T.C. M em o . 2 0 1 7 -1 8 6

UNITED STATES TAX COURT

J OE POKAWA AND NANCY FATOM A , Pet i t i o ners v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 9 9 2 0-1 6. Fi l edSep t em b er 2 1 , 2 0 1 7
.

J o e Po k awa an dNan cy

Fat om a, p ro s es e. M art y J an e Dam a, fo r res p o n den t .

M EM ORANDUM FINDINGS OF FACT AND OPINION THORNTON, Jud g e: Res p o n d en td et erm i n edd efi ci en ci es i n p et i t i o n ers ’ 2 0 1 3 an d2 0 1 4 Fed eral i n co m e t ax o f $ 3 7 ,2 1 0 an d$ 15 ,8 9 7 , res p ect i v el y .-2
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[* 2 ] Res po n den tfu rth er d et erm i n edp en al t ies p u rs u an tt o s ect i o n 6 6 6 2 (a) o f $ 7 ,2 4 4 an d$ 2 ,1 93 fo r t ax y ears 2 0 1 3 an d2 0 1 4 , res p ect i v el y . 1 Th e i s s u es fo r d eci si o n are: (1 ) wh et h er p et i t i o n ers are en t i t l edt o d educt i o n s cl ai m edo n Sch edu l es C, Pro fi to r Lo s s Fro m Bu s i n es s , g reat er t h an
res p o n d en t h as al l o wed ; (2 ) wh et h er p et i t i o ners are en t i t l edt o d edu ct i o n s fo r
u n rei m b u rs edem

p l o y ee b us i nes s ex p en s es an dm ort g ag e i n t eres tan d p oi n t s as cl ai m edo n Sch edul es A, It em izedDedu ct i o n s ; (3 ) wh et h er p et i t i o ners are en t i t l ed t o d ep en d en cy

ex em p t i o n d edu ct i o n s ; (4 ) wh eth er p et i t i o n ers are en t i t l edt o edu cat i o n cred i t s ; (5 ) wh et her p et it i on ers are l i ab l e fo r t h e s ect i o n 7 2 (t ) ad d i t i o n al t ax o n prem atu re d is tri b u ti o n s fro m a qu al i fi edret i rem en tp l an ; an d(6 ) wh et h er p et i t i o n ers are l iab l e fo r accu racy -rel at edp en al ti es p u rs u an t t o s ect i on 6 6 6 2 (a). 2

1 Al l s ect i o n referen ces are t o th e In tern al Rev en u e Co d e i n effect fo r t h e y ears ati s s u e, an dal l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an d Pro cedure, u n les s o th erwi s e i n d i cat ed . M o n et ary am o u n t s are ro un d edt o th e n eares td o l l ar.

2 Res p o n d en tm ad e ad d i t i o n al ad ju st m en t s th atare m erel y co m p u t at io n al an d d ep en dup o n o u r res ol u t i o n o f t h e rem ai n i n g i s su es . W e d o n o td i s cu s s t he co m p u t at i o n al ad

ju st m en ts fu rt h er. In ad d i ti o n , th e ad ju s t m en ti n th e n o t i ce o f d efi ci en cy

fo r “ XXX-XX-3 27 2 ” fo r 2 0 1 3 o f $ 1 ,5 0 0 --wh i ch th e p art ies h av e n o t ad dres s ed --ap p ears t o dup l i cat e t h e co m p u tat i o n al ad

ju s t m en tfo r t he edu cat i o n cred i tfo r 2 0 1 3 o f $ 1 ,5 0 0 ; we ex p ectth e Ru l e 1 5 5 co m p ut at i o n s wi l l s o refl ect .-3
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[* 3 ] FINDINGS OF FACT Th e p art i es h av e s t ip ul at eds o m e fact s , wh i ch we i n co rp orat e b y th i s referen ce. Wh en th ey t i m el y p et i t i o n edth e Co u rt , p et i t i on ers res i d ed i n Tex as . Du ri n g th e y ears ati ss u e M s . Fat o m a was em p l o y edas a n urs e ai de. Sh e
earn edwag es o f $ 1 0 ,0 2 3 i n 2 0 1 3 an d$ 8 ,1 5 9 i n 2 0 1 4. Atth e s t arto f 2 0 1 3 M r. Po kawa was em p lo y edb y AT&T, b u th e l o s tth at jo b l at er i n the y ear. He earn edwag es o f $ 53 ,1 1 4 fro m AT&T i n 2 0 1 3 an d$ 5 ,9 8 4 fro m AdSu s m an & As s o ci at es , In c., i n 2 0 1 4
. Aft er l o s i n g hi s jo b wi th AT&T M r. Po k awa wi th drew m o n ey fro m a ret i rem en tacco u n tt o i n v es ti n v ari o u s b u si nes s act i v i t i es . Th e wi th drawal s were rep o rt edo n Fo rm s 1 0 9 9 -R, Di s tri b u t i o n s Fro m Pen s i o n s , An nu 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. Th e Fo rm s 1 0 9 9-R rep o rt ed g ro s s d i s tri b u t i o n s o f $ 8 3 ,4 80 an d$ 1 2,4 4 8 fo r 2 0 1 3 an d2 0 1 4, res p ect iv el y , an d i n d i cat edd i s tri b u t i o n co d e 1 fo r an earl y d i s tri b u ti o n wi th n o kn o wnex cep t i o n . In 2 0 1 4 M r. Po k awa tu rn ed4 9 y ears o f ag e. In 2 0 1 3 M r. Po k awa o p erat eda b us i n es s cal l ed Un i t edBan qu et Hal l . He b eg ano p erat i n g Un i t edBan qu etHal l as earl y as 2 0 1 0 an dreal izeda n et l o s s fo r each y ear o f o perat io n .-4
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[* 4 ] Du ri n g 2 0 1 3 an d2 0 1 4 M r. Po k awa o p erat eda t ax return p rep arat i o n b u s i n es s , 1 s tCl as s Tax Serv i ces , o u to f h is h o m e. He b eg an o perat i n g th at b u s i n es s as earl y

as 2 0 0 8 , b u t 20 1 3 was the fi rs ty ear fo r wh i ch h e rep ort edan y p ro fi t. Du ri n g 2 0 1 3 an d2 0 1 4 M r. Po k awa al s o o p erat eda b u s i n es s cal ledSi erra Ou treach Cen t er (s o m et im es referen ced i n th e reco rdas Si erra (Leo n e) Ou treach Cen ter). Th ro u g h Sep t em b er 2 0 1 3 Si erra Ou treach Cen t er was atan ad dres s o n Bro adway

