T .C. Su m m ary Op i n io n 2 02 1 -2 4

UNITED STATES TAX COURT

DION E. M ONROE AND KIM M . M O NROE, Pet i t io n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 1 6 3 05 -1 7 S. Fi l edAu gu s t 1 1 , 2 0 2 1
.
Di o n E. M o n ro e an d Ki m M . M o nro e, p ro s es e. Do u gl as S. Po l s ky

an dJ o s ep h P. Ben o i s t, fo r res p o n d en t .
SUM M ARY OPINION COPELAND, Ju d g e: Th i s cas e was h eardp u rs uan t t o th e p ro v i s io n s o f
s ect i on 7 4 6 3 1 o f t h e In t ern al Rev en u e Co d e i n effect wh en th e p et i t i o n was fi l ed
.

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 Rev enu e Co de i n effect atal l rel ev an tt i m es , 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 dPro cedu re. Al l d o l l ar am ou n t s are ro u nd edt o th e (co n ti n u ed ...) Served 08/11/21- 2
-

Pu rs u an t t o s ect i o n 7 4 6 3(b ), th e d eci s i o n t o b e en t eredi s n o trev i ewab le b y an y
o th er co u rt , an dth i s o p i ni o n s h al l n o t b e t reat ed as p reced en tfo r an y o th er cas e. M r. an d M rs . M on ro e s eekred et erm i n at i o n o f t he fo l l o wi n g d et erm i n at i o n s b y th e In t ern al Rev en u e Serv i ce (IRS) s etfo rt h i n a n o t i ce o f d efi ci en cy d at ed Ap ri l 2 6 , 2 0 17 :

Year Defi ci en cy Accu racy -rel at edp en al ty s ec. 6 6 6 2 (a) 2 0 1 4 $ 12 ,7 2 7 $2 ,5 4 5 2 0 1 5 1 1 ,5 6 1 2 ,3 1 2 Th e i s s u es fo r d eci si o n are: 1
. wh et her t h e M o n ro es ’ g ro s s recei p t s o f $ 3 7 ,3 60 an d $ 2 3 ,8 6 0 fo r t ax y ears 2 0 1 4 an d2 0 1 5 , res p ect i v el y , rep o rt edo n Sch edu l es C, Pro fi to r Lo s s Fro m Bu s i nes s, s h o u l db e rech aract eri zedas “ o th er i n co m e,” an dwh et h er t h e am o u n t fo r 2 0 1 4 s h o u l d b e i n creas edt o t h e am o u n trep o rt edt o th e IRS b y thi rdp art i es , $ 3 8 ,8 6 2 ; 2
. wh et her t h e M o n ro es ’ ex p en s e d edu ct i o n s o f $ 5 4 , 3 33 an d$ 5 0 ,3 3 9 fo r t ax y ears 2 0 1 4 an d2 01 5 , res p ect i v el y , rep o rt edo n Sch edu l es C s h o u l d b e

1 (...co n t in u ed ) n eares td o l l ar.- 3
-

rech aract eri zedas m i s cel l an eo us i t em i zedd edu ct io ns rep o rt ab le o n Sch edul e A, It em i zedDedu ct i o n s ; 2 an d wh et h er t h o s e d edu ct i o n s h av e b een s ub s t an t i at ed ; 3
. wh et her t h e M o n ro es fai l edt o rep o rtd i v i d en di n co m e an dcap i t al g ai n i n co m e fo r t ax y ears 2 01 4 an d2 01 5 ; an d 4
. wh et her t h e M o n ro es are l i ab l e fo r s ub s t an t i al u n d ers tat em en to f i n co m e t ax p en al t i es u nd er s ect i o n 6 6 6 2 (a) an d(b )(2 ) fo r t ax y ears 2 0 1 4 an d2 0 1 5
. Back gro u n d 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 b y th is referen ce. Th e M o n ro es
res i dedi n Kan s as wh en th ey t i m el y fi l edth ei r p et it i on . Du ri n g 2 0 1 4 an d2 0 1 5 M rs . M on ro e recei v edwag es fo r wh i ch h er em p l o y er i s su edFo rm s W -2 , W ag e an dTax St at em en t . Duri n g th e s am e t i m efram e M r. M o n ro e was em

pl o y edas a car s al es m an atSh awn ee M i s si on Hy u nd ai (Sh awn ee),
an au to m o b i l e d eal ers h i p . He recei v edco m p en s at i o n fro m Sh awn ee fo r wh i ch th e p aren tco m

p an y fo r Sh awn ee i s s u edh i m

Fo rm s W -2 . Hi s co m

p en sat i on fro m Sh awn ee was b as eden t i rel y o n co m m i ss i o n s fo r t h e cars h e s o l d . Sh awn ee p ai d M r. M o n ro e co m

m i s s i o n s o f $ 72 ,3 0 5 an d$ 8 2 ,5 6 5 fo r t ax y ears 2 0 1 4 an d2 0 1 5 ,

2 If d edu ct i b l e o n Sch edu l e A rat her t h an Sch edul e C, t h e am o u n t s al l o wab le wo u l db e redu cedb y

th e 2 % fl o o r g en eral l y

ap p l icab l e fo r s u ch d edu ct i o n s.- 4
-

res p ect i vel y . M r. M on ro e was al s o el i g ib le fo r cert ai n p erfo rm an ce i n cen t i v e p aym en t s fro m

Hy u n dai M o t o r Am eri ca (Hyu n dai ) b as edo n the n u m b er o f n ew
cars that h e s o ld . Hy

u n dai p ai dM r. M o n ro e i n cen t iv e p aym en t s t o t al i n g $ 3 8 ,8 6 2
an d $ 2 3 ,8 6 0 du ri n g 2 0 1 4 an d2 0 1 5 , res pect i v el y . In o rd er t o faci l it at e h i s o v eral l car s al es , M r. M o n ro e en g ag edi n cert ai n
m ark et i n g act i v i t i es . Th o s e act i v i t i es i n vo l vedo fferi ng i n cen ti v es t o : (1 ) p o t en t i al cu s to m ers wh o t es tdro ve a Sh awn ee v eh i cl e fo r wh i ch M r. M o n ro e
was th e d es i g n at eds al es m an , (2 ) cu st o m ers wh o p urch as eda Sh awn ee v eh i cl e fo r wh i ch M r. M o n ro e was th e s al es m an , an d(3 ) p ers o n s wh o referred cu s t o m ers t o M r. M o n ro e. Th e v ari o u s i n cen t i ves i n cl u d eda free ro un do f g o lf fo r t w o p eo p l e, l u n ch , d in n er, a $ 10 0 g i ft card , o r t i ck et s t o a Kan s as Ci ty Ch iefs fo o tbal l g am e. M r. M o nro e wo u l d m ark etth es e i n cen t i v es b y t ak i ng a d ay

ev ery o th er weekt o dri v e a ci rcu i tal o n g wh i ch h e wo u l dd el iv er t o an dp o s tfl y ers atcert ai n t arg et ed i n s u ran ce ag en ci es , g o l f co urs es , g o l f s t ores , an djun k y ard s . Ond ay s wh en h e d ro v e t he ci rcu it , M r. M o n ro e u s eda p h o n e ap p l i cat i on (ap p ) t o trackh i s
m i l eag e. Th e ap p al lo w edh im t o m an u al l y

en t er t h e s t art in g o do m et er read i n g ; th en i t wo u l du s e t h e p h o n e’ s Gl o b al Po s i t i o n i n g Sy s t em recei v er t o trackm i l eag e dri v en an d , atth e en d , ad d t h e m i l eag e d ri v en t o th e i n i ti al o d o m et er read i ng t o cal cu l at e a fi n al o d o m et er read i n g . Th e ap p al s o al l o wedM r. M o n ro e t o g en erat e- 5
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a m il eag e l o g . Hi s m i leag e l o g s i ncl u d ed : (1 ) th e d at e; (2 ) t he t i m e t rav el was i n i t i at ed(b u tn o o th er t i m es ); (3 ) a d es cri p t io n , wh i ch i s ei th er “ [d ] el i v er fl y ers ” o r

“ [d ] el i ver fl y ers / [s ] etup t o u rn ”; (4 ) a p urp o s e, wh i ch i s al way s “ [b ] u s i n es s ”; (5 ) a

“ Fro m ”, wh i ch i s al way s “ Ho m e”; (6 ) a “ To ”, wh ich i s al way s “ Go l f St ores ”,

