Maxfield v. Comm'r

T.C. Summary Opinion 2008-62

UNITED STATES TAX COURT

DOUGLAS LEROY AND NANCY HELENE MAXFIELD, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8135-06S. Filed June 3, 2008.

Douglas Leroy and Nancy Helene Maxfield, pro se.

Kelly R. Morrison-Lee, for respondent.

PANUTHOS, Chief Special Trial Judge: This case was heard

pursuant to the provisions of section 7463 of the Internal

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

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

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

treated as precedent for any other case. Unless otherwise

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

Revenue Code as amended, and all Rule references are to the Tax

Court Rules of Practice and Procedure.

This case is before the Court for review of respondent’s

determination sustaining a levy action to collect a $16,351 tax

deficiency determined and assessed for tax year 1999. The Court

previously concluded in Maxfield v. Commissioner, T.C. Summary

Opinion 2007-79, filed May 22, 2007, that respondent abused his

discretion in not permitting petitioners an opportunity to

dispute the underlying tax liability at the collection due

process hearing. The case was set for further trial to consider

the issues raised with respect to the underlying tax liability.

After concessions,1 the issues for decision are: (1)

Whether petitioners are entitled to business expense deductions

for Common Sense Consultants, Inc. (CSCI),2 in amounts greater

than respondent allowed for tax year 1999; (2) whether

petitioners overreported the gross receipts of CSCI in 1999; and

(3) whether petitioners are liable for an accuracy-related

penalty pursuant to section 6662(a) for 1999.

1
The parties agree that petitioners may deduct $20,248 in
home mortgage interest and real estate taxes on Schedule A,
Itemized Deductions, and may not deduct those amounts as business
expenses on Schedule C, Profit or Loss From Business. At trial,
petitioner Douglas Maxfield conceded that petitioners are not
entitled to a claimed $310 deduction for political contributions
reported on Schedule C.
2
Despite its name, Common Sense Consultants, Inc. (CSCI),
was not incorporated; rather, petitioner Douglas Maxfield
operated CSCI as a sole-proprietorship.
 - 3 -

Background

Some of the facts have been stipulated and we so find. The

record consists of the stipulation of facts, and first and second

supplemental stipulations of facts, all with attached exhibits;

additional evidence introduced at trial; and the testimony of

petitioner Douglas Maxfield and petitioners’ daughter, who

prepared and electronically filed the 1999 Federal income tax

return for petitioners.

Petitioners resided in Maryland when they filed the

petition. Petitioner Helene Maxfield worked as a secretary in

1999. Petitioner Douglas Maxfield (hereafter petitioner) was

retired in 1999.

Respondent determined a $13,626 deficiency in petitioners’

1999 Federal income tax and a $2,725 accuracy-related penalty

under section 6662(a). Respondent mailed a notice of deficiency

to petitioners on March 6, 2003. Petitioners did not file a

timely petition for redetermination of the notice of deficiency,

and respondent assessed the deficiency, together with statutory

interest and the section 6662(a) accuracy-related penalty, on

August 4, 2003.

Respondent mailed to petitioners a Final Notice - Notice Of

Intent To Levy And Notice Of Your Right To A Hearing (levy

notice) on July 5, 2004. Petitioners timely submitted Form

12153, Request for a Collection Due Process Hearing. Petitioners
 - 4 -

sought to dispute the underlying tax liability at the Appeals

Office collection hearing. The Appeals officer did not consider

the underlying tax liability. Following the hearing, the Appeals

officer mailed a blank Form 433-A, Collection Information

Statement for Wage Earners and Self-Employed Individuals, to

petitioners and allowed more than a month for petitioners to

provide the financial information necessary for the Appeals

officer to consider any collection alternatives. Petitioners did

not submit any financial information and did not propose any

specific collection alternatives. On April 20, 2006, respondent

sustained the levy action in a Notice of Determination Concerning

Collection Action(s) Under Section 6320 and 6330.

At the initial trial of this case, the parties stipulated

that respondent mailed a notice of deficiency to petitioners on

March 6, 2003, and respondent argued that, pursuant to section

6330(c)(2)(B), petitioners were not entitled to dispute the

underlying tax liability because respondent had mailed a notice

of deficiency to petitioners at their last known address.