Bo u l ev ardi n Garl an d , Tex as . InOct o b er 2 0 1 3 Si erra Ou treach Cen t er
m o vedt o a l o cat i o n o n Nat i o n al Dri v e, al s o i n Garl an d , Tex as . M r. Po k awa d es cri b edth e Si erra Ou treach Cen t er as a fu rn is h ed wareh o u s e t h ath e ren t edfo r
m eet i n g s . Th e Si erra Ou treach Cen t er b eg an o p erat i n g as earl y as 2 0 1 2 an d real ized a n etl o s s fo r each y ear o f o perat io n . Du ri n g 2 0 1 4 M r. Po kawa b ri efl y , “ fo r l i ke a weeko r m on th ”, o p erat edan Ub er d ri v i n g b u si n es s . 3

3 M r. Po k awa t es t i fi edth ath e h adt o p u rch as e a car i n o rd er t o b eg i n th e Ub er d ri v i n g b u si n es s b utaft er t h e car “ bro k e d o wn b ecau s e o f t he ex ces s i v e dri v i ng , * * * [h e] d i dn otco nt i n u e wi th i t . ”-5
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[* 5 ] Du ri n g 2 0 1 3 M r. Po kawa’ s d au g h t er, H.J ., wh o was b o rn i n 1 9 96 , res i d ed wi th p et i t i o n ers atth ei r res i d en ce. 4 Du ri ng 2 0 1 4 M r. Po k awa’ s s o n , A.P., wh o
was b orn i n 2 0 0 2 , res i d edwi th p et i ti o n ers . Pet i t io n ers ’ 2 0 1 3 an d2 0 1 4 Fed eral In co m e Tax Retu rn s Pet i t i o ners fi l edjo i n tFed eral i n co m e t ax retu rn s fo r 2 0 1 3 an d2 0 1 4 rep o rt i n g i n co m e fro m

wag es , u n em

p l o ym en tco m

p en s at i o n , an dp en s i o n s an d
an n ui t i es . Pet i t i o ners al s o rep o rt edSch edu l e C l o s s es fo r 2 0 1 3 an d2 0 1 4 o f $ 6 8 ,0 8 0 an d$ 5 ,1 3 2 , res p ect i v el y . Sch edu l e C Ex p en s es Pet i t i o ners at t ach edth ree Sch edul es C t o th ei r 2 01 3 retu rn . Th e 2 0 1 3 Sch edu l e C fo r Un i t ed Ban qu etHal l rep o rt edn o g ro s s i nco m e an dt o t al ex p en s es
o f $ 7 , 7 6 5 , i n cl u d i n g ex p en s es fo r, am o n g o th er t h i n g s , co n tract l ab o r, ren t o r l eas e
o f o th er b u s i n es s p ro p ert y , an dren to r l eas e o f v eh i cl es , m ach i n ery , an d equ ip m en t . Th e 2 0 1 3 Sch edu l e C fo r 1 s tCl as s Tax Serv ices rep ort edg ro s s i n co m e o f $ 12 ,2 56 an dt o tal ex p en s es o f $ 9 ,1 9 0 fo r, am o n g o th er t h in g s , ad v ert i s in g , car an d t ru ck , an dm eal s an den t ert ai n m en t . Th e 2 01 3 Sch edu l e C fo r Si erra Ou treach Cen ter rep o rt edg ro s s i n co m e o f $ 3,0 6 0 an dt o t al ex p en ses o f

4 Th e Co urt refers t o m i n o r ch il dren b y th ei r i ni t i al s . See Ru l e 2 7 (a)(3 ).-6
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[* 6 ] $ 6 6 ,4 41 fo r, am o ng o ther t h i n g s, car an d tru ck , co nt ract l ab o r, ren to r l eas e o f
o th er b u s i n es s p ro p ert y , an du t i l i t i es . Pet i t i o ners al s o at t ach edth ree Sch edu l es C t o thei r 2 0 1 4 ret urn . Th e 2 0 1 4 Sch edu l e C fo r 1 s tCl as s Tax Serv i ces rep o rt ed g ro s s i n co m e o f $ 35 ,0 5 6 an dt o t al
ex p en s es o f $ 14 , 4 2 6 fo r, am o n g o th er t hi n g s , co m m i s s i o n s an dfees , ren to r l eas e
o f o th er b u s i n es s p ro p ert y , an du t i li t i es . 5 Th e 2 01 4 Sch edu le C fo r Si erra Ou treach Cen t er rep o rt edg ro s s i n co m e o f $ 7 ,1 4 6 an dt o t al ex p en s es o f $ 2 4 ,3 1 5 fo r, am o ng o th er t h i n g s , car an dtru ck , ren to r l eas e o f o th er b u s i nes s p ro pert y , an d
u t i l i t i es . Th e 2 0 1 4 Sch edu le C fo r t h e Ub er d ri vi n g b u s i nes s rep o rt ed g ro s s i n co m e o f $ 44 2 an dt o t al ex p en s es o f $ 9,0 3 5 fo r, am o n g o th er t h i n g s, car an d tru ck
. It em i zedDedu ct i o n s OnSch edu l es A fo r 2 0 1 3 an d2 0 14 p et it i o n ers cl ai m edi t em i zedd edu ct i o n s fo r, am o ng o th er t h i n g s , m o rt g ag e i n t eres tan d u n rei m b u rs edem

p lo y ee b u si n es s
ex p en s es . Fo r 2 0 1 3 pet i t i o ners cl ai m eda d edu ct i o n o f $ 3 ,8 4 6 fo r m o rt g ag e i n t eres t , an dfo r 2 0 1 4 th ey cl ai m eda d edu ct i on o f $ 5 ,4 2 1 fo r m o rt gag e i n t eres t
an d m o rt g ag e i n s u ran ce p rem i u m s .

5 Un l i k e th e co rres p on d i n g 2 0 1 3 Sch edu l e C, p et i t io n ers ’ 2 0 14 Sch edu l e C fo r 1 s t Cl as s Tax Serv i ces d i dn o ti n cl u d e d edu ct i o n s fo r car an d tru ckex p en s es .-7
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[* 7 ] Fo r 2 0 1 3 an d2 01 4 p et it i o n ers rep o rt edu nrei m b u rs ed em

