TAX COURT OPINION

Case: C. Benjamin Kirby & Sondra A. Kirby
Docket Number: 8560-15
Judge: Wherry
Opinion Type: bench
Filed: 11/14/2016
Pages: 21

UNITED STATES TAX COURT WASHINGTON, DC 20217 C. BENJAMIN KIRBY & SONDRA A. KIRBY, ) ) ) ) ) Docket No. 8560-15. ) ) ) ) COMMISSIONER OF INTERNAL REVENUE, Respondent Petitioners, v. . 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 to respondent a copy of the pages of the transcript of the proceedings in the above-case before the Judge Robert A. Wherry, Jr. at Columbus, Ohio, containing his oral findings of fact and opinion rendered on September 16, 2016. It is further ORDERED that the Court's transcript of the proceedings in the above case is hereby amended as follows: Footnote 3 is amended to read: Section 274 imposes heightened substantiation requirements for certain expenses, including automobile expenses. Secs. 274(d), 280F(d)(4)(A)(i). For expenses relating to automobiles, a taxpayer must substantiate "by adequate records or by sufficient evidence corroborating the taxpayer's own statement": (1) the amount of each separate expense; (2) the mileage for each business use of the automobile and the total mileage for all purposes during the taxable period; (3) the date of the business use; and (4) the business purpose of the use. Sec. 274(d); sec. 1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985). To satisfy the adequate records requirement of section 274, a taxpayer must maintain records and documentary evidence that in combination are sufficient to establish each element of an expenditure or use. Sec. 1.274-5T(c)(1) and (2), SERVED NOV 1 7 2016 Docket No. 8560-15 - 2 - Temporary Income Tax Regs., 50 Fed. Reg. 46016, 46017 (Nov. 6, 1985). Account books, diaries, logs, statements of expense, trip sheets, and similar records generally qualify as adequate records. Sec. 1.274-5T(c)(2)(i), Temporary Income Tax Regs., supra. "A contemporaneous log is not required", but the Court will afford a statement that is not made at or near the time of the expenditure the same degree of credibility only if the taxpayer's reconstruction has "a high degree of probative value". Sec. 1.274-5T(c)(1), Temporary Income Tax Regs., supra. In accordance with the oral fmdings of fact and opinion, a decision will be entered for respondent. (Signed) Robert A. Wherry Judge Dated: Washington, D.C. November 14, 2016 Capital Reporting Company 3 1 2 3 4 5 6 7 8 9 10 11 12 13 Bench Opinion by Judge Robert A. Wherry, Jr. September 16, 2016 C. Benjamin Kirby & Sondra A. Kirby v. Commissioner Docket No. 8560-15 THE COURT: The Court has decided to render oral findings of fact and opinion in this case, and the following represents the Court's oral findings of fact and opinion. These 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 in Section 7459(b) of the code of 1986, as amended, and Rule 152 of the Tax Court Rules . 14 of Practice and Procedure. Unless otherwise 15 16 17 18 19 20 21 22 23 24 25 indicated, section references are to the code of 1986, as amended, in effect for the years in issue, and rule references are to the Tax Court Rules of Practice and Procedure. C. Benjamin Kirby appeared on his own behalf and on behalf of Sondra A. Kirby. Evan K. Like appeared on behalf of respondent. After concessionsl, the issue for decision is whether petitioners are entitled to a deduction of ¹ At trial, Mr. Kirby conceded that petitioners were not entitled to a deduction for other miscellaneous expenses of $52,446.56, but instead $21,059.46. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 $21,059.46 for other miscellaneous expenses taken on their Schedule A itemized deductions. We find that an overwhelming majority of the expenses are personal in nature and are therefore not deductible. While some deductions may have been permissible, petitioners failed to provide proper substantiation. Thus, we sustain respondent's determination. FINDINGS OF FACT Some facts have been stipulated. The stipulation of facts with accompanying exhibits is incorporated herein by this reference. At all relevant times, petitioners C. Benjamin Kirby and Sondra A. Kirby were married and resided in Ohio. For the 2013 taxable year, petitioners filed a timely joint federal income tax return on which they indicated that they were both over the age of 65. On their joint return, prepared by Mr. Kirby, petitioners claimed medical expenses in . 