1Unless otherwise indicated, all section references are to

the Internal Revenue Code, as amended, and all Rule references

are to the Tax Court Rules of Practice and Procedure. Amounts

are rounded to the nearest dollar.

T.C. Memo. 2009-274

UNITED STATES TAX COURT

TIMOTHY P. FOSTER, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 24411-07. Filed November 25, 2009.

Timothy P. Foster, pro se.

John W. Strate, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HAINES, Judge: Respondent determined a deficiency of

$265,665 and a section 6662(a) penalty of $53,133 with respect to

petitioner’s Federal income tax for 2005.1 The issues for
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decision are: (1) Whether petitioner is entitled to business

expense deductions for labor costs and rental payments for 2005;

and (2) whether petitioner is liable for the negligence penalty

under section 6662.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. 

The stipulation of facts, together with attached exhibits, is

incorporated herein by this reference. At the time petitioner

filed his petition, he resided in California.

Petitioner is in the commercial relocation business. Since

2004 he has been the sole proprietor of C&C Services, a business

relocation company. Before striking out on his own he was a

salesperson at several other business relocation companies,

including Golden State Services. 

Commercial relocation is a labor- and cash-intensive

business. It involves the moving of heavy equipment and

machinery from one site to another and requires large amounts of

storage space. In 2005 petitioner hired two unrelated companies,

Piece of Mind and California State Interiors, to provide contract

laborers for C&C Services to staff specific relocation projects. 

Petitioner did not pay these contract laborers directly but

rather paid Piece of Mind and California State Interiors with

checks and in cash for meeting C&C Services’ staffing

requirements. Petitioner sent invoices to clients for services
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C&C Services performed, and in return would receive checks that

he placed in his bank account. 

Petitioner hired two project managers, Telemu Jennings and

Navassa Brown, to supervise and coordinate the contract laborers. 

Petitioner paid Mr. Jennings and Mr. Brown in cash at least 70

percent of the time. 

Petitioner rented part of a large warehouse in San Jose from

California State Interiors in order to store clients’ materials

while their businesses were being relocated by C&C Services. 

Petitioner often combined rental and staffing payments in the

checks he made to California State Interiors. 

Petitioner did not keep a general ledger, cash expenditure

journal, or computer program to keep track of his income and

expenses. Petitioner had studied business finance at San Jose

State University for 3 years in the 1970s and taken a basic

accounting course.

Petitioner hired an old acquaintance, Bill Miller, to

prepare his 2005 return. Mr. Miller had helped employees of

Golden State Services prepare their taxes while petitioner was a

member of that firm. Petitioner never attempted to ascertain Mr.

Miller’s qualifications to prepare tax returns, and it is unclear

whether Mr. Miller was a licensed accountant. Mr. Miller passed

away in February 2007. 
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2Petitioner lost access to the original copies of these

Forms 1099-MISC when Mr. Miller passed away.

On April 17, 2006, petitioner filed Form 1040, U.S.

Individual Income Tax Return, for 2005. On his Schedule C,

Profit or Loss From Business, petitioner claimed deductions for

business expenses consisting of wages of $603,662, contract labor

of $8,160, and rental costs of $120,000. Petitioner also filed

multiple Forms 1099-MISC, Miscellaneous Income, reporting that he

paid various independent contractors $645,524 in 2005.2 

On July 23, 2007, respondent sent a notice of deficiency to

petitioner disallowing his business expense deductions for wages,

contract labor, and rental costs. Petitioner filed a timely

petition with this Court, and trial was held on November 6, 2008,

in San Francisco, California. 

OPINION

I. Burden of Proof

Generally, the Commissioner’s determinations in a notice of

deficiency are presumed correct, and the taxpayer has the burden

of proving that those determinations are erroneous. See Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In certain

circumstances, however, section 7491(a)(1) places the burden of

proof on the Commissioner. Petitioner has not alleged that

section 7491 is applicable, nor has he established compliance
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with the requirements of section 7491(a)(2)(A). Therefore, the

burden of proof does not shift to respondent.

II. Claimed Business Expense Deductions

Deductions are strictly a matter of legislative grace, and

taxpayers must satisfy the specific requirements for any

deduction claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435,

440 (1934). Taxpayers bear the burden of substantiating the

amount and purpose of any claimed deduction. See Hradesky v.

Commissioner, 65 T.C. 87 (1975), affd. per curiam 540 F.2d 821

(5th Cir. 1976).

