Ronald G. Ezzell, Jr. v. Commissioner

PURSUANT TO INTERNAL REVENUE CODE
SECTION 7463(b),THIS OPINION MAY NOT
BE TREATED AS PRECEDENT FOR ANY
OTHER CASE.
T.C. Summary Opinion 2015-52
UNITED STATES TAX COURT
RONALD G. EZZELL, JR., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12260-14S. Filed August 25, 2015.
Ronald G. Ezzell, Jr., pro se.
Andrew J. Davis, for respondent.
SUMMARY OPINION
THORNTON, Chief Judge: This case was heard pursuant to the provisions
of section 7463 of the Internal Revenue Code in effect when the petition was
filed.1 Pursuant to section 7463(b), the decision to be entered is not reviewable by
1
Unless otherwise indicated, section references are to the Internal Revenue
(continued...)
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any other court, and this opinion shall not be treated as precedent for any other
case.
Petitioner petitioned the Court for redetermination of a $7,186 deficiency
that respondent determined in petitioner’s Federal income tax for 2010 and a
$1,437 accuracy-related penalty under section 6662(a). Following concessions,
we are left to decide two issues.2 We decide first whether petitioner may deduct
expenses for his sole proprietorship in amounts greater than respondent has
allowed. We hold he may to the extent stated. We decide second whether
petitioner is liable for the accuracy-related penalty that respondent determined.
We hold he is not.
1
(...continued)
Code (Code) in effect for the year in issue, Rule references are to the Tax Court
Rules of Practice and Procedure, and dollar amounts are rounded to the nearest
dollar.
2
In addition to the concessions which we discuss herein, respondent
conceded an adjustment in the deficiency notice relating to “Form 25551 [sic]
Income”. In addition to the two issues which we decide, the parties dispute two
computational adjustments that turn on the amount of net income from petitioner’s
sole proprietorship. The parties should readjust the computational adjustments in
accordance with this opinion.
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Background
I. Preliminaries
Some facts were stipulated. The stipulations of fact and the facts drawn
from stipulated exhibits are incorporated herein, and we find those facts
accordingly. Petitioner resided in North Carolina when the petition was filed. He
timely filed a Federal income tax return for 2010 (2010 return), using the filing
status of “Single”.
II. Repair Business
A. Background
Petitioner owned a sole proprietorship that he formed in 2005 and operated
during 2010 as an automobile repair business (repair business). He devoted a lot
of his time to the repair business, which he operated out of a room (business
headquarters) in his residence. The business headquarters measured 30 feet by 40
feet at its base and had a second level which measured 12 feet by 40 feet.
Petitioner was deployed to the Middle East on September 25, 2010, and he
did not return to the United States during the rest of 2010. While petitioner was
outside the United States, his father either used petitioner’s funds to pay some of
the repair business’ recurring expenses (e.g., insurance, utilities) or assured that
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those expenses were paid from petitioner’s bank account through automatic
payments.
Petitioner used the cash method to report on his 2010 return the following
gross income, expenses, and net loss for the repair business:
Gross income: Amount
Gross receipts $11,539
Total 11,539
Expenses:
Depreciation 15,395
Insurance (other than health) 3,354
Mortgage interest 369
Legal and professional services 175
Repairs and maintenance 2,631
Supplies 1,149
Utilities 3,991
Mileage (at standard rate) 2,150
Total 29,214
Net loss (17,675)
B. Depreciation
Petitioner reported that $15,004 of the $15,395 depreciation deduction was
attributable to depreciable property that he purchased and placed in service before
2010 and that the remaining $391 was attributable to depreciable property that he
purchased and placed in service during 2010. Petitioner purchased all of the
property for which he claimed depreciation.
