department of the treasury internal revent ee teige eo examinations commerce street dallas tx ‘tax exempt and government entities division number release date legend org organization name xk date uil dollar_figure-01 date address - address org address person to contact identification_number contact telephone number in reply refer to ‘ie ge review staff ein certified mail - return receipy dear last date for filing a petition with the tax_court april 20xx a final adverse determination_letter as this is to your exempt status under sec_501 of the internal_revenue_code your exemption from federal_income_tax under sec_501 of the code is hereby revoked effective july 20xx you have agteed to this change per signing of the form_6018 dated october 20xx our adverse determination was made for the following reasons form or amount is prohibited org has inurement and or private benefit of an sec_501’s assets in any been operating exclusively for exempt purposes within the meaning of internal_revenue_code sec_301 org also is not a charitable_organization within the meaning of sec_1 c -1 d you are not an organization which operates exclusively for one or more of the exempt purposes which would qualify it as an exempt_organization you operate substantially for a non-exempt purpose the providing of private rather than public benefits not ‘you failed to meet the requirements of sec_801 c and ‘treas reg sec_1 -1 in that you failed to establish that you were operated exclusively for an exempt_purpose rather you were operated for a substantial non-exempt purpose providing debt negotiation and debe settlement services contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropeiate service_center for the year ending july 20xx and for all years thereafter processing of income_tax returns and assessment of any taxes duc will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the intemal revenue code if you decide to contest this determination in court you must initiate a suit for declaratory_judgment in the united_states tax_court the united_states claim court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the apptoptiate court for the rules for initiating suits for declaratory_judgment you also have the right to contact the office of the ‘laxpayer advocate however you should first contact the person whose name and telephone number are shown above since this person can access your tax information and can help you get answers ‘you can call and ask for taxpayer_advocate assistance or you can contact the ‘taxpayer advocate from the site where the tax_deficiency was determined by calling or writing if you have any questions please contact the person whose name and telephone sumber ate shown in the heading of this letter ‘we will notify the appropriate state officials of this action as tequited by sec_6104 of the internal_revenue_code taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc ‘the ‘vaxpayer advocate is not able to reverse legal or technically correct_tax determinations nor extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that tax matter that may not have been resolved through normal channels gets prompt and proper handling renee b wells acting director eo examinations sincerely yours aovennment eat tes org address department of the treasury intemal revenue service exempt_organizations examinations sw 6th court plantation fl date taxpayer_identification_number form tax_year s ended person to contact number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter ifyou do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable aw and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an intemal revenue service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 24809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the intemal revenue service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 c of the code if you do ‘you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the format appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination of extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance ifyou prefer you may contact your local taxpayer_advocate at ifyou have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation enclosures publication publication report of examination sincerely vicki l hansen acting director eo examinations letter catalog number 34800f tou 886a org name of taxpayer parent oe frag tso rees sa explanation of items tchedule no or exhibit ‘yeae period ended june 20xx legend org organization name website website treasurer treasurer co-10 coll xx date president president co-2 co-1 5m xyz state _-city city secretary secretary gm co-7 ot co- g companies co-8 co-3 co-4 co-5 co-6 issues does org continue to qualify for tax-exempt status under sec_501 of the internal_revenue_code as a credit_counseling_organization opetated for sec_501 purposes primarily educational_purposes does org have a substantial non-exempt purpose by providing debt management program services to the general_public whether org is operated for the purpose of serving a private benefit rather than public interests facts background the articles of incorporation filed july 19xx in the state of xyz stated the primary purpose of org was consumer debt counseling on december 19xx org filed articles of amendment to amend its purpose to provide consumer debit counseling which are exclusively literary and educational within the meaning of sec_501 of the internal_revenue_code_of_1986 or the corresponding provision of any future united_states interaal revenue law the following individuals were listed as org’s officers president secretary ‘treasurer president secretary treasurer form_1023 application the form_1023 application recognition of exemption under sec_501 of the internal_revenue_code stated the activities of org org were org is an organization formed to help incidence of personal bankruptcy by informing the public on personal money management and by assisting low-income individuals and families who have financial problems org will work to educate the public of the uses and abuses of consumer credit and provide information to the public on budgeting buying practices and the sound use of consumer credit through the use of films speakers and publications form 886-a res page -1- deparment of the teeaeury internal revenue secvioe form 886a tare a tay teal ree secs ‘name of taxpayer explanation of items schedule noor exhibit ‘year petiod ended june 20xx org the organization will provide consumer credit and budget counseling to families and individuals especially low income families and individuals who are in need of assistance by providing one on one counseling and if necessary by establishing budget plans under the budget plan these needy individuals voluntarily make fixed payments to the organization the funds are then kept ina trust account and disbursed on a partial payments basis to the creditors whose approval of the establishment of the plan is obtained by the organization ‘the organizations primary source of financial support is contributions from creditors participating in the organizations budget plan the creditors are not required to make contributions as a condition of participation a minimal fee is charged for participation to cover administrative costs participants in the budget plan and disbursements service are charged a origination fee and a dollar_figure monthly service charge both fees are intended to cover a portion of the administrative costs of this program the personnel of org will counsel individuals or couples by appointments at the present time in our main office as to the best avenue of choice in helping relieve them of their debt burden we take them step by step into our debt management program and show them what we can and cannot do to help them we apprise them of the various methods_of_accounting the credit card companies use to reflect their interest fees late charges and accrued late payment fees we show them various newspaper articles explaining the good and evil of credit cards and the results of overcharging if the individual or couple are satisfied with our counseling and feel that our debt management program can help them they join our program from that point we handle all their creditors and arrange for timely and lower payments we also handle and manage any problems that might arise during that period on the average if the client stays on our programs to the end we will manage to get them debt free within to months the service is performed on a no fee basis the only fee that will be charged is for the monthly mailouts and the proposal mailouts to the various vendors and client notices irs correspondence request for additional information to make determination of exempt status irs correspondence dated december 19xx was mailed to org requesting additional information org correspondence dated