Court Opinion

ID: 3050656
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:32:09.414354+00
Date Added: 2024-06-11T12:44:57.011241
License: Public Domain

FOR PUBLICATION
  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

JAMES S. SPARKMAN; MERCURY                
SOLAR PTO, AMANDA MCKEOUGH,
                                                  No. 06-71476
TRUSTEE,
            Petitioners-Appellants,               Tax Ct. Nos.
                v.                                 8400-03
                                                    8650-03
COMMISSIONER OF INTERNAL
                                                   OPINION
REVENUE,
             Respondent-Appellee.
                                          
                 Appeal from a Decision of the
                   United States Tax Court

                 Submitted November 7, 2007*
                      Honolulu, Hawaii

                    Filed December 10, 2007

Before: Diarmuid F. O’Scannlain, A. Wallace Tashima, and
                   Milan D. Smith, Jr.,
                     Circuit Judges.

             Opinion by Judge Milan D. Smith, Jr.

  *The panel unanimously finds this case suitable for decision without
oral argument. See Fed. R. App. P. 34(a)(2)

                               16167
16170                 SPARKMAN v. CIR

                        COUNSEL

Paul J. Sulla, Jr., Laupahoehoe, Hawaii, for the petitioners-
appellants
                           SPARKMAN v. CIR                         16171
Eileen J. O’Connor, Assistant Attorney General; Jonathan S.
Cohen, Michelle B. Smalling, United States Department of
Justice, Tax Division, Washington, D.C., for the respondent-
appellee.

                              OPINION

MILAN D. SMITH, JR., Circuit Judge:

   Petitioner-Appellant James Sparkman appeals the decision
of the Tax Court upholding the Commissioner’s notice of
deficiency with respect to tax years 1996 through 2000. See
Sparkman v. Comm’r, T.C. Memo 2005-136 (2005). He
objects to the Tax Court’s ruling that one of his business enti-
ties, Mercury Solar PTO, lacked economic substance and
should be disregarded for income tax purposes. He contends
that the Tax Court improperly excluded his amended 1997
and 2000 tax returns from evidence admitted, erred in holding
that he had not substantiated several depreciation and charita-
ble deductions, and erred in calculating his income for 1996,
1997, and 1999. Finally, he argues that the Tax Court erred
in imposing accuracy-related penalties under § 6662(a) of the
Internal Revenue Code (I.R.C.).1 We reject each argument,
and affirm the decision of the Tax Court.

               I.   Facts and Procedural History

  James Sparkman has sold solar water heating systems to
homeowners since 1983. Until 1993, Sparkman operated his
business as a sole proprietorship, under the registered trade
name “Mercury Solar.”
  1
    Unless otherwise indicated, all references are to the Internal Revenue
Code of 1986, title 26 of the United States Code, as amended, and as in
effect during the years at issue.
16172                      SPARKMAN v. CIR
          A.   Hawaii Environmental Holdings (HEH)

   In 1993, Sparkman purported to create and transfer his
business to Hawaii Environmental Holdings (“HEH”), styled
in its formation document an “Unincorporated Business Orga-
nization.” The formation document, entitled “Contract and
Declaration of Unincorporated Business Organization,” pro-
vides that Sparkman (identified as the “Exchanger or
Exchangers”) will convey the Mercury Solar business to HEH
in exchange “for twenty-five dollars of silver, Certificates
comprising a total of one hundred units, and other full and
adequate consideration.” The formation documents also pro-
vide for a “Trustee” who will be responsible for the “exclu-
sive management and control of [HEH’s] property and
business affairs without any consent of Certificate holders.”
The original such “Trustee” was “Lee Allan Hansen,” who is
not otherwise identified in the record. The trustee immedi-
ately appointed Sparkman as “Agent” and “President” of
HEH, with authority “to open bank accounts, act as the offi-
cial authorized signature on said bank accounts and to operate
the company to the same extent as if he were the owner.” Two
months later, Hansen appointed Amanda Porter,2 at the time
Sparkman’s wife, to be trustee. In 1996, Porter was removed
as trustee, and Hansen appointed Sparkman himself and Cyn-
thia McNeff as trustees. McNeff was removed as trustee the
following year, and in 1999, Hansen was removed, leaving
Sparkman as the sole trustee of HEH.

