T.C. Mem o. 2 01 5- 20 4

UNITED STAT ES TAX COURT

W SK & SONS, INC., Pet it io ne r v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt W ILLIAM S. KARRAS AND SHANA KARRAS, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No s. 2 73 70 -1 2, 2 74 29 -1 2. Fi le d Oct ob er 1 5, 2 01 5.

J. Dav idHors po ol , forpe ti ti on ers . Je nn y R. Cas ey , Mil es D. Fried m an , Eric M . Hell er, Mi nd y S. Mei gs , and Kim -Kh an h Th i Ng uyen, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Ju dg e: In the se co ns ol id at edcas es , res po nd en t d et erm in ed de fic ie nc ie s an d p en al ti es as f ol lo ws:- 2 -

[* 2] W SK & So ns , Inc ., Dock etNo. 2 73 70 -1 2 Pen al ty

Year Defi ci en cy se c. 66 62 (a) 20 08 $4 8,5 28 $9 ,70 5.6 0 W il li am S. & Sh an a Karra s, Do ck etNo. 2 74 29 -1 2 Pen al ty Year Defi ci en cy se c. 66 62 (a) 20 08 $9 ,99 3 $1 ,99 8.6 0 20 09 5,5 11 1,1 02 .20 Any referen ce t o the tax y ear 2 00 8 fo r W SK & So ns , Inc . (pe ti ti on er), i s t o it s ap pl ic ab le fis cal y ear e nd edFeb ru ary 28 , 20 09 . Unl es s o th erwi se in di cat ed , all
se ct io n re fere nc es are t o t he Int ern al Rev enue Co de (Co de ) ineffe ctforth e y ears in is su e, an d a ll Ru le refe ren ces are t o t he Tax C ou rt Rul es of P ract ic e an d Pro cedur e. Afte r co nc es si on s, the is su es rem ai ni ng forde ci si on are wh ethe r pe ti ti on er is en ti tl edto a $3 9,3 21 de du ct io n fo r adve rti si ng expe ns es for 20 08 ; wh ethe r pe ti ti on er i s en ti tl edto a de du ct io n fo r de pr eci at io n i n e xc es s o f th e am ountth at
res po nd en t al lo wedfor20 08 ; an d wh ethe r pe ti ti on ers are l iabl e fo r se ct io n 66 62 (a) p en al ti es (pe ti ti on er fo r 20 08 an d Wil li am S. Karras an d S ha naKarras (Karra se s) for20 08 an d 2 00 9)
.- 3 -

[* 3] FINDINGS OF FACT So m e o f th e fac ts ha ve be enst ip ul at ed , andth e st ip ul at edfact s ar e in co rp or at edinou r fi nd in gs by thi s re fere nc e. At the ti m e th ei r pe ti ti on s wer e fil ed , th e Karra se s re si de d i n C al ifo rn ia , andpe ti ti on er h adit s p rin ci pa l p la ce o f bu si ne ss inCal ifo rn ia
. Pet it io ne r is a Cal ifo rn iaco rp or at io n tha t co ns tru ct s an d i ns ta ll s g as st at io n fu el de li ve ry

syste m s, an d i ts pri m ary cu st om er i s C os tc o Who le sa le Co rp . (Co st co ). It o pe rat es on a fi sc al tax y ear e nd in g o n F eb ru ary 28 an d u se s the cas h
m etho d o f acc ou nt in g. Fo r th e d is pu te d years, the Karras es were the sh areh ol de rs of pe ti ti on er, wh os e o ffi ce was at t he Karras es ’ ho m e. W il li am S. Karras (W SK)
ranth e d ay -to -d ay

fie ldop erat io ns of p et it io ne r as it s p res id en t. The Karras es ’ two adul t s on s, Ro be rt J . Karras an d Wil li am B. Karras (W BK), al so work edfor pe ti ti on er atth atti m e. W SK en te redin to a ren ta l ag reem en t wi th Est at e Pro pe rti es Int ern at io na l, In c., to ren t a b each fro ntho m e atMo na rch Beac h, Ca li fo rn ia , fro m Decem be r 26 , 20 08 , th ro ug h J anua ry

2, 2 00 9. Th e ren t was $2 2,9 50 , whi chin cl ud eda $5 ,00 0 fu ll y refu nd ab le sec ur ity

de po si t. Gu es t n am es were wri tt enas “ W il li am & Sh an a Karra s Fa m il y ”, an d t he ag reem en t i nd ic at edth atth ere wo ul d b e 1 0 a du lt s.

