T.C. Sum m ary Opi ni on 20 14 -9 7

UNITED STAT ES TAX COURT

ADEDAYO ALUBUNKUDI A ND O. AD EDOTUN ALUBUNKUDI, Peti ti on ers v. COM MIS SIONER OF INTERNAL REVENUE , Res po nd en t

Doc ke t No . 18 06 2- 12 S. Fi le d S ep te m be r 23 , 20 14
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Ade da y o Al ub un ku di an d O. Ad ed otunAlubu nkud i, p ro se. Kris ti naL. Rico , forres po nd en t.

SUMM ARY OPINION W HALEN, Ju dg e: Thi s ca se was h eardpu rs ua ntto th e p ro vi si on s o f
se ct io n 7 46 3 o f th e In te rn al Rev enue Co de ineffe ctwhen th e p et it io n was fil ed
. Pu rs ua ntto sec ti on 74 63 (b ), th e d eci si on to be en te redis no t re vi ewab le by any ot he r co urt, an d t hi s o pi ni on sh al l n otbe tre at edas p rece de ntforan y ot he r cas e. Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al Rev enue Co de-2
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in effe ctat a ll rel ev an t t im es , andall Ru le refe ren ces are t o t he Tax C ou rt Rul es of Prac ti ce an d P ro cedur e. Res po nd en t d et erm in edtax de fic ie nc ie s an d s ect io n 66 62 (a) p en al ti es for

pe ti ti on ers ’ ta xabl e y ears 20 09 an d 2 01 0. Th e is su e in th is
cas e is whet he r pe ti ti on er an d h is sp ou se have subs ta nt ia te d t he co stof g oo ds so ld
an d c ert ai n d educ ti on s cl ai m edon Sch edul es C, Pro fitor Lo ss Fro m Bu si ne ss , fil edwith the ir jo in t re tu rn s fo r anact iv it y cal le d OM A Ent erp ris es . At the ou ts et , we no te th atpe ti ti on er O. Ade do tu n Al ub un ku di sep arat ed fro m he r hu sb an d app ro xi m at el y 18 m on th s b efo re tria l, an d s he fai le d t o t ak e an y act io n t o p rep are t hi s ca se fortri al . She als o fa il edto ap pe ar, i n p ers on or t hr ou gh a rep res en ta ti ve , when th is cas e was cal le d fo r tr ia l. As ares ul t, the Co urt g ran te d
res po nd en t’s m ot io n t o d is m is s p et it io ne r O. Aded otun Alubu nkud i fo r la ck of pr os ecu ti on an d o rd eredth ata de ci si on as t o h er wo ul d b e en te redindu e co ur se . Acco rd in gl y , th e o nl y

pa rti es to th e cas e attri al were Ad ed ay o Al ub un ku di (p et it io ne r) an d re sp on de nt . Bac kg ro un d The pa rti es ha ve st ip ul at edso m e o f th e fac ts an d t he Co urt h ereb y tak es th e st ip ul at io n o f fac ts fil edby the parti es an d t he ex hi bi ts att ach edth eret o i nt o ev id en ce. Pet it io ne r an d h is sp ou se res id edinth e St at e o f New Je rs ey at t he ti m e th ey fil edth ei r pe ti ti on .-3
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Pet it io ne r an d h is sp ou se ti m el y fil edjoi ntFo rm s 1 04 0, U.S. In di vi du al In co m e Tax Return, fo r 20 09 an d 2 01 0. Bo th returns st at edth atpe ti ti on er was a

“ so ftwa re en gi ne er” a ndth athi s s po us e was a “ nu rs e.” The returns rep orte d ag gr eg at e wag es of $ 19 0,0 08 an d $ 17 5,4 42 forth e y ears inis su e, res pe ct iv el y . The returns als o re po rte d n etlo ss es fro m fou r ren ta l p ro pe rti es of $ 9,2 11 an d $3 ,64 6, re sp ect iv el y . The subjec t re turn s i nc lu de d S ch edul es C fo r OMA Ent erp ris es on whi ch pe ti ti on er an d h is sp ou se rep orte d n etlo ss es of $ 58 ,43 0 a nd$3 6,6 44 , res pe ct iv el y . The bu si ne ss of OM A Ent erp ris es in vo lv edth e p ur ch as e o f da m ag edau to m ob il es an d t he res to rat io n o f th os e au to m ob il es forres al e. OMA Ent erp ris es was al le ge dl y co nduc te d s ol el y

by pet it io ne r. The Sch edul es C fo r OMA Ent erp ris es rep orte d t he fol lo win g re ve nu e an d
ex pe ns es : Sch edul es C fo r OMA Ent erp ris es 20 09 20 10 Gro ss rece ip ts $1 6,8 54 $2 0,3 12 Co stof g oo ds so ld 57 ,85 0 23 ,29 4 Gro ss pro fit -40 ,99 6 -2,9 82 Oth er i nc om e -0- -0- Gro ss in co m e -40 ,99 6 -2,9 82-4
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Adv ert is in g 31 5 43 1 Car a ndtru ck

