T.C. Summ ary Opi ni on 20 16 -1

UNITED STAT ES TAX COURT

HAZEM GARADA AN D NOHA E LGHOSEIN, Peti ti on ers v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 37 26 -1 4S . Fi le d J anuary 7, 2 01 6.

Hazem Garad a an d No haElg ho se in , pro ses e. Andrew K. Glo ve r, fo r res po nd en t.

SUMM ARY OPINION BUCH, Ju dg e: Thi s ca se was h eardpurs ua ntto sec ti on 74 63 of t he Int ern al Rev enue Co de ineffe ctwhen th e p et it io n was fil ed . Und er s ect io n 7 46 3( b) , th e 1
Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al 1 Rev enue Co de (Co de ) in effe ctat a ll rel ev an t t im es , andall Ru le refe ren ces are t o th e Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e. All m on et ary am ount s ar e (co nt in ue d...)- 2 -

de ci si on to be en te redinth is cas e is no t re vi ewab le by any ot he r co urt, an d thi s op in io n m ay

no t b e tr eat edas p rece de ntforan y ot he r cas e. The Co m m is si on er i ss ue d ano ti ce o f de fic ie nc y de te rm in in g t he fol lo win g de fic ie nc ie s an d p en al ti es with re sp ectto Mr. Gara daan d M s. El gh os ei n’s Fe de ral in co m e ta x fo r 20 10 , 20 11 , and20 12 .

Year Defi ci en cy Pen al ty se c. 66 62 (a) 20 10 $1 9,2 62 $3 ,85 2 20 11 4,88 1 97 6 20 12 3,59 2 71 8 Afte r co nc es si on s b y

bo th pa rti es , on ly a few is su es rem ai n. Fo r 20 10 th e is su es are wh ethe r Mr. Gar ad a an d M s. El gh os ei n re cei ve d u nr ep orte d i nc om e, an d i f so , whet he r th ey

m ay cla im off se tt in g d educ ti on s; whet he r th ey m ay de du ct ex pe ns es rel at in g t o the ir i nt eres t i nc om e; an d wh ethe r th ey m ay de du ctth ei r rea l pr op erty tax es pa idon th ei r be ha lf. Fo r eac h year in is su e, we m us t d eci de whe th er Ms . Elg ho se in is en ti tl edto rel ie f fro m joi ntan d s ev eral li ab il ity an d whe th er Mr . Garad a an d M s. El gh os ei n a re l iabl e fo r anaccu racy-rela te d p en al ty un de r se ct io n 6 66 2( a). (...co nt inue d) 1 ro un de d t o the ne ares t d ol lar.- 3 -

On the ba si s o f th e ev id en ce p res en te d a t tria l, we fi ndth atMr. Gara daan d Ms . Elg ho se in fai le d fo r th e m os t p artto sh ow tha t the Co m m is si on er’s de te rm in at io ns are i nc orrect . For 2 01 0 M r. Garad a an d M s. El gh os ei n re cei ve d un rep orte d i nc om e, an d the y fai le d t o p ro vi de su ffi ci en t re co rd s t o s ub st an ti at e of fs et ti ng de du ct io ns . Like wis e, th ey fai le d t o p ro vi de ev id en ce o f ex pe ns es rel at in g t o the ir i nt eres t i nc om e b ey on d t ho se ex pe ns es forwhi chth e Co m m is si on er al read y

all owe d ade du ct io n. Ho wev er, the y m ay de du ctth ei r rea l pr op erty tax es be cau se th ey

co ns tru ct iv el y

pa idth em . Mr. Garad a an d M s. Elg ho se inare l iabl e fo r a s ect io n 6 66 2( a) ac cu racy-rela te d p en al ty for 2 01 0 o nl y if th e co m pu ta ti on s re ve al anun de rp aym en t tha t i s due to a subs tant ia l un de rs ta te m en t o f in co m e ta x. Fo r 20 11 an d 2 01 2 M r. Garad a an d M s. El gh os ei n are n otli ab le forsec ti on 66 62 (a) a ccu racy-rela te d p en al ti es be cau se th e Co m m is si on er fa il edto m eethi s b ur de n o f pr oduc ti on . Last ly, Ms . Elg ho se in is no t en ti tl edto rel ie f fro m joi ntan d s ev eral li ab il ity for an y y ear i n i ss ue be cau se sh e d idno t p res en t s uf

fic ie ntev id en ce jus ti fy in g re li ef.

Bac kg ro un d Mr. Gara daan d M s. El gh os ei n wer e m arri eddu rin g 2 01 0, 2 01 1, an d 2 01 2, th e y ears inis su e. They are st il l m arri edan d h av e b eenli vi ng to ge th er co nt in uo us ly sin ce the n.- 4 -

Dur in g 2 01 0 F as t Fu el Gas St at io n (F as t Fu el ) op erat edth ro ug h No ha Ent erp ris es , Inc ., whi chwas o rg an iz edas aC co rp or at io n i n 2 00 6 b utele ct edto be ta xe d a s an S co rp or at io n i n 2 00 8. Ms . Elg ho se in was the so le sh areh ol de r of Noh a Ent erp ris es , bu t s he di d n otpa rti ci pa te inrun ni ng Fas t Fu el . Ins te ad , sh e worke d a s a t each er. Mr. Gar ad a was th e tr eas ur er o f Noh a Ent erp ris es , andhe was als o the m an ag er o f Fas t Fu el . As the m an ag er o f Fas t Fu el , Mr. Garad a ran it s o pe rat io ns . He was the
m ai n c as hi er, o fte n wo rk in g m or e th anon e sh iftina da y . He als o t rav el edto ne ig hb or in g c it ie s t o p ur ch as e m erch an di se forres al e atFas t Fu el . Becau se Fas t Fu el pro vi de d 2 4- ho urservi ce, Mr . Garad a h ire d e m pl oyees fo r th os e ti m es when he was u na va il ab le to workat F as t Fu el . On b eh al f of Noh a Ent erp ris es , Mr. Garad a p rep aredFo rm s W-2, Wage an d Tax Sta te m en t, fo r th e em pl oyees, b uthe di d n otpre pa re a Fo rm

