T.C. Mem o. 2 01 5- 55

UNITED STAT ES TAX COURT

JERRY A. SAWYER AND KAT IE L. SAWYER, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 19 41 2- 12
. Fi le d M arch 24 , 20 15
. Troy Renk em ey er, fo r pe ti ti on ers . Ran da ll L. Eager, J r., an d Do ug la s S. Po ls ky, for res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION PARIS , Ju dg e: By

no ti ce o f de fic ie nc y

(no ti ce), re sp on de ntde te rm in ed de fic ie nc ie s i n F ed eral in co m e ta x o f $8 9,0 06 an d $ 60 ,28 6 a ndaccu racy-rela te d pe na lt ie s o f $1 7,8 01 an d $ 12 ,05 7 fo r pe ti ti on ers ’ ta x years 2 00 8 and20 09 , res pe ct iv el y .- 2 -

[* 2] The pa rti es ha ve res ol ve d m os t o f th e is su es gi vi ng ris e to th e d efi ci en ci es . 1 The is su es rem ai ni ng forde ci si on are wh ethe r pe ti ti on ers (1) un de rrep orte d g ro ss rece ip ts by $28 5,9 75 on Sch edul e C at ta ch edto th ei r Fo rm 10 40 , U.S. Ind iv idua l In co m e Tax Return, fo r ta x year 20 08 , (2) are en ti tl edto reduc e Sch edul e C g ro ss rece ip ts by $52 ,55 0 fo r co st s o f go od s s ol d- -labo r fo r ta x year 20 08 , and(3) are li ab le forth e se ct io n 6 66 2( a) accu racy-rela te d p en al ty for b ot h years. 2 FINDINGS OF FACT Pet it io ne rs , hu sb an d andwife , res id edinMi ss ou ri a t the ti m e th ey fil ed th e p et it io n. Pet it io ne rs are ca sh m etho d t ax pa y ers who m ak e th ei r return o n t he

3 cal en da r y ear b as is
. By st ip ul at io n o f fac ts , th e p art ie s h av e st ip ul at edcert ai n a dju st m en ts to 1 Mr. Sa wy er’s 2 00 8 e xp en se s re po rte d o n S ch edul e C, Pro fitor Lo ss Fro m Bu si ne ss (So le Pro pr ie to rs hi p) , setforthingre at er d et ai l i nf ra. The pa rti es ha ve al so st ip ul at edth atth ere i s a d efi ci en cy of $ 30 ,64 7 fo r ta x year 20 09
. Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al 2 Rev enue Co de ineffe ctforth e y ears inis su e, an d a ll Ru le refe ren ces are t o t he Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e. The pa rti es st ip ul at edth atpe ti ti on ers res id edinOver la ndPark , Kans as , at 3 th e ti m e th ey

fil edth e p et it io n. In th e p et it io n, h owe ve r, pe ti ti on ers de cl aredan ad dr es s i n B uc kn er, Mi ss ou ri. Th e Mi ss ou ri a dd res s i s t he same addres s pe ti ti on ers us edinth ei r ta x re turn s an d i s t he ir a dd res s o f rec or d wi th th e Co urt. Ove rlandParkap pe ars to be th e ad dr es s o f pe ti ti on ers ’ co un se l. The Co urt wi ll di sr eg ardth e st ip ul at io n a s i nc on si st en t wi th th e p et it io n. Se e Ru le 91 (a); see als o Cal -Ma in e Fo od s, In c. v. Co m mis si on er, 9 3 T.C. 1 81 , 19 5- 19 6 (1 98 9)
.- 3 -

[* 3] Dur in g t he y ears inis su e Mr. Sa wy er o wne d a ndop erat edanasp ha ltpa vi ng bu si ne ss kn own as Al an ’s Asp ha lt . Alan ’s Asp ha ltis a so le pro pr ie to rs hi p, the in co m e an d e xp en se s o f whi chpe ti ti on ers rep orte d o n S ch edul es C fo r th e y ears in is su e. Mr. Sawyer’ s fu ll na m e is Jerry Alan Sawy er, an d h e se em s t o u se eit he r or bo th na m es th ro ug ho utth e d oc um en ts . Alan ’s Asp ha ltpro vi de d p av in g a ndrep ai r se rv ic es forbu si ne ss es an d in di vi du al s. Mr . Sawy er m an ag edbu si ne ss op erat io ns , in cl ud in g n eg ot ia ti on of
m os t o f th e co nt ract s fo r pr ojec ts an d h an dl in g the co m pa ny’ s fi na nc es . Mr. Sawy er p erfo rm edm

uc h o f th e labo r hi m se lf, p art ic ul arl y when itin vo lv edth e u se of gra di ng equi pm en t an d o th er h eav y m ach in ery bu t al so hi redda y lab or ers . Mrs
. Sawy er, p et it io ne rs ’ adul t s on , andMr. Sawyer’ s b ro th er al l ro ut in el y pro vi de d
as si st an ce t o t he bu si ne ss as we ll
. Alan ’s Asp ha ltservi ceda wid e g eo gr ap hi c are a in cl ud in g F lo rid a an d m uc h of th e Mi dwe st , andMr. Sawyer tra ve le d fr eque nt ly for wo rk . Con se qu en tl y , Alan ’s Asp ha ltdi d n otret ai n ape rm an en t l ab orcrew b utin st eadhi redda y labo rers ona sh ort-t erm

ba si s wh en ev er h e arr iv edina ne w cit y . Thes e in di vi du al s wer e p ai d i n c as h a t the en d o f eac h d ay , us ua ll y $1 00 bu t n otm or e th an$2 00 , dep en di ng on th ei r sk il ls an d t he workin vo lv edina gi ve n p ro ject.- 4 -

[* 4] Alan ’s Asp ha ltdi d n otis su e an y Fo rm s 1 09 9- MIS C, Mi sc el la ne ou s In co m e, to th e labo rers . Cl ie nt s o f Ala n’s As ph al t g en eral ly pai d M r. Sawy er b y cas h o r ch eck
. Pet it io ne rs ’ bank s d idno t m ai nt ai n b ran ch es inm any of t he cit ie s M r. Sawy er vi si te d, b utMr. Sawyer freque nt ly requ ire d c as h o n h an d t o p ay lab or ers an d o th er bu si ne ss ex pe ns es in cu rredon th e job . Whe n acli en t p ai d Al an ’s Asp ha ltby ch eck , Mr. Sawyer wou ldtak e th e ch eckto a lo cal ba nk , wher e h e wou ldco nv ert itin to on e o r m or e cas hi er’s ch eck s wh il e ret ai ni ng a po rti onof t he fun ds as c as h. Mr. Sa wy er wo ul d l at er d ep os itth e cas hi er’s ch eck s an d any rem ai ni ng cas h i nt o hi s an d M rs . Sawy er’s p ers on al ba nkacco un ts . Pet it io ne rs fil eda joi ntreturn fo r ta x year 20 08 . On th atreturn t he y rep orte d a dju st edgro ss in co m e o f $4 3,6 05 , zero tax ab le in co m e, an d t ot al tax
owe d o f $6 ,62 8. Pe ti ti on ers ’ ad jus te d g ro ss in co m e co ns is te d o f ta xabl e in te res t of $1 2 andbu si ne ss in co m e fro m Alan ’s Asp ha ltof $ 46 ,90 7. OnSch edul e C fo r Alan 's As ph al t p et it io ne rs rep orte d g ro ss rece ip ts or s al es of $ 37 5,8 50 an d c os t o f go od s s ol d t ot al in g $ 20 5,8 90 an d c la im edbu si ne ss ex pe ns e d educ ti on s t ot al in g $1 23 ,05 3. Th e co stof g oo ds so ldco m pr is edcla im edpu rch as es of $ 15 3,3 40 an d labo r co st s o f $5 2,5 50
.- 5 -

[* 5] Pet it io ne rs fil eda joi ntreturn fo r ta x year 20 09 onwhi chth ey rep orte d ad jus te d g ro ss in co m e o f $4 5,2 84 , zero tax ab le in co m e, an d t ot al tax owedof $6 ,88 3. Pe ti ti on ers ’ ad

jus te d g ro ss in co m e co ns is te d o f ta xabl e in te res t o f $1 6 a nd bu si ne ss in co m e fro m

Alan ’s Asp ha ltof $ 48 ,71 0. OnSch edul e C fo r Alan’s Asp ha ltpe ti ti on ers rep orte d g ro ss rece ip ts or s al es of $ 26 6,8 67 an d c os t o f go od s so ldto ta li ng $1 35 ,78 8 a ndcla im edbu si ne ss ex pe ns e d educ ti on s t ot al in g $ 82 ,36 9. Res po nd en t’s re ve nu e ag en t, Lis a DuP on t (RA DuPo nt ), ex am in ed pe ti ti on ers ’ returns an d, b ecau se sh e co ul d n otreco nc il e th e am ou nt s re po rte d o n pe ti ti on ers ’ returns with t he bo ok s an d re co rd s o f Ala n’s As ph al t, re qu es te d c op ie s of pe ti ti on ers ’ ba nkreco rd s. RA Du Po ntrev ie wedpe ti ti on ers ’ ba nkreco rd s an d
co m pl et eda ba nkde po si ts an al y si s b as edon he r rev ie w of a ll of t he de po si ts m ad e in to pe ti ti on ers ’ ba nkacco un ts du rin g t he 20 08 an d 2 00 9 t ax y ears . On the ba si s o f th e b an k d ep os it s an al y si s RA DuPo ntco nc lu de d t ha t pe ti ti on ers ha d d ep os it ed$3 27 ,60 2 i nt o t he ir b an k a cco un ts du rin g 2 00 8 a ndth at th os e d ep os it s co ns ti tu te d g ro ss in co m e d eri ve d fr om th e b us in es s ac ti vi ti es of Alan ’s Asp ha lt . RA DuPo ntals o re vi ewed27 cu st om er i nv oi ces th atMr. Sawyer ha d p rep aredon be ha lf o f Ala n’s As ph al t. The in vo ic es rep orte d a m ou nt s rece iv edforpa vi ng job s as fol lo ws:- 6 -

[* 6] Date Cu st om er Nam e Am ou nt Mar. 3 , 20 08 Lak e Hou se Inn $7 ,25 0 Mar. 4 , 20 08 Fewei l’s Au to m ot iv e 17 ,80 0 Mar . 20 , 20 08 Fl oyd Kur zwel l 2,2 20 Apr. 1 , 20 08 Dirt y DuckBar an d Gri ll 8,4 00 Apr. 3 , 20 08 Hwy 5 St or ag e 2,3 00 Apr. 8 , 20 08 Mi dwe stKenn el 2,3 00 Apr. 9 , 20 08 Greg Mi ll er 4,5 00 Apr . 14 , 20 08 Erne stRo ge rs 7,0 00 Apr . 15 , 20 08 Ro be rt B rewi ng to n 5,0 00 Apr . 17 , 20 08 Mel vi n P hi pp s 2,0 00 May 2, 2 00 8 Asp enLawn & Land sc ap e 9,1 40 Ju ne 7, 2 00 8 Mary an d Ear l Wedd el 13 ,00 0 Ju ne 11 , 20 08 Swim Thi ng s, In c. 9,0 00 Ju ne 23 , 20 08 K&M R an chHou se Res taur an t 8,5 00 Ju ne 25 , 20 08 Harre ll Rid le y Farm s 2,7 50 Ju ly 18, 2 00 8 H&K Truc ki ng , LLC 8,0 24 Ju ly 22, 2 00 8 H&K Truc ki ng , LLC 12 ,54 4 Ju ly 22, 2 00 8 Met cal f Exc av at in g 46 ,00 0 Ju ly 22, 2 00 8 Dav e Ton de r 70 ,00 0 Aug . 12 , 20 08 Dou g Tet ers 8,6 00 Aug . 14 , 20 08 Mervi l M ul le nay 4,9 00 Aug . 17 , 20 08 Lou is e Fo rs te r 19 ,30 0 Aug . 20 , 20 08 W es te rnIm pl em en t Co ., Inc
. 31 ,38 0- 7 -