“ W il li am & Sh an a Karra s/ W .S.K. & Son s In c.” was writ te n i n t he “ Ten an t Pr in t- 4 -

[* 4] Nam e(s )” fi el d b en eath the Karras es ’ si gn atur es . W SK pr ov id edhi s p ers on al cred itcardin fo rm at io n fo r th e reque st edcred itcardauth or iz at io n i n the ag reem en t. W BK pa rti ci pa te d i n t he week lo ng ren ta l atth e b each fro ntho m e. His fia nc e, so m e o f he r fam il y , anda few o f hi s fr ie nd s wer e al so at t he ren ta l h om e du rin g t he week . On Ja nu ary 3, 2 00 9, the da y aft er the ren ta l en de d, h e an d h is fia nc e were m arri ed
. Pet it io ne rs ’ ta x re tu rn s fo r th e y ears inis su e were p rep aredby H or sp oo l & Co ., Inc . The Karr as es ti m el y fil edth ei r joi ntFo rm s 1 04 0, U.S. In di vi du al Inc om e Tax Return, fo r 20 08 an d 2 00 9, an d p et it io ne r ti m el y fil edFo rm

11 20 , U.S. Co rp or at io n In co m e Tax Return, fo r it s t ax y ear e nd edFeb ru ary 28 , 20 09 . On it s return, p et it io ne r cl ai m eda de du ct io n o f $3 9,3 21 foradve rti si ng . The ad ve rti si ng de du ct io n i nc lu de d p aym en ts th atpe ti ti on er m ad e fo r, in te r al ia , exp en se s re la te d to WBK’s wed di ng an d p ur ch as es at B as s Pr o S ho ps . Pet it io ne r’s return a ls o re po rte d acla im edde pr eci at io n d educ ti on of $7 6,0 06 . List edpro pe rty relat edto th is de du ct io n i nc lu de d a20 03 GMC Si erra tru ckan d a20 05 Humm er v eh ic le , th e ti tl e o wne r of bo th be in g S ha naKarras , and a 2 00 8 GM C Si erratru ck(20 08 tru ck ), th e ti tl e o wne r be in g WSK (co ll ect iv el y , th ree v eh ic le s) . On anatt ach edFo rm 45 62 , Depr eci at io n a ndAm orti zat io n,- 5 -

[* 5] pe ti ti on er m ad e a s ect io n 1 79 ele ct io n t o fu ll y de du ctth e cl ai m ed$5 4,5 59 acqui si ti on co stof t he 20 08 tru ckfor20 08
. The Int ern al Rev enue Serv ic e (IR S) s el ect edpe ti ti on er’s 2 00 8 t ax return an d t he Karras es ’ 20 08 an d 2 00 9 t ax returns for ex am in at io n. WhenanIRS ag en t
wen t t o p et it io ne rs ’ res id en ce/pl ace o f bu si ne ss to co nduc t the au di t, the th ree ve hi cl es were n otth ere. Du rin g t he au di t, p et it io ne r pr ov id eda do cu m en t t it le d

“ 20 08 Fed eral Su m

m ary Dep reci at io n S ch edul e” (d ep reci at io n s ch edul e) tha t sh owe d, i n p art , th e fo ll owi ng : P r i o r C u r 1 7 9 / D a t e D a t e C o s t / B u s . 1 7 9 / S D A / C u r r e n t N o . D e s c r i p t i o n A c q u i r e d S o l d B a s i s P c t S D A D e p r . M e t h o d L i f e D e p r . F o r m 1 1 2 0 A u t o / T r a n s p o r t E q u i p m e n t 1 T r u c k
- S i e r r a 3 / 0 1 / 0 4 ( ) ( ) ( ) ( ) ) B H Y 5 3 , 4 6 3 1 1 1 1 2 T r u c k
- G M C 1 1 / 3 0 / 0 4 ( ) ( ) ( ) ( ) ) B H Y 5 3 , 8 5 0 1 1 1 1 1 2 ‘ 0 8 G M C S i e r r a 6 / 3 0 / 0 8 ( ) ( ) ( ) ( ) ) B H Y 5 0 1 1 1 1

• T o t a l A u t o / T r a n s p o r t E q u i p m e n t 7 , 3 1 3 I f e n t r i e s w e r e e n t e r e d i n t h e s e f i e l d s , t h e y w e r e o b s c u r e d ( a s p a r t i a l l y w a s t h e “ M e t h o d ” f i e l d ) b y a n o t e t h a t 1 r e a d “ M i s s i n g I n v o i c e s f o r E q u i p + F u r n i t u r e P u r c h a s e s 6 1 8 7 2 7 6 0 0 6 ” )
. Pet it io ne r al so pro vi de d a n e xc erp t fr om it s g en eral led ge r ti tl ed“ Que ryYT-D Deta il ” wit h t he he ad er “ Adv ert is in g & Pro m ot io n” (adve rti si ng de ta il sh eet ) fo r th e p eri oden de d F eb ru ary 28 , 20 09 . Sho win g aba lanc e o f $3 9,3 21 .41 , th e adve rti si ng de ta il sh eetli st ed17 ex pe ns es , in cl ud in g a$5 ,93 0.8 8 i te m for“ AMEX- 6 -

