Hollingsworth v. Comm'r

T.C. Memo. 2010-262

UNITED STATES TAX COURT

HAL HOLLINGSWORTH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 3131-09. Filed December 2, 2010.

R determined a deficiency in income tax and a penalty
under sec. 6662, I.R.C., for P’s 2005 tax year that were
based on P’s failure to include certain receipts in income
and the disallowance of certain deductions.

Held: R’s determinations are sustained.

Hal Hollingsworth, pro se.

Karen Lapekas and Michelle M. Robles, for respondent.
 - 2 -

MEMORANDUM FINDINGS OF FACT AND OPINION

WHERRY, Judge: This case is before the Court on a petition

for redetermination of respondent’s determination in a notice of

deficiency that petitioner owed an income tax deficiency and a

section 6662 penalty for his 2005 tax year.1 After concessions

by the parties,2 the issues for determination are:

(1) Whether petitioner’s distributions from his section

401(k) retirement savings account are taxable;

(2) whether petitioner received self-employment income in

2005;

(3) whether petitioner is entitled to a deduction for

expenses claimed on Schedule C, Profit or Loss From Business;

(4) whether petitioner is entitled to a deduction claimed on

Schedule A, Itemized Deductions, for charitable contributions

within the meaning of section 170; and

(5) whether petitioner is liable for an accuracy-related

penalty under section 6662(a).

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the year at issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
2
Petitioner conceded respondent’s determination that a $189
State tax refund from the State of New York is includable in
petitioner’s gross income. Respondent conceded his proposed
capital gain adjustment of $5,236 and petitioner’s entitlement to
a short term capital loss of $922.
 - 3 -

FINDINGS OF FACT

Some of the facts have been stipulated. The stipulated

facts, with accompanying exhibits, are hereby incorporated by

this reference. At the time his petition was filed, petitioner

resided in Miami, Florida.

In 2004, after losing his job, petitioner moved from New

York to Miami.3 Petitioner moved to Miami in order “to try to

put things back together again”.

When petitioner first moved to Miami, he lived with his

sister, Maria Sherrer (Ms. Sherrer). Although he would

occasionally make contributions to household expenses, petitioner

did not pay Ms. Sherrer any rent. Petitioner also sometimes

helped Ms. Sherrer at her business, Sherrer and Sherrer

Accounting and Tax Preparation Services, doing minor tasks such

as filing, helping with advertising, inputting numbers into a

computer, and taking basic information from Ms. Sherrer’s

clients. Petitioner was not compensated for his work at Ms.

Sherrer’s business.

After moving to Miami, petitioner became involved in the Out

of the Ashes Foundation, Inc. (foundation), a charitable

3
At trial petitioner contradicted himself by stating he
moved to Miami in 2004 and later stating that he moved in 2005.
Although resolution of this question does not affect the outcome
of this case, because petitioner’s sister, Maria Sherrer,
testified that petitioner moved in 2004 and petitioner’s
testimony was more definite when he spoke of moving in 2004, we
have found that petitioner moved in 2004.
 - 4 -

organization that works with inner-city children. During 2005

petitioner was a member, director, and employee of the

foundation. Ms. Sherrer was president of the foundation.

Petitioner donated small amounts of cash to the foundation

throughout 2005 but kept no records of these contributions.

Petitioner explained that in approximately July 2005 he

started a multifaceted business called Xcluseif, Inc., which was

incorporated during the 2005 tax year but has since been

dissolved.4 We take judicial notice of the Florida Department of

State Division of Corporations’ Web site, which reports that the

articles of incorporation for Xcluseif were filed on July 19,

2005, and that Xcluseif was administratively dissolved for

failing to file an annual report on September 15, 2006.5

Petitioner attempted to get a “Tax ID number” for Xcluseif

but did not succeed.6 Petitioner intended to operate various

4
For ease of reference, we refer to the business as simply
Xcluseif throughout this opinion.
5
A court may take judicial notice of appropriate
adjudicative facts at any stage in a proceeding, whether or not
the notice is requested by the parties. See Fed. R. Evid.
201(c), (f); see also United States v. Harris, 331 F.2d 600, 601
(6th Cir. 1964) (explaining that a court may take judicial notice
sua sponte). In general, the court may take notice of facts that
are capable of accurate and ready determination by resort to
sources whose accuracy cannot reasonably be questioned. Fed. R.
Evid. 201(b); see also Evans v. Commissioner, T.C. Memo. 2010-
207.
6
We assume petitioner is referring to an Employer
Identification Number, which is also known as a Federal Tax
(continued...)
 - 5 -