However, after considering petitioner’s testimony and other

evidence submitted at trial, we concluded that: (1) Petitioners

rebutted the presumption of delivery of the notice of deficiency

for 1999, (2) petitioners did not otherwise have an opportunity

to dispute the underlying tax liability, and (3) respondent
 - 5 -

abused his discretion by not allowing petitioners an opportunity

to challenge the underlying tax liability.3

The deficiency results from disallowed deductions claimed on

Schedule C, Profit or Loss From Business. Petitioners claimed

$71,447 in business expense deductions for CSCI on Schedule C for

1999. Respondent allowed $10,891 as ordinary and necessary

business expenses and disallowed the remaining $60,556.4

Respondent also determined an accuracy-related penalty under

section 6662 of $2,725.20. At trial, petitioner attempted to

explain and substantiate the claimed deductions. He also

asserted that the computer software used to prepare the tax

return, TurboTax, injected numerous errors into the return

(claiming several deductions more than once and overstating the

gross receipts of CSCI).

Petitioner stated that CSCI provided paralegal and

construction services in 1999 and that he intended to begin a

commercial fishing activity under CSCI in 1999 but that he did

not actually start that business in 1999. Respondent disallowed

3
Maxfield v. Commissioner, T.C. Summary Opinion 2007-79,
filed May 22, 2007.
4
Respondent disallowed deductions totaling $62,132.
However, as a result of that adjustment, CSCI showed a net
profit, which entitled petitioners to some allowance for expenses
for the business use of their home. The $1,576 allowed was based
on a pro rata allocation of insurance, utilities, and
depreciation.
 - 6 -

all deductions claimed for expenses related to construction and

boating and fishing activities.

Discussion

I. Standard of Review

In the context of judicial review of a notice of

determination sustaining a collection action, where, as here,

there is no showing that a taxpayer received a notice of

deficiency or otherwise had an opportunity to dispute the tax

liability, the proper standard of review of the Commissioner’s

determination of the underlying tax liability is de novo. See

Sego v. Commissioner, 114 T.C. 604, 609-610 (2000); Goza v.

Commissioner, 114 T.C. 176, 181-182 (2000).

II. Burden of Proof

Generally, the burden of proof is on the taxpayer. Rule

142(a)(1). Under section 7491(a)(1), if the taxpayer produces

credible evidence with respect to any factual issue relevant to

ascertaining the taxpayer’s liability, the burden of proof shifts

from the taxpayer to the Commissioner as to that factual issue.

At trial petitioner argued that the burden should shift because

he produced sufficient evidence to prove that he incurred the

expenses claimed as deductions but disallowed by respondent.

However, section 7491(a)(2) provides that the burden will

shift only if the taxpayer complies with substantiation

requirements, maintains sufficient records, and cooperates fully
 - 7 -

with the Commissioner’s reasonable requests. Although

petitioners vigorously asserted their rights when audited, such

actions, without more, do not evince a lack of cooperation.

Additionally, petitioners introduced a plethora of documents to

substantiate the expenses claimed as business deductions.

To shift the burden, not only must a taxpayer comply with

the substantiation requirements and cooperate with the

Commissioner’s reasonable requests, but he must also maintain all

records required under the Internal Revenue Code. Sec.

7491(a)(2)(B). A taxpayer must “keep such records, render such

statements, make such returns, and comply with such rules and

regulations as the Secretary may from time to time prescribe.”

Sec. 6001. Pursuant to section 6001, a taxpayer is required to

“keep such permanent books of account or records, including

inventories, as are sufficient to establish the amount of gross

income, deductions, credits, or other matters”. Sec. 1.6001-

1(a), Income Tax Regs.

When a taxpayer’s records have been lost or destroyed

through circumstances beyond his control, he is entitled to

substantiate deductions by reconstructing his expenditures

through other credible evidence. Smith v. Commissioner, T.C.
 - 8 -

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

1125 (1979). Permissive reconstruction is intended for the loss

of records by casualty. See Silverton v. Commissioner, T.C.