ex pe ns es 7,3 14 15 ,39 9 Dep reci at io n a ndsec . 17 9 exp en se de du ct io n -0
- 4,5 95 Leg al an d p ro fes si on al servi ces 1,5 41 3,6 33 Offi ce ex pe ns e 3,1 61 4,8 13 Supp li es 4,6 23 4,3 11 Oth er ex pe ns es (In te rn et ) 48 0 48 0 Tot al ex pe ns es 17 ,43 4 33 ,66 2 Net p ro fitor ( lo ss ) -58 ,43 0 -36 ,64 4 Afte r rev ie win g t he reco rd s fo r th is act iv ity subm it te d dur in g t he au di t o f pe ti ti on er an d h is sp ou se ’s returns , res po nd en t d et erm in edinth e n ot ic e o f de fic ie nc y , am on g o th er ad jus tm en ts , th atth os e rec or ds were “ in co m pl et e an d in ad equa te ” to subs ta nt ia te th e co stof g oo ds so ldrep orte d o n t he Sch edul es C. Acco rd in gl y , res po nd en t re co m pu te d t he gro ss pro fitfro m th e act iv it y

by app lying in du st ry av erag es (i.e ., 24 .03 % for20 09 an d 2 4.5 1% fo r 20 10 ) to th e g ro ss rece ip ts rep orte d. Re sp on de ntth ende te rm in edth e co stof g oo ds so ldby
subt ract in g t he reco m

pu te d g ro ss pro fitfro m

gro ss rece ip ts . The fo ll owi ng sc he du le sh ows th atco m

pu ta ti on .-5
- 20 09 20 10 Gro ss rece ip ts (pe r return) $1 6,8 54 $2 0,3 12 Gro ss pro fitpe rcen ta ge (in du st ry

av erag e) 24 .03 % 24 .51 % Rec om pu te d g ro ss pro fit $4 ,05 0 $4 ,97 8 Co stof g oo ds so ld(i.e ., $1 2,8 04 $1 5,3 34 gro ss rece ip ts les s reco m pu te d g ro ss pro fit ) Ineffe ct , res po nd en t al lo wedco st s o f go od s s ol d o f $1 2,8 04 for 20 09 an d $ 15 ,33 4 fo r 20 10 . The am ou ntdi sa ll owe d fo r eac h year is co m pu te d a s fo ll ows : 20 09 20 10 Co stof g oo ds so ld (as rep orte d) $5 7,8 50 $2 3,2 94 Am ou ntall owe d 12 ,80 4 15 ,33 4 Am ou ntdi sa ll owe d 45 ,04 6 7,9 60 As t o t he de du ct io ns cla im edon th e Sch edul es C fo r OMA Ent erp ris es , res po nd en t d is al lo wed , forlac k o f subs ta nt ia ti on , th e d educ ti on s fo r caran d t ru ck
ex pe ns es , dep reci at io n a ndsec ti on 17 9 e xp en se s, l eg al an d p ro fes si on al servi ces , an d o ffi ce ex pe ns es , inth e ag gr eg at e am ou nt s o f $1 2,0 16 for20 09 an d $ 28 ,44 0 fo r 20 10 . Res po nd en t al lo wedth e d educ ti on s cl ai m edon eachSch edul e C fo r-6
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adve rti si ng , supp li es , andInt ern etexpe ns es , inth e ag gr eg at e am ou nt s o f $5 ,41 8 fo r 20 09 an d $ 5,2 22 for20 10
. Inth e n ot ic e o f de fic ie nc y res po nd en t d et erm in edto ta l ad jus tm en ts of $7 5,5 23 to pe ti ti on er an d h is sp ou se ’s return fo r ta xabl e y ear 2 00 9 a ndto ta l ad jus tm en ts of $ 53 ,63 8 t o t he ir r eturn fo r ta xabl e y ear 2 01 0. Th e ad jus tm en ts de te rm in edinth e n ot ic e o f de fic ie nc y are s etforthbe lo w:

2009 20 10 Sche dul e E4 re al es ta te lo ss af te r pa ssi ve li mit at ion $3, 758 $1, 414 Cons equ entadj
. Sche dul e E3 re al es ta te lo ss af te r pa ssi ve li mit at ion 2, 419 962 Cons equ entadj
. Sche dul e E2 re al es ta te lo ss af te r pa ssi ve li mit at ion 1, 453 571 Cons equ entadj
. Sche dul e E1 re al es ta te lo ss af te r pa ssi ve li mit at ion 1, 581 699 Cons equ entadj
. Sche dul e C1 bus ine ss sel li ng rec ondi ti one d cars
- Off ic e e xpe nse 3, 161 4, 813 Subs ta nti at ion

- Legal andpr ofe ssi ona l e xpe nse s 1, 541 3, 633 Pet . co nce dedattr ia l

- Carandtruck exp ens es 7, 314 15, 399 Subs ta nti at ion

- Costof

goods s old 45, 046 7, 960 Subs ta nti at ion

- Depr eci at ion andse c. 1 79 e xpe nse 4, 595 Subs ta nti at ion Stu den t l oanin te re stdeduct ion 1, 381 844 Cons equ entadj
. Ite m ized d edu ct ion s- - home m ort gag e 7, 869 10, 748 Resp . co nce des in te re standpoi nts-7
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T uit ion andfe es deduct ion 2, 000 Cons equ entadj
. T ota l a dj ust m ent s 75, 523 53, 638 The de ci si oninth is cas e tu rn s o n t he ad jus tm en ts to th e Sch edul es C th atare de si gn at ed“ Subs ta nt ia ti on ” in th e ab ov e sc he du le
. Dis cu ss io n Gen eral ly, a ta xp ay er m

us t s ho w ent it le m en t t o any deduc ti on cla im ed . See INDOPCO, In c. v. Co m

