T.C. M em o . 2 0 2 1 -8 9

UNITED STATES TAX COURT

J ACOB BERGER AND EVELYN R. BERGER, Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 1 7 1 96 -1 8
. Fi l edJ u l y 1 5, 2 0 21
.

Ken n et h P. Feh l , fo r p et i t i o n ers . M i ch ael Sk een , fo r res p on d en t .

M EM ORANDUM FINDINGS OF FACT AND OPINION NEGA, Jud g e: By n o t i ce o f d efi ci en cy d at edJ u n e 6 , 2 0 1 8 , res p o nd en t d et erm i n edd efi ci en ci es i n p et i t i o n ers ’ Fed eral i n co m e t ax an d accu racy -rel at ed p en al t i es u n d er s ect i o n 6 6 6 2 (a) 1 as fo l l ows :

1 Un l es s o th erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al (co n ti n u ed ...) Served 07/15/21- 2
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Year D efi ci en cy Pen al ty s ec. 6 6 6 2 (a) 2 0 1 3 $ 32 ,1 6 7 $ 6 ,4 3 3 2 0 1 4 1 8 ,2 3 7 3 ,6 4 7 Aft er co n ces si o ns , 2 th e i s s u es rem ai n i n g fo r d eci s i o n are wh et h er: (1 ) p et i t i o n ers are en ti t l edt o d edu ctcert ai n Sch edu l e F ex p en s es fo r t he y ears at i s su e; (2 ) p et it i o n ers recei v edSch edu l e F g ro ss recei p t s o f $ 1 5 ,0 0 0 an d$ 5,0 0 0 fo r th e y ears ati s s u e, res p ect iv el y ; (3 ) p et i t i o n ers are en t i t l edt o d edu ctal i m on y p aym en t s o f $ 1 6 ,8 0 0 an d $ 1 5,5 0 0 fo r t h e y ears ati s s u e, res p ect i v el y ; an d (4 ) p et i t i o n ers are l i ab l e fo r accu racy -rel at edp en al t i es o f $ 6 , 4 3 3 an d$ 3 ,6 4 7 fo r th e y ears ati s s u e, res p ect iv el y . [* 2 ]

1 (...co n t in u ed ) Rev enu e Co de (Co d e), i n effect fo r t h e y ears ati ss u e, an dal l Ru l e referen ces are th e Tax Co u rt Ru l es o f Pract ice an dPro cedu re. Al l m on et ary am ou n t s are ro u n dedt o th e n eares td o ll ar. Al l p ercen t ag es are ro u n d edt o th e n eares t wh o l e n u m b er. 2 Pet i t i on ers co n ced e thatth ey are n o t en ti t ledt o d edu ct$ 5 5 ,0 0 0 an d $ 1 8 ,0 0 0 cl ai m edfo r co n tract l ab o r ex p en s es o n th ei r Sch edu l e F, Pro fi t o r Lo s s Fro m Farm i ng , fo r t ax y ears 2 0 1 3 an d2 0 1 4 (y ears at i s s ue), res p ect i v el y . As wi l l b e d i s cu s s edb el ow, p et i t i o n ers as s erti n s teadth at they are en t i t l edt o d edu ct i o n s o f $ 1 7,0 0 0 an d$ 8 ,0 0 0 fo r equ i p m en tex p en s es fo r t h e y ears ati s s u e, res p ect i v el y . Ad d i t i o n al l y , p et i t i o n ers d o n o td i s p u t e t h atth ey recei v edan dfai l edt o rep o rt$ 7 2 o f t ax ab l e i n t eres tfo r 2 0 1 3.- 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 n o f fact s
an d s up p l em en t al s t i p u l at i o n o f fact s wi th ex h i b i ts at t ach edtheret o are i n co rp o rat edh erei n b y

thi s referen ce. Pet i t i o n ers res i d edi n Cal ifo rn i a atth e t i m e t h e p et i t i o n was fi l ed
. A. Can n ab id io l Oi l Ex tract i o n Ven tu re J aco b Berg er (p et it io n er h u s b an d ) o b t ai n eda b ach el o r’ s d eg ree i n b i o ch em i s try an d a m as t er’ s d eg ree i n p h arm aceu t i cal ch em i s try i n J eru sal em , Is rael . Aft er
co m p l et i n g h i s edu cat i o n ab ro ad , p et i t i o ner h us b an d an d Ev el yn Berg er m o v edi n 1 9 8 1 t o Pal o Al t o , Cal i fo rn ia, wh en p et it i on er h u s ban do b tai n edem p l o y m en tat Syn t ex Co rp . (Syn t ex ), a p h arm aceu t i cal co m p an y . Pet i ti o n er h u sb an drem ai n ed
em pl o y edatSyn t ex u n t i l 2 0 1 0 wh en th e co m p an y d eci d edt o cl o s e t h e Pal o Al t o
s i te atwh i ch h e wo rk ed . Up o n t erm i n at i o n o f p et i t i o ner h us b an d ’ s em p l o ym en t , Syn t ex p ro v i dedh i m wi th ret i rem en tb en efi ts an da s ev eran ce p ack ag e. In th e p ro ces s o f cl os i ng i t s Pal o Al t o s i t e, Syn t ex d eci d edt o s el l s o m e o f i t s t ech n i cal equi pm en t . Si n ce p et i t i o n er h u s b an dh add ev el o p edan ex p ert i s e i n fi xi n g t ech n i cal equ i p m en tu s edfo r m an u fact u ri ng p h arm aceu t i cal dru g s wh i l e
wo rk i n g atSynt ex , th e co m p an y as k edh i m

t o fi x an d p rep are t h e eq u i p m en tfo r
s al e. Pet it i o ner h u s b an dp rep aredth e eq u i p m en tfo r s al e an d, as co m p en s at i o n fo r- 4
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[* 4 ] h i s s erv i ces , recei v eds ev eral p i eces o f eq u ip m en t , wh i ch were s t o redu n u s ed i n h i s g arag e u n t i l s o m e p o in ti n th e y ears ati ss u e. Ata t i m e n o ts p eci fi edi n th e reco rd , p et i t i o n er h us b an dan d Nad av Berg er (p et i ti o n ers ’ s o n ) d eci dedt o en t er i n t o a b u s i n es s v en ture t h ati n v o l v edth e
cu l t i v at i o n o f can n ab i s p l an t s fo r t h e p u rp o se o f ex tract i n g can n ab id i o l (CBD) o i l
an d s el l i n g th e CBD o il fo r m ed i ci n al u s e. Pet i t io n er h u s b an dan dp et it i on ers ’ s o n
en t eredi n t o th e v en ture wi th the u n d ers t an d i n g t h atp et i t i o n er h u s b an dwo u l d
s up p ly th e n eces s ary

fu n d in g an d , wh en th e v en tu re ev en tual l y b ecam e p ro fi t ab le, p et i t i o n er h u s b an dwo ul drecuperat e t h e fu n d s h e h ad i nv es t edb efo re p ro fi t s were
o th erwi s e d i st ri b u t edt o p et i t io n er h us b an d an d p et i t io n ers ’ s o n. Du ri n g th e y ears ati ss u e p et i t i o n er h u sb an dp ro v i dedth e fu n d s t o p u rch as e th e eq u i p m en tu s edt o g ro w an dm ai n t ai n th e can n ab is an dt o p ay th e v en tu re’ s
o th er ex p en s es , wh i ch i n cl u d edren t fo r a g reen h o u se i n San t a Nel l a, Cal i fo rn i a, el ect ri ci ty , wat er, an d ph o n e b i l l s . Pet it i o n er h u s ban dfu n d edth es e ex p en s es b y ei th er p ay i n g them

d i rect l y o r g i v i n g cas h an dch eck s t o p et i t i o n ers ’ s o n fo r h i m t o d o s o . Pet i t i o n ers al so p ro v i d edp et i t i o n ers ’ s o n wi th a car t o dri v e t he 8 3 m i l es- 5
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[* 5 ] b et ween thei r h o m e i n Su n n yv al e, Cal i fo rn i a, an dth e g reen h o us e wh ere t h e
can n ab i s p l an t s were t o b e cu l t i v at edi n San t a Nel l a. 3 In ad d i t i o n t o fu n di n g th e v en tu re, p et it i o n er h u s ban d al s o i n t en dedt o d ev el o p an di m

p l em en tan im

p ro v ed m et h odfo r ex tract in g CBD o i l . Befo re p et i t i o n er h u s b an dwas ab l e t o i m p l em en tth e i m

p ro v edex tract i on m et h o datth e g reen h ou s e, h o wev er, p et i t i o ners ’ s on u n ex p ect ed l y d iedo n Au g u s t 2 2 , 2 01 4 . As
a res u l to f p et i ti o n ers ’ s o n ’ s d eat h , p et i t i o ner h u s b an d ceas edal l o perat i o n s o f t h e
v en tu re. B. Al i m o n y OnSep t em

b er 1 5 , 1 9 9 8 , M erav Berg er (p et i t i o n ers ’ d au g h t er) an dVard i M o s co vi t ch (M r. M o s co v i t ch ) m arri edi n Is rael , wh ere t h ey res i d ed wi th thei r t wo ch i l dren . OnM ay

2 2 , 2 0 0 3, p et i t i o n ers ’ d au gh t er an dM r. M o s co v it ch d i v o rced , an d o n J u n e 2 1 , 2 01 1 , th ey ex ecu t eda d i v o rce ag reem en t t o th ateffect
. Th e d i vo rce ag reem en ti n cl u d eda v i si t at io n arran g em en t , wh ich p ro v i d ed fo r t rav el arran g em en ts i n th e ev en tth atp et i t i o n ers ’ d au g h t er m ov ed t o the Un i t ed St at es wi th th e ch i ld ren . Un d er t h e v i s i t at i o n arran g em en t , p et i ti o n ers ’ d au g h t er
wo u l db e req u i redt o p ay fo r t h e ch i l dren t o t rav el t o Is rael tw i ce a y ear t o v i s i t M r. M o s co v i t ch an dfo r M r. M o s co v i t ch t o trav el t o t h e Un i t edSt at es th ree t i m es

