T.C. M em o . 2 0 2 1 -5 5

UNITED STATES TAX COURT

DONALD BAILEY AND SANDRA M
. BAILEY, Pet i ti o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t DONALD D. BAILEY AND SANDRA M . BAILEY, Pet it i on ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo s . 5 4 7 7 -1 4 , 9 3 9 3-1 5
. 1 Fi l edM ay 1 0 , 2 0 2 1
.

Do n al dD. Bai l ey

an dSan dra M . Bai ley , p ro s es e. Al i ci a E. El l io t t , fo r res p o n d en t .

1 OnJ an u ary

1 7 , 2 0 1 7 , we co n s o li dat edth es e cas es fo r t ri al , b ri efi n g , an d o p i n i o n . Served 05/10/21- 2
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[* 2 ] M EM ORANDUM FINDINGS OF FACT AND OPINION PUGH, Ju d g e: In thes e co n s ol i d at edcas es res p o n den td et erm i n ed th e fo l l o w i n g d efi ci en ci es , ad d i t i o n s t o t ax , an d p en al t i es : 2 Do ck etNo . 5 47 7 -1 4 Year Defi ci en cy Ad d i t i o n t o t ax s ec. 6 6 5 1(a)(1 ) Pen al ty

s ec. 6 6 6 2 (a) 2 00 8 $ 8 ,8 5 4
--- $ 1 ,7 71 2 00 9 2 8 ,5 1 3 $ 7 ,0 86 5 ,7 03 2 01 0 4 7 ,7 9 8 5 ,2 08 9 ,5 60 Do ck etNo . 9 39 3 -1 5 Year Defi ci en cy Ad d i t i o n t o t ax s ec. 6 6 5 1(a)(1 ) Pen al ty

s ec. 6 6 6 2 (a) 2 01 1 $2 7 ,3 86 $ 6 ,8 69 $ 5 ,4 77 2 01 2 3 6 ,5 0 7
--- 7 ,3 01 Aft er co n ces si o ns , th e i s s u es rem ai n i n g fo r d eci s io n are wh et h er p et i t i o n ers (1 ) s h o u l db e rel i ev edfro m thei r s ti p u l at i o n o f am ou n t s th ey s h o u l dh av e rep o rt ed
o n Sch edu l es E, Sup p l em en t al In co m e an dLo s s , fo r t h e y ears i n i s su e; (2 ) are
en t i t l edt o d edu ct i o n s cl ai m ed o n Sch edul es C, Pro fi t o r Lo s s fro m Bu s i n es s ,

2 Un l es s o th erwi s e i n d i cat ed , s ect i on referen ces are t o the In t ern al Rev en u e Co d e o f 1 9 8 6 , as am en d ed , i n effect fo r t h e y ears i n i s s u e. Ru le referen ces are t o th e Tax Co u rt Ru l es o f Pract ice an dPro cedu re. Al l m on et ary am ou n t s are ro u n dedt o th e n eares td o ll ar.- 3
-

[* 3 ] b ey o n dth o s e ei th er al lo w edi n th e s t atu to ry n ot i ces o f d efi ci en cy o r s in ce
co n ced edb y

res p on d en t; (3 ) are en t it l edt o d edu ct i o n s cl ai m edo n Sch edu l es A, It em i zedDedu ct i o n s , b ey o ndth o s e ei ther al l o wedi n th e s t atu t o ry n o t i ces o f d efi ci en cy

o r s in ce co n ced edb y

res p o n d en t; an d(4 ) are l i ab l e fo r t h e ad d i t i o n s t o t ax an dp en al t i es reco m

p u t edi n acco rd an ce wi th th e s t i pu l at i o n o f s et t l em en tan d
o u r co ncl u s i o n s i n th i s o p i n i o n . M rs . Bai l ey

d id n o tap p ear fo r tri al an dwas h el di n d efau ltwi th th e
u n d ers t an d i n g th ats h e wo u l drecei v e t h e s am e res u l tas M r. Bai l ey aft er t ri al . W e th erefo re refer t o M r. Bai l ey i n d i s cu s s i n g th e t ri al p ro ceed i n g . FINDINGS OF FACT So m e o f t h e fact s h av e b een s ti p u lat ed an dare i n co rp o rat edi n o u r fi n d i n g s b y th i s referen ce. Pet i ti o n ers res i d edi n Ari zo n a wh en th ey fi l edth ei r p et i t i o n s i n th es e cas es . I. Back gro u n d A. M r. Bai l ey M r. Bai ley

p rev io u s l y

was a l i cen sedcert i fi edp ub l i c acco u n t an t(C.P.A.). Hi s acco un t i n g p ract i ce co m m en cedi n ap p ro x i m at el y 1 9 7 5 . Hi s C.P.A. l i cen s e
was rev o kedi n 2 0 0 4
.- 4
-

[* 4 ] Du ri n g th e y ears i n i ss u e M r. Bai l ey was an u n en ro l l edt ax retu rn p rep arer. In each o f t h o s e y ears h e p rep aredt ax return s fo r ap p ro x i m at el y 1 0 0 cl i en ts i n an
o ffi ce h e ren t edo n Bro ad way Bo u lev ardi n Tu cs o n , Ari zo n a (Bro ad way o ffi ce). B. In t errad i o l o g y Befo re an di n 2 00 7 Uwe Zi n kan dGary Skuro o wn edan do p erat ed In t errad io l o g y , LLC (LLC). M r. Zi n kan dM r. Sku ro were t h e o n l y two m em b ers
o f t h e LLC, an deach o wn ed 5 0 %. Th e LLC el ect edt o b e t reat edas a p art n ers h i p fo r Fed eral t ax p u rp o s es . Wh i l e t h ey

were m em

b ers o f t h e LLC, M r. Zi nkan dM r. Sk u ro d ev el o p eda
s o ft ware p ro g ram

fo r web h o s t i n g m ed i cal i m ag es th atwas an as seto f t h e LLC. In 2 0 07 M r. Bai l ey

as s i s t edM r. Zi n kan dM r. Sk u ro i n creat i n g a n ew en t i ty , In t errad io l o g y , In c. (In t errad i o l o g y ). In t errad i ol o gy was o rg an izedu n d er t h e l aws
o f Ari zo n a o n Sep t em

b er 2 4, 2 0 0 7 , an del ect edt o b e t reat edas an S co rp o rat i o n fo r Fed eral t ax p u rp o s es . M r. Bai l ey p rep aredan dfi l edFo rm s 1 1 2 0 S, U.S. In co m e Tax Return fo r an S Co rp o rat i o n , fo r In t errad io l o gy fo r t ax y ears 2 0 0 7 th ro u g h 2 0 1 2 . He h el d1 0 % o f th e s h ares o f In t errad i o l o g y du ri n g t ax y ear 2 0 0 8
an d 2 0 % duri n g t ax y ears 2 0 09 th ro u gh 2 0 1 2
.- 5
-

