t c memo united_states tax_court chukwuma i odelugo petitioner v commissioner of internal revenue respondent docket no filed date g emeka obinna onwezi for petitioner paul t butler for respondent memorandum findings_of_fact and opinion chiechi judge respondent determined the following defi- ciencies in and additions to petitioner’s federal_income_tax 1special trial judge carleton d powell conducted the trial in this case he died after the case was submitted the parties have declined the opportunity for a new trial or for supplementa- tion of the record and have expressly consented to the reassign- ment of this case for opinion and decision based on the record of the trial held in this case tax_year deficiency dollar_figure dollar_figure additions to tax sec_6651 sec_6651 sec_6654 dollar_figure dollar_figure dollar_figure dollar_figure amount to be determined at a later date pursuant to sec_6651 and c in the answer respondent alleged certain increases in the deficiencies and the additions to tax under sec_6651 and and a for petitioner’s respective taxable years and that respondent had determined in the notices of deficiency with respect to those respective years notices the issues remaining for decision are does petitioner have unreported income for each of his taxable years and in excess of the amount determined in the notice_of_deficiency with respect to each of those years we hold that he does not is petitioner entitled for each of his taxable years and to deduct certain expenses that petitioner claims with respect to his law practice we hold that he is not is petitioner liable for each of his taxable years and for the addition_to_tax under sec_6651 we hold that he is to the extent stated herein 2all section references are to the internal_revenue_code code in effect for the years at issue all rule references are to the tax_court rules_of_practice and procedure is petitioner liable for each of his taxable years and for the addition_to_tax under sec_6651 we hold that he is to the extent stated herein is petitioner liable for each of his taxable years and for the addition_to_tax under sec_6654 we hold that he is to the extent stated herein findings_of_fact some of the facts have been stipulated and are so found petitioner’s address shown in the petition in this case was in baltimore maryland at an undisclosed time before the internal_revenue_service employed petitioner in an undisclosed capacity at all relevant times including during and the years at issue petitioner was licensed to practice law in maryland and in the district of columbia on an undisclosed date petitioner was admitted to practice before the united_states tax_court during and petitioner resided pincite u street nw washington d c the property located at that address u street property consisted of three floors during and petitioner who practiced law as a sole practitioner represented various clients at least some of whom were assigned to him under the criminal justice act cja 3the court takes judicial_notice that congress codified the cja in u s c sec 3006a starting on an undisclosed date in date through at least the end of that year petitioner employed anitha johnson ms johnson as a paralegal and office manager ms johnson continued to work for petitioner in an undisclosed capacity at least through by ms johnson’s own admission she did not perform well the administrative tasks that she was expected to undertake as part of her employment by petitioner throughout her employment neither petitioner nor ms johnson maintained adequate_records eg receipts invoices billing statements with respect to petitioner’s law practice during petitioner received nonemployee compensa- tion of dollar_figure from the general services administration kc federal building fund gsa and dollar_figure from the district of columbia and an early distribution of dollar_figure from the national finance center thrift_savings_plan during that year petitioner also earned interest of dollar_figure with respect to the checking and savings accounts petitioner’s irfcu checking and savings accounts that he maintained at the internal revenue federal credit_union irfcu during petitioner made deposits totaling dollar_figure into a checking account petitioner’s chevy chase checking account that he maintained at chevy chase bank during that year 4we shall sometimes refer collectively to petitioner’s chevy chase checking account and petitioner’s irfcu checking and continued petitioner also made deposits totaling dollar_figure into petitioner’s irfcu checking and savings accounts of which at least dollar_figure5 was made by direct deposit from gsa during petitioner received nonemployee compensation of dollar_figure from gsa during that year petitioner earned interest of dollar_figure with respect to petitioner’s irfcu checking and savings accounts during petitioner made deposits totaling dollar_figure into petitioner’s chevy chase checking account during that year petitioner also made deposits totaling dollar_figure into petitioner’s irfcu checking and savings accounts of which at least dollar_figure6 was made by direct deposit from gsa around date petitioner filed a tax_return return for his taxable_year that showed tax due of dollar_figure continued savings accounts as petitioner’s bank accounts 5for convenience we shall round up to the nearest dollar the dollar_figure of direct deposits that gsa made into petitioner’s irfcu checking account during 6the total amount of direct deposits that gsa made into petitioner’s irfcu checking account during rounded down to the nearest dollar equals the amount of nonemployee compensation from gsa that as discussed below was shown in the substitute for return that respondent prepared for petitioner’s taxable_year and the notice_of_deficiency that respondent issued to petitioner with respect to that year we presume that respondent rounded down to the nearest dollar the dollar_figure of nonemployee compensation that petitioner received from gsa during for convenience we shall round down to the nearest dollar that total amount of direct deposits and that the internal_revenue_service accepted as filed peti- tioner did not file a return for his taxable_year or his taxable_year nor did he make any estimated_tax payments with respect to either of those two years respondent prepared substitutes for return for petitioner’s respective taxable years substitute for return for and substitute for return for each of those substi- tutes for return consisted of the following documents sec_6020 certification sec_6020 certification form_1040 u s individual_income_tax_return for the taxable_year for which respondent prepared that substitute a tran- script of petitioner’s account for that year form_4549 income_tax examination changes and form 886-a explanation of items each sec_6020 certification certified that the pages attached thereto constituted a valid substitute for return under sec_6020 the substitute for return for showed inter alia nonemployee compensation of dollar_figure consisting of dollar_figure from gsa and dollar_figure from the district of columbia interest of dollar_figure a taxable_distribution from the national finance center thrift_savings_plan of dollar_figure and total_tax of dollar_figure the substitute for return for showed inter alia nonemployee compensation of dollar_figure from gsa interest of dollar_figure and total_tax of dollar_figure respondent issued to petitioner separate notices with respect to his taxable years notice for and notice for in the notice for respondent deter- mined inter alia that petitioner has nonemployee compensa- tion of dollar_figure interest of dollar_figure and a taxable distri- bution from the national finance center thrift_savings_plan of dollar_figure in that notice respondent also determined that peti- tioner is liable for additions to tax under sec_6651 and and a of dollar_figure an amount to be computed at a later date and dollar_figure respectively in the notice for respondent determined inter alia that petitioner has nonemployee compensation of dollar_figure and interest of dollar_figure in that notice respondent also determined that petitioner is liable for additions to tax under sec_6651 and and a of dollar_figure an amount to be com- puted at a later date and dollar_figure respectively 7the dollar_figure of nonemployee compensation that respondent determined in the notice for was based upon the nonemployee compensation shown in the substitute for return for as discussed above of that total amount of nonemployee compensation_for dollar_figure was from gsa and dollar_figure was from the district of columbia 8the dollar_figure of nonemployee compensation that respondent determined in the notice for was based upon the nonemployee compensation shown in the substitute for return for as discussed above the entire amount of that nonemployee compensa- tion for was from gsa in the answer respondent alleged that respondent conducted a deposit analysis and reconciliation of petitioner’s bank accounts for each of petitioner’s taxable years bank_deposits analysis and bank_deposits analysis in the answer respondent further alleged that the bank_deposits analysis showed that during petitioner made total deposits of at least dollar_figure into petitioner’s bank accounts of which dollar_figure is taxable_income and that the bank_deposits analysis showed that during petitioner made total deposits of at least dollar_figure into those accounts of which dollar_figure is taxable incomedollar_figure respondent did not allege in the answer that respondent reduced the total deposits that respondent alleged for petitioner’s respective taxable years and by the amounts of total unreported income that respondent had determined in the respective notices and that respondent should have reasonably known had been deposited into petitioner’s bank accounts during those respective years nor did respondent allege in the answer that respondent reduced the amounts of total unreported income that respondent alleged in the answer for petitioner’s respective taxable years and by any 9in effect respondent alleged in the answer that for dollar_figure of petitioner’s total deposits during that year are not taxable 10in effect respondent alleged in the answer that for dollar_figure of petitioner’s total deposits during that year are not taxable_portion of the amounts of unreported income that respondent had determined in the respective notices in the answer respondent also alleged that petitioner’s total_tax for petitioner’s taxable_year is dollar_figure and that the increase in the deficiency that respondent had determined in the notice for is dollar_figure in the answer respondent further alleged that petitioner’s total_tax for petitioner’s taxable_year is dollar_figure and that the increase in the deficiency that respondent had determined in the notice for is dollar_figure in the answer respondent further alleged certain increases in the additions to tax under sec_6651 and and a that respondent had determined in the respective noticesdollar_figure at an undisclosed time after petitioner commenced the instant case ms johnson signed petitioner’s name on and submitted to respondent on petitioner’s behalf returns for petitioner’s respective taxable years purported return and purported return in the purported return petitioner showed on page inter alia taxable inter- est of dollar_figure business income from schedule c profit or loss from business schedule c of dollar_figure and total pensions and 11in the answer respondent alleged that the amounts of the increases in the additions to tax under sec_6651 and and a for petitioner’s respective taxable years and that respondent had determined in the notices are to be determined based upon the increases in the underlying deficien- cies for those respective years annuities of dollar_figure in the purported return petitioner showed on page inter alia business income from schedule c of dollar_figure petitioner included schedule c as part of the purported return purported schedule c and the purported return purported schedule c in those purported schedules c petitioner