T.C. Mem o. 2 01 4- 19 9

UNITED STAT ES TAX COURT

BINH NGUYEN A

ND NHAT K. NGUY EN, Peti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 26 03 3- 12 . Fi le d S ep te m be r 30 , 20 14 .
Ja n R . Pie rce, fo r pe ti ti on er. Nhi T. Luu, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION GERBER, Jud ge : Res po nd en t d et erm in edin co m e ta x d efi ci en ci es of 1 $5 ,58 7 a nd$2 ,03 9 fo r pe ti ti on ers ’ 20 09 an d 2 01 0 t ax y ears , res pe ct iv el y . The tri al inth is cas e, on Ju ne 9, 2 01 4, was be fo re J ud ge Dian e Kro up a an d 1 with t he ag reem en t o f th e p art ie s t he cas e was reas si gn edto Sen io r Ju dg e Jo el Gerb er fo r th e p ur

po se of r en de rin g a n o pi ni on .- 2 -

[* 2] Res po nd en t al so de te rm in edaccu racy-rela te d p en al ti es of $ 1,1 17 .40 an d $4 07 .80 un de r se ct io n 6 66 2( a) for20 09 an d 2 01 0, re sp ect iv el y . After 2 co nc es si on s, th e is su es rem ai ni ng forus to co ns id er ar e: (1) whet he r pe ti ti on ers

3 are e nt it le d t o a n a m ou ntforco stof g oo ds so ldinex ces s o f th e am ou ntres po nd en t al lo wedfor

20 09 , (2) whet he r pe ti ti on ers are en ti tl edto de du ctanam ou ntfor supp li es inex ces s o f th e am ou ntres po nd en t al lo wedfor20 10 , and(3) whet he r pe ti ti on ers are l iabl e fo r th e se ct io n 6 66 2( a) ac curacy-rela te d p en al ty for 2 00 9 an d/ or20 10 . FINDINGS OF FACT 4 Pet it io ne rs res id edinOreg on when th ei r pe ti ti on was fi le d. Pe ti ti on ers were m arri eddu rin g 2 00 9 a nd20 10 an d fi le d jo in t Fe de ral in co m e ta x re tu rn s. Pet it io ne rs each op erat eda so le pro pr ie to rs hi p, an d S ch edul es C, Pro fitor Lo ss Fro m Bu si ne ss , were at ta ch edto th ei r returns foreach bu si ne ss . The co stof g oo ds

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 at i ss ue , andall 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. Pet it io ne rs co nc ed e th atth ey are n oten ti tl edto th e p orti on s o f th e 3 de pr eci at io n d educ ti on s at tri bu tabl e to lan d t ha t the y cla im edon Sch edul es E, Supp le m en ta l In co m e an d Lo ss , forth e y ears inis su e. The pa rti es ’ St ip ul at io n o f Fac ts an d the ex hi bi ts are i nc or po rat edby thi s 4 refe ren ce.- 3 -

[* 3] so ldan d d educ ti on s i n que st io n re la te to Mr. Ng uyen’s h ardwoo d fl oo r in st al la ti onbu si ne ss . Mr. Ng uyen m ov edto th e Uni te d S ta te s i n 1 99 2 a fte r co m pl et io n o f th e ni nt h g rad e in Viet na m , andhe be ga n h is bu si ne ss in19 97 . Mr. Ngu y enha s li mit edpro fic ie nc y

inEng li sh , bu t h e is ab le to ne go ti at e th e te rm s o f fl oo rin g jo bs with h is cu st om ers . Whi le he can no t re adEng li sh , Mr. Ngu y endo es en te r in to br ie f writ te n c on tra ct s wi thhi s cu st om ers . Mr. Ng uyen d idno t m ai nt ai n a n i nv en to ry of f lo or in g m at eri al s dur in g t he y ears at i ss ue . He gen eral ly pur ch as edth e fl oo rin g t ha t wo ul d b e in st al le d fo r each job , bu t i n s om e in st an ces he wou ldin st al l fl oo rin g p ur ch as edby the cu st om er. Inad di ti on to flo or in g, M r. Ngu y enpu rch as edsupp li es inco nn ect io n with h is bu si ne ss , su ch as wo od , pap er, g lu e, an d n ai ls . He purch as edth es e supp li es us in g d eb itcard , che ck s, an d c as h. Mr. Ng uyen k ep t h is 20 09 bu si ne ss ba nkst at em en ts inth e drawer of t he de skinhi s fa m il y

roo m . He kep t re cei pt s fo r th e 2 00 9 b us in es s ex pe ns es ina ba g in a ha ll way

inth e b as em en t. So m et im e in Sep te m be r orOcto be r 20 09 th e wat er he at er i n p et it io ne rs ’ ho m e cau se d aflo od , andso m e o f th e b us in es s re cei pt s wer e de st ro y ed .- 4 -