Memo. 1977-198, affd. without published opinion 647 F.2d 172 (9th

Cir. 1981); sec. 1.274-5A(c)(5), Income Tax Regs. Failure to

maintain adequate records in the first instance, however, is not

a loss of records through casualty or circumstances outside the

taxpayers’ control such that reconstruction must be allowed.

Petitioner did not maintain or produce books of account or

records reflecting the income from his business activities. He

relies on bank statements, credit card statements, some invoices,

and handwritten summaries to support his business expenses.

Further, the credit card statements and other documents

petitioner introduced suffice to prove only that petitioner

purchased items at specific stores. These records do not show

the particular items petitioner purchased, and they do not

demonstrate that the items purchased were ordinary and necessary

expenses for the carrying on of any trade or business in 1999.

See sec. 162(a).

We conclude that petitioner did not maintain adequate

records clearly reflecting the income and expenses of his

business activities, that he is not entitled to reconstruct

records which never existed, and that the documents he introduced

are not sufficient to prove his claimed business expenses. The
 - 9 -

burden does not shift to respondent under section 7491(a).

Petitioners, therefore, retain the burden of proving they are

entitled to the deductions claimed. INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992).

III. Underlying Tax Liability

A. Schedule C Deductions

1. Legal Principles

Taxpayers may generally deduct the ordinary and necessary

expenses paid or incurred during the taxable year in carrying on

a trade or business. Sec. 162(a); see also Commissioner v.

Lincoln Sav. & Loan Association, 403 U.S. 345, 352 (1971); FMR

Corp. & Subs. v. Commissioner, 110 T.C. 402, 414 (1998). An

ordinary and necessary expense is one that is appropriate and

helpful to the taxpayer’s business and that results from an

activity that is common and accepted practice. Boser v.

Commissioner, 77 T.C. 1124, 1132 (1981), affd. without published

opinion (9th Cir., Dec. 22, 1983).

A sine qua non of claiming deductions under section 162 is

that the expenses directly relate to an active trade or business

at the time the expenses were incurred. Glotov v. Commissioner,

T.C. Memo. 2007-147. Respondent does not dispute that

petitioner’s paralegal service activity qualifies as a trade or

business. Respondent does not agree, however, that petitioner’s
 - 10 -

boating and fishing and construction activities qualify as a

trade or business.

2. Boating and Fishing Activity

Petitioner testified that he did not conduct any boating and

fishing activity commercially in 1999, at least in part because

of his poor health. Petitioner’s testimony is consistent with

statements he made to respondent’s examining agent that he

started operating a charter boat service in 2001. We find that

petitioner was not engaged in any boating and fishing activity in

1999 and conclude that petitioners are not entitled to any

deductions related to operating such an activity in 1999.5

3. Construction and Home Improvement Activity

Petitioner’s testimony with regard to his operation of a

construction and home improvement activity in 1999 was vague.

Most importantly, although the record includes reference to some

addresses where petitioner may have performed certain

construction tasks, the record does not reflect that petitioner

performed any construction work for compensation.6 Petitioner

5
On the 1999 return, petitioners did not make an election
under sec. 195 to expense start-up costs for a boating and
fishing activity. An election under sec. 195 permits a limited
deduction only in the taxable year in which an active trade or
business begins. Sec. 195(b)(1)(A). Petitioner began his
boating and fishing activity sometime after 1999. Thus, even an
election under sec. 195 would not assist petitioners for tax year
1999.
6
Significantly, some of the locations where petitioner
(continued...)
 - 11 -

did not introduce any evidence that he operated a construction

business for profit in 1999. Because petitioner failed to

demonstrate that any construction-related expenses are directly

connected with, or proximately result from, his active conduct of

any trade or business in 1999, we hold that petitioners are not

entitled to deduct any expenses related to construction-related

activities. See Kornhauser v. United States, 276 U.S. 145, 153

(1928); O’Malley v. Commissioner, 91 T.C. 352, 361 (1988).

