TAX COURT OPINION

Case: Robert Taylor & Adrienne Taylor
Docket Number: 28465-14S
Judge: Wherry
Opinion Type: bench
Filed: 01/08/2016
Pages: 23

Sub=W UNITED STATES TAX COURT WASHINGTON, DC 20217 ROBERT TAYLOR & ADRIENNE TAYLOR, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 28465-14S. ) ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and respondent a copy of the pages of the transcript of the trial in the above case before Judge Robert A. Wherry, Jr. at Los Angeles, California, on December 11, 2015, containing his oral findings of fact and opinion rendered at the conclusion of the trial. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) Robert A. Wherry, Jr. Judge Dated: Washington, D.C. January 8, 2016 SERVED JAN 1 3 2016 Capital Reporting Company 3 1 2 3 4 5 Bench Opinion by Judge Robert A. Wherry, Jr. December 11, 2015 Robert Taylor & Adrienne Taylor v. Commissioner Docket No. 28465-14S THE COURT: The Court has decided to render 6 Oral Findings of Fact and Opinion in this case, and 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the following are the Court's oral findings of fact and Opinion. The Oral Findings of Fact and Opinion shall not be relied upon as precedent in any other case. This bench opinion is made pursuant to the authority granted by section 7459(b) and Rule 152. This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code of 1986 (Code) as amended, and Rules 170 through 174 of the Tax Court Rules of Practice and Procedure. Pursuant to the provisions of section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Unless otherwise indicated, section references are to the Internal Revenue Code, and Rule references are to the Tax Court Rules of Practice and Procedure. In a notice of deficiency mailed on September 9, 2014, Respondent disallowed Petitioners' 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 claimed Schedule E, Supplemental Income and Loss, rental real estate losses in the amount of $25,000 as passive losses, and Petitioners' Schedule A, Itemized Deductions, unreimbursed employee business expenses in the amount of $24,048. Respondent also determined a $1,658.40 accuracy-related penalty under section 6662(a). Petitioners timely petitioned this Court to challenge those determinations. After Petitioners' concessions, we decide whether Petitioners are entitled to deductions disallowed by Respondent and whether Petitioners are liable for the accuracy- related penalty. Background At trial on December 9, 2015, the parties filed a Stipulation of Facts with attached exhibits, the facts of which are incorporated herein by this reference. Petitioners were married and timely filed their joint Form 1040, U.S. Individual Income Tax Return for tax year 2011. Rental Property in South Carolina In 2009 William Taylor (William), a younger brother of Petitioner-husband, Robert Taylor (Mr. Taylor) bought in his name a real property located in the town of Columbia, South Carolina. The property was purchased with an intent to rent it out, but it 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 was in disrepair and needed improvements before it could be rented. The property was in fact never rented before December 31, 2011, and was used by church groups and local community organizations for occasional meetings free of charge. William resided in the town where the property was located and was the primary caretaker and manager of that property. Over time, William's financial situation deteriorated, and he was no longer able to make payments on the property, do repairs, and maintain it. In 2011, the property was damaged after a burglary and required further repairs. Beginning as early as 2009, Mr. Taylor either directly paid for some expenses related to the property or wired money to his brother for that purpose. All of the expenses for 2011 were incurred and paid prior to December 21, 2011. An adjacent property owner wanted the property to enlarge their own property and was trying to have the mortgage foreclosed on. To help his brother and save the property, Mr. Taylor took out a loan and paid off the delinquent debt on the property. At that time, on December 21, 2011, William transferred the title to the property by deed to Mr. Taylor. Mr. Taylor hoped to rent the property out for profit. However, due to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 the poor condition of the property, there were no tenants in 2011. On the 2011 tax return, Petitioners reported $25,000 in expense deductions related to the property. Unreimbursed Business Expenses During tax year 2011, Mr. Taylor was employed by Staples, Inc. (Staples) as an account 8 manager and was subject to Staples' expense 9 reimbursement