T.C. Sum m ary Opi ni on 20 15 -5 4

UNITED STAT ES TAX COURT

DAVID W ILLIAM LAUDON, Peti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 27 38 0- 11 S. Fi le d S ep te m be r 8, 2 01 5.

Dav idW il li am

Laud on , pro se. Ch ris ti naL. Coo k andJo hn Sch m it td ie l, fo r res po nd en t.

SUMM ARY OPINION HOLMES, Ju dg e: Davi d Lau do n i s a c hi ro pr act orli cen se d i n M in ne so ta . He m ad e n earl y

$2 90 ,00 0 i n b an k d ep os it s fr om 20 07 to 20 09 y etrep orte d o nl y a bi t l es s tha n $ 21 0,0 00 ingro ss rece ip ts on hi s re tu rn s. He d educ te d a s b us in es s ex pe ns es forhi s ch iro pr act ic ho m e o ffi ce a M ic ro so ft Xb ox 36 0, Ni nt en do W ii , an d n um ero us pi eces of h ai r-s al on equi pm en t. He al so cla im edde du ct io ns for- 2 -

dr iv in g t en s o f th ou sa nd s o f mil es th ro ug ho utMi nn es ot a an d the Dako ta s- -b ot h t o tre atpa ti en ts an d t o p erfo rm anass ortm en t o f ot he r se rv ic es . The Co m m is si on er th ou gh t thi s was a st ret chan d u rg es us to supp ort h is ad jus tm en ts . 1 Bac kg ro un d Lau do n o wns an d o pe rat es a rathe r un co nv en ti on al ch iro pr act ic bu si ne ss in Detr oi t Lak es , Min ne so ta . He trea ts so m e o f hi s p at ie nt s i n h is ho m e an d c la im s t o us e ro ug hl y

ha lf o f hi s h ou se --the ba se m en t an d h al f of th e g arag e--f

orbu si ne ss . Lik e m an y

ch iro pr act ic off

ic es , Laud on ’s has be ds , tab le s, an d await in g area. Bu t
un li ke m os t, h is als o c om es equi pp edwith aW ii , Xbo x 3 60 , bi g- sc reen TVs an d, fo r a t im e, a worki ng ha ir s al on . Lau do n t es ti fie d tha t h e al so m ak es “ ho us e cal ls ” an d re po rte d tha t h e rack edup be twee n 4 0,0 00 an d 6 0,0 00 m il es pe r y ear i n h is bu si ne ss ve hi cl es . He
sa idth athi s p at ie nt s o fte n c al le d h im a ps y ch ia tri st , chauf

feu r, ph y si ci an , pea ce of fic er, o r ev ena ph eas an t h un te r. Som e o f Lau do n’s s ta te d re as on s fo r m ak in g 2
W e tr ie d thi s s m al l ca se inSt. Paul un de r In te rn al Rev enue Co de sec ti on 1 74 63 (f). (Al l s ect io n c it at io ns are t o the Co de ineffe ctforth e y ears inis su e, an d al l Ru le refe ren ces are t o the Tax C ou rt Rul es of P ract ic e an d P ro cedur e.) Tria l as a small c as e m ean s tha t thi s d eci si on is n’t re vi ewab le by any othe r co urt, an d thi s op in io n s ho ul dn ’t be c it edas p rece de nt . Bu t n ota gh os tb us te r. The C omm is si on er rh et or ic al ly ass ert edth atso m e 2 of Laud on ’s tri ps mig htha ve m ad e m or e se ns e if he was c la im in g t o b e a

