# UNITED STATES TAX COURT

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

T.C. Memo.

2012-26

UNITED STATES TAX COURT

SUE AND PAUL COLVIN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No.

5899-09.

Filed

anuary 30, 2012.

Joseph T. Bambrick, Jr., for.petitioners.
Gary C. Barton and Elizabeth Downs, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge:

In two notices of deficien y dated

December 30, 2008, respondent determined the following
deficiencies with respect to petitioners' Federal income tax:

asa gD JAN 3 0 2012.

Year

Deficiency

Penalty"
Sec. 6662(a)

1993
1998
1999

$11,015
117,903
348,079

-0$23,580.60
69,615.80

In another notice of deficiency also dated December 30,
2008, respondent determined the following deficiencies with
respect to petitioner Sue Colvin's (Ms. Colvin) Federal income
tax:

Year

Deficiency

1994 .
1995
1996

$135,389
115,201
88,015

The disputed amounts1 relate to Ms. Colvin's sole

proprietorship Sioux Transportation (Sioux).

After concessions,

the issues for decision are:

1Petitioners do not assign error to all of réspondent's
determinations in the notices of deficiency. We deem any issue
not raised in the assignments of error in the petition conceded.
See Rule 34 (b) (4), Tax Court Rules of Practice aÄd Procedure.
In
addition, petitioners concede $55,924 of the adjustment to gross
receipts reported on the 1993 Schedule C, Profit or Loss From
Business, and respondent concedes the remaining $265,000 of'that
adjustment. Accordingly, the parties resolved all issues with
respect to 1993. Respondent concedes that the adjustment to
capital gain for 1999 should be ($20,122). All Eemaining
adjustments for all years at issue·are computational.
In the
petition, petitioners challenge interest on the deficiencies, but
by separate order entered sua sponte we shall dibmiss that part
of petitioners' case challenging interest, for lack of
jurisdiction. See sec. 6601(e) (1), which provides that interest
is excluded from the definition of "tax" for pufposes of sec.
6211(a).

See White v. Commissioner,

95 T.C.

209,

213

(1990).

(1) Whether Ms. Colvin is entitled to the deduction for
other expenses reported on her 1997 Schedule C,2 Profit or.Loss
From Business, and whether petitioners are er titled to the

deductions for other expenses reported on the 1998-99 Schedules
C;

(2) whether Ms. Colvin is entitled to decrease the Schedule

C gross receipts for 1997 by $97, 497, and whe her petitioners are
entitled to decrease the Schedule C gross receipts for 1999 by
$532, 741;

(3) whether petitioners are entitled to án additional
depreciation deduction of $55,648 for 1999; and

(4) whether petitioners are liable for t e section 6662 (a)
penalty for 1998 and 1999.3
FINDINGS OF FACT

The parties have stipulated some of the facts, which we

incorporate in our findings by this reference.

Petitioners

resided in Arkansas when they filed their petition.

Petitioners

were married during the years at issue and filed joint Federal

income tax returns for 1993 and 1998-99.

Ms. Colvin filed her

2Respondent did not issue a notice of deficiency for 1997.
However, in order to decide the issues raised by Ms . Colvin with
respect to 1994, we must also decide whether she is entitled to a
net operating loss carryback from 1997 in computing her 1994 tax
liability. See sec. 6214 (b) .
3Unless otherwise indicated, . section references are to the
Internal Revenue. Code in effect for the years at issue, and Rule
references are to the Tax Court Rules of Practice and Procedure.

- 4 -

1994-97 Federal income tax returns with the filinge status of
married filing separately.

Petitioners were divorbed at the time

of trial.'

During the years at issue Ms. Colvin operated Sioux, an ,
interstate trucking company based in Springdale, Arkansas.

In

1999 Ms. Colvin also operated STI, Inc., a C corporation, which
was a trucking company also operating out of Springdale,
Arkansas.

Sioux received revenue from hauling lodds.

In 1999

Sioux also received revenue from leasing trucks to STI, Inc.
Sioux had two types of arrangements with truck drivers.

In

some years Sioux leased trucks from owner-operators, but in later
years Sioux owned trucks.

In some years, such asa1995, both

arrangements were in place.

