Court Opinion

ID: 9901470
Source: CourtListenerOpinion
Date Created: 2023-11-21 20:02:32.497537+00
Date Added: 2024-06-11T09:21:33.588089
License: Public Domain

United States Tax Court

                               T.C. Memo. 2023-140

         KUNJLATA J. JADHAV AND JALANDAR Y. JADHAV,
                          Petitioners

                                           v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                     —————

Docket No. 12520-19.                                     Filed November 21, 2023.

                                     —————

Dustin R. Jeffords and Philip M. Anthony, for petitioners.

Ardney J. Boland and Emile L. Hebert, for respondent.

         MEMORANDUM FINDINGS OF FACT AND OPINION

       VASQUEZ, Judge:       Respondent determined deficiencies in
petitioners’ federal income tax and section 6662(a) accuracy-related
penalties for underpayments due to substantial understatements of
income tax as follows: 1

            Year                       Deficiency                     Penalty
                                                                     § 6662(a)
            2014                       $265,990                     $53,198.00
            2015                        204,817                      40,963.40
            2016                        141,039                      28,207.80
            2017                         50,727                      10,145.40

        1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the
Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and
Rule references are to the Tax Court Rules of Practice and Procedure.

                                 Served 11/21/23
                                           2

[*2] In an Amended Answer filed November 12, 2019, and a Second
Amended Answer lodged October 21, 2020, respondent alleged increased
deficiencies and section 6662(a) accuracy-related penalties for 2015,
2016, and 2017 as follows:

            Year               Deficiency after increase      Penalty after increase
                                                                    § 6662(a)
            2015                       $248,587                    $49,717.40
            2016                        167,730                      33,546.00
            2017                        157,078                      31,415.40

       After concessions, 2 the issues for decision are whether
(1) petitioners may deduct a pension contribution for taxable year 2014,
(2) petitioners’ S corporation may deduct marketing fees for the years in
issue, (3) petitioners’ S corporation may deduct rent paid (or purportedly
paid) to petitioners during the years in issue, (4) petitioners and/or their
S corporation may deduct travel expenses for the years in issue, and
(5) petitioners are liable for section 6662(a) accuracy-related penalties
for the years in issue.

                              FINDINGS OF FACT

       Some of the facts have been stipulated and are so found. We
incorporate the First Stipulation of Facts, First Supplemental
Stipulation of Facts (as amended by the First Supplement to First
Supplemental Stipulation of Facts), and accompanying Exhibits by this
reference. 3 Petitioners resided in Texas when the Petition was timely
filed.

Business and family background

      Petitioner husband, Jalandar Y. Jadhav, received a Ph.D in
chemistry on a date not established by the record. At all relevant times
he worked for Mobile Rosin Oil Co., Inc. (Mobile), as a salaried employee.
As an executive for Mobile, petitioner husband was responsible for

        2 On May 18, 2020, the parties filed a Stipulation of Settled Issues.    Therein
petitioners conceded that (1) they had underreported gross receipts for the years in
issue and (2) they had failed to report a taxable state income tax refund for 2014. The
Stipulation of Settled Issues also includes partial concessions by the parties regarding
petitioners’ S corporation’s “other” deductions for the years in issue. We address those
concessions infra notes 9 and 13.
       3 Respondent reserved objections to portions of stipulated Exhibits 20-P, 29-P,

and 30-P, and we reserved ruling on the admissibility of those documents at trial. We
overrule respondent’s objections.
                                   3

[*3] increasing sales, developing new marketing ideas, and learning
new areas of technology. During the years in issue Mobile paid him a
yearly salary ranging between $154,000 and $159,000.

       In addition to working for Mobile, petitioner husband owned and
operated a sole proprietorship from 2006 to 2014. Doing business as
“K J Marketing,” petitioner husband identified new markets for
chemical producers and connected them with potential customers. K J
Marketing earned commissions on sales to the customers petitioner
husband identified. For 2006 through 2014 petitioners reported K J
Marketing’s income and expenses on Schedules C, Profit or Loss From
Business. For reasons not explained by the record, petitioners named
petitioner wife, Kunjlata Jadhav, as the owner of K J Marketing on their
tax returns. Petitioner wife, who did not testify at trial, worked as a
substitute teacher until 2014.

      K J Marketing maintained a section 401(k) retirement plan with
Oppenheimer Funds (Oppenheimer). On April 10, 2015, petitioners
mailed Oppenheimer a $104,350 check payment to cover contributions
to the accounts of petitioner wife and their two sons, Veerendra and
Arjun Jadhav, for taxable year 2014.           Petitioners instructed
Oppenheimer to allocate the $104,350 payment as follows:

       Petitioners viewed K J Marketing as a family business and
wished to pass it on to Veerendra and Arjun. Petitioner husband started
training his sons when they were in high school. While Veerendra and
Arjun were in college, he assigned them research tasks and oversaw
their work.     Veerendra attended the University of Alabama in
                                          4

[*4] Birmingham, Alabama, from 2006 to 2015, and Arjun attended the
University of South Alabama in Mobile, Alabama, from 2009 to 2015.

Petitioners’ residential properties

       In 2005 petitioners purchased a residential property in Daphne,
Alabama (Daphne property). Petitioners used the Daphne property as
their primary residence until 2014 when they moved to Spring, Texas.

      In or about 2009 petitioners purchased a residential property in
Birmingham, Alabama (Birmingham property). Veerendra resided at
the Birmingham property while attending the University of Alabama.
In November 2015 petitioners sold the Birmingham property.

       In 2010 petitioners purchased a residential property in Mobile,
Alabama (Mobile property). Arjun resided at the Mobile property while
attending the University of South Alabama. In November 2015
petitioners sold the Mobile property.

      In 2013 petitioners purchased a residential property in Spring,
Texas (Spring property). Petitioners moved to the Spring property in
2014, and it was their primary residence at the time of trial.