m is si on er, 5 03 U.S. 79 , 84 (19 92 ). A tax pa y er m ay 1 de du ctord in ary an d n eces sa ry expe ns es pa idor i nc urreddurin g t he tax ab le y ear i n carry in g o n atra de or b us in es s, b utth e ta xp ay er m us t m ai nt ai n s uf

fic ie ntreco rd s to subs ta nt ia te th e ex pe ns es cla im ed . Secs . 16 2( a), 6 00 1; sec . 1.6 00 1- 1( a), In co m e Tax Reg s. Th e ta xp ay er b ears th e b ur de n o f subs tant ia ti on . Hrade sky v. Co m m is si on er, 6 5 T.C. 8 7, 8 9- 90 (19 75 ), aff'd , 54 0 F .2d82 1 (5 thCir . 19 76 ). Thi s requi res th e ta xp ay er t o s ho w th e am ou ntan d p ur po se of a ny ite m s cl ai m edas de du ct io ns . See i d. Deduc ti on s ar e n otall owe d fo r pe rs on al , li vi ng , or fa mil y ex pe ns es . Sec. 2 62 (a). Sect io n 2 74 (d ) im

po se s s tri ctsubs ta nt ia ti on requi rem en ts forex pe ns es rel at in g t o, am on g o th er thi ng s, trav el , ent ert ai nm en t, an d “ li st edpro pe rty”,
W e n eedno t d is cu ss th e b ur de n- sh ift in g p ro vi si on s o f se c. 74 91 (a) 1 be cau se , inth is cas e, th ere i s n ot hi ng to su gg es t tha t tho se pro vi si on s ap pl y , and pe ti ti on er h as m ad e n o c la im th atth ey do
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in cl ud in g aut om ob il es an d o th er p ro pe rty us edas am ean s o f tr an sp orta ti on . Sec. 28 0F (d )(4 ); s ec. 1 .27 4- 5T(a ), Tem po rary Inco m e Tax Reg s., 5 0 F ed . Reg . 46 01 4 (No v. 6 , 19 85 ). To d educ t s uc h i te m s, the tax pa y er m us t s ub st an ti at e “by [eithe r] ad equa te reco rd s o r by su ffi ci en t ev id en ce co rro bo rat in g * * * [hi s] own st at em en t” th e am ou nt s o f su chex pe ns es , th ei r bu si ne ss purp os e, an d t he bu si ne ss rel at io ns hi p t o t he tax pa y er o f th e p ers onus in g t he pro pe rty. Sec. 27 4( d) ; Be al e v . Co m m is si on er, T.C. Mem o. 2 00 0- 15 8; sec . 1.2 74 -A(b )(1 ), In co m e Tax Reg s. To
m eetth e “ ad equa te reco rd s” tes t a t ax pay er m us t m ai nt ai n a n a cco un t b oo k, a di ary, a lo g, a s ta te m en t o f ex pe ns e, tr ip sh eet s, o r si m il ar re co rd s p rep ared
co nt em po ran eo us ly w it h t he expe nd itur e, an d d oc um en ta ry ev id en ce o f certa in
ex pe nd itur es , su chas r ecei pt s o r bi ll s. See sec . 1.2 74 -5 T(c)(2 ), Tem po rary In co m e Tax Reg s., 5 0 F ed . Reg . 46 01 7 (No v. 6 , 19 85 ). In c om bi na ti on , th es e reco rd s m us t b e su ffi ci en t t o e st ab li sh each ele m en t o f th e expe nd itur e fo r whi cha de du ct io n i s s ou gh t, i .e., am ou nt , ti m e an d p la ce, b us in es s p ur po se , andbu si ne ss rel at io ns hi p. Co stof g oo ds so ldis anad jus tm en t t o g ro ss in co m e an d i s co m pu te d wi th pr op er ad jus tm en t fo r op en in g a ndclo si ng in ve nt or ie s fo r th e y ear. Se e se cs . 1.6 1- 3( a), 1 .16 2- 1( a), In co m e Tax Reg s. Tech ni cal ly, itis no t treat edas ade du ct io n fro m gro ss in co m e, an d i t i s n otsubjec t t o t he li m it at io ns on de du ct io ns insec ti on s-9
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16 2 a nd27 4. Se e Met ra Ch em Co rp . v. Co m

m is si on er, 8 8 T.C. 6 54 , 66 2 (1 98 7) ; B.C. Co ok& So ns , Inc . v. Co m m is si on er, 6 5 T.C. 4 22 , 42 8 (1 97 5) , aff’d p er cu ria m , 58 4 F .2d53 (5t h C ir. 1 97 8) ; s ecs . 1.6 1- 3( a), 1 .16 2- 1( a), 1 .47 1- 3, In co m e Tax Reg s. Th e ta xp ay er m us t s ub st an ti at e th e am ou ntcla im edas c os t o f go od s so ld , andth e ta xp ay er m