Sioux paid drivers per diem for

their expenses, including meals, motels, and othek expenses.
Sioux calculated per diem amounts on the basis of the number of

travel days.

Those amounts were recorded in payroll books.that

indicated travel dates but not destinations.
Besides the payroll books, Sioux had the foltlowing records

system.

Each load received a trip number that was listed in a

load book.

The drivers brought bills of lading 60 the office.

40nly Ms. Colvin was present at trial. Under the divorce
settlement, Ms. Colvin is responsible for the deficiencies.
Petitioner Paul Colvin was aware of the proceedihg and chose not
to participate.

When customers paid their bills, a Sioux employee posted the
payment in the load book .

Sioux operated on the cash basis method of accounting.

Wilson & Jackson, an accounting firm, prepared the 1993-94
returns .

Until 1998 Sioux did not have a bo kkeeper, so Ms .

Colvin totaled Sioux's gross receipts and expenses,and delivered
the information, along with Sioux's. checkbooks, to the return

preparer.
Starting with the 1995 return, Rita Wilks

(Ms . Wilks)

prepared Ms. Colvin's and petitioners' Federal income tax returns
from information Ms. Colvin furnished.

For the 1995-96 returns,

Ms . Colvin totaled all the business checks that she had written
and that had cleared the bank and gave Ms. Wilks the totals.

She

also provided Ms. Wilks a list of all expenses by category and a
statement of the total revenue .

For the depreciation schedule,

Ms . Colvin provided an equipment list .
Sometime in 1998, but before the preparation of the 1997
return, Ms. Wilks became an outside bookkeeper for Sioux.

She

used checkstubs, deposit books, bank statementis, payroll books,
and payroll reports to prepare the general ledger and profit and
loss statements for 1997-99.

She then used the bookkeeping

records to prepare the 1997-99 returns.

Procedural Background

042

On a date that does not appear in the record the Internal

Revenue Service (IRS) commenced an audit of petitibners' and Ms.
Colvin's 1993-96 returns.

In December 2000 Ms. Colvin retained

Bruce Loch (Mr. Loch), who represented petitionersi throughout the
audit.

Mr. Loch reviewed cash receipts and disbuÈsement records,

general ledgers, trip reports, payroll, and other related items

pertaining to 1993-96 and prepared a report.

Subsequently, the

IRS extended the audit to include 1997-99.

Mr. Loch reviewed the

records related to 1997-99 and participated in the audit with
respect to those years.

After respondent issued the notices of

deficiency, Mr. Loch reviewed them and prepared a summary report
of his findings.

.Petitioners filed a timely petition with this

Court.
After the case was calendared for trial, petitioners mailed
to the Court a letter requesting us to accept an expert report

prepared by Mr. Loch.

The proffered report purports to summarize

Mr. Loch's findings on the basis of his review of the notices of

deficiency.

In his report Mr. Loch reviews examination changes

proposed at various stages of the audit and describes
developments during the Appeals process.

For every year at issue

he opines "within a reasonable degree of accounting certainty" on
whether specific adjustments in the notice of deficiency were

il

Il

appropriate and on what the income tax changes and tax
liabilities should be.
Respondent filed a motion in limine seeking to exclude Mr.
Loch' s report and testimony.

Respondent contended that the

report did not comply with Rule 143 (g) , improperly addressed

legal arguments and advocated for petitioners, and was not
helpful to the Court.

Respondent also object d to the report

because it addressed matters before· the issuance of the notice of
deficiency.

Petitioners filed an opposing motion to strike.

During the calendar call we held a hearing on the motions .
We granted respondent's motion for·the reasons stated therein and

denied petitioners' motion.

We did not admit Mr. Loch's report

into evidence as an expert report and did not permit Mr. Loch to
testify as an expert witness.
Before trial the parties submitted to the Court a
stipulation of facts accompanied by 15 joint exhibits, which
included the notices of deficiency; a Form 5278, Statement-Income Tax Changes, for 1997; petitioners' Federal income tax
returns for 1993-99; Sioux's general ledgers for 1997 and 1999;

and a Form 1120, U.S. Corporation Income Tax Return, for 1999 and
the general ledger for 1999 of.STI, Inc.

