T.C. Mem o. 2 01 3- 28 7

UNITED STAT ES TAX COURT
ARTHUR MASON DUPRE, Pet it io ne r v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 27 93 -1 2. Fil edDecem be r 19 , 20 13
.
Arth urMas on DuPr e, pr o s e. Sze Wan Fl or en ce Ch ar, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION
W ELLS, Ju dg e: Res po nd en t d et erm in edth e fo ll owi ng de fic ie nc ie s i n pe ti ti on er’s Fed eral in co m e ta x a ndaccu racy-rela te d p en al ti es purs ua ntto sec ti on 66 62 (a) for

hi s 2 00 7 and20 08 tax y ears : 1
Unl es s o th erwi se in di cat ed , sec ti on refe ren ces are t o the Int ern al Rev enue 1 (co nt in ue d...)- 2 -

[* 2] Pen al ty

Year Defi ci en cy sec . 66 62 (a) 20 07 $1 8,1 49 $3 ,63 0 20 08 14 ,55 5 2,9 11 Afte r pe ti ti on er’s co nc es si on s, th e rem ai ni ng is su es th atwe m us t d eci de are (1 ) 2 whe th er p et it io ne r is en ti tl edto de du cton Sch edul e A, Ite miz edDedu ct io ns , ex pe ns es of $ 35 ,31 1 an d $ 35 ,35 8 fo r hi s 2 00 7 a nd20 08 tax y ears , res pe ct iv el y ; 3 (2 ) whe th er p et it io ne r is en ti tl edto de du ctonSch edul e C, Pro fitor Lo ss Fro m Bu si ne ss , exp en se s o f $5 5,7 22 an d $ 33 ,47 0 forhi s 2 00 7 a nd20 08 tax y ears , 4

(...co nt inue d) 1 Co de of 1 98 6, as am en de d (C od e) an d i n e ffec t fo r th e y ears inis su e, an d R ul e refe ren ces are t o the Tax C ou rt Rul es of P ract ic e an d P ro cedur e. W e ro un d a ll m on et ary am ou nt s t o the ne ares t d ol lar. Inth e n ot ic e o f de fic ie nc y res po nd en t d et erm in edth atpe ti ti on er h adno t 2 in cl ud edin te res t i nc om e o f $2 00 inhi s 2 00 8 t ax ab le in co m e. The p art ie s h av e st ip ul at edth atpe ti ti on er re cei ve d the tax ab le in te res t i nc om e dur in g h is 20 08 tax y ear a ndth atpe ti ti on er d idno t re po rt t ha t i nc om e o n h is 20 08 Fed eral in co m e ta x return. Pe ti ti on er m ak es no ad di ti on al cla im s wi th reg ardto th atin co m e. Acco rd in gl y , we dee m

pe ti ti on er t o h av e co nc ed edth is is su e. See R ul e 1 49 (b ). On h is 20 07 Fed eral in co m e ta x re tu rnpe ti ti on er i nc orrect ly repo rts to ta l 3 Sch edul e A expe ns es of $ 35 ,31 1. Ho wev er, we b el ie ve th atpe ti ti on er m ad e a m athe m at ic al erro r of

$5 , andth e co rrec t t al ly of am ou nt s re po rte d i s $ 35 ,30 6. On h is 20 08 Fed eral in co m e ta x re tu rn , pet it io ne r in co rrec tl y rep orts to ta l 4 Sch edul e C ex pe ns es of $ 33 ,47 0. Ho wev er, we b el ie ve th atpe ti ti on er m ad e a m athe m at ic al erro r of

$1 00 , andth e co rrec t t al ly of am ou nt s re po rte d i s $ 33 ,37 0.- 3 -

[* 3] res pe ct iv el y ; an d (3 ) whe th er p et it io ne r is li ab le for th e acc ur acy-rela te d pe na lt ie s p ur su an t t o s ect io n 6 66 2( a) fo r hi s 2 00 7 a nd20 08 tax y ears . 5 FINDINGS OF FACT So m e o f th e fac ts an d c ert ai n e xh ib it s h av e b eenst ip ul at ed . The p art ie s’ st ip ul at edfact s ar e in co rp or at edinth is op in io n b y refe ren ce an d a re fo un d
acco rd in gl y . Add it io na ll y , pet it io ne r is de em edto ha ve adm it te d u nd en ie d al le ga ti on s s etforth inres po nd en t’s re qu es ts foradm is si on s. See Ru le 90 (c). At th e ti m e o f fi li ng th e p et it io n, p et it io ne r res id edinNew Jer se y . Dur in g 2 00 7 a nd20 08 , pet it io ne r was a pa rt- ti m e p ro fes so r of m athe m at ic s an d c om pu te r sc ie nc e atFel ic ian C ol le ge inLod i, New J ers ey ; Ru tg ers Uni ve rs ity atNewark , New Jer se y ; the Co ll eg e o f New Je rs ey inEwin g, New J ers ey ; Ri de r Uni ve rs ity

inLawren cev il le , New Jer se y ; an d Wil li am Pat ers on Uni ve rs ity

of Ne w Je rs ey inW ayne , New Jer se y

(co ll ect iv el y , col le ge s) . Peti ti on er t au gh t cl as se s up to si x d ay s p er week ; h e sp en t ap pr ox im at el y 60 ho ur s p er weektea ch in g a nd30 ho ur s p er weekgra di ng stud en t m at eri al , pre pa rin g l ectur es , res earc hi ng , and tra ve li ng to , fro m , andbe twee n c ol le ge s. Pet it io ne r m ai nt ai ne d aW eb si te for
so m e o f th e co ur se s tha t h e taug ht , bu t co ll eg es m an ag eden ro ll m en t o f stud en ts The rem ai ni ng ad

jus tm en ts inth e n ot ic e o f de fic ie nc y are co m pu ta ti on al 5 an d wi ll be res ol ve d b y

ou r ho ld in gs on th e afo rem en ti on edis su es . Con se qu en tl y , we do no t s pe ci fic al ly addres s the rem ai ni ng ad jus tm en ts inth is op in io n.- 4 -