[* 5 ] II. Pet i t i o n ers ’ Tax Retu rn s an dRes po n d en t’ s Det erm i n at i o ns M r. Bai ley

p rep aredan dfi l edp et it i o n ers ’ Fo rm s 1 0 40 , U.S. In d i v i du al In co m e Tax Return , fo r t h e y ears i n i s s u e. He t i m el y fi ledth ei r 2 0 0 8 an d 2 0 1 2 Fo rm s 1 0 4 0 , b u t h e u n t i m el y fi l edth ei r 2 0 09 , 2 01 0 , an d2 0 11 Fo rm s 1 0 4 0 o n M arch 9 , 2 0 1 1 , No vem

b er 2 9, 2 0 1 1 , an dFeb ru ary 1 9 , 2 0 1 3 , res p ect i v el y . Th e 2 0 1 0 an d2 0 1 1 retu rn s b o th rep o rt edt ax du e, wh ich th e In t ern al Rev en ue Serv ice (IRS o r res p o n d en t ) as s es s edb efo re t h e i s s uan ce o f t he n o t i ces o f d efi ci en cy fo r th o s e y ears . Onth ei r Fo rm s 1 04 0 p et i t io n ers rep o rt edt o t al g ro ss i nco m e o f $ 1 6 ,8 8 1 , ! $ 6 5 ,8 9 9 , $ 5 4 ,6 4 9, $ 2 0 ,0 7 7 , an d$ 28 ,1 8 7 fo r t h e y ears i n i ss ue,
res p ect i vel y , wh i ch M r. Bai l ey cal cu l at edb y

ad di ng t o g et h er an y

wag es , Sch edu l e C b u s i nes s i n co m e, cap i t al g ai n , an dt ax ab l e So ci al Secu ri ty b en efi t s, p l u s th e d i s tri b u t i v e s h ares o f In t errad i o l o g y ’ s i n co m e p et i t i o ners recei veddu ri n g each y ear. He o ffs etth i s i n co m e i n p artwi th t h e s t an dardd educt i o n i n 2 0 10 an d Sch edu l e A i t em i zed d edu ct i o n s i n 2 0 0 8, 2 0 09 , 2 01 1 , an d2 0 1 2 wh ich i n cl u d ed
m o rt g ag e i n t eres tex p en ses o f $ 9 ,6 6 8, $ 8 , 9 2 0 , $ 5 ,0 7 5 , an d$ 7 ,0 0 0 , res pect i v el y . Onp et i t i on ers ’ Sch edu l es C fo r t h e y ears i n i s s u e, M r. Bai ley rep o rt edg ro s s p ro fi ts o f $ 4 7 ,6 5 0 , $ 64 ,3 3 8 , $ 9 8 ,3 2 2 , $ 5 7,9 5 2 , an d$ 5 3 ,1 52 , res pect i v el y , an d
o ffs etth o s e p ro fi t s i n p artwi th b u s i n es s ex p en s e d edu ct i o n s , i n cl u d i ng ren th e- 6
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[* 6 ] p ai dfo r t h e Bro ad way o ffi ce. Th o s e d edu ct i o ns , wh i ch res p on d en tad ju s t ed i n wh ol e o r i n p art , are l i s t edb el o w: Ex p en s e 2 0 0 8 2 0 0 9 2 0 1 0 2 01 1 2 0 1 2 M ort g ag e i n t eres t $ 2 2 ,5 0 0 $ 1 2 ,8 6 5 1 $ 24 ,4 3 7 $7 ,5 0 0 $ 2 8 ,1 2 9 Car an dtru ck 8 ,1 7 6 8 ,0 4 6 5 ,0 2 6 8 ,5 2 0 5 ,5 5 0 Dep reci at i o n 1 --- 1 8 ,5 2 6 1 ,7 6 3
--- --- Leg al an d p ro fes s i o n al s erv ices 1 ,6 0 9 9 ,3 4 5 1 6 ,9 2 6 6 ,9 3 1 6 ,3 0 0

1 Th es e am ou n t s were cl ai m edas “ Oth er” i n t eres t o n th e Sch edu l e C b u t p et i t i o n er al l eg ed du ri n g ex am i n at i o n thati t was “ m o rt g ag e” i n t eres tan d res p o n d en t u s edth e d es cri p t i o n “ m o rt g ag e” i n t eres ti n th e n o t i ce o f d efi ci en cy . Th e IRS au di t edp et i t i o n ers ’ Fo rm s 1 0 4 0 an dIn terrad i o l o g y ’ s Fo rm s 1 1 2 0 S fo r t h e y ears i n i s su e. Res p o n d en ti s s ued n o t i ces o f d efi ci en cy t o p et i t io n ers fo r t ax y ears 2 0 0 8 , 2 0 0 9 , an d2 0 10 o n Decem b er 2 0, 2 0 1 3 (fi rs tn ot ice), an dfo r t ax y ears 2 0 1 1 an d2 0 1 2 o n Feb ru ary 9 , 2 0 1 5 (s eco n dn o t i ce). Res p o n d en t ad j u s t ed p et i t i o n ers ’ d i st ri b u t iv e s h ares o f In t errad i o l o g y ’ s i n co m e up wardi n th e fi rs t
n o t i ce b y $ 2 5 ,1 02 , $ 1 4 7 ,1 2 1 , an d$ 1 3 4 ,8 6 0 , res p ect i v el y , an d i n the s eco n dn o t i ce b y $ 1 23 ,5 7 4 an d $ 1 4 2 , 2 0 6 , res p ect i vel y . He redu cedth ei r Sch edul e C d edu ct i o n s i n the fi rs t n o t ice b y

$ 20 ,2 24 , $ 4 8 ,7 82 , an d $ 4 8 ,1 5 2 , res p ect i v el y , an d i n th e
s eco n dn o t i ce fo r 2 0 12 b y $ 1 9 , 6 5 8 . So m e o f t h e ad ju s t m en t s i n cl u ded- 7
-

[* 7 ] recl as s i fy i n g p et i t i o n ers ’ m o rt g ag e i n t eres t ex p en s e d edu ct io ns as h o m e
m o rt g ag e i n t eres tex p en se d edu ct i o n s , s o res p o n d en tal so ad ju s t edth e
co rres p o n d i n g Sch edul e A d edu ct i o n s . Th e reco rdal s o i n cl u d es Fo rm s 1 0 4 0 X, Am en d edU.S. In d i v i du al In co m e Tax Retu rn , fo r t h e y ears i n i s s u e, d at edOct o b er 1 8 , 2 0 1 9 , p rep aredb y

M r. Bai ley , an d ats o m e p oi n ts i g nedb y p et it i o n ers , wh i ch were p ro vi d edt o res p o n d en t ’ s co u n s el b efo re t ri al ; th es e am en d ed retu rn s were
n o taccep t edfo r fi l i n g. 3 III. Pro cedu ral Back gro un d Pet i t i o ners t i m el y

fi l eda p et i t i o n fo r t h e fi rs tn o t i ce o n M arch 1 1 , 2 0 1 4 , an d th e s eco n dn o t i ce o n Ap ri l 9 , 2 0 1 5 . Beg i n n i n g i n Au g u s t2 0 14 i n d o ck etNo
. 5 4 7 7 -1 4 an dFeb ru ary

2 0 1 6 i n b o th cas es , p ro ceed i n gs were s up erv i s edb y a J u d g e
o f t h i s Co u rt , wh o ru l ed o n a s eri es o f m o ti o n s b ro u gh tb y p et i t i o n ers , at t em

p t edt o
as s i s t i n res o l u t io n o f t h e cas es , an do rd eredreg u l ar s t atu s rep o rt s fro m the p art i es . By o rd er s erv edOct o b er 2 2 , 2 01 9 , th e cas es were s et fo r t ri al o n Decem ber 1 6 , 2 0 1 9 . Ina s tatu s rep o rtfi l edb y p et i t i o n ers o n Oct o b er 2 8 , 2 0 1 9 , M r. Bai l ey req u es t edth at th e Co u rtd el ay th e t ri al s o th ath e h ad t im e t o rev iew a p ro po s ed

