Court Opinion

ID: 9917265
Source: CourtListenerOpinion
Date Created: 2024-01-11 20:01:34.671585+00
Date Added: 2024-06-11T08:02:00.119881
License: Public Domain

United States Tax Court

                               T.C. Memo. 2024-5

                   CHRISTOPHER R. PANGELINA,
                           Petitioner

                                      v.

            COMMISSIONER OF INTERNAL REVENUE,
                        Respondent

                                  —————

Docket No. 11350-19.                                   Filed January 11, 2024.

                                  —————

Christopher R. Pangelina, pro se.

Michael Skeen, Daniel Z. Nettles, and John M. Duddles, for respondent.

       MEMORANDUM FINDINGS OF FACT AND OPINION

       GALE, Judge: Respondent determined the following deficiencies,
penalties, and additions to tax with respect to petitioner’s federal income
tax for taxable years 2010–17 (years at issue):

                                              Penalties/Additions to Tax
     Year         Deficiency
                                           § 6662(a)             § 6651(a)(1)
     2010           $42,915                 $8,583                 $10,728
     2011            91,923                 18,384                  22,980
     2012            13,938                  2,787                    3,389
     2013            14,748                  2,949                    3,687
     2014               678                   —                        169
     2015              5,674                 1,134                    1,418
     2016              7,096                 1,419                    1,774
     2017              2,100                  —                        472

                               Served 01/11/24
                                             2

[*2] Respondent also determined a section 6651(a)(2) 1 addition to tax
of $126 for 2017. Determinations with respect to 2017 were made by
means of a substitute for return (SFR) prepared by respondent pursuant
to section 6020(b).

       The deficiencies for the years at issue result from certain
adjustments made to petitioner’s gross receipts and/or the disallowance
of all or part of certain deductions for business expenses reported on
petitioner’s Schedules C, Profit or Loss From Business.

        After concessions 2 the issues for decision are whether petitioner
(1) is entitled to deduct certain business expenses reported on
Schedules C for all years at issue; (2) failed to report taxable interest
income in the amounts respondent determined for 2010, 2011, and 2012;
(3) failed to report gross receipts from his business as income for 2017;
(4) is entitled to head of household filing status for 2017; (5) is entitled
to the additional child tax credit for 2017; (6) is entitled to the earned
income tax credit for 2017; (7) is liable for additions to tax pursuant to
section 6651(a)(1) for all years at issue; (8) is liable for an addition to tax
pursuant to section 6651(a)(2) for 2017; and (9) is liable for accuracy-
related penalties pursuant to section 6662(a) for 2010, 2011, 2012, 2013,
2015, and 2016.

                               FINDINGS OF FACT

       Some of the facts are stipulated and are so found. The Stipulation
of Facts and the attached Exhibits are incorporated herein by this
reference. Petitioner resided in California when he timely filed his
Petition.

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

Code, Title 26 U.S.C. (Code), 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.
        2 Respondent determined increases in petitioner’s reported gross receipts of

$23,509 for 2010, $309,209 for 2011, and $2,137 for 2012. These adjustments were
based on third-party information returns for 2010 and 2012.            Respondent’s
determination for 2011 was based on a bank deposits analysis conducted for that year.
Petitioner conceded each of these increases.
                                   3

[*3] Overview

       During the years at issue petitioner operated a tiling business as
a sole proprietor under the name B.C. Tile (BC). Petitioner reported
income and expenses attributable to BC on Schedules C.

       At a time not disclosed in the record, a revenue agent with
respondent’s Small Business and Self-Employed (SB/SE) Division
commenced an examination of petitioner’s federal income tax returns for
2010–16. The SB/SE agent concluded that petitioner’s reported gross
receipts for BC for 2010, 2011, and 2012 should be increased; certain
business expense deductions petitioner claimed for BC for 2010, 2012,
2013, 2014, 2015, and 2016 should be disallowed; and various penalties
and additions to tax for 2010–16 should be imposed. Since petitioner
had not filed a return for 2017 by March of 2019, the SB/SE agent
prepared an SFR on petitioner’s behalf pursuant to section 6020(b) on
March 19, 2019. The SFR attributed to petitioner gross receipts of
$13,401 and accorded him single filing status, a personal exemption, and
the standard deduction.