p lo y ee b u s in es s
ex p en s es o f $ 20 , 8 9 1 an d$ 9 ,6 7 8 , res p ect i v el y . Pet it i on ers at t ach edt o th ei r 2 0 1 3 retu rn two Fo rm s 2 10 6 , Em p l o y ee Bu s i nes s Ex p en s es , o n e fo r M r. Po k awa an d
o n e fo r M s . Fat o m a. M r. Po k awa’ s 2 01 3 Fo rm 2 1 0 6 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 o f $ 8 ,0 8 9 , co m p ri si n g v eh i cl e ex p en ses , p ark i n g fees
an d t o ll s , trav el ex p en ses wh i l e away fro m h o m e, o th er b us i n es s ex p en ses , an d
m eal s an den t ert ai n m en t . 6 M s . Fat o m a’ s 2 0 1 3 Fo rm 2 1 0 6 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 o f $ 5 ,2 1 7 , co m p ri si n g v eh i cl e ex p en ses , p ark i n g fees
an d t o ll s , o th er b u s in es s ex p en s es , an dm eal s an d en t ert ai n m en t. Th e 2 0 13 Sch edu l e A i n cl u dedan ad di ti o n al $ 7 ,5 8 5 t h atwas n o trep o rt edo n th e 2 0 1 3 Fo rm s 2 1 0 6 . Pet i ti o n ers at t ach edt o th ei r 2 0 14 retu rn a s i ng l e Fo rm 2 1 0 6 fo r M s . Fat o m a wh i ch rep o rt edu n rei m b u rs edem

p l o y ee b us i n es s ex p en s es o f $ 5 ,2 3 8 , co m p ri s i n g v eh icl e ex p en s es , p ark in g fees an dt o l l s , o th er b u si n es s ex pen s es , an d
m eal s an den t ert ai n m en t . Th e 2 0 1 4 Sch edu le A i n cl u d edan ad d i t i o n al $ 4 ,4 4 0 th at
was n otrep o rt edo n M s . Fat o m a’ s 2 0 1 4 Fo rm 2 1 0 6
.

6 Th e am o un t s o f t h e rep o rt edex p en s es fo r m eal s an den t ert ai nm en to n p et i t i o n ers ’ Fo rm s 2 1 0 6 were cal cu l at edb y ap p l y i n g t h e 5 0 % l im i t at io n p res cri b ed b y s ec. 2 7 4 (n ).-8
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[* 8 ] Dep en d en cy

Ex em p t i o n Dedu ct i on s Pet i t i o ners cl ai m ed two d ep en den cy ex em p t i o n d edu ct i o n s fo r b o th 2 0 1 3
an d 2 0 1 4 . Th ey

cl ai m edo n e o f M r. Po k awa’ s p aren t s as a d ep en d en tfo r each y ear. Th ey

al so cl ai m edH.J
. as a d ep en d en tfo r 2 0 1 3 an dA.P. as a d ep en den tfo r 2 0 1 4
. Edu cat io n Cred it s OnFo rm s 8 8 6 3, Edu cat io n Cred i t s (Am eri can Op p o rtu n i ty an dLi fet i m e Learn i n g Cred i t s ), at t ach edt o t h ei r 2 0 1 3 an d2 0 1 4 retu rn s , p et i ti o n ers cl ai m edth e refu nd ab l e Am eri can Op p o rtu n i ty Cred i t o f $ 1 ,0 00 fo r each y ear. Th e 2 0 1 3 Fo rm 8 8 6 3 rep o rt ed th atM r. Po k awa at t en d ed“ Kap l an Fi n an ci al Edu cat i o n ” i n La Cro ss e, W i s co n s i n , an d th e 2 0 1 4 Fo rm 8 8 6 3 rep o rt edth ath e at t en d ed“ Dal l as Co u n ty Co m

m u n it y Co l l eg e”. Di s tri b u t i o n s Fro m

Ret i rem en tPl an Pet i t i o ners ’ 2 0 1 3 Fo rm

1 0 4 0 i n cl u ded i n g ro s s i n co m e an earl y d i s tri b u t io n
o f $ 8 3,4 8 0 ; th e at t ach edFo rm 5 3 2 9 , Ad d i t i o n al Tax es o n Qu al i fi edPl an s (In cl ud i ng IRAs ) an dOth er Tax -Fav o redAcco u n ts , i n d i cat edex cep t i on No . 1 2 (“ Oth er”) an dad d i t i o n al t ax o f $ 8 . Pet i t i o ners ’ 2 0 1 4 Fo rm 1 0 4 0 i n cl u d edi n g ro s s i n co m e an earl y d i s tri b u t i o n o f $ 1 2 ,4 4 8 ; th e at t ach edFo rm 5 32 9 i n d i cat ed-9
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[* 9 ] ex cep t i on No . 7 (“ IRA d i s tri b u ti o ns m ad e t o cert ai n u n em p l o y edi n d i v i du al s fo r h eal th i n s u ran ce p rem i u m s ”) an dad d it i on al t ax o f $ 1
. No t ice o f Defi ci en cy Fo r 2 0 1 3 res po n d en td i s al l o w edal l o f p et i ti o n ers ’ cl ai m edSch edul e C d educt i o n s fo r 1 stCl as s Tax Serv i ces , Un i t edBan qu etHal l, an dSi erra Ou treach Cen ter. Fo r 2 0 1 4 res p on d en td i s al l o w edal l th ei r cl ai m edSch edu l e C d edu ct i o n s fo r 1 s t Cl as s Tax Serv i ces an dSi erra Ou treach Cen t er an d$ 6 ,4 3 9 o f t h e Sch edu l e C d edu ct i o n s fo r car an dtru ck ex p en s es fo r t h e Ub er d ri v i n g b u s i n es s . Res po n d en tal s o d i sal lo w edth e d ep en d en cy ex em p ti o n d edu ct i o n s fo r M r. Po k awa’ s ch i l dren an dth e refu n d ab l e educat i on cred i t s fo r l acko f s ub s t an t i at i o n . Res po n d en td i s al l o wedSch edu l e A m o rt g ag e i n t eres td edu ct i o n s o f $ 2 , 0 0 1 fo r 2 0 1 3 an d$ 2 ,6 7 2 fo r 2 0 1 4 o n the g ro u n ds th atth es e d edu ct i o n s were n o t“ veri fi ed
o r d et erm i nedt o b e reas on ab l e b as edo n al l av ai l ab l e i n fo rm at i o n.” Res p o n d en t d i s al lo wedal l o f p et it i o n ers ’ cl ai m edu n rei m b urs edem

p l o y ee b us i n es s ex p en s e d educt i o n s . Res p on d en t al s o d et erm i n edth atp et i ti o n ers were l i ab l e fo r t h e
s ect i on 7 2 (t ) ad di t i o n al t ax o n earl y d i s tri b u t i o n s fro m

a qu al i fi edret i rem en tp l an
an d fo r s ect i o n 6 6 6 2 (a) accu racy -rel at edp en al ti es .-1 0
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[* 1 0 ] OPINION Th e Co m m is s i o n er’ s d et erm i n at i o n s i n a n o t i ce o f d efi ci en cy are g en eral l y p res u m edco rrect , an dth e t ax p ay er b ears th e b urd en o f p ro v i n g t h o se d et erm i n at i o n s erro n eo u s . Ru l e 1 4 2 (a); W el ch v . Hel veri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3). Pu rs uan tt o s ect i o n 7 4 9 1(a)(1 ), th e b u rd en o f p ro o f as t o fact u al m at t ers m ay
s h i ftfro m th e t ax p ay er t o th e Co m