4. Paralegal Service Activity

Respondent does not dispute that the paralegal service

activity performed by CSCI during 1999 constitutes the carrying

on of a trade or business. As discussed, we have sustained

respondent’s determination that petitioner’s construction and

boating and fishing activities did not constitute the active

conduct of a trade or business in 1999. Petitioners are not

entitled to business expense deductions for those activities.

Petitioners combined all of the claimed CSCI business

activities on one Schedule C. The expenses that clearly relate

only to the construction and/or boating and fishing activities

6
(...continued)
allegedly worked belonged to relatives, including George
Maxfield’s rental property in Maryland and the Mountain View
Cabins, located on Maxfield Homestead Road in Washington State
and owned by petitioner’s mother and brother. Finally, although
petitioner testified about working on two properties not owned by
relatives, he did not assert that he billed for his services,
that he expected to be paid, or that he ever was paid for any
such work.
 - 12 -

are petitioners’ deductions of: $1,137 for work clothes;7 and

$4,335 for “other expenses” described at trial as construction

tools.8 Respondent’s disallowance of these deductions is

sustained.

Respondent did allow petitioners a portion of the claimed

business expense deductions. We now discuss the amounts

respondent disallowed, although from the record as a whole it

remains unclear how some of these expenses relate to petitioner’s

paralegal service activity.

a. Cost of Goods Sold (Home Office Construction)

Respondent disallowed in full petitioners’ deduction for

cost of goods sold. Petitioner explained that the $4,257 claimed

reflects the cost of materials and supplies for work done on his

7
Petitioner testified that the work clothes expense
represents his purchase of construction-related items such as
tool belts, tools, kneepads, steel-toed shoes, heavy work pants
and shirts, and hard hats; and boat-related items such as life
preservers, hats, jackets, boat shoes, and fishing suits.
8
Absent a sec. 179 election, to the extent that petitioner
purchased these construction tools to improve his home office
(discussed infra, and identified as nondeductible capital
improvements), that equipment must also be capitalized. See
Commissioner v. Idaho Power Co., 418 U.S. 1, 13 (1974); Lychuk v.
Commissioner, 116 T.C. 374, 386 (2001). In any event,
petitioners are not entitled to deduct this expense under sec.
162 in 1999.

The Court notes that respondent allowed a $385 deduction for
a framing gun, which was separately stated on Schedule C. We
will not disturb this allowance because respondent has not
asserted an increased deficiency, even though it is unclear just
how a nail gun might relate to petitioner’s paralegal service
activity, his only active trade or business in 1999.
 - 13 -

home office. Petitioner testified about the purchase and

installation of new flooring, molding, and drywall. Petitioner

did not characterize this work as repairs to existing flooring or

walls but rather as installing new walls and floor. Petitioners’

daughter testified to installing new floor joists, new plywood

subflooring, and a new hardwood floor.

Expenses incurred to maintain property used in a trade or

business in efficient operating condition ordinarily are

deductible. See sec. 162(a); Jacks v. Commissioner, T.C. Memo.

1988-237; Gilles Frozen Custard, Inc. v. Commissioner, T.C. Memo.

1970-73. Likewise, the cost of repairs “which neither materially

add to the value of the property nor appreciably prolong its

life, but keep it in an ordinarily efficient operating condition,

may be deductible as an expense”. Sec. 1.162-4, Income Tax

Regs.; see also sec. 1.263(a)-1(b), Income Tax Regs. (stating

that “Amounts paid or incurred for incidental repairs and

maintenance of property are not capital expenditures”).

In Plainfield-Union Water Co. v. Commissioner, 39 T.C. 333,

337 (1962), we described the standard for distinguishing

deductible repairs from capital improvements as follows:

An expenditure which returns property to the state it was in
before * * * and which does not make the relevant property
more valuable, more useful, or longer-lived, is usually
deemed a deductible repair. A capital expenditure is
generally considered to be a more permanent increment in the
longevity, utility, or worth of the property.
 - 14 -

While section 162(a) allows a deduction for “all the

ordinary and necessary expenses paid or incurred during the

taxable year in carrying on any trade or business”, section

263(a) provides that no deduction shall be allowed for “Any

amount paid out for new buildings or for permanent improvements

or betterments made to increase the value of any property or

estate.” Sec. 263(a)(1). Thus, if the repair is an improvement

or replacement, or if it substantially increases the property’s

value or substantially prolongs its useful life, it is capital in

nature and is not currently deductible. See Wolfsen Land &

Cattle Co. v. Commissioner, 72 T.C. 1, 14 (1979).