19 the amount of $40,263.56 and other miscellaneous 20 21 22 23 24 25 expenses of $52,446.56.2 Petitioners indicated on their Schedule A itemized deductions, line 28, that the miscellaneous expenses related to "ordinary living expenses, long-term care, travel, gifts, daily 2 On the notice of deficiency, numbers instead of rounding them, which resulted in amounts of $40,263 and $52,446 respectively. truncated these respondent 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 living expenses." On February 13, 2015, respondent issued a notice of deficiency for the 2013 taxable year. In the notice of deficiency, respondent determined that petitioners were not entitled to the Schedule A miscellaneous expenses in the amount of $52,446.56 and determined a deficiency of $10,318 and an accuracy-related penalty under Section 6662(a) of $45.74. On March 30, 2015, petitioners timely filed a petition with this Court seeking a redetermination 10 of respondent's denial of their deductions. 11 Petitioners filed an amended petition on May 22nd, 12 13 2015, which included the notice of deficiency. Petitioners incur an inordinate amount of 14 medical expenses, which stem from the effects of 15 Mrs. Kirby's debilitating stroke on January 7, 2007, 16 17 18 at 8:55 a.m. The stroke left Mrs. Kirby unable to care for herself and ended any chance petitioners had at an enjoyable traditional retirement together. 19 Mrs. Kirby is totally disabled and requires 20 assistance to perform the most basic functions. 21 Mr. Kirby is dedicated to his wife's care. After 22 receiving the devastating news, Mr. Kirby researched 23 all of the 42 nursing facilities in the areas near 24 25 their marital home in Dayton, Ohio. He learned about the ratio of Medicaid, Medicare, and "private pay" 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 patients at each facility. Mr. Kirby explained that facilities with a high proportion of Medicaid patients often struggle for funds, as "private pay" patients are needed to subsidize the facility. 5 Eventually, Mr. Kirby settled on Walnut Creek Nursing 6 Center, which he believes is the best facility 7 8 9 around. Years ago, petitioners had the excellent foresight to purchase long-term care insurance. 10 While the insurance covers a number of expenses, it 11 does not cover all of Mrs. Kirby's expenses. 12 Additionally, petitioners must pre-pay Walnut Creek 13 Nursing Center each month before getting reimbursed 14 15 16 by the insurance company. In order to receive reimbursement, Walnut Creek Nursing Center must fill out paperwork each month. If there are any issues 17 with the paperwork, petitioners must resubmit the 18 19 20 21 22 23 24 25 documentation, which causes a delay in reimbursement of approximately 60 days, instead of the usual 30 days. Mr. Kirby tirelessly cares for his wife, driving to see her every day to insure that she receives her meals and necessary medical care. He keeps a list of issues encountered at the nursing home, which he presents at care conferences with 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 Walnut Creek Nursing Center; his concerns include 2 insufficient staffing, failure to respond to the call 3 bell for 51 minutes, missing pillows from the bed, 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 failure to change or bathe Mrs. Kirby, and other hygiene issues. Mr. Kirby feels that, without his presence, Mrs. Kirby would fail to get the care she requires. Walnut Creek Nursing Center does not provide all of the medical care for Mrs. Kirby. She has a number of medical appointments with other doctors. Mr.. Kirby initially called a medical transport company to drive Mrs. Kirby to these doctors, but incurred an expense of about $900 to bring Mrs. Kirby to the appointment and $450 to return her to Walnut Creek Nursing Center. Even though Mrs. Kirby cannot walk or stand (even with assistance), she can sit upright; therefore, petitioners were unable to receive reimbursement for 19 medical transport. Thus, Mr. Kirby keeps an older 20 model large wide-door Lincoln to transport Mrs. Kirby 21 22 23 24 25 to her medical appointments. With help from a second person, he is able to get her in and out of the 15-year-old Lincoln. The sole purpose of this car is for Mrs. Kirby's transport as Mr. Kirby has another vehicle for his personal use. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 This situation has led to some monthly financial strain for petitioners, so Mr. Kirby keeps a log of "every penny he spends." The log is a daily accounting of expenses, each with a notation of the expense. Examples of items on the list include 6 gifts, groceries, gas, automobile repairs, home 7 8 9 10 11 repairs, restaurants, cleaners, AT&T, supplies, stamps and USPS, Dayton Power & Light, Allstate Insurance, and clothing. The log also details any checks written by petitioners, including the check number, amount, and type or name of the expenditure. 12 While Mr. Kirby's log is detailed, the explanation of 13 14 15 16 17 18 19 20 21 22 23 24 25 each expenditure is curt or absent. Due to her condition, Mrs. Kirby did not appear at trial, and Mr. Kirby appeared on behalf of both petitioners. OPINION As a general rule, the Commissioner's determination of a taxpayer's liability in the notice of deficiency is presumed correct, and the taxpayer bears the burden of proving that the determination is improper. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Pursuant to Section 7491(a), the burden of proof as to factual matters shifts to the Commissioner in certain circumstances. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 Petitioners have neither alleged that Section 7491(a) 2 3 4 5 6 7 8 9 10 11 12 13 14 applies nor established their compliance with the substantiation and record-keeping requirements. See Sec. 7491(a) (2) (A) and (B). Petitioners therefore bear the burden of proof. This case involves a deduction claimed on Schedule A of petitioners' 2013 tax return. 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). Taxpayers are required to identify each deduction, show that they have met all requirements, and keep books or records to substantiate all claimed deductions. Sec. 601; 15 Roberts v. Commissioner, 62 T.C. 834, 836-837 (1974); 16 17 18 19 20 21 22 Sec. 1.6001-1(a), Income Tax Regs. Even when a taxpayer is unable to substantiate the amount of a deduction, the Court may still allow the deduction, or a portion thereof, if there is an evidentiary basis for doing so. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). In those instances, the 23 Court may estimate the allowable expense, bearing 24 25 heavily if appropriate against the taxpayer whose inexactitude is of his or her own making. Cohan v. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 Commissioner, 39 F.2d at 544. The Cohan rule does not apply, however, with respect to deductions that are subject to the strict substantiation requirements of Section 274(d). Sec. 1.274-5T(a), Temporary Income Tax Regs, 50 Fed. Reg. 46014 (Nov. 6, 1985). 6 Petitioners claimed a variety of deductions on their 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 2013 return, each of which has its own specific rules and requirements. Although we will address a number of these deductions, petitioners are ultimately unable to establish entitlement to any of them because the expenses are personal, living, or family expenses and/or they have failed to provide sufficient substantiating evidence. The deductions in dispute here are allowable, if at all, under Section 162(a), which permits a taxpayer to deduct all of the ordinary and necessary expenses paid incurred during the taxable year in carrying on the taxpayer's trade or business, or Section 213 as to medical expenses. "To qualify as an allowable deduction under [section] *** 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." Commissioner v. Lincoln Sav. & Loan Ass'n, 403 U.S. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 345, 352 (1971). A business expense is ordinary for purposes of Section 162 if it is normal or customary 3 within a particular trade, business, or industry and 4 5 is necessary if it is appropriate and helpful for the development of the business. See Commissioner v. 6 Heininger, 320 U.S. 467, 471 (1943); Deputy v. du 7 8 9 Pont, 308 U.S. 488, 495 (1940). The term "trade or business" as used in Section 162(a) includes the trade or business of being an employee. Primuth v. 10 Commissioner, 54 T.C. 374, 377 (1970). Here, 11 12 13 14 15 16 17 18 19 petitioners have not asserted that these expenses relate to a trade or business or that they were incurred because of their performance of services as an employee. As mentioned, certain business expenses described in Section 274(d) are subject to strict substantiation rules (i.e., heightened scrutiny) that supersede the Cohan rule. Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968), aff'd. 412 F.2d 201 (2d 20 Cir. 1969); Sec. 1.274-5T(a), Temporary Income Tax 21 22 23 24 25 Regs, supra. Section 274(d) applies to (1) any traveling expense, including meals and lodging away from home; (2) entertainment, amusement, and recreational expenses; (3) any expense for gifts; or (4) the use of listed property, as defined in Section 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 5 280F(d)(4), including passenger automobiles. To deduct such expenses, the taxpayer must substantiate by adequate records or evidence sufficient to corroborate the taxpayer's own testimony: (1) the amount of the expenditure or use, which includes 6 mileage in the case of automobiles; (2) the time and 7 8 place of the travel, entertainment, or use; (3) its business purpose, and in the case of entertainment or 9 gifts (which are limited to $25); (4) the business 10 11 12 13 14 15 16 17 18 19 relationship to the taxpayer of each gift, expenditure, or use. Sec. 274(d). 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 20 weighing and balancing of all the facts *** bearing 21 22 in mind the presence of Section 262, which denies deductions for personal expenses, over Section 162, 23 which allows deductions for business expenses." 24 25 Sharon v. Commissioner, 66 T.C. 515, 524 (1976) (citing costs of commuting and ordinary 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 3 clothing as examples of expenses helpful and necessary to an individual's employment that are "essentially personal" and hence nondeductible) , 4 aff'd per curiam, 591 F.2d 1273 (Ninth Cir. 1978). 5 6 7 8 The vast majority of the expenses claimed by petitioners are clearly personal in nature (groceries, clothing, dry-cleaners, home repair, family gifts) and several even denote "personal" on 9 Mr. Kirby's log. However, many would be deductible 10 11 12 (or partially deductible) if they were properly substantiated and made in connection with a trade or business as described above. Stamps, +1919', USPS 13 mailing expenses, office supplies, and the like are 14 15 16 17 18 19 20 21 22 23 24 25 generally considered ordinary and necessary expenses in running a business. Additionally, gas, car, telephone, meals, and entertainment expenses may also be deductible in connection with a trade or business subject to the limits and enhanced substantiation of Section 274(d).3 Similarly, these expenses are 3 Section 274 imposes heightened substantiation requirements for cer including automobile expenses. Secs. 274(d), in expenses, 80 d) (4) (A) (i) . For expenses relating to automobiles, a (3) the date of taxpayer must substantiate "by adequate records or by sufficient evidence corroborating the taxpayer's own statement": automobile and the total mileage for all purposes during the taxable year; business purpose of the use. Sec. 274(d); Sec. 1.274-ST(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985). To satisfy the adequate records requirement of Section 274, a taxpayer must maintain records and documentary evidence that combination are sufficient to establish each element of an expenditure or use. Sec. 1.274-5T(c) (1) and (2), Temporary the business use; and (4) the (1) in 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 1 2 3 4 5 6 7 permissible as unreimbursed employee expenses where the required documentation is provided. Nonetheless, petitioners provided no evidence that either of them engaged in a trade or business or that they incurred unreimbursed employee expenses, as they are both retired. Thus any allowable expenses would need to be tied to Mrs. Kirby's medical needs. 8 Medical Expenses 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 As a general rule, Section 262 (a) precludes any deduction "for personal, living, or family expenses." Historically, the cost of commuting to and from a taxpayer's place of employment has long been recognized as a nondeductible personal expense. Commissioner v. Flowers, 326 U.S. 465, 472-473 (1946); Donnelly v. Commissioner, 262 F.2d 411, 412- 413 (2d Cir. 1959), aff'g 28 T.C. 1278 (1957); Buck v. Commissioner, 47 T. C. 113, 119 (1966) ; see also Sec. A 62-1(b) (5), Income Tax Regs. ("taxpayer's costs of commuting to his place of business or employment are personal expenses and do not qualify as deductible expenses") . Income Tax Regs., 50 Fed. Reg 46016, 46017 (Nov. 6, 1985). Account books, diaries, logs, statements of expense, trip sheets, and similar records generally qualify as adequate records. Sec. 1.274-ST(c)(2)(i), Temporary Income Tax Regs., supra. will afford a statement