t c memo united_states tax_court jay b briley and constance h briley petitioners v commissioner of internal revenue respondent docket no filed date jay b briley and constance h briley pro sese john m tkacik jr and warren p simonsen for respondent memorandum opinion kerrigan judge respondent determined the following deficiencies and penalties with respect to petitioners’ federal_income_tax for tax years and year deficiency dollar_figure big_number penalty sec_6662 dollar_figure big_number unless otherwise indicated all section references are to the internal_revenue_code in effect for the tax years in issue and all rule references are to the tax_court rules_of_practice and procedure we round all monetary amounts to the nearest dollar after concessions the issues for consideration are whether petitioners are entitled to a net_operating_loss nol for tax_year are entitled to nol carryovers for tax years and are entitled to deduct certain expenses reported by their wholly owned s_corporation for tax years and owned a business independent of their s_corporation which would entitle them to file a schedule c profit or loss from business with their tax_return and deduct self-employment_tax and are liable for the accuracy-related_penalty under sec_6662 for tax years and background this case was fully stipulated under rule the stipulated facts are incorporated in our findings by this reference petitioners resided in virginia when they filed the petition briley builders in petitioner husband incorporated briley builders inc briley builders in washington d c which constructs and refurbishes houses in the washington d c area petitioners each owned of briley builders and served as its executive officers during and on date petitioners caused briley builders to elect to be treated as an s_corporation on date briley builders purchased a residential property in washington d c washington d c property briley builders paid dollar_figure for the washington d c property plus dollar_figure in closing costs briley builders intended to convert the existing structure of the washington d c property into six condominiums and to build a second structure containing an additional six condominiums in briley builders started work on the washington d c property in briley builders completed its conversion of the existing structure and sold the first six condominiums for a total of dollar_figure during briley builders also refurbished eight other properties in washington d c and northern virginia bank accounts and loans in briley builders maintained a checking account with the adams national bank d b a premier bank adams bank in and briley builders maintained a business checking account with branch banking trust co bb t bank in briley builders opened a second business checking account with bb t bank in petitioners maintained a personal checking account with bb t bank on date briley builders obtained a loan from bb t bank the loan allowed briley builders to draw cash advances up to dollar_figure briley builders made several draws against this loan in and on date briley builders obtained a second loan from bb t bank the loan was for a principal_amount of dollar_figure briley builders obtained this loan to purchase land and pay the costs associated with building condominiums on that land tax returns briley builders filed timely a form_1120s u s income_tax return for an s_corporation for tax_year briley builders reported no gross_sales but it reported expenses consisting of dollar_figure for compensation_for officers dollar_figure for taxes and licenses dollar_figure for interest and dollar_figure of other expenses briley builders specified that the other expenses consisted of dollar_figure for office expenses dollar_figure for materials dollar_figure for insurance dollar_figure for entertainment dollar_figure for gas and dollar_figure for automobile expenses briley builders reported an nol of dollar_figure petitioners filed timely a form_1040 u s individual_income_tax_return for tax_year petitioners reported dollar_figure of wages and dollar_figure of total income petitioners offset their income with briley builders’ reported dollar_figure nol thus petitioners reported zero taxable_income for tax returns briley builders filed timely a form_1120s for tax_year briley builders reported dollar_figure of gross_sales and dollar_figure of ordinary business income briley builders reported expenses consisting of dollar_figure for salaries dollar_figure for taxes and licenses dollar_figure for interest and dollar_figure for other expenses briley builders specified that the other expenses consisted of dollar_figure for office expenses dollar_figure for materials dollar_figure for insurance dollar_figure for entertainment dollar_figure for gas and dollar_figure for automobile expenses in total briley builders claimed dollar_figure of deductions petitioners filed timely a form_1040 for tax_year petitioners reported dollar_figure of wages and dollar_figure of taxable refunds they also reported a dollar_figure carryover nol from briley builders which they used to offset their income petitioners reported zero taxable_income for tax returns briley builders filed timely a form_1120s for tax_year briley builders reported dollar_figure of gross_sales and a dollar_figure ordinary business loss briley builders reported expenses consisting of dollar_figure for compensation_for officers dollar_figure for taxes and licenses dollar_figure for interest and dollar_figure for other expenses briley builders specified that the other expenses consisted of dollar_figure for office expenses dollar_figure for labor dollar_figure for materials dollar_figure for insurance dollar_figure for entertainment dollar_figure for a surety bond dollar_figure for loan acquisition dollar_figure for