Income tax plan

        By 2014 K J Marketing was generating substantial income. 4
Around that time petitioners engaged Capital Protection Services, LLC
(CPS), to evaluate their organizational structure, facilitate succession
planning, and reduce their tax exposure. For $50,000 CPS provided
petitioners a 183-page “Income Tax Plan” (Plan). After interviewing
petitioners and reviewing their financial information, 5 CPS estimated
that petitioners’ “average tax rate” (ratio of tax to taxable income) was
37%. CPS stated that, if petitioners adopted the recommendations in
the Plan, they could reduce their “average tax rate” to 9%. According to
CPS, petitioners could achieve that goal by restructuring their business
to facilitate greater tax deductions. CPS explained:

        4 On their 2014 Schedule C petitioners reported gross receipts of $897,133 and

net profit of $619,505.
        5 CPS stated in the Plan: “We have reviewed your situation, and we have

reviewed your 1040 income tax return for 2013. Additionally we personally met and
discussed your situation. You are married. You have 2 children. The children work in
the business.”
                                    5

[*5]   [M]arginal rates are important for measuring income tax
       saving from deductions. The marginal rate is the rate
       applied to the last Dollar [sic] earned. If a deduction can
       be created, that deduction will create income tax savings at
       the marginal rate. So if your marginal rate is 48.40%, for
       each $100 of deduction created, tax savings of $48 will
       occur.

      In accordance with the above strategy, CPS advised petitioners to
(1) convert K J Marketing to an S corporation and (2) rent their
residential properties to the S corporation “for business purposes at a
reasonable per day rate supported by independent comparables.” Under
the Plan, the S corporation would rent each of petitioners’ residential
properties for a maximum of 14 days and deduct that expense on its
income tax return.       Petitioners, in turn, would exclude their
corresponding rental income pursuant to section 280A(g).

       CPS included a tax saving projection in the Plan. For purposes of
that projection, CPS “assumed” that one of the residential properties
had a per-day rental rate of $2,500 and that each of the other three
properties had a per-day rental rate of $2,000.          Despite those
assumptions, CPS warned petitioners that the rental rates “should be
supported by independent comps [sic] within a 100 mile radius.” CPS
also suggested that petitioners retain a professional appraiser to value
the rental rate every three years.

       Another component of the Plan was the creation of a
C corporation, which would provide “marketing” services to the
S corporation. Under the Plan, the S corporation would pay the
C corporation a yearly marketing fee, which “should not exceed more
than 10%” of the S corporation’s gross income. The C corporation, in
turn, would pay and deduct on its income tax returns the following
expenses: (1) deferred compensation plan payments, (2) tuition for
petitioners’ sons, (3) medical expenses and disability plans for
petitioners’ family, (4) overtime and weekend meals for the employees,
(5) meals for petitioners’ family “for the convenience of the employer,”
and (6) salaries to petitioners’ children. As for the nature of the
marketing services, the Plan states: “The C Corporation should pay for
marketing expenses for the benefit of the Operating Entity [the S
corporation]. These expenses may be for items such as promotional
materials and little league sponsorships showing that this company is
very active.”
                                           6

[*6] The Plan also includes an unsigned legal opinion from attorney
T. Walton Dallas, 6 stating: “We have determined that in the event that
the taxpayer is challenged by the IRS, it is more likely than not that the
taxpayer will be entitled to the income tax benefits described” in the
Plan. That conclusion, however, had several caveats. For one, Mr.
Dallas gave “no opinion as to the fair market value of any item for any
deduction or credit taken.” Mr. Dallas also made “no representation as
to the reasonableness of any item” and “assumed there is a substantial
and proper business purpose for each component of the tax plan, the
structure of any entities, and the participation of any persons.”

KJJJ Marketing, Inc.

      In December 2014 petitioners organized KJJJ Marketing, Inc.
(KJJJ), under the laws of Texas. Petitioners used KJJJ to conduct the
business they had previously done as K J Marketing. Petitioner wife
was the sole owner of KJJJ, which elected to be treated as an
S corporation for income tax purposes. During 2015, 2016, and 2017,
Veerendra and Arjun were employees of KJJJ. 7

       Before engaging CPS, petitioner husband used hotels and
restaurants to conduct business meetings for K J Marketing. In 2014
petitioners moved those meetings to the Daphne, Birmingham, Mobile,
and Spring Properties. After KJJJ’s incorporation, petitioners began
charging rent to the S corporation for the use of those properties.
Pursuant to the Plan, KJJJ rented each of their residential properties
for a maximum of 14 days. In 2014 petitioners invoiced KJJJ as follows:

              Property                 Daily              Days            Total
                                     rental rate         rented           rent
               Daphne                  $2,500              14            $35,000
             Birmingham                 2,000              14             28,000
                Mobile                  2,000              14             28,000
                Spring                  2,000              14             28,000
     Total                                                              $119,000

       6 CPS disclosed that Mr. Dallas (or his family) had a financial interest in its

tax planning business and advised petitioners to ask their tax return preparer or
separate legal counsel to review the Plan. Although Mr. Dallas is listed as one of
petitioners’ counsel, he did not participate in the trial of this case. Petitioners also
signed a conflict waiver, which we admitted into evidence at trial. See Rule 24(g)(1).
       7 As of the trial date, Veerendra was still a fulltime employee of KJJJ.
                                          7

[*7] In 2015 petitioners invoiced KJJJ as follows:

             Property                 Daily              Days           Total
                                    rental rate         rented           rent
             Daphne                   $2,500              14           $35,000
             Mobile                    2,000              14            28,000
             Spring                    2,000              14            28,000
              Total                                                    $91,000

In 2016 petitioners invoiced KJJJ as follows:

             Property                 Daily              Days           Total
                                    rental rate         rented           rent
             Daphne                   $2,500              14           $35,000
              Total                                                    $35,000

In 2017 petitioners invoiced KJJJ as follows:

             Property                 Daily              Days           Total
                                    rental rate         rented           rent
             Daphne                   $2,500              14           $35,000
             Spring                    2,000              14            28,000
              Total                                                    $63,000

       Petitioners did not obtain any appraisals of their properties for
purposes of valuing the above-described daily rental rates. Instead they
used the rates CPS had assumed for purposes of making a tax saving
projection in the Plan.

JYJ Marketing, Inc.

       In November 2014 petitioners incorporated their new
“marketing” company, JYJ Marketing, Inc. (JYJ), pursuant to the Plan.
Organized as a C corporation under the laws of Texas, JYJ issued 4
shares of stock to petitioner husband, 48 shares to an unrelated
individual, and 48 shares to another unrelated individual. 8 Petitioners,
Veerendra, and Arjun (collectively, Jadhav family) were appointed
directors and part-time employees of JYJ. At the initial meeting of
shareholders and directors, the Jadhav family in their capacity as

        8 In the Plan, CPS advised petitioners against owning more than 50% of the

C corporation for reasons not relevant to the resolution of this case. CPS recommended
that petitioners find two unrelated individuals to hold 96% of the C corporation’s
shares.
                                   8

[*8] directors adopted several plans for the benefit of JYJ’s employees,
including plans for (1) medical expense reimbursement, (2) overtime and
weekend meal reimbursement, (3) meals furnished for the convenience
of the employer, (4) mileage, (5) dwelling unit leasing, (6) tuition, and
(7) fitness and country club expenses.