businesses through Xcluseif including putting drink machines at

various locations, providing a UPS shipping center, selling

things on eBay, and tutoring.

When petitioner first started Xcluseif, he was still living

with Ms. Sherrer and performed most of the work for Xcluseif on

his computer at Ms. Sherrer’s house. Ms. Sherrer explained that

petitioner eventually opened an outlet for Xcluseif on Biscayne.

Petitioner paid the expenses attributable to Xcluseif out of

his personal account and with his personal credit cards. While

petitioner claimed that he kept records of these expenses, he did

not provide this Court with any of the records, stating at trial

that he was unaware that they were requested or that Xcluseif was

being audited.

In 2005, because of his financial difficulties and,

according to petitioner, Hurricane Katrina, he made two

withdrawals from his section 401(k) retirement savings account

(401(k) account) for a total distribution of $16,951. According

to petitioner, most of the distributed money “went toward paying

off the loans [he] had taken in previous years against it * * *

the small amount that remained was in part used to make ends meet

during that time.”

6
(...continued)
Identification Number. We continue to use petitioner’s term of
“Tax ID number”.
 - 6 -

Ms. Sherrer prepared petitioner’s 2005 tax return, for which

petitioner claimed to have paid her $650 in 2006.7 Ms. Sherrer’s

highest degree is an associate’s degree in accounting from Miami

Jacobs College. Ms. Sherrer is not herself a certified public

accountant, but she “[makes] sure that one is attached to [her]

office”. Petitioner’s 2005 Form 1040, U.S. Individual Income Tax

Return, was filed electronically on February 6, 2006. Three

items on the Form 1040 are relevant in this case.

First, petitioner claimed a business loss of $19,570 that

was due to Xcluseif. On the attached Schedule C petitioner

reported gross receipts of $1,500 and total expenses of $21,070,

leading to the $19,570 loss. Petitioner listed the gross

receipts and expenses from Xcluseif as income and expenses from

self-employment on Schedule C of his individual return because it

seems “the most appropriate thing to do” since Xcluseif did not

have a Tax ID number and he did not see a way to separate himself

and his personal expenses from Xcluseif.

Second, petitioner included in gross income his 401(k)

account distributions of $16,951 and claimed a corresponding

Schedule A deduction of $16,951 as “Unreimbursed employee

7
Petitioner paid Ms. Sherrer in 2006, as opposed to 2005,
because 2006 was the year that the return was filed. While both
petitioner and Ms. Sherrer testified that petitioner paid Ms.
Sherrer $650 for filing the 2005 return, evidence submitted to
this Court indicates that petitioner paid Ms. Sherrer $450 for
filing the 2005 return with the remaining $200 being the “balance
due from prior years”.
 - 7 -

expenses”.8 Petitioner claimed the $16,951 itemized deduction

because he “was aware that some regulations had been issued by

the government regarding expenses to offset the issues with

Katrina. * * * [However, he was] not sure about the details of

those exemptions or exclusions.” Ms. Sherrer was not aware of

any specific 2005 provision allowing petitioner to exclude the

401(k) account distributions from gross income and stated that

while she remembered “some kind of credit” she could not

“remember exactly what it” was.

Third, petitioner claimed a Schedule A deduction of $4,284

for asserted charitable contributions to the foundation.

