T.C. Memo. 2013-141

UNITED STATES TAX COURT

PAMELA LYNN BROOKS, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9544-11. Filed June 4, 2013.

Pamela Lynn Brooks, pro se.

Donald D. Priver, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge: In a notice of deficiency dated January 26, 2011,

respondent determined deficiencies in petitioner’s Federal income tax, fraud
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[*2] penalties under section 6663(a), and accuracy-related penalties under section

1

6662(a) as follows:

 Penalties

Year Deficiency Sec. 6663(a) Sec. 6662(a)

2005 $3,490 $2,033 $99

2006 3,406 1,830 193

2007 4,503 720 709

After concessions, the issues for decision are: (1) whether petitioner is entitled to 2

a capital loss carryover deduction for each of the years in issue; (2) whether

petitioner is entitled to charitable contribution deductions she claimed on her

Unless otherwise indicated, all section references are to the Internal 1

Revenue Code (Code), as amended and in effect for the years in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure. Some monetary

amounts have been rounded to the nearest dollar.

For 2005 respondent concedes that petitioner is entitled to: (1) the entire 2

amount of her claimed deduction for State and local sales taxes; and (2) a

dependency exemption deduction for Michael Bias. For 2006 petitioner concedes

that she is not entitled to a dependency exemption deduction for Michael Bias. 

See infra note 4. For 2007 petitioner concedes that she is not entitled to any

itemized deductions; the parties have stipulated that she is entitled to the standard

deduction for that year. See infra note 3.

Respondent concedes that petitioner is not liable for the fraud penalty under

sec. 6663(a) for any of the years in issue. The amounts shown in the table above

reflect respondent’s determinations in the notice of deficiency. On the basis of

respondent’s concession, respondent has asserted increased sec. 6662(a) accuracyrelated penalties of $698, $681, and $901 for 2005, 2006, and 2007, respectively.
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[*3] Schedules A, Itemized Deductions, for 2005 and 2006; (3) whether petitioner 3

is entitled to a casualty loss deduction she claimed on her Schedule A for 2005; (4)

whether petitioner is entitled to dependency exemption deductions for her

grandson, N.J., for 2006 and for her son, Michael Bias, for 2007; (5) whether

4

Petitioner claimed a charitable contribution deduction on a Schedule A 3

attached to her 2007 return. In her opening brief petitioner contends that she is

entitled to a charitable contribution deduction of $5,200 for 2007. She advances

this contention again in her reply brief.

Petitioner stipulated, however, that she was not entitled to any itemized

deductions for 2007. At trial this Court reviewed the stipulations of fact, and

petitioner specifically indicated that the stipulation regarding the itemized

deductions was correct. As the trial proceeded petitioner again represented that

for 2007 she would take the standard deduction rather than itemize her deductions.

Petitioner, an Internal Revenue Service (IRS) tax compliance officer, was

familiar with Schedule A. She was aware that by conceding her right to itemize

her deductions, she also was conceding her claimed charitable contribution

deduction for 2007. Respondent relied on petitioner’s concession in arguing this

case. Accordingly, we find that petitioner has conceded that she is not entitled to a

charitable contribution deduction for 2007. Furthermore, although we find that

petitioner has conceded this issue, we note that the record is devoid of any credible

evidence that would substantiate her claimed charitable contribution deduction for

2007.

In her reply brief petitioner contends that she has not conceded her

4

eligibility for the dependency exemption deduction for Michael Bias for 2006. 

Petitioner testified, however, that she had conceded the deduction, and in her

opening brief she asserts that she conceded the deduction. In her reply brief

petitioner asserts that she agreed to respondent’s disallowance of the deduction

because she could not establish the amount of income Michael Bias received 

(continued...)
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[*4] petitioner is entitled to a Federal telephone excise tax credit for 2006 in

excess of the amount respondent allowed; and (6) whether petitioner is liable for

accuracy-related penalties under section 6662(a) for 2005, 2006, and 2007.

FINDINGS OF FACT

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

facts is incorporated herein by this reference. Petitioner resided in California

when she filed her petition.

(...continued) 4

during 2006 and that she claimed the dependency exemption deduction in good

faith.

At trial and in her opening brief petitioner conceded that she is not entitled

to the dependency exemption deduction for Michael Bias for 2006. Respondent

relied on petitioner’s concession in arguing this case. Petitioner is bound by her

concession. Furthermore, although we conclude that petitioner has conceded this

issue, we note that respondent introduced credible evidence that Michael Bias

received wages in excess of the exemption amount during 2006. Additionally,

petitioner testified that in addition to the income Michael Bias earned in exchange

for caring for his aunt, he also received unemployment compensation during 2006. 

Accordingly, even if we had relieved petitioner of her concession, the record

shows that petitioner was not entitled to a dependency exemption deduction for

Michael Bias for 2006.

We construe petitioner’s argument in her reply brief to be that she is not

liable for the sec. 6662(a) penalty with respect to the portion of the underpayment

for 2006 attributable to the disallowance of the dependency exemption deduction

for Michael Bias because she claimed the deduction in good faith. We address

petitioner’s argument infra part IV.B of this opinion.
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[*5] I. Background

In 1987 petitioner began working for the IRS as a secretary. In 2003 she

began working as an IRS tax compliance officer. As part of her duties petitioner

examined individual tax returns, Schedules A, and Schedules C, Profit or Loss

From Business, and also reviewed taxpayers’ eligibility for capital loss and

dependency exemption deductions.

On a date not apparent from the record petitioner married Fred Bias. She

separated from Fred Bias in 1993; a decree of divorce was entered at a later date.

Petitioner has four children: Michael Bias, Monique Bias, Marquise Bias,5

and Clayesha McElwee. Petitioner’s son Michael Bias was born in 1986. Michael

Bias resided with petitioner during the years in issue. During 2005 Michael Bias

was a full-time high school student who worked part time at Stater Bros. He

graduated in 2005 and subsequently began providing in-home supportive care for

his disabled aunt, Janet Henry, who also resided with petitioner. During 2006 and

2007 Michael Bias received compensation from a local government agency for

providing in-home supportive care to Ms. Henry.

Petitioner has a grandson, N.J., who was born in 2006. N.J. is the son of

Monique Bias. Monique Bias and N.J. resided with petitioner during 2006.

We infer from the record that Marquise Bias is petitioner’s son. 5
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[*6] II. Petitioner’s Property Transactions

A. Los Angeles Property

Petitioner’s claimed capital loss deductions are attributable to her

investment with respect to a property in Los Angeles, California (Los Angeles

property). In 1979 petitioner’s mother-in-law, Beulah Bias, inherited the Los

Angeles property. Fred Bias subsequently began residing at the Los Angeles

property, and petitioner moved to the Los Angeles property in 1983.

In December 1990 petitioner received a gift of $34,000. She initially

deposited the $34,000 in her account at Bank of America. However, petitioner

and Beulah Bias agreed that petitioner would use the $34,000 to make

improvements to the Los Angeles property and, in exchange, petitioner would be

entitled to a portion of the proceeds from the sale of the Los Angeles property. 