(co nt in ue d...)- 3 -

th es e tr ip s s tra incred ib il ity : fo r ex am pl e, dr iv in g t o a“ sc hi zo ph ren ic ” p at ie ntwho
was --o n m or e th anon e o ccas io n- -“ runn in g s care d o f de m on s” do wn a rur al Mi nn es ot a h ig hwa y , or driv in g t o apa ti en t’s h om e ina Mi nn eap ol is subu rb
-- ex pe ns in g 2 61 m il es --b ecau se he ha d re cei ve d acal l fr om po li ce tha t s he ha d
ov erd os edonOxyCon ti n p res cri be d b y he r ph ys ic ia n . Laud on cla im edto ha ve dr iv enhu nd red s o f m il es pe r da y --s om et im es witho uta va li d l ic en se --t o s ee pa ti en ts , bu t s ev eral of t he se tri ps were fo r m ed ic al pro cedur es he was n otli cen se d to pe rfo rm . Evenhi s t es ti m on y ab ou t m ul ti pl e en tri es inth e lo gs wher e h e wro te

“ DUI” was no t cr ed ib le : He cl ai m edth atth es e were n otrefe ren ces to be in g st op pe d b y

po li ce wh il e und er the in flu en ce, o r dr iv in g wh il e h is li cen se was su sp en de d, b utin st eadwere h is m is sp el li ng s o f a p at ie ntna m ed“ Dewey ”--a
supp os edpa ti en t o f hi s. He t es ti fie d tha t h e to okon e b us in es s trip to pi ck up a pa ti en t l eftstran de d due to a do m es ti c d is pu te with h is gi rlf rie nd . Andhe ev en te st ifi edab ou t trip s h e m ad e to tes t h is pa ti en ts ’ ur in e:
(...co nt inue d) 2 gh os tb us te r. Laud on th endi sc la im edan y em pl oym en t as a gh os tb us te r. In h is rep ly brie f th e Co m

m is si on er co nc ed edth atLaud on was n ot“ em pl oyed o r un de r co nt ractto pe rfo rm

workas agh os tb us te r du rin g the tax y ears at i ss ue inth is cas e.” We the refo re n eedm ak e n o fi nd in g o n the ex is te nc e o f a m ark etfor “ supe rn atur al eli m in at io n” inwest -cen tra l M in ne so ta . See “ Gho stbu st ers ” (Co lu m bi a Pi ctur es 19 84 ).- 4 -

Abs ol ut el y

we do * * * [t es t u rin e]. It’s p artof t he --I b el ie ve it ’s Fed eral , y oukn ow, tha t the y ha ve --we h av e to ab id e b y th at . It’s sp eci fic gra vi ty. You ’re bas ic al ly, lo ok in g fo r su ga r, le t al on e h ei gh t, weig ht , bl oo d p res su re. Mak e su re the y ’re no t drunk , do in g i ll eg al drug s. W e fi ndLaud on no t cr ed ib le inhi s t es ti m on y reg ard in g h is bu si ne ss
m il eag e, an d thi s fi nd in g a ffec ts ou r vi ews of h is tes ti m on y ’s cred ib il ity on ev ery ot he r is su e in th e cas e. The se othe r is su es ari se fro m hi s u nu su al returns th atrep orte d n o n et in co m e: 3 Year Gro ss Rece ip ts Exp en se s Tax ab le Inc om e 20 07 $5 9,0 56 $1 11 ,25 0 $( 60 ,94 4) 20 08 67 ,06 8 71 ,00 5 (6 5,0 81 ) 20 09 33 ,95 2 56 ,31 3 (8 4,3 93 ) Lau do n d id , ho wev er, m ak e une xp la in edde po si ts in to hi s b an k a cco un ts . The Co m m is si on er an al yzedth es e acc ou nt s an d d is co ve redth atLaud onha d p utne arl y $8 0,0 00 m or e in to th em

th anhe ’d rep orte d o n h is tax returns . The Co m m is si on er

The g ro ss rece ip ts an d e xp en se s co m e fro m Laud on ’s Sch edul es C, whi ch 3 co ns ti tu te th e b ig ge stpart o f hi s re tu rn s. He co m bi ne d h is Sch edul e C l os se s wi th ot he r it em s- -Sch edul e A it em iz edde du ct io ns or t he st an da rdde du ct io n d ep en di ng on th e y ear, h is pe rs on al ex em pt io n, an d l arg e “ ot he r in co m e” i te m s tha t wer e carr ie d- fo rwardlo ss es --t o arri ve at h is tax ab le in co m e.- 5 -