3 Res p o n d en ts t at edi n h is p ret ri al m em o ran du m th atp et i ti o n ers “p ro v i d ed s ev eral d i fferen t v ers i o n s o f rev i s edo r am en d edreturn s fo r t h e t ax y ears ati s s u e, s o m e o f wh i ch were s i gn edan ds o m e o f wh ich were n o ts i gn ed .” Th e reco rdd o es n o ts t at e wh et h er p et it i o n ers h ads ig n edan y o f t he ret u rn s b efo re t h e Oct o b er 1 6 , 2 0 1 9 , s t atu s rep o rt .- 8
-

[* 8 ] s t ip u l at i o n o f s et t ledi s s u es s en t t o h i m b y res p o n d en tan d co m

p are i twi th th e fo u rt h v ers i o n o f am en d edretu rn s p et i t i o n ers recen t l y h ad s en tt o res p o n d en t . OnNo vem

b er 2 1, 2 0 1 9 , th e p art i es fi l eda s t i p ul at io n o f s et t l edi s su es , s i gn edb y p et i ti o n ers o n No v em

b er 9 , 2 0 1 9 , an dres p o n d en t ’ s co un s el o n No v em b er 2 1 , 2 0 1 9 . Parag rap h 1 o f t h at s ti p u lat i o n s t at edth attwo o f t h e
s ub s t an t i ve i s s u es were res ol v edan dth atthe rem ai n i n g i s su es i n v o l v e p ri m ari l y
s ub s t an t i at i o n o f b u s in es s ex p en s es an d i t em i zedd edu ct i o n s, ad di t i o n s t o t ax , an d p en al t i es . Th atp arag rap h al so n o t ed th atp et i t i o n ers h adrai s edn ew i s s u es req u es t i ng ad d it i o n al d edu ct i o n s n o t o ri g i n al l y cl ai m ed
. Parag rap h s 2 , 3 , 4 , an d5 s etfo rt h ag reem en t s reg ard i n g In t errad i o l o g y ’ s i n co m e an d d edu ct i o ns fo r each o f t h e y ears i n i s s u e an dth e am o u nt s o f M r. Bai l ey ’ s d is tri b u t i ve s h are o f In t errad i o lo g y ’ s i n co m e t hatp et i t i o n ers are req u i redt o rep o rtfo r each o f t h e y ears fro m 2 0 0 8 th ro u g h 2 0 1 2. Parag rap h 6 o f th e s t i p u l at i o n s t at ed : Th e fo l l o w i n g t ab l e s h o ws th e am o un to f i n co m e fro m In t errad i ol o g y , In c., as rep ort edb y Pet i t i o n ers o n Sch edu le E, th e co rrect am o un tth at s h o u l d h av e b een rep o rt ed , an dth e co rrect ad ju s t m en ts t o Pet i t i o n ers ’ Sch edu l e E i n co m e fo r t h e t ax y ears at i ss u e:- 9
-

[* 9] Year Sch edul e E i n co m e o r

(l o s s ) as o ri g i n al l y rep o rt edb y

p et i t i o n ers Sch edu l e E

i n co m e o r (l o ss ) as co rrect ed Co rrect ad ju s t m en tt o sch edu l e E i n co m e fro m In t errad io l og y , In c. 2 00 8
--- $ 2 5 ,1 0 2 $ 2 5,1 0 2 2 00 9 ($ 8 3,1 8 2) 6 3 ,9 3 9 1 4 7,1 2 1 2 01 0 (6 8 , 1 1 0 ) 6 6 ,7 5 0 1 3 4,8 6 0 2 01 1
--- 7 6 ,8 5 7 7 6 ,8 5 7 2 01 2 (3 3 , 0 0 1 ) 7 6 ,2 0 4 1 0 9,2 0 5 Parag rap h s 7 , 8 , 9 , an d1 0 o f t h e s t i p u lat i o n o f s et t l edi s s u es s etfo rt h
res p o n d en t’ s ag reem en tth atp et i t i o n ers d id n o t recei ve t h e cap i t al g ai n rel at i n g t o In t errad io l o g y

thath adb een rep o rt edo n th ei r Fo rm s 1 04 0 fo r 2 0 1 0 an d 2 0 1 2
. OnDecem

b er 3 , 2 0 19 , res p o n d en tfi l ed a m o t i on fo r l eav e t o fi l e fi rs t
am en d m en tt o an s wer, wh i ch s o u g h tt o as s erts ect i on 6 6 5 1(a)(2 ) ad d it i o n s t o t ax fo r fai l u re t o t i m el y

p ay t ax s ho wno n p et i ti o n ers ’ Fo rm s 1 04 0 fo r 2 0 1 0 an d2 0 1 1
. Res po n d en th adas ses s eds o m e o f t h e s ect i on 6 6 5 1(a)(2 ) ad d it i o n s t o t ax b efo re i s su i ng th e n o t i ces o f d efi ci en cy , b u tth e ad d i ti o n s co n t i n u edt o accru e o n v ari o u s d at es t o J u n e 2 0 1 5, wh en th e m ax i m u m ag g reg at e s t atu t o ry

am o u n t s h adreach ed 2 5 % fo r each y ear, b ecau s e p et i t i o n ers d i dn o tp ay thei r o u t s t an d i n g l iab i l i t i es as rep o rt edo n thei r o ri g i n al retu rn s (as i d e fro m a s m al l o verp aym en tcred i t). Res po n d en targ u edth atn o p reju d i ce wo u ldres u l tt o p et i t i o n ers b ecau s e t h ei r d efen s es , i f an y , t o th e l at e fi l i ng ad di t i o n s t o t ax u n d er s ect io n 6 65 1 (a)(1 ) wo u l d- 1 0 -

[* 1 0 ] b e s i m i l ar, an dp et i t i o n ers ’ p ri m ary arg u m en twas th atthey

d i dn o to we t h e t ax res p o n d en t h ad d et erm i n ed . Res p o n d en t d i dn o tex p l ai n wh y th e m o t i o n was
n o tb ro u g h tu n t il l es s th an two week s b efo re t h e s ch edu l edtri al
. Attri al o n Decem

b er 1 6 , 2 0 1 9 , th e p art i es fi ledth ei r fi rs ts t i p u l at io n o f fact s, s ig n edb y

p et i t i o n ers o n No v em

b er 9 , 2 0 1 9, an d res po n d en t ’ s co u n s el o n Decem b er 2 , 2 0 1 9. Parag rap h 8 8 o f t h e s t ip u lat i o n o f fact s rep eat edth e p art i es ’ ag reem en ts etfo rt h i n p arag rap h 6 o f t he s t i pu l at i o n o f s et t l edi s s u es . Th e
s t ip u l at i o n o f fact s s etfo rt h i n d et ai l th e t im e an d m an n er o f d et erm i n at i o n o f t h e
s ect i on 6 6 6 2 p en al ty