[* 7] Aug . 22 , 20 08 n/ a 3,0 00 Aug . 28 , 20 08 Sm it h F arm s 28 ,80 0 Oct. 2 7, 2 00 8 Ji m Cro wley 1,3 50 Oct. 2 7, 2 00 8 Ji m Cro wley 4,3 66 Tota l 33 9,4 24 Bec au se of M r. Sawy er’s s po tt y reco rdke ep in g a ndhaph azar d m etho d o f de po si ti ng cu st om er p aym en ts , with c ert ai n m in or ex cep ti on s RA DuPo ntwas un ab le to li nkth e in vo ic es to sp eci fic en tri es onth e b an k d ep os it s an al y si s. She 4
co nc lu de d t ha t the am ou nt s o n t he in vo ic es rep res en te d s ep arat e it em s o f in co m e an d i nc reas edth e g ro ss rece ip ts of Al an ’s Asp ha ltby $33 4,2 24 for 20 08 . Add in g th e g ro ss rece ip ts fro m

th e in vo ic es to th e $ 32 7,6 02 of d ep os it edfun ds , RA DuP on t d et erm in edth atAlan ’s Asp ha ltrece iv edto ta l g ro ss rece ip ts of $ 66 1,8 26
an d t ha t p et it io ne rs ha d t he refo re u nd erre po rte d Al an ’s Asp ha lt ’s gro ss rece ip ts by $2 85 ,97 5. RA Du Po ntals o c on cl ud edth atpe ti ti on ers were n oten ti tl edto de du ct io ns fora nu m

be r of othe r it em s re po rte d o n t he returns , in cl ud in g t he RA DuP on t was ab le to li nk$1 ,00 0 o f th e p ro ceed s fr om th e Kur zwel l 4 in vo ic e an d $ 3,6 00 of t he pro ceed s fr om th e Asp enLawn & Land sc ap e in vo ic e to sp eci fic de po si ts inhe r ba nkde po si ts an al y si s. Th e Lak e Hou se Inn in vo ic e st at es th at$6 00 of t he pa y

m en t wo ul d b e p ro vi de d i n t he form of o ne m on th ’s ren t. RA DuP on t d is reg ard edth is am ou nton th e g ro un ds th atpe ti ti on ers wou ldhave be en en ti tl edto a de du ct io n fo r th e sa m e am ou nt . The i nv oi ce t ot al was re du cedby th es e am ou nt s, an d t he gro ss rece ip ts of Al an ’s Asp ha ltwas i nc reas edby the rem ai ni ng $3 34 ,22 4 i ns te adof t he ori gi na l t ot al of $ 33 9,4 24
.- 8 -

[* 8] $5 2,5 50 of l ab or

co st s fo r 20 08 . RA DuPo ntpe rfo rm eda si m il ar an al y si s fo r th e 2 00 9 t ax y ear a ndde te rm in edth atpe ti ti on ers ha d und erre po rte d the gro ss rece ip ts of Al an ’s Asp ha ltby $13 6,8 08 an d h adov ers ta te d c ert ai n o th er de du ct io ns an d c os ts forth aty ear. Fo ll owi ng a rev ie w of RA DuPo nt ’s adju st m en ts to pe ti ti on ers ’ 20 08 an d 20 09 in co m e b y

th e In te rn al Rev enue Serv ic e App eal s Off ic e, res po nd en t i ss ue d th e n ot ic e. Res po nd en t d et erm in edde fic ie nc ie s o f $8 9,0 06 an d $ 60 ,28 6 fo r ta x y ears 20 08 an d 2 00 9, re sp ect iv el y an d s ect io n 6 66 2( a) ac cu racy-rela te d p en al ti es of $1 7,8 01 an d $ 12 ,05 7 fo r 20 08 an d 2 00 9, re sp ect iv el y . The d efi ci en ci es refl ect ed , am on g o th er ad jus tm en ts , th e d et erm in at io n t ha t p et it io ne rs ha d
un de rrep orte d the gro ss rece ip ts of Al an ’s Asp ha ltby $28 5,9 75 an d t he de ni al of th e cl ai m edde du ct io ns for$5 2,5 50 of l ab orco st s fo r ta x year 20 08
. Pet it io ne rs ti m el y

fil eda pe ti ti on with t hi s C ou rt. Th e p art ie s h av e st ip ul at edth atth e fo ll owi ng ad jus tm en ts to pe ti ti on ers ’ 20 08 Sch edul e C were
co rrec t an d p ro pe r:

Ite m Am ou nt 1 Offi ce ex pe ns es $5 00 In su ran ce 5,1 70 Uti li ti es 2,4 00- 9 -

[* 9] Supp li es (7,4 85 ) Rep ai rs 38 Trav el 3,2 87 Car & tru ck 6,2 89 Co stof g oo ds so ld --p ur ch as es (6 0,7 18 ) Adv ert is in g -0- Ren t/ le as e -0- Oth er ex pe ns es -0- Dep reci at io n -0- Mea ls & en te rta in m en t -0- The se fig ur es rep res en t d own wardad jus tm en ts to refl ectres po nd en t’s 1 di sa ll owa nc e o f ex pe ns es an d c os ts rep orte d o n S ch edul e C. The ad jus tm en ts in pa ren th es is are p os it iv e ad jus tm en ts ; tha t i s, re sp on de ntag rees th atpe ti ti on ers subs ta nt ia te d c ert ai n e xp en se s i n a dd it io n t o t ho se rep orte d o n t he ori gi na l re tu rn . Bec au se th e p art ie s h av e al so st ip ul at edth atth ere i s a d efi ci en cy intax du e fro m pe ti ti on ers of $ 30 ,64 7 fo r ta x year 20 09 , m atte rs fro m 20 09 wil l n otbe di sc us se d
an y furth er. OPINION I. Unr ep orte d In co m e A. Bu rd enof P ro of Ord in ari ly, th e b ur de n o f pr oo f is up on th e ta xp ay er. See Ru le 14 2( a). Thi s cas e in vo lv es un rep orte d i nc om e, ho wev er, an d, i n s uc h c as e, we requi re the- 10 -

[* 10 ] Co m

m is si on er t o p ro vi de a m in im al ev id en ti ary fo un da ti on supp orti ng hi s de te rm in at io n o f un rep orte d i nc om e o r el se th e b ur de n o f go in g fo rwardwith t he
ev id en ce wi th res pe ctto th e unr ep orte d i nc om e sh ift s t o h im . See, e.g ., Day v. Co m m is si on er, 9 75 F.2d53 4, 5 37 (8t h C ir. 1 99 2) , aff’g i n p art , rev ’g inpa rt o n ot he r gr ou nd s T.C. Me m o. 1 99 1- 14 0; see als o M oh le r v. C omm is si on er, T.C. Mem o. 2 01 4- 90 , at * 4. Res po nd en t d et erm in edth atth e b an k d ep os it s an d t he am ou nt s o n t he in vo ic es co ns ti tu te sep arat e it em s o f in co m e fo r 20 08 . Peti ti on ers co nt en d tha t
res po nd en t s ho ul d b ear t he bu rd enof p ro of with re sp ectto th e unr ep orte d g ro ss rece ip ts attrib ut ab le to th e in vo ic es , arg ui ng th atres po nd en t “ ha s p ro vi de d ZERO
ev id en ce tha t an y

rev enue rel at edto th e in vo ic es /b id s o n i ts li stwas re cei ve d o th er th anth e am ou nt s t ha t ar e ref le ct edinth e d ep os itan al y si s.” Pet it io ne rs are m is ta ke n. Re sp on de ntha s i nt ro du cedev id en ce s ho win g t ha t Mr. Sa wy er ro ut in el y

fai le d t o d ep os itth e p ro ceed s fr om asp ha ltpavi ng job s. Mr
. Sawy er ad m it te d a t tria l an d p et it io ne rs adm iton bri ef tha t M r. Sawy er p erfo rm ed
ne arl y all of t he asp ha ltpavi ng job s s etforthinth e in vo ic es bu t tha t fo r m an y of th os e job s t he y

fai le d t o d ep os itso m e p orti on of t he pro ceed s re cei ve d. Res po nd en t h as sat is fie d h is bu rd ento pro vi de a m in im al ev id en ti ary fo un da ti on- 11 -

[* 11 ] supp orti ng hi s d et erm in at io n o f un rep orte d i nc om e. The b ur de n o f pr oo f
rem ai ns up on pe ti ti on ers . B. Ban k Dep os it s Sect io n 6 1( a)(2 ) de fin es gro ss in co m e as all in co m e fro m what ev er s ou rce de riv ed , in cl ud in g g ro ss in co m e d eri ve d fr om bu si ne ss . Pers on s s ub

ject t o t ax are requi redto ke ep reco rd s s uf fic ie ntto est ab li sh gro ss in co m e an d d educ ti on s. See
se c. 60 01 ; s ee al so sec . 1.6 00 1- 1( a), In co m e Tax Reg s. Where a ta xp ay er fa il s t o m ai nt ai n a de qu at e rec or ds , th e Co m m is si on er i s au th or iz edto co m pu te th e ta xp ay er’s i nc om e b y

an y m etho d wh ic h c le arl y

refl ect s i nc om e. See s ec. 4 46 (b );
se e al so Pet zo ldt v . Comm is si on er, 9 2 T.C. 6 61 , 69 3 (1 98 9)
. Res po nd en t re li ed , inpa rt, o n t he so -cal le d b an k d ep os it s m etho d t o reco ns tru ctpe ti ti on ers ’ in co m e. Thi s C ou rt h as lo ng reco gn iz edth e b an k d ep os it s m etho d a s a r eas on ab le m ean s o f rec on st ru ct in g atax pa y er’s i nc om e. See, e.g ., Tok ars ki v. Co m

mis si on er, 8 7 T.C. 7 4, 7 7 (1 98 6) . Depo si ts ina ta xp ay er’s b an k
acco un t ar e co ns id eredpri m a fac ie ev id en ce o f in co m e. Id . The b an k d ep os it s m etho d a ss um es th atall m on ey de po si te d i nt o atax pay er’s b an k a cco un t dur in g a pa rti cu la r pe rio d c on st itut es tax ab le in co m e, an d t he tax pay er b ears th e b ur de n o f sh owi ng th atth e d ep os it s wer e n ottax ab le in co m e b utwere d eri ve d fr om a- 12 -