                      B.   Mercury Solar PTO

  In 1994, HEH purported to transfer its interest in the Mer-
  2
    During the period in question, Amanda Porter used a number of other
names, including Amanda McKeough, Amanda J. McKeough-Porter,
Amanda Jane Porter, Mandy Wildman, Mandy Porter, Amanda Jane
Howat, and Amanda Sparkman. For simplicity’s sake, we will follow the
convention adopted in the Tax Court’s opinion of referring to her as “Por-
ter.”
                       SPARKMAN v. CIR                    16173
cury Solar business to Mercury Solar PTO, styled in its for-
mation documents a “Pure Trust Organization,” in exchange
for units in Mercury Solar. Except for designating Mercury
Solar a “Pure Trust Organization” and entrusting “exclusive
management and control” of the entity with a “Fiduciary
Owner” rather than a “Trustee,” the formation documents are
in almost all respects identical to those of HEH. “J. Clark
Atkinson,” also not otherwise identified in the record, was ini-
tially named as “Fiduciary Owner,” but in 1998 Porter was
appointed “Trustee,” and Atkinson resigned as Fiduciary
Owner.

   The precise ownership of Mercury Solar PTO is unclear
and disputed. The formation documents call for 100 beneficial
units, which were initially given to HEH in return for the
Mercury Solar business. These appear to have been immedi-
ately transferred to Sparkman. The record, stipulated to by
both parties, contains a “Certificate Record” that records the
assignment of one share each to William Bright, William
Montgomery, and Myron Thompson. In testimony before the
Tax Court, Porter described the first two entries of assignment
as “administrational error[s]” but testified that the assignment
to Thompson, an employee of Mercury Solar, was valid.
According to Porter, 50 units are owned by HEH, 49 by
Sparkman, and one by Thompson. When Thompson himself
was asked during testimony whether he was “aware that [he]
had a share,” he responded, “I am now,” but said that he did
not know “what happened to the share.”

         C.   Operation of Mercury Solar and HEH

   During the years at issue, HEH purported to sell to custom-
ers solar energy produced by solar water heating components
on the customer’s property. It would purchase this equipment
from Mercury Solar PTO, and hire Mercury Solar to install it.
In addition to the solar service energy contract with HEH,
each customer also received a “beneficiary certificate” enti-
tling him to a beneficial ownership interest in HEH. The HEH
16174                   SPARKMAN v. CIR
trustee would thereby have the discretion to pass through
solar energy tax credits to the customer, and such credits
would be reflected on Schedules K-1 distributed to its
“beneficiary”-customers. See generally Hvidding v. Comm’r,
T.C. Memo 2003-151 (describing more fully the transaction
in the case of a customer claiming a tax credit for the energy
purchased); Richter v. Comm’r, T.C. Memo. 2002-90 (same).
As Thompson testified:

    Mercury Solar is really just a contractor, it’s a solar
    contractor. It basically was contacted to put solar
    panels and hot water heaters in homes and that kind
    of thing. So that’s what our function was. HEH had
    another function of contracting Mercury Solar to do
    that for the purposes of selling energy and things like
    that.

HEH had no employees and shared a common office space
with Mercury Solar. Mercury Solar did not have a solar con-
tractor’s license in its own name, but rather used Sparkman’s.

                   D.    HECO Payments

  According to the parties’ stipulation, in 1999 the Hawaii
Electric Company (HECO) issued a Form 1099 NEC (Non-
Employee Compensation) reporting $195,275 in income
earned by Mercury Solar. Regarding these payments, Spark-
man later testified:

    I do know that Mercury Solar in its transaction with
    Hawaiian Electric Company wanted to be paid
    faster.
    . . . [W]henever someone installs a solar system via
    the Hawaiian Electric company rebate program
    either the contractor or the homeowner is entitled to
    an $800 cash subsidy. However, through its bureau-
    cratic process Hawaiian Electric sometimes doesn’t
    pay anywhere between 120 to 60—six months.
                          SPARKMAN v. CIR                       16175
         Mercury . . . sought out a factoring company that
      would take that receivable and pay it in cash . . . .
      And how it worked was Mercury submitted invoices
      that it was owed by Hawaiian Electric Company to
      ABA Funding and ABA Funding took a percentage
      of the $800 rebate . . . and then HECO sent ABA
      funding a check made payable to Mercury Solar
      which ABA Funding cashed . . . .