fo r each y ear an dp arag rap h s 9 4 , 1 0 8 , an d1 2 1 s t at edth e p art i es ’ ag reem en tth atres po nd en th ads at is fi edthe req ui rem en t s o f s ect i o n 6 7 5 1 (b ) fo r each p en al ty

d et erm i nedi n th e s t atu t o ry n o t ices
. OPINION I. Bu rd en o f Pro o f Ord i n ari l y , th e b u rd en o f p ro o f i n cas es b efo re t h e Co u rt i s o n th e t ax p ay er. Ru l e 1 4 2 (a)(1 ); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3 ). Sect i on 7 4 9 1 (a)(1 ) p ro v i d es th ati f, i n an y co u rt p ro ceed i n g , a t ax p ay er i n tro duces cred i b l e
ev i d en ce wi th res p ectt o an y fact u al i s su e rel ev an tt o as cert ai n i n g th e l i ab il i ty o f th e t ax p ay er fo r an y

t ax i m p o s edb y s ub t i tl e A o r B, t h e Co m m i s s i o n er s h al l h av e th e b u rd en o f p ro o f wi th res pect t o th ati s s u e. See Hi gb ee v . Co m m i s s i o ner, 1 1 6- 1 1 -

[* 1 1 ] T.C. 4 3 8 , 4 41 -4 4 2 (2 0 01 ). Pet i t i o n ers h av e n ei th er cl ai m edn o r s h o wnth at th ey h av e p res en t edcred i bl e ev i d en ce s u ffi ci en t t o s h i ftth e b u rd eno f p ro o f t o
res p o n d en t as t o an y

rel ev an tfact u al i s s u e u n d er s ect i o n 7 4 91 (a). Du ri n g th es e p ro ceed i n g s p et i t i o n ers ei th er rai s edn ew d edu ct io n s o r rech aract eri zedth e am o un t s an dth e n atu re o f t h e ex p en s es fo r wh i ch th ey cl ai m ed d educt i o n s . Ev en tho u g h th e n ewl y al l eg edd edu ct i o n s were n o td i rect l y ad dres s edi n th e n o t i ces o f d efi ci en cy , th e Co m m i s s i o ner d o es n o tb ear t h e b u rd en
o f d i s p ro v i n g d edu ct i o n s t h ata t ax p ay er b el at ed l y cl ai m s . See Sh am

v . Co m m i s s i o n er, T.C. M em o . 2 0 2 0 -1 1 9 , at* 3 8 -* 3 9 ; Rap p ap o rtv . Co m m i s s io n er, T.C. M em o . 2 00 6 -8 7 , 2 0 0 6 W L 1 0 8 3 4 3 4, at* 4. Pet it i o n ers therefo re b ear t h e b u rd eno f p ro of fo r an y

d edu ct i o n s th ey

cl ai m edi n ad d i t i o n t o th o s e o n th ei r Fo rm s 1 0 4 0
. II. Sch edu l e E In co m e Du ri n g tri al M r. Bai l ey

at t em p t edt o rep u d i at e t he t erm s o f p arag rap h 6 o f th e s t i p u l at i o n o f s et tl edi s s ues th atp et i t i o n ers h ads i g n ed l es s th ana m on th earl i er
an d wh i ch were rep eat edi n p arag rap h 8 8 o f t h e s t i p u l at io n o f fact s s ig n ed o n th e
s am e d at e. He ag reedth ath e recei v ed th e i n co m e fro m In terrad i o l o g y s h own i n th e s t i p u l at i o n , b u th e v ag u el y p ro t es t edth at h e d i dn o t earn th atm u ch i n co m e each y ear an d o b

j ect edt o th e t ot al am o u nto f t h e ad ju st m en t . He d i dn o tex p l ai n- 1 2 -

[* 1 2 ] wh y , i f t he am ou n ti n th e s t i p u l at i o n was co rrect , th e res u l t i ng ad j u s t m en ts t o co rrect p et i t i o n ers ’ return s were n o n eth el es s i n co rrect . Ru l e 9 1 (e) p ro v id es : A s t i p ul at i o n s h al l b e treat ed , t o th e ex ten t o f i t s t erm s , as a co n cl u s i v e ad m i s s i o n b y

th e p art ies t o the s t i pu l at io n , u n les s o th erwi se p erm i tt edb y

th e Co u rto r ag reedup o n b y tho s e p art i es . Th e Co u rtwi l l n o tp erm i ta p art y t o a s t i p u lat i on t o qu al i fy , ch an g e, o r co n trad i cta s t i p u l at i o n i n wh o l e o r i n p art , ex cep tth ati tm ay d o s o wh ere ju s t i ce req u i res . A s t ip u l at i o n an dth e ad m i s s i o ns th erei n s h al l b e b i n d i ng an dh av e effect o n l y i n th e p en d i n g cas e an d n otfo r an y o th er p u rp o s e, an dcan n o tb e u s edag ai n s tan y o f t h e p art i es th eret o i n an y o th er cas e o r p ro ceed i n g . St i p u l at io n s o f s et t lem en tare u s u al l y en fo rcedwh ena req u es tt o wi th draw t h em i s
m ad e cl os e t o tri al . See Do rch es t er In du s . In c. v . Co m m i s s io n er, 1 0 8 T.C. 3 2 0 , 3 3 4 -3 3 5 (1 9 9 7 ) (h o l d i n g th atthe Co u rtup h o ld s s t i p u l at eds et t l em en t s “ [a] b s en ta
s h o wi n g o f l ack o f fo rm al co ns en t , frau d , m i s tak e, o r s om e s i m i l ar g ro un d ”), aff’ d , 2 0 8 F.3 d2 0 5 (3 d Ci r. 2 0 00 ); St amm In t’ l Co rp . v . Co m

m i ss i on er, 9 0 T.C. 3 1 5 , 3 2 1 -3 2 2 (1 9 8 8 ) (h o l d i n g th atm o re s tri n g en ts t an d ard s are ap p l i edt o req u es t s t o
v acat e a s t i p u lat eds et t l em en to n th e ev e o f tri al b ecau s e t h ey are ak i n t o “ v acat i n g a ju d g m en t en t eredb y

co n s en t ”). Bo th s ti pu l at i o n s were d et ai led , co m preh en s i v e,
an d u n am b i g u o us . Th ey

d em o n s trat edthatm

uch h adb een acco m

p li s h eddu ri n g th e y ears o f ex am i n at i o n b efo re t h e n o t i ces o f d efi ci en cy were s en tan ddu ri n g the- 1 3 -

