T.C. Memo. 2018-39

UNITED STATES TAX COURT

CARLOS VALLEJO, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 17570-16. Filed April 3, 2018.

Carlos Vallejo, pro se.

Emma S. Warner, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

CHIECHI, Judge: Respondent determined a deficiency in, and an accuracyrelated penalty under section 6662(a)1

 on, petitioner’s Federal income tax (tax) for

his taxable year 2013 of $19,358 and $3,871, respectively.

1All section references are to the Internal Revenue Code (Code) in effect for

the year at issue. All Rule references are to the Tax Court Rules of Practice and

Procedure.
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[*2] The issues remaining for decision for petitioner’s taxable year 2013 are:

(1) Is petitioner entitled to deduct certain claimed expenses relating to a

certain business that he contends he operated? We hold that he is not.

(2) Is petitioner liable for the accuracy-related penalty under section

6662(a)? We hold that he is.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

Petitioner resided in California at the time he filed the petition.

During 2013, the year at issue, petitioner was employed in the construction

industry. Each of Brutoco Engineering and Bechtel Global issued Form W-2,

Wage and Tax Statement (Form W-2), to petitioner for his taxable year 2013

showing wages of $18,124 and $29,976, respectively.

Petitioner filed Form 1040, U.S. Individual Income Tax Return, for his

taxable year 2013 (2013 return). In that return, petitioner showed “total income”

of $151,770 and “adjusted gross income” of $151,770. The “total income” of

$151,770 comprised “Wages, salaries, tips, etc.” of $48,100,

2

 “Taxable interest” of

$17, “Taxable refunds, credits, or offsets of state and local income taxes” of

2Petitioner attached to his 2013 return the respective Forms W-2 that he had

received from Brutoco Engineering and Bechtel Global for his taxable year 2013.
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[*3] $2,529, taxable “IRA distributions” of $76,793, “Unemployment

compensation” of $1,995, taxable “Social security benefits” of $22,336. Petitioner

did not include Schedule C, Profit or Loss From Business (Schedule C), with his

2013 return.

On November 24, 2014, petitioner filed Form 1040X, Amended U.S.

Individual Income Tax Return, for his taxable year 2013 (2013 amended return or

2013 Form 1040X) in which he claimed a refund of $6,391 for that year. In his

2013 Form 1040X, Part III, Explanation of changes, petitioner stated: “Taxpayer

negleted [sic] to declare his business.” Petitioner included with his 2013 amended

return Schedule C (2013 Schedule C) in which he showed (1) on line A his

“Principal business or profession” as “Hunting Consulting” and (2) on line C the

“Business name” as “Carlos Vallejo Hunting Consulting”.

In the 2013 Schedule C, petitioner reported “Gross receipts” of $4,832. In

that schedule, petitioner claimed the following expenses totaling $24,495 (total

claimed 2013 Schedule C expenses):
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Claimed Expense Amount

Car and truck expenses $2,001 

Legal and professional 5,368 

Supplies 6,958 

Travel 816 

Meals and entertainment 3,391 

Utilities 4,406 

Other expenses 1,555 

 Total 24,495 

Respondent issued a notice of deficiency (notice) to petitioner for his taxable year 2013. In that notice, respondent determined to disallow petitioner’s total

claimed 2013 Schedule C expense deductions except for the “Meals and entertainment” expense deduction of $3,391. (We shall sometimes refer to the total amount

of petitioner’s claimed 2013 Schedule C expense deductions that respondent

disallowed in the notice (i.e., $21,104) as the 2013 Schedule C expenses at issue.) 

Respondent also determined in the notice that petitioner is liable for his taxable

year 2013 for the accuracy-related penalty under section 6662(a).

[*4]
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OPINION

Petitioner bears the burden of establishing that the determinations in the

notice that remain at issue are erroneous.

3

 See Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933). Moreover, deductions are a matter of legislative grace,

and petitioner bears the burden of proving entitlement to any deduction claimed. 

See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). The Code and the

regulations thereunder required petitioner to maintain records sufficient to

establish the amount of any deduction claimed. See sec. 6001; sec. 1.6001-1(a),

Income Tax Regs.

We begin by summarizing our evaluation of the evidence that we made part

of the record at the trial in this case. With respect to the testimonial evidence,

petitioner was the only witness at that trial. We found his testimony to be for the

most part irrelevant and unhelpful in resolving the issues presented. Despite our

repeated admonitions reminding petitioner that he should be testifying about facts

that he believed supported his positions with respect to the issues presented, he

[*5]

3Although not altogether clear, it appears from our review of the joint first

stipulation of facts that petitioner may be contending that he is entitled to deduct

certain expenses that he did not claim in his 2013 Schedule C when he filed his

2013 amended return and included that schedule with that return. In that event,

petitioner would also bear the burden of establishing that he is entitled to deduct

any such additional expenses. See Rule 142(a).
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[*6] chose to complain during his testimony that respondent’s counsel refused to

agree that the documents that he had provided to her established his position that

he is entitled for his taxable year 2013 to deduct the 2013 Schedule C expenses at

issue. With respect to the documentary evidence, although certain of that evidence

establishes that petitioner paid certain expenses during 2013, none of that

evidence establishes that he is entitled under section 162(a)4 to deduct the 2013

Schedule C expenses at issue.5

Based upon our examination of the entire record before us, we find that

petitioner has failed to carry his burden of establishing that for his taxable year

2013 he is entitled to deduct the 2013 Schedule C expenses at issue.6 On that

4With respect to certain of the 2013 Schedule C expenses at issue, petitioner

must also establish that he satisfies the requirements of sec. 274(d). None of the

documentary evidence that is part of the record establishes that he satisfies those

requirements with respect to the expenses subject to that section.

