T.C. M em o . 2 0 1 7 -4 8

UNITED STATES TAX COURT

M UHIEDDIN A. GHAZAW I AND GHADA GHAZAWI, Pet i t io n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 4 7 5 0-1 5. Fi l edM arch 2 2 , 2 01 7
.
Ch arl es A. Ro s e, St ep hen A. Sh erm an , an dJ am es B. M art i n , J r., fo r p et i t i o n ers . Di an a N. W el l s an dDen i s e A. Di l o ret o , fo r res p o n d en t .

M EM ORANDUM FINDINGS OF FACT AND OPINION NEGA, Jud g e: Res p o n d en ti s s u eda n o t i ce o f d efi ci en cy t o p et i t io n ers d et erm i n i n g d efi ci en ci es i ni n co m e t ax , an ad d i t i o nt o t ax , an daccu racy -rel at ed p en al t i es as fo l l ows : 1

1 Un l es s o th erwi s e i nd i cat ed , al l s ect i o nreferen ces are t o th e In t ern al (co n ti n u ed ...)- 2
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[* 2 ] Year Defi ci en cy Ad d i t i o nt o t ax s ec. 6 6 5 1(a)(1 ) Pen al ty

s ec. 6 6 6 2 (a) 2 0 1 1 $ 3 0 0 ,8 3 4 $ 6 0,1 6 7 $ 6 0,1 6 7 2 0 1 2 1 3 7 ,3 5 4
--- 2 7 ,4 7 1 Th e t h res h o l di s su es fo r d eci s i o nare wh et h er Gh ad a, In c. (Gh ad a), M u h ied di nGh azawi ’ s (M r. Gh azawi ) wh ol l y o wn edS co rp o rat i o n , fai l edt o rep o rt $ 2 2 2 ,8 1 8 o f g ro s s recei p t s fo r 2 0 1 2 an di s en t it l edt o redu ce g ro s s recei p t s b y $ 2 ,1 2 6 ,9 5 4 an d$ 1 ,9 36 ,5 5 8 o f co s to f g o o d s p u rch as edfo r res al e (COGS) fo r 2 0 1 1
an d 2 0 1 2 , res p ect iv el y . 2 Th e ad d i t i o n al i s s u es fo r d eci s io n are wh et her p et i t i o n ers : (1 ) fai l edt o rep o rt$ 8 7 6 ,9 5 2 an d$ 3 7 3,5 22 o f n o np as s i v e i n co m e fro m Gh ad a fo r 2 0 1 1 an d2 0 1 2 , res p ect i vel y ; (2 ) are en t i t l edt o d educt$ 6 9 ,1 0 4
an d $ 7 1 ,1 4 8 o f m o rt g ag e i n t eres tex p en s es rep o rt edo nSch edu l es E, Sup p l em en t al In co m e an d Lo s s , fo r 2 0 1 1 an d2 0 12 , res p ect i v el y ; an d(3 ) are l i ab l e fo r accu racy rel at ed p en al t i es u n der s ect i o n 6 6 6 2 (a) fo r 2 0 1 1 an d 2 0 1 2
. 3

1 (...co n t in u ed ) Rev enu e Co de (Co d e) i neffect fo r t h e t ax ab l e y ears ati s s u e, an dal l Ru le referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re. Al l m o net ary am ou n t s are ro u n dedt o t h e n eares td o l l ar.

2 Th es e are t h e am o un t s o f COGS p et i t io n ers cl ai m ed ; th ey ex ceed th e am ou n t s res p o n d en td et erm i n edi nth e n ot i ce o f d efi ci en cy o f $ 1 ,2 9 8 ,2 1 9 an d $ 1 ,7 7 9 ,4 4 9 fo r 2 0 1 1 an d2 0 1 2 , res p ect iv el y .

3 Attri al res p on d en t co n ced edth atGh ad a d i dn o tfai l t o rep ort$ 1 7 1,1 0 1 o f (co n ti n u ed ...)- 3
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[* 3 ] FINDINGS OF FACT So m e o f t h e fact s are s t i p u l at edan dare s o fo u nd . Th e s t i p u l at io no f fact s
an d th e at t ach edex h i b i t s are i n co rp o rat edh erei nb y th is referen ce. Pet i t i o n ers
res i dedi nKen tu cky

wh en the p et i t i o nwas fi l ed
. Du ri n g 2 0 1 1 an d2 0 1 2 , th e t ax ab l e y ears ati s su e, M r. Gh azawi was th e s o l e
o wn er o f Gh ad a. Gh ad a o p erat eda co n v en i en ce s to re, Di n o ’ s Fo o dM art2 (Di n o ), wh i ch s o l d g as o l i n e, l o t t ery t i ck et s , an dg ro ceri es . OnOct o b er 3 1 , 2 0 1 2 , Gh ad a s o l dal l o f i t s as s et s (i n cl u d i n g Di n o ) t o Sam er, LLC (Sam er), Gh ad a Gh azawi ’ s wh o l l y

o wn ed S co rp o rat i o n . Gh ad a fi l edFo rm s 1 1 2 0 S, U.S. In co m e Tax Retu rn fo r an S Co rp o rat i o n , fo r t h e t ax ab le y ears at i s su e an do nth e fo rm s i n d i cat edth ati trep o rt edi n co m e an d ex p en s es o n an accru al b as i s fo r Fed eral i n co m e t ax p u rp o ses . Duri n g th e t ax ab l e y ears ati ss u e Gh ad a m ai n t ai n ed two ch eck i n g acco un t s atRep ubl i c Ban k , acco u n ts en d i n g i n 4 1 3 6 an d4 1 4 4 (h erei n aft er acco u n t4 1 36 o r acco u n t 4 1 44 ). Bo th acco u n t s were h el do pen i n Gh ad a’ s n am e fo r t h e du rat i o no f t h e t ax ab l e y ears ati ss u e, n o twi th s t an di ng Gh ad a’ s s al e o f as s et s t o Sam er.

