Court Opinion

ID: 4336909
Source: CourtListenerOpinion
Date Created: 2018-11-14 03:04:32.231767+00
Date Added: 2024-06-11T14:47:00.682650
License: Public Domain

T.C. Summary Opinion 2008-6

                     UNITED STATES TAX COURT

              DAVID AND GAIL VIGIL, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

     Docket No. 8658-06S.             Filed January 9, 2008.

     David and Gail Vigil, pro se.

     Valerie L. Makarewicz, for respondent.

     PANUTHOS, Chief Special Trial Judge:     This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect at the time the petition was filed.

Pursuant to section 7463(b), the decision to be entered is not

reviewable by any other court, and this opinion shall not be

treated as precedent for any other case.    Unless otherwise

indicated, subsequent section references are to the Internal
                               - 2 -

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 $12,118 deficiency in petitioners’

2001 Federal income tax, a $3,029.50 addition to tax pursuant to

section 6651(a)(1) for failing to file a timely 2001 tax return,

and a $2,423.60 accuracy-related penalty pursuant to section

6662.

     The issues for decision are:    (1) Whether petitioners are

liable for self-employment tax on income petitioner David Vigil

(Mr. Vigil) earned as a minister in 2001; (2) whether petitioners

are entitled to certain claimed deductions on Schedule C, Profit

or Loss From Business; (3) whether petitioners are liable for the

failure-to-file addition to tax under section 6651(a)(1); and (4)

whether petitioners are liable for the accuracy-related penalty

under section 6662.

                            Background

     The parties stipulated some of the facts, and they are so

found.   We incorporate the stipulation of facts and the attached

exhibits herein by this reference.     Petitioners resided in

Norwalk, California, when they filed the petition.

     On January 1, 1979, the Independent Pentecostal Church

granted Mr. Vigil a license as a minister.     Mr. Vigil’s primary

calling has been to minister on Indian reservations.     During

1979, Mr. Vigil worked part time as a minister and also had a
                               - 3 -

full-time job.   He became a full-time minister in 1980 and

continued his full-time ministry throughout the year at issue.

In 2001, petitioner Gail Vigil (Mrs. Vigil) was a homemaker.

     Since 1987, petitioners have claimed they are exempt from

self-employment taxes on income from Mr. Vigil’s work as a

minister, pursuant to section 1402(e).

     In 1996, apparently during the examination of petitioners’

1994 joint tax return, Mr. Vigil wrote a letter to the Internal

Revenue Service (IRS).   Mr. Vigil stated that in 1987 he had

filed a Form 4361, Application for Exemption From Self-Employment

Tax for Use by Ministers, Members of Religious Orders and

Christian Science Practitioners, and that a copy of the approved

Form 4361 had been returned to him.     Mr. Vigil requested that

another copy of the approved application be sent to him and

enclosed a copy of the signed (but unapproved) Form 4361 he

contends he filed in 1987.   The IRS received his request and the

enclosed copy of the unapproved Form 4361 in May 1996.     The IRS

searched its document and computer files but did not find any

record that Mr. Vigil had been approved for a ministerial

exemption or any record that Mr. Vigil had filed a request for a

ministerial exemption before 1996.     The IRS requested that the

Social Security Administration (SSA) search its records and

learned that the SSA did not have any record of either the
                                - 4 -

approval or the receipt of a Form 4361 from Mr. Vigil.    The IRS

notified Mr. Vigil of the results of its search on June 11, 1996.

      In June 1997, respondent notified petitioners that he

proposed an adjustment to their 1994 Federal income tax resulting

from nonpayment of self-employment tax, together with a

negligence penalty.    However, in July 1997, respondent sent

petitioners a letter stating that the 1994 examination resulted

in no change to the tax that petitioners reported.

      Petitioners filed their joint 2001 Federal income tax return

on February 27, 2004, together with a request for an extension of

time to file their 2001 return (extending the due date from April

15, 2002, to October 15, 2002).    Petitioners signed both the 2001

Form 1040, U.S. Individual Income Tax Return, and the Form 2688,

Application for Additional Extension of Time To File U.S.