m i s s i o n er u nd er cert ai n ci rcu m s t an ces . Pet i t io n ers d i dn o tal leg e t h ats ect io n 7 4 9 1 s h i ft s the b u rd en o f p ro o f t o
res p o n d en t, n o r d o es the reco rdes tab l i sh th atp et i t i o n ers s at is fy th e p rereq u i s i t es
u n d er s ect i o n 7 4 9 1 fo r an y s uch b urd en s h i ft
. Dedu ct i o n s are al l o wed as a m at t er o f l eg i s l at i v e g race, an dth e t ax pay er b ears th e b urd en o f p ro vi ng en ti t l em en tt o an y cl ai m edd edu ct io n . Ru le 1 4 2 (a); INDOPCO, In c. v . Co m

m i s s i o ner, 5 0 3 U.S. 7 9 , 8 4 (1 99 2 ); New Co l o n i al Ice Co
. v . Hel v eri n g , 2 9 2 U.S. 4 3 5 , 4 4 0 (1 9 3 4 ). Th i s b u rd en req u i res the t ax p ay er t o
s ub s t an t i at e ex p en s es fo r d edu ct i o n s cl ai m ed b y k eep i n g an dp ro du ci n g ad equ at e
reco rd s th aten ab l e t h e Co m m i s s i o n er t o d et erm i ne t h e t ax p ay er’ s co rrect t ax l i ab i l i ty . Sec. 6 00 1 ; Hrad es ky v . Co m m i s si o n er, 6 5 T.C. 8 7 , 8 9-9 0 (1 9 7 5), aff’ d p er cu ri am , 5 4 0 F.2 d8 2 1 (5 th Ci r. 1 9 7 6 ); M en eg u zzo v . Co m m i s s i o n er, 4 3 T.C. 8 2 4 , 8 3 1 -8 3 2 (1 9 65 ); s ec. 1 .6 0 0 1 -1 (a), (e), In co m e Tax Reg s.-1 1
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[* 1 1 ] Sect i o n 1 6 2 (a) al l o w s a d educt i o n fo r o rd i n ary an dn eces s ary b u s in es s
ex p en s es p ai d o r i n cu rreddu ri n g the t ax ab l e y ear i n carry in g o n an y trad e o r b u s i n es s . Anex p en se i s o rd in ary i f i t i s a co m

m o n o r frequ en t o ccu rren ce i n th e ty p e o f b u s i n es s i nv o l v ed . Dep u ty v . duPo n t, 3 08 U.S. 4 8 8 , 4 9 4-4 9 5 (1 9 4 0 ). An
ex p en s e i s n eces s ary i f i ti s ap p ro p ri at e an d h el p fu l t o th e t ax p ay er’ s b u s in es s . Co m m i s s i o n er v . Hei n i n g er, 3 2 0 U.S. 4 6 7 , 4 71 (1 9 4 3 ). If a t ax p ay er es t ab l i s h es th ata d edu ct i b le ex pen s e h as b een p ai db u ti s
u n ab le t o s ub s t an t i at e th e p reci s e am o u n t , we g en eral ly m ay es t i m at e th e am o u n t
o f t h e d edu ct i b l e ex p en s e, b eari n g h eav i l y ag ai n s tth e t ax p ay er res po n s i b l e fo r t h e i n ex act i tu d e. Co h an v . Co m m i s s i o n er, 3 9 F.2 d5 40 , 5 43 -5 4 4 (2 dCi r. 1 9 3 0 ). W e
can n otes t i m at e d edu ct i bl e ex p en s es , h o wev er, u n l es s th e t ax p ay er p res en t s
ev i d en ce p ro v i d i n g a s u ffi ci en t b as i s fo r m ak i n g an es t i m at e. Van i cekv . 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 ). W i th o u t s uch b as i s, an y al l o wan ce
wo u l dam o u n tt o u n g u i d edl arg es s e. W il l iam s v . Un i t edSt at es , 2 4 5 F.2 d 5 5 9 , 5 60 (5 th Ci r. 1 9 5 7 ). I. Sch edu l es C Res p o n d en td i s al l o wedal l o f p et i t i o n ers ’ cl ai m edSch edu l e C d edu ct i o n s rel at i n g t o 1 s t Cl as s Tax Serv i ces , Si erra Ou treach Cen t er, an dUn i tedBan qu et Hal l an d a l arg e p arto f th ei r cl ai m edSch edu l e C d edu ct i o n s fo r t h e Ub er d ri v i n g-1 2
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[* 1 2 ] b u s i n es s . Res p o nd en t h as n o t d i s p u t edth atth es e v ari o u s act i v i t i es rep res en t edb o n a fi de t rad es o r b u s i n es s es b uth as b as edh i s d i sal l owan ce o f t h e cl ai m edd edu ct i on s o n p et i t i o n ers ’ fai l u re t o es t ab l i sh th atth es e am o un t s were p ai do r i n cu rred du ri n g th e rel ev an tt ax ab l e y ear as o rd in ary an dn eces s ary b u s i n es s ex p en s es . Th e d o cu m en tary ev i d en ce p et i t i o n ers p ro v i d edt o s ub s tan t iat e t h e ex p en ses
u n d erl y i n g the cl ai m edSch edu l e C d edu ct i o n s i s s can t . 7 M r. Po k awa t es t i fi edth at i n 2 0 1 4 t h e b u i l d in g i n wh i ch he k ep tm os to f h i s t ax reco rd s fl o o d ed , d es tro y i ng h i s d o cu m en t s . If a t ax p ay er’ s reco rd s are l o sto r d es tro y edth ro u g h ci rcu m s t an ces b ey o n d h i s o r h er co nt ro l , th e t ax pay er m ay s ubs t an t i at e ex p en s es th ro ug h reas o nab l e
reco n s tru ct i o n. See M al i n ows k i v . Co m m i s s i o n er, 7 1 T.C. 1 1 2 0 , 1 1 2 4 -1 12 5 (1 9 7 9). Th e b urd eni s o n th e t ax p ay er t o s h ow t h atth e d ocu m en t s were act u al l y d es tro y edb ecau s e o f ci rcu m s t an ces b ey o n dh is o r h er co nt ro l . See Ad l er v . Co m m i s s i o n er, T.C. M em o . 2 0 1 0 -4 7 , aff’ d , 4 4 3 F. Ap p ’ x 7 3 6 (3 dCi r. 2 0 1 1 ).