Petitioner “was under the impression that charitable donations

were always tax deductible”. Ms. Sherrer relied on a document

from the foundation in claiming the charitable contribution

deduction. The document contained: (1) The name “Out of the

Ashes Foundation”, (2) a date of January 6, 2006, (3) a statement

that petitioner donated $4,725 in cash, and (4) the following

statement: “The above total represents all contributions

received during the year 2005”. The document did not contain

petitioner’s name or the specific 2005 dates on which petitioner

made contributions and in what individual amounts. In December

2009 Ms. Sherrer obtained a second document from the foundation

8
Also related to his 401(k) account withdrawals, petitioner
included $1,694 of sec. 72(t) additional tax “on IRAs, other
qualified retirement plans, etc.”
 - 8 -

which was identical to the first except that the line for the

donor which was previously blank now contained petitioner’s name.

Both documents indicated they were sent by “Dr. Carlton Fisher,

Chairman” and contained the hand-printed initials “C.F.” When

respondent attempted to call the telephone number listed on both

documents as the foundation’s, respondent reached Ms. Sherrer’s

tax preparation service.

Petitioner believed that at the time his 2005 tax return was

prepared, it was fair and accurate. On November 4, 2008,

respondent issued a notice of deficiency showing a deficiency in

income tax of $8,883 and a section 6662(a) penalty of $1,776.60.

Respondent’s adjustments to petitioner’s 2005 income tax return

which remain unresolved include: (1) Disallowing petitioner’s

$21,070 of Schedule C expenses; (2) disallowing petitioner’s

$16,951 Schedule A deduction for unreimbursed employee expenses;

(3) disallowing petitioner’s $4,284 Schedule A deduction for

charitable contributions; and (4) determining a section 6662(a)

accuracy-related penalty of $1,776.60.

On or about January 7, 2010, petitioner faxed to respondent

a signed Form 1040X, Amended U.S. Individual Income Tax Return,

for petitioner’s 2005 tax year. On the Form 1040X, petitioner:

(1) Removed both the income and expenses on Schedule C relating

to Xcluseif under the belief that they should be reported on a
 - 9 -

separately filed Federal income tax return;9 (2) claimed a

charitable contribution deduction of $5,509, a $1,225 increase

from the $4,284 which was deducted on the original Form 1040; and

(3) removed the $16,951 itemized deduction related to his 401(k)

account distributions, stating on the Form 1040X, Explanation of

Changes: “REMOVE IRA DISTRIBUTION KATRINA EXCLUSION OF

$16,951”.10

Trial was held on January 13, 2010, in Miami, Florida.

Additional discrepancies about the alleged 2005 charitable

contributions to the foundation arose at trial. Petitioner

testified that he donated at least $4,700, an amount which he

considered to be a fair deduction as it was actually less than

the true amount.

OPINION

Respondent did not amend his answer to accommodate the

amended tax return nor indicate that he would accept the amended

tax return. Therefore, we decide petitioner’s case on the basis

of the record and his original tax return. See Colvin v.

9
At trial, when attempting to explain the removal,
petitioner stated that since filing his original 2005 return he
had learned that he “should have been operating separate accounts
and everything for Xcluseif”. Even though petitioner alleges
that the income and expenses for Xcluseif should have been
separately reported, a Form 1120, U.S. Corporation Income Tax
Return, for Xcluseif’s 2005 tax year had not been filed as of the
date of trial.
10
While petitioner removed the $16,951 itemized deduction,
he retained the $16,951 in gross income.
 - 10 -

Commissioner, 122 Fed. Appx. 788, 790 (5th Cir. 2005) (“even if

the Commissioner had a legal duty to accept the amended return,

it would have no impact on the deficiencies upheld by the Tax

Court, because they were issued before * * * [the taxpayer]

attempted to submit his amended return, and amended returns do

not vitiate deficiencies that have already been issued.”), affg.

T.C. Memo. 2005-67. Furthermore, “the Internal Revenue Code does

not explicitly provide either for a taxpayer’s filing, or for the

Commissioner’s acceptance of an amended return; instead, an

amended return is a creature of administrative origin and grace.”

Badaracco v. Commissioner, 464 U.S. 386, 393 (1984).