3 Du ri n g th e y ears ati s s u e p et i t i o n ers ’ s o n l i v ed wi th p et i t i o n ers .- 6
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[* 6 ] a y ear t o v is i tth e ch i l dren . W i th res p ectt o M r. M o s co v i t ch ’ s trav el , p et i t i o n ers ’ d au g h t er was o bl i g edt o p ro v i d e a ro un d tri p ai rp l an e t i ck et , l o d g i n g ata h o t el
o f h er s el ect i o n , acces s t o a v eh i cl e, an da s t i p en do f $ 1 0 0 p er d ay fo r up t o 1 4 d ay s . Inad d i t io n , p et i t i o n ers ’ d au g ht er wo u l db e req u i redt o p ro v i d e fo r t h ree ad d it i o n al p eo pl e, s u ch as M r. M o s co v i t ch ’ s m ot h er, h i s g irl fri en d , an dh i s g i rl
fri en d’ s s o n , t o trav el t o th e Un i t edSt at es o n ce a y ear. In th e ev en t th at p et i t i o n ers ’ d au g h t er o r p et i t i on ers , wh o were al s o b o u n db y th e d i v o rce ag reem en t , co u l d
n o tfu l fi l l th es e o b l i g at i o n s , the v i s it at i o n arran g em en ts t at edth atp et i t i o n ers ’ d au gh t er an dth e ch i ld ren wo u l db e req u i redt o retu rn t o Is rael
. Ata t i m e n o ts p eci fi edi n th e reco rd , p et i t i o n ers ’ d au g h t er an d h er t w o ch i l dren m o v edt o th e Un i t edSt at es . Duri n g th e y ears at i ss u e p et i t i o ners ’ d au gh t er an dh er ch i l dren l i v edwi th an dwere fi n an ci al l y s upp o rt edb y

p et i t i o n ers . Becau s e p et i t i o n ers ’ d au g h t er was u n ab l e t o fu l fi l l h er o b l ig at i o n s u n d er t h e
v i s i t at i o n arran g em en t , p et i t i o ners p ro v i d edth e n eces s ary fi n an ci n g o n h er b eh al f. As p er t h e v i si t at i on arran g em en t , p et i t i o n ers p ai dfo r th e ch i l dren t o trav el t o Is rael an d fo r M r. M o s co v i t ch , M r. M o s co v i t ch ’ s m ot h er, an dM r. M o sco v i t ch ’ s g i rl fri en dan dh er s o n t o trav el t o th e Un i t edSt at es an dp et i t i o ners p ro v i dedth e ag reed -up o n v eh i cl e an ds t ip en d
.- 7
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[* 7 ] C. Tax Retu rn s , No t i ce, Pet it i o n, an dTri al Pet i t i o ners fi l edjo i n tt ax retu rn s fo r t h e y ears ati ss ue. On each retu rn th ey cl ai m edan al i m on y

d edu ct io n fo r t he t rav el ex pen s es th ey p ai dt o s at i s fy

p et i t i o n ers ’ d au g h t er’ s o b l i g at i on s u n d er t h e v i s it at i o n arran gem en t . Th ey al s o at tach edt o each retu rn a Sch edu l e F rep ort i n g “ m ed i ci [n ] al h erb s” as th e p ri n ci pal cro p o r act i vi ty o f t h e v en ture. Pet it i o n ers rep o rt edth e fo l l o wi n g al i m o n y d educt i on s an d Sch edu l e F g ro s s recei p ts an dex p en s es fo r t h e y ears at i ss u e:
Schedul e F g ross r ecei pt s and expenses

Year T ax r eturn deduct i on- - al i m ony Sal e of

l i v est ock and ot herr esal e i tem s C arand t ruck expenses Rent Ut i l i t y expenses Cont r act

l abor 2013 ( $16,800) $15,000 ( $16,950) ( $15,000) ( $12,000) ( $55,000) 2014 ( 15,500) 5,000 ( 11,200) ( 10,000) ( 9,600) ( 18,000) By n o t ice o f d efi ci en cy

d at edJ u n e 6 , 2 01 8 , res p o n d en td et erm i ned t ax d efi ci en ci es o f $ 3 2 ,1 67 an d$ 1 8 ,2 3 7 fo r th e y ears ati s s u e, res p ect i v el y . Res p o n d en t al s o d et erm i n ed th at p et i ti o n ers were l i ab l e fo r s ect i o n 6 6 6 2 (a) accu racy rel at ed p en al t i es o f $ 6,4 3 3 an d$ 3 ,6 4 7 fo r t h e y ears at i s s u e, res pect i vel y , fo r
u n d erp aym en t s du e t o s ub s t an t i al u n d ers t at em en t s o f i n co m e t ax o r 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 on s fo r b o th y ears . Att ach edt o th e n o t i ce o f d efi
ci en cy was a Fo rm

8 8 6 -A, Ex p l an at i o n o f It em s , i n wh i ch res p o n d en tex p l ai n ed- 8
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[* 8 ] wh y h e d i s al l o wedth e cl ai m edal i m o n y d edu ct io n s an d Sch edul e F g ro s s recei p t s an d ex p en s es . OnAu gu s t3 1 , 2 0 1 8, p et i t i o n ers fi l ed a p et i ti o n wi th th i s Co u rts eek i n g red et erm i n at i o n o f t h e d efi ci en ci es s etfo rt h i n th e n o t i ce o f d efi ci en cy . On Decem b er 1 1 , 2 0 19 , th i s cas e was tri edatth e Co urt ’ s tri al s es s i o n i n San Fran
ci s co , Cal i fo rn i a. Attri al th e p art i es jo i n tl y s ub m i t t eda s t i p u l at i o n o f fact s an da
s up p lem en t al s t ip ul at i o n o f fact s , wh i ch i n cl u d edco p i es o f, i n t er al i a, p et i t i o n ers ’ jo i n t tax retu rn s fo r t h e y ears ati s s u e, fo u r ch eck s th atp et i ti o n ers as s ertwere p aym en t s fo r ren t , th ree ch eck s t h atp et i t i o n ers as sertwere p aym en t s fo r wat er,
an d ch eck s an d wi th drawal s t at em en t s th atp et i t i o n ers as s ertwere p aym en t s t o p et i t i o n ers ’ s o n t o co ver t h e v en tu re’ s ex p en s es . Th es e s t i p u l at io n s al s o i n cl u d eda co p y o f a Let ter 9 5 0 --d at edAu g u s t1 7 , 2 0 1 7 , an ds i g n edb y

th e act i n g g ro up m an ag er o f t h e rev en u e ag en t as s ig n edt o p et i t i o n ers ’ cas e--wi th an at t ach edFo rm 4 5 4 9-A, In co m e Tax Ex am in at io n Ch an g es , wh i ch as sert edth e p en al t i es ag ai n s tp et i t i o n ers , as wel l as a co py o f a Ci v il Pen al ty

Ap p ro v al Fo rm , d at edan ds i g n edi n Oct ob er 2 0 1 7
. 4

4 Th e Ci vi l Pen al ty

Ap pro v al Fo rm

i s d at edOct o b er 2 , 2 0 1 7 . Al th o ug h i t ap p ears t o b e s i g n ed o n Oct o b er 1 0 , 2 0 1 7 , th e d at e i s d i ffi cu l tt o read ; i nd eed , th e “ 1 7 ” fo r “ 2 0 1 7 ” ap p ears l ik e a g i an t “ D”. Co n seq u en tl y , th e Co u rtwi l l s i m p l y fi ndth atth e fo rm

was d at edan ds i g n edi n Oct o b er 2 0 1 7.- 9
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[* 9 ] OPINION I. Bu rd en o f Pro o f As a g en eral ru l e, the Co m m i s s i on er’ s d et erm i nat i o n s are p res u m edco rrect , an d th e t ax p ay er b ears the b u rd en o f p ro v i n g o th erwi s e. Ru le 1 4 2 (a)(1 ); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 15 (1 9 33 ). Sect i o n 7 4 9 1 (a)(1 ) p ro v i d es th atth e b u rd en
o f p ro o f wi l l s hi ft t o th e Co m m i s s i o n er wh en th e t ax pay er h as i n tro du cedcred i bl e
ev i d en ce wi th res p ectt o an y fact u al i s su e rel ev an tt o as cert ai n i n g th e l i ab il i ty o f th e t ax p ay er fo r an y

t ax . Ho wev er, t h e b urd en o f p ro o f d o es n ots h iftt o th e Co m m i s s i o n er u n l es s th e t ax p ay er co m p l i edwi th al l s ub st an t i at i o n req u i rem en t s , m ai n t ai n edal l req u i redreco rd s , an dco o perat edwi th reas o n ab l e requ es ts b y th e In t ern al Rev enu e Serv i ce. Sec. 7 4 9 1 (a)(2 ); Hi g bee v . Co m m is s i o n er, 1 1 6 T.C. 4 3 8 , 4 4 0 -4 4 1 (2 0 01 ). Sect i o n 7 4 9 1 (c) p ro v i d es thatth e Co m m is si o n er s h al l h av e th e b u rd en o f p ro du ct i o n wi th res p ectt o an y p en al ty . See Hi g b ee v . Co m m i s s i on er, 1 1 6 T.C. at4 4 6 -4 47
. A t ax p ay er wh o p ro v i d es o n l y s el f-s erv in g t es t i m o ny

an di n co n cl u si v e d o cu m en t at i o n i s n otco ns i dered t o h av e p ro v i d edcred i b le ev id en ce. Gei ger v . Co m m i s s i o n er, T.C. M em o . 2 0 0 6 -2 7 1 , aff’ d , 2 7 9 F. Ap p ’ x 8 3 4 (1 1 th Ci r. 2 0 0 8 );
s ee Bl o d g et tv . Co m

m is s i o n er, 3 9 4 F.3 d 1 0 3 0 (8 th Ci r. 2 0 0 5 ), aff’ g T.C. M em o . 2 0 0 3 -2 1 2 ; Hi g bee v . Co m m i s s i o n er, 1 1 6 T.C. at 4 45 -4 4 6
. Cred i b l e ev i den ce i s- 1 0 -

