T.C. Sum m ary Opi ni on 20 13 -7 5

UNITED STAT ES TAX COURT SYLVESTER OGBAJIE IHEKE AND IJEOMA MARTHA IHEKE, Peti ti on ers v.

COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 24 50 2- 11 S. Fil edSep te m be r 24 , 20 13 . Sy lv es te r Ogb ajie I he ke an d Ijeo m a Marth a Ih ek e, pr o s es e. Jo n D. Fel dh am

m er, fo r res po nd en t.

SUMM ARY OPINION HAINES, Ju dg e: Thi s ca se was h eardpurs ua ntto sec ti on74 63 of t he In te rn al Rev enue Co de ineffe ctwhen th e p et it io n was fil ed . Pur su an t t o s ect io n 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 , as a m en de d a ndineffec t fo r th e ta xabl e y ear at i ss ue , andall Ru le refe ren ces are t o t he Tax C ou rt Rul es of P ract ic e an d P ro cedur e.- 2 -

74 63 (b ), th e d eci si on to be en te redis no t re vi ewab le by any ot he r co urt, an d t hi s op in io n s ha ll no t b e tr eat edas p rece de ntforan y ot he r cas e. Res po nd en t d et erm in eda $1 0,5 75 de fic ie nc y inpe ti ti on ers ’ Fed eral in co m e 2 ta x a nda $2 ,11 5 a ccu racy-rela te d p en al ty und er s ect io n 6 66 2( a) fo r 20 07 . There are t hr ee i ss ue s fo r de ci si on . The fi rs t i ss ue is whet he r pe ti ti on ers are en ti tl ed 3 un de r se ct io n 1 62 to de du ctex pe ns es rel at edto cert ai n e xp orti ng act iv it ie s fo r 20 07 . W e h ol d the y

are n ot . The s eco ndis su e is whethe r pe ti ti on ers are en ti tl ed un de r se ct io n 1 65 to cla im edlo ss de du ct io ns with re sp ectto cert ai n e xp orti ng act iv it ie s fo r 20 07 . W e h ol d t he y are n ot . The fi na l i ss ue is whet he r pe ti ti on ers are l iabl e und er s ect io n 6 66 2( a) fo r th e acc ur acy-rela te d p en al ty for 2 00 7. We ho ldth ey are. Bac kg ro un d So m e o f th e fac ts ha ve be enst ip ul at edan d a re s o fo un d. Th os e ex hi bi ts at ta ch edto th e st ip ul at io ns an d a dd it io na l ex hi bi ts whi chwere fo un d a dm is si bl e are i nc or po rat edby thi s re fere nc e. Pet it io ne rs res id edinCal ifo rn iawhen th e pe ti ti on was fi le d.

All am ou nt s ar e ro un de d t o t he ne ares t d ol la r. 2 The rem ai ni ng is su es are co m pu ta ti on al an d n eedno t b e ad dr es se d. 3- 3 -

I. Pet it io ne rs ’ Edu cat io n a ndEm pl oym en t Hi st ory Pet it io ne rs imm ig rat edto th e Uni te d S ta te s fr om Nig eri a. Afte r imm ig rat in g M r. Ih ek e earne d aba ch el orof a rts de gr ee i n a cco un ti ng in19 84 . Mr. Ih ek e th enearn eda m as te r’s de gr ee i n b us in es s ad m in is tra ti on (M.B.A.) the fo ll owi ng y ear. Mr . Ihe ke pa ss edth e certi fie d p ub li c acc ou nt an t (C .P.A.) ex am in 19 90 an d b ecame a lic en se d C PA aro un d 2 00 8. Mr . Ihe ke co m pl et edall of t he co ur se work fo r a m as te r’s de gr ee i n t ax at io n. Fro m Marc h 1 99 3 t o J ul y

