United States Tax Court

T.C. Memo. 2024-5

CHRISTOPHER R. PANGELINA,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 11350-19. Filed January 11, 2024.

—————

Christopher R. Pangelina, pro se.

Michael Skeen, Daniel Z. Nettles, and John M. Duddles, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GALE, Judge: Respondent determined the following deficiencies, 

penalties, and additions to tax with respect to petitioner’s federal income 

tax for taxable years 2010–17 (years at issue):

Year Deficiency

Penalties/Additions to Tax

§ 6662(a) § 6651(a)(1)

2010 $42,915 $8,583 $10,728

2011 91,923 18,384 22,980

2012 13,938 2,787 3,389

2013 14,748 2,949 3,687

2014 678 — 169

2015 5,674 1,134 1,418

2016 7,096 1,419 1,774

2017 2,100 — 472

Served 01/11/24
2

[*2] Respondent also determined a section 6651(a)(2)1 addition to tax 

of $126 for 2017. Determinations with respect to 2017 were made by 

means of a substitute for return (SFR) prepared by respondent pursuant 

to section 6020(b).

The deficiencies for the years at issue result from certain 

adjustments made to petitioner’s gross receipts and/or the disallowance 

of all or part of certain deductions for business expenses reported on 

petitioner’s Schedules C, Profit or Loss From Business.

After concessions2 the issues for decision are whether petitioner 

(1) is entitled to deduct certain business expenses reported on 

Schedules C for all years at issue; (2) failed to report taxable interest 

income in the amounts respondent determined for 2010, 2011, and 2012;

(3) failed to report gross receipts from his business as income for 2017;

(4) is entitled to head of household filing status for 2017; (5) is entitled 

to the additional child tax credit for 2017; (6) is entitled to the earned 

income tax credit for 2017; (7) is liable for additions to tax pursuant to 

section 6651(a)(1) for all years at issue; (8) is liable for an addition to tax 

pursuant to section 6651(a)(2) for 2017; and (9) is liable for accuracyrelated penalties pursuant to section 6662(a) for 2010, 2011, 2012, 2013, 

2015, and 2016.

FINDINGS OF FACT

Some of the facts are stipulated and are so found. The Stipulation 

of Facts and the attached Exhibits are incorporated herein by this 

reference. Petitioner resided in California when he timely filed his 

Petition.

1 Unless otherwise indicated, statutory references are to the Internal Revenue 

Code, Title 26 U.S.C. (Code), in effect at all relevant times, regulation references are 

to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, 

and Rule references are to the Tax Court Rules of Practice and Procedure.

2 Respondent determined increases in petitioner’s reported gross receipts of 

$23,509 for 2010, $309,209 for 2011, and $2,137 for 2012. These adjustments were 

based on third-party information returns for 2010 and 2012. Respondent’s 

determination for 2011 was based on a bank deposits analysis conducted for that year. 

Petitioner conceded each of these increases.
3

[*3] Overview

During the years at issue petitioner operated a tiling business as 

a sole proprietor under the name B.C. Tile (BC). Petitioner reported 

income and expenses attributable to BC on Schedules C.

At a time not disclosed in the record, a revenue agent with 

respondent’s Small Business and Self-Employed (SB/SE) Division 

commenced an examination of petitioner’s federal income tax returns for 

2010–16. The SB/SE agent concluded that petitioner’s reported gross 

receipts for BC for 2010, 2011, and 2012 should be increased; certain 

business expense deductions petitioner claimed for BC for 2010, 2012, 

2013, 2014, 2015, and 2016 should be disallowed; and various penalties 

and additions to tax for 2010–16 should be imposed. Since petitioner 

had not filed a return for 2017 by March of 2019, the SB/SE agent 

prepared an SFR on petitioner’s behalf pursuant to section 6020(b) on 

March 19, 2019. The SFR attributed to petitioner gross receipts of 

$13,401 and accorded him single filing status, a personal exemption, and 

the standard deduction.

On March 19, 2019, the SB/SE agent completed a Civil Penalty 

Approval Form for the imposition of accuracy-related penalties for 

2010–13, 2015, and 2016. The penalties were imposed on the bases of 

underpayments attributable to substantial understatements of income 

tax and negligence. The agent’s immediate supervisor signed the Civil 

Penalty Approval Form on March 22, 2019. The SB/SE Division issued 

petitioner a notice of deficiency covering the years at issue on May 1, 

2019.