[* 1 0 ] ev id en ce t h at , “ aft er cri t i cal an al y s i s , th e co u rt wo u l dfi n ds u ffi ci en tup o n wh i ch t o b as e a d eci si o n o n the i s s u e i f n o co n traryev i d en ce were s ub m i t ted ”. Hi g bee v . Co m

m i ss i o n er, 1 1 6 T.C. at4 4 2 (qu o t i n g H.R. Co n f. Rep t . No
. 1 0 5 -5 9 9 , at2 4 0 (1 9 9 8 ), 1 99 8 -3 C.B. 7 4 7 , 9 94 ). Ev id en ce i s n o t cred i b l e i f t h e Co u rti s n ot
co n vi n ced th at i ti s wo rth y o f b el i ef. Id
. Pet i t i o ners arg ue t h atth ey h av e s at i s fi edth e req ui rem en t s o f s ect i o n 7 4 9 1 (a)(1 ) an dres p o n d en t s h o u l d b ear t h e b u rd en o f p ro o f. W e d i s ag ree. On th e b as i s o f t h e reco rd befo re u s , we co n cl ud e t h atp et it i o n ers h av e n o ti n tro du ced cred i b l e ev i d en ce wi th res p ect t o th e fact u al i s su es p res en ted . Pet i t i o ners p ro v i d ed
o n l y i nco m p l et e an d i n co ncl u s i v e d o cu m en t at i on , al o n g wi th u ncred i b l e t es t i
m o ny . Becau s e p et it i o n ers d i d n o ti n tro du ce cred i b l e ev i d en ce wi th res p ectt o th o s e fact u al i s s u es , th e b u rd en o f p ro o f d oes n o t s hi ft t o res p o n den tu n d er s ect i o n 7 4 9 1 (a)(1 ). Acco rd i n gl y , we n eedn o t d eci d e wh et h er p et i t i o n ers h av e co m p l i ed wi th th e req u i rem en t s o f s ect i o n 7 4 9 1 (a)(2 ), an d p et i t i o n ers ret ai n th e b u rd en o f p ro v in g th ey

are en t i t l edt o th e Sch edu l e F d edu ct i o n s cl ai m ed . See Ru l e 1 4 2 (a). W i th res p ectt o th e Sch edu l e F g ro s s recei pt s , p et i t i o ners al s o b ear t h e b u rd en o f p ro v in g th atth ey

recei v edth e rep o rt edi n co m e. See s ec. 6 0 0 1
.- 1 1 -

[* 1 1 ] II. Sch edu l e F Dedu ct i o n s 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, an dthe t ax p ay er b ears th e b u rd eno f p ro vi ng h i s o r h er en t i t l em en t t o an y d edu ct i o n s cl ai m ed . Ru l e 1 4 2 (a); Dep ut y v . du Po n t , 3 0 8 U.S. 4 8 8 , 4 9 3 (1 9 4 0 ); New Co lo n i al Ice Co . v . Hel v eri n g , 2 9 2 U.S. 4 3 5 , 4 4 0 (1 9 3 4 ). Th is b u rd en req u i res th e t ax pay er t o d em o n st rat e t h at th e cl ai m edd edu ct i o n i s al lo w ab l e p u rs uan tt o s o m e s t atut o ry p ro v i si o n an dt o
s ub s t an t i at e t h e ex p en s e g i vi ng ri s e t o t h e d edu ct i o n cl ai m ed b y m ai nt ai ni n g an d p ro duci n g ad equ at e reco rd s t o en ab l e t h e Co m m i s s i o ner t o d et erm i n e t h e t ax p ay er’ s co rrect l i ab i l i ty . Sec. 6 0 0 1 ; Hi g bee v . Co m m is s io n er, 1 1 6 T.C. at4 4 0 ; Hrad es ky v . Co m m i s s io ner, 6 5 T.C. 8 7 , 9 0 (1 9 7 5), aff’ d p er cu ri am , 5 40 F.2 d8 2 1 (5 th Ci r. 1 9 7 6 ). A t ax p ay er m

u s t fu rt her s ub s t an t i at e th atth e ex p en s e t o wh i ch th e d edu ct i o n rel at es h as b een p ai d o r i ncu rred . See s ec. 6 0 0 1 ; Hrad es ky v . Co m m i s s i o n er, 6 5 T.C. at9 0 ; s ec. 1 .6 0 0 1 -1 (a), In co m e Tax Reg s . Inth e ev en tth ata t ax p ay er
es t ab l i s h es th ata d edu ct i b l e ex p en s e h as b een p ai db u t i s u n ab le t o s ub s t an t i at e th e p reci s e am ou n t , we g en eral l y m ay es t i m at e th e am o un to f t h e d edu ct i b le
ex p en s e, b eari n g heav i l y

ag ai n s tth e t ax p ay er wh o s e i n ex act i tu de i n s ub st an t i at i n g th e am o un to f t h e ex pen s e i s o f th e t ax p ay er’ s o wnm ak i n g . Co h an v . Co m m i s s i on er, 3 9 F.2 d5 4 0 , 5 4 3 -5 4 4 (2 dCi r. 1 9 3 0 ). W e can n o tes t i m at e a d edu ct i b l e- 1 2 -

[* 1 2 ] ex pen se, h o wev er, u n l es s th e t ax p ay er p res en t s ev i d en ce s u ffi ci en tt o p ro v id e s o m e b as is up o n whi ch an es t i m at e m ay b e m ad e. Van i cek v . Co m m i s s i on er, 8 5 T.C. 7 3 1 , 7 4 2 -7 4 3 (1 9 85 ). Sect io n 1 6 2 (a) al l o ws a t ax p ay er t o d edu ctal l o rd i naryan 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 n carry in g o n a t rad e o r b u s i
n es s . Anex p en s e i s “ o rd i n ary ” i f i ti s “ n o rm al , u s ual , o r cu s t o m ary ” i n the t ax p ay er’ s t rad e o r b u s i n es s o r ari s es fro m a t ran s act i o n “ o f co m

m on o r freq u en t
o ccu rren ce i n t h e t y

p e o f b u s i n es s i n v o l ved .” Dep u ty v . duPo n t , 3 0 8 U.S. at4 9 5. Anex p en s e i s “ n eces s ary ” i f i ti s “ ap p ro p ri at e an dh el p fu l ” t o th e t ax p ay er’ s b u s i n es s , b u ti t n eedn o t b e ab s o l u t el y es sen t i al . Co m

m i s s i o n er v . Tel l i er, 3 8 3 U.S. 6 8 7 , 6 8 9 (1 9 6 6 ) (qu ot in g W el ch v . Hel v eri ng , 2 9 0 U.S. at 1 13 ). Ho wev er, a t ax p ay er m ay

n o td edu cta p ers o n al , l i v i n g , o r fam i l y ex p en s e u n les s the Co d e
ex p res s l y p ro v i d es o th erwi s e. Sec. 2 6 2 (a). Th e d et erm i n at i o n o f wh et h er an
ex p en s e s at i s fi es th e req ui rem en t s o f s ect i o n 1 62 i s a qu es t i o n o f fact . Cl o u dv . Co m m i s s i o n er, 9 7 T.C. 6 13 , 6 1 8 (1 9 9 1 ) (ci ti n g Co m m i s s i o n er v . Hei ni n g er, 3 2 0 U.S. 4 6 7 , 4 7 3 -4 75 (1 9 4 3)). Th e d i sal lo w edtrad e o r b u s i n es s ex p en s e d edu ct i o n s at i s s u e h ere can b e d i v i d edi n t o two cat eg o ri es : (1 ) t ho s e t h atare s ub j ectt o th e m o re g en eral s ub s t an t i at i o n req u i rem en t s o f s ect i on 6 0 01 , s uch as ren t , u t i l i t ies , an d eq u i p m en t , an d- 1 3 -

[* 1 3 ] (2 ) t h o se t h atare s ub jectt o th e s tri cts ub st an t i at i o n req u i rem en t s o f s ect i o n 2 7 4 (d ), s u ch as car an d t ru ck . W e wi l l fi rs t co n s i d er t h e d i s al lo wedtrad e o r b u s i n es s ex p en s e d edu ct i on s s ub jectt o th e g en eral req u irem en ts o f s ect i o n 6 0 0 1
an d th entu rn t o t h o s e d edu ct i o n s s ub jectt o the s tri ct er req u i rem en t s o f s ect i o n 2 7 4 (d ). A. Dedu ct i o n s Sub

jectt o th e Gen eral Subs t an ti at i o n Req u i rem en t s o f Sect io n 6 0 0 1 1
. Ren t Pet i t i o ners cl ai m ed d educt i o n s o f $ 1 5,0 0 0 an d $ 1 0 ,0 0 0 fo r ren tex p en s es fo r t ax y ears 2 0 1 3 an d2 01 4 , res p ect i v el y , wh i ch res p o nd en t d i s al l o wed b ecau s e p et i t i o n ers fai l edt o es t ab l i s h th atth es e ex p en s es were, i n fact , p ai do r i n cu rred du ri n g th e t ax y ears ati s s u e an dth atth e ex p en s es were o rd i n ary an dn eces s ary

t o th e v en tu re. To s ubs t an ti at e t h es e ex p en s es , p et it i on ers s ub m i t t edo n l y fo ur ch eck s p u rp ort ed ly

rep res en t i ng p aym en ts fo r t h e m o n th s o f J an u ary , Feb ru ary , M arch , an dAp ri l 2 0 1 3 . Each ch eckwas p ay ab l e t o “ S. Sal vad o r” (M r. Sal v ad or) i n the am o u n to f $ 1 ,2 5 0 b u td i d n o tb ear an y i n di cat io n th ati twas a p aym en tfo r
ren t . Duri n g tri al , p et i t io ner h u s b an d s tat edth ath e an d p et i t io n ers ’ s o n ren t edth e g reen h ou s e fro m