W -2 forhi m se lf f

or20 10 . Mr. Gara daals o wro te ch eck s fr om Noh a Ent erp ris es ’ acco un t. In20 10 Mr. Garad a wro te hi m se lf a$1 0,0 00 ch eckfro m Noh a Ent erp ris es ’ acco un t, n ot in g

“ au to ex pe ns es ” o n the m em o l in e. Twice t ha t year he wrot e ch eck s fr om Noh a Ent erp ris es ’ acco un t t o the Co un ty of Fai rfax forreal pro pe rty tax es onhi s m ari ta l ho m e. Tho se two ch eck s t ot al ed$7 ,74 1.- 5 -

Inad di ti on to op erat in g F as t Fu el , Mr. Garad a h el d a n o ffs ho re b an k acco un t fo r pa rt o f 20 10 . He op en edth e acc ou ntin20 09 an d t ran sf erre d $1 ,11 0,0 00 fro m

hi s ac co un t ata U.S. ban k t o h is acco un t atth e Nat io na l Ba nkof Dub ai . In 2 01 0 M r. Garad a tr av el edto Dub ai , Uni te d Arab Em ira te s, an d

2 withd rew the fun ds alo ng with the accu m ul at edin te res t. The to ta l am ou nthe withd rew equa le d $ 1,1 75 ,72 3. Mr. Gara daan d M s. El gh os ei n t im el y fil edth ei r joi ntFo rm

10 40 , U.S. In di vi du al Inc om e Tax Return, fo r 20 10 . Mr. Garad a p rep aredth e return o n t he ba si s o f hi s und ers tand in g o f th e Co de . On th ei r return t he y cla im edas i te m iz ed de du ct io ns fortax es pa idsal es tax es of $ 1,4 50 an d re al pro pe rty tax es of $ 8,9 02 . The y als o re po rte d $ 55 of t ax ab le in te res t; ho wev er, the y di d n otin cl ud e th e in te res t fr om

th e Nat io na l Ba nkof Duba i ac co un t o r th e $ 10 ,00 0 p aym en t fr om Noh a Ent erp ris es to Mr. Gara da . Mr. Gara dafil edNoh a Ent erp ris es ’ Fo rm 11 20 S, U.S. Inc om e Tax Return fo r anS Co rp or at io n, fo r 20 10 . Noh a Ent erp ris es di d n otde du ctth e $ 10 ,00 0 pa ym en t t o M r. Garad a o r th e p aym en ts to th e Co un ty of Fai rfax for Mr. Gara da an d M s. El gh os ei n’s re al pro pe rty tax es . The pa rti es st ip ul at edth atMr. Gara datra ns ferr ed$1 ,10 0,0 00 to th e 2 Nati on al Ban k o f Dub ai , bu t b an ki ng reco rd s i n e vi de nc e sh ow tha t the am ou nt was $1 ,11 0,0 00 .- 6 -

InMay 201 1 M r. Garad a an d M s. El gh os ei n a m en de d t he ir r eturn b y fil in g a joi ntFo rm

10 40 X, Am en de d U.S. In di vi du al Inc om e Tax Return, fo r 20 10 . Am on g o th er ad

jus tm en ts , th ey

in crea se d t he ir i te m iz edde du ct io ns fortax es pa id by $1 ,99 8 t o i nc lu de th ei r pe rs on al pro pe rty tax pay m en ts on th ei r ve hi cl es . They
m ai nt ai ne d tha t the ir t ax ab le in te res t was $5 5; ho wev er, the y rep orte d t ha t af

te r an ex ch an ge rat e co nv ers io n, the y rece iv ed$5 3,0 21 of i nt eres t i nc om e fro m th e Nati on al Ban k o f Dub ai . They to okth e p os it io n tha t af te r un sp eci fie d e xp en se s, th e rem ai ni ng $2 4,8 18 was “ ta x e xc lu dabl e”. Mr. Gara daan d M s. El gh os ei n fi le d jo in t Fo rm s 1 04 0 fo r 20 11 an d 2 01 2. The Co m m is si on er ex am in edth ei r returns for20 10 , 20 11 , and20 12 an d pr op os edad

jus tm en ts foreach y ear. Be fo re the Co m m is si on er i ss ue d ano ti ce o f de fic ie nc y , Mr. Garad a an d M s. El gh os ei n m ad e v ari ou s p aym en ts to wardth ei r po te nt ia l l iabi li ti es . Spe ci fic al ly, th ey pa idpa rt o f th e ta x re su lt in g fr om th e pr op os edad

jus tm en ts for20 10 an d a ll of t he in co m e ta x re su lt in g fr om th e pr op os edad

jus tm en ts for20 11 an d 2 01 2; th ey di d n otpa y

an y of t he pe na lt ie s. The Co m m is si on er i ss ue d ano ti ce o f de fic ie nc y on Feb ru ary 7, 2 01 4, d et erm in in g de fic ie nc ie s i n M r. Garad a an d M s. El gh os ei n’s i nc om e ta x fo r 20 10 , 20 11 , and 20 12 an d e rro ne ou sl y

in cl ud in g t he tax ad

jus tm en ts for20 11 an d 2 01 2 tha t M r. Garad a an d M s. El gh os ei n h adalr eady pa id .- 7 -