[* 4] Jo hn E. Wy

nn of P ayro ll Pro fes si on al s LTC p rep aredpe ti ti on ers ’ 20 09 return. Pe ti ti on ers pro vi de d M r. Wynn with the 20 09 ba nkst at em en ts an d su rv iv in g re cei pt s s o t ha t h e co ul d p rep are t he return. Mr . W ynnpre pared pe ti ti on ers ’ 20 09 return dur in g asi ng le m eet in g t ha t l as te d app ro xi m at el y on e ho ur . The co stof g oo ds so ldcla im edon Mr. Ng uyen’s 2 00 9 S ch edul e C was $4 3,5 03 . Duri ng th e in it ia l ex am in at io n, re sp on de ntde te rm in edth atpe ti ti on ers subs ta nt ia te d $ 17 ,98 1 o f th e am ou ntcla im ed . After r ev ie w of a dd it io na l do cu m en ts pe ti ti on ers pro vi de d, i nc lu di ng ba nkst at em en ts , recei pt s, an d i nv oi ces , res po nd en t d et erm in edth atpe ti ti on ers ha d s ub st an ti at edanad di ti on al $1 14 .66 for co stof g oo ds so ld . Mr. Wy nn als o re po rte d $ 5,6 75 forsupp li es on Mr. Ng uyen’s 2 00 9 Sch edul e C. Mr. Wy

nn di d n otex pl ai n t o p et it io ne rs th e d iff eren ce b etweenit em s rep orte d a s co stof g oo ds so ldan d t ho se rep orte d a s s up pl ie s. Alt ho ug h M r. Ngu y enwas u ns ur e o f wha t m ad e up t he de du ct io n fo r supp li es , res po nd en t al lo wedth e am ou ntcla im ed . Mr. Wy nn di d n otreturn a ll of p et it io ne rs ’ do cu m en ts aft er the pre pa rat io n of th ei r return. Pe ti ti on ers subp oe na edMr. Wy nn to ap pe ar attri al , bu t h e d idno t 5
Pet it io ne rs ’ so n s en t the subp oe nato Payro ll Pro fes si on al s LTC v ia 5 facs im il e an d s li d aco py un de r th e o ffi ce’s d oo r.- 5 -

[* 5] ap pe ar; an d t he re i s n ot hi ng inth e rec or d e st ab li sh in g h is cred en ti al s o r ex pe rie nc e. At the en d o f 20 09 pe ti ti on ers m ov edin to a ne w ho m e whe re Mr . Ngu y en co nt in ue d t o k eep hi s 2 01 0 b an k s ta te m en ts inhi s d es k d rawer . He als o k ep t the 20 10 bu si ne ss ex pe ns e rec ei pt s i n aba g. Pet it io ne rs ’ 20 10 return was pre pa redby H en rie tt a Bro wni ng of Tax So lu ti on s C en te r, LLC, us in g t he in fo rm at io n o n t he 20 09 return a s a g ui de . No ot he r do cu m en ts or r eco rd s wer e p ro vi de d t o M s. Br own in g. Th e Sch edul e C fo r Mr. Ng uyen’s b us in es s fo r 20 10 cla im eda $3 9,8 94 de du ct io n fo r supp li es . Dur in g t he in it ia l ex am in at io n, re sp on de ntde te rm in edth atpe ti ti on ers subs ta nt ia te d $ 24 ,49 0 o f th e am ou ntcla im ed . After r ev ie w of a dd it io na l do cu m en ts pe ti ti on ers pro vi de d, i nc lu di ng ba nkst at em en ts , recei pt s, an d i nv oi ces , res po nd en t d et erm in edth atpe ti ti on ers ha d s ub st an ti at ed$1 78 .26 m or e. Ms . Bro wni ng was n otcal le d t o t es ti fy at t he tri al . OPINION Res po nd en t al lo wedon ly porti on s o f th e d educ ti on s cl ai m edon pe ti ti on ers ’ returns . W e m

us t d eci de whet he r pe ti ti on ers ha ve sh own en ti tl em en t t o de du ct io ns inex ces s o f th os e res po nd en t al lo wed . W e m us t al so de ci de whet he r pe ti ti on ers are l iabl e fo r th e acc ur acy-rela te d p en al ty.- 6 -