I. Burden of Proof

In general, determination of a taxpayer’s tax liability is

presumed correct, and the taxpayer bears the burden of proving

that the Commissioner’s determination is improper. Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).11

11
Pursuant to sec. 7491(a), the burden of proof on factual
issues that affect the taxpayer’s tax liability may shift to the
Commissioner where the “taxpayer introduces credible evidence
with respect to * * * such issue.” The burden will shift only if
the taxpayer has, inter alia, complied with applicable
substantiation requirements and “cooperated with reasonable
requests by the Secretary for witnesses, information, documents,
meetings, and interviews”. Sec. 7491(a)(2). Petitioner did not
raise the burden of proof issue, did not introduce any credible
evidence, and failed to comply with the substantiation
requirements. Accordingly, the burden of proof remains on
petitioner.
 - 11 -

II. Whether Petitioner’s 401(k) Account Distributions Are
Taxable

Petitioner made two withdrawals from his 401(k) account in

2005, for a total distribution of $16,951. Petitioner included

$16,951 in income on both his original and amended returns.12

Statements made in a tax return signed by a taxpayer may be

treated as admissions. Lare v. Commissioner, 62 T.C. 739, 750

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

1975). Therefore, we treat petitioner’s inclusion of $16,951 in

income on both returns and removal of the $16,951 itemized

deduction on his amended return as an admission.13 Accordingly,

we sustain respondent’s adjustment on this issue.14

12
We refer to the Form 1040 as the original return and the
Form 1040X as the amended return.
13
If petitioner had not included the 401(k) account
distributions in income on his original return and removed the
corresponding deduction on his amended return, we would still
reach the same result. A distribution from a qualified
retirement plan, such as petitioner’s 401(k) account, is
includable in the distributee’s gross income in the year of
distribution. See secs. 61(a)(11), 402(a), 4974(c)(1).
Additionally, early withdrawals from sec. 401(k) plan accounts
are generally subject to the requirements of sec. 72(t), which
increases a taxpayer’s tax for the taxable year in which the
distribution occurs by 10 percent of the portion of such
distribution which is includable in gross income. See secs.
72(t)(1), 401(a), (k)(1), 4947(c); see also Uscinski v.
Commissioner, T.C. Memo. 2005-124. Petitioner never disputed the
$1,695 additional tax due under sec. 72(t) or argued that he fit
within one of the exceptions to the sec. 72(t) additional tax.
Further, petitioner included the $1,695 additional tax on both
his original and amended returns.
14
We realize petitioner continues to harbor a belief that is
entitled to a deduction of $16,951 for his 401(k) account
(continued...)
 - 12 -

III. Whether Petitioner Had Self-Employment Income

Petitioner listed the gross receipts and expenses of

Xcluseif on the Schedule C attached his original return. On his

amended return, petitioner omitted both the gross receipts and

the expenses.15

14
(...continued)
distributions, arguing in his posttrial brief that “consideration
could be given to the fact that these funds were used to survive
during a horrible hurricane season here in South Florida”.
Petitioner misunderstands applicable law. Under sec. 1400Q,
certain relief is given to individuals who make withdrawals from
qualified retirement plan accounts, such as petitioner’s 401(k)
account, if the withdrawal is a qualified hurricane distribution.
Sec. 1400Q(a). Potential relief here is that: (1) Unless the
taxpayer elects otherwise, any amount required to be included in
gross income for such taxable year shall be included ratably over
the 3-taxable-year period beginning with such taxable year and
(2) the sec. 72(t) additional tax shall not apply. Sec.
1400Q(a)(1), (5)(A). A qualified hurricane distribution is “any
distribution from an eligible retirement plan made on or after
August 25, 2005, and before January 1, 2007, to an individual
whose principal place of abode on August 28, 2005, is located in
the Hurricane Katrina disaster area and who has sustained an
economic loss by reason of Hurricane Katrina”. Sec.
1400Q(a)(4)(A)(i). Petitioner’s 401(k) account distributions are
not qualified hurricane distributions for the following reasons:
(1) Petitioner did not prove that the distributions took place
after Aug. 25, 2005 and (2) other than his unsupported and self-
serving testimony, petitioner did not provide evidence that he
suffered an economic loss by reason of Hurricane Katrina; rather,
it appears petitioner’s economic hardship is due more to the fact
that he lost his job in New York and Xcluseif failed. For these
reasons, petitioner is not entitled to take advantage of the sec.
1400Q relief provisions.
15
According to the Schedule C attached to the original
return, gross receipts were $1,500 and total expenses were
$21,070, resulting in a loss of $19,570. It is unclear from
petitioner’s amended return whether he removed the $19,570 loss.
He stated in the explanation of changes section on the amended
return “remove sch. C loss of $21,070.” This statement is
(continued...)
 - 13 -