Fo r th e 2 01 0 re tu rnth e Co m m is si on er co nduc te d aba nkde po si ts an al y si s. Am on g o th er ad

jus tm en ts , th e Co m

mis si on er i nc reas edMr. Gara daan d M s. Elg ho se in ’s in co m e b y

$1 0,0 00 . The Co m

m is si on er al so in crea se d t he ir t ax ab le in te res t i nc om e b y

$5 3,0 21 , all owi ng th em

to ex cl ud e $ 12 ,70 2 fr om th ei r in te res t in co m e, whi chin cl ud eda $9 ,00 0 c urren cy lo ss . Furt he r, th e Co m

m is si on er di sa ll owe d i te miz edde du ct io ns of $ 6,9 04 fortax es pa id . Spe ci fic al ly, th e Co m m is si on er d is al lo wedth e rea l p ro pe rty tax de du ct io n o f $8 ,90 2; ho wev er, the Co m m is si on er al lo wedth e p ers on al pro pe rty tax de du ct io n o f $1 ,99 8 fr om th e am en de d re tu rn , net ti ng di sa ll owe d i te m iz edde du ct io ns fortax es pa idof $ 6,9 04 . Fo r eac h year in is su e th e Co m m is si on er’s d et erm in at io ns in cl ud edaccuracyrel at edpe na lt ie s u nd er s ect io n 6 66 2( a). Whi le res id in g i n Vi rg in ia , Mr. Garad a an d M s. El gh os ei n t im el y pe ti ti on ed fo r red et erm in at io n. Fo r 20 10 th ey ch al le ng e th e Co m

m is si on er’s d et erm in at io n to in cl ud e $ 10 ,00 0 i n i nc om e. They argu e th atif the pa ym en t i s i nc lu de d i n in co m e, th ey

sh ou ldbe en ti tl edto de du ctiton Noh a Ent erp ris es ’ Fo rm 11 20 S. Rathe r th anarg ui ng th atth e in te res t fr om th e Nat io na l Bankof Duba i ac co un t i s

“ ta x e xc lu dabl e” as th ey

di d o n the ir a m en de d re tu rn , th ey ch al le ng e th e Co m m is si on er’s d is al lo wan ce o f de du ct io ns forth ei r in te res t ex pe ns es . They al so ch al le ng e th e Co m

m is si on er’s d is al lo wan ce o f th ei r it em iz edde du ct io ns forth ei r- 8 -

ta xe s p ai d. Fo r eac h year in is su e, Mr. Gara daan d M s. El gh os ei n d is pu te th e accu racy-rela te d p en al ty und er s ect io n 6 66 2( a). Subs eque nt ly, Mr. Gara daan d M s. El gh os ei n am en de d t he ir p et it io n fo r

“ fu ll pre se rv at io n o f in no cen t s po us e ru le ” an d re qu es te d re li ef fro m joi ntan d se ve ral li ab il ity

forMs . Elg ho se in . Mr. Garad a fi ll edou t Fo rm 88 57 , Reque stfor In no cen t Sp ou se Rel ie f, al le gi ng th atMs . Elg ho se in sh ou ldbe en ti tl edto rel ie f be cau se he pre pa redth e ta x fo rm s tha t s he on ly sig ne d. Mr . Garad a, no t M s. Elg ho se in , si gn edth e reque stforrel ie f. Afterward s, M s. El gh os ei n re subm it te d th atreque stwith h er s ig na tu re. Tria l was he ldinW as hi ng to n, D.C., o n Oct ob er 3 0, 2 01 4. Ms . Elg ho se in di d n otap pe ar attri al . Mr. Garad a arg ue d t ha t the y co ul d d educ t the $1 0,0 00 pa ym en t b ecau se itwas arei m bu rs em en t fo r tr av el ex pe ns es . He pre se nt edth ree do cu m en ts to sh ow h is ex pe ns es forth ei r in te res t i nc om e: a pr in to utof a n e m ai l di sc us si ng fix edin te res t ra te s; a Bri ti sh Airways ti ck etforJan ua ry 18 , 20 09 ; an d a Decem be r 26 , 20 09 , con firm at io n fo r a J anuary 19 , 20 10 , fli gh t t o Duba i, Un it ed Arab Em ira te s, fo r $9 77 . Mr. Garad a al so arg ue d t ha t h e sh ou ldbe ab le to de du ct hi s re al pro pe rty tax es be cau se Noh a Ent erp ris es di d n otde du ctth em on it s Fo rm 11 20 S.- 9 -