3 (...co n t in u ed ) s ec. 1 2 31 g ai n fo r 2 0 1 2
. Aft er t ri al p et i t i o n ers co nced ed : (1 ) i nth ei r o p en i n g b ri ef t h atGh ad a fai l edt o rep o rt$ 1 1 ,7 9 3 o f i nco m e fro m l o t t ery co m m i s s i o n s fo r 2 0 1 1 an d(2 ) i nth ei r an sweri n g b ri ef t h atth ey are l i ab l e fo r an ad d i t i o n t o t ax u n d er s ec. 6 6 5 1 (a)(1 ) fo r 2 0 1 1
.- 4
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[* 4 ] Pet i t i o ners fi l edjo i n tretu rn s fo r t h e t ax ab l e y ears ati s su e an d rep o rt ed $ 6 1 ,4 4 6 an d$ 3 6 ,5 5 3 o f n o npas s i v e i n co m e fro m Gh ad a’ s Sch edu l es K-1 , Sh areh ol d er’ s Sh are o f In co m e, Dedu ct i o n s , Cred i t s , et c., fo r 2 0 1 1 an d 2 0 1 2 , res p ect i vel y . Pet i t i on ers ’ retu rn s were p rep aredb y M o n g er & Co
. , an acco u n t i n g
an d b o o kk eep in g fi rm . Ny en at ee M o n ger, an acco u n t an t, b oo kkeep er, an do wn er
o f M o n g er & Co ., was ei ther t h e p rep arer o r t h e t h i rd -p art y d es i g nee o f p et i t i o n ers ’ retu rn s fo r t h e t ax ab l e y ears at i s s ue. M r. M o ng er g en erat edp ro fi tan d l o s s s u m m ari es fo r p et i ti o ners u s i n g Gh ad a’ s b an ks t at em en ts an dm o n th l y cas h reg i s ter t ap es . OnNo vem

b er 2 0, 2 0 1 4 , res p o n d en ts en t p et i ti o n ers a n o ti ce o f d efi ci en cy fo r t ax y ears 2 0 11 an d 2 0 12 th atm ad e n o ad j u s t m en t t o Gh ad a’ s 2 0 1 1 rep o rt ed g ro s s recei p ts b utd et erm in edb y u s i n g a b an kd ep o s it s an al y s is o f Gh ad a’ s
acco u n t s 4 1 36 an d4 14 4 thatGh ad a h ad fai l edt o rep o rt$ 2 2 2 ,8 1 8 o f g ro s s recei p t s fo r 2 0 1 2 . Th e n o t i ce o f d efi ci en cy al s o d i s al l o wed$ 8 2 8 , 7 35 an d$ 1 5 7 ,1 0 9 o f Gh ad a’ s rep o rt edCOGS fo r 2 0 1 1 an d2 0 12 , res p ect i v el y . 4 Onth e b as i s o f
res p o n d en t’ s ad

ju s t m en t s t o Gh ad a’ s g ro s s recei p t s an dCOGS, th e n o t i ce o f d efi ci en cy

d et erm i n ed th atp et i t i o n ers h adfai ledt o rep o rti n co m e fro m Gh ad a.

4 As s t at eds upra n o t e 2 , res po n d en td et erm i n ed COGS o f $ 1 , 2 9 8 ,2 1 9 an d $ 1 ,7 7 9 ,4 4 9 fo r 2 0 1 1 an d2 0 1 2 , res p ect iv el y .- 5
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[* 5 ] Fo r t h e t ax ab l e y ears ati s s u e p et i t i o n ers cl ai m edm o rt g ag e i nt eres tex p en s e d educt i o n s fo r i nt eres t p ai do ntwo l o an s , l o an acco u n ts 5 90 6 an d 5 9 0 7 (h erei n aft er l o an5 9 0 6 o r l o an 5 9 0 7 ). Pet i t i o n ers cl ai m edSch edu l e E ex p en s e d educt i o n s o f $ 6 9 ,1 0 4 fo r “ m o rt g ag e i n t eres tp ai dt o b an k s , et c.” fo r 2 0 1 1. Pet i t io n ers cl ai m ed d educt i o n s o f $ 7 1 ,1 4 8 o n Sch edu le A, It em i zedDedu ct i o n s , fo r “ Po i nt s n o trep o rt edt o y o uo nFo rm 1 0 9 8 ” (h erei n aft er Sch edu l e A p o in t s ) fo r 2 0 1 2 . Res p o n den t ’ s n ot i ce o f d efi ci en cy al l o w ed$ 4 2 ,6 4 1 o f p et i t i o n ers ’ i n t eres t p ai dfo r 2 0 1 1 --$ 3 4 , 3 5 7 an d$ 8 ,2 8 4 fo r i n t eres tp ai do nl oan s 5 9 0 6 an d5 9 0 7 , res p ect i vel y --an dd is al l o wedal l o f p et i t io n ers ’ Sch edu l e A p o in ts fo r 2 0 1 2. Pet i t io n ers t i m el y