Petitioner asserts that it was proper to remove the revenue

and expenses related to Xcluseif from his individual tax return

because they should be reported on a separate Form 1120, U.S.

Corporation Income Tax Return. Respondent urges the opposite--

that the revenue and expenses relating to Xcluseif should be

reported as due to self-employment on Schedule C of petitioner’s

individual tax return. We agree with respondent that Xcluseif

should be disregarded and the income and expenses attributed to

petitioner individually.

A corporation is to be respected as a taxable entity

separate and distinct from its owners where the corporation

either is organized for a business purpose or carries on a

business after incorporation. Serot v. Commissioner, T.C. Memo.

1994-532 (citing Moline Props., Inc. v. Commissioner, 319 U.S.

436, 438-439 (1943)), affd. 74 F.3d 1227 (3d Cir. 1995). While a

taxpayer is free to adopt various forms of doing business, the

15
(...continued)
unclear because the loss was $19,570, not $21,070. It was the
Schedule C expenses which were $21,070. We conclude that
petitioner removed the $19,570 loss as opposed to the $21,070
expenses for two reasons. First, petitioner’s trial testimony
indicates that petitioner believes that the income and expenses
due to Xcluseif should have been filed separately on a Form 1120.
Second, petitioner’s amended tax return does not balance
otherwise. On the amended return, petitioner made a net increase
in adjusted gross income of $33,912 due to four items: (1)
Inclusion of a $189 New York State tax refund; (2) inclusion of
$16,951 due to the 401(k) account withdrawal; (3) a $2,798
capital loss not previously listed; and (4) removal of the net
loss of $19,570 previously reported on Schedule C.
 - 14 -

entity must have been organized for a substantial business

purpose or actually engage in substantive income-producing

activity in order to be recognized as a separate taxable entity.

See Pate v. Commissioner, T.C. Memo. 2008-272 (citing

Commissioner v. Culbertson, 337 U.S. 733, 743 (1949)), affd. in

part and remanded in part 364 Fed. Appx. 917 (5th Cir. 2010).

Xcluseif was incorporated on July 19, 2005. Petitioner

claims Xcluseif had $1,500 of revenue and $21,070 of expenses

during the 2005 tax year. Yet petitioner failed to prove either

that the revenue and expenses were not his and belonged to

Xcluseif or that the revenue and expenses dated from after July

19, 2005, and not before. While petitioner argued that a Form

1120 should be filed for Xcluseif’s 2005 tax year, as of the date

of trial, a Form 1120 had not been filed.

Petitioner admitted that he never received a Tax ID number

for Xcluseif. Petitioner never filed an annual report for

Xcluseif. It is unclear what Xcluseif’s principal business

purpose was. The record does not establish whether Xcluseif ever

had a place of business; and petitioner acknowledged that “in the

end [Xcluseif] never really got off the ground”. Petitioner paid

for Xcluseif’s expenses out of his personal account and stated he

“didn’t see any way to, to separate [himself] and [his] own

expenses, personal expenses, from the things that [he] spent on

Xcluseif.”
 - 15 -

We conclude that Xcluseif had no separate legal existence

from petitioner and therefore will not be recognized as a

separate entity for Federal tax purposes. We sustain

respondent’s determination that revenue and expenses attributable

to Xcluseif are properly classified as due to self-employment and

should be reported on petitioner’s individual tax return. Since

we hold petitioner had self-employment income, petitioner is also

subject to self-employment taxes and is entitled to a deduction

for one-half of the tax amount.16 See sec. 164(f).

