T.C. M em o . 2 0 2 1 -5 2

UNITED STATES TAX COURT

ANDREW

M ITCHELL BERRY AND SARA ALEXINE BERRY, Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t ANDREW M ITCHELL BERRY AND SARA BERRY, Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo s . 6 5 8 4 -1 9 , 1 1 1 80 -1 9
. Fi l edM ay 5 , 2 0 2 1
.

An drew M i t ch el l Berryan dSara Al ex in e Berry , p ro s es e. Kri s H. Anan d Jo an n e H. Ki m , fo r res p o n d en t .

M EM ORANDUM FINDINGS OF FACT AND OPINION KERRIGAN, J u dg e: Inth es e co n s o l i d at edcas es , res p o n d en ti s s u edn o t i ces
o f d efi ci en cy fo r 2 0 1 4 an d2 0 1 5 (y ears i n i s s u e). Fo r 2 0 1 4 res po n d en td et erm i n ed a d efi ci en cy

o f $ 6 8 ,5 69 , a $ 1 3,7 1 4 s ect i o n 6 6 6 2 (a) accu racy -rel at edp en al ty , an da

Served 05/05/21- 2
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[* 2 ] $ 1 6 ,1 44 ad d it i o n t o t ax p u rs u an tt o s ect i o n 6 6 5 1(a)(1 ). Fo r 2 0 15 res p o n d en t d et erm i n eda d efi ci en cy

o f $ 6 5 ,5 8 8 an d a $ 1 3 ,1 18 s ect i o n 6 6 62 (a)
accu racy -rel at edp en al ty . Un l es s o th erwi s e i n d i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev en u e Co d e i n effect fo r t h e y ears i n i s s u e, an d al l Ru l e referen ces are t o the Tax Co urtRu l es o f Pract i ce an dPro cedure. W e ro un dal l m o n et ary
am ou n t s t o th e n eares t d o l l ar. Aft er t h e p art i es ’ co n ces s i o n s , th e i s su es fo r co n s id erat i o n are: (1 ) wh et h er $ 8 ,7 0 0 an d$ 1 ,2 00 fo r 2 0 14 an d2 0 1 5 , res pect i v el y , s h o u l db e rech aract eri zedas p et i t i o n ers ’ o ther i n co m e an dn o tg ro s s recei p ts o f Ph o en i x Co n s tru ct i o n an d Rem o d el i n g , In c. (Ph o en i x ), (2 ) wh et h er Ph o en ix i s en t i t l edt o d edu ctcar raci n g
ex p en s es fo r 2 0 1 4 an d2 0 1 5 , (3 ) wh et h er Ph o en i x i s en t i t l ed t o a d edu ct i o n p u rs u an t t o s ect io n 1 79 fo r an ex cav at o r an da u ti l it y trai ler fo r 2 0 1 4 , (4 ) wh et h er Ph o en i x h as co s t o f g o od s s o l do f $ 3 3 ,2 9 4 fo r b u i l d i n g p erm i t s fo r 2 01 4 , (5 ) wh et h er p et i t i o n ers are en t i t l edt o d edu ctd ep reci at i o n o f $ 8 ,0 00 rep o rt edo n Sch edu l e C, Pro fi to r Lo s s Fro m Bu s i nes s , fo r 2 0 15 , (6 ) wh et h er p et i t i on ers are l i ab l e fo r an ad d i t io n t o t ax p u rs u an tt o s ect i o n 6 6 5 1 (a)(1 ) fo r 2 0 1 4 , an d (7 ) wh et h er p et i t i o n ers are l i ab l e fo r t h e accu racy -rel at edp en al ty p urs u an t t o
s ect i on 6 6 6 2 (a) fo r 2 01 4
.- 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 . Pet i ti o n ers res i d edi n Cal i fo rn i a wh en th ey fi l edth ei r p et i t i o n . Du ri n g th e y ears i n i ss u e An drew Berry (p et i t i o n er h u s ban d ) wo rk edas a real to r an drep o rt edh is i n co m e o n Sch edu les C. He al s o p art i ci p at ed i n car raci n g du ri n g th e y ears i n i s s u e. In 2 0 1 4 an d2 0 15 h e earn ed $ 8 ,7 0 0 an d$ 1 ,2 0 0 , res p ect i vel y , fro m

