TAX COURT OPINION

Case: J & M Futon Covers Corp.
Docket Number: 9683-10
Judge: Gustafson
Opinion Type: bench
Filed: 02/13/2012
Pages: 23

UNITED STATES TAX COURT WASHINGTON, DC 20217 J & M FUTON COVERS CORP., ) CZ Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) Docket Nos. 9683-10, ) ) ) ) 9373-11. ORD E R 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 petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Judge David Gustafson at New York, New York, on February 1, 2012, 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. The Court denied petitioner's request to file a post-trial brief, because the Court concluded that the case could be fully decided without the delay and expense that briefing would entail. However, if petitioner believes that the Court overlooked any issues or authorities that petitioner would have discussed or cited in a post-trial brief, petitioner may so argue within the time permitted by Rule 161. (Signed) David Gustafson Judge Dated. Washington, D.C. February 13, 2012 SERVED Feb 14 2012 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 Bench Opinion by Judge David Gustafson J&M Futon Covers Corp. v. Commissioner Docket Nos. 9683-10 and 9373-11 February 1, 2012 THE COURT: The Court has decided to render oral Findings of Fact and Opinion in these cases. The following represents the Court's oral Findings of Fact and Opinion, which shall not be relied on as precedent in any other case. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986, as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure. By notices of deficiency dated January 28, 2010, and January 24, 2011, the Internal Revenue Service (IRS) determined deficiencies in the Federal income tax of petitioner for the years 2006 and 2007, and an accuracy-related penalty under section 6662(a) for 2006. The deficiency in 2006 arose from disallowance of deductions totaling $96,624 (consisting of auto leasing expenses of $26,514, "EZ- Pass" highway tolls of $18,440, and a net operating loss (NOL) carryback of $51,670 from 2007). The deficiency in 2007 arose from disallowance.of deductions totaling $64,673 (consisting of auto Heritage Reporting Corporation (202) 628-4888 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 4 leasing expenses. of $34,152, "EZ-Pass" highway tolls of $18,595, and miscellaneous expenses totaling $11,628). For the reasons explained hereafter, we will uphold the notices of deficiency, except that a portion of the miscellaneous expenses in 2007 and of the tolls in both years will be allowed. Trial of this case was conducted on February 1, 2012, in New York City. The only witness was Roza Yushuvayeva, who is a 50-percent owner of petitioner. The parties' Stipulation of Facts was admitted into evidence, along with its Exhibits 1-J through 24-P, and an additional Exhibit 25-R was admitted into evidence. We find the following facts: FINDINGS Petitioner is a wholesaler and distributor of furniture. It acquires its inventory from Malaysia, Hong Kong, and Europe. It sells to numerous customers in the U.S., and its customers are furniture retailers. Petitioner's warehouse and offices are in Edison, New Jersey, as they were in the years at issue. The parties stipulate that petitioner is incorporated in the State of New York and the State of New Jersey. Petitioner's personnel In the years at issue (as at present), Heritage Reporting Corporation (202) 628-4888 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 5 petitioner was owned equally by brother and sister Yosef Leviev ("Mr. Leviev") and Roza Leviev Yushuvayeva ("Ms. Yushuvayeva"), who started the business in 1997 and moved it to its New Jersey location in 2004. During the years at issue, both of them resided in Queens, just a block from each other in Flushing, New York, about 45 miles from petitioner's offices. Mr. Leviev and Michael Yushuvayeva ("Michael"), who is Ms. Yushuvayeva's son and Mr. Leviev's nephew, were officers of petitioner. In the years at issue, Mr. Leviev and Michael received W-2 wages from petitioner as employees. Michael also resided in Flushing, on the same block as his mother. Ms. Yushuvayeva was a corporate officer of petitioner, but she was not an employee and did not receive wages. She had a full-time job working at a Sheraton hotel in Manhattan, and she was not closely involved with petitioner's business. (She used public transportation for her own commute into Manhattan, and she did not drive an automobile for that commute.) She spoke with her brother or son about the business every few weeks by telephone, about once a month while visiting with her brother, and two or three times a year when she went to the offices in New Jersey. She sometimes reviewed petitioner's bank statements, but Heritage Reporting Corporation (202) 628-4888 