automobile expenses and dollar_figure for tax preparation in total briley builders claimed dollar_figure of deductions petitioners filed timely a form_1040 for tax_year petitioners reported dollar_figure of wages dollar_figure of business income and dollar_figure of taxable refunds petitioners attached a schedule c for briley builders inc which reported dollar_figure of income and dollar_figure of expenses petitioners reported a dollar_figure carryover nol from briley builders which they used to offset their income they also reduced their gross_income by dollar_figure equal to one-half of the self- employment_tax that they reported as due on their schedule c petitioners reported zero taxable_income for notice_of_deficiency on date respondent issued petitioners a notice_of_deficiency for tax years and determining that briley builders underreported its gross_income by dollar_figure for did not substantiate certain expenses reported on its and forms 1120s and must capitalize certain expenses it incurred in and and deduct them for and respectively respondent further determined that petitioners are not entitled to the carryover nol they reported for and underreported petitioner husband’s wages from briley builders by dollar_figure for both and did not have a business independent of briley builders which would respondent has conceded that briley builders did not underreport its gross_income by dollar_figure for petitioners have conceded that briley builders should have capitalized certain expenses it incurred in and and deducted them for and respectively entitle them to file a schedule c with their tax_return or deduct self- employment_tax must increase their taxable_income as a result of respondent’s disallowance of briley builders’ expense deductions for and and are liable for the accuracy-related_penalty under sec_6662 for tax years and i burden_of_proof discussion generally the commissioner’s determinations in a notice_of_deficiency are presumed correct and a taxpayer bears the burden of proving those determinations are erroneous rule a 290_us_111 petitioners have not claimed or shown that they meet the requirements of sec_7491 to shift the burden_of_proof to respondent on any relevant factual issues ii net_operating_loss on its tax_return briley builders reported an nol of dollar_figure petitioners carried forward the nol on both their and personal income_tax returns respondent disallowed the nol carryovers for both years petitioners conceded that they underreported petitioner husband’s wages from briley builders by dollar_figure for both and sec_172 permits a deduction for a taxable_year for the full amount of allowable nol carrybacks from subsequent years and carryovers from previous years as long as taxable_income for the current_year is not less than zero sec_172 b obedin v commissioner tcmemo_2013_223 at deductions are a matter of legislative grace and the taxpayer must prove his or her entitlement to a deduction 503_us_79 as with all deductions taxpayers are required to maintain adequate_records substantiating a claimed nol deduction see scharringhausen v commissioner tcmemo_2012_350 at taxpayers claiming an nol deduction bear the burden of substantiating the deduction by establishing both the existence of the nol and the amount of any nol that may be carried over to the subject years rule a 349_us_232 obedin v commissioner at to claim the deduction taxpayers must file with their tax_return a concise statement setting forth the amount of the nol deduction claimed and all material and pertinent facts including a detailed schedule showing the computation of the nol deduction sec_1_172-1 income_tax regs petitioners provided a number of documents in an effort to substantiate the nol they provided bank records and canceled checks for from briley builders’ checking accounts with both bb t bank and adams bank petitioners compiled two handwritten summaries based on the bank statements and canceled checks petitioners’ summaries indicate that briley builders paid dollar_figure of expenses in petitioners’ summaries indicate that dollar_figure of the expenses are attributable to the washington d c property the parties agree that the dollar_figure of expenses attributable to the washington d c property should have been capitalized under sec_263a and deducted when the first six condominiums were sold in petitioners’ summaries also indicate that dollar_figure of the expenses is attributable to salary payments made to petitioner husband in petitioners reported dollar_figure of wages on their tax_return but did provide a form_w-2 wage and tax statement petitioners did not provide any evidence which shows that the dollar_figure of income they reported was attributable to salary payments made costs related to the business of developing real_property must be capitalized and are not currently deductible expenses sec_263a 112_tc_14 104_tc_207 the capitalized cost may then be recovered by the developer upon the sale of the property cartier v commissioner tcmemo_2009_10 slip op pincite sec_1_263a-1 and income_tax regs by briley builders petitioners have failed to meet their burden of showing that briley builders made deductible salary payments of dollar_figure to petitioner husband petitioners have provided substantiation for a maximum of dollar_figure of expenses for briley builders in since briley builders had no gross_sales in briley builders would have reported a loss of dollar_figure in petitioners were entitled to offset their dollar_figure of income with the dollar_figure loss as a result briley builders did not have an nol in for petitioners to carry forward into either or iii deductions sec_162 permits taxpayers to deduct all ordinary and necessary business_expenses paid_or_incurred during the taxable_year a taxpayer