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During respondent’s audit of the 2010 return, petitioner gave to respondent
a “Depreciation and Amortization Report” (depreciation report) to support
petitioner’s claimed depreciation deduction. The depreciation report describes the
property underlying the reported depreciation and lists for each property the date
placed in service, the cost, the business use, the depreciable basis, the depreciable
life, the depreciation method and convention, and the prior and current
depreciation claimed. The property and the corresponding relevant amounts
shown in the depreciation report are as follows:
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Date placed Depreciation
Property in service Cost Prior Current
2010 shop tools 6/10/10 $2,739 -0- $391
Current year total 2,739 -0- 391
Shop 1/1/05 36,000 $13,561 2,244
Miller Matic 210 (welder) 1/1/05 1,850 1,743 107
Used Ammco brake lathe 1/20/05 2,000 1,554 178
Computer 2/1/05 1,100 1,037 63
Tire changer 2/10/05 2,000 1,554 178
Used pro cat brake lathe 2/10/05 3,500 2,719 312
Brake lathe table 2/10/05 450 349 40
Tire balancer 3/5/05 1,800 1,399 160
Drill press 3/20/05 350 272 31
Bush Hog lawnmower 4/15/05 8,200 6,371 732
Car lift 4/15/05 2,300 1,786 206
Transmission jack 5/1/05 500 389 44
Septic tank 11/1/05 1,200 452 75
OTC diagnostic scanner 12/1/05 4,300 4,052 248
A/C machine 4/6/06 2,500 1,719 223
Flush machine 5/3/06 1,800 1,238 161
Plasma cutter 10/2/06 2,385 1,640 213
2007 shop tools 6/1/07 40,863 22,993 5,106
Shop building 11/30/08 20,861 602 535
2008 shop tools 12/1/08 8,895 2,769 1,750
Pro-cut 9.2 brake lathe 3/27/09 3,500 875 750
Robin Air 34788 4/29/09 2,900 518 681
Building shed attachment 10/23/09 1,957 24 193
General tools 12/1/09 2,809 100 774
Prior year total 154,020 69,716 15,004
Totals 156,759 69,716 15,395
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The Bush Hog lawnmower is a large lawnmower. Petitioner used it to mow
the grass on the grounds of his repair business. He also used it to mow the grass at
other locations where he placed signs to advertise his business.
Petitioner used the computer in his repair business. He bought the computer
in 2005 for $1,100.
Petitioner purchased various shop “tools” for the repair business during
2007 and 2008. He capitalized the cost of the shop tools. The costs of the shop
tools that he purchased in 2007 and 2008 were $32,711 and $9,146, respectively.
C. Repairs and Maintenance
The business headquarters originally had a French door on the second level,
which was accessible only by ladder. The door was not covered, and rain
throughout the years had caused the door to rot. Before 2010 petitioner replaced
the door, built a dock to gain easier access to the second level, and built a shelter
over the second level (including over the door).
Petitioner later learned that a wall on the second level of the business
headquarters had rotted and become moldy from the water damage. He bought
various items during 2010 primarily to repair the wall and to install two toilets.
He also used some of those items to maintain (but not to construct) the shelter.
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The most expensive single item that petitioner purchased for these projects was
insulation, which cost $600. Most of the other items cost less than $100 each.
D. Utilities
Petitioner reported on the 2010 return that he had paid $3,991 of utilities
expenses with respect to the repair business. These expenses related to payments
that petitioner made for (1) the provision of electricity to the business headquarters
and to the rest of his residence, (2) a cellular phone which he used primarily for
business, and (3) a bundled package comprising digital cable television for three
televisions, DVR service for two televisions, Internet service, and two landline
telephones.
Petitioner had one television in the business headquarters. He used one
landline telephone primarily for business, and he maintained the second landline
telephone as a dedicated line required by the State of North Carolina. He used the
Internet to access specifications and other information particular to the vehicles he
repaired and to purchase items used in the repair business. He continued to use
the cellular phone after he went to the Middle East, primarily to check on the
status of the repair business and on the payment of the repair business’ recurring
expenses.
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Petitioner paid $1,081 for electricity provided to his residence from
December 17, 2009, through December 15, 2010. He paid $1,442 during 2010 for
the cellular phone service. He paid $2,173 during 2010 for the bundled package.
E. Mileage
Petitioner kept receipts for purchases related to the repair business.
Contemporaneously with his making of a purchase, he typically listed on each
receipt the corresponding number of miles that he had traveled to make the
purchase. Petitioner eventually used the receipts to generate a summary (mileage
summary) which his bookkeeper gave to respondent during the audit.
The mileage summary was a 2010 calendar on which petitioner’s
bookkeeper generally copied onto the space for each day on which a receipt was
issued the miles written on the receipt and the name of the receipt’s issuer. In the
few cases where a receipt did not list the miles traveled, the bookkeeper “googled
the mileage” and wrote the number of obtained miles on the applicable day of the
calendar. The mileage summary includes miles that petitioner personally traveled
and miles which his father traveled while tending to petitioner’s business after
September 25, 2010. Petitioner concedes that he may not deduct mileage for any
day after September 25, 2010.
