TAX COURT OPINION

Case: Parind J. & Rina Raval
Docket Number: 16287-10
Judge: Gustafson
Opinion Type: bench
Filed: 11/21/2012
Pages: 23

UNITED STATES TAX COURT WASHINGTON, DC 20217 RMM PARIND J. & RINA RAVAL, ET AL., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 7141-10, ) ) ) ) 16287-10. O R D E R Pursuant to the opinion of the Court as set forth in the pages of the transcript of the proceedings before Judge David Gustafson at Washington, D.C., on October 26, 2012, containing his oral findings of fact and opinion, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcripts of the trial in the above cases before Judge Gustafson at Washington, D.C., containing his oral findings of fact and opinion rendered at the trial session at which the cases were heard. In accordance with the oral findings of fact and opinion, decisions will be entered under Rule 155. (Signed) David Gustafson Judge Dated. Washington, D.C. November 21, 2012 SERVED Nov 23 2012 Capital Reporting Company Parind J. and Rina Raval10-26-2012 3 1 Bench Opinion by Judge David Gustafson 2 Parind J. and Rina Raval Docket Nos. 7141-10 and 3 4 5 16287-10 October 26, 2012 THE COURT: The Court has decided to render the following as its oral Findings of Fact and 6 Opinion in these consolidated cases. This opinion 7 shall not be relied on as precedent in any other case. 8 9 This bench opinion is made pursuant to the 10 authority granted by section 7459(b) of the Internal 11 Revenue Code, and Rule 152 of the Tax Court Rules of 12 Practice and Procedure. 13 14 By notices of deficiency dated June 1, 2010, and September 3, 2010, the Internal Revenue 15 Service (IRS) determined deficiencies in the Federal 16 income tax of petitioners, Parind J. and Rina Raval, 17 for the years 2006 and 2007, and an accuracy-related 18 penalty under section 6662 (a) in each year. The 19 deficiencies arose from several adjustments that the, 20 IRS made, some of which are no longer in dispute. By 21 22 the time of trial, the disputed issues concerned income and expenses of Netinterlink LLC, an entity 23 that was a partnership for tax purposes and of which 24 Mr. Raval was a partner in the years at issue. For 25 the reasons explained hereafter, we will sustain the (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Parind J. and Rina Raval 10-26-2012 , 1 2 IRS's adjustments in part. Trial of this case was conducted on 3 September 23, 2012, in Washington, D.C. Mr. Raval 4 represented himself, and the IRS was represented by 5 Michele Yates. Mr. Raval testified. The parties' 6 Stipulation of Facts was admitted into evidence, 7 along with its Exhibits 1-P through 10-P, and 8 additional exhibits were admitted into evidence. We 9 find the following facts: 10 FINDINGS 11 Netinterlink's operations before 2006 12 In July 2003 Mr. Raval formed Netinterlink 13 with Mr. Siamak Asgari. (Stip. 15.) Each man owned 14 a 50 percent interest (Stip. 16), and each 15 contributed $1,000 toward capital (Stip. 17; Ex. 7-J, 16 17 sec. D.1) . The, partnership's Operating Agreement (Ex. 7-J, Stip. 15) provided that income and deductions 18 would be shared equally between them "[e]xcept as 19 otherwise provided in the Articles of Organization, 20 certificate of Formation or a similar organizational 21 document, or this Operating Agreement". And the 22 partners did "otherwise provide[]": 23 While Mr. Raval brought to the partnership 24 his skills as a marketer (Stip. 19-21, 25), Mr. 25 Asgari brought his ability to write computer (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Parind J. and Rina Raval10-26-2012 5 1 programming code (Stip. 22) and, more important, his 2 existing contracts for three important clients--the 3 D.C. Government and two other entities (Stip. 23). 