T.C. M em o . 2 0 1 9 -9 6

UNITED STATES TAX COURT

PATRICK COM BS, Pet i t i o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 2 2 7 48 -1 4
. Fi l edAu gu s t 5 , 2 0 1 9
.

Pat ri ckCo m

b s , p ro s e. Em eral dG. Sm i th an d M i n Yo u n g Ch an , fo r res po n d en t.

M EM ORANDUM FINDINGS OF FACT AND OPINION THORNTON, Jud g e: Res p o n d en td et erm i n edd efi ci en ci es i np et i t i o n er’ s Fed eral i nco m e t ax , s ect i o n 6 6 6 2 (a) accu racy -rel at edp en al t ies , an d a s ect i o n 6 6 5 1 (a)(1 ) ad d i t i o nt o t ax as fo l l o w s : 1

1 Al l s ect i o nreferen ces are t o th e In tern al Rev en u e Co d e (Co de) i neffect at al l rel ev an tt i m es , an dal l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce (co n ti n u ed ...)- 2
-
Year Defi ci en cy Pen al ty sec. 6 6 6 2 (a) Ad di t i o n t o t ax

s ec. 6 6 5 1 (a)(1 ) 2 0 1 0 $ 1 8 9 , 4 5 3 $ 3 7 ,8 9 1 -0
- 2 0 1 1 3 2 ,7 13 6 ,5 43 $ 7 ,5 46 2 0 1 2 1 ,5 89 3 1 8 -0
- Th e Co u rth as p rev io u s l y g ran tedres p o n d en t ’ s m o t i o n fo r p art ial s u m m ary ju d g m en twi th res p ectt o p et i t io n er’ s t ax ab l e y ears 2 0 1 0 an d 2 0 1 1
. 2 Aft er
co n ces si o n s , th e i s s u es rem ai n i n g fo r d eci s io nare: (1 ) wh et h er p et i t i o ner recei v ed
co n st ru ct i v e d iv i d en ds fro m Th e Go o dTh in k in g Co ., In c. (Go o dTh i n k i n g ), du ri n g 2 0 1 0 , 2 01 1 , an d2 0 1 2 (y ears ati s s ue), as res p o n d en td et erm i ned ; 3 (2 ) wh et h er h e i s l i ab l e fo r t h e s ect i on 6 6 5 1 (a)(1 ) ad d i t i o nt o t ax fo r fai l u re t o t i m el y fi l e fo r 2 0 1 1 ; (3 ) wh et h er h e i s l iab l e fo r s ect i o n6 6 6 2 (a) accu racy -rel at ed [* 2 ]

1 (...co n t in u ed ) an d Pro cedu re, u n l es s o th erwi s e i n d i cat ed . Al l m on et ary am o u n t s are ro u n d edt o th e n eares td o l l ar.

2 By o rd er d at edAu gu s t2 , 2 0 1 8 , th i s Co urtg ran t edres po n d en t’ s m ot i o n fo r p art i al s u m

m ary ju d gm en t , h o l d i n g t h atp et it i on er recei v edb u tfai l edt o rep o rto n Sch edu l e E, Su

p p l em en t al In co m e an dLo s s, ren t al i n co m e o f $ 2 4 1 ,1 4 1 an d $ 8 2 ,5 1 3 o nh i s 2 0 1 0 an d 2 0 1 1 retu rn s , res p ect i v el y . Th e Co urtt o o ku n d er ad v is em en tres p o n den t ’ s m o t i on t o i m p o s e a p en al ty

u nd er s ec. 6 6 7 3(a) fi l edAp ri l 2 7 , 2 0 1 8
.

3 In h i s p ret ri al m em o ran du m res p o nd en tco nced ed , as dup l i cat i v e o f t h e co n st ru ct i v e d iv i d en d d et erm i n at i o n , h is d et erm i n at i o nth atp et it i o n er h adfai l edt o rep o rtcert ai n g ro s s recei pt s o nSch edu l e C, Pro fi to r Lo s s Fro m Bu s i n es s.- 3
-

[* 3 ] p en al t i es fo r 2 0 10 , 2 0 1 1 , an d2 0 1 2 ; an d(4 ) wh et h er h e s h ou l db e s ub jectt o a p en al ty p u rs uan tt o s ect i o n 6 6 7 3 (a). FINDINGS OF FACT So m e o f t h e fact s h av e b een s ti p u lat ed an dare s o fo u n d. Th e s t ip u l at i o n o f fact s an dth e at t ach ed ex h i b i ts are i n co rp o rat ed h erei nb y th i s referen ce. Wh en h e fi led hi s p et i t i o n , p et i t i o ner res i d edi nCal i fo rn i a wi th h i s s i g n i fi can to th er Dean n a Lat s o n an dth ei r t w o ch il dren . Pet i t i o ner i s an au th o r, a p erfo rm er, an da m o t i v at i o nal s p eak er. Du ri n g th e y ears ati s s u e h e p erfo rm edi n “ o n e-p ers o nco m ed y s h o ws ” an dh adv ari o u s
s p eak i n g en gag em en t s . Co m p en sat i o nfo r th es e p erfo rm an ces was g en eral l y m ad e b y ch eck s p ay ab l e t o Go o d Th in k i n g an dd ep o s i tedi n t o Go o d Th i nk i n g ’ s b an k
acco u n t .- 4
-

[* 4 ] Th i s arran g em en t g rew o u to f p et i t i o n er’ s d eal i n g s wi th Ro b ertHo l co m b
. 4 Si n ce atl eas t1 9 9 9 M r. Ho l co m b h adp ro m o t edt o p et i t i o n er a t ax -av o id an ce
s trat eg y wh i ch p et i t i on er refers t o as a Pri v at e Tax Ex cep tedSel f Supp o rt in g M i n i st ry (PTESSM ). Th e g en eral co n cep to f t hi s s trat eg y was t o s h i ftb us i n es s i n co m e t o v ari o u s en t i t i es wh i ch wo u l dth en u s e t he fu n ds t o p ay p et i t i o ner’ s p ers o n al ex p en s es . 5 In fu rt h eran ce o f t h i s s trat eg y , o n J an u ary 1 , 1 99 9 , M r. Ho l co m

b arran g ed fo r t h e i nco rp orat i o n o f Go o d Th i n k i n g. 6 Im m ed i at el y aft er Go odTh in k i n g ’ s

4 In 2 0 1 6 M r. Ho l co m

b was i n d ict edb y

a g ran djury

i nth e So u th ern Di s tri ct o f Cal i fo rn i a o n ch arg es i ncl u d i n g t ax ev as i o n , ai d in g o r as s i s t in g i n th e p rep arat i o no f fal s e ret u rn s , an dm ak i n g fal se s tat em en t s t o fi n an ci al i n s t i tu t i o n s . See In d i ct m en t , Un i tedSt at es v . Ho l co m b , No . 1 6-CR-0 1 4 08 -W Q H (S.D. Cal
. J u n e 1 6, 2 0 1 6 ), ECF No
. 1
. Aft er a ju ry tri al h e was fo u n dg u i l ty o nfo ur co u n t s o f m ak i n g a fal s e s t at em en tt o a fi n an ci al i ns t i tu ti o n . See J u ry Verd ict , Ho l co m

b , No . 1 6 -CR-0 1 40 8 -W QH (S.D. Cal . J u l y 2 0 , 2 0 1 8), ECF No . 1 7 3
. Th e co urt d ecl areda m i s tri al wi th res p ectt o th e o ther ch arg es . See Decl arat i o n o f M i s tri al , Ho l co m b , No . 1 6-CR-0 1 4 0 8 -W QH (S.D. Cal . J ul y 2 0 , 2 01 8 ), ECF No . 1 72
. J u d g m en twas en tered an d M r. Ho l co m b was s en ten cedt o 4 6 m o n th s o f i m p ri s o n m en tan d fi n ed$ 60 0 ,0 0 0 . See J u d g m en t , Ho l co m b , No . 1 6 -CR-0 1 4 0 8
- W QH (S.D. Cal
. Feb
. 1 9 , 2 01 9 ), ECF No . 2 1 9
.