         And apparently mid-1999 ABA Funding or Mer-
      cury Solar or HEH decided they wanted the funds
      directed into the Hawaii Environmental Holdings
      account instead of the Mercury Solar account.

                     E.   Procedural History

   In 2003, the IRS issued Sparkman a notice of deficiency
with respect to the years 1996 to 2000, inclusive. It identified
Mercury Solar PTO as “a sham with no economic substance”
and accordingly attributed Mercury Solar’s income to Spark-
man directly. Because the income was attributable as self-
employment income to him personally, Sparkman was
assessed self-employment tax. The Service adjusted his
income to include the $195,275 HECO payment, asserting it
to be attributable entirely to Mercury Solar, and hence to Spark-
man.3 It disallowed losses flowing through from HEH to
Sparkman as unsubstantiated. Finally, it assessed both late fil-
ing (I.R.C. § 6651(a)(1)) and negligent underpayment (I.R.C.
§ 6662) penalties.

   The Tax Court conducted a trial, summarizing the issues
for decision as follows:

      (1) Whether Mercury Solar PTO should be disre-
  3
   The Commissioner later conceded that $81,921 of that sum had already
been reported on Mercury Solar PTO’s 1999 income tax return, leaving
only $113,354 at issue.
16176                  SPARKMAN v. CIR
    garded as an entity separate from Sparkman for Fed-
    eral tax purposes and its net income attributed to
    Sparkman for the years at issue; (2) whether in 1999
    Mercury Solar PTO (and hence Sparkman) had unre-
    ported income resulting from certain rebate pay-
    ments from Hawaii Electric Company (HECO); (3)
    whether for the years at issue Sparkman is liable for
    self-employment tax on his earnings from Mercury
    Solar PTO; (4) whether for the years at issue Spark-
    man is entitled to claimed losses from a purported
    business trust, Hawaii Environmental Holdings
    (HEH); (5) whether Sparkman is entitled to addi-
    tional itemized deductions, allegedly not claimed on
    his Federal income tax returns, for interest or chari-
    table contributions; and (6) whether petitioners are
    liable for additions to tax and penalties.

It admitted into evidence a stipulation by the parties and
attached exhibits (including Sparkman’s amended returns for
1996 and 1999), and heard testimony from Porter, Sparkman,
Thompson, and Joe Miskowiec, identified as a salesman for
HEH. When Sparkman tried to enter into evidence his 1997
and 2000 amended returns, the Tax Court excluded them as
irrelevant, but encouraged him to attempt to substantiate their
contents through relevant evidence. After trial, the Tax Court
decided in favor of the Commissioner on all the issues identi-
fied above and entered judgment upholding the Service’s
amended calculation of the deficiency and denying Spark-
man’s claim for additional deductions. Sparkman appealed to
this court.

    II.   Economic Substance of Mercury Solar PTO

  [1] “It has long been the law that a transaction with no eco-
nomic effects, in which the underlying documents are a
device to conceal its true purpose, does not control the inci-
dence of taxes.” Sacks v. Comm’r, 69 F.3d 982, 986 (9th Cir.
1995); see Gregory v. Helvering, 293 U.S. 465, 469 (1935).
                         SPARKMAN v. CIR                    16177
Sparkman contends that Mercury Solar PTO was not a sham
organization, but a “legitimate business enterprise.” If Mer-
cury Solar PTO has an independent existence, that would
mean that the income Sparkman received from it would not
constitute self-employment income, and, accordingly, that
Sparkman would not owe self-employment taxes on that
income.4

   In reviewing the Tax Court’s determination that a transac-
tion lacks economic substance, we review the factual determi-
nations for clear error, and we review de novo the correctness
of the legal standards applied by the Tax Court and the appli-
cation of the legal standards to the facts found. Sacks, 69 F.3d
at 986. Under the clear error standard, we will reverse the Tax
Court’s findings only when we are “left with the definite and
firm conviction that a mistake has been committed.” Wolf v.
Comm’r, 4 F.3d 709, 712 (9th Cir. 1993) (quoting United
States v. United States Gypsum Co., 333 U.S. 364, 395
(1948)).

   In evaluating whether Mercury Solar PTO had economic
substance, the Tax Court employed a four-factor test derived
from Markosian v. Comm’r, 73 T.C. 1235, 1243-44 (1980),
asking:

      (1) whether the taxpayer’s relationship to the trans-
      ferred property differed materially before and after
      the trust’s creation; (2) whether the trust had an inde-
      pendent trustee; (3) whether an economic interest
      passed to other trust beneficiaries; and (4) whether
      the taxpayer respected the restrictions placed on the
      trust’s operation as set forth in the trust documents.