        With respect to JYJ’s marketing activities, the minutes from the
initial board meeting state:

      A new Marketing Company has been formed and
      marketing activities are allocated by written agreement to
      the new Marketing Company. The Marketing Company
      conducts marketing events at the house of the Employee.
      Also employee meetings are now being held at the house of
      the Employee.

      As the marketing activities are being conducted by a
      separate legal entity, the Operating Company is not liable
      for those activities. This allows more marketing events to
      be conducted as the Operating Company will be free from
      liqueur liability and slip and fall liability.

      While all marketing decisions were made at the Operating
      Company level, now those decisions are being made at the
      Marketing Company level.

      During the years in issue, KJJJ made yearly payments to JYJ for
purported marketing services. The marketing fees were JYJ’s only
source of income. KJJJ paid JYJ as follows:

                    2014          2015           2016          2017
 Marketing fee    $190,000      $170,000       $150,000      $110,000

      JYJ used the marketing fees to pay several personal expenses of
the Jadhav family. It did not use any portion of the funds to pay KJJJ’s
marketing expenses. Nor did it host marketing or promotional events
on KJJJ’s behalf, as the minutes of the initial board meeting had
envisioned.

Tax reporting

       Kenneth Walker, a certified public accountant (CPA), prepared
petitioners’ joint Forms 1040, U.S. Individual Income Tax Return, for
the years in issue. Petitioners’ 2014 Form 1040 includes a Schedule C
                                            9

[*9] for K J Marketing. On that Schedule C petitioners claimed as a
pension and profit sharing deduction their $46,850 contribution to their
sons’ section 401(k) accounts. They also claimed a deduction of $68,063
for travel expenses.

      Petitioners selected Mr. Walker on a friend’s recommendation.
They provided their new CPA information about the Plan and the
organizational changes to their business. After telling petitioner
husband that he understood the Plan, Mr. Walker prepared income tax
returns for KJJJ and JYJ.

      KJJJ filed Forms 1120S, U.S. Income Tax Return for an
S Corporation, for the years in issue. For each year in issue, KJJJ
deducted the rent petitioners had invoiced. We summarize KJJJ’s
deductions for rent below:

                             2014         2015            2016            2017
                Rent        $119,000    $103,500 9       $35,000      $63,000

KJJJ also claimed “other” deductions as follows:

                                 2014             2015              2016           2017
     Application fees            $125                —                —             —
    Insurance expense           165,195         $129,420           $106,197      $98,800
      Marketing fees            190,000          170,000           150,000       150,000 10
   Conference expenses              —             4,800             5,080           —
      Contract labor                —            11,200             5,800           —
           Gifts                    —             7,600             3,600          3,600
  Mileage reimbursement             —            26,104             18,722        20,627
      Office supplies               —            43,700             22,890         8,250
  Payroll processing fees           —             657               1,274           —
   Product development              —            32,400             15,900          —
     Professional fees              —            12,994             9,743          3,040
           Travel                   —            17,125             11,311        23,964

       9   For 2015 KJJJ’s deduction for rent comprised $91,000 for the use of
petitioners’ properties and $12,500 for the use of a mud pump. Respondent concedes
on brief that petitioners are entitled to a flowthrough deduction of $12,500 for the mud
pump rental.
       10 There is a discrepancy between the reported marketing fee of $150,000 and

the amount petitioners have substantiated, $110,000. We find that KJJJ paid JYJ
$110,000 in purported marketing fees in 2017.
                                          10

[*10]        Total            $355,320         $456,000     $350,517      $308,281

       After deducting its reported expenses, KJJJ reported ordinary
business income of $10,945, $247,592, $104,944, and $268,563 for 2014,
2015, 2016, and 2017, respectively. Petitioners reported those amounts
on their Schedules E, Supplemental Income and Loss, for the years in
issue. Petitioners also reported their rental income from KJJJ on their
Schedules E but treated those amounts as excludable pursuant to
section 280A(g).

       JYJ reported the marketing fees it had received from KJJJ on
Forms 1120, U.S. Corporation Income Tax Return, for its taxable years
ending November 30, 2015, 2016, 2017, and 2018. 11 Besides the
marketing fees from KJJJ, JYJ did not report any income. It did not
claim any deductions for officer compensation or wages but deducted
several personal expenses of the Jadhav family including (1) out-of-
pocket medical bills, (2) meals and entertainment, (3) petitioner
husband’s mileage, (4) portions of Arjun’s and Veerendra’s tuition,
(5) petitioners’ health club membership, and (6) lawn care. 12

Examination

       In 2017 the Internal Revenue Service selected petitioners’,
KJJJ’s, and JYJ’s returns for examination and assigned the case to
Revenue Agent (RA) Kendria Vickers. With respect to KJJJ’s Forms
1120S, RA Vickers fully disallowed the S corporation’s rent deductions
for the years in issue. She also disallowed almost all of KJJJ’s “other”
deductions. Of those items, only KJJJ’s reported marketing fees and
travel expenses remain at issue. 13

      In a civil penalty approval form dated October 31, 2018, RA
Vickers made an initial determination to assert accuracy-related

        11 On its initial Form 1120, JYJ elected a taxable year ending November 30.

        12CPS advised petitioners to treat the C corporation’s payment of several
personal expenses as nontaxable fringe benefits, and petitioners appear to have
employed that strategy. Respondent has not challenged petitioners’ treatment of the
JYJ payments, so we need not address them further.
        13 RA Vickers allowed KJJJ’s 2014 deduction for application fees and its 2015

and 2016 deductions for payroll processing fees. In the Stipulation of Settled Issues,
respondent conceded that KJJJ may deduct its reported insurance expenses for the
years in issue. Meanwhile, petitioners conceded that KJJJ is not entitled to deductions
for conference expenses, contract labor, gifts, mileage reimbursement, office supplies,
product development, and professional fees.
                                       11

[*11] penalties for underpayments due to substantial understatements
of income tax for the years in issue. RA Vickers’s then-immediate
supervisor, Acting Group Manager Angela Harris, signed the civil
penalty approval form on October 31, 2018.

       On April 26, 2019, respondent issued petitioners two statutory
notices of deficiency (SNODs) determining deficiencies and section
6662(a) accuracy-related penalties for the years in issue. 14 Respondent
increased petitioners’ passthrough income for the years in issue after
making the above-described adjustments to KJJJ’s rental and “other”
deductions. Because of clerical errors, however, the SNODs understate
RA Vickers’ intended adjustments to petitioners’ passthrough income for
2015, 2016, and 2017.

