T.C. Memo. 2011-99
UNITED STATES TAX COURT
DONALD T. AND MARLENE B. ROBINSON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20544-08. Filed May 5, 2011.
Donald T. and Marlene B. Robinson, pro sese.
Jason M. Kuratnick, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
WELLS, Judge: Respondent determined deficiencies, additions
to tax for failure to file timely pursuant to section 6651(a)(1),
and accuracy-related penalties pursuant to section 6662(a) with
respect to petitioners’ Federal income tax as follows:1
1
All section references are to the Internal Revenue Code in
(continued...)
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Addition to Tax Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)
2004 $7,965 $645.00 $1,593.00
2005 9,634 940.75 1,923.80
The issues we must decide are: (1) Whether the burden of
proof has shifted to respondent pursuant to section 7491(a); (2)
whether petitioner husband was an employee or an independent
contractor of Temple University; (3) whether petitioners are
entitled to deduct business expenses reported on their returns on
Schedules C, Profit or Loss From Business; (4) whether
petitioners are entitled to deduct employee business and
miscellaneous expenses reported on their returns on Schedules A,
Itemized Deductions; (5) whether petitioners are liable for the
additions to tax under section 6651(a)(1) for failure to file
timely returns; and (6) whether petitioners are liable for
accuracy-related penalties pursuant to section 6662(a).
FINDINGS OF FACT
Some of the facts and certain exhibits have been stipulated.
The parties’ stipulations of fact are incorporated in this
opinion by reference and are found accordingly. At the time they
filed their petition, petitioners were residents of Pennsylvania.
Petitioners are husband and wife (hereinafter referred to
1
(...continued)
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
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individually as Mr. Robinson or Mrs. Robinson, respectively) who
filed joint tax returns for their 2004 and 2005 tax years (the
years in issue).
During the years in issue Mr. Robinson was employed as a
full-time professor at Rowan University, where he taught classes
related to criminal justice. Over the past several decades, Mr.
Robinson has earned income periodically from other activities
such as writing training curriculums for police officers and
providing expert testimony. Since 1985 a large part of his
outside work has included teaching classes at Temple University
(Temple) and preparing curriculums for Temple’s training
programs.
Although respondent sometimes characterized Mr. Robinson’s
position at Temple as adjunct professor, Mr. Robinson was
technically a vocational instructor. The courses he taught were
not part of the university’s regular curriculum; rather, they
were part of its Criminal Justice Training Program (CJTP). The
courses offered through the CJTP were not offered for college
credit to regular Temple students. Instead, the students Mr.
Robinson taught were usually police officers or other criminal
justice personnel enrolled in the CJTP’s Municipal Police
Academy. The students usually were assigned to the CJTP’s
Municipal Police Academy by a Pennsylvania State law enforcement
training commission such as the Pennsylvania Commission on Crime
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and Delinquency or the Municipal Police Officers’ Education and
Training Commission. In most cases, Temple operated the courses
under a contract billed to the Commonwealth of Pennsylvania.
Mr. Robinson was not responsible for managing the enrollment
in his classes, and Temple provided him with classroom space.
Mr. Robinson bore no risk of loss from underenrollment in the
courses, and he had no possibility of earning a profit in excess
of his agreed compensation from Temple. The curricula he wrote
were prepared at the direction of Temple, which set the deadline
for his finished product. The topics to be covered in the
curricula were conveyed to him by Temple, but frequently they
were mandated by the State commissions that contracted with
Temple. Sometimes Mr. Robinson was responsible for only a
portion of the curriculum; at other times he wrote or edited the
entire curriculum. The completed curricula became the property
of Temple.
Mr. Robinson was paid an hourly rate for teaching and a flat
rate for updating curricula.2 Before 2003 Mr. Robinson earned
2
Although the documents the CJTP submitted to Temple’s
payroll department to report compensation due to Mr. Robinson
provide numbers of hours and hourly rates for his work updating
curricula, those documents are inconsistent with the “Curriculum
Development Proposal” also in the record, which provides a flat
fee for updating curriculums. Because the documents submitted to
the payroll department are generic, because the “Curriculum
Development Proposal” stated the full amount Mr. Robinson would
be paid before the time he had completed the task, and because
the “Curriculum Development Proposal” provides significantly more
(continued...)
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substantial income from teaching and updating curricula at
Temple, sometimes as much as $35,000 per year. However, in
recent years he has not been hired as often by Temple. During
2004 Mr. Robinson received $1,295 from Temple for teaching 8 days
during the Municipal Police Academy, which met from May to
October, and $500 for updating one curriculum. His teaching
services and his curriculum updating services were engaged under
separate agreements entered at different times. During 2005 Mr.
Robinson received $4,145 from Temple for teaching portions of
three different courses, and he received $900 for updating
curricula. His 2005 income from Temple was paid pursuant to four
separate agreements between Mr. Robinson and Temple.
From 1985 until 1996 Temple treated Mr. Robinson as an
independent contractor and reported his income on Forms 1099-
MISC, Miscellaneous Income.3 Beginning around 1996, Temple began
to treat Mr. Robinson as an employee and report his income on
Forms W-2, Wage and Tax Statement. Mr. Robinson requested that
Temple treat him as an independent contractor, but Temple
refused. Nonetheless, petitioners continued to report Mr.
Robinson’s income on their Schedule C as if he were an
2
(...continued)
detail about the agreement between the parties, we conclude that
Mr. Robinson was paid a flat fee for his work updating curricula.
3
Petitioner testified that Temple used to report his income
on Form 1099-C, but we assume he meant Form 1099-MISC,
Miscellaneous Income, and not Form 1099-C, Cancellation of Debt.
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independent contractor. During the years in issue, Temple
treated Mr. Robinson as a part-time employee and issued him Forms
W-2.
Temple did not provide Mr. Robinson with an office, and he
completed his work for Temple out of an office in his home. His
office at home occupied 200 square feet of his 3,500-square-foot
home. During the years in issue his office was not used by
anyone else except to pass through it.