showed the principal business or profession as lawyer and attorney respectively in the purported schedule c petitioner showed gross_income of dollar_figure in that purported schedule petitioner claimed total expenses before expenses for business use of home of dollar_figure consisting of dollar_figure for advertising dollar_figure for car and truck expenses vehicle expenses dollar_figure for depreci- ation dollar_figure for insurance other than health insurance premiums dollar_figure for mortgage interest dollar_figure for other interest dollar_figure for office expense dollar_figure for repairs and maintenance dollar_figure for supplies dollar_figure for taxes and licenses dollar_figure for meals and entertainment dollar_figure for utili- ties utility expenses and dollar_figure for other expenses in the purported schedule c petitioner also claimed expenses for business use of your home of dollar_figure in that purported sched- 12the amount of gross_income shown in the purported schedule c is dollar_figure more than the total nonemployee compensation that respondent showed in the substitute for return for and that respondent determined in the notice for ule petitioner showed net profit of dollar_figure which as stated above petitioner reported in petitioner’s purported return on page as business income from schedule c in the purported schedule c petitioner showed gross_income of dollar_figure and total expenses of dollar_figure for deprecia- tion in that purported schedule petitioner showed net profit of dollar_figure which as stated above petitioner reported in petitioner’s purported return on page as business income from schedule c opinion petitioner bears the burden of proving error in the determi- nations in the notices for petitioner’s respective taxable years and that remain at issue see rule a 290_us_111 unless that burden shifts to respondent under sec_7491 the parties disagree over whether the burden_of_proof with respect to the deficiency determinations in the respective notices shifts to respondent under that sectiondollar_figure on the record before us we find that 13respondent showed in the substitute for return for and determined in the notice for that petitioner has total nonemployee compensation of dollar_figure for that year 14respondent submitted to the court a pretrial memorandum petitioner did not in respondent’s pretrial memorandum respon- dent argues that the burden_of_proof with respect to the defi- ciency determinations in the respective notices does not shift to respondent under sec_7491 at the end of the trial in this case special_trial_judge powell ordered the parties to file continued petitioner has failed to carry his burden of establishing that he complied with the requirements of sec_7491 and b on that record we hold that the burden_of_proof with respect to the deficiency determinations in the respective notices does not shift to respondent under sec_7491 respondent however bears the burden_of_proof with respect to the allegations in the answer to increase the deficiencies and the additions to tax under sec_6651 and and a that respondent had determined in the respective notices see rule a before turning to the issues presented we shall summarize certain principles applicable to the schedule c deductions that petitioner is claiming and evaluate certain evidence on which petitioner relies certain applicable principles deductions are strictly a matter of legislative grace and the taxpayer bears the burden of proving entitlement to any deduction claimed 503_us_79 a taxpayer is required to maintain records sufficient to establish the amount of any deduction claimed sec_6001 continued posttrial memoranda he specifically ordered the parties to limit the content of their memoranda to proposed findings_of_fact respondent complied with that order petitioner did not in violation of special_trial_judge powell’s order petitioner advances in petitioner’s posttrial memorandum various arguments with respect to the burden_of_proof in this case and the issues presented sec_1_6001-1 income_tax regs sec_162 generally allows a deduction for ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business the determination of whether an expenditure satisfies the requirements for deductibility under sec_162 is a question of fact see 320_us_467 in general an expense is ordinary if it is considered normal usual or customary in the context of the particular business out of which it arose see 308_us_488 ordinarily an expense is necessary if it is appropriate and helpful to the operation of the taxpayer’s trade_or_business see 383_us_687 83_tc_356 affd 777_f2d_662 11th cir sec_262 generally disallows a deduction for personal living or family_expenses for certain kinds of expenses otherwise deductible under sec_162 such as business_expenses relating to listed_property as defined in sec_280f a taxpayer must satisfy substantiation requirements set forth in sec_274 before such expenses will be allowed as deductions see sec_1_274-5t temporary income_tax regs fed reg date as pertinent here listed_property is defined in sec_280f to include passenger automobiles and other_property used as a means of transportation unless excepted by sec_280f or b and cellular telephonesdollar_figure see sec_280f ii v sec_167 allows a deduction for a reasonable allowance for the exhaustion wear_and_tear and obsolescence of property used in a trade_or_business or held_for_the_production_of_income in general the basis on which a depreciation deduction is allowable with respect to any property under sec_167 is the adjusted_basis of the property determined under sec_1011 for the purpose of determining gain on the sale or other disposi- tion of such property see sec_167 sec_280a generally disallows a deduction otherwise allowable under the code with respect to the use of a dwelling_unit that general_rule however does not apply with respect to any item to the extent such item is allocable to a portion of the dwelling_unit which is exclusively used on a regular basis-- a as the principal_place_of_business for any trade_or_business of the taxpayer or b as a place of business which is used by patients clients or customers in meeting or 15the elements that a taxpayer must prove with respect to any listed_property are a the amount of each separate expenditure with respect to such property and b the amount of each business use based on the appropriate measure eg mileage for automobiles of such property the time ie the date of the expenditure or use with respect to any such property and the business_purpose for an expenditure or use with respect to such property sec_1_274-5t temporary income_tax regs fed reg date dealing with the taxpayer in the normal course of his trade_or_business sec_280a and b evaluation of certain evidence on which petitioner relies in order to satisfy his burden_of_proof petitioner relies on inter alia ms johnson’s testimony certain stipulated documents and certain other documents that petitioner introduced into the record at trialdollar_figure we shall refer collectively to those stipulated documents and those documents that petitioner introduced into the record at trial as petitioner’s documents with respect to ms johnson’s testimony ms johnson started working for petitioner’s law practice on an undisclosed date in date she had no personal knowledge regarding peti- tioner’s law practice or any other activities of petitioner during to the date in date on which petitioner first employed her as a result at the trial in this case special_trial_judge powell ordered ms johnson to restrict her testimony to matters with respect to which she had personal knowledge see fed r evid during her testimony ms johnson failed in certain material respects to comply with special_trial_judge powell’s order under the circumstances we shall not rely on 16petitioner was not at the trial in this case 17as discussed below in order to satisfy his burden_of_proof petitioner also relies on certain other documents peti- tioner’s proffered documents ms johnson’s testimony to the extent that it pertained to matters with respect to which she did not have personal knowl- edge see id in addition we found ms johnson’s testimony to be in certain material respects general vague conclusory internally inconsistent and or contradicted by the record under the circumstances we are not required to and we shall not rely on that testimony to establish petitioner’s position with respect to any of the issues presented in this case see 877_f2d_624 7th cir affg tcmemo_1987_295 440_f2d_688 9th cir affg per curiam tcmemo_1969_159 112_tc_183 with respect to petitioner’s documents those documents include the purported return and the purported return petitioner apparently is relying on those purported returns to support his position with respect to the schedule c deductions that he is claiming heredollar_figure the respective expenses and the 18although not altogether clear it appears that petitioner is claiming for his respective taxable years and all of the expense and depreciation_deductions that are shown in the purported schedule c and the purported schedule c except the respective expense deductions claimed in the purported schedule c for other expenses meals and entertain- ment and expenses for business use of your home if our understanding were incorrect and if petitioner were also claiming that he is entitled for his taxable_year to deduct other expenses meals and entertainment and expenses for business continued respective amounts of depreciation that are shown in the pur- ported schedule c and the purported schedule c are nothing more than statements of petitioner’s position and do not establish that petitioner is entitled to deduct those claimed expenses and depreciation petitioner’s documents also include virtually all of peti- tioner’s bank statements for and respectively for petitioner’s chevy chase checking account chevy chase bank statements and petitioner’s irfcu checking and savings accounts irfcu bank statements those bank statements show withdrawals from checks drawn on and deposits into those respective accounts during the years at issue the chevy chase bank statements and the irfcu bank statements do not show the purpose of any of those withdrawals the payee or the purpose of any of those checks or the source of any of those deposits except certain deposits into the checking account petitioner’s continued use of your home on the record before us we find that peti- tioner has failed to carry his burden of establishing that he is entitled to those deductions 19although the chevy chase bank statements and the irfcu bank statements do not show the payee of the checks drawn on petitioner’s chevy chase checking account and petitioner’s irfcu checking account petitioner included as part of petitioner’s proffered documents copies of more than one-third of the checks drawn on petitioner’s chevy chase checking account and one check drawn on petitioner’s irfcu checking account those checks show the payees thereof irfcu checking account that petitioner maintained at irfcudollar_figure we shall not rely on those statements to establish the purpose of any of the withdrawals from the payee21 or the purpose of any of the checks drawn on or the source of certain of the deposit sec_22 into petitioner’s bank accounts unreported income in the notice for respondent determined that peti- tioner has the following unreported income nonemployee compensation of dollar_figure consisting of dollar_figure from gsa and dollar_figure from the district of columbia interest of dollar_figure and a taxable_distribution of dollar_figure from the national finance center thrift_savings_plan in the notice for respondent determined that petitioner has the following unre- ported income nonemployee compensation of dollar_figure from gsa24 and interest of dollar_figure petitioner concedes the income determinations in the notices 20we found above that the irfcu bank statements show that gsa was the source of certain of the deposits made into peti- tioner’s irfcu checking account during each of the years and 21see supra note 22see supra note 