wi n n i n g drag raci n g t o u rn am en t s . He as s i g n edthes e wi n n i n g s t o Ph oen i x . Fo r t he y ears i n i s s u e Ph o en ix p ai d ex pen s es rel at edt o p et i t i o ner h u s b an d ’ s race car d ri v i n g. Fo r t h e y ears i n i s su e Ph o en i x was an S co rp o rat i o n o wn edequ al l y b y p et i t i o n er h u s b an dan dh i s fat h er Ro n al d Berry(M r. Berry ). Ph o en i x was i n v o l v ed i n co n s tru ct i o n p ro j ect s i n San Lu i s Ob i s p o , Cal i fo rn ia. Pet i t i o n ers cl ai m ed5 0 % o f Ph oen i x ’ s fl o wth ro u g h p ro fi t s an dl o s s es o n Sch edu l es E, Sup p l em en t al In co m e an dLo s s, fo r 2 0 14 an d2 0 15
. Ph o en i x h adfo u r b an kacco u n ts an dp et it i on ers h adth ree du ri ng th e y ears i n i ss u e. Ph o en i x u s edQu i ck Bo o k s s o ft ware t o k eep tracko f i t s reco rd s . OnJ u ne 1 3 , 2 01 6 , Ph o en i x fi l edi ts 2 0 14 Fo rm 1 12 0 S, U.S. In co m e Tax Retu rn fo r an S Co rp o rat i o n, rep o rt i n g g ro s s i n co m e o f $ 1 ,6 6 4,3 6 4 an dco s to f g o o d s s o l do f $ 1 ,3 2 9 ,5 7 5 , i n cl u d i ng $ 1 5 0,4 1 4 fo r b u i l d i n g p erm i t s . Ph o en i x- 4
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[* 4 ] cl ai m eda s ect i o n 1 7 9 d edu ct i o n t o t al i n g $ 1 3 5 ,2 9 7 fo r 1 1 i t em s , i n cl u di n g an
ex cav at o r an da u t i l i ty

trai l er. OnM ay 2 4 , 2 0 1 6 , p et i t i o n ers fi l edthei r 2 0 1 4 Fo rm 1 0 4 0 , U.S. In d i v i du al In co m e Tax Return . Pet i t i o n ers ’ 2 0 1 4 i n co m e t ax retu rn was du e Oct ob er 1 5 , 2 0 1 5 . OnFeb ru ary

7 , 2 0 1 9, an IRS rev en u e ag en t’ s s up erv is o r s ig n ed a Ci v i l Pen al ty Ap p ro v al Fo rm