“ Go l f Co u rs es ”, “ Ju n kYard s ”, o r “ In s u ran ce Ag en ts ”; (7 ) a b eg in n i n g o d o m et er read i n g ; (8 ) an en d i n g o d om et er read i n g ; an d (9 ) a m i l eag e cal cu l at i o n . M r. M o n ro e’ s 2 0 14 m i l eag e l og refl ect s 1 9 ,9 0 7 b us i n es s m i l es dri v en , an dh i s 2 0 1 5
m i l eag e l o g refl ect s 1 5 ,6 1 0 b u s i n es s m i l es dri v en . M r. M o nro e was s u cces s fu l en o u g h ats el l in g n ew cars th ath e recei v ed
s ub s t an t i al i n cen t i v e p aym en t s fro m Hy un d ai
. Hy

u nd ai i s s u edthe i n cen t i ve p aym en t s t o M r. M o n ro e b y dep o s i t i ng fu n d s d i rect l y o n t o a p rep ai dcardi s s u edi n h i s n am e. M r. M o n ro e treat ed h i s p rep ai d card acco u n t as h is b u s i n es s acco u n t
an d u s edi tt o p ay co s t s as s o ci at ed wi th th e ab o v e-d es cri b edm ark et i ng act i v i t i es . Am o n g o th er ex p en d itu res h e i n cu rred , M r. M o n ro e p u rch as edad v ert i si n g
s up p li es an dp ro v i d ed h i s cu s t o m ers wi th p ri zes s u ch as g o l f ro u nd s an dm eal s
u s i n g h i s Hy

u nd ai p rep ai dcard . As an ex am pl e o f h o w M r. M o n ro e u s ed th e p rep ai dcard t o track ex pen s es , a cu s t o m er m i g h t p u rch as e a n ew Sh awn ee v eh i cl e th ro u g h M r. M o n ro e atth e b eg i n n in g o f t h e weekan dM r. M on ro e wo ul dt ak e t h at
cu s t o m er t o l u nch l at er i n th e week . M r. M on ro e wo ul dp ay fo r l u n ch wi th h i s- 6
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p rep ai dcard
. On ce a weekh e u s edth e p rep ai dcardacco u n t ’ s o n l in e feat u res t o g en erat e a s p read s h eet , an dh e wo u l dty pe n o t es i n the s p read s h eet reg ard i n g th at week ’ s ex p en s es . Th i s al l o wedM r. M on ro e t o cat eg o ri ze h is ex p en s es . In p rep arat i o n fo r t ri al M r. M o n ro e al s o ad d edh an dwri t t en n o t at i on s , s u ch as
cu s t o m ers ’ n am es , t o th e p rep ai dcardtran s act i on s p read s h eet s . Occas i o nal l y , M r. M o nro e wo u l dch arg e a m ark et i n g ex p en s e t o a p ers o n al
acco u n t th ath e h el dwi th Ban ko f Am eri ca. In th atci rcu m s t an ce h e wo u l d
an n ot at e t h e ex p en se d i rect l y th ro u g h an o n l i ne feat u re o f t h atacco u n t . Fo r b o th y ears ati s s u e, M r. M o n ro e p ro v i d edth e IRS wi th h i s reco rd s fro m Ban ko f Am eri ca, th e p rep ai dcardtran sact i o n s p read s h eet s , h i s cu s t o m er l i s t , an d th e
m i l eag e l o g fro m

h i s ap p . Inp rep arat i o n fo r t ri al M r. M o n ro e ad d edcu s to m er
n am es an do th er h an dwri tt en n o t at i o n s o n h i s cu s t om er l is t an dBan ko f Am eri ca b an k s tat em en t s . W i th reg ardt o i ncen t i ve p aym en t s , Hy u n dai i s s u ed M r. M o n ro e Fo rm s 1 0 9 9 -M ISC, M i s cel l an eo us In co m e, rep o rt in g th ati tp ai dh i m $ 3 8 ,8 6 2 an d $ 2 3 ,8 6 0 i n 2 0 1 4 an d2 0 1 5 , res pect i v el y . Pet i t i o n ers t i m el y fi l edth ei r 2 01 4 an d 2 0 1 5 jo i n tt ax return s o n Fo rm s 1 0 4 0 , U.S. In d i v i du al In co m e Tax Retu rn .- 7
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M r. M o n ro e rep o rt edth e fo l lo w i n g i n co m e an d ex p en s e i t em s o n Fo rm s 1 0 4 0 , Sch edu l es C: 2 0 14 2 0 1 5 Gro s s i n co m e $ 3 7 ,3 6 0 $ 2 3 ,8 6 0 Ex p en s e Ad vert i s in g 1 ,3 4 7 68 5 Car an dtru ck 2 0 ,1 7 1 1 3 ,6 9 4 Co m m i s s i on s an d fees 2 ,1 5 2 -0
- Co n tract l ab o r 2 ,5 3 5 -0
- Dep reci at i o n an ds ec. 1 7 9 1 ,6 9 6 1 ,2 0 6 Leg al an d p ro fes s i o n al 2 ,7 8 6 6 ,0 0 0 Offi ce 2 ,3 5 1 9 ,8 1 0 Ren to r l eas e o f v eh i cl es , m ach in ery , an d equ i p m en t -0
- 98 0 Rep ai rs an d m ai nt en an ce 1 ,2 7 5 -0
- Sup p l i es 2 ,5 9 4 2 ,5 2 6 Tax es an dl icen s es 2 ,1 5 1 -0
- Trav el 6 ,4 3 7 9 ,6 3 3 Dedu ct i b l e m eal s an den t ert ai n m en t 3 ,1 5 5 2 ,3 8 0 Ut i l i t i es 1 ,5 8 9 -0
- Oth er 4 ,0 9 4 3 ,4 2 5 To t al ex p en ses 5 4 ,3 3 3 5 0 ,3 3 9 Neti n co m e o r l o ss ! 1 6 ,9 7 3

! 2 6 ,4 7 9- 8
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In cal cu l at i ng th e car an dtru ckex p en s es l i s tedi n th e t ab l e ab o v e fo r 2 0 1 4 , th e M o n ro es rep o rt edth ree v eh i cl es an dthei r as s o ci at edm i l eag es o n Fo rm 4 5 6 2 , Dep reci at i o n an dAm o rt i zat i o n , as fo l l o ws : M ak e o f car Bu si n es s Co m m ut i n g Pers on al To t al Au d i A 2 ,8 1 5 4 1 2 9 0 3 , 3 1 7 Au d i A6 1 4 ,3 6 7 3,2 1 1 9 8 6 1 8 , 5 6 4 Vo l k s wag en 1 6 ,8 5 5 6,2 1 1 2 ,2 7 9 2 5 , 3 4 5 2 0 14 To t al s 3 4 ,0 3 7 9,8 3 4 3 ,3 5 5 4 7 , 2 2 6 Fo r 2 0 1 5, the M o n ro es rep o rt edfi v e v eh i cl es an dth ei r as s o ci at edm i l eag es
o n Fo rm 4 5 6 2 as fo l l o ws : M ak e o f car Bu s i nes s Co m m ut i n g Pers on al To t al Hy u n d ai So n at a 6 , 4 3 2 11 7 ,8 9 0 1 4 , 3 3 3 Hy u n d ai Gen es i s 9 , 1 7 8 7 1 ,0 4 5 1 0 , 2 3 0 Au d i 3 , 1 7 8 7 3 2 5 3 , 5 1 0 Au d i A6 2 0 8 0 1 3 7 3 4 5 Vo l k s wag en 2 ,4 3 5 10 4 4 5 2 , 8 9 0 2 0 1 5 To t al s 2 1 ,4 3 1 35 9 ,8 4 2 3 1 ,3 0 8 Fo r 2 0 1 4, the “ d ep reci at io n an ds ect i o n 1 7 9 ” ex p en s e l i s t ed i n t h e t ab l e
s up ra p . 7 was co m

p os edo f a s ect i o n 1 7 9 ex pen s e o f $ 1 ,6 9 6 (rep o rt ed l y fo r a d es k to p co m

p u t er an d a cel l p h o n e). In 2 0 1 5, i t was co m p o sedo f a s ect i o n 1 7 9- 9
-