2010

Petitioner filed his return for 2010, which had been prepared by 

a paid preparer, on January 30, 2017; it was due April 18, 2011. 

Petitioner reported $286,174 in gross income from BC. Respondent 

determined that petitioner had failed to report $34 in taxable interest 

and disallowed the $100,246 deduction petitioner claimed under “other 

expenses” for contractors. He let stand $154,380 in other claimed 

Schedule C deductions.

As substantiation for the disallowed deduction, petitioner 

proffered the 2010 monthly statements for the bank account he 

maintained for BC.
4

[*4] 2011

Petitioner filed his return for 2011, which had been prepared by 

a paid preparer, on October 16, 2017; it was due October 15, 2012, 

pursuant to a granted extension of time to file. Petitioner reported 

$36,806 in gross income from BC. Respondent determined that 

petitioner had failed to report $31 in taxable interest but did not 

disallow any Schedule C deductions.

2012

Petitioner filed his return for 2012, which had been prepared by 

a paid preparer, on January 30, 2017; it was due October 15, 2013, 

pursuant to a granted extension of time to file. Petitioner reported 

$130,941 in gross income from BC. Respondent determined that 

petitioner had failed to report $18 in taxable interest and disallowed 

Schedule C deductions petitioner claimed for $18,259 in expenses 

classified as rent or lease of other business property and $34,791 for 

expenses classified as wages. He let stand $75,441 in other claimed 

Schedule C deductions.

As substantiation for the disallowed deductions, petitioner 

proffered a profit and loss statement for 2012 that he prepared in 

October 2020, but he was unable to produce the underlying records used 

to produce it. He also proffered the 2012 monthly statements for the 

bank account he maintained for BC.

2013

Petitioner filed his return for 2013, which had been prepared by 

a paid preparer, on January 30, 2017; it was due April 15, 2014.

Petitioner reported $130,941 in gross income from BC. Respondent 

disallowed Schedule C deductions petitioner claimed for expenses 

classified as other interest of $5,008, repairs and maintenance of 

$18,259, and wages of $34,391. He let stand $73,878 in other claimed 

Schedule C deductions.

As substantiation for the disallowed deductions, petitioner 

proffered the 2013 monthly statements for the bank account he 

maintained for BC, but no profit and loss statement.
5

[*5] 2014

Petitioner filed his return for 2014, which had been prepared by 

a paid preparer, on October 15, 2017; it was due April 15, 2015. 

Petitioner reported $18,082 in gross income from BC. Respondent 

disallowed the entire $61,468 deduction petitioner claimed on 

Schedule C for car and truck expenses and $2,948 of the $6,175

deduction claimed for other expenses—payroll. He let stand the 

remaining $13,284 in deductions claimed on Schedule C.

As substantiation for the disallowed deductions, petitioner 

proffered a profit and loss statement for 2014 that he prepared in 

October 2020, but he was unable to provide the underlying records used 

to produce it. He also proffered the 2014 monthly statements for the 

bank account he maintained for BC.

2015

Petitioner filed his return for 2015, which had been prepared by 

a paid preparer, on March 28, 2018; it was due October 17, 2016, 

pursuant to a granted extension of time to file. Petitioner reported 

$48,269 in gross income from BC. Respondent disallowed the 

Schedule C deduction petitioner claimed for $49,786 in car and truck 

expenses and $12,638 of the $16,456 deduction claimed for contractor

expenses. He let stand the remaining $20,910 in claimed Schedule C 

deductions.

As substantiation for the disallowed deductions, petitioner 

proffered a profit and loss statement for 2015 that he prepared in 

October 2020, but he was unable to provide the underlying records used 

to produce it. He also proffered the 2015 monthly statements for the 

bank account he maintained for BC.

2016

Petitioner filed his return for 2016, which had been prepared by 

a paid preparer, on April 9, 2018; it was due April 18, 2017. Petitioner 

reported $45,477 in gross income from BC. Respondent disallowed the 

Schedule C deductions claimed for $36,683 in car and truck expenses,

$17,060 in expenses for rent or lease of other business property, and 

$7,377 for contractor expenses. He let stand the remaining $7,451 in 

claimed Schedule C deductions.
6

[*6] As substantiation for the disallowed deductions, petitioner 

proffered a profit and loss statement for 2016 that he prepared in 

October 2020, but he was unable to provide the underlying records used 

to produce it. He also proffered the 2016 monthly statements for the 

bank account he maintained for BC.