fi l eda p et i t i on fo r red et erm i n at i o no f t h e d efi ci en ci es . Pet i t i o ners d i dn o ti n tro du ce d o cu m en t at io n , o th er t h an b an k s tat em en t s , t o
v eri fy Gh ad a’ s rep ort ed g ro s s recei p t s fo r 2 0 12 . W e wi ll d i scu s s th e g ro s s recei pt s i s su e l at er i no ur o p i n i on . Pet i t i o n ers i n tro du cedd o cu m en ts t o s ub s t an t i at e Gh ad a’ s cl ai m edCOGS fo r t h e t ax ab l e y ears ati s s u e. Pet i t i o n ers ’ d o cu m en t at i o n i n cl u d edb an k s tat em en ts fo r acco u n t s 4 1 36 an d4 1 44 fro m 2 0 1 1 an d2 0 1 2 wi th i m ag es o f ch eck s wri t t enfro m th o se acco u n ts ; co p i es o f d ep o s i t s m ad e t o acco u n t s 4 1 3 6 an d4 1 4 4 fo r 2 0 1 2 ; A&M Oi l Co .’ s (A&M Oi l ) cu s t o m er l ed g ers fo r Di n o fro m 2 0 11 an d 2 0 1 2; s t at em en ts fro m Lam b ert ’ s Di s tri b ut o rs , In c. (Lam b ert ), refl ect i n g v ari o u s tran sact i o n s wi th Di n o du ri n g 2 0 10 -1 3 ; i n v oi ces fro m An h eu s er- 6
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[* 6 ] Bu s ch fo r 2 0 1 1 -1 3 ; an d m o d i fi edco p i es o f Gh ad a’ s Qu i ck Bo o ks rep o rt s fo r
acco u n t 41 3 6 . W e fi n d t h atp et i t io n ers ’ d o cu m en tat i o ns ubs t an t i at es th atGh ad a i n cu rred$ 1 ,7 1 7 ,5 71 an d$ 1 ,4 9 0 ,6 5 1 o f COGS fo r 2 01 1 an d2 0 1 2 , res p ect i v el y . 5 Th es e am o un t s are l es s th an th e am o un t s p et it i o n ers cl ai m ed , an do n l y COGS fo r 2 0 1 1 i s m o re t h an th e am o u n tres p o nd en td et erm i n ed ; COGS fo r 2 0 1 2 i s l es s th an th e am o un tres po n d en td et erm i n ed
. Befo re t ri al p et i ti o n ers s ti p u l at ed th atth ey were n o t en t i tl edt o a $ 7 1 ,1 4 8 Sch edu l e A p o i n t s d edu ct i o nfo r 2 0 1 2 . Aft er tri al o nM arch 9 , 2 0 1 6 , p et i t i o n ers
m ad e a m o t i o nt o co n fo rm th e p l ead i ng s t o t h e ev i d en ce t o as s ert a Sch edu l e E i n t eres tp ai dd edu ct i o n . OnM ay 1 2 , 2 0 1 6 , th i s Co u rtu n d er Ru l e 4 1 (b )(1 ) g ran t ed p et i t i o n ers ’ m o t io nt o co n fo rm th e p l ead i n g s t o the ev i d en ce, wh ich al l owed p et i t i o n ers t o as sert , as th o ug h p l ead edo nth ei r o ri g i n al p et i ti o n , th atth ey were
en t i t l edt o a $ 7 1 ,1 4 8 Sch edu l e E i n t eres t p ai dd edu ct i o n fo r 2 0 1 2. Pet i t i o ners i n tro du cedth e fo l l o wi n g d o cu m en t at i o nt o s up p o rtth ei r cl ai m ed i n t eres tp ai dd edu ct i o n s fo r 2 0 1 1 an d2 0 1 2: (1 ) l o an m as t er rep o rt s fo r l o an s 5 9 06
an d 5 9 0 7 fro m 2 0 1 1 an d2 0 1 2 s h o wi n g th e t ran s act i o n d at es , p ri n ci p al an di n t eres t

5 COGS fo r 2 0 11 co m

p ri s es $ 1 ,0 35 ,8 6 5 fro m

A&M Oi l , $ 5 6 5 ,0 00 fro m Lam b ert , an d$ 1 1 6 ,7 06 fro m

An h eu s er Bu s ch ; an dCOGS fo r 2 0 1 2 co m p ri s es $ 9 2 1 ,5 1 5 fro m

A&M Oi l , $ 4 9 4,0 6 7 fro m Lam bert , an d$ 7 5 ,0 6 9 fro m

An h eu s er Bu s ch
.- 7
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[* 7 ] am ou nt s , an da d es cri p t i o no f t h e p aym en ts ; (2 ) v ari o us m o n thl y b an k
s t at em en t s fro m

p et i t i o n ers ’ pers o n al b an k acco u n tfo r 2 0 1 1 ; an d(3 ) a v ari et y o f ch ecki m ag es i nco n

jun ct io nwi th th o s e b an k s t at em en t s (h erei naft er co l l ect i v el y l o an d ocu m en t at i o n ). Pet i t i o n ers d i d n o ti n tro du ce an y ad d i t io n al d ocu m en t at i o n fo r t h ei r cl ai m edi n t eres tp ai dd edu ct i o n s fo r 2 0 12 . W e fi n dthatp et i t i on ers ’ l o an d o cu m en t at i o ns ub s t an t iat es th atth ey m ad e t h e fo l l o wi ng p aym en ts i n2 0 1 1 : Lo an m as t er rep ort tran s act i o n d at e Ban kacco u n t 9 7 5 7 ch eckNo
. In t eres t al l o cat ed t o