A taxpayer bears the burden of proving that he is entitled

to any deductions claimed. INDOPCO, Inc. v. Commissioner, 503

U.S. at 84. Petitioners, therefore, must demonstrate that these

expenses reflect incidental repairs that returned the home office

to its original state and maintained the office in efficient

operating condition, as opposed to making the home or home office

more valuable, permanently improving the home or home office, or

adapting the space to a different use; i.e., constructing a home

office.

Petitioner testified that the expenses deducted as cost of

goods sold represent the cost of “materials to redo the office.”

The record does not indicate how petitioners used this space

before this construction or what demolition might have preceded
 - 15 -

the construction. However, the record clearly reflects that

petitioner started from a concrete floor, laid plastic sheeting

as a moisture barrier, attached 2- by 6-inch joists to the

concrete with a nail gun, laid a new plywood subfloor, and

finally installed a new hardwood floor. Further, petitioner also

installed new molding and drywall.

Petitioner did not introduce evidence demonstrating that

this construction was merely the incidental repair of his

existing home office and not his building the office in the first

instance or significantly improving the space with a new floor

and new walls. We conclude that petitioners have not proven that

they are entitled to a deduction under section 162 for the cost

of these improvements in 1999.9

b. Car and Truck Expenses

Respondent disallowed car and truck expenses of $12,847.

Petitioner claimed that he incurred these expenses for gas,

maintenance, and repairs for his vehicles. Petitioner did not

keep a log of business mileage or of business trips taken, and he

told respondent’s examining agent that he calculated his mileage

deduction by using the beginning and ending odometer readings.

Passenger automobiles are “listed property” under section

280F(d)(4). Section 274(d) disallows any deduction with respect

9
On the 1999 return, petitioners did not elect to deduct
any such expenses under sec. 179.
 - 16 -

to listed property unless the taxpayer adequately substantiates:

(1) The amount of the expense, (2) the time and place of the

travel or use of the property, (3) the business purpose of the

expense, and (4) the business relationship of the persons using

the property.

Even though petitioner introduced receipts documenting

vehicle repairs and credit card statements showing gasoline

purchases, he did not maintain a log of the business use of his

vehicles or introduce any evidence of the business purposes for

which he used the vehicles. We find that petitioners have not

satisfied the strict substantiation requirements of section

274(d), and we conclude that petitioners are not entitled to any

deduction for car and truck expenses for 1999.10

c. Home Office Expenses (Utilities & Insurance)

Petitioners claimed as home office expenses the costs of

utilities and homeowner’s insurance for their entire residence.

Respondent allowed a portion of the costs. See supra note 4. A

taxpayer is not entitled to deduct the cost of utilities for his

entire home simply because he may have a home office in a portion

of the residence. Petitioners reported that their home office

occupied 9.26 percent of their residence. Respondent allowed

10
Because petitioners’ lack of substantiation precludes any
deduction, we need not address the obvious impropriety of
claiming both actual vehicle expenses and the standard mileage
deduction.
 - 17 -

9.26 percent of the claimed expenses for utilities and insurance.

See sec. 280A(c); Feldman v. Commissioner, 84 T.C. 1, 8 (1985),

affd. 791 F.2d 781 (9th Cir. 1986); Lind v. Commissioner, T.C.

Memo. 1985-490. Respondent’s determination as to insurance and

utilities is sustained.11

d. Travel, Meals, and Lodging Expenses

Respondent disallowed in full $2,416 claimed as travel

expenses, $1,490 claimed as meals expenses, and $1,496 claimed as

lodging expenses.

A taxpayer may deduct travel expenses incurred while away

from home in pursuit of a trade or business. Sec. 162(a)(2). As

with the car and truck expenses discussed above, however,

traveling expenses are governed by the strict substantiation

requirements of section 274(d); a taxpayer must substantiate the

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

business purpose of the expense.