19 94 Mr. Ih ek e worke d i n t he acco un ts pa y ab le de pa rtment o f th e Cal ifo rn iaDepa rtment o f Tran sp orta ti on . Betwe en19 94 an d 20 10 , Mr. Ih ek e worke d fo r th e Cal ifo rn iaFran ch is e Tax Bo ard , exa m in in g in di vi du al Cal ifo rn iaSta te in co m e ta x re tu rn s. Aft er 2 00 4 M r. Ih ek e worke d o n m at te rs in vo lv in g u nr ep orte d i nc om e an d t ax sh el te rs forth e Franc hi se Tax B oa rd . In20 10 Mr. Ih ek e le ft t he Fran ch is e Tax Bo ardan d b eg anwork in g fo r th e In te rn al Rev enue Serv ic e (IR S) as a rev enue ag en t i n t he IRS’ Ban k S ecre cy Act Di vi si on . Mr. Ih ek e’s res po ns ib il it ie s as a rev enue ag en t i nc lu de d i nv es ti ga ti ng m on ey laun de rin g c as es an d s us pi ci ou s cu rren cy act iv it ie s. At t he ti m e o f tr ia l M r. Ih ek e st il l wo rk edas an IR S rev enue ag en t.- 4 -

Mrs . Ihe ke stud ie d a cco un ti ng inNig eri a fo r two y ears at aun iv ers it y . After imm ig rat in g t o the Uni te d S tate s, M rs . Ihe ke stud ie d n ur si ng an d b ecame a li cen se d v oc at io na l n ur se in20 05 . II. Exp orti ng Acti vi ti es Mrs . Ihe ke pu rch as edscr ap lea th er fro m Bo nd co te Co rp . (Bo nd co te ) fo r ex po rt andres al e to bu y ers inNig eri a (l eathe r expo rti ng act iv it y ). Mrs . Ihe ke us ed a fre ig htco m

pa ny to m ov e th e sc rap s t o aU.S. po rt. Atth e U.S. po rt, acu st om s ag en t cl eare d t he lea th er fo r ex po rt f ro m th e Uni te d S ta te s t o Ni ge ria . The l eathe r was sh ip pe d b y

co nt ai ne r to Nig eri a whe re i t ag ai n h adto be cle aredth ro ug h cu st om s. On ce cl eare d i t was tra ns po rte d t o awareh ou se inNig eri a an d t he n s ol d who le sa le fro m

th e wareh ou se by Mr. Ju dy Adin nu , a supp os edfri en d o f th e Ih ek es . Pet it io ne rs m ad e a t ot al of 1 0 p ur ch as es fro m Bo nd co te be twee n 2 00 2 a nd th e en d o f 20 04 . The s hi pm en ts were m ad e ap pr ox im at el y two m on th s ap art . The sc rap m at eri al s wer e p utinbu nd le s. Ov er the ap pr ox im at el y two -y ear p eri od , Mrs . Ihe ke pu rch as edan d e xp orte d 3 96 ,30 4 p ou nd s o f le athe r sc rap s ata co stof $5 0,4 54 . Peti ti on ers so ldor o th erwi se di sp os edof the fir stfiv e sh ip m en ts of s crap m at eri al in20 02 an d 2 00 3. Onon e sh ip m en t i n 2 00 4 p et it io ne rs m ad e- 5 -

ap pr ox im at el y

an$1 8,0 00 pro fit . Peti ti on ers cla im th e o th er fi ve sh ip m en ts were un la wfu ll y