[* 4] an d d ic ta te d c la ss sch edul es , subjec ts to be co ve red , andco ur se du rat io n. Al l bu t o ne of c ol le ge s p ro vi de d b oo ks an d o th er m at eri al s fo r pe ti ti on er’s cl as se s. The co ll eg es pro vi de d p et it io ne r with s haredoff ic e sp ace. Pe ti ti on er was pa ida fix edam ou ntforeach cla ss th athe tau gh t, an d e ach of t he co ll eg es rep orte d pe ti ti on er’s earni ng s t o h im on a Fo rm

W -2 , W ag e an d Tax Sta te m en t. On h is 20 07 an d 2 00 8 F ed eral in co m e ta x re tu rn s p et it io ne r rep orte d o n Sch edul es A th e fo ll owi ng un rei m bu rs edem

pl oyee ex pe ns es th athe cla im s ar e rel at edto hi s emplo ym en t wi thco ll eg es :

Sch edul e A ex pe ns e 20 07 20 08 Co ur se -rel at edbo ok s $5 ,76 3 $5 ,84 0 Hom e o ffi ce ex pe ns es : Secr et ari al wordpro ces si ng 6,4 00 6,4 00 Des kt op co m

pu te r 2,6 84 1,8 43 Pri nt er 32 5 14 2 Co m pu te r so ftwa re 5,0 27 5,1 35 Ren t 3,4 50 3,5 53 Elec tri ci ty 82 4 86 7 Offi ce s up pl ie s 1,2 42 1,3 56 Tele ph on e an d c ab le m od em 2,1 32 2,2 63 New Bru ns wickLib rary cop y servi ces 2,0 46 1,7 31- 5 -

[* 5] Trav el 3,2 29 3,6 28

Mea ls 2,1 84 2,6 00 Tot al 35 ,30 6 35 ,35 8 Dur in g 2 00 7 a nd20 08 , pet it io ne r al so att em pt edto res tart h is flu te m ak in g sh op at wh ic h h e cre at edflu te s fr om ba m bo o andothe r raw m at eri al s. Pet it io ne r so ldso m e o f th e fl ut es at afle a m ark et , bu t h e al so ga ve so m e to fri en ds
. Pet it io ne r al so us edso m e o f th e b am bo o a ndothe r raw m at eri al s t o m ak e o th er in st ru m en ts an d fu rn itur e. Fro m 20 02 to 20 06 , pet it io ne r di d n otge ne rat e an y pr of itfro m hi s fl ut e m ak in g a ndsel li ng . Peti ti on er d idno t trackor r eco rdth e nu m be r of ho ur s h e sp en t fl ut e m ak in g, the pri ces he ch arg edforfin is he d fl ut es an d o th er i ns tru m en ts , th e fl ut es an d o th er i ns tru m en ts th athe so ld , th e in ve nt ory of raw m at eri al s t o fi ni sh edpro du ct s, o r th e ex pe ns es th athe in cu rred . Peti ti on er di d n otcrea te a se pa rat e b an k a cco un t fo r hi s fl ut e m ak in g a ct iv ity , adv ert is e h is fin is he d p ro du ct s, o r m ai nt ai n aW eb si te . On h is 20 07 an d 2 00 8 F ed eral in co m e ta x re tu rn s p et it io ne r rep orte d o n Sch edul es C th e fo ll owi ng ex pe ns es th athe cla im s ar e rel at edto hi s fl ut e m ak in g act iv ity :- 6 -

[* 6] Sch edul e C ex pe ns e 20 07 20 08

Elec tri ci ty $1 ,56 3 $1 ,42 0 Ren t 8,6 00 8,6 00 Bam bo o 18 ,00 0 8,9 20 Lacque r an d p ol y

ur etha ne 1,8 42 1,6 20 Pro pa ne 84 8 1,2 00 Sh op furni tu re an d e qu ip m en t 8,6 54 3,8 40 Mu si cal tu ni ng an d re co rd in g e qu ip m en t 3,8 80 1,9 30 Mi sc el lane ou s t oo l an d s up pl ie s 12 ,33 5 5,8 40 Tot al 55 ,72 2 33 ,37 0 Thro ug ho ut20 07 an d 2 00 8, p et it io ne r ha d n o s av in gs bu t p ro vi de d fi na nc ia l
supp ort t o a ndpe rfo rm edho us eh ol d c ho res forhi s fo rm er g irl fri en d a ndhe r 24
- y ear- ol d s on , who ha s ce reb ral pa ls y . Peti ti on er t es ti fie d tha t h e p ai d h er re ntfor
us e o f he r ba se m en t as hi s fl ut e m ak in g wo rk sp ace. Durin g 2 00 8, p et it io ne r al le ge s, the ba se m en t fl oo de d, ru in in g h is rece ip ts an d e qu ip m en t. Ho wev er, ne ithe r pe ti ti on er n or

hi s fo rm er g irl fri en d fi le d an i ns ur an ce cl ai m forth e fl oo d da m ag e. On Oct ob er 2 5, 2 01 1, re sp on de ntis su edpe ti ti on er a n ot ic e o f de fic ie nc y reg ard in g h is 20 07 an d 2 00 8 t ax y ears , det erm in in g a n i nc om e ta x d efi ci en cy an d a n a ccu racy-rela te d p en al ty pur su an t t o s ect io n 6 66 2( a) fo r eac h year. On- 7 -

[* 7] Jan ua ry

30 , 20 12 , pet it io ne r’s pe ti ti on was fi le d wi th th is Co urt, ch al le ng in g res po nd en t’s co nt en ti on s. 6 OPINION I. Bu rd enof P ro of Gen eral ly, th e Co m

m is si on er’s d et erm in at io n o f a d efi ci en cy is pre su m ed
co rrec t, an d the tax pa y er h as th e b ur de n o f pr ov in g i t i nc orrect . Rul e 1 42 (a); W el chv. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ). Sect io n 7 49 1( a)(1 ) pr ov id es an ex cep ti on th atsh ift s the bu rd enof p ro of to th e Co m

m is si on er as to any

factua l is su e rel ev an t t o atax pa y er’s l iabi li ty for t ax if: (1) th e ta xp ay er i nt ro du ces cred ib le ev id en ce wi th res pe ctto th atis su e an d (2 ) th e ta xp ay er s at is fie s ce rta in ot he r co nd it io ns , in cl ud in g s ub st an ti at io n o f an y it em an d c oo pe rat io n wi thth e Gov ern m en t’s re qu es ts forwitne ss es , do cu m en ts , othe r in fo rm at io n, an d m eet in gs . Sec. 7 49 1( a)(2 ); s ee al so Ru le 14 2( a)(2 ). The t ax pay er b ears th e b ur de n o f