11
Petitioner stated at trial that the deductible insurance
amount is different from the $3,155 reported on Form 8829,
Expenses for Business Use of Your Home, and also reported on line
15 of Schedule C. Petitioner testified that the $3,155 figure
included not only $595 for homeowner’s insurance premiums but
also amounts for life and mortgage life insurance and car and
boat insurance (both of which were also included in car and truck
expenses on Schedule C). The examining agent appears to have
calculated a prorated allowance based on the full $3,155 claimed.
Because respondent did not assert an increase in the deficiency
at trial, we will not disturb this apparent error in petitioners’
favor.
 - 18 -

The credit card statements petitioners introduced appear to

include myriad charges for travel, food, and lodging and may

demonstrate that petitioner actually spent the sums claimed.

However, petitioner did not specify the business purpose of the

expenses, identify the persons fed or entertained, or

substantiate the business purpose of the trips or of the meals,

as required by section 274(d).12 Accordingly, petitioners are

not entitled to any deduction for travel, lodging, or meals

expenses for 1999.

e. Equipment and Upgrades (Computer Work)

Respondent disallowed petitioners’ claimed deduction for

“Equipment and upgrades”. At trial petitioner claimed that the

$3,695 amount reported was less than his actual expenses. Having

discovered additional receipts, petitioner now asserts that he

should be entitled to a deduction of $5,451 for upgrades to his

computer. While petitioners’ exhibits include credit card

statements showing charges at stores where one might purchase

computer software and equipment among other things, the specific

parts and services purchased are generally not itemized.

Computers and peripheral equipment are specifically included as

12
Petitioner testified that the meals expenses were not
food costs for running his household but instead represented his
cost for meals “that I ate out while I was conducting these
businesses.” Without more details and some records connecting
specific meals with specific legitimate business travel, this
testimony does not meet the strict substantiation requirement of
sec. 274(d).
 - 19 -

listed property in section 280F(d)(4), along with passenger

automobiles.13 Accordingly, such expenses are also subject to

the strict substantiation requirements of section 274(d).

Petitioner did not introduce sufficient evidence as to the nature

of the items purchased or identify any business purpose other

than to state that he uses computers “for my CSCI business in

reports that I type up and file.” Petitioners are not entitled

to any deduction for computer equipment or upgrades.14

Respondent’s determination is sustained, in that petitioners

have not demonstrated that they are entitled to business expense

deductions greater than those respondent allowed.15

13
Petitioners have not established that any amount spent on
computer upgrades was for computers and peripheral equipment
excluded from listed property by secs. 280A(c)(1) and
280F(d)(4)(B).
14
Because petitioners failed adequately to substantiate the
claimed computer upgrade expenditures, we need not decide whether
the expenditures were paid for repairs deductible under sec.
162(a) or for capital improvements controlled by sec. 263(a).
15
As a result of the disallowance of the business expense
deductions, petitioners’ Schedule C would reflect a net profit
resulting in self-employment income subject to self-employment
tax. The calculation of these taxes is purely computational.
Petitioners have the burden of proving that respondent
erroneously determined liability for self-employment tax. Snyder
v. Commissioner, T.C. Memo. 1995-285. Although petitioner
complained at trial that imposing self-employment taxes on him
for his business income is unfair, he raised no substantive
challenge. Respondent’s self-employment tax determination is
sustained.

Furthermore, because we find that petitioners are not
entitled to business expense deductions beyond those respondent
(continued...)
 - 20 -

B. CSCI Gross Receipts

Petitioners reported gross receipts of $28,827 for CSCI for

1999. At trial petitioner asserted that the correct amount of

gross receipts for CSCI is $15,327. Petitioners failed to keep

any books of account or other adequate records to evidence the

gross receipts of CSCI.