During the years in issue Mrs. Robinson was employed as the
general manager for Influence Marketing, a wholly owned
subsidiary of QVC, Inc. As general manager, she was in charge of
two operations: One in nearby Pennsylvania and one at the Mall
of America in Minnesota. Mrs. Robinson’s operations are retail
locations and also attract tourists who receive tours of the QVC
facility. Additionally, the operation in Pennsylvania has an
audience venue that hosts a variety of events including
interviews with celebrities who endorse QVC products. Mrs.
Robinson was responsible for the profitability of both locations
and had control over “strategic initiatives”.
Mrs. Robinson was eligible for reimbursement of her
employee-related expenses. She made a number of trips to visit
the Mall of America in Minnesota, and each of those trips was
reimbursed in full by Influence Marketing. In total, she was
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reimbursed for expenses of $9,886.10 and $8,436.23 during
petitioners’ 2004 and 2005 tax years, respectively.
Petitioners were involved in a prior dispute before the Tax
Court regarding whether Mr. Robinson qualified as an independent
contractor when he performed services for Temple. That dispute
ended when the Internal Revenue Service (IRS) stipulated that
petitioners had no deficiency for the year there in issue. We
take judicial notice of the stipulated decision entered in the
case at docket No. 10791-04S on November 2, 2004.
Petitioners filed late tax returns for the years in issue.
The IRS did not receive petitioners’ 2004 tax return until April
19, 2007, and it did not receive their 2005 tax return until June
13, 2007.
On a Schedule C attached to their 2004 tax return,
petitioners reported income of $1,795 and expenses totaling
$25,164 relating to Mr. Robinson’s services to Temple. On a
Schedule A attached to their return, petitioners also claimed a
miscellaneous deduction of $23,597, in excess of the 2-percent
limitation. The largest portion of that deduction was from
employee business expenses Mrs. Robinson incurred in her
employment as a manager with Influence Marketing. Mr. Robinson
also claimed deductions for employee business expenses from his
position as a professor at Rowan University.
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Petitioners reported similar expenses on their 2005 tax
return. On their Schedule C for 2005, petitioners reported
income of $4,045 and expenses totaling $26,826 from Mr.
Robinson’s work at Temple. On their Schedule A, petitioners
claimed a miscellaneous deduction of $24,030, in excess of the
2-percent limitation. Most of the deductions on their Schedule A
were from unreimbursed employee business expenses petitioners
claimed from both of their full-time jobs.
On November 14 and December 12, 2007, respondent mailed
letters to petitioners notifying them that respondent was
examining their 2004 and 2005 tax returns. During the
examination petitioners did not provide any documentation
substantiating their reported expenses. Instead, Mr. Robinson
repeatedly insisted throughout the examination that the examining
officer needed to first separately consider whether he qualified
as an independent contractor with regard to the services he
performed for Temple.
On June 3, 2008, respondent issued petitioners a notice of
deficiency for the years in issue. In the notice of deficiency,
respondent asserted that: (1) Mr. Robinson was an employee of
Temple and not an independent contractor; (2) petitioners were
not entitled to deduct the Schedule C expenses reported on their
returns; and (3) petitioners were not entitled to deduct the
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employee business and miscellaneous expenses reported on their
returns.
Petitioners timely filed a petition seeking redetermination
of the deficiencies, additions to tax, and penalties.
OPINION
I. Whether the Burden of Proof Has Shifted Under Section
7491(a)
We consider as a preliminary matter petitioners’ contention
that the burden of proof has shifted to respondent pursuant to
section 7491(a). Generally, the Commissioner’s determination of
a deficiency is presumed correct, and the taxpayer has the burden
of proving it incorrect. Rule 142(a); Welch v. Helvering, 290
U.S. 111, 115 (1933). Section 7491(a)(1) provides an exception
that shifts the burden of proof to the Commissioner as to any
factual issue relevant to a taxpayer’s liability for tax if: (1)
The taxpayer introduces credible evidence with respect to such
issue; and (2) the taxpayer satisfies certain other conditions,
including substantiation of any item and cooperation with the
Government’s requests for witnesses, documents, other
information, and meetings. Sec. 7491(a)(2); see also Rule
142(a)(2). Taxpayers bear the burden of proving that they have
met the requirements of section 7491(a). Rolfs v. Commissioner,
135 T.C. 471, 483 (2010).
Petitioners contend that they have satisfied the
requirements of section 7491(a) and that the burden of proof as
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to all factual issues affecting the deficiencies in their taxes
should be shifted to respondent. Respondent contends that the
burden should not shift because petitioners have not
substantiated their claimed expenses and did not cooperate with
respondent’s requests for documentation. We agree with
respondent that the burden of proof remains with petitioners
because, as we explain below, we conclude that petitioners have
failed to substantiate their reported expenses.
II. Whether Mr. Robinson Qualified as an Employee or an
Independent Contractor When He Rendered Services to Temple
University
Whether a taxpayer is an independent contractor or an
employee is decided by applying common law principles to the
specific facts and circumstances of the case. Nationwide Mut.
Ins. Co. v. Darden, 503 U.S. 318, 323-325 (1992); Weber v.
Commissioner, 103 T.C. 378, 386 (1994), affd. 60 F.3d 1104 (4th
Cir. 1995). For guidance on whether a worker qualifies as an
employee under common law principles, courts have generally
looked to the Restatement of Agency. Cmty. for Creative
Non-Violence v. Reid, 490 U.S. 730, 752 n.31 (1989). Relevant
factors include: (1) The degree of control exercised by the
principal; (2) which party invests in the work facilities used by
the worker; (3) the opportunity of the individual for profit or
loss; (4) whether the principal can discharge the individual; (5)
whether the work is part of the principal’s regular business; (6)
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the permanency of the relationship; (7) whether the worker is
paid by the job or by the time; (8) the relationship the parties
believed they were creating; and (9) the provision of employee
benefits. See Ewens & Miller, Inc. v. Commissioner, 117 T.C.
263, 270 (2001); DeTorres v. Commissioner, T.C. Memo. 1993-161;
see also 1 Restatement, Agency 2d, sec. 220 (1958). We consider
all of the facts and circumstances of each case, and no single
factor is dispositive. Ewens & Miller, Inc. v. Commissioner,
supra at 270.