During 1991 petitioner used the $34,000 to make improvements to the Los

Angeles property. She did so with the intent to make a profit from her investment

in the property when the property was sold.

On July 10, 1991, Beulah Bias died. Petitioner continued to reside at the

Los Angeles property until 1993. Fred Bias resided at the Los Angeles property

until 2000.
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[*7] In 2000 petitioner learned that the Bias family was attempting to sell the

Los Angeles property. She subsequently sued the Estate of Beulah Bias in the

Superior Court of the State of California, County of Los Angeles, in case No. BC

268995. In 2003 she settled with the Estate of Beulah Bias for $17,000. She

incurred legal expenses of $2,000 with respect to her lawsuit.

B. Riverside Property

On a date not apparent from the record petitioner purchased a house in

Riverside, California (Riverside property), for $168,000. In 2004 a fire caused

significant smoke damage to the Riverside property. After the fire petitioner

applied to the Federal Emergency Management Agency (FEMA) for disaster

assistance with respect to the Riverside property. She also filed a claim with her

insurance company, Balboa Insurance.

While it was investigating petitioner’s claims, Balboa Insurance discovered

the presence of asbestos at the Riverside property. Balboa Insurance concluded

that in order to remedy the smoke damage, petitioner would need to have the

asbestos removed, and it proceeded to have estimates prepared regarding the costs

of removing the asbestos and repairing the smoke damage.6

Petitioner subsequently received payments from Balboa Insurance and

6

FEMA, but the record does not permit us to determine the total amount of

(continued...)
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[*8] Petitioner did not make any repairs to, or remove the asbestos from, the

Riverside property. Instead, she attempted to sell the Riverside property. Her

initial asking price for the Riverside property was $335,000. After she received an

offer and while the property was in escrow, petitioner’s real estate agent

discovered that petitioner had failed to disclose the asbestos problem to the buyer. 

Petitioner consequently agreed with the buyer to reduce the price to $305,000, an

amount equal to the asking price reduced by the cost of repairing the property,

including the costs of repairing the smoke damage and removing the asbestos. In

September 2004 she sold the Riverside property for $305,000.

III. Petitioner’s Tax Reporting and the Notice of Deficiency

Petitioner prepared her own returns for the years in issue. On her 2005

Form 1040, U.S. Individual Income Tax Return, petitioner reported a capital loss

of $3,000. She claimed dependency exemption deductions for Michael Bias, 7

Marquise Bias, and Ms. Henry. On an attached Schedule A she claimed total 

(...continued) 6

payments petitioner received. However, because we find that petitioner is not

entitled to a casualty loss deduction under sec. 165, we need not determine the

amount of the payments she received. See infra note 17.

On Schedules D, Capital Gains and Losses, attached to her 2005, 2006, and 7

2007 returns, petitioner reported the capital loss as a short-term capital loss. She

did not provide any description of the property, the date acquired, the date sold,

the sale price, or the cost or basis under part I of the Schedules D.
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[*9] itemized deductions of $27,103, including deductions for State and local sales

taxes of $5,044, charitable contributions of $3,500, and a casualty loss of $16,088. 

On an attached Form 4684, Casualties and Thefts, petitioner reported that the

casualty loss was attributable to damage to the Riverside property. She reported a

cost basis in the property of $168,000 and an insurance reimbursement of $9,600. 

She also reported that the fair market value (FMV) of the Riverside property

before the casualty was $335,000, and that the FMV after the casualty was

$305,000. She calculated the amount of the casualty loss claimed by subtracting

the insurance reimbursement amount from the $30,000 decrease in the property’s

FMV and then making various adjustments as required by the Form 4684.

On her 2006 Form 1040 petitioner reported a capital loss of $3,000 and

claimed a telephone excise tax credit of $768, which she calculated on the basis of

the actual amount of Federal excise tax she paid. She claimed dependency 8

exemption deductions for Michael Bias, Marquise Bias, Ms. Henry, and N.J. On

an attached Schedule A she claimed total itemized deductions of $9,165, including

a deduction for charitable contributions of $5,200.

Petitioner attached to her 2006 return a Form 8913, Credit for Federal 8

Telephone Excise Tax Paid, on which she calculated the amount of her claimed

telephone tax credit. 
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[*10] On her 2007 Form 1040 petitioner reported a capital loss of $3,000. She

claimed dependency exemption deductions for Michael Bias, Marquise Bias, and

Ms. Henry. On an attached Schedule A she claimed total itemized deductions of

$31,849, including deductions for State and local sales taxes of $23,000,

charitable contributions of $5,200, and a casualty loss of $3,129.

Respondent subsequently mailed to petitioner the notice of deficiency. 

With respect to 2005 respondent disallowed petitioner’s claimed capital loss

deduction, her claimed casualty loss deduction, the dependency exemption

deduction for Michael Bias, $1,436 of her claimed State and local sales tax

deduction, and the entire amount of her claimed charitable contribution deduction. 

With respect to 2006 respondent disallowed her claimed capital loss deduction, the

dependency exemption deductions for Michael Bias and for N.J., her charitable

contribution deduction of $5,173, and her claimed telephone excise tax credit of

$718. With respect to 2007 respondent disallowed her claimed capital loss

deduction, her claimed casualty loss deduction, the dependency exemption

deduction for Michael Bias, her claimed State and local sales tax deduction of

$23,000, and the entire amount of her charitable contribution deduction. 

Respondent also determined that petitioner was liable for fraud penalties under

section 6663(a) with respect to portions of the underpayments and for accuracy-
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[*11] related penalties with respect to other portions of the underpayments. 

Respondent alternatively determined that she was liable for accuracy-related

penalties under section 6662(a) with respect to the underpayments.

IV. Petitioner’s Tax Court Proceedings

Petitioner timely filed a petition with this Court requesting redetermination

of respondent’s determinations in the notice of deficiency. By notice dated

November 16, 2011, we set this case for trial at this Court’s San Diego, California,

trial session beginning April 16, 2012. Attached to the notice was this Court’s

standing pretrial order requiring the parties to exchange documents and other data

that the parties intended to use at trial no later than April 2, 2012, and to prepare a

stipulation of facts to be signed and submitted at the calendar call on April 16,

2012. With respect to the trial exhibits, the standing pretrial order required the

parties to exchange any exhibits at least 14 days before the first day of the trial

session and stated that “[t]he Court may refuse to receive in evidence any

document or material that is not so stipulated or exchanged, unless the parties have

agreed otherwise or the Court so allows for good cause shown.”
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[*12] OPINION

I. Burden of Proof

In general, the Commissioner’s determination of a deficiency is presumed

correct, and the taxpayer bears the burden of proving otherwise. Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933). The burden of proof, however,

may shift to the Commissioner under section 7491(a)(1) if certain requirements are

met. See sec. 7491(a)(1) and (2); see also Higbee v. Commissioner, 116 T.C. 438,

440-441 (2001).

Petitioner does not contend that section 7491(a)(1) should shift the burden

here, and the record does not establish that she satisfied the section 7491(a)(2)

requirements. Accordingly, petitioner bears the burden of proving that the

Commissioner’s determinations are erroneous.

