UNITED STATES TAX COURT

CLC

T.C. Memo. 2012-114

UNITED STATES TAX COURT

BETTY A. ONG, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 16498-10, 18746-10,

19907-10, 28138-10.

Filed April 19, 2012.

Betty A. Ong, pro se.

Rebecca S. Duewer-Grenville and Lori Katrine H. Shelton, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HAINES, Judge: These consolidated cases arise from petitions for

redetermination filed in response to notices of deficiency issued to petitioner for

SERVEDApr192012

-22006-09 (years at issue). Respondent determined the following deficiencies in

petitioner's Federal income tax and penalties pursuant to section 6662(a):1

Year

Deficiency

Penalty

Sec. 6662(a)

2006

2007

2008

2009

$24,553

11,454

6,321

11,160

$4,911

2,290

1,264

2,232

After stipulations and concessions2 the issues remaining for decision are:

(1) whether petitioner is entitled to certain expense deductions related to her real

estate and home care businesses claimed on Schedule C, Profit or Loss From

Business, for each of the years at issue; (2) whether petitioner is entitled to a

deduction for self-employed long-term health care insurance expense for 2009;

and (3) whether petitioner is liable for penalties pursuant to section 6662(a) for the

years at issue.

lAll section references are to the Internal Revenue Code as in effect for the

years at issue, and all Rule references are to the Tax Court Rules of Practice and

Procedure, unless otherwise indicated. Amounts are rounded to the nearest dollar.

2Respondent has conceded petitioner's gambling income and losses.

Further, respondent has conceded many of petitioner's claimed deductions, as

shown in the tables below.

-3FINDINGS OF FACT

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

facts, the supplemental stipulation of facts, and the second supplemental

stipulation of facts, together with the attached exhibits, are incorporated herein by

this reference. At the time petitioner filed her petition, she lived in California.

During the years at issue petitioner lived in a house on Gardiner Avenue in

San Francisco, California (Gardiner house). Petitioner's son, Filemon Ong

(Filemon), lived in a house on Lassik Street in Sacramento, California (Lassik

house). The Lassik house has three bedrooms and is in a residential

neighborhood.

Petitioner worked as a real estate broker in northern California for over 20

years under the name Betty Ong Real Estate. Betty Ong Real Estate operated out

of the Gardiner house, where she held client meetings and performed

administrative work. However, petitioner executed the closing of any real estate

sale at the offices of a title company. Beginning in 2008 petitioner also used parts

of the Lassik house for Betty Ong Real Estate. Petitioner did not use the entire

Gardiner house or the entire Lassik house for Betty Ong Real Estate.

During the years at issue petitioner also operated a home health care

business (BAO Home Care). Petitioner has been a licensed nurse for almost 40

-4years. Petitioner also used the Gardiner house to operate BAO Home Care.

Further, on December 7, 2009, Betty Ong Real Estate and BAO Home Care

entered into a lease agreement with Filemon for use of the Lassik house from

August 1 to December 31, 2009. The lease provides for a "discounted" rent of

$4,000. Petitioner did not use the entire Gardiner house or the entire Lassik house

for BAO home care. Petitioner also met with BAO Home Care patients in their

homes and in the hospital.

In 2006 and 2007 petitioner received wage income from and was a

shareholder of U.S. Pacific Loans, Inc. (US Pacific). Petitioner worked for US

Pacific out of the Gardiner house but did not use the entire house for her work.

On March 29, 2005, petitioner entered into an open-ended Broker-Agent

Independent Contractor Agreement (broker-agent agreement) with Monique

Garcia. The broker-agent agreement provides that Garcia must maintain a real

estate license in California and provide brokerage services exclusively on behalf

of petitioner. The broker-agent agreement further provides for payments to Garcia

of 70% of broker's fees for her participation in a listing. Petitioner's books and

records include two checks made payable to Garcia, one for $4,960 and the other

for $18,930, a copy of a Form 1099-MISC, Miscellaneous Income, issued to

Garcia for 2006 from Betty Ong Real Estate for $23,890, as well as Garcia's

driver's license, Social Security card, and birth certificate. Petitioner's books and

records also include Forms 1099-MISC for Fe G. De Asis for 2006 issued from

Betty Ong Real Estate and for Marta Ceron and Analee M. Marasigan for 2006

from BAO Home Care.