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III. Preparation of 2010 Return
Petitioner is relatively unsophisticated as to tax matters, and he relies upon
professionals to assist him on tax matters.
A certified public accountant (C.P.A.) prepared the 2010 return on the basis
of the receipts and the other information that petitioner gave to the C.P.A.
Petitioner met with the C.P.A. to discuss the receipts and the other information
before the C.P.A. prepared the 2010 return, and petitioner proffered the receipts
and the other information to the C.P.A. for his consideration. The C.P.A. had
previously prepared petitioner’s Federal income tax returns for other years and
was familiar with the repair business and with its operation.
IV. Deficiency Notice
Respondent mailed petitioner a deficiency notice for 2010. Respondent
determined in relevant part that petitioner may not deduct any expense that he
reported as to the repair business except for the expenses for mortgage interest and
for legal and professional services. Respondent disallowed the depreciation
deduction primarily because, he determined, petitioner did not establish the cost
basis of any depreciable asset. Respondent disallowed deductions for the other
expenses because, he determined, petitioner did not establish that any of the
reported expenses were paid in the carrying on of a trade or business. Respondent
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also determined in the deficiency notice that petitioner was liable for an accuracy-
related penalty under section 6662(a).
V. Respondent’s Concessions
Respondent conceded before trial that petitioner is entitled to some of the
disallowed deductions. Those concessions, as well as the reported expenses and
the amounts of the reported expenses which remain in dispute, are as follows:
Reported Conceded In dispute
Depreciation $15,395 $12,060 $3,335
Insurance (other than health) 3,354 3,354 -0-
Repairs and maintenance 2,631 -0- 2,631
Supplies 1,149 1,149 -0-
Utilities 3,991 1,885 2,106
Mileage 2,150 1,075 1,075
Total 28,670 19,523 9,147
Discussion
I. Disputed Expenses
A. Burden of Proof
The Commissioner’s determinations in a deficiency notice are presumed
correct, and a taxpayer generally bears the burden of proving the determinations
wrong in order to prevail. See Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111,
115 (1933). As one exception to the general rule, the burden of proof with respect
to factual issues underlying a deficiency may shift to the Commissioner to the
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extent that the taxpayer introduces credible evidence with respect to the factual
issues and meets certain other requirements. See sec. 7491(a). Where, as here, the
record allows the Court to decide a case without regard to the burden of proof, we
need not opine on which party bears the burden of proof. See, e.g., Knudsen v.
Commissioner, 131 T.C. 185, 186-189 (2008). Instead, we may decide the case on
the preponderance of the evidence. See, e.g., id. We decide this case on the
preponderance of the evidence.
B. Ordinary and Necessary Business Expenses
1. General Rule
Section 162(a) generally lets taxpayers deduct “all the ordinary and
necessary expenses paid or incurred during the taxable year in carrying on any
trade or business”. Under that section, a cash method taxpayer such as petitioner
may deduct an expenditure if it is: (1) an expense, (2) an ordinary expense, (3) a
necessary expense, (4) paid during the taxable year, and (5) made to carry on a
trade or business. See Commissioner v. Lincoln Sav. & Loan Ass’n, 403 U.S.
345, 352-353 (1971); Lychuk v. Commissioner, 116 T.C. 374, 386 (2001).
2. Personal and Capital Expenses
Section 162(a) does not let taxpayers deduct personal, living, or family
expenses. See sec. 262(a). Nor does section 162(a) let taxpayers currently deduct
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capital expenses. See sec. 263(a). Capital expenses include “[a]ny amount paid
out for new buildings or for permanent improvements or betterments made to
increase the value of any property”. See sec. 263(a)(1). Deductible expenses
include repairs made to maintain property in ordinarily efficient operating
condition. See, e.g., Ill. Merchs. Trust Co. v. Commissioner, 4 B.T.A. 103, 106
(1926);3 accord Gibson & Assocs., Inc. v. Commissioner, 136 T.C. 195, 232-233
(2011).
The characterization of an expenditure as a deductible repair or a capital
expense is not always straightforward and generally hinges on the unique facts of
each case. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 86 (1992). Former
3
In the seminal case of Ill. Merchs. Trust Co. v. Commissioner, 4 B.T.A.