W e n ot e th atpe ti ti on er fa il edto co m pl y with the Co urt’s o rd ers to fil e a 6 po st tri al bri ef. Whe n apa rty fail s t o fi le a br ie f al to ge th er, s uc h afai lu re h as be en he ldby thi s C ou rt t o ju st ify the di sm is sa l o f al l i ss ue s as to whi chth e n on fil in g pa rty has th e b ur de n o f pr oo f. See Ru le 12 3; Str in ge r v. C omm is si on er, 8 4 T.C. 69 3 (1 98 5) , aff’d wit ho utpubl is he d o pi ni on , 78 9 F .2d91 7 (4 th Cir . 19 86 ). Whi le we are u nwi ll in g t o e nt er a d efau ltjud gm en t ag ai ns t p et it io ne r fo r fai lu re t o fi le a br ie f, we vi ew hi s fa il ur e as anin di cat io n o f hi s t enuo us po si ti on with re ga rdto th e is su es inqu es ti on . See Mc Gee v . Comm is si on er, T.C. Mem o. 2 00 0- 30 8, 2 00 0 W L 14 34 24 0, at*6
.- 8 -

[* 8] pro vi ng th atth e ta xp ay er h as m etth e requi rem en ts of s ect io n 7 49 1( a). Ro lfs v. Co m m is si on er, 1 35 T.C. 47 1, 4 83 (20 10 ), aff’d, 6 68 F.3d88 8 (7 th Cir . 20 12 ). Pet it io ne r di d n otarg ue th atth e b ur de n s ho ul d s hi ft, andhe fai le d t o c om pl y with the subs tant ia ti on an d c oo pe rat io n re qu ire m en ts . Accor di ng ly, th e b ur de n o f pr oo f rem ai ns on pe ti ti on er. II. Sch edul e A Exp en se s W e fi rs t co ns id er wh ethe r pe ti ti on er i s en ti tl edto de du ctSch edul e A
ex pe ns es of $ 35 ,31 1 a nd$3 5,3 58 forhi s 2 00 7 a nd20 08 tax y ears , res pe ct iv el y . A. Hom e Offi ce Ex pe ns es Pet it io ne r cl ai m edho m e o ffi ce ex pe ns e d educ ti on s o n h is 20 07 an d 2 00 8 Fed eral in co m e ta x re tu rn s. Sec ti on 28 0A( c)(1 ) pe rm it s a d educ ti on forth e po rti onof ares id en ce tha t i s, i nt er al ia , reg ul arl y or e xc lu si ve ly use d (1 ) as th e pr in ci pa l p la ce o f bu si ne ss for an y tra de or b us in es s o f th e ta xp ay er o r (2 ) as a pl ace o f bu si ne ss whi chis us edby pat ie nt s, cl ie nt s, o r cu st om ers inm eet in g o r de al in g wi th th e ta xp ay er i n the no rm al co ur se of h is tra de or b us in es s. Ho wev er, if t he tax pa y er i s anem

pl oyee, th e h om e o ffi ce m us t b e fo r th e co nv en ie nc e o f th e em pl oyer; i t ca nn otbe on ly a pla ce atwhi chth e em pl oyee ch oo se s t o d o s om e o f hi s wo rk . Sec. 2 80 A(c)(1 ) (fl us h l an gu ag e); Fran ke l v . Comm is si on er, 8 2 T.C. 31 8, 3 23 , 32 6 (1 98 4) . Mor eo ve r, itm us t b e u se d e xc lu si ve ly for the em pl oyer’s- 9 -

[* 9] workan d n otforpe rs on al us e. Sec. 2 80 A(c)(1 ); C adwall ad er v . Co m m is si on er, 9 19 F.2d12 73 , 12 75 (7t h C ir. 1 99 0) , aff’g T.C. Mem o. 1 98 9- 35 6. Pet it io ne r ha s n otpro ve d tha t h is ho m e o ffi ce was us edex cl us iv el y in
co nn ect io n wi th hi s emplo ym en t o r th atth e h om e o ffi ce was us edforth e co nv en ie nc e o f co ll eg es . Peti ti on er’s o wn t es ti m on y rev eal edth atco ll eg es pr ov id edhi m

with a n o ffi ce an d tha t h e li ke ly didno t u se hi s h om e o ffi ce ex cl us iv el y

forhi s wo rkforco ll eg es . Accor di ng ly, pe ti ti on er i s n oten ti tl edto de du ctho m e o ffi ce ex pe ns es pu rs ua ntto sec ti on 28 0A( c)(1 ) on hi s 2 00 7 a nd20 08 Fed eral in co m e ta x re tu rn s. B. Trav el , Meal , andOth er Ex pe ns es Pet it io ne r cl ai m s tha t the rem ai ni ng ex pe ns es were unr ei m bu rs edem

pl oyee ex pe ns es de du ct ib le pu rs uantto sec ti on 16 2. Se ct io n 1 62 (a) p erm it s a t ax pay er t o de du ctth e o rd in ary an d n eces sary ex pe ns es pa idor i nc urreddu rin g the tax ab le y ear i n c arrying on a tr ad e o r bu si ne ss . See Co m m is si on er v . Lin co ln Sav . & Loan Ass ’n, 40 3 U.S. 3 45 , 35 2 (1 97 1) . In o rd er fo r a t ax pa y er “ to be en ga ge d i n atra de
orbu si ne ss , th e ta xp ay er m us t b e in vo lv edinth e act iv ity with c on ti nu ity

an d reg ul ari ty and* * * the tax pa y er’s p rimary pu rp os e fo r en ga gi ng inth e act iv ity
m us t b e fo r in co m e o r pr of it .” Co m m is si on er v . Groe tz in ge r, 48 0 U.S. 2 3, 3 5 (1 98 7) . An ex pe ns e is ord in ary if i t i s n orm al , us ua l, o r cu st om ary withi n a- 10 -

