T .C. Su m m ary Op i n io n 2 01 9 -1 8

UNITED STATES TAX COURT
RODRIGO KHO AND LORETA KHO, Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 1 0 3 98 -1 6 S. Fi l edAu gu s t 5 , 2 0 1 9
.
Ro dri g o Kh o an dLo ret a Kh o , p ro s es e. J as o n T. Sco tt , fo r res p o n d en t .

SUM M ARY OPINION CARLUZZO, Ch i ef Sp eci al Tri al J u d g e: Th i s cas e was h eardp u rs u an tt o th e p ro v i s i o n s o f s ect i o n 7 4 6 3 o f t h e In t ern al Rev en u e Co d e i n effect wh en th e p et i t i o n was fi l ed
. 1 Pu rs u an t t o s ect i o n 7 4 6 3(b ), th e d eci si on t o b e en t eredi s n o t

1 Un l es s o th erwi s e i nd i cat ed , s ect io n referen ces are t o t h e In t ern al Rev en u e (co n ti n u ed ...)-2
-

rev i ewab l e b y

an y o ther co u rt , an d t h i s o p i n i o n s h al l n o tb e t reat ed as p reced en t fo r an y o th er cas e. In a n o t ice o f d efi ci en cy d at edFeb ru ary 3 , 2 0 16 (n o ti ce), res p o n d 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 as fo l l ows : Pen al ty Year Defi ci en cy s ec. 6 6 62 (a) 2 0 12 $ 1 1 ,9 7 0 $ 2 ,3 94 2 0 13 1 5 ,7 8 5 3 ,1 5 7 Th e i s s u es fo r d eci si o n are wh et h er p et i t i o n ers are: (1 ) en t i t l edt o ch ari t ab l e
co n tri b u t i o n d edu ct i o n s cl ai m edo n Sch edul es A, It em i zedDedu ct i o n s, fo r d o n at i o n s m ad e i n cas h an d/ o r p ro p ert y du ri n g th e y ears i n i s s u e; (2 ) en t i t l edt o
v ari o u s d edu ct io n s cl ai m edo n Sch edu l es C, Pro fi to r Lo s s Fro m Bu s i n es s , fo r cert ai n ex p en s es rel at edt o a fo s t er care b u si n es s i n ex ces s o f am ou n t s al l o wed b y
res p o n d en t; (3 ) en t it l edt o cert ai n d ep en d en cy ex em pt i o n d edu ct i o n s cl ai m edo n th ei r 2 01 2 retu rn ; (4 ) en t i tl edt o edu cat io n cred i t s u n d er s ect i on 2 5 A fo r 2 0 1 3 ; an d (5 ) l i ab l e fo r a s ect i o n 6 66 2 (a) accu racy -rel at edp en al ty fo r ei th er y ear i n i s s u e.

1 (...co n t in u ed ) Co d e (Co d e), as am en d edan d i n effect fo r t he y ears i n i s s u e, an dRu l e referen ces are t o the Tax Co urtRu l es o f Pract i ce an dPro cedure. Do l lar am o u nt s h av e b een ro u n dedt o th e n eares td o ll ar.-3
- Back gro u n d So m e o f t h e fact s h av e b een s ti p u lat ed an dare s o fo u n d. Atth e t i m e t h e p et i t i o n was fi l ed , p et i t i o ners res i d ed i n Cal ifo rn i a. Pet i t i o ners h av e t wo ch i ld ren , a s o n an d a d au g h t er. Du ri n g 2 0 1 2 an d2 0 1 3 p et i t i o n ers an dth ei r s o n res i dedi n a 1 ,6 6 5 -s qu are-fo o t s i n g l e-fam il y h ou s e al o n g wi th two adu l ti n d i v i du al s wi th d ev el o p m en t al d is ab i l i t i es wh o were p l aced wi t h p et i t i o n ers u n d er a St at e-s p o n so redfo s ter care p ro gram (fo s t er care cl i en t s ). Pet i t io n ers p u rch as edth e h ou s e i n 2 0 0 1 fo r $ 4 5 5 ,0 00 . In2 0 08 p et i ti o n ers ad d ed th ree ad d i t i o n al b ed ro o m s an d an ad d i t i o n al b at h ro o m (5 7 5 s qu are feet ) t o wh at h ad b een a t wo b ed ro o m , 1 , 0 9 0 -s qu are-fo o t h o u se. Two o f th e ad d i t i o n al b ed ro o m s an dth e ad d i t i o n al b at h ro o m were u s edex cl u s i v el y

b y th e fo s t er care cl i en ts ; th e t h i rdad d i t i o n al b ed ro o m was u s edp ri m ari l y , b u tn o tex cl u s i v el y , b y th e fo s t er care cl i en t s . On e o f t h e fo s t er care cl i en t s m o v edi n t o p et i t io n ers ’ h o u s e i n J u l y 2 0 1 2 , an d th e o th er m o v edi n t o t h e h o u s e i n Au g u s t 2 0 12
. Du ri n g th e y ears i n i ss u e o n e o f th e fo s ter care cl i en t s ro u t in el y s p en t week en d s at h i s p aren ts ’ h o m e. W i th th e ex cep t i o n o f cert ai n h o li d ay s , the o th er fo s t er care cl i en tl i v edwi th p et i t i o n ers y ear ro u ndan dacco m p an i edthem

o n fam i l y v acat i o n s an d recreat i o n al o u t i n g s. On e o f t h e fo s ter care cl i en t s h ad
s p eci al d i et ary

req u i rem en t s an dres tri ct io n s .-4
-

A St at e ag en cy

p ai d p et i t i o n ers $ 2 4 ,0 0 0 i n 2 0 1 2 an d$ 4 8 ,0 0 0 i n 2 01 3 fo r p ro v id i n g fo s t er care s erv i ces t o th e fo s t er care cl ien t s . Th e s erv i ces p et i t io n ers p ro v id edt o th es e i n d i v i du al s i n cl u d edp u rch as i ng th ei r fo o d, p rep ari ng th ei r
m eal s , an dtran s po rt i n g th em t o th ei r n u m ero u s d o ct o rs ’ ap p o i n t m en t s an d o th er act i vi t i es away

fro m th e h o u se. Atal l t i m es rel ev an t , p et i t i o n ers o wn eda BM W an da Lex u s . Pet i t io n ers d i dn o t m ai n t ai n co n tem

p o ran eo u s m i l eag e l og s fo r ei th er v eh i cl e; h o w ev er, t h ey d i dk eep recei pt s fo r au t o m o b il e rep ai rs an d g as . Th ey al s o m ai nt ai nedrecei p t s
an d/o r reco rd s fo r ex p en s es i ncu rredfo r g ro ceri es , trav el , m eal s an d
en t ert ai n m en t , rep ai rs , an dcert ai n n o n cas h ch ari tab l e co n tri b u ti o n s. M rs . Kh o was n o t em

p l oy eddu ri n g ei th er y ear i n i s s ue. M r. Kh o was
em pl o y edb y v ari o u s h eal th care p ro vi d ers duri n g b ot h y ears . Pet i t i o ners ’ t i m el y

fi ledjo i n t2 0 12 an d2 0 1 3 Fed eral i n co m e t ax retu rn s were p rep aredb y

a p ai di n co m e t ax retu rn p rep arer. Th e 2 0 1 2 an d2 0 1 3 retu rn s rep o rt edwag es o f $ 2 0 1 ,0 12 an d$ 1 4 0 ,2 2 3 , res pect i vel y , fro m M r. Kh o’ s
em pl o y m en t . Pet it i o n ers cl ai m edd ep en d en cy ex em p t i o n d edu ct i o n s fo r b ot h o f th e fo s t er care cl i en t s o n t h ei r 2 0 1 2 retu rn b u t n o to n thei r 2 0 1 3 ret u rn . Each retu rn i n cl u d es a Sch edu l e C an da Sch edu l e A. Th e i n co m e an dd edu ct i o ns-5
-

at tri b u t ab l e t o th e fo s t er care s erv i ces th ey p ro v i d edfo r t h e fo s t er care cl i en t s are
s h o wno n t h e Sch edu l es C as fo l l o ws : 20 1 2 20 1 3