4 5 6 7 8 9 In order to be able to be put on the GSA's schedule to bid for Federal Government business, Netinterlink needed to be able to point to "past performance" (Stip. 23), and Mr. Asgari's existing business gave it that ability. Consequently, the partners immediately began operating under the assumption that 10 Mr. Asgari would profit disproportionately. The 11 parties here have stipulated that, notwithstanding 12 13 the terms of the Operating Agreement, the partners agreed that Mr. Asgari would initially receive 100 14 percent of the profit and loss. (Stip. 30) 15 Roughly consistent with that agreement, the 16 partnership's information return (Form 1065) for 17 2004, for example, included Schedules K-1 showing Mr. 18 Asgari's share as 48 percent at the beginning of the 19 year but 100 percent at the end, and showed Mr. 20 Raval's share as 52 percent at the beginning of the 21 year but zero at the end. (Ex. 11-P.) In December 22 23 2005, this 100-zero split was memorialized in a "Amendment to Operating Agreement" (Ex. 12-P) . 24 Netinterlink's operations in 2006 and 2007 25 However, the business relationship of the (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Parind J. and Rina Raval10-26-2012 6 1 partners deteriorated, and in 2006 they operated in a 2 manner different from the actual terms of their 3 4 5 amended agreement. Each partner maintained his own separate bank account under the name of Netinterlink (Stip. 34, 36) and deposited into that account some 6 of the revenues of the business. In 2006 Mr. Asgari 7 deposited $118,108 into his account (Stip. 35), and 8 Mr. Raval deposited $47,009 into his account (Stip. 9 37), totaling $165,117. In 2007 Mr. Asgari deposited 10 $48,069 (Stip. 39, Ex. 10-J), and Mr. Raval deposited 11 12 13 14 15 zero. The IRS concedes that Netinterlink incurred $20,023 of deductible expenses in 2006 and $12,861 in 2007. The IRS concedes that half of the allowable expenses are allocable to Mr. Raval. Insufficient 16 documentation exists to enable us to determine 17 whether there were any additional deductible expenses 18 incurred in 2006 or 2007. 19 Credit Card Expenditures 20 Mr. Raval used credit cards in 2006..and 2007, 21 for which he offered into evidence the monthly 22 23 24 25 statements for both years (Exs. 15-P, 17-P), as well as spreadsheets on which he listed and categorized some of the expenditures as business expenses. Mr. Raval paid for travel and for meals and (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Parind J. and Rina Raval 10-26-2012 1 entertainment in 2006 and 2007. He offered no 2 testimony about these, expenditures and we cannot 3 determine the purpose of that travel, the persons 4 5 6 involved in the meals, nor the purpose and nature of the events . Mr. Raval purchased office supplies at 7 Staples in the amount of $113 in 2006. He made much 8 larger purchases in both 2006 and 2007 from Dell, 9 Hotkey, Circuit City, Intuit, and CompOSA, which he 10 11 12 13 listed as "computer supplies". However, he offered no testimony about these expenditures both their size and the vendors involved 4Ee support the inference that they were for the purchase of computer 14 equipment that should have been amortized rather than 15 immediately expensed. 16 17 18 Mr. Raval paid $301 to lawyers in 2006 and $2,350 in 2007. However, he offered no testimony about these lawyers or their work and we cannot tell 19 the nature and purpose of these expenditures. 20 Mr. Raval spent $7,845 in 2006 and $1,792 in 21 2007 on automobile-related expenses. He did not 22 offer into evidence any log or other documentation of 23 his use of any car for business purposes, and he 24 offered no testimony on the subject. We cannot tell 25 the nature and purpose of his automobile use. (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Parind J. and Rina Raval 10-26-2012 8 1 2 3 4 5 Mr. Raval spent $937 in 2006 and $1,096 in 2007 for cell phone service. He did not offer any testimony about the use of this phone for business purposes, nor about whether he has other phone service for his personal use. We cannot tell the 6 purpose or use of the cell phone for which these 7 8 9 10 11 charges were paid. Tax reporting 2006 and 2007 A paid preparer prepared Form 1065 information returns for Netinterlink for 2006 and 2007. (Exs. 4-J, 6-J.) Despite the terms of the 12 Operating Agreement, and despite the actual division 13 of revenue to which the partners agreed, the 14 Schedules K-1 attached to the returns showed Mr. 15 Raval's share of profit and loss as 52 percent. 