       Respondent also made adjustments to petitioners’ 2014
Schedule C in the SNOD for that year. Therein respondent disallowed
petitioners’ Schedule C deductions for travel and pension and profit
sharing expenses.

       With respect to JYJ, respondent did not determine any
deficiencies against the corporation. Instead, respondent treated JYJ’s
2015, 2016, and 2017 Forms 1120 as “sham” returns. Respondent
refunded the amounts JYJ had paid as tax for those years.

Proceedings in this Court

       In response to the SNODs, petitioners timely petitioned this
Court, and respondent filed an Answer. Thereafter respondent filed a
Motion for Leave to File an Amended Answer, in which he asserted
increased deficiencies and accuracy-related penalties for 2015 and 2016
on the basis of the above-described clerical errors. Petitioners had no
objection to the Motion, which we granted.

       This case was set for remote trial at the Court’s October 13, 2020,
Winston-Salem, North Carolina, trial session. On September 22, 2020,
respondent filed a Pretrial Memorandum. Therein respondent asserted
an increased deficiency and accuracy-related penalty for 2017.
Respondent’s counsel explained that he had recently discovered a
clerical error in the 2017 SNOD, the correction of which would increase
the deficiency and accuracy-related penalty for that year. Although
petitioners stipulated a revised computation for 2017, at trial they

      14 The first SNOD covers 2014, 2015, and 2016; the second covers 2017.
                                   12

[*12] objected to the increased deficiency for that year. After trial
respondent filed a Motion for Leave to File Second Amended Answer to
Conform Pleadings to Proof (Motion for Leave), to which petitioners
objected.

                               OPINION

I.    Respondent’s Motion for Leave

       Respondent moved under Rule 41(b) to amend his pleading to
conform to the evidence submitted at trial. Respondent lodged with his
Motion a Second Amended Answer asserting an increased deficiency
and accuracy-related penalty for 2017. Respondent alleges that he
failed to account for KJJJ’s reported ordinary business income of
$268,563 in calculating petitioners’ corrected passthrough income.
Respondent attributes that failure to a clerical error, the correction of
which would increase petitioners’ deficiency from $50,727 to $157,078
and accuracy-related penalty from $10,145.40 to $31,415.40.

      This Court has held on numerous occasions that it will not
consider issues which have not been properly pleaded or otherwise
preserved. Markwardt v. Commissioner, 64 T.C. 989, 997 (1975).
Nevertheless, Rule 41(b) provides a procedure whereby the pleadings
may be amended to conform to the evidence presented at trial in
appropriate circumstances. Rule 41(b) provides in part:

      (1) Issues Tried by Consent: Issues not raised by the
      pleadings but tried by express or implied consent of the
      parties are treated in all respects as if raised in the
      pleadings. The Court, on motion of any party at any time,
      may allow any amendment of the pleadings as may be
      necessary to cause them to conform to the evidence and to
      raise these issues, but failure to amend does not affect the
      result of the trial of these issues.

      (2) Other Evidence: If a party objects to evidence on the
      ground that it is not within the issues raised by the
      pleadings, the Court may receive the evidence and at any
      time allow the pleadings to be amended to conform to the
      proof. The Court will do so freely when justice so requires
      and the objecting party fails to satisfy the Court that the
      admission of the evidence will prejudice that party’s
      position on the merits.
                                   13

[*13] This Court, in deciding whether an issue was tried by implied
consent within the meaning of Rule 41(b)(1), has considered whether the
consent results in unfair surprise or prejudice to the consenting party
and prevents that party from presenting evidence that might have been
introduced if the issue had been timely raised. Phillips v. Commissioner,
T.C. Memo. 2013-215, at *9–10; Bulas v. Commissioner, T.C. Memo.
2011-201, 2011 Tax Ct. Memo LEXIS 202, at *2 n.2. When a party
objects to the evidence relating to issues that the other party seeks to
raise by amending a pleading, Rule 41(b)(2) determines whether an
amendment to a pleading should be allowed. An amendment is to be
allowed under Rule 41(b)(2) only if (1) “justice so requires” and (2) the
amendment would not prejudice the objecting party in maintaining his
or her position on the merits. See Phillips, T.C. Memo. 2013-215, at *9–
10.

        Allowing respondent to amend his Answer would not unfairly
surprise or prejudice petitioners. Approximately three weeks before
trial, respondent filed a Pretrial Memorandum disclosing the above-
described clerical error and asserting an increased deficiency and
accuracy-related penalty. Petitioners were therefore on notice of the
increased deficiency and penalty and had ample opportunity to plan a
defense to those increases. Petitioners have neither claimed nor shown
that they would have prepared differently for trial had respondent
amended his Answer sooner.

       Although petitioners objected to the increased deficiency and
penalty, they did not make any related evidentiary objections. To the
contrary, they stipulated a revised computation of the 2017 deficiency.
Even if they had reserved an objection to that Exhibit, justice would
require allowing the amendment. Respondent is attempting to correct
a clerical error that he discovered and disclosed several weeks before
trial. The substantive issues in the case—petitioners’ and/or KJJJ’s
deductions for pension contributions, travel expenses, rent, and
marketing fees—are unchanged by respondent’s proposed amendment.
We will therefore grant respondent’s Motion for Leave and allow
respondent to assert an increased deficiency and penalty for 2017.

II.   Burden of proof

     The Commissioner’s determination of a deficiency in tax is
presumptively correct. Welch v. Helvering, 290 U.S. 111, 115 (1933).
Generally, the burden of proof is on the taxpayer to show that the
Commissioner has erred in his determination. Rule 142(a)(1). That
                                          14

[*14] presumption, however, applies only to the determinations in the
notice of deficiency. If the Commissioner asserts an increased deficiency
or new matter after the notice of deficiency is issued, then the burden of
proof as to the increased deficiency or new matter is on him. Id.; Wayne
Bolt & Nut Co. v. Commissioner, 93 T.C. 500, 507 (1989).

       Where the increase in deficiency is based on a clerical or
mathematical error in the notice of deficiency, the Commissioner bears
only the burden of establishing the clerical or mathematical error.
Raquet v. Commissioner, T.C. Memo. 1996-279, 1996 Tax Ct. Memo
LEXIS 293, at *10. The taxpayer retains the burden with regard to the
Commissioner’s determinations. Id. at *10–11 (first citing Estate of
Applestein v. Commissioner, 80 T.C. 331, 347 n.5 (1983); then citing Beck
Chem. Equip. Corp. v. Commissioner, 27 T.C. 840, 856 (1957); then
citing Kiehl v. Commissioner, T.C. Memo. 1986-54; and then citing Holtz
v. Commissioner, T.C. Memo. 1982-436).