Individual Income Tax Return, on February 25, 2004.

      Respondent determined a $12,118 deficiency in petitioners’

2001 income tax.    Upon examination, respondent disallowed the

following amounts claimed as deductions on Mr. Vigil’s Schedule

C:   $3,463 for meals and entertainment expenses; $12,347 for

travel expenses; $7,862 for supplies; and $17,199 for car and

truck expenses.    Respondent determined that Mr. Vigil was not

exempt from self-employment tax under section 1402(e) and that

petitioners were liable for both an addition to tax under section

6651(a)(1) for failing to file their 2001 tax return on time and
                              - 5 -

an accuracy-related penalty under section 6662.    Respondent

issued a statutory notice of deficiency to petitioners for the

2001 taxable year on February 10, 2006, and petitioners timely

petitioned this Court for redetermination of respondent’s

determinations.

                           Discussion

     In general, the Commissioner’s determinations set forth in a

notice of deficiency are presumed correct, and the taxpayer bears

the burden of proving that these determinations are in error.

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

Pursuant to section 7491(a), the burden of proof as to factual

matters shifts to the Commissioner under certain circumstances.

Petitioners have neither alleged that section 7491(a) applies nor

established their compliance with the requirements of section

7491(a)(2)(A) and (B) to substantiate items, maintain records,

and cooperate fully with respondent’s reasonable requests.

Petitioners therefore bear the burden of proof.

     With respect to the section 6651(a)(1) addition to tax and

the section 6662 accuracy-related penalty, pursuant to section

7491(c), the Commissioner bears the burden of production.    To

meet this burden, the Commissioner must produce sufficient

evidence showing that the imposition of the addition to tax and

the penalty is appropriate in a particular case.    Higbee v.

Commissioner, 116 T.C. 438, 446 (2001).
                                - 6 -

     Once the Commissioner meets this burden, the taxpayer must

come forward with persuasive evidence that the Commissioner’s

determination is incorrect.   Rule 142(a); Higbee v. Commissioner,

supra at 447.   As a defense to the addition to tax, the taxpayer

bears the burden of proof regarding reasonable cause and lack of

willful neglect.   Sec. 6651(a).   To the extent that the taxpayer

shows there was reasonable cause for an underpayment and that he

acted in good faith, section 6664(c)(1) prohibits the imposition

of an accuracy-related penalty.

A.   Exemption From Self-Employment Tax

     Section 1401 imposes a tax on an individual’s self-

employment income, based on the “net earnings from self-

employment” derived by an individual during the taxable year.

Sec. 1402(b).   Net earnings from self-employment are the gross

income derived by the individual from any trade or business

carried on by that individual less the deductions attributable to

that trade or business.   Sec. 1402(a).   Section 1402(c)(4) and

the final sentence of section 1402(c), however, provide that the

term “trade or business” does not include “the performance of

service by a duly ordained, commissioned, or licensed minister of

a church in the exercise of his ministry” if an exemption under

section 1402(e) is in effect.

     Section 1402(e) provides specific requirements for a

minister to obtain an exemption from self-employment tax.    A
                               - 7 -

minister seeking the exemption must file an application stating

that he is opposed, because of religious principles or

conscientious beliefs, to the acceptance of certain types of

public insurance, such as that provided by the Social Security

Act, attributable to his services as a minister.   Sec.

1402(e)(1).   This application must be filed within the specific

time limits set forth in section 1402(e)(3).   Once properly

obtained, the exemption from self-employment tax is irrevocable

and remains effective for all succeeding taxable years.   Sec.

1402(e)(4).

     Section 1402(e)(3) provides that the application for

exemption must be filed on or before the later of the following

dates:   (1) The due date of the return (including any extensions)

for the second taxable year for which the taxpayer has net

earnings from self-employment of $400 or more, any part of which

was derived from the performance of services as a minister, or

(2) the due date of the return (including any extensions) for his

second taxable year ending after 1967.   Sec. 1402(e)(3); sec.