2017

As petitioner failed to file a return for 2017, the SB/SE agent 

prepared an SFR on petitioner’s behalf pursuant to section 6020(b) and 

notified him of the same on March 19, 2019. Petitioner has not paid the 

amounts shown as due on the SFR. The SFR adjustments were 

incorporated in the notice of deficiency and included determinations 

that petitioner had unreported gross receipts of $13,401 and was 

entitled to single filing status and one personal exemption.

On February 1, 2021, two days before the first scheduled trial 

date in this case, petitioner provided respondent’s counsel with an 

unsigned return for 2017. The return, which had been prepared by a 

paid preparer, reports his filing status as head of household and claims 

a personal exemption for himself and dependency exemptions for three 

children. The return also claims the additional child tax credit and the 

earned income tax credit. Finally, Schedule C3 of the unsigned return 

reports that BC had gross receipts of $79,781 (offset by a $13,605 cost of 

goods sold) and claims the following deductions for expenses:

3 The Schedule C attached to the unsigned 2017 return is incomplete in the 

stipulated Exhibit in the record. However, that Exhibit also contains a complete copy 

of the federal Schedule C that is attached to the unsigned California income tax return 

that is included as part of the Exhibit.
7 

Expense Amount

Advertising $1,129

Commissions and fees 5,033

Depreciation and § 179 deduction 321

Insurance 3,005

Legal and professional services 400

Office expense 216

Rent or lease other business property 24,143

Repairs and maintenance 2,053

Meals and entertainment 816

Utilities 1,787

Wages 4,316

Other expenses 8,315

 Total $51,534

As substantiation for the disallowed deductions, petitioner 

proffered a profit and loss statement for 2017 that he prepared in 

October 2020, but he was unable to provide the underlying records used 

to produce it. He also proffered the February and March 2017 monthly 

statements for the bank account he maintained for BC.

OPINION

I. Burden of proof 

Generally, the Commissioner’s determinations in a notice of 

deficiency are presumed correct, and the taxpayer bears the burden of 

proving that those determinations are erroneous. See Rule 142(a)(1); 

Welch v. Helvering, 290 U.S. 111, 115 (1933). Under section 7491(a), in 

certain circumstances the burden of proof may shift from the taxpayer 

to the Commissioner. Petitioner has not claimed or shown that he has 

satisfied the requirements of section 7491(a) so as to shift the burden of 

proof to respondent as to any relevant factual issue.

II. Schedule C deductions

A. Applicable law

Deductions are a matter of legislative grace, and a taxpayer must 

prove his or her entitlement to a deduction. See INDOPCO, Inc. v. 

[*7]
8

[*8] Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. 

Helvering, 292 U.S. 435, 440 (1934). A taxpayer claiming a deduction 

on a federal income tax return must demonstrate that the deduction is 

allowable pursuant to a statutory provision and must further 

substantiate that the expense to which the deduction relates has been 

paid or incurred. See § 6001; Hradesky v. Commissioner, 65 T.C. 87, 89–

90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976). A taxpayer 

must substantiate deductions claimed by keeping and producing 

adequate records that enable the Commissioner to determine the 

taxpayer’s correct tax liability. § 6001; Hradesky, 65 T.C. at 89–90.

Under section 162(a) a deduction is allowed for “ordinary and 

necessary expenses paid or incurred . . . in carrying on any trade or 

business.” An ordinary expense is one that commonly or frequently 

occurs in the taxpayer’s line of business. Deputy v. du Pont, 308 U.S. 

488, 495 (1940). A necessary expense is one that is appropriate and 

helpful in carrying on the taxpayer’s business. Commissioner v. 

Heininger, 320 U.S. 467, 471 (1943); Treas. Reg. § 1.162-1(a).