[* 1 3 ] y ears o f n eg o ti at i o n s b etween th e fi l i n g o f t he p et i t i o n s an dthe t i m e o f t ri al
. Th e p ream

bl e t o th e s ti p ul at i o n o f fact s s t at es : It is h ereb y

s t i p ul at ed th atfo r t h e p u rp os es o f t h is cas e, th e fo l l o wi n g s t at em en t s m ay

b e accep t edas fact s an dal l ex h i b it s referred t o h erei n an dat tach edh eret o m ay

b e accep tedas au th en ti c an dare i n co rp orat edi n t h i s s t i p u l at i o n an dm ad e a p arth ereo f; p ro v i d ed , h o wev er, t h atei th er p art y h as th e ri g h t t o o b

jectt o th e ad m i s si o n o f an y s u ch fact s an dex h i b i t s i n ev i d en ce o n th e g ro u n d s o f m at eri al i ty an drel ev an cy , b u tn o to n o th er g ro u n d s u n les s ex p res s l y res erv ed h erei n . Th e p art ies d o n o tn eces s ari l y ag ree t o th e tru th o f as s ert i o n s wi th in s ti p u l at edex h i b i t s an ds u ch as s ert i on s m ay b e reb u t t edo r co rro b o rat ed b y ad d i ti on al ev i d en ce. Becau s e M r. Bai l ey ’ s t es t i m o n y at tri al s u g g es t ed th ath e d i dn otb el i ev e p et i t i o n ers t o b e b o u n db y the s et t l em en to f t h e In t errad io lo g y i s s ues , th e Co u rt
o rd eredaft er t ri al thatp et it i o n ers ex p lai n thei r d i s ag reem en t , i f an y , wi th th e
s t ip u l at i o n o f s et t ledi s s u es , wh y ju s t i ce n ow req u i res m o d ify i n g t h e s t i p u lat i o n , an d wh atev i d en ce, i f an y , th ey wo u l do ffer i n s up po rto f t h ei r p o si ti o n . Pet i t io n ers ’ res p o ns e rei t erat edth atth ey d is ag reedwi th p arag rap h 6 b ecau s e each Fo rm 1 0 4 0 X s ho wedthatthey h adn o Sch edu l e E i n co m e fro m In t errad i o lo g y

an d
o th erwi s e o wedn o t ax n o r were du e a refu n d . Th ey o ffered n o ex p l an at i o n as t o wh y th e s t i p u l at i o n th ey

s i g n edo n No v em

b er 9 , 2 0 1 9 , d i dn o ts up ers ed e t h e cl ai m s i n t h ei r am en dedretu rn s d at edOct o b er 1 8 , 2 0 1 9 , wh y they s i g n edth e
s t ip u l at i o n i f t h ey

d i s ag reedwi th i t , o r wh y ju s t i ce req u i redrel i ef fro m th e- 1 4 -

[* 1 4 ] s t i p u l at i o n . W e co n cl ud e th atp et i t i o n ers fai l edt o s h o w g ro u n ds fo r wi th drawi n g th e s t i pu l at i on . Th erefo re, t h e s t i p u l at i o n o f s et t l edi s s u es i s b i n d i n g , an d th e In t errad io l o g y i s s u es wi l l b e d et erm i n edi n acco rd an ce wi th that d o cu m en t . M o reo v er, ev en i f p et i t i o n ers h adb een al l o w edt o co n trad i ctth e s ti p u l at i o n attri al , M r. Bai l ey

p ro v i d edn o ev i d en ce th at wo u l d s up p o rtco m p u t i n g th ei r d i s tri b u t i v e s h ares o f i n co m e fro m In t errad io l o g y as s etfo rt h i n th ei r am en d ed retu rn s . As we ex p lai n ed rep eat ed l y attri al , th e am en d edreturn s were m erel y
s t at em en t s o f p et i ti on ers ’ p o si t i o n an dn o tev id en ce o f t h e co n t en t s . See M cLai n e
v . Co m m i s s i o n er, 1 3 8 T.C. 2 28 , 2 4 5 (2 0 1 2); W i l k i n s o n v . Co m m is s i o n er, 7 1 T.C. 6 3 3 , 6 3 9 (1 9 7 9); Ro b ert s v . Co m m i s s i on er, 6 2 T.C. 8 3 4 , 8 3 7 (1 9 7 4 ). Th u s , p et i t i o n ers h av e n o t es t ab l i s h edth atth e co m p u t at i o n s o f In terrad i o l o g y ’ s i n co m e
an d th ei r d is tri b ut i v e s h ares s etfo rth i n th e s ti p u l at i o n o f s et t l edi s s u es were i n co rrect . III. Dedu ct i o n s As M r. Bai l ey

kno ws fro m

d ecad es o f p rep ari n g t ax retu rn s fo r h i m s el f an d
o th ers an drep res en t i n g t ax pay ers , i ncl u d i n g h i m s el f an dh i s wi fe, b efo re th e IRS, t ax p ay ers h av e t h e b u rd en o f p ro v i n g en t i t l em en tt o th ei r cl ai m edd edu ct i o n s . See New Co l o n i al Ice Co . v . Hel v eri n g , 2 9 2 U.S. 4 3 5, 4 4 0 (1 9 3 4 ); Sp ark m an v .- 1 5 -

[* 1 5 ] Co m

m i s si o n er, 5 0 9 F.3 d1 1 4 9 , 1 1 5 9 (9 th Ci r. 2 0 0 7 ), aff’ g T.C. M em o . 2 0 0 5 -1 3 6 ; Ro ckwel l v . Co m m i s s i o n er, 5 1 2 F.2 d8 8 2 , 8 8 6 (9 th Ci r. 1 9 7 5 ), aff’ g T.C. M em o . 1 97 2 -1 3 3 . Tax p ay ers , th erefo re, are req u i redt o m ai n t ai n s uffi ci en t
reco rd s t o es t ab l i s h the am ou n tan dp u rp o s e o f an y d edu ct io n . Sec. 6 00 1 ; Hi g b ee
v . Co m m i s s i o n er, 1 1 6 T.C. at4 4 0 ; s ec. 1 .6 0 0 1 -1 (a), (e), In co m e Tax Reg s . Th e fai l u re t o k eep an d p res en ts u ch reco rd s co u n t s h eav i l y ag ai n s t a t ax p ay er’ s at t em p t edp ro o f. Ro g ers v . Co m m i s s i o n er, T.C. M em o . 2 0 1 4 -1 4 1, at* 1 7
. W e ad dres s each ty

p e o f d educt i o n i n i s su e i n tu rn . A. M o rt g ag e In t eres tEx p en s es Pet i t i o ners cl ai m ed b o th b u s i n es s an dh o m e m o rt g ag e i n t eres tex p en s e d educt i o n s fo r t he y ears i n i s s u e o n b o th th ei r Fo rm s 1 0 4 0 an dFo rm s 1 0 4 0X. Des pi t e M r. Bai l ey ’ s ex p eri en ce as a C.P.A. an d a t ax retu rn p rep arer, p et it i o n ers
o ffered n o ev i den ce t h atthe am o u n t s th ey p ai dex ceed edth e am o u n t s res p o n d en t al l o wed
. In factres p o nd en th adi n creas ed p et it i on ers ’ d edu ct i o n s fo r s ub s t an t i at ed
m o rt g ag e i n t eres tex p en ses du ri n g th e ex am i n at i o n wh en h e al l o wedi t em i zed d educt i o n s rat her t h an th e s t an d ardd edu ct i o n cl ai m edo n p et i ti o n ers ’ 2 0 1 0 Fo rm 1 0 4 0 . Pet i t i o n ers al s o o ffered n o s up po rtfo r t h e i n creas edam o u n t s th ey cl ai m ed i n thei r am en d edretu rn s . As we d i s cu s s edab o v e t h e am en d ed retu rn s were
m erel y s t at em en t s o f p et i t i o n ers ’ p o s i t i on an d n o t ev id en ce o f t h e co n t en t s . See- 1 6 -