1.1402(e)-3A(a)(1), Income Tax Regs.   This Court has consistently

held that the time limitations imposed by section 1402(e)(3) are

mandatory and taxpayers must strictly comply with them.     Wingo v.

Commissioner, 89 T.C. 922, 930 (1987); Ballinger v. Commissioner,

78 T.C. 752, 757 (1982), affd. 728 F.2d 1287 (10th Cir. 1984);

Keaton v. Commissioner, T.C. Memo. 1993-365.
                                - 8 -

     Petitioners bear the burden of proving that because Mr.

Vigil was eligible for the exemption and his Form 4361 was timely

filed, respondent’s determination is erroneous.   See Rule 142(a);

Welch v. Helvering, supra.

     In response to petitioners’ assertion of exemption from

self-employment tax with respect to their 2001 tax return,

respondent’s Ministerial Exemption Unit conducted a search to

determine whether Mr. Vigil had previously filed a Form 4361 and

whether it had been approved.   Upon searching the IRS files, a

supervisor of this unit found Mr. Vigil’s 1996 letter asserting

that he filed Form 4361 in 1987, requesting another copy of the

approved Form 4361, and enclosing a copy of the signed but

unapproved Form 4361.   The supervisor also found the case history

sheet that was completed in 1996 when the IRS received Mr.

Vigil’s letter.   The case history sheet documented the search at

both the IRS and the SSA for any Form 4361 filed by Mr. Vigil and

reflects that the IRS notified petitioners in June 1996 that

neither the IRS nor the SSA found any record of a Form 4361 for

Mr. Vigil, either approved or denied.1   The supervisor queried

     1
       The supervisor described the procedure for processing
ministerial exemption applications. Upon receipt, Form 4361 is
evaluated to determine whether the applicant meets the
eligibility requirements. If so, the IRS sends the taxpayer a
declaration statement to sign and return. Finally, the Form
4361, originally filed in triplicate, is approved or denied. The
IRS retains copy A for its files, sends copy B to the SSA for
retention, and returns copy C, marked approved or denied, to the
                                                   (continued...)
                               - 9 -

the SSA again and received a certification, dated May 3, 2007,

that the SSA had no record of Mr. Vigil’s submitting a Form 4361.

Finally, she testified that the SSA retains such records for 75

years.

     Mr. Vigil’s testimony regarding when he filed Form 4361 was

vague and inconsistent; he was certain it was filed in the 1980s,

but he thought it might have been a couple of years after he was

licensed.   Mr. Vigil signed the Form 4361 on April 7, 1987.    The

form states that Mr. Vigil was licensed in January 1979.    His

testimony was confusing on this issue; he stated that he was

licensed around 1980, but could not say exactly when.   He also

testified that he worked part time as a minister in 1979 and full

time starting in 1980.   The Form 4361 states that the first 2

years in which he had net self-employment earnings in excess of

$400, at least some of which came from services as a minister,

were 1979 and 1980.

     We find that Mr. Vigil was licensed in 1979 and that his

first 2 earning years as a minister were 1979 and 1980.    We

conclude that Mr. Vigil’s Form 4361 was due on the due date of

his tax return for 1980; i.e., April 15, 1981, with extensions.

Mr. Vigil signed the Form 4361 and gave it to their certified

public accountant (C.P.A.).   However, he has not demonstrated

     1
      (...continued)
taxpayer.
                              - 10 -

that he submitted a Form 4361 to the IRS before his letter in May

of 1996 or that an application for exemption was ever approved.2

     Because a search of IRS and SSA records by respondent for

Mr. Vigil’s Form 4361 failed to discover the original form, and

since petitioners failed to carry their burden of proving that

the form was filed, we find that petitioners did not timely file

a request for exemption as required by section 1402(e).