ad de d thi s amoun t t o Lau do n’s i nc om e an d d is al lo wedm an y de du ct io ns . The
no ti ce o f de fic ie nc y

de te rm in ed : Year Gro ss Rece ip ts Exp en se s Tax ab le Inc om e 20 07 $7 1,0 56 $1 1,3 19 $4 6,7 66 20 08 10 5,9 97 28 ,78 0 62 ,81 2 20 09 62 ,01 4 23 ,29 0 26 ,13 8 Lau do n fi le d ati m el y

pe ti ti on , andwe tri edhi s ca se inSt. Paul . Laud on rem ai ns a Mi nn es ot a res id en t, as he was wh enhe be ga n h is cas e. Dis cu ss io n A. In co m e W e fi rs t as k wh ethe r Lau do n u nd erre po rte d h is in co m e. Laud on di d n ot ke ep reco rd s o f hi s i nc om e in an y de ci ph erab le form ; an d wh enth is happ en s the Co m m is si on er m ay

reco ns tru cta ta xp ay er’s i nc om e b y us in g any rati on al m etho d th atsep arat es tax ab le in co m e fro m no nt ax ab le in co m e an d e xp en se s. A ba nk
de po si ts an al y si s i s an acce pt ab le m etho d. Se e, e.g ., Cau lfi el d v . Comm is si on er, 33 F.3d99 1, 9 93 (8t h C ir. 1 99 4) , aff’g T.C. Mem o. 1 99 3- 42 3. Fo r us to acce pthi s b an k- de po si ts an al y si s, the Co m m is si on er m

us t s ho w th atLaud on op erat edanin co m e-p ro du ci ng bu si ne ss forth e ta x years a t i ss ue , and
m ad e reg ul ar d ep os it s i nt o thi s b us in es s’s b an k a cco un ts . He m ay th enco m pu te- 6 -

ne t t ax ab le in co m e b y

di st in gu is hi ng tax ab le de po si ts fro m de po si ts of n on ta xabl e in co m e an d i nc om e fro m y ears no t atis su e. See Un it edSta te s v . Abo de el y , 80 1 F.2 d 1 02 0, 1 02 3 (8 th Cir . 19 86 ). Usi ng th is lo ng -acc ep te d m etho d, the Co m m is si on er d et erm in edth atLaud on ha d m ad e n ettax ab le de po si ts forth e ta x y ears be fo re u s: 4 Year Tot al Depo si ts Rep orte d and no n- ta xabl e in co m e Tot al un rep orte d

ta xabl e in co m e 20 07 $9 9,5 78 $8 7,5 78 $1 2,0 00 20 08 11 3,4 48 74 ,51 9 38 ,92 9 20 09 74 ,86 2 46 ,80 0 28 ,06 2 Tot al 28 7,8 88 20 8,8 97 78 ,99 1 Bec au se th e Co m

mis si on er u se d an a ccep tabl e m etho d o f in co m e reco ns tru ct io n, Lau do n h as th e b ur de n o f pr ov in g tha t the Co m m is si on er m ad e so m e m is ta ke . See Caul fie ld , 33 F.3dat 9 93 ; Do dg e v . Comm is si on er, 9 81 F.2d 35 0, 3 54 (8t h C ir. 1 99 2) , aff’g 9 6 T.C. 1 72 (19 91 ). Laud onco nt en ds th atth e Co m m is si on er fa il edto cla ss ify certa inde po si ts as n on ta xabl e, in cl ud in g in su ran ce p aym en ts forda m ag e to sev eral ve hi cl es , on e o f whi chwas i nv ol ve d i n a “ hi ghsp eedpo li ce ch as e” wi th a m an“ hi gh on m eth andco cai ne .” He als o The C omm is si on er d idco nc ed e th aton e $ 90 0 d ep os itsh ou ldn’t b e 4 in cl ud edinth e b an k- de po si ts an al y si s due to a ba nkerro r.- 7 -

cl ai m s h e h adpro ceed s fr om car s al es go ne awry , th e sa le of s cubaequi pm en t,
co m pe ns at io n fo r lo stlu gg ag e, an d p aym en ts fro m Bes t Bu y an d F ed Ex fo r da m ag e to hi s l ap to p c om pu te r ontwo di ffer en t o ccas io ns . Andhe cla im s tha t