[* 1 6 ] M cLai n e v . Co m

m i ss i o n er, 1 3 8 T.C. at2 4 5 ; W i l k i ns o n v . Co m m is si o n er, 7 1 T.C. at6 3 9 ; Ro b ert s v . Co m m i s s i o n er, 6 2 T.C. at8 3 7 . Acco rd i n gl y , p et i t io n ers
are n o ten t it l edt o an y

ad d i t i o n al m ort g ag e i n t eres tex p en s e d edu ct i on s . B. Veh i cl e Dep reci at io n an d Ex p en s es Pet i t i o ners cl ai m ed v eh icl e d ep reci at i o n an dex p en se d edu ct i on s o n t h ei r 2 0 0 8 , 2 0 0 9 , an d 2 0 1 0 Fo rm s 1 0 4 0 an di n creas edth ei r cl ai m ed d ep reci at io n
ex p en s e d educt i o ns o n thei r Fo rm s 1 0 4 0 X. Au t o m o b i l es are cl as s i fi edas th ree-y ear p ro p ert y

fo r d ep reci at i o n p u rp o s es . Rev . Pro c. 8 7-5 6 , 1 9 8 7 -2 C.B. 6 7 4
. Th e p eri o dfo r wh i ch an as s etd ep reci at es b eg i n s wh en th e t ax p ay er p l aces th e
as s et i n s erv i ce an den ds wh en i ti s ret i redfro m s erv i ce. Sec. 1
. 1 6 7 (a)-1 1 (e)(1 )(i ), In co m e Tax Reg s . Veh i cl e ex p en s es are s ub jectt o th e h ei g h ten eds ubs t an t i at i o n req u i rem en t s
o f s ect i o n 2 7 4(d ), 4 wh i ch req u i re a t ax p ay er t o s ub s t an t i at e b y ad equ at e reco rd s o r b y s u ffi ci en tev i d en ce co rro b o rat i n g th e t ax p ay er’ s o wn s tat em en t : (1 ) t h e am o u n t
o f t h e ex p en s e, (2 ) m i l eag e fo r each b u si n es s u s e o f t h e v eh i cl e as wel l as th e t o t al
m i l eag e fo r al l p u rp o s es du ri n g t h e t ax ab l e p eri o d , (3 ) t h e t i m e an dp lace o f t h e

4 Sec. 2 7 4 (d )(4 ) p ro v i d es th atn o d edu ct i o n s h al l b e al l o wedwi th o ut s ub s t an t i at i o n fo r “ li s t edp ro p erty (as d efi n edi n s ect i o n 2 8 0 F(d )(4 ))”. Sec. 2 8 0 F(d )(4 ) d efi n es th e t erm “ l i s t edp ro p erty ” t o m ean , i n ad di t io n t o o th er p ro p erty , an y

p as sen g er au t o m o b i l e o r an y o th er p ro p ert y

u s edas a m ean s o f tran s po rt at i o n .- 1 7 -

[* 1 7 ] trav el o r u s e, an d (4 ) t h e b u s i n es s p u rp os e o f t h e ex p en s e. Sec. 1 .2 74 -5 (j)(2 ), In co m e Tax Reg s .; s ec. 1 .2 7 4 -5 T(b )(6 ), Tem p o raryIn co m e Tax Reg s., 5 0 Fed . Reg . 4 6 0 1 6 (No v . 6 , 1 9 8 5); s ee al s o Sh ea v . Co m m is si o n er, 1 1 2 T.C. 1 8 3 , 1 8 6 -1 88 (1 9 9 9) (d is al l o wi n g trav el -rel at ed b u s i n es s ex p en s e d edu ct i o n s b ecau s e th e t ax p ay er fai l edt o co m p l y wi th t h e “ s tri n g en ts ub s t an t i at i o n req u i rem en t s o f s ect i o n 2 7 4 ”). To s ub s t an t i at e b y ad equ at e reco rd s , a t ax pay er
m u stp ro vi d e an acco u n tb o o k , a l o g , o r s i m i lar reco rdan dd o cu m en t ary ev i d en ce wh i ch t o g et h er are s u ffi ci en t t o es t ab l i sh each el em en twi th res p ectt o an
ex p en d i tu re. Sec. 1 .2 7 4 -5 T(c)(2 )(i ), Tem po raryIn co m e Tax Reg s ., 5 0 Fed . Reg
. 4 6 0 1 7 (No v . 6 , 1 9 8 5 ). Pet i t i o ners p u rch as edth e v eh i cl e fo r p ers o n al u s e i n 1 9 9 0 . Th e reco rdd o es
n o ts h o w thatp et it i o n ers co n v ert edth e v eh i cl e t o b us i n es s u s e atan y p o i n t . In ad d it i o n M r. Bai l ey

p res en t ed n o d o cu m en t ary ev i d en ce t o s up p o rtd edu ct i o n s fo r
v eh icl e ex p en s es i n am o u nt s g reat er t h an th o s e p rev i ou s ly al l o wedb y

res p o n d en t . He al s o ad m it t edth ath e h ad n o tm ai n t ai n eda co n t em p o ran eo u s l o g o f t h e v eh icl e
ex p en s es b u th ades t im at edthe am o u n ts . Acco rd in gl y , p et i t i on ers are n o ten t i t l ed t o d eductan y

v eh i cl e d ep reci at i o n o r ad d it i o n al v eh icl e ex p en s es .- 1 8 -

[* 1 8 ] C. Pro fes si o nal Fees Pet i t i o ners cl ai m ed d educt i o n s fo r p ro fes s i o n al fees o n thei r 2 0 0 9 an d2 0 1 0 Fo rm s 1 0 4 0 , wh i ch res p on d en t d i s al l o wed i n fu l l , an di n creas edth ei r cl ai m s o n th ei r Fo rm s 1 0 40 X fo r t h o s e y ears . Res p o n d en tp res en t edev i d en ce th atth e l eg al fees rep o rt edrel at ed t o an u n s u cces s fu l m al pract ice s u i t M r. Bai l ey co m m en ced ag ai n s th i s at to rn ey

an dan ex p ertwi tn es s wh o h ad as s i s t edh i m i n an earl i er
u n s u cces s fu l Fed eral Di s tri ct Co u rtcas e fo r a refu n do f i n co m e t ax . Ev en i f p aym en t o f t h e l eg al fees was es t ab l i s h ed , th e l eg al fees wo ul db e p ers o n al an d n o t d educt i b l e b ecau s e th e o ri g i n an dch aract er o f t h e cl ai m rel at edt o p et i t i o n ers ’ p ers o n al i n co m e t ax an da co ns equ en tcl ai m ag ai n s t M r. Bai ley ’ s rep res en t at i v es , n o tt o h i s t ax p rep arat i o n b u s i n es s . See g en eral l y Un i t edSt at es v . Gi l m o re, 3 7 2 U.S. 3 9 , 4 9 (1 96 3 ). Acco rd i n g l y , p et i t i o n ers are n o ten t it l edt o d edu ct p ro fes s i on al fees
. D. Ho m e Offi ce Ex p en s es Onth ei r Fo rm s 1 0 4 0 X, p et i t i o n ers cl ai m edn ew o r i n creas edh om e o ffi ce
ex p en s e d educt i o ns . Res po n d en th adp rev i o u s l y al l o wedd edu ct io n s fo r ren t s p ai d fo r M r. Bai l ey ’ s Bro ad way o ffi ce fo r t h e y ears i n i s s u e an d fo r h o m e o ffi ce d educt i o n s p et i t i o n ers cl ai m edo n th ei r Fo rm s 1 0 40 fo r 2 0 1 1 an d 2 0 1 2
. He
co n ten d ed th at p et i ti o n ers were n o ten ti t l edt o th e n ew o r i ncreas edam o u nt s . W e- 1 9 -