Respondent argues that Mr. Robinson’s working arrangement
with Temple is similar to the taxpayers’ positions as adjunct
professors in Potter v. Commissioner, T.C. Memo. 1994-356, and
Bilenas v. Commissioner, T.C. Memo. 1983-661, and that Mr.
Robinson similarly should be treated as a part-time employee. In
both of those cases the taxpayers were hired by their respective
universities as adjunct professors to teach semester-long classes
on a class-by-class basis. The schools determined which courses
those adjunct professors would teach and where they would teach
them. The schools managed enrollment in the courses and provided
classroom space. In both cases the universities treated the
relationship as an employer-employee relationship.
However, certain aspects of the instant case are more
similar to Reece v. Commissioner, T.C. Memo. 1992-335, in which
we held that the taxpayer’s position as an instructor for
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seminars he conducted as part of a university’s executive
education program was that of an independent contractor, not an
employee. In Reece, the taxpayer was employed by the university
as a full-time professor, and the taxpayer conducted corporate
seminar services to multiple clients in his spare time. Some of
the seminars he designed and led were taught through the
executive education program at the university, in classrooms
supplied by the university. The seminars led by the taxpayer
were short and were not offered for college credit. The
university considered the taxpayer’s seminar work separate from
his work as a professor and treated him, like its other seminar
instructors, as an independent contractor.
The principal’s degree of control over the details of the
taxpayer’s work is the most important factor in determining
whether a common law employment relationship exists. See
Clackamas Gastroenterology Associates, P.C. v. Wells, 538 U.S.
440, 448 (2003); Weber v. Commissioner, supra at 387. In an
employer-employee relationship the principal must have the right
to control not only the result of the employee’s work but also
the means and method used to accomplish that result. Packard v.
Commissioner, 63 T.C. 621, 629 (1975); Youngs v. Commissioner,
T.C. Memo. 1995-94, affd. without published opinion 98 F.3d 1348
(9th Cir. 1996). The degree of control necessary to find
employee status varies according to the nature of the services
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provided. Weber v. Commissioner, supra at 387. Where the nature
of the work is more independent, a lesser degree of control by
the principal may still result in a finding of an employer-
employee relationship. Potter v. Commissioner, supra; Reece v.
Commissioner, supra.
In each of Potter, Bilenas, and Reece, we concluded that the
taxpayer’s position as a professor (whether adjunct or otherwise)
required a certain degree of independence. Yet in Potter and
Bilenas we concluded that the taxpayer’s work as an adjunct
professor nonetheless resulted in an employer-employee
relationship. In Reece we stated that although the taxpayer’s
full-time job as a professor was no doubt that of an employee
despite the degree of independence inherent in that position, the
circumstances of the case did not warrant extending that
relationship to cover the taxpayer’s services as a seminar
instructor for the university’s executive education program.
The amount of control Temple exercised over Mr. Robinson in
his work as a vocational instructor is somewhere between that
exercised over the adjunct professors in Potter and Bilenas and
that exercised over the seminar instructor in Reece. In both
Potter and Bilenas the university mandated the courses the
respective adjunct professors were to teach, and in Bilenas the
school even selected the textbooks and syllabuses he was to use.
In contrast, in Reece the taxpayer wrote his own course materials
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and syllabuses even though those materials were published by the
school and were not permitted to be sold separately. Mr.
Robinson prepares the curricula for the courses he teaches.
Sometimes he is in charge of writing and editing the entire
curriculum; at other times he writes only a portion of it.
However, Mr. Robinson does not select the topics to cover in the
curricula; they are chosen by the State police commissions that
pay Temple. As in Reece, Temple publishes the work produced by
Mr. Robinson and distributes it with the course materials.
Accordingly, Temple exercises less control over Mr. Robinson’s
teaching work than the universities in Potter and Bilenas, but
more than the university in Reece.
A significant distinction between the instant case and the
Potter, Bilenas, and Reece cases is that in the instant case part
of Mr. Robinson’s work for Temple during the years in issue
consisted of writing and updating curricula. His work on the
curricula was separate and distinct from his teaching, and he was
compensated for that work by the job. Although the taxpayer in
Reece wrote his own curricula, he was not compensated for doing
so and wrote the curricula only to facilitate his teaching. The
only control Temple asserted over Mr. Robinson’s work updating
curricula was to set the deadlines for his work and convey the
general topics he was to cover. Temple did not exercise control
over how Mr. Robinson completed the curricula.
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The control test suggests that Mr. Robinson was an
independent contractor. See Packard v. Commissioner, supra at
629; see also Bernstein v. Universal Pictures, Inc., 517 F.2d
976, 980 (2d Cir. 1975) (although composers contracted for a
specific output, they worked at their own pace at home and were
not subject to day-to-day supervision, suggesting independent
contractor status because the principal had no right to control
the manner of performance).
As to the second factor, Temple provided the facilities
where Mr. Robinson taught but did not provide him an office or
any other space in which to write and update curricula.
The third factor asks whether the individual had the
opportunity for profit or loss. It is true, as respondent
asserts, that Mr. Robinson’s opportunity for profit or loss did
not depend upon the level of enrollment in his classes. However,
petitioners contend that the opportunity for profit or loss in
Mr. Robinson’s job as a police trainer did not consist of an
opportunity for profit or loss in individual courses he taught
but rather in how many courses he was hired to teach each year.
Mr. Robinson testified that although most of his outside income
has come from Temple, he has also received compensation from
providing expert testimony, conducting other training, and
curriculum writing. In Reece the taxpayer likewise provided
services as a seminar instructor both to the university and to
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other organizations. Unlike the taxpayer in Reece, Mr. Robinson
recently has not been successful at soliciting other buyers for
his services. However, the fact that he has not been successful
does not change the nature of his business.
The fourth factor requires us to consider whether the
principal could discharge the individual. Because petitioners
did not provide copies of Mr. Robinson’s contracts with Temple,
it is difficult to assess the discharge authority factor.