Petitioners did not

identify which entries in Sioux's general ledgérs pertained to
Sioux's deductions for 1997 and 1999 and introduced no" credible

evidence to substantiate Sioux's deductions claimed on their

returns that respondent disallows.

Instead, petitioners called

Mr. Loch to testify as a fact witness, which we allowed.
Petitioners' counsel Joseph T. Bambrick, Jr.

(Mr. Bambrick),

insisted that Mr. Loch had participated in the audit, which in
his view was not different from preparing a return, and had
reviewed Sioux's business records.
Mr. Loch testified that he became involved in this case in
December 2000 when Ms. Colvin retained him to review the revenue
agent's report and that he reviewed the revenue agent's report
for 1993-96 and Sioux's books and records for 1993-99.

Respondent objected on the ground of relevancy, and we sustained
the objections.

We explained to Mr. Bambrick, among other

things, that Mr. Loch's testimony does not prove whether

respondent's adjustments were incorrect because Mr. Loch had no
firsthand knowledge regarding the relevant facts.

Petitioners'

counsel then stated that the records had been destroyed as a
result of a flood.
We permitted Mr. Loch to proceed with his testimony but

explained to petitioners' counsel that Mr. Loch's.testimony to
the extent it attempted to substitute for business records was
lj

not helpful to the Court.

We then permitted petitioners' counsel

to proffer additional testimony of Mr. Loch.

Mri. Bambrick'.s

proffer of Mr. Loch's testimony revealed that the testimony would
show a transpositional error by the auditor and its effect on

other years and would address "supporting documents and the basis
for the various objections that the Service has", and "pure
accounting items."

Mr. Loch, however, then stated that the

transpositional error had been corrected in the notices of
deficiency that were before the Court.

Petitioners again

attempted to.introduce Mr. Loch'.s report into evidence as an
expert report or as a factual report.

Consistent with the ruling

regarding the motion in limine, we did not admit the report in
evidence.

We·explained to petitioners' counsel that identifying

accounting issues in the notices of deficiency, as opposed to
presenting credible evidence of the deductions that petitioners
claimed,

is not helpful to the Court.
OPINION

I.

. Burden of Proof

The Commissioner's determinations in a notice of deficiency
are presumed correct, and the taxpayer generaîly.bears the burden
of showing they are erroneous.
290 U.S.

111,

115

Rule 142(a); Welch v. Helvering,

(1933).. Moreover, deductio s are a matter of

legislative grace, and the taxpayer bears the burden of proving
that he is entitled to any deduction claimed.
Commissioner,

503 U.S.

of substantiation.
87,

89

(1975),

sec.

1.6001-1(a),

79,

84

(1992).

INDOPCO, Inc. v.

This includes the·burden

Sec. 6001; ·Hradesky v. Commissioner, 65 T.C.

affd. per curiam 540 F.2d 821
(e),

Income Tax Regs.

(5th Cir.

1976);

- 10 -

Pursuant to section 7491(a) (1), the burden of proof as to
factual matters may shift from the taxpayer to the.Commissioner
under certain circumstances.

The record does not allow us to

conclude that petitioners met the requirements for shifting the
burden of proof under section 7491(a) (2).
Petitioners argue that the notices of deficiency are not
entitled to the presumption of correctness and respondent bears
the burden of proof because respondent's determinations are
"without rational foundation and excessive".

However, the cases

petitioners cite, such as United States v. Janis, 428 U.S. 433
(1976), Dellacroce v. Commissioner,

83 T.C.

269

(1984), and

others are distinguishable because, unlike the case at hand, they
involved determinations of unreported income.
Petitioners also cite Coleman v. United States, 704 F.2d 326

(6th Cir. 1983), a refund case, in which the Court of Appeals for
the Sixth Circuit agreed with the taxpayers that the tax

.

assessment at issue was not entitled to the presumption of
correctness when neither the Government nor the thxpayer had

records to support the calculations.
distinguishable.

Coleman is ålso

Unlike this case, in Coleman v.d Commissioner,

supra at 329, the Government stipulated that the assessments had
no evidentiary foundation.

Respondent has not conceded that his

determinations have no evidentiary foundation.