II. Capital Loss Deductions

A. Parties’ Arguments

Petitioner claimed capital loss carryover deductions of $3,000 on her 2005,

2006, and 2007 returns. Respondent disallowed her claimed capital loss

deductions in full. Petitioner contends that she is entitled to the claimed capital

loss deductions because she incurred a $19,000 loss with respect to her investment
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[*13] in the Los Angeles property during 2003. Respondent contends that 9

petitioner is not entitled to the claimed deductions under either section 165 or

section 166. First, respondent contends that petitioner is not entitled to deduct the

purported loss as a loss on a sale or exchange of property under section 165

because she failed to show either that: (1) she owned or had an enforceable

property interest in the Los Angeles property; or (2) she made the improvements to

the property with the intent to make a profit. Second, respondent contends that

In her opening brief petitioner contends that because she recovered $17,000 9

as a result of her litigation against the Estate of Beulah Bias, she is entitled to a

capital loss deduction equal to the sum of the amount recovered plus the $2,000

she paid in attorney’s fees related to the litigation. Petitioner appears to contend

that there was a conclusive finding regarding her ownership interest in the Los

Angeles property because the litigation resulted in her recovery.

We construe petitioner’s argument to be that she is claiming a capital loss

deduction under sec. 165 on the basis of her investment in the Los Angeles

property, which petitioner appears to contend gave her an ownership interest in the

property under California law. However, no court made any findings or entered a

decision regarding petitioner’s ownership interest, if any, in the Los Angeles

property. The mere fact that petitioner received a sum pursuant to a settlement is

not dispositive of the issue of whether she had such an ownership interest.

In her reply brief petitioner addresses respondent’s arguments regarding her

right to a capital loss deduction under secs. 165 and 166. Keeping in mind that

petitioner is representing herself without the benefit of counsel, we have reviewed

relevant statutory law, and we are unable to identify any Code provisions, beyond

the two cited above, that would support petitioner’s contention that she is entitled

to the claimed deductions. Accordingly, we will address whether petitioner is

entitled to the deduction claimed under either sec. 165 or sec. 166.
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[*14] petitioner is not entitled to deduct the purported loss under section 166

because she has failed to show that she had a bona fide loan agreement regarding

her investment in the Los Angeles property. Because we find that petitioner is

entitled to deduct the loss under section 165, we need not decide whether she is

entitled to deduct the loss under section 166.

B. Section 165

Section 165(a) allows a taxpayer to deduct any loss sustained during the

taxable year that is not compensated for by insurance or otherwise. Section 165(c)

limits the deduction in the case of an individual to losses incurred in a trade or

business or any transaction entered into for profit, casualty losses, and theft

losses. Losses from sales or exchanges of capital assets are allowable only to the 10

extent authorized in sections 1211 and 1212. Sec. 165(f). A taxpayer must have

11

an economic interest in the relevant property to be allowed a loss deduction. See

secs. 165(b), 1011(a), 1012(a), 1016; see also Barber v. Commissioner, 152 F.2d

930 (2d Cir. 1946) (affirming the Tax Court’s finding that the taxpayer did not

The term “capital asset” is defined in sec. 1221 as “property held by the 10

taxpayer (whether or not connected with his trade or business)”, with four

exceptions, none of which is relevant here.

If an individual’s capital losses exceed capital gains, sec. 1211(b) restricts

11

deductions for capital losses to the lower of (1) $3,000, or (2) the excess of such

losses over gains.
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[*15] have an economic interest in stock shares when the taxpayer did not

purchase the shares, have possession of the shares, or receive the shares via

transfer); Dunne v. Commissioner, 75 F.2d 255 (2d Cir. 1935), aff’g 29 B.T.A.

1109 (1934). No deduction is allowed for personal, living, or family expenses. 

Sec. 262.

For purposes of section 165(c)(2), a taxpayer is considered as entering a

transaction for profit if: (1) the transaction has economic substance; and (2) the

taxpayer was “motivated by profit to participate in the transaction.” Illes v.

Commissioner, 982 F.2d 163, 165 (6th Cir. 1992), aff’g T.C. Memo. 1991-449;

see also Jefferson v. Commissioner, 50 T.C. 963, 966 (1968). A transaction with

economic substance has “a realistic potential for profit.” Cherin v. Commissioner,

89 T.C. 986, 993 (1987); Farmer v. Commissioner, T.C. Memo. 1994-342. A

taxpayer may expect to earn a profit either from income generated by the

investment or from a sale of the investment. Weir v. Commissioner, 109 F.2d 996,

997 (3d Cir. 1940), aff’g in part, rev’g in part 39 B.T.A. 400 (1939). To be

allowed a deduction, the taxpayer must show that her “predominant, primary, or

principal objective” was to realize an economic profit. Wolf v. Commissioner, 4

F.3d 709, 713 (9th Cir. 1993), aff’g T.C. Memo. 1991-212. In analyzing whether

the taxpayer has adequately shown that she intended to realize an economic profit
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[*16] from the transaction, we look primarily to the taxpayer’s subjective intent. 

Id.

The parties stipulated that petitioner used $34,000 of her own funds to make

improvements to the Los Angeles property. Petitioner testified that she invested

the $34,000 in the Los Angeles property with the expectation that Beulah Bias

eventually would sell the house and petitioner would receive a portion of the

proceeds. She further testified that she had an agreement with Beulah Bias that

petitioner would receive 50% of the proceeds.

Respondent first contends that section 165 requires that the taxpayer have

an enforceable property interest to be allowed a loss deduction with respect to real

property and petitioner did not have such an interest. However, respondent has

offered no legal support for that contention. Section 165 requires only that the

taxpayer have an economic interest in the property.

Although petitioner did not introduce a copy of a written agreement signed

by both petitioner and Beulah Bias or her successor in interest, we find petitioner’s

testimony regarding her oral agreement with Beulah Bias to be credible. Under

the agreement petitioner acquired an equitable interest in the Los Angeles

property, in that she was promised a share of the proceeds if and when the Los

Angeles property was sold. Accordingly, we find that petitioner’s investment of
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[*17] $34,000 in the Los Angeles property resulted in her acquiring an economic

interest in and claim against the property in exchange for her $34,000 investment. 

Petitioner filed a lawsuit against the Estate of Beulah Bias to protect her interest

and enforce her claim because petitioner felt she had a cognizable legal claim to a

portion of the proceeds from the Los Angeles property. Under the circumstances,

we find that petitioner had an economic interest in the property and that interest is

sufficient for purposes of section 165.

12

Respondent contends that under Cal. Civ. Code sec. 1624(a)(3) (West

12

2011), an agreement for the lease or sale of real property must be in writing and

signed by the party to be charged. Respondent contends, therefore, that even if

this Court finds that petitioner and Beulah Bias had an oral agreement, the oral

agreement was not an enforceable contract under California law. However, as

discussed below, the oral agreement between petitioner and Beulah Bias was not

an agreement for the lease or sale of real property, but instead more closely

resembled a joint venture agreement for the development and sale of real estate.

Under California law, “‘[a] joint adventure in the purchase and sale of real

estate may be formed by parol agreement.’” Fitzgerald v. Provines, 227 P.2d 860,

866 (Cal. Dist. Ct. App. 1951) (quoting Sly v. Abbott, 264 P. 507, 510 (Cal. App.