us t m ai nt ai n s uf

fic ie ntreco rd s fo r th atpu rp os e. Sec. 60 01 ; s ec. 1 .60 01 -1 (a), In co m e Tax Reg s.; see Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 40 (20 01 ); R od rig ue z v . Comm is si on er, T.C. Mem o. 2 00 9- 22 ; Sa idv. Co m m is si on er, T.C. Mem o. 2 00 3- 14 8, af f’d, 11 2 F ed . App x. 6 08 (9th C ir. 2 00 4)
. Befo re we d is cu ss pe ti ti on er an d h is sp ou se ’s eli gi bi li ty for the co st s o f go od s s ol d a ndth e d educ ti on s cl ai m edon th e subjec t Sc he du le s C forOMA Ent erp ris es , sev eral ge ne ral ob se rv at io ns ab ou t the ir e vi de nc e are ap pr op ria te . The fir stob se rv at io n d eal s wi th th e in vo ic es th atpe ti ti on er s ub m it te d t o subs ta nt ia te th e ta x b en efi ts cla im edon th e Sch edul es C. All of t ho se in vo ic es are at ta ch edto th e St ip ul at io n o f Fac ts inon e o f th ree e xh ib it s t o t ha t s ti pu la ti on . Tak ento ge th er, the in vo ic es pu rp ort t o s ho w pu rch as es du rin g 2 00 9 a nd20 10 ag gr eg at in g app ro xi m at el y $2 12 ,16 1.7 8. Tho se in vo ic es rai se m or e que st io ns th anth ey an swe r. Forex am

pl e, th e in vo ic es for20 09 sh ow p ur ch as es to ta li ng $1 35 ,78 5.1 2, wh erea s the ag gr eg at e co stof g oo ds so ldan d d educ ti on s cl ai m edon th e Sch edul e C fo r 20 09 is $7 5,2 84 ,-1 0-

or$6 0,5 01 .12 les s tha n the to ta l i nv oi ces for20 09 . Sim il arl y , th e in vo ic es for 20 10 sh ow p ur ch as es to ta li ng $7 6,3 76 .66 wher eas th e ag gr eg at e co st s o f go od s so ldan d d educ ti on s cl ai m edon th e Sch edul e C fo r 20 10 is $5 6,9 56 , or $ 19 ,42 0.6 6 le ss th anth e to ta l i nv oi ces for20 10 . In s umm ary, pe ti ti on er s ub m it te d i nv oi ces to ta li ng $2 12 ,16 1.7 8 t o s ub st an ti at e d educ ti on s an d c os ts of g oo ds so ldto ta li ng $1 32 ,24 0. W e are at alo ss to un de rs ta ndth e n atur e o f th e ex ces s i nv oi ces to ta li ng $7 9,9 21 .78 . Peti ti on er h as no t as ke d t o b e al lo wedde du ct io ns an d/ orco st s o f go od s s ol d i n e xc es s o f th e am ou nt s cl ai m edonth e Sch edul es C. Furth erm or e, each Sch edul e C s ta te s tha t i t was pre pa redus in g t he cas h m etho d o f acc ou nt in g. W e are un aware of a ny reaso n fo r a t im in g d iff eren ce b etweenth e in vo ic e y ear an d t he ti m e a p art ic ul ar ex pe nd itur e is tak enin to acco un t fo r ta x p ur po se s. A sec on d o bs erv at io n abo utpe ti ti on er’s ev id en ce i s the factth atpe ti ti on er in tro du cedno bo ok s o r rec or ds forOMA Ent erp ris es , andth ere i s n ot hi ng inth e reco rdth atti es a sp eci fic in vo ic e o r in vo ic es to th e am ou ntcla im edon a pa rti cu la r li ne of e it he r Sch edul e C. Thi s p ro bl em was d is cu ss edat t ria l as fol lo ws: THE COURT: Do you h av e an yth in g t ha t s ho ws the co m po si ti on of each of t he ex pe ns es th atwere cl ai m edon y ou r Sch edul e C? MR. ALUBUNKUDI: I d idn’t u nd ers ta ndwhaty ousay, sir. * * * * * * *-1 1-

THE COURT: W el l, o n S ch edul e C y oucla im edanoff ic e ex pe ns e in 20 09 of $ 3,1 61 . Do y ouha ve an yth in g t ha t s ho ws wh atwere the am ou nt s tha t you d educ te d a s p artof t ha t $ 3,1 61 ? Pet it io ne r co ul d n otan swe r th e Co urt’s co nc ern , andth e rec or d p ro vi de s n o way to ti e th e in vo ic es pe ti ti on er p ro du cedto th e co stof g oo ds so ldan d b us in es s de du ct io ns cla im edonth e Sch edul es C. Pet it io ne r’s te st im on y

at t ria l ab ou t the co nduc t o f hi s b us in es s was va gu e an d c on fu si ng . Peti ti on er i ni ti al ly test ifi edth athe ha d p ur ch as edda m ag edcars fro m a co m pa ny call edCo pa rt, In c.: “ I bu y us edcars fro m

a pl ace c al le d C op art , cars th atha s an acci de nt . W he n I b uy the m , I go to jun kyard t o b uy the pa rts an d fix itinord er t o re se ll it .” Pet it io ne r th entes ti fie d t ha t h e h adactua ll y pu rch as edth e d am ag edcars th ro ug h a no th er co m

pany, Sanch as e Aut o. Pe ti ti on er ex pl ai ne d t ha t Sa nc ha se Aut o h ada “ li cen se ” to bu y cars fro m

Co pa rt a ndSan ch as e Aut o a ll owe d h im to us e it s l ic en se . Peti ti on er re ferr edto two rece ip ts is su edby Sanch as e Aut o t o