ex p en s e o f $ 7 6 3 (rep o rt ed l y fo r a cel l p h on e) an dan M ACRS d ep reci at i o n d educt i o n o f $ 4 43 (fo r p ro p ert y p l aced i n s erv i ce i n a p ri o r y ear) fo r a t o t al o f $ 1 ,2 0 6
. Un rel at edt o h i s car s al es , M r. M o n ro e was i s s uedFo rm s 1 0 9 9-DIV, Di v id en ds an d Di s tri b ut i o n s , fro m Nat i on al Fi n an ci al Serv i ces LLC (Nat i o n al Fi n an ci al ) fo r 2 0 14 an d 2 0 1 5 ; th o s e fo rm s rep ort ed t ax ab l e d i v id en di nco m e o f $ 7 4 an d$ 1 0 2 , res p ect iv el y . Th e M o n ro es fai l ed t o rep ortan y d i v i d en di n co m e o n th ei r 2 01 4 o r 2 0 1 5 jo i n treturn . Si m i l arl y , Nat i o nal Fi n an ci al i s s u edM r. M o n ro e Fo rm s 1 09 9 -B, Pro ceed s Fro m Bro k er an dBart er Ex ch an g e Tran s act i o n s, rel at i n g t o t h e s al es o f s t ock . Fo r 2 0 1 4 tho s e s al es am o u n tedt o $ 1 3 4 i n s h ort -t erm cap i t al g ai n an d $ 1 ,9 3 0 i n l o n g t erm cap i t al g ai n . Fo r 2 01 5 tho s e s al es am o un t ed t o $ 6 2 6 i n s h o rt -t erm cap i t al g ai n an d$ 28 4 i n l o n g -t erm cap i t al g ai n . Th e M on ro es fai l edt o rep o rtan y cap i t al g ai n i n co m e o n t h ei r 2 0 1 4 o r 2 0 1 5 jo i n tretu rn . On e o f t h e IRS rev en u e ag en t s i n v o l v edi n th e ex am i n at io n o f t h e M o n ro es ’ t ax return s fo r 2 0 1 4 an d2 0 1 5 was Sh ei l a Al ex an d er. Du ri n g th e ex am i n at i o n Rev enu e Ag en t Al ex an d er fi ll edo u ta Fo rm 3 00 , Ci v i l Pen al ty

Ap p ro v al Fo rm , d at edFeb ru ary

1 0 , 2 0 1 7 , requ es t i n g t o as s erta s ub st an t i al u n d ers t at em en t p en al ty fo r each y ear. On Feb ru ary 2 1 , 2 0 1 7 , M s . Pet ru s k a, t h e g ro up m an ag er fo r- 1 0 -

Rev enu e Ag en t Al ex an d er, s i g n edth e Ci v i l Pen al ty Ap p ro v al Fo rm . Sh o rt l y th ereaft er, o n Ap ri l 2 6 , 2 0 1 7 , a n o t i ce o f d efi ci en cy fo r th e rel ev an tt ax y ears was i s su edd en y i ng al l o f t h e M o n ro es ’ Sch edu l e C d edu ct i o n s , rech aract eri zi ng th e Sch edu l e C i n co m e as “ o th er i nco m e,” i n cl u di n g th e u n rep o rt edd i v id en d an d cap i t al g ai n i nco m e as u n rep o rt edt ax ab l e i n co m e, an d d et erm i ni n g s ect io n 6 6 6 2 (a) u n d erp aym en tp en al t i es at tri b u t ab le t o (1 ) n eg l i gen ce o r d i sreg ardo f ru l es
o r reg u l at i o n s , (2 ) s ub st an t i al u n d ers t at em en to f i n co m e t ax , o r (3 ) s ubs t an t i al
v al u at i o n o v ers t at em en t ev en th o u g h M s. Pet ru s k a’ s ap p ro v al was o n l y fo r a p en al ty fo r s ub s t an ti al u nd ers t at em en to f i nco m e t ax . 3 Di s cu ss i o n I. Bu rd en o f Pro o f Gen eral ly , th e IRS’ d et erm i n at io n o f a d efi ci en cy i s p res u m edco rrect , an da t ax p ay er b ears th e b u rd en o f p ro v i n g o therwi s e. See Ru l e 1 4 2 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 15 (1 9 33 ). Th e t ax pay er l i k ewi s e b ears th e b u rd en o f p ro v in g h i s o r h er en t i tl em en tt o d edu ct i o n s an do f s ubs t an ti at i n g th e am o u n t s p ai d fo r i t em s u n d erl y i n g cl ai m edd edu ct i o n s . INDOPCO, In c. v . Co m m i s si o n er, 5 0 3 U.S. 7 9 , 8 4 (1 99 2 ); s ec. 1 .6 00 1 -1 (a), In co m e Tax Reg s . Ata m i n i m u m a t ax p ay er

3 Attri al an di n h i s b ri efi n g th e Co m m i s s i o n er as s ert ed o n l y

th e s ub st an t i al u n d ers t at em en tp en al ty , co n s is t en twi th th e m an ag eri al ap p ro v al o b t ai n ed
.- 1 1 -

m u stp ro du ce b u s in es s reco rd s o r o th er ev i d en ce s ub st an t i at in g th e am o u n ts an d th e p u rp o s e o f t h e i tem s u n d erl y i n g d edu ct i o n s th atth ey as s ertth e IRS i m

p ro p erl y d i s al lo wedan dd em o n s trat e th atth e d edu ct i o n s are al l o wab l e. Sec. 6 0 0 1 ; Hi g b ee
v . Co m m i s s i o n er, 1 1 6 T.C. 4 38 , 4 4 0 (2 0 0 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 97 5 ), aff’ dp er cu ri am , 5 4 0 F.2 d8 2 1 (5 th Ci r. 1 9 7 6 ). If t h e t ax p ay er i n tro du ces cred i b le ev id en ce wi th res p ectt o an y fact u al i s s ue rel ev an tt o
as cert ai n i n g h is o r h er l i ab i l i ty an ds at i sfi es o th er co n d i t i o n s, th en th e b u rd en o f p ro o f s h i ft s t o res p o n d en t , th e Co m m i s s i o n er o f t h e IRS, wi th res p ectt o th ati s s u e. Sec. 7 4 91 (a)(1 ) an d(2 ). Th e M o n ro es h av e n o t arg u edth ats ect i o n 7 4 9 1 (a) ap p li es , n o r h av e t h ey

es t ab l is h edth ati t s req u i rem en t s are m et . Th e b u rd en o f p ro o f rem ai n s wi th t h em . II. An al y s i s Th e Co m m is s i o n er co n t en d s th atth e i n cen t i v e p aym en t s M r. M o n ro e recei v edfro m

Hy u nd ai were n o ts el f-em

p l o ym en t i n co m e an d th atan y rel at ed al l o wab le d edu ct i on s h o u ldh av e b een rep o rt ed as “ Oth er Ex p en s es ” o n Sch edu l e A, rath er t h an Sch edu l e C. 4 Th e Co m m i s si on er m ai nt ai n s th at s uch

4 Th e IRS’ p o s it i on i s thatth es e p aym en t s are “ Oth er Ex p en s es ” u n d er “ J o b Ex p en s es an d M o s tOth er M i s cel l an eo u s Deduct i o n s ” s ub j ectt o a 2 % ad

ju s t ed g ro s s i n co m e l i m i t at io n . See IRS Pu b l i cat i o n 3 2 0 4 , Au t o m o t iv e M an ufact u rers ’ In cen t i v e Pro g ram