23see supra note 24see supra note in the answer respondent alleged that the bank_deposits analysis showed that during petitioner made total deposits of at least dollar_figure into petitioner’s bank accounts of which dollar_figure is taxable and therefore dollar_figure is not taxable and that the bank_deposits analysis showed that during petitioner made total deposits of at least dollar_figure into those accounts of which dollar_figure is taxable and therefore dollar_figure is not taxable dollar_figure respondent did not allege in the answer that respondent reduced the total deposits that respondent 25in the stipulation of facts the parties stipulated of the dollar_figure petitioner deposited into the chevy chase checking account in dollar_figure was from non- taxable sources of the dollar_figure petitioner deposited into the chevy chase checking account in dollar_figure was from non-taxable sources of the dollar_figure petitioner deposited into the irfcu accounts in dollar_figure was from non-tax- able sources we construe the foregoing stipulations to mean that at least dollar_figure of the total deposits that petitioner made during into petitioner’s bank accounts and at least dollar_figure of the total deposits that petitioner made during into those accounts are not taxable to construe those stipulations otherwise would mean that petitioner conceded in the parties’ stipulation of facts that for each of his taxable years and he has the total amount of unreported income that respondent alleged in the answer for each of those years on the record before us we find that petitioner did not intend to make that concession cf rule e alleged for petitioner’s respective taxable years and by the amounts of total unreported income that respondent had determined in the respective notices and that respondent should have reasonably known had been deposited into petitioner’s bank accounts during those respective years nor did respondent allege in the answer that respondent reduced the amounts of total unreported income that respondent alleged in the answer for petitioner’s respective taxable years and by any portion of the amounts of unreported income that respondent had determined in the respective notices where a taxpayer has failed to maintain sufficient records under sec_6001 as is the case here the commissioner of internal revenue commissioner may rely on the bank_deposits method in order to determine the taxpayer’s income 70_tc_1057 respondent has the burden_of_proof with respect to the allegations of unreported income that respondent advanced in the answer on the basis of the bank_deposits method see rule a and the obligation to check all reasonable leads in order to verify the essential accuracy of the income approximation produced by that methoddollar_figure on the record before us we find that respondent has failed to carry respondent’s burden of showing that respondent checked all reasonable leads in order to verify the essential accuracy of 26see cruz v commissioner tcmemo_1990_594 the amount of total unreported income for each of petitioner’s taxable years and that respondent alleged in the answer in fact respondent appears to have ignored actual facts of which respondent was aware that affect the essential accuracy of each of those amounts of alleged total unreported income with respect to the total deposits that respondent alleged in the answer for petitioner’s taxable_year respondent knew that at least certain dollar_figure of the nonemployee compensation that petitioner received from gsa during that year which respon- dent included as part of the total unreported income determined in the notice for had been deposited by direct deposit into petitioner’s irfcu checking accountdollar_figure respondent has not proffered any evidence as to whether the dollar_figure that respondent excluded from petitioner’s total deposits under the bank_deposits analysis included any of the dollar_figure that gsa had deposited into petitioner’s irfcu checking account during nor has respondent proffered any evidence as to whether respon- dent checked all reasonable leads in order to verify whether any of the remaining unreported income that respondent determined in 27in the notice for respondent determined that peti- tioner has additional nonemployee compensation of dollar_figure from gsa see supra note 28the irfcu bank statements show that gsa started making direct deposits into petitioner’s irfcu checking account in date and that during november through date gsa made direct deposits totaling dollar_figure into that account the notice for ie the balance of the nonemployee compen- sation from gsa dollar_figure the nonemployee compensation from the district of columbia dollar_figure and the distribution from the national finance center thrift_savings_plan dollar_figure had been deposited into petitioner’s bank accounts during that year with respect to the total deposits that respondent alleged in the answer for petitioner’s taxable_year respondent knew that all dollar_figure of the nonemployee compensation that peti- tioner received from gsa during that year which respondent included as part of the total unreported income determined in the notice for had been deposited by direct deposit into petitioner’s irfcu checking account respondent has not prof- fered any evidence as to whether the dollar_figure that respondent excluded from petitioner’s total deposits under the bank_deposits analysis included any of the dollar_figure that gsa had deposited into petitioner’s irfcu checking account during moreover even if respondent had excluded dollar_figure of the total amount that gsa had deposited respondent did not exclude from petitioner’s total deposits during the balance dollar_figure that gsa had deposited into petitioner’s irfcu checking account during that year nor did respondent reduce the amount of total unreported income that respondent alleged in the answer for petitioner’s taxable_year by any portion of the amount of unreported income that respondent determined in the notice for on the record before us we find that respondent has failed to carry respondent’s burden of establishing that petitioner has unreported income for his respective taxable years and in excess of the amounts determined in the notices on that record we further find that respondent has failed to carry respondent’s burden of establishing that petitioner has the increases in the deficiencies for his respective taxable years and that respondent alleged in the answer claimed deductions it is petitioner’s position that he is entitled to deduct for his taxable_year the following advertising expenses of dollar_figure vehicle expenses of dollar_figure insurance premiums of dollar_figure mortgage interest of dollar_figure other interest of dollar_figure office expenses of dollar_figure repair and maintenance_expenses of dollar_figure expenses for supplies of dollar_figure taxes and licenses of dollar_figure utility expenses of dollar_figure and depreciation of dollar_figure with respect to a the u street property and b certain unidentified vehicles it is petitioner’s position that he is entitled to deduct for his taxable_year depreciation of dollar_figure with respect to the u street property and an unidentified vehicledollar_figure 29in his posttrial memorandum petitioner states the petitioner includes all his business_expenses under depreci- continued in support of his position that he is entitled to the schedule c deductions that he is claiming petitioner relies on ms johnson’s testimony and petitioner’s documents we set forth above our evaluation of that evidence petitioner also relies on petitioner’s proffered documents virtually all of which pertain to petitioner’s taxable_year petitioner’s proffered documents dollar_figure at the trial in this case respondent objected to the admission of petitioner’s proffered documents on the ground that no proper foundation had been laid for the admission of those documents as business records it is not clear from the record whether special_trial_judge powell ruled on that objec- tion the following discussion assumes arguendo that special_trial_judge powell admitted petitioner’s proffered documents into evidence and made them part of the record continued ation and sec_179 expense deduction although not alto- gether clear we construe petitioner’s statement to mean that the only schedule c deduction that he is claiming for is a depreciation deduction our understanding of petitioner’s statement in petitioner’s posttrial memorandum is consistent with the purported return the only deduction that petitioner claimed in the purported schedule c is a depreciation deduction of dollar_figure 30only two of petitioner’s proffered documents pertain to petitioner’s taxable_year ie a check drawn on peti- tioner’s irfcu checking account dated date and payable to ana jose reyes and a check drawn on petitioner’s chevy chase checking account dated date and payable to u street cleaners the record does not disclose the issue s presented in this case if any to which those checks pertain we first evaluate petitioner’s proffered documents those proffered documents consist of certain checks peti- tioner’s checks that petitioner issued to various individuals and establishments including certain checks that petitioner issued to a pediatrician certain credit card statements consisting of a two statements for a chase card that show closing dates of june and date respectively and b two statements for a visa gold card that show closing dates of date and date respectively a purported mileage log of petitioner petitioner’s purported mileage log duplicates of certain of the irfcu bank statements and the chevy chase bank statements that are included in petitioner’s documents that the parties stipulated certain invoices and billing statements from various estab- lishments petitioner’s invoices and billing statements includ- ing certain statements from a pediatrician certain receipts consisting of a two receipts from sears dated september and date respectively b a receipt from hechinger dated date and c a receipt from the university of the district of columbia dated date certain docu- ments relating to certain student loans certain deposit slips and a notice dated date with respect to an unsatisfied parking ticket we find that petitioner’s proffered documents are inadequate to establish petitioner’s entitlement to any of the schedule c deductions that he is claiming for his taxable_year by way of illustration of the inadequacies of petitioner’s proffered documents we do not know the claimed expense s to which approximately three-quarters of petitioner’s checks pertaindollar_figure as for the remainder of petitioner’s checks although we have been able to determine the claimed expense s to which those checks pertain we find that those checks do not establish inter alia that petitioner paid those expenses in conducting his law practice by way of further illustration of the inadequacies of petitioner’s proffered documents petitioner’s credit card statements do not establish the claimed expense s to which those statements pertain or whether petitioner is claiming all of the expenses shown in those statements moreover we find that petitioner’s credit card statements do not establish inter alia that petitioner paid the expenses shown in petitioner’s credit card statements in conducting his law practice 31included in petitioner’s checks are a substantial number of checks with handwritten notations most of which are illegible or unclear as to their meaning we note that even if the hand- written notations on petitioner’s checks were legible and clear as to their meaning those notations do not establish that the expenditures paid_by those checks were paid in conducting peti- tioner’s law practice as a further illustration of the inadequacies of peti- tioner’s proffered documents petitioner’s purported mileage log32 consists of four columns with the headings date from to and miles the entries shown in the columns headed from and to for the period january through date consist of various addresses with no further explanation