For each year at issue petitioner claimed deductions on Schedule C of her

Form 1040, U.S. Individual Income Tax Return, in connection with Betty Ong

Real Estate and BAO home care. Petitioner's books and records with respect to

Betty Ong Real Estate and BAO Home care consist of an assortment of poorly

organized handwritten notes, bills, checks, credit card statements, receipts, and her

calendar. Petitioner did not keep a contemporaneous log of business expenses

incurred with respect to any vehicles, cellular telephones, computer equipment,

travel, and meals and entertainment.

Petitioner's books and records include many personal expenses and many

other expenses with little, if any, explanation of a business purpose. For example,

many of petitioner's credit card bills include notations identifying an expense as

"supplies" or "business promotions" without further explanation. Many of the

checks petitioner has provided have no explanation in the memo line. In others,

the memo line provides vague references to dates and addresses.

-6Petitioner prepared her own Federal tax returns for 2006-08. Petitioner was

a member of the California Tax Education Council (CTEC) throughout the years at

issue and worked for H&R Block as a tax return preparer sometime between 2003

and 2005. For 2009 HRB Tax Group, Inc. (HRB), prepared petitioner's Federal

tax return.

On May 7, 2010, respondent sent petitioner notices of deficiency for 2006

and 2007, disallowing many of her claimed deductions. On August 11 and

December 3, 2010, respondent sent petitioner a notice of deficiency for 2008 and

2009, again disallowing many of petitioner's claimed deductions. Respondent has

since conceded some of petitioner's deductions. The following tables summarize

petitioner's claimed expense deductions for Betty Ong Real Estate and BAO

Home Care for the years at issue, the amounts disallowed, and respondent's

concessions.3

3In addition to conceding some of her claimed deductions, respondent has

conceded that petitioner is entitled to additional deductions for expenses that she

did not claim on her Federal tax returns for the years at issue.

-7Betty Ong Real Estate

Year

2006

Expense

Claimed

deduction

Amount

disallowed

Amount

conceded

Contract labor

$26,140

$26,140

--

Business promotions

36,284

36,284

--

2007

Commissions and fees

Contract labor

Taxes and licenses

Other expenses

Advertising

Tax preparation

15,360

6,450

3,794

12,712

---

15,000

6,450

3,394

6,580

---

--$165

-547

36

2008

Returns and allowances

Advertising

Legal and professional

Supplies

Travel

Cell phone

Business phones

Web site

Licenses

Tax preparation

Software/computers

Miscellaneous

1,300

747

1,555

1,511

222

602

2,087

529

-----

1,300

119

1,355

1,511

222

422

835

132

-----

-466

--137

--65

737

147

506

479

2009

Commissions and fees

Contract labor

Employee benefit program

Insurance (nonhealth)

Mortgage

Legal and professional

3,000

2,740

3,660

1,469

27,316

1,349

3,000

756

3,660

1,469

27,316

1,349

-------

Rent or lease--other property

4,000

4,000

--

Repairs and maintenance

Travel

Meals and entertainment

Utilities

Alarm

Advertising

Tax preparation

Software/computers

Miscellaneous

939

2,798

1,000

1,575

308

-----

939

2,798

1,000

1,575

308

-----

-----578

50

50

710

-8BAO Home Care

Year

Expense

Claimed

deduction

2006

Contract labor

Miscellaneous

$1,150

2,209

$1,150

2,209

---

2,082

2,082

--

Rent or lease--vehicles,

18,228

18,228

--

machinery and equipment

Other expenses

6,765

2,616

--

Commissions and fees

168

Contract labor

4,785

Insurance (nonhealth)

1,610

Legal and professional

5,225

Rent or lease--vehicles,

18,228

machinery and equipment

Supplies

1,164

Meals and entertainment

1,217

Education

167

Dues and membership fees

474

Gasoline and car maintenance 1,911

Software/computers

482

Other expenses

2,729

Bookkeeping

-Tax preparation

--

168

4,785

1,610

5,225

18,228

-$4,553

42

---

1,164

1,217

60

150

1,583

482

2,522

---

---

Contract labor

Insurance (nonhealth)

Rent or lease--other property

Repairs and maintenance

Supplies

Travel

Meals and entertainment

Utilities

Alarm

964

1,610

43

2,329

2,150

1,221

353

1,679

180

15,539

---------

Business promotions

2007

2008

2009

.