However, the record does contain several letters from Temple to
Mr. Robinson that suggest he was hired for individual jobs
several times each year. During 2004 he was separately hired to
teach eight classes and to update curricula, and during 2005
Temple entered into four separate agreements with Mr. Robinson.
Being repeatedly asked to perform discrete tasks under varying
payment terms suggests that if Temple had not satisfied with Mr.
Robinson’s performance, its recourse would have been to not hire
him for any more projects, rather than to discharge him.
The fifth factor asks whether the work performed by the
taxpayer was part of the principal’s regular business. Temple is
primarily a university and not a police training academy.
Although teaching is part of its business as a university, the
type of teaching that is central to its mission is teaching for-
credit courses completed by regularly enrolled students.
Teaching noncredit courses to police officers through contracts
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with the Commonwealth of Pennsylvania is not an essential part of
Temple’s regular business.
The sixth factor requires us to consider the permanence of
Mr. Robinson’s relationship with Temple. Although he has been
involved in the CJTP for many years, Mr. Robinson’s duties
teaching and writing curricula have fluctuated throughout that
period and recently have been very minimal. During 2004, for
instance, Mr. Robinson taught only 8 days and updated one
curriculum. Moreover, each of those assignments was a separate
engagement with Temple governed by different payment terms.
During 2005 he engaged in four separate agreements with Temple
for remuneration totaling only $5,045. His position at Temple is
significantly less permanent than that of the taxpayer in Potter,
who had taught semester-long courses for many consecutive years.
Again, Mr. Robinson’s situation is more similar to that of the
taxpayer in Reece, who had been teaching seminars through the
university’s executive education program for many years but
taught multiple small seminars for 12 to 25 days each year.
The seventh factor asks whether the taxpayer was paid by the
job or by the time. Mr. Robinson was paid an hourly wage for his
teaching duties, but he was paid a set fee for the curricula he
wrote. The hourly wage he received for teaching is consistent
with an employer-employee relationship, but the set fee for
writing curricula suggests an independent contractor
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relationship. See C.C. Eastern, Inc. v. NLRB, 60 F.3d 855, 859
(D.C. Cir. 1995) (that drivers were paid by the job suggested
independent contractor status); Marco v. Accent Publg. Co., 969
F.2d 1547, 1550 (3d Cir. 1992) (that a photographer was paid by
the job suggested independent contractor status); James v.
Commissioner, 25 T.C. 1296, 1300 (1956) (that a doctor was given
an annual salary and was not paid by the job suggested employee
status).
The eighth factor examines the relationship the parties
believed they were creating. Since 1996 Temple has issued Mr.
Robinson Forms W-2, and it denied his requests to issue him Forms
1099-MISC. From Temple’s perspective, Mr. Robinson was a part-
time employee. Temple’s treatment of Mr. Robinson as an employee
is different from the taxpayer’s treatment in Reece, where the
university did not consider the taxpayer’s services as a seminar
instructor to be within an employment relationship; but it is
consistent with the way the universities treated the adjunct
professors in Potter and Bilenas.
The ninth factor asks whether the alleged employer provided
employee benefits. Mr. Robinson received no employee benefits
from Temple.
Considering all of the foregoing facts and circumstances and
applying common law principles, we conclude that Mr. Robinson was
an independent contractor at Temple during the years in issue.
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III. Whether Petitioners Are Entitled to the Deductions They
Claimed for Each Year
Deductions are a matter of legislative grace, and taxpayers
generally bear the burden of proving their entitlement to the
deductions claimed. Sec. 6001; INDOPCO, Inc. v. Commissioner,
503 U.S. 79, 84 (1992). Section 162(a) permits “as a deduction
all the ordinary and necessary expenses paid or incurred during
the taxable year in carrying on any trade or business”. To be
deductible, ordinary and necessary expenses must be “directly
connected with or pertaining to the taxpayer’s trade or
business”. Sec. 1.162-1(a), Income Tax Regs. Additionally,
section 212 generally allows the deduction of ordinary and
necessary expenses paid or incurred during the tax year for the
production or collection of income. Sec. 1.212-1(d), Income Tax
Regs. The deduction for such expenses must be reasonable in
amount and bear a reasonable and proximate relationship to the
production or collection of taxable income. Id. However, a
taxpayer may not deduct personal expenses. Sec. 262(a).
Generally, a taxpayer must keep records sufficient to
establish the amounts of the items reported on his Federal income
tax return. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs.
In the event that a taxpayer establishes that a deductible
expense has been paid but is unable to substantiate the precise
amount, we generally may estimate the amount of the deductible
expense, bearing heavily against the taxpayer whose inexactitude
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in substantiating the amount of the expense is of his own making.
Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). We
generally will not estimate a deductible expense, however, unless
the taxpayer presents sufficient evidence to provide some basis
upon which an estimate may be made. Vanicek v. Commissioner, 85
T.C. 731, 743 (1985).
Section 274(d) supersedes the Cohan doctrine for certain
categories of expenses. Sanford v. Commissioner, 50 T.C. 823,
827-828 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969).
Generally, a deduction is disallowed for travel expenses, meals
and entertainment, and listed property unless the taxpayer
properly substantiates: (1) The amount of the expense; (2) the
time and place of the expense; (3) the business purpose; and (4)
in the case of meals and entertainment, the business relationship
between the taxpayer and the persons being entertained. Sec.
274(d). Listed property includes passenger automobiles, any type
of property generally used for entertainment or recreation, any
computer or peripheral equipment, and any cellular phone or other
similar telecommunications equipment.4 Sec. 280F(d)(4).
Generally, deductions for expenses subject to the strict
4
Sec. 280F(d)(4) was amended by the Small Business Jobs Act
of 2010, Pub. L. 111-240, sec. 2043(a), 124 Stat. 2560, which
removed cellular phones and other similar telecommunications
equipment from “listed property”. However, that amendment is
effective only for tax years beginning after Dec. 31, 2009. Id.
sec. 2043(b).
