t c memo united_states tax_court bobby d perry petitioner v commissioner of internal revenue respondent docket no filed date michael lynn durham and w lance stodghill for petitioner m kathryn bellis for respondent memorandum findings_of_fact and opinion kroupa judge respondent determined a dollar_figure deficiency and a dollar_figure accuracy-related_penalty under sec_6662 a with respect to 1all monetary amounts are rounded to the nearest dollar 2all section references are to the internal_revenue_code for the year at issue and all rule references are to the tax_court rules_of_practice and continued petitioner’s federal_income_tax for we must decide five issues the first issue is whether petitioner’s s_corporation perry co p c company is entitled to deduct certain travel_expenses we hold it is not the second issue is whether petitioner is entitled to a depreciation deduction with respect to use of a portion of his home we hold he is not the third issue is whether petitioner may reduce the gross_receipts of his insurance_business by certain claimed costs of goods sold we hold he may not the fourth issue is whether certain payments the company made to petitioner were rental payments or executive compensation we hold they were executive compensation the final issue is whether petitioner is liable for an accuracy-related_penalty under sec_6662 for we hold he is liable findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the accompanying exhibits are incorporated by this reference continued procedure unless otherwise indicated 3all other issues were either conceded or settled or need not be decided because they follow from our holdings or are computational 4for convenience we shall address the claimed travel_expenses that petitioner contends the company is entitled to deduct and not the correlative effect in the schedule e that would result if we were to allow all or a portion of the claimed travel_expenses petitioner resided in texas when he filed the petition i background petitioner worked as a revenue_agent for the internal_revenue_service irs for a few years and has been a certified_public_accountant cpa since petitioner conducted his accounting practice through the company operating it out of a portion of his home petitioner was the company’s sole shareholder president and employee preparing tax returns and providing related consulting services petitioner was involved in various other business entities and activities during one such business involved selling insurance policies through a sole_proprietorship insurance_business ii tax returns the company filed a form_1120s u s income_tax return for an s_corporation for which petitioner prepared and signed as president the company claimed on the form_1120s a dollar_figure deduction for travel_expenses claimed travel_expenses part of the claimed travel_expenses consists of dollar_figure petitioner paid in airfare purportedly to travel for the company’s business petitioner indicated at trial that the remaining amount was a dollar_figure payment he made to rosa porter a continental airlines employee to be designated her travel companion so that he could purchase discounted airline tickets petitioner filed form_1040 u s individual_income_tax_return for the return included a schedule c profit or loss from business and a schedule e supplemental income and loss the schedule c was for petitioner’s insurance_business petitioner claimed on schedule c costs of goods sold totaling dollar_figure claimed costs of goods sold this amount included expenses purportedly paid for rent referral fees and record-keeping services a dollar_figure expense claimed as part of the claimed costs of goods sold was actually paid and claimed as a deduction by another business_entity with which petitioner was involved petitioner reported as rental income on schedule e payments he received from the company totaling dollar_figure he also claimed a dollar_figure depreciation expense deduction claimed depreciation expense on schedule e with respect to use of his home iii deficiency determination respondent examined the form_1120s the company filed and the form_1040 petitioner filed for thereafter respondent issued petitioner a deficiency_notice for respondent increased petitioner’s flow-through income from the company based upon various adjustments to the company’s tax items including the disallowance of the claimed travel_expenses respondent disallowed the claimed costs of goods sold and the claimed depreciation expense finally respondent determined that petitioner was liable for the accuracy- related penalty under sec_6662 for petitioner timely filed a petition for redetermination opinion petitioner a cpa and former irs revenue_agent was involved in various business activities during we are asked to decide whether petitioner and the company are entitled to deduct certain expenses and whether petitioner may treat certain expenses as costs of goods sold we also must decide whether certain payments petitioner received from the company were rental payments or executive compensation finally we must decide whether petitioner is liable for an accuracy- related penalty we begin with the burden_of_proof i burden_of_proof generally the commissioner’s determinations are presumed correct and the taxpayer bears the burden of proving otherwise rule a see 290_us_111 the burden_of_proof may shift to the commissioner if the taxpayer proves that he or she has satisfied certain requirements sec_7491 see 122_tc_143 petitioner has neither claimed that the burden shifts to respondent nor shown that he complied with the requirements of sec_7491 the burden_of_proof therefore remains on petitioner see rule a ii expenses at issue a travel we first turn to the claimed travel_expenses generally taxpayers may deduct ordinary and necessary business_expenses incurred during the taxable_year in carrying_on_a_trade_or_business sec_162 the taxpayer must maintain records sufficient to substantiate the amounts of the deductions claimed sec_6001 sec_1_6001-1 income_tax regs if a taxpayer establishes that he or she paid_or_incurred a deductible business_expense but does not establish the amount this court may approximate the amount of the allowable deduction bearing heavily against the taxpayer whose inexactitude is of his or her own making 39_f2d_540 2d cir for the cohan_rule to apply however a basis must exist on which this court can make an approximation 85_tc_731 with respect to certain business_expenses specified in sec_274 more stringent substantiation requirements apply and the cohan_rule is superseded see 50_tc_823 aff’d per curiam 412_f2d_201 2d cir deductions for travel_expenses gifts and meals and entertainment as well as for listed_property are disallowed unless the taxpayer substantiates them by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement sec_274 the substantiation for travel_expenses must show a the amount of each travel expense b the time and place of travel and c the business_purpose for travel sec_1_274-5t temporary income_tax regs fed reg date petitioner failed to substantiate the claimed travel_expenses under sec_274 the only evidence supporting the claimed travel_expenses is petitioner’s own self-serving testimony that the expenses were incurred petitioner did not substantiate that he met the requirements under sec_1_274-5t temporary income_tax regs supra by adequate_records or sufficient evidence corroborating 5substantiation of expenses by adequate_records requires that the taxpayer maintain an account book a diary a log a statement of expenses trip sheets or similar records prepared contemporaneously with the expenditure supplemented by other documentary_evidence sec_1_274-5 income_tax regs sec_1_274-5t temporary income_tax regs fed reg date substantiation by other_sufficient_evidence requires the production of corroborative evidence in support of a taxpayer’s statement specifically detailing how he met the requirements sec_1_274-5t temporary income_tax regs fed reg date his testimony for each of the claimed travel_expenses petitioner therefore is not entitled to deduct any of the claimed travel_expenses for b depreciation we now turn to the claimed depreciation expense with respect to use of petitioner’s home subject_to certain exceptions sec_280a bars a taxpayer from deducting expenses_incurred with respect to use of the taxpayer’s residence see sec_280a we need not consider whether sec_280a precludes petitioner from being entitled to deduct the claimed depreciation expense because he failed to establish that he met the basic depreciation requirements under sec_167 a taxpayer is allowed to deduct a reasonable allowance for the exhaustion and wear_and_tear of property used in a trade_or_business or held_for_the_production_of_income sec_167 depreciation is computed on the adjusted_basis of the property the applicable_depreciation_method the applicable_recovery_period and the applicable convention sec_167 sec_168 109_tc_21 petitioner has the burden to prove these 6we note in particular that petitioner did not substantiate for any travel he did as ms porter’s travel companion if any that he met the requirements under sec_1_274-5t temporary income_tax regs fed reg date items see langer v commissioner tcmemo_2008_255 aff’d 378_fedappx_598 8th cir here petitioner failed to prove the adjusted_basis of the portion of his home with respect to which he claimed the depreciation expense there is no persuasive evidence in the record on the cost of the home and the portion of that amount attributable to the underlying real_property or the cost of improvements nor is there any persuasive evidence in the record establishing the percentage of petitioner’s home that was actually used by the company to conduct business in addition there is no evidence as to when the home and the improvements were placed_in_service accordingly we find that petitioner has failed to meet his burden_of_proof under sec_167 with respect to the claimed depreciation expense while we are allowed to estimate the amount of an expense that we find