[* 10 ] pa rti cu lar tr ad e, bu si ne ss , or i ndus try or ari se s fr om a tr an sa ct io n “ of
co m m on or f reque ntoc cu rren ce i n the type o f bu si ne ss in vo lv ed .” Depu ty v. du Po nt , 30 8 U.S. 4 88 , 49 5 (1 94 0) . An ex pe ns e is ne ces sa ry if i t i s ap pr op ria te an d he lp fu l fo r th e d ev el op m en t o f th e b us in es s. See Co m m is si on er v . Lin co ln Sav . & Loan As s’n, 4 03 U.S. at 3 53 ; Co m m is si on er v . Hein in ge r, 32 0 U.S. 4 67 , 47 1 (1 94 3) . Sect io n 2 62 (a) d is al lo ws d educ ti on s fo r pe rs on al , li vi ng , or fa m il y ex pe ns es . See al so sec . 1.1 62 -1 7( a), In co m e Tax Reg s. The term “ tra de or b us in es s” as u se d i n s ect io n 1 62 (a) i nc lu de s the tra de or bu si ne ss of b ei ng anem

pl oyee. See Pri m

ut h v . Comm is si on er, 5 4 T.C. 3 74 , 37 7 (1 97 0) ; M art el l v . Comm is si on er, T.C. Mem o. 2 01 3- 11 5, at*2 4. Ho wev er, t o de du ctex pe ns es in curredth ro ug h the pe rfo rm an ce o f se rv ic es as an e m pl oyee, th e ta xp ay er m

us t n otha ve th e ri gh t t o re im bu rs em en t fo r su chexpe ns es fro m hi s o r he r em pl oyer. See Orv is v. Co m m is si on er, 7 88 F.2d14 06 , 14 08 (9t h C ir. 1 98 6) , aff’g T.C. Me m o. 1 98 4- 53 3. Al on g wi th othe r m is cel lane ou s i te m iz edde du ct io ns , un rei m bu rs edem

pl oyee ex pe ns es are s ub

ject t o the 2% o f ad

jus te d g ro ss in co m e li mit at io n u nd er s ect io n 6 7( a). See sec . 67 (a) and(b)
. Deduc ti on s ar e a m at te r of leg is la ti ve gra ce, an d the tax pa y er b ears th e bu rd enof p ro vi ng th athe is en ti tl edto an y cla im edde du ct io ns . INDOPCO, Inc
. v. Co m m is si on er, 5 03 U.S. 79 , 84 (19 92 ). Thi s i nc lu de s the bu rd enof- 11 -

[* 11 ] subs tant iati on . Sec. 6 00 1; Hrad es ky v. Co m m is si on er, 6 5 T.C. 8 7, 8 9 (1 97 5) , aff’d p er cu ria m , 54 0 F .2d82 1 (5 th Cir . 19 76 ); M art el l v . Comm is si on er, at*2 4; sec . 1.6 00 1- 1( a), (e) , Inc om e Tax Reg s. Tax pay ers m us t m ai nt ai n re co rd s rel at in g t o the ir i nc om e an d e xp en se s an d m us t p ro ve th ei r en ti tl em en t t o a ll cl ai m edde du ct io ns , cred it s, an d e xp en se s i n c on tro ve rs y . See s ec. 6 00 1; Ru le 14 2( a); INDOPCO, In c. v. Co m m is si on er, 5 03 U.S. at 8 4; W el chv. Hel ve rin g, 29 0 U.S. at11 5. A clai m edex pe ns e (o th er tha n tho se subjec te d t o h ei gh te ne d 7
sc ru ti ny un de r se ct io n 2 74 ) m ay be de du ct ib le ev enwher e th e ta xp ay er i s unabl e 8 to ful ly sub st an ti at e it . Chr is ti ne v. Co m mis si on er, T.C. Mem o. 2 01 0- 14 4, 2 01 0

One m etho d o f subs tant ia ti ng anord in ary an d n eces sary bu si ne ss ex pe ns e 7 is th ro ug h “pr ep arat io n o f a d ai ly diary or r eco rdof e xp en di tu res , m ai nt ai ne d i n su ffi ci en t d et ai l t o e nabl e * * * [th e em pl oyee] to read il y

id en ti fy th e am ou ntan d na tu re o f an y

ex pe nd itur e, an d the pre se rv at io n o f supp orti ng do cu m en ts , es pe ci al ly in co nn ect io n wi th lar ge or e xc ep ti on al ex pe nd itur es .” Sec. 1.1 62 -1 7( d) (2 ), In co m e Tax Reg s. Pet it io ne r cl ai m s trav el an d m eal ex pe ns e d educ ti on s o n the Sch edul es A of 8 hi s 2 00 7 a nd20 08 Fed eral in co m e ta x re turn s. Trav el ex pe ns es , in cl ud in g m eal s an d l od gi ng away

fro m ho m e, are s ub

ject t o the sp eci fic an d m or e st rin ge nt subs tant ia ti on requi rem en ts of s ec. 2 74 . See s ec. 2 74 (d ). To d educ t the se ex pe ns es , th e ta xp ay er m us t s ub st an ti at e b y

ad equa te reco rd s o r su ffi ci en t ev id en ce t o c orro bo rat e th e ta xp ay er’s o wn t es ti m on y : (1 ) th e am ountof t he ex pe ns e; (2) th e ti m e an d p la ce o f th e tr av el or m eal ex pe nd itur e; an d (3 ) th e bu si ne ss pu rp os e o f th e ex pe ns e. Id . Howev er, b ecau se we co nc lu de th at pe ti ti on er h as no t s at is fie d the les s s tri ng en t s tand ardforsubs tant ia ti on of s ec. 1 62 ex pe ns es inge ne ral , itis un ne ces sa ry to furth er d is cu ss th e m or e st rin ge nt subs tant ia ti on requi rem en ts of s ec. 2 74
.- 12 -