(rev . Feb ru ary

2 00 8 ). Ho wev er, we n o t e t h atIRS p ubl i cat i o n s (co n ti n u ed ...)- 1 2 -

treat m en ti s p ro p er b ecau se M r. M o n ro e’ s act iv i t i es rel at ed t o s el l in g cars fo r Sh awn ee an dh i s recei pto f p aym en t s fro m Hy u n d ai was n o tfro m

a s ep arat e t rad e
o r b u si n es s . Th e Co m

m is s i o n er fu rt h er co n ten d s th atwe s h o u ldd i s al l o wal l o f M r. M o n ro e’ s cl ai m edSch edu l e A ex p en s e d edu ct i o n s fo r fai l u re t o ap p ro p ri at el y
s ub s t an t i at e. M r. M o n ro e co n t en d s th ath e was o p erat i n g an i n d ep en d en ttrad e o r b u s i n es s wi th res p ectt o i n cen t i v e p aym en ts an dth at m o s to f h i s ex p en s es are
s ub s t an t i at ed . W e ad dres s th e p art i es ’ co n t en ti o n s i n turn . A. In cen t iv e Paym en t s Nei ther p art y

cl ai m s th atM r. M o n ro e was a s tatu t o ry em p l o y ee u n d er
s ect i on 3 1 2 1 (d )(3 ) as t o th e Hy u n d ai i n cen t i v e p aym en t s. Th e Co m m i s s i o ner h as
n o tas s ert ed th at M r. M o n ro e i s l i ab le fo r s el f-em p l o ym en tt ax as t o t h e i n cen t i v e p aym en t s. Th e p art i es l i k ewi se d o n o td i s p u t e t h at M r. M on ro e was an em p l o y ee
o f Sh awn ee an d n o t an em p l o y ee o f Hy

u n dai an dth ath e earn edi n co m e fro m b o th
. M r. M o n ro e cl ai m s , as t o th e i ncen t i v e p aym en t s , th ath e i s i n th e m ark et i n g b u s i n es s . Ho wev er, “ n o tev ery i n co m e-p ro du ci n g an d p ro fi t -m ak i n g en d eav o r
co n st i tu t es a t rad e o r b us i nes s .” Co m m i s s i o n er v . Gro et zi n g er, 4 8 0 U.S. 2 3, 3 5

4 (...co n t in u ed ) d o n o t h av e t h e fo rce o f l aw. See M i l l er v . Co m m i s s i o n er, 1 1 4 T.C. 1 8 4 , 1 9 4 -1 9 5 (2 0 0 0) (“ Th e au th o ri t at i ve s o u rces o f Fed eral t ax l aw are t h e s t atu t es , reg u l at i o n s , an d ju d i ci al d eci s i o ns ; th ey d o n o ti n cl ud e i n fo rm al IRS p ub l i cat i o n s.”).- 1 3 -

(1 9 8 7). Th e s i tu at i on h ere i s th atth e M r. M o nro e’ s p ro fi t -b as edact i v i ty b en efi t ed h i s car s al es as an em

p l o y ee an dal s o h el p ed h i m recei v e i n cen t i ve p aym en t s fro m Hy un d ai . Thu s , th e fai res tch aract eri zat i o n o f t h e i ncen t i v e p aym en t s , es p eci al l y g i v en th e Co m

m i s s i o n er’ s co n ces s i o n as t o s el f-em p l o ym en tt ax , i s th atth e i n cen t i v e p aym en t s are s i m p l y i n co m e t o M r. M o nro e, an dwe s o h o l d
. In ad d it i o n , M r. M o nro e p ro v i d edn o ex p l an at io n fo r t h e d i fferen ce b et ween i n cen t i v e p aym en t s h e rep o rt edo n h i s retu rn fo r 2 0 14 , $ 37 ,3 6 0 , an d the am o u n t Hy un d ai rep o rt edt o th e IRS, $ 3 8 ,8 6 2 ; an dthu s , we h o l dh e recei v edth e h ig h er
am ou n tas rep ort edb y Hy u n dai
. 5 B. Ex p en s es Th e k ey i t em l eftfo r d i s p u t e i s wh et h er M r. M o n ro e’ s ex pen s es were
s u ffi ci en t l y

l i n k edt o an i nco m e-p ro du ci n g act i v i ty an ds ub s t an t iat ed . A cas h b as i s t ax p ay er m ay

d edu cto rd i n ary

an d n eces saryex p en s es p ai ddu 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 us i n es s . Sec. 1 6 2(a). Ho wev er, “ ex p en s es
n o ti n cu rredi n a t rad e o r b u s in es s act i vi ty b u ti n th e p ro du ct io n o r co l l ect i o n o f i n co m e are d educt i b l e o n l y as m i s cel l an eo us i t em izedd edu ct i o n s o n a Sch edu l e A. Secs . 6 7(b ), 2 1 2 (1 ).” Ken t o n v . Co m m i s s i o n er, T.C. M em o . 2 0 0 6 -1 3, 9 1 T.C.M
.

5 Wh il e s ec. 6 2 01 (d ) s o m et i m es p l aces up o n res p o nd en t a b u rd en as t o an am ou n trep o rt edas i n co m e o n an i n fo rm at i o n retu rn , we co n cl ud e t h at th i s i s n o t o n e o f t h o s e o ccas io ns .- 1 4 -

(CCH) 6 7 9 , 6 8 0 (2 0 0 6 ). Li k ewi s e, an i n d i v i du al p erfo rm i n g s erv ices as an
em pl o y ee m ay

g en eral l y d eductu n rei m

b u rs edem

p l o ym en t -rel at edex p en ses i n cu rredas m i s cel l an eo u s i t em i zedd edu ct i o n s o n Sch edu l e A. Id . Inb ot h cas es th e m i s cel l an eo u s i t em i zedd edu ct i o n s o f s u ch an i n di v i du al are d edu ct i b l e o n l y t o th e ex t en tth atth ey

ex ceed 2 % o f t h e t ax p ay er’ s ad ju s t edg ro s s i n co m e. Secs
. 6 3 (d ), 6 7(a) an d(b ), an d2 1 2
. If t h e t ax p ay er i s ab l e t o es t ab l i s h th ath e p ai do r i n cu rred a d edu ct i b l e
ex p en s e b u t i s u n ab l e t o s ub s t an t i at e t h e p reci s e am o un t , th e Co u rtg en eral l y m ay ap p ro x i m at e t h e d edu ct ib le am o u n t , b u to nl y i f th e t ax pay er p res en t s s u ffi ci en t
ev i d en ce t o es t ab l i s h a rat io n al b as i s fo r m ak i n g th e es t i m at e. 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 ). Ho wev er, cert ai n d edu ct i o n s
u n d er s ect i o n 2 7 4 are s ub jectt o s tri cts ubs t an t i at i o n ru l es th ats up ers ed e t h e Co h an ru l e; th o se d edu ct i o n s i n cl u d e: trav el , m eal s , en t ert ai n m en t, g ift s , an d
au t o m ob i l e ex p en s es . See s ecs . 2 74 (d ), 2 80 F(d )(4 ); San fo rdv . Co m m i s s i o n er, 5 0 T.C. 8 2 3 , 8 2 7 -8 28 (1 9 6 8), aff’ d p er cu ri am , 4 1 2 F.2 d2 0 1 (2 dCi r. 1 9 6 9); s ec. 1 .2 74 -5 T(a), Tem

p o rary In co m e Tax Reg s . , 5 0 Fed . Reg . 4 60 1 4 (No v . 6 , 1 9 8 5 ). Th e reco rdm

u s t s h ow t h atex pen s es were i n p u rs ui t o f p ro fi t rat h er t h an p ers o n al
an d th atth ey

were o rd i n ary

an d n eces s ary . Ru l e 1 42 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. at1 1 5 . To s at i s fy

a t ax p ay er’ s b u rd en o f s ubs t an ti at i o n , th e reco rdm us t- 1 5 -

refl ects u ffi ci en tp erm an en t reco rd s o r b o o k s o f acco un tt o s up p ortth e am ou n t s o f d educt i o n s cl ai m edo n the ret u rn . Sec. 6 0 0 1; s ec. 1 .6 0 01 -1 (a), (e), In co m e Tax Reg s. Th e Co m

m is s i o n er co n ced edth atal l o f M r. M on ro e’ s d edu ct i b l e ex p en s es
s h o u ldh av e b een rep o rt edo n Sch edu l e A, b u t arg u es th atth e ex p en s es are n o t
s up p ort edb y

th e reco rd . Wh ati s cl ear i s th atth e ex p en s es i n creas ed M r. M o n ro e’ s car s al es l ead i n g t o ex tra co m m i s s i o n s as an em

p l o y ee o f Sh awn ee an d atthe s am e t i m e al l o wedh i m t o p ro du ce s ub s t an t i al i n co m e fro m Hy u n d ai . Wh i le th e p art i es d i d n o t p ro v i d e th e Co u rta way t o d el in eat e b et ween ex p en s es rel at ed t o co m m i s s i o n s v ers us i n cen ti v e p aym en t s , i ti s cl ear t h atth e ex p en s es b en efi t ed b o th . W e d ecl in e t o m ak e a ran d o m g u es s as t o an y

s u ch b reak d o wnan dp ro ceed
o n th e b as i s o f res p on d en t’ s co n ces s i o n th atth e ex pen s es , t o th e ex ten t
s ub s t an t i at ed , are m i s cel l an eo u s i t em i zedd edu ct i o ns s ubjectt o th e 2 % fl o o r. See
s ecs . 6 7 , 2 1 2 W e n o wan al y ze each ex p en s e i n th e o rd er p res en t ed i n the t ab l e s up ra p . 7
. 1
. Advert i s i ng Th e M on ro es d educt ed$ 1 ,3 47 i n ad v ert is i n g ex p en s es fo r 2 01 4 an d$ 6 8 5 fo r 2 0 1 5 . M r. M o n ro e cred i b l y t es t i fi edreg ard i n g h i s ad v ert i s i n g p u rch as es an d p ro v id edco nt em

p o ran eo u s ly

an n o t at ed p rep ai dcardtran sact i o n s p read s h eet s- 1 6 -

s u ffi ci en t l y

co rro b o rat i n g h i s t es t i m o n y . W e h o l dth at the M o n ro es are en t i t l edt o th e ad v ert i s i n g ex p en s e d edu ct i o n s .