IV. Deductions

Deductions are a matter of legislative grace, and taxpayers

bear the burden of proving entitlement to any claimed deduction.

Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992). Taxpayers are required to identify each deduction

available and show that they have met all requirements as well as

to keep books or records to substantiate all claimed deductions.

Roberts v. Commissioner, 62 T.C. 834, 836-837 (1974).

16
Sec. 1401 imposes, in addition to other taxes, a tax of
12.40 percent on the self-employment income of every individual.
One-half of this tax is then deductible from adjusted gross
income (AGI) under sec. 164(f)(1). Sec. 1402(b) defines “self-
employment income” as an individual’s “net earnings from self-
employment”. Sec. 1402(a) defines “net earnings from self-
employment” as “the gross income derived by an individual from
any trade or business carried on by such individual, less the
[claimed] deductions [in the year in issue] allowed by this
subtitle which are attributable to such trade or business”.
 - 16 -

A. Whether Petitioner Is Entitled To Deduct Expenses
Listed on Schedule C

After holding, see supra part III, that petitioner must

include the revenue and expenses attributable to Xcluseif as due

to self-employment on his individual tax return, we must

determine which, if any, of the $21,070 of claimed expenses

petitioner is allowed to deduct.

Section 162(a) authorizes a deduction for “all the ordinary

and necessary expenses paid or incurred during the taxable year

in carrying on any trade or business”. A trade or business

expense is ordinary for purposes of section 162 if it is normal

or customary within a particular trade, business, or industry and

is necessary if it is appropriate and helpful for the development

of the business. Commissioner v. Heininger, 320 U.S. 467, 471

(1943); Deputy v. du Pont, 308 U.S. 488, 495 (1940).

The evidence is unclear as to what Xcluseif’s business

actually entailed, and thus the Court has no way to determine

which expenses are ordinary and necessary. And even if

petitioner demonstrated that the alleged expenses were ordinary

and necessary to Xcluseif’s business, he did not substantiate

them. The record consists only of petitioner’s unsupported

testimony. He claims he kept records, but they are not a part of

the record in this case. Where taxpayers do not substantiate

their reported expenses, the Commissioner is not arbitrary or

unreasonable in determining that the claimed deductions should be
 - 17 -

denied. See Roberts v. Commissioner, supra at 837.17

Accordingly, we sustain respondent’s adjustment disallowing

petitioner’s Schedule C expenses of $21,070.

B. Whether Petitioner Is Entitled to a Schedule A
Deduction for Charitable Contributions Within the
Meaning of Section 170

While petitioner claims he is entitled to a Schedule A

deduction for his charitable contributions to the foundation, he

has been inconsistent as to what amount he contributed, claiming

$4,284 on his original return, $5,509 on his amended return, and

$4,700 at trial. Additionally, the document from the foundation

that Ms. Sherrer used to claim the charitable contribution

deduction listed $4,725 as petitioner’s charitable contribution.

Section 170(a)(1) allows a deduction for contributions to

charitable organizations defined in section 170(c). Section

170(f)(8) provides recordkeeping requirements for certain

charitable contributions. Specifically, section 170(f)(8)(A)

provides: “No deduction shall be allowed under subsection (a)

for any contribution of $250 or more unless the taxpayer

substantiates the contribution by a contemporaneous written

17
Under Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.
1930), if a taxpayer claims a deduction for a business expense
and cannot fully substantiate it, the Court, except for expenses
governed by sec. 274, may approximate the allowable amount.
However, the taxpayer must provide reasonable evidence from which
to estimate that amount. Vanicek v. Commissioner, 85 T.C. 731,
742-743 (1985). The lack of any evidence in this case precludes
this Court from attempting an approximation.
 - 18 -

acknowledgment of the contribution by the donee organization that

meets the requirements of subparagraph (B).”18 The written

acknowledgment must include: (1) The amount of the cash

contribution, (2) whether the donee organization provided any

goods or services in consideration of the donation, and (3) if

so, a description and good faith estimate of the value of those

goods or services. Sec. 170(f)(8)(B). A written acknowledgment

is contemporaneous if it is obtained by the taxpayer on or before

the earlier of: (1) The date the taxpayer files the original

return for the taxable year of the contribution or (2) the due

date (including extensions) for filing the original return for

the year. Sec. 170(f)(8)(C); sec. 1.170A-13(f)(3), Income Tax

Regs.