“ W el ls Farg o l os t [a ] cas h d ep os it ” o f $6 ,00 0 o r m ay be $7 ,85 0. Bu t b ecau se he di dn ’t pro du ce an yev id en ce v eri fy in g tha t the se am ou nt s were d ep os it edin to th e rel ev an t ac co un ts , Laud onha sn ’t m ethi s b ur de n o f pr oo f. Cf. Cau lfi el d, 3 3 F .3dat 9 93 -9 4. Th e Co m mis si on er ca lc ul at edLaud on ’s in co m e by add in g the de po si ts inhi s p ers on al acco un ts an d b us in es s ac co un t fo r eac h o f th e y ears at i ss ue . He th enreduc edth e to ta l b y Laud on ’s rep orte d i nc om e an d b y an y de po si ts id en ti fie d a s n on ta xabl e. W e th eref or e acc ep t the Co m

m is si on er’s
reco ns tru ct io n o f Lau do n’s i nc om e. B. Deduc ti on s W e n ex t l oo k a t Lau do n’s d educ ti on s. Th e Co m m is si on er al lo wedve ry

few of th em : Sch edul e C ex pe ns es Year Am ou ntrep orte d

on return Am ountall owe d

by exam Adju st m en t 20 07 $1 11 ,25 0 $1 1,3 19 $9 9,9 31 20 08 71 ,00 5 28 ,78 0 42 ,22 5 20 09 56 ,31 3 23 ,29 0 33 ,02 3- 8 -

Tot al 23 8,5 68 63 ,38 9 17 5,1 79 The Co m m is si on er’s rea so n was si m pl e: Lik e an y

tax pa y er, Lau do n c ancla im bu si ne ss -ex pe ns e d educ ti on s o nl y forth e o rd in ary an d n eces sa ry expe ns es of h is bu si ne ss , see sec . 16 2( a), an d h e b ears th e b ur de n o f pr oo f, se e Ru le 14 2( a); INDOPCO, In c. v. Co m

m is si on er, 5 03 U.S. 79 , 84 (19 92 ). Taxp ay ers us ua ll y
m eetth is bu rd enwith re co rd s o f so m e k in d. Se e se c. 60 01 ; Hra de sky v. Co m m is si on er, 6 5 T.C. 8 7, 8 9- 90 (19 75 ); s ec. 1 .60 01 -1 (a)- (e), In co m e Tax Reg s. Andforso m e k in ds of e xp en se s, tho se reco rd s m us t b e p art ic ul arl y

de ta il ed . See
se c. 27 4( d)
. Car an d Tru ck

Ex pens es W e lo okfir stat t he ve ry

lar ge de du ct io ns th atLaud on cla im edforhi s trav el th ro ug ho utan d b etweenth e Dak ot as an d M in ne so ta . The Co m m is si on er o bjec te d to all of t he se on th e g ro un d tha t Lau do n’s re co rd s d idn’t s ub st an ti at e th em : Car a ndtru ckex pe ns es Year Am ou ntrep orte d

on return Am ountall owe d

by exam Adju st m en t 20 07 $3 0,6 45 $0 $3 0,6 45 20 08 24 ,89 9 0 24 ,89 9 20 09 23 ,74 1 0 23 ,74 1- 9 -