1928)). Petitioner and Beulah Bias agreed that if petitioner invested $34,000 to

improve the Los Angeles property, petitioner would be entitled to a portion of the

sale proceeds. Although petitioner did not have the right to control the use or

disposition of the property, she exercised significant control over the selection and

implementation of the improvements. See Bank of Cal. v. Connolly, 111 Cal.

Rptr. 468, 477 (Cal. Ct. App. 1973). Accordingly, the oral agreement between

petitioner and Beulah Bias was enforceable under California law. See id. at 480

(“Agreements by landowners to share profits from the sale of their land in

consideration of capital contribution or for services to be rendered have been held

to be valid and enforceable according to their terms.”).
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[*18] Respondent also contends that petitioner is not entitled to a loss deduction

because she did not invest the $34,000, which paid for improvements to the

property, with the intent to make a profit. We disagree. Petitioner invested 13

Sec. 1.165-9(a), Income Tax Regs., provides that “[a] loss sustained on the 13

sale of residential property purchased or constructed by the taxpayer for use as his

personal residence and so used by him up to the time of sale is not deductible

under section 165(a).” However, a loss is deductible if the taxpayer appropriates

the property to income-producing purposes and uses the property for those

purposes up to the time of sale. Sec. 1.165-9(b), Income Tax Regs. In evaluating

whether a taxpayer has converted a personal residence to an income-producing

property, we have considered the following factors: (1) the length of time the

taxpayer occupied the property as her personal residence; (2) whether the property

was available for the taxpayer’s personal use during the purported conversion

period; (3) the recreational character of the property; (4) whether the taxpayer

offered to rent the property; and (5) whether the taxpayer previously offered to sell

the property. Newcombe v. Commissioner, 54 T.C. 1298, 1300-1302 (1970); see

also Bolaris v. Commissioner, 776 F.2d 1428 (9th Cir. 1985), aff’g in part, rev’g

in part 81 T.C. 840 (1983).

When petitioner invested $34,000 in the Los Angeles property, she had a

reasonable expectation that she would benefit either by acquiring an ownership

interest in the property when Beulah Bias decided to dispose of the property or by

receiving a share of the proceeds when the property was sold. Petitioner did not

own the Los Angeles property. Accordingly, petitioner could not control the use

or disposition of the Los Angeles property. By contrast, the taxpayers in

Newcombe held an ownership interest in the relevant property and could control

its use or disposition. They could have offered the property for rent or for sale or

used it if it remained unoccupied. The factors considered by the Court in

ascertaining the taxpayers’ intent with respect to the property assumed that the

taxpayers controlled the use or disposition of the property. In a case such as this,

however, where petitioner did not hold an ownership interest in the property and

could not control its use and disposition, the Newcombe factors are meaningless. 

Therefore, Newcombe is distinguishable.
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[*19] $34,000 in the property with the understanding that she was acquiring an

economic interest in the property and that she would receive a share of the

proceeds when the property was sold. Although petitioner temporarily resided at

the Los Angeles property until 1993, this fact alone does not compel a conclusion

that she made the improvements primarily for personal purposes. See Willcox v.

Commissioner, 20 T.C. 305 (1953) (allowing taxpayers a loss deduction under

section 165 with respect to the sale of a residence when the taxpayers invested in

the residence for profit and lived in the residence only temporarily). In fact,

petitioner vacated the house shortly after the renovations were completed. 

Furthermore, we find it unlikely that petitioner would have expended such a large

sum of money to renovate a house that she did not own purely for her own

personal comfort.

We find that petitioner invested $34,000 in the property with the

“predominant, primary, or principal objective” of realizing an economic profit, see

Wolf v. Commissioner, 4 F.3d at 713, and that in 2000, when the Bias family

attempted to sell the property, she had an economic interest in and claim against

the property, which was a capital asset. This conclusion is supported by the

following facts: (1) petitioner made the investment with the expectation that the

Los Angeles property would be sold and she would receive a portion of the
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[*20] proceeds; (2) she made general improvements that would increase the value

of the property rather than any improvements specific to the needs of her family;

and (3) she moved out of the property within a relatively short time following the

completion of the construction work. Accordingly, petitioner is entitled to a loss

deduction under section 165.

C. Amount of Capital Loss

Petitioner’s settlement with the Estate of Beulah Bias was a sale or

exchange of the claim that resulted from her investment in the Los Angeles

property. Petitioner had a cost basis in that claim of $34,000. See sec. 1012(a). 

Her basis is increased by the $2,000 of legal expenses she incurred in defending

her claim with respect to the Los Angeles property. See, e.g., Estate of Franco v.

Commissioner, T.C. Memo. 1980-340; Cowden v. Commissioner, T.C. Memo.

1965-278, aff’d per curiam, 365 F.2d 832 (1st Cir. 1966).

Petitioner exchanged her claim for $17,000 paid pursuant to her settlement

agreement with the Estate of Beulah Bias. Therefore, the amount of the loss

petitioner sustained must be adjusted for the consideration she received under the

settlement agreement. See sec. 1.165-1(c)(4), Income Tax Regs. We find that

petitioner incurred a loss of $19,000 in 2003 with respect to her investment in the

Los Angeles property. Accordingly, petitioner was entitled to a capital loss
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[*21] carryover deduction of $3,000 for each of 2005, 2006, and 2007. See sec.

1211(b).

III. Schedule A Deductions

Deductions are a matter of legislative grace, and a taxpayer ordinarily must

prove that she is entitled to the claimed deduction. INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992). A taxpayer is required to maintain records

to substantiate claimed deductions and to establish her correct tax liability. 

Higbee v. Commissioner, 116 T.C. at 440; see also sec. 6001. The taxpayer must

produce such records upon the request of the Secretary. Sec. 7602(a); see also

14

sec. 1.6001-1(e), Income Tax Regs. Substantiation is adequate if it establishes the

amount and purpose of the claimed deduction. Higbee v. Commissioner, 116 T.C.

at 440; see also Hradesky v. Commissioner, 65 T.C. 87 (1975), aff’d per curiam,

540 F.2d 821 (5th Cir. 1976).

The term “Secretary” means “the Secretary of the Treasury or his 14

delegate”, sec. 7701(a)(11)(B), and the term “or his delegate” means “any officer,

employee, or agency of the Treasury Department duly authorized by the Secretary

of the Treasury directly, or indirectly by one or more redelegations of authority, to

perform the function mentioned or described in the context”, sec.

7701(a)(12)(A)(i).
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[*22] A. Charitable Contribution Deductions for 2005 and 2006

On her 2005 return petitioner claimed a charitable contribution deduction of

$3,500; respondent disallowed her claimed deduction in full. On her 2006 return

petitioner claimed a charitable contribution deduction of $5,200; respondent

disallowed $5,173 of her claimed deduction. Petitioner contends that she is

entitled to charitable contribution deductions in the amounts claimed on her

returns.

Ordinarily, a taxpayer may deduct charitable contributions made during the

taxable year. Sec. 170(a). Charitable contributions, however, may be deducted

only to “the extent that the aggregate of such contributions does not exceed 50

percent of the taxpayer’s contribution base for the taxable year.” Sec.