103, 106-107 (1926), the Board considered whether the cost of repairing rotting
support pilings in a warehouse was deductible as an ordinary expense where the
warehouse threatened to collapse if the repairs were not made. The warehouse
was on the Chicago River, and the pilings supporting the warehouse developed dry
rot when the river unexpectedly receded. See id. at 104. The taxpayer removed
the dry rot and inserted cement supports between the pilings and the floor of the
building. See id. The taxpayer removed large parts of the ground floor and shored
up and raised the partially collapsed wall. See id. The Board held that the cost of
the taxpayer’s work was deductible because it was incurred to prevent the total
loss of the building and to keep the property in its ordinary operating condition as
a warehouse. See id. at 106-107.
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section 1.162-4, Income Tax Regs.,4 illustrates the distinction between a
deductible repair and a nondeductible capital expense as follows:
The cost of incidental repairs which neither materially add to the
value of the property nor appreciably prolong its life, but keep it in an
ordinarily efficient operating condition, may be deducted as an
expense, provided the cost of acquisition or production or the gain or
loss basis of the taxpayer’s plant, equipment, or other property, as the
case may be, is not increased by the amount of such expenditures.
Repairs in the nature of replacements, to the extent that they arrest
deterioration and appreciably prolong the life of the property, shall
either be capitalized and depreciated in accordance with section 167
or charged against the depreciation reserve if such an account is kept.
***
3. Need To Substantiate Expenses
Taxpayers generally bear the burden of substantiating an expense in order to
deduct it. See sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975),
aff’d, 540 F.2d 821 (5th Cir. 1976). All the same, the Court may apply the
longstanding Cohan rule to estimate an expense that a taxpayer establishes is
deductible but does not otherwise substantiate the precise amount of. See Cohan
v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). The Court may apply the
Cohan rule, however, only if the record gives the Court a basis upon which to
4
T.D. 9564, 2012-14 I.R.B. 614, amended by Announcement 2013-7, 2013-
3 I.R.B. 308, revised former sec. 1.162-4, Income Tax Regs., generally for taxable
years beginning after December 31, 2013.
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estimate the deductible expense. See Vanicek v. Commissioner, 85 T.C. 731,
742-743 (1985).
4. Vehicle Expenses
Vehicle expenses are subject to strict substantiation rules and are excepted
from the Cohan rule. See secs. 274(d)(4), 280F(d)(4)(A)(i), (5); see also Boyd v.
Commissioner, 122 T.C. 305, 320 (2004); sec. 1.274-5T(a), Temporary Income
Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). These strict rules allow taxpayers
to substantiate vehicle expenses through adequate records that establish (1) the
amount and business purpose of the expense and (2) the time and place of the
vehicle’s use. See sec. 274(d). Adequate records are (1) an account book, a log, a
statement of expense, or a similar record and (2) documentary evidence (e.g.,
receipts, paid bills, or similar evidence), which together are sufficient to establish
each element of an expenditure. See sec. 1.274-5T(c)(2)(i), Temporary Income
Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985); see also sec. 1.274-5(c)(2)(iii),
Income Tax Regs.
C. Depreciation Expense
Taxpayers may deduct depreciation for certain tangible property used in a
trade or business. See sec. 167(a); see also secs. 167(b), 168. Depreciation is
generally computed by using the cost of the depreciable property as its basis. See
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secs. 167(c), 1011(a), 1012(a). Where the Commissioner has determined that a
taxpayer failed to establish the cost of depreciable property, the taxpayer must
establish the cost of the property in order to depreciate it. See Cluck v.
Commissioner, 105 T.C. 324, 337 (1995); Reinberg v. Commissioner, 90 T.C.
116, 139 (1988).