Petitioners assert that their daughter, who prepared the

return, entered $15,327 into the computer but that TurboTax added

petitioner’s retirement pay (also reported on line 16b of Form

1040, U.S. Individual Income Tax Return) and petitioners’ State

income tax refund (reported on line 10, Form 1040) to the $15,327

entered as gross receipts. However, the retirement pay shown on

Form 1040 was $10,366, and the State tax refund was $3,594. The

sum of these amounts and the $15,327 petitioner now asserts as

the correct gross income is $29,287, not the $28,827 reported as

CSCI gross receipts. Petitioners’ TurboTax error theory does not

explain the $460 difference.

Petitioners blame the computer software for other errors as

well. For example, petitioners reported their deductions for

home mortgage interest and real estate taxes on three separate

15
(...continued)
allowed, we need not consider what portion of the disputed
expense deductions (such as car and truck expenses and travel,
meals, and lodging expenses) relates to those business activities
(construction and boating and fishing) that petitioners failed to
demonstrate were carried on for profit by CSCI in 1999.
 - 21 -

schedules on their 1999 return: (1) On Schedule A, (2) on Form

8829, Expenses for Business Use of Your Home, and (3) on Schedule

C. Petitioners reported insurance and utilities expenses for

their residence twice: Not only on Form 8829, where no deduction

was allowed because petitioners’ calculations resulted in a net

loss for the year, see sec. 280A(c)(5), but also on lines 15 and

25 of Schedule C as direct business expenses, where they offset

gross receipts and increased the loss claimed for CSCI. As

discussed above, various insurance premiums were reported both as

business insurance and as car and truck expenses on Schedule C.

Petitioner’s daughter testified that TurboTax supported data

entry through question-and-answer forms only, did not permit the

user to manually enter or override the TurboTax program, and

mysteriously reported income and expense items in multiple

places.

We find that petitioners authorized their daughter to file

their return electronically and that they considered that filing

to be their 1999 Federal income tax return. They may not now

disavow the information reported on the return.

Statements made on a tax return signed by the taxpayer have

long been considered admissions, and such admissions are binding

on the taxpayer, absent cogent evidence indicating that those

statements are wrong. Pratt v. Commissioner, T.C. Memo. 2002-

279. Petitioners’ assertion that computer errors inflated the
 - 22 -

gross receipts for CSCI is simply not credible, and it does not

represent cogent evidence of misreporting.

We treat the gross receipts listed on petitioners’ return as

an admission that petitioners had gross receipts of at least the

$28,827 reported. See Lare v. Commissioner, 62 T.C. 739, 750

(1974), affd. without published opinion 521 F.2d 1399 (3d Cir.

1975). The evidence presented at trial is unpersuasive and

insufficient to support a lower gross receipt finding.

C. Accuracy-Related Penalty

Section 6662(a) provides a penalty in the amount of 20

percent of the portion of any underpayment attributable to, inter

alia, negligence or disregard of rules or regulations. Sec.

6662(b)(1). Pursuant to section 6662(c), negligence includes any

failure to make a reasonable attempt to comply, and disregard

includes any careless, reckless, or intentional disregard.

Negligence also includes any failure by the taxpayer to maintain

and retain adequate books and records or to substantiate items

properly. Sec. 1.6662-3(b)(1), Income Tax Regs.

We have no difficulty in finding that petitioners were

negligent in preparing their 1999 tax return and in seeking a

$5,725 refund. They claimed clearly improper deductions,

reported expenses multiple times on their return, and made no
 - 23 -

attempt to maintain books of account or satisfactory records for

petitioner’s claimed business activities.16

Respondent has met his burden of production with respect to

the section 6662(a) penalty. See sec. 7491(c). Petitioners bear

the burden of proving that respondent’s determination is

incorrect. Rule 142(a); Higbee v. Commissioner, 116 T.C. 438,

446 (2001). To the extent that a taxpayer shows that he had

reasonable cause for an underpayment and that he acted in good

faith, section 6664(c)(1) may relieve the taxpayer of a penalty

under section 6662.