964

1,610

426

2,329

2,959

1,221

353

1,679

180

Amount

disallowed

Amount

conceded

49

----204

108

-9OPINION

I.

Burden of Proof

The Commissioner's determinations in a notice of deficiency are generally

presumed correct, and the taxpayer bears the burden of proving that those

determinations are incorrect. Rule 142(a)(1). Petitioner does not argue that the

burden of proof shifts to respondent pursuant to section 7491(a), nor has she

shown that the threshold requirements of section 7491(a) have been met for

any of the determinations at issue. Accordingly, the burden of proving that

respondent's determinations are erroneous remains on petitioner.

II.

Schedule C Deductions

A.

General Rules

Deductions are a matter of legislative grace, and taxpayers must prove they

are entitled to the deductions claimed. Rule 142(a); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934). Section 162(a) provides that "[t]here shall

be allowed as a deduction all the ordinary and necessary expenses paid or incurred

during the taxable year in carrying on any trade or business".4 Taxpayers are

required to maintain records sufficient to establish the amounts of allowable

4Respondent does not argue that Betty Ong Real Estate or BAO home care

is not a "trade or business" pursuant to sec. 162(a).

- 10 deductions and to enable the Commissioner to determine the correct tax liability.

Sec. 6001; Shea v. Commissioner, 112 T.C. 183, 186 (1999). Section 262(a)

precludes any deduction "for personal, living, or family expenses".

If a factual basis exists to do so, the Court may in some circumstances

estimate an allowable expense, bearing heavily against the taxpayer who failed to

maintain adequate records. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d

Cir. 1930); see sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg.

46014 (Nov. 6, 1985). However, in order for the Court to estimate the amount of

an expense, the Court must have some basis upon which an estimate may be made.

Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). Without such a basis,

any allowance would amount to unguided largesse. Williams v. United States, 245

F.2d 559, 560-561 (5th Cir. 1957).

B.

Section 274 Expenses

Section 274(d) applies a more strict substantiation requirement for certain

business expenses including, among other things, expenses for travel, meals and

entertainment, gifts, and listed property (e.g., automobile expenses, cellular

telephones, computer equipment, or any property of a type generally used for

purposes of entertainment, recreation, or amusement). See secs. 274(d),

280F(d)(4)(A). To substantiate a deduction attributable to such expenses, a

- 11 taxpayer must maintain adequate records or present corroborative evidence to

show the following: (1) the amount of the expense; (2) the amount of each

business use and total use (e.g., mileage for automobiles and time for other listed

property); (3) the time (i.e., date of the expenditure or use); and (4) the business

purpose of the expense or use. Sec. 274(d); sec. 1.274-5T(b)(6), Temporary

Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985). In the absence of evidence

establishing the elements of the expenditure or use, deductions are to be

disallowed entirely. Sec. 274(d); Sanford v. Commissioner, 50 T.C. 823, 827

(1968), aff'd per curiam, 412 F.2d 201 (2d Cir. 1969); see also sec. 1.274-5T(a),

Temporary Income Tax Regs.,;tup_ra.

To satisfy the adequate records requirement of section 274(d), the taxpayer

must maintain an account book, a diary, a log, a statement of expense, trip sheets,

or similar record and documentary evidence that in combination are sufficient to

establish each element of the expenditure or use. See sec. 1.274-5T(c)(2)(i),

Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). If a taxpayer

does not have adequate records to substantiate each element of an expense, he may

alternatively establish an element by "his own statement, whether written or

- 12 oral, containing specific information in detail as to such element", and by "other

corroborative evidence sufficient to establish such element". Sec. 1.274-5T(c)(3),

Temporary Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985).

The Cohan rule does not permit the Court to estimate expenses with respect

to items enumerated in section 274(d). Sanford v. Commissioner, 50 T.C. at 827;

Rodriguez v. Commissioner, T.C. Memo. 2009-22 (the strict substantiation

requirements of section 274(d) preclude the Court and taxpayers from

approximating certain expenses).

Petitioner claimed the following deductions that are subject to the strict

substantiation requirements of section 274(d): (1) travel expenses; (2) meals and

entertainment expenses; (3) automobile expenses including insurance, gasoline,

repairs and maintenance; (4) software expenses; and (5) cell phone expenses.