“ W al ly AAkan

ji.” One rece ip t, d at edJu ne 3, 2 00 9, i s fo r th e p ur ch as e o f 7 c ars in th e ag gr eg at e am ou ntof $ 33 ,13 5, an d asec on d re cei pt , dat edDecem be r 3, 2 01 0, is forth e p ur ch as e 1 0 c ars inth e ag gr eg at e am ou ntof $ 55 ,36 0. Afte r th at , pet it io ne r te st ifi ed : “ Whe n I b idforcar, I wen t fo r th e car , th enI go to Co pa rt a ndpa y

with my m on ey .” Thu s, h e se em edto co nt rad ic t h im se lf b y-1 2-

st at in g t ha t h e p ai d C op artfor th e car s, n otSan ch as e Aut o. Acco rd in g t o pe ti ti on er, h e p ai d C op artwith c as hi er’s ch eck s o bt ai ne d fr om Ban k o f Am eri ca. He ex pl ai ne d: “ Tha t’s the on ly w ay y oucanpa y

to Co pa rt.” If pe ti ti on er p ai d Co pa rt f orth e car s, we d o n otun de rs ta ndth e p ur po se of t he in vo ic es fro m San ch as e Aut o. Pet it io ne r ex pl ai ne d tha t h e k ep t co pi es of t he cas hi er’s ch eck s u se d t o p ay Co pa rt i n abri efca se inhi s p ers on al car b utth ey were l os t wh enth e b rie fcas e was st ol enfro m

hi s au to m ob il e. Acco rd in g t o p et it io ne r, he us edcas h t o p ur ch as e th e cas hi er’s ch eck s fr om

Ban k o f Am eri ca. Pet it io ne r di d n otex pl ai n wh y he ch os e to pa y forth e cas hi er’s ch eckwith c as h i ns te adof s im pl y cau si ng th e m on ey

for th e cas hi er’s ch eck s t o b e wit hd rawnfro m hi s B an k o f Am eri ca ac co un t. Inan y ev en t, p et it io ne r is no w un ab le to sh ow tha t h e p ur ch as edan y of t he cas hi er’s ch eck s tha t h e cl ai m s t o h av e g iv ento Co pa rt. In pa ss in g, we n ot e th atth e Co urt ha d c on ti nu edth is cas e fro m a pr io r cal en da r fo r th e ex pr es s p ur po se of g iv in g pe ti ti on er ad di ti on al ti m e to ob ta in ba nkdo cu m en ts . W e fi ndcurio us an othe r as pe ctof p et it io ne r’s te st im on y ab ou t the bu si ne ss of OMA Ent erp ris es . The rec or d c on ta in s i nv oi ces da te d dur in g 2 00 9 fo r th e pu rch as e o f 11 cars th ro ug h C op artby ano th er co m pa ny call edDis co un t M ot or s, In c., inW as hi ng to n, D.C. The se 11 in vo ic es to ta l $ 90 ,68 9.9 8. Pe ti ti on er d idno t-1 3-

m en ti onth es e in vo ic es du rin g h is tes ti m on y or e xp la inwhatco nn ect io n, i f an y , he ha d t o Di sc ou ntMo to rs , Inc . Non e o f th es e in vo ic es is inpe ti ti on er’s n am e an d,
as with t he San ch as e Aut o i nv oi ces , th ere i s n ot hi ng inth e rec or d t o s ho w th at pe ti ti on er p ai d t he in vo ic es or p ur ch as edan y of t he au to m ob il es de sc rib edinth e in vo ic es . Co stof Go od s So ld As d is cu ss edab ov e, res po nd en t d et erm in edinth e n ot ic e o f de fic ie nc y th at th e rec or ds subm it te d dur in g p et it io ne r an d h is sp ou se ’s aud itwere “ in co m pl et e an d i na de qu at e” an d d idno t s ub st an ti at e th e co st s o f go od s s ol d re po rte d o n t he Sch edul es C fo r OMA Ent erp ris es . As a res ul t, re sp on de ntreco m pu te d t he gro ss pr of itforth e b us in es s u si ng in du st ry av erag es an d a dju st edth e co st s o f go od s s ol d in acco rd an ce wi th th atco m pu ta ti on . Peti ti on er an d h is sp ou se be ar the bu rd enof sh owi ng th atres po nd en t’s ad jus tm en ts to th e co st s o f go od s s ol d a re wro ng an d th atth ey are en ti tl edto cla im

m or e th anth e am ou nt s re sp on de ntall owe d . See Ru le 14 2. Pet it io ne r’s de sc rip ti on of t he bu si ne ss of OM A Ent erp ris es su gg es ts th at th e co stof g oo ds so ldforth e b us in es s wo ul d c on si stof t he co stof the dam ag ed
au to m ob il es an d t he pa rts us edto rep ai r th em . As di sc us se d abo ve , th e in vo ic es subm it te d a re n otsu ffi ci en t t o p ro ve th atpe ti ti on er p ur ch as edan y su chgo od s.-1 4-

Fu rth erm or e, pe ti ti on er’s t es ti m on y was v ag ue an d c on tra di ct ory . On th e b as is of th e rec or d i n t hi s ca se , we fin d t ha t p et it io ne r an d h is sp ou se ha ve no t subs ta nt ia te d c os t o f go od s s ol d fo r ei th er y ear i n e xc es s o f th e am ou ntres po nd en t al lo wed
. Offi ce Ex pe ns es On the Sch edul es C fo r OMA Ent erp ris es , pet it io ne r an d h is sp ou se cla im ed de du ct io ns for

off ic e ex pe ns es of $ 3,1 61 for20 09 an d $ 4,8 13 for20 10 . As
m en ti on edab ov e, pe ti ti on er was un ab le to sh ow the Co urt wh ic h o f th e in vo ic es co rres po ndto th e ex pe nd itur es rep orte d a s o ffi ce ex pe ns es . Neverth el es s, u si ng th e in vo ic es an d p et it io ne r’s te st im on y , th e Co urt h as id en ti fie d t he fol lo win g in vo ic es forpu rch as es th atap pe ar t o h av e b een cla ss ifi edas o ffi ce ex pe ns es : D at e D es cri pt io n Am ou nt June 1, 2 00 9 Dell I ns pi ro n 1 54 5 Lap to p $4 04 .46 June 7, 2 00 9 Dell Vo st ro A86 0 Lap to p 54 8.9 1 Tot al 95 3.3 7 May 27, 2 01 0 Dell P ho to A/O 9 26 Pri nt er