       On March 19, 2019, the SB/SE agent completed a Civil Penalty
Approval Form for the imposition of accuracy-related penalties for
2010–13, 2015, and 2016. The penalties were imposed on the bases of
underpayments attributable to substantial understatements of income
tax and negligence. The agent’s immediate supervisor signed the Civil
Penalty Approval Form on March 22, 2019. The SB/SE Division issued
petitioner a notice of deficiency covering the years at issue on May 1,
2019.

2010

       Petitioner filed his return for 2010, which had been prepared by
a paid preparer, on January 30, 2017; it was due April 18, 2011.
Petitioner reported $286,174 in gross income from BC. Respondent
determined that petitioner had failed to report $34 in taxable interest
and disallowed the $100,246 deduction petitioner claimed under “other
expenses” for contractors. He let stand $154,380 in other claimed
Schedule C deductions.

       As substantiation for the disallowed deduction, petitioner
proffered the 2010 monthly statements for the bank account he
maintained for BC.
                                  4

[*4] 2011

       Petitioner filed his return for 2011, which had been prepared by
a paid preparer, on October 16, 2017; it was due October 15, 2012,
pursuant to a granted extension of time to file. Petitioner reported
$36,806 in gross income from BC. Respondent determined that
petitioner had failed to report $31 in taxable interest but did not
disallow any Schedule C deductions.

2012

       Petitioner filed his return for 2012, which had been prepared by
a paid preparer, on January 30, 2017; it was due October 15, 2013,
pursuant to a granted extension of time to file. Petitioner reported
$130,941 in gross income from BC. Respondent determined that
petitioner had failed to report $18 in taxable interest and disallowed
Schedule C deductions petitioner claimed for $18,259 in expenses
classified as rent or lease of other business property and $34,791 for
expenses classified as wages. He let stand $75,441 in other claimed
Schedule C deductions.

       As substantiation for the disallowed deductions, petitioner
proffered a profit and loss statement for 2012 that he prepared in
October 2020, but he was unable to produce the underlying records used
to produce it. He also proffered the 2012 monthly statements for the
bank account he maintained for BC.

2013

       Petitioner filed his return for 2013, which had been prepared by
a paid preparer, on January 30, 2017; it was due April 15, 2014.
Petitioner reported $130,941 in gross income from BC. Respondent
disallowed Schedule C deductions petitioner claimed for expenses
classified as other interest of $5,008, repairs and maintenance of
$18,259, and wages of $34,391. He let stand $73,878 in other claimed
Schedule C deductions.

       As substantiation for the disallowed deductions, petitioner
proffered the 2013 monthly statements for the bank account he
maintained for BC, but no profit and loss statement.
                                   5

[*5] 2014

       Petitioner filed his return for 2014, which had been prepared by
a paid preparer, on October 15, 2017; it was due April 15, 2015.
Petitioner reported $18,082 in gross income from BC. Respondent
disallowed the entire $61,468 deduction petitioner claimed on
Schedule C for car and truck expenses and $2,948 of the $6,175
deduction claimed for other expenses—payroll. He let stand the
remaining $13,284 in deductions claimed on Schedule C.

       As substantiation for the disallowed deductions, petitioner
proffered a profit and loss statement for 2014 that he prepared in
October 2020, but he was unable to provide the underlying records used
to produce it. He also proffered the 2014 monthly statements for the
bank account he maintained for BC.

2015

      Petitioner filed his return for 2015, which had been prepared by
a paid preparer, on March 28, 2018; it was due October 17, 2016,
pursuant to a granted extension of time to file. Petitioner reported
$48,269 in gross income from BC.           Respondent disallowed the
Schedule C deduction petitioner claimed for $49,786 in car and truck
expenses and $12,638 of the $16,456 deduction claimed for contractor
expenses. He let stand the remaining $20,910 in claimed Schedule C
deductions.

       As substantiation for the disallowed deductions, petitioner
proffered a profit and loss statement for 2015 that he prepared in
October 2020, but he was unable to provide the underlying records used
to produce it. He also proffered the 2015 monthly statements for the
bank account he maintained for BC.