Petitioner's books and records prove that many of these expenses were incurred

and paid. However, petitioner has failed to present adequate records or present

corroborative evidence to show a business purpose for these expenses. The only

evidence petitioner has presented to support the business purpose of these claimed

deductions is her own broad self-serving testimony and uncorroborated notes. We

are under no obligation to accept uncorroborated and self-serving testimony. See

- 13 Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). Petitioner has not presented the

detailed information needed to meet the strict substantiation requirements of

section 274(d). We therefore sustain respondent's determinations with respect to

all expenses subject to those requirements.

C.

Business Use of Home

Petitioner claimed expense deductions for rent, utilities, repairs, alarm

systems, cleaning, gardening, and water associated with the Gardiner house and

the Lassik house. In addition to the requirements discussed above, section

280A(a) provides the general rule that deductions with respect to a dwelling unit

which is used as the taxpayer's residence are not allowable unless an exception

applies.5 The exceptions are found in section 280A(c), which provides in relevant

part:6

5For a dwelling unit to qualify as a residence the taxpayer must use it for the

greater of 14 days or 10% of the number of days during the taxable year for which

the unit is rented at a fair rental price. See sec. 280A(d)(1).

6Sec. 280A(c)(4) generally provides a specific exception to sec. 280A(a) for

items allocable to the use of any portion of a dwelling unit on a regular basis in a

taxpayer's trade or business of providing "day care" services for children,

individuals who have attained the age of 65, and individuals who are physically or

mentally incapable of taking care of themselves. This exception requires the

owner or operator of the trade or business to have applied for, been granted, or be

exempt from having the proper license, certification, registration, or approval as a

"day care" under State law. Sec. 280A(c)(4)(B). Petitioner has not presented any

(continued...)

- 14 SEC. 280A(c). Exceptions for Certain Business or Rental Use;

Limitation on Deductions for Such Use.-(1) Certain business use --Subsection (a) shall not apply to

any item to the extent such item is allocable to a portion of

the dwelling unit which is exclusively used on a regular basis-(A) as the principal place of business for any trade or

business of the taxpayer,

(B) as a place of business which is used by patients,

clients, or customers in meeting or dealing with the taxpayer

in the normal course of his trade or business * * *

Because there are substantial business and personal motives for the

expenses related to petitioner's residence, we must determine what portion of the

residence was used regularly and exclusively for her businesses. See Int'l Trading

Co. v. Commissioner, 275 F.2d 578, 584-587 (7th Cir. 1960), gffg T.C. Memo.

1958-104; Deihl v. Commissioner, T.C. Memo. 2005-287. Combined personal

and business use of a section of the residence precludes deductibility. See

generally Sam Goldberger, Inc. v. Commissioner, 88 T.C. 1532, 1557 (1987).

6(...COnlinued)

evidence about the age and condition of BAO Home Care's clients. Further,

petitioner has not presented any evidence of a license, registration, or approval

under California law. Therefore, sec. 280A(c)(4) is not applicable to petitioner

because BAO Home Care was not a "day care" service during the years at issue.

- 15 -

1.

Gardiner House

The Gardiner house was petitioner's residence during the years at issue. As

a result, expenses with respect to the Gardiner house are not deductible unless an

exception pursuant to section 280A(c) applies. Petitioner used the Gardiner house

for business purposes in connection with Betty Ong Real Estate, BAO Home Care,

and US Pacific during the years at issue. Petitioner argues that the Gardiner house

was used to meet with clients and perform administrative work for Betty Ong Real

Estate. However, petitioner has not established the existence of an office or other

similar part of the Gardiner house that was exclusively used for this purpose. For

BAO Home Care and US Pacific, petitioner has failed to present any evidence of

how and to what extent she used the Gardiner house. Thus, we have no reasonable

basis upon which we may apply the Cohan rule to estimate the deductible portions

of petitioner's expenses in connection with the Gardiner house. We therefore

sustain respondent's determination with respect to all expenses in connection with

the Gardiner house.

2.