Dell 2 15 5 c dnMu lt ifu nc ti on Pri nt er 62 3.8 1 May 27, 2 01 0 Dell Lap to p In sp iro n 1 7 Lap to p 1,6 03 .93 May 30, 2 01 0 Dell I ns pi ro n 1 50 1 Lap to p 89 0.2 4-1 5-

20 10 Oscar’s Ca rp etOne 48 .15 Tot al 3,1 66 .13 The ab ov e in vo ic es pu rp ort t o s ho w exp en di tures of $ 95 3.3 7 i n 2 00 9 a nd $3 ,16 6.1 3 i n 2 01 0. Acco rd in g t o t he se in vo ic es , pet it io ne r pu rch as edtwo lap to p co m pu te rs in20 09 , two lap to p c om pu te rs in20 10 , two pri nt ers in20 10 , and
so m ethi ng fro m

Osca r’s Carp etOne i n 2 01 0. As to th os e ex pe nd itur es , pe ti ti on er’s t es ti m on y

ab ou t wh attype o f co m

pu te rs he pu rch as edwas c on fu si ng . The in vo ic es sh ow tha t h e p ur ch as edfou r lapt op s wh erea s p et it io ne r te st ifi edth at he pu rch as edtwo de sk to ps an d o ne lap to p. We fin d the ab ov e in vo ic es an d pe ti ti on er’s t es ti m on y

to be in su ffi ci en t t o s ub st an ti at e th e d educ ti on foroff ic e ex pe ns es cla im edforeach of t he subjec t years. Dep reci at io n On the Sch edul e C fo r OMA Ent erp ris es for20 10 , pet it io ne r an d h is sp ou se cl ai m eda de du ct io n fo r de pr eci at io n a ndsec ti on 17 9 e xp en se of $ 4,5 95 . Sect io n 17 9 p ro vi de s tha t a t axpa y er m ay ele ctto tre atth e co stof a ny sect io n 1 79 pro pe rty as anex pe ns e whi chis no t ch arg eab le to a cap it al acco un t. If a t ax pa y er m ak es th is ele ct io n, the co stsh al l b e al lo wedas ade du ct io n fo r th e ta xabl e y ear i n wh ic h th e se ct io n 1 79 pro pe rty is p la cedinservi ce. Sec . 17 9( a). Sec ti on 17 9 p ro pe rty is de fin edinpe rti ne ntpa rt a s “ ta ng ib le pro pe rty”, whi chis sec ti on 12 45 pro pe rty (as-1 6-

de fin edinsec ti on 12 45 (a)( 3) ) an d wh ic h i s ac qu ire d b y pu rch as e fo r us e in th e act iv e co nduc t o f a trad e o r bu si ne ss . Sec. 1 79 (d )(1 ). Acco rd in g t o t he Fo rm

45 62 , Depr eci at io n a ndAm orti zat io n (I nc lu di ng In fo rm at io n o n Li st edPro pe rty), andth e d ep reci at io n s ch edul e fi le d wi th pe ti ti on er an d h is sp ou se ’s return, the subjec t d educ ti on forth e co st s o f a

“ Co m pu te r”, p ur ch as edfor$9 43 on Feb ru ary 1, 2 01 0, an d “ Equ ip m en t” , pu rch as edfor$3 ,65 2 o n J anuary 15 , 20 10 . The rec or d c on ta in s n o fu rth er de sc rip ti on of t he se ass et s. At t ria l, p et it io ne r st at edth atth e it em s m us t b e “ sp are car p art s” . Peti ti on er the n c on cl ud ed : “ I’m no t s ur e.” We fin d tha t p et it io ne r an d hi s s po us e h av e n otm etth e b ur de n o f pr ov in g t ha t re sp on de nt ’s di sa ll owa nc e o f th is de du ct io n was wron g. Car a ndTruc k Ex pe ns es On the Sch edul es C fo r OMA Ent erp ris es , pet it io ne r an d h is sp ou se cla im ed de du ct io ns for

car an d t ru ckex pe ns es of $ 7,3 14 for20 09 an d $ 15 ,39 9 fo r 20 10
. The re i s n o o th er m en ti on of t he se car an d t ru ck ex pe ns es inth e rec or d o f th is
cas e, ex cep t fo r th e st at em en t i n t he st ip ul at io n o f fac ts th at“ [p ]etit io ne rs di d n ot pr ov id e d oc um en ts , su chas c on te m po ran eo us mil eag e lo g, i n a n a tt em ptto subs ta nt ia te ‘ Car a ndTruc k’ expe ns es .” Becaus e th ere i s n othi ng inth e rec or d t o subs ta nt ia te th es e ex pe ns es , we fin d t ha t p et it io ne r an d h is sp ou se ha ve no t-1 7-

es tabl is he d e nt it le m en t t o t he car an d t ru ck ex pe ns e d educ ti on cla im edonth e subjec t re tu rn s. Leg al an d P ro fes si on al Serv ic es On the Sch edul es C fo r OMA Ent erp ris es , pet it io ne r an d h is sp ou se cla im ed de du ct io ns for