The Co m m is si on er ar gu edth atMr. Gara daan d M s. El gh os ei n wer e li ab le fo r a s ect io n 6 66 2( a) ac curacy-rela te d p en al ty for 2 01 0 b ecau se th ei r un de rp aym en t was du e to a subs tant ia l u nd ers ta te m en t o f in co m e ta x. Fo r 20 11 an d 2 01 2 the Co m

m is si on er ar gu edth atth ey were l iabl e fo r se ct io n 6 66 2( a) accu racy-rela te d p en al ti es be cau se th ey co nc ed edan d p ai d t he ir d efi ci en ci es for th os e y ears . The Co m

m is si on er o ffer edno furth er ev id en ce re ga rd in g p en al ti es fo r 20 11 an d 2 01 2. Th e Co m mis si on er o ral ly m ov edto di sm is s the reque stfor rel ie f fro m

joi ntan d s ev eral li ab il ity forfai lu re t o p ro se cu te . W e wil l i ss ue an or de r de nyin g tha t m ot io n. Dis cu ss io n I. Bu rd enof P ro of Inge ne ral , th e Co m

m is si on er’s d et erm in at io ns ina no ti ce o f de fic ie nc y are pr es um edco rrec t, an d t ax pa y ers be ar the bu rd enof p ro vi ng ot he rwis e. Altho ug h 3 th e b ur de n m ay

sh iftto th e Co m

m is si on er und er s ect io n 7 49 1( a) i f certa in requi rem en ts are m et , Mr. Garad a an d M s. El gh os ei n h av e n otcla im edth atth e bu rd enha s s hi fte d, an d the reco rddo es no t s up po rt s hi fti ng th e b ur de n t o t he Co m m is si on er.

Ru le 14 2( a); W el chv. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ). 3- 10 -

The tax pa y er b ears th e b ur de n o f pr ov in g e nt it le m en t t o a ny deduc ti on . 4 Add it io na ll y , th e ta xp ay er m us t m ai nt ai n s uf

fic ie ntreco rd s “ to sh ow wh ethe r or no t s uc h p ers on is li ab le fortax ”. Andinso m e in st an ces , hei gh te ne d 5
subs tant ia ti on requi rem en ts m ay ap pl y . 6 II. Om it te d In co m e Inun rep orte d i nc om e cas es , th e Co m m is si on er h as th e b ur de n t o c om e fo rwardwith s om e ev id en ce l in ki ng th e ta xp ay er t o t he in co m e-p ro du ci ng act iv ity . Whe re a t ax pay er fa il s t o m ai nt ai n s uf fic ie ntreco rd s o f ta xabl e in co m e, 7 th e Co m m is si on er m ay

reco ns tru ctth e ta xp ay er’s i nc om e in acco rd an ce wi th a m etho d tha t cl earl y

refl ect s the ful l am ou ntof i nc om e rec ei ve d. Thi s C ou rt h as 8 lo ng est ab li sh edth ata bankde po si ts an al y si s i s o ne su chm etho d. Thi s m etho d 9

“ as su m es th atall m on ey

de po si te d i n atax pa y er’s b an k a cco un t dur in g agi ve n

Ru le 14 2( a); INDOPCO, In c. v. Co m m is si on er, 5 03 U.S. 79 , 84 (19 92 ). 4 Sec. 6 00 1. 5 See, e.g ., sec . 27 4( d) . 6 Ro be rts on v. Co m

m is si on er, T.C. Mem o. 2 01 4- 14 3, at*4 . 7 Sec. 4 46 (b ); s ee Di Leo v. Co m m is si on er, 9 6 T.C. 8 58 , 88 2 (1 99 1) , aff’d, 8 95 9 F .2d16 (2dCir . 19 92 ). Tok ars ki v. Co m

m is si on er, 8 7 T.C. 7 4, 7 7 (1 98 6) ; Es tate of M as on v. 9 Co m m is si on er, 6 4 T.C. 6 51 , 65 6 (1 97 5) , aff’d, 5 66 F.2d2 (6 th Cir . 19 77 ).- 11 -

pe rio d c on st itut es tax ab le in co m e”. The Co m m is si on er d oe s n othave to pro ve a 1 0 li ke ly sou rce o f th atin co m e. Howev er, i f th e Co m mis si on er kno ws o f an y 1 1
no nt ax ab le so ur ce o r de du ct ib le ex pe ns e, th enhe m us t t ak e itin to acco un t. The 1 2 ta xp ay er b ears th e b ur de n o f sh owi ng th ata de po si t cam e fro m a no nt ax ab le so ur ce. 1 3 The Co m m is si on er co nduc te d aba nkde po si ts an al y si s an d d et erm in edth at Mr. Gara dadi d n otrep ort the $1 0,0 00 pa ym en t h e rec ei ve d fr om Noh a Ent erp ris es . Alth ou gh Mr. Gara daan d M s. El gh os ei n t ak e th e p os it io n t ha t thi s pa ym en t was a no nt ax ab le rei m bu rs em en t fo r ex pe ns es th atMr. Gara dain cu rred on be ha lf o f Noh a Ent erp ris es , th ey di d n otpre se ntan y

ev id en ce t o s ub st an ti at e th ei r ex pe ns es . Ins te ad , th ey rel y on Mr. Gara da ’s un co rro bo rat edtes ti m on y th at th e p aym en t was forrei m bu rs em en t o f tr av el expe ns es .