Lassik House

If a member of the taxpayer's family uses the dwelling unit as a principal

residence, a personal purpose is attributed to the taxpayer. Sees. 280A(d)(2)(A),

267(c)(4). Beginning in 2008 petitioner began using the Lassik house for Betty

- 16 Ong Real Estate. The Lassik house was Filemon's principal residence and,

therefore, section 280A(d)(2)(A) attributes a personal purpose to petitioner's use

of the Lassik house. Petitioner has not established that any part of the Lassik

house was used exclusively for any of her businesses. Accordingly, because

petitioner used the Lassik house for "personal purposes" pursuant to section

280A(d)(2)(A) and because petitioner failed to establish that any part of the Lassik

house was used exclusively for business, we sustain respondent's determination

with respect to all expenses in connection with the Lassik house.

D.

Life Insurance

A taxpayer is not entitled to a deduction for premiums paid on any life

insurance policy if the taxpayer directly or indirectly is a beneficiary under the

policy. See sec. 264(a)(1). Petitioner made payments to Reassure America Life

Insurance Co. on behalf of BAO Home Care of $1,610 in 2008 and 2009.

Petitioner failed to provide a copy of the insurance policy related to these

payments or any other information listing the beneficiaries of the policy. She has

therefore failed to meet her burden of proof. Accordingly, we sustain respondent's

- 17 determinations with respect to petitioner's deductions for nonhealth insurance of

$1,610 for 2008 and 2009.7

E.

Contract Labor, Commissions and Fees, and Returns and Allowances

Petitioner relies on numerous checks in the record to various individuals to

substantiate expense deductions for contract labor, commissions and fees, and

returns and allowances. Further, petitioner has provided Forms 1099-MISC issued

to Garcia and Asis for 2006 from Betty Ong Real Estate and to Ceron and

Marasigan for 2006 from BAO Home Care.

With respect to Garcia, in addition to the Form 1099-MISC for 2006, the

broker-agent agreement indicates that as of March 29, 2005, Garcia provided

brokerage services on behalf of petitioner. The broker-agent agreement required

Garcia to maintain a real estate license in California, work exclusively for

petitioner, and entitled her to 70% of broker's fees for her participation in a listing.

Petitioner's books and records include a copy of Garcia's driver's license, Social

Security card, and birth certificate. Petitioner has established the existence of a

working relationship between herself and Garcia. Additionally, petitioner has

7Sec. 264(b) provides that sec. 264(a)(1) shall not apply to any annuity

contract described in sec. 72(s)(5) and any annuity contract to which sec. 72(u)

applies. Petitioner has not presented any evidence of an annuity contract that

would qualify as an exception to sec. 264(a)(1).

- 18 presented two checks made payable to Garcia in 2006 as proof of payment, one for

$4,960 and the other for $18,930. Therefore, petitioner is entitled to a deduction

of $23,890 for contract labor paid to Garcia in 2006.

Petitioner testified that Asis was one of her employees, and respondent

conceded that petitioner is entitled to a deduction for $900 paid to Asis on behalf

of BAO Home Care in 2009. However, the Form 1099-MISC issued to Asis in

2006 was from Betty Ong Real Estate. Asis did not testify at trial, and petitioner

has not provided any information to describe the type of work Asis performed on

behalf of her businesses. Therefore, although respondent has conceded that a

working relationship existed between petitioner and Asis with respect to BAO

Home Care in 2009, we have no reliable proof of such a relationship in 2006 with

respect to Betty Ong Real Estate.

Similarly, petitioner has not provided any additional evidence that Ceron

and Marasigan performed work for her during the years at issue or had any

connection with her businesses. The memo lines in the checks payable to Ceron

and Marasigan make vague references to dates and addresses, but absent any

corroborative evidence do little to prove a working relationship. Neither Ceron

nor Marasigan testified at trial, and petitioner did not provide a description of their

work performed or proof that they included the amounts received from her in their

- 19 income. This lack of evidence is equally applicable to each of the other payees

listed in petitioner's checks where she has not presented a Form 1099-MISC.

Therefore, petitioner has failed to establish a business purpose for these expenses,

and we sustain respondent's determinations with respect to all contract labor

expenses, commissions and fees, and returns and allowances outside of the

$23,890 paid to Garcia in 2006.

F.

Taxes and Licenses

Respondent has conceded deductions for taxes and licenses of $165 for

2007 and licenses of $737 for 2008 in connection with Betty Ong Real Estate.