leg al an d p ro fes si on al servi ces of $ 1,5 41 for20 09 an d $ 3,6 33 for 20 10 . Peti ti on er co nc ed edth es e d educ ti on s attri al
. Accu racy-Rel at edPen al ty Und er Se ct io n 6 66 2( a) Res po nd en t d et erm in edinth e n ot ic e o f de fic ie nc y th atth e und erp aym en ts of tax inth is cas e are att rib ut ab le to ne gl ig en ce o r di sr eg ardof rul es or reg ul at io ns , or t o s ub st an ti al un de rs ta te m en ts of i nc om e ta x. Acco rd in gl y , res po nd en t ad de d t o t he tax de fic ie nc ie s ac cu racy-rela te d p en al ti es im po se d b y se ct io n 6 66 2( a). Und er s ect io n 6 66 2( a) an d (b )(1 ) an d (2 ) a t ax pa y er m ay be li ab le fora pe na lt y of 2 0% o f th e p orti on of a n und erp aym en t o f ta x due to ne gl ig en ce o r di sr eg ardof rul es or r eg ul at io ns , or due to an y subs ta nt ia l u nd ers ta te m en t o f in co m e ta x. Th e te rm

“ ne gl ig en ce” i n s ect io n 6 66 2( b) (1 ) in cl ud es an y fai lu re t o m ak e a rea so nabl e at te m

ptto co m pl y with t he Int ern al Rev enue Co de ; thi s m ay in cl ud e a fai lu re t o k eep ad equa te bo ok s an d re co rd s o r to subs ta nt ia te it em s pr op erl y . Sec. 6 66 2( c); sec . 1.6 66 2- 3( b) (1 ), In co m e Tax Reg s. Neg li ge nc e h as-1 8-

al so be ende fin edas the fai lu re t o e xe rci se du e car e o r th e fai lu re t o d o wh ata reas on ab le pe rs on wou lddo un de r th e ci rcu m st an ces . See All env. Co m m is si on er, 92 T.C. 1, 1 2 (1 98 9) , aff’d, 9 25 F.2d34 8 (9 th Cir . 19 91 ); Ne el y v. Co m m is si on er, 85 T.C. 93 4, 9 47 (19 85 ). The t erm “ di sr eg ard ” in cl ud es an y care le ss , reck le ss , or in te nt io na l d is reg ard . Sec. 6 66 2( c). Inth e cas e o f anin di vi du al , th e p hr as e

“ subs ta nt ia l u nd ers ta te m en t o f in co m e ta x” is de fin edas an u nd ers ta te m en t tha t ex ceed s the gre at er o f $5 ,00 0 o r 10 % of t he tax requi redto be sh own on th e return. Sec. 6 66 2( d) (1 )(A). Norm al ly, th e Co m

mis si on er b ears th e b ur de n o f pr oduc ti on with re sp ectto th e li ab il ity

of a n i nd iv idua l t ax pa y er fo r th e acc ur acy-rela te d p en al ty. Sec. 74 91 (c). To m eetth atbu rd en , th e Co m m is si on er m

us t p ro du ce s uf

fic ie ntev id en ce in di cat in g t ha t i t i s ap pr op ria te to im po se th e p en al ty. See Hi gb ee v . Co m m is si on er, 1 16 T.C. at 4 46 . Once t he Co m m is si on er m eet s the bu rd enof pr oduc ti on , th e ta xp ay er m us t co m e fo rwardwith p ers ua si ve ev id en ce tha t the Co m m is si on er’s d et erm in at io n i s i nc orrect . Rul e 1 42 (a); see Hig be e v . Co m m is si on er, 1 16 T.C. at 4 46 -4 47 . The t ax pay er m ay m eetth is bu rd enby pr ov in g t ha t h e act edwith re as on ab le cau se an d i n g oo d fa ith. Se e se c. 66 64 (c)( 1) ; s ec. 1 .66 64 -4 (a), In co m e Tax Reg s.-1 9-

Pet it io ne r an d h is sp ou se fai le d t o t ak e is su e in th e p et it io n wi th
res po nd en t’s d et erm in at io n i n t he no ti ce o f de fic ie nc y im po si ng accu racy-rela te d pe na lt ie s u nd er s ect io n 6 66 2( a). Fu rth erm or e, pe ti ti on er d idno t t ak e is su e with th e p en al ti es at t ria l. He m ad e n o m en ti on of t he m . In Fu nkv. Co m m is si on er, 1 23 T.C. 21 3, 2 18 (20 04 ), th e Co urt s ta te d: whe re a p et it io n fa il s t o s ta te a cl ai m inres pe ctof p en al ti es , add it io ns to tax , and/o r ad di ti on al am ou nt s, the Co m m is si on er i nc ur s n o ob li ga ti onto pro du ce ev id en ce i n s up po rt o f su chde te rm in at io ns pu rs ua ntto sec ti on 74 91 (c). See , e.g., Parke r v. C omm is si on er, 1 17 F.3 d 7 85 , 78 7 (5 th Cir . 19 97 ) (the Co m m is si on er h as no ob li ga ti on to in ve st ig at e (o r pr oduc e ev id en ce wi th res pe ctto ) a thi rd -p arty paym en t re po rt t ha t i s n otdi sp ut edby the tax pa y er). Res po nd en t ar gu es th athe ha s n o b ur de n u nd er s ect io n 7 49 1( c) t o p ro du ce ev id en ce tha t the sec ti on 66 62 (a) p en al ti es are ap pr op ria te be cau se pe ti ti on er an d hi s s po us e are de em edto ha ve co nc ed edth e p en al ti es by fail in g t o a ss ig n e rro r to th em inth e p et it io n a ndby fail in g t o ra is e anis su e ab ou t the m at t ria l. See id .; Swai n v . Comm is si on er, 1 18 T.C. 35 8, 3 63 -3 64 (20 02 ). W e n eedno t d eci de th atis su e b ecau se th ere i s m or e th anen ou gh ev id en ce to sh ow tha t ac cu racy-rela te d p en al ti es un de r se ct io n 6 66 2( a) s ho ul d b e im po se d in th is cas e. Fo r ex am