170(b)(1)(A) (flush language). A charitable contribution deduction is allowed

only if verified under regulations promulgated by the Secretary. Sec. 170(a)(1). A

taxpayer who deducts charitable contributions must maintain adequate

documentation to substantiate them. See sec. 1.170A-13(a)(1), Income Tax Regs.

Section 1.170A-13(a)(1), Income Tax Regs., requires the taxpayer to

maintain a canceled check or a receipt from the donee organization to substantiate

a cash contribution. In the absence of a canceled check or a receipt from the

donee organization, the taxpayer must maintain other reliable written records
- 23 -

[*23] showing the name of the donee and the date and the amount of the

contribution. Id.

For any charitable contribution of $250 or more, the taxpayer must obtain a

contemporaneous written acknowledgment from the donee. Sec. 170(f)(8)(A).15

Section 170(f)(8)(B) provides that the contemporaneous written acknowledgment

must include the following:

(B) Content of acknowledgment.--An acknowledgment meets

the requirements of this subparagraph if it includes the following

information:

(i) The amount of cash and a description (but not value)

of any property other than cash contributed.

(ii) Whether the donee organization provided any goods

or services in consideration, in whole or in part, for any

property described in clause (i).

(iii) A description and good faith estimate of the value

of any goods or services referred to in clause (ii) or, if such

goods or services consist solely of intangible religious benefits,

a statement to that effect.

Section 170(f)(8)(C) provides that a written acknowledgment is contemporaneous

when the taxpayer obtains it on or before the earlier of: (1) the date the taxpayer

Separate contributions of less than $250 are not subject to the 15

requirements of sec. 170(f)(8), regardless of whether a taxpayer’s contributions to

a donee organization during a taxable year total $250 or more. Sec. 1.170A13(f)(1), Income Tax Regs.
- 24 -

[*24] files a return for the year of contribution; or (2) the due date, including

extensions, for filing that return.

Petitioner testified that she is a Jehovah’s Witness, she attends religious

services at the Kingdom Hall, and she made cash contributions to the Jehovah’s

Witnesses during the years in issue. She also testified that she contributed $3,000

to a tsunami relief fund through the Jehovah’s Witnesses during 2006. She further

testified that although she supplied the funds for the $3,000 contribution, her

mother physically made the contribution.

To substantiate her $3,000 contribution, petitioner referred the Court to

Exhibit 41-J, a photocopy of two receipts. The first receipt shows that on

September 25, 2006, DaimlerChrysler Corp. made a payment to petitioner of

$15,782. The second receipt is a customer receipt from Bank of America showing

a deposit of $12,782 into petitioner’s account on September 28, 2006.

Exhibit 41-J contains no reference to a charitable contribution. Exhibit 41-J

shows only that petitioner received payment from DaimlerChrysler Corp. and that

she did not deposit into her account the entire amount of that payment. Petitioner

offered only her testimony to substantiate her claim that she made a charitable

contribution using $3,000 of the payment she received from DaimlerChrysler

Corp. Not only did petitioner fail to provide corroborating evidence for her self-
- 25 -

[*25] serving testimony, which we are not required to accept, see Shea v.

Commissioner, 112 T.C. 183, 189 (1999), she also failed to provide a

contemporaneous written acknowledgment documenting the contribution.

Petitioner did not adequately substantiate her other reported charitable

contributions for 2005 or 2006. Accordingly, we sustain respondent’s 16

determinations with respect to petitioner’s claimed charitable contribution

deductions for 2005 and 2006.

B. Casualty Loss Deduction for 2005

On her 2005 return petitioner claimed a casualty loss deduction of $16,088. 

In the notice of deficiency respondent disallowed the claimed casualty loss

deduction in full. Respondent contends that petitioner is not entitled to the

claimed casualty loss deduction because: (1) petitioner failed to show that she was

entitled to claim the casualty loss deduction on her 2005 return; and (2) petitioner

failed to substantiate the loss of value with respect to the Riverside property.

Before addressing respondent’s contentions, we must decide whether to

admit petitioner’s Exhibit 45-P. We then consider whether petitioner has

At trial petitioner attempted to introduce Exhibit 42-P, a document entitled 16

“Kingdom Hall Cash Disbursement Register/Log 2006”. Respondent objected to

petitioner’s introduction of the document, and petitioner admitted that she did not

prepare the document until the IRS had begun an examination of her returns. On

the basis of petitioner’s admission, we did not admit Exhibit 42-P into evidence.
- 26 -

[*26] substantiated the amount of the loss of value caused by the casualty. 

Because we find that petitioner failed to substantiate the loss of value, we need not

decide whether she properly claimed the deduction for 2005.

1. Evidentiary Matters

Respondent objected to the admission of Exhibit 45-P. Respondent

contends that this Court should exclude Exhibit 45-P because petitioner violated

this Court’s standing pretrial order by failing to present Exhibit 45-P to respondent

until April 16, 2012, the date of the calendar call. Alternatively, respondent

contends that this Court should exclude Exhibit 45-P because the documents

therein constitute inadmissible hearsay.

Petitioner contends that she provided Exhibit 45-P to respondent’s counsel

on January 10, 2012. She further contends that Exhibit 45-P is admissible either

under the business records exception to the hearsay rule or as a trustworthy

statement of material fact.

Exhibit 45-P is a 75-page exhibit consisting of copies of documents related

to petitioner’s claimed casualty loss deduction for 2005. Exhibit 45-P consists

primarily of cost repair estimates by various contractors relating to the repair of

the Riverside property following the fire in 2004. Exhibit 45-P also includes a 
- 27 -

[*27] letter sent by petitioner to FEMA regarding her appeal requests and asbestos

testing reports related to the Riverside property.

Respondent’s counsel asserted at trial that petitioner did not give him

Exhibit 45-P until April 16, 2012. Respondent’s counsel further asserted that he

stipulated all the documents petitioner had provided to him and which he had in

his possession before April 16, 2012, the date of the calendar call.

Although petitioner testified that she gave respondent’s counsel Exhibit 45-

P on January 10, 2012, we find credible respondent’s counsel’s assertion that he

did not receive Exhibit 45-P until April 16, 2012. Respondent’s counsel included

in the stipulation of facts all of the documents petitioner had previously provided

to him. Respondent’s counsel also reserved objections to many of those

documents in the stipulation of facts. We can find no reason respondent’s counsel

would have included in the stipulation of facts all of the documents petitioner

provided except for Exhibit 45-P, particularly when respondent’s counsel included

in the stipulation of facts a number of documents with respect to which he had

evidentiary objections.

Because petitioner did not exchange Exhibit 45-P with respondent’s counsel

as required by our standing pretrial order, we will exclude Exhibit 45-P.
- 28 -

[*28] 2. Substantiation of Loss of Value

Section 165(a) and (c) allows a deduction for losses arising from fire or

other qualifying casualty sustained during the taxable year and not compensated

for by insurance or otherwise (casualty loss). See also sec. 1.165-7(a)(1), Income

Tax Regs. A casualty loss is “treated as sustained during the taxable year in which

the loss occurs as evidenced by closed and completed transactions and as fixed by

identifiable events occurring in such taxable year.” Sec. 1.165-1(d)(1), Income

Tax Regs.; see also sec. 1.165-1(b), Income Tax Regs.