Lau do n’s p ro bl em

is th atcar- an d- tru ck

ex pe ns es are g ov ern edby sect io n 27 4( d) , whi chrequi res hi s re co rd s t o s ho w (1) th e am ou ntof e ach ex pe ns e, (2 ) th e da te s tha t h e dro ve forbu si ne ss pu rp os es , (3) wher e h e was go in g, an d (4 ) hi s bu si ne ss reas on forgo in g the re. See sec . 27 4( d)
. Lau do n h ada m il eag e lo g, b utitfai ls to m eetsec ti on 27 4( d) ’s st an da rd s. The Ju ly 31, 2 00 7 e nt ry , forex am pl e, de sc rib es hi s p ur

po se as “ [t]rav el to an d fro m pl aces .” Even Laud on co nc ed edth athi s l og was “ no t a c om pl et e it em iz ed th in g.” W e fi ndth is lo g t o b e b ot h i nc om pl et e an d i nc om

pr eh en si bl e an d d is al lo w Lau do n’s m il eag e d educ ti on s i n fu ll
. Ho m e Off

ic e Ex pens es Lau do n a ls o t oo k d educ ti on s fo r us in g h is ba se m en t an d g arag e as a ho m e of fic e in20 07 an d 2 00 9: Bu si ne ss us e o f ho m e expe ns e Year Am ou ntrep orte d

on return Am ountall owe d

by exam Adju st m en t 20 07 $5 ,23 5 $0 $5 ,23 5 20 09 $1 ,78 7 $0 $1 ,78 7 Sect io n 2 80 A(c)(1 ) al lo ws a t ax pa y er t o c la im a de du ct io n fo r th e p orti on of h is ho m e al lo cat edforbu si ne ss us e. A tax pa y er cl ai m in g ade du ct io n u nd er thi s se ct io n m us t, h owe ve r, sh ow tha t h e u se d the po rti on of h is ho m e excl us iv el yfor- 10 -

bu si ne ss . Id.; Lang er v . Comm is si on er, 9 80 F.2d11 98 , 11 99 (8t h C ir. 1 99 2) , aff’g T.C. Mem o. 1 99 0- 26 8. Whi le we acce ptth atLaud on tre at edpa ti en ts inhi s h om e atlea stso m e o f th e ti m e, we do n’t fi ndcred ib le hi s t es ti m on y th athi s b as em en t was us ed
ex cl us iv el y

forhi s b us in es s. We part ic ul arl y di sb el ie ve hi s cl ai m

th atth e Xbo x, W ii , bi g- sc reen TVs, an d o th er el ectro ni cs inhi s b as em en t wer e u se d e xc lu si ve ly fo r ch iro pr act ic pu rp os es si nc e th is cla im co nf li ct s wi th hi s m

uc h m or e p laus ib le adm is si on to th e IRS ex am in er dur in g aud itth athi s d au gh te r an d h is gi rlf rie nd ’s
so n wo ul d p lay

th es e v id eo ga m es whi le he was o n the ph on e. Laud on als o 5 adm it te d tha t h e u se d h is garag e to st or e th e car s tha t h e u se d p ers on al ly. Thi s i s anen ti rel y

pl au si bl e u se of agarag e, bu t i t m ean s we wo n’t fi ndth athe us edth e ga rag e ex cl us iv el y

for bu si ne ss pu rp os es . W e al so de ny the se de du ct io ns be cau se

Laud on furth er u nd erm in edhi s cr ed ib il ity by clai m in g tha t h e u se d the W ii 5 an d Xb ox 36 0 t o k eep hi s p at ie nt s “ act iv e an d m ov in g.” Thes e are well -kno wn ga m es who se featur es are n otsubjec t t o re as on ab le di sp ut e an d are “ ge ne ral ly kn own withi n the tri al co urt’s t erri to ria l juris di ct io n.” Fed . R. Evi d. 2 01 (b )(1 ). One canim ag in e th e Wii--wi thga m es su chas Wii Bo wli ng an d Wii Fitth at featur e m ot io n- ba se d c on tro ll ers requi rin g p hysic al act iv ity fro m it s u se rs --m ig ht be us edforit s p hysic al be ne fit s. Bu t n o re as on ab le pe rs on co ul d thi nkth atth e Xbo x 3 60 co ul d b e--M ic ro so ft d idn’t i nt ro du ce the Kin ectun ti l l at e 2 01 0, ju stin ti m e fo r Ch ris tm as an d b efo re the y ears at i ss ue inth is cas e. Befo re Ki ne ct , Xbo x pl ay in g was m or e o f th e v eg gi ng -o ut -o n- th e-co uc h v ari ety .- 11 -