2
. Car an d Tru ckEx p en s es Th e M on ro es d educt ed$ 2 0 ,1 7 1 i n car an d t ru ckex p en s es fo r 2 0 1 4 , an d $ 1 3 ,6 9 4 fo r 2 0 1 5
. Ex p en ses rel at i n g t o p as sen g er au t o m o b i l es are s ub j ectt o th e
s tri cts ub s t an t iat i o n ru l es o f s ect i o n 2 7 4. Un der t hats ect i on , a t ax p ay er m u s t
m ai n t ai n ad equ at e reco rd s o r s u ffi ci en tev i d en ce co rro b o rat i n g h i s o wns t at em en t i n cl u d i n g th e fo ll o wi n g : (1 ) t h e am o u n to f each s ep arat e ex p en s e; (2 ) t h e m i l eag e fo r each b u s i n es s u s e o f t h e p as s en g er au t o m o b il e an dth e t ot al m i l eag e fo r al l p u rp os es du ri n g th e t ax ab l e p eri o d ; (3 ) t h e d at e o f th e b us i n es s u s e; an d(4 ) t h e b u s i n es s p u rp o s e o f t h e u s e. See s ec. 1 .2 74 -5 T(b )(6 ), Tem p oraryIn co m e Tax Reg s., 5 0 Fed . Reg . 4 6 0 1 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 g en eral l y req ui res th e t ax p ay er t o “ m ai n t ai n an acco un tb o o k , d i ary , l o g , s t at em en t
o f ex p en s e, t ri p s h eet s , o r s im i l ar reco rd ” p rep aredco n t em p o ran eo us l y

wi th th e
u s e o f th e p as s en g er au to m ob i l e as wel l as d o cu m en t ary ev i den ce o f th e i n d i v i du al , actu al ex p en ses . Id . p ara. (c)(2 ), 5 0 Fed . Reg . 4 6 0 1 7. M r. M o nro e’ s b an k s tat em en t s i n th e reco rdfo r t h i s ex p en s e i n cl u d e a ch arg e o f $ 5 7 7 .1 7 o n Ap ri l 1 3 , 2 0 1 5 . Th e o ffi ci al ch arg e was t o “ Ch eck card [XXXX] Dan Pro Au t o Care Len ex a.” Th e m arg i n co nt ai n s th e h an dwri t t en n o t e- 1 7 -

“ Au t o Rep ai r.” Fo r s ev eral reas o ns , th e i n fo rm at i o n p ro v i d edi s i n s u ffi ci en tt o
co rro b o rat e actu al v eh icl e ex p en s es . Fi rs t , we fi n dn o recei p tfo r t h e ch arg e. Seco n d , th e M o n ro es l i st edfi v e v eh i cl es o n thei r 2 0 1 5 t ax retu rn ; we are u n ab l e t o d eci p h er t o wh i ch v eh i cl e t h is ch arg e i s rel at ed . As a res u l t , we are fu rth er u n ab l e t o d et erm i n e wh i ch p ercen t ag e o f t h i s ch arg e i s at tri bu t ab l e t o b u s i n es s u s e an d wh i ch p ercen t ag e i s at tri b u t ab le t o p ers o nal u s e. See, e.g
. , Lars o n v . Co m m i s s i on er, T.C. M em o . 2 0 0 8-1 87 , 2 0 0 8 W L 2 9 8 63 8 7 , at* 5 ; s ec. 1 .2 7 4 -5 T (d )(2 )(i ), Tem p o raryIn co m e Tax Reg s ., 5 0 Fed . Reg . 4 6 02 5 (No v . 6 , 1 9 8 5 ). W e t h erefo re d en y an y d edu ct i o n s fo r act u al v eh i cl e ex p en s es . In l i euo f s ubs t an ti at i n g th e act u al am o u n t , t ax pay ers wh o d edu ctv eh i cl e
ex p en s es m ay i n s tead co m p u t e t h ei r d educt i on s th ro u g h u se o f a p red et erm i n ed
s t an d ardm i l eag e rat e. See, e.g ., Nas h v . Co m m i ss i o ner, 6 0 T.C. 5 0 3 , 5 2 0 (1 9 7 3 );
s ee al so s ec. 1 .2 74 -5 (j)(2 ), In co m e Tax Reg s . Th e s tan d ardm i l eag e m et h o d i n cl u d es an al l o w an ce fo r al l fi x edan dv ari ab l e co s t s o f a v eh i cl e, i n cl ud i n g d ep reci at i o n , m ai nt en an ce an drep ai rs , t i res , g as ol i n e, o i l , i n s u ran ce, an d o th er fees
. See Cam

p an a v . Co m

m i ss i o n er, T.C. M em o . 1 9 9 0 -3 9 5 ; Rev . Pro c. 2 0 1 0 -5 1 , s ec. 4 .0 2 , 2 0 1 0 -5 1 I.R.B. 8 83 , 8 8 4 -8 8 5 . Un d er t h e s t an d ard m i l eag e m et h o da t ax p ay er d edu ct s v eh i cl e ex p en s es i n an am o un t equ al t o th e p red et erm i n edrat e
s etb y the IRS each y ear m

u l t i pl i edb y

th e n u m b er o f b u s i nes s m i l es dri v en i n th e- 1 8 -

y ear. See s ec. 1 .2 74 -5 (j)(2 ), In co m e Tax Reg s . Fo r 2 0 1 4 , th e s tan d ardm i l eag e rat e was 5 6 cen t s p er m il e. See No t ice 2 0 1 3 -8 0, s ec. 3 , 2 0 1 3 -5 2 I.R.B. 8 2 1 , 8 2 1. Fo r 2 01 5 the s tan d ardm i l eag e rat e was 5 7 .5 cen t s p er m i l e. See No ti ce 2 0 1 4 -7 9 , s ec. 3 , 2 0 1 4-5 3 I.R.B. 1 0 0 1 , 1 0 0 1
. In ad d i t i o n t o cred i b l e t es t i m o n y , th e M o n ro es p ro vi d ed co n t em p o ran eo u s
m i l eag e l o g s , wh i ch th ey were ab l e t o rel at e b ackt o M r. M o nro e’ s cu s t o m er l i s t s . Fo r 2 01 4 M r. M o nro e’ s m i l eag e l o g s tat es th ath e d ro v e 1 9 ,9 0 7 m i l es fo r b u s i n es s p u rp os es . Si m i l arl y , M r. M o n ro e’ s 2 0 15 m i l eag e l o g s t at es thath e d ro v e 1 5 ,6 1 0
m i l es fo r b u s i n es s p u rp o s es . W e wi l l accep tth e m i l eag e s h own i n th e
co n tem p o ran eo u s m i l eag e l o g fo r each y ear. Th u s , we h o l dth atth e M o n ro es are
en t i t l edt o d edu ctcar an d tru ckex p en s es o f $ 11 ,1 4 8 (1 9,9 0 7 × .5 6 ) fo r 2 0 1 4 an d $ 8 ,9 7 6 fo r 2 01 5 (1 5,6 1 0 × .5 7 5 ).