ap p ro vi n g th e p en al ty

d et erm i n edi n t h e n o ti ce o f d efi ci en cy

i s s u edM arch 1 1 , 2 0 1 9 . OnFeb ru ary 8 , 2 0 1 9 , a 3 0 -d ay

l et t er was s en t t o p et i ti o n ers . Th e n o t i ce o f d efi ci en cy

fo r 2 0 14 i n cl u dedad

ju s t m en t s p u rs u an tt o th e
ex am i n at i o n o f Ph o en i x ’ s 2 0 14 retu rn . In th e n o t i ce res p o n d en t d et erm i n edth at p et i t i o n ers u n d errep o rt edth ei r Sch edu l e E i nco m e fro m Ph o en i x . Res p o n d en t d i s al lo wedp et it i o n ers ’ cl ai m eds ect i o n 1 7 9 d educt i o n an dco s t o f g o o ds s o l dfo r b u i l d i n g p erm i t s , b u t h e l at er co n ced edth atcert ai n ex p en s es were al lo w ab l e o n th e b as i s o f ad di t i o n al d o cu m en t at i o n p et i t io n ers p ro vi d ed
. Aft er t h e i s s u an ce o f th e n o ti ce o f d efi ci en cy , res p o n d en tv eri fi edth e p u rch as e o f a t i l e s aw an d ad ju s t edth e d i s al l o weds ect i o n 1 7 9 d edu ct i o n t o t ak e i ti n to acco u n t . Res po n d en t al l o wed so m e o f t h e b u i l d i ng p erm i t s as co sto f g o o ds s o ldb u tco nt i n uedt o d i s al lo w $ 3 3 ,2 9 4 o f t h e rep ort edb u il d i n g p erm i ts .- 5
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[* 5 ] Ono r ab o u t Oct o b er 1 5 , 2 0 1 6 , p et i t i o n ers fi l edth ei r 2 0 1 5 Fo rm 1 0 4 0 . On th ei r 2 01 5 Sch edu l e C th ey rep o rt eda d ep reci at i o n ex p en s e o f $ 8 ,0 0 0 . Inth e
n o t i ce o f d efi ci en cy

fo r 2 0 1 5 res p o n d en td i sal l o wedal l Sch edu l e C ex pen s es , b ut
res p o n d en t l at er co n ced edthatal l the ex p en ses were al l o wab l e ex cep tfo r t h e $ 8 ,0 0 0 d ep reci at i o n ex p en s e. OPINION Gen eral ly , th e Co m

m i s s i o n er’ s d et erm i n at i o n s i n a n o t i ce o f d efi ci en cy are p res u m edco rrect , an dth e t ax p ay er b ears th e b urd en o f p ro v i n g t h atth o s e d et erm i n at i o n s are erro n eo u s . Ru l e 1 4 2 (a)(1 ); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 93 3 ). Un d er s ect i o n 7 49 1 (a), i n cert ai n ci rcu m s tan ces , the b u rd en o f p ro o f
m ay s h iftfro m

th e t ax p ay er t o th e Co m

m i s s i o n er. Pet i t i o n ers h av e n o tcl ai m edo r
s h o wnth atth ey

h av e m etthe s p eci fi cat i o ns o f s ect i o n 7 4 9 1(a) t o s hi ft th e b u rd en
o f p ro o f t o res po n d en tas t o an y rel ev an tfact u al i ss ue. 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 da t ax p ay er m u s tp ro v e h i s
o r h er en t i t l em en tt o a d edu ct i o n . INDOPCO, In c. v . Co m m i ss i o n er, 5 0 3 U.S. 7 9 , 8 4 (1 99 2 ); New Co l o n i al Ice Co . v . Hel v eri n g, 2 9 2 U.S. 4 3 5 , 4 40 (1 9 3 4 ). Gen eral l y , an S co rp o rat i o n s h areh o l d er d et erm i n es h is o r h er t ax l i ab i li ty b y t ak i n g i n t o acco u n t a p ro rat a s h are o f t h e S co rp o rat io n ’ s i n co m e, l os s es , d educt i o n s , an d cred i t s . Sec. 1 3 6 6 (a)(1 ). Wh ere a n o t i ce o f d efi ci en cy i n cl u d es- 6
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[* 6 ] ad ju s t m en t s fo r S co rp orat i o n i tem s wi th o th er i t em s u n rel at edt o th e S co rp o rat i o n, we h av e ju ri s d i ct i o n t o d et erm i n e th e co rrect n es s o f al l ad ju s t m en t s . See W i n t er v . Co m