5 Th i s t ax -av o i dan ce s trat eg y i s s im il ar t o th atd es cri b edi n an o ther cas e i n wh i ch M r. Ho l co m

b ad v i sedth e t ax p ay ers . See Carreo n v . Co m m i s s io n er, T.C. M em o. 2 0 1 4 -6
.

6 Go o dTh i n k i n g was p arto f a web o f en t i t i es th atco n st itu t edo r p art i ci p at ed i nthe PTESSM an dth at were creat edfo r th i s p urp o s e i nacco rd an ce wi th M r. Ho l co m b ’ s p l an . Th es e o th er en t i t i es , wh i ch are referen cedi nth e reco rdat (co n ti n u ed ...)- 5
-

[* 5 ] i n co rp o rat i o n , p et i t io n er was i ts s o l e s t o ckh o l d er, p res i d en t , ch ief ex ecu t i v e
o ffi cer, ch i ef fi n an ci al o ffi cer, s o l e d i rect o r, an dtreas u rer. M s . Lat s o ns erv edas i t s s ecret ary . 7 Du ri n g th e y ears ati ss u e, i nacco rd an ce wi th M r. Ho l co m b an dp et it i o n er’ s p l an , th e fees p ai dfo r p et it i o n er’ s s p eak i n g en g ag em en t s were g en eral ly m ad e p ay ab l e t o an acco u n tatBan ko f Am eri ca u n d er t he acco u n tn am e Go o d Th i n k i n g , acco u n t N o . x x x x x x 2 5 2 0 (GT 2 5 2 0 acco un t ). In so far as th e reco rds h o ws , p et i t i o n er an dM s . Lat so n were t h e o n l y i n d iv i dual s wi th s i g n atu re au th o ri ty o v er th e GT 2 5 2 0 acco u nt . Pet i t i o n er an dM s . Lat s o n were al s o au th o ri zedu s ers o f Go o dTh in k in g ’ s Am eri can Ex p res s cred i t cardacco u n t(GT cred i tcardacco u n t ). 8

6 (...co n t in u ed ) v ari o u s p l aces b utd o n o t s eem t o en t er d irect l y

i nt o res p on d en t ’ s d et erm i n at i o n s th atp res en t l y

co n cern u s , i n cl u d e Bu il d ers Tru s t , St i l l wat er Tru s t , an dGo l dwat er Tru s t . M r. Ho l co m

b an dp et i t io n er were g en eral l y co tru s t ees o f t h es e en t i t i es , an d p et i t i o n er was au th o ri zed t o actas an ag en t fo r each en t i ty . Th e g en eral p u rp o s e o f t h es e en ti t ies was t o s h i ftas s et s an d i n co m e fro m o n e t o t h e o th er. Fo r i n s t an ce, fro m 2 0 10 t o 2 0 1 2 p et i t i o ner wro t e ch eck s t o Bu i l d ers Tru s tfro m th e Go o d Th i n ki n g acco un t s .

7 Go o dTh i n k i n g was d i s s o l v edi n M ay 2 0 1 2 . GreatTh i n k i n g LLC was creat ed i n 2 0 1 1 t o b e i t s rep l acem en t . Aft er a p eri oddu ri ng wh i ch th e t wo en t i t i es ran co n cu rren t l y , th e t ran s i t i o n b et ween th e t wo en t i ti es was co m p l et edi n 2 0 1 2
. Pet i t io n er was th e fi du ci ary o f b o th en t i t i es . No n e o f t h e ad ju s t m en t s i n th e cu rren tp ro ceed in gs rel at e t o Go o dTh i n k in g .

8 Two o th er i nd i v i dual s , Fo u ad e RC Di n i an d Lyn e In ad a, were al s o l i s t edas (co n ti n u ed ...)- 6
-

[* 6 ] Du ri n g th e y ears ati ss u e p et i t i o n er an dM s . Lat s on p ai dv ari o u s ex p en s es
u s i n g th e GT cred i t cardacco u n tan dfu n d s d ep o s it edi n t o th e GT 2 5 2 0 acco u n t . Th es e ex pen s es i n cl ud edai rfare, p aym en t s t o v id eo ren t al s t o res , g ro cerys t o res , fas t -fo o d res t au ran t s , an d p aym en t s fo r o ther m i scel lan eo u s ex p en s es . Pet i t i o ner fi l edh i s Fo rm s 1 0 4 0 , U.S. In d i v i du al In co m e Tax Retu rn , fo r t ax y ears 2 0 1 0 an d2 0 1 2 o nt im e b u tfi l edh i s Fo rm 1 0 40 fo r 2 0 1 1 (wh ich was du e Ap ri l 1 7 , 2 0 12 ) o nJ u n e 2 4, 2 0 1 3 . Onthes e Fo rm s 1 04 0 h e rep o rt edwag es fro m Go o dTh in k in g o f $ 1 3 ,7 5 0 , $ 1 7 ,0 1 9, an d$ 7 ,8 6 2 fo r 2 0 1 0, 2 0 1 1 , an d2 0 1 2,
res p ect i vel y . Fo r t ax y ears 2 0 10 , 2 0 1 1 , an d2 0 1 2 Go o dTh i n ki n g fi l edFo rm s 1 1 2 0 , U.S. Co rp o rat i o nIn co m e Tax Return , rep o rt i ng th e fo l lo wi n g am ou n ts o f i n co m e an d
ex p en s es :