Generally, if a taxpayer provides sufficient evidence that he or 

she has incurred a trade or business expense contemplated by section 

162(a) but is unable to adequately substantiate the amount, the Court 

may estimate the amount and allow a deduction to that extent. Cohan 

v. Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930). For the Court to 

estimate the amount of an expense, there must be some basis upon 

which an estimate may be made. Vanicek v. Commissioner, 85 T.C. 731, 

742–43 (1985). The Court may not estimate expenses under Cohan in 

situations where section 274 imposes heightened substantiation 

requirements. See § 274(d); Sanford v. Commissioner, 50 T.C. 823, 827 

(1968), aff’d per curiam, 412 F.2d 201 (2d Cir. 1969); Temp. Treas. Reg. 

§ 1.274-5T(a).

Section 274 imposes strict substantiation rules on certain 

specified expenses. No deductions under section 162 shall be allowed 

for “any traveling expense (including meals and lodging while away from 

home),” or “listed property,” as defined in section 280F(d)(4), “unless the 

taxpayer substantiates [them] by adequate records or by sufficient 

evidence corroborating the taxpayer’s own statement.” § 274(d)(1), (3). 

Listed property includes passenger automobiles and other property used 

for transportation. § 280F(d)(4)(A)(i) and (ii). Thus, substantiation of 

any expense categorized as car and truck or meals and entertainment is 

governed by section 274.
9

[*9] To meet these strict substantiation rules, a taxpayer must 

substantiate by adequate records or by sufficient evidence corroborating 

his own statement: (1) the amount of the expense, (2) the time and place 

the expense was incurred, and (3) the business purpose of the expense. 

§ 274(d). To substantiate by adequate records, the taxpayer must 

provide (1) an account book, a log, or a similar record, and 

(2) documentary evidence, which together are sufficient to establish 

each element of an expenditure. Temp. Treas. Reg. § 1.274-5T(c)(2)(i). 

Documentary evidence includes receipts, paid bills, or similar evidence. 

Treas. Reg. § 1.274-5(c)(2)(iii). To substantiate by sufficient evidence 

corroborating the taxpayer’s own statement, the taxpayer must 

establish each element by his or her own statement and by documentary 

evidence or other direct evidence. Temp. Treas. Reg. § 1.274-5T(c)(3)(i).

B. 2010

The bank records petitioner proffered to substantiate the 

disallowed $100,246 Schedule C deduction for contractors do not do so. 

Most of the entries are for debit card purchases or ACH debits for certain 

identified commercial establishments. We are unable to see how such 

transactions could constitute payments to contractors. There are also 

entries for payments of checks, but these show only a check number and 

an amount. Without any reference to a payee or a purpose, these check 

payment entries do not substantiate payments to contractors. 

Petitioner has failed to substantiate the deduction, and we sustain 

respondent’s disallowance of it.

C. 2011

No Schedule C deductions were disallowed for this year.

D. 2012

The 2012 profit and loss statement and bank statements for that 

period, which petitioner proffered to substantiate the disallowed 

$18,259 deduction for rent or lease payments and the disallowed $34,791 

deduction for wage payments, are insufficient to do so. Petitioner 

prepared the 2012 profit and loss statement in October 2020, and he 

concedes that he does not have any records (other than the bank 

statements) to substantiate the entries. The 2012 profit and loss 

statement contains numerous discrepancies as between the statement 

itself and the corresponding entries on petitioner’s 2012 return. This 

may suggest that petitioner’s return preparer found fault with some of 

the profit and loss statement entries. Moreover, there are also 
10

[*10] discrepancies between the 2012 profit and loss statement figures 

and the bank statements for that period. The determinations in the 

notice of deficiency to disallow the claimed Schedule C deductions for 

rent or lease payments and wage payments are presumptively correct,

and petitioner bears the burden of proof to show that the determinations 

are incorrect. See, e.g., Baxter v. Commissioner, 816 F.2d 493, 495 (9th 

Cir. 1987), aff’g in part, rev’g and remanding in part T.C. Memo. 1985-

378. The unreliable profit and loss statements petitioner proffered are 

insufficient to demonstrate error in the determinations, and we 

accordingly sustain them.

E. 2013

Petitioner did not proffer a profit and loss statement for 2013 but 

only the monthly statements for the bank account he maintained for BC 

for that year. We are unable to find any entries in those bank 

statements that provide clear substantiation for the claimed deductions 

for expenses classified as other interest of $5,008, repairs and 

maintenance of $18,259, and wages of $34,391. We accordingly sustain 

respondent’s determinations to disallow those deductions.