In co m e: Gro s s recei p t s o r s al es $2 4 ,0 0 0 $4 8 ,0 0 0 Gro s s i nco m e 2 4 ,0 0 0 4 8 ,0 0 0 Ex p en s es : Car an dtru ck 1 6 ,9 4 3 1 3 ,8 4 8 Co n tract l ab o r 5 9 5 1 ,8 9 5 Dep reci at i o n an ds ec. 1 7 9 ex p en s e 2 7 ,4 6 5 7 ,7 8 8 Leg al an dp ro fes s io n al 2 5 0 4 ,6 1 0 Offi ce 1 0 9 8 1 0 Ren to r l eas e o f v eh i cl es , m ach i nery , an dequ i pm en t 1 2 0 1 ,0 7 4 Sup p l ies 3 ,0 9 7 6 ,0 5 0 Tax es an d l i cen s es 2 0 0 -0 - Trav el 1 ,5 3 5 1 ,4 2 7 M eal s an d en tert ai n m en t 1 ,8 7 5 4 ,3 6 3 Ut i l i t ies 4 9 6 -0 - Oth er 3 9 ,3 2 8 1 7 ,0 5 8 Bu s i n es s u se o f h o m e 8 ,3 0 5 3 5 ,7 1 1 To tal 4 0 ,3 1 8 9 4 ,6 3 4 Netp ro fi t(l os s ) (1 6 , 3 1 8) (4 6 , 6 3 4)
1 M rs . Kh o t es t i fi edth atth e car an dtru ck ex pen s e fo r each y ear was co m p u t edo n the b as i s o f act u al ex p en s es ; h o wev er, a rev i ew o f t h e ret u rn s s h o ws th atth e ex pen s es were act u al l y co m p u t edu s i n g t h e s t an d ardm il eag e rat e. Th e Co m m i s s i o n er g en eral l y

up d at es th e o p t i o n al s t an d ardm i l eag e rat e an n u al l y . See s ec. 1 .2 7 4-5 (j)(2 ), In co m e Tax Reg s.; Rev . Pro c. 2 0 10 -5 1 , 2 0 1 0 -5 1 I.R.B. 8 8 3
. Fo r 2 01 2 the rat e was 5 5 .5 cen t s p er m i le. See No t i ce 2 0 1 2 -1 , s ec. 2 , 2 0 1 2 -2 I.R.B. 2 6 0 , 2 6 0. Fo r 2 0 1 3 th e rat e was 5 6 .5 cen t s p er m il e. See No t i ce 2 0 12 -7 2, s ec. 2 , 2 0 1 2-5 0 I.R.B. 6 7 3 , 6 7 3
.-6
- 2 Pet i t i on ers at t ach edFo rm 4 5 6 2 , Dep reci at i o n an dAm o rt i zat i o n , t o th ei r 2 0 1 2 retu rn wh i ch s h o ws h o wth e $ 7 ,4 6 5 d ep reci at io n d edu ct i o n was cal cu l at ed
.

3 Th e d edu ct i o n fo r “ o th er ex p en s es ” fo r each y ear i ncl u d es p ark i n g fees , edu cat i o n , p o s t ag e, an dg ro ceri es . Fo r 2 0 1 3 th e d edu ct i o n fo r “ o th er ex p en s es ” al s o i n cl u d es “ s al o n fo r cl i en t s ”. As rel ev an th ere, t h e Sch edu l es A s h o w ch ari t ab l e co n tri bu t i o n d edu ct i o n s
as fo l l ows : Year Cash No n cas h 2 0 1 2 $ 4 ,2 00 $ 1 ,3 0 0 2 0 1 3 7 ,0 0 0 5 0 0 Acco rd in g t o p et it i on ers , th ey reg u l arl y d o n at edm o n ey

an dp ro p ert y t o “ a ch u rch ”
an d “ s o m e n o n -p ro fi t o rg an i zat i o n ”. Pet i ti o n ers at t ach edFo rm 8 28 3 , No n cas h Ch ari t ab l e Co n tri b u t io n s , t o t h ei r 2 0 1 2 retu rn g en eral l y d es cri bi ng th e n o n cas h
co n tri b u t i o n s as “ BAGS OF CLOTHING HOUSEHOLD ITEM S TOYS”. Th e fai r m ark etv al u e o f t h e d o n at edp ro p ert y i s rep o rt edas $ 1 ,3 0 0 . Th ey d i dn o t at t ach Fo rm

8 2 8 3 t o t h ei r 2 0 1 3 retu rn . Ins up p orto f t h ei r cl ai m t o the cas h
co n tri b u t i o n s, p et i t i o ners s ub m i t t edb an kreco rd s s up p ort i n g a $ 1 0 0 d edu ct i o n fo r
cas h co n tri b u t io n s t o a ch urch
. Pet i t i o ners ’ 2 0 1 3 retu rn al s o i n cl u d es Fo rm 8 8 6 3 , Edu cat io n Cred i t s . On th atfo rm p et i t io n ers cl ai m ed an Am eri can Op p ortu n it y Tax Cred i t (AOTC) o f $ 2 ,5 0 0 , o f wh ich th ey

treat ed$ 1 ,0 0 0 as refu n d ab l e an d$ 1 ,5 0 0 as n o nrefu n d ab l e.-7
-