Petitioner relies on two different documents from the

foundation to substantiate his charitable contribution deduction.

The first document has a date of January 6, 2006, and does not

contain petitioner’s name. The second was received in December

2009 and is identical to the first except that it does contain

petitioner’s name.19

18
Separate contributions of less than $250 are not subject
to the requirements of sec. 170(f)(8), regardless of whether the
sum of the contributions made by a taxpayer to a donee
organization during a taxable year equals $250 or more. See sec.
1.170A-13(f)(1), Income Tax Regs.
19
The first letter was marked Exhibit 4-P and the second
Exhibit 5-P. Respondent objected to both exhibits on grounds of
(continued...)
 - 19 -

Both documents fail the requirements of section 170(f)(8)

because they fail to state whether the foundation provided any

goods or services in consideration for petitioner’s charitable

contribution. See Friedman v. Commissioner, T.C. Memo. 2010-45

(stating that the statement under section 170(f)(8)(B)(ii) that

no goods or services were provided by the donee in exchange for

the contribution is necessary for a charitable contribution

deduction); Kendrix v. Commissioner, T.C. Memo. 2006-9 (denying a

charitable contribution deduction because the receipt failed to

state whether the donee provided any goods or services in

consideration); Castleton v. Commissioner, T.C. Memo. 2005-58

(denying a charitable contribution deduction for reasons

including that the receipt failed to state whether the donee

provided goods or services), affd. 188 Fed. Appx. 561 (9th Cir.

2006).20

19
(...continued)
authenticity. The issue of admissibility is moot because
petitioner is not entitled to a deduction for charitable
contributions regardless of whether the documents marked as
Exhibits 4-P and 5-P are introduced into evidence, and therefore
we need not decide the authenticity issue.
20
Other problems with both documents include that they fail
to state the date of petitioner’s contribution(s); they fail to
contain a breakdown of amounts petitioner contributed; the
original document does not contain petitioner’s name; and the
second document fails to meet the “contemporaneous” requirement
of sec. 170(f)(8). Petitioner testified that he contributed
small amounts to the foundation throughout the year, stating:
“The amounts [were] always small amounts. There was no time at
which I wrote a $5,000, a $2,000 check or a $500 check to Out of
(continued...)
 - 20 -

Because petitioner failed to substantiate his charitable

contributions, he is not entitled to a charitable contribution

deduction. Accordingly, we sustain respondent’s adjustment with

regard to this issue.

V. Section 6662 Accuracy-Related Penalty

Under section 7491(c), respondent bears the burden of

production with respect to petitioner’s liability for the section

6662(a) penalty. This means that respondent “must come forward

with sufficient evidence indicating that it is appropriate to

impose the relevant penalty.” See Higbee v. Commissioner, 116

T.C. 438, 446 (2001).

Section 6662(a) imposes an accuracy-related penalty of 20

percent on any underpayment that is attributable to causes

specified in subsection (b). Respondent asserts two causes

justifying the imposition of the penalty: Negligence and a

substantial understatement of income tax. Sec. 6662(b)(1) and

(2).

“[N]egligence” is “any failure to make a reasonable attempt

to comply with the provisions of * * * [the Internal Revenue

Code]”. Sec. 6662(c). Under caselaw, “‘Negligence is a lack of

20
(...continued)
the Ashes * * * I never had that amount of money”. The documents
stated: “the above total represents all contributions received
during the year 2005.” The total amount was $4,725. The
document was dated Jan. 6, 2006. We have no way of knowing on
the basis of these documents on what dates in 2005 petitioner
contributed cash to the foundation and in what amounts.
 - 21 -

due care or failure to do what a reasonable and ordinarily

prudent person would do under the circumstances.’” Freytag v.