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 6 she did not ever review the accounting records or financial statements of petitioner. Ms. Yushuvayeva never received any dividend or other distribution from petitioner, and we infer that the other 50 percent owner, Mr. Leviev, also did not. The leased automobiles In the years at issue, petitioner paid the monthly lease payments for three automobiles. Two of them were 2004 BMWs that were the subject of two lease agreements with Rallye Motors on both of which petitioner was named as the lessee. One of the BMWs was garaged at Michael's residence, and the lease expired July 14, 2007. The lease was guaranteed by Ms. Yushuvayeva, since the lessor required a personal guarantee.. The insurance policy for that car was in Ms. Yushuvayeva's name, and she paid the insurance premiums. Michael had no other automobile, except that his wife owned a Lexus. Ms. Yushuvayeva owned another vehicle that she drove (a Chevy). The second BMW was garaged at Mr. Leviev's residence, and the lease expired June 4, 2007. Mr. Leviev personally guaranteed the lease. The insurance policy for that car was in Mr. Leviev's name, and he paid the insurance premiums. Mr. Leviev owned a Lexus Heritage Reporting Corporation (202) 628-4888 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 that he also drove. The third automobile was a 2007 Land Rover that was the subject of an agreement between Land Rover Capital Group and Ms. Yushuvayeva. The lease agreement stated that the vehicle use would be "personal" and that. the lease expired May 31, 2009. Ms. Yushuvayeva was the lessee of the Land Rover. The Land Rover was garaged at Michael's residence (Stip. 17), and he was the driver of the car. The lease payments paid by petitioner for these three automobiles was $26,514 in 2006 and $34,152 in 2007. The use of the leased automobiles Michael and Mr. Leviev used the leased automobiles to commute from their homes to petitioner's location in Edison, New Jersey. That round-trip commute was 90 miles. Petitioner estimates that each of them worked at the Edison location 180 days per year, which would constitute total commuting of 16,200 miles (i.e., 180 days times 90 miles). They sometimes car-pooled to reduce the expense of the commute, and they sometimes visited customers on the way to work or on the way back home; but the record lacks sufficient evidence to enable us to conclude how often they did either of these variations. Petitioner Heritage Reporting Corporation (202) 628-4888 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 8 did not maintain a log of the miles driven on the leased automobiles nor the purposes for the trips on which they were driven. The predominant use of the vehicles was thus commuting. They were presumably also used from time to time for actual client calls and other non- personal, non-commuting trips, but we cannot tell in what quantity. We also cannot tell the extent to which they were used for non-commuting personal purposes. Petitioner and its witness contend that they were not used at all for such personal purposes, but petitioner did not call as witnesses either Mr. Leviev or Michael, the actual users of the vehicles; and however sincere the witness may have been in reporting her impressions, she did not persuade us that she had personal knowledge of their use of the vehicles. The EZ-Pass tolls Petitioner paid charges for highway tolls billed against "EZ-Pass" devices, in the amount of $18,541 for 2006 and $18,595 for 2007. Such devices are installed in an automobile, so that tolls can be automatically charged to the account holder without his making any stop at a toll booth. Petitioner had four such devices for which it paid the tolls. The Heritage Reporting Corporation (202) 628-4888 I 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 9 four devices were issued to Mr. Leviev and to Michael for their use in the leased automobiles, to a driver who delivered furniture in a truck, and to another employee, Roseanna. Roseanna also lived in Queens, and petitioner agreed to obtain an EZ-Pass for her and pay it, in order to induce her to come to work in Edison. Petitioner did not treat or report that payment as wages to Roseanna. The eviden'ce shows that the toll charges for Roseanna were entirely commuting charges. The characterization of the tolls paid for Mr. Leviev and Michael corresponds to the characterization of the use; of their vehicles. That is, the payment of their EZ-Pass charges was principally a commuting exp'ense, and to some unquantifiable extent was also an expense for business-related driving and for personal driving. Because petitioner did not maintain a log of the miles driven on the leased automobiles nor the purposes for the trips on which they were driven (and did not. present a knowledgeable witness), we cannot quantify the non-commuting business portion of the toll charges. The toll charges for the delivery truck were business-related. That is, we.infer that the truck Heritage Reporting Corporation (202) 628-4888 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 10 was not a passenger vehicle; the truck engaged in delivery of furniture; and such delivery is an ordinary and necessary expense of petitioner's business. We conclude that a fourth of the EZ-Pass charges related to the delivery truck. Miscellaneous expenses Petitioner contends that $11,628 of the amounts it reported as "Tolls" on its 2007 returns were actually not for tolls but were for miscellaneous expenses, including postage, gasoline, supplies, food for lunches, and others. Respondent so stipulates, and stipulates that the expenditures for postage (to Pitney Bowes) and supplies (to Staples and Office Depot) are ordinary and necessary, but does not stipulate that the other miscellaneous expenditures are deductible. In petitioner's exhibits we find substantiation for $1,743.50 of postage and $2,996.55 of supplies, totaling $4,740.05. However, the gasoline charges: that can be substantiated include (or may consist entirely of) amounts paid by Mr. Leviev and Michael for commuting; and the documents include numerous charges for restaurants and the like, but do not enable us to identify any business purpose for any food purchases. We therefore conclude that only $4,740.05 of the 2007 "miscellaneous expenses" are Heritage Reporting Corporation (202) 628-4888 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 11 ordinary and necessary business expenses. Petitioner's tax returns On petitioner's tax return for 2005 (a pre- suit year), petitioner reported income of $107,376. On its 2006 return, petitioner claimed a deduction of $26,514 for "Auto", which consisted of its claimed payments for the leased automobiles, and a deduction of $18,440 for "Tolls", which consisted of its payments of the EZ-Pass accounts. On its 2007 return, petitioner claimed a deduction of $34,152 for "Auto", which consisted of its payments for the leased automobiles, and a deduction of $30,521 for "Tolls". Petitioner now contends that this consisted of its payments of $18,595 for the EZ-Pass accounts and its payment of $11,628 of miscellaneous expenses. (cid:16)042 The 2007 return as filed reflected a loss of $51,670. Petitioner therefore filed with the IRS a Form 1139, "Corporate Application for Tentative Refund", claiming an NOL carryback deduction for 2006. The IRS processed the application and issued to petitioner a refund of $10,915. When the IRS thereafter examined petitioner's returns for 2006 and 2007, it disallowed the deductions for "Auto", "Tolls", and the NOL Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 1·9 20 21 22 23 24 25 12 carryback. The deductions that the IRS disallowed for 2007 totaled $64,673, which more than offset the loss of $51,670 that petitioner reported on its 2007 return and had carried back to 2006. Consequently, the IRS's notice of deficiency for 2006 stated, "Since you did not establish that the [2007 NOL] amount shown was (a) a loss and (b) sustained by you, it is not deductible." The IRS issued its notices of deficiency in January 2010 and January 2011. Petitioner timely filed its petitions with this Court in April 2010 and April 2011. I. Burden of proof OPINION The IRS's determination is presumed correct, and the taxpayer generally bears the burden to prove his entitlement to any deductions it claims. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions are strictly a matter of legislative grace, and taxpayers must satisfy the specific requirements for any deduction claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Furthermore, taxpayers are required to maintain records sufficient to substantiate their claimed deductions. See sec. 6001; 26 C.F.R. sec. 1.6001-1(a), Proced. & Admin. Heritage Reporting Corporation (202) 628-4888 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 13 Regs. In evaluating the taxpayer's evidence, we keep in mind " [t]he rule * * * that the failure of a party to introduce evidence within his possession and which, if true, would be favorable to him, gives rise to the presumption that if produced it would be favorable". See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), aff'd, 162 F.2d 513 (10th Cir. 1947). Petitioner presented only a witness who lacked personal knowledge of the facts important to the disputed issues in this case. It did not present Mr. Leviev or Michael, the two individuals who would have been most knowledgeable about the use of the vehicles and the character of the tolls. The absence of these witnesses gives rise to a presumption that