january 19xx was mailed to the irs in response to request one of the questions in the irs letter inquired about org’s sources of income in response to the question org provided the following response q question-irs a answer-org form 886-a revs page -2- ‘department of the treasury - intemal revenue service sega fam name of taxpayer depa of try re se explanation of items mn schedule no or exhibit ‘year period ended june org q a during our review we noticed that you reported sources of income as a dollar_figuredollar_figure origination fee and a dollar_figuredollar_figure monthly service charge explain who will actually be required to pay these fees will it be the creditor the consumer both or another source explain in detail the dollar_figure origination fee previously mentioned is not charged to the average client as a practice it is only charged to the client if the volume of debt and the time needed for debt management is overwhelmingly large the dollar_figuredollar_figure monthly maintenance fee as previously explained is a fee needed to overwrite the expense of the letters of proposals to the clients debtors and the required mailing of payments and notifications to clients keeping them abreast of their financial standing this charge also helps offset the numerous phone calls involved the client consumer will be responsible for this fee the fee is waived in extreme hardship cases ina letter dated january 19xx org was recognized by the internal_revenue_service as exempt from federal_income_tax as an otganization described in sec_501 of the code credit counseling and debt management program act dollar_figure program service expenses during the examination year ended june 20xx org's form_990 described its primary purpose and program achievements as follows and individuals established budget plans wherein fixed partial payments were remitted to creditors primary exempt_purpose help reduce incidences of personal bankruptcy by providing information education and money management assistance exempt_purpose achievements a provided consumer credit and budget counseling to families org provides its credit_counseling_services primarily by telephone and occasionally has face-to- face counseling org has two full-time counselors the primary counselor bas a grade education and no prior financial or budgetary counseling experience org’s other counselor also its president states to be a certified personal financial counselor per org the primary counselor has not received any formal training all training was provided directly from the president of org the counselors handle incoming telephone calls from the general_public in response to website and local_advertising targeted at individuals experiencing credit problems during the field_examination the eo agent requested to listen to counseling sessions either via telephone or during a one-on-one counseling no counseling sessions took place during the field_examination for the eo agent observe however org provided counselor transcripts for the form 886-a rent page -3- department ofthe treavury - ternal revenue service fo 886a dagar of faso trl rens sar ‘name of taxpayer explanation of items schedule noor exhibit year period ended june 20kx org following potential clients issued education text phone counseling text issued clients enrolled with face-to-face counseling sessions and consumer program reviewed and re-counseled list ‘the transcripts contained the clients name city and state and a brief message stating if a message was left for an internet potential client whether the packet with educational text was mailed and if client signed up for program with the exception of the clients enrolled with face- to-face counseling notes org did not mention how much time was spent on the telephone counseling sessions additionally the notes did not detail any critical analysis of the caller's budget the eo agent reviewed client files maintained by org none of the files reviewed contained documentation for counseling sessions the files contained only information relating to the client's dmp accounts typically the documents contained in client files included the following items e e e r e e w enrolle budget intake form dmp affidavit and release form welcome letter with payment amount due debt work sheet proposal request payments dmp related correspondence and other account data ‘the debt management services org provides consists of enrolling individuals who qualify into a debt management program dmp once org enrolis clients into its dmp program their file is transferred to co-i a for-profit organization referred to as org processing center for processing co-1 negotiates client contracts and credit proposals in addition too collecting and disbursing client payments org requests a one-time creditor mandated budget proposal compliance charge a refundable program completion charge and monthly payments from its clients for its dmp services it advises individuals in its affidavit and release form that the monthly expense contribution and any set-up contribution are made voluntarily to defray expenses_incurred by org in creation and administration of client’s dmp the affidavit also stated that making a payment directly to a cteditor while enrolled may result in the termination of the plan org also requests payments from creditors for its dmp setvices when dmp proposals are sent to creditors by co-1 they are asked to participate in a voluntary fairshare donation program at a specified percentage level ifa creditor agrees to participate in the fairshare donation program it is then requested to indicate if it wants org to deduct the fairshare donation from client remittances or if it wants to be billed for the fairshare donation form 886-a text page -4- ‘deparument of the treasury -inteenal revenue service name of taxpayer depart ofthe tay ral row explanation of items ee schedule noor exhibit year period banded jone 20k tom 886a org during the year ended june 20xx org’s income was generated ftom program service fees fair share payments and grants as evidenced below of org’s revenue comes ftom fees and fair share payments received and the remaining income represents grants received from two credit card companies and a for-profit organization clean start grants per books client program fees received counseling services fair share payments received my co-2 grants co-3 grants other income outreach administration services total dusing the examination the examining agent reviewed some of the documentation which accompanied the grants in letters from co-2s dated august 20xx and november 20xx they stated that co-2’s grant program provides support to qualifying agencies according to their financial needs and based on the benefit they provide to consumers and the public at large the letters also state that qualifications for grants are determined by the information submitted in grant applications and other_relevant_factors evaluated based on co-2’s discretion finally the letters state that the receipt of a grant in any given calendar_quarter does not mean your agency will or will not receive a grant in the future and amounts may vary from quarter-to-quarter and or year to year-to-year org received grants from co-2s in the amount of dollar_figuredollar_figure and dollar_figuredollar_figure respectively based on the leiters inan email from co-3 dated april 20xx it states that org’s grant application has been approved in the amount of dollar_figuredollar_figure and the funds will be directed to the account number currently used to receive fair share disbursements the purpose of the grant was to provide funding to support org s education counseling sessions and outreach programs on april 20xx org entered into a contract with co-4 a for-profit entity to develop education and counseling programs for org through its community outreach efforts the terms of the contract also stated the co-4 shall donate to org for use of its resources to qualify consumers for various services offered by org see exhibit for contract per org co-4 provided grants for org to provide counseling and pull credit reports for first time homebuyers org ceased its arrangement with co-4 in june of 20xx educational activities form bg6-a cre page -5- ‘department of the treasury -totemal revenue service name of taxpayer dpasineat othe tresoy- pomel revs semen explanation of items schedule novor exhibit ‘yeat period ended june 205x fom 886a org org’s educational activities consist of conducting seminars at different venues and distributing educational texts in addition too maintaining a website org’s website is located at website the website’s welcome page contained the following questions under the frequently asked questions section can i keep my eredit cards is there a fee to enroll how do tenroll how can our program help you willmy monthly payment be reduced what