8 (...co n t in u ed ) au th o ri zedu s ers o f t he GT cred i tcardacco u n t . M r. Di ni ch arg edo n l y ab o u t$ 1 5 4 o nth e GT cred i t cardacco u n t o v er t h e y ears ati s s u e. M s. In ad a m ad e ch arg es o n th e GT cred itcardacco u n ts i m i l ar i n am o un t t o ch arg es m ad e b y p et i t i o n er an d M s . Lat s o n . Al th o u g h th e reco rdd o es n o tm ak e cl ear t h e ex actn atu re o f M r. Di n i an d M s . In ad a’ s rel at io n s h i p t o p et i t i o n er an d Go o d Th i n k in g , th e reco rdd o es co n tai nnu m ero u s ch eck s wri t t en fro m p et i t i o n er an dfro m Go o d Th i n k in g t o M s . In ad a wi th th e m em o l i n es o nm an y o f t h e ch eck s i n d icat i n g v ari o u sl y thatth e p aym en t s are fo r “ Ki d s ”, “ Bab y s i t ti n g ”, “ Ch i l d care”, o r s im i l ar t hi n gs .- 7
- 2 0 1 0 2 01 1 2 0 1 2 Gro s s p ro fi t s $ 2 1 7,7 8 9 $ 6 5,5 2 0 $ 9 ,6 1 1 Ex p en s es : Sal ari es an dwag es 6 0,2 8 8 5 6 ,8 9 4 7 ,5 0 0 Tax es an dl i cen s es 6 ,2 9 4 6 ,0 2 3 9 5 2 Adv ert i s i n g 3 ,3 5 9 -0
- -0
- Em p l oy ee b en efi t s 3 ,2 7 0 -0
- -0
- Trav el 6 9,3 1 6 -0
- -0
- Oth er d edu ct i o ns 7 8,9 3 0 2 ,6 0 3 1 ,1 5 9 To t al 2 2 1,4 5 7 6 5 ,5 2 0 9 ,6 1 1 Tax ab l e i n co m e (3 ,6 6 8 ) -0
- -0
-
Th e In t ern al Rev en u e Serv i ce (IRS) s el ect edp et i t i o n er’ s an dGo o d Th i n ki n g’ s return s fo r ex am i n at i o n . By n o t i ce o f d efi ci en cy

d at ed J ul y

3 , 2 0 1 4 , th e IRS ad

ju s t edGo o dTh i n k i ng ’ s t ax ab l e i n co m e b y d i s al l o w i n g , fo r l acko f
s ub s t an t i at i o n , m o s t o f t h e cl ai m edd educt i o n s an db y ad j u s t i n g up wardi ts g ro s s p ro fi ts fo r 2 0 1 1 an d2 0 1 2 , as fo l l o ws : [* 7 ]- 8
- 2 0 1 0 2 0 1 1 2 0 1 2 Gro s s p ro fi t s $ 2 1 7 ,7 8 9 $ 8 9 ,7 1 0 $ 4 7 ,1 4 6 Ex p en s es : Sal ari es an d wag es 1 3 ,7 5 0 1 7 ,0 0 0 7 ,5 00 Tax es an d l i cen ses -0
- -0
- -0
- Adv ert is i n g -0
- -0
- -0
- Em p lo y ee b en efi ts -0
- -0
- -0
- Trav el -0
- -0
- -0
- Oth er d edu ct i on s -0
- -0
- -0
- To tal 1 3 ,7 5 0 1 7 ,0 0 0 7 , 5 0 0 Tax ab l e i n co m e 2 0 4 ,0 3 9 7 2 ,7 1 0 3 9,6 46 By a s ep arat e n o t i ce o f d efi ci en cy , al s o d at edJ u l y 3 , 2 01 4 , res p o n d en t d et erm i n edth atp et i t i o n er h adfai l edt o rep o rtco n s tru ct i v e d i v i d en d s at tri b u t ab l e t o p ers o n al ex p en s es th atGo o dTh i n k i n g h ad p ai d o nh i s b eh al f o f $ 2 0 7 , 7 07 , $ 7 2 ,7 1 0 , an d$ 3 9,6 4 6 fo r 2 0 1 0 , 2 0 1 1 , an d2 01 2 , res p ect i v el y . 9 In ad d i t i o n , [* 8 ]

9 Fo r al l y ears at i s s u e t h e IRS co u n t edas co n s tru ct i ve d i v i den d s tho s e ex p en s es th atGo o dTh i n k i ng h adrep o rt edan dth atth e IRS h add i s al l o wedas d educt i o n s , n am el y

$ 2 07 ,7 07 ($ 2 21 ,4 5 7 o f rep o rt edex pen s es l es s th e $ 1 3 , 7 5 0 al l o wed ), $ 4 8 ,5 20 ($ 6 5 ,5 2 0 o f rep o rt edex p en s es l es s th e $ 1 7 ,0 00 al l o w ed ), an d $ 2 ,1 1 1 ($ 9 ,6 1 1 o f rep o rt ed ex p en s es l es s th e $ 7 ,5 0 0 al l o wed ) fo r 2 0 10 , 2 01 1 , an d 2 0 1 2 , res p ect i v el y . Fo r 2 0 1 1 an d2 0 1 2 th e IRS al s o co u n t edas co n s tru ct i ve d i v i d en d s p aym en t s o f $ 2 4 ,1 9 0 an d$ 3 7 ,3 5 3 , res pect i v el y , th atGo o dTh i n k i n g h ad m ad e o ni t s GT cred i tcard acco u n t . Go odTh i n k i n g h ad n ei th er i n cl ud edth es e l at t er am o u n t s i ni t s g ro s s p ro ceed s n o r cl ai m edan y d edu ct io n fo r t h es e am o u n t s o ni t s co rp o rat e ret u rn s fo r 2 0 1 1 an d 2 01 2 . Inth e n ot i ce o f d efi ci en cy i s s uedt o (co n ti n u ed ...)- 9
-

[* 9 ] res p o n d en td et erm i nedth atfo r each y ear at i s s u e p et i t i o n er was l i ab l e fo r an
accu racy -rel at edp en al ty

u n d er s ect i o n6 6 62 (a) as a res u l t o f o ne o r m o re o f (1 ) n eg l i g en ce o r d i s reg ardo f ru l es o r reg u l at i o n s, (2 ) a s ub st an t i al u n ders t at em en t
o f i n co m e t ax , o r (3 ) a s ub st an t i al v al uat i o no v ers t at em en t . Th e reco rdi n cl u d es a Ci v i l Pen al ty Ap p ro v al Fo rm , d at edM ay 1 4 , 2 0 1 4 , an d s ig n edb y th e IRS ex am i n er’ s g ro up m an ag er o nM ay 2 3 , 2 0 1 4 , fo r th e
as s ert i o no f accu racy -rel at edp en al t i es u n d er s ect i o n6 6 6 2 (a) fo r n eg li g en ce. Th ere was n o fo rm al co m m u n icat i o no f p en al ti es g i v i n g p et i t i o n er t h e ri g h tt o p ro t es tth em

o r ch al l en g e t hem

i nco u rtb efo re t h e n o t i ce o f d efi ci en cy . 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 p res u m ed
co rrect , an dth e t ax p ay er g en eral l y b ears th e b u rd en o f p ro vi n g th 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). 1 0

9 (...co n t in u ed ) Go o dTh in k in g , res p on d en t d et erm i n ed th atth es e am o u n t s s h o u l dh av e b een i n cl u d edi nGo o d Th in k i n g ’ s g ro s s p ro ceed s.