Sparkman does not contest these criteria as probative of eco-
nomic substance, and the precedent from which they derive
  4
  Sparkman has not separately challenged his liability for self-
employment taxes.
16178                       SPARKMAN v. CIR
has been cited with approval in this circuit. See Zmuda v.
Comm’r, 731 F.2d 1417, 1421 (9th Cir. 1984); Hansen v.
Comm’r, 696 F.2d 1232, 1234 (9th Cir. 1983). This court
reviews the Tax Court’s application of these factors for plain
error. Sacks, 69 F.3d at 986.

  [2] The Tax Court concluded that Sparkman’s formation of
Mercury Solar PTO and HEH did little to change his relation-
ship to the Mercury Solar business. As “Agent” and “Presi-
dent” of both HEH and Mercury Solar PTO, Sparkman was
empowered “to operate the company to the same extent as if
he were the owner.” As Porter testified, he continued to have
day-to-day control of the Mercury Solar business, except dur-
ing the period when Thompson was operation manager. The
business continued under the same name, and even continued
doing business under Sparkman’s contracting license.

   [3] The Tax Court next determined that Mercury Solar PTO
had no independent trustee. From Sparkman’s failure to call
Atkinson, the first named “Fiduciary Owner” of Mercury
Solar PTO, the Tax Court properly inferred that Atkinson’s
testimony would not favor Sparkman.5 Similarly, the Tax
Court’s finding that Porter was not an independent trustee was
not due to confusion regarding the proper role of trustees and
agents in a corporate trust, as Sparkman contends. Rather, the
Tax Court found that “she had no meaningful role” whatso-
ever. That Porter testified otherwise does not, in itself, estab-
lish that the Tax Court committed clear error. The Tax Court,
describing Porter’s testimony as “vague, contrived, and non-
credible,” plainly did not believe her, and “the Tax Court, like
any other court, ‘may disregard uncontradicted testimony by
  5
    Where the burden of production rests on a party, a court may, at its dis-
cretion, presume or infer from that party’s failure to call a witness that the
testimony the witness would have offered would not favor that party. See,
e.g., Underwriters Labs. Inc. v. NLRB, 147 F.3d 1048, 1054 (9th Cir.
1998); Simon v. Comm’r, 830 F.2d 499, 506 (3d Cir. 1987); Wichita Ter-
minal Elevator Co. v. Comm’r, 6 T.C. 1158, 1165 (1946), aff’d, 164 F.2d
513 (10th Cir. 1947).
                          SPARKMAN v. CIR                       16179
a taxpayer where it finds that testimony lacking in credibili-
ty.’ ” Conti v. Comm’r, 39 F.3d 658, 664 (6th Cir. 1994)
(quoting Lerch v. Comm’r, 877 F.2d 624, 631 (7th Cir.
1994)); see also Demkowicz v. Comm’r, 551 F.2d 929, 931
(3d Cir. 1977) (holding the Tax Court “not bound to accept
taxpayer’s uncontradicted testimony if it found the testimony
to be improbable, unreasonable, or questionable”); Wood v.
Comm’r, 338 F.2d 602, 605 (9th Cir. 1964).

   [4] Next, the Tax Court determined that, in reality, Spark-
man was the sole owner of Mercury Solar PTO. The Tax
Court was free to disregard the self-serving testimony of
Sparkman and Porter, especially in the light of contradictory
documentary evidence, consider Thompson’s apparent admis-
sion that he was unaware that he had a share until the trial
itself, and Sparkman’s own testimony, in a prior unrelated
proceeding, that he “believed” that he was the sole beneficiary
of the trust.

   [5] Finally, the Tax Court found that Sparkman failed to
respect the trust form. The record reflects several inconsisten-
cies in form: Porter was named “Trustee” rather than “Fidu-
ciary Owner” (the position’s title in Mercury Solar PTO’s
formation documents); the “Certificate Record” showing
ownership of the trust is, by the parties’ own admission,
entirely false; and there are two proffered dates when Thomp-
son was allegedly granted his one unit.