Cl ayto n v . Comm is si on er, 1 02 T.C. 63 2, 6 45 -6 46 (19 94 ). 1 0 Tok ars ki v. Co m

m is si on er, 8 7 T.C. at76 -7 7 (h ol di ng th atpro of of l in ka ge 1 1 m ay be requi redincas es in vo lv in g a ll eg edil le ga l s ou rce o f in co m e). Cl ayto n v . Comm is si on er, 1 02 T.C. at 6 45 -6 46 . 1 2 Tok ars ki v. Co m

m is si on er, 8 7 T.C. at77 . 1 3- 12 -

Cert ai n e xp en se s ar e subjec t t o s tri ctsubs tant ia ti on un de r se ct io n 2 74 (d ) be fo re the y

canbe de du ct ed . Thes e in cl ud e th os e expe ns es rel at in g t o t rav el . 1 4 1 5 To m eetth e st ric t s ub st an ti at io n re qu ire m en t, a t ax pa y er m us t s ub st an ti at e th e tra ve l ex pe ns e th ro ug h a de qu at e rec or ds or b y su ffi ci en t ev id en ce co rro bo rat in g th e ta xp ay er’s o wn s ta te m en t. The ev id en ce m us t i nc lu de th e am ou ntof t he 1 6
ex pe ns e, th e ti m e an d p la ce the ex pe ns e was in cu rred , th e b us in es s p ur po se of t he tra ve l, an d the bu si ne ss rel at io ns hi p o f th e ta xp ay er t o a ny oth er b en efi te d pe rs on . To s ub st an ti at e b y ad equa te reco rd s, a t ax pa y er m us t p ro vi de anacco un t 1 7 bo ok , a lo g, trip sh eet s, o r si m il ar re co rd s p rep aredco nt em po ran eo us ly w ith t he ex pe nd itur e, as well as d oc um en tary ev id en ce o f certa in ex pe nd itur es . 1 8 Doc um en tary

ev id en ce i nc lu de s re cei pt s o r si m il ar ev id en ce. 1 9 Mr. Gara daan d M s. El gh os ei n d idno t p ro vi de ad equa te reco rd s t o m eetth e st ric t s ub st an ti at io n re qu ire m en ts fortra ve l ex pe ns es . They di d n otm ai nt ai n a Sec. 2 74 (d ). 1 4 Sec. 2 74 (d ). 1 5 Sec. 2 74 (d ). 1 6 Sec. 2 74 (d ). 1 7 Sec. 1 .27 4- 5T(c )(2 ), Tem po rary Inco m e Tax Reg s., 5 0 F ed . Reg . 46 01 7 1 8 (No v. 6 , 19 85 ). Sec. 1 .27 4- 5T(c )(2 ), Tem po rary Inco m e Tax Reg s., s up ra. 1 9- 13 -

co nt em po ran eo us mil eag e lo g o r an y ot he r do cu m en tary

ev id en ce t o d em on st rat e th atth ey were en ti tl edto a de du ct io n. Acco rd in gl y , Mr. Garad a an d M s. Elg ho se infai le d t o p ro ve th atMr. Gara dawas re im bu rs edfortrave l ex pe ns es , and th e $ 10 ,00 0 m

us t b e in cl ud edinin co m e. Mr. Gara daan d M s. El gh os ei n a rg ue inth e al te rn at iv e th atNoh a Ent erp ris es cande du ctth e $ 10 ,00 0 a s a trav el ex pe ns e o n i ts Fo rm 11 20 S. Bu t th is arg um en t fa il s fo r th e sa m e rea so n; li ke Mr. Gara daan d M s. El gh os ei n, No ha Ent erp ris es di d n otsubs tant ia te th e ex pe ns es . III. Tax ab le Int eres t Sect io n 2 12 all ows tax pa y ers to de du ctord in ary an d n eces sa ry bu si ne ss ex pe ns es pa idor i nc urreddu rin g t he tax ab le y ear f orth e p ro du ct io n o f in co m e. Tax pay ers m

us t m ai nt ai n re co rd s tha t ar e su ffi ci en t t o e st ab li sh th e am ou ntof t he de du ct io n. 2 0 Altho ug h M r. Garad a an d M s. El gh os ei n re po rte d o n the ir F orm 10 40 X th at th ei r in te res t i nc om e fro m th e Nat io na l Ba nkof Duba i ac co un t was “ ta x ex cl ud ab le ”, th ey

co nc ed e th atth e in te res t i nc om e is tax ab le . Ins te adof a rg ui ng fo r ex cl us io n, the y

arg ue th atth ey

m ay de du ctth ei r ex pe ns es inge ne rat in g t ha t in co m e. The C omm is si on er, o n t he ot he r hand , arg ue s tha t M r. Garad a an d M s. Sec. 6 00 1. 2 0- 14 -

Elg ho se inm ay

no t ex cl ud e am ou nt s g reat er than wh athe ha s al read y all owe d i n th e n ot ic e o f de fic ie nc y . In the no ti ce o f de fic ie nc y th e Co m mis si on er al lo wed Mr. Gara daan d M s. El gh os ei n t o e xc lu de $1 2,7 02 fro m th ei r in te res t i nc om e, in cl ud in g a$9 ,00 0 c urren cy lo ss . Mr. Gara daan d M s. El gh os ei n d idno t p ro vi de su ffi ci en t re co rd s t o warran t a d educ ti on forad di ti on al ex pe ns es . Alth ou gh Mr. Gara daan d M s. El gh os ei n pr ov id eda pr in to utof an e m ai l d is cu ss in g fi xe d i nt eres t ra te s fo r th e acc ou ntan d pl an e ti ck et s t o Duba i, Un it edArab Em ira te s, t o s ub st an ti at e th e co stof t rav el in g to th ei r bankto withd raw the fun ds , th ey fai le d t o s ho w th atth ei r to ta l ex pe ns es ex ceed edth e am ou ntth atth e Co m m is si on er al read y

all owe d. Mr . Garad a an d M s. Elg ho se inare n oten ti tl edto de du ctad di ti on al ex pe ns es forth e p ro du ct io n o f th ei r ta xabl e in te res t. IV. Rea l Pr op erty