is a fixed monthly payment consumer educational text is there any effect on credit reports can you reduce interest payments benefits of the program the consumer education text web page contained an excerpt from the organization’s educational text surviving debt ‘the purpose of the excerpt was to inform and guide individuals through best available choices individuals had to call the organization in order to receive a free of copy of the complete educational text the welcome page also offered free financial analysis in which the consumez had to fill out the monthly intake and debt worksheet forms the monthly intake page requests the potential client’s name email address home address phone number past due time frame total net monthly income and total monthly household and fiving expenses there is a disclaimer at the bottom of the webpage the states in part a counselor will contact you as soon as information is received and your accounts are verified and configured for our plan the debt worksheet requests the potential elient’s name phone number creditor name current balance and current payment additionally there is a sample savings chart page to illustrate to potential clients the difference between repaying creditors on their own or repaying on org’s budget plan org modified the appearance of its website on april 20xx prior to the modification the welcome page contained all the aforementioned data in addition to the following frequently asked questions s a a n r consolidate debt lower interest rate charges lower monthly payments ‘stop harassing phone calls avoid bankruptcy form 886-a gente page -6- department of toe trensury -toternal reveoue seniee form 886a tdepartat af the tienary tntmal revenue sc ‘name of taxpayer june 20xx org explanation of items schedule noor exhibit ‘yeat petiod ended the educational materials distributed by org in included surviving debt beware of credit card tricks a student guide to financial aid and services consumer budgeting and savings text and potential client advice document the educational materials were distributed to individuals who attended seminars and mailed to individuals who contacted org for information and or counseling org provided a list of all educational seminars conducted during the year under examination based on the list the organization held seminars locally and in surrounding cities all of the seminars were conducted by the president of org treasurer a number of the events on the list provided do not appear to be seminars presented the org but events attended by org some of the topics discussed during the workshops included how to improve credit scores pitfalls of unsecure debt verses none secured debt surviving debts and financial budgeting tips what it takes to get back on your feet etc org provided a seminar script used during the presentations which outlines discussions on budgeting how to make a budget and an excerpt from surviving debt occasionally org also held joint seminars with a lawyer or a representative from to discuss bankruptey and morigage related issues the organization said it advertised these seminars through flyers but no flyers were maintained see exhibit for complete list of seminars the following statistics were provided by org for the tax_year ended june 20xx total sessions including seminars and re-counseling dmp session sec_39 client enrolled org states that their dmp counseling sessions represent versus all activity conducted and only of total sessions resulted in a client enrolling in a dmp service agreements on december 20xx org entered into a service agreement with co-1 a for-profit conporation to provide payment processing in the service agreement the scope of services provided by co-1 included collecting client payments processing client receipts submitting payments to creditors balancing trust account activities mailing late letters researching returned checks and ach payments processing agency fees agency and client management system e o e n e n a r form 886-a tev si page -7- ofthe teeasury - internal_revenue_service department form 886a tiere of he tangy teal reve beier name of taxpayer explanation of items schedule noor exhibit ‘year period ended june 20k org i agency consulting services the agreement also states that co-1 would provide consulting services which include establishing workflows developing agency documentation and training assisting in state licensing agency organization and operations the terms of the agreement required org to maintain and afford co-1 full access to one or more accounts for deposit of budget payment plan payments from clients the disbursement of refunds to clients and the disbursement of payments to creditors org may periodically transfer amounts from accounts maintained by co-1 to its operating accounts amounts representing contributions from clients and or fair share contributions co-1’s compensation_for services included dollar_figure per month per client system customization services at dollar_figure per hour workflow and quality manual documentation at dollar_figure per hour state licensing assistance at dollar_figure per hour co-1 was authorized to deduct its fees from org’s revenues to the extent owed the agreement was valid for three years see exhibit for complete agreement org also has management agreements with two for-profit entities co-s and co-6 located in city xyz to provide financial budgeting counseling and to enroll potential clients in org’s debt management program these for-profit entities were portrayed as satellite offices of org according the agreements all clients enrolled in org’s dmp via the for-profit entities will remain active client of org in event of termination compensation would be of amounts collected by org for services rendered or activities carried on at the center by manager there isa minimum term of years and in the event of termination year minimum org shall pay of fair share amounts collected by org enrolled clients monthly receipts to the for-profit entities until the last enrolled client makes the last payment see exhibit for agreements according to org these satellite offices are paid a management fee generated by the amount of fair share and service fees received monthly by clients that were counseled by the satellite office and after counseling it was determined that the client was also in need of a debt management program the client is transferred to org for program counseling and program enrollment the fair share due to the satellite office is determined by each encolled clients monthly creditor payments this amount is paid directly to the satellite office minus a dollar_figure co-1 processing fee of which dollar_figure goes to co-1 and dollar_figure goes to org for continued servicing of client accounts law section s01 c of the code exempts from federal_income_tax corporations organized and operated exclusively for charitable educational and other purposes provided that no part of its net_earnings inures to the benetit of any private_shareholder_or_individual form bb6-a evs page -8- department of the treaeory - tatemal revenue service fom 886a name of taxpayer ‘department of the tieaary total raves serio explanation of items org sec_1_501_c_3_-1 of the code provides that an organization is organized exclusively for one or more exempt purposes only if its artless of organization referred to in this section as its articles as defined in subparagraph of this paragraph june schedule noor exhibit ‘yeat period ended limit the purposes of such organization to one or more exempt purposes and b do not expressly empower the organization to engage otherwise than as an insubstantial part of its activities in activities which in themselves are not in furtherance of one or more exempt purposes sec_1_501_c_3_-1 of the regulations provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more that an insubstantial part of its activities is not in furtherance of an exempt_purpose sec_1_501_c_3_-1 of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals sec_1_501_a_-1 c defines the words private_shareholder_or_individual in sec_501 refer to persons having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 of the regulations provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus to meet the requirements of this subsection it is necessary for an organization to establish that it is not organized or operated for the benefit of private interest such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_501_c_3_-1 of the regulations provides that the term charitable is used in sec_501 of the code in its generally accepted legal sense and includes relief of the poor and distressed or of the underprivileged as well as the advancement of education sec_1 -1 of the regulations provides that the term educational refers to the instruction or training of the individual for the