   [6] In light of the cumulative weight of this evidence, we
conclude that the Tax Court did not commit clear error in
finding that Mercury Solar PTO lacks economic substance.
We therefore affirm the Tax Court’s decision with respect to
self-employment taxes.6
  6
   Sparkman also argues that the Tax Court erred by failing to classify
Mercury Solar as a “business trust” within the meaning of Treas. Reg.
§ 301.7701-4(b), and hence as a partnership. Sparkman’s argument fails
because the question of whether an entity has economic substance neces-
16180                      SPARKMAN v. CIR
  III.   The Tax Court’s Exclusion of Sparkman’s 1996
                 and 1997 Amended Returns

   During his direct examination, Sparkman attempted to enter
his 1997 and 2000 amended returns into evidence, which he
had filed with the IRS shortly before trial. The Tax Court
rejected them as not probative. The Tax Court’s evidentiary
rulings are reviewed for abuse of discretion and will not be
reversed absent a showing of prejudice. Sacks v. Comm’r, 82
F.3d 918, 921 (9th Cir. 1996).

   [7] A tax return, even though signed under penalty of per-
jury, is not per se evidence of the income, deductions, credits,
and other items claimed therein. Mays v. United States, 763
F.2d 1295, 1297 (11th Cir. 1985); Lunsford v. Comm’r, 212
F.2d 878, 883 (5th Cir. 1954); Wilkinson v. Comm’r, 71 T.C.
633, 639 (1979); Halle v. Comm’r, 7 T.C. 245, 247-50
(1946), aff’d, 175 F.2d 500 (2d Cir. 1949). As the Tax Court
noted, Sparkman retained the opportunity to substantiate the
contents of his returns with testimony and documentary evi-
dence. Because Sparkman’s amended returns did not “hav[e]
any tendency to make the existence” of those underlying
items “more probable or less probable than it would be with-
out” them, Fed. R. Evid. 401, the Tax Court was correct in
declining to admit the returns into evidence.

   [8] Even if the returns were somehow relevant, however,
the Tax Court did not abuse its discretion in refusing to admit
them. Federal Rule of Evidence 403 allows even relevant evi-

sarily underlies how to classify that entity. Cf. Lerman v. Comm’r, 939
F.2d 44, 52 (3d Cir. 1991) (“Economic substance is a prerequisite to the
application of any Code provisions allowing deductions.”). By definition,
to be a “business entity” (and hence a business trust), an entity must be
an “entity recognized for federal tax purposes.” Treas. Reg. § 301.7701-
2(a). An entity without economic substance, whether a sham partnership
or a sham trust, is a sham either way and hence is not recognized for fed-
eral tax law purposes.
                      SPARKMAN v. CIR                   16181
dence to be excluded if its admission would result in “need-
less presentation of cumulative evidence.” In this case, an
amended tax return filed only a few days before trial merely
demonstrates that Sparkman now contends he had a different
level of income than was reflected on his original return—a
contention that Sparkman presented in oral testimony imme-
diately after the returns were rejected. Sparkman has not dem-
onstrated what the returns would have added to his own
testimony that same day. Because the returns were at best
cumulative, and at worst irrelevant, we hold that the Tax
Court did not abuse its discretion in declining to accept them
into evidence.

          IV.   Attribution of HECO Payments

  Among the parties’ pre-trial stipulations was the following:

    8. For the year 1999, Hawaiian Electric Company
    (HECO) issued a Form 1099, Non-Employee Com-
    pensation, to Mercury Solar in the amount of
    $195,275. The statutory notices issued to Sparkman
    and Mercury Solar both contain an adjustment in the
    amount of $195,275 labeled “1099 NEC” that is
    based on the Form 1099 issued by HECO.

At trial, Sparkman contradicted this stipulation and claimed
that he never received the form. He conceded, however, that
HECO did make those payments, and contended only that
$113,354 of those payments should be attributed to HEH, not
to Mercury Solar PTO. He renews his objection on appeal.

   Sparkman argues that the Tax Court incorrectly treated the
stipulation as an admission that the HECO payments were
attributable to Sparkman. But the Tax Court based its attribu-
tion of the payments not on an admission in the stipulation,
but rather on basic assignment-of-income principles and
Sparkman’s own admission in testimony. Whether
assignment-of-income principles apply is a mixed question of
16182                      SPARKMAN v. CIR
fact and law. Mixed questions are reviewed de novo unless
the question is primarily factual. Hood v. Encinitas Union
Sch. Dist., 486 F.3d 1099, 1104 (9th Cir. 2007).