M r. Sal v ad o r, wh o wi s hedt o b e p ai di n cas h , an dthatth ey
s i gn eda wri t t en l eas e, b u tth atM r. Sal v ad or refu s ed t o g i v e t h em a co p y o f i t .- 1 4 -

[* 1 4 ] Bey o n d th es e fo u r ch eck s an dp et it i on er h u s b an d’ s t es ti m o n y , h owev er, p et i t i o n ers fai l edt o p ro vi de an y ad d i t i o n al ev id en ce t o co rro b o rat e t h atth es e ch eck s were, i n fact , p aym en t s fo r ren t . Pet i t i o n ers d i dn o tp ro v i de a l eas e o r, ata
m i n i m u m , an ad dres s fo r t h e g reen h o u s e t o ev in ce t h atthey were act u al l y ren t i n g a g reen h ou s e t o g ro w can nab i s an dex tract CBD o i l . Pet i t i o n ers al s o fai ledt o i n tro du ce an y

b an ks t at em en t s t o s h ow co n s i s t en tm o n th l y wi th drawal s o f $ 1 ,2 5 0 t o co rro b o rat e t h ei r as s ert i o n th atth ey p ai dM r. Sal v ad o r du ri n g th e y ears ati s s u e. Onth e b as is o f th e s can t fact s an d ev id en ce p res en t ed , we co n cl u d e t h atp et i t i o n ers h av e fai l edt o p ro v id e cred ib l e ev i d en ce t o s ub st an t i at e th es e d educt i on s , an d th e Co u rts u s t ai ns res p o nd en t ’ s d et erm i n at i o n s t o d i sal l o w th e cl ai m edSch edu l e F d educt i o n s fo r ren t ex p en s es fo r t h e y ears ati s s u e.

2
. Ut i l i t i es Pet i t i o ners cl ai m ed d educt i o n s o f $ 1 2,0 0 0 an d $ 9 ,6 00 fo r u t i l i ty ex p en s es , wh i ch i n cl u d edp aym en ts fo r wat er, el ect ri ci ty , an da cel l p h o n e, fo r t h e y ears at i s su e, res p ect i v el y . Res p o n d en td is al lo wedthes e cl ai m edd edu ct i o n s b ecau s e p et i t i o n ers h adfai l edt o es t ab l is h th atth e ex p en s es were, i n fact , p ai d o r i n cu rred du ri n g th e t ax y ears ati s s u e an dth atth e ex p en s es were o rd i n ary an dn eces s ary

t o th e v en tu re. To s ubs t an ti at e t h e wat er ex p en s es , p et i ti o n ers s ub m i t t edo nl y co p i es
o f t h ree ch eck s i n the am o u n t s o f $ 1 0 0 , $ 1 0 0 , an d$ 1 5 0 m ad e p ay ab l e t o th e- 1 5 -

[* 1 5 ] “ San t a Nel l a W at er Di s tri ct ” (W at er Di s tri ct ) an dp u rp o rt ed l y rep res en t i n g wat er p aym en ts fo r t he m o nt hs o f J an u ary , M arch , an dM ay 2 0 1 3
. No twi th s t an d i n g th es e t h ree ch eck s t o t h e W at er Di s tri ctan dp et i t i o ner h u s b an d ’ s t es t i m o n y , p et i t i o ners fai l edt o p ro v i d e an y fu rth er ev id en ce t o co rro b o rat e t h atth e ch eck s were, i n fact , p aym en t s fo r wat er fo r t h e v en tu re o r t o o th erwi s e co rro b o rat e th ei r as s ert i o n s th atthey m ad e p aym en t s fo r el ect ri ci ty an da cel l p h o n e fo r t h e v en tu re. W i th res p ectt o t h e wat er ex p en s es , p et it i on er h u s b an d t es t i fi eddu ri n g tri al th ath e i ncu rred$ 2 0 0 p er m o n th i n wat er ex p en s es fo r 1 2
m o nt h s i n 2 0 1 3 an d8 m o n th s i n 2 0 1 4 ; y etth e t h ree ch eck s th atp et i ti o ners p ro duced refl ectp aym en t s o f $ 1 0 0 fo r J an u ary 2 0 13 , $ 1 0 0 fo r M arch 2 0 1 3 , an d $ 1 5 0 fo r M ay

2 01 3 . Pet i t i o n er h u s b an das sert edth ath e p ro cu red a co p y o f an i n v o i ce fro m

the W at er Di s tri ct , b u th e fai l edt o s ub m i ti tas ev i d en ce o r p ro v i d e b an k s tat em en t s s ho wi n g m o nt h l y p aym en t s t o co rro b o rat e h is p o si t io n . Onacco u nto f t he i n co n s i s t en cy b et w een o th er ev i d en ce p res en t edan d p et i t i o n er h u s b an d ’ s t es t i m o ny , es peci al l y i n th e l ig h to f th e factth atp et i t i o n ers fai l edt o es t ab l i s h th atth ey were ev en ren t i n g a g reen h o u s e, we co n cl u d e t hat p et i t i o n ers h av e n o t p ro v i d edcred i b l e ev i d en ce t o s ub s t an t i at e t h e cl ai m edwat er
ex p en s e d educt i o ns . W i th res p ectt o th e p aym en ts fo r el ect ri ci ty an da cel l p h o n e, p et i t i o n ers s i m i l arl y

h av e fai ledt o p ro du ce cred i b l e ev i d en ce t o s ub s t an t i at e t h es e- 1 6 -

[* 1 6 ] ex pen ses . Acco rd i n g l y , th e Co u rt s us t ai n s res p o n den t ’ s d et erm i n at i o n s t o d i s al lo w th e cl ai m ed Sch edu le F d edu ct i o n s fo r u t i l i ty ex p en s es fo r t h e y ears at i s su e. 3
. Equ i p m en t Pet i t i o ners cl ai m ed “ co n tract l ab o r” ex p en s e d edu ct i o n s o f $ 5 5 ,0 00 an d $ 1 8 ,0 0 0 fo r t h e y ears ati s s u e, res p ect i v el y , wh i ch res p o nd en td i s al l o wedfo r l ack
o f s ub st an t i at i o n . Pet i ti on er h u s b an di n i ti al ly t es t i fi edth atth es e ex p en s es co m p ri s edth e co st s o f equ i p m en t, wh i ch ran g edfro m $ 2 0 ,0 0 0 t o $ 3 0,0 0 0 fo r 2 0 1 3
an d $ 3 0 ,0 0 0 t o $ 4 0 ,0 0 0 fo r 2 0 14 , an dco nt ract l ab or. Ho wev er, p et i t i o ners l at er
co n ced eddu ri n g tri al th at , aft er a s ub s equ en trev i ew o f t h e ex p en s es fo r au d i t p u rp os es , th e co s t o f eq ui p m en twas i n s t ead$ 17 ,0 0 0 fo r 2 0 1 3 an d$ 8 , 0 0 0 fo r 2 0 1 4 . In cl u dedi n th es e am o u n t s was th e co s to f t h e t ech n i cal equ i pm en tth at p et i t i o n er h u s b an drecei v edas co m p en s at i o n fro m Syn t ex . Fo l l o wi n g t ri al , p et i t i o n ers ap p ear t o h av e ab an d o n edth ei r arg u m en t th atth ey are en t i t l edt o
ex p en s e d educt i o ns rel at edt o co n tract l ab o r, fo cu s i n g i n s t eado n thei r en t i tl em en t t o the rev i s edequ ip m en tex p en s e d edu ct i on s . To s ub s tan t i at e th e rev i s edequ i p m en tex p en ses , p et i t io n ers s ub m i t t eda t ab l e fo r each t ax y ear l i s ti n g the t y p e o f eq u i p m en t , nu m

b er o f u n i ts , u n i tp ri ce,
an d t o tal co s t . Pet it i on ers al s o s ub m i t t edco p ies o f ch eck s an dwi th drawal- 1 7 -