purpose of improving or developing his capabilities or b the instruction of the public on subjects useful to the individual and beneficial to the community form 886-a iev 46a page -9- ‘department of the treasury - internal_revenue_service fom 886a depart of tra ed reems son ‘name of taxpayer explanation of items schedule no or exhibit ‘yese period ended june 20xx org sec_1_501_c_3_-1 of the regulations provides that an organization may meet the requirements of sec_501 c although it operates a trade_or_business as a substantial part of its activities if the operation of such trade_or_business is in furtherance of the organization's exempt_purpose or purposes and if the organization is not organized or operated for the primary purposes of carrying on an unrelated_trade_or_business in 326_us_279 the supreme court held that the presence of a single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes the court found that the trade_association had an underlying commercial motive that distinguished its educational program from that carried out by a university in 302_f2d_934 ct_cl the court considered an organization that provided analyses of securities and industries and of the economic climate in general it sold subscriptions to various periodicals and services providing advice for purchases of individual securities the court noted that education is a broad concept and assumed arguendo that the organization had an educational purpose however the totality of the organization’s activities which included the sale of many publications as well as the sale advice for a fee to individuals was indicative of a business therefore the court held that the organization had a significant non-exempt commercial purpose that was not incidental to the educational purpose and was not entitled to be regarded as exempt in consumer credit counseling service of alabama inc v united_states us t c d d c the court held that an organization that provided free information on budgeting buying practices and the sound use of consumer credit qualified for exemption from income_tax because its activities were charitable and educational the consumer credit counseling service of alabama is an umbrella organization made up of numerous credit counseling service agencies these agencies provided information to the general_public through the use of speakers films and publications on the subjects of budgeting buying practices and the sound use of consumer credit they also provided counseling the appropriate use of consumer credit to debt-distressed individuals and families they did not limit these services to low-income individuals and families but they did provide such services free of charge as an adjunct to the counseling function they offered a debt management plan approximately percent of a professional counselor’s time was applied to the debt management plan as opposed to education the agencies charged a nominal fee of up to dollar_figure per month for the debt management plan this fee was waived in instances when payments of the fee would work a financial hardship the agencies received the bulk of their support from government and private_foundation grants contributions and assistance ftom labor agencies and the united way an incidental amount of their revenue was from service fees on budgeting and the court found the organizations exempt under sec_501 because providing information to the public regarding the sound use of consumer credit is charitable in that it advances and form 886-a evs page -10- department of the treasury -taternal revenue service form 886a dipareon of he tena tena ravine seni ‘name of taxpayer explanation of items schedule noor exhibit ‘year period ended june 20kx org promotes education and social welfare these programs were also educational because they instructed the public on subjects useful to the individual and beneficial to the community the counseling assistance programs were likewise charitable and educational in nature because the community education and counseling assistance programs were the agencies’ primary activities the agencies were organized and operated for charitable and educational_purposes the court also concluded that the limited debt management services were an integral part of the agencies’ counseling function and thus charitable but stated further that even if this were not the case these activities were incidental to the agencies principal functions finally the court found that the law did not require that an organization must perform its exempt fanctions solely for the benefit of low-income individuals to qualify under sec_501 or to provide its services solely without charge nonetheless these agencies did not charge a fee for the programs that constituted their principal activities they charged nominal fees for services that were incidental moreover even this nominal fee was waived when payment would work financial hardship tn zaster house v us ct_cl aff'd 846_f2d_78 fed cir the court found that adoption services were the primary activity of the organization in deciding that the organization conducted adoption services for a business_purpose rather for a charitable purpose the court considered that manner in which the organization operated the record established a number of factors that characterize a commercial activity and which were evident in the operations of easter house also the court determined that the organization competed with other coromercial organizations providing similar services fees were the only source of revenue it accumulated very substantial profits because it set its fees in order to generate a profit the accumulated capital was substantially greater than the amounts spent on charitable and educational activity and the organization did not solicit and did not plan to solicit contributions the court also found a corporate-type structure in the classes of memberships including a single life member having inherent power that the holder could transfer like stock and dependence on paid employees in international postpraduate medical foundation v commissioner t c memo january the court found an organization that ran tours aimed at doctors and their families ‘was operated to benefit the private interests of both an individual who controlled the organization and a for-profit travel agency h c tours that handled all of its tour arrangements the organization used the h c tours exclusively for ali travel arrangements there was no evidence that the organization solicited competitive bids from any travel agency for travel arrangements for its tours other than h c tours the organization physically located its office within the offices of h c tours which provided it secretarial clerical and administrative personnel for a fee equal to h c tours’ costs the organization spent percent of its revenue on travel brochures prepared to solicit customers for tours arranged by the travel agency the brochures emphasized the sightseeing and recreational component of the tours but did not form 886-a ter4s9 page -11- department ofthe treasury -totemal revenue service tdepamint ofthe treanaq tncemal reverse savice explanation of items foun 886a name of taxpayer org echedale noor bshibit ‘year petiod haded june describe the medical curriculum for the seminars and symposia that was the basis for exemption educational activities occurred on less than one-half of the days on a typical tour the court found that a substantial purpose of the organization's operations was to increase the income of h c tours the president of h c tours controlled the organization and exercised that control for the benefit of h c tours moreover the administrative record supported the finding that the organization was formed to obtain customers for h c tours in airlie foundation v commissioner f_supp 2d dollar_figure d d c the court concluded that an alleged exempt_organization was operated for a substantial non-exempt purpose it based this conclusion on the manner in which the organization conducted the operation of its conference center among the major factors courts have considered in assessing commerciality are competition with for profit commercial entities extent and degree of below cost services provided pricing policies and reasonableness of financial reserves additional factors include inter alia whether the organization uses commercial promotional methods eg advertising and the extent to which the organization receives charitable donations thus the court looked at the business methods of the organization as a way to infer whether its purpose was to serve the public or whether there was a substantial non-exempt purpose of operating a business for profit see sec_1_501_c_3_-1 of the regulations the court determined that if private individuals or for-profit entities have either formal or effective_control of a non-profit organization it is