[* 12 ] W L 26 40 12 5, at*2 , aff’d, 4 75 Fed . App x. 2 59 (9t h C ir. 2 01 2) . The reg ul at io ns pro vi de th at“ [w]here r eco rd s ar e in co m pl et e o r do cu m en tary

pro of is
un av ai labl e, itm ay

be po ss ib le to est ab li sh th e am ou ntof the expe nd itur es by ap pr ox im at io ns ba se d upo n re li ab le sec on da ry so ur ces of i nf

orm at io n a nd
co ll at eral ev id en ce.” Se c. 1.1 62 -1 7( d) (3 ), In co m e Tax Reg s. Ho wev er, the re m us t be su ffi ci en t ev id en ce i n the reco rdto pro vi de a ba si s upo n wh ic h a n e st im at e m ay be m ad e an d t o p erm itus to co nc lu de th ata de du ct ib le ex pe ns e, rathe r th ana no nd educ ti bl e p ers on al ex pe ns e, was in cu rredinat l eas t the am ountall owe d. W il li am s v . Uni te d S ta te s, 2 45 F.2d55 9, 5 60 (5t h C ir. 1 95 7) ; Co ha n v . Co m m is si on er, 3 9 F .2d54 0, 5 43 -5 44 (2dCir . 19 30 ); Vani cekv. Co m m is si on er, 85 T.C. 73 1, 7 42 -7 43 (19 85 ); C hr is ti ne v. Co m m is si on er, 2 01 0 WL 26 40 12 5, at *2 . In the se in st an ces , th e Co urt i s p erm it te d t o m ak e as clo se anap pr ox im at io n of th e al lo wab le ex pe ns e as itcan , bea rin g h eav il y ag ai ns t the tax pa y er wh os e in ex act itud e is of h is or h er o wn m ak in g. Co ha n v . Comm is si on er, 3 9 F .2dat 54 3- 54 4. Inm ak in g s uc h a n app ro xi m at io n, du e co ns id erat io n wi ll be gi ve n t o the reas on ab le ne ss of t he st at ed ex pe nd itur es forth e cl ai m edpu rp os es inrel at io n t o the tax pa y er’s ci rcu m st an ces (su chas h is in co m e an d the na tu re o f hi s o ccupa ti on ), to th e rel iabi li ty andaccu racy of rec or ds inco nn ect io n wi th othe r it em s m or e rea di ly len di ng th em se lv es to de ta il edreco rd -k eep in g, an d to all of t he fact s an d c irc um st an ces inth e p art ic ul ar ca se .- 13 -

[* 13 ] Sec. 1 .16 2- 17 (d )(3 ), In co m e Tax Reg s. Inde ci di ng whet he r a t ax pa y er h as sa ti sf ie d h is or h er b ur de n o f subs tant ia ti ng a de du ct io n, we ar e n otrequi redto
acce ptth e ta xp ay er’s s el f-s erv in g, u nd oc um en te d t es ti m on y . Niedrin gh au s v . Co m m is si on er, 9 9 T.C. 2 02 , 21 9- 22 0 (1 99 2) ; To ka rs ki v. Co m m is si on er, 8 7 T.C. 74 , 77 (19 86 ). Pet it io ne r ha s fa il edto carry hi s b ur de n o f pr oo f. Altho ug h i t g en eral ly m ay be “po ss ib le to est ab li sh th e am ou ntof the expe nd itur es by app ro xi m at io ns ba se d up on rel iabl e se co nd ary so ur ces of i nf orm at io n a ndco ll at eral ev id en ce”, s ee s ec. 1.1 62 -1 7( d) (3 ), In co m e Tax Reg s., we co nc lu de th atpe ti ti on er fa il edto subm it
su ffi ci en t re li ab le ev id en ce t o p ro vi de a ba si s upo n wh ic h a n e st im at e co ul d b e
m ad e an d t o p erm itus to co nc lu de th athe in cu rreda de du ct ib le ex pe ns e, rathe r th ana no nd educ ti bl e p ers on al expe ns e, se e Van ic ekv. Co m m is si on er, 8 5 T.C. at 74 2- 74 3. Pe ti ti on er h as no t s ub m it te d a ny writt ensubs tant ia ti on what so ev er o f th e Sch edul e A ex pe ns es rep orte d o n h is 20 07 an d 2 00 8 F ed eral in co m e ta x returns bu t i ns te adadm it s tha t h e h as no su chwrit te n s ub st an ti at io n. Pe ti ti on er rel ie s o nl y

on hi s o ral tes ti m on y , whi chwe fin d t o b e unc orro bo rat ed , sel f-s erv in g, an d u nr el iabl e. See To ka rs ki v. Co m m is si on er, 8 7 T.C. at77 . Mor eo ve r, pe ti ti on er h as fai le d t o p ro ve th athi s cl ai m edun rei m bu rs edem

pl oyee bu si ne ss- 14 -

[* 14 ] ex pe ns es were, i n fa ct , no t re im bu rs ab le
. See Orv is v. Co m m is si on er, 7 88 9 F.2 d a t 1 40 8. Acco rd in gl y , we con cl ud e th atpe ti ti on er i s n oten ti tl edto de du ct Sch edul e A un rei m

bu rs edem

pl oyee ex pe ns es of $ 35 ,31 1 a nd$3 5,3 58 forhi s 20 07 an d 2 00 8 t ax y ears , res pe ct iv el y . III. Sch edul e C Ex pe ns es W e n ex t co ns id er wh ethe r pe ti ti on er i s en ti tl edto de du ctSch edul e C
ex pe ns es of $ 55 ,72 2 a nd$3 3,4 70 forhi s 2 00 7 a nd20 08 tax y ears , res pe ct iv el y . 1 0 Pet it io ne r cl ai m s tha t the se expe ns es were re la te d t o h is flu te m ak in g a ct iv ity an d are d educ ti bl e as eithe r or di na ry an d n eces sa ry