7 Attri al th e Co u rts u s t ai n edres p o n den t ’ s o bject io n s t o cert ai n d o cu m en t s o n th e g ro u n d s th atth e d o cu m en t s h adn o tb een ex ch an g edp urs u an t t o th e Co u rt ’ s s t an d i n g p ret ri al o rd er o f No v em b er 2 8 , 2 0 1 6 , were i n co m p l et e, o r s u m

m ari zed d o cu m en t s th atwere n otal so o ffered as ev i d en ce. Ev eni f t h es e p ro ffered d o cu m en t s h adb een ad m i t t ed , th ey wo u l d d o v ery

l i t t l e t o as si s tp et i t i o n ers ’ cas e; i n fact , s ev eral o f t he recei p t s ap p ear t o b e fo r a b u s i n es s cal led“ Si erra Au t o s ” fo r wh i ch n o Sch edu les C were i ncl u dedwi th th e ret u rn s fo r 2 0 13 an d2 0 1 4
.-1 3
-

[* 1 3 ] Th e ci rcu m st an ces s u rro u n d i n g M r. Po k awa’ s as s ert i o n o f a fl o o d are v ag u e,
an d p et i t i o n ers h av e o ffered n o ev i d en ce, ap artfro m th is t es ti m o n y , th atth ei r t ax
reco rd s were d es tro y edi n a fl oo d . Itrem ai n s u n cl ear wh y p et i t io n ers co u ldn o t h av e reco n s tru ct ed , i n a t i m el y m an n er, atl eas ts o m e o f t h ei r reco rd s b y o b t ai n i ng b an k reco rd s an d co n t act i n g t h i rd -p art y p ay ees , s u ch as p ro p ert y m an ag ers an d i n s u ran ce an du t i l i ty

co m pan i es . In d eed , M r. Po kawa t es t i fi edth at ju s to n e week b efo re t ri al h e h i red“ a t as km as t er ap p ro v edt o h el p * * * [h i m ] p u t * * * [h i s ] d o cu m en t s t o g et h er”. M o reo v er, p et i t io n ers h av e fai l edt o ex p l ai n t h e d eart h o f
reco rd s fo r t h e p eri o d aft er t h e al l eg edfl o o d
. Nev ert h el es s , aft er carefu l l y rev i ewi n g p et i ti o n ers ’ s can t d o cu m en tat i o n , wh i ch i n cl u d es p o rt i o n s o f a l eas e ag reem en t , s o m e u ti l i ty b i l l s , an dcarb o n co p ies
o f ch eck s fo r ren tp aym en t s , al o n g wi th M r. Po k awa’ s t es t i m o n y , an d b eari n g h eav il y ag ai n s tp et i t i o ners , wh o s e i nex act i tu d e i s o f t h ei r o wnm ak in g, we are
s at i s fi edth atth ere i s a s u ffi ci en tev i d en t i ary b as i s t o p erm i tu s t o es t i m at e t h e fo l l o w i n g am o u nt s o f d edu ct i b l e ex p en s es : (1 ) ren t as cl ai m edo n t h e 2 0 13 Sch edu l e C fo r Si erra Ou treach Cen t er; (2 ) u t i li t ies o f $ 1 ,0 5 0 fo r t he 2 0 13 Sch edu l e C fo r Si erra Ou treach Cen t er; (3 ) ren tas cl ai m edo n th e 2 0 1 4 Sch edu l e C fo r Si erra Ou treach Cen t er; an d(4 ) u t i l i t i es as cl ai m edo n th e 2 0 1 4-1 4
-

[* 1 4 ] Sch edul e C fo r Si erra Ou treach Cen t er. 8 See Co han v . Co m m i s s i o n er, 3 9 F.2 d5 4 0
. Pet i t i o ners p ro du ced n o ev i d en ce t o s ub s t an t iat e t h e rem ai ni n g Sch edu l e C
ex p en s es fo r wh i ch res p o n d en td i s al l o wedd educt i on s fo r 2 0 1 3 an d2 0 1 4 o r t o p ro v id e u s an y

b as is fo r es t i m at i n g an y

s u ch d edu ct i b l e ex p en s es . 9 Acco rd i n g l y , we s u st ai n res po n d en t ’ s d et erm i n at i o n s reg ard i n g the rem ai n in g Sch edu l e C
ex p en s es n o td i s cu s s edab o v e.

8 Pet i t i on ers p ro du cedev i d en ce t h atSi erra Ou treach Cen t er o ccup i edan d p ai dren tfo r a b u il d i n g o n Bro ad way Bo u lev ardu n t i l Oct o ber 2 0 1 3 , atwh ich t i m e i t m o v ed t o an ad dres s o n Nat i o n al Dri v e, wh ere i trem ai n edth ro u gh 2 0 1 4. Th e ev i d en ce p erm i t s u s t o co n cl u d e t h atp et i t io n ers h av e s ub s tan t i at edth e ren t d educt i o n s cl ai m edwi th res p ectt o Si erra Ou treach Cen ter o n th ei r 2 0 1 3 an d2 01 4 retu rn s . Pet i t i o n ers al so p ro du ced u t i l i ty b i l ls fo r t h e Nat i o n al Dri ve ad dres s s h o wi n g an av erag e u t i l i ty ex p en s e o f $ 3 5 0 p er m o n th. Th e ev i den ce p erm i t s u s t o co n cl u d e t hatp et i t i o n ers h av e s ub s t an t i at edu t i l i t i es ex p en s es fo r Si erra Ou treach Cen t er as d edu ct ed o n th ei r 2 0 1 4 return an d , fo r t h ei r 2 0 1 3 t ax ab l e y ear, th ree ad d i t i o n al m o n th s o f t h os e u t i l i t ies ex p en s es , at$ 3 5 0 p er m o n th , fo r Oct o b er, No v em

b er, an dDecem

b er 2 0 1 3 . Th e reco rd co nt ai n s n o ev i d en ce wh ereb y we m i g h tes t i m at e an y

u t il i ty ex p en ses i n cu rredatth e Bro ad way Bo u l ev ard ad dres s.