presumed that the organization furthers the profit-seeking motivations of those private individuals or entities this is the case even when the organization is a partnership between a non-profit and a for-profit entity citing 113_tc_47 the credit repair organizations act croa u s c et seq effective date imposes restrictions on credit repair organizations including forbidding the making of untrue or misleading statements and forbidding advance_payment before services are fully performed uss c significantly sec_501 organizations are excluded from regulation under the croa the croa defines a credit repair organization as a any person who uses any instrumentality of interstate commerce or the mails to sell provide or perform or represent that such person can or will sell provide or perform any service in return for the payment of money or other valuable consideration for the express or implied purpose of - improving any consumer’s credit record credit history or credit rating or form b86-a ceva page -12- ‘department of the treanury-toteinal revenue service ‘name of taxpayer ‘daparonnt of tas tate ravenae secs explanation of items schedule no or exhibit ‘year period ended june 20kx fon b86a org ii providing advice or assistance to any consumer with regard to any activity or service described in clause i u s c 1679a the courts have interpreted this definition broadly to apply to credit counseling agencies the federal trade commission’s policy is that if an entity communicates with consumers in any way about the consumers’ credit situation it is providing a service covered by the croa 21_fsupp2d_424 ndn j gii b cer sec_64 c sec_501 organizations are not businesses are prohibited from cold-calling consumers who have put theit phone numbers on the national do-not-call registry which is maintained by the federal trade commission cer subject_to this rule against cold-calting because c organizations are exempt from regulation under the croa and the cold-calling restrictions otganizations that are involved in credit repair have added incentives to be recognized as sec_501 organizations even if they do not intend to operate primarily for exempt purposes government’s position based on the examination conducted it has been concluded that org does not continue to qualify for tax-exempt status as an organization described in sec_501 of the code org does not operate exclusively for sec_501 purposes rather it has a substantial non- exempt_purpose org’s primary activity consists of providing dmp services and such services are in furtherance of a substantial non-exempt purpose our conclusion is based on the totality of factors that are noted above and discussed below what org deems to be credit counseling activities are primarily dmp enrollment activities the counseling session notes obtained did not contain any details of a critical analysis of the caller’s budget or counseling provided client files maintained by org contain only correspondence forms transactional and other data relating to the client’s dmp account additionally the primary counselor did not have the educational background or formal training to enable her to provide educational counseling to clients on personal money management the material posted on org’s website is both very general and inspirational or promotes its debt management plan dmp it does not provide readers with useful information about credit- related topics such as how credit is established or impaired how credit reports are maintained or how individuals can protect or improve their credit through budgeting financial planning and other conscientious measures it does not help individuals ot the public at large to enhance their knowledge or improve their skills under the applicable legal standards the content of the web site does not qualify as public education fora s86-a rev45 page -13- deparment of the treasury - tnternal revenue service ‘name of taxpayer pen of et al kevan see explanation of items schedule noor exhibit ‘yeat petiod ended june 20kx form 886a org org is similar to the organization in co-7 that the court concluded that a significant non- exempt commercial purpose in that case the organization sold periodicals and provided services to individuals relating to the purchase of securities org is providing services to individuals relating to the repayment of their debts like the organization in co-7 org is providing services to individuals for a fee while org may provide some educational_services the manner in which it operates is indicative of a business rather than an organization described in sec_501 of the code org is not like the organization in co-8 the co-8 is an umbrella organization made up of numerous credit counseling service agencies in that case the agencies provided information to the general_public through the use of speakers films and publications on the subjects of budgeting buying practices and the sound use of consumer credit provided counseling on budgeting and the appropriate use of consumer credit to debt- distressed individuals and families ‘ did not limit these services to low-income individuals and families but they did provide such services free of charge as an adjunct to the counseling function they offered a debt management plan approximately percent of a professional counselor's time was applied to the debt management plan as opposed to education and received the bulk of their support from govemment and private_foundation grants contributions and assistance from labor agencies and the co-9 an incidental amount of their revenue was from service fees during the year under examination org provided limited information for educational seminars and outreach activities conducted while org does provide some educational activities they are incidental when weighed against its dmp services as provided in better business bureau of washington d c ine the presence ofa single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes the reason org is organized as an exempt_organization is to avoid the regulatory scheme of the credit repair organizations act croa u s c section et seq croa was enacted to protect consumers by banning certain deceptive practices in the credit counseling industry if org was a for-profit company the croa would prohibit it from charging fees in advance of form 886-a rev4-65 page -14- ‘department of the treasury - internal_revenue_service fou 886a apart fe tear two revo sane ‘name of taxpayer explanation of items schedule noor exhibit ‘year period ended june 20xx org fully providing services in addition if org were for-profit federal_law would prohibit it from purchasing leads similar to its agreements with the two profit entities to acquire dmp clients because sec_501 organizations are exempted from the provisions of croa org is able to engage in deceptive business practices that congress intended to prohibit when it passed the croa law as such org is operated for a substantial non-exempt purpose that of carrying on a business while avoiding federal regulation in addition org could not collect fair share payments from creditors if it did not have exempt status the entire dmp business depends on an organization having tax-exempt status substantially_all of org’s activities revolve around its dmp operations in describing its primary purpose and program achievements in its form_990 return for the examination year org stated that it provided consumer credit and budget counseling and established plans for families and individuals wherein fixed partial payments were remitted to their creditors what org deems to be credit and budget counseling is merely a process to determine if potential clients qualify for a dmp and can afford the monthly payments required of a dmp except for an insignificant amount of receipts all of org’s income is derived from dmp-related activities org’s books_and_records indicate that it received dollar_figure in grants for the examination year however based on the documents reviewed by the examining agent it appears that the grants received by org are payments for collection services and credit checks it performed for other entities the facts in org’s case also show that its activities serve to promote the private business_interest of co-1 rather than to promote the public interest org’s agreement with co-1 allows it to perform all services related to its debt management program other than intake and counseling services under the agreement co-1 has the authority to prepare present and negotiate with creditors on behalf of all clients once they are enrolled in a dmp the agreement also authorizes co-1 to solicit and distribute fair share payment from creditors to you thus as in 71_tc_1067 certain aspects of your business operation are controlled to acertain extent by a for-profit company the essence of the agreement with co-1 allows it to dictate charges