   [9] Under assignment-of-income principles, “income must
be taxed to him who earns it.” Comm’r v. Culbertson, 337
U.S. 733, 739-40 (1940); see also Lucas v. Earl, 281 U.S. 111
(1930). Sparkman was clear in his testimony that it was Mer-
cury Solar, as the installing contractor, which earned the
money, even if HEH received some of it. He stated that “I do
know that Mercury Solar in its transaction with [HECO]
wanted to be paid faster” and that “Mercury submitted
invoices that it was owed by [HECO] to” the factor for pay-
ment (emphases added). Instead, “apparently mid-1999 . . .
the funds [were] directed into the Hawaii Environmental
Holdings account instead of the Mercury Solar account.”
Sparkman has pointed to no evidence in the record that con-
tradicts this interpretation of his testimony—that the money
was earned by Mercury Solar, and the proceeds merely
directed to HEH.

   [10] No matter where the funds are “directed,” they are
taxed where they are earned. Kochansky v. Comm’r, 92 F.3d
957, 958 (9th Cir. 1996). Any attempt to reattribute income
through redirection of payments by a factor can only be
described as an “arrangement by which the fruits are attri-
buted to a different tree from that on which they grew,” and
disregarded for income tax purposes. Lucas, 281 U.S. at 114.7
For this reason, we affirm the Tax Court’s holding that the
entire HECO payment should be attributed to Mercury Solar
PTO, and hence to Sparkman.
  7
    Sparkman now contends that his assignment of the income from the
HECO rebates constituted a “transfer of property rights.” Such an arrange-
ment also makes assignment-of-income principles no less relevant: one
can no more escape taxation by assigning the gain from the sale of prop-
erty than one can by assigning income from services.
                        SPARKMAN v. CIR                  16183
 V.    Tax Court’s Calculation of 1996 and 1997 Income

   Before trial, the Commissioner stipulated that Sparkman’s
income from Mercury Solar PTO for 1996 and 1997 “did not
exceed” $74,985 and $70,062, respectively, figures drawn
from Sparkman’s original income tax returns. Sparkman now
contends that these returns were in error, that a portion of
each is properly characterized as a “return of principal,” and
that the real amounts of income, reflected on Mercury Solar
PTO’s amended form K-1 for those years, are $45,788 and
$54,727, respectively.

   [11] The Commissioner contends that Sparkman failed to
raise this issue properly in the Tax Court below. Absent
exceptional circumstances, this court will not consider an
argument that was not first raised in the Tax Court. Comm’r
v. Ewing, 439 F.3d 1009, 1014 (9th Cir. 2006); Monetary II
Ltd. P’ship v. Comm’r, 47 F.3d 342, 347 (9th Cir. 1995).
“Generally, in order for an argument to be considered on
appeal, the argument must have been raised sufficiently for
the trial court to rule on it.” A-1 Ambulance Serv., Inc. v.
County of Monterey, 90 F.3d 333, 338 (9th Cir. 1996).

  The only reference to this alleged bookkeeping error in the
Tax Court came in Sparkman’s testimony, when he testified:

      A:   Well, one of the major problems Mercury Solar
           has had is finding a competent accountant,
           bookkeeper and CPA. And these initial years
           they reported repayment of my principal as
           income that I put into Mercury Solar. And in
           preparing for the audit . . . this mistake was
           found. And it was corrected to reflect my actual
           income as separate from my return of principal.
           So they reduced my distribution from Mercury
           Solar from I don’t know what it was originally
           but it was 70, something 70,000 to 45,000.
16184                      SPARKMAN v. CIR
      ...

      Q:    Okay. Well, have you likewise had to amend
            your tax returns?

      A:    Yes, I had to. I had to amend my 1996, ’97 and
            ’98 returns to reflect the change in the income.

No reference to the error, or any required adjustment from the
sum the Commissioner sought, appeared in Sparkman’s open-
ing or answering briefs to the Tax Court. The only other men-
tion of this adjustment in income appears in Sparkman’s
Computation for Entry of Decision filed pursuant to Tax Ct.
R. 155:8

      Sparkman’s 1996 (Ex 64-P) and 1997 (Ex 67-P) tax
      returns were amended to comply with the Mercury
      amended 1996 (Ex 12-J) and 1997 (Ex 13-J) tax
      returns that was [sic] filed in September 2003 and
      based upon the amended K-1 issued to Sparkman for
      those years.