9 Th e l i m i tedev i den ce i n th e reco rdal s o m ak es u s th i n kth atev en i f p et i t i o n ers h ads ub s t an t i at edth e ex pen s es rep o rt edfo r Un i t edBan qu etHal l an d th e Ub er d ri v i ng b us i n es s --wh i ch th ey h av e n o t --an y

s u ch ex p en s es wo u l dh av e co n st i tu t edn o n d educt i b l e s tart up ex p en s es o r p o ss i b ly , i n th e cas e o f cert ai n am ou n t s cl ai m edfo r t h e Ub er d ri v i n g b u s i n es s , cap i t al ex p en di tu res . See s ecs . 1 7 9 , 1 9 5 , 2 6 3
.-1 5
-

[* 1 5 ] II. Sch edu l e A Dedu ct i o ns A. M o rt g ag e In teres tan dPo i n t s Attri al p et it i on ers m ad e n o arg u m en tan dp ro v i d edn o s ub s t an t i at i o n fo r t h e p o rt i on o f t h e m o rt g ag e i n t eres td edu ct i o n th atres po n d en td i sal l o wed . Pet i t i o n ers h av e n o tes t ab l i sh eden t it lem en tt o m o rt g ag e i n t eres t d edu ct i on s g reat er t h an
res p o n d en t al l owedi n th e n o t i ce o f d efi ci en cy . B. Un rei m

b urs edEm

p l o y ee Bu s i n es s Ex pen s es Pet i t i o ners cl ai m ed , an dres p o n d en td i s al l o wed , u n rei m b urs edem

p l o y ee b u s i n es s ex p en s e d edu ct i on s o f $ 2 0 , 8 9 1 fo r 2 0 1 3 an d$ 9 , 6 7 8 fo r 2 0 1 4
. Th e p erfo rm an ce o f s erv i ces as an em p l o y ee i s co n s id ereda t rad e o r b u s i n es s . Pri m

u th v . Co m

m i ss i o n er, 5 4 T.C. 3 7 4 , 3 7 7 -3 7 8 (1 9 7 0). Anem p l o y ee b u s i n es s ex p en s e i s n o to rd i naryan dn eces s ary , h o wev er, i f t h e em p l o y ee i s
en t i t l edt o rei m

b u rs em en tfro m

h i s o r h er em

p l o y er. See 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 ); No z v . Co m m i ss i o ner, T.C. M em o . 2 0 1 2 -2 7 2 , at* 22 . Fu rt h erm o re, p ers o n al , l i vi n g, o r fam i l y ex p en s es are g en eral l y
n o td edu ct i b l e. Sec. 2 62 (a). Attri al p et it i on ers m ad e n o arg u m en tan dp ro v i d edn o s ub s t an t i at i o n fo r t h e
u n rei m b u rs edem

p l o y ee b us i nes s ex p en s es . Th ey h av e n o t es t ab l i sh edth atth e rep o rt edex p en s es were i n cu rredo r, i f i n cu rred , were n o trei m b u rs edb y th ei r-1 6
-

[* 1 6 ] em p lo y ers . Co n seq u en t l y , we s u s tai n res p on d en t ’ s d et erm i n at i o n t h at p et i t i o n ers are n oten ti t l edt o d edu ct i on s fo r u n rei m b u rs edem

p l o y ee b u si nes s
ex p en s es fo r 2 0 1 3 an d2 0 1 4
. III. Dep en d en cy

Ex em p t i o n Dedu ct i on fo r Qu al i fy i n g Ch i l d Ani n d i v idual i s al l o weda d edu ct i o n fo r an ex em p t i o n fo r “ each i n d i v i du al wh o i s a d ep en d en t(as d efi n edi n s ect i o n 1 5 2 ) o f t h e t ax pay er fo r t h e t ax ab l e y ear.” Sec. 1 5 1 (c). Sect i o n 1 5 2 (a) d efi n es a “ d ep en d en t ” t o i n cl u d e a “ qu al i fy i ng ch i l d ”. Gen eral ly , a “ qu al i fy i ng ch i ld ” m u s t : (1 ) b ear a s p eci fi edrel at i o ns h i p t o th e t ax p ay er; (2 ) h av e t h e s am e p ri n ci p al p lace o f ab o de as the t ax p ay er fo r m o re th an o ne-h al f o f t h e t ax ab le y ear; (3 ) m eetcert ai n ag e req u i rem en t s ; (4 ) n o th av e p ro v id edo v er o n e-h al f o f h i s o r h er o wns up po rtfo r t h e y ear at i s s ue; an d(5 ) n o t h av e fi l eda jo i n tretu rn (o th er t h an a cl ai m fo r refu n d ) wi th a s p o us e fo r t he t ax ab l e y ear. Sec. 1 5 2 (c)(1 ). Th e n o t i ce o f d efi ci en cy

i n cl u d edan ad

ju s t m en t fo r “ Dep en d en tCh i l dren -- Li v e wi th Tax pay er”, ex p lai n i n g : “ W e d i s al l o w edth e am o u n ts h o wn o n y o u r retu rn b ecau se we d i d n o trecei v e an an s wer t o o u r req u es tfo r s up p o rt i n g i n fo rm at i o n . To b e al l oweda d educt i o n , ex p en s e, ex em p t i o n, cred i t , o r o ther t ax-1 7
-

[* 1 7 ] b en efi t, y o um

u s tes t ab l i s h thaty o u h av e m et al l req u irem en t s o f t h e l aw.” 1 0 Res po n d en t ’ s an s w er an dp ret ri al m em o ran du m p ro vi d ed n o fu rt h er cl ari fi cat i o n
o r ex p lan at i on o f th e g ro u n d s up o n wh i ch th e d ep en d en cy ex em p t i o n d educt i o n s were d i s al l o w ed . Res p o n d en t ap p ears t o d i s p u t e wh et h er M r. Po k awa an dh i s ch i l dren h adth e s am e p ri n ci p al p l ace o f ab o d e fo r m o re t h ano n e-h al f o f th e t ax ab l e y ear. M r. Po k awa h as two ch i l dren : a d au g h t er, H.J ., b o rn i n 1 9 9 6 , an da s o n , A.P., b o rn i n 2 00 2 . In2 01 3 H.J . res i d edwi th p et i t i o n ers fo r t h e en t ire y ear. In 2 0 1 4 A.P. res i dedwi th p et it i on ers fo r t h e en t i re y ear. M r. Po k awa ex p lai n edth at th i s l i v i n g arran gem en t w as d i ct at edb y th e fam i l y

m em b ers ’ p referen ces . W e are
s at i s fi edth atM r. Po k awa’ s d au g h t er an ds o n each s at i s fy th e rel at i o n s h ip req u i rem en tan d th e p ri n ci p al p l ace o f ab o de req ui rem en t . To b e a qual i fy i n g ch i l d , an i n di v i du al m u s tn o th av e at t ai n edag e 1 9 as o f th e cl o s e o f th e cal en d ar y ear i n wh i ch th e t ax p ay er’ s t ax ab le y ear b eg i n s o r el s e b e a s tu d en twh o h as n o t at t ai n edag e 2 4 du ri n g th at s am e y ear. Sec. 1 5 2 (c)(1 )(C), (3 )(A). In 2 0 1 3 H.J . tu rn ed1 7 , an di n 2 01 4 A.P. turn ed1 2 . Acco rd i n g ly , each ch i l dm etth e ag e req ui rem en tfo r t h e y ear fo r wh i ch h e o r s he was cl ai m edas a