F. 2014

Petitioner proffered both a 2014 profit and loss statement and 

BC’s monthly bank statements for that period to substantiate the 

$61,468 deduction claimed for car and truck expenses and the $2,948 

deduction claimed for payroll expenses. But the proffered 

substantiation is insufficient. Petitioner prepared the profit and loss 

statement in October 2020 and concedes that he does not have any of 

the supporting documentation (other than the bank statements) used to 

prepare it. The discrepancy between the 2014 profit and loss statement 

and the 2014 return is substantial for the car and truck expenses. 

Whereas the combined figure for “Auto and Truck Expenses” and for 

“Fuel” on the profit and loss statement is $3,674.03, the amount claimed 

on the return for car and truck expenses is $61,468. As for the amounts 

claimed for payroll expenses, there is no traceable connection between 

the checks that were written from the bank account and amounts 

recorded as payroll on the profit and loss statement. The foregoing is

insufficient to overcome the presumptive correctness of the notice of 

deficiency’s determinations to disallow the claimed deductions for car 

and truck expenses and payroll expenses. We accordingly sustain them.
11

G. 2015

Petitioner proffered both a 2015 profit and loss statement and 

BC’s monthly bank statements for that period to substantiate the 

$49,786 deduction claimed for car and truck expenses and the $12,638 

deduction claimed for contractor expenses. Petitioner prepared the 

profit and loss statement in October 2020 and concedes that he does not 

have any of the supporting documentation (other than the bank 

statements) used to prepare it. The discrepancy between the 2015 profit 

and loss statement and the 2015 return is substantial for the car and 

truck expenses. Whereas the combined figure for “Auto and Truck 

Expenses” and for “Fuel” recorded in the profit and loss statement is 

$5,376.39, the amount claimed on the return for car and truck expenses 

is $49,786. As for the amounts claimed for contractors, there is no 

traceable connection between checks that were written from the bank 

account and amounts recorded as payroll on the profit and loss 

statement. (There are no entries on the 2015 profit and loss statement 

for contractors.) The foregoing is insufficient to overcome the 

presumptive correctness of the notice of deficiency’s determinations to 

disallow the claimed deductions for car and truck expenses and 

contractor expenses. We accordingly sustain them.

H. 2016

Petitioner proffered both a 2016 profit and loss statement and 

BC’s monthly bank statements for that period to substantiate the 

$36,683 deduction claimed for car and truck expenses, the $17,060 

deduction claimed for rent or lease of other business property expenses, 

and the $7,377 deduction claimed for contractor expenses. Petitioner 

prepared the profit and loss statement in October 2020 and concedes 

that he does not have any of the supporting documentation (other than 

the bank statements) used to prepare it.

The discrepancy between the 2016 profit and loss statement and 

the 2016 return is substantial for the car and truck expenses. Whereas 

the combined figure for “Auto and Truck Expenses” and for “Fuel” 

recorded in the profit and loss statement is $5,949.08, the amount 

claimed on the return for car and truck expenses is $36,683. Given this 

discrepancy, the proffered records are insufficient to substantiate the 

deduction. We accordingly sustain respondent’s determination 

disallowing it.

[*11]
12

[*12] With respect to the deduction claimed for expenses for rent or 

lease of other business property, there is in fact consistency between the 

profit and loss statement, the monthly bank statements, and the return. 

The profit and loss statement and the monthly bank statements both 

record nine payments totaling $17,060, which is the figure claimed on 

the return. The profit and loss statement records that the nine

payments were made to Debbie Parson, whereas the monthly bank 

statements merely indicate that nine checks (totaling $17,060) were 

issued on dates corresponding to the dates in the profit and loss 

statement but without any indication of the payee. Without any 

testimony or other evidence establishing who Debbie Parson is or the 

purpose of the payments, the foregoing records are insufficient to 

substantiate any rental expense with a business purpose. We 

accordingly sustain respondent’s determination to disallow it.