16 17 18 Netinterlink's 2006 return (Ex. 4-J) reported gross receipts of $147,419 (not the total of $165,117 that the two partners had deposited), reported total 19 deductions of $157,806 (not the $20,023 that the IRS 20 concedes), reported an overall loss of $10,387, and, 21 as noted above, reported Mr. Raval's share as 52 22 percent. The Ravals timely filed their 2006 tax 23 return on Form 1040 (Stip. 5; Ex. 3-J); and on it 24 they claimed, as a negative amount reducing their 25 total income, $5,401 (i.e., 52 percent) of (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Parind J. and Rina Raval 10-26-2012 1 Netinterlink's reported loss. 9 2 3 Netinterlink's 2007 return (Ex. 6-J) reported gross receipts of $48,069 (i.e., the amount 4 Mr. Asgari had deposited in his own account), 5 6 7 8 9 10 11 reported total deductions of $74,997 (not the $12,861 that the IRS concedes), reported an overall loss of $26,928, and, as noted above, reported Mr. Raval's share as 52 percent. The Ravals timely filed their 2007 tax return on Form 1040 (Stip. 10; Ex. 5-J); and on it they claimed, as a negative amount reducing their total income, $14,003 (i.e., 52 percent) of 12 Netinterlink's reported loss. 13 IRS examination and adjustments 14 After examining the Ravals' and 15 Netinterlink's returns, the IRS disallowed all but 16 $20,023 of Netinterlink's 2006 deductions and all but 17 $12,861 of its 2007 deductions. This resulted in a 18 determination that for 2006 Netinterlink had not a 19 loss of $10,387 but rather income of $127,396 (Ex. 1- 20 J, Form 4605-A), and that for 2007 it had not a loss 21 of $26,928 but rather income of $35,207.63 (Ex. 2-J, 22 Form 4605-A). The IRS therefore disallowed the 23 Ravals' claimed losses from Netinterlink and imputed 24 to the Ravals' 50 percent of the redetermined income. 25 The IRS then issued notices of deficiency (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Parind J. and Rina Raval 10-26-2012 1 determining the resulting deficiencies in tax, and 10 2 3 corresponding accuracy-related penalties. The Ravals filed timely petitions challenging those 4 deficiencies. At the time they filed their 5 petitions, the Ravals resided in Maryland. (Stip. 1.) 6 7 8 9 I. Evidentiary principles OPINION The IRS's determination is presumed correct, and the taxpayer generally bears the burden to prove his 10 entitlement to any deductions he claims. Rule 11 12 13 142(a). Deductions are a matter of legislative grace, and taxpayers must satisfy the specific requirements for any deduction claimed. See INDOPCO, 14 Inc. v. Commissioner, 503 U. S. 79, 84 (1992) . 15 Furthermore, taxpayers are required to maintain 16 records sufficient to substantiate their claimed 17 deductions. See sec. 6001; 26 C.F.R. sec. 1.6001- 18 1(a) . 19 II. Income issues 20 The IRS's position on income--i.e., that Mr. 21 Raval must report a 50 percent share of the 22 partnership's income items--is -f-eend on 23 Netinterlink's original Operating Agreement. 24 However, we hold that Mr. Raval carried his burden to 25 show that the agreement had been amended. (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Parind J. and Rina Raval10-26-2012 11 1 A. The partnership agreement 2 Section 761(c) provides that a partnership agreement 3 for our purposes "includes any modifications of the 4 partnership agreement *** which are agreed to by all 5 6 7 8 9 the partners". The regulations add that an "agreement or modification can be oral or written. " 26 C.F.R. sec. 1.761-1(c). In this case, the Netinterlink partnership agreement was amended twice, first by the December 10 2005 written amendment, which would have allocated 11 all the income to Mr. Asgari, and none to Mr. Raval. 