and methods of operation and assures long-term financial support for co-1 for example if the agreement with co-1 should be terminated co-1 will have the option to continue servicing existing customers at the established fees morever the agreement gives co- full access to one or more accounts for deposit of payments from clients and disbursement of payments to creditors taxpayer's position based on a letter faxed may 20xx taxpayer stated the following please be aware of the fact that even though co-i is a for-profit company it is not a budget or financial consulting or planning agency or a debt consolidation agency of interest for a non-profit agency it is an electronic transfer agency for individual counseling agency’s such as ours that are in need of electronic proposal electronic payment receipts and disbursement transfer porm bb6-a nes page -15- department ofthe freasury -totemal revenue service depart of ie tray tae rgr nte explanation of items foun 886a name of taxpayer org schedule noor exhibit ‘year period ended june 20xx services this agency is on par with co-10 and co-11 both for-profit agencies that service the same industry without conflict of interest queries by contracting co-1 to perform these services for our agency it has allowed us to reduce our office personnel by two people and eliminate the need to dedicate one computer to the needs of constant electronic transfers account updates and creditor updates that are required on a daily basis it allows us to better service our existing clients accounts and to dedicate more of our time to our financial literary programs it also eliminated the cost and time involved for data backup program updating and primary computer maintenance which we could no longer afford to maintain i ask you to please rethink the fact that our contracting co-1 is considered by you to be aconflict of interest for monetary gain and to research that matter further also question why our dmp enrollment parameters is considered to be excessive a dmp counseling rate and a dmp enrollment rate does not project our agency to be a mill only interested in client dmp enrollment and not educational support for involved consumers i ask that you please reconsider you thoughts on this matter conclusion in summary org is not operated exclusively for exempt purposes because it does not engage primarily in activities that accomplish an exempt_purpose more than an insubstantial part of org activities are in furtherance of non-exempt purposes that are commercial in nature org is operated for the purpose of serving a private benefit rather than public interests it is recommended that org’s tax-exempt status be revoked effective july 20xx form 886-a rcv t65 page -16- department of the teeasury - internal_revenue_service


t c summary opinion united_states tax_court amy l hartman petitioner v commissioner of internal revenue respondent james jennings and amy hartman petitioners v commissioner of internal revenue respondent docket nos 197-06s 374-06s filed date james jennings and amy l hartman pro sese beth a nunnink for respondent carluzzo special_trial_judge each of these consolidated cases was heard pursuant to the provisions of sec_7463 1unless otherwise indicated section references are to the internal_revenue_code_of_1986 as amended in effect for the relevant period rule references are to the tax_court rules_of_practice and procedure pursuant to sec_7463 the decision to be entered in each case is not reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency dated date respondent determined the following deficiencies in and penalties with respect to petitioners’ federal income taxes year penalty deficiency sec_6662 dollar_figure big_number dollar_figure dollar_figure in a notice_of_deficiency dated date respondent determined a dollar_figure deficiency in amy l hartman’s federal_income_tax and imposed a dollar_figure sec_6662 accuracy-related_penalty after concessions by the parties the issues for decision are as follows whether petitioners are entitled to deductions for unreimbursed employee business_expenses for and or whether amy l hartman ms hartman is entitled to a deduction for unreimbursed employee business_expenses for whether petitioners are liable for a sec_6662 accuracy-related_penalty for and or and whether ms hartman is liable for a sec_6662 accuracy-related_penalty for background some of the facts have been stipulated and are so found petitioners resided in tennessee at the time that the petitions in these consolidated cases were filed employment status of each petitioner james jennings mr jennings began employment as a firefighter for the city of franklin tennessee in and he was so employed at all times relevant to this proceeding he was also a member of the franklin firefighters association local no the association as a firefighter mr jennings worked 24-hour-on 48-hour-off shifts while on duty mr jennings was permitted to leave the fire station to purchase takeout meals but he was otherwise required to eat his meals at the fire station in addition to the expenses he incurred for the take- out meals mr jennings contributed dollar_figure a month towards a common meal fund for meals usually breakfast prepared and eaten at the fire station according to the association its members were required to contribute to the meal fund starting in and at all relevant times on his days off as a firefighter mr jennings was employed as a fire investigator by southern fire analysis southern his employment with southern required him to travel all over the southeast as far north as virginia and west virginia illinois and as far south as florida as part of his responsibilities with southern he typically traveled by car from his residence in tennessee to various locations as part of a fire investigation he routinely photographed the scene of the fire upon the submission of a travel voucher to southern he was reimbursed for_the_use_of his car at the rate of cents per mile he was also reimbursed by southern for expenses_incurred for supplies photos and copies southern required that mr jennings wear business casual clothing while meeting with a client and business attire ie a suit and tie when attending a deposition or testifying in court when investigating at the scene of a fire he generally wore steel-toe boots and clothing suitable for what he needed to do such as crawling around in tight spaces etc often the clothing that he wore during a fire scene investigation was damaged during the years in issue ms hartman was employed as a sales representative for interior design services design during and her primary responsibilities related to design’s contract with the state of tennessee pursuant to that contract design supplied furniture and design services for state offices and other buildings many of which were in knoxville tennessee where ms hartman spent much of her time as an employee of design during those years her residence was approximately miles from knoxville she routinely drove back and forth between her residence and knoxville but she seldom if ever stayed overnight in knoxville sometime during although still employed by design ms hartman was no longer required to travel as frequently or as far from her residence her reduced travel schedule was due in part to the birth of a child in and in part to a change in the location of the clients of design that she was serving petitioners’ federal_income_tax returns petitioners filed timely joint federal_income_tax returns for and ms hartman timely filed her federal_income_tax return for the returns were prepared by a professional income_tax_return_preparer as relevant here petitioners’ return includes a schedule a itemized_deductions and two form sec_2106 employee business_expenses one relating to mr jennings’ employment as a fire investigator and the other to ms hartman’s employment as a design sales representative among other things on the schedule a petitioners claimed a dollar_figure deduction for unreimbursed employee business_expenses of this amount dollar_figure relates to mr jennings and dollar_figure 2totals referenced in this opinion for unreimbursed employee_business_expense deductions are before the application of sec_67 relates to ms hartman the amount relating to mr jennings dollar_figure is attributable to claimed expenses for meals consumed at the firehouse dollar_figure after the application of sec_274 uniforms dollar_figure and union dues dollar_figure the amount relating to ms hartman dollar_figure is attributable to claimed expenses for vehicle expenses dollar_figure otherwise unidentified business_expenses dollar_figure meals and entertainment dollar_figure after the application of sec_274 and her home_office dollar_figure as relevant here petitioners’ return includes a schedule a and two form sec_2106 one relating to mr jennings’ employment