With respect to the deduction claimed for $7,377 in contractor 

expenses, the 2016 profit and loss statement contains a section entitled 

“Payroll Expenses,” the entries of which total $7,376.50. Putting aside 

the issue of whether a payroll expense, typically associated with 

employees, could be taken to indicate payments to contractors (an issue 

that we need not decide), the greater shortcoming in the probative value 

of the 2016 profit and loss statement—in addition to the fact that it was 

prepared in October 2020—lies in the 2016 monthly bank statements 

that purportedly support the profit and loss statement entries. The 

majority of the payroll entries in the profit and loss statement tie back 

to ATM withdrawals in the bank statements, while the remainder tie 

back to checks, but the check entries in the bank statements do not 

identify the payees. The profit and loss statement does identify an 

individual payee for each entry, but even if we were to accept the 

designated payees given in the profit and loss statement, there is no 

testimony or other evidence to establish who the payees were (other than 

petitioner himself, and his ATM withdrawals could have been for a 

multitude of purposes other than salary) or the nature of the services for 

which payment was made. On the basis of the foregoing, we conclude 

that petitioner has failed to substantiate the deduction for contractor 

expenses and accordingly sustain respondent’s disallowance of it.

III. 2017

When petitioner had not filed a return for 2017 by sometime in 

2019, the SB/SE agent prepared an SFR pursuant to section 6020(b) and 

notified petitioner of the same on March 19, 2019. The SFR adjustments 

were incorporated in the notice of deficiency and included 
13

[*13] determinations that petitioner had unreported gross receipts of 

$13,401, and was entitled to single filing status and one personal 

exemption.

In the course of the proceedings in this case, petitioner submitted 

to respondent’s counsel an unsigned Form 1040, U.S. Individual Income 

Tax Return, for 2017, and it is a stipulated Exhibit. An unsigned return 

submitted in a deficiency proceeding such as this has no legal effect. 

Selgas v. Commissioner, 475 F.3d 697, 700–01 (5th Cir. 2007). 

Nevertheless, in view of petitioner’s pro se status, we will treat the 

positions taken on the return, where appropriate, as claims pleaded by 

petitioner in the case, as the parties effectively tried them by consent. 

See Rule 41(b)(1). The unsigned return reports gross receipts from BC 

on Schedule C of $79,781 and claims various expenses totaling $51,534. 

The return also reports petitioner’s filing status as head of household 

and claims dependency exemptions for three children as well as a 

personal exemption for petitioner. In addition, the return claims the 

additional child tax credit and the earned income tax credit.

A. Unreported gross receipts

Where a notice of deficiency has determined that the taxpayer 

had unreported income, it is presumptively correct so long as the 

Commissioner introduces some substantive evidence that the taxpayer 

received unreported income. Hardy v. Commissioner, 181 F.3d 1002, 

1004 (9th Cir. 1999), aff’g T.C. Memo. 1997-97; Rapp v. Commissioner, 

774 F.2d 932, 935 (9th Cir. 1985). Here, the notice of deficiency and a 

Wage and Income Transcript for petitioner’s 2017 taxable year both 

reference the payment of income to petitioner by third parties. That is 

sufficient to meet respondent’s burden of production with respect to the 

unreported income. See Nelson v. Commissioner, T.C. Memo. 2018-95; 

Banister v. Commissioner, T.C. Memo. 2008-201, aff’d, 418 F. App’x 637 

(9th Cir. 2011). Moreover, petitioner has not disputed that he received 

gross receipts for 2017; indeed, in his unsigned return he reported that 

BC had gross receipts of $79,781. Accordingly, we sustain respondent’s 

determination that petitioner had unreported gross receipts of $13,401.

B. Filing status, exemptions, and credits

Petitioner proffered no evidence to support his claims on the 

unsigned return that he is entitled to head of household filing status, 

dependency exemptions for three children, the additional child tax 

credit, or the earned income credit. We accordingly sustain respondent’s 
14

[*14] determination that petitioner is entitled to single filing status and 

one personal exemption. We conclude that petitioner has not shown 

entitlement to head of household filing status, dependency exemptions 

for three children, or any credits.