1 0 Un d er s ec. 7 49 1 (a) i f t h e t ax p ay er i n tro du ces cred i b l e ev i d en ce wi th res p ectt o an y

fact u al i s s u e rel ev an tt o as cert ai n i n g th e p ro p er i n co m e t ax l i ab i li ty , (co n ti n u ed ...)- 1 0 -

[* 1 0 ] II. Co n s tru ct i ve Di v i d en d s Res p o n d en td et erm i n edth at p et i t i o n er recei v edfro m Go o dTh in k in g
co n st ru ct i v e d iv i d en ds at tri bu t ab l e t o p ers o n al ex p en s es th atGo o dTh in ki n g p ai d
o nh i s b eh al f. Res p o n d en t ’ s d et erm i n at i o no f co n s tru ct i v e d i v i d en d s i s a d et erm i n at i o n o f u n rep o rt edi n co m e. See Pac. M g m t . Grp . v . Co m

m i s s io n er, T.C. M em o. 2 0 1 8 -1 3 1 , at * 6 4 . Th e Co u rto f Ap p eal s fo r t h e Ni n th Ci rcu i t , t o wh i ch
an y ap p eal i nth is cas e wo u l do rd i n ari l y l i e, s ee s ec. 7 4 8 2 (b )(1 )(A), h as h el dth at th e Co m m i s s i o n er m

u stes t ab l i s h “ s o m e ev i d en t i ary fo u n d at i o n ” l i n k i n g th e t ax p ay er t o an al l eg edi n co m e-p ro du ci ng act i v it y , W ei m ers k i rch v . Co m m i s s i o n er, 5 9 6 F.2 d3 5 8, 3 6 1 -3 62 (9 th Ci r. 1 9 7 9 ), rev ’ g 6 7 T.C. 6 7 2 (1 9 7 7 ). On ce t h e Co m m i s s i o n er h as es t ab l i s h ed s u ch a fo u n d at i o n, the b u rd en o f p ro o f s h i ft s t o th e t ax p ay er t o p ro v e b y

a p rep o nd eran ce o f t h e ev i d en ce t h atth e IRS’ d et erm i n at i o n s are arb i traryo r erro n eo us . See Hard y v . Co m m i s s i o n er, 1 81 F.3 d 1 0 0 2 , 1 0 0 4 (9 th Ci r. 1 9 99 ), aff’ g T.C. M em o. 1 9 9 7 -9 7
. Res p o n d en th as es t ab l is h eda s u ffi ci en tev i d en t i ary fo u nd at i o nt o s at i s fy

an y th res ho l db u rd en . Th e ev i d en ce s h o ws th atp et i t io n er o wn ed1 0 0 % o f Go o d

1 0 (...co n t i nu ed ) an d i f cert ai nco n di t i o n s are m et , th e b urd en o f p ro o f s h i ft s t o th e Co m m i s s i o n er. See al s o Ru l e 1 42 (a)(2 ). Pet i t i o n er d o es n o tco n t en d , an dth e reco rdd oes n o t es t ab l i s h , th atth e b u rd en o f p ro o f s h o u l ds h i ftp u rs u an tt o s ec. 7 4 9 1 (a).- 1 1 -

[* 1 1 ] Th in k in g an d m ai n tai n edau th o ri ty o v er i ts ch eck i n g an dcred i tcard
acco u n t s. He was i nt eg ral l y l i n k edt o --ap p aren t l y

the s o l e s o u rce o f--i t s i n co m ep ro duci n g act i v i ty . Th e reco rds h o ws th atres p o n d en t ’ s d et erm i nat i on i s b as edo n
an ex ten si v e rev i ew o f b o th p et i t i o n er’ s an dGo o dTh i n k i n g ’ s act i v it i es , b an k
acco u n t s, an d ot h er fi n an ci al acco u nt s . Res p o n d en ti n tro du cedev i den ce t o s h o w th atGo o dTh i nk i n g m ad e s i g n i fi can tex p en d itu res p ri m ari l y fo r p et i t i on er’ s b en efi t . Sect io n s 3 0 1 an d3 1 6 g o v ern th e ch aract eri zat i o n , fo r Fed eral i n co m e t ax p u rp os es , o f co rp o rat e d i s tri b u t i o n s o f p ro p ert y t o s h areh ol d ers . If the d i s tri b u t i ng
co rp o rat i o n h as s u ffi ci en t earn i n g s an d p ro fi ts (E&P), t h e d is tri b u t i o ni s a d i v i d en d th atth e s h areh ol d er m u s ti n cl u de i n g ro s s i nco m e. Secs . 3 01 (c)(1 ), 3 1 6
. If t h e d is tri b u t i o nex ceed s th e co rp o rat i on ’ s E&P, t he ex ces s g en eral l y rep res en t s
a n o n t ax ab l e ret urn o f cap i t al t o t h e ex t en t o f t h e s hareh o l d er’ s b as i s i n t h e
co rp o rat i o n, an dan y

rem ai n i n g am o u n ti s t ax ab l e t o th e s h areh o l d er as a g ai nfro m th e s al e o r ex ch an g e o f p ro pert y . Sec. 3 0 1 (c)(2 ) an d(3 ); Tru es d el l v
. Co m m i s s i o n er, 8 9 T.C. 1 28 0 , 1 2 9 5 -1 2 9 8 (1 98 7 ). Pet i t i o ner b ears th e b u rd en o f p ro vi n g th at Go o dTh i n k in g l ack ed s uffi ci en t E&P t o s up p o rtd iv i d en d t reat m en tatth e s h areh o l d er l ev el
. See Tru es d el l v . Co m m i s s i o n er, 8 9 T.C. at 1 2 9 5-1 2 9 6 ; Fazzi o v . Co m m i ss i o n er, T.C. M em o . 1 9 9 1-- 1 2 -

[* 1 2 ] 1 3 0 , aff’ d , 9 5 9 F.2 d6 3 0 (6 th Ci r. 1 9 9 2 ); Zal ews k i v . Co m m i s s i o ner, T.C. M em o. 1 9 8 8 -3 4 0 ; Del g ad o v . Co m m i ss i o ner, T.C. M em o. 1 9 8 8 -6 6 . If n ei th er p art y p res en t s ev i den ce as t o th e d i s tri b u t i ng co rp o rat io n ’ s E&P, t h e t ax p ay er h as
n o tm eth i s b u rd en o f p ro o f. Tru es d el l v . Co m m is s io n er, 8 9 T.C. at1 2 9 5 -1 2 9 6 ; Vl ach v . Co m

m i s s i o n er, T.C. M em o . 2 0 1 3 -1 1 6 , at* 3 3 n .3 8
. Pet i t i o ner p ro du cedn o ev i d en ce co n cern i n g Go o dTh i n k i n g’ s E&P du ri n g th e y ears ati s s u e an dh as th u s fai l edt o m eeth i s b u rd en o f p ro v i n g th atth ere were i n s u ffi ci en tE&P t o s up po rtres p o n d en t ’ s d et erm in at i o n s o f co n s tru ct i v e d i v i d en d s t o p et i ti o n er. See Tru es d el l v
. Co m m i s s i o ner, 8 9 T.C. at1 2 9 5 -1 2 9 6 ; Pac. M g m t. Grp
. v . Co m

m i s si o ner, at * 6 5 -* 6 6
. W e t herefo re d eem Go o dTh i n k i n g t o h av e h ad s uffi ci en tE&P i neach y ear t o s up p ortd i v i d en dtreat m en t . Ch aract eri zat i on o f a d i s tri b u t i o nas a d i v i den dd o es n otd ep en dupo na fo rm al d i v i d en d d ecl arat i o n . See Bo u l ware v . Un i tedSt at es , 5 5 2 U.S. 4 21 , 4 2 9
- 4 3 0 (2 00 8 ); Tru es d el l v . Co m m i s s i o n er, 8 9 T.C. at1 2 9 5 ; s ee al s o No b l e v . Co m m i s s i o n er, 3 6 8 F.2 d4 3 9 , 4 4 2 (9 th Ci r. 1 9 6 6 ), aff’ g T.C. M em o . 1 9 6 5 -8 4
. Di v id en ds m ay

b e fo rm al l y

d ecl aredo r co n s tru ct i v e. A co n s tru ct i ve d i v i d en di s
an eco n o m i c b en efi tco n ferred up o na s h areh o l der b y a co rp orat i o n wi th o u t
ex p ect at i o n o f rep aym en t . Tru es d el l v . Co m m i s s i on er, 8 9 T.C. at1 2 9 5 . Co rp o rat e fu n d s t h ata co n tro l l i ng s h areh o l d er d i v ert s t o p ers o nal u s e are g en eral ly- 1 3 -