virtually all of the entries shown in the columns headed from and to for the period may through date consist of terms such as home court jail witness client’s home and crime scene dollar_figure because petitioner was not at the trial in this case he was not available to explain the entries in petitioner’s purported mileage log nor is there reli- able evidence in the record to explain any of the entries in petitioner’s purported mileage log and how petitioner used that purported log to calculate the deduction that he claims for vehicle expenses we find that petitioner’s purported mileage log does not establish inter alia that petitioner made the purported trips reflected in that purported log in conducting 32ms johnson who did not start working for petitioner until sometime in date testified that petitioner prepared petitioner’s purported mileage log ms johnson did not testify how she knew that petitioner prepared that purported log which purports to cover trips during only or when he prepared it 33certain of the entries in the respective columns headed from and to for the period may through date are addresses his law practice by way of further illustration of the inadequacies of petitioner’s proffered documents we find that petitioner’s invoices and billing statements do not establish inter alia that petitioner paid the amounts shown therein and or that petitioner paid the amounts shown in those invoices and billing statements in conducting his law practice as a final illustration of the inadequacies of petitioner’s proffered documents neither the receipt from the university of the district of columbia nor the receipts from sears indicate the reason petitioner expended the amounts shown in those respec- tive receipts although the receipt from hechinger shows the item sec_34 that were purchased for the total amount shown in that receipt we find that it does not establish inter alia that petitioner purchased those items in conducting his law practice we now address petitioner’s argument that he is entitled to the schedule c deductions that he is claiming for his respective taxable years and with respect to the claimed sched- ule c deductions for for advertising expenses vehicle expenses insurance premiums mortgage interest other inter- 34the items shown in the receipt from hechinger are drum liner trash bag ground fault kit staple dispenser romex connector and nmb cable 35the record does not establish the type of insurance_policy to which petitioner’s claimed insurance premiums pertain est office expenses repair and maintenance_expenses expenses for supplies taxes and licenses and utility expenses we find nothing in the record that satisfies petitioner’s burden of showing that during petitioner paid_or_incurred those expenses that he paid_or_incurred those expenses in conduct- ing his law practice and or that those expenses constitute ordinary and necessary business_expenses in conducting his law practice under sec_162 on the record before us we find that petitioner has failed to carry his burden of establishing that he is entitled for his taxable_year to the respective deductions under sec_162 that he claims for advertising expenses vehicle expenses insurance premiums mortgage inter- est other interest office expenses repair and maintenance_expenses expenses for supplies taxes and licenses and utility expenses with respect to the depreciation_deductions that petitioner claims with respect to the u street property for his respective taxable years and the only evidence that petitioner introduced to support those claimed deductions is ms johnson’s general and vague testimony that the depreciation on the home is based on a calculation of a formula based on the amount you purchase the home over a period of time and that a good guess 36the record does not establish the nature of petitioner’s claimed interest of the purchase_price for that property is dollar_figure on the record before us we find that petitioner has failed to carry his burden of establishing that he is entitled for his respective taxable years and to the depreciation_deductions under sec_167 that he claims with respect to the u street property with respect to the respective depreciation_deductions that petitioner claims for his taxable_year with respect to certain unidentified vehicles and the depreciation deduction that he claims for his taxable_year with respect to an unidenti- fied vehicle on the record before us we find that petitioner has failed to carry his burden of establishing inter alia that he used any vehicle as part of his law practice see sec_167 on that record we further find that petitioner has failed to carry his burden of establishing that he is entitled for his taxable_year to the depreciation deduction under sec_167 that he claims with respect to certain unidenti- fied vehicles and for his taxable_year to the deprecia- tion deduction under that section that he claims with respect to an unidentified vehicle assuming arguendo that we had found that petitioner carried his burden of establishing for his taxable_year the deductibility under sec_162 of petitioner’s claimed expenses pertaining to the u street property ie petitioner’s claimed mortgage interest petitioner’s claimed utility expenses and petitioner’s claimed repair and maintenance_expenses and for his respective taxable years and the deduct- ibility under sec_167 of petitioner’s claimed depreciation with respect to that property he would still have to satisfy the requirements of sec_280a with respect to those expense and depreciation_deductions in order to satisfy the requirements of that section petitioner would have to establish that those expense and depreciation_deductions are allocable to a portion of the u street property that was exclusively used on a regular basis as the principal_place_of_business for his law practice or as a place of business to meet or deal with clients in the normal course of his law practice see sec_280a the parties do not dispute that petitioner resided at the u street property and that that property consisted of three floors petitioner contends that during each of the years at issue he exclusively used on a regular basis the lower two floors of the u street property as his principal_place_of_business for his law practice or as a place of business to meet or deal with clients in the normal course of his practice to support petitioner’s contention petitioner relies on ms johnson’s testimony as discussed above we are unwilling to rely on ms johnson’s testimony to the extent that it pertained to matters surrounding petitioner’s law practice or any other activities of petitioner during to the date in date on which petitioner first employed her assuming arguendo that we were willing to rely on ms johnson’s testimony with respect to whether during each of the years at issue petitioner exclusively used on a regular basis the u street property as his principal_place_of_business for his law practice or as a place of business to meet or deal with clients in the normal course of his practice we found her testimony to be internally inconsistent ms johnson testified on direct examination that the top two floors of the u street property were completely business on cross-examination ms johnson contra- dicted that testimony and testified that the top floor of the u street property was just his residence and that the lower two floors of that property were used for business purposes on the record before us we find that petitioner has failed to carry his burden of establishing that during each of the years at issue he exclusively used on a regular basis any portion of the u street property as the principal_place_of_business for his law practice or as a place of business to meet or deal with clients in the normal course of his law practice see sec_280a assuming arguendo that we had found that petitioner carried his burden of establishing for his taxable_year the deduct- ibility under sec_162 of petitioner’s claimed vehicle expenses petitioner would still have to satisfy the requirements of sec_274 with respect to those expenses on the record before us we find that he has not done so see sec_274 sec_1_274-5t temporary income_tax regs fed reg date assuming arguendo that we had found that petitioner carried his burden of establishing for his taxable_year the deduct- ibility under sec_162 of petitioner’s claimed office expenses it appears from ms johnson’s testimony that those claimed expenses include certain expenses that pertained to the use of a cellular telephonedollar_figure to the extent that petitioner is claiming expenses that pertained to the use of a cellular tele- phone petitioner would still have to satisfy the requirements of sec_274 on the record before us we find that he has not done so see sec_274 sec_1_274-5t temporary income_tax regs fed reg date additions to tax it is respondent’s position that petitioner is liable for the respective additions to tax under sec_6651 and and a that respondent determined in the notices and the 37because ms johnson testified that she itemized the expenses shown in the purported return we believe that she had personal knowledge of the nature of the expenses that peti- tioner is claiming for his taxable_year as discussed above that is not to say that ms johnson had personal knowledge of the expenses that petitioner paid during that year in conduct- ing his law practice increases in those respective additions to tax that respondent alleged in the answer sec_6651 imposes an addition_to_tax for failure_to_file timely a return sec_6651 imposes an addition_to_tax for failure to pay timely the amount shown as tax in a return the respective additions to tax under sec_6651 and do not apply if the respective failures to file timely and to pay timely are due to reasonable_cause and not willful neglect sec_6651 and sec_6654 imposes an addition_to_tax in the case of an underpayment of estimated_tax by an individualdollar_figure the addition_to_tax under that section is mandatory unless petitioner qualifies under one of the exceptions in sec_6654dollar_figure 38for purposes of sec_6654 it is necessary to determine whether there is an underpayment of a required_installment of estimated_tax see sec_6654 and b in this connection the amount of any required_installment i sec_25 percent of the required_annual_payment sec_6654 the required_annual_payment is equal to the lesser_of percent of the tax shown in the return for the taxable_year or if no return was filed percent of the tax for such year or if the indi- vidual filed a return_for_the_preceding_taxable_year percent of the tax shown in such return sec_6654 sec_6654 provides that no addition_to_tax shall be imposed under sec_6654 for any taxable_year if the tax shown in the return for such taxable_year or if no return is filed the tax reduced by the credit allowable under sec_31 is less than dollar_figure sec_6654 the preceding_taxable_year was a taxable_year of months the individual did not have any liability for such preceding_taxable_year and the individual was a citizen or resident_of_the_united_states throughout such preceding_taxable_year sec_6654 the secretary continued respondent must carry the burden of production with respect to the respective additions to tax under sec_6651 and and a that respondent determined in the notices and the increases in those respective additions to tax that respondent alleged in the answer sec_7491 116_tc_438 to satisfy respondent’s burden of production respondent must come forward with sufficient evi- dence indicating that it is appropriate to impose the additions to tax higbee v commissioner supra pincite although respon- dent bears the burden of production with respect to the respec- tive additions to tax under sec_6651 and and a that respondent determined in the notices respondent need not introduce evidence regarding reasonable_cause or similar provisions the taxpayer bears the burden_of_proof with regard to those issues higbee v commissioner supra respondent bears the burden_of_proof with respect to the in- creases in the respective additions to tax under sec_6651 and and a for petitioner’s