l o an acco un t5 90 6 M ar. 3 , 2 0 1 1 1 0 1 $5 ,2 1 8 M ay 4 , 2 0 11 1 1 5 5 ,2 1 0 Ju l y 1 1 , 2 01 1 1 4 2 5 ,2 0 6 Au g . 4 , 2 0 1 1 1 4 4 5 ,2 0 2 Sep t. 1 2, 2 0 1 1 2 2 2 5 ,1 9 7 Dec. 9 , 2 0 11 2 2 5 5 ,1 8 5 No d o cu m en tat i o nwas i n tro du ced t o s ub st an t i at e t h atp et i t i o n ers were t h e p ay o rs o f t h e rem ai n i n g i n t eres tp aym en t s --s om e p aym en t s were m ad e i n cas h (an dwere n o ts ub s tan t i at ed ), an do th er p aym en t s cam e fro m ch ecknu m

b ers
as s o ci at ed wi th Gh ad a’ s b an kacco un t s . Acco rd i n gl y , we fi n das fact th at p et i t i o n ers p ai d i n t eres to f $ 3 1 ,2 1 8 an dzero fo r 2 0 11 an d 2 0 12 , res p ect i v el y .- 8
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[* 8 ] OPINION I. Bu rd en o f Pro o f Th e Co m m is s i o n er’ s d et erm i n at i o n s i na n o t i ce o f d efi ci en cy are g en eral l y p res u m edco rrect , an dth e t ax p ay er o rd in ari l y b ears th e b u rd en o f p ro vi n g t h o s e d et erm i n at i o n s erro n eo u s . Ru l e 1 4 2 (a); W el ch v . Hel veri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3). Fo r cas es ap p eal ab l e t o th e Co u rto f Ap p eal s fo r t h e Si x th Ci rcu i t , s u ch as th e cu rren tcas e, t he Co m m is s i o n er m ay n o trel y

o n t h e p res u m

p t i o n o f co rrect nes s wi th reg ardt o a d et erm i nat i o n o f u n rep o rt edi n co m e u n l es s th atd et erm in at i o n i s
s up p ort edb y

a “ m i n i m al ev i d en t i ary

fo u n d at i o n ”. Un i t edSt at es v . W al t o n, 9 0 9 F.2 d9 1 5 , 9 1 9 (6 th Ci r. 1 9 9 0 ) (qu o t i n g W ei m ers k i rch v . Co m m i s s i o n er, 5 9 6 F.2 d 3 5 8 , 3 6 1 (9 th Ci r. 1 9 7 9 ), rev ’ g 6 7 T.C. 6 7 2 (1 9 7 7 )); s ee Go l s en v . Co m m i s s i o n er, 5 4 T.C. 7 4 2 , 7 5 7 (1 9 7 0 ), aff’ d , 4 4 5 F.2 d9 8 5 (1 0 th Ci r. 1 9 7 1 ). Res p o n d en th as m etth i s b u rd en b y i n tro du ci n g a b an kd ep o s i t s an al y s i s fo r Gh ad a’ s b an kacco u n t s th ati n d i cat es Gh ad a recei v ed u nrep o rt edi n co m e. Th u s
res p o n d en t’ s d et erm i n at i o n s i n t h e n o t ice o f d efi ci en cy are en t i t l ed t o th ei r g en eral p res u m p t i o no f co rrect n es s ; an dp et i t i o n ers b ear t h e b u rd en o f p ro vi n g b y a p rep o n d eran ce o f t h e ev i den ce t h atres p o n d en t ’ s d et erm i n at io n s o f u nrep o rt ed i n co m e are arb i traryo r erro n eo u s . See Hel v eri ng v . Tay l o r, 2 9 3 U.S. 5 07 , 5 1 5 (1 9 3 5); Es t at e o f M as o nv . Co m m i s si o n er, 6 4 T.C. 6 51 , 6 56 -6 5 7 (1 9 7 5 ), aff’ d , 5 6 6- 9
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[* 9 ] F.2 d2 (6 th Ci r. 1 9 7 7 ). Th e t ax p ay er m ay p ro v e th atth e Co m

m i s s io n er’ s
reco n s tru ct i o n o f h is i n co m e i s i n erro r, i n wh o l e o r i np art , b y p ro v i n g t h ata d ep os i ti s n o n t ax ab l e. See Cl ayt o n v . Co m m i s si o n er, 1 0 2 T.C. 6 3 2 , 6 4 5 (1 9 9 4 ). Th e ev i d en ce d o es n o tes t ab l is h th atth e b u rd en o f p ro o f s h i ft s t o res p o n den tu n d er
s ect i on 7 4 9 1 (a) as t o an y i s s u e o f fact
. Dedu ct i o n s are a m at t er o f l eg i s l at i v e g race; th e t ax p ay er b ears th e b u rd en
o f p ro v i n g en t i t l em en t t o d edu ct i o n s al l o w edb y th e Co d e an do f s ub st an t i at i n g
ex p en s es u n d erl y i n g cl ai m edd edu ct i o n s b y k eep i ng an d p ro duci n g reco rd s
s u ffi ci en tt o en ab l e t he Co m m is s i o n er t o d et erm i ne t h e co rrect t ax l i ab i l it y . Sec. 6 0 0 1 ; INDOPCO, In c. v . Co m m i s s i o n er, 5 0 3 U.S. 7 9 , 8 4 (1 9 9 2 ); New Co lo n i al Ice Co . v . Co m

m i s s i on er, 2 92 U.S. 4 3 5 , 4 4 0 (1 93 5 ); s ec. 1 .6 00 1 -1 (a), (e), In co m e Tax Reg s . Th e Co m m is s i o n er b ears th e b u rd en o f p ro du ct i o nwi th res p ectt o an y
accu racy -rel at edp en al ti es u n d er s ect i o n6 6 6 2. See s ec. 7 4 9 1 (c); Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. 4 3 8 , 4 4 6 (2 0 0 1). On ce th e b u rd en o f p ro du ct io ni s m et , th e t ax p ay er b ears the b urd eno f p ro o f, i n cl u d i n g t h e b u rd en o f p ro v i ng reas o n ab l e
cau s e fo r h i s o r h er u n d erp aym en to f Fed eral i n co m e t ax . See Ru l e 1 4 2(a); Hi g bee
v . Co m m i s s i o n er, 1 1 6 T.C. at4 4 6 -4 4 7
.- 1 0 -