to be deductible when the exact amount cannot be ascertained for us to do so petitioner had to supply us with some basis upon which an estimate could be made see vanicek v commissioner t c pincite there is no evidence in the record on the adjusted_basis of petitioner’s home other than his own self- serving and uncorroborated testimony we are not required to accept such testimony and decline to do so see 87_tc_74 accordingly we lack a basis to estimate the claimed depreciation expense attributable to any use of petitioner’s home we therefore hold that petitioner is not entitled to the claimed depreciation expense c costs of goods sold petitioner contends that he is entitled to reduce the gross_receipts from his insurance_business by the claimed costs of goods sold we disagree cost_of_goods_sold may be subtracted from gross_receipts to compute gross_income in a taxpayer’s manufacturing merchandising or mining business see sec_1_61-3 income_tax regs we have held that a business must involve the sale of a material product to which direct_cost may be allocated to reduce gross_receipts by the costs of goods sold in computing gross_income 82_tc_275 aff’d 814_f2d_1388 9th cir 30_tc_195 aff’d 271_f2d_739 5th cir more generally we have held that gross_receipts equal gross_income where a business is primarily engaged in providing services ie ability know-how and experience guy f atkinson co v commissioner t c pincite hahn v commissioner t c pincite 7taxpayers must show their entitlement to the amount of costs of goods sold claimed see rule a here petitioner claimed costs of goods sold with respect to his insurance_business the insurance_business income was primarily if not exclusively derived from the sale of insurance policies an insurance_policy is a contract not a material product to which direct costs may be allocated moreover we note that selling insurance policies generally involves meeting the particular preferences and purposes of buyers such tailoring generally requires ability know-how and experience we find that petitioner’s insurance_business was primarily engaged in rendering services accordingly we hold that the insurance business’ gross_income equals its gross_receipts iii payments at issue we now address the characterization of payments totaling dollar_figure that petitioner received from the company in the parties dispute whether the payments were rental payments or executive compensation the payments are includible in petitioner’s income and deductible by the company whether they are characterized as rental payments or executive compensation the main tax 8petitioner failed to raise whether the expenses claimed as cost_of_goods_sold may be deducted as business_expenses under sec_162 in his pretrial memorandum at trial or in his posttrial briefs we note however that petitioner is not entitled to deduct these expenses as business_expenses under sec_162 petitioner failed to establish that he actually paid dollar_figure of the expenses claimed as costs of goods sold and failed to establish that the remaining expenses were ordinary and necessary business_expenses see sec_162 consequence of characterizing the payments as executive compensation rather than rental payments is that the payments will be subject_to federal employment_taxes if they are properly characterized as executive compensation petitioner argues that the payments he received from the company were rental payments more specifically he contends that he rented a portion of his home to the company and that the relevant payments were for rent the company owed him we disagree petitioner did not produce a rental agreement between himself and the company for petitioner did not provide any checks or documentation demonstrating that the company paid him rent for use of his home more generally there is no documentation in the record reflecting that the company rented a portion of petitioner’s home the only evidence supporting petitioner’s claim that the company rented a portion of his home is his testimony this court is not required to accept petitioner’s self-serving unverified and undocumented testimony and we decline to do so see tokarski v commissioner t c pincite respondent argues and we agree that the payments were executive compensation the record does not reflect that the payments at issue were anything other than executive compensation accordingly we hold that the dollar_figure the company paid to petitioner was executive compensation iv accuracy-related_penalty the final issue we address is respondent’s determination that petitioner is liable for an accuracy-related_penalty under sec_6662 on the underpayment for respondent conceded in his reply brief that petitioner is not liable for the accuracy-related_penalty on the portion of the underpayment attributable to unreported interest_income stemming from petitioner’s and respondent’s settlement of certain issues regarding a roth individual_retirement_account roth_ira dollar_figure accordingly we focus on whether petitioner is liable for the accuracy-related_penalty on the remaining portion of the underpayment for remaining underpayment a taxpayer is liable for an accuracy-related_penalty on any part of an underpayment attributable to among other things a substantial_understatement of 9we note that petitioner does not dispute in his opening brief or reply brief respondent’s contention that the payments should be characterized as executive compensation if we find that they were not rental payments 10petitioner and respondent entered into a stipulation of settled issues in unrelated cases at docket nos and the parties settled several issues relating to a roth_ira based on the roth_ira settlement the parties stipulated in this case that petitioner had unreported interest_income of dollar_figure income_tax sec_6662 there is a substantial_understatement_of_income_tax if the amount of the understatement exceeds the greater of either of the tax required to be shown on the return or dollar_figure sec_6662 b d a sec_1_6662-4 and b income_tax regs see jarman v commissioner tcmemo_2010_285 the commissioner has the burden of production with respect to the accuracy- related penalty sec_7491 rule a see 116_tc_438 we find that respondent has met his burden of production if rule_155_computations show petitioner has a substantial_understatement_of_income_tax for see higbee v commissioner t c pincite jarman v commissioner tcmemo_2010_285 a taxpayer is not liable for an accuracy-related_penalty however if the taxpayer acted with reasonable_cause and in good_faith with respect to any portion of the underpayment sec_6664 sec_1_6664-4 income_tax regs the determination of whether a taxpayer acted with reasonable_cause and in good_faith depends on the pertinent facts and circumstances including the taxpayer’s efforts to assess his or her proper tax_liability the knowledge experience and education of the taxpayer and the reliance on the advice of a professional sec_1_6664-4 income_tax regs the taxpayer has the burden of proving the reasonable_cause and good-faith exception sec_7491 rule a see higbee v commissioner t c pincite petitioner a cpa and former irs revenue_agent prepared the form_1040 he filed for and the form_1120s that the company filed for the same year petitioner exercised a lack of care and reckless disregard for rules and regulations in reporting income and claiming deductions against income on the returns resulting in the remaining underpayment petitioner failed to offer any persuasive evidence that he acted with reasonable_cause and in good_faith with respect to any portion of the remaining underpayment we find under the relevant facts and circumstances that petitioner did not act with reasonable_cause and in good_faith with respect to any portion of the remaining underpayment accordingly we hold that petitioner is liable for the accuracy-related_penalty on the remaining underpayment we have considered all arguments made in reaching our decision and to the extent not mentioned we conclude that they are moot irrelevant or without merit to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index numbers ------------------------------------------------- ------------------------------------------------------------- ------------ ------------------------------------- ------------------------------ 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-135957-15 date date legend x ------------------------------------ ---------------------------------- ------------------------ a ----------------------------- state -------------- date ------------------------ year ------- dear --------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_754 of the internal_revenue_code code the information submitted states that x is a state limited_partnership a a partner of x died on date x inadvertently failed to make a timely election under sec_754 for the year of a’s death year x represents that it has acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government plr-135957-15 sec_754 provides that a partnership may elect to adjust the basis of partnership property when there is a distribution_of_property or a transfer of a partnership_interest an election under sec_754 applies with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable_year with respect to which the election was filed and all subsequent taxable years sec_1_754-1 of the income_tax regulations provides that an election under sec_754 to adjust the basis of partnership property under sec_734 and sec_743 with respect to a distribution_of_property to a partner or a transfer of an interest in a partnership must be made in a written_statement filed with the partnership return for the taxable_year during which the distribution or transfer occurs for the election to be valid the return must be filed not later than the time prescribed by sec_1 e including extensions for filing the return for such taxable_year under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose due_date is prescribed by a regulation published in the federal_register sec_301_9100-1 through provide