[* 6] CHARGES STMT 7 /2 4” on Ju ly 24, 2 00 8, a $ 22 ,95 0 i te m for

“ PRUDENTIAL PROP RENTAL” onNov em be r 28 , 20 08 , anda $9 76 .41 it em for

“ DC-BASS PRO SHOPS” on Decem be r 26 , 20 08 . Peti ti on er al so pro vi de d a $9 76 .41 rece ip t fr om

Bas s Pr o S ho ps da te d Dec em be r 24 , 20 08
. As a re su ltof the ex am in at io n, the IRS d is al lo wed$6 1,8 72 of p et it io ne r’s de pr eci at io n e xp en se de du ct io n (t he am ou ntatt rib ut ab le to th e th ree v eh ic le s) . It al so di sa ll owe d p et it io ne r’s en ti re ad ve rti si ng ex pe ns e d educ ti on . At tria l p et it io ne rs pre se nt eda ret ai l i ns ta ll m en t co nt ractbe twee n WSK and Hatf ie ldBu ic k GM C th atsh owe d ato ta l s al e p ric e o f $5 7,0 83 .27 forth e 2 00 8 tru ck . They al so pro du ceda si ng le pa ge of o ne of p et it io ne r’s W el ls Farg o B an k st at em en ts th atsh owe d a n Au gu st25 , 20 08 , deb itm ad e b y Sh an a Karra s fo r a

“ GMAC” p aym en t o f $9 48 .99
. OPINION Pers on al , li vi ng , andfam il y ex pe ns es are g en eral ly notde du ct ib le . Sec. 26 2. Onth e o th er h an d, s ect io n 1 62 all ows as ade du ct io n “ al l the ord in ary an d
ne ces sa ry ex pe ns es pa idor i nc urreddu rin g t he tax ab le y ear i n c arrying on an y tra de or b us in es s” . For a n e xp en di tu re t o b e anord in ary an d n eces sa ry bu si ne ss ex pe ns e, ge ne ral ly the tax pa y er m us t s ho w a bo nafid e b us in es s p ur po se forth e ex pe nd itur e, an d t he re m

us t b e a p ro xi m at e rel at io ns hi p b etweenth e expe nd itur e- 7 -

[* 7] an d t he bu si ne ss of t he tax pa y er. See Ch al le ng e Mfg . Co. v . Comm is si on er, 37 T.C. 65 0, 6 60 -6 61 (19 62 ); s ee al so sec . 1.1 62 -1 (a), In co m e Tax Reg s. Tax pa y ers are re qu ire d t o m ai nt ai n s uf fic ie ntreco rd s t o e st ab li sh th e am ountan d p ur

po se of any deduc ti on . Sec. 6 00 1; Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 40 (20 01 ); s ec. 1 .60 01 -1 (a), (e ), In co m e Tax Reg s.; see als o Lysen g v . Co m m is si on er, T.C. Mem o. 2 01 1- 22 6, s li p o p. at8 (“ Inge ne ral , tax pa y ers m us t
subs tant ia te cla im edde du ct io ns with e vi de nc e su chas i nv oi ces or r ecei pt s tha t
es tabl is h t ha t the ex pe ns es were ac tu al ly inc urred [.]”). They als o h av e th e b ur de n of pro vi ng th ei r en ti tl em en t t o d educ ti on s cl ai m ed . Rul e 1 42 (a); see New Co lo ni al Ice C o. v . Helv eri ng , 29 2 U.S. 4 35 , 44 0 (1 93 4) ; Ro ckwell v. Co m m is si on er, 5 12 F.2 d 8 82 , 88 6 (9 th Cir . 19 75 ), aff’g T.C. Me m o. 1 97 2- 13 3. Th e b ur de n m ay sh ift to res po nd en t u nd er s ect io n 7 49 1( a)(1 ) an d (2 ), bu t p et it io ne rs di d n otsat is fy
co nd it io ns forth atsh ift , parti cu larly the subs tant ia ti on requi rem en ts an d
m ai nt en an ce o f al l re qu ire d re co rd s. Th e b ur de n o f pr oo f th eref or e rem ai ns with pe ti ti on ers . Adv ert is in g Ex pe ns e Deduc ti on Altho ug h p et it io ne r co nt es ts th e d is al lo wan ce o f th e en ti re ad ve rti si ng ex pe ns e d educ ti on of $ 39 ,32 1.4 1, i t ad dr es se s o nl y two pa rti cu lar it em s: (1) th e $2 2,9 50 ex pe ns e fo r a “ co rp or at e ret reat ” al le ge dl y he ldat t he be ach fro ntren ta l- 8 -