In that filing, Sparkman made no reference to his testimony
regarding the reason for the amendment.

   [12] On these facts, we hold that Sparkman did not prop-
erly raise this issue before the Tax Court. Because Sparkman
failed to raise this matter in his briefs to the Tax Court, and
made only one reference to it in testimony, it is difficult to see
how that court could have ruled on it.9 This circuit has held
  8
     Tax Court Rule 155(b) allows litigants to “file with the Court a compu-
tation of the deficiency, liability, or overpayment believed by such party
to be in accordance with the Court’s findings and conclusions.” The Tax
Court has held that this rule “does not allow arguments as to any other
issues beyond the issues litigated in respect of the ultimate bottom-line
deficiency, liability, or overpayment for the years at issue.” Bankamerica
Corp. v. Comm’r, 109 T.C. 1, 10 (1997) (second emphasis added).
   9
     Even if Sparkman’s reference to his 1996 and 1997 returns contained
in his Rule 155 Recalculation filing had been more specific, it would have
                          SPARKMAN v. CIR                         16185
that it may, at its discretion, hear appeals on issues not raised
before the Tax Court if the issue “is purely one of law and
either does not depend on the factual record developed below,
or the pertinent record has been fully developed.” Bolker v.
Comm’r, 760 F.2d 1039, 1042 (9th Cir. 1985). In this case,
however, the record is far from developed—we can only
guess what led to the recalculation by Sparkman and his
accountants, or the precise character of the “return of princi-
pal” (proceeds from sale of assets? Repayment of loan princi-
pal?) that his accountants are supposed to have discovered.10
Because Sparkman did not properly address the issue before
the Tax Court, we deem the issue waived.

                 VI.   Unsubstantiated Deductions

   “[A]n income tax deduction is a matter of legislative grace
and . . . the burden of clearly showing the right to the claimed
deduction is on the taxpayer.” New Colonial Ice Co. v.
Helvering, 292 US 435, 440 (1934); Boyd Gaming Corp. v.
Comm’r, 177 F.3d 1096, 1098 (9th Cir. 1999). Taxpayers are
required to keep sufficient records to substantiate deductions.
I.R.C. § 6001; Treas. Reg. § 1.6001-1(a). This Court reviews
for clear error the Tax Court’s factual determination that a
taxpayer has failed to produce sufficient evidence to substan-
tiate a deduction. Maciel v. Comm’r, 489 F.3d 1018, 1028
(9th Cir. 2007).

            A.    Depreciation Deductions from HEH

   [13] The Commissioner disallowed in full the depreciation
losses, allegedly attributable to depreciating solar water heat-

been too late to litigate the question. “Ordinarily, arguments not timely
presented are deemed waived.” Boardman v. Estelle, 957 F.2d 1523, 1535
(9th Cir. 1992).
   10
      Needless to say, the Commissioner had no opportunity to respond to
any such arguments.
16186                      SPARKMAN v. CIR
ing equipment, that HEH had allocated to Sparkman on his
Schedules K-1. The Tax Court agreed, stating that the “only
evidence introduced at trial in support of the claimed HEH
losses consists of self-serving figures listed in the HEH
returns (prepared, signed, and filed by Sparkman less than 3
weeks before trial) . . . , and Sparkman’s returns for the years
at issue,” which the Tax Court declined to accept because
they were not credible. The only other document in the record
cited by Sparkman is a document, produced by HEH and
given to HEH’s “beneficiary”-customers, purporting to allo-
cate to them a portion of the cost of the equipment as a tax
credit, similar to schemes rejected by the Tax Court in Hvid-
ding, T.C. Memo 2003-151, and Richter, T.C. Memo. 2002-
90. The Tax Court did not commit clear error in declining to
accept such a document at face value.