[* 1 9 ] ag ree. Pet i t i o n ers fai l ed t o p ro v i d e an y s up p o rt i n g d o cu m en t s fo r t h es e n ew
an d i n creas edd edu ct i o n s . Fu rt herm o re, p et i t i o n ers fai l edt o s h ow t h atth ey co u l d av o i dth e ap p l i cat i o n
o f s ect i o n 2 8 0A(a), wh i ch b ars d edu ct i o n s fo r a h o m e u s edb y the t ax p ay er as a
res i den ce du ri n g th e t ax ab l e y ear. To b e en t i t l edt o a d edu ct i o n th ey wo u l dh av e t o es t ab l i s h th atp art o f t h ei r h o m e was u s ed o n a reg u l ar b as i s as th e p ri n ci p al p l ace o f b u s i nes s fo r t hei r t rad e o r b u s i n es s o r as a p l ace o f b u s i n es s u s edb y cl i en ts o r cu s t o m ers i n m eet in g o r d eal i n g wi th th em i n th e n o rm al co u rs e o f t h ei r trad e o r b u si n es s (an dal l o cat e t h e ex p en s es t o th at p arto f th ei r h o m e). See s ec. 2 8 0 A(c)(1 )(A) an d (B). Th ey fai l edt o d o s o an dth erefo re are n o ten t i t l edt o an y ad d it i o n al d educt i o n s fo r h o m e o ffi ce ex p en s es . E. Co n cl us i on Up o n co n s i d erat i on o f t he en t i re reco rd , we fi n d t h atp et i t i o n ers h av e n o t p ro v enen t i t l em en t t o an y d edu ct i o n s b ey o n d th o s e al read y al l o wedo r co n ced ed b y res p o n d en t . IV. Ad d i t i o n s t o Tax an dPen al t i es Res p o n d en th as th e b u rd en o f p ro du ct i o n wi th res p ect t o th e l i ab i l it y o f an y i n d i v i du al fo r p en al t i es an dad d i t i o n s t o t ax . See s ec. 7 4 9 1 (c). In an y ev en t- 2 0 -

[* 2 0 ] res p o n d en th as th e b u rd en o f p ro vi n g t h e i n creas edam ou n t s cl ai m edi n th e
am en d m en tt o the an swer i f we g ran tres p o n d en t ’ s m o t i o n. Ru l e 1 4 2 (a)(1 ). Sect io n 6 6 5 1 (a)(1 ) i m

p o s es an ad d i t io n t o t ax fo r t h e l at e fi l i n g o f a ret u rn . An ds ect io n 6 6 5 1 (a)(2 ) i m p o s es an ad d i t i o n t o t ax fo r l at e p aym en t o f t h e am o u n t
s h o wnas t ax o n th e ret u rn . Th e fi rs ts t i p u l at io n o f fact s s et s fo rth th e du e d at e an d th e fi li n g d at e o f p et i t i on ers ’ retu rn fo r each y ear i n i s s u e, an dth e reco rdi n cl u d es th e ret urn s th atp et i t i on ers fi led . Thu s res po n den t h as m eth i s b u rd en o f p ro duct i o n wi th res pect t o l at e fi l i n g u n der s ect i o n 6 6 5 1 (a)(1 ) fo r 2 0 0 9 , 2 01 0 , an d 2 0 1 1 . See Wh eel er v . Co m m i s s i o n er, 1 2 7 T.C. 2 0 0 , 2 0 7 -2 0 8 (2 0 0 6), aff’ d, 5 2 1 F.3 d1 2 8 9 (1 0 th Ci r. 2 00 8 ); Hi g b ee v . Co m m is s i o n er, 1 16 T.C. at 4 4 6 -4 4 7
. Pet i t io n ers d i dn o tad dres s o r d i s p u t e t ho s e ad d i t i o ns t o t ax attri al an dh av e
n ei th er co n t en d ed n o r s h o wnth at th ey h adreas o n ab l e cau s e fo r fi l i ng l at e o r n o t p ay i n g th e t ax due. Th o se ad d i t i o n s t o t ax wi l l b e s u st ai n ed
. Res p o n d en t“b ears th e o v eral l b u rd en o f p ro o f wi th res p ectt o h is i n creas es i n the ad d i t i o n s t o t ax ” fo r fai l u re t o p ay t ax s h o wn o n p et i t i o ners ’ o ri g i n al retu rn s fo r 2 0 1 0 an d 2 0 1 1 u n d er s ect i o n 6 6 5 1 (a)(2 ) t h ath e as s ert s i n the am en d m en tt o h i s an s wer. See Rad er v . Co m m i s si o ner, 1 4 3 T.C. 3 7 6 , 3 8 9 (2 01 4 ), aff’ di n p art , ap p eal d is m i s s edi n p art , 6 1 6 F. Ap p ’ x 3 9 1 (1 0 th Ci r. 2 0 1 5); s ee al s o Ru l e 1 4 2 (a); W ayn e Bo l t& Nu tCo . v . Co m m i s s io n er, 9 3 T.C. 5 0 0 , 5 0 7 (1 98 9 ) (h o l d i n g th ata- 2 1 -

[* 2 1 ] ch an g e i n th e Co m

m i s si o n er’ s p o si t i o n res u lt s i n a “ n ew m at t er” an ds h i ft s th e b u rd en o f p ro o f t o h i m i f t h e ch an g e ei th er al ters th e o ri g i n al d et erm in at i o n o r

“ req u i res th e p res en t at i o n o f d i fferen t ev i d en ce” b utn o t i f i t“ m erel y cl ari fi es o r d ev el o p s t h e o ri g i n al d et erm i n at i o n ”). Th e Co m m i ss i o n er m

u stp ro v e th e ab s en ce
o f ex cu l p at o ry

fact o rs an dreas o n ab l e cau s e t o “ ju s ti fy th e as s ert edi ncreas e i n th e
* * * [ad di t i o n t o t ax ] ”. RERI Ho l d i n g s I, LLC v . Co m m i s s i o n er, 1 49 T.C. 1 , 3 9 (2 0 1 7) (ci t i n g Rad er v . Co m m is s i o n er, 1 43 T.C. at3 8 9 ), aff’ d s ub n o m . Bl auv . Co m m i s s i o n er, 9 2 4 F.3 d1 2 6 1 (D.C. Ci r. 2 0 1 9 ). Ho w ev er, i f “ th e ex i s t en ce o f
reas on ab l e cau s e as a d efen s e t o b o th th e * * * [ad d i t i o n t o t ax ] i n i t i al ly d et erm i n edan dth e i n creas ed* * * [ad d i t i o n t o t ax ] ‘ i s co m p l et el y d ep en d en tup o n th e s am e ev i d en ce’ , th ere m i g h tb e ‘ l i t t l e p ract ical reas o n t o s h iftth e b u rd en o f p ro o f.’ ” Id . (qu o t i n g Sh ea v . Co m m i s s i o n er, 1 1 2 T.C. at1 9 7 n .2 2 ). Pet i t i o ners ’ fi l edreturn s s at i s fy res p on d en t ’ s b u rd en o f es t ab l i s h i n g th atan
am ou n to f t ax was s h o wno n the ret u rn . See Wh eel er v . Co m m i s s i on er, 1 2 7 T.C. at2 1 0
. Attri al res p o n d en tp res en t edev id en ce fro m tran scri p t s o f p et i t i o n ers ’
acco u n t sup po rt i n g th e accru al o f l at e p aym en tad d i ti o n s u n d er s ect i o n 6 6 51 (a)(2 ) fo r am o un ts rep o rt edo n p et i t i o n ers ’ o ri g i n al retu rn s. Pet i t i o n ers d i dn o tp res en t
an y arg u m en t s o r ev id en ce as t o wh y th ey h adn o ty etp ai dth es e am ou n t s . Attri al M r. Bai l ey

ag reedth atp et i t i o n ers ’ o ri g i n al retu rn s s h owedam o un t s were o wed- 2 2 -

