t c memo united_states tax_court thai v pham and khuy t bui petitioners v commissioner of internal revenue respondent docket no filed date johnny w richards ii for petitioners alvin a ohm for respondent memorandum findings_of_fact and opinion wright judge respondent determined deficiencies in and additions to tax and a penalty with respect to petitioners' federal income taxes as follows year additions to tax and penalty deficiency sec_6653 sec_6661 sec_6662 dollar_figure big_number dollar_figure - dollar_figure - - dollar_figure after concessions the issues for our consideration are whether petitioners are entitled to schedule c deductions for the cost of labor in excess of the amounts allowed by respondent for taxable years and we hold that they are not whether petitioners are entitled to a schedule c equipment rental deduction in the amount of dollar_figure for taxable_year we hold that they are not whether petitioners received unreported income of dollar_figure during taxable_year we hold that they did whether petitioners are liable for the addition_to_tax pursuant to sec_6653 a for the underpayment_of_tax due to negligence or intentional disregard of the rules or regulations for taxable_year we hold that they are whether petitioners are liable for the addition_to_tax pursuant to sec_6661 for a substantial_understatement_of_income_tax for taxable_year we hold that they are whether petitioners are liable for the accuracy-related_penalty pursuant to sec_6662 for taxable_year we hold that they are 1unless otherwise indicated all section references are to the internal_revenue_code in effect during the years in issue and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and are found accordingly the stipulation of facts and the attached exhibits are incorporated herein at the time the petition was filed petitioners resided in arlington texas petitioners timely filed joint federal_income_tax returns for taxable years and during the years at issue petitioners operated a sewing business out of their residence petitioner khuy t bui hereinafter petitioner bui solicited contracts from various clothing manufacturers to assemble clothing upon entering into a contract with a clothing manufacturer the manufacturer provided petitioner bui with the precut material and buttons to be assembled the manufacturer also provided petitioner bui with a fully assembled model of the finished product this sample was used to guide the assembly process after receiving the precut material petitioner bui proceeded to subcontract the assembly process to various home sewers the assembly process consisted of sewing together multiple pieces of precut material in accordance with specifications provided by the manufacturer upon completing their subcontracts the home sewers returned the assembled garments to petitioner bui petitioners and their four sons then performed the finishing work finishing work consisted of attaching buttons cutting button holes hemming trimming threads ironing folding pinning and packaging upon completing the finishing work petitioner bui returned the completed product to the manufacturer the manufacturer generally paid petitioner bui the contract_price within weeks of her delivery of the completed product after receiving payment from the manufacturer petitioner bui paid the subcontractors who assembled the garments during taxable years and three of petitioners' four sons assisted in performing the finishing work on their federal_income_tax returns for taxable years and petitioners deducted the following sums with respect to amounts allegedly paid to their four sons in exchange for their performance of the finishing work thinh dat pham dung tien pham duy duc pham total dollar_figure dollar_figure dollar_figure dollar_figure thinh dat pham duy duc pham tri minh pham total dollar_figure dollar_figure dollar_figure dollar_figure there was no formal policy governing these payments to petitioners' sons all payments to petitioners' four sons were made in cash and were based on records allegedly maintained by the recipient son petitioners did not maintain records or other written documentation of the amounts paid to their sons for each son petitioners prepared a form 1099-misc statement for recipients of miscellaneous income with respect to each of the above amounts for both taxable years in preparing the forms 1099-misc for each son petitioners derived the amount presented on the forms 1099-misc from data maintained by the recipient son all records maintained by the four sons were discarded either after receiving cash payment or after the son provided petitioner bui with the figures used in preparing the forms 1099-misc each of petitioners' four sons filed federal_income_tax returns for taxable years and reporting the amounts identified above for both the and taxable years each son had a net tax due and owing upon completion of his return petitioner bui paid the entire tax due for both taxable years and for each of her sons excluding tri minh pham citing the lack of substantiation respondent disallowed petitioners' claimed schedule c deductions for the cost of labor attributable to payments petitioners made to their sons in taxable years and on their schedule c for taxable_year petitioners also claimed an equipment rental_expense_deduction in the amount of dollar_figure this expense is attributable to rental payments for six sewing machines that petitioners used in the operation of their enterprise petitioners produced a photocopy of a lease representing their agreement with the lessor of the machines this photocopy states the following state of texas tarrant county equipments sic rental agreement lessor lessee chung v tran khuy t bui equipments sic sewing machines and equipments sic as needed term cash dollar_figure per month for months in total of dollar_figure all the equipments sic as needed per lessee in good use lessor agreed to repair and maintain condition lessee can not assign or sub-let all the equipments sic to other persons without the agreement of lessor in the event of any breach of the agreement lessor can have full rights to terminate this lease in accordance with state law and re-claim possession of the leased equipments sic signed and agreed on thi sec_4th day of