taxable_year sec_39 continued determines that by reason of casualty disaster or other unusual circumstances the imposition of such addition_to_tax would be against equity and good conscience sec_6654 or the secretary determines that during the taxable_year for which the estimated payments are required or in the taxable_year preceding such taxable_year the taxpayer retired after having attained the age of or became disabled and the underpayment of any estimated_tax was due to reasonable_cause and not willful neglect sec_6654 and that respondent alleged in the answer see rule a with respect to the respective additions to tax under sec_6651 and and a that respondent deter- mined in the notices we turn first to the addition_to_tax under sec_6651 we have found that petitioner did not file a return for each of his taxable years and on the record before us we find that respondent has carried respon- dent’s burden of production under sec_7491 with respect to the additions to tax under sec_6651 that respondent determined in the respective notices petitioner relies on ms johnson’s testimony to support his position that his failure_to_file timely was due to reasonable_cause and not willful neglect sec_1_6081-4 income_tax regs provides that an individual who is required to file an individual_income_tax_return will be allowed an automatic 4-month extension of time to file the return after the date prescribed for filing the return after taking the automatic four-month extension into account the due_date for petitioner’s return for would have been date and the due_date for petitioner’s return for would have been date ms johnson began working for petitioner sometime in date and continued to work for him until at least through we believe that ms johnson had personal knowledge about why peti- tioner failed to file a return for each of his taxable years and ms johnson testified that petitioner did not file a return for each of his taxable years and because he did not have all of the information that he needed to file a return for each of those years and was too busy in his law practice the unavailability of information or records does not necessarily establish reasonable_cause for failure_to_file timely a return see 56_tc_1324 affd without published opinion 496_f2d_876 5th cir a taxpayer is required to file timely based upon the best information available and to file thereafter an amended_return if necessary 79_tc_298 moreover a taxpayer’s preoccupation with employment or other activities does not necessarily establish reasonable_cause for failure to timely file a return 53_tc_491 affd 467_f2d_47 9th cir on the record before us we find that petitioner has failed to carry his burden of showing that his failure_to_file a return for each of his taxable years and was due to reasonable_cause and not willful neglect on that record we further find that petitioner has failed to carry his burden of establishing that he is not liable for the additions to tax under sec_6651 that respondent determined in the respective notices we turn now to the additions to tax under sec_6651 that respondent determined in the respective notices that section applies only in the case of an amount of tax shown in a return 120_tc_163 for purposes of sec_6651 a return prepared by the commis- sioner under sec_6020 is treated as the return filed by the taxpayer sec_6651 cabirac v commissioner supra because petitioner did not file a return for each of his taxable years and respondent prepared a substitute for return under sec_6020 for each of those years the substitute for return for showed total_tax of dollar_figure the substi- tute for return for showed total_tax of dollar_figure the record establishes that petitioner failed to pay timely the tax shown in each of those substitutes for return on the record before us we find that respondent has carried respondent’s burden of production under sec_7491 with respect to the additions to tax under sec_6651 that respondent determined in the respective notices it appears that petitioner is claiming that he failed to pay timely the tax shown in the substitute for return for and the tax shown in the substitute for return for for the same reasons that petitioner failed to file timely a return for each of those years that is to say he did not have all of the requisite information and was too busy in his law practice on the record before us we find that petitioner has failed to carry his burden of showing that his failure to pay timely the tax shown in the substitute for return for and the tax shown in the substitute for return for was due to reasonable_cause and not willful neglectdollar_figure on that record we further find that petitioner has failed to carry his burden of establish- ing that he is not liable for the additions to tax under sec_6651 that respondent determined in the respective notices we turn finally to the additions to tax under sec_6654 that respondent determined in the respective notices we have found that petitioner filed a return for his taxable_year that showed tax due of dollar_figure and that the irs ac- cepted as filed that petitioner did not file a return for each of his taxable years and and that petitioner did not make any estimated_tax payments for either of his taxable years or on the record before us we find that respondent has carried respondent’s burden of production under sec_7491 with respect to the additions to tax under sec_6654 that respondent determined in the respective notices with respect to the additions to tax under sec_6654 that respondent determined in the respective notices petitioner 40cf klein v commissioner tcmemo_2007_325 joubert v commissioner tcmemo_2007_292 does not argue and the record does not establish that he qualifies under any of the exceptions listed in sec_6654 on the record before us we find that petitioner is liable for the additions to tax under sec_6654 that respondent determined in the respective notices with respect to the increases in the additions to tax under sec_6651 and and a for petitioner’s respec- tive taxable years and that respondent alleged in the answer we have found that respondent has failed to carry respon- dent’s burden of establishing that petitioner has the increases in the deficiencies for his respective taxable years and that respondent alleged in the answer on the record before us we find that respondent has failed to carry respondent’s burden of establishing that petitioner is liable for his respec- tive taxable years and for the increases in the addi- tions to tax under sec_6651 and and a that respondent alleged in the answer we have considered all of the contentions and arguments of petitioner that are not discussed herein and we find them to be without merit irrelevant and or moot to reflect the foregoing decision will be entered for respondent with respect to the deficiencies and additions to tax determined in the notices and for petitioner with respect to the increases in those deficiencies and those additions to tax alleged in the answer


t c summary opinion united_states tax_court david bagdan and maureen bagdan petitioners v commissioner of internal revenue respondent docket no 16317-15s filed date david bagdan and maureen bagdan pro sese kimberly a trujillo and catherine j caballero for respondent summary opinion leyden special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not 1all section references are to the internal_revenue_code as amended in continued 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 the internal_revenue_service irs determined a deficiency in petitioners’ federal_income_tax of dollar_figure and a sec_6662 accuracy-related_penalty of dollar_figure the issues for decision are whether petitioners are entitled to deduct dollar_figure of unreimbursed employee_expenses reported on schedule a itemized_deductions entitled to deduct dollar_figure of car and truck expenses with respect to mr bagdan’s business of officiating sports games reported on schedule c profit or loss from business and liable for a sec_6662 accuracy-related_penalty the court holds that petitioners are not entitled to deduct dollar_figure of unreimbursed employee_expenses not entitled to deduct dollar_figure of car and continued effect at all relevant times and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated 2the court uses the term irs to refer to administrative actions taken outside of these proceedings the court uses the term respondent to refer to the commissioner of internal revenue who is the head of the irs and is respondent in this case and to refer to actions taken in connection with this case truck expenses and not liable for the sec_6662 accuracy-related_penalty background the parties submitted this case fully stipulated pursuant to rule petitioners resided in california when they timely filed their petition i mr bagdan’s employment during during mr bagdan was employed by on demand power inc on demand power as an outside sales and business development associate during on demand power had a policy of reimbursing all sales-related expenses for mr bagdan’s position on demand power’s reimbursement policy with respect to mr bagdan stated on demand power will reimburse mr bagdan for all sales related expenses when all receipts are presented in a documented hard copy paper or fax approved by mr bagdan’s signature as being business related and approved by on demand power during on demand power reimbursed mr bagdan dollar_figure for cellular phone expenses dollar_figure for an oil change for his car dollar_figure for tolls and dollar_figure for brake repairs to his car 3adjustments to the amounts of petitioners’ self-employment_tax self- employment_tax deduction alternative_minimum_tax and education credit are purely computational matters the resolution of which depends on our disposition of the first and second disputed issues ii mr bagdan’s officiating business during mr bagdan officiated at a large number of basketball and boys’ lacrosse games he received dollar_figure in gross_receipts for this work mr bagdan drove to and from most of the games using his own car and did not maintain contemporaneous documentation for the miles he drove the parties stipulated three exhibits a list mr bagdan prepared in connection with the irs audit of petitioners’ tax_return that contained columns listing dates in in chronological order in the form of a day and month4 and names of the school or place and locations where games were played another list mr bagdan prepared in connection with the irs audit of petitioners’ tax_return that contained three columns titled game location and mileage and monthly calendars for january through date that mr bagdan prepared and printed on 16pm 4the list included dates for boys’ lacrosse games starting date and ending date and dates for basketball games starting date and ending date 5the basketball games listed did not include a second column listing the locations where the games were played iii petitioners’ tax_return petitioners prepared and timely filed a joint federal_income_tax return they claimed a deduction on schedule a of dollar_figure for unreimbursed employee_expenses and reported an expense on schedule c of dollar_figure for car and truck expenses with respect to mr bagdan’s officiating business petitioners attached to their tax_return a form_2106 employee business_expenses and reported unreimbursed employee_expenses of dollar_figure as follows dollar_figure of vehicle expenses dollar_figure of parking fees tolls and transportation including train bus etc that did not involve overnight travel or commuting to and from work dollar_figure of travel_expenses while away_from_home_overnight including lodging airplane car rental etc dollar_figure of business_expenses not otherwise included and not including meals and entertainment and dollar_figure of meals and entertainment_expenses 6on the form_2106 petitioners listed business miles driven of big_number and delineated the business miles as driven in vehicle of big_number miles and in vehicle of big_number miles it appears that the vehicle expense listed on form_2106 of dollar_figure was calculated