Taxe s Sect io n 1 64 all ows tax pa y ers to de du ctcert ai n t ax es pa idwithi n atax ab le y ear. Re al pro pe rty tax es are o ne su chtax . “ Inge ne ral , tax es are d educ ti bl e o nl y 2 1

Sec. 1 64 (a)( 1) . 2 1- 15 -

by the pe rs on up on who m th ey are i m po se d.” Andtax pa y ers “ ge ne ral ly cann ot

2 2 de du cttax es pa idby ano th er t ax pa y er.” 2 3 Mr. Gara daan d M s. El gh os ei n t ak e th e p os it io n t ha t the y m ay de du cton th ei r pe rs on al return the real pro pe rty tax es pa idby N oh a Ent erp ris es with re sp ect to th ei r m ari ta l h om e. The C omm is si on er ar gu es th atMr. Gara daan d M s. Elg ho se inm ay

no t d educ t the real pro pe rty tax es be cau se Noh a Ent erp ris es pa id th em . In h is clo si ng th e Co m m is si on er i nf

orm edth e Co urt tha t h e tr eat edth e pa ym en t o f a p ers on al ex pe ns e b y Noh a Ent erp ris e as a no nt ax ab le di st rib ut io n t o Ms . Elg ho se in . If thi s i s a d is tri bu ti on , th enitis a co ns tru ct iv e d is tri bu ti on . Andwe ha ve pr ev io us ly hel d tha t wh enanS co rp or at io n p ay s a p ers on al ex pe ns e o f it s sh areh ol de r, th e sh areh ol de r rec ei ve s a c on st ru ct iv e d is tri bu ti on . It al so fol lo ws 2 4 th atforpu rp os es of c la im in g the de du ct io n, the sh areh ol de r is tre at edas co ns tru ct iv el y

pa y in g the ob li ga ti on . Aba rca v . Comm is si on er, T.C. Mem o. 2 01 2- 24 5, at*1 5; sec . 1.1 64 -1 (a), 2 2 In co m e Tax Reg s. (f

lu shlan gu ag e). See Os tro w v. Co m

m is si on er, 1 22 T.C. 37 8, 3 80 (20 04 ), aff’d, 4 30 F.3d 2 3 58 1 (2 d C ir. 2 00 5) ; s ee al so Depu ty v. duPo nt , 30 8 U.S. 4 88 , 49 3- 49 4 (1 94 0) ; Rap papo rt v . Comm is si on er, T.C. Mem o. 2 00 6- 87 , 20 06 W L 10 83 43 4, at*3 . See C av an au gh v. Co m

m is si on er, T.C. Mem o. 2 01 2- 32 4; see als o s ec. 2 4 1.1 36 1- 1( l)( 2) (i) , Inc om e Tax Reg s.- 16 -

In de ed , we hav e tr eat editas s uc h. Fo r ex am pl e inPet ers , Gam

m , W es t & Vin cen t, In c. v. Co m

m is si on er, anS co rp or at io n p ai d l eg al fees forit s

2 5 sh areh ol de r. The s ha reh ol de r was no t ex pe ct edto rep ay th e co rp or at io n, an d the 2 6 pa ym en t d ire ct ly ben efi te d the sh areh ol de r. Thi s C ou rt h el d tha t wh enth e 2 7
co rp or at io n p ai d the leg al fees forth e sh areh ol de r, th e sh areh ol de r was in co ns tru ct iv e rec ei ptof t he di strib ut io n a nd“ fo r pu rp os es of c la im in g t he m as a de du ct io n h e h as als o c on st ru ct iv el y pa idth e le ga l fe es .” As a res ul t, the 2 8 sh areh ol de r was ab le to de du ctth e le ga l fe es as a n o rd in ary an d n eces sa ry ex pe ns e pa idor i nc urredfor

th e p ro du ct io n o f in co m e. 2 9

Pet ers , Gam

m , W es t & Vin cen t, In c. v. Co m m is si on er, T.C. Mem o. 1 99 6- 2 5 18 6, 1 99 6 WL 18 25 45 , at * 8; see als o B ro adv. Co m m is si on er, T.C. Mem o. 1 99 0- 31 7 (h ol di ng th atsh areh ol de r was all owe d ade du ct io n a fte r rec ei vi ng a co ns tru ct iv e d iv id en d fr om th e C co rp or at io n’s p aym en t o f hi s p ers on al ob li ga ti on s) ; Be rli n v . Comm is si on er, T.C. Mem o. 1 96 1- 19 4 (h ol di ng th at sh areh ol de r was all owe d t o d educ t the accrue d i nt eres t fo ll owi ng C co rp or at io n’s pa ym en t o f hi s l oa ns ). Pet ers , Gam

m , W es t & Vin cen t, In c. v. Co m m is si on er, 1 99 6 WL 18 25 45 , 2 6 at*1 , *8 . Pet ers , Gam

m , W es t & Vin cen t, In c. v. Co m m is si on er, 1 99 6 WL 18 25 45 , 2 7 at*8 . Pet ers , Gam

m , W es t & Vin cen t, In c. v. Co m m is si on er, 1 99 6 WL 18 25 45 , 2 8 at*8 . Pet ers , Gam

m , W es t & Vin cen t, In c. v. Co m m is si on er, 1 99 6 WL 18 25 45 , 2 9 at*8 .- 17 -