the standards that the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under 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 based solely upon the facts submitted and the representations made we conclude that the requirements of sec_301_9100-1 and sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to make a sec_754 election for its year taxable_year and thereafter the election should be made in a written_statement filed with the appropriate service_center for association with x’s year tax_return a copy of this letter should be attached to the statement filed this ruling is contingent on x adjusting the basis of its properties to reflect any sec_734 or sec_743 adjustments that would have been made if the sec_754 election had been timely made these basis adjustments must reflect any additional_depreciation plr-135957-15 that would have been allowable if the sec_754 election had been timely made regardless of whether the statutory period of limitation on assessment or filing a claim_for_refund has expired for any year subject_to this grant of late relief any depreciation deduction allowable for an open_year is to be computed based upon the remaining useful_life and using property basis as adjusted by the greater of any depreciation deduction allowed_or_allowable in any prior year had the sec_754 election been timely made additionally the partners of x must adjust the basis of their interests in x to reflect what that basis would be if the sec_754 election had been timely made regardless of whether the statutory period of limitation on assessment or filing a claim_for_refund has expired for any year subject_to this grant of late relief specifically the partners of x must reduce the basis of their interests in x in the amount of any additional_depreciation that would have been allowable if the sec_754 election had been timely made except as specifically ruled upon above we express or imply no opinion concerning the tax consequences of any facts discussed or referenced in this letter this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office we are sending a copy of this letter_ruling to your authorized representatives sincerely associate chief_counsel passthroughs and special industries by ________________________________ mary beth carchia senior technician reviewer branch office of associate chief_counsel passthroughs special industries enclosures copy of this letter copy of this letter for sec_6110 purposes


internal_revenue_service number release date index number --------------------------------------------- ------------------------- -------------------------- --------------------------- - department of the treasury washington dc person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi b01 - plr-112253-04 date date -------------------------------------------- ------ ------------------------------------------ ---------------------- legend x --------------------------------------------------- country entity date dear ---------------- this letter responds to a letter dated date written on behalf of x requesting a ruling that x be granted an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a disregarded_entity for federal tax purposes facts according to the information submitted x is a country entity x intended to elect to be treated as a disregarded_entity for federal tax purposes effective date however the form_8832 entity classification election inadvertently was not timely filed x represents that it is an entity that is eligible to elect under sec_301_7701-3 to be a disregarded_entity for federal_income_tax purposes sec_301_7701-3 provides in part that a business_entity that is not law and analysis 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 plr-112253-04 sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if a foreign eligible_entity has one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 if a foreign eligible_entity has more than one owner it may elect to be treated as a partnership pursuant to the rules in sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date on which the form is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 sec_301_9100-2 provides automatic_extension of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301 a conclusion based solely on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied as a result x is granted an extension of time of days from the date of this letter to file form_8832 with the appropriate service_center and elect to be treated as a disregarded_entity for federal tax purposes effective date to be valid the election must contain any consents required under sec_301_7701-3 and iii further a copy of this letter should be attached to the election plr-112253-04 except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transactions described above under any other provision of the code this ruling is directed only to the taxpayer on whose behalf it was requested sec_6110 of the internal_revenue_code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative enclosures copy of this letter copy for sec_6110 purposes sincerely s heather c heather heather c maloy associate chief_counsel passthroughs and special industries


t c memo united_states tax_court william p adams petitioner v commissioner of internal revenue respondent docket no filed date anthony v diosdi for petitioner shannon f edelstone for respondent memorandum findings_of_fact and opinion morrison judge the respondent the irs issued a notice_of_deficiency for the year to the petitioner william adams determining a dollar_figure income-tax deficiency a dollar_figure addition_to_tax under sec_6651 a dollar_figure addition_to_tax under sec_6651 and a dollar_figure addition_to_tax under sec_6654 adams timely filed a petition under sec_6213 for redetermination of the deficiency and the additions to tax we have jurisdiction under sec_6214 the issues for decision are did adams’ sale of his san francisco house in date qualify for nonrecognition treatment as a part of a sec_1031 like-kind_exchange we hold that it did what are the amounts of adams’ income and deductions from his rental properties we find that he received dollar_figure in rent and is entitled to a related deduction of dollar_figure is adams entitled to certain deductions for his electrical-safety- consulting business for we find that adams is entitled to deductions of dollar_figure resulting in taxable_income of dollar_figure from the business is adams liable for the sec_6651 and and sec_6654 additions to tax we hold that he is liable for the sec_6651 1all references to sections are to the internal_revenue_code in effect for the year in issue all references to rules are to the tax_court rules_of_practice and procedure and additions to tax and that he is liable for the sec_6654 addition_to_tax unless rule_155_computations show that he qualifies for the exception under sec_6654 findings_of_fact some facts have been stipulated and they are so found william adams is a semiretired electrical engineer who resided in california when he filed the petition we refer to him as adams we refer to his son whose name is also william adams as bill the san francisco house the eureka house and the sec_1031 exchange in adams bought a house in san francisco san francisco house for dollar_figure he and his family lived in the house until when they moved to rohnert park california soon after moving to rohnert park adams rented the san francisco house to an acquaintance during the period that he rented out the house--1979 to 2003--adams made various improvements to it including upgrading the electrical service installing a circuit for an electric range installing 2the dollar_figure consisted of the dollar_figure sale price and dollar_figure in closing costs and commissions the purchase was made by adams and his wife but for simplicity we refer to the purchase and all subsequent transactions concerning the san francisco house as being made by adams neither adams nor the irs claims that his wife’s involvement changes the tax consequences three energy-efficient windows installing carpet painting the exterior painting the kitchen and patching and ultimately replacing the roof after the renter moved out in adams decided to sell the san francisco house he consulted a real-estate broker to help him with the sale at the broker’s suggestion adams engaged an intermediary known as a 1031-exchange facilitator to reduce the income_tax on the gain from the sale of the san francisco house the sale of the san francisco house and the purchase of the eureka house discussed below took place through the intermediary on date adams sold the san francisco house for dollar_figure adams understood that he had days after selling the san francisco house to identify a property to buy through the intermediary see sec_1031 on date adam sec_3if the sale of a property occurs as part of a sec_1031 exchange the taxpayer does not recognize gain_or_loss on the sale see sec_1031 sec_1031 provides that under certain circumstances the sale of a property to one party and the purchase of a replacement_property from a different party through a qualified_intermediary is treated as an exchange of the property sold for a combination of the property purchased and any additional money received see sec_1031 and b sec_1_1031_k_-1 g the irs does not challenge the nonrecognition treatment of the transaction on the grounds that it did not involve a qualified_intermediary 4there is evidence that adams and his wife sold the san francisco house as cotrustees the parties do not ascribe any significance to the possibility that adams may have owned the house as a cotrustee instead of owning the house outright bought a house in eureka california eureka house for dollar_figure adams’ son bill who had extensive homebuilding and home renovation experience lived in eureka adams thought buying a house in eureka would be advantageous because bill could manage its rental to a third party or even be the tenant himself adams chose the particular house because of its size with five bedrooms it suited