In fact,

respondent asserts that his determinations a e supported by the
evidence and are correct.

We conclude that the.notices of deficie cy are entitled to
the presumption of correctness and petitioners bear the burden of
proof.s
II.

Procedural Matters

A.

Mr. Loch's Report and Testimony

In their posttrial briefs, petitioners contend that the
Court erred by refusing to allow Mr. Loch to testify as an expert

witness or as a fact witness..regarding errors in the notices of
deficiency.'

Petitioners contend that Mr. Lo h negotiated with

the revenue agent and the Appeals employee and was thoroughly
familiar with the facts.

According to petitioners, the Court

should have allowed Mr. Loch to testify as an expert witness
because the case involves.technical subjects, such as a net
operating loss carryover.

sPetitioners contend in their posttrial brief that
respondent presented no admissible evidence to call into question
petitioners' records "to support the alleged deficiency".
However, because the notices of deficiency are entitled to the
presumption of correctness and because petitioners bear the
burden of proof, respondent does not need to present such
evidence.
Contrary to petitioners' assertion, we allowed Mr. Loch to
testify as a fact witness to the extent he had any firsthand
knowledge of information relevant to this case. Mr. Loch's
testimony was not helpful because he was not Sioux's bookkeeper
or the return preparer for the years at issue.

- 12 -

Generally, under rule 702 of the Federal Rules of Evidence,
expert testimony is admissible if it assists the Cburt to
understand the evidence or to determine a fact in Îissue.
Sunoco,

Inc.

& Subs. v. Commissioner,

118 T.C.

181,

183

See
(2002).

Il

Mr. Loch's opinion about whether respondent's adjustments in the

notices of deficiency are proper does not "assist the trier of
fact to understand the evidence or to determine a fact in issue".
See Fed. R. Evid. 702.

Mr. Loch's report stated petitioners'

litigation position, summarized concessions and the remaining

contested items, and set forth his opinion as to whether the
contested adjustments are proper.

In short, Mr. Loch's expert

report attempted to tell the Court how to decide the issues, was

not helpful, and was irrelevant.

As we observed in Boltar,

L.L.C. v. Commissioner,

326,

136 T.C.

335

(2011):||

"we may fairly

reject the burden on the parties and on the Court® created by
unreasonable, unreliable, and irrelevant expert testimony."

B.

Petitioners' Hearsay Objections

Before trial the parties submitted to the Court a

stipulation of facts accompanied by 15 joint exhibits, including
the notices of deficiency.

Neither party reserved any objection

to any of the stipulations or to the attached joint exhibits.
At the commencement of trial petitioners' counsel objected
to the notices of deficiency as hearsay.

He stated that because

the IRS employee who had prepared them was not ayailable for

- 13 -

cross-examination, the notices of deficiency were inadmissible as
hearsay.

We .overruled petitioners' objectio , explaining that

petitioners failed to reserve it in the stipúlation of facts.
In the. posttrial briefs petitioners contend that we erred when we
.admitted the 15 exhibits, because they were hearsay.

Petitioners

allege they were denied their due process ri hts when they were

not permitted to cross-exam1ne the IRS emploýee who prepared the
notices of deficiency as to how the notices of deficiency were
prepared.

Rule 91(d) provides that "Any objection to all or any part
of a stipulation should be noted in the stipulation, but the

Court will consider any objection to a stipul ted matter made at
the commencement of the trial or for good cause shown made during

the trial."

In addition, stipulations, like contracts, bind

parties to the terms actually agreed upon.
Commissioner,

87 T . C .

1451,

1454

(1986) .

R le 91(e); Stamos v.
The interpretation of a

stipulation is determined primarily by ascert ining the intent of

the parties, and we construe the language of

stipulation

pursuant to rules applicable to the construct on of contracts.
Stamos v. Commissioner, supra at 1455.

The preamble of the stipulation of facts states that the
parties have the right to object to the admission of any facts
and exhibits in evidence on the grounds of rel vancy and

- 14 -

materiality.7

The preamble also states that either party has the

right to object on other grounds, but only if the objection was

expressly reserved in the stipulations.

Neither the preamble nor

any of the stipulation paragraphs contain any objections by
either party to any of the exhibits.