[* 1 0 ] II. Gh ad a’ s Return s A. Gro s s Recei p t s Sect io n6 1 (a) d efi n es “ g ro s s i n co m e” as “ al l i n co m e fro m wh at ev er s o u rce d eri v ed ”, i ncl ud in g “ [g ] ro s s i n co m e d eri v edfro m b u s i n es s ”. Sec. 6 1 (a)(2 ). Th i s d efi n i t i o ni s co n s tru edb ro ad ly an dh as “been h el dt o en co m p as s al l ‘ acces s i o n s t o weal th , cl earl y

real ized , an d o v er wh i ch th e t ax pay ers h av e co m p l et e d o m i n i o n .’ ” J am es v . Un i t ed St at es , 3 6 6 U.S. 2 1 3, 2 1 9 (1 9 6 1) (q uo t i ng Co m m i s s i o ner v . Gl en s h aw Gl as s Co ., 3 4 8 U.S. 4 2 6 , 4 3 1 (1 95 5 )). A t ax p ay er h as d o m i ni o nan d
co n tro l o v er an acco u nt wh en th e t ax p ay er h as th e freed o m t o u s e i t s fu n d s atwi l l
. See Ru t k i nv . Un i t edSt at es , 3 4 3 U.S. 1 3 0 , 1 3 6 -1 3 7 (1 9 5 2). Pet i t i o ners were req u i red , b u tfai led , t o m ai n t ai nad equ at e b o o k s an d
reco rd s es t ab l i sh i ng th e am o u n t s o f t h ei r g ro s s i n co m e. See s ec. 6 0 0 1; Pet zo l d tv . Co m m i s s i o n er, 9 2 T.C. 6 61 , 6 8 6 (1 9 8 9 ); s ec. 1 .4 4 6-1 (a)(4 ), In co m e Tax Reg s . Wh en a t ax p ay er fai l s t o k eep ad equ at e b o o k s an dreco rd s , th e Co m m i s si o n er i s
au th o ri zedt o d et erm in e t he ex is t en ce an dam o u nto f t h e t ax p ay er’ s i n co m e an d
m ay ap pro p ri at el y

em p l o y th e b an kd ep o s it s m et h o dt o es ti m at e t h e t ax p ay er’ s i n co m e. Sec. 4 4 6 (b ); Pet zo l d tv . Co m m is s i o n er, 9 2 T.C. at6 9 3 ; Es t at e o f M as o n
v . Co m m i s s i o n er, 6 4 T.C. at6 5 6 -6 5 7 . Th e Co m m i s si on er h as g reat l at i tu d e i n
reco n s tru ct i n g a t ax p ay er’ s i n co m e, an dth e reco n s tru ct i on n eedo n l y b e- 1 1 -

[* 1 1 ] reas o n ab l e i n th e l i g h t o f al l s u rro u n d i n g fact s an dci rcu m s t an ces . Pet zo l d t
v . Co m m i s s i o n er, 9 2 T.C. at6 8 7
. Ban kd ep o s i t s are p ri m a faci e ev i den ce o f i nco m e. To k ars k i v . Co m m i s s i o n er, 8 7 T.C. 7 4, 7 7 (1 9 8 6 ); Es t at e o f M as on v . Co m m i s s i o n er, 6 4 T.C. at6 5 6 -6 5 7 . Th e b an k d ep o s i t s m eth o d as s um es th atal l d ep o s i t s i nt o a t ax p ay er’ s
acco u n t are t ax ab l e u n l es s th e t ax p ay er can s h o w th atth e d ep o s it s are n o n t ax ab le,
an d “ th e Go vern m en tm

u stt ak e i n t o acco u n tan y n o n -t ax ab l e s o u rce * * * o f wh i ch i th as kn owl ed g e.” Pri ce v . Un i t edSt at es , 3 3 5 F.2 d6 7 1 , 6 7 7 (5 th Ci r. 1 9 6 4 ); s ee Di Leo v . Co m m is s i o n er, 9 6 T.C. 8 58 , 8 68 (1 9 9 1 ), aff’ d , 9 59 F.2 d1 6 (2 dCi r. 1 9 9 2). Res p o n d en t ’ s rev enu e ag en t em p l o y edth e b an kd ep o s i t s m et h o dt o
reco n s tru ctGh ad a’ s i n co m e b ecau se s h e d et erm in edGh ad a’ s reco rd s were i n co m pl et e as a res u l to f Gh ad a’ s s i g n i fi can tu se o f cas h . Th e rev en ue ag en tu sed Gh ad a’ s b an kacco u n ts t at em en t s (wh i ch are p arto f t h e reco rd ) t o p rep are a b an k d ep os i t s an al y si s , ex cl u di n g al l n o n t ax ab l e recei p t s o f wh i ch s h e was aware. Res po n d en treas o nab l y

rel i ed on th e b an kd ep os i t s m et h o d t o d et erm i n e Gh ad a’ s t ax ab l e i n co m e o nwh ich p et i t i o n ers ’ res u lt i n g i n co m e t ax d efi ci en ci es are b as ed
. Pet i t i o ners co n t en dth atth ey d idn o tfai l t o rep o rt$ 2 2 2 ,8 1 8 o f g ro s s recei p ts fo r 2 0 1 2 : Th ey m ai n t ai nth atth e d ep o s i t s recei v edi n No v em b er an dDecem