tra de or b us in es s ex pe ns es pu rs ua ntto sec ti on 16 2 o r as ex pe ns es in cu rredintra ns act io ns en te redin to for
At tria l p et it io ne r al le ge d fo r th e fi rs t t im e th athe was n otanem pl oyee bu t 9 anin de pe nd en t co nt ract or . Peti ti on er d idno t ra is e th is m at te r inhi s p et it io n o r am en d h is pl ead in gs to in cl ud e it . W e d o n otco ns id er anis su e th atha s n otbe en pl ead ed . See, e.g ., Fren tz v. Co m m is si on er, 4 4 T.C. 4 85 , 49 1 (1 96 5) , aff’d, 3 75 F.2 d 6 62 (6t h C ir. 1 96 7) ; Si can of f Veg et ab le Oil Co rp . v. Co m m is si on er, 2 7 T.C. 10 56 , 10 66 (19 57 ) (an d the cas es cit edth erea t), re v’d o n o th er g ro un ds , 25 1 F .2d 76 4 (7 thCir . 19 58 ). Thi s i s p art ic ul arl y tru e in a cas e li ke th is wher e th e is su e can no t b e co ns id eredwitho utsu rp ris e an d p reju di ce t o the othe r pa rty. See Est at e of Man de ls v. Co m

m is si on er, 6 4 T.C. 6 1, 7 3 (1 97 5) . Accor di ng ly, we wil l n ot co ns id er p et it io ne r’s al le ga ti on th athe was an i nd ep en de ntco nt ract or . Inth e n ot ic e o f de fic ie nc y , res po nd en t fu ll y di sa ll owe d the Sch edul e C 1 0 ex pe ns es forbo th hi s 2 00 7 and20 08 tax y ears bu t al lo wedpe ti ti on er t o d educ t o n hi s Sc he du le A th e fl ut e m ak in g e xp en se s fo r hi s 2 00 7 t ax ab le y ear t o the ex te ntof th e g ro ss rece ip ts am ou ntof $ 13 ,26 4. As is th e cas e wit h o th er Sc he du le A ex pe ns es , th e al lo wedde du ct io n i s s ub ject t o the 2% o f ad

jus te d g ro ss in co m e li mit at io n p ur su an t t o s ec. 6 7( a).- 15 -

[* 15 ] pro fitpu rs ua ntto sec ti on 21 2. Re sp on de ntco nt en ds th atpe ti ti on er i s n ot
en ti tl edto a de du ct io n b ecau se he fai le d t o p ro pe rly subs tant ia te th es e ex pe ns es an d b ecau se th e ex pe ns es are n otde du ct ib le pu rs ua ntto sec ti on 18 3. 1 1 As we s ta te d abo ve , deduc ti on s ar e a m at te r of leg is la ti ve gra ce, an d the ta xp ay er b ears th e b ur de n o f pr ov in g tha t h e is en ti tl edto an y cla im edde du ct io ns , in cl ud in g the bu rd enof s ub st an ti at io n. Se c. 60 01 ; INDOPC O, Inc . v. Co m m is si on er, 5 03 U.S. at 8 4; Hrad es ky v. Co m m is si on er, 6 5 T.C. at89 ; M art el l v. Co m m is si on er, at*2 4; sec . 1.6 00 1- 1( a), (e) , Inc om e Tax Reg s. Pet it io ne r ha s fai le d t o c arry tha t b ur de n. As was the cas e wit h h is Sch edul e A ex pe ns es , pe ti ti on er h as no t s ub m it te d a ny writt ensubs tant ia ti on of t he Sch edul e C ex pe ns es rep orte d o n h is 20 07 an d 2 00 8 F ed eral in co m e ta x re tu rn s an d re li es on ly on h is
or al tes ti m on y , whi chwe fin d t o b e unc orro bo rat ed , sel f-s erv in g, an d u nr el iabl e. See To ka rs ki v. Co m

m is si on er, 8 7 T.C. at77 . Peti ti on er ad m it s tha t h e d idno t
m ai nt ai n re co rd s as he sh ou ldha ve an d i ns te adde pe nd edon hi s o wn unr el iabl e es ti m at es to tra ckco st s, i nv en to ry , m erch an di se pri ces , andho ur s s pe ntflu te
m ak in g. Pe ti ti on er co ul d n otpro du ce b an k re co rd s b ecau se he di d n otm ai nt ai n a Gen eral ly, se c. 18 3 l im it s the de du ct io ns foran“ act iv ity no t en ga ge d i n 1 1 fo r pr of it ” to th e am ou ntof g ro ss in co m e rec ei ve d fr om th e act iv ity . Sec. 1 83 (a) an d (b ). W e d o n otco ns id er wh ethe r pe ti ti on er en ga ge d i n h is flu te m ak in g act iv ity forpro fitbe cau se we su st ai n re sp on de nt ’s di sa ll owa nc e o f pe ti ti on er’s Sch edul e C ex pe ns es on acco un t o f pe ti ti on er’s l ackof s ub st an ti at io n.- 16 -

[* 16 ] se pa rat e b an k a cco un t fo r hi s fl ut e m ak in g a ct iv ity ; an d h e co ul d n ot pr oduc e cre di t ca rdst at em en ts be cau se he pa idall of h is ex pe ns es with c as h o r ch eck s. Pet it io ne r al le ge s tha t h is m in im al reco rd s fr om hi s fl ut e m ak in g a ct iv ity , whi chco ns is te d o f rec ei pt s, were de st ro y edina fl oo d dur in g 2 00 8. If atax pa y er’s
reco rd s ar e n o l on ge r av ai labl e o n a cco un t o f ci rcu m st an ces be y on d the tax pa y er’s
co nt ro l, s uc h a s a f

ire , flo od , or o th er ca su al ty, th enth e ta xp ay er i s ex pe ct edto
subs tant ia te de du ct io ns by recor ds reco ns tru ct edth ro ug h c on ta ct s wi th th ird pa rti es an d o th er re as on ab le m ean s. Giz zi v. Co m m is si on er, 6 5 T.C. 3 42 , 34 5 (1 97 5) ; Fe rn an de z v . Comm is si on er, T.C. Mem o. 2 01 1- 21 6, 2 01 1 WL 38 75 06 1, at *2 . Peti ti on er n oton ly fail edto pro vi de an y reco ns tru ct io n o f th e lo strece ip ts ; h e al so ha s n otpro ve d tha t the re was a fl oo d. Pe ti ti on er d idno t o fferin to ev id en ce an y in su ran ce cl ai m