[* 6] Dedu ct io ns are a m at te r of leg is la ti ve gra ce, an d t ax pa y ers be ar the burd en of est ab li sh in g e nt it le m en t t o a ny clai m edde du ct io n. Ru le 14 2( a); INDOPCO, In c. v. Co m

m is si on er, 5 03 U.S. 79 , 84 (19 92 ). Taxp ay ers are re qu ire d t o m ai nt ai n reco rd s s uf

fic ie ntto all ow the Co m

m is si on er t o d et erm in e th ei r co rrec t t ax li ab il it y . Sec. 6 00 1; sec . 1.6 00 1- 1( a), In co m e Tax Reg s. Ad di ti on al ly, ta xp ay ers be ar the bu rd enof s ub st an ti at in g t he am ou ntan d p ur po se of e ach it em

forwhi ch th ey cla im a de du ct io n. Hrad es ky v. Co m m is si on er, 6 5 T.C. 8 7, 8 9 (1 97 5) , aff’d pe r cu ria m , 54 0 F .2d82 1 (5 th Cir . 19 76 ). 6 Pet it io ne rs cla im eda $4 3,5 03 reduc ti on fro m gro ss in co m e fo r th e co stof go od s s ol d o n M r. Ngu y en ’s Sch edul e C at ta ch edto th e 2 00 9 re turn . Peti ti on ers ex pe rie nc eda fl oo d i n 2 00 9 i n t he ba se m en t o f th ei r ho m e whe re the rece ip ts for Mr. Ng uyen’s b us in es s wer e st or ed . Whi le th e fl oo d d es tro y edso m e o f th e bu si ne ss ’ rece ip ts , Mr. Ngu y entes ti fie d t ha t the 20 09 return was pre pa redus in g ba nkst at em en ts an d t he rece ip ts th atwere n otde st ro y ed . On the ba si s o f hi s i ni ti al ex am in at io n, re sp on de ntde te rm in edth at$1 7,9 81 of th e co stof g oo ds so ldha d b een subs tant ia te d. Pe ti ti on ers pro vi de d b an k st at em en ts , recei pt s, an d i nv oi ces to res po nd en t, an d, upo n fu rth er re vi ew, No que st io n was rai se d b y eit he r pa rty rega rd in g s hi fti ng of t he bu rd enof 6 pr oo f or go in g fo rwardwith the ev id en ce. Thu s, the bu rd enof p ro of rem ai ns on pe ti ti on ers . See s ec. 7 49 1( a).- 7 -

[* 7] res po nd en t d et erm in edth atanad di ti on al $1 14 .66 of t he co stof g oo ds so ld ha d b een subs ta nt ia te d. Th e o nl y do cu m en tary

ev id en ce p et it io ne rs off

eredin to th e rec or d fo r 20 09 was i nc om pl et e b an k s ta te m en ts . Furt he r, Mr. Ng uyen fa il ed to pro vi de an y

tes ti m on y

reg ard in g s pe ci fic ex pe nd itur es rel at edto flo or in g jo bs fo r whi ch de du ct io ns sh ou ldbe all owe d b utwere d en ie d b y res po nd en t. Pet it io ne rs ha ve no t o ffer edev id en ce tha t wo ul d a ll ow u s t o d eci de th atth ey are e nt it le d t o c os t o f go od s s ol d i n e xc es s o f th e am ou ntres po nd en t d et erm in ed was subs ta nt ia te d. Acco rd in gl y , we ho ldth atpe ti ti on ers are n oten ti tl edto cla im co stof g oo ds so ldfor20 09 inex ces s o f th e am ou ntde te rm in edor a gr eedto by res po nd en t. Pet it io ne rs rep orte d $ 39 ,89 4 fo r supp li es on th e 2 01 0 re tu rn . Mr. Ngu y en te st ifi edth atth e 2 01 0 re tu rnwas p rep aredus in g o nl y th e 2 00 9 re tu rnas agu id e. The on ly evi de nc e o ffer edfor20 10 was b an k s ta te m en ts . Agai n, M r. Ngu y endi d no t p ro vi de an y