m i s s io ner, 1 3 5 T.C. 2 3 8 (2 0 10 ). A t ax p ay er cl ai m i n g a d edu ct io n o n a Fed eral i n co m e t ax return m u s t d em o n s trat e t h atth e d edu ct i o n i s al l o wab le p u rs u an tt o a s t atu t o ry p ro v i s i o n an d
m u stfu rt h er s ub s t an ti at e t h atth e ex pen s e t o wh ich th e d edu ct i o n rel at es h as b een p ai do r i n cu rred
. Sec. 6 0 0 1 ; Hrad es ky v . Co m m i s s i on er, 6 5 T.C. 8 7 , 8 9 -9 0 (1 9 7 5), aff’ dp er cu ri am , 5 4 0 F.2 d8 2 1 (5 th Ci r. 1 9 7 6 ). Gro ss Recei p t s A t ax p ay er m ay

n o td et erm i n e t h e n atu re o f h i s o r h er i n co m e m erel y b y
u s i n g a p art i cu l ar fo rm , o r b y l ab el i n g i t as h e o r s h e wi sh es , b u tm u s trep o rth i s o r h er i n co m e acco rd in g t o th e eco n o m i c real i t i es o f t h e s i tu at io n . W al ker v
. Co m m i s s i o n er, 1 0 1 T.C. 5 3 7 , 5 4 4 (1 9 9 3) (ci t i n g Fran k Ly o n Co . v . Un i t edSt at es , 4 3 5 U.S. 5 6 1 (1 97 8 )). Pet i t i o ners co n t en dth atp et i ti o n er h u s b an d’ s race car wi nn i n g s s h o u l db e i n cl u d edi n Ph o en i x ’ s g ro s s recei p t s . Ins up p o rto f th i s co n t en t i o n M r. Berry t es t i fi edth atPh oen i x p ai dth e en try fees fo r p et i t i on er h u s b an d’ s car races . Pet i t io n er h u s b an d t es t i fi edthath e raced u n d er t h e n am e “ BerryRaci n g”, wh i ch h e d es cri b edo n h is Faceb o o k acco u n tas a fam i l y drag raci n g t eam . Du ri n g th e- 7
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[* 7 ] y ears i n i s s ue p et i t i o n er h us b an d ’ s raci n g crew wo re s h i rt s em b l azo n edwi t h

“ BerryRaci ng ”. Th e ev i d en ce d o es n o ts h o w thatcar raci ng was p arto f Ph o en i x ’ s b u s i n es s . Becau s e i n co m e earn edb y p et i t i o n er h u s b an das a race car d ri v er i s n oti nco m e d eri v edfro m Ph o en i x’ s b u s i n es s o f rem o d el i n g an dco n s tru ct i o n, i t s h o u l dn o t b e i n cl u d edi n Ph o en i x ’ s g ro s s recei p t s . Th erefo re, we s u s t ai n res p o n den t ’ s rech aract eri zat i o n o f $ 8 ,7 0 0 an d$ 1 ,2 00 as o th er i n co m e fo r 2 0 1 4 an d2 01 5 , res p ect i vel y . Race Car Ex p en s es Sect io n 1 6 2 p erm i t s t ax p ay ers t o d edu ct al l o rd in ary an dn eces s ary

b u s i n es s
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. An o rd in ary ex p en s e i s o n e t h at
co m m o n ly o r freq u en t l y

o ccu rs i n th e t ax pay er’ s b u s i n es s, Dep u ty v . duPo n t , 3 0 8 U.S. 4 8 8 , 4 9 5 (1 9 4 0 ), an da n eces s ary ex p en s e i s o ne t h at i s ap p ro p ri at e an d h el p fu l i n carry i n g o n th e t ax p ay er’ s b u s i n es s , Co m m i s s i o ner v . Hei n i n g er, 3 2 0 U.S. 4 6 7 , 4 7 1 (1 9 4 3 ); s ec. 1 .1 6 2 -1 (a), In co m e Tax Reg s . Pet i t i o n ers fai ledt o
s h o w th e co n n ect i o n b et w een Ph o en i x ’ s co n s tru ct i o n b u s i n es s an d t h e rep o rt ed
race car ex p en s es . Ev en i f we co n cl u d edth atth e race car ex p en ses were o rd i n ary an d
n eces s ary ex p en ses p u rs u an t t o s ect i o n 1 6 2 , we are n o t ab l e t o d et erm i n e wh i ch- 8
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[* 8 ] ex p en s es wo u l db e d edu ct edas race car ex p en s es . Pet it i on ers d i dn o tp ro v i d e
ev i d en ce i d en t ify i n g wh i ch ex pen s es i n Ph o en ix ’ s reco rd s were rel at edt o race
cars . W e s u st ai n res p o n d en t ’ s d en i al o f d edu ct i o ns fo r race car ex p en s es fo r 2 0 14
an d 2 0 1 5
. Ph o en i x ’ s Sect i on 1 79 Dedu ct io n Sect io n 1 7 9 p ro v i d es th ata t ax pay er m ay el ect t o treat th e co s to f an y
s ect i on 1 7 9 p ro p ert y