policy. The policy provided procedures 10 for reimbursement of his expenses such as the use of 11 12 13 14 15 16 17 personal automobile ($69.23 per week allowance), parking, cell phone expenses and charges, and meals and entertainment for customers and employees. Mr. Taylor used his personal cell phone both for business and personal purposes. Mr. Taylor could not recall or reliably estimate the percentage of his cell phone use related to business or personal 18 matters. Mr. Taylor also did not keep any records 19 detailing the use of the cell phone except monthly 20 bills from his cell phone provider. The Staples 21 22 23 24 25 reimbursement policy allowed reimbursement of a certain monthly dollar amount of cell phone charges, but Mr. Taylor never tried to file a claim under the policy. Instead, he claimed the cell phone expenses on his 2011 tax return. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 Mr. Taylor's work required him to travel to various customers, and Mr. Taylor used three cars for that purpose: 1999 GMC Yukon SUV, 1997 Lincoln Mark 8, and 2003 Toyota Corolla. Mr. Taylor did not 5 maintain a travel log and did not produce a 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 contemporaneous or constructed record of his cars' use. Mr. Taylor also did not specify how, if at all, he allocated the expenses between personal and business use of the vehicles. Instead of claiming his car and truck business expenses through the Staples reimbursement procedures, Mr. Taylor claimed them on the 2011 tax return. Mr. Taylor also incurred parking expenses, as well as meals and entertainment expenses while traveling to and meeting with his customers and prospective customers. He maintained a daily calendar log of customer appointments, but the log did not contain details on purpose of the appointments. Again, instead of filing a reimbursement claim with Staples, Mr. Taylor chose to report these expenses on the 2011 tax return. In the course of his employment, Mr. Taylor also needed to participate in various promotional activities, often sponsored by existing customers, where he gave out Staples sample products to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 familiarize existing and potential customers with the 2 merchandise. Sometimes Mr. Taylor gave small token 3 gifts such as pens, pencils, transparencies, DVDs, 4 CDs, G.I. Joe-type figurines, cookies, nuts, snacks, 5 markers, bracelets, etc. and other low-cost 6 7 8 9 10 11 12 13 stationery to his customers to maintain and generate business. For example, Mr. Taylor participated in the County of Los Angeles Wellness Fairs on August 24, 2011, September 21, 2011, and October 5, 2011. For some of these events, Mr. Taylor had to purchase additional sample merchandise to give out. On one occasion, Mr. Taylor's boss asked him to donate to a local family in need. Mr. Taylor donated a gift card 14 worth $100. Mr. Taylor reported these expenses 15 16 17 18 19 20 21 22 23 24 25 totaling $3,119 on the 2011 tax return. Finally, Petitioners reported identified postage expenses on their 2011 tax return totaling $260. Mr. Taylor admitted that receipts contained in Ex. 10-P, Bates stamp page 5, 9, 10, 11, 12, and 13 were related to personal mail. Yet Petitioners chose to reflect all of these expenses on their 2011 tax return because, in their opinion, the personal mail related to the Columbia, South Carolina, rental property and some loans with Mr. Taylor's older brother, Marlon Taylor, that related to business. 866.488.DEPO www.CapitalReportingCompany.com 1 Capital Reporting Company 9 1 Petitioners also claimed a deduction for some mail 2 3 4 5 6 7 8 9 sent to Mr. Taylor's personal friend, Donald Stevenson. To substantiate their expenses, Petitioners produced at trial various documents and receipts contained in the stipulated exhibits. Mr. Taylor also testified to substantiate a portion of these expenses. We note that the receipts provided at trial by Petitioners only account for $15,557 of the .10 $24,048 disallowed by Respondent. There are no 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 documents in evidence substantiating the remaining $8,491 of expenses. Discussion Deductions are a matter of legislative grace, and taxpayers bear the burden of proving entitlement to any claimed deduction. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). A taxpayer must identify each deduction available, show that he or she has met all requirements therefore, and keep books or records that substantiate the expenses underlying the deduction. Sec. 6001; Roberts v. Commissioner, 62 T.C. 834, 836 (1974). The fact that a taxpayer claims a deduction on an income tax return is not sufficient to substantiate the underlying expense. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979). 2 3 4 5 6 7 8 9 Rather, an income tax return "is merely a statement of the *** [taxpayer's] claim ***; it is not presumed to be correct." Roberts v. Commissioner, 62 T.C. at 837. Under Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930), if a taxpayer claims a deduction but cannot fully substantiate the expense underlying the deduction, the Court may generally 10 approximate the allowable amount, bearing heavily 11 12 13 14 15 against the taxpayer +Ao inexactitude in substantiating the amount of the expense is of his own making. The Court must have some basis upon which to make its estimate, howeve else the allowance would amount to "unguided largesse." 16 Williams v. United States, 245 F. 2d 559, 560 (5th 17 Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731, 18 19 20 21 22 23 24 25 742-743 (1985). I. Schedule E Rental Real Estate Loss Taxpayers are allowed deductions for certain business and investment expenses under section 162 and 212. Section 212 allows taxpayers who are individuals to deduct all ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 income or for the management, conservation, or 2 maintenance of property held for the production of 3 4 5 6 7 8 9 income. Sec. 212(1) and (2). For purposes of section 212, the term "income" includes not only income of the current year but also income that may be realized in a subsequent year. Sec. 1.212-1(b), Income Tax Regs; see Bradley v. Commissioner, T.C. Memo. 1998-170 ("The term 'held for production of income' includes held appreciation in value"). An 10 individual can deduct ordinary and necessary expenses 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 incurred in management, conservation, or maintenance of a building devoted to rental purposes notwithstanding the fact that there is no actual income from that building in the tax year in question. Sec. 1.212-1(b), Income Tax Regs. In this case, Petitioners introduced into evidence a deed for the South Carolina property transferring title from William to Mr. Taylor dated December 21, 2011. Petitioners did not introduce any evidence that would allow us to conclude that Mr. Taylor had an ownership interest in that property before December 21, 2011, sufficient to justify claiming a deduction for repair and maintenance expenses. The parties also stipulated that William was the primary caretaker of that property. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 Petitioners did not incur any expenses related to the 2 3 property in the period from December 21, 2011, to December 31, 2011. At best, it appears that 4 Petitioners made loans or gifts starting as early as 5 6 2009 to William to help him pay the expenses for the property. There was no evidence or claim by 7 Petitioners that William was a nominee or trustee who 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 held the title to this property Mr. Taylor's benefit. As the owner of the property, William is the one who should have claimed the deduction for the expenses incurred before December 21, 2011, on his tax return. Thus, we hold Petitioners are not entitled to the $25,000 deduction for real estate loss claimed on Schedule E. II. Unreimbursed Business Expenses A. Legal Standard for Business Expenses Deduction Pursuant to sections 67 and 162(a), an employee taxpayer may deduct as miscellaneous itemized deductions all of the ordinary and necessary unreimbursable business expenses paid or incurred during the tax year as a part of taxpayer's employment. Lucas v. Commissioner, 79 T.C. 1, 6 (1982); Wakefield v. Commissioner, T.C. Memo 2015-4. "To qualify as an allowable deduction under [section) 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 162(a) *** an item must (1) be 'paid or incurred during the taxable year,' (2) be for 'carrying on any trade or business,' (3) be an 'expense,' (4) be a 'necessary' expense, and (5) be an 'ordinary' expense." Wakefield v. Commissioner, T.C. Memo 2015- 4 (citing Commissioner v. Lincoln Sav. & Loan Ass'n, 403 U.S. 345, 352 (1971)). While business expenses are generally deductible, personal, living, and family expenses are typically nondeductible. See sec. 262(a). A business expense claimed as a deduction must be incurred primarily for business rather than personal reasons. See Walliser v. Commissioner, 72 T.C. 433, 437 (1979). Where an expense exhibits both personal and business characteristics, the "test[] requires a 16 weighing and balancing of all the facts *** bearing 17 18 in mind the precedence of section 262, which denies deductions for personal expenses, over section 162, 19 which allows deductions for business expenses." 