[* 1 7 ] s t at em en t s , wh i ch th ey co n t en d rep res en tth e m o ney th ey g av e t o p et i t i o n ers ’ s o n t o p ay

th e v en tu re’ s ex p en s es . Sect io n 1 6 7 (a) al l o ws , as rel ev an th ere, a d educt i o n fo r “ the ex h au s t i o n o r
wear an d t ear” o f p ro p ert y u s edi n a t rad e o r b u s i n es s . Fo r s om e d ep reci ab l e p ro p erty , a t ax p ay er can m ak e an el ect i o n u n d er s ect io n 1 79 (a) t o accel erat e d ep reci at i o n b y d edu ct i n g i ts co s tas an ex p en s e fo r t h e t ax ab le y ear i n wh i ch th e p ro p erty i s p l aced i n s erv i ce. Th e el ect i on m u s t s p eci fy

th e i t em s o f s ect i o n 1 7 9 p ro p erty t o wh ich the el ect i o n ap p l i es an dth e p o rt i o n o f t h e co sto f each wh i ch i s t o b e t ak en i nt o acco u ntu n der s ub s ect i on (a). Sec. 1 79 (c)(1 )(A). Th e el ect i o n
m u stal s o b e m ad e o n th e t ax p ay er’ s fi rs ti n co m e t ax retu rn fo r t he t ax ab l e y ear o r a t im el y fi l edam en d edretu rn . Sec. 1 7 9(c)(1 )(B); s ec. 1
. 1 7 9 -5 (a), In co m e Tax Reg s. Th e reco rdd o es n o t i n d i cat e t h atp et it i on ers m ad e an el ect io n u n d er s ect i on 1 7 9 (a) fo r ei th er 2 0 1 3 o r 2 0 1 4 t o accel erat e t h e d ep reci at i o n o f t h e eq u ip m en t . In d eed , th e reco rdl ack s an y d ocu m en t at i on s p eci fy i n g each i t em o f s ect i o n 1 7 9 p ro p erty t o wh ich the el ect i o n ap p l i es . Acco rd in g ly , p et i t i o ners are n o t en ti t l ed t o d eductth e eq u i p m en t co s t s u n d er s ect i o n 1 7 9 as an ex p en s e fo r ei th er 2 0 1 3 o r 2 0 1 4 b u t , rat h er, m

u s td ep reci at e t h em

u n d er s ect i o n 1 67 , p ro v i d edth atthey can
s h o w th ei r en t i t lem en tt o s u ch d ep reci at i o n d edu ct i o n s .- 1 8 -

[* 1 8 ] A t ax p ay er can cl ai m d ep reci at io n d educt i o n s o n l y fo r p ro p ert y

i to wn s , Arev al o v . Co m

m i s s io n er, 1 2 4 T.C. 2 4 4 , 2 5 1 -2 5 2 (2 0 0 5), aff’ d, 4 6 9 F.3 d 4 3 6 (5 t h Ci r. 2 0 06 ), an d can s tartd ep reci at i n g p ro p ert y o n l y wh en i tfi rs t p l aces the p ro p erty i n t o s erv i ce i n i t s trad e o r b u s i n es s , s ec. 1 .1 67 (a)-1 0 (b ), In co m e Tax Reg s. To p ro v e en ti t l em en tt o a d ep reci at i o n d edu ct i o n , a t ax p ay er m u s tal s o
es t ab l i s h th e p ro p ert y ’ s d ep reci ab l e b as is b y s ub s t an t i at i n g i t s co st , reco v ery p eri o d , an dan y

p rev io u s al l o wab l e d ep reci at i o n . See Cl uckv . Co m m i s s i o n er, 1 0 5 T.C. 3 2 4 , 3 3 7 (1 9 9 5 ). Pet i t i o ner h u s b an d s t at edth ath e i n cl u d edthe co s to f t h e t ech n ical equ i p m en tth ath e recei v edfro m Syn t ex i n th e eq u i p m en tex p en ses ; h o w ev er, h e fai l ed t o p ro v i d e an y d o cu m en t at i o n l i s t i n g th e co s to f t h e p ro p ert y , i t s reco v ery p eri o d , o r an y p rev i o u s al l owab l e d ep reci at i o n o n i t . Fu rth erm o re, wh i l e p et i t i o ner h u s b an dcl ai m edt o h av e u sed th e eq u i p m en t t o d ev el o p an d t es t an i m p ro v ed
m et h o d t o ex tract CBD o i l , h e h as n o td em o n s trat edwh en th e eq u i pm en twas p l aced i n t o s erv i ce fo r p u rp o s es o f s ect i o n 1 6 7
. W i th res p ect t o th e eq u i p m en t l i s t edo n th e t ab l es , p et i t i o n er h u s b an d t es t i fi edth ath e p rep aredth e t ab l es fo r au d i t p u rp o ses . Pet i t i o ner h us b an d ad d i
t i on al l y av o wed th at th e i tem s l i s t edwere wh ath e recal l ed “ n eed edt o b e rep l aced ” an dwh ath e an dp et it i on ers ’ s o n an t i ci p at edwere n eed edt o b eg i n th e- 1 9 -

[* 1 9 ] v en tu re. Pet i t io ner h u s b an d al so av erred that , b ecau s e h e h ad g i v en m o n ey t o p et i ti o n ers ’ s on t o p u rch as e t h e eq u i p m en tdu ri n g the y ears ati s s u e, h e wen t
o n l i n e t o a co m

p an y thath ad s up p l iedth e l i st edi t em s t o fi n dth ei r p ri ces . Th es e s t at em en t s b y

p et i t i o ner h u sb an di nd i cat e t h at : (1 ) t h e t ab l es l i s t i n g th e eq u i p m en tex p en ses were p rep areds ev eral y ears aft er p et i t i o ners fi l edth ei r jo i n t tax retu rn s fo r t h e y ears ati s s u e, (2 ) t h e t ab les an dth e i t em s l i s t edth erei n
were reco n s tru ct edfro m

p et i ti o n er h u s b an d’ s m em o ry , an d(3 ) p et i t io n er h u s b an d l ack s reco rd s, i n cl u d i n g recei p t s , o f h o w m u ch th e i t em s o f eq ui pm en t actu al l y
co s twh en p u rch as ed . W i th res p ectt o th e co p i es o f ch eck s an dwi th drawal
s t at em en t s th atp et i t io ners p ro vi d ed , th es e co pi es refl ectm on ey g i v en t o p et i t i o n ers ’ s o n fo r o n l y

ei g h tm o n th s i n 2 0 1 3 an db ear n o i n d i cat i o n as t o h o w p et i t i o n ers ’ s o n u s edth e m o n ey

fo r t h e v en tu re. Onth e b as is o f th e s can t ev id en ce t h at p et i t i o n ers p ro du ced , we co n cl u d e th atth ey h av e n otp ro v en th ei r en t i t l em en tt o d ep reci at i o n d educt i on s u n d er
s ect i on 1 6 7 fo r t h e y ears ati s s u e. Acco rd i n g ly , th e Co u rt s us t ai n s res p o n d en t ’ s d et erm i n at i o n s t o d i sal l o w th e cl ai m edSch edu l e F d edu ct io n s fo r eq u ip m en t
ex p en s es fo r t h e y ears ati ss u e.- 2 0 -

[* 2 0 ] B. Dedu ct i o n s Sub jectt o th e St ri ctSub s t an t i at i o n Req u i rem en t s o f Sect i o n 2 7 4 (d ) Pet i t i o ners cl ai m ed $ 1 6 , 9 5 0 an d$ 1 1 ,2 0 0 i n car an dtru ckex p en s e d edu ct i on s fo r t ax y ears ati s s u e, res p ect i v el y , wh i ch res p o nd en t d i s al l o wed fo r l acko f
s ub s t an t i at i o n . Ins up po rto f t h e u n d erl y i n g ex p en s es , p et i t i o n er h us b an dt es t i fi ed th atth e g reen ho us e i n San t a Nel l a was 8 3 m i l es fro m thei r h o m e i n Su n n yv al e. He as sert edth ath e t rav el edt o th e g reen h o u s e “ o n ce o r t wi ce a week ” an dth at p et i t i o n ers ’ s o n trav el edt o th e g reen h o us e “ th ree t o fo u r t i m es a week ”. Acco rd
i n g t o p et i t i o ners , p et i ti o n er h u s b an dan dp et i t i o n ers ’ s o n trav el edt o th e g reen h o u s e a m i n i m

u m o f fo ur t o s i x t i m es a weekfo r 5 2 week s i n 2 0 1 3 an dfo u r t o s i x t i m es a weekfo r 3 2 week s i n 2 0 1 4 . Onth e b as i s o f t h es e es t i m at es , p et i t i o n ers ad v an ce t h atth ey are en ti t l edt o a car an dtru ckex p en s e d edu ct i o n ran g i n g fro m $ 1 9 ,5 0 8 t o $ 2 9 ,2 6 2 fo r 2 0 1 3 an da d edu ct i on ran g i ng fro m $ 1 1 ,8 9 9 t o $ 1 7 ,8 4 8 fo r 2 0 1 4 . Pet i t i o n ers al s o co n t en dth atth es e m i l es s h ou l dn o tb e ch aract eri zedas
co m m u t i ng m i les b ecau s e t h ey

rep res en t trav el b et ween p et i ti o n er h u s b an d’ s

“ wo rk pl ace i n Su n n yv al e” h i s h o m e, an d“ the o rg an ic farm i n San t a Nel la”, t h e g reen h ou s e. Sect io n 2 7 4 (d ) i m

p o s es s tri ct er s ub s t an t iat i o n req u irem en t s t o b e m etb efo re a t ax p ay er m ay

d edu ctcert ai n cat eg o ri es o f ex p en s es , i n cl u d i n g , i n t er al i a,- 2 1 -