Section 162(a) allows a deduction for all ordinary and

necessary expenses paid or incurred by a taxpayer in carrying on

any trade or business. An expense is considered ordinary if

commonly or frequently incurred in the trade or business of the

taxpayer. Deputy v. du Pont, 308 U.S. 488, 495-496 (1940). An

expense is necessary if it is appropriate or helpful in carrying

on a taxpayer’s trade or business. Commissioner v. Heininger,

320 U.S. 467, 471 (1943); Welch v. Helvering, supra at 113.

A taxpayer must maintain records sufficient to substantiate

the amounts of the deductions claimed. Sec. 1.6001-1(a), Income

Tax Regs. If a taxpayer establishes that an expense is

deductible but is unable to substantiate the precise amount, we

may estimate the amount, bearing heavily against the taxpayer
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whose inexactitude is of his own making. Cohan v. Commissioner,

39 F.2d 540, 543-544 (2d Cir. 1930). The taxpayer must present

sufficient evidence for the Court to form an estimate because

without such a basis, any allowance would amount to unguided

largesse. Williams v. United States, 245 F.2d 559, 560-561 (5th

Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

A. Wages and Contract Labor Expenses

Petitioner claims that he is entitled to labor cost

deductions of $617,708 for 2005. Taxpayers operating a trade or

business are entitled to deduct “salaries or other compensation

for personal services” which they can substantiate. Sec.

162(a)(1); sec. 1.162-7(a), Income Tax Regs.

Petitioner submitted four Forms 1099-MISC for 2005 listing

payments he made to his project managers and labor providers in

the following amounts: 

Labor Contractor Amount

Telemu Jennings $38,700

Navassa Brown 52,000

Piece of Mind 275,000

Jesse Mausa/ 

 California State 

 Interiors1 252,008

1Petitioner’s Form 1099-MISC for California State

Interiors also listed Jesse Mausa as a recipient of

petitioner’s payments. Petitioner did not provide a

taxpayer identification number for Mr. Mausa, who

presumably is an officer/owner of California State

Interiors.
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3Although neither party submitted petitioner’s original

Forms 1099-MISC, respondent’s electronic records indicate that

petitioner reported labor costs of $645,524 for 2005.

Petitioner’s reconstructed Forms 1099-MISC list costs of $617,708

for 2005. Petitioner could not account for this discrepancy.

As petitioner lost his original Forms 1099-MISC when Mr. Miller

passed away, these reconstituted forms represent petitioner’s

best recollection of his labor costs for 2005.3 

Petitioner also submitted a California State Interiors

“aging” worksheet that states C&C Services’ invoices and payments

for 2005. The document lists accrued charges for California

State Interiors’ labor procurement services as $252,008 and C&C

Services’ payments for both labor procurement and rent as

$161,920.

Petitioner’s testimony and submitted documentation are

inadequate to meet his burden to substantiate any of his claimed

labor expenses. A schedule of expenses is not sufficient to

substantiate claimed deductions. Lofstrom v. Commissioner, 125

T.C. 271, 278 (2005); Cluck v. Commissioner, 105 T.C. 324, 338

(1995); see also Paal v. Commissioner, T.C. Memo. 1969-284

(holding that salary expense for secretary to type manuscript

could be substantiated with introduction of manuscript into

evidence), affd. 450 F.2d 1108 (9th Cir. 1971). 

However, petitioner’s testimony, coupled with the laborintensive nature of his business, indicates that petitioner

incurred substantial labor costs for 2005. Although petitioner’s
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4Petitioner credibly testified that he paid Mr. Jennings $15

per hour and Mr. Brown $25 per hour. 

5Petitioner’s petition does not dispute respondent’s

disallowance of petitioner’s rental cost deductions. Petitioner

has not moved to amend his petition to assert this issue. 

Nonetheless, since the issue was raised at trial and respondent

addressed it on brief, we assume that the rental cost deduction

issue was tried by consent of the parties. See Rule 41(b)(1). 

testimony was too vague to allow us to estimate his payments to

Piece of Mind and California State Interiors for providing

contract laborers, see Vanicek v. Commissioner, supra at 742-743,

petitioner credibly testified that he paid each of his project

managers, Telemu Jennings and Navassa Brown, a regular weekly

wage throughout the year.4 Accordingly, we find that Mr.