b er- 1 2 -

[* 1 2 ] 2 0 1 2 are n o tat tri b u t ab le t o Gh ad a b ecau s e Gh ad a s ol d al l o f i t s as s et s t o Sam er o nOct o b er 3 1 , 2 0 1 2 , an dth erefo re t h o se g ro s s recei p t s are p ro p erl y at tri b u t ab l e t o Sam er. Pet i t i o n ers d i dn oti n tro du ce an y d o cu m en t at i o n , s u ch as p ro o f o f s i gn at o ry

au th o ri ty o v er t h e Gh ad a b an kacco u n t s , a s al es co nt ract , o r an y
o th er cred i b le ev id en ce, t o p ro ve t hatth e g ro s s recei p t s recei v edi nNo vem b er an d Decem b er 2 0 1 2 are at tri b ut ab l e t o Sam er o r were p ro p erl y i n cl u d edo nSam er’ s 2 0 1 2 t ax retu rn . Fu rt h er, acco u n ts 4 1 3 6 an d 4 1 4 4 were b o th h el do pen i nGh ad a’ s
n am e fro m

J an u ary 1 , 2 0 1 1 , u n t i l Decem

b er 3 1, 2 0 12 , i n cl u d i n g aft er Gh ad a’ s s al e
o f as s et s t o Sam er o nOct ob er 3 1 , 2 01 2 . Gh ad a h adco m p l et e d o m i n i on an d
co n tro l o v er t h e acco u n ts fo r t he t ax ab l e y ears ati s s u e. Acco rd i n g l y , p et i ti o n ers fai l edt o p ro v e t h atres po n d en t ’ s reco n s tru ct i o no f Gh ad a’ s i n co m e was i nerro r. Al l t ax ab l e d ep o s i t s i n t o acco u n t s 4 1 3 6 an d4 1 4 4 fo r 2 0 12 are t h erefo re p ro p erl y i n cl u d edi nth e cal cu l at i on o f Gh ad a’ s 2 01 2 g ro s s recei p t s , an dwe s u s t ai n
res p o n d en t’ s d et erm i n at i o n s o f u nrep o rt edi n co m e co n si s t en twi th th e rev en u e ag en t’ s b an kd ep o s it s an al y s i s . B. COGS Sect io n1 6 2 (a) al l o ws as a d edu ct i o n “ al l th e o rd i n ary an dn eces s ary
ex p en s es p ai d o r i n cu rreddu ri n g the t ax ab l e y ear i ncarry in g o n an y trad e o r b u s i n es s ”. Anaccru al b as i s t ax p ay er, s u ch as Gh ad a, i s al l oweda d edu ct i o n- 1 3 -

[* 1 3 ] du ri n g th e t ax ab l e y ear i nwh i ch th e ex p en s es are i n cu rred . Th e co s to f g o o d s p u rch as edfo r res al e, wi th p ro p er ad ju s t m en tfo r o p en i n g an d cl o s i n g i n v en t o ri es as d et erm i n edi n acco rd an ce wi th th e t ax p ay er’ s m eth o do f acco u n t i n g ,

“ i s n ota d edu ct i o n wi th i nthe m ean i n g o f s ec. 1 62 (a) b u ti s s ub tract edfro m g ro s s recei p t s i nd et erm in i n g a t ax p ay er’ s g ro s s i n co m e.” Ol i v e v . Co m m i s s i o n er, 1 3 9 T.C. 1 9 , 2 0 n .2 (2 01 2 ), aff’ d , 7 9 2 F.3 d1 1 4 6 (9 th Ci r. 2 0 1 5 ); s ee s ec. 1 .1 6 2 -1 (a), In co m e Tax Reg s . Pet i t i o ners ’ d o cu m en t at i o n s ub s t an ti at es th atth ey i n cu rred$ 1 ,7 1 7 ,5 7 1 an d $ 1 ,4 9 0 ,6 5 1 o f COGS fo r 2 0 1 1 an d 2 0 1 2 , res p ect i v el y . W e d o n o tfi ndth e
m o di fi edco p y

o f t h e Qu i ck Bo o k s t o b e cred ib le d o cu m en t at i o n o f p et it i on ers ’ COGS. W e t h erefo re h o l dth atp et i t i o n ers s ub st an t i at edan d are t h u s en t i t l edt o $ 1 ,7 1 7 ,5 7 1 o f COGS fo r 2 0 1 1 ; p et i ti o n ers h av e n ots ub s t an t i at edCOGS i n ex ces s
o f res po n d en t ’ s d et erm i nat i o n fo r 2 0 1 2 an d are t h erefo re en ti t ledt o the am o u n to f COGS res p o n d en td et erm i n edi nth e n o t i ce o f d efi ci en cy fo r 2 0 1 2
. III. Pet i t i o ners ’ Un rep o rt edGro s s In co m e fo r 2 0 1 1 an d2 0 1 2 Sect io n1 3 6 6 (a)(1 ) p ro v i d es th atan S co rp o rat io ns h areh ol d er d et erm i n es h i s o r h er t ax l i ab i l it y

b y t ak i n g i nt o acco un th is o r h er p ro rat a s h are o f t h e S
co rp o rat i o n’ s i n co m e, l o s ses , d educt i o n s, an d cred it s fo r t h e S co rp o rat i on ’ s t ax ab l e y ear en d i n g wi th o r i n t h e s h areh ol d er’ s t ax ab l e y ear.- 1 4 -