Section 1.165-7(b)(1), Income Tax Regs., provides that the amount of loss

to be taken into account for purposes of section 165(a) is the lesser of either (i) the

amount that is equal to the FMV of the property immediately before the casualty

reduced by the FMV of the property immediately after the casualty or (ii) the

amount of the taxpayer’s adjusted basis prescribed in section 1.1011-1, Income

Tax Regs., for determining the loss from the sale or disposition of the property

involved. The FMV of the property immediately before and immediately after the

casualty “shall generally be ascertained by competent appraisal.” Sec. 1.165-

7(a)(2)(i), Income Tax Regs. The amount determined is then reduced by any

insurance or other compensation received to arrive at the deduction allowable. 

Sec. 165(a); sec. 1.165-1(c)(4), Income Tax Regs.; see also Helvering v. Owens,
- 29 -

[*29] 305 U.S. 468 (1939); Pfalzgraf v. Commissioner, 67 T.C. 784 (1977);

Millsap v. Commissioner, 46 T.C. 751 (1966), aff’d, 387 F.2d 420 (8th Cir. 1968);

sec. 1.165-7(b)(3), Income Tax Regs.

Section 1.165-7(a)(2)(ii), Income Tax Regs., provides that a taxpayer may

use the cost of repairing the property to show the loss of value, but only if the

taxpayer shows that “(a) the repairs are necessary to restore the property to its

condition immediately before the casualty, (b) the amount spent for such repairs is

not excessive, (c) the repairs do not care for more than the damage suffered, and

(d) the value of the property after the repairs does not as a result of the repairs

exceed the value of the property immediately before the casualty.” This Court has

applied the “cost of repairs” method only where the repairs and expenditures were

actually made and has rejected the use of estimates for cost of repairs method

purposes. See Lamphere v. Commissioner, 70 T.C. 391, 396 (1978); see also

Higbee v. Commissioner, 116 T.C. at 442; Ashley v. Commissioner, T.C. Memo.

2000-376; Johnston v. Commissioner, T.C. Memo. 1980-477, aff’d without

published opinion, 696 F.2d 1003 (9th Cir. 1982).

Although petitioner testified that she had the Riverside property appraised

after the fire, she did not introduce any appraisal into evidence. She explained that

the pre- and post-casualty FMVs set forth on her Form 4684 represented her initial
- 30 -

[*30] asking price for the Riverside property and the initial asking price reduced

by the estimated cost of repairing the property. While petitioner attempted to

show the FMV of the Riverside property by reference to the initial asking price,

she did not offer the Riverside property for sale until after the fire. We infer that

the fire damage was visible and would have been factored into the initial asking

price of the Riverside property. Petitioner thus failed to show that any part of the

reduction in the asking price was attributable solely to the fire damage. 

Accordingly, petitioner failed to introduce: (1) any credible evidence of the FMV

of the property immediately before the fire; and (2) an appraisal of the property

immediately after the fire.

Petitioner did not repair any of the damage to the Riverside property caused

by the fire. Although she testified as to the cost of repairing the Riverside

property and she attempted to introduce into evidence documents purportedly

showing cost repair estimates, the estimated costs of repairing the Riverside

property are insufficient to show petitioner’s loss in value under the cost of repairs

method. While we are sympathetic to petitioner’s position, we find that she has 17

In her opening brief petitioner asserts that FEMA and Balboa Insurance 17

refused to cover the cost of removing the asbestos. However, petitioner testified

that FEMA and Balboa Insurance would have paid for all of the repairs if she had

wanted to perform the repairs. Petitioner’s testimony contradicts her assertion that

(continued...)
- 31 -

[*31] failed to substantiate the loss of value with respect to the Riverside property

caused by the fire in 2004, and consequently, she is not entitled to a casualty loss

deduction with respect to that incident. Accordingly, we sustain respondent’s

determination disallowing petitioner’s claimed casualty loss deduction.

IV. Dependency Exemption Deductions

Section 151(c) permits a taxpayer to claim as a deduction an exemption for

each dependent as that term is defined under section 152. Section 152(a) provides

that a dependent must be either a qualifying child or a qualifying relative.

Section 152(c)(1) defines a qualifying child as a child who bears a specified

relationship to the taxpayer, who lived with the taxpayer for more than one-half of

the tax year at issue, and who did not provide more than one-half of his or her own

support during the tax year. A child satisfies the specified relationship

requirement if the child is a child of the taxpayer, or “a brother, sister, stepbrother,

or stepsister of the taxpayer or a descendant of any such relative.” Sec. 151(c)(2). 

(...continued) 17

neither FEMA nor Balboa Insurance was willing to cover the cost of asbestos

removal. In addition, the record is replete with contradictory evidence regarding

the amounts of the payments she received from FEMA and Balboa Insurance. We

need not decide the amounts of the payments petitioner received because we find

that she did not complete the actual repairs and consequently is not entitled to the

claimed casualty loss deduction.
- 32 -

[*32] A qualifying child must be less than 19 years old, a student less than 24

years old, or permanently and totally disabled. Sec. 152(c)(3).

If two or more taxpayers can claim an individual as a qualifying child, the

individual is treated as the qualifying child of the taxpayer who is the parent of the

individual or, if neither taxpayer is the individual’s parent, the taxpayer “with the

highest adjusted gross income”. Sec. 152(c)(4)(A). However, if neither parent

claims the individual as a qualifying child for the taxable year, another taxpayer

may claim the individual as a qualifying child but only if the taxpayer’s adjusted

gross income is higher than the adjusted gross income of the parent having the

higher adjusted gross income. Sec. 152(c)(4)(C).

Section 152(d) defines a qualifying relative as an individual who bears a

specified relationship to the taxpayer, who earned gross income less than the

exemption amount defined in section 151(d), who had more than one-half of his or

her support provided for by the taxpayer during the tax year, and who is not the

qualifying child of any other taxpayer. An individual satisfies the specified

relationship requirement if the individual is a child or descendant of a child of the

taxpayer. Sec. 151(d)(2)(A). For 2007 the gross income exemption amount was

$3,400. See secs. 1(f)(3), 151(d), 152(d); see also IRS Publication 501, 
- 33 -

[*33] Exemptions, Standard Deduction, and Filing Information (For use in

preparing 2007 Returns).

Under Rule 142(a)(1) petitioner has the burden of presenting credible

evidence that N.J. and Michael Bias were dependents within the meaning of

section 152(a) and that she was entitled to the claimed dependency exemption

deductions. See Stephenson v. Commissioner, 79 T.C. 995, 1004 (1982), aff’d,

748 F.2d 331 (6th Cir. 1984). In evaluating petitioner’s evidence we are not

bound to accept self-serving, unverified, and undocumented testimony. Shea v.

Commissioner, 112 T.C. at 189; see also Tokarski v. Commissioner, 87 T.C. 74,

77 (1986).