The Co m m is si on er co nc ed edth atth e p aym en t was a no nt ax ab le di st rib ut io n to Ms . Elg ho se in fro m

Noh a Ent erp ris es . Accor di ng ly, Mr. Gara daan d M s. Elg ho se inha ve co ns tru ct iv el y pa idth e rea l p ro pe rty tax es an d a re en ti tl edto th e de du ct io n. V. Sect io n 6 66 2( a) Accu racy-Rel at edPen al ti es Sect io n 6 66 2( a) an d (b ) (1 ) an d (2 ) im po se s a 2 0% a ccuracy-rela te d p en al ty on an y po rti on of a n u nd erp aym en t o f ta x tha t i s due to ne gl ig en ce, d is reg ardof ru le s o r reg ul at io ns , or any sub st an ti al un de rs tate m en t o f in co m e ta x. Th es e pe na lt ie s d o n otap pl y

to an y po rti on of a n u nd erp aym en t fo r whi cha ta xp ay er es tabl is he s tha t h e o r sh e h adreas on ab le cau se an d a ct edingo odfai th . The 3 0 Co m m is si on er b ears th e b ur de n o f pr oduc ti on forth es e p en al ti es be fo re the bu rd en sh ift s t o t ax pa y ers to pro ve th atth e p en al ty sho ul d n otap pl y . Forth e 3 1 Co m m is si on er t o m eetth atburd en , th e Co m m is si on er m

us t co m e fo rwardwith su ffi ci en t ev id en ce t o s ho w th atth e im po si ti on of t he pe na lty

was ju st ifi ed . The

3 2 Co m m is si on er ar gu es th atMr. Gara daan d M s. El gh os ei n a re l iabl e fo r acc ur acyrel at edpe na lt ie s u nd er s ect io n 6 66 2( a) o n t he ba si s o f a s ub st an ti al un de rs tate m en t Sec. 6 66 4( c)(1 ). 3 0 See s ec. 7 49 1( c); Hig be e v . Comm is si on er, 1 16 T.C. 43 8, 4 46 -4 47 (20 01 ). 3 1 See s ec. 7 49 1( c); see als o Hi gb ee v . Commis si on er, 1 16 T.C. at 4 47 . 3 2- 18 -

of in co m e ta x fo r 20 10 an d n eg li ge nc e o r di sr eg ardof rul es or r eg ul at io ns for 20 11 an d 2 01 2. A. Subs tant ia l Un de rs ta te m en t o f In co m e Tax An u nd ers ta te m en t o f in co m e ta x i s “ subs tant ia l’ when th atun de rs ta te m en t ex ceed s the gre at er o f 10 % of t ax requi redto be sh own onth e return o r $5 ,00 0. 3 3 Howev er, i f ta xp ay ers ha ve subs tant ia l au th or ity forth e ta x t reat m en t o f anit em , th enth e p orti on of the tax att rib ut ab le to th atit em is no t i nc lu de d i n t he un de rs ta te m en t. 3 4 Inacco rd an ce wi th th is op in io n, M r. Garad a an d M s. El gh os ei n’s ex act un de rp aym en t fo r 20 10 de pe nd s o n t he Ru le 15 5 c om pu ta ti on s. If the se co m pu ta ti on s es tabl is h asubs tant ia l u nd ers ta te m en t o f in co m e ta x, the n t he Co m m is si on er h as m ethi s b ur de n o f pr oduc ti on . Furt he r, Mr. Gara daan d M s. Elg ho se inha ve no t p res en te d a ny evi de nc e to sh ow tha t the y ha d s ub st an ti al au th or ity forth e ta x treat m en t o f an y of t he it em s i n i ss ue . Accor di ng ly, we su st ai n the pe na lty

un de r se ct io n 6 66 2( a) fo r 20 10 on ly if th e Ru le 15 5 co m pu ta ti on s es tabl is h asubs tant ia l u nd ers ta te m en t o f in co m e ta x.

Sec. 6 66 2( d) (1 )(A). 3 3 Sec. 1 .66 62 -4 (d )(1 ), In co m e Tax Reg s. 3 4- 19 -

B. Neg li ge nc e o r Dis reg ardof R ul es or R eg ul at io ns Fo r 20 11 an d 2 01 2, b ecau se th e th res ho ldfora subs tant ia l u nd ers ta te m en t of in co m e ta x i s n otm et , th e Co m mis si on er i ns te adarg ue s tha t M r. Garad a an d Ms . Elg ho se in were n eg li ge ntor d is reg ard edrul es or r eg ul at io ns . The t erm

“ ne gl ig en ce” i nc lu de s an y fai lu re t o m ak e a rea so nabl e at te m ptto co m pl y with the pr ov is io ns of t he Co de , andth e te rm “ di sr eg ard ” in cl ud es an y care le ss , reck le ss , or in te nt io na l d is reg ard . 3 5 The Co m m is si on er d idno t p ro vi de any ev id en ce tha t the im

po si ti on of t he pe na lty was ju st ifi edfor

20 11 or 2 01 2. Th e Co m m is si on er d idno t s ho w th atMr. Garad a an d M s. El gh os ei n fa il edto ke ep ad equa te bo ok s an d re co rd s o r fai le d t o pr op erl y subs tant ia te th e it em s i n que st io n fo r th os e y ears . Ins te ad , th e 3 6 Co m m is si on er ar gu es th atbe cau se Mr. Gara daan d M s. El gh os ei n c on ced edan d pa idth ei r de fic ie nc ie s fo r 20 11 an d 2 01 2, the y are l iabl e fo r se ct io n 6 66 2( a) accu racy-rela te d p en al ti es forne gl ig en ce o r di sr eg ardof rul es or r eg ul at io ns . Altho ug h we m ay

tak e co nc es si on s i nt o a cco un t i n d et erm in in g wh ethe r th e

Sec. 6 66 2( c). 3 5 See s ec. 7 49 1( c); see als o Hi gb ee v . Commis si on er, 1 16 T.C. at 4 47 . 3 6- 20 -