[* 1 4 ] W e h o l dth atp et i t i o n ers recei v edu n rep o rt edn o np as s i v e i n co m e fro m Gh ad a as wi l l b e d et erm i n edu n d er Ru l e 1 5 5 , t ak i ng i n t o co n s i d erat i o n : (1 )
res p o n d en t’ s co n ces s i o nas t o Gh ad a’ s s ect i o n 1 2 3 1 g ai nfo r 2 0 1 2 , (2 ) p et i t i o n ers ’
co n ces si o nas t o Gh ad a’ s i n co m e fro m l o t teryco m

m i s s i o n s fo r 2 0 1 1 , an d(3 ) o u r h o l d i n g s reg ard i n g Gh ad a’ s g ro s s recei p t s fo r 2 0 1 2 an dCOGS fo r 2 01 1 an d2 0 1 2
. IV. Pet i t i o ners ’ Sch edu l e E M o rt g ag e In t eres tEx pen s e fo r 2 0 1 1 an d 2 0 1 2 Sect io n1 6 3 (a) g en eral l y

p erm i t s a d edu ct i o nfo r al l i n t eres tp ai d o r accru ed wi th i nth e t ax ab le y ear o ni n d eb t edn es s . Cas h b as i s t ax pay ers , s u ch as p et i t i o n ers , are al lo weda d edu ct i o n fo r i n t eres tp ai ddu ri n g th e t ax ab l e y ear i n cas h o r i t s equ iv al en t . See Do n E. W i ll iam s Co
. v . Co m m i s s i on er, 4 2 9 U.S. 5 6 9 , 5 77 -5 7 8 (1 9 7 7); Heym an v . Co m

m i s s i o n er, 7 0 T.C. 4 8 2 , 4 8 5 (1 9 7 8 ), aff’ d , 6 5 2 F.2 d5 9 8 (6 th Ci r. 1 9 8 0 ). Pet i t i o ners ’ l o an d o cu m en t at i o n s ub s t an t i at es th atth ey p ai di n t eres to f $ 3 1 ,2 1 8 an dzero fo r 2 0 11 an d2 0 1 2 , res p ect i v el y . W e t h erefo re fi n dth at p et i t i o n ers are n oten ti t l edt o an i n t eres tp ai d d edu ct i o nfo r 2 0 1 1 o r 2 0 1 2 i nex ces s
o f res po n d en t ’ s d et erm i nat i o n s i nth e n o t i ce o f d efi ci en cy .- 1 5 -

[* 1 5 ] V. Sect io n 6 6 6 2 (a) Pen al t i es fo r Tax Years 2 0 1 1 an d2 0 1 2 Sect io n6 6 6 2 (a) an d(b )(2 ) i m p o s es an accu racy -rel at edp en al ty o nan y p o rt i on o f an u n d erp aym en to f Fed eral i n co m e t ax th at i s at tri bu t ab le t o t h e t ax p ay er’ s “ s ubs t an t i al u n d ers tat em en to f i n co m e t ax ”. Anu n d ers t at em en t o f Fed eral i n co m e t ax i s s ub s t an t ial i f t h e am ou n to f t h e
u n d ers t at em en tfo r t h e t ax ab l e y ear ex ceed s th e g reat er o f 1 0 % o f t h e t ax req u i red t o b e s h own o n th e ret u rn o r $ 5 ,0 0 0 . Sec. 6 6 6 2 (d )(1 )(A). If th e Ru l e 1 5 5
co m p u t at i o n s co n fi rm s ub s tan t i al u n d ers t at em en ts fo r t h e t ax ab l e y ears at i s s u e, th en res p o n d en th as m eth i s b u rd en o f p ro du ci ng ev i d en ce t hatth e p en al ti es are ju s t ifi ed . See s ec. 7 4 9 1 (c). On ce res p o nd en t h as m et h i s b u rd en , p et i t io n ers m ay
av o ids ect i o n6 6 6 2 (a) accu racy -rel at edp en al t i es i f t h ey can d em o n s trat e (1 )
reas on ab l e cau s e fo r each u n d erp aym en tan d (2 ) t h atth ey act edi ng o o d fai th wi th
res p ectt o each u n d erp aym en t . See s ec. 6 6 6 4 (c)(1 ). A d et erm i n at i o no f
reas on ab l e cau s e an dg o o d fai th “ i s m ad e o n a cas e-b y -cas e b as i s , t ak i n g i n t o
acco u n t al l p ert i nen tfact s an dci rcu m s t an ces .” See s ec. 1 .6 6 64 -4 (b )(1 ), In co m e Tax Reg s . Fo r p u rp o s es o f s ect i on 6 6 6 4 (c), a t ax p ay er m ay es tab l i s h reas o n ab l e cau s e
an d g o o dfai th wi th res p ectt o th e am o u n to f t ax l i ab i l i ty rep ort edo n a ret u rn , th ereb y n eg at i n g a s ect i o n6 6 6 2 accu racy -rel at edp en al ty , b y s h o w i ng h i s- 1 6 -

[* 1 6 ] rel i an ce o n p ro fes si o nal ad v i ce. Sec. 1 .6 66 4 -4 (b )(1 ), In co m e Tax Reg s . W e
s t at edi nNeo n at o l o gy