Acco rd in g t o th e fo rm , th e cred i ti s at tri b u tab l e t o p et i t i o n ers ’ d au g h t er’ s edu cat i o n ex p en s es atth e Un i v ers i ty o f Po rt l an d . A Fo rm 1 09 8 -T, Tu i t i o n St at em en t , i ss u ed t o p et i t i o n er’ s d au g h t er b y th e u ni v ers i ty

s u g g es t s th atn o n e o f th e qu al i fy i n g tu i t i o n b i l l edfo r 2 0 1 2 was p ai d
. In th e n ot ice res p o n d en t : (1 ) d i s al lo wedal l th e d edu ct i o n s fo r Sch edu l e A
n o n cas h ch ari t ab l e co n tri b u t io ns fo r 2 0 1 2 an d 2 0 1 3 ; (2 ) d i s al l o wedal l b u t$ 1 0 o f th e d edu ct i o n s cl ai m edo n th e 2 0 1 2 an d 2 01 3 Sch edu l es A fo r cas h ch ari t ab l e
co n tri b u t i o n s; (3 ) d i s al l owedth e d ep en d en cy ex em p ti o n d edu ct i o n s fo r t h e fo s t er care cl i en t s fo r 2 0 1 2 ; (4 ) d i sal lo wedi n fu l l o r i n p artSch edul e C d educt i on s fo r
car an dtru ck

ex pen s es , d ep reci at i o n , trav el , m eal s an den tert ai n m en t, u ti l it i es , an d g ro ceri es ; (5 ) d i sal lo wed$ 5,3 9 7 o f t h e $ 8 ,3 0 5 d edu ct io n fo r ex p en s es at tri b u t ab l e t o the b u s i n es s u s e o f p et i t i o n ers ’ h o m e fo r 2 0 1 2 ; (6 ) d i s al l o wed $ 2 7 ,2 6 0 o f t h e $ 3 5 ,7 1 1 d edu ct i o n fo r ex p en ses at tri b u t ab l e t o th e b u si n es s u s e o f p et i ti o n ers ’ h o m e fo r 2 0 1 3 ; (7 ) d i s al l o wed th e AOTC fo r 2 0 1 3 ; an d(8 ) i m po s eda s ect i o n 6 6 6 2 (a) accu racy -rel at edp en al ty o n v ari o u s g ro un d s fo r each y ear. So m e o f t h e ad ju s t m en t s m ad e i n t h e n o t ice are co m pu t at i o nal an dwi l l n o tb e d i s cu s sed
.-8
- Di s cu ss i o n 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 o f a t ax p ay er’ s l i ab i l i t y i n a n o ti ce o f d efi ci en cy

i s p res u m edco rrect , an dth e t ax pay er b ears th e b urd en o f p ro v in g th atth e d et erm i n at io n i s i n co rrect . Ru l e 1 4 2 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3 ). 2 Dedu ct i o n s an dcred i t s are a m at t er o f l eg i sl at iv e g race,
an d th e t ax p ay er g en eral l y bears th e b u rd en o f p ro v i n g en t i t l em en tt o an y d educt i o n o r cred i t cl ai m ed . Ru l e 1 4 2 (a); INDOPCO, In c. v . Co m m i s s i o ner, 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 ). I. Ch ari t ab l e Co n tri b u t i o n Dedu ct i o n s Pet i t i o ners cl ai m ed a $ 5 ,5 0 0 ch ari t ab l e co n tri b u ti o n d edu ct i o n o n th ei r 2 0 1 2 retu rn , co n si s t i n g o f $ 4 ,2 0 0 i n cas h co n tri b u t i o ns an d$ 1 , 3 00 i n n o n cas h
co n tri b u t i o n s. Pet i t i on ers cl ai m eda $ 7 ,5 0 0 ch ari t ab l e co n tri b ut i o n d edu ct io n o n th ei r 2 01 3 retu rn , co n s is t in g o f $ 7,0 0 0 i n cas h co n tri b u ti on s an d$ 5 0 0 i n n o n cas h
co n tri b u t i o n s. Acco rd i n g t o res p o n d en t , p et i t i o n ers are n o t en t it l edt o an y d educt i o n g reat er t han the am o u n t s al read y al l o wedb ecau s e t h ey

fai l ed t o
s ub s t an t i at e t h e cl ai m edd edu ct i o n s .

2 Pet i t i on ers d o n o t cl ai m

an dth e reco rdd o es n o t o th erwi se d em o n s trat e t h at th e p ro v i s i o n s o f s ec. 7 4 9 1 (a) are ap p l i cab l e h ere, an d we p ro ceed as th ou g h th ey are n o t .-9
-

Sect io n 1 7 0 al l o w s d edu ct i o n s fo r co nt ri bu t i o n s m ad e du ri ng a t ax ab l e y ear t o qu al i fy i n g o rg an izat i o n s . Cas h co nt ri b u t i on s m u s tb e s ub s t an t i at edb y : (1 ) can cel ed ch eck s o r (2 ) recei p t s fro m th e d on ee (s h o wi n g th e d on ee’ s n am e an d th e d at e an d am o u n t o f t h e d o n at i o n ). Sec. 1 70 (f)(1 7 ). In g en eral , a g i fto f p ro p erty m u s tb e s ub s tan t i at edb y

a recei p t fro m

the d o n ee s h o wi n g the d o n ee’ s
n am e, t h e d at e an d l ocat i o n o f t h e co n tri bu t i o n , an da d es cri p t i o n o f t h e p ro p ert y
co n tri b u t ed . Sec. 1 .1 7 0 A-1 3 (b )(1 ), In co m e Tax Reg s . An y co nt ri b u t i o n o f $ 2 5 0 o r m o re m u s t al s o s at is fy

th e req u irem en t o f
s ect i on 1 .1 7 0 A-1 3 (f)(1 ), In co m e Tax Reg s ., wh i ch p ro vi d es th att o cl ai m a ch ari t ab le co n tri b u t i on d educt i o n o f $ 2 5 0 o r m o re, t h e t ax p ay er m u s t s ub s tan t i at e th e co n tri b u t i o n wi th a co n t em p o ran eo u s wri t t enackno wl ed g m en t fro m th e d o n ee
o rg an i zat i o n . Sec. 1 7 0 (f)(8 ). Th e co n t em

p o ran eo u s wri t t en ackn owl ed g m en tm u s tco nt ai n: (1 ) a
s t at em en to f t h e am o un to f cas h o r a d es cri p t i o n o f an y p ro p ert y o th er t h an cas h
co n tri b u t ed ; (2 ) a s t at em en tas t o wh et h er t h e d o n ee o rg an izat i o n p ro v i dedan y g o o d s o r s erv i ces i n co n s i d erat i o n fo r an y p ro p ert y co n tri b u t ed ; an d (3 ) a d es cri p t io n an d g o o d -fai th es t i m at e o f t h e v al u e o f an y p ro v i d edg o o d s o r s erv i ces , o r i f s u ch g o o d s o r s erv ices co n s i sto f i n t an g i b l e rel i g i o u s b en efi t s , a s t at em en tt o th ateffect . See s ec. 1 7 0 (f)(8 )(B); s ec. 1 .1 7 0 A -1 3 (f)(2 ), In co m e Tax Reg s . A-1 0
-

wri t ten ackn owl ed g m en ti s co n t em p o ran eo u s i f i ti s o b tai n edb y th e t ax p ay er o n o r b efo re t h e earl ier o f: (1 ) t h e d at e t h e t ax p ay er fi l es th e o ri g i n al return fo r t h e t ax ab l e y ear o f the co n tri b u t i o n o r (2 ) t he du e d at e (i n cl u d i n g ex t en s i o n s ) fo r fi l i n g th e o ri gi n al retu rn fo r t h e y ear. Sec. 1 7 0 (f)(8 )(C); s ec. 1 .1 7 0 A-1 3 (f)(3 ), In co m e Tax Reg s . 3 If a t ax p ay er m ak es a ch ari t ab l e co n tri b u ti on o f p ro p ert y o th er t h anm o n ey
an d cl ai m s a d edu ct i o n i n ex ces s o f $ 5 0 0 wi th res p ect t o th e co n tri b u t i o n o f t h at i t em , then th e t ax pay er m u s tm ai n t ai n wri t t en reco rd s s ho wi n g th e m an n er o f acq u is i t io n o f t h e i t em