[* 1 3 ] ch aract eri zedfo r t ax p u rp o s es as co n s tru ct i v e d i s tri b u t io n s t o th e
s h areh o ld er. See Eri ck s o n v . Co m m i s s i o n er, 5 9 8 F.2 d 5 2 5 , 5 31 (9 th Ci r. 1 9 7 9 ), aff’ g i np art , rev ’ g in p artT.C. M em o . 1 9 7 6 -1 4 7. Su ch a d i v ers i on m ay o ccu r, fo r
ex am p l e, wh ere a co rp o rat i o n m ak es a d i s tri b u ti o nt o a co n tro l l i ng s h areh o l d er th atres u l t s i nan eco n o m i c b en efi tt o th e s h areh o l d er b u ts erv es n o l eg i ti m at e
co rp o rat e p u rp o s e. See M eri d i an W o o d Pro d s . Co . v . Un i t edSt at es , 7 2 5 F.2 d 1 1 8 3 , 1 1 9 1 (9 th Ci r. 1 9 8 4 ). Su ch a d i v ers i o nm ay al s o o ccu r wh ere a co nt ro l l i n g
s h areh o ld er cau s es a co rp o rat i o nt o p ay h i s o r h er p ers o nal ex p en se fo r th e
s h areh o ld er’ s p ri m ary

b en efi t an dwi th o u tex p ect at i o no f rep aym en t . See Ho o dv . Co m m i s s i o n er, 1 1 5 T.C. 1 7 2 , 1 7 9 -1 8 0 (2 0 0 0). A d i s tri b ut i on d o es n otes cap e t ax at io nas a d iv i d en d s i m p l y b ecau se t he s h areh o l der d i dn o t p ers o n al ly recei v e th e p ro p ert y . Sam

m on s v . Un i t edSt at es , 4 3 3 F.2 d 7 2 8 , 7 3 0 (5 th Ci r. 1 9 7 0); s ee al s o Sp ark s Nu g g et , In c. v . Co m m i s s i o ner, T.C. M em o. 1 9 70 -7 4 , aff’ d, 4 5 8 F.2 d 6 3 1 (9 th Ci r. 1 9 72 ). Rat h er, “ i ti s th e p o wer t o d i sp o se o f i n co m e an d th e ex erci s e
o f t h at p o wer t h atd et erm i n es wh et h er * * * [a d i v i d en d ] h as b een recei v ed .” Samm o n s, 4 3 3 F.2 dat7 3 2; s ee al s o Hel v eri n g v . Ho rs t , 3 1 1 U.S. 1 1 2 (1 9 40 ); Cl arkv . Co m

m i s s i o n er, 2 6 6 F.2 d6 9 8 , 7 1 3 (9 th Ci r. 1 9 59 ), aff’ g o nthi s i s s u e an d
rem an di n g T.C. M em o . 1 9 5 7 -1 2 9
. Wh et h er co rp o rat e ex p en d i tures are d i s g u i s ed d i v i d en d s p res en t s a qu es t i o no f fact . See Pi t t m an v . Co m m i s s i o ner, 1 0 0 F.3 d- 1 4 -

[* 1 4 ] 1 3 0 8 , 1 3 1 3 -1 3 14 (7 th Ci r. 1 99 6 ), aff’ g T.C. M em o . 1 99 5 -2 4 3 ; Ho o dv . Co m m i s s i o n er, 1 1 5 T.C. at1 8 0. Th e Co u rto f Ap p eal s fo r t h e Ni nt h Ci rcu i t h as en u n ci at eda t w o-p artt es t fo r d et erm in i ng co n s tru ct iv e d iv i d en d s : “ Co rp o rat e ex p en d i tu res co n s t i tu t e
co n st ru ct i v e d iv i d en ds o n l y i f 1 ) t h e ex p en d i tu res d o n o t g i ve ri s e t o a d edu ct i o n
o nb eh al f o f t h e co rp o rat i o n , an d2 ) t he ex p en d i tu res creat e ‘ eco n o m i c g ai n , b en efi t , o r i n co m e t o the o wn er-t ax pay er.’ ” P.R. Farm s, In c. v . Co m m i ss i o n er, 8 2 0 F.2 d1 0 84 , 1 0 8 8 (9 th Ci r. 1 9 8 7 ) (qu o t i n g M eri d ian W o o dPro ds . Co
. , 7 2 5 F.2 dat 1 19 1 ), aff’ g T.C. M em o . 1 9 8 4 -5 4 9 ; s ee al s o Eri ck s o nv . Co m m i s s i o n er, 5 9 8 F.2 dat5 3 1
. As we o bs erv edi nFal s et t i v . Co m m i s s i o n er, 8 5 T.C. 3 3 2 , 3 5 7 (1 9 8 5 ): Oft en th e Co u rtwi l l h av e b efo re i t b o th th e i n d i v i du al s h areh o l d er an dth e co rp o rat i o n s o thatap p l i cat i o n o f t h e t wo -p art t es ti s a rel at i v el y

s i m p l e m at t er. Ho wev er, Tax Co u rtjuri s d i ct i o n i s d ep en d en t up o n t i m el y

fi l edp et it i o n s b y

b ot h th e i n d i v i du al s h areh o l d er an dth e co rp o rat i o n . Thu s * * * ap p l i cat io no f t h e Ni n th Ci rcu i t ’ s co n s tru ct i v e d i v i d en dru l e i s co m p l i cat edwh eno n l y

o ne o f th e p art i es i s b efo re th e Co u rt , a ci rcu m s t an ce b ey o n do ur co n tro l
. * * * Si m i l arl y i n t h is cas e, b ecau s e o n l y p et i t i o n er an dn o t Go o dTh i n k i n g i s b efo re t h e Co u rt , we “p ro ceed as b es t we can o nth e reco rdb efo re u s .” Id
.- 1 5 -