Commissioner, 89 T.C. 849, 887 (1987) (quoting Marcello v.

Commissioner, 380 F.2d 499, 506 (5th Cir. 1967), affg. on this

issue 43 T.C. 168 (1964) and T.C. Memo. 1964-299), affd. 904 F.2d

1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991). Negligence can

also include any failure by the taxpayer to keep adequate records

and to substantiate items properly. Sec. 1.6662-3(b)(1), Income

Tax Regs. A substantial understatement of income tax is an

understatement that exceeds the greater of $5,000 or 10 percent

of the tax required to be shown on the return. Sec.

6662(d)(1)(A).

There is an exception to the section 6662(a) penalty when a

taxpayer can demonstrate: (1) Reasonable cause for the

underpayment and (2) that the taxpayer acted in good faith with

respect to the underpayment. Sec. 6664(c)(1). Regulations

promulgated under section 6664(c) further provide that the

determination of reasonable cause and good faith “is made on a

case-by-case basis, taking into account all pertinent facts and

circumstances” with the most important factor being the extent of

the taxpayer’s effort to assess the taxpayer’s proper tax

liability. Sec. 1.6664-4(b)(1), Income Tax Regs.

Petitioner was negligent and substantially understated his

2005 tax liability. Petitioner believed that when the tax return
 - 22 -

was prepared, it was “a fair and accurate way to report it”, yet

for most of the issues on the return “I feel unqualified to

comment.” When asked why he took certain positions in his tax

return, petitioner was vague and uninformed. He stated he

deducted his 401(k) account distributions because “the government

had issued that statement about Katrina”, but he was unsure

whether he was actually entitled to the deduction. He deducted

his charitable contributions because he “was always of the

opinion that charitable contributions were deductible”. He

failed to include the $189 New York State tax refund in income

for “no particular reason”. Further, petitioner failed to

substantiate his claimed expenses and deductions.

Petitioner relied on his sister to prepare his tax return,

but she was also vague and unsure of the law.21 She could not

remember why the 401(k) account distributions were deducted on

the original return. She indicated that she had gone over

21
This Court has articulated a three-prong test in cases
where a taxpayer attempts to rely upon professional advice to
negate a sec. 6662(a) accuracy-related penalty determined by the
Commissioner. In order to do so, “the taxpayer must prove * * *
that the taxpayer meets each requirement of the following three-
prong test: (1) The adviser was a competent professional who had
sufficient expertise to justify reliance, (2) the taxpayer
provided necessary and accurate information to the adviser, and
(3) the taxpayer actually relied in good faith on the adviser’s
judgment.” Neonatology Associates, P.A. v. Commissioner, 115
T.C. 43, 99 (2000), affd. 299 F.3d 221 (3d Cir. 2002). Further,
“reliance may not be reasonable or in good faith if the taxpayer
knew, or reasonably should have known, that the advisor lacked
knowledge in the relevant aspects of Federal tax law.” Sec.
1.6664-4(c)(1), Income Tax Regs.
 - 23 -

Katrina relief issues with Stuart Gladsden, a certified public

accountant she consulted with but did not remember details; she

was unsure whether she applied 2005 law when preparing

petitioner’s return; and she could not remember any of the

documents or receipts she used in preparing the return and “never

really noticed that [petitioner’s] name was not on the first”

document from the foundation used in claiming the charitable

contribution deduction.

On the basis of the above, respondent has met his burden of

production with regard to the section 6662(a) accuracy-related

penalty and petitioner has failed to meet the burden of proof

with regard to the section 6664(c)(1) exception. Therefore, we

sustain respondent’s imposition of a section 6662(a) accuracy-

related penalty for petitioner’s 2005 tax year.

The Court has considered all of petitioner’s contentions,

arguments, requests, and statements. To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.

To reflect the foregoing,

Decision will be entered

under Rule 155.