bill’s large family the eureka house was old dilapidated and moldy it had been damaged by a previous squatter much work was required to make it livable bill and his family began working on the eureka house in date they worked an aggregate of hours per week on the property during july august and date they repaired mold damage replaced broken doors fixed holes in walls repaired rotten subflooring prepared floors for new carpet installation scrubbed and repaired surfaces for painting painted the interior of the house renovated the kitchen replumbed the kitchen and laundry room for gas replaced electrical fixtures and appliances and performed landscaping they exterminated rats and other pests and on one occasion even chased away a bear their efforts made the house livable for july august and date 5adams and his wife purchased the eureka house together but for simplicity we discuss the purchase as if adams was the sole buyer neither adams nor the irs claims that the wife’s involvement changes the tax consequences adams accepted the services performed by bill and his family in lieu of monetary rent adams did not reimburse them for the labor and out-of-pocket costs of the home improvements the three months of services were worth dollar_figure in date bill and his family started living in the eureka house and paying monetary rent they paid dollar_figure per month in october november and date they continued to pay rent of dollar_figure per month--with one exception7--until they moved out in early bill and his family also continued to maintain and conduct home improvement work on the eureka house until they moved out similar houses in the neighborhood rented for a few hundred dollars more than dollar_figure per month however the tenants did not maintain or conduct home improvement on the houses 6the irs argues that the date rent payment was never made because it was not substantiated by documentary_evidence and adams could not recall at trial whether he received a rent payment in date however bill testified credibly that a dollar_figure rent payment was made in date thus we find that bill and his family paid dollar_figure of rent in date 7in date or bill was injured he and his family could not pay rent for that month afterward they paid rent of dollar_figure per month until they paid off the one month of missing rent at which time they resumed paying dollar_figure per month in the meantime adams continued to live in rohnert park where he had moved in the events and arrangements discussed above are summarized as follows - adams buys the san francisco house for dollar_figure adams moves out of the san francisco house and rents it out renter moves out of the san francisco house adams sells the san francisco house for dollar_figure adams buys the eureka house for dollar_figure bill and his family begin work on the eureka house bill and his family complete enough work on the eureka house to make it livable by the end of the month bill and his family start living in the eureka house in date they pay rent of dollar_figure per month in october november and date bill and his family continue to live in the eureka house and pay rent of dollar_figure per month with one exception see supra note early bill and his family move out of the eureka house adams’ rental properties during adams owned three rental properties the san francisco house which he owned until it was sold on date the eureka house which he bought on date and land in idaho we discuss adams’ reporting of rental income and expenses on schedule e supplemental income and loss infra part electrical-safety-consulting business during adams operated an electrical-safety-consulting business in which he investigated electrical accidents performed hands-on electrical work served as an expert witness and participated in a public-utility-commission rulemaking proceeding he traveled from northern california to southern california to perform some of the accident investigations the parties have stipulated that adams had dollar_figure of gross_receipts from his electrical-safety-consulting business for we discuss the business_expenses that adams claimed on schedule c profit or loss from business infra part procedural history and adams’ federal income-tax return adams failed to timely file his federal income-tax return adams testified that his general practice starting around was not to file a tax_return instead each year he would estimate the amount of tax he owed using the tax table in the income_tax booklet and send a payment to the irs on april 15th for 8as we discuss later he submitted to the irs a form_1040 u s individual_income_tax_return for the year in date after he filed the petition in this case the amount of tax that he thought he owed according to a form_4340 certificate of assessments payments and other specified matters for adams’ tax_year the irs received a payment of dollar_figure from adams on date on date the irs prepared a substitute for return for adams’ tax_year on date the irs issued a notice_of_deficiency to adams for the year that reflected the items on the substitute for return the substitute for return and thus the notice_of_deficiency relied on information returns from third parties that showed they had made payments to adams in the notice_of_deficiency determined that the following items were included in adams’ income for the entire dollar_figure of sale proceeds from the san francisco house an amount the irs treated as ordinary_income not capital_gain dollar_figure of nonemployee compensation dollar_figure of taxable social_security_benefits dollar_figure of pensions and annuities and dollar_figure of interest the only deduction that the irs allowed adams was a standard_deduction of dollar_figure which was the statutory amount for a taxpayer who wa sec_65 or older and had the filing_status of married_filing_separately see sec_63 - f the notice_of_deficiency also determined that adams had an income-tax deficiency of dollar_figure a sec_6651 addition_to_tax of dollar_figure a sec_6651 addition_to_tax of dollar_figure and a sec_6654 addition_to_tax of dollar_figure adams filed a tax_court petition seeking redetermination of the deficiencydollar_figure in his amended petition adams claimed that his correct_tax liability calculated on a joint-return basis with his wife was reflected on a form_1040 for the year dated date which he attached to the amended petitiondollar_figure adams requested that the court consider the attached return in place of the proposed statutory return proposed by the respondent ie the substitute for return the form_1040 attached to the amended petition was unsigned and had not been submitted to the irs for processing thus it did not qualify as a return even if it had been signed and submitted to the irs for processing on the day it 9adams wa sec_76 years old in 10adams’ wife did not join his tax_court petition thus she is not a party to this case 11adams’ original petition was substantially identical to his amended petition the only significant difference was that the original petition did not include an attached form_1040 which was apparently omitted by mistake for this reason we discuss only the amended petition and the irs’s answer to it was dated ie date the form_1040 would have been submitted so late that it would not affect any of the issues in this case such as adams’ liability for additions to tax see infra parts v a v b and v c although the form_1040 is thus not significant as a tax_return it informs us of adams’ assignments of error on the form_1040 attached to his amended petition adams reported that he owed the irs dollar_figure for the year adams claimed a standard_deduction of dollar_figure he reported the following amounts of income dollar_figure of capital_gain from the sale of the san francisco house dollar_figure of ordinary_income from the sale of the san francisco house dollar_figure of rental-real-estate income dollar_figure of business income from his electrical-safety-consulting business dollar_figure of taxable social_security_benefits dollar_figure of taxable pensions and annuities and dollar_figure of taxable interest neither the form_1040 nor the schedules and returns attached to it indicated how adams calculated the dollar_figure of capital_gain or the dollar_figure of ordinary_income from the sale of the san francisco house on a schedule e attached to the form_1040 adams reported that the dollar_figure of rental-real-estate income was calculated as follows san francisco house dollar_figure income expense idaho land rents received dollar_figure auto and travel insurance repairs taxes utilities painting and decorating total expenses net_income rents received minus total expenses eureka house dollar_figure total dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number on a schedule c attached to the form_1040 adams reported that the dollar_figure of business income from his electrical-safety-consulting business was equal to dollar_figure in gross_receipts minus the following dollar_figure in expenses dollar_figure of office expenses dollar_figure of taxes and licenses dollar_figure of travel_expenses dollar_figure of meals-and-entertainment expenses adams accounted for sec_274 which limits deductions for meals-and-entertainment expenses to of such expenses dollar_figure of dues and subscriptions dollar_figure of materials dollar_figure of postage and dollar_figure of printing expenses in date adams submitted to the irs a form_1040 for the tax_year except for the two differences noted below it was identical for the purposes of this case to the form_1040 that he had attached to the amended petition the date form_1040 differed from the form_1040 attached to the amended petition in two ways first unlike the form_1040 attached to the amended petition the date form_1040 was signed the date of the signature was date second a form_8824 like-kind_exchanges was attached to the date form_1040 the form_8824 indicated that the dollar_figure capital_gain from the sale of the san francisco house was calculated as follows cash and