     Petitioners claimed that their C.P.A. showed the Form 4361

to the IRS agent examining their 1994 return and that this

documentation ultimately resulted in the no-change letter from

the IRS for 1994.3   Petitioners contend that the decision by the

IRS not to change their tax for 1994 proves that the IRS accepted

Mr. Vigil’s exemption for 1994 and establishes that the

     2
       At times during the trial, Mr. Vigil intimated that he
submitted Form 4361 to the IRS in 1980. Such a submission would
have been timely. The copy of the only Form 4361 introduced into
evidence bears a signature date of “April 7, 198”. The last
digit of the year appears to have been cut off in copying. Mr.
Vigil’s May 1996 letter provided this copy to the IRS. In that
letter, Mr. Vigil wrote that he had filed the Form 4361 on April
7, 1987. He testified that the signature date should be April 7,
1987, but he also claimed that he might have submitted the Form
4361 much earlier in the 1980s. However, the Form 4361 in the
record bears a revision date of March 1986. Since the version of
the Form 4361 completed by Mr. Vigil did not exist before 1986,
it follows that he could not have timely submitted this form by
the due date of his 1981 return, even with extensions, as
required by sec. 1402(e)(3).
     3
       It is doubtful, however, that petitioners shared with the
IRS examiner the June 11, 1996, notice from the IRS stating that
both the IRS and the SSA had searched their records but neither
could find any record of Mr. Vigil’s ever filing Form 4361.
                                - 11 -

application form was on file at that time and, by implication,

was approved.     Petitioners conclude that respondent cannot now

deny the exemption.

     It appears that petitioners are suggesting an estoppel

argument based on their reliance on the no-change decision in

1994.     However, it is well established that each tax year stands

on its own.     See Rose v. Commissioner, 55 T.C. 28, 32 (1970).

Furthermore, errors of law in prior years do not estop the

Commissioner from correcting those errors in later years.        Auto.

Club of Mich. v. Commissioner, 353 U.S. 180, 183 (1957).

        In view of the apparent failure of Mr. Vigil to file Form

4361 timely, acquiescence by agents of respondent in accepting

his claim of exemption in 1994 was an error of law.     Such a

mistake does not prevent correction of the error as to 2001. Id.

at 184.     Section 1402(e) imposes time limitations, and the

Commissioner’s agents have neither the authority nor the power to

grant an exemption not complying with the statute.     Robertson v.

Commissioner, T.C. Memo. 1983-32, affd. without published opinion

742 F.2d 1446 (2d Cir. 1983).

        We conclude that Mr. Vigil is not exempt because he did not

satisfy the requirements of section 1402(e)(1).     Respondent’s

determination that petitioners are liable for the tax imposed by

section 1401 on Mr. Vigil’s 2001 self-employment income is

sustained.
                                - 12 -

B.   Business Expense Deductions

     Respondent disallowed certain deductions petitioners claimed

on Schedule C, specifically:    $3,463 for meals and entertainment

expenses; $12,347 for travel expenses; $7,862 for supplies; and

$17,199 for car and truck expenses.      Respondent disallowed each

of these deductions in full but allowed the remaining $26,403

petitioners claimed as business expenses.

     As a general rule, section 162(a) authorizes a deduction for

“all the ordinary and necessary expenses paid or incurred during

the taxable year in carrying on any trade or business”.

Taxpayers are required to maintain records sufficient to

substantiate each claimed deduction.      Sec. 6001; Hradesky v.

Commissioner, 65 T.C. 87, 89-90 (1975), affd. 540 F.2d 821 (5th

Cir. 1976); sec. 1.6001-1(a), Income Tax Regs.

     When a taxpayer adequately establishes that he paid or

incurred a deductible expense but does not establish the precise

amount, we may in some circumstances estimate the allowable

deduction, bearing heavily against the taxpayer whose

inexactitude is of his own making.       Cohan v. Commissioner, 39
F.2d 540, 544 (2d Cir. 1930).    We can estimate the amount of the

deductible expense only when the taxpayer produces evidence

sufficient to establish a rational basis upon which the estimate

can be made.   Vanicek v. Commissioner, 85 T.C. 731, 742-743

(1985).
                                - 13 -

     Section 274(d) supersedes the general rule of Cohan v.

