Brown v. Comm'r

T.C. Summary Opinion 2010-97

UNITED STATES TAX COURT

DONALD BROWN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 23554-07S. Filed July 19, 2010.

Donald Brown, pro se.

Kathleen K. Raup, for respondent.

RUWE, Judge: This case was heard pursuant to the provisions

of section 74631 of the Internal Revenue Code in effect when 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.

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
 - 2 -

Respondent determined a $34,488 deficiency and a $6,898

accuracy-related penalty in petitioner’s 2004 Federal income

tax.2 After concessions,3 the issues we must decide are: (1)

Whether, pursuant to Rule 142 and section 7491, the burden of

proof has shifted to respondent regarding the disputed

deficiency; (2) whether petitioner had unreported gross receipts

or sales (self-employment income); (3) whether petitioner is

entitled to deduct certain business expenses claimed on Schedule

C, Profit or Loss From Business (Sole Proprietorship); and (4)

whether petitioner is liable for an accuracy-related penalty

under section 6662(a).

Background

Some of the facts have been stipulated and are so found.

The stipulated facts and the attached exhibits are incorporated

herein by this reference. At the time the petition was filed,

petitioner provided a post office box mailing address in New

Jersey.4

Petitioner graduated from college and law school, and he has

been practicing law since 1958. From 1958 to 1992 petitioner was

2
All figures have been rounded to the nearest dollar.
3
Respondent has allowed and/or conceded a number of issues
and expenses that were previously disallowed. We discuss only
those issues and expenses that remain in dispute.
4
The parties stipulate that petitioner’s current address is
also in New Jersey.
 - 3 -

employed by the law firm Fox Rothschild. In 1979 petitioner

became a managing partner at Fox Rothschild, at which time Fox

Rothschild had approximately 40 attorneys. During his tenure as

managing partner, which ended in or about 1987, the number of

attorneys working for the firm increased to 120.

During 2004 petitioner engaged in the practice of law as a

sole practitioner. Petitioner maintained and operated a law

office in Bala Cynwyd, Pennsylvania (Bala Cynwyd office), and

used this address on his 2004 Federal income tax return, on his

business letterhead, for court proceedings, and for billing

purposes. In addition to the Bala Cynwyd office, petitioner

asserts that he also maintained a home office.

During 2004 petitioner maintained two checking accounts at

Commerce Bank (Commerce Bank accounts). Petitioner was the only

person with signature authority and exercised complete control

over the Commerce Bank accounts. Petitioner deposited both

personal funds and funds from the operation of his law practice

into the Commerce Bank accounts. Petitioner also paid both

personal and law-practice-related expenses from the Commerce Bank

accounts. During 2004 petitioner’s deposits into the Commerce

Bank accounts totaled $150,085. Respondent concedes that

deposits totaling $56,821 were from nontaxable sources.

Petitioner timely filed a 2004 Form 1040, U.S. Individual

Income Tax Return, on which he reported gross receipts or sales
 - 4 -

of $69,509 and claimed Schedule C expenses of $94,816.

Petitioner used the cash method of accounting for his law

practice in 2004. In preparing his 2004 Federal income tax

return petitioner contemporaneously created ledger sheets to aid

in preparing the Schedule C.

On July 13, 2007, respondent issued to petitioner a notice

of deficiency. The deficiency was the result of increased gross

receipts (pursuant to a bank deposits analysis) and disallowed

Schedule C business expenses (which also resulted in

computational adjustments). Respondent’s bank deposits analysis

resulted in a determination that petitioner underreported his

Schedule C gross receipts by $36,394. The notice of deficiency

also reflects that respondent made the following adjustments to

petitioner’s claimed Schedule C deductions:

Amount Amount
Expense Per Return Per Exam Adjustment

Car and truck expenses $7,450 $3,688 $3,762
Depreciation 652 652 -0-
Office expenses 3,151 940 2,211
Rent/lease-–vehicles 5,261 2,631 2,630
Rent/lease-–other business property 32,301 17,194 15,107
Repairs and maintenance 3,260 -0- 3,260
Supplies 1,369 1,369 -0-
Travel 2,316 -0- 2,316
Meals and entertainment 3,972 -0- 3,972
Utilities 9,108 593 8,515
Other expenses–-filing costs 8,110 2,351 5,759
1
Other expenses 17,867 -0- 17,867
2
Total 94,817 29,418 65,399
1
On his 2004 Schedule C petitioner labeled the $17,867 of
other expenses as “outsourcing temp. secretary service”, which
allegedly represents payments to petitioner’s son, Seth Brown, for
work performed for petitioner’s law practice.
2
The difference between what was reported on petitioner’s
2004 Federal tax return ($94,816) and this figure is due to
rounding.
 - 5 -