20 Sharon v. Commissioner, 66 T.C. 515, 524 (1976), 21 aff'd per curiam, 591 F.2d 1273 (9th Cir. 1978). 22 23 24 25 Business expenses described in section 274 are subject to rules of substantiation that supersede the Cohan doctrine. H. Rep. No. 1447, 87th Cong., 2d Sess., at 23 (1962); S. Rep. No. 1881, 87th Cong. 2d 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 14 Sess., at 35 (1962); Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968), aff'd per curiam, 412 F.2d 201 (2d Cir. 1969). Section 274(d) provides that no deduction shall be allowed for, among other things, traveling expenses, entertainment expenses, gifts, and expenses with respect to listed property (as defined in section 280F(d)(4) and including passenger automobiles and computer equipment) "unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer's own statement": (1) the amount of the expenditure or use; (2) the time and place of the expenditure or use, or date and description of the gift; (3) the business purpose of the expenditure or use; and (4) in the case of entertainment or gifts, the business relationship to the taxpayer of the recipients or persons entertained or receiving the gift. Sec. 274(d). Employer B. Business Expenses Reimbursable by It is well settled that an employee may not deduct otherwise valid unreimbursed business expenses if the employee is entitled to reimbursement from his or her employer for such expenditures. Orvis v. Commissioner, 788 F.2d 1406, 1408 (9th Cir. 1986), 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 1 aff'g T.C. Memo. 1984-533 (1984)("A bright line rule 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 prohibiting deductions for reimbursable expenses avoids the difficult inquiry into the taxpayer's knowledge, and gives the taxpayer an incentive to determine which expenses are reimbursable. The rule also forecloses an avenue for tax manipulation by preventing the taxpayer from converting a business expense of his company into one of his own simply by failing to seek reimbursement."). Where the employer imposes a cap.on the amount that it will reimburse, the employee may deduct otherwise ordinary and necessary business expenses in excess of the cap, to the extent that the expenses have not been actually reimbursed. See Noyce v. Commissioner, 97 T.C. 670, 682, 685-689 (1991); Wakefield v. Commissioner, T.C. Memo. 2015-4 at *34. An employee taxpayer bears the burden of proving that claimed business expenses were not reimbursable by his or her employer. See Christine v. Commissioner, T.C. Memo. 2010-144, aff'd, 475 Fed. App'x 259 (9th Cir. 2012). Petitioners introduced in evidence "Staples Advantage T&E Supplement to Staples Global Travel and Expense Policy and Staples Cellular Device Policy," effective April 4, 2011 (we refer to this document as 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 1 2 3 4 5 Staples policy). The policy established reimbursement procedures for such expenses as car use for business purposes, parking when visiting existing or prospective custome , meals and entertainment for customers and associates, and cell phone expenses. 6 Mr. Taylor was eligible for car allowance of $69.23 7 8 9 10 11 12 13 per week and cell phone expenses reimbursement of up to $70 per month during 2011. There was no cap on parking and meals and entertainment expenses. Mr. Taylor testified that instead of seeking reimbursement of his expenses through the Staples reimbursement policy, he decided to claim the expenses as deductions on the 2011 tax return. Under 14 Orvis, Mr. Taylor had to seek reimbursement first. 15 Accordingly, we sustain Respondent's determination 16 17 18 19 20 21 22 23 24 25 disallowing Petitioners' business-related expenses claimed on Schedule A to the extent such expenses were reimbursable under the Staples policy. We note that the Staples policy imposed limits on certain expenses, including automobile expenses and cell phone charges. Because of that, we discuss these expenses separately. Petitioners deducted $7,077 in automobile expenses for 2011 for the three cars allegedly used by Mr. Taylor for visits to his current and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 17 1 2 3 4 5 6 7 prospective clients. Generally, car and truck expenses are subject to the section 274(d) substantiation requirements discussed above. Section 274(d) demands proof of the date, amount, and business purpose of each use or expenditure. See sec. 1.274-5T(b)(6), Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985). Petitioners have failed to 8 meet those requirements. Mr. Taylor generally 9 testified that he used three personal cars for his 