sei zedby N ig eri ancu st om s. InAug us t 2 00 4 M r. Ih ek e p ur ch as edth ree F or d s po rt u ti li ty veh ic le s fo r ex po rt t o Ni ge ria(carex po rti ng act iv it y ). Thatsame m on th Mr. Ih ek e ex po rte d two of the ve hi cl es to Nig eri a. In20 04 Mr. Ih ek e so ldon e o f th e ex po rte d ve hi cl es forap pr ox im at el y $1 2,0 00 . The s eco ndex po rte d v eh ic le wou ldno t ru n be cau se of m ech an ic al pro bl em s an d was di sc ard ed . The thi rdve hi cl e Mr. Ih ek e pu rch as edwas n ev er ex po rte d t o Ni ge riaan d was co nv ert edto pe rs on al us e in 20 06 . III. Tax Returns an d No ti ce o f Defi ci en cy Pet it io ne rs fil eda joi ntFed eral in co m e ta x re tu rnfor20 07 . Peti ti on ers rep orte d g ro ss rece ip ts , cos t o f go od s s ol d, an d c ert ai n u ti li ty exp en se s fo r th e le athe r ex po rti ng act iv ity an d t he car ex po rti ng act iv it y (co ll ect iv el y , exp orti ng act iv it ie s) on sep arat e Sch edul es C, Pro fitor Lo ss Fro m Bu si ne ss . Peti ti on ers cl ai m edlo ss es of $ 35 ,84 0 a nd$1 6,6 89 on th e return fo r th e le athe r ex po rti ng act iv ity an d t he car ex po rti ng act iv it y , res pe ct iv el y . Peti ti on ers ele ct edon th e Sch edul es C to us e th e cas h m etho d o f acc ou nt in g t o c om pu te th ei r ta xabl e in co m e fro m th e ex po rti ng act iv it ie s.- 6 -

Res po nd en t i ss ue d p et it io ne rs a de fic ie nc y no ti ce. Res po nd en t d is al lo wed th e g ro ss rece ip ts , cos t o f go od s s ol d, ex pe ns es , andul ti m at el y th e lo ss de du ct io ns cl ai m edwith re sp ectto th e ex po rti ng act iv it ie s. Pet it io ne rs fil eda pe ti ti on with th is Co urt ch al le ng in g re sp on de nt ’s det erm in at io ns . Dis cu ss io n I. Burd enof P ro of Gen eral ly, th e Co m

m is si on er’s d et erm in at io n o f a d efi ci en cy is pre su m ed co rrec t, an d t he tax pa y er b ears th e b ur de n o f pr ov in g i t i nc orrect . See Ru le 14 2( a); W el chv. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ). Pet it io ne rs do no t ar gu e th atth e b ur de n o f pr oo f sh ift s t o re sp on de ntun de r se ct io n 7 49 1( a), n or have pe ti ti on ers sh own th atth e th res ho ldrequi rem en ts of s ect io n 7 49 1( a) h av e b een m etforan y

of t he de te rm in at io ns at i ss ue . Accor di ng ly, th e b ur de n o f pr ov in g th atres po nd en t’s d efi ci en cy de te rm in at io ns are erro ne ou s re m ai ns on pe ti ti on ers . II. Deduc ti bi li ty of th e Rep orte d S ch edul e C Ex pe ns es Und er Se ct io n 1 62 Pet it io ne rs ha ve ab an do ne d t he ir r ep orti ng po si ti on s tha t the ex pe ns es rep orte d o n t he Sch edul es C as co stof g oo ds m ay be subt ract edfro m

th e rep orte d gr os s re cei pt s i n c om

pu ti ng th ei r gr os s i nc om e fro m th e ex po rti ng act iv it ie s. Pet it io ne rs arg ue in st eadth atth e ex pe ns es rep orte d a s co stof g oo ds so ldan d t he- 7 -

ot he r ex pe ns es rep orte d o n t he Sch edul es C sh ou ldbe tre at edas d educ ti bl e bu si ne ss ex pe ns es un de r se ct io n 1 62 . Sect io n 1 62 (a) a ll ows a de du ct io n fo r al l o rd in ary an d n eces sary ex pe ns es pa idor i nc urreddurin g t he tax ab le y ear i n c arrying on an y tra de or b us in es s. Pet it io ne rs co nt en d t he y