[* 1 5 ] Fo r al l y ears ati s su e res p o n d en td et erm in edth e am o u n to f co n s tru ct i v e d i v i d en d s o nth e b as i s o f Go o d Th i n k i n g’ s d i s al l o wedcl ai m edd edu ct i o n s an d , fo r 2 0 1 1 an d2 0 1 2 , al s o o nth e b as i s o f ad d i t i o nal ch arg es m ad e o nthe GT cred i tcard
acco u n t . Pet it io n er cl ai m s th atm an y o f t h es e ex p en d itu res an dch arg es rep res en t l eg i t i m at e b u s i n es s ex p en ses o f Go o dTh in k i n g . Pet i t i o ner o ffered i n t o ev i d en ce, wi th o u t m ean i ng fu l ex p l an at i o n , h u n dred s
o f p ag es o f p h ot o co p iedrecei p t s , ex p en s e l ed gers , s pread s h eet s , an dv ari ou s o th er
u n s o rt edd o cu m en t at i on . Th es e m at eri al s are n otl i nk edi nan y m ean i n g fu l way t o
res p o n d en t’ s ad

ju s t m en t s . Attri al p et i t i o n er at t em p t eds el ect i v el y

t o l i n k a v ery few o f th es e i t em s t o d edu ct i b l e ex p en ses o f Go o dTh i n k i n g . W e d i dn o tfi n dh i s t es t i m o ny as t o th es e few i t em s cred i bl e o r ad equat e t o s h o w th atan y p art i cu l ar i t em rep res en t edan o rd i n ary an d n eces s ary b u s i n es s ex p en s e o f Go o dTh i n k i n g . 1 1

1 1 Fo r i n s t an ce, ack n o wl ed g i n g th ath e was “ a l i t t l e s l ow” o nth e d i fferen ce b et ween d eb i t s an d cred i ts o n t h e GT 2 5 2 0 acco u n ts t at em en t , p et i t i o n er g o ti t b ack w ard s an dcl ai m edth atcert ai n b an ks t at em en tcred i ts (i .e., i n creas es t o th e acco u n t bal an ce) rep res en t edex p en s es . As an o th er ex am p l e, p et i ti o n er p o i n t edt o cert ai n Go o dTh i nk i n g ch eck s th atwere wri t t en i n2 00 9 ; we s ee n o b as i s fo r co n cl u d in g th atth es e ch eck s rep res en to rd i n ary an dn eces s ary

ex p en s es fo r 2 0 10 , 2 0 1 1 , o r 2 0 1 2
. He al s o cl ai m edth atGo o dTh in k i n g h ad m ad e cert ai nch ari t ab l e co n tri b u t i o n s b u to ffered n o co n t em p o ran eo u s d o cu m en t at i o nas req u i redb y s ec. 1 7 0 (f)(8 ). He al s o p o i nt edt o a few o th er p h o to co p i edcan cel edch eck s--m ad e o u t v ari o u s l y t o a p ho n e co m

p an y , an i nt ern etp ro v i d er, a p ubl i sh i n g h o u s e, a v i d eo p ro duct i o nco m

p an y , a co l l eg e, an da l aw fi rm an dt ot al i n g ab o u t $ 2 ,2 4 9 --b u t o ffered n o i n v o i ces o r co n tract s t o s h o w th atth es e ch eck s rep res en t edo rd i n ary (co n ti n u ed ...)- 1 6 -

[* 1 6 ] In fact , p et i t i o n er co n ced edattri al th atcert ai ncat eg o ri es o f ex pen s es rep o rt edb y

Go o dTh i n k i n g --s u ch as fo r ch i l dcare--were n o tal l o wab l e b u s i n es s
ex p en s es . Part i cu l arl y

i n t h e l i g h to f t h i s co n ces s i on , we n eed n otan ds h al l n o t
u n d ert ak e t h e t as ko f s ort in g thro u gh p et i ti o n er’ s v o l um i n o us ev i d en ce i nan at t em p tt o d et erm i n e d edu ct i b l e b u s i n es s ex p en ses o f Go o d Th i n k i n g . See Hal e v . Co m m i s s i o n er, T.C. M em o . 2 0 1 0 -2 2 9 ; Pat t ers o nv . Co m m i s s i o ner, T.C. M em o . 1 9 7 9 -3 6 2
. In s u m , p et i t io n er’ s v o l u m in o u s d o cu m en t at i o n, i n wh i ch p ers on al l i v i n g
ex p en s es are n o t cl earl y

d i s t i n g u i s h edfro m

l eg i t i m at e b u s in es s ex pen s es , p ro v i d es
u s n o reas o n ab l e m ean s o f es ti m at i n g o r d et erm i n i n g wh i ch i f an y o f t h e
ex p en d i tu res i n qu es t i on were i n cu rred as o rd i n ary an dn eces s ary

b u s i n es s
ex p en s es o f Go o dTh i nk i n g fo r t h e y ears at i s su e. Becau s e p et i t i o n er h as fai l ed t o s h o w th atth e ex p en d i tu res i nqu es t i o n p ro p erl y g av e ri s e t o d edu ct i on s o n b eh al f o f Go o dTh i n k in g , th e rem ai n i n g qu es ti o ni s wh et her t h es e ex p en d i tu res creat ed“ eco n o m i c g ai n , b en efi t , o r i n co m e t o the o wn er-t ax p ay er.” P.R. Farm s, In c. v . Co m m i s s i o n er, 8 2 0 F.2 d at1 0 8 8

1 1 (...co n t i nu ed ) an d n eces s ary

b u s i n es s ex p en s es o f Go o dTh i n ki n g . Our s k ep t i ci sm o nth i s s co re i s h ei g h t en edb y

p et i ti o n er an dM r. Ho l co m b ’ s t ax -av o i d an ce s trat eg y o f h av i n g Go o dTh in k in g d edu ct p et i ti o n er’ s p ers o nal l i vi n g ex p en s es as b u si n es s ex p en s es .- 1 7 -

[* 1 7 ] (qu o t i n g M eri d i an W o o dPro d s . Co ., 7 2 5 F.2 dat1 1 9 1 ). Th e ex p en d i tu res i n qu es ti o ns h o w a p at t ern o f p aym en to f p ers o n al ex p en s es , fo r i t em s s u ch as ch i l d care, cl ot h i n g , g ro ceri es , an dfas t -fo odres t au ran t s . Th i s p at t ern i s co n s i s t en twi th p et i t i o n er’ s t ax -av o i d an ce s trat eg y , as d ev is edb y M r. Ho lco m

b , t o h av e Go o d Th i n ki n g d edu ctp et i t i o n er’ s p ers o n al l iv i ng ex p en s es as b u s i nes s ex p en s es . Pet i t i o ner h as n oti d en t i fi edan y cat eg o ry o f ch al l en gedco rp orat e ex p en s es th atd i d n o tb en efi th i m

p ers o n al l y . In st ead , h e h as res o rt edt o g ro un d l es s an d fri v ol o u s arg u m en t s . As h as b een o ft en o bs erv ed , “ [w] e p ercei v e n o n eedt o refu t e th es e arg u m en t s wi th s o m b er reas o n i n g an dco p io u s ci tat i o no f p reced en t ; t o d o s o
m i g h ts u gg es tth atth es e arg u m en t s h av e s o m e co l o rab l e m eri t .” Crai nv . Co m m i s s i o n er, 7 3 7 F.2 d1 4 1 7 , 1 4 1 7 (5 th Ci r. 1 9 8 4 ). W e s u s t ai nres p o nd en t ’ s d et erm i n at i o n s t h atp et i t i o n er recei v edan dfai l ed t o rep o rtco n st ru ct i ve d i vi d en ds o f $ 2 0 7 ,7 0 7 , $ 7 2 ,7 10 , an d$ 3 9 , 6 4 6 fo r 2 01 0 , 2 0 1 1 , an d2 0 1 2 , res p ect i v el y . III. Sect i o n6 6 5 1 (a)(1 ) Ad d i ti on t o Tax Res p o n d en td et erm i n edth at p et i t i o n er i s l i ab l e fo r a s ect i o n6 6 51 (a)(1 ) ad d it i o nt o t ax fo r fai l i n g t o fi l e h i s 2 0 11 Fed eral i n co m e t ax retu rn o nt i m e. Sect i o n6 6 5 1(a)(1 ) p ro v i d es fo r an ad d i t io nt o t ax fo r fai lu re t o fi l e a ret u rnb y th e d at e p res cri b ed un l es s th e t ax p ay er es t ab l i s hes th atth e fai lu re i s du e t o reas o n ab l e- 1 8 -