C. Schedule C deductions

The expenses listed on Schedule C of petitioner’s unsigned return 

lack substantiation. Petitioner proffered a profit and loss statement for 

2017, but he proffered bank statements only for the months of February 

and March 2017. Consequently, for many of the expenses listed on the 

profit and loss statement and carried over onto the return, there is no 

proof that the payment of the expense was actually made. This absence 

of proof of payment covers the claims for legal and professional services, 

office expense, repairs and maintenance, and various items in the “other 

expenses” category, including garbage, parking fees, and bridge toll. In 

other cases, an expense listed on Schedule C has no corresponding entry 

on the profit and loss statement to support it, or there is a significant 

(and unexplained) discrepancy between the figure on Schedule C and 

the figure on the profit and loss statement. In this category are the 

expenses for commissions and fees, utilities, wages, and certain items 

grouped under other expenses (telephone and gas). As for the remaining 

expenses—namely, rent or lease of other business property, advertising, 

insurance, internet, and miscellaneous—the two months of bank 

statements are insufficient to establish that these expenses were 

actually paid in 2017. Consequently, petitioner has failed to show 

entitlement to any deduction for the expenses listed on Schedule C of 

the unsigned return for 2017.

IV. Unreported interest income

Respondent also determined that petitioner had unreported 

taxable interest income of $34, $31, and $18 for 2010, 2011, and 2012, 

respectively. As noted, where a notice of deficiency has determined 

unreported income, the Commissioner must introduce some substantive 

evidence that the taxpayer received unreported income in order for the 

determination to be presumed correct. The record includes Wage and 

Income Transcripts for petitioner’s 2010, 2011, and 2012 taxable years, 

and they record that an identified third-party payor filed information 

returns reporting the payment of interest to petitioner for the foregoing 

amounts and years. This satisfies respondent’s burden of production, 

rendering the determinations presumptively correct. Moreover, at trial 

petitioner testified that he did not dispute these amounts. We 
15

[*15] accordingly sustain respondent’s determination that petitioner 

received unreported taxable interest in the specified amounts for 2010, 

2011, and 2012.

V. Penalties and additions to tax

Respondent determined that petitioner is liable for accuracyrelated penalties under section 6662(a) for 2010–13, 2015, and 2016. He 

also determined that petitioner is liable for additions to tax under 

section 6651(a)(1) for failure to timely file for all years at issue and under 

section 6651(a)(2) for failure to timely pay for 2017. The Commissioner 

bears the burden of production with respect to any individual taxpayer’s 

liability for any penalty or addition to tax imposed by the Code. 

§ 7491(c). To meet this burden, the Commissioner must come forward 

with sufficient evidence indicating that the imposition of the penalty is 

appropriate. See Higbee v. Commissioner, 116 T.C. 438, 446–47 (2001). 

Once the Commissioner meets his burden of production, the taxpayer 

bears the burden of proving error in the determination, including 

evidence of reasonable cause or other exculpatory factors. Id.

A. Accuracy-related penalties

Section 6662(a) and (b)(2) imposes a 20% accuracy-related 

penalty on any portion of an underpayment of tax required to be shown 

on a return that is attributable to any substantial understatement of 

income tax. A substantial understatement of income tax exists if the 

amount of the understatement for the taxable year exceeds the greater 

of 10% of the tax required to be shown on the return for the taxable year 

or $5,000. See § 6662(d)(1).

For each of the taxable years 2010–13, 2015, and 2016, we have 

sustained deficiencies (and thus understatements of tax) that exceed 

10% of the tax required to be shown on the return. Thus, respondent 

has met his burden of showing that imposition of an accuracy-related 

penalty is appropriate for each of those years.4

Respondent’s burden of production for an accuracy-related 

penalty under section 6662(a) also includes demonstrating compliance 

with the procedural requirements of section 6751(b)(1). See Graev v. 

Commissioner, 149 T.C. 485, 492–93 (2017), supplementing and 

4 In view of our conclusion regarding the substantial understatement basis for 

the accuracy-related penalty, we find it unnecessary to decide whether respondent has 

met his burden with respect to negligence.
16

[*16] overruling in part 147 T.C. 460 (2016). Section 6751(b)(1) provides 

that “[n]o penalty under this title [Title 26, the Internal Revenue Code] 

shall be assessed unless the initial determination of such assessment is 

personally approved (in writing) by the immediate supervisor of the 

individual making such determination.” In interpreting the proper 

timing of the supervisory approval the statute requires, we apply the 

test of the Court of Appeals for the Ninth Circuit for cases presumptively 

appealable to that court, such as this one. See Kraske v. Commissioner, 

No. 27574-15, 161 T.C. (Oct. 26, 2023); Golsen v. Commissioner, 54 T.C. 