as a fire investigator and the other to ms hartman’s employment as a design sales representative among other things on the schedule a petitioners claimed a dollar_figure deduction for unreimbursed employee business_expenses of this amount dollar_figure relates to mr jennings and dollar_figure relates to ms hartman the amount relating to mr jennings dollar_figure is attributable to claimed vehicle expenses dollar_figure and union dues dollar_figure the amount relating to ms hartman dollar_figure is attributable to claimed vehicle expenses dollar_figure and otherwise unidentified business_expenses dollar_figure as relevant here ms hartman’s return includes a schedule a and a form_2106 relating to her employment as a design sales representative among other things on the schedule a she claimed a dollar_figure deduction for unreimbursed employee business_expenses ms hartman’s unreimbursed employee business_expenses are attributable to vehicle expenses dollar_figure parking fees and tolls dollar_figure internet expenses dollar_figure meals and entertainment_expenses dollar_figure after the application of sec_274 uniforms expenses dollar_figure and cell phone expenses dollar_figure the notices of deficiency some of the adjustments made in the notices have been agreed to between the parties or conceded and other adjustments are computational those adjustments will not be discussed for and respondent disallowed all unreimbursed employee business_expenses with the exception of union dues dollar_figure of dry cleaning expenses and dollar_figure of ms hartman’s vehicle expenses for respondent disallowed all unreimbursed employee business_expenses claimed on ms hartman’s return because allowable itemized_deductions were less than the standard_deduction respondent disallowed otherwise allowable itemized_deductions claimed on the schedule a and allowed ms hartman the standard_deduction for each year in issue respondent also imposed a sec_6662 accuracy-related_penalty on several grounds including negligence or disregard of rules or regulations discussion as we have observed in countless opinions deductions are a matter of legislative grace and the taxpayer bears the burden_of_proof to establish entitlement to any claimed deduction rule a 503_us_79 292_us_435 this burden requires the taxpayer to substantiate claimed deductions by keeping and producing adequate_records that enable the commissioner to determine the taxpayer’s correct_tax liability sec_6001 65_tc_87 affd per curiam 540_f2d_821 5th cir 43_tc_824 a taxpayer claiming a deduction on a federal_income_tax return must demonstrate that the deduction is allowable pursuant to some statutory provision and must further substantiate that the expense to which the deduction relates has been paid_or_incurred see sec_6001 hradesky v commissioner supra sec_1_6001-1 income_tax regs certain expenses such as the portions of the disallowed unreimbursed employee_business_expense deductions attributable to vehicle and meals expenses here in dispute are subject_to strict substantiation requirements see sec_274 in general those expenses must be substantiated by adequate written records that is the taxpayer must maintain a diary a log or a similar record and documentary_evidence that in combination are sufficient to establish the time place business_purpose and amount of each expenditure or use sec_1_274-5t temporary income_tax regs fed reg date in general the substantiating records or combination of records should be made at or near the time of the expenditure or use sec_1_274-5t temporary income_tax regs fed reg date the types of deductions here in dispute are allowable if at all under sec_162 that section generally allows a deduction for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business the term trade_or_business as used in sec_162 includes the trade_or_business of being an employee 54_tc_374 17_tc_1456 certain types of business_expenses may be estimated if substantiating evidence does not exist or is otherwise not available see 39_f2d_540 2d cir business_expense deductions subject_to sec_274 however may not be estimated see sec_280f 50_tc_823 affd per curiam 412_f2d_201 2d cir under sec_7491 the burden_of_proof shifts from the taxpayer to the commissioner if the taxpayer produces credible_evidence with respect to any factual issue relevant to ascertaining the taxpayer’s tax_liability and the taxpayer has satisfied certain conditions accordingly petitioners argue that the burden_of_proof should be placed upon respondent with respect to all issues here in dispute if for no other reason the procedural histories of these cases which include respondent’s use of formal discovery to attempt to obtain documents and other information from petitioners completely undermines their argument see sec_7491 and b accordingly the burden_of_proof remains on petitioners with these fundamental principles in mind we turn our attention first to the deductions here in dispute i unreimbursed employee_business_expense deductions the unreimbursed employee_business_expense deduction in dispute for each year in issue consists of one or more of the 3the use of formal discovery in a deficiency proceeding subject_to sec_7463 is less than routine through no fault of respondent’s respondent’s formal discovery attempts were not successful following components vehicle expenses meals and entertainment_expenses uniform and uniform maintenance_expenses unidentified business_expenses home_office expenses parking fees and tolls expenses internet expenses and cell phone expenses we consider each in the order just listed a vehicle expenses according to petitioners the amounts deducted for vehicle expenses each year represent only the amounts that exceeded the reimbursements that each received from his or her employer as noted deductions for vehicle expenses must be substantiated in accordance with the requirements of sec_274 sec_162 sec_274 petitioners provided a logbook maintained by mr jennings to substantiate his mileage as a southern employee the documents submitted however demonstrate that mr jennings was reimbursed for the mileage recorded in the logbook according to mr jennings he also maintained a second logbook of unreimbursed miles but this second logbook was not made part of the record absent written substantiation for the additional mileage petitioners are not entitled to a deduction attributable to that mileage see sec_274 except for no adequate substantiating records were provided with respect to the mileage expense deductions attributable to ms hartman’s employment with design it follows that petitioners are not entitled to a deduction for vehicle expenses in each of the years in issue in excess of the amounts respondent allowed b meals and entertainment_expenses for petitioners’ unreimbursed business_expenses deduction includes amounts mr jennings claims to have contributed to the common meal fund as well as for the cost of all other meals mr jennings consumed while on duty as a firefighter ms hartman’s claimed meals expense deductions in and include the costs of meals consumed while traveling on business as well as the costs of meals for entertaining design clients mr jennings’ meals expenses according to petitioners because mr jennings was required as a condition of his employment to eat his meals at the fire station the costs of the meals as well as his contributions to the meal fund are deductible as employee business_expenses in support of their position petitioners rely upon a letter from the association stating that every member of the franklin 4respondent concedes the vehicle expense deduction attributable to ms hartman for firefighters association is required to pay into a meal fund while they are on duty for the city of franklin generally the costs of a taxpayer’s meals are nondeductible personal expenses unless the expense of a meal is incurred while the taxpayer is traveling away from home for business purposes see sec_162 sec_262 if however a fire department requires its firefighter-employees as a condition_of_employment to make contributions into a common meal fund so as to ensure their presence at all times at the fire station then those contributions qualify as deductible ordinary and necessary business_expenses see eg 68_tc_422 affd 611_f2d_1260 9th cir belt v commissioner tcmemo_1984_167 on the other hand if a firefighter’s contributions into a common meal fund are not required as a condition_of_employment but are made voluntarily then such contributions are considered a personal_expense that is not deductible see eg 77_tc_911 the meal expenses attributable to mr jennings and deducted by petitioners were not incurred while he was traveling away from home on business and the expenses cannot be deducted on that ground furthermore the deduction is not supported by the letter from the association