t c summary opinion united_states tax_court luis acle jr petitioner v commissioner of internal revenue respondent docket no 20069-02s filed date luis acle jr pro_se donna l pahl for respondent goldberg special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect at the time the petition was filed the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure respondent determined a deficiency in petitioner’s federal_income_tax of dollar_figure and an accuracy-related_penalty of dollar_figure for the taxable_year the issues for decision are with respect to petitioner’s rental activities whether the losses petitioner incurred are subject_to the passive_activity_loss limitations of sec_469 with respect to petitioner’s business activities a whether petitioner received unreported income as determined by respondent and b whether petitioner is entitled to a business_expense deduction disallowed by respondent and whether petitioner is liable for the accuracy-related_penalty under sec_6662 the adjustments in the notice_of_deficiency to the itemized_deductions and to the self-employment_income tax and the deduction therefor are computational and will be resolved by the court’s holding on the issues some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference petitioner resided in san diego california on the date the petition was filed in this case petitioner filed a federal_income_tax return for taxable_year with the filing_status of head_of_household petitioner reported dollar_figure of interest_income a dollar_figure business loss and a dollar_figure loss from rental activities for an adjusted_gross_income of negative dollar_figure petitioner also claimed dependency_exemption deductions for two daughters and itemized_deductions of dollar_figure for mortgage interest and real_estate_taxes resulting in a taxable_income of negative dollar_figure and zero tax_liability petitioner’s rental activities during petitioner owned or held partial ownership interests in seven separate rental properties petitioner is not a real_estate_professional and he did not personally manage any of the rental properties three of the properties are in the san diego area and during were professionally managed by westman property management the other four properties are located in the washington d c area and during were professionally managed by yarmouth property management on his federal_income_tax return petitioner reported the following income and expenses with respect to the rental properties reporting an overall deductible loss of dollar_figure california properties washington d c area properties san san spring arlington wash wash wash diego diego valley virginia d c d c d c rents received dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure less cash expenses big_number big_number big_number big_number big_number big_number big_number less depreciation big_number big_number big_number big_number big_number big_number gain loss dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure petitioner did not directly receive the rents from these properties instead the rental management companies collected the rents paid the related expenses and then billed petitioner for the expenses which were in excess of the total amount of rent collected if necessary in the notice_of_deficiency respondent disallowed dollar_figure of the losses claimed by petitioner with respect to the rental properties although petitioner disputes the disallowance of the losses he has made no arguments with respect to this issue and at trial he stated that this issue seems to be a matter of law sec_469 imposes limits on deductions for losses from any passive_activity under sec_469 an individual may not deduct a passive_activity_loss which is defined in sec_469 to be the excess of the individual’s aggregate losses from passive activities over his aggregate income from passive activities as a general_rule any rental_activity is a passive_activity sec_469 a rental_activity in turn is any activity where payments are principally for_the_use_of tangible_property sec_469 although certain exceptions apply to this general_rule petitioner does not assert and the record does not show that any such exceptions apply in this case thus petitioner’s rental activities with respect to the seven properties are passive activities and petitioner is not allowed a deduction for his aggregate losses with respect thereto sec_469 respondent disallowed dollar_figure of the claimed deduction of dollar_figure with respect to petitioner’s rental activities it is not clear from the record why respondent determined that a portion of the loss was allowable respondent has not sought to disallow the remaining dollar_figure of the loss and we therefore do not address respondent’s calculation of the allowable_amount of the loss petitioner’s business activities during the year in issue petitioner was engaged in certain business consulting activities in connection with these consulting activities petitioner served as the chief_executive_officer of an entity named north american free trade_association nafta which is incorporated in mexico in this position petitioner would provide services to foreign companies seeking to do business in mexico petitioner would allow his clients the foreign companies to use the address of nafta’s office in mexico city nafta maintained a bank account in mexico petitioner also operated a business activity under the name of occidental utilities ou while petitioner entered into at least one agreement with a client in which petitioner asserted that ou was a delaware corporation petitioner does not recall incorporating ou and in any event petitioner conducted business only as a sole_proprietor under that name in this business activity petitioner provided consulting services within the utilities industry in or petitioner entered into a contract with a business known as san luis tank to provide consulting services in connection with this agreement san luis tank issued petitioner a form 1099-misc miscellaneous income reflecting a payment of dollar_figure to petitioner in petitioner’s relationship with san luis tank lasted until that business ceased operations in also during or petitioner entered into a contract with pseg global inc to provide consulting services pseg global was interested in building and operating a power