jan lessor chung v tran lessee khuy t bui aside from this rental agreement petitioners are unable to produce any written record or other documentation reflecting actual payment of the rent respondent therefore disallowed the claimed deduction due to lack of substantiation in taxable years and petitioners reported gross_receipts from their sewing business in the amounts of dollar_figure and dollar_figure respectively because petitioners failed to maintain records or other written documentation reflecting the financial activities of their enterprise respondent conducted a bank deposit analysis of the bank account petitioners used in the operation of their sewing business this analysis determined the following deposits and source of funds source pam's closet donovan-galvania byn-mar inc brenco apparel inc bently arbuckle inc jones of dallas h a fashions tu van le ruoc h or thim t doan cash various pam's closet marlin manuf co inc tam van nguyen dau thi bui or tuan ngoc various amount dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure after concessions by both parties regarding the above figures only two deposits remain in dispute both deposits occurred in taxable_year and totaled dollar_figure remaining in dispute are the dollar_figure deposit identified above as received from tu van le and the dollar_figure deposit identified above as cash petitioners maintaining that both deposits represent nontaxable loans did not report the dollar_figure on their federal_income_tax return respondent contends that both amounts represent unreported taxable_income accordingly respondent has adjusted petitioners' taxable_income for to reflect the unreported amount of dollar_figure opinion issue schedule c cost of labor deduction petitioners contend that pursuant to sec_162 they are entitled to schedule c deductions in the amounts of dollar_figure and dollar_figure for taxable years and respectively for compensation paid to their sons with respect to their involvement in petitioners' sewing enterprise respondent argues that petitioners' failure to substantiate these deductions precludes their entitlement to them respondent's determinations are presumed to be correct and petitioners bear the burden of proving otherwise rule a 290_us_111 moreover the taxpayers do not have an inherent right to take tax deductions deductions are a matter of legislative grace requiring the taxpayers to establish their right to take them 308_us_488 292_us_435 additionally taxpayers are required to keep books_and_records so that they can file true and correct returns and to enable respondent to determine their correct_tax liability sec_6001 menequzzo v commissioner 43_tc_824 sec_1_446-1 sec_1_6001-1 income_tax regs the record is clear and there is no doubt that petitioners failed to maintain records or other written documentation of the work performed by or compensation paid to their sons petitioners are unable to identify with any degree of certainty factors customarily associated with a compensatory relationship the number of hours worked by petitioners' sons is unknown the number of buttons attached button holes cut and garments pinned ironed or packaged by any particular son is also unknown furthermore the actual work performed by any particular son for any particular period is unknown similarly with the exception of the forms 1099-misc provided to each son for tax_return purposes petitioners are unable to provide records reflecting the compensation paid to any of their sons for any particular period petitioners are also unable to produce any documentation regarding the calculation of compensation paid to any particular son on any particular occasion petitioner bui testified that she paid her sons on a piece or per-unit basis however she presented inconsistent testimony with regard to the per-unit amount_paid to any particular son she first testified that her sons were paid between cents and cents per garment to attach buttons depending on the complexity of the design of the garment petitioner bui subsequently testified that this range was between cents and cents the testimony of petitioner bui's sons with regard to this matter was equally conflicting suffice it to say that the record does not support a finding of a per-unit compensation schedule used by petitioners when compensating their sons petitioner bui testified that her sons maintained records of their own work activity and that all compensation paid to her sons was based solely on those records when it came time to be paid each son simply informed petitioner bui of the work he had performed and petitioner bui in turn paid cash to that son petitioner bui further testified that she prepared forms misc for each son for both taxable years at issue based on the records maintained by her sons petitioner bui's oldest son tri did not testify at trial however her other three sons dung duy and thinh did testify the sons' testimony regarding the recordation of their work activity is ambiguous and conflicting dung testified that he kept track of the work he performed in a multitude of ways he frequently relied upon invoices for his record but occasionally he recorded his activity on pieces of paper still other times he simply made mental notes of the work he performed dung further testified that he did not submit his records to petitioner bui for payment rather he simply told her what he had done and was paid accordingly dung also testified that he discarded the records reflecting his work activity dung's testimony with regard to what happened to his work activity records is inconsistent dung first testified that he discarded his records after petitioner bui paid him dung later testified that he retained his records until he filed his federal_income_tax return dung also testified that his work activity records were destroyed after petitioner bui paid him but that he then created a new record reflecting the amount he was paid dung further testified that this new record was discarded only after he completed his tax_return the testimony of both duy and thinh though not as explicit as is dung's testimony is equally obscure in any event no records were produced further all testimonial evidence is tenuous in respect to the relevant points petitioners correctly