[* 8] pr op erty

an d (2 ) th e $ 5,9 30 ex pe ns e fo r a Wash in gt on Sta te fis hi ng tri p wh ere th e Karra se s al le ge dl y

ho st edCo st co ex ecu ti ve s. Pet it io ne r arg ue s tha t the retreat
se rv eda le gi ti m at e b us in es s p ur po se by enh an ci ng em

pl oyer-em

pl oyee rel at io ns hi ps for

futur e p ro du ct iv ity

an d p res erv in g a ndex pa nd in g p et it io ne r’s cl ie ntrel at io ns hi p wi th Co st co . Like wis e, itass ert s tha t the co stof t he fis hi ng tri p was “ ap pr op ria te an d h el pf ul ” fo r th e d ev el op m en t o f it s b us in es s an d i ts
co nt in ui ng rel at io ns hi p wi th Co st co , cit in g C omm is si on er v . Tell ie r, 38 3 U.S. 6 87 , 68 9 (1 96 6)
. Pet it io ne r pr ov id edli tt le do cu m en ta ti on of t he se ex pe ns es --p rimaril y a se lfge ne rat edadve rti si ng de ta il sh eetwith n o d et ai l ab ou t the se two it em s (a ndrefe rs to th e co rp or at e ret reatan d fi sh in g t rip as “ PRUDENTIAL PROP RENTAL” and

“ AMEX CHARGES STMT 7 /2 4” , res pe ct iv el y ). The o nl y st ip ul at edrece ip t i n t he
reco rdis a Decem

be r 24 , 20 08 , Bas s Pr o S ho ps rece ip t fo r $9 76 .41 , anditdo es no t s eem to be rel at edto th e fi sh in g t rip inis su e, th e al le ge d c os t o f whi chwou ld ha ve be enin cu rredbe fo re J ul y 24 , 20 08 . No ex pl an at io n was gi ve n a s t o h ow thi s rece ip t re la te d t o p et it io ne r’s bu si ne ss . The ren ta l ag reem en t b etweenW SK an d Es ta te Pro pe rti es Int ern at io na l, In c., pr es um ab ly neg ot ia te d b y Pru de nt ia l Ca li fo rn iaReal ty, is als o i n e vi de nc e. Whi le th e ag reem en t s ho ws a t ot al ren t o f $2 2,9 50 ($5 ,00 0 o f whi chwas a- 9 -

[* 9] refu nd ab le de po si t) anda cred itcardau th or iz at io n, i t d oe s n otest ab li sh th at th is ex pe ns e was actua ll y pa id
. Inaneffo rt t o b ol st er thi s i ns uf fic ie ntdo cu m en ta ti on , pet it io ne r rel ie s he av il y up on WBK’s tes ti m on y . WBK te st ifi edth athe is a te ch ni ci an , eng in eer, an d “ al m os t a jo b s up eri nt en de nt ” o f pe ti ti on er, fo r whi chhe co un se ls , pro gr am s, co ns tru ct s, an d d oe s el ectric al work . He als o s ta te d tha t h e was no t i nv ol ve d i n pe ti ti on er’s b an ki ng or a cco un ti ng . Neverth el es s, i n re fere nc e to th e Ju ly 24 e nt ry of $5 ,93 0 o n t he adve rti si ng de ta il sh eet , WBK at te st edth athi s p aren ts fle w to W as hi ng to n t o m eetCo st co ’s di rect or of o pe rat io ns forga so li ne an d t ha t the y ho st eda fi sh in g t rip forCo st co ex ecu ti ve s. W BK di d n otst at e whe th er h e wit ne ss edth ird -p arty reco rd s, s ta te m en ts , or rece ip ts ve rif

y in g t ha t thi s ex pe ns e was pa idor wh y su chdo cu m en ts co ul d n otbe pr oduc ed . The rec or d d oe s n otrefl ecthi s h av in g a tt en de d t he fis hi ng tri p, thu s h e ha s n o fi rs th an d kno wled ge as t o wh ethe r itactua ll y to okpl ace, wh o a tt en de d i t,
orho w m uc h b us in es s- rel at edex pe ns e was in cu rred . See Ch ag ra v . Co m m is si on er, T.C. Mem o. 1 99 1- 36 6, 6 2 T.C.M . (CCH) 3 47 , 36 7 (1 99 1) (d et erm in in g t es ti m on y

to be va gu e an d l ack in g p ro ba ti ve va lu e whe re, i n p art , th e witne ss di d n otpe rs on al ly obs erv e m uc h o f th e ev en ts ab ou t wh ic h h e te st ifi ed bu t, i ns te ad , rel ie d o n s eco nd ha ndso ur ces ), aff’d wi th ou t p ub li sh edop in io n, 9 90- 10 -