12 However, we hold that later the agreement was orally 13 14 amended when each partner set up his own Netinterlink bank account. We have found that the agreement 15 between them was modified to permit each one to keep 16 for himself (and to deposit into his own bank 17 18 account) a certain portion of the partnership's revenue. Under that agreement, Mr. Raval was 19 entitled only to the share of the income that was put 20 21 22 23 in his account--i.e., $47,009 in 2006 and zero in 2007--and those amounts would be his distributive share of Netinterlink income. B. Mr. Raval's distributive share of 24 partnership income 25 The primary dispute in this case appeared to be a (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Parind J. and Rina Raval10-26-2012 12 1 2 3 4 5 6 factual dispute about the terms of the partnership agreement regarding Mr. Raval's distributive share of income, and we have concluded that the partnership agreement effective in 2006 and 2007 provided that each partner's distributive share of income would be reflected by deposits into their separate 7 Netinterlink bank accounts. The IRS in its pretrial 8 memorandum argues that Netinterlink's income 9 allocations that deviate from the original 10 partnership agreement "are made *** only for the 11 12 13 avoidance of payment of tax" and therefore we should not respect those allocations. (R's pretrial memo at 6.) We find otherwise and conclude that in this case 14 income should be allocated in accordance with the 15 orally amended partnership agreement, which 16 allocation also accords with the actual receipt of 17 18 19 income by the partners. A partnership is not subject to Federal income tax. Rather, partners are liable for tax in 20 their separate or individual capacities. Sec 701. 21 Each partner is required to take into account his 22 distributive share of the partnership's income, gain, 23 loss, deductions, and credits. Sec. 702(a). A 24. partner's distributive share of income, gain, loss, 25 deduction, or credit is generally determined by the (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Parind J. and Rina Raval 10-26-2012 13 1 partnership agreement. Sec. 704 (a). If the 2 partnership agreement does not provide how a 3 partner's distributive share is to be determined, or 4 5 6 7 if the allocation provided in the partnership agreement does not have substantial economic effect, the partner's distributive share is determined in accordance with the partner's interest in the 8 partnership. Sec. 704 (b). 9 A partner's interest in a partnership 10 refers to "the manner in which the partners have 11 agreed to share the economic benefit or burden *** 12 13 corresponding to the income, gain, loss, deduction, or credit (or item thereof) that is allocated. " 26 14 C.F.R. sec. 1.704-1(b) (3) (i). A partner's interest 15 in a partnership is determined by taking into account 16 all relevant facts and circumstances. Sec. 704 (b). 17 Netinterlink's partnership agreement as in 18 effect during 2006 and 2007 is in line with the 19 intent of subchapter K of the Code; that is, "the tax 20 consequences *** to each partner *** accurately 21 reflect the partners' economic agreement and clearly 22 23 reflect the partner's income". 26 C.F.R. sec. 1.701- 2(a) (3). The bank accounts set up by each of the 24 partners in this case adequately reflect each 25 individual partner's economic interest in the (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Parind J. and Rina Raval 10-26-2012 14 1 partnership and partnership cash flow distributions. 2 Therefore, we conclude the bank account deposits 3 4 5 correspond to Mr. Raval's and Mr. Asgari's respective interests in Netinterlink. See 26 C.F.R. 1.704- 1(b) (3) (i), (ii). Accordingly, we respect the 6 allocation of Mr. Raval's distributive share of 7 partnership income as reflected by deposits in this 8 Netinterlink bank account and set forth in the orally 9 amended partnership agreement. 10 Since the income allocation that 11 resulted from the separate bank accounts gave each 12 partner a share of that income that both was called 13 14 for by the orally amended agreement (see sec. 704 (a)) and corresponded to the partners' interests in the 15 partnership (see sec. 704 (b) (1)), we do not need to 16 examine whether the allocation also had "substantial 17 economic ef fect" (see sec. 70 4 (b) (2 ) ) . 