A. Dependency Exemption Deduction for N.J. for 2006

Respondent concedes that N.J. was a qualifying child of petitioner during

2006. Respondent contends, however, that petitioner was not entitled to a 18

dependency exemption deduction for N.J. because his mother, Monique Bias,

claimed N.J. as a qualifying child for 2006 and as his parent, she is entitled to the

dependency exemption deduction for N.J. under the tiebreaker rule of section

152(c)(4)(A).

Furthermore, the record shows that N.J. was a qualifying child of 18

petitioner for 2007. Because N.J. was a qualifying child of petitioner, N.J. cannot

be her qualifying relative. See sec. 152(d)(1)(D).
- 34 -

[*34] Monique Bias claimed a dependency exemption deduction for N.J. on her

Form 1040 for 2006. She did so even though she told petitioner that petitioner

could claim the dependency exemption deduction for N.J. for 2006. Petitioner did

not know that Monique Bias had claimed the dependency exemption deduction for

N.J. until the IRS audit of petitioner’s returns.

Petitioner contends that, despite the fact that Monique Bias claimed a

dependency exemption deduction for N.J. on her 2006 return, petitioner still is

entitled to a dependency exemption deduction for N.J. To support her contention,

petitioner introduced a copy of a purported 2006 Form 1040X, Amended U.S.

Individual Income Tax Return, for Monique Bias. The Form 1040X bears the

signature of Monique Bias and is dated September 18, 2008. On the Form 1040X

Monique Bias decreases by one the number of dependency exemption deductions

she claimed. In the explanation of changes, she explains that she is requesting the

change because petitioner provided more than half of N.J.’s support during 2006.

The Form 1040X petitioner produced is not credible evidence that Monique

Bias released her claim to the dependency exemption deduction for N.J. The Form

1040X was not prepared until the IRS had begun auditing petitioner’s 2006 return. 

Although Monique Bias signed the Form 1040X, she had not filed the Form

1040X with the IRS as of the time of trial.
- 35 -

[*35] Although both petitioner and Monique Bias testified that they had agreed

that petitioner would claim the dependency exemption deduction for N.J.,

Monique Bias still claimed the dependency exemption deduction on her Form

1040. On this record, we cannot conclude that Monique Bias has released her

claim to the dependency exemption deduction for N.J. for 2006. Accordingly, as

N.J.’s mother, Monique Bias is entitled to the dependency exemption deduction

for N.J. pursuant to the tiebreaker rule of section 152(c)(4)(A). We therefore

sustain respondent’s determination disallowing petitioner’s claimed dependency

exemption deduction for N.J. for 2006.

B. Dependency Exemption Deduction for Michael Bias for 2007

During 2007 Michael Bias earned income by providing in-home supportive

services for Ms. Henry. Respondent introduced IRS transcripts showing that a

Form W-2, Wage and Tax Statement, was filed with respect to Michael Bias. On

the Form W-2, “IHSS Recipients” reported that it paid Michael Bias wages of

$3,666 during 2007.

Michael Bias turned 21 in 2007. During 2007 he was not a full-time

student. Petitioner failed to introduce any evidence that Michael Bias was

permanently and totally disabled. Accordingly, Michael Bias was not a qualifying

child of petitioner during 2007. See sec. 152(c)(3).
- 36 -

[*36] We also conclude that Michael Bias was not a qualifying relative of

petitioner during 2007. Respondent introduced credible evidence that Michael

Bias received wages of $3,666 during 2007. See sec. 152(d)(1)(B). We sustain

19

respondent’s determination disallowing petitioner’s claimed dependency

exemption deduction for Michael Bias for 2007.

V. Federal Telephone Excise Tax Credit

On a Form 8913 attached to her 2006 return, petitioner claimed a Federal

telephone excise tax credit of $768. In the notice of deficiency respondent

determined that petitioner was entitled to a telephone excise tax credit of $50.

Section 4251 imposes an excise tax on “communication services”. After

certain Federal courts held that the excise tax was invalid with respect to certain

communication services, see Nat’l R.R. Passenger Corp. v. United States, 431 F.3d

374 (D.C. Cir. 2005); OfficeMax, Inc. v. United States, 428 F.3d 583 (6th Cir.

2005); Am. Bankers Ins. Grp. v. United States, 408 F.3d 1328 (11th Cir. 2005),

Petitioner contends that although the IRS transcripts show that Michael 19

Bias earned more than the exemption amount, he did not receive the entire amount

reported because he occasionally paid his sisters to care for Ms. Henry. However,

petitioner did not call Michael Bias to testify regarding the income he earned in

2007 or the amounts he purportedly paid to his sisters. Petitioner offered no

evidence of the amounts, if any, that Michael Bias paid to his sisters, and Ms.

McElwee did not offer an estimate of how much she received from Michael Bias

in exchange for caring for Ms. Henry.
- 37 -

[*37] the IRS issued Notice 2006-50, 2006-1 C.B. 1141, conceding the 20

nontaxability of most long-distance telephone service. The IRS undertook to

refund to taxpayers the Federal telephone excise taxes billed after February 28,

2003, and before August 1, 2006. See Notice 2007-11, 2007-1 C.B. 405; Notice

2006-50, supra; see also In re Long-Distance Tel. Serv. Fed. Excise Tax Refund

Litig., 853 F. Supp. 2d 138, 141 (D.D.C. 2012). The IRS consequently added line

71 (“Credit for federal telephone excise tax paid”) to the 2006 Form 1040,

enabling taxpayers to claim the excise tax refund as if it were a payment of income

tax.

Although neither party contends that we lack jurisdiction to decide whether

petitioner claimed an excessive telephone excise tax credit, we may question our

jurisdiction sua sponte. See Moorhous v. Commissioner, 116 T.C. 263, 272

(2001). The Tax Court is a court of limited jurisdiction, and we may exercise our

jurisdiction only to the extent authorized by Congress. See sec. 7442. 

Section 6213(a) of subchapter B authorizes the Tax Court to redetermine a

deficiency provided a timely petition is filed. Section 6211 defines a deficiency as

Notice 2006-50, 2006-1 C.B. 1141, has been prospectively vacated by the 20

U.S. District Court for the District of Columbia. See In re Long-Distance Tel.

Serv. Fed. Excise Tax Refund Litig., 853 F. Supp. 2d 138, 145 (D.D.C. 2012). 

Because Notice 2006-50, supra, was in effect at the time petitioner filed her 2006

Form 1040, we apply the provisions of that notice in this instance.
- 38 -

[*38] the amount by which the tax imposed by subtitle A or B or chapter 41, 42,

43, or 44 of the Code exceeds the amount of such tax shown on the taxpayer’s

return and the amount of such tax previously assessed.

Section 4251 imposes the telephone excise tax and section 6415 allows a

taxpayer to claim a telephone excise tax credit. See also Notice 2006-50, supra. 

Thus the excise tax and credit are not properly part of an income tax deficiency

determination. See sec. 6211(a). Accordingly, we do not have jurisdiction to

determine the proper amount of petitioner’s telephone excise tax credit. See sec.

6211(a); Villafane v. Commissioner, T.C. Memo. 2010-118.