1 0 A s i m i l ar ex p l an at i on was i n cl u dedi n th e n o t i ce o f d efi ci en cy fo r m o s to f th e p ro p o s edad

ju s tm en t s .-1 8
-

[* 1 8 ] qu al i fy i n g ch i ld
. Res p o n d en th as n o t ex pres s l y co n t en dedan d n o thi n g i n th e reco rds u g g es t s thatH.J . o r A.P. p ro v i dedm o re th an o n e-h al f o f h i s o r h er o wn
s up p ortfo r t h e y ears ati s s u e o r t h atH.J . o r A.P. fi l ed a jo in tretu rnwi th a s p o u s e fo r t h e y ears ati s su e. In s u m , we co n cl u d e an d h o l dth atH.J . was a “ qu al i fy i ng ch i l d ” fo r p et i t i o n ers ’ 2 0 13 t ax y ear an d A.P. was a “ qual i fy in g ch i l d ” fo r t h ei r 2 0 14 t ax y ear; co ns equ en t l y , p et i t i o n ers are en t i tl ed t o t h e d i s p u t ed d ep en d en cy ex em p t i o n d educt i o n s fo r 2 01 3 an d2 0 1 4
. IV. Edu cat i on Cred it s Th e Am eri can Op p o rtu n i ty Cred i ti s a m od i fi ed v ers io n o f th e Ho p e Sch ol ars h i p Cred i t . Sec. 2 5A(i ). Th e Am eri can Op p o rtu n i ty Cred i tp ro v i d es fo r a cred i tag ai n s tt ax equ al t o “ (A) 1 0 0 p ercen t o f s o m u ch o f th e qual i fi edtu i t i o n an d rel at ed ex p en s es p ai db y

th e t ax p ay er du ri n g th e t ax ab l e y ear * * * as d oes n o t
ex ceed $ 2,0 0 0 , p l u s (B) 2 5 p ercen to f s uch ex pen s es s o p ai das ex ceed s $ 2 ,0 0 0 b u t d o es no tex ceed $ 4 ,0 0 0 .” Sec. 2 5 A(i )(1 ). Th e cred i t p h as es o utfo r a t ax p ay er wh o s e m o d i fi edad

ju st edg ro s s i n co m e ex ceed s $ 80 ,0 0 0 , o r $ 1 6 0 ,0 0 0 fo r m arri ed t ax p ay ers fi l i n g jo i n tretu rn s . Sec. 2 5 A(i )(4 ). In ad d i t i o n, up t o 4 0 % o f th is cred i t
m ay b e refu n dab l e. Sec. 2 5 A(i )(5 ).-1 9
-

[* 1 9 ] Pet i ti o n ers cl ai m ed , an dres p o n d en td is al lo wed , th e Am eri can Op p o rtu n i ty Cred i tfo r 2 0 1 3 an d 2 0 1 4
. Pet it i o n ers i n tro du ced n o ev i d en ce t en di n g t o s h o w th at th ey were el ig i b l e fo r t h i s cred i tfo r 2 0 13 o r 2 0 1 4 . Th ey p ro du cedn o reco rd s o f tu i t i o n p aym en t s o r edu cat i o n al ex p en s es rel at edt o M r. Po k awa’ s cl ai m ed edu cat i o n al act i v i t i es . Pet i t i on ers h av e n otm etth ei r b urd en o f p ro v i n g
en t i t l em en tt o th e Am eri can Op p o rtu n i ty Cred i ts . Acco rd i n g ly , we s u s tai n
res p o n d en t’ s d i s al l o wan ce o f the cred i t s . V. Sect io n 7 2 (t ) Ad d i t io n al Tax Gen eral ly , s ect i o n 7 2 (t )(1 ) i m p o s es an ad d i t i o n al t ax o n an earl y d i s tri b u t i o n fro m a qual i fi edret irem en tp lan equ al t o 1 0 % o f t h e p o rt i o n o f t he d i s tri b u t i o n th at i s i ncl u d i b l e i n g ro s s i n co m e. Th e ad d i ti o n al t ax i s i n t en ded t o d i sco u rag e t ax p ay ers fro m

t ak in g p rem atu re d i s tri b u t i o n s fro m ret i rem en tp l an s . Dwy er v . Co m m i s s i o n er, 1 0 6 T.C. 3 3 7 , 3 4 0 (1 9 9 6); s ee al s o S. Rep t . No . 9 3 -3 83 , at1 3 4 (1 9 7 4), 1 9 74 -3 C.B. (Sup p . ) 8 0 , 2 1 3 . Th e ad d it i o n al t ax u n d er s ect i o n 7 2 (t ) d o es
n o tap pl y t o cert ai n d i s tri bu t i o n s fro m qu al ifi edret i rem en t p l an s , i n cl u d i n g d i s tri b u t i o n s : (1 ) t o anem p l o y ee ag e 5 9 -1 / 2 o r o l d er o r (2 ) t o u n em p l o y ed i n d i v i du al s fo r h eal th i n s u ran ce p rem iu m s . Sec. 7 2 (t )(2 )(A)(i ), (D). Th ere i s n o
ex cep t i o n u n d er s ect i o n 7 2 (t ) fo r fi nan ci al h ard s h i p . See Arn o l dv . Co m m i s s i o n er,-2 0
-

[* 2 0 ] 1 1 1 T.C. 2 5 0 , 2 5 5 (1 9 9 8 ); Gal l ag h er v . Co m m is s i o n er, T.C. M em o . 2 0 0 1
- 3 4 ; Deal v . Co m

m i s s i o n er, T.C. M em o. 1 9 99 -3 5 2
. Pet i t i o ners d o n otd i sp u t e t h atth e d i s tri b u t io n s i n 2 0 1 3 an d2 0 1 4 o f $ 8 3 ,4 8 0
an d $ 1 2 ,4 4 8 , res p ect i v el y , were earl y d i s tri b u t io n s fro m a qu al i fi edret i rem en t p l an . In d eed , th ey

p ro p erl y i n cl u d ed th e d i s tri b u ti o n s i n g ro s s i n co m e fo r b o th 2 0 1 3 an d2 0 1 4 . OnFo rm s 5 3 2 9 p et i t i o ners i n d i cat edex cep t i on No . 1 2 fo r