or e li ci t t es ti m on y

fro m hi s fo rm er g irl fri en d wh o o wne d the ho us e inwhi chth e fl oo d o ccu rred . He reli es on ly on h is owntes ti m on y , th ro ug h whi chhe adm it s tha t the flo odis no t l is te d i n the cit y ’s reco rd s an d tha t the flo od
was no t a f

lo od , bu t a “ parti cu lar wat er ci rcu m st an ce”. W e co nc lu de th atpe ti ti on er h as no t p ro pe rly subs tant ia te d h is ex pe ns es rel at edto hi s fl ut e m ak in g a ct iv ity an d, co ns eque nt ly, th atpe ti ti on er i s n oten ti tl ed- 17 -

[* 17 ] to de du ctSch edul e C ex pe ns es of $ 55 ,72 2 a nd$3 3,4 70 forhi s 2 00 7 a nd 20 08 tax y ears , res pe ct iv el y . IV. Accu racy-Rel at edPen al ti es Sect io n 6 66 2( a) i m

po se s an accu racy-rela te d p en al ty of 20 % of a ny po rti on of anun de rp aym en t tha t i s at tri bu tabl e to cau se s s pe ci fie d i n s ub se ct io n (b ). Subs ect io n (b ) ap pl ie s the pe na lty to an y un de rp aym en t at tri bu tabl e to , in te r al ia , a

“ subs tant ia l u nd ers ta te m en t” of i nc om e ta x. An“un de rs ta te m en t” is th e ex ces s o f th e am ou ntof t ax requi redto be sh own on th e return o ve r th e am ountof t ax th atis actua ll y sh own on th e return, re du cedby any reb at e. Sec. 6 66 2( d) (2 )(A). A

“ subs tant ia l u nd ers ta te m en t” of i nc om e ta x e xi st s i f th e am ou ntof the
un de rs ta te m en t fo r th e ta xabl e y ear e xc eed s the gre at er o f (1 ) 10 % of t he tax requi redto be sh own on th e return o r (2 ) $5 ,00 0. Se c. 66 62 (d )(1 )(A). Gen eral ly, th e Co m

m is si on er b ears th e b ur de n o f pr oduc ti onwith re sp ectto
an y pe na lty , in cl ud in g the accu racy-rela te d p en al ty. Sec. 7 49 1( c); Hig be e v . Co m m is si on er, 1 16 T.C. 43 8, 4 46 (20 01 ). To m eetth atbu rd en , th e Co m mis si on er
m us t co m e fo rwardwith s uf fic ie ntev id en ce i nd ic at in g tha t i t i s ap pr op ria te to im po se th e rel ev an t p en al ty. Hig be e v . Comm is si on er, 1 16 T.C. at 4 46 . Howev er, on ce the Co m

m is si on er h as m etth e b ur de n o f pr oduc ti on , th e b ur de n o f pr oo f
rem ai ns with the tax pa y er, i nc lu di ng th e b ur de n o f pr ov in g tha t the pe na lty is- 18 -

[* 18 ] in ap pr op ria te be cau se of s ub st an ti al au th or ity or r eas on ab le cau se un de r se ct io n 6 66 4. Se e Ru le 14 2( a); Hig be e v . Comm is si on er, 1 16 T.C. at 4 46 -4 49
. Res po nd en t co nt en ds th atth e se ct io n 6 66 2 p en al ti es forpe ti ti on er’s 2 00 7
an d 2 00 8 t ax y ears are ju st ifi edon th e b as is of s ub st an ti al un de rs ta te m en t o f in co m e ta x. See s ec. 6 66 2( b) (2 ). Forhi s 2 00 7 t ax y ear p et it io ne r rep orte d atax

1 2 li ab il ity of $ 5,2 95 an d re sp on de ntde te rm in eda co rrec t t ax li ab il ity of $ 23 ,44 4. Pet it io ne r un de rs ta te d h is tax li ab il ity by $18 ,14 9, an am ou ntwhi chex ceed s $5 ,00 0, wh ic h i s g reat er than $ 2,3 44 , 10 % of t he am ou ntrequi redto be sh own on th ei r return. Fo r hi s 2 00 8 t ax y ear p et it io ne r rep orte d atax li ab il ity of $ 14 ,26 4 a nd
res po nd en t d et erm in eda co rrec t t ax li ab il ity of $ 28 ,81 9. Pe ti ti on er u nd ers ta te d h is ta x l iabi li ty by

$1 4,5 55 , an a m ou ntwhi chex ceed s $ 5,0 00 , whi chis gre at er tha n $2 ,88 2, 1 0% o f th e am ou ntrequi redto be sh own on th ei r return. Acco rd in gl y , we

Res po nd en t al so co nt en ds th atpe ti ti on er was ne gl ig en t b ecau se he fai le d 1 2 to subs tant ia te any

of h is Sch edul e A an d S ch edul e C ex pe ns es forhi s 2 00 7 a nd 20 08 tax y ears . Howev er, o nl y on e acc ur acy-rela te d p en al ty m ay be ap pl ie d wi th res pe ctto an y

gi ve n p orti onof a n u nd erp aym en t, ev enif tha t p orti on is subjec t t o m or e th anon e o f th e types of m is co nduc t d es cri be d i n s ec. 6 66 2. J aro ff v
. Co m m is si on er, T.C. Mem o. 2 00 4- 27 6, 2 00 4 WL 28 09 56 8, at*6 (ci ti ng sec . 1.6 66 2- 2( c), In co m e Tax Reg s.). Be cau se we co nc lu de th atpe ti ti on er i s l iabl e fo r th e acc ur acy-rela te d p en al ti es forsubs tant ia ll y un de rs tati ng hi s i nc om e ta x fo r hi s 20 07 an d 2 00 8 t ax y ears , itis un ne ces sa ry to co ns id er wh ethe r pe ti ti on er was ne gl ig en t.- 19 -