pl e, as di sc us se d abo ve , pet it io ne r an d h is sp ou se fai le d t o ke ep ad equa te bo ok s an d re co rd s an d fa il edto pro pe rly subs ta nt ia te ex pe ns es rel at in g t o the co stof g oo ds so ldan d d educ ti on s cl ai m ed . Thu s, i t i s cl ear, fo r-2 0-

pu rp os es of s ect io n 6 66 2( b) (1 ), th atall of e ach un de rp aym en t i s due to ne gl ig en ce, an d we s o fi nd . Furt he rm or e, al te rn at iv el y , eve n t ho ug h t he ex actam ou nt s o f th e un de rp aym en ts wil l d ep en d upo n R ul e 1 55 co m

pu ta ti on s, t ak in g i nt o a cco un t o ur fin di ng s an d c on cl us io ns he rei n, i t ap pe ars to be th e cas e th at , forpu rp os es of
se ct io n 6 66 2( b) (2 ), th ere i s a s ub st an ti al un de rs ta te m en t o f in co m e ta x fo r bo th 20 09 an d 2 01 0. Notwiths ta nd in g t he ab ov e fi nd in gs , no pe na lt y wil l b e im

po se d u nd er se ct io n 6 66 2( a) wi th res pe ctto an y po rti on of a n u nd erp aym en t i f itis sh ownth at th ere was reas on ab le cau se forsu chpo rti on an d t ha t the tax pa y er ac te d i n g oo d fai th with re sp ectto su chpo rti on . See s ec. 6 66 4( c). Whe th er a t ax pa y er ac te d i n go odfai th de pe nd s upo n t he fact s an d c irc um st an ces of e ach cas e. See s ec. 1.6 66 4- 4( b) (1 ), In co m e Tax Reg s. Pet it io ne r di d n otex pl ic it ly argu e rea so nabl e cau se an d g oo d fa it h. Nev erthe le ss , onoc cas io n dur in g h is tes ti m on y , he m en ti on edth e fac t tha t h e h ad ret ai ne d areturn p rep arerto pre pa re the tax returns . Reli an ce o n apro fes si on al return p rep arerm ay

co ns ti tu te reas on ab le cau se an d g oo d fa it h i f th e ta xp ay er es tabl is he s: (1) th e return p rep arerha d s uf fic ie ntexpe rti se to jus ti fy rel ia nc e; (2) th e ta xp ay er p ro vi de d n eces sa ry an d a ccu rat e in fo rm at io n t o t he return p rep arer ; an d (3 ) th e ta xp ay er ac tu al ly reli edingo odfai th on th e return p rep arer ’s-2 1-

jud gm en t. E.g., Neo na to lo gy Asso cs ., P.A. v. Co m m is si on er, 1 15 T.C. 43 , 99 (2 00 0) , aff’d, 2 99 F.3d22 1 (3 d C ir. 2 00 2)
. Apart f ro m pa ss in g re fere nc es inpe ti ti on er’s t es ti m on y to th e ta x re tu rn pr ep arer , th e rec or d i s d ev oi d o f an y ev id en ce t o s up po rt afin di ng th atan y rel ia nc e b y

pe ti ti on er an d h is sp ou se on a return p rep arerwas re as on ab le an d i n go odfai th . Peti ti on er d idno t ca ll th e ta x re tu rnpre pa rer a s a wi tn es s. Th ere i s n o ev id en ce as to th e ad vi ce the tax return p rep arerm ig htha ve gi ve n; no ev id en ce t o supp ort a d et erm in at io n t ha t p et it io ne r an d h is sp ou se act edreas on ab ly or ingo od fai th inrel y in g upo n i t; no ev id en ce ab ou t the tax return p rep arer ’s qu al ifi cat io ns ; no ev id en ce tha t al l re le vantfact s an d c irc um st an ces were d is cl os edto th e ta x return p rep arer ; an d n o e vi de nc e th atth e ad vi ce was ba se d o n re as on ab le factua l
orleg al ass um

pt io ns . See i d. Mo re fu nd am en ta ll y , pet it io ne r an d h is sp ou se ha ve no t s ho wn re as on ab le cau se forth e fai lu re t o k eep ad equa te reco rd s t o s ub st an ti at e ex pe ns es rel at in g t o t he cla im edde du ct io ns . Accor di ng ly, we ho ldpe ti ti on er an d hi s s po us e li ab le forsec ti on 66 62 (a) p en al ti es forne gl ig en ce an d, al te rn at iv el y , for
subs ta nt ia l u nd ers ta te m en ts of i nc om e ta x i ns of ar as th e Ru le 15 5 c om

pu ta ti on s sh ow an y .-2 2-

On the ba si s o f th e ab ov e co nc es si on s b y th e p art ie s, Deci si on wil l b e en te redun de r Ru le 15 5.