On brief respondent concedes that petitioner’s unreported

gross receipts should be reduced to $23,754 and that petitioner

may deduct Schedule C expenses of $49,132 (i.e., respondent has

decreased the disallowed Schedule C expenses to $45,684). The

following table summarizes the 2004 Schedule C expenses

petitioner reported and the amounts respondent has conceded:

Amount Amount
Expense Per Return Allowed

Car and truck expenses $7,450 $3,688
Depreciation 652 652
Office expense 3,151 1,291
Rent/lease–-vehicles 5,261 2,631
Rent/lease–-other business property 32,301 17,194
Repairs and maintenance 3,260 -0-
Supplies 1,369 1,369
Travel 2,316 -0-
Meals and entertainment 3,972 -0-
Utilities 9,108 1,025
Other expenses–-filing costs 8,110 2,351
Other expenses1 17,867 18,931
Total 94,817 49,132
1
Respondent allowed some expenses which were claimed as
“Other expenses--filing costs” as “Other expenses”. Additionally,
respondent allowed an expense of $14,891 as “Other expenses”,
which petitioner did not claim on the Schedule C attached to his
2004 Federal tax return.

Discussion

A. Burden of Proof

In general, the Commissioner’s determinations in a notice of

deficiency are presumed correct, and the taxpayer bears the

burden of proving, by a preponderance of the evidence, that these

determinations are erroneous. Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933). The taxpayer is required to maintain

records that are sufficient to enable the Commissioner to

determine his correct tax liability. See sec. 6001; sec. 1.6001-
 - 6 -

1(a), Income Tax Regs. Additionally, the taxpayer bears the

burden of substantiating the amount and purpose of each item

claimed as a deduction. See Higbee v. Commissioner, 116 T.C.

438, 440 (2001); Hradesky v. Commissioner, 65 T.C. 87, 90 (1975),

affd. per curiam 540 F.2d 821 (5th Cir. 1976).

Section 7491(a)(1) provides that if, in any court

proceeding, the taxpayer introduces credible evidence with

respect to factual issues relevant to ascertaining the taxpayer’s

liability for tax, the burden of proof with respect to such

factual issues will be placed on the Commissioner. See Higbee v.

Commissioner, supra at 442 (“In order for section 7491(a) to

place the burden of proof on respondent, the taxpayer must first

provide credible evidence.”). For the burden to shift to the

Commissioner, however, the taxpayer must have complied with the

substantiation and recordkeeping requirements of the Code and

have cooperated with reasonable requests by the Commissioner for

“witnesses, information, documents, meetings, and interviews”.

Sec. 7491(a)(2)(A) and (B).

Petitioner argues that he has met the requirements to shift

the burden of proof to respondent because, as he alleges, he has

introduced credible evidence regarding the Schedule C expenses

and has not run afoul of the limitations under section

7491(a)(2)(A) and (B). More specifically, petitioner argues that

his 2004 ledger of business expenses coupled with copies of bank
 - 7 -

statements and canceled checks from the Commerce Bank accounts

amounts to credible evidence. Respondent argues that petitioner

has neither provided credible evidence nor cooperated with

reasonable requests for witnesses, information, documents,

meetings, and interviews. Thus, respondent states: “While the

ledger, along with the bank records supplied by respondent, may

support that petitioner made expenditures, no evidence was

introduced to substantiate that these expenditures were ordinary

and necessary and were for the purpose indicated.”

In Higbee v. Commissioner, supra at 442, we recognized that

section 7491 does not state what constitutes credible evidence.