742, 756–57 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971). The Ninth 

Circuit has held that written supervisory approval must occur “before 

the assessment of the penalty or, if earlier, before the relevant 

supervisor loses discretion whether to approve the penalty assessment.” 

Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066, 

1074 (9th Cir. 2022), rev’g and remanding 154 T.C. 68 (2020).

Here, the immediate supervisor of the SB/SE agent examining 

petitioner’s returns signed a Civil Penalty Approval Form on March 22, 

2019, that the latter had prepared proposing section 6662 penalties for 

2010–13, 2015, and 2016 on the basis of substantial understatements of 

income tax and of negligence. The SB/SE Division issued petitioner a 

notice of deficiency covering those years on May 1, 2019. Thus, written 

supervisory approval for the penalties was given before assessment 

(assessment of these penalties not having yet occurred). We are also 

satisfied that respondent has met his burden of production with respect 

to the approving supervisor’s having retained discretion to give approval 

when he did so, given that the issuance of the notice of deficiency (which 

would eliminate the supervisor’s discretion) occurred after the signing 

of the Civil Penalty Approval Form and the fact that the notice was 

issued by the SB/SE Division. Issuance of the notice of deficiency by the 

SB/SE Division strongly suggests that the case was not transferred to 

the Office of Appeals, which could have terminated the supervisor’s 

discretion to approve, because if the case had been transferred to 

Appeals, that office would normally have issued the notice of deficiency. 

See Internal Revenue Manual 8.2.1.9(4) (Oct. 1, 2016); see also Kraske, 

161 T.C., slip op. at 8 (finding Commissioner satisfied burden of 

production to show supervisory approval where approval occurred before 

case was transferred to Appeals).

Petitioner has not shown that he had reasonable cause for the 

understatements or otherwise addressed the accuracy-related penalties. 

We accordingly sustain them.
17

B. Additions to tax

Section 6651(a)(1) imposes an addition to tax if the taxpayer fails 

to file his or her income tax return by the required due date (including 

any extension of time for filing). The addition is equal to 5% of the 

amount required to be shown as due on the return for each month (or 

fraction thereof) after the due date, up to a maximum of 25%. 

For each year at issue, petitioner failed to file more than five 

months after the due dates for the returns. Accordingly, respondent has 

met his burden of production to show that imposition of the section 

6651(a)(1) addition to tax is appropriate. The section 6751(b)

supervisory approval requirement is not applicable to section 6651 

additions to tax. § 6751(b)(2). Petitioner did not claim or show that his 

failure to file timely with respect to any year at issue was due to 

reasonable cause. Accordingly, we sustain the section 6651(a)(1) 

addition to tax for each year at issue.

Section 6651(a)(2) imposes an addition to tax for failure to pay 

timely the amount shown as tax due on a return, equal to 0.5% of the 

amount required to be shown as due on the return for each month the 

failure to pay persists, up to a maximum of 25%. Where a taxpayer has 

not filed a return, the Commissioner must introduce evidence that an 

SFR satisfying the requirements of section 6020(b) was made. Wheeler 

v. Commissioner, 127 T.C. 200, 210 (2006), aff’d, 521 F.3d 1289 (10th

Cir. 2008). A return made under section 6020(b) is treated as “the return 

filed by the taxpayer for purposes of determining the amount of the 

addition” under section 6651(a)(2). § 6651(g)(2).

Respondent produced evidence that the IRS prepared an SFR 

satisfying the requirements of section 6020(b) for 2017 and that 

petitioner failed to pay the amount shown on the SFR. Respondent has 

therefore met his burden of production for the addition to tax under 

section 6651(a)(2). See Burnett v. Commissioner, T.C. Memo. 2023-46, 

at *6 n.7. Petitioner has not claimed or shown reasonable cause for the 

failure to pay the tax shown as due on the SFR for 2017. The section 

6751(b) supervisory approval requirement is not applicable to section 

6651 additions to tax. Accordingly, we sustain the section 6651(a)(2) 

addition to tax for 2017.

VI. Conclusion

We have considered all arguments made by the parties, and to the 

extent not mentioned or addressed, they are irrelevant or without merit.

[*17]
18

[*18] To reflect the foregoing,

An appropriate decision will be entered for respondent.