their testimony would have been unfavorable to petitioner. II. Defects in the audit Petitioner contends that the IRS's examination of its returns was deficient in various ways, that the IRS's personnel harassed petitioner's attorney, and that the notices of deficiency are defective. However, we have no jurisdiction to adjudicate any tort claims that petitioner may have against the IRS, and the adequacy of the audit is not Heritage Reporting Corporation (202) 628-4888 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 14 an issue here. If the IRS does a poor job of examining a taxpayer's return, then the taxpayer will presumably fare well in Tax Court. Section 6212(a) simply requires the IRS to determine that a deficiency exists before issuing a notice of deficiency. If a purported notice of deficiency reveals on its face that no determination of a tax deficiency has been made with respect to the taxpayer who is named in the notice, then it does not meet the requirements of section 6212(a), and this Court has no jurisdiction to hear a case arising therefrom. Scar v. Commissioner, 814 F.2d 1363, 1370 (9th Cir. 1987), rev'q 81 T.C. 855 (1983). However, under Campbell v. Commissioner, 90 T.C. 110, 113 (1988), if "the notice of deficiency does not reveal on its face that the Commissioner failed to make a determination, a presumption arises that there was a deficiency determination." This presumption is made "conclusive" upon the presentation of further evidence that ties the calculations in the notice of deficiency to the taxpayer who is named in the notice. For example, in Campbell we held that the existence of other supporting schedules in the IRS's case file that clearly tied the notice of deficiency to items reported on the correct taxpayer's tax return Heritage Reporting Corporation (202) 628-4888 I 15 made the presumption of a valid determination conclusive. In this case the supporting schedules attached to the notices do the same, and petitioner's pretrial memorandum (at 4, paras. 10-11) affirmatively states that the deficiencies arise from disallowing deductions that petitioner claimed. That ends our . inquiry. The purpose of a notice of deficiency is to inform a taxpayer that a deficiency has been determined, specify the year for which the deficiency is determined, and state the amount of the deficiency in unequivocal terms, all in a communication sent to the right taxpayer at his last known address. In rare cases, such as Scar v. Commissioner, supra, where the calculation of the deficiency in the notice of deficiency has no connection whatsoever to the taxpayer who is named in the notice, the notice is invalid on its face. In the instant case, the notice of deficiency is facially valid and the presumption of correctness applies, because the notice states a deficiency and the tax years for which the deficiency is determined, correctly refers to petitioner, and was sent to his last known address. Moreover, this presumption is made "conclusive", both because the 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 Heritage Reporting Corporation (202) 628-4888 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 16 supporting documents attached to the notices of deficiency directly relate to petitioner's tax returns and because of petitioner's admissions to the same effect. Thus, the notice of deficiency herein is not facially invalid under the rationale of Scar v. Commissioner. Rather, the notice of deficiency is valid, and we have jurisdiction to hear this case pursuant to 6213(a). III. Automobile expenses Petitioner's witness testified that all the usage of the vehicles was "business", but in her lexicon "business" use includes commuting, and in the tax law it is not so. In general, the cost of daily commuting to and from worR is a nondeductible personal expense. See Commissioner v. Flowers, 326 U.S. 465, 473-474 (1946); 26 C.F.R. sec. 1.162-2(e), Income Tax Regs. Moreover, certain business expenses described in section 274 (d) are subject to strict substantiation rules. See Sanford v. Commissioner, 50 T.C. 823., 827- 828 (1968), affd. 