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 business-related travel. However, he did not keep a log of trips complying with the section 274(d) requirements and could not establish the necessary details of such trips required to fully comply with section 274(d) during his oral testimony at trial. He also could not establish at trial how he allocated certain repair expenses between personal and business-related use of the vehicles. For these reasons, we hold that Petitioners are not eligible to deduct automobile expenses in excess of the amounts which would have been reimbursable under the Staples policy on their 2011 tax return. Therefore, Respondent's automobile expense adjustment is sustained. Petitioners also deducted $1,549 in cell phone charges on their 2011 tax return. Cell phones 866.488.DEPO www.CapitalReportingCompany.com . Capital Reporting Company 18 1 2 3 4 5 6 7 8 9 10 11 12 13 were subject to section 274(d) up until 2010 as "listed property" under section 280F(d). However, after 2010 cell phones were no longer treated as "listed property." As a result, cell phones charges are now subject to the Cohan analysis. Mr. Taylor testified at trial that he used his personal cell phone both for personal and business-related phone calls. However, he could not testify as to the percentage of personal and business-related use. There is no evidence in the record that would allow the Court to make its own estimate of the business use of the cell phone either. Under these circumstances, we hold that 14 Petitioners were not eligible to claim a deduction 15 16 17 18 19 20 21 22 23 24 25 for cell phone charges on their 2011 tax return in excess of the reimbursable amount under the Staples policy. See Vanicek v. Commissioner, 85 T.C. at 742- 743. C. Business Expenses not Subject to Reimbursement Under the Staples Policy In addition to the expenses discussed above, Petitioners reported $3,119 in unreimbursed expenses for sales gifts and promotional items and $260 in postage expenses. These expenses were not covered by the Staples Policy, so we discuss them 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 19 1 2 3 4 5 6 7 separately. 1. Sales Gifts and Promotional Items As a part of his job, Mr. Taylor participated in various promotional activities where he gave out Staples sample products such as pens, pencils, and other low-cost stationery to familiarize the existing and potentia customers with the 8 merchandise. Sometimes Mr. Taylor gave small token I 9 gifts such as those listed above to his customers to ,10 maintain and generate business. One time at the 11 12 13 14 15 16 17 18 19 20 21 22 23 24 request of his boss, he donated a gift card worth $100 to a family in need as a part of Staples' Adopt a Family initiative. Like travel and automobile expenses, expenditures on gifts must meet the heightened standard of section 274(d). In particular, the taxpayer claiming a deduction must offer evidence to substantiate, for each gift, its cost, date, description, and business purpose, as well the taxpayer's business relationship to the recipient. Sec. 1.274-5T(b)(5), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985). In addition, section 274(b) limits annual business gift deduction to $25 per recipient. However, low-cost promotional items 25 with a value below $4 each on which the name of the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 20 1 2 3 4 5 6 7 8 9 10 11 taxpayer is clearly and permanently imprinted and which is one of a number of identical items distributed generally by the taxpayer do not count toward the $25 limit. See sec. 274(b)(1)(A). After reviewing the record, we conclude that product samples, if any, purchased by Mr. Taylor for the purpose of distribution to potential and existing customers during 2011 at events such as the Los Angeles County Wellness Fairs do not meet the requirements of section 274 and are thus not deductible. There is no record of who received the 12 gifts Mr. Taylor paid for, and of the receipts 13 14 15 16 17 18 19 20 21 22 23 24 25 introduced into evidence none qualify for the section 274(b)(1)(A) $4 or less imprinted promotional item exception. The $100 gift card which Mr. Taylor donated to a family in need in response to a request from his boss does not meet Section 274(d) requirements because Mr. Taylor did not have any business relationship with the gift recipient, the family in need. All other expenses for sales gifts are not deductible because Petitioners failed to satisfy substantiation requirements under section 274(d). 