explain that in 77_tc_934 this court held that compensation is deductible under sec_162 only if it is reasonable in amount provided for services actually rendered and paid_or_incurred but the burden is on petitioners to prove that they are entitled to the deduction claimed rule a welch v helvering supra even if we were convinced that petitioners paid reasonable amounts to their sons for their involvement in the enterprise we remain unpersuaded as to the amount of compensation paid petitioners contend that the cohan_rule 39_f2d_540 2d cir should be used to bridge this gap we disagree according to the cohan_rule if the record provides sufficient evidence that the taxpayer has incurred a deductible expense but the taxpayer is unable to adequately substantiate the amount of the deduction to which he or she is otherwise entitled the court may estimate the amount of such expense and allow the deduction to that extent cohan v commissioner supra in order for us to estimate the amount of an expense however we must have some basis upon which an estimate may be made 85_tc_731 without such basis any allowance would amount to unguided largesse 245_f2d_559 5th cir due to the total absence of documentation and inconsistent testimony we are without a reasonable basis to estimate the amount of compensation payments petitioners made to their sons thus we decline to apply the cohan_rule consequently petitioners have failed to satisfy their burden of establishing their right to this deduction accordingly respondent's determination regarding this issue is sustained issue schedule c equipment rental_expense_deduction petitioners contend that pursuant to sec_162 they are entitled to deduct dollar_figure as a business_expense on their income_tax return for taxable_year petitioners attribute this expense to lease payments paid for_the_use_of six sewing machines all of which were used in the ordinary course of their sewing business respondent argues that petitioners' inability to substantiate the rental expense precludes allowance of the deduction the burden is on petitioners to prove entitlement to a deduction rule a 290_us_111 petitioner bui presented the only testimony with respect to this issue petitioner bui testified that she rented six sewing machines from mr tran trung for dollar_figure per month totaling dollar_figure for the taxable_year petitioner bui further testified that all rental payments were made in cash and that she did not maintain any record or other written documentation of the payments petitioner bui argues that the rental expense is satisfactorily evidenced by a photographic copy of a document entitled equipments sic rental agreement respondent objects to the authenticity of this document contending that it appears to have been prepared after the fact and in preparation for trial respondent argues that in the absence of the original document the date on which the document was prepared cannot be accurately ascertained the requirement of authentication is a condition_precedent to the admissibility of the lease agreement fed r evid evidence that will support a finding that the matter in question is what its proponent claims is sufficient mcmahon v commissioner tcmemo_1991_355 2although petitioner bui testified that she rented the sewing machines from mr tran trung the lease agreement identifies the lessor as mr chung v tran this inconsistency remains unexplained petitioner bui testified that the original of the rental agreement is in the possession of the lessor mr tran trung petitioner bui also testified that she was unaware of mr trung's location and that she has had no contact with mr trung since returning the six sewing machines to him at the end of petitioner bui further testified that the document was a true and exact copy signed and received by her on the date she picked up the sewing machines the federal rules of evidence generally permit the use of copies rather than originals but an exception is made if a genuine question is raised as to the authenticity of the original fed r evid see 958_f2d_756 7th cir 893_f2d_1573 9th cir christopher v commissioner tcmemo_1984_394 respondent however does not establish in any way how the document is fatally flawed respondent contends that the authenticity of the lease agreement is suspect because without the original the date on which the document was created is unknown we are unpersuaded by this argument furthermore merely objecting to the admission of evidence does not make that evidence suspect nor does it rise to a showing that a genuine issue of authenticity exists tyson v jones laughlin steel corp supra pincite accordingly we find that a genuine issue has not been raised as to the authenticity of the lease agreement and it is admissible under rule of the federal rules of evidence although we conclude that the photocopy of the lease agreement is admissible we remain unconvinced that petitioners have satisfactorily proven their entitlement to a deduction of dollar_figure for lease of the sewing machines we are not convinced that the lease agreement establishes conclusively that petitioners disbursed the monthly payments called for therein petitioner bui produced the only testimony with regard to this issue and we are not required to accept her self-serving testimony 99_tc_202 additionally petitioner bui's testimony is less than credible with regard to this matter petitioner bui first testified that she paid months' rent in advance when she picked up the sewing machines in date petitioner bui subsequently testified that she paid the first months' rent in late date it is the occurrence of inconsistencies such as this that cast doubt on the credibility of petitioners' argument petitioners have failed to establish their entitlement to a business_expense deduction with respect to the dollar_figure accordingly respondent's determination is sustained as to this issue issue unreported income in the notice_of_deficiency issued to petitioners for taxable_year respondent adjusted petitioners' gross_receipts by dollar_figure after concessions by the parties the amount in dispute has been reduced to dollar_figure petitioners contend that the dollar_figure is composed of two loans and as such is not taxable under sec_61 respondent contends