As s o cs ., P.A. v . Co m

m i ss i o n er, 1 1 5 T.C. 4 3 , 9 9 (2 0 0 0 ), aff’ d , 2 9 9 F.3 d2 2 1 (3 dCi r. 2 0 0 2 ), th at fo r a t ax p ay er t o rel y

reas o n ab l y

up o nad v i ce s o as p o s s i b l y t o n eg at e a s ect i o n 66 6 2 (a) accu racy -rel at edp en al ty d et erm i n edb y th e Co m m is s i o n er, t h e t ax p ay er m u stp ro v e b y

a p rep o nd eran ce o f t he ev i d en ce t h atth e t ax p ay er m eet s each req u i rem en to f t h e fo l l o wi n g th ree-p ro n g t es t : (1 ) Th e ad v i s er was a co m p et en tp ro fes s i o n al wh o h ads u ffi ci en tex p ert i s e t o ju s t ify rel i an ce, (2 ) t he t ax p ay er p ro v i d ed n eces s ary an daccu rat e i n fo rm at io nt o th e ad v i s er, an d(3 ) t h e t ax p ay er act u al l y

rel i edi ng o o dfai th o nth e ad vi s er’ s ju d g m en t . * * * Pet i t i o ners as s ertth atth ey act edwi th reas o n ab l e cau s e an di ng o o dfai th wi th res p ect t o th ei r u n d erp aym en tfo r each y ear b y (1 ) h i ri n g M r. M on g er, (2 ) p ro v id i n g M r. M o n g er wi th i n fo rm at i o nn eces s ary fo r k eep i n g accu rat e reco rd s
an d p rep ari n g t ax fi l in g s , (3 ) an du l t i m at el y rel y i n g o nM r. M on g er’ s ad v i ce wh en fi li n g th ei r t ax retu rn s . Wh en i n t erp ret i n g th e m ean i n g o f ad vi ce, t hi s Co u rth as l o o ked t o th e d efi n i t i o no f t h e t erm

i ns ect io n 1 .6 6 6 4 -4 (c)(2 ), In co m e Tax Reg s .: (2 ) Ad v i ce d efi n ed .--Ad v i ce i s an y co m m un i cat i o n , i n cl ud i ng th e o p i n io no f a p ro fes si o n al t ax ad v i s o r, s et t i n g fo rt h the an al y s i s o r co n cl u s i o no f a p ers o n , o th er t h an the t ax p ay er, p ro v i d edt o (o r fo r th e b en efi to f) t h e t ax p ay er an do nwh i ch th e t ax pay er rel i es , d i rect l y o r i n d irect l y , wi th res p ectt o t h e i m p o s i t io no f t h e s ect i o n6 6 62 accu racy -rel at edp en al ty . Adv i ce d o es n o t h av e t o b e i nan y p art i cu l ar fo rm .- 1 7 -

[* 1 7 ] See W o o d s um

v . Co m m i s s i o n er, 1 3 6 T.C. 5 8 5 , 5 9 2 -5 9 3 (2 0 11 ). Wh en a t ax p ay er as s ert s rel i an ce o n“ ad v ice” fro m a co m p et en t p ro fes s io n al as an affi rm at i v e d efen s e t o an ad d i t i o nt o t ax o r a p en al ty , the Sup rem e Co u rt h as h el d th atad v i ce m

u stco n s i s t o f “ sub s t an t i v e ad vi ce” refl ect in g an ad v i s er’ s an al y s i s o r
co n cl u s i o n , as o p po s edt o a n o np ro fes s i o n al fu n ct i o nwh i ch “ req u i res n o s p eci al trai n in g ”. See Un i t edSt at es v . Bo y l e, 4 6 9 U.S. 2 4 1 , 2 5 1 -2 5 2 (1 9 8 5 ); W o o d s u m v . Co m m i s s i o n er, 1 3 6 T.C. at5 9 3 (ci t i n g Neo n at o l o g y As s o cs ., P.A. v
. Co m m i s s i o n er, 1 1 5 T.C. at9 9 ). Pet i t i o ners h av e n o tp ro ven th atM r. M o n g er p ro v i d eds ub s t an ti v e ad v i ce wi th res p ect t o an y o f t h e i t em s rep o rt edo n p et i t i o n ers ’ t ax return s fo r t h e t ax ab l e y ears ati s s u e. Bo th M r. M o ng er’ s an dp et i t i o n ers ’ rel ev an tt es t im on y es t ab l i s h ed th at(1 ) M r. M o n g er m erel y rep o rt edGh ad a’ s i n co m e fro m th e i n fo rm at i o nth at p et i t i o n ers p ro v i d edt o h i m , (2 ) M r. M on g er d et erm i n ed Gh ad a’ s COGS fro m Gh ad a’ s b an ks t at em en t s an dv en d o r i n v o ices / l o g s , an d(3 ) p et i t i o ners t o l dM r. M o n ger t h e am ou nt s th ey wan t edt o rep o rtas ren t al ex p en s es . Th ere i s n o
ev i d en ce t h atM r. M o n g er p ro v i d eds ub st an t i v e ad v i ce s et ti n g fo rt h an an al y s i s o r
co n cl u s i o no nwh i ch p et i t i o n ers rel i ed . W e fi n dthatp et i t i on ers h av e n o t
es t ab l i s h edreas o n ab le cau s e an dg o o dfai th as a d efen s e t o th e accu racy -rel at ed p en al t i es . W e th erefo re h ol dthati f Ru l e 1 5 5 co m p u t at i o n s co n fi rm

s ub st an t i al- 1 8 -

[* 1 8 ] u n d ers t at em en t s o f i n co m e t ax , p et i ti o n ers are l i ab le fo r p en al ti es fo r
u n d erp aym en t s at tri b u t ab le t o s ub s t an t i al u n d ers tat em en t s o f i nco m e t ax u nd er
s ect i on 6 6 6 2 (a) an d(b )(2 ). W e h av e co n s id eredal l th e o th er arg u m en ts m ad e b y th e p art i es , an dt o th e
ex t en tn o td i s cu ss edab o v e, fi n dth o s e arg u m en t s t o b e i rrel ev an t , m o o t , o r wi th o u t
m eri t . To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t ered
u n der Ru l e 1 5 5
.