as an ex p en se wh i ch i s n otch arg eab l e t o a cap i t al acco u n t . If a t ax p ay er m ak es s u ch an el ect i o n , th e co s ts h al l b e al l o w edas a d edu ct io n fo r t h e t ax ab l e y ear i n wh i ch th e s ect i o n 1 7 9 p ro p erty i s p l aced i n s erv ice. Sec. 1 7 9 (a). Sect i o n 1 7 9 p ro p ert y

i n cl u d es t an gi b l e p ro p ert y th ati s s ect i o n 1 2 4 5 p ro p ert y req u i redfo r u s e i n th e act i v e co n ducto f a t rad e o r b u s in es s . Sec. 1 7 9 (d )(1 )(B). To b e en t i t ledt o a s ect i o n 1 7 9 d edu ct i o n a t ax p ay er m u s t m ai n t ai n reco rd s refl ect i n g h o w an dfro m

wh o m th e s ect i o n 1 7 9 p ro p erty was acq u i redan dwh en i t
was p laced i n s erv i ce. Sec. 1 .1 7 9 -5 (a), In co m e Tax Reg s . Fo r 2 0 1 4 Ph o en ix cl ai m eda s ect i o n 1 7 9 d edu ct i o n fo r 1 1 i t em s . Res po n d en ti n i t i al l y

d is al lo wedth e d edu ct i o n fo r al l 1 1 i t em s . Pet i t i o n ers co n t en d th atth ey s h o u ld b e al l o weda d edu ct i o n fo r t h e u t il i ty trai ler an dth e ex cav at o r. Wh i l e Ph o en i x p ro p erl y

el ect edt o treat th e u t i l i ty trai l er an d t h e ex cav at o r as- 9
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[* 9 ] s ect i o n 1 7 9 p ro p ert y , i t fai l edt o s ubs t an ti at e t h e s ect i o n 1 7 9 d edu ct io n fo r ei th er i t em . In Feb ru ary

2 0 1 4 M r. Berryp u rch as eda u t il i ty trai ler. He t es t i fi edth atth e trai l er was p u rch as edt o s to re m at eri al s ata rem o t e jo b s i te. He fu rt h er t es t i fi ed th attrai l er co u l db e s o l dfo r a p ro fi t . Th ere i s n o ev i d en ce t o s up p o rth i s t es t i m o ny . Onth e co n traryres po n d en t ’ s rev en ue ag en t t es t i fi edth ati n 2 0 1 8 p et i t i o n er h u s b an dl i s t ed fo r s al e a t rai l er t h atwas u sedt o tran s p o rt race cars . Th e ev i d en ce d o es no ts up p o rtp et it i on er’ s cl ai m th atth e t rai l er was u s ed fo r Ph o en i x ’ s
co n st ru ct i o n -rel at edact i v i t i es . Acco rd in g ly , res p o n d en t ’ s d i s al l o wan ce o f t h e
s ect i on 1 7 9 d educt i o n fo r t h e u t i l i ty trai l er i s s u s t ai n ed
. M r. Berryt es t ifi edth atPh o en i x p u rch as edan ex cav at o r i n 2 0 1 4 an d p ro v id edan u n d at edb i l l o f s al e. Pet i t i o n ers p ro v i d edev i d en ce t o s h o w th at p et i t i o n er h u s b an dm ad e a cas h wi th drawal an du s eda m o n ey o rd er t o p u rch as e th e ex cav at o r. Th ey