Petitioners have offered no

compelling reason why we should not enforce the terms of the
preamble to which the parties agreed.

Accordingly, petitioners'

objections to the admission of the joint exhibits are untimely,
and we reject petitioners' argument.
III. The Adiustments'at Issue

A.

Schedule C Other Expenses
1.

1997 Schedule C Other Expenses

N

For 1997 respondent disallowed deductions for $12,409 of
Schedule C other expenses.

The explanation attached to the Form

5278 shows that respondent calculated this amount" on the basis of

the analysis of Sioux's business checking account"s and the cash

7The preamble states:

It is hereby stipulated that, for the purpose of this
case, the following statements may be accepted as facts
and all exhibits referred to herein and attached hereto
may be accepted as authentic and are incorpdrated in
this stipulation and made a part hereof; provided,
however, that either party has the right to object to
the admission of any such facts and exhibits in
evidence on the grounds of relevancy and materiality,
but not on other grounds unless expressly reserved
herein, and provided, further, that either party may
introduce other and further evidence not inconsistent
with the facts herein stipulated.

- 15 expenses reported.

Petitioners contend that in that analysis

respondent improperly disallowed a meals and entertainment
expense deduct ion of $70 , 4 25 .

However, re sp ndent subtract s

$70,425 as the nondeductible portion of the meals and
entertainment expense, as his methodology regulres.

Respondent's

methodology in fact is consistent with the 1997 Schedule C on
which Ms. Colvin also reported $70,425 as the nondeductible

portion of the meals and entertainment expense.

See sec. 274 (n) .

Neither party explains what specific expense disallowance
resulted in the $12,409 adjustment.

Because petitioners bear the

burden of proof and they failed to convince us that respondent's

determination is incorrect, we sustain respondent's
determination.
2.

1998 and 1999 Schedule C Other Expenses

On the 1998 and 1999 Schedules C petitioners reported other
expenses of $2, 692, 486 and $2, 423, 943, respectively .

Ms . Wilks

explained at trial that under the "other expenses" category Sioux

reported per diem expenses paid to drivers.

I s. Wilks calculated

the amounts by totaling per diem amounts in the payroll book.

The per diem amounts reimbursed the truck dri ers for meals,
motels, and other expenses while away from home.

In the notice

of deficiency respondent disallowed $88,548 and $872,318 of those
expenses for 1998 and 1999, respectively.

- 16 -

Generally, section 162(a) allows a taxpayer to deduct
ordinary and necessary.expenses of carrying on the taxpayer's
trade or business.

Section 274 (n) (3) (B) limits the amount

allowable as a deduction under section 162 for any$ expense for
food, beverages, or entertainment to 55 percent ofd the amount of
the expense that otherwise would be allowable as af deduction.8

The taxpayer must maintain sufficient records to substantiate the
deduction.

See sec. 6001; Petzoldt v. Commissioner, 92 T.C. 661,

686 (1989).

It is petitioners' failure to -substantiate the

disallowed portion of the per diem expenses that is at issue.

Mr. Bambrick stated at trial that "if you want all of those
records, we certainly will furnish them here, in Washington or
someplace else, but what I'm saying to you is, there's going to
be literally a hundred thousand records that we may have to bring

in."

Mr. Bambrick later reiterated that if petitioners. brought

in documents, they would be in barrels, and reviewing every truck
trip and expense would take weeks.

He stated that he was ready

to produce those documents at a location convenieht to'the Court.
However, Mr. Bambrick then claimed that the records had been

destroyed in a flood.

Respondent's counsel contends that

8The return explains this expense as "Travel Allowance x
55%". We assume this means that petitioners deducted the per
diem expenses subject to the limitation of sec. 274 (n) (3).

- l'7 petitioners had nearly 6 years to raise the

..ssue of the

destroyed records and to attempt to reconstr ct any damaged
records.

Ms. Colvin then testified that someone had broken into the
storage building where she kept records for approximately 1990-

2000 and tore copper lines out of the walls, causing flooding.'
According to Ms. Colvin, no one realized there was a flood for
several months.

The records were stored in

oxes that became

soaked, and the records had to be scooped up off the floor.