[* 12 ] no nt ax ab le so ur ce. Welch v. Co m m is si on er, 2 04 F.3d12 28 , 12 30 (9t h C ir. 20 00 ), aff’g T.C. Me m o. 1 99 8- 12 1. Rel y in g o n RA DuPo nt ’s ban k d ep os it s an al y si s, re sp on de ntde te rm in edth at pe ti ti on ers ha d d ep os it ed$3 27 ,60 2 i nt o t he ir b an k a cco un ts du rin g 2 00 8 a ndth at th os e fu nd s re pr es en t g ro ss rece ip ts att rib ut ab le to Alan ’s Asp ha lt . Peti ti on ers do
no t d is pu te res po nd en t’s re li an ce o n t he ba nkde po si ts m etho d. Pe ti ti on ers co nt en d t ha t o ne it em

li st edinres po nd en t’s an al y si s, a M arch 24 , 20 08 , dep os itof $9 ,96 0, re pr es en ts a di sh on or edch eckth atwas s ub se qu en tl y rei ss ue d a nd de po si te d a t a l at er d at e. Res po nd en t co nc ed es th atth e $ 9,9 60 de po si t d oe s n ot rep res en t t ax ab le in co m e. The C ou rt a ccep ts res po nd en t’s co nc es si on an d wi ll reduc e p et it io ne rs ’ gr os s i nc om e at tri bu tabl e to tax ab le de po si ts acco rd in gl y . The Co urt fi nd s t ha t p et it io ne rs de po si te d $ 31 7,6 42 in to th ei r ba nkacco un ts du rin g 5 20 08 an d t ha t tho se de po si ts rep res en t g ro ss rece ip ts of Al an ’s Asp ha lt
. C. In vo ic es 1. Ove rv ie w Res po nd en t d et erm in edth at , inad di ti on to th e $ 31 7,6 42 of g ro ss rece ip ts rep res en te d b y

th e b an k d ep os it s, Al an ’s Asp ha ltrece iv edgro ss rece ip ts to ta li ng $3 34 ,22 4 i n c on ne ct io n wi th 27 cu st om er i nv oi ces . Peti ti on ers co nt en d t ha t Thi s amoun t re fle ct s t he ba nkde po si ts reduc edby the di sh on or edch eck
. 5- 13 -

[* 13 ] res po nd en t’s d et erm in at io n s ev erel y ov ers ta te s i n ava rie ty of way s t he gro ss rece ip ts th atAlan ’s Asp ha ltrece iv eddu rin g 2 00 8. Fi rs t, p et it io ne rs arg ue th atno t al l o f th e in vo ic es rep res en t ac tu al asp ha lt pa vi ng job s fo r whi chAlan ’s Asp ha ltwas h ire d a ndpa id . Spe ci fic al ly, pe ti ti on ers id en ti fy two in vo ic es th atsh ou ldbe ex cl ud ed : the un si gn edin vo ic e d at edAug us t 22 , 20 08 , for$3 ,00 0 andth e Ji m Cro wley inv oi ce d at edOcto be r 27 , 20 08 , for $1 ,35 0. Th es e in vo ic es , pet it io ne rs co nt en d, m erel y rep res en t u ns uc ces sf

ul bi ds fo r as ph al t p av in g jo bs . No work was pe rfo rm edinco nn ect io n wi th th e in vo ic es , an d n o m on ey

was re cei ve d. Re sp on de ntdo es no t d is pu te pe ti ti on ers ’ ex pl an at io n an d c on ced es th atAlan ’s Asp ha ltdi d n otrece iv e p aym en t wi th res pe ctto th os e two in vo ic es . Accor di ng ly, th es e am ou nt s s ho ul d n otbe in cl ud edinth e g ro ss rece ip ts of Al an ’s Asp ha lt
. W it h re sp ectto th e rem ai ni ng 25 in vo ic es , pet it io ne rs adm itth atAlan ’s Asp ha ltrece iv edpa ym en t as st at edon th e in vo ic es . Con se qu en tl y , th e am ou nt st at edineach of the rem ai ni ng in vo ic es co ns ti tu te s g ro ss rece ip ts to Alan ’s Asp ha lt . See s ec. 6 1( a). Pet it io ne rs co nt en d, h owe ve r, th atMr. Sawyer dep os it ed
m os t o f th e p ro ceed s o f eac h a sp ha ltpa vi ng job in to pe ti ti on ers ’ ba nkacco un ts , ei th er i n c as h o r cas hi er’s ch eck s i n t he m an ne r de sc rib ed . See s up ra p . 4. Thu s, pe ti ti on ers arg ue d t ha t re sp on de ntha s t wice in cl ud edth e p ro ceed s o f th os e as ph al t- 14 -

[* 14 ] pa vi ng job s i n g ro ss rece ip ts : fi rs t b y in cl ud in g t he am ou nt s s ta te d i n t he in vo ic e an d asec on d t im e b y in cl ud in g t he de po si te d fu nd s i n t he ba nkde po si ts
an al y si s. Pet it io ne rs arg ue th atwher e th e p ro ceed s o f a g iv enin vo ic e were de po si te d i nt o o ne of t he ba nkacco un ts , th es e fu nd s h av e b een du ly accou nt edfor in res po nd en t’s b an k d ep os it s an al y si s an d s ho ul d n otbe in cl ud edingro ss rece ip ts
a se co ndti m e. The Co urt ag rees th atth e p ro ceed s fr om th e as ph al t p av in g jo bs sh ou ldno t be in cl ud edingro ss rece ip ts twi ce, b utwe can no t s im pl y di sr eg ardth e in vo ic es as dupl ic at iv e. Pet it io ne rs be ar the bu rd enof p ro of inth is cas e. See s up ra p artI.A. Mo reo ve r, pe ti ti on ers co nc ed e th atAlan ’s Asp ha ltrece iv ed , bu t M r. Sawy er fa il ed to de po si t, s ig ni fic an t am ou nt s o f cas h i n c on ne ct io n wi th th e in vo ic es . To th e 6
ex te ntth atpe ti ti on ers cande m on st rat e a l in k b etweenth e p ro ceed s fr om an in vo ic e an d asp eci fic de po si t i n t he ba nkde po si ts an al y si s, the Co urt ag rees th at th es e fu nd s h av e b een du ly accou nt edforan d s ho ul d n otbe in cl ud edingro ss

Pet it io ne rs arg ue th atinan y in st an ce wh ere c as h was rece iv edin 6 co nn ect io n wi th anin vo ic e b utno t d ep os it edin to a ba nkacco un t, tho se fun ds were s pe nton lab orco st s o r othe r ex pe ns es . Peti ti on ers co nc ed e th atth os e pr oc eed s s ho ul d b e in cl ud edingro ss rece ip ts bu t ar gu e th atth ey are en ti tl edto a co m m en su rat e reduc ti on forco stof g oo ds so ldor abu si ne ss ex pe ns e d educ ti on . The Co urt ad dr es se s t he co stof g oo ds so ldis su e se pa rat el y . See i nf ra p artII.- 15 -

[* 15 ] rece ip ts a se co ndti m e. The C ou rt a dd res se s ea chof the se ou ts ta nd in g in vo ic es be lo w.

2. Ana lysis of I nv oi ces a. Lak e Hou se Inn Res po nd en t d et erm in edth atpe ti ti on ers rece iv edun rep orte d g ro ss rece ip ts of $6 ,65 0 inco nn ect io n wi th th e Ma rch 3, 2 00 8, i nv oi ce i ss ue d t o Lak e Hou se

7 In n. Re sp on de ntco nc ed es th atpe ti ti on ers have de m on st rat edth at$6 ,00 0 o f th e pr oc eed s was de po si te d i nt o the ir b an k a cco un ts . Peti ti on ers adm itth atAlan ’s Asp ha ltrece iv edth e rem ai ni ng $6 50 incas h b utdi d n otde po si t tho se fun ds
. Acco rd in gl y , th e Co urt fi nd s t ha t Al an ’s Asp ha ltrece iv edad di ti on al un rep orte d gr os s re cei pt s o f $6 50 inad di ti on to th e $ 6,0 00 th atha s al read y be enacco un te d fo r in res po nd en t’s b an k d ep os it s an al y si s i n c on ne ct io n wi th th e Lak e Hou se Inn in vo ic e. b. Fewei l’s Au to m ot iv e Pet it io ne rs adm itth atAlan ’s Asp ha ltrece iv ed$1 7,8 00 inco nn ect io n wi th th e Ma rch 4, 2 00 8, i nv oi ce i ss ue d t o F ewei l’s Au to m ot iv e. Res po nd en t co nc ed es th atpe ti ti on ers ha ve de m on st rat edth at$1 6,4 60 of t he pro ceed s was de po si te d i nt o
Thi s amoun t re fle ct s t he in vo ic e am ou ntof $ 7,2 50 reduc edby the $6 00 7 ren t cr ed it
.- 16 -

[* 16 ] pe ti ti on ers ’ ba nkacco un ts . Peti ti on ers adm itth atAlan ’s Asp ha ltrece iv ed th e rem ai ni ng $1 ,34 0 i n c as h b utdi d n otde po si t tho se fun ds in to pe ti ti on ers ’ ba nk
acco un ts . Accor di ng ly, th e Co urt fi nd s t ha t Al an ’s Asp ha ltrece iv edad di ti on al
un rep orte d g ro ss rece ip ts of $ 1,3 40 inad di ti on to th e $ 16 ,46 0 t ha t h as alr eady be enacco un te d fo r in res po nd en t’s b an k d ep os it s an al y si s i n c on ne ct io n wi th th e Fewei l’s Au to m ot iv e in vo ic e.

c. Fl oyd Kur zwel l Pet it io ne rs adm itth atAlan ’s Asp ha ltrece iv ed$2 ,22 0 i n c on ne ct io n wi th th e Mar ch20 , 20 08 , in vo ic e is su edto Flo y d Ku rzwel l. Res po nd en t co nc ed es th at pe ti ti on ers ha ve de m on st rat edth at$1 ,00 0 o f th e p ro ceed s fr om th atpro ject was de po si te d i nt o p et it io ne rs ’ bankacco un ts . Peti ti on ers co nc ed e th atAlan ’s Asp ha lt
rece iv edth e rem ai ni ng $1 ,22 0 i n c as h b utdi d n otde po si t tho se fun ds in to pe ti ti on ers ’ bankacco un ts . Accor di ng ly, th e Co urt fi nd s t ha t Al an ’s Asp ha lt
rece iv edad di ti on al un rep orte d g ro ss rece ip ts of $ 1,2 20 inad di ti on to th e $ 1,0 00 th atha s al read y

be enacco un te d fo r in res po nd en t’s b an k d ep os it s an al y si s i n co nn ect io n wi th th e Kur zwel l i nv oi ce.

d. Dirt y

DuckBar an d Gri ll Pet it io ne rs adm itth atAlan ’s Asp ha ltrece iv ed$8 ,40 0 i n c on ne ct io n wi th th e Apr il 1, 2 00 8, i nv oi ce i ss ue d t o Di rty DuckBar an d Gri ll . Res po nd en t co nc ed es- 17 -