d idn o t p ro v i d e an y

ev i d en ce t h at co n n ect edth e cas h wi th drawal an d th e p u rch as e o f t h e ex cav at o r. Th erefo re, p et i ti o n ers fai ledt o
m eetth ei r b urd en t o s h o w en ti t l em en tt o a s ect i o n 1 7 9 d edu ct i o n fo r t h e
ex cav at o r.- 1 0 -

[* 1 0 ] Co s to f Go o d s So l d Co s to f g o od s s o l d i s an o ffs ets ub tract ed fro m g ro s s recei p t s i n d et erm i n i n g g ro s s i n co m e, s ecs . 1 .6 1 -3 (a), 1 .6 1 -6 (a), In co m e Tax Reg s . , an d i s n o t a d edu ct i o n , s ee M et ra Ch em

Co rp . v . Co m

m i s s i o n er, 8 8 T.C. 6 5 4 , 6 6 1 (1 9 8 7 ). An y am o u n t cl ai m edas co s t o f g o od s s o l dm u s tb e s ub s t an t i at ed , an dt ax p ay ers are req u i redt o
m ai n t ai n reco rd s s u ffi ci en t fo r t h i s p u rp o s e. Sec. 6 0 0 1; Nu n n v . Co m m i s s i o n er, T.C. M em o . 2 00 2 -2 5 0 , s l i p o p . at1 6 ; s ec. 1 .6 0 0 1 -1 (a), In co m e Tax Reg s . Res p o n d en t ’ s rev enu e ag en t ex am i n edPh o en i x ’ s Qu ick Bo o k s reco rd s . Fo r
s i x en tri es rel at edt o b ui l d i n g p erm i t s i n 2 0 1 4 th e rev en ue ag en tfo u n d dup l i cat e
en tri es an dd is al lo wedthe dup l i cat es . Pet i t i on ers d i dn o ts ub s t an t i at e en t it l em en t t o the d i s al l o weddup l i cat es . Res p on d en t ’ s d i sal l o wan ce o f dup l i cat e en tri es o f $ 3 3 ,2 9 4 fo r 2 0 1 4 i s s u s tai n ed
. Sch edu l e C Dedu ct i o n Fo r p ro p ert y u s edi n a t rad e o r b u s i n es s o r h el dfo r t he p ro du ct i o n o f i n co m e, a d ep reci at i o n d educt i o n i s al l o wed fo r reas o n ab l e ex h au s t io n an dwear
an d t ear. Sec. 1 6 7(a). Pet i t i on ers rep o rt eda d ep reci at i o n ex p en s e o f $ 8 ,0 0 0 o n th ei r 2 01 5 Sch edu l e C. Pet i t io n ers co n t en d th atth e $ 8 ,0 00 was fo r p et i t i o n er h u s b an d ’ s tru ckth ath e “ u s edt o m eetcl i en t s , an d l oo katjo b s , an d g o t o
m eet i n g s ”.- 1 1 -

[* 1 1 ] To s ub s tan t i at e en t it l em en tt o a d ep reci at i o n d edu ct io n , a t ax p ay er m u s t
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 h o wi n g th e co sto f t h e p ro p erty , i t s
u s efu l l i fe, an dth e p rev i o u sl y al l o w ab l e d ep reci at i o n . Cl u ckv . Co m m i s si o n er, 1 0 5 T.C. 3 2 4 , 3 3 7 (1 9 9 5 ). In ad d i t i o n , a cl ai m edd edu ct i o n wi th res p ectt o an y