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substantiation requirements of section 274(d) must be disallowed
in full unless the taxpayer satisfies every element of those
requirements. Sanford v. Commissioner, supra at 827-828; Larson
v. Commissioner, T.C. Memo. 2008-187; sec. 1.274-5T(a), Temporary
Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). Deductions
for listed property that is used both personally and in the
taxpayer’s business are disallowed unless a taxpayer establishes
the amount of business use of the property. Kinney v.
Commissioner, T.C. Memo. 2008-287; Olsen v. Commissioner, T.C.
Memo. 2002-42, affd. 54 Fed. Appx. 479 (9th Cir. 2003); sec.
1.274-5T(b)(6)(i)(B), Temporary Income Tax Regs., 50 Fed. Reg.
46016 (Nov. 6, 1985).
Taxpayers may substantiate their deductions by either
adequate records or sufficient evidence that corroborates the
taxpayer’s own statement. Sec. 274(d). To satisfy the adequate
records requirement, a taxpayer must maintain records and
documentary evidence that in combination are sufficient to
establish each element of an expenditure or use. Larson v.
Commissioner, supra; sec. 1.274-5T(c)(2)(i), Temporary Income Tax
Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). A contemporaneous log
is not required, but corroborative evidence used to support a
taxpayer’s reconstruction of the expenditure “‘must have a high
degree of probative value to elevate such statement’” to the
level of credibility of a contemporaneous record. Larson v.
- 22 -
Commissioner, supra (quoting section 1.274-5T(c)(1), Temporary
Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985)).
In the absence of adequate records, a taxpayer alternatively
may establish an element of an expenditure by “‘his own
statement, whether written or oral, containing specific
information in detail as to such element’” and by “‘other
corroborative evidence sufficient to establish such element.’”
Id. quoting (section 1.274-5T(c)(3), Temporary Income Tax Regs.,
50 Fed. Reg. 46020 (Nov. 6, 1985)). Even if an expense would
otherwise be deductible, the deduction may still be denied if
there is insufficient substantiation to support it. See sec.
1.274- 5T(a), Temporary Income Tax Regs., supra. We do not
estimate under the Cohan doctrine expenses that are subject to
the requirements of section 274(d). Sanford v. Commissioner,
supra at 827; Larson v. Commissioner, supra.
A. Schedule C Expenses for Mr. Robinson
For the years in issue petitioners reported the following
expenses for Mr. Robinson on a Schedule C for each year:
Expense 2004 2005
Business use of home $438 $457
Office expense 4,222 5,128
Repairs and maintenance 2,760 2,822
Supplies 2,943 2,788
Utilities 3,356 3,765
Car and truck 7,219 7,123
Travel 1,003 1,250
Meals and entertainment 443 393
Other expenses 2,780 3,100
Total 25,164 26,826
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Most of petitioners’ claimed expenses relate to Mr.
Robinson’s use of an office in his home. Section 280A generally
prohibits the deduction of the costs of a taxpayer’s residence.
However, section 280A(c)(1) permits a deduction for the allocable
portion of a residence that is used exclusively and on a regular
basis as a taxpayer’s principal place of business. To meet the
regular basis test under section 280A(c)(1), the business use
must be more than occasional or incidental. Jackson v.
Commissioner, 76 T.C. 696, 700 (1981). It must be continuous,
ongoing, or recurring. Uphus v. Commissioner, T.C. Memo.
1994-71.
Petitioners offered no testimony or other evidence regarding
the amount of time Mr. Robinson spent doing work in the office in
his home. Mr. Robinson had a full-time job at Rowan University
during the years in issue, and he completed only minimal work for
Temple during each year. The parties stipulated that Mr.
Robinson’s work for Temple was completed out of the office in his
home, but the amount of work he was required to complete was so
minimal that it does not allow us to conclude, in the absence of
any other evidence, that Mr. Robinson used the office in his home
on a regular basis. Because petitioners bear the burden of
proving that Mr. Robinson regularly used the office in his home
during the years in issue and because they offered no evidence to
prove such regular use, we conclude that petitioners have failed
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to show that they are entitled to deduct any expenses related to
Mr. Robinson’s use of an office in his home during the years in
issue. Accordingly, because petitioners may not deduct such
expenses, we sustain respondent’s disallowance of all the expense
deductions petitioners claimed for the business use of their
home, office expenses, repairs and maintenance, supplies, and
utilities, all of which are related to Mr. Robinson’s use of an
office in petitioners’ home, except for cellular phone and
computer expenses, which we treat separately.
Cellular phones and computers are listed property under
section 280F(d)(4), and therefore related expenses are subject to
strict substantiation under section 274(d). Petitioners offered
no testimony or other evidence regarding the business purpose of
Mr. Robinson’s cellular phone or Apple computer. Accordingly,
petitioners have failed in their burden of proof, and we sustain
respondent’s disallowance of petitioners’ cellular phone and
computer expense deductions.
For the years in issue, petitioners claimed car and truck
expenses for Mr. Robinson’s 2004 Chrysler Pacifica (Pacifica).
Passenger automobiles are listed property under section
280F(d)(4), and expenses associated with their purported business
use therefore are subject to the heightened substantiation
requirements of section 274(d).
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For 2004 petitioners reported car and truck expenses
totaling $7,219 for Mr. Robinson’s Pacifica. To substantiate
those expenses, petitioners provided canceled checks and invoices
from Mr. Robinson’s payments to Chrysler Financial for the
Pacifica, totaling $6,443.67, and miscellaneous receipts from
mechanics, body shops, insurance companies, and tolls, totaling
$3,014.10. On the Schedule C for Mr. Robinson’s business,
petitioners reported that Mr. Robinson drove the Pacifica 18,000
miles for business, 3,200 for commuting, and 14,800 for other
purposes. However, petitioners did not provide a log documenting
Mr. Robinson’s business trips, nor did they otherwise explain how
he managed to drive 18,000 miles for his business even though he
taught class only 8 days during 2004.