5Nor does the documentary evidence that is part of the record establish

petitioner’s entitlement to deduct any expenses that he did not claim in his 2013

Schedule C.

6Based upon our examination of the entire record before us, we find that

petitioner also has failed to carry his burden of establishing that for his taxable

year 2013 he is entitled to deduct certain expenses that he did not claim in his

2013 Schedule C when he filed his 2013 amended return and included that schedule with that return.
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[*7] record, we sustain respondent’s determinations in the notice to disallow

petitioner’s deduction of those expenses in his 2013 Schedule C.

We turn to the remaining issue presented under section 6662(a). Section

6662(a) imposes an accuracy-related penalty of 20 percent on the underpayment to

which section 6662 applies. Section 6662 applies to the portion of any underpayment which is attributable to, inter alia, (1) negligence or disregard of rules or

regulations, sec. 6662(b)(1), or (2) a substantial understatement of tax, sec.

6662(b)(2).

The term “negligence” in section 6662(b)(1) includes any failure to make a

reasonable attempt to comply with the Code. Sec. 6662(c). Negligence has also

been defined as a failure to do what a reasonable person would do under the

circumstances. See Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th Cir. 1992),

aff’g T.C. Memo. 1991-179; Antonides v. Commissioner, 91 T.C. 686, 699

(1988), aff’d, 893 F.2d 656 (4th Cir. 1990). The term “negligence” also includes

any failure by the taxpayer to keep adequate books and records or to substantiate

items properly. Sec. 1.6662-3(b)(1), Income Tax Regs. The term “disregard”

includes any careless, reckless, or intentional disregard. Sec. 6662(c).

For purposes of section 6662(b)(2) an understatement is equal to the excess

of the amount of tax required to be shown in the tax return over the amount of tax
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[*8] shown in the return. Sec. 6662(d)(2)(A). An understatement is substantial in

the case of an individual if the amount of the understatement for the taxable year

exceeds the greater of 10 percent of the tax required to be shown in the tax return

for that year or $5,000. Sec. 6662(d)(1)(A).

The accuracy-related penalty does not apply to any portion of an underpayment if it is shown that there was reasonable cause for, and that the taxpayer

acted in good faith with respect to, such portion. Sec. 6664(c)(1). The determination of whether the taxpayer acted with reasonable cause and in good faith

depends on all the pertinent facts and circumstances, including the taxpayer’s

efforts to assess the taxpayer’s proper tax liability, the knowledge and experience

of the taxpayer, and the reliance on the advice of a professional, such as an

accountant. Sec. 1.6664-4(b)(1), Income Tax Regs.

Respondent bears the burden of production with respect to the accuracyrelated penalty under section 6662(a) that respondent determined in the notice. 

See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). To

satisfy respondent’s burden of production, respondent must come forward with

“sufficient evidence indicating that it is appropriate to impose” the penalty. See

Higbee v. Commissioner, 116 T.C. at 446. Although respondent bears the burden

of production with respect to the penalty under section 6662(a), respondent “need
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[*9] not introduce evidence regarding reasonable cause * * * or similar provisions. 

* * * the taxpayer bears the burden of proof with regard to those issues.” Id.

The parties stipulated the so-called civil penalty approval form with respect

to petitioner’s taxable year 2013 in which the group manager approved on April

18, 2016, the assertion of the “substantial understatement of income penalty” in

the notice of deficiency that was thereafter issued to petitioner with respect to that

year. See Graev v. Commissioner, 149 T.C. __ (Dec. 20, 2017), supplementing

147 T.C. __ (Nov. 30, 2016).

The record establishes that petitioner did not keep books or adequate

records with respect to his alleged “Hunting Consulting” business. In addition, we

have found that petitioner failed to substantiate properly the 2013 Schedule C

expenses at issue or any other expenses that he claims he is entitled to deduct as

expenses relating to that alleged business. See sec. 1.6662-3(b)(1), Income Tax

Regs.

On the record before us, we find that respondent has satisfied respondent’s

burden of production under section 7491(c) with respect to the accuracy-related

penalty under section 6662(a).

At trial, petitioner presented no evidence, and made no argument, as to why

he should not be liable for his taxable year 2013 for the accuracy-related penalty.
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[*10] On the record before us, we find that petitioner has failed to carry his burden of establishing that there was reasonable cause for, and that he acted in good

faith with respect to, the underpayment for his taxable year 2013.

Based upon our examination of the entire record before us, we find that

petitioner has failed to carry his burden of establishing that he is not liable for his

taxable year 2013 for the accuracy-related penalty under section 6662(a). On that

record, we sustain respondent’s determination in the notice that petitioner is liable

for his taxable year 2013 for that penalty.

We have considered all of the contentions and arguments of the parties that

are not discussed herein, and we find them to be without merit, irrelevant, and/or

moot.

To reflect the foregoing,

Decision will be entered for

respondent.