Das en ts u g g es tedattri al th atp et i t i o ners qu al i fy fo r t h i s ex cep t i o n b ecau s e th ey

u sedh i s IRA d is tri b u t io n s t o p ay fo r t h ei r d au g h t er’ s tui t io n t o W CU

9 (...co n t in u ed ) b o u n dt o accep ta t ax p ay er’ s s el f-s erv i n g , u n v eri fi ed , an du n d ocu m en t ed t es t i m o ny .” Sh ea v . Co m m i s s io n er, 1 1 2 T.C. 1 8 3 , 1 8 9 (1 9 9 9 ) (ci t i n g To k ars k i v . Co m m i s s i o n er, 8 7 T.C. 7 4, 7 7 (1 9 8 6 )).- 1 9 -

[* 1 9 ] i n 2 0 1 4 . Onth e b as i s o f M r. Das en t ’ s t es t i m o n y th e Co u rtd eci d edt o h o l d th e reco rdo p en fo r t he l i m i t edp u rp o s e o f g i v i n g p et i t i o n ers an o p po rtu n i ty t o p ro ffer ev i d en ce th atth e IRA d i s tri b u t io n s M r. Das en trecei v edwere u sedt o p ay fo r qu al i fi edh i g her ed u cat i o n ex p en s es . OnJ an u ary 5 , 2 0 18 , res p o n d en tfi l eda
s t atu s rep o rt , ap p ri s i n g th e Co u rto f t h e d o cu m en t s h e recei vedfro m p et i t i o n ers
an d at t ach i n g th es e d ocu m en t s th eret o . Th e d o cu m en t s are: (1 ) a p u rp o rt ed b i l l i n g s t at em en td at edAu g u s t 4 , 2 0 1 4 , ad dres s edt o p et i t i o n ers ’ s on fro m Bel m o n tAb b ey , s h o wi n g a cu rren t b al an ce du e o f $ 1 4,9 5 6 fo r t h e fal l 2 0 1 4
s em es t er; (2 ) a p u rp o rt edem ai l fro m Nel n etBu s i n es s So l u t i o ns (Nel n et ) t o M rs . W al co t t-Das en td at ed“ W edn es d ay , Au g us t , 4 , 2 0 1 4 3 : 5 7 AM ”, wh i ch s tat es th ata p aym en t t o Bel m o n tAb bey o f $ 1 4,9 5 6 i s s ch edul edt o b e p ro ces s edfro m h er b an k
acco u n t on Au g us t 6 , 2 0 1 4 ; 1 0 (3 ) a p u rp o rt edem ai l t o M rs . W al co tt -Das en t fro m W CU d at ed“ Fri d ay , Au gu s t1 8 , 2 0 1 4 1 : 5 2 PM ”, wh i ch s h o w s a p aym en to f $ 5 ,5 0 0 fro m

W o o d fo res tNat i o n al Ban k(W o o d fo res tBan k ); 1 1 an d(4 ) a p u rp o rt ed
em ai l fro m

W oo d fo res tBan k d at ed“ Fri d ay , Decem ber 2 9 , 2 0 1 7 6 : 1 4 AM ”, wh i ch
s h o ws a b an ks t at em en tfro m the b an kfo r an u nkn own acco un tth ati n cl ud es an

“ ACH--DEBIT” o f $ 5 ,5 0 0 t o W CU o n Au gu s t 1 5 , 2 0 1 4
.

1 0 Au g u s t4 , 2 01 4 , i s n o t a W ed n es d ay b u ta M o n d ay . 1 1 Au g u s t1 8 , 2 0 1 4 , i s n o ta Fri d ay b u t a M o n d ay .- 2 0 -

[* 2 0 ] Res p o n d en tex p res s es co n cern as t o th e au then t i ci ty o f t he em ai l s fro m Nel n etan dW CU. W e d ecl i n e t o recei v e t hes e t wo d o cu m en ts as ad d i t i o n al
ev i d en ce b u t wi ll recei v e the o th er d o cu m en t s . Ho wev er, t h i s ad d i t i o n al ev i d en ce (an dev en th e t wo em ai l s fo r t h atm at t er) d o es n o ts h o wth at p et i t i o n ers u s edan y p o rt i on o f t h e IRA d is tri b u t i on s M r. Das en trecei v edt o p ay th e tu i t io n ex p en s es o f th ei r d au g h t er wh o was en ro l l edatW CU (o r th ei r s o n wh o was en ro l l edat Bel m o n tAb b ey ) i n 2 0 1 4. Onth e reco rdb efo re u s, we fi n dthatn o n e o f t h e
en u m erat eds t atut o ry