The conference committee’s report provides a glimpse into

Congress’ intent for the use of the term “credible evidence” in

section 7491(a):

Credible evidence is the quality of evidence which,
after critical analysis, the court would find
sufficient upon which to base a decision on the issue
if no contrary evidence were submitted (without regard
to the judicial presumption of IRS correctness). A
taxpayer has not produced credible evidence for these
purposes if the taxpayer merely makes implausible
factual assertions, frivolous claims, or tax protestor-
type arguments. The introduction of evidence will not
meet this standard if the court is not convinced that
it is worthy of belief. If after evidence from both
sides, the court believes that the evidence is equally
balanced, the court shall find that the Secretary has
not sustained his burden of proof. [H. Conf. Rept.
105-599, at 240-241 (1998), 1998-3 C.B. 747, 994-995.]
 - 8 -

See Higbee v. Commissioner, supra at 442. The conference

report also explains the purpose of the limitations set forth in

section 7491(a)(2):

Nothing in the provision shall be construed to
override any requirement under the Code or regulations
to substantiate any item. Accordingly, taxpayers must
meet applicable substantiation requirements, whether
generally imposed or imposed with respect to specific
items, such as charitable contributions or meals,
entertainment, travel, and certain other expenses.
Substantiation requirements include any requirement of
the Code or regulations that the taxpayer establish an
item to the satisfaction of the Secretary. Taxpayers
who fail to substantiate any item in accordance with
the legal requirement of substantiation will not have
satisfied the legal conditions that are prerequisite to
claiming the item on the taxpayer’s tax return and will
accordingly be unable to avail themselves of this
provision regarding the burden of proof. Thus, if a
taxpayer required to substantiate an item fails to do
so in the manner required (or destroys the
substantiation), this burden of proof provision is
inapplicable. [H. Conf. Rept. 105-599, supra at 241,
1998-3 C.B. at 995; fn. refs. omitted.]

As discussed in greater detail below, while we recognize

that petitioner’s 2004 ledger coupled with his bank statements

and canceled checks tends to establish that certain expenditures

were made, we are not persuaded that petitioner’s uncorroborated

self-serving testimony, which we need not accept, see Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986), establishes that the

disputed deposits were not includable in gross receipts, nor does

it establish the amount and business purpose of the disputed

expenditures. See Higbee v. Commissioner, supra at 440-441.

Accordingly, we hold that to the extent that the issue of who
 - 9 -

bears the burden of proof is dispositive in the determination of

whether petitioner had unreported gross receipts or sales and

whether petitioner is entitled to deductions for expenses claimed

on his 2004 Schedule C, the burden remains with petitioner.

B. Unreported Gross Receipts or Sales (Self-Employment Income)

Section 61(a) defines gross income for purposes of

calculating taxable income as “all income from whatever source

derived”. Courts have long recognized that the definition of

gross income includes accessions to wealth, clearly realized, and

over which the taxpayer has complete dominion and control.

Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).

Where a taxpayer fails to maintain records adequate to

determine his correct tax liability, the Commissioner is entitled

to reconstruct his income by any reasonable method. See Erikson

v. Commissioner, 937 F.2d 1548, 1553 (10th Cir. 1991), affg. T.C.

Memo. 1989-552. Courts have long sanctioned the use of the bank

deposits method as a reasonable method for computing income.

Estate of Mason v. Commissioner, 64 T.C. 651, 656 (1975), affd.

566 F.2d 2 (6th Cir. 1977). Furthermore, where a bank deposits

analysis is used, the bank deposits are prima facie evidence of

the receipt of income. Tokarski v. Commissioner, supra at 77.

Where the Commissioner has determined that certain deposits are

income, the taxpayer has the burden of showing that the
 - 10 -

determination is incorrect. Estate of Mason v. Commissioner,

supra at 657.

The parties have stipulated that the aggregate deposits into

the Commerce Bank accounts totaled $150,085 during 2004.

Respondent conceded that $56,821 of the aggregate deposits was

from nontaxable sources. Thus, respondent contends that

petitioner underreported gross receipts by $23,755 ($93,264 in

taxable deposits minus $69,509 reported by petitioner).

Petitioner argues that certain deposits, or a portion of

them, are not includable in gross income because the deposits

included reimbursement for costs associated with litigation.