For 2005 petitioners claimed car and truck expenses of
$7,123 for Mr. Robinson’s Pacifica. Petitioners similarly
provided invoices substantiating most of Mr. Robinson’s payments
to Chrysler Financial for the Pacifica, totaling $5,902.78 during
2005. Petitioners reported on the Schedule C for Mr. Robinson’s
business that Mr. Robinson drove the Pacifica 16,500 miles for
business, zero miles for commuting, and 16,500 miles for other
purposes during 2005. As with the expenses for 2004, Mr.
Robinson did not supply a log or other means to substantiate the
purposes of his trips or explain how he calculated his miles.
Petitioners provided no other documentation of Mr. Robinson’s car
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and truck expenses for 2005, and it is unclear from the record
how he arrived at total expenses of $7,123.
Petitioners offered no testimony or other evidence to
explain how they calculated which automobile expenses were
related to Mr. Robinson’s business and which were not. The very
round numbers of miles reported on the Schedules C and the
overall lack of any records suggesting how the expenses were
allocated significantly detract from the credibility of the
expenses reported. We conclude that petitioners have failed in
their burden of satisfying the strict substantiation requirements
of section 274(d), and we therefore sustain respondent’s
disallowance of petitioners’ car and truck expense deductions.
Petitioners claimed deductions for additional travel
expenses, as well as meal and entertainment expenses, related to
Mr. Robinson’s business during the years in issue. However, they
provided no documentation or testimony to support their claimed
travel expenses and meal and entertainment expenses.
Accordingly, petitioners have failed in their burden of proof,
and we therefore sustain respondent’s disallowance of deductions
for those expenses.
Finally, petitioners claimed deductions for “other expenses”
on their Schedules C of $2,780 and $3,100 for their 2004 and 2005
tax years, respectively. Those expenses reflect the costs of
publications Mr. Robinson purchased during the years in issue.
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Petitioners did not provide any receipts or invoices to
substantiate the expenses they deducted for publications for
2004. Instead, petitioners provided only canceled checks and
credit card statements, which do not give any details about the
items Mr. Robinson purchased.
Petitioners did provide receipts to substantiate Mr.
Robinson’s expenses for publications for 2005. The receipts they
provided show that the “publications” Mr. Robinson purchased
included: Laugh Out Loud Knock-Knock Jokes; several books about
midwives; several television shows on DVD including Gilmore
Girls, Arrested Development, and Friends; several books about
origami; several books on the architect Frank Lloyd Wright; a
Harry Potter book; Witchcraze; Teen Idol; In Her Shoes; A
Christmas Carol; Top Gun; Mary Poppins; 501 Must-See Movies; Good
Will Hunting; The Iliad; The Odyssey; subscriptions to People
magazine, several books on logic, unknown purchases totaling
$68.74 at LexisNexis, and various other publications, some of
which were not listed on the receipts, and some of which the
parties stipulated were not related to Mr. Robinson’s business.
Although Mr. Robinson admitted during his testimony that
many of the books listed on the receipts for 2005 were unrelated
to his business, petitioners argued that it should not matter
because the receipts and statements they supplied total
approximately $3,900, and they deducted only $2,780 in expenses.
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However, petitioners appear to have erred in those calculations;
we find that the sum of the receipts they provided falls well
short of the expense deduction they claimed. The sum of all the
purchases listed on the receipts is $2,201.06, yet petitioners
deducted $3,100 on their 2005 Schedule C.
Moreover, although we have examined all of the receipts
petitioners provided, we did not find even a single receipt that
would have justified deducting the item’s cost as a business
expense. Most of the receipts were clearly unrelated to Mr.
Robinson’s business. The few that might conceivably have been
related to his business as a police instructor (receipts from
LexisNexis and the Pennsylvania State Bookstore) did not list the
items purchased, and Mr. Robinson did not testify or provide
other evidence about how they were related to his business.
During cross-examination Mr. Robinson attempted to justify some
of the expenses that were apparently unrelated to his business.
For instance, he contended that a subscription to People magazine
was a business expense because it contained articles on current
events, that purchases of books on midwifery were business
expenses because he sometimes taught classes on ethics, and that
purchases of books about Frank Lloyd Wright were business
expenses because the architect had been involved in a crime.
We are not persuaded by Mr. Robinson’s testimony that such
expenses were related to his business. Accordingly, we conclude
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that petitioners have failed to substantiate any of the
publication expenses they deducted on their Schedules C, and we
therefore sustain respondent’s disallowance of those expenses.
B. Schedule A Deductions for Mrs. Robinson’s Expenses
Pursuant to section 162(a), a taxpayer is entitled to deduct
all of the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on a trade or business.
However, employees cannot deduct such expenses to the extent that
employees are entitled to reimbursement from their employers for
expenditures related to their status as employees. Orvis v.
Commissioner, 788 F.2d 1406, 1408 (9th Cir. 1986), affg. T.C.
Memo. 1984-533; Lucas v. Commissioner, 79 T.C. 1, 7 (1982). The
deduction for an employee’s unreimbursed business expenses under
section 162 is claimed on Form 2106, Employee Business Expenses,
and included in the miscellaneous itemized deductions claimed on
Form 1040, U.S. Individual Income Tax Return, Schedule A. An
individual performing services as an employee may deduct
miscellaneous itemized deductions incurred in the performance of
services as an employee only to the extent such expenses exceed 2
percent of the individual’s adjusted gross income. Sec. 67(a).
Expenses incurred in the performance of services as an employee
are to be reported as required by the regulations promulgated
under section 162. See sec. 1.162-17(a), Income Tax Regs. To
satisfy the requirements of section 162(a), an expense must be
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ordinary and necessary and have the requisite relationship to the
taxpayer’s business. The taxpayer bears the burden of proving
that the claimed expenses were ordinary and necessary under
section 162. The employee must show the relationship between the
expenditures and the employment. See Rosemann v. Commissioner,
T.C. Memo. 2009-185; Colvin v. Commissioner, T.C. Memo. 2007-157,
affd. 285 Fed. Appx. 157 (5th Cir. 2008); Evans v. Commissioner,
T.C. Memo. 1974-267, affd. in part and revd. in part on another
ground 557 F.2d 1095 (5th Cir. 1977).