Commissioner, supra, and prohibits the Court from estimating the

taxpayer’s expenses with respect to certain items.     Sanford v.

Commissioner, 50 T.C. 823, 827-828 (1968), affd. per curiam 412
F.2d 201 (2d Cir. 1969).   Section 274(d) imposes strict

substantiation requirements for, inter alia, traveling expenses

(including meals) and expenses with respect to listed property.

Listed property is defined in section 280F(d)(4) to include

computers and passenger automobiles.

     To obtain deductions for a listed property, travel, meal, or

entertainment expense, a taxpayer must substantiate by adequate

records or sufficient evidence to corroborate the taxpayer’s own

testimony the amount of the expense, the time and place of the

use, the business purpose of the use, and, in the case of meals

and entertainment, the business relationship to the taxpayer of

each person entertained.   Sec. 274(d); sec. 1.274-5T(b),

Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).

Section 274 requires that expense be recorded at or near the time

when the expense is incurred.    Sec. 1.274-5T(c)(1), Temporary

Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).

     When a taxpayer’s records have been lost or destroyed

through circumstances beyond his control, he is entitled to

substantiate a deduction by reconstruction of his expenditures

through other credible evidence.    Smith v. Commissioner, T.C.
                              - 14 -

Memo. 1998-33; see also Malinowski v. Commissioner, 71 T.C. 1120,

1125 (1979).

     Petitioners did not introduce any documents and offered only

vague testimony regarding these claimed expenses.   Many of the

claimed travel expenses involved Mr. Vigil’s driving in his

personal automobile to Indian reservations in various States.     He

traveled with family; namely, Mrs. Vigil and one or more of their

adult children.   Petitioners testified that they maintained a

list of locations where Mr. Vigil ministered and of the mileage

driven and that they used credit cards for business expenses and

kept the receipts.   They further explained that, at the time the

2001 return was prepared in 2004, they provided those documents

to their C.P.A. but did not retain copies.

     Petitioners’ C.P.A. at the time of the preparation of the

Form 4361 and the audit of their 1994 tax return developed a drug

problem and later died.   Their C.P.A.’s wife took over the

accounting business and prepared petitioners’ 2001 return in

2004.   However, petitioners testified credibly that she too has

developed a drug habit, that they have been unable to retrieve

their documents from her, and that even the sheriff was unable to

serve her with a subpoena to appear and testify at trial.

Although they tried, petitioners were also unable to retrieve

documents from their credit card companies to reconstruct or

substantiate their 2001 expenses.
                              - 15 -

     On their Schedule C, petitioners claimed a deduction for

parking fees and tolls and for the business use of their personal

automobile calculated using the standard mileage rate.   In

addition to these travel expenses totaling $12,347, petitioners

also claimed car and truck expenses of $17,199.   Mr. Vigil

testified that the car and truck expenses claimed represent his

purchase of tires, valves, and three transmissions for their

automobile in 2001.4   Apart from this testimony, petitioners

introduced no evidence to support the deductions claimed for

mileage, parking fees and tolls, or vehicle repair expenses.

Petitioners offered no documents or testimony with respect to the

claimed deduction for meals, other than to state that they were

responsible for their own meals when teaching and ministering and

that they charged the meals to their credit cards.5

     4
       Taxpayers may choose to compute vehicle expenses using
either the business standard mileage rate or their actual
operating and fixed costs, such as repairs, tires, gasoline,
insurance, depreciation, etc. Even with proper substantiation,
taxpayers may not deduct both standard mileage and actual
expenses. Nash v. Commissioner, 60 T.C. 503, 520 (1973); Rev.
Proc. 2000-48, sec. 5.03, 2000-2 C.B. 570, 571.
     5
       Mrs. Vigil testified that they have five children, the
youngest of whom was 20 in 2001. The children traveled with
petitioners when Mr. Vigil ministered away from home, at least
until each child married. Because we conclude that petitioners
have not adequately substantiated their claimed deduction for
meals, we need not, and do not, decide the extent to which the
added costs of feeding and traveling with his family are
legitimate business expenses for Mr. Vigil as opposed to
personal, living, and family expenses rendered not deductible by
sec. 262.
                              - 16 -