an d t he ap p ro x i m at e d at e o f th e acqu i s i t i o n . See s ec. 1 .1 70 A-1 3 (b )(3 ), In co m e Tax Reg s . A. Cas h Ch ari t ab le Co n tri b u t i o n s W i th res p ect t o th e cas h ch ari t ab l e co n tri b u t i o n s , p et i t i o n ers p ro v i d eda b an k s tat em en tp u rp ort i n g t o s ub s t an t i at e s o m e o f t he cas h co n tri b u t i o n s th ey cl ai m t o h av e m ad e i n 2 01 2 . Th e b an ks t at em en t s ho ws a n u m b er o f ch eck s i n th e
am ou n to f $ 5 th att o tal $ 1 0 0 du ri n g 2 0 1 2 . Al th o u g h th e b an ks t at em en td oes n o t i d en t i fy th e p ay ee, we fi n d th atth e b an k s t at em en t , al o n g wi th p et i t i o n ers ’

3 Sep arat e co n tri b ut io n s o f l es s th an $ 2 5 0 are n ots ub jectt o the req u i rem en t s o f s ec. 1 7 0 (f)(8 ) reg ard l es s o f wh et h er t h e s um o f t h e co n tri b u t i o n s m ad e b y a t ax p ay er t o a d o n ee o rg an i zat i o n du ri n g a t ax ab l e y ear eq u al s $ 2 5 0 o r m o re. See s ec. 1 .1 7 0A-1 3 (f)(1 ), In co m e Tax Reg s.-1 1
-

t es t i m o ni es o n the p o i n t , i s s uffi ci en tt o al l o w a $ 1 0 0 cas h ch ari t ab l e co n tri b u t i o n d educt i o n fo r 2 0 1 2
. Pet it i o n ers d i d n o to th erwi s e p ro v i d e an y d o cu m en tat i o n t o
s ub s t an t i at e cas h d o n at i on s m ad e i n 2 0 1 2 o r 2 0 1 3 . Acco rd i n gl y , p et it i on ers are
n o ten ti t l edt o a d edu ct i o n fo r cas h ch ari t ab l e co n tri b u t i o n s g reat er th an$ 1 0 0 fo r 2 0 1 2 an dth e am o u ntres p o n d en th as al read y al l o wedfo r 2 0 1 3. B. No ncas h Ch ari t ab l e Co n tri b u ti o n s W i th res p ect t o th e n on cas h ch ari t ab le co nt ri bu t i o n s , p et i t i o n ers at t ach ed Fo rm 8 2 8 3 t o th ei r 2 01 2 retu rn s h owi ng a co n tri b ut i o n o f p ro p ert y v al u edat $ 1 ,3 0 0 t o th e Can cer Co n tro l So ci ety . Acco rd in g t o Fo rm 8 2 83 , p et i t i o n ers p u rch as edth e d o n at edp ro p ert y i n Feb ru ary

2 0 0 9. Pet it i o n ers p ro v i d eda d o n at i o n recei p t fro m

th e Can cer Co n tro l So ci et y d es cri b i ng th e d o n at edp ro p ert y as

“ Cl o th es , Ho u s eh o l d i t em s , To y s ”. Th e d o n at io n recei p t es t ab l i s h es n o th in g m o re th an th e fact th atcert ai n i t em s , g en eral l y an dv ag u el y

d es cri b ed , were d o n at edt o th e o rg an i zat i o n th ati s s u edth e recei p t . W e are s at i s fi edth ata d o n at i o n was m ad e b u tn o th i n g i n t h e reco rds up p o rt s the v al u e t h at p et it i on ers at tri bu t ed t o th e d o n at i o n . In s t ead , th e reco rdwo ul dal l o w fo r a n o ncas h ch ari t ab l e co n tri b u t i o n d educt i o n o f $ 1 00 fo r 2 0 1 2 , an dwe s o fi n d . Pet i t i o ners d i d n otp ro v id e an y
s ub s t an t i at i n g d ocu m en ts fo r t he n o ncas h ch ari t ab le co nt ri b u t i o n d edu ct i o n fo r-1 2
-

2 0 1 3 . Acco rd i n g ly , p et i t io ners are n o ten t i t l edt o a n o n cas h ch ari tab l e
co n tri b u t i o n d edu ct i o n fo r 2 0 1 3
. II. Sch edu l e C Dedu ct i o n s Tax p ay ers m ay

d edu cto rd in ary

an dn eces s ary

ex p en s es p ai d i n co n n ect i o n wi th o perat i ng a t rad e o r b u s i n es s . Sec. 1 6 2 (a); Bo y dv . Co m m i s s i o n er, 1 2 2 T.C. 3 0 5 , 3 1 3 (2 0 0 4). To b e o rd i n ary th e ex p en s e m

u s tb e o f a co m

m o n 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. 4 8 8 , 4 9 5 (1 9 4 0). To b e n eces s ary

an ex p en s e m

u stb e ap p ro p ri at e an d h el p fu l t o t h e t ax p ay er’ s b u s i n es s . W el ch v . Hel v eri ng , 2 90 U.S. at1 1 3 . A d edu ct i o n n o rm al l y i s n o tal lo wed , h o wev er, fo r p ers o n al , l i v in g , o r fam i ly ex p en s es . Sec. 2 6 2 (a). Wh et h er an ex pen d i ture s at i s fi es th e req u i rem en t s fo r d educt i bi l i ty u n der s ect i o n 1 6 2 i s a qu es t i o n o f fact . See Co m m i s si o n er v . Hei n i n g er, 3 2 0 U.S. 4 6 7 , 4 7 5 (1 9 4 3). As a g en eral ru l e, i f a t ax p ay er p ro v i d es s u ffi ci en t ev i d en ce t h atth e t ax p ay er h as p ai d o r i n cu rreda t rad e o r b u s i n es s ex p en se co nt em p l at ed b y s ect i o n 1 6 2 (a) b uti s u nab l e t o ad equ at el y s ubs t an ti at e th e am o u n t, th e Co u rtm ay es t i m at e th e am o un tan d al l o w a d edu ct i o n t o th atex ten t . Co h an v . Co m m i s si o n er, 3 9 F.2 d 5 4 0 , 5 4 3 -5 4 4 (2 d Ci r. 1 9 3 0 ). Ho wev er, i n o rd er fo r t h e Co u rtt o es t i m at e t h e
am ou n to f an ex pen s e, t h ere m u s tb e s o m e b as i s up on wh ich an es t i m at e m ay b e-1 3
-