       In his First and Second Amended Answers, respondent asserts
increased deficiencies and accuracy-related penalties for 2015, 2016,
and 2017 on the ground that the SNODs contain clerical errors for those
years. In his Simultaneous Opening Brief, respondent described those
errors and directed the Court to several Exhibits showing how they
occurred. Besides disputing respondent’s Motion for Leave, petitioners
did not address the clerical errors on brief. They have therefore
conceded that the errors in the SNODs are clerical. See Mendes v.
Commissioner, 121 T.C. 308, 312–13 (2003) (holding that arguments not
addressed in posttrial brief may be considered abandoned); Leahy v.
Commissioner, 87 T.C. 56, 73–74 (1986) (finding concession by failure to
argue). Thus, having established clerical errors in the SNODs for 2015,
2016, and 2017, respondent has met his burden as to the increased
deficiencies. See Raquet, T.C. Memo. 1996-279.

        With respect to respondent’s determinations in the SNODs, we
decide this case on the preponderance of the evidence. Accordingly, we
need not further allocate the burden of proof as to the expense items at
issue. 15 See Estate of Turner v. Commissioner, 138 T.C. 306, 309 (2012).

        15 Section 7491(a) provides that if, in any court proceeding, a taxpayer

introduces credible evidence with respect to any factual issue relevant to ascertaining
the liability for tax and meets other prerequisites, the burden of proof rests on the
Commissioner as to that factual issue. See Higbee v. Commissioner, 116 T.C. 438, 440–
                                         15

[*15] III.     Deductions

      Section 162(a) allows a deduction for ordinary and necessary
expenses paid or incurred during the taxable year in carrying on a trade
or business.

      Deductions are a matter of legislative grace, and a taxpayer
generally bears the burden of proving that he or she is entitled to the
deduction claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
The taxpayer is required to maintain records that are sufficient to
enable the Commissioner to determine the correct tax liability. See
§ 6001; Treas. Reg. § 1.6001-1(a). The taxpayer 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. See § 6001; Hradesky v. Commissioner, 65 T.C.
87, 89–90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976);
Hershberger v. Commissioner, T.C. Memo. 2014-63, at *7–8.

       If the taxpayer can establish that he or she paid or incurred a
deductible expense but cannot substantiate the precise amount, the
Court may approximate the deductible amount of the expense. See
Cohan v. Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930). However,
the taxpayer must present sufficient evidence to establish a rational
basis for making the estimate. See id.; Vanicek v. Commissioner, 85 T.C.
731, 742–43 (1985).

       A.      2014 Schedule C

               1.      Pension and profit-sharing expense

        On their 2014 Schedule C petitioners deducted as a pension and
profit-sharing expense their $46,850 contribution to Arjun’s and
Veerendra’s section 401(k) accounts.        Disputing the deduction,

41 (2001). Petitioners have not argued that they satisfied the requirements of section
7491(a) to shift the burden of proof to respondent.
        In their Simultaneous Answering Brief, petitioners suggested that
respondent’s argument regarding KJJJ’s rent deductions was a new matter, which
would shift the burden of proof to respondent. See Wayne Bolt & Nut Co., 93 T.C. at
507. Because we decide this case on the preponderance of the evidence, we need not
resolve this issue.
                                          16

[*16] respondent contends that neither Arjun nor Veerendra was an
employee of petitioners in 2014.

       Section 404(a) allows an employer to deduct certain contributions
to deferred compensation plans that are paid or accrued on account of
an employee. Gaston v. Commissioner, T.C. Memo. 2021-107, at *26.
Whether an employer-employee relationship exists is a question of fact.
Air Terminal Cab, Inc. v. United States, 478 F.2d 575, 578 (8th Cir.
1973); Pro. & Exec. Leasing, Inc. v. Commissioner, 89 T.C. 225, 232
(1987), aff’d, 862 F.2d 751 (9th Cir. 1988). Courts typically apply a
common law agency test to determine whether an employer-employee
relationship exists. See, e.g., Nationwide Mut. Ins. Co. v. Darden, 503
U.S. 318, 323–24 (1992); Cmty. for Creative Non-Violence v. Reid, 490
U.S. 730, 751–52 (1989); Matthews v. Commissioner, 92 T.C. 351, 360
(1989), aff’d, 907 F.2d 1173 (D.C. Cir. 1990). Moreover, where a family
relationship is involved, close scrutiny is required to determine whether
a bona fide employer-employee relationship existed and whether
payments were made on account of the employer-employee relationship
or on account of the family relationship. See Denman v. Commissioner,
48 T.C. 439, 450 (1967); Haeder v. Commissioner, T.C. Memo. 2001-7,
2001 Tax Ct. Memo LEXIS 6; Shelley v. Commissioner, T.C. Memo.
1994-432.

       In determining whether a person is an employee under the
general common law of agency, we consider several nonexclusive
factors. 16 See Nationwide Mut. Ins. Co., 503 U.S. at 323–24; NLRB v.
United Ins. Co. of Am., 390 U.S. 254, 258 (1968); Pro. & Exec. Leasing,
Inc., 89 T.C. at 232. Inevitably cases turn on the particular facts of each
case, and no one factor is controlling. See Pro. & Exec. Leasing, Inc., 89
T.C. at 232.

       At trial petitioner husband credibly testified that he viewed K J
Marketing (which later became KJJJ) as a family business. He also
credibly testified that he wished to pass his business on to Veerendra

         16 This Court has enumerated the following factors in determining whether an

employer-employee relationship exists: (1) the degree of control exercised by the
principal over the details of the work; (2) which party invests in the facilities used in
the work; (3) the opportunity of the individual for profit or loss; (4) whether the
principal has the right to discharge the individual; (5) whether the work is part of the
principal’s regular business; (6) the permanency of the relationship; and (7) the
relationship the parties believe they are creating. Weber v. Commissioner, 103 T.C.
378, 387 (1994), aff’d per curiam, 60 F.3d 1104 (4th Cir. 1995); Pro. & Exec. Leasing,
Inc., 89 T.C. at 232; Simpson v. Commissioner, 64 T.C. 974, 984–85 (1975).
                                          17

[*17] and Arjun. The record establishes that petitioners pursued that
goal. Although Veerendra and Arjun were in college in 2014, petitioner
husband credibly recounted assigning them research tasks and
overseeing their work while they were in school. Upon KJJJ’s
incorporation, Veerendra and Arjun became employees of the
S corporation, which issued them Forms W–2, Wage and Tax Statement,
for 2015, 2016, and 2017. Veerendra was a full-time employee of KJJJ
at the time of trial. These facts support a finding of an employment
relationship, as they demonstrate petitioner husband’s control over his
sons’ work, his investment in the business, a lengthy employment
relationship, and an intention to create an employer-employee
relationship.