[* 10 ] F.2 d 1 25 0 (2 d C ir. 1 99 3) . The Karr as es , who actua ll y to okth e fi sh in g t rip , di d n otap pe ar attri al an d d idno t t es ti fy . Peti ti on er h as no t p ro pe rly subs tant ia te d th is ex pe ns e. W BK di d, h owe ve r, at te ndth e ev en t h el d a t the be ach fro ntren ta l h om e. He te st ifi edth ata la rg e b each ho us e was ren te d t o h ol d p et it io ne r’s week lo ng co m pa ny m eet in g fo ll owe d b y en te rta in m en t an d t ha t “

jus t the ve nd or s an d t he
subc on tra ct or s * * * [were] in vi te d, al on g wi th ou r em pl oyees.” He th entes ti fie d th athi s fi an ce, s om e o f he r fam il y , anda few o f hi s fr ie nd s s ho wedup at t he ren ta l ho m e b ecau se “ we en de d up s po ns or in g a --h os ti ng a fi sh in g t rip sh ortl y aft er as well .” Whi le un su re o f th e num be r of em pl oyees i n a tt en da nc e (s om ewh ere be twee n 5 an d 1 0) , he s ta te d tha t m or e th an30 pe op le att en de d t he m eet in g. W BK al so affi rm edth athi s wed di ng was o n J anua ry 3, 2 00 9, the day

aft er th e m eet in g e nd ed . Peti ti on ers ha d s ti pu la te d t ha t the adve rti si ng de du ct io n in cl ud edpa ym en ts th atpe ti ti on er m ad e fo r th e p ers on al expe ns es of t hi s wed di ng . W BK di d n otcla rif

y whatpa rt o f th e ren t ex pe ns e o r th e o ve ral l ad ve rti si ng ex pe ns e was no t re la te d t o h is no nd educ ti bl e wed di ng expe ns es . He di d n ot di sc lo se whet he r th e $ 5,0 00 sec ur ity de po si t h adbe enrefu nd ed . He di d n ot
ex pl ai n a ny oth er i te m

onth e adve rti si ng de ta il sh eet .- 11 -

[* 11 ] Ove ral l, WBK’ s t es ti m on y ab ou t the adve rti si ng ex pe ns e was va gu e, un co rro bo rat ed , andledby pet it io ne rs ’ co un se l. We are no t re qu ire d t o a ccep t h is te st im on y an d d o n otdo so . See To ka rs ki v. Co m m is si on er, 8 7 T.C. 7 4, 7 7 (1 98 6) ; Be nn et t v . Commis si on er, T.C. Mem o. 1 99 7- 14 5, s li p o p. at22 -2 3, af f’d witho utpubl is he d o pi ni on , 14 1 F .3d11 49 (1s t Ci r. 19 98 ). W e h ol d t ha t p et it io ne r di d n otpro pe rly subs tant ia te an y of i ts adve rti si ng ex pe ns es an d thu s i s n ot
en ti tl edto an y

de du ct io n. Dep reci at io n Ex pe ns e Deduc ti on Rel y in g o n t he “be ne fit s an d b ur de ns of o wne rs hi p” tes t, p et it io ne r ne xt arg ue s i ts en ti tl em en t t o t he cla im edde pr eci at io n a ndsec ti on17 9 e xp en si ng de du ct io ns . See g en eral ly Gro dt& McKa y Real ty, In c. v. Co m

m is si on er, 7 7 T.C. 12 21 , 12 37 -1 23 8 (1 98 1) (us in g m ul ti pl e fac to rs fro m

cas el aw as gu id ep os ts to de te rm in e o wne rs hi p o f pr op erty ). It co nt en ds th atth es e d educ ti on s ar e b as ed up on it s i nv es tm en t i n andactua l o wne rs hi p o f th e th ree v eh ic le s ra th er than t he po ss es si on of b are l eg al ti tl es . A reas on ab le de pr eci at io n d educ ti on m ay be all owe d fo r th e “ ex haus ti on , wear an d t ear” of p ro pe rty us edina tr ad e o r bu si ne ss . Secs . 16 1, 1 67 (a)( 1) . To
subs tant ia te en ti tl em en t t o ade pr eci at io n d educ ti on , a tax pa y er n oton ly has to sh ow tha t the pro pe rty was u se d i n abu si ne ss bu t al so m us t es tabl is h t he- 12 -