   [14] Sparkman now contends that, instead of disallowing
the losses in full, the Tax Court ought to have approximated
the correct amount of the depreciation losses. Sparkman cites
Cohan v. Comm’r, 39 F.2d 540 (2d Cir. 1930), to support his
contention.11 This circuit’s precedents adopting the Cohan
rule, however, are clear that the rule does not obviate the need
for some proof of entitlement to a deduction in the first place.
The finding of the Tax Court that Sparkman failed to establish
such an entitlement eliminates the requirement that the Tax
Court estimate what those losses were. See Edelson v.
Comm’r, 829 F.2d 828, 831 (9th Cir. 1987) (summarizing
Cohan as standing for the proposition that “a court should
allow the taxpayer some deductions if the taxpayer proves he
is entitled to the deduction but cannot establish the full
amount claimed” (emphasis added)); see also Norgaard v.
Comm’r, 939 F.2d 874, 879 (9th Cir. 1991) (noting that,
  11
    In Cohan, the taxpayer, a theater producer, was unable to substantiate
his entertainment deductions, and the Commissioner sought to disallow
them entirely. The circuit court reversed, ordering that “the Board should
make as close an approximation as it can” of the losses to which Cohan
was entitled. 39 F.2d at 543.
                       SPARKMAN v. CIR                   16187
under the Cohan rule, the trial court “may not be compelled
to guess or estimate . . . even though such an estimate, if
made, might have been affirmed”).

   Reviewing the evidence does not give the panel “the defi-
nite and firm conviction that a mistake has been committed,”
Wolf, 4 F.3d at 712, required to reverse the Tax Court under
the clear error standard.

            B.   Charitable Donation Deductions

   Sparkman claims that he is entitled to additional deduc-
tions, arising out of charitable donations made in 1997 and
2000, which he did not claim on his original tax returns for
that year. He testified that he intentionally did not claim all
the charitable deductions he was entitled to because the depre-
ciation deductions he was claiming through HEH had reduced
his adjusted gross income such that he could not take the full
amount of charitable deductions. See I.R.C. § 170(b)(1) (lim-
iting the charitable contribution deduction to 50% of the tax-
payer’s adjusted gross income). If his depreciation deductions
are disallowed, and his adjusted gross income correspond-
ingly increased, he argues in the alternative that he should be
allowed the charitable deductions.

   The record contains five receipts from charitable organiza-
tions. Four are from United States IAS Members’ Trust,
acknowledging donations made in the years 1997 to 2000.
The third is from the Church of Scientology, acknowledging
a donation made in 2000. All are addressed to Sparkman. As
Sparkman himself admitted in testimony, however, in the past
he had donated to these organizations personally, through
Mercury Solar PTO, and through HEH—but the receipts were
always sent to Sparkman. Sparkman contends that the 1997
and 2000 donations should be attributed to him personally,
but that the 1998 and 1999 donations were properly attribut-
able to HEH.
16188                  SPARKMAN v. CIR
   [15] Sparkman has produced no evidence that the funds
referred to in any of these receipts were drawn on his personal
funds, as opposed to HEH’s, apart from his own testimonial
insistence that “the ones I have claimed are definitely attribut-
able to me.” Neither the Commissioner nor the Tax Court was
required to accept Sparkman’s testimony as a substitute for
the documentary substantiation I.R.C. § 6001 requires.

   [16] For these reasons, we hold that the Tax Court did not
commit plain error in finding that Sparkman has failed to sub-
stantiate his depreciation and charitable deductions.

        VII.   § 6662 Negligent Underpayment Penalty

   [17] I.R.C. § 6662 imposes a 20% penalty on any portion
of an underpayment of tax that is attributable to, inter alia,
“[n]egligence or disregard of rules or regulations.” I.R.C.
§ 6662(b)(1). “Negligence” is defined as “any failure to make
a reasonable attempt to comply with the provisions” of the
Internal Revenue Code. I.R.C. § 6662(c). The Commission-
er’s determination of a penalty is presumptively correct, and
the taxpayer has the burden of proving that his underpayment
was not the result of negligence or disregard. Pahl v. Comm’r,
150 F.3d 1124, 1131 (9th Cir. 1998). The Tax Court’s deter-
mination on a negligence penalty is reviewed for clear error.
Wolf, 4 F.3d at 715 (9th Cir. 1993).

  [18] While it is a defense to show that there “was a reason-
able cause for such [underpayment] and that the taxpayer
acted in good faith,” I.R.C. § 6664(c)(1), Sparkman does not
seek refuge in the good faith exception in his appeal. Rather,
he contends simply that his “returns were not inaccurate in
any way,” and that there was no underpayment to penalize.
Having affirmed the Tax Court’s determination that there was
a substantial underpayment of taxes, we uphold as well the
Tax Court’s imposition of § 6662 penalties.

  AFFIRMED.