“ l i s t edp ro p ert y ”, a cat eg o ry i n cl u d i n g “ an y

p as s en g er au t o m o b i l e”, i s s ub j ectt o th e h ei g h t en ed s ub s t an t i at i on req u i rem en t s u n der s ect i o n 2 7 4 (d )(4 ). See s ec. 2 8 0 F(d )(4 ) (d efi n in g “ l i s t edp ro p ert y ”). Pet i t i o ners fai ledt o p ro v i d e an y s h owi n g o f t h e co s to f t h e t ru ck , wh en i t
was p laced i n s erv i ce, t h e b u s i n es s p ercen t ag e u s e o f t h e v eh icl e, an dth e p rev i o u s l y al l o wedd ep reci at i on . Acco rd i n g l y , th e d i sal l owan ce o f a d edu ct i o n fo r d ep reci at i o n fo r 2 0 1 5 i s s us t ai ned
. Sect i o n 6 6 5 1(a)(1 ) Ad d i t io n t o Tax Sect io n 6 6 5 1 (a)(1 ) i m

p o s es an ad d i t io n t o t ax i f t h e t ax p ay er fai l s t o fi l e h i s
o r h er i nco m e t ax return b y th e req u i reddu e d at e (i n cl u d i ng an y ex t en s i o n o f t i m e fo r fi l i ng ). A t ax p ay er h as th e b u rd en o f p ro vi n g thatfai l u re t o t i m el y fi l e was du e t o reas o n ab l e cau s e an dn otwi l l fu l n eg l ect . See s ec. 6 6 5 1 (a)(1 ); Hi gb ee v . Co m m i s s i o n er, 1 1 6 T.C. 4 3 8 , 4 4 7 (2 0 0 1). Un d er s ect i o n 7 49 1 (c) t h e Co m m i s s io n er b ears th e b u rd eno f p ro du ci n g
ev i d en ce wi th res p ectt o the l i ab i l i ty o f t h e t ax pay er fo r an y

ad d i t io n s t o t ax . See- 1 2 -

[* 1 2 ] Hi gb ee v . Co m

m i s s i o n er, 1 16 T.C. at4 4 6 -4 4 7 . Fo r 2 0 14 p et i ti o n ers fi l ed th ei r i n co m e t ax return aft er t h e du e d at e. Th erefo re, res p on d en t ’ s b u rd en o f p ro duct i o n h as b een m et . Pet i ti o n ers d idn o t es t ab l is h th atth ei r fai l u re t o t i m el y fi le was du e t o reas o n ab l e cau s e. Acco rd in g l y , th e s ect i on 6 6 5 1(a)(1 ) ad d it i o n t o t ax i s s u s t ai n edfo r 2 0 1 4
. Sect i o n 6 6 6 2(a) Pen al ty Th e Co m m is s i o n er b ears th e b u rd en o f p ro du ct i o n wi th res p ectt o th e p en al ty i m

po s edb y s ect io n 6 6 62 (a). Sec. 7 4 91 (c). Th i s b u rd en o f p ro du ct i o n i n cl u d es p ro du ci n g ev i d en ce t hatth e Co m m i s s i on er h as co m

pl i edwi th th e p ro cedural req u i rem en ts o f s ect i o n 6 7 5 1 (b ). Fro s tv . Co m m i s s i o ner, 1 5 4 T.C. 2 3 , 3 4 (2 02 0 ). On ce t h e Co m m i s s i o n er m eet s th i s b u rd en , the t ax p ay er m us tco m e fo rwardwi th co n traryev i den ce. Id
. Th e Co m m is s i o n er m