m ad e. Van i cekv . Co m

m i s s i o n er, 8 5 T.C. 7 3 1 , 7 42 -7 4 3 (1 9 8 5 ). Oth erwi s e, an y al l o wan ce wo u l dam ou n tt o u n g u i d ed l arg es se. W i ll i am s v . Un i t edSt at es , 2 4 5 F.2 d5 5 9 , 5 6 0 (5 th Ci r. 1 9 5 7 ). Res p o n d en tag rees th atp et i t i o n ers were en g ag edi n a fo s t er care t rad e o r b u s i n es s du ri n g each y ear i n i s s u e; b u tacco rd i n g t o res po n d en t , p et i t i o ners fai l ed t o s ub s t an t i at e t h e am o u n t s cl ai m edfo r t he d i s al l o wedSch edu l e C ex p en s es o r
es t ab l i s h th atth ey

were o rd i n ary

an d n eces s ary trad e o r b u s i n es s ex p en s es o f t h at b u s i n es s . A. Car an dTru ck , Trav el , M eal s an dEn t ert ai n m en t, Ut i l i t i es , an dGro ceri es Pet i t i o ners ackn o w l ed g e t h atth e d educt i o n s cl ai m edo n th e Sch edu le C fo r each y ear i n i s s u e i n cl u d e b o th p ers o n al an d b u s i n es s ex pen s es . A t ax p ay er
s eek i n g a b u s i n es s ex p en s e d edu ct i o n fo r wh atwo u l d o rd i n ari l y b e co n s i dered p ers o n al l i v i n g ex p en s es , s u ch as v eh i cl e ex pen ses an dm eal s an d en t ert ai n m en t
ex p en s es fo r o n es el f an do n e’ s d ep en d en t s, m u s td em o n s trat e t h atthe ex p en d i tu res were “ d i fferen t fro m

o r i n ex ces s o f t h atwh ich wo u ldh av e b een m ad e fo r t h e t ax p ay er’ s p ers o n al p u rp o s es .” Du g g an v . Co m m i ss i o ner, 7 7 T.C. 9 1 1 , 9 1 4 (1 9 8 1 ) (qu o ti n g Su t t er v . Co m

m i s s i o n er, 2 1 T.C. 1 7 0 , 1 7 3 (1 95 3 )). Pet i t i o ners fai ledt o s h o w th atth ei r car an dtru ck , trav el , m eal s an d
en t ert ai n m en t , u t i li ti es , an dg ro ceri es ex p en s es , i n ex ces s o f t h e am ou n t s al l o wed-1 4
-

b y res p o n d en t , were d i fferen tfro m o r ex ceed edth o s e t h ey

wo u ldh av e s p en tfo r p ers o n al p u rp o s es . Acco rd i n g l y , we fi n dth at th e ex p en s es i n d i s p u t e were p ri m ari l y fo r p et i t i o n ers ’ an dthei r s o n ’ s p ers o n al b en efi tan dan y b u si nes s p u rp o s e
was d is t i n ct ly

s eco n d ary

an di nci d en t al . See, e.g ., In t ’ l Art i s t s , Lt d . v . Co m m i s s i o n er, 5 5 T.C. 9 4, 1 04 (1 9 7 0 ). Co n seq u en tl y , we co n cl ud e t h atth e d i s p u t edam o u n t s co n s t i tu t e n on d edu ct i bl e p ers o n al , l i v i ng , o r fam il y ex p en s es
u n d er s ect i o n 2 6 2 (a). B. Dep reci at i o n an d Bu s i n es s Us e o f Ho m e A t ax p ay er g en eral l y

i s n o ten t it l ed t o d edu ct an y ex pen s es rel at edt o a dwel l i n g u n itu s edas a res i d en ce du ri n g t h e t ax ab l e y ear. Sec. 2 8 0A(a). Sect i on 2 8 0 A(c)(1 ) p ro v i d es an ex cep t i o n fo r cert ai n b u si nes s u s es o f a d wel li n g u n i t , p ro v id edth e d wel l in g u ni th as a p o rt i o n wh ich i s ex cl u s i v el y u s edo n a reg u l ar b as i s : (A) as th e p ri n ci p al p l ace o f b u s i n es s fo r an y trad e o r b u s i n es s o f t h e t ax pay er, (B) as a p l ace o f b u s i n es s wh i ch i s u s edb y p at i en t s , cl i en t s , o r cu s t om ers i n m eet i ng o r d eal i n g wi th the t ax p ay er i n th e n orm al co u rs e o f h i s trad e o r b u s i n es s , o r (C) i n th e cas e o f a s ep arat e s tru ctu re wh i ch i s n otat t ach edt o th e d wel l in g u n it , i n co n n ect io n wi th th e t ax pay er’ s trad e o r b u s in es s .-1 5
- 1
. Dep reci at i o n Pet i t i o ners cl ai m ed d educt i o n s o f $ 7 , 4 65 an d$ 7 ,7 8 8 fo r d ep reci at i o n o n Sch edu l es C fo r 2 0 1 2 an d2 0 1 3 , res p ect i v el y . Acco rd i n g t o p et i t i on ers , th e d educt i o n s fo r d ep reci at i o n are at tri bu t ab l e en t i rel y t o th ei r u s e o f th ei r p ers o n al
res i den ce. Th ere i s al l owedas a d ep reci at i o n d edu ct i o n a reas o nab l e al l owan ce fo r t h e
ex h au s t i o n an dwear an d tear (i n cl u d i n g o b so l es cen ce) o f p ro p ert y u s edi n a t rad e
o r b u si n es s . Sec. 1 6 7(a). As rel ev an th ere, t h e b as is fo r d ep reci at i o n i s the co s to f th e p ro p ert y . Secs . 1 6 7 (c), 1 0 1 1
. Res p o n d en tag rees th atp et i t i o n ers s at is fy atl eas t o n e o f t h e ex cep ti on s s et fo rt h i n s ect i o n 2 8 0 A(c)(1 ). Fu rt h erm o re, p et i ti o n ers h av e s h o wnth attw o o f t he ad d it i o n al b ed ro o m s an dth e ad d i t i o n al b at h ro o m were u s edex cl u s i v el y

an do n a reg u l ar b as i s fo r t hei r fo s ter care b us i nes s . As b es twe can t el l fro m wh ath as b een
s ub m i t t ed , we cal cu l at e t h atth e ad d i t i o n al b ed ro o m s an dth e ad d i t i o n al b at h ro o m rep res en t7 0 % , o r 4 0 2.5 s quare feet , o f t h e t o tal s quare fo o t ag e ad d eddu ri n g th e
ren o v at i o n . To cl ai m th e d educt i o n s fo r d ep reci at i o n p et i t i on ers m u s tes tab l i s h th e d ep reci ab l e b as i s i n the ren o vat i o n . Onth e b as i s o f t he reco rd , an ds p eci fi cal l y p et i t i o n ers ’ t es t i m o n y , we fi n dth atp et i t i o n ers ’ co s t o f t h e ren o v at i o n i n 2 0 0 8 was-1 6
-