[* 2 1 ] ex pen ses wi th res p ectt o l i s t edp ro p ert y as d efi nedi n s ect i on 2 8 0 F(d )(4 ). Th e t erm “ li s tedp ro p ert y ” i n cl u d es p as s en g er au t o m o b i l es . Sec. 2 80 F(d )(4 )(A)(i ). To s at i s fy th e req u i rem en t s o f s ect io n 2 7 4 (d ), a t ax p ay er m u s tg en eral l y

m ai n t ai n ad equat e reco rd s o r p ro duce s u ffi ci en t ev id en ce co rro b o rat i n g h i s o r h er o wn
s t at em en twh i ch , i n co m

b in at i o n , are s u ffi ci en tt o es t ab l is h th e am o u nt , th e t i m e
an d p l ace o f t h e t rav el , an dthe b u si n es s p u rp o s e fo r each ex p en d i tu re. See s ec. 1 .2 74 -5 T(b )(2 ), (6 ), (c)(1 ), Tem p o raryIn co m e Tax Reg s ., 5 0 Fed
. Reg . 4 6 0 1 4
- 4 6 0 1 7 (No v . 6 , 1 9 8 5 ). Sec. 1 .2 7 4 -5 T(c)(2 ), Tem p o raryIn co m e Tax Reg s ., 5 0 Fed
. Reg . 4 6 0 1 7
- 4 6 0 1 8 (No v . 6 , 1 9 8 5 ), p ro v i d es , i n rel ev an tp art , th at“ ad equ at e reco rd s ” g en eral l y
co n si s to f an acco u n t b o o k, a d i ary , a l og , a s t at em en to f ex p en s e, t ri p s h eet s , o r a
s i m i l ar reco rdm ad e ato r n ear t h e t i m e o f th e ex pen d i tu re o r u s e, al o n g wi th
s up p ort i n g d o cu m en t ary

ev i d en ce. Th e Co u rtm ay n o tu s e t h e ru l e es t ab l i s h edi n Co h an v . Co m

m i s s i o n er, 3 9 F.2 dat5 43 -5 4 4 , t o es t i m at e ex p en s es co v eredb y
s ect i on 2 7 4 (d ). San fo rdv . Co m m i s s i o n er, 5 0 T.C. 8 2 3 , 8 2 7 (1 9 6 8 ), aff’ dp er
cu ri am , 4 1 2 F.2 d2 0 1 (2 d Ci r. 1 9 6 9); s ec. 1 .2 7 4-5 T(a), Tem p o raryIn co m e Tax Reg s., 5 0 Fed . Reg . 4 6 0 1 4 (No v . 6 , 1 9 8 5). M o reo v er, ex p en ses th ata t ax p ay er g en eral l y i n cu rs i n co m m u t in g b et ween h i s h o m e an dh i s p l ace o f b u s i n es s are p ers o n al an dn o n dedu ct i b l e. Co m m i s s i o n er- 2 2 -

[* 2 2 ] v . Fl o wers , 3 26 U.S. 4 6 5 , 4 7 3 -4 7 4 (1 9 4 6 ); Heu er v . Co m m i s si on er, 3 2 T.C. 9 4 7 , 9 5 1 (1 9 5 9), aff’ dp er cu ri am , 2 8 3 F.2 d 8 6 5 (5 th Ci r. 1 9 60 ); s ecs . 1 .1 6 2 -2 (e), 1 .2 62 -1 (b )(5 ), In co m e Tax Reg s . Ex p en s es i n cu rredfo r t rav el i ng b et ween two o r
m o re p l aces o f b u s in es s , h o wev er, m ay b e d edu ct i b l e u n d er s ect io n 1 6 2 i f i n cu rred fo r b u s i n es s reas o n s . St ei n h o rtv . Co m m is s i o n er, 3 3 5 F.2 d4 9 6 , 5 0 3 -5 0 4 (5 th Ci r. 1 9 6 4 ), aff’ g an drem an d i n g T.C. M em o . 1 9 6 2 -2 3 3 ; Heu er v . Co m m i s s io n er, 3 2 T.C. at9 5 3 ; s ee al s o Fau s n er v . Co m m i ss i o n er, 5 5 T.C. 6 2 0 (1 9 7 1 ) (p erm it t i n g
s ect i on 1 6 2 d educt i o n s fo r t rav el b et ween jo b s o r jo b l ocat i o n s). Bu ti f o n e o f t h e p l aces o f b us i n es s i s th e t ax p ay er’ s res i d en ce, t h e res i d en ce m us tb e t h e t ax p ay er’ s p ri n ci p al p l ace o f b u s i n es s fo r t h e t rad e o r b u si n es s th e t ax p ay er co ndu ct s atth o s e
o th er l ocat i o n s . See, e.g ., Stro h m ai er v . Co m m i ss i o n er, 1 1 3 T.C. 1 0 6 (1 9 9 9 ). Pet i t i o ners h av e n o tp ro du cedad equ at e reco rd s o r, ata m i n i m u m , an y
ev i d en ce t o co rro b o rat e p et it i o n er h us b an d ’ s s t at em en ts reg ard i n g th e car an d tru ckex p en s es . Th ey

h av e n o tp ro v i d edan acco u n tb o o k , a l o g , o r an y o th er fo rm
o f d o cu m en t ary

ev id en ce p rep aredco n t em p o ran eo u s ly

wi th an y ex p en di tu re d et ai li n g i t s am o u n t, th e t i m e an dp l ace i twas i n cu rred , o r i t s b u s i n es s p u rp o s e t o
s at i s fy th e s tri ct s ub s tan t i at io n req u irem en t s o f s ect i o n 2 7 4 (d ). M o reo v er, p et i
t i on ers h av e n o ti nt ro du cedan y d o cu m en t at i o n p ro v i n g th atth ei r h o m e i n Su n n yv al e s erv edas th e p ri n ci p al p lace o f b u si n es s fo r t h e v en tu re; n or d o es th e- 2 3 -

[* 2 3 ] reco rd s up p o rta s u ch a fi n d i n g . See, e.g ., Reh m an v . Co m m i s s i o n er, T.C. M em o. 2 0 1 3 -7 1 , at* 1 4 0 . Acco rd i n g l y , th e Co urts u s t ai n s res p o n den t ’ s d et erm i
n at i o n s t o d i s al l o w the cl ai m edSch edu l e F d edu ct i on s fo r car an dtru ckex p en s es fo r t h e y ears ati s su e. III. Sch edu l e F Gro s s Recei p t s Pet i t i o ners rep ort edg ro s s recei p t s o f $ 1 5 ,0 0 0 an d$ 5 ,0 0 0 o n t h ei r Sch ed
u l es F fo r t h e t ax y ears 2 0 1 3 an d2 0 1 4 , res p ect iv el y . Inth e n o ti ce o f d efi ci en cy
res p o n d en t d i s al l owedth e rep o rt edg ro s s recei p t s b ecau s e p et i ti o n ers fai ledt o p ro v id e an y

ev i d en ce t h atth ey h ad , i n fact , recei vedan y p ro ceed s fro m

th e
v en tu re. Gro s s i n co m e i n cl u d es al l i n co m e fro m wh at ev er s ou rce d eri v ed , s ee s ec. 6 1 (a), an dt ax p ay ers are req u i redt o k eep b o o k s an d reco rd s s uffi ci en t t o es t ab l i sh th ei r Fed eral i nco m e t ax l i ab i l i t i es , s ee s ec. 6 00 1
. Wh ere t ax p ay ers fai l t o m ai n t ai n ad equ at e reco rd s t o es t ab l i s h th at l iab i l i ty , th e Co m m i s s i o n er m ay

reco n s t ru ct th ei r i n co m e b y an y

m et h o d t h atth e Co m

m i s s i o n er b el i ev es refl ect s i n co m e cl earl y . See s ec. 4 4 6 (b ); s ee al s o Pal m er v . U.S. IRS, 1 1 6 F.3 d 1 30 9 , 1 3 1 2-1 3 1 3 (9 th Ci r. 1 9 9 7 ); Park s v . Co m m i s s i o n er, 9 4 T.C. 6 5 4 , 6 5 8 (1 9 9 0 ); Pet zo l dtv . Co m m i s s i o n er, 9 2 T.C. 6 61 , 6 8 6 -6 8 7 (1 9 8 9 ). Th e Co m m i s s i o n er’ s m et h o d n eed
n o tb e ex act ; h o wev er, i tm us t b e reas o n ab l e i n th e l i g h t o f t h e s u rro u n d i n g fact s- 2 4 -

[* 2 4 ] an d ci rcu m st an ces . See Pet zo ld tv . Co m m is s i o n er, 9 2 T.C. at6 8 7 ; s ee al s o Cracch io l a v . Co m

m i s s i on er, 6 4 3 F.2 d 1 3 8 3 , 1 3 8 4-1 3 8 5 (9 th Ci r. 1 9 8 1 ), aff’ g T.C. M em o. 1 9 7 9 -3 an dthree o th er cas es . Pet i t i o ners d i dn o ts ub m i tan y ev i d en ce t o es t ab l i s h thatth e v en ture recei v edg ro s s recei p ts as rep o rt edo n th ei r Sch edu l es F fo r t h e y ears ati s s u e, as req u i redu n d er s ect io n 6 00 1 . Thu s , res p o nd en t d et erm i n edth atp et i t i o n ers d i dn o t recei v e t he i n co m e. Becau s e o f t h e l acko f ev i d en ce t o s up p o rtp et i t i o n ers ’ rep o rt edSch edu l e F g ro s s recei p t s , we fi ndth at res p on d en tap p ro pri at el y d i s al
l o wedth e i n co m e an d , acco rd i n g l y , s u s tai n res p on d en t ’ s d et erm i n at i o n s t o d i s al lo w th e rep ort edSch edu l e F g ro s s recei p t s fo r t h e t ax y ears ati s s u e. 5 IV. Al i m o n y Sect io n 2 1 5 (a) al l o ws a t ax p ay er a d edu ct i o n fo r al i m o n y p aym en t s du ri ng th e t ax ab l e y ear. Th e t erm “ al i m o n y ” i s d efi n ed fo r p u rp o s es o f s ect i o n 2 1 5 (a) as
an y p aym en t o f al i m o n y

th ati s i n cl u d i b l e i n t h e i n co m e o f th e reci p i en tu n d er
s ect i on 7 1 . See s ec. 2 1 5 (b ). In p ert i nen tp art , s ect i o n 7 1(b )(1 ) d efi n es “ al im o n y ”
as an y p aym en ti n cas h th at s at i s fi es fo u r req u i rem en t s : (1 ) t he p aym en t i s