        Respondent does not appear to dispute the classification of
Veerendra and Arjun as employees—at least not for 2015, 2016, and
2017. Rather, respondent disputes the timing of their employment,
asserting that it did not commence in 2014. In support of his contention,
respondent cites petitioners’ failure to file Forms W–2 for 2014. To be
sure, the failure to file information returns may undermine the
assertion of a bona fide employer-employee relationship. See Haeder,
2001 Tax Ct. Memo LEXIS 6, at *33. In this case, however, petitioner
husband’s credible testimony is supported by contemporaneous evidence
in the trial record. The Plan, which was prepared in 2014, states: “You
[petitioner husband] have 2 children. The children work in the
business.” Thus, under the particular circumstances of this case, we
find it more likely than not that Arjun and Veerendra were petitioners’
employees in 2014. 17

      Respondent does not dispute petitioners’ pension and profit-
sharing deduction on any ground besides Arjun’s and Veerendra’s

         17 Respondent contends that Veerendra and Arjun were absent from trial and

that he is entitled to a presumption that their testimony would be unfavorable to
petitioners. See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165
(1946), aff’d, 162 F.2d 513 (10th Cir. 1947). But where both parties have equal access
to the evidence, we do not apply an adverse inference. Jordan v. Commissioner, 134
T.C. 1, 10 (2010), supplemented by T.C. Memo. 2011-243. Respondent could have
subpoenaed Veerendra and Arjun; thus both parties had equal access to the potential
witnesses. We therefore decline to draw a negative presumption against petitioners
on this issue. Even if we did, we would still find that the weight of the evidence favors
petitioners here. See Diaz v. Commissioner, 58 T.C. 560, 564 (1972) (observing that
the process of distilling truth from the testimony of witnesses, whose demeanor we
observe and whose credibility we evaluate, “is the daily grist of judicial life”).
                                    18

[*18] employment statuses. Having resolved that factual issue in
petitioners’ favor, we hold that petitioners are entitled to the deduction.

             2.     Travel expenses

      On their 2014 Schedule C petitioners claimed a deduction of
$68,063 for travel expenses. Respondent argues that petitioners have
not substantiated these reported expenses.

        The strict substantiation requirements of section 274(d) apply to
travel expenses. Under section 274(d), the taxpayer generally must
substantiate either by adequate records or by sufficient evidence
corroborating the taxpayer’s own statement (1) the amount of the
expense; (2) the time and place the expense was incurred; (3) the
business purpose of the expense; and (4) in the case of an entertainment
or gift expense, the business relationship to the taxpayer of each expense
incurred. For listed property expenses, the taxpayer must establish the
amount of business use and the amount of total use for the property. See
Temp. Treas. Reg. § 1.274-5T(b)(6)(i)(B).

       Substantiation by adequate records requires the taxpayer to
maintain an account book, a diary, a log, a statement of expense, trip
sheets, or a similar record prepared contemporaneously with the
expenditure and documentary evidence (e.g., receipts or bills) of certain
expenditures. Treas. Reg. § 1.274-5(c)(2)(iii); Temp. Treas. Reg. § 1.274-
5T(c)(2). Substantiation by other sufficient evidence requires the
production of corroborative evidence in support of the taxpayer’s
statement specifically detailing the required elements. Temp. Treas.
Reg. § 1.274-5T(c)(3).

       In support of their deduction for travel expenses, petitioners
submitted reconstructions of purported travel logs and odometer
readings. However, the record does not contain any documentary
evidence or other direct or circumstantial evidence of the time, location,
and business purpose of each reported travel expense. Petitioners’
failure to produce such evidence (which one would expect to be in their
exclusive possession or control) creates a presumption that it would not
be favorable to them. See Wichita Terminal Elevator Co., 6 T.C. at 1165.
In the light of that presumption, and considering petitioners’ failure to
establish by adequate records or other sufficient evidence each element
of their reported travel expenses, petitioners have not met the
requirements of section 274(d). We sustain respondent’s determination
on this issue.
                                          19

[*19] B.        2014–17 Forms 1120S (KJJJ)

      We next consider whether respondent properly disallowed KJJJ’s
deductions for marketing fees, rent, and travel expenses. 18

                1.      Marketing fees

      For the years in issue, KJJJ claimed deductions for marketing
fees in accordance with the Plan. Having fully disallowed those
deductions, respondent contends that the marketing fees were not
ordinary and necessary under section 162. We agree.

      To be “necessary” within the meaning of section 162, an expense
needs to be “appropriate and helpful” to the taxpayer’s business. Welch
v. Helvering, 290 U.S. at 113. The requirement that an expense be
“ordinary” connotes that “the transaction which gives rise to it must be
of common or frequent occurrence in the type of business involved.”
Deputy v. DuPont, 308 U.S. 488, 495 (1940).

       Having carefully reviewed the record, we are doubtful that the
marketing fees were ordinary and necessary. The creation of JYJ was
one of the tax reduction strategies CPS had recommended in the Plan.
Pursuant thereto, KJJJ made large annual payments to JYJ, of which
petitioners were shareholders and directors. JYJ did not make any
marketing expenditures for KJJJ, as CPS had suggested it would in the
Plan. Nor did JYJ host meetings on KJJJ’s behalf, as envisioned in
JYJ’s initial board minutes. Nevertheless, KJJJ paid large yearly sums
to JYJ, which, in turn, used those sums to pay the personal expenses of
the Jadhav family. In the light of these facts, we find it more likely than
not that JYJ did not provide ordinary and necessary marketing services
to KJJJ.