that the expenditure the same degree of credibility only if the taxpayer' s reconstruction has "a high degree of probative value." Sec 1.274-5T(c) (1), Temporary Income Tax Regs., supra. "A contemporaneous log is not required," but is not made at or near the time of the Court 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Section 213 carves out of the rule of Section 262 a limited exception for medical expenses, providing as follows in relevant part: (a) Allowance of deduction. There shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for the medical care of the taxpayer, his spouse, or a dependent (as defined in Section 152 [26 USC § 152], determined without regard to subsections (b) (1), (b) (2), and (d) (1) (B) thereof), to the extent that such expenses exceed 10 percent of adjusted gross income.4 (d) Definitions. For purposes of this section -- amounts paid -- (1) The term "medical care" means (A) for the diagnosis, cure, 18 mitigation, treatment, or prevention of disease, or (cid:16)042 19 20 21 22 23 24 25 for the purpose of affecting any structure or function of the body. (B) for transportation primarily for and essential to medical care referred to in subparagraph (A) , 4 Section 213(f) 2015, and 2016 for taxpayers who have attained age 65 before the beginning of reduces the 10% floor to 7.5% for 2013, 2014, the taxable year. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 1 2 3 4 5 (C) for qualified long-term care services (as defined in Section 7702B(c)[26 USC § 7702B(c)]), or (D) for insurance (including amounts paid as premiums under part B of title XVIII of the 6 Social Security Act [42 USC §§ 1395j et seq.], 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 relating to supplementary medical insurance for the aged) covering medical care referred to in subparagraphs (A) and (B) or any qualified long-term care insurance contract (as defined in Section 7702B(b) [26 USC § 7702B(b)]). (2) Amounts paid for certain lodging away from home treated as paid for medical care. Amounts paid for lodging (not lavish or extravagant under the circumstances) while away from home primarily for and essential to medical care referred to in paragraph (1) (A) shall be treated as amounts paid for medical care if -- (A) the medical care referred to in paragraph (1) (A) is provided by a physician in a licensed hospital (or in a medical care facility 22 which is related to, or the equivalent of, a licensed 23 24 25 hospital), and (B) there is no significant element of personal pleasure, recreation, or vacation in the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 17 1 2 3 4 5 6 7 8 9 travel away from home. Regulations promulgated under Section 213 caution that medical expense deductions should be "confined strictly to expenses incurred primarily for the prevention or alleviation of a physical or mental defect or illness." Sec. 1.213-1(e)(1) (ii), Income Tax Regs. This Court has established a two-pronged "but for" test in determining whether expenses were directly or proximately related to treatment of a 10 medical condition. The taxpayer must prove that (1) 11 12 13 14 15 16 17 18 19 20 21 22 23 the expenditures were an essential element of the treatment of the condition and (2) the expenditures would not have otherwise been incurred for nonmedical reasons. See Jacobs v. Commissioner, 62 T.C. 813, 818 (1974). Relevant factors in evaluating these elements include the motive or purpose of the taxpayer in making the expenditure, the effect of the purchased goods or services on the condition and the origin of the expense. Id.; Havey v. Commissioner, 12 T.C. 409, 412 (1949). Petitioners did incur a number of automobile expenses in transporting Mrs. Kirby. The record does not indicate if Mr. Kirby deducted 24 mileage or other expenses as part of the $40,236.56 25 in medical expenses claimed on their return. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 18 1 Petitioners are advised that mileage is deductible 2 3 4 for medical travel as discussed above. In certain circumstances, the Court has allowed deductions for other expenses related to automobiles used for 5 medical purposes. See Montgomery v. Commissioner, 51 6 7 8 T.C. 410 (1968) aff'd 428 F.2d 243 (6th Cir. 1970)(allowing deductions for travel to medical appointments, including food, lodging, and mileage); 9 Weinzimer v. Commissioner, T.C. Memo 1958-137 10 11 12 (permitting a deduction of car expenses as medical treatment). The Court recognizes that petitioners made a number of vehicle repairs, some or all of 13 which may relate to repairs to the Lincoln which may 14 be a justifiable medical expense for Mrs. Kirby. 