Without any further explanation, petitioner relies on checks to the department of

motor vehicles, Fire Insurance Exchange, and American General Finance to

substantiate her additional deductions for taxes and licenses. Petitioner has failed

to explain the purpose of these expenses. Further, petitioner has failed to provide

proof of a tax due or license acquired. We therefore sustain respondent's

determinations with respect to taxes and licenses.

G.

Legal and Professional Fees

Petitioner claimed legal and professional fee deductions for amounts paid to

her gardener, her cleaning lady, and repair workers on the Lassik house. As

discussed above, petitioner has failed to satisfy the requirements of section 280A

- 20 with respect to all expenses in connection with the Lassik house. Petitioner has

also presented several checks for what she claims to be legal work but has not

presented any evidence of the type of legal or professional work conducted. We

therefore sustain respondent's determinations with respect to legal and

professional fees.

H.

Business Phones, Web Site, Education, and Dues and Membership

Fees

Respondent allowed many of petitioner's claimed deductions for business

phone expenses, Web site expenses, education expenses, and dues and

membership fees. Petitioner has not presented any evidence outside of checks and

her own self-serving testimony to establish a business purpose for her disallowed

deductions. See Tokarski v. Commissioner, 87 T.C. at 77. We therefore sustain

respondent's determination with respect to business phone expenses, Web site

expenses, education expenses, and dues and membership fees.

I.

Business Promotions, Advertising, Supplies, Miscellaneous, Other

Expenses, and Any Remaining Expenses

Petitioner relies on a voluminous collection of books and records to

substantiate many additional disallowed expense deductions. These books and

records establish the authenticity of most of petitioner's expenses. However, they

do little to connect petitioner's expenses with a business purpose. As a result, the

- 21 Court has little evidence upon which to distinguish between petitioner's legitimate

and illegitimate deductions.

Further, petitioner's books and records list many expenses that are clearly

personal. For instance, among other personal expenses too numerous to list,

petitioner claimed the following expense deductions with respect to Betty Ong

Real Estate and BAO Home Care: (1) $20 for a "6 week make over"; (2) $54 and

$148 for fashion jewelry; (3) $55 and $99 for health club memberships; (4) $200

to her son supported by a check with the note "happy birthday"; and (5) $200 to

the "Martinez Family" as an offer of condolences. Petitioner's attempt to deduct

these clearly personal expenses makes it difficult for the Court to give credibility

to any deduction where she has not established a clear business purpose.

Nonetheless, respondent does not dispute that Betty Ong Real Estate and

BAO Home Care were legitimate businesses during the years at issue.

Consequently, we have no doubt that some of petitioner's remaining disallowed

deductions are legitimate. Petitioner's credit card bills include notations next to

each item identifying expenses such as "supplies" or "business promotions".

Petitioner is likely to have incurred these types of expenses for her businesses

during the years at issue and testified that these notations indicate legitimate

business expenses. Accordingly, given petitioner's burden, the lack of evidence in

- 22 the record to support the business purpose of her remaining claimed deductions,

and her lack of credibility, we believe we are being generous in allowing 10% of

her remaining disallowed deductions under the Cohan rule. Any inexactitude in

the estimate by the Court is of petitioner's own making and due to her failure to

maintain proper business records. See Cohan v. Commissioner, 39 F.2d at

543-544.

III.

Long-Term Health Care Insurance

Section 213(a) carves out an exception to section 262, allowing for a

deduction for personal medical care expenses to the extent that such expenses

exceed 7.5% of the taxpayer's adjusted gross income. "Medical care" includes

premiums paid for any qualified long-term care insurance contract as defined in

section 7702B(b). Sec. 213(d)(1)(D). Section 7702B(b)(1) provides that a

"qualified long-term care insurance contract" means any insurance contract if:

(A) the only insurance protection provided under such contract is

coverage of qualified long-term care services,

(B) such contract does not pay or reimburse expenses incurred for

services or items to the extent that such expenses are reimbursable under

title XVIII of the Social Security Act or would be so reimbursable but for

the application of a deductible or coinsurance amount,

(C) such contract is guaranteed renewable,

- 23 (D) such contract does not provide for a cash surrender value or other

money that can be--

(i) paid, assigned, or pledged as collateral for a loan, or

(ii) borrowed,

other than as provided in subparagraph (E) or paragraph (2)(C),

(E) all refunds of premiums, and all policyholder dividends or similar

amounts, under such contract are to be applied as a reduction in future

premiums or to increase future benefits, and

(F) such contract meets the requirements of subsection (g).

