T.C. Memo. 2010-124

UNITED STATES TAX COURT

DAVID GEORGE KARKOUR, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16359-08. Filed June 8, 2010.

R determined a deficiency in P’s income tax and a

penalty pursuant to sec. 6662(a), I.R.C., for the 2005 tax

year. The deficiency and the sec. 6662(a), I.R.C., penalty

were based on P’s failure to substantiate deductions for: 

Self-employed health insurance expenses, business expenses,

Simplified Employee Pension plan, medical and dental

expenses, home interest expenses, and unreimbursed employee

business expenses.

Held: P is liable for the deficiency and the sec.

6662(a), I.R.C., penalty.

David George Karkour, pro se.

Nathan C. Johnston, for respondent.
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1Respondent concedes $6,543 of adjustments in the notice of

deficiency. This includes $2,095 of auto and gas expenses, $680

of auto insurance expenses, and $3,768 of auto rental expenses.

MEMORANDUM FINDINGS OF FACT AND OPINION

WHERRY, Judge: This case is before the Court on a petition

for redetermination of an alleged income tax deficiency and an

accuracy-related penalty that respondent determined for

petitioner’s 2005 tax year. After concession by respondent of

deductions for certain of the expenses petitioner claimed on his

Form 1040 Individual Income Tax Return, Schedule C, Profit or

Loss From Business,1 the issues left for decision are: 

(1) Whether petitioner is entitled to an additional claimed

$45,166 of Schedule C business expense deductions for the 2005

tax year; 

(2) whether petitioner is able to substantiate the remaining

$350 of the $2,300 deduction claimed on his return for selfemployed health insurance for the 2005 tax year;

(3) whether petitioner is entitled to a $1,900 deduction for

contributions to a Simplified Employee Pension plan (SEP) for the

2005 tax year;

(4) whether petitioner, having been allowed $40,180 of his 

$57,500 of deductions claimed on Schedule A, Itemized Deductions,

for the 2005 tax year can substantiate $17,320 of the additional

claimed Schedule A deductions for that year;
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2This amount will be resolved in the Rule 155 computations

in accordance with this opinion. All section references are to

the Internal Revenue Code of 1986, as amended and in effect for

the tax year at issue, and all Rule references are to the Tax

Court Rules of Practice and Procedure.

(5) whether petitioner is liable for $7,053 of selfemployment tax for the 2005 tax year;2

(6) whether petitioner is entitled to an additional selfemployment tax deduction of $3,527 for the 2005 year; and

(7) whether petitioner is liable for a section 6662(a)

accuracy-related penalty for the 2005 tax year.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated

facts and the accompanying exhibits are hereby incorporated by

reference into our findings. At the time he filed his petition,

petitioner resided in California.

In 2005 petitioner was self-employed as a lien collector;

his title was lien representative. He claimed $1,900 and $2,300

deductions for SEP and self-employment health insurance,

respectively. He deducted $51,709 in business expenses on

Schedule C for 2005. Petitioner included deductions on Schedule

A for medical expenses, home interest expenses, and unreimbursed

employee expenses. Petitioner filed a Schedule SE, SelfEmployment Tax, which included zero net earnings from selfemployment and subsequently listed zero self-employment tax owed. 
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Respondent issued a notice of deficiency on April 17, 2008,

determining an alleged income tax deficiency of $7,164 and an

accuracy-related penalty of $1,432.80. Petitioner filed a timely

petition with this Court on July 2, 2008, denying liability for

the deficiency. A trial was held on June 19, 2009, in Los

Angeles, California.

At trial petitioner testified about additional deductions

and expenses he believed he was entitled to but introduced no

other corroborating evidence. He candidly admitted that because

he did not expect to be audited he had not kept some required

financial records and was thus unable to provide sworn testimony

as to exactly which of his expenses were personal and which were

business in those areas for which records were not maintained. 

He pointed out, however, that he had kept or while under audit

obtained from third parties or reconstructed numerous records

substantiating many of his claimed deductions and expenses. He

believed that because of this, the other claimed expenses, or at

least some percentage thereof, should also be allowed. 