15 Notwithstanding this fact, petitioners failed to 16 17 18 19 provide substantiation of these expenses (i.e. receipts) or evidence that the expenses related to the Lincoln in connection with medical travel/medical expenses and not petitioners' other vehicle(s). 20 Petitioners are advised to keep complete records 21 22 23 24 25 including the purpose of the expenditure (personal, business, or medical) in order to properly compute taxes for future years. Petitioners are further advised that travel expenses incurred on travel for medical reasons may 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 19 1 also be deductible. See Sec. 213(d)(2). The cost of 2 meals and lodging on trips for medical reasons for 3 4 5 6 both petitioners may be deductible given proper documentation. There are a number of meal and lodging expenses on Mr. Kirby's list; however, no evidence was presented about the circumstances of the 7 meal (i.e., were they personal in nature or relating . 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to medical travel?) Again, proper substantiation and compliance with the applicable provlsions is required to deduct any of the expenses described above. Section 6662 Penalty Respondent determined that petitioners were liable for a penalty under Section 6662(a). Respondent bears the burden of production with respect to petitioner's liability for that penalty. See Sec. 7491(c). This means that respondent "must come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty." Higbee v. Commissioner, 116 T.C. 438, 446 (2001). We find that respondent met his burden. Section 6662(a) imposes an accuracy-related penalty of 20 percent of any underpayment that is attributable to one of the causes listed in subsection (b). One such cause is negligence or disregard of rules or regulations, with negligence 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 20 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 including "any failure by the taxpayer to keep adequate books and records or to substantiate items properly." Sec. 6662(b)(1); Sec. 1.6662-3(b)(1), Income Tax Regs. Another cause is any substantial understatement of income tax, defined for individuals as an understatement that exceeds the greater of (1) 10 percent of the tax required to be shown on the return for the taxable year or (2) $5,000. Sec. 6662(b)(2), (d)(1)(A). There is an exception to the Section 6662(a) penalty when a taxpayer can demonstrate (1) reasonable cause for the underpayment and (2) that the taxpayer acted in good faith with respect to the underpayment. Sec. 6664(c)(1). Regulations promulgated under Section 6664(c) provide further that the determination of reasonable cause and good faith "is made on a case-by-case basis, taking into account all pertinent facts and circumstances." Sec. 1.6664-4(b) (1), Income Tax Regs. Both reasonable cause and good faith are questions of fact and circumstance. The most important factor is the extent of the taxpayer's effort to determine and reach the proper tax liability. Stubblefield v. Commissioner, T.C. Memo. 1996-537. Petitioners did not rely on any tax professionals and Mr. Kirby 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 21 1 2 3 4 5 6 7 8 9 filled out his return on his own (and by hand). Although Mr. Kirby asserted he tried his best, he has not shown that he acted with reasonable cause or in good faith, which is the proper statutory test. Petitioners' income tax deficiency meets the requirements of Section 6662(d) as petitioners failed to show reasonable cause for the underpayment and that they acted in good faith with respect to the underpayment. As a result, the petitioners are 10 liable for the penalty pursuant to Section 6662. 11 Accordingly, we sustain respondent's determination 12 13 that petitioners are liable for the Section 6662(a) penalty for the 2013 tax year. 14 Conclusion 15 16 In sum, we applaud the efforts and dedication of Mr. Kirby with respect to his beloved 17 wife, but cannot permit him to take deductions which the law does not allow. Decision will be entered for respondent. This concludes the court's oral findings of fact and opinion in this case. (Whereupon, at 5:16 p.m., the above- entitled matter was concluded.) 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com