by multiplying the total number of business miles listed for vehicle and vehicle by cents the standard mileage rate set by the irs for wa sec_51 cents per mile before date and cents per mile on or after date announcement 2011_29_irb_56 notice_2010_88 2010_51_irb_882 7the total meals and entertainment_expenses listed on the form_2106 were continued petitioners reported dollar_figure of car and truck expenses on their schedule c but did not list in part iv information on your vehicle information about any vehicle including the total number of business miles driven petitioners also filed a form_4562 depreciation and amortization including information on listed_property with respect to mr bagdan’s officiating business activity on that form petitioners reported in part iv section b--information on use of vehicles total business miles driven during of big_number the record does not show how petitioners calculated the expense of dollar_figure but it appears they used mileage rather than actual costs i burden_of_proof discussion generally the commissioner’s determination_of_a_deficiency is presumed correct and a taxpayer bears the burden of proving it incorrect see rule a 290_us_111 if the taxpayer introduces credible_evidence with respect to any factual issue relevant to ascertaining his or her continued dollar_figure before the limitation prescribed in sec_274 8the car and truck expenses of dollar_figure divided by big_number the number of business miles reported on form_4562 yields an expense per mile of approximately cents liability and satisfies other conditions then the burden_of_proof shifts to the commissioner with respect to that issue sec_7491 and petitioners have not argued that sec_7491 applies nor established that its requirements are met the burden_of_proof remains with them as the court has observed in countless opinions deductions are a matter of legislative grace and a taxpayer generally bears the burden of proving entitlement to any claimed deduction rule a 503_us_79 292_us_435 the 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 sec_6001 65_tc_87 aff’d per curiam 540_f2d_821 5th cir 43_tc_824 sec_1_6001-1 income_tax regs ii unreimbursed employee_expenses a cash_basis taxpayer may deduct ordinary and necessary expenses paid during the taxable_year in carrying_on_a_trade_or_business sec_162 generally the performance of services as an employee constitutes a trade_or_business 91_tc_352 54_tc_374 if as a condition_of_employment an employee is required to incur certain expenses then the employee is entitled to deduct those expenses to the extent the expenses are not subject_to reimbursement see 59_tc_696 24_tc_21 sec_262 generally disallows a deduction for personal living or family_expenses a taxpayer cannot deduct employee business_expenses to the extent he is entitled to reimbursement from his employer for those expenses see 79_tc_1 the taxpayer bears the burden of proving that he is not entitled to reimbursement see fountain v commissioner t c pincite the taxpayer can prove that he is not entitled to reimbursement by showing for example that he is expected to bear these costs id an expense for which the taxpayer is entitled to but does not claim reimbursement from his employer is generally not considered necessary and thus is not deductible under sec_162 788_f2d_1406 9th cir aff’g tcmemo_1984_533 podems v commissioner t c pincite mr bagdan’s employer on power demand did have a reimbursement policy that provided reimbursements to mr bagdan for all sales-related expenses therefore petitioners have the burden of proving that the reported unreimbursed employee_expenses were not covered by mr bagdan’s employer’s reimbursement policy petitioners have not provided any documents demonstrating the expenses reported on the schedule a were not covered therefore petitioners have failed to meet their burden_of_proof moreover mr bagdan did not maintain a log a calendar or a similar record required to properly substantiate or demonstrate the business_purpose of the unreimbursed employee_expenses accordingly the court concludes that petitioners are not entitled to deduct dollar_figure of unreimbursed employee_expenses iii schedule c car and truck expenses petitioners reported dollar_figure for car and truck expenses on schedule c with respect to mr bagdan’s officiating business deductions for expenses with respect to the use of passenger automobiles if otherwise allowable are subject_to strict substantiation rules see sec_274 sec_280f 50_tc_823 aff’d per curiam 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date for expenses relating to passenger automobiles a taxpayer must substantiate with adequate_records or sufficient evidence corroborating his or her own statement the amount of each separate expense the mileage for each business use of the passenger_automobile and the total mileage for all purposes during the taxable_period the date of the business use and the business_purpose of the use see sec_1_274-5t temporary income_tax regs fed reg date substantiation by adequate_records generally requires the taxpayer to maintain an account book diary log statement of expense trip sheets or similar record prepared contemporaneously with the use of the passenger_automobile as well as documentary_evidence of the individual actual expenses id para c fed reg in lieu of substantiating actual passenger_automobile expenses a taxpayer may calculate them by using the standard mileage rate established by the commissioner see sec_1_274-5 income_tax regs the taxpayer may base the deduction on either actual expenses or standard mileage not both 60_tc_503 if the taxpayer elects the actual_expense_method he must substantiate his business_use_percentage for the passenger_automobile larson v commissioner tcmemo_2008_187 tax ct memo lexi sec_182 at sec_1_274-5t temporary income_tax regs fed reg date petitioners submitted this case fully stipulated and thus did not testify petitioners submitted and the parties stipulated calendar pages for the months of january through date and spreadsheets that purport to show the games mr bagdan officiated at and the miles he drove to and from the games many of the games listed on the two lists do not appear on the calendar further as respondent has noted in his brief a comparison of the calendar and the mileage logs shows discrepancies in the number of miles petitioners assert mr bagdan drove to officiate at games the comparison shows that entries with a total of big_number miles driven by mr bagdan do not have a corresponding game listed on the calendar but it does show entries with a total of big_number miles driven by mr bagdan that do have a corresponding game listed on the calendardollar_figure however neither the mileage logs nor the calendar satisfies the requirement under sec_274 to show the business_purpose while petitioners assert that mr bagdan officiated at over games his notations on his calendar are at best vague for example an entry on the calendar for date is 00pm uc merced udp it does not indicate whether the notation was for a basketball or 9for some days the block on the calendar is filled and there is an arrow at the end which might be an indication that there were more entries however petitioners have not presented any further evidence of any additional entries in those instances 10respondent’s simultaneous opening brief compared the mileage logs and the calendar his comparison reveal sec_102 games with a total of big_number miles driven for games shown on the mileage logs that do not have a corresponding game listed on the calendar and games with a total of big_number miles driven for games that are listed on both the mileage logs and the calendar the court’s comparison revealed a different conclusion from respondent’s comparison a boys’ lacrosse game or whether mr bagdan was officiating at the game only two entries for games listed on the calendar indicate mr bagdan’s connection to the games further some games on the two lists are not listed on the corresponding dates on the calendar as a result of this inconsistency the court does not afford much weight to the lists or the calendar unfortunately for petitioners the law requires more than what petitioners have provided to substantiate expenses related to driving vehicles for a business the court concludes that petitioners are not entitled to deduct dollar_figure for car and truck expenses iv accuracy-related_penalty respondent determined the accuracy-related_penalty for because petitioners’ underpayment was due to a substantial_understatement_of_income_tax or negligence or disregard of rules or regulations see sec_6662 and b and a taxpayer may be liable for a accuracy-related_penalty on the portion of an underpayment of income_tax attributable to a substantial_understatement_of_income_tax or to negligence or disregard of rules or regulations sec_6662 a - d only one sec_6662 accuracy-related_penalty may be imposed with respect to any given portion of an underpayment even if that portion is attributable to more than one type of conduct listed in sec_6662 see 132_tc_161 aff’d 408_fedappx_908 6th cir sec_1_6662-2 income_tax regs the commissioner bears the burden of production with respect to a sec_6662 accuracy-related_penalty in any court proceedings with respect to the liability of any individual sec_7491 sec_6751 provides that subject_to certain exceptions in sec_6751 no penalty shall be assessed unless the initial determination of the assessment is personally approved in writing by the immediate supervisor of the individual making the determination or such higher level official as the secretary may designate written approval of the initial penalty determination under sec_6751 must be obtained no later than the date the notice_of_deficiency is issued or the date the commissioner files an answer or amended answer asserting the penalty 851_f3d_190 2d cir aff’g in part rev’g in part tcmemo_2015_42 see also graev v commissioner 149_tc_485 supplementing and overruling in part 147_tc_460 compliance with sec_6751 is part of the commissioner’s burden of production in any deficiency case in which a penalty subject_to sec_6751 is asserted chai v commissioner f 3d pincite the parties stipulated a copy of a workpaper civil penalty approval form that approved imposition of an accuracy-related_penalty against petitioners on the basis of a substantial_understatement or negligence or disregard of rules or regulations that form bore a signature of elain li in the group manager signature line and was signed on date after this case was submitted the court issued its opinion in clay v commissioner t c __ date in clay the court concluded that sec_6751 may require written approval of penalties before the issuance of a notice_of_deficiency the court held that the initial determination of the penalties occurred when the irs mailed a 30-day_letter which formally communicated to the taxpayers proposed adjustments that included penalties and gave the taxpayers their right to protest the proposed penalties the court by order permitted respondent to file a motion to reopen the record to provide evidence of compliance with clay and provided petitioners an opportunity to file a response if respondent filed a motion to reopen the record respondent filed a motion to reopen the record supported by a declaration of elain li who was the group manager of the revenue_agent who examined petitioners’ return the court granted that motion petitioners did not file a response the court finds on the basis of the stipulated record and the declaration of elain li that respondent has failed to meet his burden of production and he may not impose the sec_6662 penalty see id to reflect the foregoing decision will be entered for respondent as to the deficiency and for petitioners as to the accuracy-related_penalty under sec_6662