u s ts h o w co m

pl i an ce wi th s ect i o n 6 7 51 (b )(1 ), wh i ch req u i res th atcert ai n p en al t i es b e p ers o nal l y ap pro v edi n wri t i ng b y th e i m m ed i at e
s up erv i s o r o f t h e i n d iv i du al m ak i n g th e d et erm in at i o n . See Graev v . Co m m i s s i o n er, 1 4 9 T.C. 4 8 5 , 4 9 3 (2 0 1 7), s up p lem en t i n g an do v erru l in g i n p art 1 4 7 T.C. 4 6 0 (2 01 6 ). Th e reco rdi n d i cat es th atwri t t en s up erv i s o ry ap p ro v al fo r t h e as s ert i o n o f an
accu racy -rel at edp en al ty

fo r 2 01 4 was g i v en o n Feb ru ary 7 , 2 0 1 9, an d t h ata- 1 3 -

[* 1 3 ] 3 0 -d ay

l et t er was s en tt o p et it i o n ers o n Feb ru ary 8 , 2 0 1 9. Res p o n d en th as
s at i s fi edth e b u rd en o f p ro du ct i o n wi th reg ardt o t h e s up erv i s o ry ap p ro v al req u i rem en to f s ect i o n 6 7 51 (b ), an dp et i t i o ners d o n o tco n ten do th erwi se. See Fl u m e v . Co m

m i s s io ner, T.C. M em o . 2 0 2 0 -8 0, at* 34
. Sect io n 6 6 6 2 (a) i m

p o s es a 2 0 % accu racy -rel at ed p en al ty o n an y p o rt i o n o f
an u n d erp aym en t o f t ax req u i redt o b e s h o wno n a retu rn i f, as p ro v i d edb y s ect i on 6 6 6 2 (b )(1 ), the u n d erp aym en ti s at tri b u t ab l e t o “ [n ] eg l i g en ce o r d i s reg ardo f ru l es
o r reg u l at i o n s .” Neg l i gen ce i n cl u d es “ an y fai l ure t o m ak e a reas o n ab l e at t em p tt o
co m p l y ” wi th th e i n t ern al rev en u e l aws , an d“ di s reg ard ” i ncl u d es “ an y carel es s , reck l es s , o r i n t en t io 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 th e 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 . Pet i t io n ers d i d n o t k eep reco rd s
as req u i redb y s ect i o n 6 0 0 1 . Th ei r u n d erp aym en t was at tri b u tab l e t o n eg li g en ce. Th e accu racy -rel at edp en al ty d o es n o tap p l y

wi th res pect t o an y

p o rt i o n o f th e u n derp aym en t fo r wh i ch th e t ax p ay er s h o ws th ath e o r s h e h adreas o n ab l e
cau s e an d act edi n g o o dfai th . Sec. 6 6 6 4 (c)(1 ); s ee Hi g b ee v . Co m m i s si o n er, 1 1 6- 1 4 -

[* 1 4 ] T.C. at4 4 6 -4 4 7
. Pet it i o n ers d i dn o tco n tes t th e s ect i o n 6 6 6 2 (a) p en al ty , an d th erefo re t h e p en al ty i s s u s tai n edfo r 2 0 1 4
. 1 W e h av e co n s id eredal l arg u m en t s m ad e b y th e p art i es , an dt o the ex t en tn ot
m en t i o n edo r ad dres s ed , th ey are i rrel ev an t o r wi th o u t m eri t . To refl ectthe fo reg o i n g , Deci s i o n s wi l l b e en t eredu n der Ru l e 1 5 5
.

1 Res p o n d en tal s o al l eg edth atp et i ti o n ers were l i ab l e fo r t h e s ec. 6 6 6 2 (a) an d (b )(2 ) accu racy -rel at edp en al ty fo r 2 0 1 4 fo r a s ub s tan t i al u n d ers tat em en to f i n co m e t ax . Becau s e we fi n dth atp et i t i o n ers were n eg l i g en tan dth at th ey d i dn o t p ro v id e ev i d en ce t h atth ey act edwi th reas o n ab le cau s e o r i n g o o dfai th , we n eed n o tad dres s wh et her t h ey s ub s tan t i al l y

u n d ers t at edth ei r i n co m e t ax fo r 2 0 1 4
.