As discussed, petitioners blame TurboTax for all errors on

their return. Petitioners’ allegations of computer errors are

rejected. Petitioners have not demonstrated reasonable cause for

their underpayment. Further, on the record as a whole, we are

convinced that petitioners knew they were deducting personal

expenses as business expenses and that they were claiming the

same expenses multiple times on their return. We find that

16
Where a taxpayer maintained some books and records but
those documents proved inadequate to satisfy the strict
substantiation requirements of sec. 274(d), we have refused to
sustain a determination of negligence. See Silverton v.
Commissioner, T.C. Memo. 1977-198, affd. without published
opinion 647 F.2d 172 (9th Cir. 1981). We have characterized sec.
274(d) as a standard of proof, not a standard determinative of
negligence or intentional disregard. Id. That is not this case.
Petitioner’s records were inadequate and he failed to keep books
of account. This failure renders petitioners liable for the
penalty under sec. 6662 for negligence or intentional disregard.
 - 24 -

petitioners have demonstrated neither reasonable cause nor good

faith. Respondent’s determination is sustained.

IV. Collection Action

Respondent issued the levy notice, petitioners requested a

hearing, and respondent’s Appeals Office conducted the hearing

and sustained the decision to collect by levy. We found in our

earlier opinion that respondent abused his discretion in not

allowing petitioners to challenge the underlying tax liability

during the collection hearing.

At the collection hearing, the Appeals officer verified that

the requirements of applicable law and administrative procedure

were met, pursuant to section 6330(c)(1). Petitioners were

allowed to raise issues relevant to the unpaid tax and to the

proposed levy. See sec. 6330(c)(2)(A). Petitioners raised two

challenges to the underlying tax liability: (1) That the

assessment was untimely, and (2) that the deficiency respondent

determined in the notice of deficiency is incorrect. In their

request for a collection hearing, petitioners also mentioned the

appropriateness of the collection action, collection

alternatives, and spousal defenses.

Petitioners asserted that the assessment was untimely and

time barred by the 3-year period of limitations on assessments

provided by section 6501(a) and (b)(1). We found in Maxfield v.

Commissioner, T.C. Summary Opinion 2007-79, that respondent
 - 25 -

mailed a notice of deficiency to petitioners on March 6, 2003,

which was within 3 years of the due date of petitioners’ return.

As discussed in that opinion, a properly addressed notice of

deficiency suspends the period of collection, even where the

taxpayer does not receive the notice of deficiency. We concluded

that the assessment period did not expire until September 15,

2003, pursuant to section 6503(a)(1), and that respondent’s

assessment on August 4, 2003, was timely.

As discussed here, petitioners have now had the opportunity

to challenge the underlying tax liability for 1999. Their

challenge has failed.

Although petitioners listed “Appropriate spousal defenses”

on their Form 12153, the record does not indicate that they

pursued any spousal defenses at the hearing. Petitioners raised

no spousal defenses at trial. This issue is deemed conceded.

See Rule 331(b)(4); Mendes v. Commissioner, 121 T.C. 308, 312-313

(2003); see also Giamelli v. Commissioner, 129 T.C. 107, 113-114

(2007); Magana v. Commissioner, 118 T.C. 488, 493 (2002).

Petitioners also listed “Collection alternatives such as

installment agreement, offer in compromise, posting a bond or

substitution of other assets” on Form 12153. After the telephone

hearing, the Appeals officer sent petitioners a collection

information statement and allowed petitioners more than a month

to return the completed statement and to provide financial
 - 26 -

information required for the Appeals officer to evaluate and

consider collection alternatives. See Wells v. Commissioner,

T.C. Memo. 2003-234. Petitioners did not return the completed

statement, did not provide the requested financial information,

and did not propose any collection alternatives for

consideration.

Petitioners make no other arguments challenging the notice

of determination. In particular, petitioners fail to make a

valid challenge to the appropriateness of respondent’s intended

collection action, to raise a spousal defense, or to offer

alternative means of collection. See sec. 6330(c)(2)(A).

Respondent’s Appeals officer did not consider spousal

defenses or collection alternatives at the collection hearing

because petitioners did not pursue those claims and petitioners

did not provide the required financial information. This was not

an abuse of discretion.

Having resolved petitioners’ challenges to the underlying

tax liability, and concluding that respondent’s other

determinations were not an abuse of discretion, we hold that the

collection action may now proceed.

Decision will be entered

for respondent.