Petitioner’s allegations concern the following deposits:

Amount
Petitioner
Source Amount Alleges is
Date of Deposit of Deposit Not Includable

1/9/04 Mammuth & Rosenberg $12,919 $253
1
3/8/04 PA Land Dev. L.P. 3,650 3,650
2
5/21/04 TIG Insurance 25,000 14,891
6/15/04 David Skolnick 1,000 1,000
9/1/04 Noor Flooring, Inc. 47 47
11/4/04 Royal Floor N Construction 900 200
12/10/04 Mammuth & Rosenberg 1,977 44
12/15/04 Noor Flooring 1,000 356
12/20/04 Estate of Snyder 1,000 1,000
2
12/28/04 Noor Flooring 750 219
Total 48,243 21,660
1
The parties stipulate that respondent has conceded this
deposit is nontaxable.
2
We note that the parties stipulate that respondent allowed
this amount as a deduction for “Other expenses”.

Petitioner’s contention is misplaced. The bank statements

establish that the contested deposits were made into the Commerce

Bank accounts. Petitioner commingled business and personal funds
 - 11 -

in the Commerce Bank accounts, and he had complete dominion and

control over these funds without restriction as to their

disposition. To the extent petitioner has shown that any portion

of the deposits was actually used for litigation costs,

respondent has allowed a deduction. Accordingly, we hold that

petitioner underreported his gross receipts or sales (i.e., his

self-employment income) on his 2004 Schedule C by $23,755.

C. Schedule C Expenses/Deductions

Deductions are strictly a matter of legislative grace, and

the taxpayer bears the burden of proving entitlement to the

deductions claimed. Rule 142(a); INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292

U.S. 435, 440 (1934).

Section 162(a) authorizes a deduction for business expenses

if a taxpayer proves that the expenses (1) were paid or incurred

during the taxable year, (2) were incurred to carry on the

taxpayer’s trade or business, and (3) were ordinary and necessary

expenditures of the business. See Commissioner v. Lincoln Sav. &

Loan Association, 403 U.S. 345, 352 (1971). An expense is

ordinary if it is customary or usual within a particular trade,

business, or industry or relates to a transaction “of common or

frequent occurrence in the type of business involved.” Deputy v.

du Pont, 308 U.S. 488, 495 (1940). An expense is necessary if it

is appropriate and helpful for the development of the business.
 - 12 -

See Commissioner v. Heininger, 320 U.S. 467, 471 (1943).

However, personal, living, or family expenses generally are not

deductible. See sec. 262(a).

A taxpayer must substantiate amounts claimed as deductions

by maintaining the records necessary to establish that he or she

is entitled to the deductions. Sec. 6001; sec. 1.6001-1(a),

Income Tax Regs. Thus, under section 162, the recordkeeping

requirement under section 6001 not only requires petitioner to

keep records sufficient to establish that an expense was paid

during the taxable year (such as his 2004 business expense ledger

coupled with bank statements and copies of canceled checks), see

sec. 162(a)(1), but also requires that the records establish that

the expenses were ordinary and necessary in carrying on

petitioner’s trade or business, see sec. 162(a)(2) and (3).

Petitioner claimed Schedule C expenses of $94,817.

Respondent has conceded that petitioner is entitled to $49,132 in

deductions for Schedule C expenses. We now address those

expenses petitioner claimed at trial and on brief.

1. Automobile Expenses

Under section 274(d) a taxpayer is required to meet

heightened substantiation requirements for, inter alia, travel,

meals, lodging, entertainment, computer, automobile, gifts, and

cellular telephone expenses. Section 274(d) requires the

taxpayer to establish by adequate records or by sufficient
 - 13 -

evidence corroborating the taxpayer’s own statement: (A) The

amount of such expense or other item; (B) the time and place of

the travel, entertainment, amusement, recreation, or use of the

facility or property, or the date and description of the gift;

(C) the business purpose of the expense or other item; and (D)

the business relationship to the taxpayer of persons entertained,

using the facility or property, or receiving the gift.

On his 2004 Federal income tax return petitioner claimed a

$7,450 deduction for car and truck expenses and an additional

$5,261 deduction for the rent or lease of a vehicle. In the

notice of deficiency respondent allowed petitioner’s parking

expenses in full but disallowed 50 percent of all other expenses

related to automobiles. At trial petitioner continued to contend

that he was entitled to deduct 100 percent of his automobile

expenses.