$ 1 2 5 ,0 0 0 . See Co h an v . Co m m i s s i o n er, 3 9 F.2 d at5 43 -5 4 4 . Acco rd i n gl y , p et i t i o n ers are en t i t l ed t o d edu ct i o n s fo r d ep reci at i o n fo r each y ear i n i s s ue i n
acco rd an ce wi th o u r fi nd i n g s ab o v e. Th e ap p ro p ri at e d ep reci at i on cal cu l at i o n
s h o u ldb e refl ect edi n t h e p art i es ’ Ru l e 1 5 5 co m pu t at i o n s . 2
. Bu s i n es s Us e o f Ho m e Pet i t i o ners cl ai m ed d educt i o n s o f $ 8 , 3 05 an d$ 3 5 ,7 11 fo r t h e b u s i n es s u s e
o f t h ei r h o m e o n Sch edu l es C fo r 2 0 1 2 an d2 0 1 3 , res pect i v el y . Pet i t i o ners rep o rt edth at3 3 .3 3% an d6 6.6 7 % o f thei r h o m e was u sedex cl u s i v el y fo r b u s i n es s du ri n g 2 0 1 2 an d2 0 1 3, res p ect iv el y . As we d et erm i n edab o v e, p et i t i o n ers u sed4 0 2 .5 s qu are feet o u to f t he h o m e’ s t o t al area o f 1 ,6 65 s qu are feet ex cl us i v el y fo r b u s i n es s . Thu s, 2 4 .1 7 % o f th ei r h om e was us edex cl u s iv el y fo r b u s i n es s . Acco rd i n g ly , p et i t i o ners are
en t i t l edt o d edu ct i o n s fo r t h e b u s i nes s u s e o f t h ei r h om e fo r each y ear i n i s s u e i n
acco rd an ce wi th o u r fi nd i n g s ab o v e. Th e ap p ro p ri at e d edu ct io n s s h o u l db e refl ect edi n th e p art i es ’ Ru le 1 5 5 co m p u t at i on s . III. Dep en d en cy

Ex em p t i o n Dedu ct i o n Pet i t i o ners cl ai m ed a d ep en d en cy ex em p t i on d edu ct i o n fo r each fo st er care cl i en t fo r 2 0 1 2 . Res p on den tco n t en ds th atp et it i o n ers h av e n otp ro v edth atth ei r-1 7
-

fo s t er care cl i en t s res i d edwi th th em fo r m o re th an o n e-h al f o f 2 0 1 2 an dthatth ey p ro v id edm o re t h an o n e-h al f o f th ei r fo st er care cl i en ts ’ s up p o rt . In co m p u t i n g t ax ab l e i n co m e s ect i o n 1 5 1(c) al l o ws as a d edu ct i o n an
ex em p t i o n fo r each d ep en den to f a t ax p ay er. Sect i o n 1 5 2 (a) d efi n es th e t erm

“ d ep en d en t ” t o m ean ei th er a “ qu al i fy i n g ch il d ”, s ee s ec. 1 5 2 (a)(1 ), (c), o r a

“ qu al i fy i n g rel at i v e”, s ee s ec. 1 5 2 (a)(2 ), (d ), o f t h e t ax p ay er. A. Qu al i fy in g Ch i l d In o rd er t o b e a t ax p ay er’ s “ qu al i fy i n g ch i l d ”, an i n di v i du al m u s t : (A) b ear
a s p eci fi edrel at io n s h i p t o th e t ax p ay er, (B) h av e t h e s am e p ri n ci p al p l ace o f ab o d e
as th e t ax p ay er fo r m o re th an o n e-h al f o f t he t ax ab l e y ear, (C) m eetcert ai n ag e req u i rem en t s , (D) h av e n o tp ro v i d edm ore t han o n e-h al f o f h i s o r h er o wns up p o rt fo r t h e y ear, an d , i f m arri ed , (E) h av e n o tfi l eda jo i ntretu rn (o ther t han o nl y fo r a cl ai m o f refu n d ) wi th h i s o r h er s p ou s e. Sec. 1 5 2 (c)(1 ). Th e t erm “ ch i l d ” i n cl u d es
an i n d iv i du al wh o i s an el i g i b l e fo s t er ch il do f t h e t ax p ay er. Sec. 1 5 2 (f)(1 )(A)(i i ). Th e t erm “ el i g i b l e fo s t er ch i ld ” fo r t h e p u rp os es o f s ub p arag rap h (A)(i i ) m ean s an i n d i v i du al wh o i s p l aced wi th th e t ax p ay er b y an au th ori zedp l acem en tag en cy o r b y ju d g m en t , d ecree, o r o th er o rd er o f an y co u rto f co m p et en tjuri s d i ct i o n . Sec. 1 5 2 (f)(1 )(c).-1 8
-

Pet i t i o ners ackn o w l ed g edth at th ei r fo s t er care cl i en t s d i dn o th av e th e s am e p ri n ci p al p l ace o f ab o d e as p et it i o n ers fo r m o re th an o n e-h al f o f 2 0 1 2 . Itfo l l o ws th atth ei r fo s t er care cl i en ts were n o tp et i t io n ers ’ qu al i fy i n g ch i l dren wi th i n t h e
m ean i n g o f s ect i o n 1 5 2 (c). B. Qu al i fy i n g Rel at i ve Th e t erm “ qu al i fy i n g rel at i v e” m ean s an i n d i v i du al : (A) wh o b ears a
s p eci fi edrel at i o n sh i p t o the t ax p ay er, (B) wh o s e g ro s s i n co m e i s l es s th an th e
ex em p t i o n am o u n t , (C) wi th res p ectt o wh o m th e t ax p ay er p ro v i d es o v er o n e-h al f
o f t h e i n d i vi du al ’ s s up p o rt , an d(D) wh o i s n ota qu al i fy i n g ch il do f t he t ax p ay er
o r o f an y o th er t ax p ay er. Sec. 1 5 2 (d )(1 ). In ap p l y i n g th e s up p o rtt es t , we ev al u at e t h e am o u n to f s upp o rtfu rn i s h edb y th e t ax p ay er as co m

p aredt o th e t o t al am o un t o f s up p o rtrecei v ed b y th e cl ai m ed d ep en d en t fro m al l s o u rces . Turecam o v . Co m m is si o n er, 5 5 4 F.2 d5 6 4 , 5 69 (2 d Ci r. 1 9 77 ), aff’ g 6 4 T.C. 7 2 0 (1 9 75 ); s ec. 1 .1 5 2 -1 (a)(2 )(i ), In co m e Tax Reg s . Th e t ax p ay er m

u s t i n i t i al ly

d em on s trat e, b y co m

p et en tev i d en ce, t h e t o t al am ou n to f
s up p ortfu rn i s h ed b y

al l s o u rces fo r t he t ax ab l e y ear i n i s su e. Bl an co v . Co m m i s s i o n er, 5 6 T.C. 5 12 , 5 1 4 (1 9 7 1 ). Oth erwi s e, t he t ax p ay er can n o t b e s ai d t o h av e es t ab l i s h ed th at h e p ro vi d edm o re th an o n e-h al f o f t h e s up po rtfo r t h e cl ai m edd ep en d en t . Id . at5 1 4-5 1 5
.-1 9
-