department of the treasury internal_revenue_service washington d c qyiqvod tax_exempt_and_government_entities_division uil numbers date mar employer_identification_number legend m n o p q x dear sir or madam contact person identification_number telephone number b3 we have considered the letter dated date and subsequent correspondence submitted on your behalf by your attorney who requested a ruling on the proper treatment of revenues generated from a manufacturing work activity program this program was created specifically for the development of disabled individuals you m’ are exempt from federal_income_tax under sec_501 of the internal_revenue_code code as an organization described in sec_507 mis also classified as a public charity under sec_509 and sec_170 m which is located in the state of n provides habilitative training services to developmentally and physically disabled infants children and adults collectively referred to as clients the services offered are designed to enable every individual to prepare for a more independent life in the least restrictive environment while developing to their fullest potential in all areas m accomplishes these goals by providing an integrated preschool program educational_services to school-age children which are contracted through the local school districts educational and work-related training to high school children and adults and supervised living programs for adults m generates funding for these programs through fundraising private tuition payments contributions from the general_public contracts for service agreements with federal and state sources and monies generated by the clients in the work activity center services are provided to all clients without discrimination by race creed age gender or religion m bills the sv government for services provided to clients who are eligible for governmental assistance also m provides services to clients who are ineligible for governmental assistance and are otherwise unable to pay for these needed services the work activity center was implemented in the late 1970’s to provide clients with the m has contracted for many years with local industries to opportunity to learn work skills assemble manufacturing components clients receive habilitative training in a controlled work environment and are paid wages from the receipts earned on these industry contracts although m has been issued a sheltered_workshop certificate by the united_states department of labor to enable m to pay clients’ wages below the minimum wage requirements based on each client’s productive capacity the work activity center is merely a component of m’s education and training program the work activity center functioned as an assembly department of a local manufacturing industry the industry delivered its inventory components to m the clients assembled those components into a finished product and the industry picked up the finished products in addition the industry owned the fixtures and equipment used to assemble the finished goods payment under these contracts was at a rate for labor assembly only per finished unit revenues generated by these contracts were set_aside as follows a n o o r client wages and related payroll_taxes workers’ compensation insurance on client wages health insurance benefits for clients capital expenditures including buses for transportation additional buildings for the work activity center and buildings for client recreation and supplement operation costs of all programs of m approximately two years ago m's largest industry contractor notified m of changes in the industry's corporate structure and operations the industry’s regional distribution center in o closed and all distribution operations moved to p in order to make these corporate structure changes the contractor began to require its vendors inciuding m to purchase and warehouse all parts required by present and future contracts in essence if m were to continue to assemble products for this industry m would be required to purchase and warehouse component parts which previously had been owned and warehoused by the industry quotas for finished products would vary based on peak production seasons for the industry contractor in order for m to continue to provide work related training services and jobs to more than clients in the program a substantial monetary contract was required since m is located in a rural community of less than big_number in q there were no other industries immediately available to fulfill this need the educational job training services provided to the clients in the work activity center are funded through government programs but that funding covers only the costs of staff trainers and instructors utilities and other general overhead for the year ended date billable work activity training units of service were only of the total units provided resulting in funding for only of work activity staff salaries without industry contracts training opportunities for the clients could not exist and billable services for training under government funding would not exist this would result in termination of work activity staff and loss of funding for non-variable overhead client wages enable many of the client families to provide necessary personal living_expenses not covered by other sources of income loss of the current contract would seriously erode the ability of m to provide work-related training to all clients with an increasing amount of m’s financial resources coming from governmental sources and the uncertainty of the federal and state programs’ continued strength m has been searching for ways to become more self-reliant and less government-reliant although purchasing inventory and warehousing that inventory would mean additional overhead for m it would also be the means to increase job opportunities to m’s clients and teach them new work skills to develop their individual capabilities and increase their quality of life these skills could be used in other off-site businesses in the public sector realizing the loss of the work activity center would seriously jeopardize the financial stability of all of m’s programs its board_of directors approved the following activities a d purchase of land for expansion construction of a warehouse establish a line of credit with a local bank to facilitate inventory purchase negotiate new contract unit rate to offset ownership costs of inventory in addition to labor assembly costs phase-in inventory to meet major industrial contractor's requirements and obtain a written commitment from the major industry regarding repurchase of any unused or obsolete parts recognizing m’s inexperience with inventories m negotiated a new contract with the major contractor and purchased acres of land construction began on a warehouse for the purpose of meeting the new contract requirements the land cost x and the construction of the warehouse totaled more than 5x m was required to use the contractor's entire stock of old inventory and to begin purchasing new inventory as the old was used approximately two years ago m began to purchase parts inventory for assembly and clients continued to assemble those parts as they had in years past client training also began in the areas of inventory control movement and warehousing procedures before the change in operations the number of m's clients totaled between and since the change in operations m has more than clients working in the work activity center m also employs between and non-clients who are senior citizens and who perform work only when required by m in order to meet a production or assembly deadline that could not be met utilizing only m's clients the use of non-clients may range from a few hours during a single day up to two or three days in a week but only if there are not sufficient clients available to meet a deadline all such work has been far less than full-time and sporadic in nature the senior citizens are paid the same hourly wage as m's clients in reality the only change that has taken place in the work activity center is the ownership of the inventory and its warehousing although gross revenues and capital expenditures have increased with this change in operations net_revenues have not changed significantly also the work activity program has remained unchanged its goal is still to provide clients with the opportunity to learn work skills to provide habilitative training in a controlied environment and to se enable every client to prepare for a more independent life in the least restrictive environment the capital expenditures involved in the acquisition of land and construction of a warehouse building have necessitated several actions the loan agreement for the land purchase has been negotiated with no interest or principal payment due until the year loan funds for the warehouse have been obtained through the department of housing and urban development community block grant for economic development in the form of a loan to be passed through the n department of economic development m must create new permanent full-time jobs within a two-year period at an average hourly wage of dollar_figure per hour some new equipment was required to be purchased or leased m has requested a ruling that revenues generated from its manufacturing work activity program will not be treated as unrelated_business_taxable_income under sec_512 of the code and accordingly will not be subject_to the tax imposed by sec_511 sec_501 of the code provides in part for the exemption from federal_income_tax of organizations organized and operated exclusively for charitable or educational_purposes provided no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_511 of the code imposes a tax on the unrelated_business_taxable_income of organizations exempt from federal_income_tax under sec_501 of the code sec_512 of the code defines the term unrelated_business_taxable_income as gross_income derived by an organization from an unrelated_trade_or_business regularly carried on by it less the allowable deductions which are directly connected with such trade_or_business sec_513 of the code defines the term unrelated_trade_or_business as any trade_or_business the conduct of which is not substantially related aside from the need of such organization for income or funds or the use it makes of the profits derived to the exercise or performance by such organization of its exempt_function sec_513 of the code provides that the term trade_or_business includes any activity which is carried on for the production_of_income from the sale_of_goods or the performance of services sec_1_513-1 of the income_tax regulations provides that gross_income of an exempt_organization subject_to the tax imposed by sec_511 of the code is inctudible in the computation of unrelated_business_taxable_income if it is income from a trade_or_business such trade_or_business is regularly carried on by the organization and the conduct of such trade_or_business is not substantially related other than through the production of funds to the organization's performance of its exempt functions sec_1_513-1 of the regulations provides that in general gross_income derives from unrelated_trade_or_business within the meaning of sec_513 of the code if the conduct of the trade_or_business which produces the income is not substantially related other than through the production of funds to the purposes for which exemption is granted the presence of this requirement necessitates an examination of the relationship between the business activities which generate the particular income in question -- the activities that is of producing or distributing the goods or performing the services involved -- and the accomplishment of the organization's exempt purposes sec_1_513-1 of the regulations provides that trade_or_business is related to exempt purposes in the relevant sense only where the conduct of the business activities has a causal relationship to the achievement of exempt purposes and is substantially related for purposes of sec_513 of the code only if the causal relationship is a substantial one thus for the conduct of trade_or_business from which a particular amount of gross_income is derived to be substantially related to purposes for which exemption is granted the production or distribution of the goods or the performance of the services from which the gross_income is derived must contribute importantly to the accomplishment