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed Reg. 46014 (Nov. 6, 1985). Section 274 (d) applies to, among other things, the use of "listed property", as defined in section 280F(d) (4), which includes passenger automobiles. Petitioner's auto leasing and Heritage Reporting Corporation (202) 628-4888 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 17 toll expenses are in this category. To deduct such expenses, the taxpayer must substantiate by adequate records or sufficient evidence to corroborate the taxpayer's own testimony: (1) the amount of the expenditure or use; (2) the time and place of the travel; and (3) its business purpose. Sec 274(d) (flush language). Petitioner seems to argue that because the taxpayer is a corporation filing a Form 1120 return, and not an individual filing a Schedule C with a Form 1040, that these limitations do not apply tò it. But we see no relevant exception in section 274. Mr. Leviev and Michael used the leased vehicles and, with Roseanna on her commute, incurred toll charges. All of these costs were in connection with the use of passenger vehicles. In the absence of proof of non- commuting, non-personal business use, none of those expenses is deductible. The exception is the toll charges ·incurred in connection with the delivery truck (which is not a passenger vehicle). In view of this evidently business-related usage, we hold that 25 percent of the toll charges -- i.e., $4,610 in 2006 and $4,649 in 2007 -- were deductible business expenses. // Heritage Reporting Corporation (202) 628-4888 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 18 IV. Miscellaneous expenses For lack of substantiation of business purpose, petitioner cannot deduct expenses in 2007 for gasoline, food or "others". But, in view of respondent's concessions, we hold that petitioner has substantiated, and may deduct, $1,743.50 of postage and $2,996.55 of supplies, totaling $4,740.05. V. NOL carryback Section 172(a) provides, "There shall be allowed as a deduction for the taxable year an amount equal to * * * the net operating loss carrybacks to such year". Petitioner contends that it had a net operating loss in 2007 and that it is entitled to claim a carryback of that loss in 2006. A. Whether a loss exidted Petitioner's 2007 return as filed showed a loss of $51,670. However, after.the audit, the IRS disallowed deductions totaling $64,673; and if $51,670 of those disallowances are sustained, they eliminate that loss (and give petitioner a small positive income for the year) and by definition eliminate the possibility of any carryback. For 2007 we have sustained all but $4,649 in tolls and $4,740.05 of miscellaneous expenses. Petitioner therefore has no loss in 2007, and no net operating loss carryback Heritage Reporting Corporation (202) 628-4888 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 19 deduction in 2006. B. Whether any loss could be carried back from 2007 to 2006 Even if the foregoing were not sufficient to resolve this issue, it must be resolved against petitioner on other grounds. The loss-generating year that petitioner alleges is 2007. Section 172(b) (1) (A) provides, "a net operating loss for any taxable year * * * shall be a net operating loss carryback to each of the 2 taxable years preceding the taxable year of such loss", i.e., in this case, 2005 and 2006. Section 172 (b) (2) provides, "The entire amount of the net operating loss for any taxable year * * * shall be carried to the earliest of the taxable years to which (by reason of paragraph (1)) such loss may be carried", i.e., in this case 2005, a year not in suit. Section 172(b) (2) continues, "The portion of such loss which shall be carried to each of the other taxable years [such as 2006, in this case] shall be the excess, if any, of the amount of such loss over the sum of the taxable income of each of the prior taxable years to which such loss may be carried." That is, before petitioner may claim a 2007 NOL in 2006, it must first use it in 2005 or show that in 2005 it had no income, or insufficient income to absorb the 2007 Heritage Reporting Corporation (202) 628-4888 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 20 loss. The IRS showed at trial that petitioner had income in 2005 that would absorb the 2007 loss, leaving it unavailable for deduction in 2006, the year at issue. Petitioner contends that section 172 does not require this sequence, but we agree with respondent: "Section 172 * * * requires that the losses be carried back and forward in a certain order". Benton v. Commissioner, 122 T.C. 353, 375 (2004). The taxpayer has an "obligation (under section 172(b)(2))" to follow the prescribed sequence. Plumb v. Commissioner, 97 T.C. 632, 641 (1991). The statute does grant the taxpayer some latitude in electing the application of an NOL, but the only possible election involves "relinquish[ing] the entire carryback period", sec. 173(b) (3), 1.e., ln this case, 2005 and 2006. Petitioner's positive income in 2005 makes it ineligible for a deduction in 2006 of an NOL from 2007. VI. Accuracy-related penalty Section 6662 1mposes an "accuracy-related penalty" of 20 percent of the portion of the underpayment of tax that is attributable to the Heritage Reporting Corporation (202) 628-4888 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 21 taxpayer's negligence or disregard of rules or regulations or that is attributable to any substantial understatement of income tax. As to 2006, the IRS