Sup p o rtp ro v i d ed b y

a t hi rdp art y , s u ch as a Fed eral o r St at e ag en cy , i s n o t
co n si d ereds up p o rtfu rn i s h edb y th e t ax p ay er. See, e.g ., Gu l v in v . Co m m i ss i o n er, 6 4 4 F.2 d2 (5 th Ci r. 1 9 8 1 ), aff’ g T.C. M em o . 1 9 8 0 -1 1 1; Lu t t er v . Co m m i s s i o n er, 6 1 T.C. 6 8 5 (1 9 74 ), aff’ d , 5 1 4 F.2 d1 0 9 5 (7 th Ci r. 1 9 7 5 ); W i l l iam s v . Co m m i s s i o n er, T.C. M em o . 1 9 9 6 -1 2 6 , aff’ dwi th ou tp ub l i s h edo p i n i o n , 1 1 9 F.3 d 1 0 (1 1t h Ci r. 1 9 97 ). Pet i t i o ners p ai dv ari o u s ex p en s es o n b eh al f o f t h ei r fo s t er care cl ien t s du ri n g 2 0 1 2 ; h o w ev er, t h ey i n tro du cedn o ev i d en ce o f t h e t o t al s up p o rtfu rn i s h ed fo r each . M o reo v er, a St at e ag en cy p ai dp et i t i o ners $ 2 4 , 0 0 0 i n 2 0 12 fo r p ro v i d i n g fo s t er care s erv i ces t o th ei r fo s t er care cl i en t s. As n ot edab o v e, t h e St at e ag en cy p aym en t s d o n o tco n s t i tu te s up p o rtb y p et i t i o n ers . See Lu t t er v . Co m m i s s i o n er, 6 1 T.C. 6 8 5
. Co n s equ en t l y , p et i t io n ers h av e n otes t ab l i s h edth atthey p ro v id edo v er
o n e h al f o f t hei r fo s t er care cl i en t s ’ s up po rtdu ri ng 2 0 1 2 . Itfo l lo ws th at p et i t i o n ers ’ fo s t er care cl i en ts were n o t th ei r qual i fy i n g rel at i v es wi th i n th e
m ean i n g o f s ect i o n 1 5 2 (d ). Acco rd i n g l y , p et i t io n ers are n o ten t i t l edt o th e d ep en d en cy

ex em p t i o n d educt i o n s h ere i n d is pu t e, an dres p o n den t ’ s d is al lo wan ces
o f t h o s e d edu ct i o n s are s u s t ai n ed
.-2 0
-

IV. AOTC OnFo rm 8 8 6 3 at t ach edt o th ei r 2 0 1 3 retu rn p et i t i o n ers cl ai m edan AOTC o f $ 2 ,5 0 0 , o f wh ich th ey

treat ed$ 1 ,0 0 0 as refu n d ab l e an d$ 1 ,5 0 0 as n o nrefu n d ab l e. Acco rd in g t o th atfo rm , th e cred i ti s at tri bu t ab l e t o p et i t i o n ers ’ d au g h ter’ s edu cat i o n ex p en s es atth e Un i v ers i ty o f Po rt l an d
. Th e AOTC i s a m o di fi edv ers i o n o f t h e Ho pe Sch o lars h i p Cred i t . See s ec. 2 5 A(i ). Itp ro v i d es fo r a cred i tfo r qu al i fi edtu i t io n an drel at edex pen s es p ai db y a t ax p ay er fo r edu cat i o n fu rn i s h edt o an el ig i bl e s tu den t . Th e cred i t i s equ al t o

“ (A) 1 0 0 p ercen to f s o m u ch o f t h e qual i fi edtu i t i o n an d rel at edex p en s es p ai db y th e t ax p ay er duri n g th e t ax ab l e y ear * * * as d oes n o t ex ceed $ 2 , 0 0 0 , p l u s (B) 2 5 p ercen to f s u ch ex p en s es s o p ai das ex ceed s $ 2 ,0 0 0 b u t d o es n o tex ceed $ 4 ,0 0 0 .” Sec. 2 5 A (i )(1 ). Th e s t atu t e d efi n es “ qu al i fi edtu i t i o n an drel at edex p en s es ” t o i n cl u d e tu i t i o n an d fees atan el i g i b l e edu cat i o nal i n s t i tu t i on th atth e t ax p ay er, t h e t ax p ay er’ s s p o u se, o r t h e t ax pay er’ s d ep en d en tat t en ds , as wel l as co u rs e m at eri al s . Sec. 2 5 A (f)(1 ), (i )(3 ). Pet i t i o ners d i dn o tp ro v id e an y can cel edch eck s , cred i tcards t at em en t s , b an k acco u n ts t at em en t s, acco un ts t at em en ts fro m th e Un i vers i ty

o f Po rt l an d , o r
an y o th er d o cu m en tth ats h o ws th atth ey p ai d an y o f t h e “ qu al i fi edtu i t i o n an d rel at ed ex p en s es ” s ho wno n th e Fo rm 8 8 6 3 . Th e Fo rm

1 0 9 8 -T s u g g es t s th at-2 1
-

n o th i n g was p ai d . Th atb ei n g s o , p et i t i o ners are n o t en ti t ledt o the AOTC h ere i n d i s p u t e, an dres p o n d en t ’ s d i s al l o w an ce o f t he cred i t i s s u s t ai n ed
. V. Sect io n 6 6 62 (a) Accu racy -Rel at ed Pen al t ies Las t ly , we co n s i d er wh et h er p et i t i o ners are l i ab l e fo r a s ect i o n 6 6 6 2 (a)
accu racy -rel at edp en al ty

fo r ei th er y ear i n i s s u e. As rel ev an t h ere, s ect i o n 6 6 6 2 (a) i m p o s es a p en al ty

o f 2 0 % o f t h e p o rt i o n o f an u n d erp aym en to f t ax at tri b u t ab l e t o th e t ax p ay er’ s : (1 ) n eg l i g en ce o r d i s reg ardo f ru l es o r reg u l at io n s o r (2 ) s ub s t an t i al u n d ers t at em en to f i nco m e t ax . Sec. 6 66 2 (a) an d(b )(1 ) an d(2 ).

“Neg li g en ce” i n cl u d es an y fai lu re t o m ak e a reas on ab l e at t em p t t o co m p l y wi th th e p ro v is i o n s o f t h e Co d e, i n cl u d i n g an y fai l ure t o k eep ad equat e b o o k s an dreco 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. 6 6 6 2 (c); s ec. 1 .6 6 6 2 -3 (b )(1 ), In co m e Tax Reg s. A “ s ub s t an t i al u n d ers t at em en to f i n co m e t ax ” i n cl u d es an u n d ers t at em en t o f i n co m e t ax th atex ceed s th e g reat er o f 1 0% o f t h e t ax req u i red t o b e s h o wno n th e retu rn o r $ 5,0 0 0 . Sec. 6 6 6 2(d )(1 )(A); s ec. 1 .6 6 6 2 -4 (b ), In co m e Tax Reg s . Res po n d en tb ears th e b u rd en o f p ro du ct i o n wi th res p ectt o th e i m p o s i t i o n o f t h e
s ect i on 6 6 6 2 (a) accu racy -rel at edp en al ti es . See s ec. 7 4 9 1 (c); Hi g bee v
. Co m m i s s i o n er, 1 1 6 T.C. 4 3 8 , 4 4 6 -4 4 7 (2 0 0 1). Sect io n 6 7 5 1 (b )(1 ) p ro v i d es th at , s ub j ectt o cert ai n ex cep t io n s i n s ect i o n 6 7 5 1 (b )(2 ), n o p en al ty