5 Res p o n d en tal s o h adrai s eda ch al l en g e as t o wh et h er p et i t i o ners h ad es t ab l i s h edth atth ey

were carry i n g o n a t rad e o r b u s i nes s du ri n g th e t ax y ears at i s su e. W i th o u r d eci s i o n to s u s t ai n res p o n d en t ’ s d et erm i n at i o n s t o d i s al l o w th e Sch edu l e F g ro s s recei p ts an dex p en s es , h o w ev er, we n eedn o tco n s i d er res p o n d en t’ s ad d i ti o n al ch al len g e.- 2 5 -

[* 2 5 ] recei v edb y

(o r o n b eh al f o f) a s p o u s e u n d er a d i v o rce o r s ep arat i o n i n s tru m en t ; (2 ) t h e d i v o rce o r s ep arat i o n i n s tru m en td o es n otd es i g n at e th e p aym en tas a p aym en t th ati s n o ti ncl u d i bl e i n g ro s s i n co m e u nd er t h i s s ect i o n an d n o tal l o wab le
as a d edu ct i o n u n d er s ect io n 2 15 ; (3 ) i n th e cas e o f an i n d i vi du al l eg al l y s ep arat ed fro m h i s s p o u s e u n d er a d ecree o f d i v o rce o r o f s ep arat e m ai n t en an ce, t h e p ay ee
s p o u se an dth e p ay o r s p o u se are n o tm em b ers o f t h e s am e h o u s eh o l d atth e t i m e th e p aym en ti s m ad e; an d(4 ) t h ere i s n o l iab i l i ty t o m ak e t he p aym en tfo r an y p eri o daft er t h e d eat h o f th e p ay ee s p o u s e, an d th ere i s n o l i ab i l i ty t o m ak e an y p aym en t (i n cas h o r p ro p ert y ) as a s ub s t i tu t e fo r s u ch p aym en ts aft er t h e d eat h o f th e p ay ee s p o u s e. Secs . 7 1 (b )(1 ), 2 1 5 (b ). Pet i t i o ners cl ai m ed al i m o n y d edu ct i o n s o f $ 1 6 ,8 0 0 an d$ 1 5,5 0 0 fo r 2 0 1 3
an d 2 0 1 4 , res p ect iv el y , wh i ch res p o n d en t d i s al l o wed . Pet i t i o n ers arg u e t h atth ey
s h o u ldb e en t i t l edt o th e cl ai m edal i m o n y d edu ct i o n s b ecau s e t h ey were b o u n db y th e d i v o rce ag reem en tas g uaran t o rs i n th e ev en tth atp et i t i o n ers ’ d au g ht er was
u n ab le t o s at i s fy

h er o b l i g at i on s u n d er t h e v i s i t at i o n arran g em en t . Pet i t i o n ers fu rt her as s ertth atth ey p ai dm o re t h an 5 0 % o f h er fi n an ci al s up p o rtdu ri n g th e y ears ati s s u e, m ak i n g p et i ti o ners ’ d au g h t er t hei r d ep en d en tan den t i tl i ng th em t o th e al i m o n y

d edu ct i o ns .- 2 6 -

[* 2 6 ] A d edu ct io n fo r al i m o ny u nd er s ect i o n 2 1 5 i s p erm i tt edo n l y t o th e o b l i g o r
s p o u se; “ [i ] ti s n o tal lo wedt o * * * an y o th er p ers o n wh o m ay

p ay th e al i m o n y
o b l i g at i o n o f s u ch o b l i g o r s p o us e.” Sec. 1 .2 1 5-1 (b ), In co m e Tax Reg s . As s u m i n g , arg u en d o , th at th e o b l i g at i o n s req u i red u n der t h e v i s i t at io n ag reem en t co n s t i
tu t e al im on y , p et it i on ers are n o ten t i t l edu n d er s ect io n 2 15 an dthe acco m p an y i n g reg u l at i o n s t o d edu ctan y p aym en t s m ad e o n b eh al f o f t h ei r d au g h t er. Acco rd
i n g l y , the Co u rts u s t ai n s res p o n d en t ’ s d et erm i n at io n s t o d i s al l o w th e al i m o n y d educt i o n s fo r t he y ears ati s s u e. V. Sect io n 6 6 6 2 (a) Pen al ty Sect io n 6 6 6 2 (a) an d(b )(1 ) an d(2 ) au th o ri zes a 2 0 % accu racy -rel at ed p en al ty o n an y

u n d erp aym en to f Fed eral i n co m e t ax at tri b u t ab l e t o a t ax p ay er’ s
n eg li g en ce o r d i sreg ardo f ru les o r reg u l at i o ns o r a s ub s t an t i al u n d ers tat em en to f i n co m e t ax . “ ‘ [N] eg li g en ce’ i n cl u d es an y fai l u re t o m ak e a reas o n ab le at t em p tt o
co m p l y wi th th e p ro v i s i o n s o f * * * [t h e Co d e] , an d t h e t erm ‘ d is reg ard ’ i n cl u d es
an y carel es s , reck l es s , o r i n ten t i o n al d i s reg ard
. ” Sec. 6 6 6 2(c). “ ‘ Neg l i g en ce’ al s o i n cl u d es an y

fai l u re b y

the t ax p ay er t o k eep ad equ at e b o o k s an d reco rd s o r t o
s ub s t an t i at e i t em s p ro p erl y .” Sec. 1 .6 6 6 2 -3 (b )(1 ), In co m e Tax Reg s . Fo r i n d i v i d
u al t ax p ay ers th ere i s a s ub s t an t i al u n ders tat em en t o f i n co m e t ax i f t h e am o u n to f th e u n ders 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 he t ax- 2 7 -

[* 2 7 ] req u i red t o b e s h o wno n th e ret u rnfo r th e t ax ab l e y ear o r $ 5 , 0 0 0 . Sec. 6 6 6 2 (d )(1 )(A). As i n d i cat edab o ve, t h e Co m m i s s i on er b ears the b u rd en o f p ro duct i o n wi th
res p ectt o an i n di vi du al t ax p ay er’ s l i ab i l i ty fo r accu racy -rel at edp en al t i es . Sec. 7 4 9 1 (c); Hi g b ee v . Co m

m i s s io n er, 1 1 6 T.C. at 4 4 6. In Fro st v . Co m m i s s io n er, 1 5 4 T.C. 2 3 , 3 4 (2 0 2 0 ), we h el dth atth e Co m m is s i o n er’ s i n i t ial b u rd en o f p ro du ct i on u n d er s ect i o n 7 4 9 1 (c) i n cl u d es p ro du ci n g ev i den ce t h ath e h as co m p l i edwi t h th e p ro cedu ral req u i rem en t s o f s ect i o n 6 7 5 1(b ); an d , o n ce h e h as s at i s fi edth i s i n i t i al b u rd en , th e t ax p ay er m u s tco m e fo rwardwi th co n traryev i d en ce. Sect i o n 6 7 5 1 (b )(1 ) req u i res th atth e i n i t i al d et erm in at i o n o f cert ai n p en al ti es b e “ p ers o n al l y ap p ro v ed(i n wri t i ng ) b y th e i m m ed i at e s up erv is o r o f t h e i nd i v i du al m ak i n g
s u ch det erm i n at io n o r s u ch h i gh er l ev el o ffi ci al as th e Secret ary m ay d es i gn at e.” See Graev v . Co m

m i ss i o n er, 1 4 9 T.C. 4 8 5 , 4 92 -4 9 3 (2 0 1 7 ), s up pl em en t i n g an d
o v erru l i ng i n p art1 4 7 T.C. 4 6 0 (2 0 1 6 ); s ee al s o Cl ay v . Co m m i s s io n er, 1 5 2 T.C. 2 2 3 , 2 4 8 (2 0 1 9) (q uo t i n g s ect i o n 6 7 5 1 (b )(1 )), aff’ d , 9 9 0 F.3 d1 2 9 6 (1 1t h Ci r. 2 0 2 1 ). Sect io n 6 6 6 4 (c)(1 ) p ro v i d es an ex cep t i on t o the i m po s it i on o f a s ect io n 6 6 6 2 (a) accu racy -rel at edp en al ty i f i ti s s h o wnth atth ere was reas o n ab l e cau s e fo r th e u n derp aym en t an dth e t ax p ay er act edi n g o odfai th . As a g en eral ru l e, “ [t ] h e- 2 8 -

[* 2 8 ] d et erm in at i o n o f wh et h er a t ax p ay er act edwi th reas on ab l e cau s e an di n g o o dfai 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 nt o acco u n tal l p ert i nen tfact s
an d ci rcu m s t an ces .” Sec. 1 .6 6 6 4 -4 (b )(1 ), In co m e Tax Reg s . Inm ak i ng th at d et erm i n at i o n , “ th e m o s ti m p o rt an tfact o r” i s u s ual l y