[* 1 8 ] cau s e an d n o twi l l fu l n eg l ect . Th e Co m m i s s i o n er b ears the b u rd en o f p ro duct i o nwi th res pect t o wh et h er i ti s ap p ro pri at e t o i m p o s e t h e s ect i o n 6 6 5 1 (a)(1 ) ad d i t i o nt o t ax , s ee s ec. 7 4 9 1 (c), an d th e b u rd en o f p ro o f i s o nth e t ax p ay er t o es t ab l is h reas on ab l e cau s e an d t h e ab s en ce o f wi l l fu l n eg lect , Un i t ed St at es v . Bo y l e, 4 6 9 U.S. 2 4 1 , 2 4 5 (1 9 8 5). Reas o n ab le cau s e ex i st s wh en a t ax p ay er ex erci s es o rd i n ary b u s i n es s care an dp ru den ce an di s n o n eth el es s u n ab l e t o fi l e h is retu rnb y

th e d at e p res cri b edb y

l aw. Sec. 3 0 1 .6 65 1 -1 (c)(1 ), Pro ced . & Ad m i n . Reg s. W i l l fu l n eg l ectco n n o t es “ co n s ci o u s , i n t en t i o n al fai l u re o r reck l es s i n d i fferen ce.” Bo y le, 4 6 9 U.S. at2 4 5. Pet i t i o ner’ s 2 0 1 1 t ax return was du e Ap ri l 1 7 , 2 0 1 2 . Itwas fi ledJ u n e 2 4 , 2 0 1 3 . Res p o n den th as m eth i s b u rd en o f p ro duct i o n . Pet i t i o n er fai ledt o s h o w
reas on ab l e cau s e fo r n o tt im el y fi l i n g h i s 2 0 11 t ax retu rn . W e s us t ai nres p o n d en t ’ s d et erm i n at i o n o f t h e s ect i o n 66 5 1 (a)(1 ) ad d i t i o n t o t ax . IV. Sect i o n6 6 6 2 (a) Accu racy -Rel at edPen al t i es Res p o n d en td et erm i n edth at fo r each y ear at i s s u e p et i ti o n er i s l i ab l e fo r a 2 0 % accu racy -rel at edp en al ty p u rs u an tt o s ect i o n 6 6 6 2 (a). Un d er s ect i o n7 4 9 1 (c),
res p o n d en t b ears th e b u rd en o f p ro du ct io nwi th res p ectt o th e s ect i o n6 6 6 2 (a) p en al ty . Gen eral l y , th i s m ean s th at h e m u s tco m e fo rwardwi th s u ffi ci en tev i d en ce i n d i cat i n g t h at i ti s ap p ro p ri at e t o i m po s e t h e rel ev an tp en al ty . See Hi g b ee v .- 1 9 -

[* 1 9 ] Co m

m i s si o n er, 1 1 6 T.C. 4 3 8 , 4 4 6 (2 0 01 ). Th e Co m m i s si on er’ s b u rd en o f p ro duct i o nu n d er s ect i on 7 49 1 (c) i n cl u d es es t ab l i s h in g co m p l i an ce wi th t h e
s up erv i s o ry

ap p ro v al req u i rem en to f s ect i on 6 7 5 1(b ). Graev v . Co m m i ss i o n er, 1 4 9 T.C. 4 8 5 , 4 9 3 (2 0 1 7 ), s up pl em en t i ng an do v erru l i n g i np art1 4 7 T.C. 4 6 0 (2 0 1 6). On ce t h e Co m

m is s io n er h as m eth i s b u rd en o f p ro du ct i o n , th e b u rd en o f p ro o f i s up o nthe t ax p ay er t o s h o w thath e i s n o tl iab l e fo r t h e p en al ty . See Hi g b ee
v . Co m m i s s i o n er, 1 1 6 T.C. at4 4 9 . Th e t ax p ay er m ay m eetth i s b u rd en b y p ro v i n g th ath e act edwi th reas o nab l e cau s e an d i ng o o d fai th wi th reg ardt o th e
u n d erp aym en t . See s ec. 6 6 6 4(c)(1 ). Sect io n6 6 6 2 (a) i m

p o s es a p en al ty

o f 2 0 % o f t h e p o rt i o no f an y
u n d erp aym en t at tri b u t ab l e t o , am o n g o ther t h i n g s , n eg l i g en ce o r d is reg ardo f ru les
o r reg u l at i o n s . See s ec. 6 66 2 (b )(1 ). Neg l i g en ce i n cl u d es th e fai l u re t o m ak e a
reas on ab l e at t em

p tt o co m p l y wi th th e p ro vi s i o n s o f th e Co de an dal s o i n cl u d es
an y fai l u re t o k eep ad equ at e b o o k s an dreco rd s o r t o s ub s t an t i at e i tem s p ro p erl y . Sec. 6 6 62 (c); s ec. 1 .6 6 6 2-3 (b )(1 ), In co m e Tax Reg s . Th e ev i d en ce s h ows th at p et i t i o n er h as fai l edt o m ak e a reas o n ab l e at tem pt t o co m p ly wi th th e p ro v i s i o n s o f th e Co d e an dfai l edt o k eep ad equ at e b o o ks an dreco rd s , i n s t eades p o u s in g v ari o u s fri v ol o u s an dg ro u n d l es s arg um en t s . Th e reco rd i n cl u d es a Ci v i l Pen al ty Ap p ro v al Fo rm

fo r t h e accu racy -rel at ed n eg l i g en ce p en al t i es , s i g n edb y th e IRS- 2 0 -

[* 2 0 ] ex am i n er’ s g ro up m an ag er b efo re t h e fi rs tfo rm al co m m un i cat i o no f p en al t i es , i nth e n o ti ce o f d efi ci en cy , g i vi n g p et i t i o n er th e ri gh tt o ch al l en g e t h em . See Ro s e v . Co m

m is s i o n er, T.C. M em o . 2 0 1 9 -7 3 , at * 4 0 ; cf. Cl ay v . Co m m i s s i o n er, 1 5 2 T.C. _