Petitioners claimed on their tax returns for the years in
issue that Mrs. Robinson was eligible for the following
unreimbursed employee business expense deductions:
Expense 2004 2005
Vehicle expense $337 $444
Parking fees, tolls, and
transportation 678 24,876
Travel expenses 22,785 765
Other business expenses 763 3,915
Meals and entertainment 3,258 ---
Total 27,821 30,000
Mrs. Robinson was the sole driver of petitioners’ 2002
Chrysler Sebring (Sebring) during the years in issue. On their
Schedule A for 2004 petitioners reported that Mrs. Robinson drove
22,000 miles, 5,000 of which were for business. They used the
corresponding percentage, 23 percent, to calculate the share of
Mrs. Robinson’s total reported gasoline, oil, repairs, and
vehicle insurance expenses of $1,422 that should be allocated to
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Mrs. Robinson’s unreimbursed employee business expenses. In
total, petitioners reported $337 as Mrs. Robinson’s unreimbursed
employee business vehicle expenses during 2004. Petitioners
did not supply a log or other means to substantiate the business
purposes of Mrs. Robinson’s trips in the Sebring, nor did they
explain the purposes of such trips during their testimony.
For 2005 petitioners made the same calculation as for 2004,
reporting that Mrs. Robinson traveled 23,000 miles in the
Sebring, 5,000 of which were for business. For 2005 they claimed
$2,044 in expenses for gasoline, oil, repairs, and vehicle
insurance, and they reported an unreimbursed employee business
vehicle expense of $444. Petitioners provided no evidence or
testimony to substantiate the business purpose of the miles they
reported on their Schedule A.
As stated above, passenger automobiles are listed property
and expenses associated with their purported business use are
subject to the heightened substantiation requirements of section
274(d). Petitioners have the burden of proof, yet they provided
no testimony or other evidence to substantiate the business
purposes of the expense deductions claimed for Mrs. Robinson’s
vehicle. Accordingly, we conclude that they have failed to prove
that they are entitled to those deductions, and we therefore
sustain respondent’s disallowance of them.
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It is unclear from the record how petitioners arrived at the
remainder of the expenses they reported for Mrs. Robinson on
their Schedule A. Except for invoices from Chrysler Financial
and a single receipt from an auto mechanic, petitioners provided
no receipts to substantiate the $27,821 in unreimbursed employee
business expenses petitioners claimed that Mrs. Robinson incurred
during 2004. Instead, petitioners provided a list of
uncategorized expenses, culled from credit card statements,
totaling $2,024.25. During her testimony Mrs. Robinson explained
that three of the charges listed were for visits to tourist
attractions: The Metropolitan Museum of Art; the Philadelphia
Museum of Art; and the Easton Town Center in Ohio, which Mrs.
Robinson explained was a “lifestyle center” that demonstrated the
direction retail had taken in the last decade. Mrs. Robinson
explained that she made visits to tourist attractions to look for
ideas or business opportunities that she might employ in her own
business, an activity she labeled “benchmarking”. Although Mrs.
Robinson believed such “benchmarking” excursions were important
for developing her business, her employer would not reimburse her
for them, and they had to be conducted on her personal time.
Mrs. Robinson did not testify about or otherwise explain any of
the other unreimbursed employee business expenses she deducted
for 2004.
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To substantiate Mrs. Robinson’s reported unreimbursed
employee business expenses of $30,000 for 2005, petitioners
supplied invoices and canceled checks from Chrysler Financial for
their payments on the Sebring and 46 uncategorized receipts
totaling $4,270.63. Many of the receipts are from restaurants,
yet petitioners reported no expenses for meals and entertainment
on Mrs. Robinson’s Schedule A for 2005. Other receipts show
expenses for parking, airplane tickets, and retail items,
including two purchases of doll clothes at American Girl Place in
New York. The largest receipt is from a hotel stay at Disney’s
Grand Californian Hotel at Disneyland in Anaheim, California.
Petitioners also included receipts for tickets to Disneyland and
receipts from a visit to Disney World in Orlando, Florida.
During her testimony, Mrs. Robinson explained that she makes an
annual trip to Disney World to “see what’s going on”. While
there, she visits all of the theme parks to compare the newest
attractions and look at Disney’s retail establishments. Mrs.
Robinson took these trips during 2005 accompanied by Mr. Robinson
and their daughter. On at least one of the trips they were also
accompanied by Mrs. Robinson’s mother and Mr. Robinson’s mother.
Nonetheless, petitioners claimed that all of the expenses from
those trips were unreimbursed employee business expenses because
they were important “benchmarking” excursions for Mrs. Robinson’s
job.
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If a trip is primarily personal, expenses are not deductible
even if the taxpayer engaged in some business activities at the
destination. Sec. 1.162-2(b)(1), Income Tax Regs. Whether
travel is primarily related to the taxpayer’s trade or business
or is primarily personal is a question of fact. Sec.
1.162-2(b)(2), Income Tax Regs.; see also Holswade v.
Commissioner, 82 T.C. 686, 698, 701 (1984). The amount of time
spent on personal activity during the trip compared with the
amount of time spent on activities directly relating to the
taxpayer’s trade or business is an important factor in
determining whether the trip is primarily personal. Sec.
1.162-2(b)(2), Income Tax Regs. The taxpayer must prove that the
trip was primarily related to the trade or business. Rule
142(a).
Petitioners have failed to show that Mrs. Robinson’s trips
to visit tourist attractions around the country were ordinary and
necessary for her employment. See sec. 162(a). Moreover, the
facts suggest that the primary purpose of her trips was personal
pleasure: she was always accompanied by other family members and
she took vacation time to make the trips. The mere fact that
Mrs. Robinson may have garnered some business ideas on her visits
to tourist attractions does not permit her to deduct the costs of
those trips as unreimbursed employee business expenses.
Accordingly, we sustain respondent’s disallowance of all expenses
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associated with those trips during the years in issue. Because
we understand petitioners to be claiming that all of Mrs.
Robinson’s unreimbursed employee business expenses relate to her
“benchmarking” excursions, the disallowance of those expenses
dispenses with all of the unreimbursed employee business expenses
claimed by Mrs. Robinson.