        18 If a business meets the requirements of section 1361, it may elect to be

treated as an S corporation and generally avoid corporate tax. §§ 1362(a), 1363(a). An
S corporation, like a partnership, is a flowthrough entity; its income and losses flow
through to its shareholders, who then pay income tax. See § 1363(b). Section 1366(a)(1)
provides that an S corporation shareholder determines his or her tax liability by taking
into account his or her pro rata share of the S corporation’s income, losses, deductions,
and credits for the S corporation’s taxable year ending with or in the shareholder’s
taxable year. We have jurisdiction to redetermine the deductions claimed by KJJJ.
See Winter v. Commissioner, 135 T.C. 238 (2010); Berry v. Commissioner, T.C. Memo.
2018-143, at *6, aff’d, 828 F. App’x 431 (9th Cir. 2020); Alli v. Commissioner, T.C.
Memo. 2014-15, at *17 n.11.
                                         20

[*20] Acknowledging that JYJ did not provide traditional marketing
services to KJJJ, petitioners nevertheless contend that the fees were
ordinary and necessary for purposes of risk mitigation. At trial
petitioner husband testified that he used JYJ to develop new ideas,
many of which would fail. According to petitioner husband, JYJ shielded
KJJJ from the reputational risk of such failures. Petitioner husband
testified that once an idea proved viable, KJJJ would market it to
potential users. Although we found petitioner husband credible, he did
not explain how the marketing fees were determined. It is also unclear
from the record whether JYJ developed any ideas that warranted KJJJ’s
payments of large annual marketing fees. The invoices in the record are
vague, stating only that JYJ provided “[m]arketing and sale promotion.”

       This Court has upheld disallowances of section 162 deductions in
similar circumstances. For instance, in ASAT, Inc. v. Commissioner,
108 T.C. 147, 174–75 (1997), we held that the taxpayer was not entitled
to deduct consulting fees it had paid to an unrelated corporation where
the taxpayer did not establish how the fees were determined, there was
no written contract, the invoices provided almost no detail, and there
was no evidence of the service provider’s skills that might warrant the
consulting fees.     See also Weekend Warrior Trailers, Inc. v.
Commissioner, T.C. Memo. 2011-105 (sustaining the Commissioner’s
disallowance of management fee deduction where the evidence did not
adequately establish the specific services performed and who performed
them). For similar reasons, we hold that JYJ is not entitled to the
marketing fee deductions for the years in issue. We sustain respondent’s
determination on this issue.

               2.      Rent

       KJJJ also claimed deductions for rent paid to petitioners for the
use of their residential properties during the years in issue. Having fully
disallowed those deductions, respondent contends that KJJJ’s reported
rental expenses were not ordinary and necessary. 19 See § 162. We agree.

      Section 162 permits a taxpayer to deduct all ordinary and
necessary expenses paid during the taxable year in carrying on its trade
or business, including “rentals or other payments required to be made
as a condition to the continued use or possession” of property.

       19 Respondent also contends that petitioners failed to substantiate some of the

reported rent payments. Because we sustain respondent’s determination on other
grounds, we need not resolve this issue.
                                          21

[*21] § 162(a)(3). In determining whether the payments in issue are
deductible under section 162, the basic question is whether the
payments were in fact rent and not something else disguised as rent.
Accord Levenson & Klein, Inc. v. Commissioner, 67 T.C. 694, 715 (1977);
see Place v. Commissioner, 17 T.C. 199, 203 (1951), aff’d per curiam, 199
F.2d 373 (6th Cir. 1952). This is a question of fact, “and the character
of the payments in question is to be judged in light of (1) all the terms
and conditions of the agreement establishing the obligation to pay and
(2) all the facts and circumstances existing at the time the agreement
was made.” Audano v. United States, 428 F.2d 251, 256 (5th Cir. 1970);
see Brown Printing Co. v. Commissioner, 255 F.2d 436, 440 (5th Cir.
1958), rev’g T.C. Memo. 1957-37.

      Only the portion of an expense that is reasonable qualifies for
deduction under section 162(a). United States v. Haskel Eng’g & Supply
Co., 380 F.2d 786, 788–89 (9th Cir. 1967); see also Fuhrman v.
Commissioner, T.C. Memo. 2011-236, 2011 Tax Ct. Memo LEXIS 230,
at *6. The reasonableness concept has particular significance in
determining whether payments between related parties represent
ordinary and necessary expenses. See Fuhrman, 2011 Tax Ct. Memo
LEXIS 230, at *6–7 (citing Boris I. Bittker & Lawrence Lokken, Federal
Taxation of Income, Estates, and Gifts, para. 20.1.5, at 20-18 (3d ed.
1999)). Because petitioners wholly owned KJJJ, we must consider
whether the rental arrangement between the two was reasonable.

       Having carefully reviewed the record, we find it more likely than
not that KJJJ’s payments to petitioners were unreasonable and
something other than rent. Petitioners’ rental arrangement with KJJJ
was another tax reduction strategy CPS had suggested in the Plan. In
making that suggestion, CPS advised petitioners to use a reasonable
rental rate supported by independent comparables. CPS also suggested
that petitioners retain a professional appraiser to determine fair rental
values for their properties. Petitioners did not follow that advice.
Instead they charged KJJJ the daily rental rates CPS had assumed in
its tax saving projection. Although petitioners contend that those rates
were based on independent comparables, no such comparables appear
in the record. 20 Their absence creates a presumption that they would be

        20 Petitioners’ contention also conflicts with Mr. Dallas’s legal opinion, which

disclaims any opinion “as to the fair market value of any item for any deduction or
credit taken.”
                                   22

[*22] unfavorable to petitioners. See Wichita Terminal Elevator Co.,
6 T.C. at 1165.

       Petitioners contend that respondent’s full disallowance of KJJJ’s
rent deductions was arbitrary and capricious. According to petitioners,
some portion of the rent must be deductible because the residential
properties have fair rental values greater than zero. However, as
explained above, the record establishes that KJJJ’s rental arrangement
with petitioners was not reasonable. While we may approximate a fair
rental value in appropriate circumstances, see Cohan v. Commissioner,
39 F.2d at 543–44; Clem v. Commissioner, T.C. Memo. 1991-414, 1991
Tax Ct. Memo LEXIS 463, at *17 (“[B]ased upon the well-established
Cohan rule and its reasoning, we have done our best to approximate a
reasonable fair market value.”), we must have some basis upon which to
make an estimate, Vanicek, 85 T.C. at 742–43. Petitioners have not
provided any expert testimony or other evidence of their properties’ fair
rental values. Accordingly, we are unable to conclude that any portion
of KJJJ’s reported rent was reasonable and, in turn, ordinary and
necessary. We therefore sustain respondent’s determination on this
issue.

             3.    Travel expenses

       On its Forms 1120S, KJJJ deducted $17,125, $11,311, and
$23,964 for 2015, 2016, and 2017, respectively. Respondent contends
that petitioners have not substantiated KJJJ’s reported travel expenses.