OPINION

I. Whether Petitioner Is Entitled to Additional Business

Expense Deductions

Deductions are a matter of legislative grace, and the

taxpayer must maintain adequate records to substantiate the

amounts of any deductions or credits claimed. Sec. 6001 (the

taxpayer “shall keep such records”); INDOPCO, Inc. v.
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Commissioner, 503 U.S. 79, 84 (1992); sec. 1.6001-1(a), Income

Tax Regs. In some circumstances the Court may allow the

deduction of a claimed expense even where the taxpayer is unable

to fully substantiate it, provided the Court has an evidentiary

basis for doing so. Cohan v. Commissioner, 39 F.2d 540, 543-544

(2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743

(1985). But see sec. 1.274-5T(a), Temporary Income Tax Regs., 50

Fed. Reg. 46014 (Nov. 6, 1985). In these instances, the Court is

permitted to approximate the allowable expense, bearing heavily

against the taxpayer whose inexactitude is of his or her own

making. Cohan v. Commissioner, supra at 544. However, the

record must contain sufficient evidence to provide a basis upon

which the estimate may be made and to permit us to conclude that

those expenses were deductible expenses, rather than

nondeductible personal expenses. Williams v. United States, 245

F.2d 559, 560 (5th Cir. 1957); Vanicek v. Commissioner, supra at

742-743. 

Section 162(a) authorizes a deduction for “all the ordinary

and necessary expenses paid or incurred during the taxable year

in carrying on any trade or business”. A trade or business

expense is ordinary for purposes of section 162 if it is normal

or customary within a particular trade, business, or industry and

is necessary if it is appropriate and helpful for the development

of the business. Commissioner v. Heininger, 320 U.S. 467, 471
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(1943); Deputy v. du Pont, 308 U.S. 488, 495 (1940). In

contrast, “personal, living, or family expenses” are generally

nondeductible. Sec. 262(a). Again, any amount claimed as a

business expense must be substantiated. Sec. 6001; Hradesky v.

Commissioner, 65 T.C. 87, 89-90 (1975), affd. 540 F.2d 821 (5th

Cir. 1976). The taxpayer is required to maintain “permanent

books of account or records * * * as are sufficient to establish

the amount of gross income, deductions * * * in any return of

such tax or information.” Sec. 1.6001-1(a), Income Tax Regs. In

sum, taxpayers must maintain records at least sufficient to

provide a basis on which the Court can estimate the business

expense deductions, to meet the substantiation requirement.

Petitioner’s 2005 Schedule C includes a long list of

business expenses. Respondent does not dispute that petitioner

operated a business. Instead, respondent points out that

petitioner failed to substantiate his business expense

deductions. At trial petitioner introduced no probative evidence

to substantiate those expenses. Petitioner has therefore not met

his burden of substantiation.

II. Whether Petitioner Is Able To Verify the Remaining $350

of the $2,300 Claimed on His Return for Self-Employed Health

Insurance

Section 162(l)(1) allows a self-employed individual to

deduct the cost of his health insurance, with some limitations. 

Respondent does not contest the fact that petitioner was self-
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employed or that he was entitled to deduct the cost of his health

insurance to the extent of $1,950. Petitioner was able to

substantiate $1,950 of his $2,300 deduction for self-employed

health insurance during the audit.

At or before trial petitioner presented no evidence to

substantiate the remaining $350 deduction for his self-employed

health insurance. Petitioner testified that he provided the

Internal Revenue Service (Service) with information on health

insurance and out-of-pocket expenses and the Service “made

reductions.” However, at trial he did not “specifically recall”

what the remaining $350 pertained to. Petitioner did not meet

his burden of substantiation.

III. Whether Petitioner Is Entitled to a $1,900 Deduction 

for Contributions to a SEP Account for the 2005 Tax Year

Contributions by an employer to an individual retirement

account or annuity meeting certain requirements described in

section 408(k) qualify as a SEP plan and may be deducted. A

person who is self-employed is treated as his own employer for

the purposes of a SEP plan. See secs. 401(c)(4), 408(k)(7). The

requirements of a SEP plan are extensive and complicated;

however, as petitioner cannot show that he made a contribution to

any account, we need not enumerate them here. 

Petitioner did not substantiate the $1,900 deduction for his

contributions to a SEP account for 2005. When the Court asked

him about the $1,900 deduction, petitioner testified: “I
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honestly don’t remember.” Petitioner did not attempt to

introduce any evidence related to this deduction. Again,

petitioner has failed to meet his burden of substantiation, and

this deduction is not allowable.