s h al l b e as s es s ed u n les s the i ni t i al d et erm i n at i o n o f t h e-2 2
-

as s es s m en ti s p ers o n al l y

ap p ro v edi n wri t i n g b y

th e i m m ed i at e s uperv i s o r o f t h e i n d i v i du al m ak i n g th e d et erm i n at i o n o r s u ch h i g h er l ev el o ffi ci al as the Secret ary
m ay d es i g n at e. Wri tt en ap pro val o f t h e i n it i al p en al ty d et erm i n at io n u nd er s ect i on 6 7 5 1 (b )(1 ) m

u s tb e o b tai n edn o l at er t h an th e d at e t h e n ot i ce o f d efi ci en cy i s i s su edo r t he d at e t he Co m m i s s i o n er fi les an an s wer o r am en d edan swer as s ert i n g th e p en al ty . Ch ai v . Co m m i s s i o n er, 8 5 1 F.3 d1 9 0 , 2 2 1 (2 dCi r. 2 0 1 7 ), aff’ g i n p art , rev ’ g i n p art T.C. M em o . 2 0 1 5 -4 2 ; s ee al so Graev v . Co m m i ss i o n er, 1 4 9 T.C. 4 8 5 , 4 9 2 -4 9 3 (2 0 17 ), s up p lem en t i n g an do v erru li n g i n p art1 4 7 T.C. 4 6 0 (2 0 1 6 ). Th e s ect i on 6 6 6 2(a) accu racy -rel at edp en al ti es d et erm i n edi n the n o t i ce were p ro perl y

ap p ro v edas req ui redb y

s ect i o n 6 7 5 1 (b )(1 ). Th e reco rdi n cl u d es a Ci v il Pen al ty

Ap p ro v al Fo rm , ap p ro v i n g i m p os i t i o n o f accu racy -rel at edp en al t ies ag ai n s tp et i t i o n ers fo r 2 0 1 2 an d2 0 1 3 an d ex ecu t ed b y th e In t ern al Rev en u e Serv i ce t ax ex am i n er’ s i m m ed i at e s up erv i s o r b efo re t he d at e t he n o t i ce was i s s u ed
. Res po n d en th as p ro v en s u ffi ci en tfact s t o s at i s fy the b u rd en o f p ro duct i o n as t o th atreq u i rem en t. Pet i t i o ners d i dn o tp res en tad equ at e d ocu m en t s s ub s t an t i at i n g thei r cl ai m ed ch ari t ab le co n tri b u t i on s fo r 2 0 1 2 an d2 0 1 3 o r t h ei r p aym en t o f “ qu al i fi ed tu i t i o n
an d rel at edex pen s es ” s h o wno n th e Fo rm 8 8 6 3 . Th ey

al s o cl ai m eds i g n i fi can t p ers o n al ex p en s es as Sch edu l e C ex p en s es fo r t h e y ears i n i s s u e. Th erefo re,-2 3
-

res p o n d en t h as m eth i s b u rd en o f p ro du ct i o n wi th res p ectt o the i m p o s it i on o f
s ect i on 6 6 6 2 (a) accu racy -rel at edp en al ti es . Th e accu racy -rel at edp en al ty d o es n o tap p l y

t o an y p art o f an u n d erp aym en t
o f t ax i f i ti s s h o wnth atth e t ax p ay er act edwi th reas o nab l e cau s e an di n g o o dfai t h wi th res p ect t o th atp o rt i o n . Sec. 6 6 6 4 (c)(1 ). Th e d et erm i n at i on o f wh et h er a t ax p ay er act edi n g oo 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 n t o acco u n t al l th e p ert in en t fact s an d ci rcu m s t an ces . Sec. 1
. 6 6 64 -4 (b )(1 ), In co m e Tax Reg s .

“ Ci rcu m s t an ces thatm ay i n d icat e reas on ab l e cau s e an dg o odfai th i n cl u d e an h o n es tm i s u n d ers tan d i n g o f fact o r l aw t h ati s reas o n ab l e i n l i g h t o f al l o f th e fact s
an d ci rcu m s t an ces , i n cl u d i n g th e ex p eri en ce, kn o w l ed g e, an d edu cat i o n o f th e t ax p ay er.” Id
. Pet it i on ers b ear t h e b u rd eno f p ro v i n g th atth ey h adreas on ab l e
cau s e an d act edi n g o o dfai th wi t h res p ectt o t h e u n d erp aym en ts . See Hi g b ee v . Co m m i s s i o n er, 1 1 6 T.C. at4 4 9. Co n si d eri ng al l th e fact s an dci rcu m s t an ces , i ncl u d in g p et it i o n ers ’ g o o d
fai th rel i an ce o n the as s i s tan ce o f an acco u n t an ti n p rep ari n g th ei r t ax retu rn s fo r th e y ears i n i s s u e, we co n cl ud e t h atp et i t i o n ers h av e s h o wn reas o n ab l e cau s e an d th atth ey act edi n g o odfai th in res p ecto f t h e p o rt io n s o f t h e u n d erp aym en ts th at are at tri b u t ab l e t o th e d i s al l o wan ce o f d edu ct io n s fo r d ep reci at i o n an d b us i n es s
u s e o f h om e ex p en ses cl ai m edo n th ei r Sch edu l es C fo r 2 0 12 an d2 0 1 3 an dth e-2 4
-

d ep en d en cy

ex em p t i o n d educt i o n s cl ai m edfo r 2 0 1 2 . Th erefo re, we h o l d t h at p et i t i o n ers are n otl i ab l e fo r s ect i o n 6 6 6 2 (a) accu racy -rel at edp en al ti es i n res p ect
o f t h o s e p o rt i o n s o f t h e u n d erp aym en t s . Inco n tras t , p et i t i o n ers ’ ex p l an at i o n s fo r cl ai m i ng p ers o n al ex pen s es as b u s i n es s ex p en s es o n th ei r Sch edu l es C an dth ei r fai l u re t o s ub s t an t i at e p aym en t s o f t he “ qual i fi edtu i t i o n an drel at edex p en s es ”
s h o wno n t h e Fo rm 8 8 6 3 an dch ari t ab l e co n tri b ut i o n s fo r 2 0 1 2 an d2 0 1 3 d o n o t d em o n s trat e t h atth ey

act edwi th reas on ab l e cau s e an di n g o o d fai th wi th res p ectt o th e p o rt i o n s o f t h e u n d erp aym en t s at tri b u t ab l e t o th o s e ad ju s t m en t s , an dwe, th erefo re, co n cl u d e t hatp et i t i o n ers are l i ab l e fo r t he p en al t i es i n res p ecto f t h o s e p o rt i on s o f t h e u n d erp aym en t s . To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t eredu n d er Ru l e 1 5 5
.