     Petitioners’ testimony with respect to the supplies expenses

was vague.   Mr. Vigil testified that the supplies consisted of

computers, envelopes, paper, and stamps for preparing and sending

ministry newsletters.   Mrs. Vigil’s testimony described her

purchase of video equipment and tapes for preparing, editing, and

duplicating video tapes for Mr. Vigil’s ministry.   She claimed

that she bought such equipment in 2001 but also testified that

she could not remember honestly.   This testimony is insufficient

to satisfy the strict substantiation requirement of section

274(d) applicable to computers as listed property, and it is

inadequate either to reconstruct petitioners’ records in support

of their $7,862 claimed deduction for supplies or to establish a

rational basis upon which the Court can estimate the amount of

the deductible expense.

     We conclude that petitioners have not satisfied the strict

substantiation requirements of section 274(d) to support their

claimed deductions for car and truck expenses, travel expenses,

or meals and entertainment expenses.   Nor have they reconstructed

their records or provided evidence sufficient for the Court to

estimate the amount of expenses for supplies.   Accordingly,

respondent’s determination that these expenses are not allowable

is sustained.
                                - 17 -

C.   Section 6651(a)(1) Addition to Tax for Failure To File

     Petitioners’ 2001 Federal income tax return was due on April

15, 2002 (October 15, 2002, if petitioners had timely filed a

request for an extension).   The parties stipulated that

petitioners filed their 2001 return on February 27, 2004.

Respondent has met his burden of production to show that it is

appropriate to impose the addition to tax for petitioners’

failure timely to file their 2001 Federal income tax return.

     The last sentence of section 6651(a) provides a defense to

the addition to tax for failure to file.    The taxpayer must show

that the failure was “due to reasonable cause and not due to

willful neglect”.

     Petitioners testified that their C.P.A. regularly requested

extensions for their tax returns and that they believed she had

successfully obtained approval for them to file late.

Petitioners relied on their C.P.A. to prepare and file their tax

returns, and they argue that their reliance was reasonable and

should suffice to avoid this addition to tax.

     Taxpayers may not avoid the duty of timely filing accurate

tax returns by placing responsibility on a tax return preparer.

Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662 (1987).      The

Supreme Court has provided a very clear, bright line:    “It

requires no special training or effort to ascertain a deadline

and make sure that it is met.    The failure to make a timely
                                - 18 -

filing of a tax return is not excused by the taxpayer’s reliance

on an agent, and such reliance is not ‘reasonable cause’ for a

late filing under § 6651(a)(1).”    United States v. Boyle, 469
U.S. 241, 252 (1985).

       Respondent’s determination that petitioners are liable for

the addition to tax for failing timely to file their 2001 Federal

income tax return is sustained.

D.     Section 6662 Accuracy-Related Penalty

       The final issue for decision is whether petitioners are

liable for an accuracy-related penalty under section 6662(a) for

2001.    Section 6662(a) imposes a penalty equal to 20 percent of

any underpayment of tax that is attributable to negligence or

disregard of rules or regulations, or a substantial

understatement of income tax.    See sec. 6662(a) and (b)(1) and

(2).

       An “understatement” of income tax is defined as the excess

of the tax required to be shown on the return over the tax

actually shown on the return.    Sec. 6662(d)(2)(A).   An

understatement is “substantial” if it exceeds the greater of 10

percent of the tax required to be shown on the return, or $5,000.

Sec. 6662(d)(1)(A).