Lau do n fa il edto subs tant ia te hi s cl ai m edho m e-o ffi ce ex pe ns es with any reco rd s orothe r do cu m en ta ti on . In su ra nce, Rep ai rs , Util iti es , Offi ce Ex pens es , and Wa ge s E xp ens es W e’ll d is po se of s om e o th er co nt es te d d educ ti on s o n Lau do n’s re tu rn s: In su ran ce, rep ai rs , ut il it ie s, o ffi ce ex pe ns es , andwage s Year Exp en se

cat eg ory Am ou nt

rep orte d o n return Am ou nt

al lo wedby ex am Adju st m en t
20 07 In su ran ce $2 ,03 0 $8 50 $1 ,18 0

Rep ai rs 5,4 05 0 5,4 05 Uti li ti es 6,1 60 3,4 90 2,6 70 Offi ce ex pe ns es 13 ,16 9 1,5 53 11 ,61 6 20 08 In su ran ce 3,7 17 85 0 2,8 67

Uti li ti es 7,7 49 4,3 39 3,4 10 W ag e 9,6 00 0 9,6 00 20 09 In su ran ce 3,0 12 0 5,0 83 * Tot al 50 ,84 2 11 ,08 2 41 ,83 1* * Th e n ot ic e o f de fic ie nc y di sa ll owe d i ns ur an ce ex pe ns es of t hi s amoun t ev en th ou gh Laud on ha d c la im eda sm al le r am ount . W e su sp ectth atth e Co m m is si on er m ean t t o d is al lo w th e $ 5,0 83 th atLaud on cla im edon hi s 2 00 9 re tu rnas “ Rep ai rs an d M ai nt en an ce.” Bu t thi s i s ju stsp ecu la ti on , andne ithe r pa rty offe redan y ev id en ce o n the subjec t. We the refo re treatth e d is al lo wan ce o f $5 ,08 3 a s a di sa ll owa nc e o f th e actua l am ou ntth atLaud on cla im ed --$ 3,0 12 . This reduc es th e to ta l ad jus tm en ts forth es e expe ns es , andth e p art ie s s ho ul d re do th e Co m m is si on er’s m ath andus e th is lo wer am ou ntinth ei r Ru le 15 5 c om pu ta ti on s.- 12 -

Lau do n p ro du cedno subs tant ia ti on what so ev er tha t wo ul d l etus all ow an yth in g be y on d wh atth e Co m

m is si on er al read y

ha s. Othe r Ex pens es Oth er ex pe ns es Year Am ou ntrep orte d

on return Am ountall owe d

by exam Adju st m en t 20 07 $3 3,7 28 $2 ,74 1 $3 0,9 87 20 08 3,2 99 1,8 50 1,4 49 20 09 1,5 34 1,2 84 25 0 The Co m m is si on er d is al lo wed$3 0,9 87 of Lau do n’s cl ai m ed“ ot he r ex pe ns es ” in 20 07 . Laud on di dn ’t subs tant ia te any of h is cla im edde du ct io ns for th es e “ ot he r ex pe ns es ” fo r 20 07 , 20 08 , and20 09 , so we ag ree wi th th e Co m m is si on er’s d et erm in at io n. Mo stof t hi s amoun t-- $2 2,6 65 --was a de du ct io n fo r th e v al ue of Lau do n’s l ab or , supp li es , andst ol ento ol s re la te d t o the ren ov at io n of a ho m e th atLaud on ne ithe r li ve d n orwork edin , or e ve n o wne d. We agre e wit h th e Co m m is si on er tha t the se im