[* 17 ] th atpe ti ti on ers ha ve de m on st rat edth at$8 ,30 0 o f th e p ro ceed s fr om th at pr ojec t was de po si te d i nt o p et it io ne rs ’ ba nkacco un ts . Peti ti on ers adm itth at Alan ’s Asp ha ltrece iv edth e rem ai ni ng $1 00 inth e fo rm of f oo d a nddri nk s, wh ic h Mr. Sa wy er p ro vi de d t o t he lab or ers . Peti ti on ers co nc ed e th atth is rece ip t
co ns ti tu te s b art eredservi ces in co m e, se e se c. 1.6 1- 2( d) (1 ), In co m e Tax Reg s., b ut arg ue th atth ey

are en ti tl edto a bu si ne ss ex pe ns e d educ ti on form eal s an d
en te rta in m en t i n t he same am ou nt . Res po nd en t o bjec ts to th e Co urt’s al lo win g t he de du ct io n. Re sp on de ntdo es no t al le ge th atAlan ’s Asp ha ltdi d n otrece iv e th e fo odan d drin ks , no r do es he arg ue th atMr. Sawyer di d n otpro vi de th e ref res hm en ts to hi s l ab or ers . Rath er, res po nd en t co nt en ds th atwe sh ou ldno t co ns id er p et it io ne rs ’ arg um en t b ecau se th ey rai se d i t fo r th e fi rs t t im e in th ei r op en in g b rie f. Res po nd en t al so arg ue s t ha t th e p art ie s h av e st ip ul at edth e am ou ntof m eal s an d e nt ert ai nm en t ex pe ns es to whi chth ey

were en ti tl edfor20 08
. As a g en eral rul e, th is Co urt wi ll no t co ns id er i ss ue s ra is edby a part y forth e fir stti m e o n b rie f whe n t o d o s o wi ll pre ve ntth e o pp os in g p arty fro m pre se nt in g ev id en ce o r arg um en ts th atm ig htha ve be enoff eredha d the is su e b een ti m el y rai se d. Se e, e.g ., Graha m v. Co m m is si on er, 7 9 T.C. 4 15 , 42 3 (1 98 2) ; Bo eh m e v . Co m m is si on er, T.C. Mem o. 2 00 3- 81 , 20 03 W L 13 92 72 0, at*4 . Mr. Sawy er- 18 -

[* 18 ] tes ti fie d a t tria l tha t h e rec ei ve d t he refre sh m en ts as p art ia l p aym en t o n t he Dirt y DuckBar an d Gri ll in vo ic e, an d re sp on de ntha s ac cep te d M r. Sawy er’s te st im on y . Resp on de ntha d t he op po rtu ni ty to ad dr es s t he de du ct ib il it y of t he refr es hm en ts inhi s re pl y

bri ef b utde cl in edto do so . The Co urt d oe s n otbe li ev e th atres po nd en t h as be enpre jud ic edby pet it io ne rs ’ rai si ng th e m at te r on th ei r op en in g b rie f. Nordo es th e Co urt b el ie ve th atth e p art ie s’ st ip ul at io n p recl ud es pe ti ti on ers fro m arg ui ng th atth ey

are en ti tl edto th e d educ ti on . Sti pu la ti on s ar e tr eat ed“ as * * * co nc lu si ve admis si on [s ] by the pa rti es ”. See R ul e 9 1( e); Ch ap m anGlen Ltd
. v. Co m m is si on er, 1 40 T.C. 29 4, 3 17 (20 13 ). Und er Ru le 91 (e), the Co urt m ay rel ie ve parti es of ast ip ul at io n i f jus ti ce s o re qu ire s. Fo r ex am pl e, th e Co urt m ay rel ie ve parti es of ast ip ul at io n wh ic h i s co nt rary to the reco rd . See Ca l-M ai ne Fo od s, In c. v. Co m

m is si on er, 9 3 T.C. 1 81 , 19 5 (1 98 9) ; s ee al so Crawfo rdv. Co m m is si on er, T.C. Mem o. 2 01 4- 15 6, at*1 7. Pe ti ti on ers di d n otcla im an y de du ct io n fo r m eal s an d e nt ert ai nm en t ex pe ns es on Sch edul e C fo r Ala n’s Asp ha lt . The p art ie s s ti pu la te d tha t re sp on de nt ’s adju st m en ts to th e rep orte d Sch edul e C ex pe ns es , in cl ud in g n o a dju st m en t t o t he m eal s an d e nt ert ai nm en t
ex pe ns es , were co rrec t. Pet it io ne rs in tro du cedev id en ce tha t the st ip ul at io n was pl ai nl y in co rrec t, an d re sp on de ntdo es no t d is pu te th e v al id ity of tha t ev id en ce.- 19 -

[* 19 ] The C ou rt wi ll th eref or e rel ie ve pe ti ti on ers of t he ir s ti pu la ti on forth e al lo wab le $1 00 m eal s an d e nt ert ai nm en t ex pe ns e fo r 20 08
. Acco rd in gl y , th e Co urt fi nd s tha t Al an ’s Asp ha ltrece iv edad di ti on al
un rep orte d b art er i nc om e o f $1 00 inad di ti on to th e $ 8,3 00 th atha s al ready be en acco un te d fo r in res po nd en t’s b an k d ep os it s an al y si s i n c on ne ct io n wi thth e Dirty Duc k B ar an d Gri ll in vo ic e. The C ou rt a ls o fi nd s t ha t Al an ’s Asp ha ltis en ti tl edto
anad di ti on al de du ct io n fo r m eal s an d e nt ert ai nm en t ex pe ns es of $ 10 0.

e. Hwy

5 St or ag e Pet it io ne rs adm itth atAlan ’s Asp ha ltrece iv ed$2 ,30 0 i n c on ne ct io n wi th th e Apr il 3, 2 00 8, i nv oi ce i ss ue d t o Hwy 5 St or ag e an d t ha t tho se fun ds were n ot de po si te d i nt o p et it io ne rs ’ bankacco un ts . Accor di ng ly, th e Co urt fi nd s t ha t Alan ’s Asp ha ltrece iv edad di ti on al un rep orte d g ro ss rece ip ts of $ 2,3 00 in
co nn ect io n wi th th e Hwy 5 St or ag e in vo ic e. f. Mi dwe stKenn el Pet it io ne rs adm itth atAlan ’s Asp ha ltrece iv ed$2 ,30 0 i n c on ne ct io n wi th th e Apr il 8, 2 00 8, i nv oi ce i ss ue d t o M idwes t Ken ne l an d t ha t tho se fun ds were n ot de po si te d i nt o p et it io ne rs ’ bankacco un ts . Accor di ng ly, th e Co urt fi nd s t ha t Alan ’s Asp ha ltrece iv edad di ti on al un rep orte d g ro ss rece ip ts of $ 2,3 00 in
co nn ect io n wi th th e Mi dwe stKenn el in vo ic e.- 20 -

[* 20 ] g. Greg Mi ll er Pet it io ne rs adm itth atAlan ’s Asp ha ltrece iv ed$4 ,50 0 i n c on ne ct io n wi th th e Apr il 9, 2 00 8, i nv oi ce i ss ue d t o Gre g M il le r. Res po nd en t co nc ed es th at pe ti ti on ers ha ve de m on st rat edth at$3 ,82 5 o f th e p ro ceed s fr om th atpro ject was de po si te d i nt o p et it io ne rs ’ bankacco un ts . Peti ti on ers co nc ed e th atth e rem ai ni ng $6 75 was n otde po si te d i nt o p et it io ne rs ’ ba nkacco un ts . Accor di ng ly, th e Co urt fin ds th atAlan ’s Asp ha ltrece iv edad di ti on al un rep orte d g ro ss rece ip ts of $ 67 5 i n ad di ti on to th e $ 3,8 25 th atha s al read y be enacco un te d fo r in res po nd en t’s b an k de po si ts an al y si s i n c on ne ct io n wi th th e Mi ll er i nv oi ce.

h. Erne stRo ge rs Pet it io ne rs adm itth atAlan ’s Asp ha ltrece iv ed$7 ,00 0 i n c on ne ct io n wi th th e Apr il 14 , 20 08 , in vo ic e is su edto Erne stRo ge rs . Res po nd en t co nc ed es th at pe ti ti on ers ha ve de m on st rat edth at$5 ,15 0 o f th e p ro ceed s fr om th atpro ject was de po si te d i nt o p et it io ne rs ’ bankacco un ts . Peti ti on ers co nc ed e th atAlan ’s Asp ha lt
rece iv edth e rem ai ni ng $1 ,85 0 i n c as h b utcla im th atth os e fu nd s wer e n ot de po si te d i nt o p et it io ne rs ’ bankacco un ts . Accor di ng ly, th e Co urt fi nd s t ha t Alan ’s Asp ha ltrece iv edad di ti on al un rep orte d g ro ss rece ip ts of $ 1,8 50 inad di ti on to th e $ 5,1 50 th atha s al read y be enacco un te d fo r in res po nd en t’s b an k d ep os it s an al y si s i n c on ne ct io n wi th th e Ro ge rs in vo ic e.- 21 -

[* 21 ] i. Ro be rt B rewi ng to n Pet it io ne rs adm itth atAlan ’s Asp ha ltrece iv ed$5 ,00 0 i n c on ne ct io n wi th th e Apr il 15 , 20 08 , in vo ic e is su edto Ro be rt B rewi ng to n. Re sp on de ntco nc ed es th at pe ti ti on ers ha ve de m on st rat edth at$4 ,80 0 o f th e p ro ceed s fr om th atpro ject was de po si te d i nt o p et it io ne rs ’ bankacco un ts . Peti ti on ers adm itth atAlan ’s Asp ha lt
rece iv edth e rem ai ni ng $2 00 incas h b utth atth os e fu nd s wer e n otde po si te d i nt o pe ti ti on ers ’ bankacco un ts . Accor di ng ly, th e Co urt fi nd s t ha t Al an ’s Asp ha lt
rece iv edad di ti on al un rep orte d g ro ss rece ip ts of $ 20 0 i n a dd it io n t o t he $4 ,80 0 t ha t ha s al read y

be enacco un te d fo r inres po nd en t’s b an k d ep os it s an al y si s i n co nn ect io n wi th th e Bre win gt on in vo ic e.

j. Mel vi n P hi pp s Pet it io ne rs adm itth atAlan ’s Asp ha ltrece iv ed$2 ,00 0 i n c on ne ct io n wi th th e Apr il 17 , 20 08 , in vo ic e is su edto Mel vi n P hi pp s. Pet it io ne rs ackno wled ge th atth e pr oc eed s fr om

th is pro ject wer e p ai d i n c as h a ndth atth ey di d n otde po si t tha t ca sh in to th ei r ba nkacco un ts . Accor di ng ly, th e Co urt fi nd s t ha t Al an ’s Asp ha lt
rece iv edad di ti on al un rep orte d g ro ss rece ip ts of $ 2,0 00 inco nn ect io n wi thth e Ph ip ps in vo ic e.- 22 -