fair_market_value of other_property received dollar_figure plus fair_market_value of like-kind_property received big_number minus adjusted_basis of like-kind_property given up equals realized gain big_number cash and fair_market_value of other_property received minus ordinary_income from depreciation_recapture equals capital_gain recognized deferred gain dollar_figure-dollar_figure dollar_figure - big_number big_number dollar_figure like the form_1040 attached to the amended petition the date form_1040 reported that adams owed the irs dollar_figure the irs’s records show that it received a payment of dollar_figure from adams’ on date thus we infer that the irs received the date form_1040 and processed it as a returndollar_figure the substantial lateness of the return however means that its submission does not affect the issues in this case see infra parts v a v b and v c the irs’s answer denied adams’ assignments of error and asserted that the notice_of_deficiency was correct in response to adams’ plea that the court accept the form_1040 attached to the amended petition in place of the irs’s substitute for 12with the possible exception of its lateness the date form_1040 appears to be a valid_return cf 431_f3d_1055 7th cir very-late-filed return was not an honest and reasonable attempt to satisfy the law because the taxpayer filed the return to satisfy a condition_precedent to obtaining a discharge_in_bankruptcy return the irs stated denies the return submitted by the petitioner should be accepted as filed the irs conceded at trial and on brief that adams had a filing_status of married_filing_jointly and that he was entitled to a standard_deduction of dollar_figure for the parties have also stipulated the following facts adams and his wife received dollar_figure of taxable interest in adams and his wife received dollar_figure of taxable pensions and annuities in adams and his wife received dollar_figure of taxable social_security_benefits in we address the remaining issues below opinion i burden_of_proof generally the taxpayer has the burden of proving that the irs’s determinations are incorrect rule a 290_us_111 adams has not argued or presented evidence that the burden_of_proof should shift to the irs see sec_7491 thus adams has the burden_of_proof on all issues ii whether adams engaged in a valid sec_1031 exchange a the parties’ positions adams argues that the sale of the san francisco house and the purchase of the eureka house was a valid sec_1031 exchange that qualified for nonrecognition treatment he claims that both the san francisco house and the eureka house were held for productive use in a trade_or_business or for investment within the meaning of sec_1031 for the eureka house in particular adams asserts that he charged fair market rent to bill and his family considering the condition of the house and the home-improvement work bill and his family performed adams also argues that the boot from the sec_1031 exchange ie the property he received other than the eureka house should be treated as capital_gain not ordinary_income adams argues in the alternative that if the sale of the san francisco house was not part of a valid sec_1031 exchange then the gain from the sale should be treated as capital_gain adams contends that the basis of the san francisco house--which he claims is dollar_figure before adjustments--should be increased by the following amounts dollar_figure of closing costs that he paid when buying the house dollar_figure of capital improvements that he claims to have made to the house and dollar_figure of closing costs that he claims that he incurred when selling the house if these adjustments were made the adjusted_basis of the san francisco house would be dollar_figure this is different from the adjusted_basis assumed in the form_8824 calculations which was zero the irs argues that the sale of the san francisco house and the purchase of the eureka house did not qualify as a sec_1031 exchange the irs claims that adams acquired the eureka house for personal purposes--ie with the intention of letting his son and family live there at below market rent thus the irs claims adams must recognize gain for on the sale of the san francisco house the irs asserts that the adjusted_basis in the san francisco house was zero because his initial basis was dollar_figure the amount he paid to purchase the property including closing costs of dollar_figure against which he claimed dollar_figure of depreciation_deductions and he has not shown that he made any capital improvements to the property the irs claims that adams recognized gain of dollar_figure for the year on the sale of the san francisco house the irs calculated the dollar_figure by subtracting dollar_figure of selling costs from the dollar_figure sale pricedollar_figure the irs asserts that the dollar_figure it calculated as recognized gain consists of 13actually the difference between dollar_figure and dollar_figure is dollar_figure dollar_figure of long-term_capital_gain and dollar_figure of ordinary_income from depreciation_recapture both parties agree that if adams engaged in a valid sec_1031 exchange the boot he received in the transaction is taxable to him in neither party’s view does the adjusted_basis of the san francisco house need to be ascertained in determining the tax consequences of the exchange assuming the exchange is a valid sec_1031 exchange the irs’s brief proposes a method for calculating boot but not the exact amount the brief takes the position that the amount of boot is equal to the net_proceeds from the sale of the san francisco house minus the purchase_price of the eureka house if the irs’s method of calculating boot is used boot would be calculated as follows sale price of san francisco house expenses from sale of san francisco house net_proceeds from sale of san francisco house1 purchase_price of eureka house boot dollar_figure -dollar_figure dollar_figure -dollar_figure dollar_figure 1the irs’s brief erroneously calculates the difference as dollar_figure in adams’ view the amount of boot is equal to sale price of san francisco house expenses from sale of san francisco house net_proceeds from sale of san francisco house purchase_price of eureka house boot b analysis dollar_figure -dollar_figure dollar_figure -dollar_figure dollar_figure sec_1031 provides no gain_or_loss shall be recognized on the exchange of property held for productive use in a trade_or_business or for investment if such property is exchanged solely for property of like_kind which is to be held either for productive use in a trade_or_business or for investment we find that adams bought the eureka house for investment within the meaning of sec_1031 in determining whether the taxpayer intended to hold the acquired property for investment in a sec_1031 exchange we consider the taxpayer’s intent at the time of the exchange 78_tc_225 the taxpayer’s conduct before and after the exchange can inform our determination of the taxpayer’s intent see id pincite although adams chose the eureka house because bill and his family lived in eureka and the house suited bill’s large family we do not believe adams intended to charge bill and his family below-market rent bill and his family paid rent of dollar_figure per month from july to date and continued to pay rent of dollar_figure per month or dollar_figure per month when making up for the one month’s missed rent until they moved out in early dollar_figure see supra part the monthly rent of dollar_figure was a fair rental value because bill and his family assumed substantial responsibilities for renovating maintaining and repairing the eureka house even though adams stated that the rental of the eureka house was a gift when pressed on cross-examination we construe his testimony to mean that he wished to offer bill reduced rent in exchange for working on the house we conclude that the sale of the san francisco house and the purchase of the eureka house constituted a valid sec_1031 exchange of like-kind_property to be held for investment dollar_figure however under sec_1031 adams must recognize gain to the extent of the boot he received in the exchange sec_1031 provides if an exchange would be within the provisions of subsection a if it were not for the fact that the property received in exchange 14as discussed supra part the dollar_figure of rent that bill and his family paid in consisted of dollar_figure per month in the form of services from july to date and dollar_figure per month in the form of money from october to date 15the irs does not argue that the san francisco house was not held for investment consists not only of property permitted by such provisions to be received without the recognition of gain but also of other_property or money then the gain if any to the recipient shall be recognized but in an amount not in excess of the sum of such money and the fair_market_value of such other_property because adams received boot in the sec_1031 exchange we must determine the amount and character of the gain that adams should recognize from the transaction the parties take different positions with respect to the selling costs of the san francisco house the irs’s position that the selling costs were dollar_figure is supported in its brief by citations of the record adams’ position that the selling costs were dollar_figure is unsupported in his brief by citations of the record we adopt the irs’s position that the selling costs were dollar_figure we therefore determine that the boot from the exchange of the properties and therefore adams’ taxable gain was dollar_figure both parties agree that the taxable gain is ordinary_income only to the extent of dollar_figure therefore the remainder dollar_figure dollar_figure - dollar_figure is capital_gain in summary we hold that the taxable gain from the exchange of the properties is in the amount and of the character determined using the method proposed by the irs ordinary_income of dollar_figure and capital_gain of dollar_figure iii income and expenses from adams’ rental properties we find