C. Schedule A Deductions for Mr. Robinson’s Expenses
Petitioners also claimed unreimbursed employee business
expense deductions for Mr. Robinson on their Schedules A for the
years in issue in the following amounts:
Expense 2004 2005
Vehicle expense --- $262
Parking fees, tolls, and
transportation $380 324
Travel expenses 390 189
Other business expenses 465 1,707
Meals and entertainment --- 160
Total 1,235 2,642
Petitioners offered no documents, testimony, or other evidence to
substantiate Mr. Robinson’s Schedule A expenses. Accordingly,
petitioners have failed in their burden of proof, and we
therefore sustain respondent’s disallowance of all such expenses
for the years in issue.
D. Schedule A Deductions for Tax Preparation Expenses
Petitioners also claimed tax preparation expenses of $70 and
$75 for their 2004 and 2005 tax years, respectively. However,
they did not provide any receipts to substantiate those expenses.
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Accordingly, petitioners have failed in their burden of proof and
we therefore sustain respondent’s disallowance of their tax
preparation expense deductions.
IV. Whether Petitioners Are Liable for Additions to Tax Under
Section 6651(a)(1) for Failure To File Timely Returns
Section 6651(a)(1) provides for an addition to tax where a
failure to file a Federal tax return timely is not due to
reasonable cause or is due to willful neglect. Pursuant to
section 7491(c), the Commissioner generally bears the burden of
production for any penalty, but the taxpayer bears the ultimate
burden of proof. Higbee v. Commissioner, 116 T.C. 438, 446
(2001).
Petitioners do not dispute that they were late in filing
their tax returns for the years in issue. Consequently,
respondent has met his burden of production under section
7491(c), and in order to avoid the section 6651(a)(1) addition to
tax, petitioners have the burden of establishing reasonable cause
and the absence of willful neglect for failure to file timely.
See Calloway v. Commissioner, 135 T.C. 26, 45 (2010); Gates v.
Commissioner, 135 T.C. 1, 14 (2010).
Petitioners contend that their failure to file timely is due
to reasonable cause because they were awaiting a decision in a
prior dispute before the Tax Court regarding Mr. Robinson’s
status as an independent contractor. However, the stipulated
decision in that case was entered on November 2, 2004, and
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petitioners’ tax returns for the years in issue were not due
until April 15, 2005, and April 17, 2006. Petitioners offered no
other explanation for why they filed their returns late.
Accordingly, we conclude that petitioners have failed in their
burden of proof, and we therefore sustain respondent’s
determination of the addition to tax under section 6651(a)(1)
against petitioners for their failure to file timely returns.
V. Whether Petitioners Are Liable for Accuracy-Related
Penalties Pursuant to Section 6662(a)
Section 6662(a) imposes an accuracy-related penalty of 20
percent of any underpayment that is attributable to causes
specified in subsection (b). Subsection (b) applies the penalty
to any underpayment attributable to, inter alia, a “substantial
understatement of income tax” or “Negligence or disregard of
rules or regulations.”
There is a “substantial understatement” of income tax for
any tax year where the amount of the understatement exceeds the
greater of 10 percent of the tax required to be shown on the
return for the tax year or $5,000. Sec. 6662(d)(1)(A). However,
the amount of the understatement may be reduced by any portion of
the understatement attributable to any item for which there was
substantial authority for the taxpayer’s treatment, or with
respect to which the relevant facts were adequately disclosed on
the taxpayer’s return and there was a reasonable basis for the
taxpayer’s treatment. Sec. 6662(d)(2)(B).
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Section 6662(a) and (b)(1) also imposes a penalty for
negligence or disregard of rules or regulations. Under section
6662(c), “negligence” is “any failure to make a reasonable
attempt to comply with the provisions of this title”. We have
defined negligence as “a lack of due care or a failure to do what
a reasonable and prudent person would do under the
circumstances.” Bunney v. Commissioner, 114 T.C. 259, 266
(2000). Failure to maintain adequate books and records or to
substantiate items properly constitutes negligence. Sec.
1.6662-3(b)(1), Income Tax Regs. A taxpayer is considered to
have disregarded rules or regulations even if such disregard is
“careless,” meaning that the taxpayer “does not exercise
reasonable diligence to determine the correctness of a return
position that is contrary to the rule or regulation.” Sec.
1.6662-3(b)(2), Income Tax Regs.
Generally, the Commissioner bears the burden of production
with respect to any penalty, including the accuracy-related
penalty. Sec. 7491(c); Higbee v. Commissioner, supra at 446. To
meet that burden, the Commissioner must come forward with
sufficient evidence indicating that it is appropriate to impose
the relevant penalty. Higbee v. Commissioner, supra at 446. The
Commissioner has the burden of production only; the ultimate
burden of proving that the penalty is not applicable remains on
the taxpayer. Id.
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Respondent contends that petitioners are liable for the
penalty pursuant to section 6662 both because they substantially
understated their income tax and because they were negligent.
Petitioners understated their tax liabilities by $7,965 and
$9,634 for their 2004 and 2005 tax years, respectively. The
amount by which they understated their tax liability for each
year exceeds both: (1) 10 percent of the amount required to be
shown on their return for each year ($1,925.20 and $2,858.30,
respectively); and (2) $5,000. Petitioners have the burden of
proof regarding whether any portion of either understatement
should be reduced pursuant to section 6662(d)(2)(B), but they did
not address the issue or present any evidence showing that their
understatements should be reduced. Accordingly, we conclude that
petitioners have failed in their burden of proof, and we
therefore hold that petitioners are liable for the section 6662
penalty for both years for substantially understating their
income tax. See sec. 6662(d). Because we decide petitioners are
liable for the section 6662 penalty on account of their
substantial understatements of their tax liabilities for both
years, we need not consider whether they were also negligent.
In reaching the foregoing holdings, we have considered all
the parties’ arguments, and, to the extent not addressed herein,
we conclude that they are moot, irrelevant, or without merit.
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To reflect the foregoing,
Decision will be entered
under Rule 155.