of those purposes where the production or distribution of the goods or the performance of the services does not contribute importantly to the accomplishment of the exempt purposes of an organization the income from the sale of the goods or the performance of the services does not derive from the conduct of related trade_or_business whether activities productive of gross_income contribute importantly to the accomplishment of any purpose for which an organization is granted exemption depends in each case upon the facts and circumstances involved u s v american college of physicians 475_us_834 states that the proper focus under the substantially related requirement is on the conduct of the exempt_organization specifically whether the business activity is conducted in a manner calculated to further the organization’s exempt_purpose or function revrul_73_127 1973_1_cb_221 describes a nonprofit organization formed to operate a cut-rate retail grocery store in a poverty area to provide free grocery delivery service to residents who need it to participate in the federal food stamp program and to provide job training for unemployed residents the store is operated by a staff of employees experienced in the retail food industry the store has a smaller markup than competing stores but otherwise is operated in a manner similar to for profit businesses in the area about four percent of the store's earnings are allocated for use in a continuous training program for the hard-core unemployed the training program includes lectures demonstrations of retail store techniques and on-the-job training a trainee receives a small salary during the training period at the conclusion of his training he is qualified for employment in the retail food industry revrul_73_127 states that the organization’s purpose of providing job training for the hard-core unemployed is charitable and educational within the meaning of the common_law concept of charity sec_501 of the code and sec_1_501_c_3_-1 and sec_1_501_c_3_-1 of the regulations however the organization’s purpose of operating a cut-rate retail grocery store in a poverty area is not a charitable purpose under the legal authority just cited while the store operation is used in part as a vehicle for the training program nevertheless it is conducted on a scale larger than is reasonably necessary for the performance of the organization's training program and was not intended to nor does it in fact serve solely as a vehicle for carrying out the training program held the organization does not qualify for exemption under sec_501 revrul_73_128 1973_1_cb_222 notes that while charitable organizations may engage in commercial endeavors for the production_of_income to be used for carrying on charitable programs and activities the manufacture and sale of commercial items as an end in itself does not constitute a charitable purpose however the provision of vocational training and guidance to the unskilled and under-employed may qualify as a charitable purpose so long as the manner of its achievement is otherwise charitable revrul_67_22 1967_1_cb_125 and revrul_68_504 1968_2_cb_211 are cited revrul_73_128 goes on to state that with respect to the organization described the facts clearly support the conclusion that the manufacturing and merchandising operation is the means of accomplishing the organization's declared charitable objectives thus there is a clear and distinct causal relationship between the manufacturing activity and the training of individuals for the purpose of improving their individual capabilities there is likewise no evidence that the scale of the endeavor is such as to suggest that it is being conducted on a larger scale than is reasonably necessary to accomplish the organization's charitable purpose revrul_75_472 1975_2_cb_208 concerns an exempt_organization that operated a halfway house and at the same time operated a furniture shop any profits realized from the furniture shop operations were applied toward the cost of operating the halfway house the furniture shop's activities were related to the organization’s purposes therefore the organization did not have unrelated_trade_or_business income revrul_76_94 1976_1_cb_171 held that the operation of a retail grocery store by an exempt_organization as part of its therapeutic program for emotionally disturbed adolescents was not unrelated_trade_or_business income within the meaning of sec_513 of the code in order to determine whether amounts derived from m's manufacturing work activity program are subject_to the unrelated_business_income_tax it is necessary to apply the standards contained in sec_511 through of the code and the accompanying regulations m agrees that its work activity program is a trade_or_business within the meaning of sec_513 and is regularly carried on as required by sec_512 thus the central question in this case is whether the work activity program is substantially related to m’s exempt_purpose or function m's stated exempt_purpose is to provide habilitative training services to developmentally and physically disabled infants children and adults which is a charitable and educational purpose within the meaning of sec_501 of the code m has various programs that help individuals prepare for an independent life one of which is the work activity program the function of the work activity program is to provide clients with the opportunity to learn work skills to provide habilitative training in a controlled environment and to enable every client to prepare for a more independent life in the least restrictive environment all of the available information indicates that the work activity program as described above contributes importantly to m’s charitable and educational purpose as required by sec_1_513-1 of the regulations and therefore is substantially related to m’s exempt_purpose or function the work activity program is a means to help develop m's clients and is similar to the situations described in rev ruls and supra m's activities are distinguishable from those described in revrul_73_127 supra unlike the grocery store that was the subject of revrul_73_127 m’s work activity program is conducted on a scale that is reasonably necessary to accomplish its charitable purpose and such program does serve solely as a vehicle for carrying out m's charitable and educational purpose the expansion of the program as detailed above is consistent with m’s exempt_purpose and the training services offered by m to its clients have not changed significantly because of the expansion based on the foregoing we rule that the revenues generated from m's manufacturing work activity program will not be treated as unrelated_business_taxable_income under sec_512 of the code and accordingly will not be subject_to the tax imposed by sec_511 this ruling is based on the understanding that there will be no material changes in the facts upon which it is based this ruling is directed only to the organization that requested it sec_61 k of the code provides that this ruling may not be used or cited by others as precedent if you have any questions about this ruling please contact the person whose name and telephone number are shown in the heading of this letter sincerely faoteerr c he gh robert c harper jr manager exempt_organizations technical group 2s


internal_revenue_service number release date index number ------------------------------------------- ------------------------- ----------------------------------------- -------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ----------------- telephone number -------------------- refer reply to cc psi b03 plr-106473-09 date date x ----------------------------------------------------------------------------------------------------- ---------------------- legend state ------------- date1 ------------------ date2 ---------------------- dear ----------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x by its authorized representative requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election to be classified as an association_taxable_as_a_corporation for federal tax purposes facts the information submitted states that x was formed in state on date as a limited_partnership x represents that it intended to be classified as an association_taxable_as_a_corporation effective date however x inadvertently failed to timely file a form_8832 entity classification election electing to treat x as an association_taxable_as_a_corporation effective date x further represents that a form_8832 was filed timely to change x’s classification from an association_taxable_as_a_corporation to a disregarded_entity effective date plr-106473-09 law and analysis sec_301_7701-3 provides in part that a business_entity that is not classified as a corporation under sec_301_7701-2 or an eligible_entity can elect its classification for federal tax purposes as provided in sec_301_7701-3 an eligible_entity with at least two members can elect to be classified as either an association and thus a corporation under sec_301_7701-2 or a partnership and an eligible_entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner sec_301_7701-3 provides that except as provided in sec_301 b unless the entity elects otherwise a domestic eligible_entity is i a partnership if it has two or more members or ii disregarded as an entity separate from its owner if it has a single owner sec_301_7701-3 provides in part that an eligible_entity may elect to be classified other than as provided under sec_301_7701-3 or to change its classification by filing form_8832 with the service_center designated on form_8832 sec_301_7701-3 provides that an election under sec_301_7701-3 will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed and can not be more than months after the date on which the election is filed if an election specifies an effective date more than days prior to the date on which the election is filed it will be effective days prior to the date it was filed sec_301_9100-1 provides that the commissioner may grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but not more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 defines a regulatory election to include an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-2 provides the standards the commissioner will use to determine whether to grant an automatic_extension of time for making certain elections sec_301_9100-3 provides the standards the commissioner will use to determine whether to grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 plr-106473-09 sec_301_9100-3 provides that requests for relief subject_to sec_301_9100-3 will be granted when the taxpayer provides the evidence including affidavits described in sec_301_9100-3 to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and the grant of relief will not prejudice the interests of the government conclusion based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied accordingly x is granted an extension of sixty days from the date of this letter to elect to be classified as an association_taxable_as_a_corporation for federal tax purposes effective date the election to be classified as an association_taxable_as_a_corporation from date should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the election if x makes the election for date within days of this letter the previously filed election to be treated as a disregarded_entity as of date would also be a valid classification change therefore x would be a disregarded_entity as of date except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter specifically no opinion is expressed or implied regarding whether x is otherwise eligible to make the election this ruling is directed only to the taxpayer requesting it sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent in accordance with a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed plr-106473-09 by an appropriate party while this office has not verified any of the material submitted in support of the request for a ruling it is subject_to verification on examination sincerely s curtis g wilson associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes cc