tes ti m on y

reg ard in g e xp en se s fo r supp li es rel at edto flo or in g jo bs th atwere p ai d b utforwhi ch res po nd en t d is al lo wedde du ct io ns . Nor d idhe pr ov id e an y

tes ti m on y

in di cat in g t ha t h e p ai d e xp en se s re la te d t o s up pl ie s i n ex ces s o f th e am ou ntres po nd en t h as de te rm in edis all owabl e as a de du ct io n. Acco rd in gl y , we ho ldth atpe ti ti on ers are en ti tl edto a de du ct io n fo r supp li es equa l to th e am ou ntres po nd en t d et erm in edwas s ub st an ti at edfor 20 10 .- 8 -

[* 8] Sect io n 6 66 2( a) an d (b )(1 ) an d (2 ) im po se s an accu racy-rela te d p en al ty of 20 % on th e p orti on of a n u nd erp aym en t at tri bu tabl e to ne gl ig en ce o r a s ub st an ti al un de rs ta te m en t o f in co m e ta x. Neg li ge nc e in cl ud es an y fai lu re t o k eep ad equa te bo ok s an d re co rd s o r to subs ta nt ia te it em s p ro pe rly. Sec. 1.6 66 2- 3( b) (1 ), In co m e Tax Reg s. W it h re sp ectto th e acc ur acy-rela te d p en al ty, th e Co m m is si on er b ears th e bu rd enof p ro du ct io n. Se c. 74 91 (c). Th is requi res th e Co m m is si on er t o “ co m e fo rwardwith s uf

fic ie ntev id en ce i nd ic at in g t ha t i t i s ap pr op ria te to im po se ” th e accu racy-rela te d p en al ty. Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 46 (20 01 ). Onc e th e Co m

m is si on er p ro vi de s s uf

fic ie ntin fo rm at io n t o s at is fy hi s b ur de n o f pr oduc ti on , th e b ur de n s hi fts to th e ta xp ay er t o s ho w th atth e p en al ty sho ul d n otbe ap pl ie d. Id . at 4 47 ; s ee Ru le 14 2. Pe ti ti on ers ha ve fai le d t o p ro vi de ad equa te reco rd s t o s ub st an ti at e fu ll y th e am ou nt s cl ai m edforco stof g oo ds so ldin20 09 7 Pet it io ne rs ex pe rie nc eda fl oo d i n t he ir h om e in 20 09 ; h owe ve r, Mr. 7 Ngu y entes ti fie d t ha t the 20 09 return was pre pa redus in g h is co m pl et e b an k st at em en ts an d re cei pt s t ha t s urvi ve d t he flo od . He als o t es ti fie d t ha t h e p ur ch as ed supp li es forhi s b us in es s u si ng cas h, ch eck s, an d d eb itcard . Tho se ex pe ns es pa id us in g ade bi t ca rdor c he ck s wo ul d b e refl ect edon th e b an k s ta te m en ts . W it hd rawal s o f cas h fr om Mr. Ng uyen’s b us in es s b an k a cco un t u se d t o p ur ch as e m at eri al s an d s up pl ie s wo ul d b e ref le ct edon th e st at em en ts . The o nl y ex pe ns es th atwou ldno t h av e a co nn ect io n t o t he 20 09 ba nkst at em en ts wou ldbe cas h ex pe nd itur es forsupp li es no t d eri ve d fr om th e b us in es s o r rec ei ve d fr om cu st om ers bu t n otde po si te d i n t he bu si ne ss acco un t. Co ns eque nt ly, th e fl oo d (co nt in ue d...)- 9 -

[* 9] an d s up pl ie s i n 2 01 0. By sho win g t ha t p et it io ne rs lac k a de qu at e rec or ds to subs ta nt ia te ful ly the am ou nt s cl ai m ed , res po nd en t h as m ethi s b ur de n o f pr oduc ti on . See s ec. 1 .66 62 -3 (b )(1 ), In co m e Tax Reg s. Sect io n 6 66 4( c)(1 ) pr ov id es anex cep ti onto th e se ct io n 6 66 2 p en al ty if th e ta xp ay er ca n e st ab li sh th atth ere was reas on ab le cau se forth e u nd erp aym en t an d th atth e ta xp ay er ac te d i n g oo d fa it h. Se c. 1.6 66 4- 4( a), In co m e Tax Reg s. Whe th er a t ax pay er ac te d wi threas on ab le cau se an d i n g oo d fa it h i s d et erm in edin each cas e b y