Automobile expenses are subject to the heightened

substantiation requirements of section 274(d), as described

above. Petitioner, however, has failed to meet these heightened

substantiation requirements. Other than indicating on his 2004

Schedule C that he drove his car 18,000 miles for business and

2,100 miles for commuting, petitioner has not provided a

contemporaneous mileage log, gasoline receipts, or anything more

than his self-serving testimony to establish what portion of his

use of the car was for business purposes. Petitioner has failed
 - 14 -

to prove that he is entitled to any automobile expense deduction

in excess of the amount respondent allowed.5

2. AOL Expense

On line 18 of his 2004 Schedule C petitioner claimed an

office expense of $3,151, which he contends includes $358 for

payments made to AOL for Internet and email service. Although

petitioner testified that Internet and email service was

necessary for communication purposes, he has not established

whether the AOL expense was for Internet and email service to his

office or to his home, nor has he established what portion of the

use, if any, was for business versus personal use. Consequently,

we find that petitioner has failed to adequately substantiate the

portion, if any, of the AOL expense attributable to business use.

5
When taxpayers establish that they have incurred deductible
expenses but are unable to substantiate the exact amounts, we can
estimate the deductible amounts in some circumstances, but only
if the taxpayers present sufficient evidence to establish a
rational basis for making the estimates. See Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v.
Commissioner, 85 T.C. 731, 742-743 (1985). In estimating the
amount allowable, we bear heavily upon taxpayers whose
inexactitude is of their own making. See Cohan v. Commissioner,
supra at 544. There must be sufficient evidence in the record,
however, to permit us to conclude that a deductible expense was
paid or incurred. Williams v. United States, 245 F.2d 559, 560
(5th Cir. 1957).
The Cohan doctrine, however, is not available to estimate
expenses that fall under the purview of sec. 274(d). See Sanford
v. Commissioner, 50 T.C. 823, 827 (1968), affd. 412 F.2d 201 (2d
Cir. 1969); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed.
Reg. 46014 (Nov. 6, 1985).
 - 15 -

Accordingly, we hold that petitioner is not entitled to an office

expense deduction beyond that already allowed by respondent.

3. Telephone Service

On line 25 of his 2004 Schedule C petitioner claimed a

$9,108 deduction for utilities, including what petitioner

contends is a $2,861 expense for telephone service. In the

notice of deficiency respondent allowed a utilities expense for

50 percent of petitioner’s cell phone bill.

Petitioner, via the statements from his Commerce Bank

accounts, has established that he made payments to AT&T and

Verizon, but he has failed to establish that the payments were

ordinary and necessary to carrying on his trade or business. It

remains unclear whether the payments to AT&T and Verizon were for

telephone service to his office, his home, or both, and if to his

home what portion of the telephone service was for personal

versus business use.

At trial petitioner asserted that the AT&T service was to

his Bala Cynwyd office and that he did not have any AT&T service

to his home. Petitioner, however, has failed to provide any

evidence, such as an invoice or bill establishing that the AT&T

service was to his Bala Cynwyd office, corroborating his self-

serving statement. Consequently, we find that petitioner has

failed to adequately substantiate a business purpose for his

payments to AT&T and Verizon. Accordingly, we hold that
 - 16 -

petitioner is not entitled to a deduction for utilities expenses

beyond that already allowed by respondent.

4. Deductions Related to the Business Use of a Taxpayer’s
Home

Section 280A(a) provides as a general rule that no deduction

otherwise allowable to an individual “shall be allowed with

respect to the use of a dwelling unit which is used by the

taxpayer during the taxable year as a residence.” This seemingly

prohibitory rule is ameliorated by section 280A(c), which

provides exceptions for certain business use. As relevant

herein, section 280A(c)(1) provides:

SEC. 280A(c). Exceptions for Certain Business or
Rental Use; Limitation on Deductions for Such Use.--

(1) Certain business use.--Subsection (a)
shall not apply to any item to the extent such
item is allocable to a portion of the dwelling
unit which is exclusively used on a regular
basis--

(A) as the principal place of business
for any trade or business of the taxpayer,

(B) as a place of business which is used
by patients, clients, or customers in meeting
or dealing with the taxpayer in the normal
course of his trade or business, or

(C) in the case of a separate structure
which is not attached to the dwelling unit,
in connection with the taxpayer’s trade or
business.