are en ti tl edun de r se ct io n 1 62 to de du ctth e expe ns es rep orte d wi th res pe ctto th e ex po rti ng act iv it ie s o n t he 20 07 Sch edul es C. Res po nd en t ar gu es th atth e rep orte d e xp en se s wer e n otpa idor i nc urredin20 07 an d t he refo re ar e n otde du ct ib le . W e ag ree wi th res po nd en t. Sect io n 7 70 1( a)(2 5) pro vi de s tha t the term “pa idor i nc urred ” sh al l b e co ns tru edacco rd in g t o t he m etho d o f acc ou nt in g u se d b y th e ta xp ay er. Pet it io ne rs were ca sh m etho d t ax pa y ers . Und er the cas h m etho d o f acc ou nt in g, i te m s ar e in cl ud ib le inin co m e fo r th e ta xabl e y ear i n wh ic h re cei ve d (a ctua ll y or co ns tru ct iv el y ) an d e xp en di tu res are d educ ti bl e fo r th e ta xabl e y ear i n wh ic h p ai d. Sec. 4 51 ; s ec. 1 .46 1- 1( a)(1 ), In co m e Tax Reg s.; see als o s ec. 1 .44 6- 1( c)(1 )(i ), In co m e Tax Reg s. Pet it io ne rs tes ti fie d a t tria l tha t the y di d n otsel l an y

go od s wi thres pe ctto th e ex po rti ng act iv it ie s i n 2 00 7. Th ey als o t es ti fie d t ha t al l o f th e ex pe ns es th ey rep orte d o n t he 20 07 Sch edul es C fo r th e expo rti ng act iv it ie s, ex cep t fo r certa in ex pe ns es th ey

pu rp orte dl y

pa idforil le ga l b rib es , were p ai d o r in cu rredintax- 8 -

y ears be fo re 2 00 7. Ad di ti on al ly, th e rec or d o th erwi se refl ect s tha t p et it io ne rs ne it he r rec ei ve d i nc om e n or pa idor i nc urredan y

ex pe ns es (ex cl ud in g p ur po rte d il le ga l b rib es pa idto Nig eri ancu st om s) with re sp ectto th e ex po rti ng act iv it ie s i n 20 07 . The i ll eg al bri be s p et it io ne rs pu rp orte dl y pa idor i nc urredin20 07 are n ot de du ct ib le . See s ec. 1 62 (c). Giv enth atpe ti ti on ers admitall of t he ot he r cl ai m ed ex pe ns es were p ai d o r in cu rredbe fo re 2 00 7, the y to o a re n otde du ct ib le be cau se th ey were n ot“pa idor i nc urreddu rin g t he tax ab le y ear” . Accor di ng ly, we reject pe ti ti on ers ’ arg um en t tha t the rep orte d e xp en se s fo r 20 07 with re sp ectto th e ex po rti ng act iv it ie s ar e d educ ti bl e und er s ect io n 1 62 . III. Deduc ti bi li ty Und er Se ct io n 1 65 of P ur po rte d Lo ss es Fro m

th e Exp orti ng Acti vi ti es Pet it io ne rs co nt en d a lt ern at iv el y th atth ey are en ti tl edun de r se ct io n 1 65 to de du ctas l os se s fo r 20 07 th e ex pe ns es rep orte d a s co stof g oo ds so ldan d the ot he r ex pe ns es cla im edon th e Sch edul es C. Sect io n 1 65 (a) p erm it s a d educ ti on ag ai ns t or di na ry in co m e fo r “ any

lo ss su st ai ne d dur in g t he tax ab le y ear a ndno t co m pe ns at edforby ins ur an ce o r ot he rwis e.” Fo r in di vi du al s, the de du ct io n i s li mit edto : (1 ) lo ss es in cu rredina tr ad e o r bu si ne ss ; (2 ) lo ss es in cu rredinan y tra ns act io n e nt eredin to forpro fitth ou gh no t co nn ect edto a tr ad e o r bu si ne ss ; o r (3 ) lo ss es of p ro pe rty no t co nn ect edwith atra de or b us in es s o r a tran sa ct io n- 9 -

en te redin to for

pro fit , if s uc h l os se s ar is e fro m “ fir e, st orm , sh ip wreck , or o th er cas ua lt y , or fr om