_ _ , _

_ _ (s l i p o p . at4 4 ) (Ap r. 2 4 , 2 01 9 ). W e h ol dth at
res p o n d en t h as s at i sfi edh i s b u rd en o f p ro du ct i o n, i ncl u d in g h i s b u rd enp u rs u an tt o
s ect i on 6 7 5 1 (b )(1 ), wi th res p ectt o th e s ect i on 6 6 6 2 accu racy -rel at ed p en al t i es fo r
n eg li g en ce. 1 2 Reas o n ab l e cau se req u i res th atth e t ax pay er ex erci s e o rd i n ary b u s i n es s care
an d p ru d en ce as t o t he d i s p u t edi t em . Bo y l e, 4 6 9 U.S. at2 4 6. Th e t erm “ g o o d fai th ” h as n o p reci se d efi n i t i o nb u tco n no t es , am o n g o th er t h i ng s , (1 ) an h o n es t b el i ef an d(2 ) t h e i n t en tt o p erfo rm al l l awfu l o b l i g at io ns . Sam p s o nv . Co m m i s s i o n er, T.C. M em o . 2 0 1 3 -2 1 2 , at* 1 8
. Th e d et erm i n at i o n o f wh et h er a t ax p ay er act edwi th reas o n ab le cau s e an d i ng o o d fai th i s m ad e o na cas e-b y -cas e b as i s , t ak i n g i n t o acco un tal l fact s an dci rcu m s t an ces . Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. at4 48 ; s ec. 1 .6 6 6 4 -4 (b )(1 ), In co m e Tax Reg s . Gen eral l y , th e m o s t i m p o rt an tfact o r i s t h e ex t en to f t h e t ax pay er’ s effo rt t o as s es s t h e p ro p er t ax

1 2 Becau s e we co n cl u de t h atres p o n d en th as m eth i s b u rd en o f p ro du ct i o n fo r i m p o s i n g p en al t i es b as ed o nn eg l i g en ce, an dwe s u s t ai nth e s ec. 6 6 6 2 (a) p en al t i es o nth atg ro u n d , we n eedn o tco n s i d er wh et h er res po n d en th as m eth i s b u rd en o f p ro duct i o nwi th res pect t o th e accu racy -rel at edp en al t i es as t o an y o th er g ro u n d
.- 2 1 -

[* 2 1 ] l i ab i l i ty . Sec. 1 .6 6 6 4 -4 (b )(1 ), In co m e Tax Reg s . Oth er ci rcu m s t an ces th at
m ay i n d i cat e reas o nab l e cau s e an dg o odfai th i n cl u d e an h o n es tm i s u n d ers t an d i n g
o f fact o r l aw t hati s reas o n ab l e i nth e l ig h to f al l o f t he fact s an dci rcu m st an ces , i n cl u d i n g th e ex p eri en ce, kn o wl ed g e, an dedu cat i o no f t h e t ax p ay er. Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. at4 4 9; Sam p s o n v . Co m

m i s si o n er, at* 1 8 ; s ec. 1 .6 6 6 4
- 4 (b )(1 ), In co m e Tax Reg s . Pet i t i o ner h as fai l edt o es t ab l i s h th ath e act edwi th reas o n ab l e cau s e an d i n g o o dfai th . To th e co n trary , th e reco rdco n v i n ces u s th ath e p urp o sefu l l y p art i ci p at edi na s ch em e t o redu ce h i s i nco m e t ax b y i m p ro p erl y treat i n g p ers o n al l i vi n g ex p en s es as b u s i n es s d edu ct i o n s . Acco rd i n g l y , we s u s t ai nres p o n d en t ’ s d et erm i n at i o n th atp et i t i o ner i s l i ab l e fo r accu racy -rel at edp en al t i es fo r n eg l i g en ce fo r 2 0 1 0 , 2 0 11 , an d 2 0 1 2
. V. Sect io n6 6 73 Pen al ty Sect io n6 6 7 3 (a)(1 ) au tho ri zes th e Tax Co u rtt o req u i re a t ax p ay er t o p ay t o th e Un i t edSt at es a p en al ty o f up t o $ 2 5 ,0 0 0 wh en i t ap p ears thatth e t ax p ay er i n s t i tu t edo r m ai n t ai n edp ro ceed i n g s p ri m ari ly fo r d el ay , th atth e t ax p ay er’ s p o s i t i on i n s uch p ro ceed i n gs i s fri v o l o u s o r g ro u nd l es s , o r th atth e t ax p ay er
u n reas o nab l y

fai l edt o p u rs ue av ai l ab le ad m i n i s trat i v e rem ed i es . See Bu rk e v . Co m m i s s i o n er, 1 2 4 T.C. 1 8 9 , 1 9 7 (2 0 0 5).- 2 2 -

[* 2 2 ] Th ro u g h o u tth es e p ro ceed i n g s p et i t i o n er h as ad v an cedfri vo l ou s an d g ro u nd l es s p o s i t i o n s . 1 3 He h as b een warn edrep eat ed l y ab o u t the p o s s i b i l i ty

o f a p en al ty u n d er s ect i o n6 6 7 3 (a). Nev ert hel es s , h e h as p ers i s tedi nh i s m i s g u i d ed
co u rs e o f co n du ct , cau s i n g th i s Co u rtan d res po n den t t o was te s ig ni fi can tt i m e an d
res o u rces . It ap p ears t o t h e Co u rtth atp et i t io n er’ s p o s i ti o n i nth is p ro ceed i n g i s fri v ol o u s an dg ro u n d l es s an dthath e h as i n st i tu t edan d m ai nt ai n ed th es e p ro ceed in g s p ri m ari l y fo r d el ay . Co n s equ en t l y , we wi l l g ran tres p o n d en t ’ s m o t i o n
an d wi l l req u i re p et i t io n er t o p ay t o th e Un i t edSt at es a p en al ty o f $ 2,5 0 0 p u rs u an t t o s ect io n6 6 7 3 (a)(1 ). To refl ectres p o n den t ’ s co n ces s i o nan dth e Co u rt ’ s Au g u st2 , 2 0 1 8, o rd er, Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5
.

1 3 Pet i t i o ner’ s v ari o u s fi l i n g s i ncl u d e arg u m en t s th at : as a res u lto f th e PTESSM h e i s a “ k ep tM an ” b en efi t i n g fro m th e “ Art is t ic Pat ro nag e” o f M r. Ho l co m b ; an y t ax es du e are t h e s o l e res p o n s ib il i ty o f M r. Ho l co m

b ; p et it i on er i s n o ta “ U.S. fran ch i s ed1 4 th [A] m en d m en tci t izen ” o r a “ U.S. res i d en t ” o r a “p ers o n ” wi th i n th e m ean i n g o f Fed eral s t atu t es ; an dth i s Co u rtan di t s o ffi cers are “ b en efi t i n g fi n an ci al ly ” fro m a “ s ecu ri t i zedd o cu m en tp ack ag e” l i s t ed u n d er p et i t i o n er’ s n am e an d cas e n u m b er. Attri al p et i t i o n er rep eat ed ly i n v o k edh i s rel i an ce o nth e PTESSM s trat eg y an do ffered i nt o ev i d en ce a l et t er fro m M r. Ho l co m b es p o u si n g fri v o lo u s an dg ro u n d l es s cl ai m s ; p et i t i o ner t es ti fi edth atth e l et t er “ m i rro rs m

y m i n d set of ex act l y

wh atm y s i tu at i o ni s an dm

y rel at i o ns h i p wi th M r. Ho l co m

b an dth e PTESSM .”