3
. Co m m i s si o ns an dFees Th e M on ro es d educt ed$ 2 ,1 52 i n ex p en ses fo r co m m i ss i o n s an d fees fo r 2 0 1 4 an dn o n e fo r 2 0 1 5. Th e reco rdco n t ai n s n ei th er t es t i m o n y n o r s u ffi ci en t
s ub s t an t i at i n g ev i d en ce as t o wh atco m m i s s i o ns an d fees M r. M o n ro e p ai do r h o w th ey rel at edt o h i s wo rks el l i ng cars . W e t herefo re d en y th e co m m is s i o n s an dfees d educt i o n .- 1 9 - 4
. Co n tract Lab o r Th e M on ro es d educt ed$ 2 ,5 35 i n ex p en ses du ri n g 2 0 1 4 fo r co n tract l ab o r. Th ey d edu ct edn o s uch ex p en s es du ri n g 2 0 1 5 . Th e reco rd co nt ai n s n o ev i d en ce t o
s ub s t an t i at e t h es e ex p en s es . W e t herefo re d en y th e co nt ract l ab o r d edu ct i o n . 5
. Dep reci at i o n an dSect i on 1 7 9 Ex p en s e Deduct i on Th e M on ro es d educt eda s ect i o n 1 7 9 ex p en s e o f $ 1 ,6 9 6 fo r a d es k t o p
co m p u t er an da cel l p h o n e o n th ei r 2 01 4 retu rn , an da s ect i o n 1 7 9 ex p en s e o f $ 7 6 3 fo r a cel l p h o n e an dan M ACRS d ep reci at i o n d edu ct i o n o f $ 4 4 3 (fo r p ro p ert y p l aced i n s erv i ce i n a p ri o r y ear) fo r a t o t al o f $ 1 ,2 0 6 o n th ei r 2 01 5 retu rn . Th e
reco rdco n t ai n s n o ev i d en ce t o s ub s t an t iat e t h es e ex p en s es . W e t h erefo re d en y th es e d edu ct i o n s .

6
. Leg al an dPro fes s i o nal Serv i ces Fo r 2 0 1 4 an d2 01 5, res p ect i v el y , th e M o n ro es d edu ct ed$ 2 , 7 86 an d$ 6 ,0 0 0 fo r l eg al an dp ro fes s i o n al s erv i ces . M r. M o n ro e t es t i fi edth ath e co u l d n o t p ro duce an y

reco rd s as t o t h e 2 0 1 4 l eg al ex p en ses , an d h e was o th erwi se u n ab l e t o
s ub s t an t i at e t h os e ex p en s es ; we wi l l th erefo re d en y th e 2 0 1 4 l eg al an dp ro fes
s i on al s erv i ces d educt i o n . Reg ard i ng 2 0 1 5 , M r. M o n ro e s h owedth ath e m ad e p aym en t s t o t wo l aw fi rm s , “ Go rd o n & As s o ci at e” an d“ Tax Ti ger,” b u th e d i dn o t
es t ab l i s h h o w th e l eg al s erv i ces rel at edt o h is wo rks el l i n g cars . M r. M o n ro e’ s- 2 0 -

o wnt es t im o n y

i n d i cat edthatthe l eg al s erv i ces i n 2 0 1 5 were fo r an u n rel at ed d i s p u t e wi th th e IRS. W e d en y th i s 2 0 1 5 d edu ct i o n as wel l
. 7
. Offi ce Ex p en s es Th e M on ro es d educt ed$ 2 ,3 51 i n o ffi ce ex p en s es o n t h ei r 2 0 1 4 retu rn an d $ 9 ,8 1 0 o n th ei r 2 0 1 5 retu rn . M r. M o nro e p ro v i d edh i s p rep ai d card tran sact i o n
s p read s h eet s , wh i ch id en t i fi ed s ev eral “ o ffi ce” rel at edex p en s es . Fo r 2 01 4 h e l i st ed$ 3 5 3 fo r an o ffi ce co m p u t er, $ 1,0 6 9 fo r an o ffi ce d es k , an d $ 6 8 1 fo r an o th er
o ffi ce d es k . Th e o ffi ce d es k s an dthe o ffi ce co m p u t er d o n ot ap p ear t o h av e b een
u s ed in co n n ect io n wi th M r. M o n ro e’ s wo rk s el l i ng cars , an dh e d i d n o t o th erwi s e
m ai n t ai n o r p ro du ce ad equat e reco rd s fo r t h e rem ai n i n g 2 0 1 4 o ffi ce ex p en s es . Fo r 2 0 1 5 o ffi ce-rel at edi t em s were n o tl i s t edo n ei th er t h e p rep ai dcardtran sact i o n
s p read s h eet s o r b an ks t at em en t s an dwere n o t o th erwi s e s ub st an t i at ed . W e th erefo re d en y

th e o ffi ce ex p en s es d edu ct i o n s . 8
. Ren to r Leas e o f Veh i cl es , M ach in ery , an dEqu i p m en t Th e M on ro es d educt ed$ 9 8 0 i n ex p en s es rel at i n g t o th e ren t o r l eas e o f
v eh icl es , m ach i n ery , an dequ i p m en t fo r 2 01 5 ; an dn o s u ch ex p en ses fo r 2 0 1 4 . Th e
reco rdco n t ai n s n o ev i d en ce t o s ub s t an t iat e t h e ren to r l eas e ex p en s es . W e th erefo re d en y

th i s d edu ct i o n.- 2 1 - 9
. Rep ai rs an dM ai n t en an ce Th e M on ro es d educt ed$ 1 ,2 75 i n ex p en ses fo r 2 0 1 4 fo r rep ai rs an d
m ai n t en an ce. Th ey

d edu ct edn o s u ch ex pen s es fo r 2 0 1 5 . Th e reco rdco n t ai n s n o
ev i d en ce t o es t ab l i s h th es e ex p en s es . W e t h erefo re d en y th e rep ai rs an d
m ai n t en an ce d edu ct i o n.

1 0. Sup p l i es Th e M on ro es d educt ed$ 2 ,5 94 i n ex p en ses fo r s up p li es fo r 2 0 1 4 , an d $ 2 ,5 2 6 fo r 2 01 5 . M r. M o n ro e cred i bl y t es t i fi edreg ard in g h is s up pl y p u rch as es
an d p ro v i d edco nt em

p o ran eo u s l y

an n o t at edp rep ai dcardtran s act i o n s p read s h eet s
an d b an ks tat em en t s s uffi ci en t ly co rro bo rat i ng h i s t es t i m on y . W e h ol d th atth e M o n ro es are en t i t l edt o th es e s up p l i es d educt i o n s .

1 1. Tax es an dLi cen ses Th e M on ro es d educt ed$ 2 ,1 51 i n t ax es an d l i cen s es fo r 2 0 1 4 . Th ey d educt edn o s u ch ex pen s es fo r 2 0 1 5. M r. M o nro e p ro v i d ed2 0 1 4 an n o t at ed p rep ai dcard tran s act i o n s p read s h eet s wh i ch i d en t i fi edas “ TAXES” a $ 74 .9 8 p aym en t t o “ H RB ONLINE TAX PRODUCT” an dp ro v i d eda b an ks t at em en twi th
m o nt h l y d edu ct io n s fo r $ 1 5 0 an d$ 3 .9 5 , b o th p ay ab le t o “ US TREASURY.” W e h o l dth atth e M o n ro es fo r 2 01 4 are en t i t l edt o d edu ct$ 7 5 as t ax p rep arat i o n fees
an d d en y th e rem ai n der o f t h e t ax es an dl i cen ses d edu ct io n .- 2 2 - 1 2. Trav el Th e M on ro es d educt ed$ 6 ,4 37 i n trav el ex p en s es fo r 2 0 1 4 an d $ 9 ,6 3 3 i n trav el ex p en ses fo r 2 01 5 . Trav el ex p en s es are s ub jectt o s tri cts ub s t an t i at i o n ru l es
u n d er s ect i o n 2 7 4 . Wh i l e M r. M o n ro e t es t i fi edas t o s o m e trav el ex p en s es , an d wh i le s o m e an no t at i o n s o n h is reco rd s i n d i cat e t rav el ex p en s es , th e ev i d en ce p ro v id edwas i n su ffi ci en t t o s at i s fy th e s tri cts ub s t an t i at i o n ru l es u n der s ect i o n 2 7 4 . W e th erefo re d en y