2016

      Petitioner filed his return for 2016, which had been prepared by
a paid preparer, on April 9, 2018; it was due April 18, 2017. Petitioner
reported $45,477 in gross income from BC. Respondent disallowed the
Schedule C deductions claimed for $36,683 in car and truck expenses,
$17,060 in expenses for rent or lease of other business property, and
$7,377 for contractor expenses. He let stand the remaining $7,451 in
claimed Schedule C deductions.
                                          6

[*6] As substantiation for the disallowed deductions, petitioner
proffered a profit and loss statement for 2016 that he prepared in
October 2020, but he was unable to provide the underlying records used
to produce it. He also proffered the 2016 monthly statements for the
bank account he maintained for BC.

2017

       As petitioner failed to file a return for 2017, the SB/SE agent
prepared an SFR on petitioner’s behalf pursuant to section 6020(b) and
notified him of the same on March 19, 2019. Petitioner has not paid the
amounts shown as due on the SFR. The SFR adjustments were
incorporated in the notice of deficiency and included determinations
that petitioner had unreported gross receipts of $13,401 and was
entitled to single filing status and one personal exemption.

       On February 1, 2021, two days before the first scheduled trial
date in this case, petitioner provided respondent’s counsel with an
unsigned return for 2017. The return, which had been prepared by a
paid preparer, reports his filing status as head of household and claims
a personal exemption for himself and dependency exemptions for three
children. The return also claims the additional child tax credit and the
earned income tax credit. Finally, Schedule C3 of the unsigned return
reports that BC had gross receipts of $79,781 (offset by a $13,605 cost of
goods sold) and claims the following deductions for expenses:

         3 The Schedule C attached to the unsigned 2017 return is incomplete in the

stipulated Exhibit in the record. However, that Exhibit also contains a complete copy
of the federal Schedule C that is attached to the unsigned California income tax return
that is included as part of the Exhibit.
                                          7

[*7]                         Expense                 Amount
            Advertising                               $1,129
            Commissions and fees                       5,033
            Depreciation and § 179 deduction             321
            Insurance                                  3,005
            Legal and professional services              400
            Office expense                               216
            Rent or lease other business property     24,143
            Repairs and maintenance                    2,053
            Meals and entertainment                      816
            Utilities                                  1,787
            Wages                                      4,316
            Other expenses                             8,315
             Total                                   $51,534

       As substantiation for the disallowed deductions, petitioner
proffered a profit and loss statement for 2017 that he prepared in
October 2020, but he was unable to provide the underlying records used
to produce it. He also proffered the February and March 2017 monthly
statements for the bank account he maintained for BC.

                                    OPINION

I.     Burden of proof

       Generally, the Commissioner’s determinations in a notice of
deficiency are presumed correct, and the taxpayer bears the burden of
proving that those determinations are erroneous. See Rule 142(a)(1);
Welch v. Helvering, 290 U.S. 111, 115 (1933). Under section 7491(a), in
certain circumstances the burden of proof may shift from the taxpayer
to the Commissioner. Petitioner has not claimed or shown that he has
satisfied the requirements of section 7491(a) so as to shift the burden of
proof to respondent as to any relevant factual issue.

II.    Schedule C deductions

       A.      Applicable law

      Deductions are a matter of legislative grace, and a taxpayer must
prove his or her entitlement to a deduction. See INDOPCO, Inc. v.
                                    8

[*8] Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.
Helvering, 292 U.S. 435, 440 (1934). A taxpayer claiming a deduction
on a federal income tax return must demonstrate that the deduction is
allowable pursuant to a statutory provision and must further
substantiate that the expense to which the deduction relates has been
paid or incurred. See § 6001; Hradesky v. Commissioner, 65 T.C. 87, 89–
90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976). A taxpayer
must substantiate deductions claimed by keeping and producing
adequate records that enable the Commissioner to determine the
taxpayer’s correct tax liability. § 6001; Hradesky, 65 T.C. at 89–90.

      Under section 162(a) a deduction is allowed for “ordinary and
necessary expenses paid or incurred . . . in carrying on any trade or
business.” An ordinary expense is one that commonly or frequently
occurs in the taxpayer’s line of business. Deputy v. du Pont, 308 U.S.
488, 495 (1940). A necessary expense is one that is appropriate and
helpful in carrying on the taxpayer’s business. Commissioner v.
Heininger, 320 U.S. 467, 471 (1943); Treas. Reg. § 1.162-1(a).