th eft .” Sec. 1 65 (c); see als o Lo ck et t v . Comm is si on er, T.C. Mem o. 2 00 8- 5, af

f’d, 30 6 F ed . App x. 4 64 (11 th Cir . 20 09 ). A lo ss de du ct io n i s ge ne ral ly perm it te d u nd er s ect io n 1 65 on ly for a t ax ab le y ear i n wh ic h t he lo ss is su st ai ne d, as ev id en cedby clo se d a ndco m pl et edtra ns act io ns an d a s fi xe d b y id en ti fiabl e ev en ts oc cu rri ng inth attax ab le y ear. Se c. 1.1 65 -1 (d )(1 ), In co m e Tax Reg s. No po rti on of alo ss is de du ct ib le un ti l i t ca n b e as cert ai ne d wi th reas on ab le cert ai nt y whet he r th ere i s a r eas on ab le pro sp ectof r eco ve ry . Sec. 1 .16 5- 1( d) , In co m e Tax Reg s. Th e b ur de n i s o n t he tax pa y er t o e st ab li sh th atth ere i s a de du ct ib le lo ss an d t he am ou ntof i t. Bo eh m v. Co m m is si on er, 3 26 U.S. 28 7, 2 94 (1 94 5) ; Be nn et t v . Commis si on er, 1 39 F.2d96 1, 9 63 (8t h C ir. 1 94 4) . Turn in g t o t he car ex po rti ng act iv it y , we fin d p et it io ne rs fai le d t o p ro ve th ey su st ai ne d a ny los s fo r 20 07 . Mr. Ih ek e p ur ch as edth ree F or d s po rt u ti li ty veh ic le s in 20 04 forth e carex po rti ng act iv it y . The rec or d re fle ct s tha t M r. Ih ek e sh ip pe d two of the ve hi cl es to Nig eri a in Aug us t 2 00 4. Mr . Ihe ke tes ti fie d t ha t o ne of th es e two ex po rte d v eh ic le s was so ldinNig eri a in 20 04 . He als o t es ti fie d t ha t the ot he r ve hi cl e expo rte d t o Ni ge riaco ul d n otbe so ldbe cau se of m ech an ic al pr ob le m s an d was “

jun ke d” . His t es ti m on y

refl ect s tha t the ve hi cl e’s m ech an ic al pr ob le m s ex is te d i n 2 00 4 b utdo es no t re fle ctth e d at e itwas “ jun ke d” or- 10 -

di sc ard ed . The rec or d d oe s n otot he rwis e ref le ctth atth e v eh ic le was d is card edin 20 07 . Fin al ly, th e rem ai ni ng Fo rdsp ort u ti li ty veh ic le was n otsh ip pe d t o Ni ge ria an d was co nv ert edto pe ti ti on ers ’ pe rs on al us e in 20 06 . As fo r th e le athe r ex po rti ng act iv it y , we li ke wis e fi ndth atpe ti ti on ers fai le d to est ab li sh th atth ey

su st ai ne d a ny los s fo r 20 07 fro m su chact iv it y . Peti ti on ers arg ue th atth ey

su st ai ne d alo ss in20 07 fro m th e le athe r ex po rti ng act iv it y be cau se th ey ga ve up on trying to reco ve r fi ve sh ip m en ts of l eathe r sc rap s tha t wer e pu rp orte dl y

sei zedby N ig eri ancu st om s. Pet it io ne rs di d n otpro du ce cr ed ib le ev id en ce s ho win g a ny shi pm en ts m ad e in co nn ect io n wi th th e le athe r expo rti ng act iv ity were s ei zedby N ig eri ancu st om s. Th e o nl y ev id en ce p et it io ne rs off

eredto supp ort the ir c la im

was the ir t es ti m on y . W e fo un d b ot h M r. Ih ek e’s an d M rs . Ih ek e’s te st im on y