[* 22 ] k. Asp enLawn & Land sc ap e Pet it io ne rs adm itth atAlan ’s Asp ha ltrece iv ed$9 ,14 0 i n c on ne ct io n wi th th e May 2, 20 08 , in vo ic e is su edto Asp enLawn & Land sc ap e. Res po nd en t de te rm in edth at$3 ,60 0 o f th e p ro ceed s fr om th atasp ha ltpa vi ng job was d ep os it ed in to pe ti ti on ers ’ ba nkacco un ts . Peti ti on ers co nt en d t ha t a c he ckde po si te d o n May 5, 20 08 , for$1 ,45 0 a ndcas h d ep os it s o f $3 ,00 0 o n M ay 6, 2 00 8, an d $ 1,2 00
on May 16, 2 00 8, ar e al so att rib ut ab le to th e Asp enLawn & Land sc ap e in vo ic e. Pet it io ne rs di d n otpro vi de an y do cu m en ta ti on or o th er ev id en ce t o s up po rt t hi s cl ai m . Non ethe le ss , th e Co urt i s s at is fie d b y pe ti ti on er’s t es ti m on y

as we ll as t he ti min g a ndam ou ntof t he May 6 cas h d ep os itth atth e $ 3,0 00 rep res en ts pro ceed s at tri bu tabl e to th e Asp enLawn & Land sc ap in g i nv oi ce. The Co urt fi nd s t ha t pe ti ti on ers ha ve de m on st rat edth atanad di ti on al $3 ,00 0 o f th e p ro ceed s was de po si te d i nt o t he ir b an k a cco un ts . Peti ti on ers ha ve fai le d t o s at is fy th ei r bu rd en of pro of with re sp ectto th e rem ai ni ng fun ds , ho wev er, an d the Co urt s us ta in s res po nd en t’s d et erm in at io n a s t o t he un de po si te d $ 2,5 40 . Accor di ng ly, th e Co urt de te rm in es th atAlan ’s Asp ha ltrece iv edad di ti on al un rep orte d g ro ss rece ip ts of $2 ,54 0 i n a dd it io n t o t he $6 ,60 0 t ha t h as alr eady be enacco un te d fo r in
res po nd en t’s b an k d ep os it s an al y si s.- 23 -

[* 23 ] l. Mary an d Ear l Wedd el Pet it io ne rs adm itth atAlan ’s Asp ha ltrece iv ed$1 3,0 00 inco nn ect io n wi th th e Ju ne 7, 2 00 8, i nv oi ce i ss ue d t o M ary an d Ear l Wedd el . The i nv oi ce p ro vi de s th atth e fund s wer e “ [t]o b e p ai d upo n s at is fact ory co m pl et io n” of t he work . Mr. Sawy er cr ed ib ly test ifi edat t ria l tha t h e rec ei ve d p aym en t i n t he form of asi ng le ch eck , andpe ti ti on ers co nt en d o n b rie f th atth e $ 13 ,00 0 c he ckde po si te d i nt o t he ir ba nkacco un t o n S ep te m

be r 23 , 20 08 , rep res en ts th e p ro ceed s o f th is pro ject. Th e Co urt i s s at is fie d wi th pe ti ti on ers ’ ex pl an at io n a ndfin ds th atth e p ro ceed s o f th e W ed de l i nv oi ce were in cl ud edinres po nd en t’s b an k d ep os it s an al y si s. No furth er ad jus tm en t t o t he gro ss rece ip ts of Al an ’s Asp ha ltwith re sp ectto th e Wedd el in vo ic e is ap pr op ria te .

m . Swim

Thi ng s, In c. Pet it io ne rs adm itth atAlan ’s Asp ha ltrece iv ed$9 ,00 0 i n c on ne ct io n wi th th e Ju ne 11 , 20 08 , in vo ic e is su edto Swim Thi ng s, In c., a co m

pany bas edinBlu e Sp rin gs , Mis so ur i. At t ria l M r. Sawy er t es ti fie d t ha t h e was pa idby check , whi ch he th enco nv ert edto a cas hi er’s ch eckan d c as h. Re sp on de nt ’s ban k d ep os it s an al y si s i nd ic at es two de po si ts on Ju ne 11 , 20 08 , to ta li ng $4 ,00 0, an d t he
an no ta ti on “ cas hi er’s ch eckfro m Alan to Alan fro m

Ban k o f th e West- -Bl ue Sp rin gs , MO.” Pet it io ne r al so de po si te d $ 1,0 00 incas h tha t s am e d ay . The Co urt- 24 -

[* 24 ] fin ds th es e d et ai ls su ffi ci en t t o e st ab li sh th atth e $ 5,0 00 pe ti ti on ers de po si te d i nt o t he ir b an k a cco un ts on June 11 , 20 08 , was p ro ceed s fr om th e Swi m Thi ng s, In c. in vo ic e. Pet it io ne rs ha ve fai le d t o s ho w th atth ey de po si te d t he
rem ai ni ng $4 ,00 0 a tt rib ut ab le to th is pro ject. Th e Co urt the refo re s us ta in s res po nd en t’s d et erm in at io n t ha t Al an ’s Asp ha ltrece iv edad di ti on al un rep orte d gr os s re cei pt s o f $4 ,00 0 i n a dd it io n t o t he $5 ,00 0 t ha t h as alr eady be enacco un te d fo r in res po nd en t’s b an k d ep os it s an al y si s i n c on ne ct io n wi th th e Swi m Thi ng s, In c. in vo ic e. n. K&M R an chHou se Res taur an t Pet it io ne rs adm itth atAlan ’s Asp ha ltrece iv ed$8 ,50 0 i n c on ne ct io n wi th th e Ju ne 23 , 20 08 , in vo ic e is su edto K&M Ra nc h Ho us e Res taur an t. At t ria l M r. Sawy er t es ti fie d t ha t h e rec ei ve d p aym en t i n t he form of f ou r ch eck s t ot al in g $5 ,73 9, p lu s ca sh of $ 2,6 00 (on bri ef p et it io ne rs ass ert edth e cas h re ta in edwas $2 ,76 1) . Peti ti on ers adm iton bri ef tha t the cas h re cei ve d i n c on ne ct io n wi th th e K&M R an chHou se in vo ic e was no t d ep os it ed . Peti ti on ers ass ert , ho wev er, tha t cert ai n e ntrie s o n re sp on de nt ’s ban k d ep os it s an al y si s re pr es en t the fou r ch eck s al le ge dl y rece iv edas p aym en t fr om K&M Ra nc h Ho us e. Eachof t ho se en tri es be ars anan no ta ti on by RA DuPo nt , in di cat in g t he na m e o f th e m ak er o f th e ch eck
. Not ab ly, no ne of tho se na m es in cl ud e K&M R an chHou se or i ts own er Karo lyn- 25 -

[* 25 ] Ly on , andpe ti ti on ers ha ve pro vi de d n o e xp lana ti on forth is di sc rep an cy . Pet it io ne rs ha ve no t s at is fie d t he ir b ur de n o f pr oo f. The C ou rt s us ta in s res po nd en t’s d et erm in at io n t ha t Al an ’s Asp ha ltrece iv edun rep orte d a dd it io na l gr os s re cei pt s o f $8 ,50 0 wi th res pe ctto th e K&M R an chHou se in vo ic e.

o. Harre ll Rid le y

Farm s Pet it io ne rs adm itth atAlan ’s Asp ha ltrece iv ed$2 ,75 0 i n c on ne ct io n wi th th e Ju ne 25 , 20 08 , in vo ic e is su edto Harrel l Ri dl ey Farm s. Th e in vo ic e b ears a ha nd writ te n n ot e in di cat in g t ha t the in vo ic e was “pa idinful l” by check . At tri al Mr. Sa wy er t es ti fie d t ha t h e rec ei ve d awire tra ns fer o f $2 ,60 0, l es s $ 15 0 fo r ba nk in g fe es . On b rie f pe ti ti on ers cla im edth atth ey rece iv eda wire tra ns fer o f $2 ,60 0 o n J ul y

3, 2 00 8, p lu s $ 15 0 i n c as h. In vi ew of pe ti ti on ers ’ in co ns is te nt cl ai m s, n ei th er o f whi chis supp orte d b y do cum en ta ti on or o th er ev id en ce, the Co urt co nc lu de s t ha t p et it io ne rs ha ve no t s at is fie d t he ir b ur de n o f pr oo f wit h
res pe ctto th e Harre ll Rid le y Farm s i nv oi ce. The Co urt s us ta in s re sp on de nt 's de te rm in at io n t ha t Al an ’s Asp ha ltrece iv edad di ti on al un rep orte d g ro ss rece ip ts of $2 ,75 0 wi th res pe ctto th e Harre ll Rid le y Farm s i nv oi ce. p. H&K Truc ki ng , LLC Alan ’s Asp ha ltis su edtwo in vo ic es to H&K Truc ki ng , LLC, du rin g 2 00 8. The fir stin vo ic e is da te d J ul y 18 , 20 08 , andis for$8 ,02 4. Th e se co nd , dat edJu ly- 26 -

[* 26 ] 22 , 20 08 , is for

$1 2,5 44 . The fi rs t i nv oi ce b ears a hand writ te n n ot e th atit ha s b een“pa idinful l” an d re fere nc es a ch ecknu m be r. The s eco nd , th ou gh la ck in g a“pa idinful l” no te , in di cat es th atitwas a ls o p ai d b y ch eck . Peti ti on ers adm itth atth ey

“ [d o] no t re cal l the sp eci fic s” of t he se pa ym en ts . Accor di ng ly, pe ti ti on ers ha ve fai le d t o s at is fy th ei r bu rd enof p ro of

, andth e Co urt s us ta in s res po nd en t’s d et erm in at io n t ha t Al an ’s Asp ha ltrece iv edad di ti on al un rep orte d gr os s re cei pt s o f $8 ,02 4 and$1 2,5 44 inco nn ect io n wi th th e two H&K Truc ki ng in vo ic es . q. Met cal f Exc av at in g Pet it io ne rs adm itth atAlan ’s Asp ha ltrece iv ed$4 6,0 00 inco nn ect io n wi th th e Ju ly 22, 2 00 8, i nv oi ce i ss ue d t o M et cal f Exc av at in g re fle ct in g M ik e Me tc al f as
own er. Mr. Sa wy er t es ti fie d t ha t h e rec ei ve d ach eckfor$6 ,50 0 fr om Lero y Lath am as p aym en t t owa rdth is in vo ic e as well as e ig htcas h p aym en ts to ta li ng $2 7,8 20 be twee n Jul y

17 an d Dec em

be r 23 , 20 08 . On b rie f pe ti ti on ers alt ered th ei r ex pl an at io n a ndcla im edth atth ey rece iv edth ree c he ck s: th e $ 6,5 00 ch eck fro m Mr. Latha m

pl us a ch eckfro m

“ Ri tc hi e Bro s- -Lin co ln , NE” for $ 5,7 20 an d a ch eckfro m

Ji m Kauf fm anfor$6 ,30 0. Pe ti ti on ers ’ cl ai m is un de rm in edby Mr. Sawy er’s n ot es on th e Me tc al f Exc av at in g i nv oi ce, wh ic h s ta te th atth e in vo ic e was pa idby two ch eck s fo r $1 0,0 00 an d $ 36 ,00 0, re sp ect iv el y . Res po nd en t’s- 27 -