       Generally, if a taxpayer provides sufficient evidence that he or
she has incurred a trade or business expense contemplated by section
162(a) but is unable to adequately substantiate the amount, the Court
may estimate the amount and allow a deduction to that extent. Cohan
v. Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930). For the Court to
estimate the amount of an expense, there must be some basis upon
which an estimate may be made. Vanicek v. Commissioner, 85 T.C. 731,
742–43 (1985). The Court may not estimate expenses under Cohan in
situations where section 274 imposes heightened substantiation
requirements. See § 274(d); Sanford v. Commissioner, 50 T.C. 823, 827
(1968), aff’d per curiam, 412 F.2d 201 (2d Cir. 1969); Temp. Treas. Reg.
§ 1.274-5T(a).

       Section 274 imposes strict substantiation rules on certain
specified expenses. No deductions under section 162 shall be allowed
for “any traveling expense (including meals and lodging while away from
home),” or “listed property,” as defined in section 280F(d)(4), “unless the
taxpayer substantiates [them] by adequate records or by sufficient
evidence corroborating the taxpayer’s own statement.” § 274(d)(1), (3).
Listed property includes passenger automobiles and other property used
for transportation. § 280F(d)(4)(A)(i) and (ii). Thus, substantiation of
any expense categorized as car and truck or meals and entertainment is
governed by section 274.
                                    9

[*9] To meet these strict substantiation rules, a taxpayer must
substantiate by adequate records or by sufficient evidence corroborating
his own statement: (1) the amount of the expense, (2) the time and place
the expense was incurred, and (3) the business purpose of the expense.
§ 274(d). To substantiate by adequate records, the taxpayer must
provide (1) an account book, a log, or a similar record, and
(2) documentary evidence, which together are sufficient to establish
each element of an expenditure. Temp. Treas. Reg. § 1.274-5T(c)(2)(i).
Documentary evidence includes receipts, paid bills, or similar evidence.
Treas. Reg. § 1.274-5(c)(2)(iii). To substantiate by sufficient evidence
corroborating the taxpayer’s own statement, the taxpayer must
establish each element by his or her own statement and by documentary
evidence or other direct evidence. Temp. Treas. Reg. § 1.274-5T(c)(3)(i).

      B.     2010

       The bank records petitioner proffered to substantiate the
disallowed $100,246 Schedule C deduction for contractors do not do so.
Most of the entries are for debit card purchases or ACH debits for certain
identified commercial establishments. We are unable to see how such
transactions could constitute payments to contractors. There are also
entries for payments of checks, but these show only a check number and
an amount. Without any reference to a payee or a purpose, these check
payment entries do not substantiate payments to contractors.
Petitioner has failed to substantiate the deduction, and we sustain
respondent’s disallowance of it.

      C.     2011

      No Schedule C deductions were disallowed for this year.

      D.     2012

        The 2012 profit and loss statement and bank statements for that
period, which petitioner proffered to substantiate the disallowed
$18,259 deduction for rent or lease payments and the disallowed $34,791
deduction for wage payments, are insufficient to do so. Petitioner
prepared the 2012 profit and loss statement in October 2020, and he
concedes that he does not have any records (other than the bank
statements) to substantiate the entries. The 2012 profit and loss
statement contains numerous discrepancies as between the statement
itself and the corresponding entries on petitioner’s 2012 return. This
may suggest that petitioner’s return preparer found fault with some of
the profit and loss statement entries. Moreover, there are also
                                   10

[*10] discrepancies between the 2012 profit and loss statement figures
and the bank statements for that period. The determinations in the
notice of deficiency to disallow the claimed Schedule C deductions for
rent or lease payments and wage payments are presumptively correct,
and petitioner bears the burden of proof to show that the determinations
are incorrect. See, e.g., Baxter v. Commissioner, 816 F.2d 493, 495 (9th
Cir. 1987), aff’g in part, rev’g and remanding in part T.C. Memo. 1985-
378. The unreliable profit and loss statements petitioner proffered are
insufficient to demonstrate error in the determinations, and we
accordingly sustain them.