Thus, for a deduction to be allowed under section 280A(c)(1) “the

taxpayer must establish that a portion of his dwelling unit is

(1) exclusively used, (2) on a regular basis, [and] (3) for the
 - 17 -

purposes enumerated in subparagraphs (A), (B), or (C) of section

280A(c)(1)”. Hamacher v. Commissioner, 94 T.C. 348, 353 (1990).

Petitioner did not claim a home office deduction on line 30

of his 2004 Schedule C, nor did he attach to his return a Form

8829, Expenses for Business Use of Your Home. Rather, petitioner

claimed his alleged home office expenses in other areas of his

2004 Schedule C; e.g., on line 20b as rent or lease of other

business property and on line 21 as repairs and maintenance. In

this regard, petitioner testified that his home office expenses

included items such as cable television to his home paid to

Comcast, Internet and email service to his home through AOL,

mortgage payments (which petitioner stated he treated as rent

since neither he nor his wife owned the home), other home

maintenance items, such as cutting and maintaining the lawn, and

utilities.

In the notice of deficiency respondent disallowed in full

petitioner’s claimed repairs and maintenance expense of $3,260

because petitioner had not established business use of his home.

Furthermore, respondent disallowed all of petitioner’s claimed

utilities expense, except for 50 percent of the cell phone

expense as previously discussed, because petitioner had not

established business use of his home. Respondent did allow

$17,194 of the $32,301 petitioner claimed for rent or lease of

other business property as it was verified as rent for the Bala
 - 18 -

Cynwyd office. The remaining $15,107 purportedly relates to

mortgage (or rent) payments for petitioner’s home.

On the basis of the record before us, we find that

petitioner has not established the portion of his home that was

used exclusively on a regular basis for business as required by

section 280A(c)(1). Consequently, we need not determine whether

petitioner’s home office was his principal place of business, see

sec. 280A(c)(1)(A), or whether his home office was used by

clients in meeting with petitioner in the normal course of his

trade or business, see sec. 280A(c)(1)(B). Accordingly, we hold

that petitioner is not entitled to any deductions related to the

business use of his residence beyond those which responded has

already allowed.

5. “Other Expenses”

On line 27 of his 2004 Schedule C petitioner claimed a

$25,977 deduction for other expenses. The $25,977 claimed

deduction included $17,867 for “outsourcing temp. secretary

service” and $8,110 for “court stenographers, transcripts, filing

costs, expert fees, duplication of records” (filing costs). At

trial and on brief petitioner also asserted that certain deposits

made into his Commerce Bank accounts included reimbursements for

litigation costs he paid (litigation costs). See supra p. 10.

In the notice of deficiency respondent disallowed the full

$17,867 deduction for other expenses as reported on Schedule C,
 - 19 -

explaining that the expenses were for payments made to

petitioner’s son or cash withdrawals from an automatic teller

machine and that no business purpose has been established. The

only indication that petitioner gave at trial or on brief that he

paid any person for services rendered to his law practice, other

than a referral fee, was that he made payments to his son, Seth

Brown.

Petitioner testified that his son is a graduate of Widener

Law School, that his son set his own hours, and that his son

worked for him, performing such tasks as contacting clients,

“doing research”, and “running my computer system”. Petitioner

provided “weekly time sheets” that were allegedly prepared by his

son. The Commerce Bank accounts statements also tend to

establish that petitioner wrote numerous checks made payable to

Seth Brown during 2004. Upon review of the record before us, we

are unable to reconcile the copies of canceled checks payable to

Seth Brown with the alleged weekly time sheets, and petitioner

has not made an attempt to reconcile them at trial or on brief.

Despite petitioner’s testimony that his son had told him that he

prepared a Form 1099 to be filed for the payments made to him,

the record is devoid of any such evidence. Petitioner’s son did

not testify. Furthermore, petitioner testified that he wrote

checks to his son drawn on the Commerce Bank accounts for both

personal and work-related purposes.
 - 20 -

Petitioner has failed to prove what portion, if any, of the

payments to his son was ordinary and necessary business expenses.