pr ov em en ts aren ’t rela te d t o Lau do n’s ch iro pr act ic bu si ne ss . They do see m

to ha ve pro du cedso m e m on ey forLaud on , th ou gh : He fil eda m ech an ic ’s li enforex pe ns es in cl ud in g a“ Ja cu zzi tub,” “ Rac e Track s,”
se ve ral ho te l-r oo m

bi ll s, a s at el li te di sh , andsev eral ne ces si ti es fora “ [b ]asem en t
m ov ie roo m ,” an d re cei ve d $ 20 ,00 0 a s a r es ul t. The Co m m is si on er cl as si fie d thi s- 13 -

$2 0,0 00 as n on ta xabl e in co m e, an d we h av e n o re as on to di sturb thi s de te rm in at io n e ithe r. Depre ci at io n Dep reci at io n Year Am ou ntrep orte d

on return Am ountall owe d

by exam Adju st m en t 20 07 $5 ,17 2 $0 $5 ,17 2 20 09 3,2 34 0 3,2 34 W e tu rnne xtto de pr eci at io n. Onth is it em , th e Co m mis si on er s eem s t o ha ve m ad e a m is ta ke th atbe ne fit s Lau do n. Fo r hi s 2 00 7 t ax y ear, Lau do n c la im ed a $ 5,1 72 de pr eci at io n e xp en se ; an d fo r 20 08 , a $1 2,1 93 de pr eci at io n e xp en se . But th e Co m m is si on er i n the no ti ce o f de fic ie nc y di sa ll owe d $ 12 ,19 3 i n d ep reci at io n fo r 20 07 an d d idn’t d is al lo w anyth in g fo r 20 08 . For 2 00 9 h e d is al lo wed$2 8,0 62 , bu t Lau do n h adcla im edon ly $3,2 34 . This su gg es ts a cl eri cal erro r, bu t the Co m m is si on er n ev er as ke d t o fi x i t. As ares ul t, the Co m m is si on er d oe s n ot di sp ut e Lau do n’s cl ai m ed$1 2,1 93 de pr eci at io n fo r 20 08 . Andfor 20 07 an d 2 00 9, th e Co m m is si on er’s ad

jus tm en ts were l arg er tha n the am ou nt s tha t Lau do n cl ai m ed . Laud on di dn ’t pre se ntan y ev id en ce-- ei th er re co rd s o r te st im on y -- subs tant ia ti ng hi s cl ai m edde pr eci at io n i n any am ou nt , so we su st ai n the ir di sa ll owa nc e. Bu t o nl y

up to th e am ou nt s tha t h e cl ai m ed . (As wit h the 20 09- 14 -

“ in suran ce” e xp en se , th e p art ie s s ho ul d t ak e th is in to acco un t wh enth ey do th e Ru le 15 5 c om

pu ta ti on s.) Net Ope ra tin g L os se s Net Op erat in g Lo ss es Year Am ou ntrep orte d

on return Am ountall owe d

by exam Adju st m en t 20 08 $5 2,1 94 $0 $5 2,1 94 20 09 52 ,18 2 0 52 ,18 2 Lau do n c la im edne t o pe rat in g l os se s o f $5 2,1 94 for 20 08 an d $ 52 ,18 2 fo r 20 09 , bu t the Co m

m is si on er d is al lo wedth em en ti rel y . Laud on ha s the bu rd enof pr oo f. See Kei th v. Co m m is si on er, 1 15 T.C. 60 5, 6 21 (20 00 ). He di d n ot , ho wev er, ev er ad dr es s thi s i ss ue at t ria l. We the refo re fi ndforth e Co m m is si on er an d s us ta inhi s d is al lo wan ce. C. Pen al ty The las t i ss ue is whet he r to su st ai n the Co m m is si on er’s ap pl ic at io n o f an
accu racy-rela te d p en al ty und er s ect io n 6 66 2 fo r Lau do n’s u nd erre po rte d i nc om e an d o ve rs ta te d d educ ti on s. A ta xp ay er i s s ub ject t o asubs tant ia l-u nd ers ta te m en t pe na lty if h e und ers ta te s h is in co m e ta x b y th e g reat er o f $5 ,00 0 o r te n p erce ntof th e ta x re qu ire d t o b e sh ownforth e ta xabl e y ear. Se e se c. 66 62 (a), (d )(1 )(A).- 15 -