[* 27 ] ba nkde po si ts an al y si s d oe s n otrefl ectth atpe ti ti on ers de po si te d c he ck s i n th os e am ou nt s dur in g 2 00 8. Pe ti ti on ers ha ve fai le d t o s at is fy th ei r bu rd enof p ro of with re sp ectto th e Me tc al f Exc av at in g i nv oi ce, an d t he Co urt s us ta in s res po nd en t’s d et erm in at io n t ha t Al an ’s Asp ha ltrece iv edad di ti on al un rep orte d gr os s re cei pt s o f $4 6,0 00 inco nn ect io n wi th th e Me tc al f Exc av at in g p ro ject.
r. Dav e Ton de r Pet it io ne rs adm itth atAlan ’s Asp ha ltrece iv ed$7 0,0 00 inco nn ect io n wi th th e Ju ly 22, 2 00 8, i nv oi ce i ss ue d t o Dav e Ton de r. Acco rd in g t o M r. Sawy er’s ha nd writ te n n ot es onth e in vo ic e, Mr. To nd er p ai d b y two ch eck s: on e fo r $1 7,5 00 an d, “ up on sat is fact ory co m pl et io n,” an ot he r fo r $5 2,5 00 . Peti ti on ers id en ti fy a $1 7,5 75 de po si t o n re sp on de nt ’s ban k d ep os it s an al y si s t ha t the y all eg e rep res en ts Mr. Ton de r’s do wnp aym en t, an d t he Co urt b el ie ve s t he ev id en ce supp orts pe ti ti on ers ’ cl ai m . At tri al Mr. Sawyer tes ti fie d t ha t the $5 2,5 00 ba la nc e was actua ll y

pa idinth ree i ns ta ll m en ts ov er the co ur se of t he asp ha ltpa vi ng job bu t was un sp eci fic as t o t he am ou nt s o r th e ti m in g o f th e d ep os it s. Th e Co urt i s un ab le to id en ti fy

whi chde po si ts , if an y , corres po ndwith t he rem ai ni ng pa ym en ts . Co ns eque nt ly, pe ti ti on ers ha ve fai le d t o s at is fy th ei r bu rd enof p ro of

as t o t he $5 2,4 25 ba la nc e, an d the Co urt s us ta in s re sp on de nt ’s det erm in at io n t ha t Al an ’s Asp ha ltrece iv edad di ti on al un rep orte d g ro ss rece ip ts of $ 52 ,42 5 i n a dd it io n t o t he- 28 -

[* 28 ] $1 7,5 75 th atha s al read y be enacco un te d fo r in res po nd en t’s b an k d ep os it s an al y si s i n c on ne ct io n wi th th e Ton de r in vo ic e.

s. Dou g Tet ers Pet it io ne rs adm itth atAlan ’s Asp ha ltrece iv ed$8 ,60 0 i n c on ne ct io n wi th th e Aug us t 1 2, 2 00 8, i nv oi ce i ss ue d t o Do ug Tete rs . Res po nd en t co nc ed es th at pe ti ti on ers ha ve de m on st rat edth at$3 ,50 0 o f th e p ro ceed s fr om th atpro ject was de po si te d i nt o p et it io ne rs ’ bankacco un ts . Peti ti on ers adm itth atth e rem ai ni ng $5 ,10 0 was rece iv edas c as h b utwas n otde po si te d i nt o p et it io ne rs ’ ba nkacco un ts . Acco rd in gl y , th e Co urt fi nd s t ha t Al an ’s Asp ha ltrece iv edad di ti on al un rep orte d gr os s re cei pt s o f $5 ,10 0 i n a dd it io n t o t he $3 ,50 0 t ha t h as alr eady be enacco un te d fo r in res po nd en t’s b an k d ep os it s an al y si s i n c on ne ct io n wi th th e Tet ers in vo ic e.

t. Mervi l M ul le nay Alan ’s Asp ha ltis su edanin vo ic e to Merv il Mu ll en ay da te d Au gu st14 , 20 08 , for$4 ,90 0. Pe ti ti on ers adm itth atth ey “ [d o] no t re cal l the sp eci fic s ab ou t th is de po si t.” Acc or di ng ly, pe ti ti on ers ha ve fai le d t o s at is fy th ei r bu rd enof p ro of

, an d t he Co urt s us ta in s re sp on de nt ’s det erm in at io n t ha t Al an ’s Asp ha ltrece iv ed ad di ti on al un rep orte d g ro ss rece ip ts of $ 4,9 00 with re sp ectto th e Mu ll en ay in vo ic e.- 29 -

[* 29 ] u. Lou is e Fo rs te r Pet it io ne rs adm itth atAlan ’s Asp ha ltrece iv ed$1 9,3 00 inco nn ect io n wi th th e Aug us t 1 7, 2 00 8, i nv oi ce i ss ue d t o Lo ui se Fo rs te r. A han dwr it te n n ot e o n t he in vo ic e in di cat es th atMs . For st er i ni ti al ly pai d $ 8,0 00 by checkwith t he $1 1,3 00 ba la nc e due up on co m

pl et io n. Mr . Sawy er t es ti fie d t ha t the in vo ic e was pa idby
an$1 1,0 00 cas hi er’s ch eck , a pe rs on al ch eckfro m Edwi n M cEll ey

for$6 ,40 0, an d
cas h o f $1 ,20 0. Th e Co urt i s s at is fie d t ha t the Octo be r 29 , 20 08 , dep os itof $1 1,0 00 rep res en ts pro ceed s fr om th e Fo rs te r in vo ic e an d fi nd s ac co rd in gl y . Pet it io ne rs ’ cl ai m

with re sp ectto th e rem ai ni ng $8 ,30 0 i s i nc on si st en t wi thth e in vo ic e an d u ns up po rte d b y ot he r ev id en ce. Pet it io ne rs ha ve th eref or e fai le d t o sa ti sf y th ei r bu rd enof p ro of

, andth e Co urt s us ta in s re sp on de nt ’s det erm in at io n th atAlan ’s Asp ha ltrece iv edad di ti on al un rep orte d g ro ss rece ip ts of $ 8,3 00 in ad di ti on to th e $ 11 ,00 0 tha t h as alr eady be enacco un te d fo r in res po nd en t’s b an k de po si ts an al y si s i n c on ne ct io n wi th th e Fo rs te r in vo ic e.

v. W es te rnIm

pl em en t Co ., Inc
. Pet it io ne rs co nc ed e th atth ey rece iv ed$3 1,3 80 wort h o f equi pm en t as pa ym en t fo r th e Aug us t 2 0, 2 00 8, i nv oi ce i ss ue d t o West ernIm pl em en t Co ., Inc ., an d t ha t tha t ex ch an ge co ns ti tu te s t ax ab le ba rte r in co m e und er s ect io n 6 1( a). See
se c. 1.6 1- 2( d) , Inc om e Tax Reg s.- 30 -

[* 30 ] Pet it io ne rs co nt en d t ha t the y are en ti tl edto a se ct io n 1 79 expe ns e d educ ti on of $3 1,3 80 with re sp ectto th e equi pm en t re cei ve d. Se ct io n 1 79 (a) p erm it s a ta xp ay er t o e le ctto tre atth e co stof c ert ai n p ro pe rty as an ex pe ns e fo r th e ta xabl e y ear i n wh ic h the pro pe rty is p la cedinservi ce. To c la im th e b en efi t o f se ct io n 17 9, the tax pa y er m

us t, am on g o th er requi rem en ts , m ak e anirr ev oc ab le ele ct io n on hi s o r he r ta x re turn . See s ec. 1 79 (c). Pet it io ne rs rai se th is is su e fo r th e fi rs t ti m e b rie f an d, i n a ny even t, d idno t m ak e th e requi si te ele ct io n. Th e Co urt wi ll de ny the de du ct io n. Pet it io ne rs arg ue , inth e al te rn at iv e, th atth ey are en ti tl edto a de pr eci at io n ex pe ns e d educ ti on forth e co stof t he equi pm en t. Thi s i ss ue , to o, p et it io ne rs rai se fo r th e fi rs t t im e o n b rie f an d o nl y inth e m os t g en eral term s. Mo reo ve r, th e pa rti es ha ve st ip ul at edth e am ou ntof d ep reci at io n e xp en se s t o wh ic h p et it io ne rs are e nt it le d. Th e Co urt wi ll no t al lo w any furt he r de pr eci at io n d educ ti on . Acco rd in gl y , th e Co urt s us ta in s re sp on de nt ’s det erm in at io n t ha t Al an ’s Asp ha lt
rece iv edad di ti on al un rep orte d g ro ss rece ip ts of $ 31 ,38 0 i n c on ne ct io n wi th th e W es te rnIm

pl em en t Co ., Inc . in vo ic e. w. Sm it h F arm s Pet it io ne rs adm itth atAlan ’s Asp ha ltrece iv ed$2 8,8 00 inco nn ect io n wi th th e Aug us t 2 8, 2 00 8, i nv oi ce i ss ue d t o S m it h F arm s. Onbri ef p et it io ne rs co nt en d- 31 -

[* 31 ] th atcert ai n c he ck s d ep os it edin to th ei r ba nkacco un ts an d i nc lu de d i n res po nd en t’s b an k d ep os it s an al y si s wer e p aym en ts att rib ut ab le to th e Sm it h Farm s i nv oi ces . In the ba nkde po si ts an al y si s RA DuPo nt ’s no te s i nd ic at e th at th os e ch eck s wer e is su edby G o R en ta ls , Inc ., Ji m Kauf fm an , andJames Vale rio
. The Co urt d oe s n otfin d c red ib le pe ti ti on ers ’ cl ai m s t ha t tho se ch eck s wer e p ai d b y orforth e b en efi t o f th e o wne r Je rry Sm it h o r Sm it h F arm s. Pet it io ne rs ha ve fai le d to sat is fy th ei r bu rd enof p ro of

with re sp ectto th e Sm it h F arm s i nv oi ce, an d t he Co urt s us ta in s re sp on de nt ’s det erm in at io n t ha t Al an ’s Asp ha ltrece iv edad di ti on al gr os s re cei pt s o f $2 8,8 00 inco nn ect io n wi th th e Sm it h F arm s i nv oi ce.

x. Ji m

Cro wley Pet it io ne rs adm itth atAlan ’s Asp ha ltrece iv ed$4 ,36 6 i n c on ne ct io n wi th th e Octo be r 27 , 20 08 , in vo ic e is su edto Ji m Cro wley andco nc ed e th atth ey are u nabl e to id en ti fy

th e fu nd s i n re sp on de nt ’s ban k d ep os it s an al y si s. Th e Co urt s us ta in s res po nd en t’s d et erm in at io n t ha t Al an ’s Asp ha ltrece iv edad di ti on al gro ss rece ip ts of $4 ,36 6 i n c on ne ct io n wi thth e Cro wley inv oi ce. As p rev io us ly dis cu ss ed , th e se co ndOcto be r 27 , 20 08 , in vo ic e is su edto Ji m Cro wley for $ 1,3 50 was a n un su cces sf

ul bi d fo r anasp ha ltpa vi ng job an d wi ll no t b e in cl ud edinth e g ro ss rece ip ts of Al an ’s Asp ha lt
.- 32 -