Approximately 2 months before the trial Ms. Colvin cleaned out

the building, at which point the documents we e unreadable .
Colvin testified that no other documents are available.

Ms .

Mr.

Bambrick claims that Mr. Loch had reviewed those records and used
them f or his report .

After trial and as directed by the Court, respondent's
counsel provided petitioners with respondent's workpapers to

assist the parties in supplementing the record if the parties
could agree on additional stipulations.

The parties did not

agree on the admissibility of the workpapers, nor did they offer

9After trial petitioners submitted to respondent's counsel
and the Court (1) a letter dated Feb. 23, 2010, from Omni
Plumbing, Inc., indicating that on May 22, 2004, Ms. Colvin
requested an emergency service call because of the water in the
building and (2) a receipt from Omni. Plumbing. However, the
parties did not stipulate that the documents were admissible as
evidence.
We note that the documents petition rs proffered
indicate that the water problem occurred on or before May 22,
2004.

- 18 -

any additional stipulated facts or documents.

In the absence of

a stipulation, respondent now contends that a substantial portion
of respondent's workpapers is irrelevant because by examining
them we would "look behind the notice of deficiency."

We agree.

See Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324, 327

(1974).

Some of the documents appear to be copies of various

documents that petitioners submitted to the revenue agent during
audit.

Petitioners did not identify any relevant portions of the

documents or workpapers and did not move to reopen the record.

The joint status report describes petitioners' position as
follows:

"The following pages of * * *

[the documents]

contain

relevant factual information to either support and/or not support

the statements made by and/or on behalf of the Tax Payer [sic]
and/or the Service".

Consequently, we limit our review to the

record and do not consider unstipulated documents submitted by
either party after trial ended.
burden of proof.

Petitioners properly bear the

See Rule 142(a).

Generally, section 274 (d) provides that no deduction is
allowable for traveling expenses (including meals and lodging

while away from home), unless the deduction is substantiated in
accordance with the strict substantiation requirements of section
274 (d) and the regulations promulgated thereunder.
1.274-5T(c) (5), Temporary Income Tax Regs.,

Section

50 Fed. Reg. 46022

(Nov. 6, 1985), provides that when a taxpayer's

ecords have been

- 19 -

destroyed or lost due to circumstances beyond his control, he is
generally allowed to substantiate his deductions by reasonable

reconstruction of his expenditures .

A taxpa er is required to

try to salvage or reconstruct what he can.
Commissioner, T.C. Memo. 2007-12.

See, e.g., Chong v.

If the taxpayer establishes

that the records were destroyed, he must nevertheless
substantiate each element of each expenditure under section 274.
See Boyd v. Commissioner,

122 T.C.

305,

320-321

(2004).

Petitioners argue that they presented un¼ontradicted

evidence as to how their records were prepared and maintained and
how the tax returns were filed.

We disagree.

The oral testimony

presented at trial addressed the paperflow and recordkeeping in
very general terms only.

Petitioners presented no credible

evidence, for example, of how_ many.drivers they had, how long on
average they were away from home, or how much the per diem amount

was.

Petitioners .failed to reasonably reconstruct the per diem

expenditures within the meaning of section 1.274-5T(c) (5),
Temporary Income Tax Regs., supra, and we sust in respondent's
determination.
B.

Schedule C Gross Receipts-

Respondent made no adjustment to petition rs' Schedule C .
gross receipts .

Petitioners contend that Schedule C gross

receipts should be reduced by $97,497 and $532,741 for 1997 and
1999, respectively.

ll

- 20 Sioux operated on a cash basis method of. accoùnting.

For .

1997 it reported Schedule C gross receipts of $4,797,495, and its
general ledger for 1997 shows the same amount of gross receipts.

On the 1999 Schedule C it reported gross receipts of $3,697,917,
and.the general ledger shows the same amount of gross receipts.
Petitioners presented no credible evidence to prove that the
gross receipts reported on Ms. Colvin's and petitioners' 1997 and
1999 Schedules C, respectively, were not correct. " Accordingly,
we reject petitioners' argument that Sioux's Schedule C gross

receipts, as claimed on Ms. Colvin's and petitioners' 1997 and
1999 returns, respectively, should be reduced.