[* 19 ] co nc lu de th atres po nd en t m ethi s b ur de n o f pr oduc ti on insh owi ng th at pe ti ti on er s ub st an ti al ly und ers tate d h is in co m e ta x fo r hi s 2 00 7 a nd20 08 tax ab le y ears . The am ountof a n u nd ers ta te m en t o n wh ic h the pe na lty is im po se d wi ll be reduc edby the po rti on of t he un de rs ta te m en t tha t i s at tri bu tabl e to th e ta x tre atm en t o f anit em

(1) th atwas s up po rte d b y “ subs tant ia l au th or ity ” o r (2 ) fo r whi chth e rel ev an t fa ct s wer e “ ad equa te ly dis cl os edinth e return o r in a st at em en t at ta ch edto th e return” an d “ th ere i s a r eas on ab le ba si s fo r th e ta x treat m en t o f
su chit em ”. Sec. 6 66 2( d) (2 )(B) . Peti ti on er d oe s n otarg ue th atth e am ou nt s o f hi s un de rs ta te m en ts sh ou ldbe reduc edbe cau se he ha d s ub st an ti al au th or ity foran it em or b ecau se hi s p os it io n wi th res pe ctto anit em was a de qu at el y

di sc lo se d. Acco rd in gl y , we do no t re du ce p et it io ne r’s un de rs ta te m en ts pu rs ua ntto sec ti on 66 62 (d )(2 )(B)
. Add it io na ll y , sec ti on 66 64 (c)( 1) pro vi de s tha t the accu racy-rela te d p en al ty sh al l n otap pl y

to an y po rti on of a n u nd erp aym en t i f itis sh own th atth ere was reas on ab le cau se forth e ta xp ay er’s p os it io n wi thres pe ctto th atpo rti on an d tha t th e ta xp ay er ac te d i n g oo d fa ith wi th res pe ctto th atpo rti on . The d et erm in at io n o f whe th er a t ax pa y er ac te d wi th reas on ab le cau se an d i n g oo d fa ith wi th in th e
m ean in g o f se ct io n 6 66 4( c)(1 ) is m ad e o n acas e-b y -cas e b as is , tak in g i nt o a cco un t- 20 -

[* 20 ] all of t he pe rti ne ntfact s an d c irc um st an ces . Sec. 1 .66 64 -4 (b )(1 ), In co m e Tax Reg s. Th e m os t i m

po rtantfact oris th e ex te ntof t he tax pa y er’s eff ort t o as se ss hi s p ro pe r ta x l iabi li ty for the y ear. Id . “ Ci rcu m st an ces th atm ay in di cat e reas on ab le cau se an d g oo d fa ith i nc lu de anho ne stmis un de rs tand in g o f fac t o r la w th atis reas on ab le inli gh t o f al l o f th e fac ts an d c irc um st an ces , in cl ud in g the
ex pe rie nc e, kn owl ed ge , andeduc at io n o f th e ta xp ay er.” Id . Taxp ay ers de m on st rat e rea so nabl e cau se when th ey ex erci se ord in ary bu si ne ss care an d prud en ce. Ri ch ard so n v . Commis si on er, 1 25 F.3d55 1, 5 58 (7t h C ir. 1 99 7) , aff’g T.C. Mem o. 1 99 5- 55 4. Pet it io ne r ha s n otest ab li sh edreas on ab le cau se forth e und erp aym en ts or th atth e returns were p rep aredingo odfai th . See s ec. 6 66 4( c)(1 ); Hi gb ee v . Co m m is si on er, 1 16 T.C. at 4 48 -4 49 . Peti ti on er co nt en ds th athe ha d n o s av in gs an d tha t h e p ro vi de d fi nanc ia l s up po rt t o a ndpe rfo rm edho us eh ol d c ho res forhi s fo rm er g irl fri en d andhe r 24 -y ear- ol d s on , who ha s ce reb ral pa ls y . W hi le we sym pa th iz e wit h p et it io ne r fo r hi s fi na nc ia l h ard sh ip an d c omm en d h im forhi s ch ari tabl e en de av or s, we d o n otco nc lu de th ateit he r hi s h ard sh ip or h is ch ari ty qu al ifi es as areas on ab le cau se to ex cu se hi s und erp aym en ts of t ax . Con se qu en tl y , on th e b as is of t he for eg oi ng , we ho ldth atpe ti ti on er i s l iabl e fo r acc ur acy-rela te d pe na lt ie s p ur su an t t o s ect io n 6 66 2( a) fo r hi s 2 00 7 a nd20 08 tax y ears .- 21 -

[* 21 ] V. Co nc lu si on Insu m , we con cl ud e th at(1) pe ti ti on er i s n oten ti tl edto de du ctSch edul e A
ex pe ns es of $ 35 ,31 1 a nd$3 5,3 58 forhi s 2 00 7 a nd20 08 tax y ears , res pe ct iv el y ; (2 ) pe ti ti on er i s n oten ti tl edto de du ctSch edul e C ex pe ns es of $ 55 ,72 2 and $3 3,4 70 forhi s 2 00 7 a nd20 08 tax y ears , res pe ct iv el y ; an d (3 ) pe ti ti on er i s l iabl e fo r th e acc ur acy-rela te d p en al ti es pu rs uantto sec ti on 66 62 (a) fo r hi s 2 00 7 and 20 08 tax y ears . Con se qu en tl y , we su st ai n re sp on de nt ’s det erm in at io ns th at pe ti ti on er i s l iabl e fo r in co m e ta x d efi ci en ci es an d fo r acc ur acy-rela te d p en al ti es fo r hi s 2 00 7 a nd20 08 tax y ears . Inreac hi ng th es e h ol di ng s, we h av e co ns id eredall th e p art ie s’ arg um en ts , an d, t o the ex te ntno t ad dr es se d h erei n, we co nc lu de th atth ey are m oo t, i rrel ev an t,
orwitho utm eri t. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te redfor
res po nd en t.