[* 12 ] pro pe rty’ s d ep reci ab le ba si s b y sh owi ng th e co stof the pro pe rty, its us efu l li fe o r rec ov ery pe rio d, an d i ts pre vi ou sl y all owabl e d ep reci at io n. Se e, e.g ., Clu ck v. Co m m is si on er, 1 05 T.C. 32 4, 3 37 (19 95 ). If a t ax pa y er h as no cap it al in ve st m en t i n p ro pe rty, she or h e h as no rig htto de pr eci at io n d educ ti on s wi th
res pe ctto th e cap it al ass et . Mil le r v. C omm is si on er, 6 8 T.C. 7 67 , 77 5 (1 97 7)
. Alt ern at iv el y , a tax pa y er m ay ele ctto tre atth e co stof c ert ai n p ro pe rty us ed in anact iv e tr ad e o r bu si ne ss as acurren t ex pe ns e in th e y ear t ha t p ro pe rty is pl acedinservi ce. Sec . 17 9( a), (d ). If th e p ro pe rty is u se d fo r bo th bu si ne ss an d ot he r pu rp os es , th enth e p orti on of t he co stth atis attrib ut ab le to th e b us in es s u se is eli gi bl e fo r ex pe ns in g u nd er s ect io n 1 79 bu t o nl y if m or e th an50 % of the us e is fo r bu si ne ss pu rp os es (pr ed om in an t u se requi rem en t). Se e se c. 1.1 79 -1 (d ), In co m e Tax Reg s. Eithe r way , add it io na l re qu ire m en ts of h ei gh te ne d s ub st an ti at io n m us t al so be m etforpro vi ng th e b us in es s u se of c ert ai n a ss et s, i nc lu di ng “ li st edpro pe rty”. See s ec. 2 74 (d ); s ee, e.g ., Mears v. Co m m is si on er, T.C. Mem o. 2 01 3- 52 , at * 22 (co ns id eri ng sec ti on 27 4( d) requi rem en ts with re sp ectto ap pl ic ab le sec ti on 16 7 de du ct io ns ); S in gh v. Co m mis si on er, T.C. Mem o. 2 00 9- 36 , sl ip op . at 4 (co ns id eri ng sec ti on 27 4( d) requi rem en ts with re sp ectto anap pl ic ab le sec ti on 17 9 de du ct io n) . Pass en ge r au to m ob il es an d a ny oth er p ro pe rty us edas am ean s o f- 13 -

[* 13 ] tra ns po rta ti onare l is te d p ro pe rty. Sec. 28 0F (d )(4 )(A)(i ) an d (i i). To cla im
ex pe ns es rel at edto li st edpro pe rty, tax pa y ers m us t co rro bo rat e th ei r own st at em en ts with a dd it io na l s ub st an ti at io n t ha t ad equa te ly establ is he s the am ou nt , ti m e, pl ace, andbu si ne ss pu rp os e o f th es e expe nd itur es . Sec. 2 74 (d )(4 ) an d fl us h lang ua ge ; s ee al so sec . 1.2 74 -5 T(b) (6 ), (c)( 1) an d (2 ), Tem po rary Inco m e Tax Reg s., 5 0 F ed . Reg . 46 01 6- 46 01 7 (No v. 6 , 19 85 ). Pet it io ne r ag ai n re li es pre do m in an tl y on WBK’s tes ti m on y

to subs tant ia te th es e d educ ti on s. WBK att es te d t ha t the 20 08 tru ckis curren tl y us edex cl us iv el y by him to pu ll a job tra il er fo r pe ti ti on er’s b us in es s. Whenqu es ti on edab ou t h ow m an y othe r ve hi cl es pe ti ti on er o wns , he a ns wered : “ I be li ev e o ne m or e. I’m no t to o c le ar o n h ow m an y

th ey actua ll y own . W e o nl y

us e th e o ne tru ckforhaul in g th e tr ai le r, whi chI’m

res po ns ib le for .” Whe n a sk ed , m or e sp eci fic al ly, wha t
ve hi cl es pe ti ti on er o wne d i n a dd it io n t o t he 20 08 tru ckin20 08 , he a ns wered :