Petitioner paid $3,660 to Genworth Financial for long-term care insurance

in 2009. Petitioner has not provided a copy of any related insurance policy or any

other information regarding the coverage provided or terms of the agreement.

Without such information, we have no way to determine whether petitioner's long-

term care insurance satisfies the requirements of section 7702B(b). Accordingly,

petitioner has not met her burden, and we sustain respondent's determinations

with respect to petitioner's long-term health care insurance.

IV.

Penalties

Respondent bears the burden of production with respect to the

accuracy-related penalty and must therefore produce sufficient evidence that it is

appropriate to impose that penalty. See sec. 7491(c); see also Higbee v.

- 24 Commissioner, 116 T.C. 438, 446 (2001). Section 6662(a) and (b)(2) imposes an

accuracy-related penalty upon any underpayment of tax resulting from a

substantial understatement of income tax. The penalty is equal to 20% of the

portion of any underpayment attributable to a substantial understatement of

income tax. Id. The term "substantial understatement" is defined as an

understatement exceeding the greater of: (1) 10% of the tax required to be shown

on the return for the taxable year or (2) $5,000. Sec. 6662(d)(1)(A). Section

6662(a) and (b)(1) also imposes a penalty equal to 20% of the amount of an

underpayment attributable to negligence or disregard of rules or regulations.

Negligence includes any failure to make a reasonable attempt to comply with the

provisions of the Internal Revenue Code, including any failure to maintain

adequate books and records or to substantiate items properly. Sec. 6662(c); sec.

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

Petitioner's failure to produce records substantiating her Schedule C

expenses and her long-term health care costs supports the imposition of the

accuracy-related penalty for negligence for the years at issue. The applicability of

section 6662(b)(2) will depend on the magnitude of the understatement of income

tax as calculated under Rule 155. If petitioner's understatement of income tax for

each year at issue, as calculated under Rule 155, exceeds the greater of $5,000 or

- 25 10% of the tax required to be shown on her return, respondent will have met his

burden of production under section 7491(c). If not, respondent will have failed to

meet his burden of production under section 7491(c) with respect to the section

6662 penalty for a substantial understatement.

The accuracy-related penalty is not imposed with respect to any portion of

the underpayment of tax if the taxpayer can establish that he acted with reasonable

cause and in good faith. Sec. 6664(c)(1). The decision as to whether the taxpayer

acted with reasonable cause and in good faith depends upon all the pertinent facts

and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Circumstances

indicating that a taxpayer acted with reasonable cause and in good faith include

"an honest misunderstanding of fact or law that is reasonable in light of all of the

facts and circumstances, including the experience, knowledge, and education of

the taxpayer." Id. Reliance on the advice of a tax professional may establish

reasonable cause and good faith. See United States v. Boyle, 469 U.S. 241, 250

(1985). A taxpayer claiming reliance on professional advice must show that: (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

- 26 judgment. Neonatology Assocs. P.A. v. Commissioner, 115 T.C. 43, 99 (2000),

aff'd, 299 F.3d 221 (3d Cir. 2002).

Petitioner was a knowledgeable taxpayer. She was a member of CTEC

throughout the years at issue, and worked for H&R Block as a tax return preparer

sometime between 2003 and 2005. Petitioner filed her own Federal tax returns for

2006-08. Despite her knowledge and training, petitioner claimed deductions for

many clearly personal expenses. This conduct shows a lack of reasonable cause

and good faith. For 2009 HRB prepared petitioner's Federal tax return. Petitioner

argues that she provided HRB with all the necessary information to prepare her

2009 Federal tax return and relied on HRB to prepare an accurate return.

Petitioner has failed to establish the accuracy of the information she provided to

HRB and, therefore, has failed to establish reasonable cause and good faith for

2009.

Accordingly, pending a final calculation of petitioner's understatement of

income tax under Rule 155, we find her liable for the section 6662 penalty for the

years at issue as commensurate with respondent's concessions and our holdings.

- 27 The Court, in reaching its holdings, has considered all arguments made, and,

to the extent not mentioned, concludes that they are moot, irrelevant, or without

merit.

To reflect the foregoing,

Decisions will be entered

under Rule 155.