plant in san luis mexico during petitioner assisted pseg global by performing various tasks including negotiating with the mexican government acting as a conduit in obtaining the proper certifications and permits that are required in mexico and engaging in other business negotiations petitioner prepared monthly billing invoices for the work he performed for pseg global these invoices indicate that they are from luis acle occidental utilities and the total amount billed by petitioner in was dollar_figure of this amount dollar_figure was for services petitioner rendered and dollar_figure was for expenses he incurred on certain occasions pseg global would refuse payment of certain charges or modify the amount requested pseg global’s records indicate the addition of three payments other than those shown on petitioner’s invoices totaling dollar_figure and the omission of one payment of dollar_figure that was requested by petitioner on an invoice the one payment that petitioner requested but which is not shown on pseg global’s records as having been paid is a request for fees of dollar_figure and expenses of dollar_figure on an invoice dated date although pseg global’s records reflect payments to petitioner in totaling dollar_figure pseg global issued petitioner a form 1099-misc on which it reported payments to petitioner totaling dollar_figure during that year petitioner ceased working on behalf of pseg global in during petitioner maintained at least two bank accounts in the united_states the first was maintained under the name of ou at wells fargo bank and the second was maintained under the names of petitioner and m cristina a robles at home savings of america amounts totaling dollar_figure were deposited into the first account and dollar_figure was deposited into the second account petitioner filed a schedule c profit or loss from business with his federal_income_tax return for taxable_year this schedule named petitioner as the proprietor of a business engaged in international business consulting the schedule listed the name of the business as nafta and it provided an address in mexico city neither party addressed the use of petitioner’s corporation’s name on the schedule c based on petitioner’s testimony and other evidence in the record we conclude that the 1the total deposit amounts are those reflected in the bank deposit summaries prepared by respondent respondent calculated the amount of the deposits using the account statements provided by petitioner several of these statements were not available leaving gaps of approximately weeks with respect to wells fargo bank and approximately weeks with respect to home savings of america respondent based his determination solely on the time periods for which bank statements were available schedule c was filed for ou rather than for nafta petitioner reported schedule c gross_receipts of dollar_figure and claimed deductions totaling dollar_figure for various expenses for an overall loss of dollar_figure one of the expenses claimed as a deduction by petitioner is in the amount of dollar_figure and is described as administrative mexico in the notice_of_deficiency respondent determined that petitioner received dollar_figure in unreported income from his business activities respondent calculated this amount as follows bank_deposits dollar_figure less transfers between accounts big_number less line of credit advances big_number less gross_receipts reported on return big_number unreported income dollar_figure respondent now concedes that the amount of unreported income should be reduced by dollar_figure to dollar_figure to reflect credit card overdraft transfers into petitioner’s accounts respondent also disallowed in the notice_of_deficiency the dollar_figure deduction claimed by petitioner as administrative mexico respondent allowed the deductions for each of the other expenses claimed by petitioner on the schedule c a unreported income gross_income generally includes income from whatever source derived unless specifically excluded by statute sec_61 taxpayers are required to maintain records sufficient to establish the amounts of income deductions and other items which underlie their federal_income_tax liabilities sec_6001 sec_1 a e income_tax regs if a taxpayer fails to keep adequate books_and_records the commissioner may reconstruct the taxpayer’s income by any method that is reasonable under the circumstances 92_tc_661 see also 536_us_238 stating that the assessment authority of the irs is not exceeded when the irs estimates an individual’s tax liability--so long as the method used to make the estimate is a ‘reasonable’ one the reconstruction need not be exact so long as it is reasonable and substantially correct petzoldt v commissioner supra pincite 43_tc_824 the use of bank_deposits is recognized as a reasonable method of reconstructing income 94_tc_654 87_tc_74 70_tc_1057 this method is premised on the assumption that the deposits into a taxpayer’s account consist of income from taxable sources see sec_61 as a general_rule a taxpayer bears the burden of proving the commissioner’s determinations in a notice_of_deficiency to be in error rule a certain courts have recognized a limited exception to the general_rule where the notice_of_deficiency determines that the taxpayer failed to report income 649_f2d_152 2d cir affg in part and revg in part 74_tc_260 596_f2d_358 9th cir revg 67_tc_672 in such circumstances the commissioner must come forward with evidence establishing a minimal foundation which may consist of evidence linking the taxpayer with an income-producing activity petzoldt v commissioner supra pincite in the present case petitioner does not dispute that he received income with respect to the relevant business activities petitioner argues that respondent’s determination concerning the receipt of unreported income is in error to this effect petitioner argues that he received a certain amount of money as compensation_for my services i acknowledged that and that was reported there are additional_amounts that were third party expenses that had nothing to do with me for which i was nonetheless responsible there were a number of deposits that were made from one account to another primarily because the expenses sec_7491 which shifts the burden_of_proof to the commissioner under certain circumstances does not