claiming a deduction on a federal_income_tax return must demonstrate that the deduction is allowable pursuant to a statutory provision and must further substantiate that the expense to which the deduction relates has been paid_or_incurred sec_6001 65_tc_87 aff’d per curiam 540_f2d_821 5th cir a - - on its tax_return briley builders claimed a total of dollar_figure of deductions respondent disallowed dollar_figure of the claimed deductions on account of petitioners’ failure to substantiate the expenses petitioners provided a number of documents including bank records and canceled checks in an effort to substantiate the expenses petitioners compiled two handwritten summaries based on the bank statements and canceled checks petitioners’ summaries indicate that briley builders paid a total of dollar_figure of expenses these expenses consist of dollar_figure for labor costs dollar_figure for materials dollar_figure for office fees dollar_figure for legal fees dollar_figure for vehicle costs dollar_figure for insurance and dollar_figure for taxes respondent has conceded that petitioners are entitled to deduct dollar_figure for labor many of the checks that petitioners submitted to substantiate their labor costs are made out to cash or petitioner husband petitioners have not provided any additional evidence to show the purpose of these payments petitioners have not substantiated their reported labor expenses beyond the amount that respondent has conceded respondent has conceded that petitioners are entitled to deduct dollar_figure for materials petitioners did not submit invoices bills or ledgers to support their reported expenses for materials petitioners have not substantiated their reported materials expenses beyond the amount that respondent has conceded respondent has conceded that petitioners are entitled to deduct dollar_figure of office fees among the documents that petitioners submitted is a check for dollar_figure made out to avenue settlement co the writing on the check indicates that it was negotiated as an earnest deposit petitioners admit that this check was intended to be a deposit for a property they planned to purchase but the transaction was never completed the dollar_figure was refunded to briley builders therefore petitioners never paid this expense it is not deductible see eg 93_tc_220 oatman v commissioner tcmemo_2004_236 slip op pincite petitioners have not substantiated their reported office fees expenses beyond the amount that respondent has conceded respondent has conceded that petitioners are entitled to deduct dollar_figure of legal fees petitioners did submit several checks to substantiate their legal expenses but they have not substantiated their reported legal fees expenses beyond the amount that respondent has conceded respondent has conceded that petitioners are entitled to deduct the dollar_figure for vehicle costs dollar_figure for insurance and dollar_figure for taxes that they report on their summaries petitioners’ documents do not support further deductions as discussed earlier respondent has conceded that petitioners are entitled to deduct for the dollar_figure of expenses that briley builders paid with respect to the washington d c property in respondent has conceded that briley builders is entitled to deduct a total of dollar_figure of expenses for we do not allow any further deductions b on its tax_return briley builders claimed a total of dollar_figure of deductions and reported dollar_figure of income respondent disallowed dollar_figure of the claimed deductions on account of petitioners’ failure to substantiate the expenses petitioners provided a number of documents in an effort to substantiate the expenses they provided bank records and canceled checks for from briley builders’ two checking accounts with bb t bank petitioners compiled a handwritten summary based on the bank statements and canceled checks the summary indicates that briley builders paid a total of dollar_figure of expenses these expenses consist of dollar_figure for labor costs dollar_figure for materials dollar_figure for office fees dollar_figure for legal fees dollar_figure for vehicle costs dollar_figure for insurance and dollar_figure for interest petitioners’ summaries indicate that dollar_figure of the expenses listed in the summaries is attributable to the washington d c property the parties agree that the dollar_figure of expenses attributable to the washington d c property should have been capitalized under sec_263a and deducted when the final six condominiums were sold in respondent has conceded that petitioners are entitled to deduct dollar_figure for labor many of the checks that petitioners submitted to substantiate their labor costs are made out to cash petitioners have not provided any additional evidence to show the purpose of these payments petitioners have not substantiated their reported labor expenses beyond the amount that respondent has conceded respondent has conceded that petitioners are entitled to deduct dollar_figure for materials petitioners did not submit invoices bills or ledgers to support their reported expenses for materials petitioners have not substantiated their reported materials expenses beyond the amount that respondent has conceded respondent has conceded that petitioners are entitled to deduct dollar_figure of office fees many of petitioners’ summary entries are not supported by checks in instances where a check is provided the check often either is made out to cash or does not state the purpose of the expense among the checks that petitioners submitted is a check for dollar_figure for red box earnest deposit petitioners submitted no evidence about a red box project another check for dollar_figure is made out to d st lot llc the check does not state its purpose and