“ Oth er” wi th o u t fu rt her ex p l an at i on fo r 2 0 1 3 an dex cep t i o n No . 7 fo r “ IRA d i s tri b u t i o n s m ad e t o u n em p l o y edi n d i v i du al s fo r h eal th i n s uran ce p rem i um s ” fo r 2 0 1 4 . M r. Po k awa t es t i fi edth ath e “ s p en tal l th e m on ey * * * [h e] was ab l e t o g et fro m * * * [h i s ] 4 0 1 (k ) o r ret i rem en t” o n h i s v ari o u s b u si n es s v en tu res . Pet i t io n ers p ro du ced n o ev i d en ce t o s h o w th atth ey m eet an y o f t h e ex cep t i o n s
u n d er s ect i o n 7 2 (t )(2 ). Acco rd i n g l y , we s u st ai n res po n den t’ s d et erm i n at i o n th at p et i t i o n ers are l iab l e fo r t he s ect i o n 7 2 (t ) ad d i ti o n al t ax fo r 2 0 1 3 an d 2 0 1 4
. VI. Sect io n 6 6 6 2 (a) Pen al t i es Res p o n d en td et erm i n edth at fo r each y ear at i s s u e p et i ti o n ers are l i ab l e fo r a 2 0 % accu racy -rel at edp en al ty p u rs u an tt o s ect i o n 6 6 6 2 (a) an d(b )(1 ) an d(2 ) fo r an
u n d erp aym en t at tri b u t ab l e t o n eg l i g en ce o r 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 . Res po n den tb ears the b u rd en o f p ro du ct i o n wi th res pect t o thi s p en al ty . See
s ec. 7 4 91 (c). To m eet th i s b urd en , res p o n d en t m u stp ro duce ev i d en ce es t ab l i s h i n g-2 1
-

[* 2 1 ] th ati ti s ap p ro p ri at e t o i m p o s e t h i s p en al ty . On ce res po n den t h as d o n e s o , th e b u rd en o f p ro o f i s upo n p et i t i o n ers t o s h o w th atthey are n o t l i ab le fo r t h e p en al ty . See Hi g b ee v . Co m m i s s i o n er, 1 16 T.C. 4 3 8 , 4 4 9 (2 0 0 1). Neg l i g en ce i n cl u d es an y

fai l u re t o m ak e a reas on ab l e at t em p t t o co m p l y wi th th e p ro v i s i on s o f t h e i n t ern al rev en u e l aws an di s th e fai l ure t o ex erci s e du e
care o r t h e fai l u re t o d o wh ata reas on ab l e an dp ru den tp ers o n wo u l dd o u n d er t h e ci rcu m s t an ces . Sec. 6 6 6 2 (c); Neel y v . Co m m i s s i on er, 8 5 T.C. 9 3 4 , 9 4 7 (1 9 8 5 );
s ec. 1 .6 6 62 -3 (b )(1 ), In co m e Tax Reg s . Neg l ig en ce al s o i n cl u des an y fai l u re b y th e t ax p ay er t o k eep ad equ at e b o o k s an d reco rd s o r t o s ub s tan t i at e i t em s p ro p erl y . Sec. 1 .6 6 6 2 -3 (b )(1 ), In co m e Tax Reg s . Pet i t i o n ers ex h i b it eda l acko f du e care i n fai l i n g t o k eep ad equ at e b oo k s an dreco rd s an di n fai l in g t o p ro p erl y s ub s tan t i at e
ex p en s es u n d erl y i n g cl ai m edd edu ct i o n s an dcred i t s . Res p o n d en th as carri edh i s b u rd eno f p ro du ct i o n wi th res p ectt o th e s ect i o n 6 6 6 2 (a) p en al ty fo r n eg l ig en ce. Sect io n 6 6 6 2 (a) an d(b )(2 ) i m p o s es th e accu racy -rel at edp en al ty o n an y p o rt i on o f a t ax u n d erp aym en tth ati s at tri b u t ab l e t o an y s ub s t an t i al u n d ers t at em en t
o f i n co m e t ax , d efi n edi n s ect i on 6 6 6 2 (d )(1 )(A) as an u n ders t at em en tth atex ceed s th e g reat er o f 1 0 % o f t h e t ax req u i redt o b e s h o wn o n th e ret u rno r $ 5 ,0 00 . Th e
ex actam o u n t s o f p et i t i o n ers ’ u n d erp aym en ts wi ll d ep en dup on th e Ru l e 1 5 5
co m p u t at i o n s , i n acco rd an ce wi th o u r fi n d i n g s an dco n cl u s i o n s . To th e ex t en tth at-2 2
-

[* 2 2 ] th o s e co m

p ut at i o ns es t ab l i s h th at p et i t i o n ers h av e s ub st an t i al
u n d ers t at em en t s o f i nco m e t ax , res p o n d en th as al s o m eth i s b u rd en o f p ro du ct i o n i n thi s reg ard . See Pri n ce v . Co m m is s i o n er, T.C. M em o . 2 0 0 3 -2 4 7
. Th e accu racy -rel at edp en al ty d o es n o tap p l y

wi th res pect t o an y

p o rt i o n o f
an u n d erp aym en t i f t h e t ax p ay er act edwi th reas o n ab le cau s e an d i n g o o dfai th wi th reg ardt o th at po rt i o n . Sec. 6 6 64 (c)(1 ). Th at d et erm i n at i on i s m ad e cas e b y
cas e, d ep en d i n g o n th e fact s an dci rcu m s t an ces . Sec. 1 .6 6 6 4 -4 (b )(1 ), In co m e Tax Reg s. Th o s e ci rcu m s t an ces i n cl u d e t h e ex p eri en ce, kn o wl ed ge, an dedu cat i o n o f th e t ax p ay er. Id . Pet i t i o n ers h av e m ad e n o at t em p t t o es t ab l i s h reas o n ab l e cau s e
an d g o o dfai th . M o reo v er, M r. Po k awa, d es p i te h av i n g a t ax retu rn p rep arat i o n b u s i n es s , fai l edt o k eep ad equ at e b o o k s an d reco rd s an dt o p ro p erl y s ub s t an t i at e
ex p en s es u n d erl y i n g cl ai m edd edu ct i o n s an dcred i t s . Acco rd i ng l y , we s u s t ai n res p o n d en t ’ s d et erm i nat i on th at p et i t io n ers are l i ab l e fo r t he s ect i o n 6 6 6 2 (a) p en al ti es fo r 2 0 1 3 an d 2 0 1 4 fo r n eg li g en ce an d , al t ern at i v el y , fo r s ub s t an ti al u n d ers t at em en t s o f i n co m e t ax i n s o far as th e Ru l e 1 5 5
co m p u t at i o n s s h o ws ubs t an t i al u n d ers t at em en t s .-2 3
-

[* 2 3 ] To refl ectth e fo reg o i n g , Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5
.