18 19 III. Deduction issues A. Amounts of Netinterlink's deductions 20 The IRS concedes that Netinterlink incurred 21 deductible business expenses of $20,023 in 2006 and 22 $12,861 in 2007. It was incumbent on Mr. Raval to 23 prove that Netinterlink was entitled to greater 24 deductions, but he did not do so. 25 1. Section 274(d) deductions (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Parind J. and Rina Raval 10-26-2012 15 1 2 Certain business expenses described in section 274 (d) are subject to especially strict 3 substantiation rules. Those expenses include: any 4 5 6 traveling expense, including meals and lodging while away from home; entertainment, amusement, and recreational expenses; and the use of "listed 7 property", as defined in section 280F(d) (4), 8 9 including passenger automobiles and cell phones. Some of Mr. Raval's alleged expenses are in these 10 categories. To deduct such expenses, the taxpayer 11 must substantiate by adequate records or sufficient 12 13 14 15 16 evidence to corroborate the taxpayer's own testimony: (1) the amount of the expenditure or use, which includes mileage in the case of automobiles; (2) the time and place of the travel, entertainment, or use; (3) its business purpose; and in the case of 17 entertainment, (4) the business relationship to the 18 19 20 taxpayer of each expenditure or use. Sec. 274 (d) (flush language). a. Meals 21 Mr. Raval contends that Netinterlink incurred 22 deductible expenses for meals and entertainment. 23 Such expenses claimed as deductions under section 162 24 are, with. limited exceptions, subject to the 25 substantiation requirements of section 274 (d). 26 (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Parind J. and Rina Raval 10-26-2012 1 C.F.R. section 1.274-5T(c) (1) requires a taxpayer to 16 2 3 4 substantiate each element of an expenditure by adequate records or by sufficient evidence corroborating his own statements. At trial Mr. Raval 5 offered a spreadsheet on which each meal expense was 6 listed along with columns identifying the date (which 7 was substantiated by the credit card statements), the 8 occasion, and the client involved in the meal. 9 However, he offered no detailed testimony and no 10 written corroboration to show that the persons or 11 entities named on the spreadsheet were actually 12 clients or prospective clients of Netinterlink. 13 Consequently, we are not persuaded that these were 14 business meals, and he did not meet the standards of 15 16 17 18 section 274 to substantiate these meal expenses. (Moreover, section 274 (n) provides that the deduction for meals expense "shall not exceed 50 percent of the amount of such expense" incurred by the taxpayer . 19 Therefore, even if Mr. Raval had proved any amount, 20 his deduction would be half of that amount.) 21 22 b. Travel expenses Mr. Raval contends that Netinterlink 23 incurred deductible travel expenses. A taxpayer may 24 not deduct travel expenses (including meals and 25 lodging while away from home) unless he substantiates (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Parind J. and Rina Raval10-26-2012 17 1 2 3 4 5 6 7 8 9 by adequate records or sufficient evidence corroborating his own statements: (A) the amount of the expense, (B) the time and place of the travel; and (C) the business purpose of the travel. Sec. 274 (d). Under the regulations, to meet the section 274 (d) "adequate records" requirement, a taxpayer "shall maintain an account book, diary, log, statement of expense, trip sheets, or similar record *** and documentary evidence *** which, in 10 combination, are sufficient to establish each element 11 of an expenditure . " 26 C. F. R. sec. 1. 274- 12 ST(c) (2) (i). The elements he must prove for each 13 travel expense are the amount, time, place, and 14 business purpose of the travel. Mr. Raval's 15 spreadsheet has columns for "Client", "Business 16 Discussed", and "Location of Meeting", but he offered 17 18 no testimony whatsoever about these supposed clients or meetings. Consequently, we are not persuaded that 19 the travel was actually business travel, and he did 20 not meet his burden under section 274. 