2. Postage Expenses Mr. Taylor admitted in his testimony that 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 21 1 2 3 4 receipts contained in Ex. 10-P, bates stamp pages 5, 9, 10, 11, 12, and 13 were related to personal mail. These amounts must be disallowed as personal expenses under section 262. However, as to the rest of the 5 mail receipts, Mr. Taylor credibly testified that 6 7 8 9 this was mail he sent in the ordinary course of his employment. As such, it is deductible under section 162(a)(1), subject to the section 67(a) 2% of the adjusted gross income floor limitation for 10 miscellaneous itemized personal deductions. In this 11 12 case it seems to the Court that the expenses allowed in this opinion and the tax return preparation fee, 13 which is the only other allowed by Respondent 14 miscellaneous itemized deduction, would be less than 15 16 17 18 19 20 21 22 23 24 25 the 2% threshold. Thus, it is not likely it will affect Respondent's calculations. III. Section 6662(a) Accuracy-Related Penalty In his pretrial memorandum, Respondent asserts two grounds for the section 6662(a) accuracy- related penalty: negligence or disregard of the rules and regulations or substantial understatement of income tax. Sec. 6662(a), (b). Respondent bears the burden of-production with respect to the penalty. Sec. 6662(d)(1)(A). However, once Respondent has met 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 that burden, it is the taxpayer's burden to show that the penalty does not apply because, for example, the taxpayer acted with reasonable cause and in good faith under section 6664(c). Rule 142(a); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). Section 6662(b) 1mposes an accuracy-related penalty on a portion of any underpayment which is attributable to (1) negligence or disregard of rules or regulations or (2) a substantial understatement of income tax. Negligence includes "any failure to make a reasonable attempt to comply with the provisions" of the Code or to exercise "ordinary and reasonable care in the preparation of a[n] [income] tax return." Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs. 15 Negligence also includes any failure to maintain 16 17 adequate books and records or to substantiate items properly. Sec. 1.6662-3(b)(1), Income Tax Regs. 18 Disregard includes "any careless, reckless or 19 20 21 22 23 24 25 intentional disregard" of the rules or regulations. Id. At subpara. (2). In the instance of individuals a substantial understatement of income tax exists if the amount of the understatement exceeds the greater of 10% of the tax required to be shown on the return or $5,000. Sec. 6662(d)(1)(A). A taxpayer may completely avoid section 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 6662(a) penalty if he shows that he acted with reasonable cause and in good faith, for example, by relying on advice of a competent tax professional. Sec. 6664(c) (1); Sec. 1.6664-4(b)(1) and (c), Income Tax Regs; Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 98 (2000), aff'd, 299 F.3d 221 (3d Cir. 2002). To prove that reliance on advice of a tax professional constitutes a reasonable cause, the taxpayer must prove by a preponderance of the evidence the following three requirements: (1) the adviser was a competent professional who had sufficient expertise to justify reliance, (2) the taxpayer provided necessary and accurate information to the adviser, and (3) the taxpayer actually relied in good faith on adviser's judgment. Neonatology Assocs., P.A. v. Commissioner, 115 T.C. at 99. Here, Petitioners failed to maintain adequate books and records to substantiate their claimed expenses and deductions properly. Moreover, 20 Petitioners failed to make reasonable attempt to 21 22 figure out whether they were entitled to claim a deduction for South Carolina rental property 23 maintenance and repair. Although Petitioners' 2011 24 25 tax return was prepared by a paid tax return preparer, Tax Methods Co., and its employee or agent, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 24 1 2 3 4 5 6 7 8 Dexter L. Minter, Mr. Minter did not testify at trial. Petitioners did not produce any evidence or testimony as to the qualifications of their tax preparer, information they actually provided to him, or whether they carefully reviewed the prepared tax return before filing. Petitioners also did not testify whether they requested tax advice on how to report certain items on their tax return. Thus, 9 Petitioners failed to meet the Neonatology test. 10 Accordingly, we hold that the imposition of an accuracy-related penalty under section 6662(a) is appropriate. To reflect the foregoing, the decision will be entered under Rule 155. THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 2:25 p.m., the above- entitled matter was concluded.) 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com