      E.     2013

       Petitioner did not proffer a profit and loss statement for 2013 but
only the monthly statements for the bank account he maintained for BC
for that year. We are unable to find any entries in those bank
statements that provide clear substantiation for the claimed deductions
for expenses classified as other interest of $5,008, repairs and
maintenance of $18,259, and wages of $34,391. We accordingly sustain
respondent’s determinations to disallow those deductions.

      F.     2014

       Petitioner proffered both a 2014 profit and loss statement and
BC’s monthly bank statements for that period to substantiate the
$61,468 deduction claimed for car and truck expenses and the $2,948
deduction claimed for payroll expenses.             But the proffered
substantiation is insufficient. Petitioner prepared the profit and loss
statement in October 2020 and concedes that he does not have any of
the supporting documentation (other than the bank statements) used to
prepare it. The discrepancy between the 2014 profit and loss statement
and the 2014 return is substantial for the car and truck expenses.
Whereas the combined figure for “Auto and Truck Expenses” and for
“Fuel” on the profit and loss statement is $3,674.03, the amount claimed
on the return for car and truck expenses is $61,468. As for the amounts
claimed for payroll expenses, there is no traceable connection between
the checks that were written from the bank account and amounts
recorded as payroll on the profit and loss statement. The foregoing is
insufficient to overcome the presumptive correctness of the notice of
deficiency’s determinations to disallow the claimed deductions for car
and truck expenses and payroll expenses. We accordingly sustain them.
                                  11

[*11] G.     2015

       Petitioner proffered both a 2015 profit and loss statement and
BC’s monthly bank statements for that period to substantiate the
$49,786 deduction claimed for car and truck expenses and the $12,638
deduction claimed for contractor expenses. Petitioner prepared the
profit and loss statement in October 2020 and concedes that he does not
have any of the supporting documentation (other than the bank
statements) used to prepare it. The discrepancy between the 2015 profit
and loss statement and the 2015 return is substantial for the car and
truck expenses. Whereas the combined figure for “Auto and Truck
Expenses” and for “Fuel” recorded in the profit and loss statement is
$5,376.39, the amount claimed on the return for car and truck expenses
is $49,786. As for the amounts claimed for contractors, there is no
traceable connection between checks that were written from the bank
account and amounts recorded as payroll on the profit and loss
statement. (There are no entries on the 2015 profit and loss statement
for contractors.)    The foregoing is insufficient to overcome the
presumptive correctness of the notice of deficiency’s determinations to
disallow the claimed deductions for car and truck expenses and
contractor expenses. We accordingly sustain them.

      H.     2016

      Petitioner proffered both a 2016 profit and loss statement and
BC’s monthly bank statements for that period to substantiate the
$36,683 deduction claimed for car and truck expenses, the $17,060
deduction claimed for rent or lease of other business property expenses,
and the $7,377 deduction claimed for contractor expenses. Petitioner
prepared the profit and loss statement in October 2020 and concedes
that he does not have any of the supporting documentation (other than
the bank statements) used to prepare it.

       The discrepancy between the 2016 profit and loss statement and
the 2016 return is substantial for the car and truck expenses. Whereas
the combined figure for “Auto and Truck Expenses” and for “Fuel”
recorded in the profit and loss statement is $5,949.08, the amount
claimed on the return for car and truck expenses is $36,683. Given this
discrepancy, the proffered records are insufficient to substantiate the
deduction.      We accordingly sustain respondent’s determination
disallowing it.
                                   12

[*12] With respect to the deduction claimed for expenses for rent or
lease of other business property, there is in fact consistency between the
profit and loss statement, the monthly bank statements, and the return.
The profit and loss statement and the monthly bank statements both
record nine payments totaling $17,060, which is the figure claimed on
the return. The profit and loss statement records that the nine
payments were made to Debbie Parson, whereas the monthly bank
statements merely indicate that nine checks (totaling $17,060) were
issued on dates corresponding to the dates in the profit and loss
statement but without any indication of the payee. Without any
testimony or other evidence establishing who Debbie Parson is or the
purpose of the payments, the foregoing records are insufficient to
substantiate any rental expense with a business purpose.               We
accordingly sustain respondent’s determination to disallow it.