that adams had dollar_figure of schedule e gross_income for in the form of rents received from his rental properties adams owned three rental properties in the san francisco house the eureka house and the land in idaho adams received no rent for the san francisco house in as the renter had moved out in as discussed supra part we find that adams’ gross rental income for from the eureka house was dollar_figure on both the form_1040 attached to the amended petition and the date form_1040 adams reported that he received rent of dollar_figure from the idaho land in its answer the irs asserted that the notice_of_deficiency was correct the notice_of_deficiency does not assert adams earned any schedule e income therefore the irs’s position in its answer is that adams did not earn rental income from the idaho property we accept the irs’s concession that adams earned no income from the idaho land the concession was reflected in the answer and this was the last thing either party said about the income from the idaho land on both the form_1040 attached to the amended petition and the date form_1040 adams claimed dollar_figure of rental-property expenses from three properties the san francisco house the eureka house and the idaho land see supra part however adams has provided evidence for only one rental-property expense--a dollar_figure payment for property insurance on the eureka house on brief adams specifically argued that we should allow a dollar_figure deduction for insurance on the eureka house but he did not argue that we should allow other rental-property-expense deductions we consider adams to have conceded that he is not entitled to deduct the other rental-property expenses that he reported on schedule e the irs contends that adams is not entitled to any deductions for rental-property expenses we thus examine whether adams can deduct the dollar_figure payment for property insurance on the eureka house we conclude that the dollar_figure payment is deductible under sec_212 sec_212 provides in relevant part that an individual taxpayer can deduct all the ordinary and necessary expenses paid_or_incurred for the production_or_collection_of_income or for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income sec_212 and the dollar_figure property-insurance payment relates to the eureka house which adams maintained for the production of rental income see supra part ii b thus the dollar_figure property- insurance payment is deductible under sec_212 the irs also argues that sec_280a limits any deductions associated with the eureka house sec_280a generally allows deductions related to a dwelling_unit except that no deduction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling_unit which is used by the taxpayer during the taxable_year as a residence under sec_280a a taxpayer is treated as using a dwelling_unit during the taxable_year as a residence if the taxpayer rents the dwelling_unit to a family_member unless the taxpayer rents the dwelling_unit to the family_member at a fair rental and for use as that family member’s principal_residence sec_280a a a we find that adams used the eureka house not as a residence but as a rental property adams did not live in the eureka house instead he rented it to bill’s family who used the eureka house as their principal_residence and paid fair rent of dollar_figure per month from july to date see supra part sec_1 ii b although dollar_figure per month was slightly below market it was a fair rent considering the ongoing work that bill had performed on the house thus the sec_280a prohibition of deductions for dwelling units used as residences does not apply to the eureka house in summary the gross rents received were zero for the san francisco house dollar_figure for the eureka house and zero for the idaho land the allowable rental- property expenses were zero for the san francisco house dollar_figure for the eureka house and zero for the idaho land iii allowable deductions for adams’ electrical-safety-consulting business the parties have stipulated that adams operated an electrical-safety- consulting business in and that he had gross_receipts of dollar_figure from this business for the parties dispute the deductions to which adams is entitled for his business adams claims that he is entitled to dollar_figure of deductions in the following categories dollar_figure of office expenses dollar_figure of taxes and licenses dollar_figure of travel_expenses dollar_figure of meals-and-entertainment expenses dollar_figure of dues-and-subscriptions expenses dollar_figure of materials expense dollar_figure of postage expenses and dollar_figure of printing expenses 16the dollar_figure amount accounts for the limitation on deductions for meals- and-entertainment expenses see sec_274 the irs argues that adams is entitled only to the following deductions dollar_figure of office expenses dollar_figure of travel_expenses dollar_figure of dues-and-subscriptions expenses and dollar_figure of materials expense sec_162 allows a taxpayer to deduct all ordinary and necessary expenses_incurred by the taxpayer in carrying_on_a_trade_or_business an expense is ordinary if it is normal usual or customary in the taxpayer’s trade_or_business see 308_us_488 an expense is necessary if it is appropriate and helpful in the taxpayer’s business but it need not be absolutely essential 383_us_687 citing 290_us_111 whether an expense is deductible under sec_162 is a question of fact to be decided on the basis of all the relevant facts and circumstances 97_tc_613 citing 320_us_467 in addition to the requirements of sec_162 sec_274 imposes strict substantiation requirements for certain expenses including expenses for travel meals and entertainment no deduction is allowed for travel meal or entertainment_expenses unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement the amount of the expense the time and place of the travel meal or entertainment the business_purpose of the expense and for entertainment_expenses the business relationship to the taxpayer of the persons entertained sec_274 we address adams’ entitlement to deductions for each of his eight categories of business_expenses as we explain below adams is entitled to dollar_figure of deductions for his electrical-safety-consulting business a office expenses adams can deduct dollar_figure of office expenses on schedule c the parties have agreed and we find that adams is entitled to a dollar_figure deduction for office expenses b taxes and licenses adams is entitled to a schedule c deduction of dollar_figure for taxes and licenses adams credibly testified that in he paid dollar_figure for a two-year state contractor’s license and dollar_figure for a one-year city of rohnert park business license we find adams’ testimony sufficient as evidence of payment furthermore the record contains a printout from the california department of consumer affairs contractors state license board indicating that adams had an active electrical contractor’s license from date to date c travel_expenses adams is entitled to a schedule c deduction of dollar_figure for travel_expenses although adams reported dollar_figure of travel_expenses on schedule c the record contains documentation for only dollar_figure of travel_expenses a dollar_figure check to airport express dated date a dollar_figure southwest airlines receipt for a roundtrip flight from oakland california to orange county california leaving date and returning date a dollar_figure southwest airlines receipt for a roundtrip flight from oakland california to orange county california leaving date and returning the same day a receipt bearing the handwritten notation electric line inspection and an dollar_figure credit card charge to best western in santa ana california in orange county on date adams testified that he paid dollar_figure to airport express for transportation to the airport adams also testified that the date trip to orange county the date trip to orange county and the best western hotel expense were all for business purposes he did not elaborate however on the business purposes served by these three expenses the irs concedes that adams is entitled to deduct dollar_figure for the date trip to orange county we thus consider whether adams is entitled to deduct the other travel_expenses for which there is documentation in the record one such expense is the dollar_figure cost of the date trip to orange county the deductibility of this trip is unconceded adams cannot deduct the dollar_figure paid to airport express that expense was incurred in not the year in issue adams cannot deduct the dollar_figure for the date roundtrip flight to orange county or the dollar_figure paid to best western because he failed to substantiate the business_purpose of these expenses see sec_274 adams’ general assertion that these expenses were for business purposes is insufficient to find business_purpose we need at least a statement by adams that details the specific business_purpose served by the expenses and separate evidence corroborating his statementdollar_figure see sec_1_274-5t fed reg date 66_tc_879 we have neither for the above reasons adams is entitled to deduct only the dollar_figure of travel_expenses that the irs concedes the expenses of the date flight d meals-and-entertainment expenses adams is not entitled to deduct any schedule c expenses for meals and entertainment adams testified that he sometimes had meals and entertained people but the record is devoid of any documentation on the amount date location or business_purpose of any meals or entertainment_expenses see sec 17adams had no records of the business_purpose thus he does not satisfy the adequate-records test see sec_274 d there is also no evidence concerning the business relationship to adams of any people he might have entertained see id e dues-and-subscriptions expenses adams is entitled to deduct dollar_figure for dues-and-subscriptions expenses although adams reported dollar_figure of dues and subscriptions on schedule c the record contains documentation for only