asserts both that petitioner's understatement was substantial and that it was attributable to negligence. Under sectiòn 7491(c), the Commissioner bears the burden of production and must produce sufficient evidence that the imposition of the penalty is appropriate in a given case. Once the Commissioner meets this burden, the taxpayer must come forward with persuasive evidence that the Commissioner's determination is incorrect. Rule 142(a); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). A. "Substantial understatement" By definition, a corporation has a substantial understatement" of income tax "if the amount of the understatement for the taxable year exceeds the lesser of (i) 10 percent of the tax required to be shown on the return for the taxable year (or, if greater, $10,000), or (ii) $10,000,000." Sec. 6662(d) (1) (B). The IRS concedes that, in this case, the understatement must exceed $10,000 in order to be substantial. Because we will instruct the parties to recompute the deficiency pursuant to Rule 155, we Heritage Reporting Corporation (202) 628-4888 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 22 cannot tell, until they have done. so, whether petitioner's understatement exceeded $10,000. If the resulting understatement is an amount above $10,000, then petitioner's return reflected a "substantial understatement", and it would owe the accuracy-related penalty on the entire amount (absent the successful invocation of one of the defenses discussed below). This remains to be seen. B. Negligence For purposes of section 6662, the term "negligence" includes a failure to exercise ordinary and reasonable care in the preparation of a return. Sec. 1.6662-3 (b) (1), Income Tax Regs. Negligence is defined as a lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neelv v. Commissioner, 85 T.C. 934 (1985). The term "disregard" includes any careless, reckless, or intentional disregard of the rules or regulations. Sec. 6662(c). It also "includes any failure by the taxpayer to keep adequate books and records to substantiate items properly." 26 C.F.R. sec. 1.6662-3(b) (1), Income Tax Regs. By this standard, we find that petitioner's position reflects negligence. Whether commuting expense is business or personal -- the fundamental Heritage Reporting Corporation (202) 628-4888 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 23 issue behind most of the dollars at issue in this case -- is not a close question. The remaining dollars turn on petitioner's inability to substantiate the business purpose of its expenditures -- a consequence of failure to keep adequate records. We therefore hold petitioner's position reported on its return to reflect negligence. C. Defenses A taxpayer who is otherwise liable for the accuracy-related penalty may avoid the liability if he successfully invokes one of three other.provisions: First, section 6662(d) (2) (B) provides that an understatement may be reduced where the taxpayer had substantial authority for its treatment of any item giving rise to the understatement. There is no authority that would warrant petitioner's position on any of the disallowed deductions. Second, section 6662(d) (2) (B) provides that an understatement may be reduced where the relevant facts affecting the item's treatment are adequately disclosed on the taxpayer's return and the taxpayer had a reasonable basis for its treatment of that item. Neither of these criteria is met here. Third, section 6664 (c) (1) provides that, if the taxpayer shows, first, that there was reasonable Heritage Reporting Corporation (202) 628-4888 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 24 cause for a portion of an underpayment and, second, that it acted in good faith with respect to such portion, then no accuracy-related penalty shall be imposed with respect to that portion. Whether the taxpayer acted with reasonable cause and in good faith depends on the pertinent facts and circumstances, including its efforts to assess its proper tax liability, its knowledge and experience, and the extent to which it relied on the advice of a tax professional. 26 C.F.R. sec. 1.6664-4 (b) (1), Income Tax Regs. Petitioner put on no evidence of reasonable cause and good faith. Petitioner's counsel stated that he prepared its return, but petitioner made no showing as to the disclosures that petitioner made to him, nor the extent to which he gave any advice. This defense would be unavailing to petitioner. The IRS's notices of deficiency are upheld in part, to the extent shown above. So that the liability can be recalculated, decision will be entered pursuant to Rule 155. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 2:43 p.m., the bench opinion in the above-entitled matter was concluded.) // Heritage Reporting Corporation (202) 628-4888