       With respect to the deduction claimed for $7,377 in contractor
expenses, the 2016 profit and loss statement contains a section entitled
“Payroll Expenses,” the entries of which total $7,376.50. Putting aside
the issue of whether a payroll expense, typically associated with
employees, could be taken to indicate payments to contractors (an issue
that we need not decide), the greater shortcoming in the probative value
of the 2016 profit and loss statement—in addition to the fact that it was
prepared in October 2020—lies in the 2016 monthly bank statements
that purportedly support the profit and loss statement entries. The
majority of the payroll entries in the profit and loss statement tie back
to ATM withdrawals in the bank statements, while the remainder tie
back to checks, but the check entries in the bank statements do not
identify the payees. The profit and loss statement does identify an
individual payee for each entry, but even if we were to accept the
designated payees given in the profit and loss statement, there is no
testimony or other evidence to establish who the payees were (other than
petitioner himself, and his ATM withdrawals could have been for a
multitude of purposes other than salary) or the nature of the services for
which payment was made. On the basis of the foregoing, we conclude
that petitioner has failed to substantiate the deduction for contractor
expenses and accordingly sustain respondent’s disallowance of it.

III.   2017

       When petitioner had not filed a return for 2017 by sometime in
2019, the SB/SE agent prepared an SFR pursuant to section 6020(b) and
notified petitioner of the same on March 19, 2019. The SFR adjustments
were incorporated in the notice of deficiency and included
                                   13

[*13] determinations that petitioner had unreported gross receipts of
$13,401, and was entitled to single filing status and one personal
exemption.

       In the course of the proceedings in this case, petitioner submitted
to respondent’s counsel an unsigned Form 1040, U.S. Individual Income
Tax Return, for 2017, and it is a stipulated Exhibit. An unsigned return
submitted in a deficiency proceeding such as this has no legal effect.
Selgas v. Commissioner, 475 F.3d 697, 700–01 (5th Cir. 2007).
Nevertheless, in view of petitioner’s pro se status, we will treat the
positions taken on the return, where appropriate, as claims pleaded by
petitioner in the case, as the parties effectively tried them by consent.
See Rule 41(b)(1). The unsigned return reports gross receipts from BC
on Schedule C of $79,781 and claims various expenses totaling $51,534.
The return also reports petitioner’s filing status as head of household
and claims dependency exemptions for three children as well as a
personal exemption for petitioner. In addition, the return claims the
additional child tax credit and the earned income tax credit.

      A.     Unreported gross receipts

       Where a notice of deficiency has determined that the taxpayer
had unreported income, it is presumptively correct so long as the
Commissioner introduces some substantive evidence that the taxpayer
received unreported income. Hardy v. Commissioner, 181 F.3d 1002,
1004 (9th Cir. 1999), aff’g T.C. Memo. 1997-97; Rapp v. Commissioner,
774 F.2d 932, 935 (9th Cir. 1985). Here, the notice of deficiency and a
Wage and Income Transcript for petitioner’s 2017 taxable year both
reference the payment of income to petitioner by third parties. That is
sufficient to meet respondent’s burden of production with respect to the
unreported income. See Nelson v. Commissioner, T.C. Memo. 2018-95;
Banister v. Commissioner, T.C. Memo. 2008-201, aff’d, 418 F. App’x 637
(9th Cir. 2011). Moreover, petitioner has not disputed that he received
gross receipts for 2017; indeed, in his unsigned return he reported that
BC had gross receipts of $79,781. Accordingly, we sustain respondent’s
determination that petitioner had unreported gross receipts of $13,401.

      B.     Filing status, exemptions, and credits

       Petitioner proffered no evidence to support his claims on the
unsigned return that he is entitled to head of household filing status,
dependency exemptions for three children, the additional child tax
credit, or the earned income credit. We accordingly sustain respondent’s
                                    14

[*14] determination that petitioner is entitled to single filing status and
one personal exemption. We conclude that petitioner has not shown
entitlement to head of household filing status, dependency exemptions
for three children, or any credits.