dollar_figure of dues-and-subscriptions expenses dollar_figure to redwood empire american subcontractors association dollar_figure to redwood empire national electrical contractors association dollar_figure to redwood empire national electrical contractors association dollar_figure to international brotherhood of electrical workers dollar_figure to international society of arboriculture dollar_figure to redwood empire american subcontractors association dollar_figure to daily journal corp for a directory of california lawyers dollar_figure to thomson west for the publication electrical safety orders us and dollar_figure to international association of electrical inspectors all of the above expenses were paid in the year in issue except the dollar_figure to thomson west which was paid in date there is dollar_figure in dues-and-subscription expenses for which the record contains no documentation there is no evidence--written or otherwise--that adams incurred these expenses adams has not shown that he is entitled to deduct these expenses and thus cannot do so the irs concedes on brief that adams is entitled to deduct dollar_figure of dues-and-subscriptions expenses we find however that the irs made two mistakes in calculating the dollar_figure amount of its concession first the irs appears to have double-counted the dollar_figure payment to daily journal corpdollar_figure there are two documents in the record that show a dollar_figure payment to daily journal corp but closer inspection reveals that the two documents relate to the same payment second the irs counted the dollar_figure payment to thomson west even though it was incurred in since the record plainly reveals that the irs erred in calculating the amount of its concession we choose not to accept its concession as stated on brief we believe that the irs intended to concede that adams could deduct all of the dues-and-subscriptions expenses that were paid in and are 18if we add another dollar_figure payment to the list of expenses above see supra p we arrive at dollar_figure--instead of dollar_figure--as the total amount of dues-and- subscription expenses that are documented in the record documented in the record under this interpretation the irs meant to concede a total of dollar_figure of dues-and-subscriptions expenses for the above reasons adams is entitled to deduct only dollar_figure of the reported dollar_figure of dues-and-subscriptions expenses f materials expenses adams is entitled to deduct schedule c expenses of dollar_figure for materials the record contains documentation of various payments made in to maltby electric yardbirds and friedman brothers hardware totaling dollar_figure adams testified credibly that he purchased materials from these three stores that he then used in his electrical-safety-consulting business the irs does not argue that any portion of the dollar_figure spent on materials was a personal_expense thus we need not consider the possibility that the dollar_figure included materials that adams bought for personal_use the irs contends that when adams calculated the dollar_figure of materials expense that he reported on schedule c he included materials that may have been purchased before while adams admitted on cross-examination that the dollar_figure may have included materials that he purchased before this fact is irrelevant the record shows--independently of the calculations adams used for his return--that adams bought dollar_figure of materials in for his business thus we need not examine whether the calculations adams used for his return were correct for the above reasons adams is entitled to deduct dollar_figure of materials expenses g postage expenses although adams reported dollar_figure of postage expenses on schedule c the record contains documentation for only dollar_figure of postage expenses which were incurred at various post office locations of the dollar_figure of documented postage expenses adams testified that he paid dollar_figure to a post office in rohnert park california to mail copies of pleadings that he had filed with the california public_utilities commission commission he testified that the pleadings concerned an order-instituting-rulemaking proceeding that was pending before the commission and that he sent copies of the pleadings to the service list for the proceeding which involved to addresses we find that the dollar_figure postage expense was an ordinary_and_necessary_expense of adams’ electrical-safety-consulting business adams has not demonstrated that the other dollar_figure of documented postage expenses was related to his business for the dollar_figure of undocumented postage expenses there is no evidence that adams incurred these expenses thus he can deduct only dollar_figure of postage expenses h printing expenses adams reported dollar_figure of printing expenses on his schedule c the record contains receipts for dollar_figure of the printing expenses the receipts show different payments to kinko’s for printing expenses totaling dollar_figure there are also two receipts for printing expenses from clone digital print copy of the printing-expense receipts in the record receipts bear the handwritten notation oir --8 kinko’s receipts and clone digital print copy receipt we infer that oir stands for order instituting rulemaking it is unclear whether the oir notations were made when adams received the receipts or sometime later under the circumstances the value of the oir notation to us is limited adams testified that the payments to kinko’s were the expenses of making copies of the pleadings that he filed with the commission we find that these expenses relate to adams’ electrical-safety-consulting business adams has not proven that the printing expenses other than the kinko’s expenses were business_expenses we conclude that the amount of adams’ deductible printing expenses is dollar_figure i conclusion in conclusion adams had dollar_figure of deductible business_expenses in from his electrical-safety-consulting business subtracting these deductions from his dollar_figure of gross_receipts yields dollar_figure in net profits in from his electrical-safety-consulting business v additions to tax the irs has the burden of production with respect to additions to tax and penalties sec_7491 the irs satisfies this burden by producing sufficient evidence indicating that it is appropriate to impose the relevant addition_to_tax or penalty 116_tc_438 once the irs satisfies its burden of production the taxpayer has the burden of persuading the court that he is not liable for the addition_to_tax or penalty id pincite if the taxpayer wishes to raise an exception or affirmative defense to an addition_to_tax or penalty the taxpayer bears the burden of producing evidence on the exception and persuading the court that the exception applies see id stating that the irs need not introduce evidence regarding reasonable_cause substantial_authority or similar provisions a sec_6651 addition_to_tax the irs determined that adams was liable for a dollar_figure addition_to_tax under sec_6651 for failing to timely file his tax_return adams admits that he failed to timely file his tax_return but he argues that he had reasonable_cause for failing to timely file the return because he did not realize he had a filing requirement for his advanced age prevented him from timely filing the return and he had no relevant education or knowledge of tax law sec_6651 imposes an addition_to_tax for failing to file a return by the filing deadline as extended unless such failure is due to reasonable_cause and not due to willful neglect for each month the return is late the addition_to_tax i sec_5 of the tax due not to exceed in the aggregatedollar_figure sec_6651 if the sec_6651 addition_to_tax for failure to timely pay tax runs concurrently with the sec_6651 addition_to_tax the per month addition_to_tax under sec_6651 is reduced to per month sec_6651 reasonable_cause for the failure to timely file a return exists if the taxpayer exercised ordinary business care and prudence but nevertheless was unable to file the return on time sec_301_6651-1 in order to prove he or she did not act with willful neglect a taxpayer must show that the late filing did not result from a ‘conscious intentional failure or reckless indifference ’ 19for sec_6651 the tax due is the amount of tax required to be shown on the return reduced by the amount of any part of the tax which is paid on or before the date prescribed for payment of the tax and by the amount of any credit against the tax which may be claimed on the return sec_6651 99_tc_202 quoting 469_us_241 the irs has met its burden of production for the sec_6651 addition_to_tax the record shows that adams did not file his tax_return until date--after he had filed his tax_court petition in this case thus adams failed to timely file his tax_return see sec_6072 adams has not shown that he had reasonable_cause for failing to timely file his tax_return a taxpayer’s belief that no return is required in itself is not sufficient to show that the failure_to_file was due to reasonable_cause niedringhaus v commissioner t c pincite moreover we find it implausible that adams did not believe he had a filing requirement for adams testified that his general practice starting around was not to file a return instead each year he would estimate the amount of tax he owed using the tax table in the income_tax booklet and send a payment to the irs on april 15th for the amount of tax that he thought he owed we conclude that adams knew he was required to file a return and deliberately chose not to file the return on time we also do not believe that adams’ age or purported lack of tax knowledge prevented him from timely filing his return adams has not provided any evidence that his age resulted in an inability to timely prepare and file his tax_return on the contrary his ability to engage in a sec_1031 exchange--a relatively complex transaction--indicates that his physical and mental faculties were intact adams’ decision to engage in a sec_1031 exchange