ex cep t i o ns ap p li es h ere an dth at al l o f M r. Das en t ’ s IRA d i s tri b u t i o n s are s ub

jectt o th e s ect i o n 7 2 (t ) ad di t i o n al t ax . IV. Sect io n 6 6 6 2 (a) Accu racy -Rel at edPen al ty W e n o wad dres s wh et h er p et i t i o n ers are l iab l e u n d er s ect i o n 6 6 62 (a) an d (b )(2 ) fo r anaccu racy -rel at edp en al ty o n an u n derp aym en tdu e t o a s ub s t an t i al
u n d ers t at em en to f i n co m e t ax . Sect io n 6 6 6 2 (a) i m

p o s es a 2 0 % accu racy -rel at ed p en al ty o n an y p o rt i o n o f
an u n d erp aym en t o f t ax req u i redt o b e s h o wno n a retu rn i f, as p ro v i d edb y s ect i on 6 6 6 2 (b )(2 ), the u n d erp aym en ti s at tri b u t ab l e t o an y s ub s tan t ial u n d ers t at em en to f i n co m e t ax . Th e t erm

“ sub st an t i al u n d ers tat em en t ” m ean s i n th e cas e o f an i n d i v i du al an u n d ers t at em en t o f i n co m e t ax th atex ceed s th e g reat er o f 1 0 % o f t he t ax req u i red t o b e s ho wno n th e ret u rn o r $ 5 ,0 0 0 . Sec. 6 6 6 2(d )(1 )(A).- 2 1 -

[* 2 1 ] Th e Co m

m is s i o n er b ears th e b u rd en o f p ro du ct i o n reg ard i n g an i n d iv i du al t ax p ay er’ s l i ab i l i ty fo r t h e accu racy -rel at edp en al ty an d t h u s i s req u i redt o co m e fo rwardwi th s u ffi ci en tev i d en ce i nd i cat in g th ati m po s it i o n o f t h e p en al ty

i s ap p ro p ri at e. See s ec. 7 4 9 1 (c); Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. at4 4 6 . On ce th e Co m m i s s i o n er m eet s th i s b u rd en , th e t ax p ay er m u s tco m e fo rwardwi th p ers u as i v e ev i d en ce th atth e Co m m is s i o n er’ s d et erm i nat i o n i s i n co rrect . See Ru l e 1 4 2 (a); W el ch v . Hel v eri n g , 2 90 U.S. at1 1 5 ; Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. at 4 4 7 . Sect i o n 6 7 5 1 (b )(1 ) p ro v i d es th at“ [n ] o p en al ty * * * s h al l b e as s es s edu n l es s th e i n i ti al d et erm in at i o n o f s uch as s es s m en ti s p ers o n al l y ap pro v ed(i n wri t i n g ) b y th e i m m ed i at e s up erv i s o r o f t h e i n di v i du al m ak i ng s u ch d et erm i n at i o n o r s u ch h i g h er l ev el o ffi ci al as th e Secret ary m ay d es i g n at e.” In Graev v . Co m m i s s i o n er, 1 4 9 T.C. _

_ , _

_ (s l i p o p . at1 3-1 4 ) (Dec. 2 0 , 2 0 1 7 ), s up p lem en t i ng an do v erru l i n g i n p art 1 4 7 T.C. 4 6 0 (2 0 1 6 ), we h el dth atthe Co m m i ss i o n er’ s b u rd en o f p ro duct i o n u n d er s ect i on 7 49 1 (c) i n cl u d es es t ab l i s h in g co m p l i an ce wi th t h e
s up erv i s o ry

ap p ro v al req u i rem en t s o f s ect i o n 6 7 5 1 (b ). Th e reco rdi n cl u d es a Ci v i l Pen al ty Ap p ro v al Fo rm

fo r t he s ub s t an t i al
u n d ers t at em en to f i n co m e t ax pen al ty fo r 2 0 1 4 , d at edb efo re t h e i s su an ce o f t h e
n o t i ce o f d efi ci en cy

an ds i g n edb y

th e i m m ed i at e s up erv i s or o f t he i nd i v i du al
m ak i n g t he d et erm in at i o n . As a res u l to f t h e p art i es ’ co n ces s i on s an dth e Co u rt ’ s- 2 2 -