[* 32 ] y . Tot al Und ep os it edGros s R ecei pt s On the ba si s o f ou r rev ie w of t he in vo ic es , res po nd en t’s b an k d ep os it s an al y si s, M r. Sawy er’s t es ti m on y at t ria l, an d t he pa rti es ’ br ie fs , th e Co urt
co nc lu de s t ha t Al an ’s Asp ha ltrece iv edbu t fa il edto de po si t ad di ti on al gro ss rece ip ts to ta li ng $2 32 ,26 4. D. Co nc lu si on Dur in g t ax y ear 2 00 8 Al an ’s Asp ha ltrece iv edgro ss rece ip ts to ta li ng $5 49 ,90 6, wh ic h c on si st s o f $3 17 ,64 2 d ep os it edin to pe ti ti on ers ’ ba nkacco un ts
an d a n a dd it io na l $ 23 2,2 64 inun de po si te d g ro ss rece ip ts . On th ei r 20 08 return pe ti ti on ers rep orte d t ha t Al an ’s Asp ha ltrece iv edgro ss rece ip ts of $ 37 5,8 50 . The Co urt co nc lu de s, the refo re, tha t p et it io ne rs un de rrep orte d t he ad di ti on al gro ss rece ip ts of Al an ’s Asp ha ltby $17 4,0 56 . Add it io na ll y , Alan ’s Asp ha ltis en ti tl ed to a bu si ne ss ex pe ns e d educ ti on form eal s an d e nt ert ai nm en t o f $1 00
. II. Co st s o f Goo ds So ld --Lab or On Sc he du le C of

th ei r ta x re tu rnfor20 08 pe ti ti on ers cla im edth atAlan ’s Asp ha ltin cu rredco stof g oo ds so ldto ta li ng $2 05 ,89 0. Th is am ou ntco m pr is ed pu rch as es to ta li ng $1 53 ,34 0 a ndlab orco st s o f $5 2,5 50 . In the no ti ce re sp on de nt de te rm in edth atAlan ’s Asp ha ltis en ti tl edto anad di ti on al $6 0,7 18 forpu rch as es fo r 20 08 bu t d is al lo wedth e cl ai m edlab orco st s i n t he ir e nt ire ty. Res po nd en t- 33 -

[* 33 ] arg ue s t ha t p et it io ne rs are n oten ti tl edto th e cl ai m edlab orco st s b ecau se th ey ha ve fai le d t o e st ab li sh th atth e co st s wer e p ai d o r in curreddurin g t he 20 08 ta x year orth atan y

lab orco ul d h av e b een co m pl et edby Mr. Sawy er o r hi s fam il y m em be rs witho utth e as si st an ce o f an y hi redlab or . A tax pa y er en ga ge d i n am anuf actur in g o r m erch an di si ng bu si ne ss m ay subt ractco stof g oo ds so ldfro m gro ss rece ip ts to arri ve at g ro ss in co m e. Sec. 1.6 1- 3( a), In co m e Tax Reg s.; see als o s ec. 1 .16 2- 1( a), In co m e Tax Reg s. Co stof go od s s ol d i s t he am ou ntth atth e ta xp ay er ex pe nd edto pu rch as e o r co ns tru ctth e in ve nt ory so lddurin g t he y ear. Kazh uk au sk as v. Co m m is si on er, T.C. Mem o. 20 12 -1 91 , 20 12 WL 28 48 69 4, at*9 . Cos t o f go od s s ol d i s anoff se t t o g ro ss rece ip ts for

pu rp os es of c om

pu ti ng gro ss in co m e, rathe r th ana de du ct io n, wh ic h i s subt ract edfro m

gro ss in co m e in arri vi ng at t ax ab le in co m e. Id . The t ax pa y er be ars th e b ur de n o f subs ta nt ia ti ng th e am ou ntcla im edas c os t o f go od s s ol d, an d i t is th e ta xp ay er’s res po ns ib il ity to m ai nt ai n a de qu at e b oo ks an d re co rd s s uf fic ie nt to subs ta nt ia te all it em s o n t he tax return, i nc lu di ng co stof g oo ds so ld . See s ec. 60 01 ; s ee al so Sai d v . Comm is si on er, T.C. Mem o. 2 00 3- 14 8, 2 00 3 WL 21 20 52 52 , at*3 , aff’d, 1 12 Fed . App x. 6 08 (9t h C ir. 2 00 4) . W he re a t ax pa y er d oe s n otha ve ad equa te reco rd s, b utth e rec or d i nd ic at es th athe or s he cle arl y in cu rredanoff

se t to gro ss in co m e, th e Co urt m ay est im at e th e o ffs eton th e b as is of t he ev id en ce.- 34 -

[* 34 ] Co ha n v . Comm is si on er, 3 9 F .2d54 0, 5 43 -5 44 (2dCir . 19 30 ); s ee al so Kazh uk au sk as v. Co m

mis si on er, 2 01 2 WL 28 48 69 4 a t * 9. Inest im at in g t he
am ou ntall owabl e, ho wev er, the Co urt b ears he av il y ag ai ns t t ax pa y ers who se in ex act itud e is of t he ir o wn m ak in g. Co han v . Comm is si on er, 3 9 F .2dat 5 44
. Mr. Sa wy er ad mit te d t ha t the fig ur e subm it te d o n S ch edul e C o f pe ti ti on ers ’ 20 08 return was anap pr ox im at io n. Mr . Sawy er t es ti fie d t ha t h e typi cal ly hire d two to th ree l ab or ers pe r day an d p ai d t he m

$1 00 to $2 00 incas h a t the en d o f each da y . He di d n otm ai nt ai n a ny reco rd s t o trackhi s co st s, an d p et it io ne rs di d
no t s ub m itan y

ev id en ce t o c orro bo rat e th is tes ti m on y . The Co urt i s n otrequi redto acce pta ta xp ay er’s u ns ub st an ti at edtes ti m on y , se e Tok ars ki v. Co m

mis si on er, 8 7 T.C. at77 , andth e Co urt i s n otco nv in cedth at wha t M r. Sawy er ad m it s i s an est im at e is su ffi ci en t t o p ro ve th e cl ai m edco st s. Nev erthe le ss , Mr. Sawyer pro vi de d c red ib le tes ti m on y de sc rib in g, i nt er al ia , th e pr oc es s o f la y in g a sp ha lt , th e m anpo wer requi red , andhi s m etho d o f rec ru it in g d ay labo rers . On th e b as is of M r. Sawy er’s t es ti m on y an d the in vo ic es inev id en ce, i t is cle ar tha t p et it io ne rs are en ti tl edto so m e o ffs etfor lab orco st s. The Co urt fo un d c red ib le Mr. Sawyer’ s t es ti m on y th athe hi redtwo to th ree labo rers pe r da y

form os t o f th e as ph al t p av in g jo bs li st edinth e in vo ic es an d t ha t he pa idth em

cas h a t the en d o f th e d ay . Keepi ng inm in d t he adm on it io n i n C oh an- 35 -

[* 35 ] th atwe m ay

be ar h eav il y

ag ai ns t the tax pay er wh os e in ex act itud e is of h is
own m ak in g, the Co urt wi ll acce ptth e lo w endof t ha t ra ng e. The C ou rt wi ll th eref or e al lo w a lab orco streduc ti on of t wo l ab or ers at $ 10 0 p er l ab or er p er d ay . 8 The Co urt i s fa cedwith s om e d iff ic ul ty esti m at in g t he nu m be r of day s fo r whi chpe ti ti on ers are en ti tl edto th e labo r co st s. Mr . Sawy er t es ti fie d t ha t Al an ’s Asp ha ltrel ie d o n the hi redlab or“ [f]rom th e en d o f Mar chpro babl y un ti l the weathe r ge ts ba d” , whi ch , onbri ef, p et it io ne rs ap pe ar t o e xp la in as r eferrin g t o t he
en d o f Sep te m

be r. The C ou rt a ccep ts th e p eri odfro m Marc h t o S ep te m

be r as th e st art in g p oi ntforou r an al y si s, b utwe fin d p et it io ne rs ’ as se rti on on bri ef tha t Alan ’s Asp ha lthi redlab or ers fiv e d ay s a we ek , eve ry week , for

si x m on th s t o b e un supp orte d b y

th e ev id en ce. The Co urt b el ie ve s p et it io ne rs ’ es ti m at e o ve rs ta te s th e num be r of day s dur in g wh ic h Al an ’s Asp ha ltactua ll y requi redlab oran d g iv es no reg ardto ot he r ne ces sa ry bu si ne ss act iv it ie s, s uc h a s t rav el , neg ot ia ti on of
co nt ract s, an d o th er p rep arat io n.
Mr. Sa wy er’s cl ai m

th athe pa idap pr ox im at el y $1 00 for 8 t o 9 ho ur s o f 8 work p er d ay

is co ns is te ntwith fi gu res rel eas edby the Bureauof Lab orSta ti st ic s (BLS) fo r th atpe rio d. BLS re po rts th atinMay 200 8 t he na ti on al m ed ia n h ou rly wag e fo r co ns tru ct io n l ab or ers was $ 13 .71 an d t he na ti on al m ed ia n h ou rly wage fo r pa vi ng , su rfac in g, an d t am pi ng equi pm en t o pe rat or s was $1 6. Se e Ma y 20 08 Nati on al Occupa ti on al Em pl oym en t an d Wage Est im at es --Un it edSta te s, Bu reau of Labo r St at is ti cs , ht tp ://www.b ls .go v/ oe s/ 20 08 /m ay /o es _n at .ht m

(la stvi si te d Ja n. 1 5, 2 01 5)
.- 36 -

[* 36 ] Ouran al y si s o f th e in vo ic es inev id en ce re ve al s t ha t the da te s o n t he in vo ic es ge ne ral ly ten d t o b e cl us te redto ge th er, fo ll owe d b y pe rio ds durin g wh ic h Alan ’s Asp ha ltsi gn edfew to no ne w con tra ct s. Th e Co urt s urm is es fro m th is pa tt ernth atMr. Sawyer li ke ly spe ntsev eral da y s p ro curin g a sp ha ltpa vi ng job s, fo ll owe d b y

a few week s o f pe rfo rm in g t ho se job s. In th e ab se nc e o f ad di ti on al
ev id en ce, the Co urt co nc lu de s t ha t Al an ’s Asp ha ltdi d n otin cu r an y lab orco st s du rin g t he pe rio ds du rin g wh ic h M r. Sawy er n eg ot ia te d a sp ha ltpa vi ng job s. Th e Co urt wi ll th eref

or e ex cl ud e fro m

th e es ti m at e th e week s o f Mar ch3, Ma rch 31 , Apr il 7, Ap ril 14 , Ju ne 9, J un e 2 3, J ul y 21 , Aug us t 1 1, Au gu st18 , andAug us t 2 5. Afte r el im in at in g t ho se week s dur in g wh ic h M r. Sawy er n eg ot ia te d a sp ha lt pa vi ng job s, the Co urt i s l eftwith app ro xi m at el y 10 5 d ay s. Th e Co urt wi ll als o ex cl ud e fro m

th e es ti m at e certa in in vo ic es th atpro vi de for sm al le r as ph al t p av in g job s. Sp eci fic al ly, th e Co urt wi ll no t al lo w lab orco st s i n c on ne ct io n wi th th e Kur zwel l i nv oi ce, the Ph ip ps in vo ic e, th e Hwy 5 St or ag e in vo ic e, th e Mi dwe st Ken ne l i nv oi ce, the Mi ll er i nv oi ce, an d t he $4 ,36 6 J im Cro wley inv oi ce. Each of th os e in vo ic es in vo lv edth e p av in g o f a rel at iv el y sm al le r are a an d re qu ire d l it tl e to
no rem ov al of e xi st in g m at eri al . The Co urt ag rees with re sp on de ntth atth es e ta sk s co ul d h av e b eenacco m

pl is he d b y

Mr. Sawyer andhi s fa m il y m em be rs witho utth e as si st an ce o f ad di ti on al hi redlab or . In the ab se nc e o f ev id en ce s ho win g- 37 -