petitioners provided no evidence concerning the purpose of the check petitioners have not substantiated their reported office fees expenses beyond the amount that respondent has conceded respondent has conceded that petitioners are entitled to deduct dollar_figure of legal fees many of petitioners’ summary entries are not supported by checks for example petitioners contend that they paid dollar_figure for an arbitration they did not submit a check to substantiate this expense nor did they provide any information concerning the payee or the circumstances surrounding the arbitration petitioners also did not submit a check to substantiate a dollar_figure expense for lots and they failed to introduce any information concerning this entry petitioners have not substantiated their reported legal fees expenses beyond the amount that respondent has conceded respondent has conceded that the dollar_figure of vehicle costs and dollar_figure of interest that petitioners reported on their summaries are substantiated but contends that petitioners can deduct only of each amount for and must capitalize the remaining of each amount petitioners’ summary for indicates that portions of the labor materials office and legal fees are attributable to the washington d c property they did not however attribute any part of the vehicle costs or interest to the washington d c property respondent contends that of these expenses is also attributable to the washington d c property and is deductible for under sec_263a respondent seems to arrive pincite by dividing the amount that petitioners have conceded is attributable to the washington d c property dollar_figure by the total expenses that petitioners reported in their summary dollar_figure we agree that petitioners can deduct only of each amount for as they have failed to show that they are entitled to deduct additional_amounts for that year respondent has conceded that petitioners incurred dollar_figure of insurance costs in but contends that they can deduct only dollar_figure for respondent contends that the remaining dollar_figure is also attributable to the washington d c property and must be capitalized and deducted for under sec_263a many of petitioners’ summary entries are not supported by checks for example one entry indicates that petitioners paid dollar_figure to sentry select insurance co as a performance bond the bank records that petitioners submitted indicate that a check for dollar_figure was issued but they did not include a copy of that check we have no way of confirming that petitioners issued this check as a bond petitioners also reported an insurance expense of dollar_figure petitioners did not provide a copy of the check petitioners have not substantiated their reported insurance expenses beyond the amount that respondent has conceded respondent has conceded that briley builders is entitled to deduct a total of dollar_figure of expenses for we sustain respondent’s disallowance of expenses beyond this amount iv schedule c respondent disallowed petitioners’ use of a schedule c on their tax_return a taxpayer typically attaches a schedule c to his or her form_1040 to report the profits and losses of his or her sole_proprietorship a sole_proprietorship is a business owned by one person petitioners’ schedule c indicates that petitioner husband was the sole_proprietor of briley builders petitioners admit that in petitioner husband and petitioner wife each owned of briley builders briley builders was not a sole_proprietorship in petitioners have not provided any evidence that they owned a sole_proprietorship in since petitioners were not entitled to attach a schedule c they were not required to pay self-employment_tax in addition income from conducting the business of an s_corporation is not subject_to self-employment_tax see eg taylor v commissioner tcmemo_2009_235 slip op pincite petitioners were not entitled to deduct one-half of the self-employment_tax shown as due on their schedule c v accuracy-related_penalties respondent determined that petitioners are liable for an accuracy-related_penalty pursuant to sec_6662 for each year in issue sec_6662 provides a penalty for an underpayment attributable to negligence or disregard of rules or regulations within the meaning of sec_6662 the commissioner bears the burden of production regarding the taxpayer’s liability for any penalty sec_7491 see also 116_tc_438 once the commissioner has met this burden the taxpayer must provide persuasive evidence that the commissioner’s determination was incorrect see rule a higbee v commissioner t c pincite negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws to exercise due care or to do what a reasonable and prudent person would do under the circumstances sec_6662 85_tc_934 sec_1_6662-3 income_tax regs negligence also includes any failure by a taxpayer to keep adequate books_and_records or to substantiate items properly sec_1_6662-3 income_tax regs respondent has demonstrated that petitioners failed to keep accurate records with respect to their income and expenses many entries in petitioners’ summaries are not supported by checks and the bank records they provided are incomplete respondent has shown that petitioners acted negligently with respect to both and the accuracy-related_penalty does not apply with respect to any portion of an underpayment for which it is shown that the taxpayer had reasonable_cause and acted in good_faith sec_6664 petitioners did not show reasonable_cause for failing to keep adequate books_and_records in order to substantiate items properly we hold that for each year in issue petitioners are liable for a sec_6662 penalty for negligence any contentions we have not addressed are irrelevant moot or meritless to reflect the foregoing decision will be entered under rule