Jennings and Mr. Brown were employees of petitioner for 2005 and

that petitioner paid them wages of $38,700 and $52,000,

respectively. See Cohan v. Commissioner, supra at 544.

B. Rental Costs

Petitioner claims that he paid California State Interiors

$10,000 per month in 2005 in order to rent a portion of a

warehouse.5 Taxpayers are entitled a Schedule C deduction for

expenses for rental property used in a trade or business if they

can substantiate them. Sec. 162(a)(3); sec. 1.162-1(a), Income

Tax Regs. 

The “aging” worksheet submitted by petitioner shows that

petitioner paid California State Interiors more than $120,000 in

2005. Petitioner also credibly testified that he paid $120,000
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6The aging worksheet indicates that petitioner did not make

any payments to California State Interiors in 2005 until August

of that year.

per year to California State Interiors as part of a joint lease

on the warehouse but often paid late and thus sometimes paid

California State Interiors more or less than $10,000 per month.6

On the basis of the record, we are able to approximate

petitioner’s rental costs considering the aging worksheet and

petitioner’s testimony regarding his warehouse. We find that

petitioner is entitled to deduct $120,000 in rental costs for

2005 as a business expense. See Cohan v. Commissioner, supra at

544.

III. Accuracy-Related Penalty

Respondent determined that petitioner is liable for the

accuracy-related penalty under section 6662(a) for 2005. The

accuracy-related penalty applies to any underpayment of tax

required to be shown on a return that is attributable to

negligence or disregard of rules or regulations under section

6662(b)(1).

Negligence is defined as any failure to make a reasonable

attempt to comply with the provisions of the Internal Revenue

Code. Sec. 6662(c). However, section 6664(c)(1) provides that a

penalty under section 6662 will not be imposed on any portion of

an underpayment if the taxpayer shows reasonable cause for such

portion of the underpayment and that the taxpayer acted in good
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faith with respect to such portion. Reliance on the advice of a

professional, such as a certified public accountant, may

constitute a showing of reasonable cause if, under all the facts

and circumstances, such reliance is reasonable and the taxpayer

acted in good faith. Henry v. Commissioner, 170 F.3d 1217, 1219-

1223 (9th Cir. 1999), revg. T.C. Memo. 1997-29; Betson v.

Commissioner, 802 F.2d 365, 372 (9th Cir. 1986), affg. in part

and revg. in part T.C. Memo. 1984-264; sec. 1.6664-4(b)(1), (c),

Income Tax Regs. To prove reasonable cause based on the receipt

of professional advice, a taxpayer must show that he reasonably

relied in good faith upon a qualified adviser after full

disclosure of all necessary and relevant facts. Collins v.

Commissioner, 857 F.2d 1383, 1386 (9th Cir. 1988), affg. Dister

v. Commissioner, T.C. Memo. 1987-217; sec. 1.6664-4(b)(1), Income

Tax Regs. 

Under section 7491(c) the Commissioner has the burden of

production with respect to the taxpayer’s liability for the

penalty provided by section 6662 and must come forward with

sufficient evidence to impose the penalty. Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001). But once the

Commissioner meets that burden, the taxpayer has the burden of

proof concerning whether the Commissioner’s determination to

impose the penalty is correct. Allen v. Commissioner, T.C. Memo.

2005-118.
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We conclude that respondent has met his burden of production

under section 6662. Respondent has demonstrated that petitioner

incorrectly claimed Schedule C deductions for 2005 and failed to

maintain records to substantiate his claimed deductions. These

facts indicate that petitioner in general failed to make a

reasonable attempt to comply with the provisions of the Internal

Revenue Code. 

Petitioners is otherwise unable to show why respondent’s

determination to impose the penalty is incorrect. Petitioner

demonstrated that he relied on the advice of Mr. Miller to

prepare his 2005 return but failed show that Mr. Miller was a

qualified adviser. Nor has petitioner offered any reasonable

cause for his inability to substantiate his claimed deductions,

particularly given his level of education and experience in the

business relocation industry. Accordingly, with the exception of

the portion of the penalty attributable to adjustments to

petitioner’s business expense deductions for payments to Telemu

Jennings and Navassa Brown and for rental costs, petitioner is

liable for the accuracy-related penalty under section 6662(a). 
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In reaching our holdings herein, we have considered all

arguments made, and, to the extent not mentioned above, we find

them to be moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered

under Rule 155.