to be sel f-s erv in g a ndun tru st worth y . W e n eedno t an d d o n ot acce ptan y

of t he ir t es ti m on y . See To ka rs ki v. Co m m is si on er, 8 7 T.C. 7 4, 7 7 (1 98 6) . Mor eo ve r, we fin d i t i nc red ib le th atpe ti ti on ers wou ldco nt in ue to m ak e fo urad di ti on al sh ip m en ts ov er an ap pr ox im at el y eig ht -m on th pe rio d a fte r th e fi rs t sh ip m en t was pu rp orte dl y un lawfu ll y

sei zedby N ig eri ancu st om s. Pet it io ne rs are al so no t en ti tl edto th e cl ai m edlo ss de du ct io n wi th res pe ctto th e le athe r ex po rti ng act iv ity foran ot he r rea so n. Pe ti ti on ers tes ti fie d tha t the y pa idil le ga l b rib es to reco ve r th e sh ip m en ts th atwere p ur po rte dl y sei zed . Mrs .- 11 -

Ih ek e te st ifi edth aton Decem be r 31 , 20 07 , sh e wir edm on ey to Mr. Ad in nu , th e supp os edfam il y

fri en d, t o b e u se d i n a n e ffo rt t o re co ve r th e fi ve sh ip m en ts fro m th e Nig eri ancu st om s. Giv enth e ti m e zo ne di ffer en ce b etweenCal ifo rn iaan d Nig eri a, Mr. Ad in nuli ke ly cou ldno t h av e rec ei ve d t he wire tra ns fer unt il lat e Decem be r 31 , 20 07 , or e arl y

Jan ua ry 1, 2 00 8. So , eve n i f we b el ie ve d p et it io ne rs ’ te st im on y th atth e sh ip m en ts were s ei zedby N ig eri ancu st om s, the reco rd in di cat es pe ti ti on ers were l ik el y co nt inui ng to att em

ptreco ve ry

of t he pu rp orte d se iz edsh ip m en ts th ro ug h t he en d o f 20 07 an d i nt o 2 00 8. Un de r su cha sc en ari o, we fi ndth atitis ve ry

un li ke ly tha t p et it io ne rs co ul d a sc ert ai n wi th reas on ab le cert ai nt y whet he r th ere was a reas on ab le pro sp ectof r eco ve ry at t he en d o f 20 07 . Acco rd in gl y , th e lo ss fro m th e le athe r ex po rti ng act iv it y co ul d n otbe tre at edas su st ai ne d i n 2 00 7. W e h ol d t ha t p et it io ne rs have no t m etth ei r bu rd enof p ro vi ng th ey su st ai ne d lo ss es with re sp ectto th e ex po rti ng act iv it ie s fo r 20 07 an d a re n oten ti tl edto th e cl ai m edlo ss de du ct io ns un de r se ct io n 1 65 . IV. Dis al lo wan ce o f th e Rep orte d Gro ss Rece ip ts Res po nd en t d is al lo wedth e g ro ss rece ip ts rep orte d o n t he Sch edul es C with res pe ctto th e ex po rti ng act iv it ie s. Th e rec or d re fle ct s tha t p et it io ne rs di d n ot- 12 -