the dollar_figure constitutes unreported taxable_income and that petitioners have failed to carry their burden of proving the determination inaccurate respondent determined the unreported income using the bank_deposits method the use of the bank_deposits method for computing income has been authorized by the courts for many years 96_tc_858 affd 959_f2d_16 2d cir 64_tc_651 affd 566_f2d_2 6th cir bank_deposits are prima facie evidence of income 87_tc_74 estate of mason v commissioner supra pincite in analyzing a bank_deposits case deposits will be considered income when there is no evidence that they represent anything other than income 335_f2d_671 5th cir 234_f2d_788 7th cir harlan v commissioner tcmemo_1995_309 the burden generally is on the taxpayers to show that the bank_deposits were derived from nontaxable sources rule a 31_tc_690 affd 295_f2d_336 5th cir 28_tc_1228 here the use of the bank_deposits method by respondent was necessitated because petitioners lacked financial records for the years at issue petitioners contend that dollar_figure of the dollar_figure at issue was received in the form of a loan from petitioner bui's friend mr tu van le and was intended for working_capital purposes petitioners further contend that the remaining dollar_figure at issue was received from petitioner bui's sister and was also intended for working_capital purposes these alleged loans were not formalized or documented in any fashion no instrument evidences their existence petitioners did not call mr tu van le or petitioner bui's sister to testify as to these loans furthermore their absence was not explained we cannot assume that the testimony of absent witnesses would have been favorable to petitioners indeed the normal inference is that it would have been unfavorable 47_tc_92 affd 392_f2d_409 5th cir except for petitioner bui's self-serving testimony petitioners have produced no evidence that the two deposits totaling dollar_figure in constituted nontaxable income hence petitioners have not overcome the presumption that the two deposits originate from a taxable source as respondent determined accordingly respondent's determination is sustained issue addition_to_tax sec_6653 respondent determined that petitioners are liable for an addition_to_tax under sec_6653 because the underpayment of income_tax for taxable_year was attributable to negligence or intentional disregard of rules or regulations petitioners claim that they are not liable for this addition_to_tax because they relied upon their accountant to prepare their return sec_6653 imposes an addition_to_tax equal to percent of the underpayment_of_tax if any part of the underpayment is due to negligence or intentional disregard of rules or regulations negligence is a lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances marcello v commissioner 380_f2d_499 5th cir affg in part and remanding in part 43_tc_168 85_tc_934 petitioners must rebut the presumption of correctness by showing that the addition_to_tax is unjustified rule a 58_tc_757 good_faith reliance on the advice of a competent independent tax professional may offer relief from the imposition of the negligence addition 469_us_241 73_tc_671 petitioners bear the burden of proving that their reliance on professional advice was reasonable 89_tc_849 affd 904_f2d_1011 5th cir affd 501_us_868 moreover reliance on professional advice standing alone is not an absolute defense to negligence but rather a factor to be considered id in order for the reliance on professional advice to excuse a taxpayer from the negligence addition the reliance must be reasonable in good_faith and based upon full disclosure id 94_tc_473 63_tc_149 not only have petitioners failed to establish that their reliance was based on full disclosure reasonable and in good_faith they have fallen short in their attempt to establish that they relied upon the advice of a tax professional no testimony or other evidence as to advice relied upon by petitioners was advanced no accountant responsible for preparing petitioners' return was called petitioners merely contend that they relied upon an accountant to complete their tax returns on this record we conclude that any reliance maintained by petitioners is not sufficient to shield them from liability for the negligence addition accordingly respondent's determination as to this issue is sustained issue addition_to_tax sec_6661 respondent determined that petitioners are liable for the addition_to_tax pursuant to sec_6661 for taxable_year due to a substantial_understatement_of_income_tax respondent's determination carries with it the presumption of correctness rule a the addition_to_tax i sec_25 percent of any underpayment attributable to a substantial_understatement sec_6661 90_tc_498 a substantial_understatement is one which exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6661 accordingly because the understatement for taxable_year is not subject_to reduction pursuant to sec_6661 or ii respondent's determination as to this issue is sustained issue accuracy-related_penalty sec_6662 respondent determined that petitioners are liable for the penalty pursuant to sec_6662 for taxable_year because the underpayment of income_tax was attributable to negligence or disregard of rules or regulations as well as to a substantial_understatement_of_income_tax petitioners disagree and claim that all disallowed deductions are based on substantial_authority sec_6662 provides that the taxpayers are liable for a penalty equal to percent of the portion of the underpayment to which sec_6662 applies sec_6662 provides that sec_6662 applies to an underpayment attributable to any substantial_understatement_of_income_tax a substantial_understatement_of_income_tax occurs when the amount of the understatement for the taxable_year exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 petitioners bear the burden of rebutting respondent's determination rule a petitioners have offered nothing in support of their position having failed to present sufficient evidence as to the substantial_authority upon which they relied we find that petitioners have not carried their burden accordingly respondent is sustained as to this issue to reflect the foregoing decision will be entered under rule