“ W SK-wis e, I’m

no t v ery su re o n wh atot he r ve hi cl es th ey m ig htha ve us edforth e co m pa ny.” Whe n a sk edwhet he r he reca ll edif h is fathe r ha d aworktru ckin20 08 th atwas u se d i n p et it io ne r’s bu si ne ss , WBK st at edth athe di d n otreca ll . He als o st at edth atpe ti ti on er m ad e al l p aym en ts on th e 2 00 8 tru ck
. Thi s t es ti m on y

do es no t s ho w th atpe ti ti on er h adcap it al in ve st m en ts inth e 20 03 GMC Si erratru ckan d t he 20 05 Humm er o r th atth ey were u se d i n i ts- 14 -

[* 14 ] bu si ne ss . Evenwith t he do cu m en ts pe ti ti on er p ro du cedat t ria l, i t re m ai ns un cl ear wh o o wne d t he 20 08 tru ckor wh enitwas p la cedinservi ce. Reg ard le ss of cap it al in ve st m en t o r own ers hi p, p et it io ne r fai le d t o p ro ve en ti tl em en t t o t he de pr eci at io n e xp en se de du ct io n. Neit he r W BK’s tes ti m on y no r pe ti ti on er’s s el f-g en erat edde pr eci at io n sc he du le est ab li sh es any

co stba se s o r pr ev io us ly allo wab le de pr eci at io n o f th e ol de r two ve hi cl es . (The d ep reci at io n s ch edul e actua ll y off ers les s i nf

orm at io n th anpe ti ti on er’s Fo rm

45 62 .) Add it io na ll y , hi s t es ti m on y di d n otad dr es s wh ethe r th e 2 00 8 t ru ckm etth e p red om in an t u se requi rem en t i n 2 00 8. Hi s u nc orro bo rat ed te st im on y as t o p et it io ne r’s de pr eci ab le pro pe rty for the y ear i n i ss ue is in su ffi ci en t to carry pe ti ti on er’s b ur de n o f pr oo f. Mo reo ve r, pe ti ti on er fa il edto in tro du ce re co rd s, m il eag e lo gs , recei pt s, o r ot he r cre di bl e ev id en ce tha t wo ul d s at is fy th e h ei gh te ne d re qu ire m en ts of s ect io n 27 4( d) foran y

of t he th ree v eh ic le s. Nei th er t ax pa y ers no r th e Co urt m ay est im at e pe rm is si bl e d educ ti on s fo r expe ns es th atdo no t s at is fy th e st ric t s ub st an ti at io n requi rem en ts of s ect io n 2 74 (d ). See Sa nf or d v . Comm is si on er, 5 0 T.C. 8 23 , 82 7- 82 8 (1 96 8) , aff’d, 4 12 F.2d20 1 (2 d C ir. 1 96 9) . Accor di ng ly, we su st ai n res po nd en t’s d et erm in at io n t ha t p et it io ne r is no t en ti tl edto a de pr eci at io n e xp en se de du ct io n o r a s ect io n 1 79 de du ct io n b ey on d wh atha s al read y be enall owe d.- 15 -

[* 15 ] Sect io n 6 66 2( a) Pe na lt ie s Res po nd en t d et erm in edsec ti on 66 62 (a) p en al ti es forpe ti ti on er’s 2 00 8 t ax y ear a ndth e Karra se s’ 20 08 an d 2 00 9 t ax y ears . Sect io n 6 66 2( a) an d (b )(1 ) an d (2 ) im po se s a 2 0% a ccu racy-rela te d p en al ty on any un de rp aym en t o f Fed eral in co m e ta x a ttrib ut ab le to a ta xp ay er’s n eg li ge nc e o r di sr eg ardof rul es or reg ul at io ns , or asubs tant ia l u nd ers ta te m en t o f in co m e ta x. Se ct io n 6 66 2( c) de fin es ne gl ig en ce as in cl ud in g a ny fail ur e to m ak e a rea so nabl e at te m ptto
co m pl y with t he pro vi si on s o f th e Co de an d d efi ne s d is reg ardas any carel es s, reck le ss , or i nt en ti on al di sr eg ard . See s ec. 1 .66 62 -3 (b )(1 ) an d (2 ), In co m e Tax Reg s. Dis reg ardof rul es or r eg ul at io ns is care le ss if the tax pa y er d oe s n ot
ex erci se reas on ab le di li ge nc e to de te rm in e th e co rrec tn es s o f a return p os it io n t ha t is co nt rary to the rul e o r reg ul at io n. Id . subp ara. (2 ). Fora C co rp or at io n, an un de rs ta te m en t o f in co m e ta x i s s ub st an ti al if i t ex ceed s the les se r of 10 % of t he ta x re qu ire d t o b e sh own on th e return (o r, if g reat er, $ 10 ,00 0) or $ 10 m il li on . Sec. 6 66 2( d) (1 )(B)
. Und er s ect io n 7 49 1( c), the Co m m is 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 fo r pe na lt ie s an d m us t co m e fo rward with s uf fic ie ntev id en ce i nd ic at in g t ha t i t i s ap pr op ria te to im po se pe na lt ie s. Hig be e v . Comm is si on er, 1 16 T.C. at 4 46 -4 47 ; s ee al so NT, Inc. v . Comm is si on er,- 16 -