      C.     Schedule C deductions

        The expenses listed on Schedule C of petitioner’s unsigned return
lack substantiation. Petitioner proffered a profit and loss statement for
2017, but he proffered bank statements only for the months of February
and March 2017. Consequently, for many of the expenses listed on the
profit and loss statement and carried over onto the return, there is no
proof that the payment of the expense was actually made. This absence
of proof of payment covers the claims for legal and professional services,
office expense, repairs and maintenance, and various items in the “other
expenses” category, including garbage, parking fees, and bridge toll. In
other cases, an expense listed on Schedule C has no corresponding entry
on the profit and loss statement to support it, or there is a significant
(and unexplained) discrepancy between the figure on Schedule C and
the figure on the profit and loss statement. In this category are the
expenses for commissions and fees, utilities, wages, and certain items
grouped under other expenses (telephone and gas). As for the remaining
expenses—namely, rent or lease of other business property, advertising,
insurance, internet, and miscellaneous—the two months of bank
statements are insufficient to establish that these expenses were
actually paid in 2017. Consequently, petitioner has failed to show
entitlement to any deduction for the expenses listed on Schedule C of
the unsigned return for 2017.

IV.   Unreported interest income

       Respondent also determined that petitioner had unreported
taxable interest income of $34, $31, and $18 for 2010, 2011, and 2012,
respectively. As noted, where a notice of deficiency has determined
unreported income, the Commissioner must introduce some substantive
evidence that the taxpayer received unreported income in order for the
determination to be presumed correct. The record includes Wage and
Income Transcripts for petitioner’s 2010, 2011, and 2012 taxable years,
and they record that an identified third-party payor filed information
returns reporting the payment of interest to petitioner for the foregoing
amounts and years. This satisfies respondent’s burden of production,
rendering the determinations presumptively correct. Moreover, at trial
petitioner testified that he did not dispute these amounts. We
                                         15

[*15] accordingly sustain respondent’s determination that petitioner
received unreported taxable interest in the specified amounts for 2010,
2011, and 2012.

V.     Penalties and additions to tax

        Respondent determined that petitioner is liable for accuracy-
related penalties under section 6662(a) for 2010–13, 2015, and 2016. He
also determined that petitioner is liable for additions to tax under
section 6651(a)(1) for failure to timely file for all years at issue and under
section 6651(a)(2) for failure to timely pay for 2017. The Commissioner
bears the burden of production with respect to any individual taxpayer’s
liability for any penalty or addition to tax imposed by the Code.
§ 7491(c). To meet this burden, the Commissioner must come forward
with sufficient evidence indicating that the imposition of the penalty is
appropriate. See Higbee v. Commissioner, 116 T.C. 438, 446–47 (2001).
Once the Commissioner meets his burden of production, the taxpayer
bears the burden of proving error in the determination, including
evidence of reasonable cause or other exculpatory factors. Id.

       A.      Accuracy-related penalties

       Section 6662(a) and (b)(2) imposes a 20% accuracy-related
penalty on any portion of an underpayment of tax required to be shown
on a return that is attributable to any substantial understatement of
income tax. A substantial understatement of income tax exists if the
amount of the understatement for the taxable year exceeds the greater
of 10% of the tax required to be shown on the return for the taxable year
or $5,000. See § 6662(d)(1).

      For each of the taxable years 2010–13, 2015, and 2016, we have
sustained deficiencies (and thus understatements of tax) that exceed
10% of the tax required to be shown on the return. Thus, respondent
has met his burden of showing that imposition of an accuracy-related
penalty is appropriate for each of those years. 4

      Respondent’s burden of production for an accuracy-related
penalty under section 6662(a) also includes demonstrating compliance
with the procedural requirements of section 6751(b)(1). See Graev v.
Commissioner, 149 T.C. 485, 492–93 (2017), supplementing and

        4 In view of our conclusion regarding the substantial understatement basis for

the accuracy-related penalty, we find it unnecessary to decide whether respondent has
met his burden with respect to negligence.
                                   16

[*16] overruling in part 147 T.C. 460 (2016). Section 6751(b)(1) provides
that “[n]o penalty under this title [Title 26, the Internal Revenue Code]
shall be assessed unless the initial determination of such assessment is
personally approved (in writing) by the immediate supervisor of the
individual making such determination.” In interpreting the proper
timing of the supervisory approval the statute requires, we apply the
test of the Court of Appeals for the Ninth Circuit for cases presumptively
appealable to that court, such as this one. See Kraske v. Commissioner,
No. 27574-15, 161 T.C. (Oct. 26, 2023); Golsen v. Commissioner, 54 T.C.
742, 756–57 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971). The Ninth
Circuit has held that written supervisory approval must occur “before
the assessment of the penalty or, if earlier, before the relevant
supervisor loses discretion whether to approve the penalty assessment.”
Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066,
1074 (9th Cir. 2022), rev’g and remanding 154 T.C. 68 (2020).