because mr jennings was not an employee of the association there is insufficient evidence in the record to establish that mr jennings while on duty and as a condition_of_employment with the city of franklin fire department was required to purchase his meals through contributions made to a common meal fund petitioners are not entitled to a deduction for amounts attributable to mr jennings’ meal expenses included in the unreimbursed employee_business_expense deduction claimed for ms hartman’s meals expenses ms hartman contends that because she incurred costs for meals while traveling on business and or while entertaining design clients the costs of the meals are deductible as unreimbursed employee business_expenses as stated above in general the costs of a taxpayer’s meals are nondeductible personal expenses unless the expense of a meal is incurred while the taxpayer is traveling away from home for business purposes see sec_162 sec_262 the deductibility of meals and entertainment_expenses is also conditioned on their being substantiated by adequate_records or by other_sufficient_evidence corroborating the claimed expenses pursuant to sec_274 sec_1_274-5t temporary income_tax regs fed reg date 5even if the expenses were otherwise allowable we note that petitioners failed to meet the strict substantiation requirements of sec_274 ms hartman failed to provide any substantiating documentation with respect to her claimed meals expenses see sec_274 respondent’s disallowance of ms hartman’s claimed meals expenses is sustained c expenses for uniforms and uniform maintenance in petitioners claimed a deduction for the purchase and dry cleaning of the clothing each wore while at work in ms hartman claimed a deduction for the dry cleaning of her work uniform expenses for work clothing are deductible if the clothing or uniform is of a type specifically required as a condition_of_employment the uniform is not adaptable to general use as ordinary clothing and the uniforms are not worn as ordinary clothing 30_tc_757 wasik v commissioner tcmemo_2007_148 beckey v commissioner tcmemo_1994_514 the business casual attire and business suits mr jennings purchased including any related dry cleaning or other maintenance_costs of that clothing are not deductible because the clothing is adaptable for nonbusiness wear see eg hawbaker v commissioner tcmemo_1983_665 with respect to expenses_incurred for specialized clothing and steel-toe footwear mr jennings wore while investigating a fire scene we find that petitioners are entitled to a deduction of dollar_figure for the purchase of mr jennings’ fire-resistant clothing and maintenance thereof in see cohan v commissioner f 2d pincite 85_tc_731 ms hartman failed to provide the court with any explanation as to her claimed dry cleaning expenses furthermore she did not offer any evidence to substantiate the deductions claimed accordingly respondent’s disallowance of ms hartman’s claimed uniforms expenses is sustained d deduction for unidentified business_expenses petitioners claimed business_expense deductions of dollar_figure and dollar_figure on their and joint returns respectively for both years in issue the entire amount of the business_expense deductions relates to ms hartman but it is unclear what specific costs are included in the deduction at trial petitioners failed to present any evidence to explain much less substantiate the amounts so deducted petitioners are not entitled to deductions identified simply as business_expenses on either their or joint_return e home_office expenses petitioners claimed a dollar_figure home_office deduction on their return according to petitioners the home_office was used in connection with their rental properties and by ms hartman to prepare for meetings and or sales calls with design clients in general a taxpayer is not entitled to deduct any expenses related to the use of a dwelling_unit used by the taxpayer as a residence during the taxable_year see sec_280a expenses attributable to a home_office are excepted from this general_rule however if the expenses are allocable to a portion of the dwelling_unit which is exclusively used on a regular basis as the principal_place_of_business for the taxpayer’s trade_or_business see sec_280a 125_tc_271 if the taxpayer is an employee the exception under sec_280a will apply only if the home_office is maintained for the convenience_of_the_employer see 94_tc_348 petitioners do not claim and they have not established that during the den was used exclusively on a regular basis as the principal_place_of_business for either petitioner or that the den home_office was maintained for the convenience of either of their employers the fact that petitioners used the den home_office for business purposes as they claim is insufficient to 6petitioners’ joint_return includes a schedule e supplemental income and loss showing rental income and expenses attributable to certain real_estate none of the items reported on the schedule e are in dispute allow any deduction attributable to that use see lofstrom v commissioner supra pincite petitioners are not entitled to a home_office deduction for and respondent’s determination in this regard is sustained f parking fees and tolls ms hartman claimed a deduction for parking fees and tolls on her return according to ms hartman she incurred the parking fees while traveling on business in knoxville tennessee where she met with her design clients she testified that design reimbursed her for parking fees and she has not established that she is entitled to a deduction in excess of the amount reimbursed ms hartman is not entitled to a deduction for expenses shown as parking fees and tolls on her return g internet expenses ms hartman claimed a deduction for internet expenses on her return but she did not address the internet expense deduction at trial and no receipts or other documentation to substantiate her internet expenses were provided therefore ms hartman is not entitled to a deduction for internet expenses h cell phone expenses ms hartman claimed a dollar_figure deduction for cell phone use on her return expenses for cell phone use must be substantiated in accordance with sec_274 and the regulations thereunder she has provided no evidence that substantiates her cell phone expense in accordance with sec_274 and therefore is not entitled to the cell phone expense deduction ii the accuracy-related_penalties lastly we consider whether petitioners are liable for sec_6662 accuracy-related_penalties for and or and whether ms hartman is liable for that penalty for although various grounds for the imposition of the penalty for each year are stated in the appropriate notice_of_deficiency under the circumstances for each year only negligence or disregard of rules or regulations is applicable see sec_6662 b c the burden of production with respect to the imposition of the penalty rests with respondent sec_7491 in support of this burden respondent points out that for each year in issue petitioners and or ms hartman as applicable failed to maintain adequate substantiating records supporting the various deductions here in dispute according to respondent a taxpayer’s failure to maintain adequate_records is a ground for the imposition of a sec_6662 penalty for negligence sanderlin v commissioner tcmemo_2008_209 corrigan v commissioner tcmemo_2005_119 sec_1_6662-3 income_tax regs in principle we agree with respondent but are not willing to impose the penalty on that basis in these cases for any of the years in issue according to petitioners and their return preparer petitioners maintained and presented to respondent’s examining agent sufficient documentation to support each of the deductions claimed on the returns for the years in issue it has not been made clear why if once available to the examining agent the records were not available at trial in any event petitioners assumed that the examining agent would be called as a witness at trial because that individual was listed as a witness on respondent’s pretrial memorandum respondent however did not call the examining agent who was not otherwise present during the trial and not available to be called as a witness on petitioners’ behalf what documents the examining agent reviewed remains a mystery but it stands that the only evidence on the point in the record consists of petitioners’ claim that substantiating documents at least as of the time each return was filed were not only maintained but also available to respondent for examination in the absence of any contrary evidence as to what documents were reviewed by the examining agent we are reluctant to impose a sec_6662 accuracy-related_penalty for any of the years in issue to reflect the foregoing an appropriate order will be issued denying petitioners’ motion to shift the burden_of_proof and decisions will be entered under rule