the t rav el ex p en ses d edu ct i o n s. 1 3. Dedu ct i bl e M eal s an dEn t ert ai n m en t Th e M on ro es rep o rt ed$ 3 ,1 5 5 i n d edu ct ib l e m eal s an den t ert ai n m en tfo r 2 0 1 4 , an dan o th er $ 2 ,3 8 0 fo r 2 0 1 5 . M eal s an den t ert ai n m en tare b o th d edu ct i o n s
s ub jectt o t h e s ect i o n 2 7 4 s tri cts ub s t an t iat i o n ru l es . M r. M o nro e ex p l ai nedattri al h o w h i s i n cen t i v e p aym en t s wo rk edan dh o w h is b an k s tat em en t s rel at e b ackt o h i s
cu s t o m er l i s t . Here, s o m e ex am p l es are i l l u s trat i v e. W e b eg i n b y l o ok i n g atM r. M o n ro e’ s Ban ko f Am eri ca s tat em en t s. OnAp ri l 1 4 , 2 0 1 5 , a ch arg e o f $ 2 6 .4 0 at Red Lo b st er h ada h an dwri tt en an n o t at i o n th at s tat ed“ Kram er cu s t [s i c] l u n ch .” Pro b lem at i c i s th atth ere i s n o recei p ti t em i zi ng th e m eal ex p en s e an d th e h an dwri t t en an n o t at i on was m ad e i n p rep arat io n fo r t ri al rat her t h an
co n tem p o ran eo u s ly . M oreo v er, wh i l e we are cert ai n th atRedLo b s t er i s a
res t au ran t , th e b u s i n es s p u rp o s e i s n otd et ai l edo n th e co n tem po ran eo u s reco rd
.- 2 3 -

AnAp ri l 2 2 , 2 0 1 5, en try

s h o ws a ch arg e o f $ 4 4
. 1 3 atHen Ho u se # 1 9 i n Len ex a, Kan sas . Ev en i f t h e Hen H ou s e i n Len ex a i s a res t au ran t , th ere i s n o th i n g i n d i cat i n g t h at th ere was a b u s i n es s p u rp o s e fo r t he ex p en s e. W i th reg ardt o the p rep ai dcardtran s act i o n s p read s h eet s , M r. M o nro e’ s 2 0 1 4 cu s t o m er l i s ti n d i cat es th ath e s o l d a Hy un d ai El an tra t o a M r. Hei s l er o n M arch 1 , 2 0 1 4 ; i tfu rt her i n d i cat es th atM r. Hei sl er was a “ W i n n er” o f o ne o f M r. M o n ro e’ s p ri ze d rawi n g s . Th e s p read s h eet s i n d i cat eda M arch 9 , 2 01 4 , ch arg e o f $ 5 0 at Ch ed d ar’ s # 0 1 i n Ov erl an dPark , Kan sas ; a co n t em p o ran eo u s ty

p ed
n o t at i o n s t at es “ Cu st[s i c] Di n n er.” A h an dwri t t en n ot at i o n m ad e i n p rep arat i o n fo r t ri al s t at es “ Hei s l er.” As M r. M o n ro e ex p l ai n edattri al , th ere was ty p ical l y a l ag t i m e b et ween th e s al e o f a car, t h e d rawi n g o f a wi n n er, an d t h e wi n n er’ s u s i n g th e p ri ze ata co n ven i en tt i m e. Al l o f wh i ch m ak es s en s e; u n fo rtu n at el y , i t
u n rav el s wi tho u tth e h an dwri t t en n o t at i o n m ad e i n p rep arat i o n fo r t ri al an d b ecau s e o f t h e l acko f recei p t s . Co ns i d er an o th er ch arg e o n t h e s p read s h eet s : a Feb ru ary 2 8 , 2 0 1 4 , ch arg e t o th e “ KC Ch i efs ” o f $ 5 0 0 , al on g wi th th e
co n tem p o ran eo u s ty

p edn o tat i o n “ Cu s t[s ic] Ti ck et s .” W e can n o td eci p her fro m M r. M o n ro e’ s cu s t o m er l is twh i ch cl i en t(s ) t h e ch arg e was fo r, an d al th o ug h we fo u n d h i s t es t i m o n y

cred i bl e, we d o n o tfi n dh i s reco rd k eep i n g s u ffi ci en tt o- 2 4 -

co rro b o rat e h i s t es t i m o n y u n der t h e s ect io n 2 7 4 s tri cts ub s t an t i at i o n ru l es . W e th erefo re d en y

th e m eal s an d en t ert ai n m en t d edu ct i o n s . 1 4. Ut i l i t i es Th e M on ro es d educt ed$ 1 ,5 89 i n u t i l i t i es ex p en s es fo r t h ei r 2 0 1 4 t ax ab l e y ear. Th ey

d edu ct edn o s u ch ex p en s es fo r 2 0 15 . Th e p rep ai dcards p read s h eet s i d en t i fy a M ay 2 1 , 2 01 4 , ch arg e o f $ 7 8 1 t o “ K CP&L” wi th th e co n t em p o ran eo u s ty p edan n o t at i on “ UTILITIES.” Th ere i s al s o a M ay 2 0, 2 0 1 4 , ch arg e o f $ 7 1 8 .7 5 t o “ Kan sas Gas Ser” wi th an i d en ti cal n o tat i o n . Th e M on ro es p ro v i d edn ei th er t es t i m o ny n o r o th er co rro b o rat i n g ev i d en ce fo r t h es e ex p en s es . W e t h erefo re d en y th e 2 0 14 u t i l i t i es d edu ct i o n .

1 5. Oth er Ex p en s es Th e M on ro es d educt ed$ 4 ,0 94 i n o th er ex p en s es fo r 2 0 1 4 an d$ 3 ,4 2 5 fo r 2 0 1 5 . Ho wev er, t h ey

p ro v i d edn ei th er t es t i m on y n o r o th er s u ffi ci en t
co rro b o rat in g ev i den ce fo r th es e ex p en s es fo r th e Co u rtt o d i s cern fro m th e p ro v id edreco rd s wh i ch ex p en s es wo u l dco ns t i tu t e “ o th er ex p en ses ” o r wh atth ei r b u s i n es s p u rp o s e was . Th erefo re, we d en y th e “ o th er ex p en s es ” d edu ct i o n s . C. Un rep o rt edIn co m e Th e M on ro es recei v edfro m Nat i o n al Fi n an ci al a Fo rm 1 0 9 9-DIV fo r 2 0 1 4 i n the am o u n to f $ 7 4 an d an o ther Fo rm 1 09 9 -DIV fo r 2 0 15 i n th e am o un t o f $ 1 0 2 ;- 2 5 -

h o wev er, t h e M on ro es d i dn o treco g n i ze ei th er o f t h o s e am o u nt s as i n co m e fo r t h e
res p ect i ve y ears . Th e M o n ro es al s o recei v edFo rm s 1 0 9 9 -B, rel at i n g t o th e s al es
o f s t o ck , fro m

Nat i o n al Fi n an ci al . Fo r 2 0 1 4 t h o se s al es am o u n t edt o $ 1 3 4 i n
s h o rt -t erm

cap i t al g ai n an d $ 1 , 9 3 0 i n l o n g -t erm cap i t al g ai n. Fo r 2 0 1 5 th os e s al es
am ou n t edt o $ 62 6 i n s ho rt -t erm cap i t al g ai n an d$ 2 8 4 i n l o ng -t erm cap it al g ai n . Ho wev er, th e M o n ro es fai l edt o rep o rt an y cap i tal g ai n o n ei th er th ei r 2 0 14 o r 2 0 1 5 jo i n tretu rn . Sect io n 6 1 (a) p ro v i des th atg ro s s i n co m e i n cl u d es “ al l i nco m e fro m wh at ev er s o u rce d eri ved .” See Co m m i s s i o ner v . Gl en s h aw Gl as s Co ., 3 4 8 U.S. 4 2 6 , 4 3 0 (1 9 5 5). Sect io n 6 1(a)(4 ) an d(7 ) s p eci fi cal l y d efi n es g ro s s i n co m e as i n cl u d i n g i n t eres ti nco m e an dd i v i d en di n co m e. Sect i o n 6 1 (a)(3 ) s peci fi cal l y d efi n es g ro s s i n co m e as i n cl u d i n g “ [g ] ai n s d eri v edfro m d eal i ng s i n p ro p ert y .” Th e M on ro es h av e n o t co n t es t edth e IRS’ d et erm i n at i o n s reg ard i n g t h ei r d i v i d en d s recei v edan dcap i t al g ai n . W e co n s id er t h e M o n ro es t o h av e co n ced ed th e i s s ue an d h o l dfo r t h e Co m m i s s io n er o n thi s p o i n t . III. Sect io n 6 6 6 2 (a) Accu racy -Rel at edPen al ty W e n ex td et erm in e wh et h er t h e M o n ro es are l i ab l e fo r accu racy -rel at ed p en al t i es u n d er s ect i o n 6 6 6 2 (a) an d(b )(2 ) fo r t hei r 2 0 1 4 an d2 0 1 5 t ax y ears . Th e IRS m ay d et erm i n e a p en al ty