[* 2 2 ] h o l d i n g s h erei n , th e Ru l e 1 5 5 co m p u t at i o n s m

us tco n fi rm

a s ub st an t i al
u n d ers t at em en to f i n co m e t ax by p et i t i o n ers . Sh o u l dth e Ru l e 1 5 5 co m p u t at i o n s
s h o w a s ub s t an t i al u n d ers t at em en to f i n co m e t ax , we co n cl u d e t hatres po n den th as
m eth i s b u rd en o f p ro du ct i o n fo r t he accu racy -rel at edp en al ty u nd er s ect i o n 6 6 6 2 (a) an d (b )(2 ) fo r 2 0 1 4. Th e b u rd en th en s h i ft s t o p et i t i o ners t o co m e fo rward wi th p ers u as i v e ev i den ce t h atth e p en al ty i s i nap p ro p ri at e b ecau s e, fo r ex am p l e, th ey h adreas o n ab l e cau s e an d act edi n g o odfai th . See s ec. 6 6 6 4 (c)(1 ); Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. at4 4 6-4 4 7
. Th e d et erm i n at i o n wh et h er t h e t ax p ay er h adreas o n ab l e cau s e an dact edi n g o o dfai th d ep en d s up o n t h e p ert i n en tfact s an dci rcu m s tan ces o f a p art i cu lar cas e. Sec. 1 .6 6 6 4 -4 (b )(1 ), In co m e Tax Reg s . W e co n s i d er, am o n g o th er fact o rs , th e
ex p eri en ce, educat i o n , an d s o p h i s t i cat i o n o f t h e t ax p ay er; h owev er, t he p ri n ci p al
co n si d erat io n i s th e ex t en to f t h e t ax p ay er’ s effo rt s t o as s es s t h e p ro p er t ax l i ab i l i ty . Id .; s ee al s o Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. at4 48 . Tak i n g i nt o
co n si d erat io n th e t ax p ay er’ s ex p eri en ce, educat i o n , an ds o p h i s t i cat i o n , an h o n es t
m i s u n d ers t an d i n g o f fact o r l aw m ay i n d i cat e reas o n ab l e cau s e an dg oo dfai th
. Hi g bee v . Co m

m i ss i o n er, 1 1 6 T.C. at4 4 9 (ci t i ng Rem y v . Co m m i s s i o ner, T.C. M em o. 1 9 9 7 -7 2 ). In ad di t i o n , rel i an ce o n p ro fes s io n al ad v i ce m ay i n d i cat e
reas on ab l e cau s e an dg o o d fai th i f, i n th e l i g h t o f al l th e fact s an dci rcu m s t an ces ,- 2 3 -

[* 2 3 ] s u ch rel i an ce was reas o n ab l e an d the t ax p ay er act edi n g o o dfai th . Id . at 4 4 8 -4 4 9
. Attri al p et it i on ers , wh o h av e b ach el o r’ s d eg rees --o n e i n b u s in es s ad m i n is trat i o n an d t he o th er i n m ech an i cal en g in eeri n g --ap p eareds i n cere b u t
co n fu s ed , p art i cu l arl y

ab o u t th e t ax treat m en to f t h e ex p en s es th ey rep o rt edo n th ei r Sch edu l es A an d C an dthe IRA d i s tri b u t i o n s t h atM r. Das en tad m i t t ed recei v i ng i n 2 0 1 4. Th ey

d i d n o tp ro v i d e an y

t es ti m o n y

th atth ey rel i edo n ad v i ce fro m a t ax p ro fes s i on al wh enp rep ari ng th e jo i n t retu rn . Th ey u s edTu rb oTax t o p rep are t he ret urn . Th i s Co u rt h as fo u n d that“ [t ] ax p rep arat io n s o ft ware i s o n l y as g o o das th e i n fo rm at i o n o n e i np u t s i n t o i t .” See Bu n ney v . Co m m i s s io n er, 1 1 4 T.C. 2 5 9 , 2 6 7 (2 0 0 0 ). Th e s o ft ware d o es n o tco n st i tu t e p ro fes s i o nal ad v i ce fo r wh i ch th i s Co u rtcan rel y i n a reas on ab l e cau s e/ g o o dfai th an al y si s . Acco rd i n g l y , we can n o tfi n di n th e reco rdei th er ev i d en ce o f a co g n i zab l e effo rtt o as s es s th ei r p ro p er t ax l i ab i l i ty

o r reas o n ab l e cau s e fo r t h e erro r. W e wi ll s us t ai n th e p en al t y
s h o u ldth e Ru l e 1 5 5 co m p u t at i o n s co n fi rm

a s ub st an t i al u n d ers tat em en t o f i n co m e t ax . W e h av e co n s id eredal l o f t h e arg um en t s m ad e b y th e p art i es an d , t o th e
ex t en tth ey

are n o tad dres s edh erei n , we fi n dth em t o b e m o o t , i rrel ev an t, o r wi th o u tm eri t
.- 2 4 -

[* 2 4 ] To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t ered
u n der Ru l e 1 5 5
.