[* 2 2 ] an d al s o th atth e IRS wo u l das s es s t ax o wed . He al s o t es t i fi edth atth e IRS
wo u l d“ au to m at i cal l y

cal cu l at e * * * [t h e t ax o wedan d ] i f th ere’ s [s ic] an y p en al t y du e.” M ore g en eral l y , h i s d efen s e ag ai n s t an y p en al t i es an dad d i t i o n s t o t ax was th atp et i t i o n ers d i d n o to we ad di t i o n al t ax (al th o ug h h e d i d ad m itt o an o m i s s i o n o f $ 3 ,0 0 0 ). Al th ou g h we d o n o twi s h t o en co u rag e m o t io n s t o am en d s o n ear t h e t ri al d at e, we wi l l g ran t res po n d en t ’ s m o t i o n i n th is i n s t an ce fo r co m p l et en es s o f t h e i s su es b efo re u s an db ecau s e “ th e co m p l et e ab s en ce o f ev i d en ce o f ex cu l p at o ry fact ors ” an d p et it i o n ers ’ fai l u re t o p res en tan y reas o n ab l e arg u m en t s ex p l ai n i n g th ei r fai l u re t o p ay

th e rep o rt edt ax “ s up po rt s a fi n d in g th atres p o n d en th as
s at i s fi edh i s b u rd en o f p ro o f t o s h o w th atn o s uch fact ors ex i s t , th ereb y ju s t i fy i n g h i s i n creas es i n th e ad di t i o n s t o t ax .” See Rad er v . Co m m i s si o n er, 1 4 3 T.C. at3 9 1
. Sect io n 6 6 6 2 (a) an d(b )(1 ) an d(2 ) i m p o s es a p en al ty

equ al t o 2 0 % o f t h e p o rt i on o f an u n d erp aym en to f t ax req u i red t o b e s h o wn o n th e ret u rn thati s at tri b u t ab l e t o “ [n ] eg l i g en ce o r d i s reg ard o f ru l es o r reg u lat i o n s ” an d/ o r a

“ s ub s t an t i al u n d ers t at em en to f i n co m e t ax .” Neg l ig en ce i n cl u des “ an y fai l u re t o
m ak e a reas o n ab l e at t em

p tt o co m p l y wi th th e p ro vi s i o n s o f t h i s t i t l e”. Sec. 6 6 6 2 (c); s ee al s o Al l env . Co m m i s s i o n er, 9 2 T.C. 1 , 1 2 (1 9 89 ) (ci t i n g Neel y v . Co m m i s s i o n er, 8 5 T.C. 9 34 , 9 4 7 (1 9 8 5 ), i n s t at i n g we h av e d efi n edn eg l i g en ce as- 2 3 -

[* 2 3 ] “ the l acko f du e care o r fai l u re t o d o wh ata reas o n ab l e an d o rd i n ari ly p ru d en tp ers o n wo u l dd o u n d er t h e ci rcu m s t an ces ”), aff’ d , 9 2 5 F.2 d3 4 8 (9 th Ci r. 1 9 9 1 ). Res p o n d en t ’ s b u rd en o f p ro du ct i o n wi th res p ectt o th e s ect i o n 6 6 62 p en al t i es i s m eti n p artb y th e s t i p u l at i o n s thath e s at i s fi edth e req u i rem en t s o f
s ect i on 6 7 5 1 (b ). Fo r 2 0 08 th e p en al ty ap pro v edu n d er s ect i o n 6 6 6 2 (a) was an
u n d erp aym en t du e t o a s ub s t an t i al u n d ers t at em en t o f i n co m e t ax . Fo r 2 0 0 9, 2 0 1 0 , 2 0 1 1 , an d2 0 1 2 , th e p en al ti es ap p ro v edwere fo r u n d erp aym en t s du e t o n eg l i g en ce. Wh et h er t he u nd ers t at em en to f i n co m e t ax o n p et i t i o n ers ’ o ri g i n al retu rn i s
s ub s t an t i al wi l l b e d et erm i n edwh en p et i t i o ners ’ t ax l i ab i l it y fo r 2 0 08 i s
reco m pu t edu n d er Ru l e 1 55 . Fo r t h e o th er y ears p et i t i o n ers ’ n eg l i g en ce i s ap p aren t fro m

th e i m p ro p er rep o rt i n g o f In t errad io l og y ’ s i n co m e an dM r. Bai l ey ’ s d i s tri b u t i v e s h are as s et fo rt h i n p arag rap h 6 o f t h e s ti p u lat i o n o f s et t l edi s s u es . On ce t h e Co m

m i s s io n er h as m etth e b u rd eno f p ro du ct i o n , th e t ax pay er
m u stco m e fo rward wi th p ers u as i v e ev i d en ce t hatth e p en al ty i s i n ap p ro p ri at e b ecau s e, fo r ex am

p l e, h e act edwi th reas o n ab l e cau s e an di n g o o dfai th . Sec. 6 6 6 4 (c)(1 ); Hi g b ee v . Co m m is s i o n er, 1 1 6 T.C. at 4 48 -4 4 9
. Th e d eci s i o n as t o wh et h er a t ax p ay er act edwi th reas o n ab le cau se an d i n g o o dfai th i s m ad e o n a
cas e-b y -cas e b as i s , t ak in g i nt o acco u n tal l o f t h e p ert i n en tfact s an dci rcu m s t an ces .- 2 4 -

[* 2 4 ] See s ec. 1 .6 6 64 -4 (b )(1 ), In co m e Tax Reg s . Th e m o s ti m p o rt an tfact o r i n d et erm i n i n g reas o n ab l e cau s e an dg o o d fai th i s th e ex t en to f t h e t ax p ay er’ s effo rt t o as s es s h i s o r h er p ro p er i n co m e t ax l i ab i li ty . Id
. Pet i t i o ners o ffered n o ev i d en ce o f reas o n ab l e cau se o r o f th e m an n er i n wh i ch M r. Bai l ey

m ad e erro n eo u s en tri es o n In t errad i o lo g y ’ s o r p et i t i o ners ’ retu rn s . Acco rd i n g l y , th e s ect io n 6 6 6 2 p en al t i es wi l l b e s us t ai n ed
. To refl ectthe co n ces s io ns an do u r co n cl u si on s , Ap p ro p ri at e o rd ers wi l l b e i ss u ed , an d d eci s i o n s wi l l b e en t eredu n d er Ru l e 1 5 5
.