tak in g i nt o a cco un t al l re le va ntfact s an d c irc um st an ces . Reli an ce o n th e ad vi 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 reas on ab le cau se an d g oo d fa it h, b utitcanincert ai n s itua ti on s. Fre yta g v . Co m m is si on er, 8 9 T.C. 8 49 , 88 8 (1 98 7) , aff’d, 9 04 F.2d10 11 (5t h C ir. 1 99 0) , aff’d, 5 01 U.S. 86 8 (1 99 1) ; s ec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s. In de te rm in in g whe th er a t ax pa y er re as on ab ly reli edingo odfai th on th e ad vi ce o f a p ro fes si on al ta x a dv is er, the tax pa y er’s educ at io n, s op hi st ic at io n, an d b us in es s ex pe rie nc e wil l be tak enin to co ns id erat io n. Se c. 1.6 66 4- 4( c)(1 ), In co m e Tax Reg s. Fu rth er, i n or de r fo r rel ia nc e o n apro fes si on al tax advi se r to ex cu se th e ta xp ay er fro m th e se ct io n 6 66 2 p en al ty, th e ta xp ay er m us t p ro ve : (1 ) th e ad vi se r was a co m pe te nt (...co nt inue d) 7 can no t s erv e as a reas on pe ti ti on ers are u nabl e to pro vi de subs ta nt ia ti onforall of th e am ou nt s cl ai m edas c os t o f go od s s ol d fo r 20 09 .- 10 -

[* 10 ] pr of

es si on al with s uf

fic ie ntex pe rti se to jus ti fy rel ia nc e; (2) th e ta xp ay er pr ov id edth e ad vi se r ne ces sa ry an d a ccu rat e in fo rm at io n; an d (3 ) th e ta xp ay er actua ll y rel ie d i n g oo d fa it h o n t he advi se r’s jud gm en t. See Neon at ol og y Ass oc s., P.A. v. Co m

m is si on er, 1 15 T.C. 43 , 98 -9 9 (2 00 0) , aff’d, 2 99 F.3d22 1 (3 d C ir. 20 02 ). Mr. Ng uyen ca m e to th e Uni te d S ta te s i n 1 99 2 a fte r co m pl et io n o f th e n in th gr ad e in Viet na m . Alth ou gh hi s En gl is h s ki ll s ar e li m it ed , Mr. Ngu y enha s su cces sf ul ly ope rat edhi s b us in es s s in ce 1 99 7. He p ro vi de d M r. Wynn co m pl et e ba nkst at em en ts an d re cei pt s t ha t s urvi ve d t he flo odto pre pare p et it io ne rs ’ 20 09 return. Mr . Ngu y enrel ie d o n M r. Wynn ’s jud gm en t t o d et erm in e whi ch am ou nt s were d educ ti bl e fo r hi s b us in es s an d t es ti fie d t ha t h e trus te d M r. Wy nn . Nev erthe le ss , Mr. Wynndi d n otap pe ar attri al , andno ev id en ce was in tro du cedto es tabl is h M r. Wynn ’s cred ib il it y or e xp eri en ce p rep ari ng Fed eral in co m e ta x returns . Con se qu en tl y , pet it io ne rs ha ve no t s ho wn t ha t the y act edingo odfai th an d t ha t the re was reas on ab le cau se forth e u nd erp aym en t. We ho ldth at pe ti ti on ers are l iabl e fo r a s ect io n 6 66 2( a) p en al ty for 2 00 9. At tria l p et it io ne rs pre se nt edno ev id en ce t o s ho w th ey act edingo odfai th an d t ha t the un de rp aym en t fo r 20 10 was due to reas on ab le cau se . W e acc or di ng ly- 11 -

[* 11 ] ho ldth atpe ti ti on ers are al so li ab le forth e se ct io n 6 66 2( a) ac cu racy-rela te d pe na lty for 20 10 . To re fle ctco nc es si on s o f th e p art ie s an d t he ad di ti on al am ou nt s re sp on de nt de te rm in edwere s ub st an ti at edaft er the no ti ce o f de fic ie nc y was i ss ue d, Deci si on wil l b e en te redun de r Ru le 15 5.