apply with respect to any factual dispute in this case because petitioner did not keep adequate books_and_records and did not meet statutory substantiation requirements sec_7491 and b including the real_estate expenses were coming out of those accounts therefore my contention is that a number of these additional_amounts that are presumed by the irs to be income are simply transfers from one account to another or deposits that were made after money was taken from that same account therefore a lot of money was counted two or three times in addition i would suggest that there are a number of expenses including all of those for st luis tank that were expenses channeled through me and going to other people including specifically people who were providing services to that company without it being any income to me or expendable nor was it claimed as an expense fund thus petitioner argues that a portion of the deposits consists of reimbursements for expenses petitioner incurred on behalf of clients and that a portion of the deposits consists of transfers between accounts or amounts that were withdrawn and redeposited into the same account petitioner does not provide details concerning specific amounts of either the alleged reimbursements or the alleged transfers in certain cases reimbursements received by a taxpayer engaged in a trade_or_business for expenses_incurred on behalf of another are not included in the taxpayer’s gross_income 10_tc_590 however in the absence of adequate_records and proper substantiation it remains the taxpayer’s burden to show error in the commissioner’s determination that bank_deposits are income sec_7491 rule a tokarski v commissioner supra pincite the only corroborating evidence in the record showing that petitioner received reimbursements from his clients lies in the invoices that petitioner submitted to pseg global on which he requested reimbursement for expenses totaling dollar_figure pseg global’s records indicate that the company paid all but dollar_figure of these expenses in accordance with petitioner’s requests for payment petitioner however claimed deductions for numerous expenses on his schedule c in an amount totaling dollar_figure respondent has not challenged dollar_figure of these deductions some of which are for expenses that are of the same type as those for which petitioner requested reimbursement from pseg global because petitioner’s schedule c was filed for his consulting business and pseg global was the primary source_of_income for this business we conclude that the schedule c deductions substantially encompass the expenses for which petitioner was reimbursed by pseg global a taxpayer is not entitled to both exclude an amount from income as a reimbursement of an expense and then deduct the same amount as a business_expense see generally sec_1_161-1 income_tax regs providing that double deductions are not permitted because petitioner has failed to provide records of any sort supporting the amount of his deductions the court cannot ascertain whether the dollar_figure in reimbursements petitioner received is wholly reflected in the dollar_figure of allowed expenses that he claimed as deductions on his return we conclude that petitioner has failed to show either that he is entitled to exclude from income any portion of the reimbursements he received from pseg global or that he is entitled to additional deductions with respect to the underlying expenses see rule a petitioner further argues that he received reimbursements from other sources such as san luis tank however petitioner has presented no credible_evidence that any of the amounts deposited into his bank accounts were reimbursements for expenses_incurred on behalf of san luis tank or any other entity or individual the only evidence to this effect was petitioner’s own self-serving uncorroborated testimony which we do not find to be credible at more than one point in his testimony petitioner stated that he could not recall the purpose of individual withdrawals or deposits noted on his bank account statements petitioner’s next argument is that a portion of the deposits into his accounts consists of transfers between accounts or amounts that were withdrawn and subsequently redeposited into the same account the only evidence in the record pertaining to this argument lies in bank statements from the bank accounts at wells fargo bank and home savings of america and copies of checks drawn on the wells fargo account while petitioner was unable to discuss the bank statements in detail certain of the wells fargo checks clearly indicate that they were for transfers to another account however the total amount of these checks is less than the amount already taken into account as transfers in respondent’s calculation other wells fargo checks were written to household bank these checks represent mortgage payments by petitioner most of the remaining checks were written to petitioner himself or to wells fargo presumably indicating that on some occasions petitioner was withdrawing cash from his account there is no evidence that any such withdrawal was redeposited into petitioner’s account to the contrary there is evidence that at least a portion of such funds was used to make payments on a line of credit or another loan in summary we find that the wells fargo checks do not refute any aspect of respondent’s calculation of petitioner’s unreported income other than the two general arguments discussed above petitioner has not presented any specific objections to respondent’s reconstruction of petitioner’s income for example petitioner has not argued that any individual deposit is from a nontaxable source nor has petitioner asserted or provided evidence tending to show that any deposit was from an alternative source such as a savings account finally petitioner summarizes his argument that respondent’s determinations are in error by stating i think that there is clear evidence of the fact that there is a certain amount of necessary recycling of this money for the reasons that i have explained to the points that there’s no way that anybody could say that this clearly reflects income we disagree with petitioner while respondent’s reconstruction of petitioner’s records certainly is not exact we find the reconstruction to be substantially correct and to be a more accurate reflection