       Here, the immediate supervisor of the SB/SE agent examining
petitioner’s returns signed a Civil Penalty Approval Form on March 22,
2019, that the latter had prepared proposing section 6662 penalties for
2010–13, 2015, and 2016 on the basis of substantial understatements of
income tax and of negligence. The SB/SE Division issued petitioner a
notice of deficiency covering those years on May 1, 2019. Thus, written
supervisory approval for the penalties was given before assessment
(assessment of these penalties not having yet occurred). We are also
satisfied that respondent has met his burden of production with respect
to the approving supervisor’s having retained discretion to give approval
when he did so, given that the issuance of the notice of deficiency (which
would eliminate the supervisor’s discretion) occurred after the signing
of the Civil Penalty Approval Form and the fact that the notice was
issued by the SB/SE Division. Issuance of the notice of deficiency by the
SB/SE Division strongly suggests that the case was not transferred to
the Office of Appeals, which could have terminated the supervisor’s
discretion to approve, because if the case had been transferred to
Appeals, that office would normally have issued the notice of deficiency.
See Internal Revenue Manual 8.2.1.9(4) (Oct. 1, 2016); see also Kraske,
161 T.C., slip op. at 8 (finding Commissioner satisfied burden of
production to show supervisory approval where approval occurred before
case was transferred to Appeals).

      Petitioner has not shown that he had reasonable cause for the
understatements or otherwise addressed the accuracy-related penalties.
We accordingly sustain them.
                                    17

[*17] B.     Additions to tax

        Section 6651(a)(1) imposes an addition to tax if the taxpayer fails
to file his or her income tax return by the required due date (including
any extension of time for filing). The addition is equal to 5% of the
amount required to be shown as due on the return for each month (or
fraction thereof) after the due date, up to a maximum of 25%.

       For each year at issue, petitioner failed to file more than five
months after the due dates for the returns. Accordingly, respondent has
met his burden of production to show that imposition of the section
6651(a)(1) addition to tax is appropriate.         The section 6751(b)
supervisory approval requirement is not applicable to section 6651
additions to tax. § 6751(b)(2). Petitioner did not claim or show that his
failure to file timely with respect to any year at issue was due to
reasonable cause. Accordingly, we sustain the section 6651(a)(1)
addition to tax for each year at issue.

       Section 6651(a)(2) imposes an addition to tax for failure to pay
timely the amount shown as tax due on a return, equal to 0.5% of the
amount required to be shown as due on the return for each month the
failure to pay persists, up to a maximum of 25%. Where a taxpayer has
not filed a return, the Commissioner must introduce evidence that an
SFR satisfying the requirements of section 6020(b) was made. Wheeler
v. Commissioner, 127 T.C. 200, 210 (2006), aff’d, 521 F.3d 1289 (10th
Cir. 2008). A return made under section 6020(b) is treated as “the return
filed by the taxpayer for purposes of determining the amount of the
addition” under section 6651(a)(2). § 6651(g)(2).

       Respondent produced evidence that the IRS prepared an SFR
satisfying the requirements of section 6020(b) for 2017 and that
petitioner failed to pay the amount shown on the SFR. Respondent has
therefore met his burden of production for the addition to tax under
section 6651(a)(2). See Burnett v. Commissioner, T.C. Memo. 2023-46,
at *6 n.7. Petitioner has not claimed or shown reasonable cause for the
failure to pay the tax shown as due on the SFR for 2017. The section
6751(b) supervisory approval requirement is not applicable to section
6651 additions to tax. Accordingly, we sustain the section 6651(a)(2)
addition to tax for 2017.

VI.   Conclusion

      We have considered all arguments made by the parties, and to the
extent not mentioned or addressed, they are irrelevant or without merit.
                                  18

[*18] To reflect the foregoing,

      An appropriate decision will be entered for respondent.