equ al t o 2 0 % o f an y

u n derp aym en tth atari ses fro m a- 2 6 -

s ub s t an t i al u n ders t at em en to f i nco m e t ax . See s ec. 6 6 6 2 (b )(2 ). Anu n d ers t at em en ti s s ub s t an t i al i f i tex ceed s t h 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 rn o r $ 5 ,0 0 0 . Sec. 6 6 6 2 (d )(1 )(A). Un d er s ect i o n 7 49 1 (c) t h e Co m m i s s io n er h as th e b u rd en o f p ro du ct io n wi th
res p ectt o t h e s ect i o n 6 6 6 2(a) p en al ty . To m eeth i s b u rd en th e Co m m i s s i o n er m

u s t p ro duce s u ffi ci en tev i d en ce i n di cat i n g t hati t i s ap p ro p ri at e t o i m p o s e t h e p en al ty ag ai n s tth e M on ro es . See Hi g b ee v . Co m m i s s i o ner, 1 1 6 T.C. at4 4 6. Th e Co m m i s s i o n er’ s b u rd en o f p ro du ct i o n u nd er s ect i on 7 4 9 1(c) al s o g en eral ly i n cl u d es es t ab li s h i n g co m pl i an ce wi th th e s up erv i s ory ap p ro v al req u i rem en to f
s ect i on 6 7 5 1 (b )(1 ). See Graev v . Co m m is s io n er, 1 4 9 T.C. 4 8 5 , 4 9 3 (2 0 1 7 ),
s up p lem en t i n g an do v erru l i n g i n p art1 4 7 T.C. 4 6 0 (2 0 1 6 ). Wri t t en s up erv i s o ry ap p ro v al m

u s tb e o bt ai n edb efo re t h e IRS fo rm al l y co m m u ni cat es the p en al ty

t o th e t ax p ay er. Cl ay

v . Co m m is s i o n er, 1 5 2 T.C. 2 2 3 , 2 49 (2 0 1 9 ), aff’ d , 9 9 0 F.3 d 1 2 9 6 (1 1 th Ci r. 2 0 2 1 ). Here, M s . Al ex an d er, t h e rev en u e ag en twh o p erfo rm edan ex am i n at i o n o f th e M o n ro es ’ t ax retu rn s fo r 2 0 1 4 an d2 0 1 5 , m ad e t h e i n i t i al d et erm i nat i on t o
as s ertth e accu racy -rel at edp en al t i es fo r s ub s t an t i al u nd ers t at em en ts . M s . Pet ru s k a, wh o was M s . Al ex an d er’ s m an ag er, s i g neda Ci v il Pen al ty Ap pro v al Fo rm o n Feb ru ary

2 1 , 2 01 7 , ap p ro v i n g t h ati n i t i al d et erm i n at i o n . Th e n o t i ce o f- 2 7 -

d efi ci en cy

i n thi s cas e was n oti s s u edu nt i l Ap ri l 2 6 , 2 01 7 . Th e M o nro es h av e n o t cl ai m ed , n o r d o es th e reco rd s up p o rta co n cl u si on , th atth e Co m m i s s io ner fo rm al l y
co m m u n icat edh i s i n it i al p en al ty d et erm i n at io n t o th em

b efo re t h e d at e wh en th e
rev en u e ag en t ’ s m an ag er s i g n edth e Ci v il Pen al ty Ap p ro val Fo rm ap p ro vi n g th e
s ub s t an t i al u n ders t at em en tp en al t ies fo r t h e rel ev an tt ax y ears . See Fro s tv . Co m m i s s i o n er, 1 5 4 T.C. 2 3 , 3 6 (2 0 2 0 ). Th erefo re, we h o l dth atth e s ub s t an t i al
u n d ers t at em en tp en al t ies un d er s ect i o n 6 6 6 2(b )(2 ) fo r 2 0 1 4 an d2 0 1 5 were ap p ro v edi n wri ti n g b efo re t h e fi rs tfo rm al co m m u n i cat i o n t o th e M o n ro es o f t h e p en al t i es an d i ti s th e o n l y s ect i o n 6 6 6 2 (a) p en al ty

th atap p l i es i n th i s cas e. Th e M on ro es m ay

av o i dl i ab i l i ty

fo r t h e s ect i o n 6 6 6 2 (a) an d (b )(2 ) p en al t i es i f t h ey d em o n s trat e t h atth ey

h adreas o nab l e cau s e fo r t he u n d erp aym en t s an d act edi n g o o dfai th wi th res pect t o th em . See s ec. 6 6 6 4 (c)(1 ); 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 4 7; Bu n n ey v . Co m m i s si on er, 1 1 4 T.C. 2 5 9 , 2 6 6 (2 0 0 0); s ec. 1 .6 6 64 -4 (b )(1 ), In co m e Tax Reg s . Wh et h er t h e M o n ro es act edwi th
reas on ab l e cau s e an di n g oo dfai th d ep en d s o n th e fact s an dci rcu m s t an ces o f t h e
cas e. See s ec. 1 .6 6 64 -4 (b )(1 ), In co m e Tax Reg s. Gen eral l y , the m os ti m p o rt an t fact or i s th ei r effo rtt o as ses s th ei r p ro p er t ax l i ab i l i t i es . Id
. A t ax p ay er’ s kn o wl ed g e, edu cat i o n , an d ex p eri en ce are rel ev an t fact o rs t o i n d i cat e reas o n ab l e
cau s e an d g o o dfai th . Id
.- 2 8 -

Al l o f t h e ad

ju s tm en t s rel at e t o th e M o n ro es ’ fai l u re t o rep o rts o m e o f t h ei r i n co m e o r t o th e d i s al l o w edSch edu le C d edu ct io n s . Th e reco rdrefl ect s th ats o m e
o f t h e ex p en s es were d edu ct i b l e o n Sch edu l e A. Wh i l e th e 2 % fl oo r m ay h av e l i m i ted s om e o f t h e d edu ct i on s we al l o wed , th e M o n ro es were n otu n reas o nab l e i n cl ai m i ng th o s e am o u nt s as Sch edu l e C d edu ct i o n s i n th atth e ju di ci ary h as n ev er
s p o k eno n th e p ro per ch aract eri zat i o n o f t h o s e i t em s i n th e s et t i n g h erei n . See, e.g ., Bu n n ey

v . Co m m i s s io ner, 1 1 4 T.C. at2 66 ; Cu rt is In v . Co
. v . Co m m i s s i o n er, T.C. M em o . 2 01 7 -1 5 0 , at* 3 9 (ci t i ng W i l l i am s v . Co m m is s i o n er, 1 23 T.C. 1 4 4 , 1 5 3 -1 5 4 (2 0 0 4 )), aff’ d , 9 09 F.3 d1 3 3 9 (1 1t h Ci r. 2 0 1 8 ). As t o th e u n rep o rt ed i n co m e an d as t o t h e ex p en s e d edu ct i o n s th atwe s p eci fi cal ly d is al lo wedfo r
reas on s o th er t h an th e 2 % l im i t at i o n , th e M o n ro es d i dn otes t ab l i s h thatth ey are
en t i t l edt o a reas o nab l e cau s e d efen s e. Co n s equ en t l y we h o l d th atth e M o n ro es are l i ab l e fo r t h e s ect i o n 6 6 62 (a) an d (b )(2 ) accu racy -rel at edp en al t i es t o th e ex t en t th e Ru l e 1 5 5 co m

p ut at i o n s s h o w th ere are u nd erp aym en ts at tri b u t ab l e t o
s ub s t an t i al u n ders t at em en t s o f i n co m e t ax , ex cep tn o tas t o th e p o rt io n s o f t h e
u n d ers t at em en t s th at rel at e t o a l i m i t at i on res u l ti n g fro m the 2 % fl o o r.- 2 9 -

To refl ectthe 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.