IV. Whether Petitioner Can Substantiate $17,320 of the Itemized

Deductions on Schedule A for 2005

The remaining deductibility issue, whether petitioner can

substantiate $17,320 of the itemized deductions on Schedule A for

the 2005 tax year, was not argued at trial or in petitioner’s

pretrial memorandum. Petitioner did not present any evidence to

substantiate these deductions and therefore failed to meet his

burden of substantiation. None of the $17,320 is allowable.

V. Whether Petitioner is Liable for $7,053 of Self-Employment

Tax and Entitled to the Resulting $3,527 Adjustment to

Adjusted Gross Income

Section 1401(a) imposes a tax of 12.40 percent on the selfemployment income of every individual. One-half of this tax is

then deductible from adjusted gross income (AGI) under section

164(f)(1). Petitioner showed zero self-employment income on his

Schedule SE; however, respondent determined that petitioner had

$49,917 of self-employment income and owed $7,053 of selfemployment tax. Petitioner is then allowed to deduct one-half

($3,527) of this self-employment tax from his AGI.

This issue was not argued at trial or in petitioner’s

pretrial memorandum. As a general rule, the Commissioner’s

determination of a taxpayer’s liability is presumed correct, and
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the taxpayer bears the burden of proving that the determination

is improper. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). Because petitioner has presented no evidence that the

determination of the self-employment tax was improper, we find

that petitioner owes $7,053 in self-employment tax and is

entitled to a $3,527 adjustment to AGI. 

VI. Section 6662(a) Penalty

Respondent determined that petitioner is liable for a

section 6662(a) penalty. Pursuant to section 7491(c), respondent

has the burden of production with respect to a taxpayer’s

liability for a penalty and is, therefore, required to “come

forward with sufficient evidence indicating that it is

appropriate to impose the relevant penalty.” See Higbee v.

Commissioner, 116 T.C. 438, 446 (2001). But see Swain v.

Commissioner, 118 T.C. 358 (2002). However, “once the

Commissioner meets his burden of production, the taxpayer must

come forward with evidence sufficient to persuade a Court that

the Commissioner’s determination is incorrect.” Higbee v.

Commissioner, supra at 447. 

 Subsection (a) of section 6662 imposes an accuracy-related

penalty of 20 percent of any underpayment that is attributable to

causes specified in subsection (b). Respondent asserts two

causes justifying the imposition of the penalty: A substantial
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understatement of income tax and negligence. Sec. 6662(b)(2),

(1).

There is an exception to the section 6662(a) penalty when a

taxpayer can demonstrate (1) reasonable cause for the

underpayment and (2) that the taxpayer acted in good faith with

respect to the underpayment. Sec. 6664(c)(1). Regulations

promulgated under section 6664(c) further provide that the

determination of reasonable cause and good faith “is made on a

case-by-case basis, taking into account all pertinent facts and

circumstances.” Sec. 1.6664-4(b)(1), Income Tax Regs.

There is a “substantial understatement” of income tax for

any tax year where the amount of the understatement exceeds the

greater of (1) 10 percent of the tax required to be shown on the

return for the tax year or (2) $5,000. Sec. 6662(d)(1)(A). 

Section 6662(a) also imposes a penalty for negligence or

disregard of rules or regulations. Under this section

“negligence” is “any failure to make a reasonable attempt to

comply with the provisions of * * * [the Internal Revenue Code]

this title”. Sec. 6662(c). 

Under caselaw, “‘Negligence is a lack of due care or failure

to do what a reasonable and ordinarily prudent person would do

under the circumstances.’” Freytag v. Commissioner, 89 T.C. 849,

887 (1987) (quoting Marcello v. Commissioner, 380 F.2d 499, 506

(5th Cir. 1967), affg. on this issue 43 T.C. 168 (1964) and T.C.
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Memo. 1964-299), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501

U.S. 868 (1991).

At trial respondent sought to justify application of the

penalty for either of two reasons, asserting both that there was

a substantial understatement of income tax and that petitioner

was negligent in the preparation of his return. Respondent met

his burden of production, and petitioner did not address the

section 6662(a) penalty at trial. We sustain the penalty. 

Petitioner presented no evidence that he had a reasonable cause

for any portion of the underpayment. See Basile v. Commissioner,

T.C. Memo. 2005-51 (“Because petitioners did not contest the

additions to tax or penalties in the petitions, they are deemed

conceded.” (citing Rule 34(b)(4) and Swain v. Commissioner,

supra)).

The Court has considered all of petitioner’s contentions,

arguments, requests, and statements. To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.

To reflect the foregoing,

Decision will be entered

under Rule 155.