C.

Depreciation Deduction

On the 1999 Schedule C petitioners reported å depreciation
deduction of $240,392.

In the notice of deficiency respondent

allowed an additional depreciation.deduction of $81,461.
Petitioners contend that the additional depreciation deduction
should be $137,309.

Petitioners bear the burden of proof, see

Rule 142, but they presented no credible evidence or explanation
to establish they are entitled to any additional depreciation

deduction.

Accordingly, petitioners are not entitled to the

additional depreciation deduction.
IV.

Section 6662(a)

Penalty for 1998 and 1999

Generally, section 6662(a) and (b) (1) authorizes the

Commissioner to impose a 20-percent penalty on the portion of an

- 21 -

underpayment of income tax attributable to negligence or
disregard of rules or regulations .

The term "negligence"

includes any failure to make. a reasonable attempt to comply with
the provisions of the internal revenue laws, and the term
"disregard" includes any careless, reckless, br intentional
disregard.

Regs.

Sec .

6662 (c) ; sec .

1. 6662-3 (b) (1)

and (2) ,

Income Tax

Disregard of rules or regulations is careless if "the

taxpayer does not exercise reasonable diligen e to determine the
correctness of a return position" and is reckless if "the
taxpayer makes little or no effort to determine whether a rule or
regulation exists, under circumstances which demonstrate a
substantial deviation from the standard of conduct that a

reasonable person would observe . "

Sec . 1. 6662 -3 (b) (2) , Income

Tax Regs.; see also Neely v. Commissioner, 85 T.C. 934, 947
(1985) .

Section 6662 (a) and (b) (2) . also authorizes the Commissioner
to impose a 20-percent penalty if there is an underpayment due
to a substantial understatement of income tax.

An

"understatement" means the excess of the amount of the tax
required to be shown on the return over the am unt of the tax
which is shown on the return, reduced by any rebate.

6662 (d) (2) (A) .

Sec.

An understatement is substantial in the case of

an individual if the amount of the understatement for the taxable

- 22 -

year exceeds the greater of 10 percent of the tax required to be
shown on the return or $5,000.

Sec. 6662(d) (1) (A).

The Commissioner bears the burden 'of production with respect

to the taxpayer's liability for the section 6662(a) penalty and
must produce sufficient evidence indicating that it is
appropriate. to impose the penalty.

See sec. 7491(c).

Once the

Commissioner meets his burden of production, the tiaxpayer must
come forward with persuasive evidence that the Codmissioner's
determination is incorrect or that the taxpayer hard reasonable
cause or substantial authority for the position.
Commissioner,

116 T.C. 438, 447

¡See Higbee v.

(2001).

The exact amount of the understatement shall be computed as
part of the Rule 155 calculations.

Even if the understatement is

not substantial, respondent met his burden of production with
respect to negligence by showing that petitioners claimed
deductions to which they were not entitled.

Petitioners had the burden of producing sufficient evidence
to prove that respondent's penalty determinations5 are incorrect.
See id. at 446-447.

Petitioners argue that the penalties do not

apply because respondent failed to introduce any evidence.
However, once the Commissioner meets his burden of production
under section 7491(c), the taxpayer bears the burden of showing
that the.determination is incorrect.

Petitioners failed to

- 23 establish that they were not negligent or that the substantial
understatement penalty should not apply.1°
We have considered the remaining arguments made by the

parties and, to the extent not discussed above, conclude those
arguments are irrelevant, moot, or without merit .
To reflect the foregoing,
Decision wi .1 be entered under
Rule 155 .

1°Sec. 6664 (c) (1) provides an exception frot the penalty
determination with respect to any portion of an underpayment if
the taxpayer shows that there was reasonable cause for such
portion and that the taxpayer acted in good fait h with respect to
such portion.
Reliance upon the advice of a ta professional may
establish reasonable cause and good faith.
See United States v.
Boyle, 469 U.S.

241,

250

(1985).

Petitioners dd not argue that

the exception of sec. 6664(c) (1) to the sec. 6662(a) accuracyrelated penalty applies, .nor does the record allow us to conclude
that relief is appropriate..

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A744bff724b1166a5. Public record. Not legal advice.