       Whether the accuracy-related penalty is applied because of

negligence or disregard of rules or regulations, or a substantial

understatement of income tax, section 6664 provides a defense if
                                - 19 -

a taxpayer establishes that there was reasonable cause for the

underpayment and that he acted in good faith with respect to that

portion.    Sec. 6664(c)(1); sec. 1.6664-4(b), Income Tax Regs.;

see also Higbee v. Commissioner, 116 T.C. 448.       Although not

defined in the Code, “reasonable cause” is viewed in the

applicable regulations as the exercise of “ordinary business care

and prudence”.     Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.;

see United States v. Boyle, supra at 246.       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(b)(1), Income

Tax Regs.     Considering the taxpayer’s education, experience, and

knowledge, a reasonable misunderstanding of fact or law may

indicate reasonable cause and good faith.       Higbee v.

Commissioner, supra at 449.

     Generally, the most important factor is the extent of the

taxpayer’s effort to assess the proper tax liability, including

reliance on the advice of a tax return preparer.      However,

reliance on a professional adviser, alone, is insufficient; the

reliance must be reasonable and the taxpayer must act in good

faith.     Sec. 1.6664-4(b)(1), Income Tax Regs.   Furthermore, a

substantial understatement of income tax is reduced by that

portion of the understatement attributable to the tax treatment
                                - 20 -

of any item with respect to which the taxpayer provides adequate

disclosure.    Sec. 1.6662-4(a), (e), Income Tax Regs.

     The understatement of income tax resulting from the

disallowance of petitioners’ Schedule C deductions, alone, is

$5,546, which is greater than 10 percent of the tax petitioners

were required to show on their 2001 return.     Therefore, we

conclude that respondent has met his burden of production for his

determination of the accuracy-related penalty based on a

substantial understatement of income tax pursuant to section

6662(d)(1)(A).

     Accordingly, petitioners bear the burden of proving that the

accuracy-related penalty should not be imposed with respect to

any portion of the underpayment for which they acted with

reasonable cause and in good faith.      See sec. 6664(c)(1); Higbee

v. Commissioner, supra at 446.

     Some of the claimed deductions, such as those for meals for

Mr. Vigil’s family (absent proof that these expenses had a bona

fide business purpose), are likely nondeductible family living

expenses.     See sec. 262; sec. 1.162-2(c), Income Tax Regs.   In

addition, it should be obvious to any taxpayer exercising

ordinary business care and prudence that duplicating automobile

expenses (by deducting not only car and truck expenses based on

actual costs but also driving expenses calculated using the

standard mileage rate) is prohibited.
                              - 21 -

     Petitioners failed to prove that they acted with reasonable

cause and in good faith with respect to the disallowed business

expense deductions.   We therefore sustain respondent’s

determination that petitioners are liable for the section 6662

accuracy-related penalty on the underpayment associated with the

disallowed Schedule C deductions.

     With respect to the tax imposed under section 1401 on Mr.

Vigil’s self-employment income from his ministry, petitioners

relied on the advice of their C.P.A., who told them that Mr.

Vigil was exempt.   This reliance was reinforced by the July 1997

letter from the IRS which closed the examination of petitioners’

1994 tax year with no change and from which petitioners logically

and reasonably deduced that their Form 4361 must have been

approved.   We find that petitioners acted with reasonable cause

and in good faith in claiming the exemption in 2001.6

Accordingly, we conclude that petitioners are not liable for the

section 6662 accuracy-related penalty on the underpayment

associated with the self-employment tax.

     6
       The Court notes that the tax returns contained in the
record indicate that petitioners consistently entered “Exempt--
Form 4361” on the self-employment tax line of their Form 1040.
Because we find that petitioners had reasonable cause and acted
in good faith with respect to self-employment tax, we need not,
and do not, decide whether this entry constituted “adequate
disclosure” pursuant to sec. 1.6662-4(a), Income Tax Regs.
                        - 22 -

To reflect the foregoing,

                                 Decision will be entered

                            under Rule 155.