[* 37 ] ot he rwis e, th e Co urt co nc lu de s t ha t p et it io ne rs are n oten ti tl edto lab orco st s with re sp ectto th os e as ph al t p av in g jo bs an d wi ll rem ov e o ne da y fro m ou r ap pr ox im at io n fo r eac h o f th e si x i nv oi ces . App lying th e p rin ci pl e se t fo rth inCo ha n, the n, the Co urt es ti m at es th at pe ti ti on ers m ay

cla im a reduc ti on ag ai ns t g ro ss rece ip ts forlab orco st s fo r two labo rers pe r da y

at $ 10 0 p er l ab or er p er d ay for99 day s. Th e Co urt wi ll th eref or e al lo w a reduc ti on forlab orco st s o f $1 9,8 00
. III. Sect io n 6 66 2( a) Pe na lt ie s Sect io n 6 66 2( a) an d (b )(1 ) an d (2 ) pr ov id es foranaccu racy-rela te d p en al ty of 20 % of the po rti onof a ny un de rp aym en t at tri bu tabl e to , am on g o th er thi ng s, ne gl ig en ce o r in te nt io na l d is reg ardof rul es or r eg ul at io ns (wit ho utdi st in ct io n, ne gl ig en ce) o r an y

subs ta nt ia l u nd ers ta te m en t o f in co m e ta x. Th e te rm

“ ne gl ig en ce” i nc lu de s “ an y fai lu re t o m ak e a rea so nabl e atte m ptto co m pl y with th e p ro vi si on s” of t he Co de or t o e xe rci se “ or di na ry an d re as on ab le care inth e pr ep arat io n o f a t ax return.” See s ec. 1 .66 62 -3 (b )(1 ), In co m e Tax Reg s. Neg li ge nc e al so in cl ud es “ an y fai lu re b y

th e ta xp ay er t o k eep ad equa te bo ok s an d
reco rd s o r to subs tant ia te it em s p ro pe rly.” Id. The term “ di sr eg ard ” in cl ud es “ an y care le ss , reck le ss , or i nt en ti on al di sr eg ard .” Sec. 6 66 2( c).- 38 -

[* 38 ] Sect io n 6 66 4( c)(1 ) pr ov id es th atth e p en al ty sha ll no t b e im po se d wi th
res pe ctto an y

po rti onof a n u nd erp aym en t i f th e ta xp ay er s ho ws tha t the re was reas on ab le cau se for , andth athe act edingo odfai th with re sp ectto , th atpo rti on . Sect io n 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s., p ro vi de s: The de te rm in at io n o f whe th er a t ax pa y er ac te d wi th reas on ab le cau se an d i n g oo d fa ith i s m ad e o n acas e-b y -cas e b as is , tak in g i nt o a cco un t al l p ert in en t fa ct s an d c irc um st an ces . * * * Gen eral ly, th e m os t im po rta ntfact oris th e ex te ntof t he tax pay er’s eff ort t o a ss es s the ta xp ay er’s p ro pe r ta x l iabi li ty. Cir cum st an ces th atm ay in di cat e reas on ab le cau se an d g oo d fa it h i nc lu de anho ne stmis un de rs tand in g of * * * l aw th atis reas on ab le inli gh t o f al l the fact s an d ci rcu m st an ces , in cl ud in g the ex pe rie nc e, kn owl ed ge , andeduc at io n o f th e ta xp ay er. * * * Res po nd en t b ears th e b ur de n o f pr oduc ti on with re sp ectto th e p en al ty. See
se c. 74 91 (c). Th e b ur de n i m po se d b y sec ti on 74 91 (c) i s “ ‘onl y to co m e fo rward with e vi de nc e reg ard in g t he ap pr op ria te ne ss of app lying a pa rti cu lar ad di ti on to ta x o r pe na lt y

to th e ta xp ay er.’” Che rry v. Co m m is si on er, T.C. Mem o. 2 01 3- 3, at *1 4 (quo ti ng Goo d v . Comm is si on er, T.C. Mem o. 2 00 8- 24 5) . Once t ha t b ur de n i s m et , pet it io ne rs be ar the bu rd enof p ro vi ng th atth ey are en ti tl edto rel ie f un de r se ct io n 6 66 4( c)(1 ). See Hi gb ee v . Comm is si on er, 1 16 T.C. 43 8, 4 46 (20 01 ). Res po nd en t d et erm in edth atpe ti ti on ers are l iabl e fo r acc ur acy-rela te d pe na lt ie s o n t he ba si s o f un de rp aym en ts att rib ut ab le to ne gl ig en ce o r subs ta nt ia l
un de rs ta te m en ts of i nc om e ta x fo r 20 08 an d 2 00 9. Re sp on de ntha s m ethi s b ur de n- 39 -

[* 39 ] of pro du ct io n wi th res pe ctto pe ti ti on ers ’ ne gl ig en ce fo r bo th y ears . The
reco rdsh ows th atpe ti ti on ers fai le d t o re po rt alar ge po rti on of t he gro ss rece ip ts of Alan ’s Asp ha lton Sch edul e C an d fa il edto m ai nt ai n re co rd s ad equa te ly to
subs ta nt ia te m an y

of t he bu si ne ss ’ cl ai m edco st s an d e xp en se s. Pet it io ne rs adm it th atth ei r cl ai m edlab orco st s wer e m erel y est im at es . They ha ve st ip ul at edth at th ey di d n otaccu rat el y

rep ort ex pe ns es form an y cla im edde du ct io ns on th ei r 20 08
an d 2 00 9 re tu rn s an d h av e ag reedth atth ere i s a d efi ci en cy intax of $ 30 ,64 7 fo r 20 09 . Thu s, p et it io ne rs are l iabl e fo r th e se ct io n 6 66 2( a) p en al ty on t he gro un d o f
ne gl ig en ce fo r bo th y ears un le ss th ey m eetth e se ct io n 6 66 4( c) ex cep ti on for
reas on ab le cau se an d g oo d fa it h. 9 Pet it io ne rs arg ue th atth ey act edwith re as on ab le cau se an d i n g oo d fa it h be cau se th ey

rel ie d o n t he advi ce o f anacco un ta ntinpre pa rin g the ir t ax return. Rel ia nc e o n t he advi ce o f a p ro fes si on al tax advi se r do es no t n eces sa ril y de m on st rat e rea so nabl e cau se an d g oo d fa ith. Se e se c. 1.6 66 4- 4( b) (1 ), In co m e Tax Reg s. Ra th er, rea so nabl e cau se m ay be fou ndwher e th e ta xp ay er s el ect s a co m pe te nttax advi se r, supp li es th e ad vi se r wit h a ll rel ev an t i nf orm at io n, an d, i n a m an ne r co ns is te ntwith o rd in ary bu si ne ss care an d p ru de nc e, rel ie s o n t he Bec au se pe ti ti on ers ’ ne gl ig en ce i s s uf fic ie ntto su st ai n t he pe na lt y , th e 9 Co urt n eedno t ad dr es s t he ap pl ic ab il it y of t he pe na lt y

ba se d upo n t he gro un d o f subs ta nt ia l u nd ers ta te m en t o f in co m e ta x.- 40 -

[* 40 ] advi se r’s pr of

es si on al jud gm en t as to th e ta xp ay er’s t ax ob li ga ti on s. See Uni te d S ta te s v . Boyle, 4 69 U.S. 24 1, 2 51 (19 85 ); Ne on at ol og y Ass oc s., P.A. v. Co m m is si on er, 1 15 T.C. 43 , 99 (20 00 ), aff’d, 2 99 F.3d22 1 (3 d C ir. 2 00 2) . The pr of es si on al ’s adv ic e m

us t b e b as edon all pe rti ne ntfact s an d c irc um st an ces ; “ if th e ad vi se r is no t v ers edinth e n on ta x fa ct or s, m ere r el ia nc e o n t he tax advi se r m ay no t s uf fic e.” Tod d v . Comm is si on er, T.C. Mem o. 2 01 1- 12 3, 2 01 1 WL 21 83 76 7, at*9 , aff’d, 4 86 Fed . App x. 4 23 (5t h C ir. 2 01 2) ; s ee al so Gou ldv. Co m m is si on er, 1 39 T.C. 41 8, 4 60 (20 12 ), aff’d, 5 52 Fed . App x. 2 50 (4t h C ir. 20 14 ). Pet it io ne rs ha ve no t i nt ro du cedany ev id en ce re ga rd in g t he ir a cco un ta nt ’s qu al ifi cat io ns . See Neo na to lo gy Asso cs ., P.A. v. Co m m is si on er, 1 15 T.C. at 9 9. Mo reo ve r, th ey

ha ve fai le d t o d em on st rat e th atth ey pro vi de d h im

with a ll rel ev an t in fo rm at io n. Id . At tri al Mr. Sawyer tes ti fie d t ha t the in accu rat e fi gu res rep orte d
on th e returns were d eri ve d fr om fig ur es he hi m se lf a dd edup an d p ro vi de d t o pe ti ti on ers ’ return p rep areran d t ha t h e d idno t p ro vi de th e return p rep arerwith t he
un de rlyin g i nv oi ces or r ecei pt s. Mr . Sawy er al so adm it te d t ha t the cla im edlab or co stwas m erel y

anest im at e. Pet it io ne rs ha ve fai le d t o s ho w th atth ey are en ti tl ed to rel ie f un de r se ct io n 6 66 4( c)(1 ). The C ou rt s us ta in s re sp on de nt ’s im po si ti on of th e se ct io n 6 66 2( a) ac cu racy-rela te d p en al ty for b ot h years.- 41 -

[* 41 ] IV. Co nc lu si on Pet it io ne rs are l iabl e fo r th e d efi ci en cy fortax y ear 2 00 8 t o t he ex te ntset fo rth he rei n. Pe ti ti on ers are l iabl e fo r th e se ct io n 6 66 2( a) ac cu racy-rela te d p en al ty fo r bo th y ears as app li edto th e red et erm in edde fic ie nc ie s. To refl ectth e fo reg oi ng , Deci si on wil l b e en te red
un de r Ru le 15 5.