21 22 c. Automobile expenses Section 274 (d) imposes stringent 23 substantiation requirements for claimed deductions 24 relating to the use of "listed property", which is 25 defined under section 280F (d) (4) (A) (i) to include (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Parind J. and Rina Raval10-26-2012 18 1 passenger automobiles. Under this provision, any 2 deduction claimed with respect to the use of a 3 passenger automobile will be disallowed unless the 4 5 taxpayer substantiates specified elements of the use by adequate records or by sufficient evidence 6 corroborating the taxpayer's own statement. See sec. 7 8 274 (d); 26 C.F.R. sec. 1.274-5T(c) (1). The elements that must be substantiated to deduct the business use 9 of an automobile are: (i) the amount of the 10 expenditure; (ii) the mileage for each business use 11 of the automobile and the total mileage for all uses 12 of the automobile during the taxable period; (iii) 13 the date of the business use; and (iv) the business 14 purpose of the use of the automobile. See sec. 15 1.274-5T)b) (6). Mr. Raval's proof falls far short of 16 17 this standard. He offered into evidence no mileage log or other record of his automobile use, and he 18 offered no testimony about it. We hold that he did 19 not prove business use of any.automobile. 20 d. Cell phone 21 Cell phones are also "listed property" subject to the 22 strict substantiation requirements of section 274 (d). 23 See sec. 280F (d) (4) (A) (v) . A taxpayer must establish 24 the amount of business us.e and the amount of total 25 use for the property to substantiate the amount of (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Parind J. and Rina Raval10-26-2012 19 1 the expenses for listed property. Sec. 1.274- 2. 5T(b) (6) (i) (B), Mr. Raval offered no testimony about 3 his cell phone usage, and in particular gave no 4 indication whether the phone at issue is used 5 predominately for business, or whether instead he has 6 7 a single cell phone that he uses for both business and personal calling. He has not substantiated his 8 cell phone expense as a business expense. 9 2. Other deductions 10 Mr. Raval's deductions for office supplies and legal 11 12 services do not fall under section 274, and therefore the normal, less demanding substantiation rules 13 apply. However, for the legal expenses claimed on 14 his spreadsheet, he gave no information to support 15 their business character. For all but $113 of his 16 office supplies, the "computer supplies" he listed 17 18 appear to be computer equipment. Assuming that this equipment was for business use rather than personal 19 use--a fact that Mr. Raval did not establish--such 20 expenditures constitute not ordinary and necessary 21 expenses that can be deducted in the year incurred, 22 but rather capital items that must be amortized over 23 their useful lives. He did not show the identity nor 24 the useful life of any equipment. Consequently, he 25 did not show himself entitled to any deduction for (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Cornpany Parind J. and Rina Raval 10-26-2012 1 2 these computer-related expenditures. . Jrpm+--franMtm==$=1 ,, he 3 Ravals will not be allowed any deductions beyond 20 4 5 those the IRS conceded. B. Allocation of Netinterlink's 6 deductions 7 Notwithstanding the division of Netinterlink's income 8 (see part II above), the IRS has conceded that Mr. 9 Raval is entitled to 50 percent of the allowable 10 deductions--that is, in 2006, 50 percent of $20,023, 11 12 or $10,012; and in 2007, 50 percent of $12,861, or $6,431. Since we find no additional deductions 13 beyond those the IRS conceded, we leave that 14 allocation undisturbed. 15 V. Accuracy-related penalty 16 Section 6662 1mposes an "accuracy-related 17 penalty" of 20 percent of the portion of the 18 19 underpayment of tax that is attributable to the taxpayer's negligence or disregard of rules or 20 regulations or that is attributable to any 21 substantial understatement of income tax. The 22 precise amounts of the understatements that result 23 from the Netinterlink adjustments are yet to be 24 determined pursuant to Rule 155. .Consequently, we 25 are not yet certain whether those understatements are (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Parind J. and Rina Raval 10-26-2012 21 1 2 "substantial" under section 6662 (a) . We therefore turn first to the question whether they were 3 attributable to negligence, and we find that in part 4 they were and that to that extent the penalty 5 applies. If upon recomputation of the liability, it 6 is shown that the understatement for either or both 7 of the years was substantial, then the penalty will 8 apply to the entire understatement. 