Certain rebates may affect the Commissioner’s determination of a

deficiency. See, e.g., sec. 6211(b)(2). The telephone excise tax credit, however, is

a non-rebate refund. Internal Revenue Manual pt. 4.19.15.37(9) (Dec. 12, 2008). 

The Commissioner may not seek recovery of such a non-rebate refund from a

taxpayer through the deficiency procedures. Interlake Corp. v. Commissioner, 112

T.C. 103, 114-115 (1999).

Petitioner properly characterized her telephone excise tax credit as a

payment on her Form 1040 for 2006. See sec. 301.6211-1(b), Proced. & Admin.

Regs. (“Payments on account of estimated income tax, like other payments of tax

by the taxpayer, shall likewise be disregarded in the determination of a 
- 39 -

[*39] deficiency.”); see also Villafane v. Commissioner, T.C. Memo. 2010-118. 

Petitioner claimed a refund, arising partially from this payment, on her Form 1040. 

Respondent’s determinations in the notice of deficiency indicate that petitioner

received a refund because respondent increased the amount of petitioner’s tax due

for 2006 by the amount of her purportedly excessive telephone excise tax credit. 

Respondent is attempting to recapture petitioner’s purportedly excessive

telephone excise tax credit using the deficiency procedures. Respondent cannot

seek recovery of the excise tax refund from petitioner through the income tax

deficiency procedures. Accordingly, we do not sustain respondent’s determination

with respect to petitioner’s telephone excise tax credit. 

VI. Accuracy-Related Penalties

Respondent contends that petitioner is liable for accuracy-related penalties

under section 6662(a) and (b)(1) because her underpayments of tax were

attributable to negligence and disregard of rules and regulations. Section 6662

authorizes the Commissioner to impose a penalty on an underpayment of tax that

is attributable to negligence or disregard of rules or regulations. Sec. 6662(a) and

(b)(1). The Commissioner bears the initial burden of production with respect to

the taxpayer’s liability for the section 6662 penalty. Sec. 7491(c). At trial the

Commissioner must introduce sufficient evidence “indicating that it is appropriate
- 40 -

[*40] to impose the relevant penalty.” Higbee v. Commissioner, 116 T.C. at 446. 

If the Commissioner satisfies his initial burden of production, the burden of

producing evidence to refute the Commissioner’s evidence shifts to the taxpayer,

and the taxpayer must prove that the penalty does not apply. Id. at 447.

For purposes of section 6662, negligence is any failure to make a reasonable

attempt to comply with the provisions of the Code, and disregard includes any

careless, reckless, or intentional disregard. Sec. 6662(c); see also Neely v.

Commissioner, 85 T.C. 934, 947 (1985) (negligence is lack of due care or failure

to do what a reasonably prudent person would do under the circumstances); sec.

1.6662-3, Income Tax Regs. Negligence also includes any failure to exercise

ordinary and reasonable care in the preparation of a tax return, or any failure to

keep adequate books and records and to properly substantiate items. Sec. 1.6662-

3(b)(1), Income Tax Regs. A return position that has a reasonable basis is not

attributable to negligence. Id.

Section 6664(c)(1) sets forth an exception to the imposition of a section

6662(a) penalty. It provides that generally “[n]o penalty shall be imposed under

[section 6662] * * * with respect to any portion of an underpayment if it is shown

that there was a reasonable cause for such portion and that the taxpayer acted in

good faith with respect to such portion.” Whether a taxpayer had reasonable cause
- 41 -

[*41] for, and acted in good faith with respect to, part or all of an underpayment is

determined on a case-by-case basis, taking into account all pertinent facts and

circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The most important factor

is the extent of the taxpayer’s effort to assess his or her proper tax liability. Id.

Respondent introduced evidence showing that petitioner failed to make a

reasonable attempt to ascertain the correctness of her reporting positions with

respect to her claimed Schedule A deductions, dependency exemption deductions,

and State and local sales tax deductions. Petitioner has stipulated that she is not

entitled to any Schedule A deductions for 2007 and has conceded that she is not

entitled to all of her claimed dependency exemption deductions or the entire

amount of her claimed State and local sales tax deductions. Respondent also met

the burden of production by establishing that petitioner did not maintain required

records or substantiate the aforementioned deductions as required by the Code.

Because respondent has met the burden of production, petitioner must come

forward with sufficient evidence to persuade the Court that respondent’s

determination is incorrect. See Higbee v. Commissioner, 116 T.C. at 446-447. 

Petitioner contends that section 6664(c) relieves her from the section 6662(a)

penalties because she had reasonable cause for the underpayments of tax and acted

in good faith with respect to the underpayments. In particular, petitioner contends
- 42 -

[*42] that she acted with good faith with respect to her claimed State and local

sales tax deduction for 2007 and her claimed dependency exemption deductions.

With respect to her State and local sales tax deduction for 2007, petitioner

testified that she erroneously added an extra zero to the amount of her claimed

deduction. While we find petitioner’s testimony credible, petitioner’s mistake in

entering the amount into the tax preparation software, albeit accidental, is not a

defense to the imposition of the section 6662(a) penalty. See, e.g., Langley v.

Commissioner, T.C. Memo. 2013-22, at *9-*10. Furthermore, petitioner’s review

of her 2007 return should have alerted her to the fact that she claimed a $23,000

deduction instead of a $2,300 deduction. Accordingly, petitioner has not

established that she acted with reasonable cause and in good faith with respect to

her claimed State and local sales tax deduction for 2007.

With respect to her claimed dependency exemption deductions, petitioner

testified that she was unaware that Michael Bias earned income greater than the

exemption amount. She further testified that, with respect to N.J., she and

Monique Bias had agreed that petitioner would claim N.J. as a dependent. 

Although petitioner testified that she was unaware that Michael Bias earned

income in excess of the exemption amount, petitioner admitted that she knew

Michael Bias earned income. Despite this knowledge, petitioner did not inquire as
- 43 -

[*43] to the amount of income Michael Bias earned. Furthermore, although

petitioner testified that she had an agreement with Monique Bias regarding N.J.,

petitioner knew at the time she attempted to submit her return electronically that

another individual already had claimed a dependency exemption deduction for

N.J. Rather than make further inquiries, petitioner decided to submit her return

with the claimed dependency exemption deduction anyhow. Accordingly,

petitioner has not established that she acted with reasonable cause and in good

faith with respect to her claimed dependency exemption deductions.

With respect to the portions of the underpayments attributable to the

remaining adjustments, petitioner has not established that she acted with

reasonable cause and in good faith with respect to the underpayments. Petitioner

is an IRS employee with many years of service. Her occupation involves the

examination of Federal income tax returns. Despite petitioner’s expertise, she

claimed excessive deductions and dependency exemptions and failed to maintain

adequate records to substantiate her itemized deductions.

Consequently, we sustain respondent’s determination of accuracy-related

penalties under section 6662(a) with regard to petitioner’s underpayments

attributable to respondent’s denial of her claimed Schedule A deductions,

dependency exemptions, and State and local sales tax deductions.
- 44 -

[*44] We have considered all the other arguments made by the parties, and to the

extent not discussed above, find those arguments to be irrelevant, moot, or without

merit.

To reflect the foregoing,

Decision will be entered under

Rule 155.