of petitioner’s income than what was reported on his return see petzoldt v commissioner t c pincite 43_tc_824 although the amount of income exceeds that which was reported on the two forms 1099-misc appearing in the record at least one of the forms has been shown to be inaccurate furthermore the forms were issued by only two sources it is reasonable to conclude that petitioner had other income generated from his business activities during either directly from his operation of ou or indirectly through his corporation nafta there is no evidence in the record establishing the amount of income that petitioner derived from nafta finally according to the information reported by petitioner on his return petitioner had a negative taxable_income of dollar_figure petitioner has not explained how he would have been able to pay the disproportionately large amount of expenses shown on his return in comparison to the gross_income that he reported while at the same time maintaining a standard of living for himself and for his two daughters whom he claimed as dependents we sustain respondent’s determination concerning petitioner’s unreported income as adjusted for respondent’s concession that petitioner had dollar_figure less unreported income than the amount determined in the notice_of_deficiency b business_expense petitioner argues that respondent’s disallowance of the dollar_figure schedule c deduction for administrative mexico is in error petitioner stated at trial that the dollar_figure represents the cost of doing business in mexico city in particular petitioner asserts that he lost office equipment valued at a little over dollar_figure in a burglary and that he was forced to scrap an automobile--because the oil pump or something had gone bad and the car was basically ruined --for which he took a little over a dollar_figure loss it is unclear from the record whether the office to which petitioner refers in his testimony regarding this issue was the office of nafta petitioner’s mexico city-based corporation a corporation formed for legitimate business purposes is an entity 3we briefly address a factual issue that was not discussed by either party--the interrelationship between the rental_activity issue and the unreported income issue in light of petitioner’s burden_of_proof in this regard see rule a we note that the record does not support a finding that any of the amounts deposited into petitioner’s bank accounts were derived from the rental activities we reach this conclusion based upon the record as a whole which establishes inter alia that the property management companies rather than petitioner collected the rents and paid the expenses therefrom that petitioner held only partial ownership interests in several of the properties that petitioner may have held bank accounts other than the two named above and that no deposits listed in the bank statements have been identified as having been derived from the rental properties separate from its shareholders and the business of the corporation is separate and distinct from the business of its shareholders 319_us_436 308_us_488 thus a shareholder generally is not entitled to a deduction for the payment of corporate expenses deputy v du pont supra 47_tc_483 and petitioner accordingly would not be entitled to deduct nafta’s expenses we assume arguendo that petitioner is asserting that the dollar_figure expense was incurred in connection with ou rather than nafta nevertheless petitioner provided only vague uncorroborated testimony to substantiate the dollar_figure expense at issue and we do not find petitioner’s testimony concerning this issue to be reliable furthermore we note that petitioner’s description of the expense at trial does not appear to be consistent with the description of the expense given on the schedule c we conclude that petitioner has failed to substantiate the disallowed deduction see sec_6001 sec_1_6001-1 e income_tax regs respondent’s disallowance of the deduction is sustained accuracy-related_penalty respondent determined that petitioner is liable for the accuracy-related_penalty under sec_6662 with respect to the portion of the underpayment attributable to the omission of the schedule c gross_receipts respondent did not determine that petitioner is liable for the accuracy-related_penalty with respect to any other adjustment in the notice_of_deficiency sec_6662 imposes a 20-percent penalty on the portion of an underpayment attributable to any one of various factors one of which is negligence or disregard of rules or regulations sec_6662 negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code including any failure to keep adequate books_and_records or to substantiate items properly sec_6662 sec_1_6662-3 income_tax regs sec_6664 provides that the penalty under sec_6662 shall not apply to any portion of an underpayment if it is shown that there was reasonable_cause for the taxpayer’s position and that the taxpayer acted in good_faith with respect to that portion the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all the pertinent facts and circumstances sec_1_6664-4 income_tax regs the most important factor is the extent of the taxpayer’s effort to assess his proper tax_liability for the year id it is clear that petitioner was negligent with respect to the omission of the schedule c income petitioner did not keep adequate books_and_records or otherwise substantiate the amount of income reported on his return as required by the internal_revenue_code the evidence petitioner did provide that shows certain amounts of income that he received in the year in issue does not correspond to the total amount reflected on his return nor does the amount of income reported on his return correspond to the forms 1099-misc which petitioner was issued despite being involved in transactions resulting in bank_deposits of over dollar_figure petitioner testified that i also am mindful of the fact that there’s probably a valid criticism that could be made of me because i do not keep records that are precise that can be added up and totaled we sustain respondent’s determination with respect to the sec_6662 accuracy-related_penalty as modified by respondent’s concession concerning the amount of unreported income reviewed and adopted as the report of the small_tax_case division decision will be entered under rule