real iz e an y

in co m e fro m

th e expo rti ng act iv it ie s i n 2 00 7. Acco rd in gl y , we su st ai n res po nd en t’s d et erm in at io n. V. Accur acy-Rela te d P en al ty W e n ow turn t o t he accu racy-rela te d p en al ty resp on de ntde te rm in edfor 20 07 . Sect io n 6 66 2( a) an d (b )(2 ) im po se s a 2 0% a ccuracy-rela te d p en al ty upo n an y po rti onof a n und erp aym en t o f ta x re su lt in g fr om a subs ta nt ia l u nd ers ta te m en t of in co m e ta x. Anun de rs ta te m en t o f in co m e ta x i s s ub st an ti al if i t ex ceed s the gr eat er o f 10 % of t he tax requi redto be sh own on th e return o r $5 ,00 0. Se c. 66 62 (d )(1 )(A). Res po nd en t b ears th e b ur de n o f pr oduc ti on with re sp ectto pe ti ti on ers ’ li ab il it y for th e acc ur acy-rela te d p en al ty det erm in edinth e n ot ic e o f de fic ie nc y an d m us t the refo re p ro du ce ev id en ce tha t i t i s ap pr op ria te to im po se th atpe na lt y . See se c. 74 91 (c); see als o Hi gb ee v . Comm is si on er, 1 16 T.C. 43 8, 4 46 (20 01 ). Pet it io ne rs ’ un de rs ta te m en t o f in co m e ta x a s re fle ct edinth e n ot ic e o f de fic ie nc y is gr eat er tha n 1 0% o f th e ta x re qu ire d t o b e sh own onth e return fo r th e y ear a t i ss ue , whi chis gre at er tha n $ 5,0 00 . Accor di ng ly, res po nd en t h as m ethi s b ur de n o f pr oduc ti on . The accu racy-rela te d p en al ty is n otim po se d, h owe ve r, with re sp ectto an y po rti onof t he un de rp aym en t o f ta x i f th e ta xp ay er ca n e st ab li sh th athe act edwith- 13 -

reas on ab le cau se an d i n g oo d fa it h wi th res pe ctto th atpo rti on . Sec. 6 66 4( c)(1 ). The de ci si on as t o wh ethe r th e ta xp ay er ac te d wi th reas on ab le cau se an d i n g oo d fai th de pe nd s upo n a ll th e p ert in en t fa ct s an d c irc um st an ces . Sec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s. Ci rcu m st an ces in di cat in g t ha t a t ax pa y er ac te d wi th reas on ab le cau se an d i n g oo d fa ith i nc lu de “ anho ne stm is un de rs tand in g o f fac t o r la w th atis reas on ab le inli gh t o f al l o f th e fac ts an d c irc um st an ces , in cl ud in g t he expe rie nc e, kn owl ed ge , andeduc at io n o f th e ta xp ay er.” Id . Mr. Ih ek e p rep aredpe ti ti on ers ’ in co m e ta x re tu rnfor20 07 . Mr. Ih ek e is a li cen se d C .P.A. andha s wo rk edas a n a cco un ta ntforat l eas t 2 0 years. He h as an M.B.A. an d a ls o c om

pl et edall of t he co ur se work fo r a m as te r’s intax at io n. He worke d a s a t ax ex am in er fo r th e Cal ifo rn iaFran ch is e Tax Bo ardbe twee n 1 99 4 an d 2 01 0. In20 10 he be cam e a rev enue ag en t fo r th e IRS , work in g i n t he Ban k Secr ecy A ctDiv is io n, wh ere h e st il l wo rk s t od ay . Mrs . Ihe ke als o s tu di ed acco un ti ng inco ll eg e. The un de rp aym en t fo r 20 07 is th e res ul t o f pe ti ti on ers ’ di sr eg ard in g ru le s an d re gu la ti on s o n re po rti ng in co m e an d c la im in g d educ ti on s ag ai ns t i nc om e. Giv enMr. Ih ek e’s educ at io n andem pl oym en t b ack gr ou nd , we fin d p et it io ne rs ’ di sr eg ardof rul es an d re gu la ti on s i ne xc us ab le . Add it io na ll y , pet it io ne rs fai le d t o of fer any pers ua si ve ev id en ce tha t the y act edwith re as on ab le cau se an d i n g oo d- 14 -

fai th . W e, th eref

or e, ho ldth atpe ti ti on ers are l iabl e fo r th e acc ur acy-rela te d pe na lty for 20 07 . Inreac hi ng ou r ho ld in gs he rei n, we h av e co ns id eredall arg um en ts m ad e, an d, t o t he ex te ntno t m en ti on edab ov e, we co nc lu de th ey are m oo t, i rrel ev an t, o r witho utm eri t. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te redfor res po nd en t.