also suggests that he was not entirely lacking in tax knowledge in addition adams was able to estimate the amount of tax due from tax_tables which suggests some working knowledge of tax law we believe adams had sufficient knowledge of tax law to know that he was required to file a returndollar_figure we hold that adams is liable for the sec_6651 addition_to_tax for failing to timely file his tax_return b sec_6651 addition_to_tax the irs determined that adams was liable for a dollar_figure addition_to_tax under sec_6651 for failing to timely pay his tax adams argues that he is not liable for the sec_6651 addition_to_tax because the irs did not prepare a valid substitute for return for adams also argues that he had reasonable_cause for failing to timely pay his tax because his advanced age prevented him from timely paying his tax and he had no relevant education or knowledge of tax law 20of course unawareness of one’s legal obligations is not reasonable_cause for not filing carlebach v commissioner t c __ __ slip op pincite date sec_6651 imposes an addition_to_tax for failing to pay the tax shown on a return on or before the date prescribed for payment unless such failure is due to reasonable_cause and not due to willful neglect for each month the taxpayer fails to pay the tax shown the addition_to_tax is of the net amount of tax due at the beginning of each month not to exceed in the aggregate sec_6651 b when a taxpayer does not file a return the irs may prepare a substitute for return sec_6020 such a return if it meets the requirements of sec_6020 is treated as the return filed by the taxpayer for purposes of the sec_6651 addition_to_tax sec_6020 sec_6651 127_tc_200 aff’d 521_f3d_1289 10th cir o’boyle v commissioner tcmemo_2010_149 slip op pincite for a return prepared by the irs to constitute a sec_6020 return it must be subscribed must contain sufficient information from which to compute the taxpayer’s tax_liability and must purport t464_fedappx_4 d c cir reasonable_cause for the failure to timely pay taxes exists if the taxpayer has made a satisfactory showing that he exercised ordinary business care and prudence in providing for payment of his tax_liability and was nevertheless either unable to pay the tax or would suffer an undue_hardship if he paid on the due_date sec_301_6651-1 the irs has met its burden of production for the sec_6651 addition_to_tax we find that the irs prepared a valid substitute for return for adams’ tax_year and that he failed to timely pay the tax shown on the substitute for return the record contains a return prepared by the irs that is subscribed is sufficient to compute adams’ tax_liability and is certified to be a return adams fails to allege specific reasons that the substitute for return was invalid there is no evidence in the record that suggests that the substitute for return was invalid therefore we conclude that the irs prepared a valid substitute for return for adams’ tax_year see wheeler v commissioner t c pincite to meet its burden of production the irs must introduce evidence that a valid substitute for return was made the irs’s records show that it received a payment of dollar_figure on date and a payment of dollar_figure on date with respect to adams’ tax the dollar_figure payment did not cover all of the tax shown on the substitute for return the dollar_figure payment occurred too late to affect the calculation of the sec_6651 addition_to_tax as the addition_to_tax had already reached the maximum of of the net amount of tax due therefore we conclude that adams failed to timely pay the tax shown on the substitute for returndollar_figure adams has not shown that he had reasonable_cause for failing to timely pay his tax for reasons similar to those we articulated supra part v a we find that adams’ age and purported lack of tax knowledge did not prevent him from timely paying his taxes we hold that adams is liable for the sec_6651 addition to taxdollar_figure c sec_6654 addition_to_tax the irs determined that adams was liable for a sec_6654 addition_to_tax for failing to pay estimated_tax adams argues that he is not liable for the 21adams’ dollar_figure payment on date does reduce the net amount of tax due for each month after the payment was made see sec_6651 the reduction in the net amount of tax due means that the sec_6651 addition_to_tax a percentage penalty applies to a smaller amount of tax due for months after date 22although adams did ultimately file a tax_return he did not file the return until date which was after he filed his tax_court petition in this case thus in preparing the notice_of_deficiency the irs did not err in using the substitute for return to determine adams’ liability for the sec_6651 addition_to_tax neither party has raised the issue of whether adams’ late-filed tax_return means that his liability for the sec_6651 addition_to_tax should be calculated using the tax shown on the return rather than the tax shown on the substitute for return see hardin v commissioner tcmemo_2012_162 slip op pincite if either party believes that further briefing is required that party should make a motion to file additional briefs before the deadline for rule_155_computations sec_6654 addition_to_tax because he qualifies for the exception under sec_6654 he qualifies for the exception under sec_6654 he qualifies for the exception under sec_6654 and he had reasonable_cause for failing to pay estimated_tax because of his advanced age and his lack of understanding of the tax consequences of the sec_1031 exchange sec_6654 imposes an addition_to_tax for failing to make estimated_tax payments as required by sec_6654 b - d the addition_to_tax is calculated by applying the sec_6621 underpayment interest rate to the amount of each underpayment from the due_date of each installment until april following the close of the taxable_year for calendar-year taxpayers sec_6654 b the amount of each underpayment is the excess of the required_installment over the amount if any of the installment paid on or before the due_date for the installment sec_6654 the required_installment is due at four times during the year and i sec_25 of the required_annual_payment sec_6654 d a the required_annual_payment is equal to the lesser of-- i percent of the tax_shown_on_the_return for the taxable_year or if no return is filed percent of the tax for such year or ii percent of the tax_shown_on_the_return of the individual for the preceding_taxable_year clause ii shall not apply if the preceding_taxable_year was not a taxable_year of months or if the individual did not file a return for such preceding_taxable_year sec_6654 the irs has met its burden of production for the sec_6654 addition_to_tax adams did not file a tax_return for and although adams filed a tax_return for his return was filed too late to be considered a filed return for purposes of sec_6654 see 121_tc_308 a return filed after a notice_of_deficiency is issued is not considered a filed return for purposes of sec_6654 thus adams’ required_annual_payment for wa sec_90 of his tax_liability for see sec_6654 adams did not make any_tax payments for the year until date when he sent dollar_figure to the irs his four required installments for were all due before date see sec_6654 therefore adams had an underpayment with respect to each of his four required installments for see sec_6654 adams’ qualification for the sec_6654 exception to the addition_to_tax will depend on the outcome of the rule_155_computations under section e the sec_6654 addition_to_tax does not apply if the tax_shown_on_the_return for the taxable_year or if no return is filed the tax --as reduced by the credit allowable under sec_31 ie a wage_withholding_credit --is less than dollar_figure as adams is considered not to have filed a return for purposes of sec_6654 he will qualify for the sec_6654 exception if his tax_liability for reduced by any sec_31 credit is less than dollar_figure rule_155_computations will determine adams’ exact tax_liability for and thus his qualification for the sec_6654 exception adams does not qualify for the sec_6654 exception to the addition_to_tax under sec_6654 the sec_6654 addition_to_tax does not apply if the taxpayer had no tax_liability for the preceding taxable yeardollar_figure exhibit 35-j is a form_4340 for adams’ tax_year the form_4340 shows that adams had a tax_liability for thus he cannot qualify for the sec_6654 exception to the addition_to_tax adams does not qualify for the sec_6654 exception to the addition_to_tax under sec_6654 the sec_6654 addition_to_tax does not apply if the taxpayer retired after reaching age or became 23the preceding_taxable_year must have been a taxable_year of months and the taxpayer must have been a u s citizen or resident throughout the preceding_taxable_year sec_6654 disabled in the taxable_year or the preceding_taxable_year and the underpayment was due to reasonable_cause and not to willful neglect although adams was over at the time the record does not indicate whether he retired in the taxable_year at issue or the preceding_taxable_year we find that adams did not become disabled during or despite his claim of advanced age in adams was capable of engaging in a sec_1031 exchange managing rental properties and operating an electrical-safety-consulting business all of these activities strongly suggest that he was not disabled on the basis of the record we conclude that adams does not meet the first requirement for the sec_6654 exception thus we need not consider whether his underpayment was due to reasonable_cause lastly adams raises a separate reasonable-cause defense to the a addition_to_tax however there is no reasonable-cause exception to the sec_6654 addition_to_tax the taxpayer is subject_to the addition_to_tax unless one of the e exceptions applies see sec_1_6654-1 75_tc_1 33_tc_1071 we hold that adams is liable for the sec_6654 addition_to_tax unless rule_155_computations show that he qualifies for the sec_6654 exception to the addition_to_tax to reflect the foregoing decision will be entered under rule