      To substantiate those expenses, petitioners submitted
reconstructed travel logs. For the reasons stated supra Part III.A.2, we
sustain respondent’s determination on this issue.

IV.   Accuracy-related penalties

       Finally we consider whether petitioners are liable for accuracy-
related penalties for the years in issue. Section 6662(a) imposes a
penalty equal to 20% of any underpayment that arises from a
substantial understatement of income tax. See § 6662(b)(2). An
understatement is substantial if it exceeds the greater of 10% of the
correct tax or $5,000. § 6662(d)(1)(A). Respondent contends that there
is a substantial understatement of income tax for each year in issue.

       Generally, the Commissioner bears the initial burden of
production of establishing via sufficient evidence that a taxpayer is
liable for penalties and additions to tax; once this burden is met, the
                                    23

[*23] taxpayer must carry the burden of proof with regard to defenses
such as reasonable cause. See § 7491(c); Higbee, 116 T.C. at 446–47.
However, the Commissioner bears the burden of proof with respect to a
new penalty or increase in the amount of a penalty asserted in his
answer. See Rader v. Commissioner, 143 T.C. 376, 389 (2014), aff’d in
part, appeal dismissed in part, 616 F. App’x 391 (10th Cir. 2015); see also
RERI Holdings I, LLC v. Commissioner, 149 T.C. 1, 38–39 (2017), aff’d
sub nom. Blau v. Commissioner, 924 F.3d 1261 (D.C. Cir. 2019); Bass v.
Commissioner, T.C. Memo. 2023-41, at *19; Arnold v. Commissioner,
T.C. Memo. 2003-259, 2003 Tax Ct. Memo LEXIS 258, at *11–12. As
part of the burden of production, the Commissioner must satisfy section
6751(b) by producing evidence of written approval of the penalty by an
immediate supervisor, made before formal communication of the
penalty to the taxpayer. See Graev v. Commissioner, 149 T.C. 485, 493
(2017), supplementing and overruling in part 147 T.C. 460 (2016); see
also Clay v. Commissioner, 152 T.C. 223, 246, 249 (2019), aff’d, 990 F.3d
1296 (11th Cir. 2021).

       We first address the proportionate increases to the accuracy-
related penalties asserted by respondent in the Amended and Second
Amended Answers. Respondent’s burden includes showing written
supervisory approval of the increases pursuant to section 6751(b)(1).
See Dynamo Holdings Ltd. P’ship v. Commissioner, 150 T.C. 224, 238
(2018); Bass, T.C. Memo. 2023-41, at *20; Dynamo Holdings Ltd. P’ship
v. Commissioner, T.C. Memo. 2018-61, at *108. The record does not
establish that respondent complied with section 6751(b)(1) in asserting
increased penalties in the Amended and Second Amended Answers.
Accordingly, respondent has not carried his burden regarding the
increased penalties for 2015, 2016, and 2017.

       As for the accuracy-related penalties determined in the SNODs,
the initial penalty determination was made by RA Vickers on October
31, 2018, and approved in writing by her then-immediate supervisor,
Ms. Harris, that same day. Petitioners do not contend that respondent
failed to comply with section 6751(b)(1). We therefore find that
respondent complied with all procedural requirements to assert the
accuracy-related penalty under section 6662(b)(2) for the years in issue.
Moreover, petitioners’ understatements of income tax likely exceed the
greater of 10% of the amount of tax required to be shown on their returns
or $5,000. Thus, if the Rule 155 computations show substantial
understatements for the years in issue, respondent has satisfied his
burden of production with respect to the penalties determined in the
SNODs.
                                       24

[*24] Since respondent likely has met his burden regarding the
penalties (as initially determined), petitioners must come forward with
persuasive evidence that the penalties are inappropriate. See § 7491(c);
Higbee, 116 T.C. at 446–47. Petitioners may meet their burden by
proving that they acted with reasonable cause and in good faith with
respect to the underpayments. See § 6664(c)(1); see also Higbee, 116 T.C.
at 447; Treas. Reg. § 1.6664-4(a). The decision as to whether a taxpayer
acted with reasonable cause and in good faith is made on a case-by-case
basis, taking into account all of the pertinent facts and circumstances.
Treas. Reg. § 1.6664-4(b)(1).

       “Circumstances that may indicate reasonable cause and good
faith include an honest misunderstanding of fact or law that is
reasonable in light of all of the facts and circumstances, including the
experience, knowledge, and education of the taxpayer.” Id. Reliance on
a tax professional demonstrates reasonable cause when a taxpayer
(1) selects a competent tax adviser, (2) supplies the adviser with all
relevant information, and (3) relies in good faith on the adviser’s
professional judgment. See Neonatology Assocs., P.A. v. Commissioner,
115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002).

       Citing their reliance on Mr. Walker to prepare their and KJJJ’s
returns, petitioners assert that they acted with reasonable cause. 21
According to petitioners, Mr. Walker was a qualified CPA who was
independent of CPS. Respondent does not dispute those assertions.
However, the fact that petitioners hired Mr. Walker to prepare their
returns does not, by itself, establish that they acted with reasonable
cause and in good faith. See id. at 99–100. They must also establish
that they supplied him with all relevant information and relied in good
faith on his professional judgment. See id.

       Petitioners have not established that they reasonably relied on
Mr. Walker. To be sure, petitioners provided Mr. Walker information
about the organizational changes to their business as contemplated by
the Plan. However, the record does not establish that petitioners alerted
Mr. Walker to the nature of JYJ’s purported marketing services, which
deviated from those described in the Plan. Nor does the record clearly
establish what information, if any, petitioners provided Mr. Walker
about their and KJJJ’s reported travel expenses, the items petitioners
have conceded, and the rental values of their properties. Because

        21 Petitioners do not contend that they reasonably relied on Mr. Dallas’s

opinion letter.
                                  25

[*25] petitioners have failed to show that they provided Mr. Walker all
relevant information, we cannot conclude that their reliance on him was
reasonable.

      Accordingly, and assuming the Rule 155 calculations confirm
substantial understatements of income tax, we sustain respondent’s
determinations of accuracy-related penalties as reflected in the SNODs.
However, we do not sustain respondent’s determinations regarding the
proportionate increases to the penalties as reflected in the Amended and
Second Amended Answers.

      In reaching our holdings herein, we have considered all
arguments made, and to the extent not mentioned above, we conclude
them to be moot, irrelevant, or without merit.

      To reflect the foregoing,

      An appropriate order will be issued, and decision will be entered
under Rule 155.