Lau do n’s u nd ers ta te d i nc om e ta x m eet s thi s re qu ire m en t fo r al l thr ee t ax y ears at is su e. Lau do n a ss ert s the de fen se th athe reas on ab ly reli edonth e advi ce o f a t ax pr of es si on al . See s ec. 1 .66 64 -4 (b ), In co m e Tax Reg s. To m ak e th is de te rm in at io n, we l oo k t o thr ee fa ct or s. Neo na to lo gy Asso cs ., P.A. v. Co m m is si on er, 1 15 T.C. 43 , 99 (20 00 ), aff’d, 2 99 F.3d22 1 (3 d C ir. 2 00 2)
.

C Fi rs t, was th e advi se r a co m pe te ntpro fes si on al who ha d s uf fic ie nt ex pe rti se to jus ti fy

rel ianc e?

C Seco nd , di d the tax pa y er p ro vi de ne ces sary an d a ccurat e in fo rm at io n to th e advi se r?

C Thi rd , di d the tax pa y er ac tu al ly rely ingo odfai th on th e advi se r’s jud gm en t? W e d on ’t nee d t o a dd res s the fir stan d thi rdfact or s b ecau se we do n’t b el ie ve th atLaud on pro vi de d “ ne ces sary an d a ccu rat e in fo rm at io n” to hi s advi se r. See i d. At tria l Lau do n p res en te d the su m m ari es of h is tax in fo rm at io n andex pe ns es th at he pro vi de d t o H& R Bl oc k’s p rep arer s. He s ai d h e al so pro vi de d h is pre pa rers with “ al l m

y rece ip ts an d s tu ff,” b uthe di dn ’t pre se ntev id en ce s ug ge st in g h e pr ov id edall of h is rece ip ts or t ha t wh athe pro vi de d was su ffi ci en tl y de ta il edto ai d h is pre parers . For e xa m pl e, in cl ud edinth e ex hi bi t al on gs id e th es e su m m ari es was Laud on ’s m il eag e lo g, b uthe lat er ad m it te d h is m il eag e lo g was n’t a c om pl et e- 16 -

it em iz edli st ; an d s o i f th is is so m ethi ng he pre se nt edhi s p rep arer s, i t wo ul dn ’t be
su ffi ci en t. Mo reo ve r, whi le he cla im edto ha ve bro ug htall of h is rece ip ts to H&R Bl oc k a lo ng with h is su m m ari es , he l at er s tate d tha t h is pre pa rers di dn ’t wanthi m to jus t wal k i n wi th hi s re cei pt s an d h av e th em ad d i t up, s o i t’s u nc le ar t o wh at
ex te nthe actua ll y

wentov er h is rece ip ts with h is pre pa rers rathe r th anjus t pr es en ti ng th e su m

m ari es . AndLaud on ne ve r m en ti on edex pl ai ni ng th e d iv ers e an d u nc on ve nt io na l n atur e o f hi s b us in es s s o a s t o h el p h is pre pa rers un de rs tand hi s (i nc om

pl et e) l og s an d c la im edex pe ns es . All o f th is lea ds us to fin d tha t Lau do n d idno t p ro vi de all of t he ne ces sa ry an d a ccu rat e in fo rm at io n t o h is advi se rs . Havi ng bl in de d H& R Bl oc k t o the de ta il s an d p ecu li ari ti es of h is ch iro pr act ic en te rp ris e, Lau do n c an no t n ow cl ai m th athe rel ie d o n H& R Bl oc k’s advi ce. We sus ta inth e p en al ty. Deci si on wil l b e en te red
un de r Ru le 15 5.