[* 16 ] 12 6 T.C. 1 91 , 19 5 (2 00 6) (no ti ng th atsec ti on 74 91 (c) app li es on ly to the li ab il ity of an i nd iv idua l fo r a p en al ty andth us do es no t ap pl y to a co rp or at e ta xp ay er). On ce the Co m m is si on er h as m etth e b ur de n o f 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 pe na lty is in ap pr op ria te --fo r ex am pl e, by sho win g t ha t h e o r sh e act edwith re as on ab le cau se an d i n g oo d fa ith. Sec. 6 66 4( c)(1 ); Hi gb ee v . Comm is si on er, 1 16 T.C. at 4 48 -4 49 . Res po nd en t
as se rts th atth e Karra se s ar e li ab le forth e p en al ti es be cau se of t he ir n eg li ge nc e. Co nt rary to the ir t ax returns , th e Karra se s s ti pu la te d t ha t the y rece iv edun rep orte d in co m e in20 08 an d 2 00 9 a ndth atth ey were n oten ti tl edto cert ai n re nt al ex pe ns e de du ct io ns cla im edforth os e y ears . The s ti pu la te d o m is si on of i nc om e an d
un warrant edde du ct io ns by the Karras es sat is fy res po nd en t’s b ur de n o f sh owi ng th atsec ti on 66 62 (a) p en al ti es are ap pr op ria te . Peti ti on ers are thu s re qu ire d t o sh ow tha t the pe na lt ie s s ho ul d n otbe im po se d. At tria l p et it io ne rs cal le d a s a wi tn es s B ro okHors po ol of Ho rs po ol & Co ., In c., th e co m

pa ny tha t p rep aredth ei r returns forth e y ears inis su e. He was a sk ed in ap pr op ria te qu es ti on s ca ll in g fo r hi s o pi ni on th atth e returns were co rrec t. Eve n aft er the Co urt i ns tru ct edth atitdi d n otne edth e wit ne ss ’ op in io n o f th e co rrec tn es s o f th e ta x re tu rn s b ut , in st ead , want edto kn ow wh athapp en edwith reg ardto th e p rep ari ng of t he returns , Bro okHors po ol st il l d idno t t es ti fy ab ou t h is- 17 -

[* 17 ] qu al ifi cat io ns as atax pro fes si on al , whatin fo rm at io n was pro vi de d t o h im to pr ep are t he returns , who pro vi de d t ha t i nf orm at io n, wh atadvi ce, i f any , he g av e to pe ti ti on ers , or h is ba si s fo r su chadvi ce. (He d idno t ev entes ti fy th athe pre pa red pe ti ti on ers ’ returns forth e y ears inis su e.) Whi le th e wit ne ss m ay

ha ve be encal le d t o s ug ge stth atpe ti ti on ers reas on ab ly reli edon a ta x p ro fes si on al , th atarg um en t was ne ve r m ad e. See ge ne ral ly sec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s. (p ro vi di ng th atth e d et erm in at io n as to whet he r a t ax pa y er ac te d wi th reas on ab le cau se an d g oo d fa ith d ep en ds up on al l the pe rti ne ntfact s an d c irc um st an ces ). Even if the arg um en t h adbe en pr es en te d, the Karras es di d n ottes ti fy ; thu s, the re i s n o e vi de nc e th atpe ti ti on ers rel ie d o n a nyon e wit h re gardto th ei r returns . In an y ev en t p et it io ne rs fai le d t o sh ow an y gro un d fo r rel ie f fro m

th e p en al ti es forth e y ears inis su e. W e h av e co ns id eredot he r arg um en ts of t he pa rti es , bu t the y are i rrel ev an t,
un supp orte d b y

th e rec or d o r by autho rity , or o th erwi se witho utm eri t. To re fle ctth e fo reg oi ng an d t o g iv e eff ectto th e p art ie s’ con ces si on s, Deci si on s wi ll be en te red
un de r Ru le 15 5.