“ th e ex t en t o f th e t ax pay er’ s effo rtt o as ses s th e t ax p ay er’ s p ro p er t ax l i ab i l i ty .” Id
. Res p o n d en td et erm i n eds ect i o n 6 66 2 (a) accu racy -rel at edp en al t i es o f $ 6 ,4 3 3 an d$ 3 ,6 47 fo r t h e y ears at i s s u e, res pect i vel y . Res p o n d en t co n t en ds th at p et i t i o n ers are l iab l e fo r t he p en al t i es as a res u lto f n eg l i g en ce u n d er s ect i on 6 6 6 2 (b )(1 ) o r, i n th e al t ern at i v e, s ub s tan t i al u n d ers tat em en t s o f i nco m e t ax u n d er
s ect i on 6 6 6 2 (b )(2 ). 6 W e co ncl u d e t h at res p on d en t h as m eth i s b u rd en wi th res p ect t o t h e accu racy -rel at ed p en al t i es at tri b u tab l e t o s ub s t an t i al u n d ers t at em en ts o f i n co m e t ax
u n d er s ect i o n 6 6 6 2 (b )(2 ) fo r t h e y ears ati s s u e. Acco rd i n g l y , we n eedn o t ad dres s wh et h er t h e u n d erp aym en t s o f t ax were al s o at tri bu t ab l e t o p et it i on ers ’ n eg l i g en ce
u n d er s ect i o n 6 6 6 2 (b )(1 ). Res po n d en th as i n tro du cedev i den ce t o es tab l is h h i s
rev en u e ag en t ’ s co m

pl i an ce wi th th e p ro cedu ral req u i rem en ts o f s ect i o n 6 7 5 1 (b )(1 ) i n o b t ai ni n g s uperv i s o ry ap p ro val t o as s ert th e p en al ty u n d er s ect i o n

6 On l y o n e accu racy -rel at edp en al ty m ay b e ap p l i edwi th res pect t o an y g i v en p o rt i on o f an u n d erp aym en t , ev en i f t h atp o rt i o n i s s ubjectt o th e p en al ty o n m o re th an o ne g ro u n d
. Sec. 1 .6 6 6 2-2 (c), In co m e Tax Reg s .- 2 9 -

[* 2 9 ] 6 6 6 2 (a). See Fl u m e v . Co m m i s s i o n er, T.C. M em o . 2 0 2 0 -8 0 , at* 3 4
. Pet i t io n ers h av e n o tcl ai m ed , n o r d o es th e reco rds upp o rta co n cl u s i o n, that
res p o n d en t fo rm al l y

co m m u n i cat edh i s i n it i al p en al ty d et erm i n at i o n b efo re Au g u s t 1 7 , 2 0 1 7 , the d at e t hatthe rev en u e ag en t ’ s act in g g ro up m an ag er s ig n edthe Let t er 9 5 0 wi th th e at t ach edFo rm 4 5 4 9 -A. See Fro s t v . Co m m i s s io n er, 1 5 4 T.C. at3 6 ; Fl u m e v . Co m

m i s s io ner, at * 3 4 -* 3 5
. Aft er co n cl u d i n g th atres p o n d en th as es t ab l i s h edco m p li an ce wi th th e req u i rem en t s o f s ect i o n 6 7 5 1 (b )(1 ), we n o w tu rn t o th e rem ai n d er o f h i s i ni t i al b u rd eno f p ro du ct i o n u n d er s ect i o n 7 49 1 (c)--n am el y , wh et h er p et i t i o n ers s ub s t an t i al l y u n d ers tat edth ei r i n co m e t ax fo r t h e t ax y ears at i s su e. As we co ncl u d e ab o ve, res p o n d en tco rrect l y d et erm i n edth atp et i t i o n ers ’ i n co m e t ax was u n d ers t at edb y $ 3 2 ,1 6 7 an d$ 18 ,2 3 7 fo r t h e y ears ati s su e, res pect i v el y . Th es e am o u n t s
ex ceed th e g reat er o f 1 0 % o f t he t ax th at res p on d en td et erm i n ed was req u iredt o b e
s h o wno n p et i t i o n ers ’ jo i n t t ax retu rn s fo r t h o se y ears o r $ 5 ,0 0 0
. Th erefo re, we h o l dth atres p o n d en th as m et h i s b urd en o f p ro du ct i o n t o s h o wth atp et i t i o n ers ’
u n d erp aym en t fo r each o f t h e y ears at i ss u e was at tri bu t ab l e t o a s ub s t an t ial
u n d ers t at em en to f i n co m e t ax . Pet i t io n ers n o w b ear t he b u rd en o f s h o w i n g th at th ey h adreas o n ab l e cau s e fo r t h e u n d erp aym en t s an d thatth ey act ed i n g o o dfai t h
. See s ec. 6 6 6 4 (c)(1 ); Hi g b ee v . Co m m i s s i o n er, 1 16 T.C. at4 4 6 -4 4 7
.- 3 0 -

[* 3 0 ] Pet i t i o ners arg ue t h atth ey p ro v i d edp et i t i o n ers ’ s o n wi th cas h an dch eck s t o p u rch as e th e raw m at eri al s an dequi p m en tan d t o p ay the v en tu re’ s o p erat in g
ex p en s es . Th ey s tat e t hatp et i t i o n ers ’ s o n was res p o n si bl e fo r m an ag i n g the recei p t s s up po rt i n g th es e ex p en s es b u t h i s u n ex p ect edd eat h , wh i ch o ccu rredl es s th an two m o n th s b efo re t h ey fi l edth ei r 2 0 1 3 jo i n t t ax retu rn o n Oct o b er 9 , 2 0 1 4 , h i n d eredth ei r co l l ect i n g th e recei p t s fo r t h e ex p en ses rep o rt edfo r t h at y ear. Pet i t io n ers s ub m i t th at th e d eat h o f p et i t io n ers ’ s o n al so h i n d eredth ei r co l l ect i n g th e recei pt s fo r t h e ex p en s es rep o rt edo n th ei r 2 0 1 4 jo i n t t ax retu rn , wh ich th ey fi led on Au g u s t 1 7 , 2 0 1 5. Pet i t i o ners ad van ce t h atth e d eat h o f p et i t i o n ers ’ s o n
an d th e res ul ti n g d i ffi cu lt y i n co l l ect i n g the n eces s ary recei pt s t o s ub s tan t iat e t h e
ex p en s es co ns t i tu te reas o n ab l e cau s e fo r t h e u n d erp aym en ts . No twi th s t an d i n g p et i t i o n ers ’ p ers o n al trag ed y , res p o n d en tco n t en d s th at p et i t i o n ers fai l edt o k eep ad equ at e b o o k s an dreco rd s t o s ub s t an t i at e t hei r rep o rt ed
ex p en s es . Res p o n den th i gh l i g h t s p et i t i o n ers ’ co n ces s i o n thatth ey i nco rrect l y d et erm i n edth e am o u n t s o f eq u i p m en tex p en s es fo r t h e t ax y ears ati s s u e as fu rt h er
s up p orto f p et i t i on ers ’ fai l u re t o d et erm i n e t h ei r p ro p er t ax l i ab i l i t i es fo r t h e t ax y ears ati s s u e. Acco rd i ng ly , res p o n d en targ u es th atthe p en al ty d et erm i n at i o n s
s h o u ldb e s u s t ai ned . W e ag ree.- 3 1 -

[* 3 1 ] Wh i l e we are s ym

p ath et i c t o th e h ard s h i p th atp et i t i o n ers faced as a res u l t o f th ei r s on ’ s u n ex pect ed d eat h, thath ard s h i p d o es n o tco n s t i tut e reas o n ab l e cau s e fo r u n d erp aym en ts o f Fed eral i n co m e t ax wi th i n the m ean i n g o f s ect i o n 6 6 6 4 (c). See M art i n ez v . Co m

m i s s io n er, T.C. M em o. 2 0 1 6 -1 8 2 , at* 1 9 -* 20 ; s ee al s o s ec. 1 .6 66 4 -4 (b ), In co m e Tax Reg s . Pet it i o n er h u s ban d , wh o i s an edu cat edi n d i v i d
u al , t es t ifi edth ath e was the fi n an ci er o f t h e v en tu re an di nt en d edt o recup erat e t h e
m o ney h e ex p en d edt o co m

m en ce i t . Th e fact s an dci rcu m s t an ces i n th is cas e i n d i cat e, h owev er, th atp et i ti o n ers d i d n o tat t em p tt o k eep ad equ at e b o o k s an d
reco rd s t o d et ai l th e ex p en s es i n cu rred an das s es s th ei r p ro per t ax l iab i l i ti es . Res po n d en t ’ s po s it i o n th atp et i t i o n ers fai l edt o as s es s thei r p ro p er t ax l i ab i l i t i es i s b o l s t eredb y th ei r co n ces s i o n th atth ei r cl ai m ed Sch edu le F d edu ct i o n s fo r eq u i p m en tex pen s es were i n co rrect aft er l at er rev i ewi n g ad d i ti o n al d o cu m en tat i o n , as wel l as th e fact th atth ey

d o n o td i s p u t e t h ei r recei p tan dfai l u re t o rep o rt$ 7 2 o f t ax ab l e i n t eres t fo r t ax y ear 2 0 1 3 . Th e Co u rt , th erefo re, h o l d s th atp et i t i o n ers are l i ab l e fo r t he s ect i o n 6 6 6 2 (a) p en al ti es fo r t h e t ax y ears ati s s u e. VI. Co n cl u si o n Fo r t h e reas o n s ab o v e, the Co u rts u s t ai n s res p o nd en t’ s d et erm in at i o n s t o d i s al lo w p et i t i on ers ’ al i m o ny d edu ct io n s , Sch edu l e F g ro s s recei p t s , an dSch ed
u l e F ex p en s e d edu ct i o n s. Th e Co u rtfu rt h er s u s t ai n s res p on d en t ’ s d et erm i n at i o n s- 3 2 -

[* 3 2 ] rel at i n g t o th e accu racy -rel at edp en al t i es u n d er s ect i o n 6 6 6 2 (a) fo r t h e y ears ati ss u e. Th e Co u rth as co n s i d eredal l o th er arg um en t s m ad e b y th e p art i es , an dt o th e ex t en tn o t d i s cu s s edab o v e, fi n dtho s e arg u m en t s t o b e i rrel ev an t , m oo t , o r wi th o u tm eri t . To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t ered fo r res p o n den t .