9 10 11 A. The IRS's burden The Commissioner bears the burden of production under section 7491(c), and he must produce sufficient 12 evidence that the imposition of the penalty is 13 appropriate in a given case. Once the Commissioner 14 meets this burden, the taxpayer must come forward 15 with persuasive evidence that the Commissioner's 16 determination is incorrect. Rule 142(a). 17 For the adjustments on the notice of 18 deficiency that Mr. Raval did not dispute, the IRS 19 put on no evidence that would carry its burden of 20 production. Therefore, the penalty will not be 21 applicable to the portion of the understatement 22 attributed to those adjustments. However, as we now 23 24 25 show, the IRS did meet its burden of production as to the Netinterlink-related adjustments. B. Negligence (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Parind J. and Rina Raval 10-26-2012 22 1 2 3 For purposes of section 6662, the term "negligence" includes a failure to exercise ordinary and reasonable care in the preparation of a tax return. 4 Sec. 1.6662-3(b) (1), Income Tax Regs. Negligence is 5 defined as a lack of due care or failure to do what a 6 7 reasonable and ordinarily prudent person would do under the circumstances. Neely, v. Commissioner, 85 8 T.C. 934 (1985) . The term "disregard" includes any 9 careless, reckless, or intentional disregard of the 10 rules or regulations. Sec. 6662 (c). It also 11 12 "includes any failure by the taxpayer to keep adequate books and records to substantiate items 13 properly. " 26 C. F. R. sec. 1. 6662-3 (b) (1) . 14 By this standard, we find the Ravals' 15 underpayments attributable to the Netinterlink- 16 17 related adjustments were the result of negligence. They derive in effect from the disallowance of 18 unsubstantiated expenses. Either the deductions were 19 improper or fanciful, or else Netinterlink and Mr. 20 Raval did not maintain records to support them. In 21 either event, the tax reporting was negligent. 22 23 C. Defenses A taxpayer who is otherwise liable for the 24 accuracy-related penalty may avoid the liability if 25 he successfully invokes one of three other (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Parind J. and Rina Raval 10-26-2012 1 provisions. Mr. Raval made no contention as to any 2 such defense, but we briefly consider them 23 3 nonetheless: 4 5 6 7 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 8 authority that would warrant the Ravals' position on 9 any of the disallowed deductions. 10 11 12 Second, section 6662 (d) (2) (B) provides that an understatement may be reduced where the relevant facts affecting the item's treatment were adequately 13 disclosed on his tax return and the taxpayer had a 14 reasonable basis for its treatment of that item. 15 Neither of these criteria is met here. 16 17 18 Third, section 6664 (c) (1) provides that, if the taxpayer shows, first, that there was reasonable cause for a portion of an underpayment and, second, 19 that he acted in good faith with respect to such 20 portion, then no accuracy-related penalty shall be 21 22 imposed with respect to that portion. Whether the taxpayer acted with reasonable cause and in good 23 faith depends on the pertinent facts and 24 circumstances, including his efforts to assess his 25 proper tax liability. 26 C.F.R. sec. 1.6664- (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Parind J. and Rina Raval 10-26-2012 24 1 2 (4) (b) (1). Mr. Raval put on no evidence as to any attempts to comply with the tax laws and pay the 3 proper tax liability, and he showed no reasonable cause. 4 5 The IRS's notice of deficiency is upheld in 6 part, to the extent shown above. So that the 7 8 9 liability can be recalculated, decision will be entered pursuant to Rule 155. This concludes the Court's oral Findings of 10 Fact and Opinion in this case. 11 12 13 14 15 16 17 18 19 20 21 22 23 2 4 2 5 (Whereupon, at 11:23 a.m., the bench opinion in the above-entitled matter was concluded.) (866) 448 - DEPO www.CapitalReportingCompany.com 2012