Accordingly, we hold that petitioner is not entitled to deduct

any of the payments made to his son.

As to the remaining $8,110 of filing costs, respondent

disallowed $5,759 because petitioner established neither a

business purpose nor that it was paid during the taxable year.

Respondent allowed a $2,351 deduction for filing costs. At trial

and on brief petitioner continues to contend that he is entitled

to the disallowed filing costs reported on the Schedule C and the

additional litigation costs he claimed at trial and on brief.

Petitioner, however, has failed to establish that he actually

paid these costs during the taxable year.

Respondent, however, has agreed to allow petitioner a

$21,282 deduction for his 2004 Schedule C line 27 “Other

expenses” ($18,931 as other expenses, $14,891 of which was not

claimed by petitioner on his 2004 Federal income tax return). We

hold that petitioner is not entitled to a deduction for other

expenses (including filing and litigation costs) beyond that

which respondent has allowed.

D. Accuracy-Related Penalty

In the notice of deficiency respondent determined that

petitioner is liable for a $6,898 accuracy-related penalty under

section 6662(a). Pursuant to section 7491(c), respondent bears
 - 21 -

the burden of production with respect to petitioner’s liability

for any penalty or addition to tax. If respondent meets this

burden, then petitioner bears the burden of establishing that an

exception to imposition of the penalty applies. See Higbee v.

Commissioner, 116 T.C. at 446-447.

Section 6662(a) and (b)(1) and (2) provides for an addition

to tax equal to 20 percent of the portion of the underpayment

attributable to, inter alia, negligence or disregard of rules or

regulations or any substantial understatement of tax.

The term “negligence” includes any failure to make a

reasonable attempt to comply with the provisions of the Internal

Revenue Code, and the term “disregard” means any careless,

reckless, or intentional disregard. Sec. 6662(c); see also

Matthies v. Commissioner, 134 T.C. ___, ___ (2010) (slip op. at

22). Negligence is the failure to exercise due care or the

failure to do what a reasonable and ordinarily prudent person

would do under the circumstances. Matthies v. Commissioner,

supra at ___ (slip. op. at 22) (citing Allen v. Commissioner, 92

T.C. 1, 12 (1989), affd. 925 F.2d 348 (9th Cir. 1991), and Neely

v. Commissioner, 85 T.C. 934, 947 (1985)).

An understatement of income tax is defined as the excess of

the amount of the tax required to be shown on the return for the

taxable year over the amount of the tax shown on the return. See

sec. 6662(d)(2)(A). For purposes of section 6662, there is a
 - 22 -

substantial understatement of income tax for any taxable year if

the amount of the understatement for the taxable year exceeds the

greater of 10 percent of the tax required to be shown on the

return for the taxable year or $5,000. See sec. 6662(d)(1)(A).

On his 2004 Federal income tax return petitioner reported

zero taxable income and, therefore, zero tax owed. Respondent

has shown that petitioner failed to keep adequate books and

records or to substantiate properly the items in question. Such

a failure is evidence of negligence. See sec. 1.6662-3(b)(1),

Income Tax Regs. Furthermore, after accounting for the

concessions made before and at trial, petitioner’s deficiency has

been preliminarily recalculated at $20,906. Thus, the

understatement of income tax ($20,906) exceeds the greater of 10

percent of the tax required to be shown on petitioner’s Federal

income tax return ($0 tax + $20,906 = $20,906, 10% of $20,906 =

$2,091) or $5,000. Therefore, petitioner’s understatement is

substantial. Consequently, we conclude that respondent has met

his burden of production for the determination of an accuracy-

related penalty based on either negligence or disregard of rules

or regulations or a substantial understatement of income tax.

On brief, other than a broad assertion that he contests the

accuracy-related penalty, petitioner fails to dispute the

imposition of the accuracy-related penalty. Petitioner did not

set forth or discuss the points of law and any disputed questions
 - 23 -

regarding this issue, and he has neither contended nor

established that he qualified for an exception to the imposition

of the accuracy-related penalty; e.g., the reasonable cause

exception found in section 6664(c). On the basis of the record

we hold that petitioner is liable for the accuracy-related

penalty.

In reaching our holdings herein, we have considered all

arguments made, and to the extent not mentioned above, we find

them to be moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered

under Rule 155.