Co m m is si on er h as carr ie d h is burd en , th e Co m m is si on er’s arg um en t h ere i s t oo 3 7 br oa d. Co nc ed in g tha t a p os it io n i s n otall owabl e is no t the same as co nc ed in g th atitwas t ak enne gl ig en tl y or wi th di sr eg ardof rul es or r eg ul at io ns . 3 8 Acco rd in gl y , th e Co m

m is si on er h as no t m ethi s b ur de n o f pr oduc ti on forth e se ct io n 6 66 2( a) p en al ti es for 20 11 an d 2 01 2, an d o n the reco rdbe fo re u s, we d o no t s us ta in th e p en al ti es for20 11 an d 2 01 2. VI. Rel ie f Fro m

Jo in t an d S ev eral Liab il ity Gen eral ly, m arri edtax pa y ers m ay ele ctto fil e joi ntFed eral in co m e ta x returns . Afterm ak in g the ele ct io n, ea chsp ou se is joi nt ly andsev eral ly liab le for

3 9 th e en ti re t ax du e fo r th aty ear. If cert ai n re qu ire m en ts are m et , sec ti on60 15 4 0 al lo ws a t ax pa y er re li ef fro m joi ntan d s ev eral li ab il ity . Excep t as ot he rwis e pr ov id ed , th e reque st in g s po us e b ears th e b ur de n o f pr ov in g t ha t h e o r sh e is en ti tl edto sec ti on 60 15 rel ie f. 4 1

Oriav. Co m

m is si on er, T.C. Mem o. 2 00 7- 22 6. 3 7 See M ur

ph y v. Co m m is si on er, T.C. Mem o. 2 00 6- 24 3. 3 8 Sec. 6 01 3( a). 3 9 Sec. 6 01 3( d) (3 ). 4 0 Ru le 14 2( a); Altv. Co m m is si on er, 1 19 T.C. 30 6, 3 11 (20 02 ), aff’d, 1 01 F. 4 1 App ’x 34 (6t h C ir. 2 00 4) .- 21 -

Ms . Elg ho se in is no t en ti tl edto rel ie f un de r se ct io n 6 01 5. Al th ou gh Mr. Garad a te st ifi edth athe was i n c ha rg e o f fi li ng th e returns an d t ha t h e was res po ns ib le forth e it em s o f in co m e th atth e Co m m is si on er d is al lo wed , Ms . Elg ho se indi d n otpro vi de an y ad di ti on al ev id en ce tha t s he is en ti tl edto rel ie f. Mr. Gara daan d M s. El gh os ei n a re s ti ll m arri edan d h av e co nt in uo us ly liv ed to ge th er. Ms . Elg ho se in di d n otap pe ar attri al to tes ti fy or p ro vi de an y

othe r ev id en ce tha t d em on strat es th atsh e m eet s the requi rem en ts forrel ie f. Acco rd in gl y , Ms . Elg ho se in ha s n otm ethe r bu rd enof s ho win g t ha t s he is en ti tl ed to sec ti on 60 15 rel ie f. VII. Co nc lu si on On the ba si s o f ou r ex am in at io n o f th e rec or d b efo re u s an d t he pa rti es ’ arg um en ts at t ria l, we fi ndth atMr. Gara daan d M s. El gh os ei n fa il edforth e m os t pa rt t o s ho w th atth e Co m mis si on er’s d et erm in at io ns are i nc orrect . For 2 01 0 M r. Garad a an d M s. El gh os ei n m us t i nc lu de inin co m e th e $ 10 ,00 0 p aym en t fr om Noh a Ent erp ris es . They are n oten ti tl edto de du ctad di ti on al expe ns es rel at in g t o in te res t i nc om e. Howev er, Mr . Garad a an d M s. El gh os ei n a re en ti tl edto de du ct th ei r rea l p ro pe rty tax es . Mr. Garad a an d M s. El gh os ei n a re l iabl e fo r a s ect io n 66 62 (a) a ccu racy-rela te d p en al ty for 2 01 0 i f th e co m pu ta ti on s re ve al th atth ey subs tant ia ll y

un de rs ta te d the ir i nc om e ta x. Ho wev er, the Co m mis si on er fa il edto- 22 -

m eethi s b ur de n fo r 20 11 an d 2 01 2, an d M r. Garad a an d M s. El gh os ei n are n ot li ab le forsec ti on 66 62 (a) a ccu racy-rela te d p en al ti es forth os e y ears . For e ach y ear in is su e, Ms . Elg ho se in is no t en ti tl edto rel ie f fro m joi ntan d s ev eral li ab il ity . To re fle ctth e fo reg oi ng , An ap pr op ria te ord er wi ll be is su ed , an d d eci si on wil l b e en te redun de r Ru le 15 5.