D. Depreciation in Issue
The parties dispute whether petitioner is entitled to deduct $3,335 of the
depreciation that he reported for 2010. The disputed depreciation relates to the
following property:
Property Disputed depreciation
2010 shop tools $291
Computer 63
Miller Matic 210 welder 107
Tire changer 178
Brake lathe table 40
Drill press 160
Car lift 206
Transmission jack 44
Flush machine 161
Plasma cutter 213
Bush hog lawnmower 732
2007 and 2008 shop tools 1,140
Total 3,335
We start with the Bush Hog lawnmower. Respondent asserts in his pretrial
memorandum that he disallowed the depreciation deduction for that lawnmower
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because petitioner’s use of it was not ordinary and necessary to his carrying on of
the repair business. We disagree with respondent’s rationale for his disallowance
of that depreciation deduction. A depreciation deduction is not dependent on the
taxpayer’s satisfaction of the “ordinary and necessary” expense requirements of
section 162 but rests solely on the taxpayer’s use of depreciable property in a trade
or business. See Noyce v. Commissioner, 97 T.C. 670, 689-690 (1991). Because
we have found that petitioner used the Bush Hog lawnmower in the repair
business, we hold that he may deduct the depreciation that he reported on that
property.5
We turn to the other property in dispute and, more specifically, the amounts
of petitioner’s bases in that property. We start first with the computer and with the
2007 and 2008 shop tools. We have found that petitioner paid $1,100 for the
computer and that he respectively paid $32,711 and $9,146 for the 2007 and 2008
shop tools. We conclude that petitioner’s bases in those three items are the
amounts of those corresponding payments. We hold therefore that petitioner may
5
Respondent does not assert that petitioner is precluded from depreciating
the Bush Hog lawnmower because he failed to establish his basis in that item. Nor
does respondent assert that petitioner’s deduction for some of the depreciation on
that item should be disallowed because it is personal. We consider those potential
assertions waived and do not consider them. See Swords Trust v. Commissioner,
142 T.C. 317, 339 n.30 (2014).
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expense those payments through depreciation deductions. As for the remaining
property, however, we agree with respondent that the record does not reveal
petitioner’s bases in any of that property. We conclude and hold that petitioner
may not deduct depreciation as to any of that remaining property.
E. Other Expenses in Issue
1. Repairs and Maintenance
Respondent disallowed petitioner’s deduction of $2,631 in expenses for
repairs and maintenance. Respondent asserts that these expenses must be
capitalized because they relate to petitioner’s building of a shelter over the second
level in the business headquarters. We have found, however, that the expenses
related not to the building of the shelter but primarily to petitioner’s repair of the
wall that was damaged by water.6 Given the minimal amount of these expenses,
$2,631, vis-a-vis the 2005 cost of the business headquarters, $36,000, and the
2008 cost of the shelter, $20,861, we infer that the repair in 2010 did not
meaningfully increase the value or the original service life of the business
headquarters but merely kept it in ordinarily efficient operating condition. We
6
We note that petitioner repaired the wall in a year after the year that he
built the second level and that, for 2008, petitioner capitalized $20,861 in
expenses for “Shop building”. We infer and find that the $20,861 in expenses was
related to the building of the shelter.
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hold that petitioner may deduct the disputed repairs and maintenance expenses as
ordinary and necessary business expenses under section 162(a).
2. Utilities
Petitioner claimed a $3,991 deduction for utilities expenses related to the
repair business. Respondent conceded that petitioner may deduct $1,885 of the
$3,991 as a business expense and asserts that the remaining $2,106 is a
nondeductible personal expense. Respondent computed the $1,885 by assuming
(incorrectly as he now acknowledges) that the repair shop business was terminated
when petitioner went to the Middle East. While the record does not allow the
Court to determine petitioner’s deduction for utilities expenses with any scientific
precision, we are able to determine that amount from the evidence with the
assistance of reasonable inferences which we draw from the record.
First, as to the electricity expense, we infer that one-half of the $1,081
charge for 2010 was for electrical services supplied to the repair business.
Petitioner both worked and lived at the site of his residence; and given our finding
that petitioner devoted a lot of his time to the repair business, we consider it
reasonable on the basis of the record at hand to split the electricity expense equally
between his business and his personal pursuits. We hold that petitioner may
deduct $541 for electricity ($1,081 × 50%).
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Second, as to the cellular phone, petitioner used that phone primarily for
business. We consider it reasonable to allow petitioner to deduct 80% of the
$1,442 charge for the cellular phone. We hold that petitioner may deduct $1,154
for cellular phone service ($1,442 × 80%).
Third, as to the bundled package, we have found that one television, two
phone lines, and some of the Internet service were for the benefit of the repair
business. While the record does not include a breakdown of the cost for 2010 of
each of the services underlying the bundled package, there is a stipulated bill for a
bundled package provided to petitioner during 2012, which breaks down the
charges for the various services for 2012. We understand that the parties included
this bill in the record as representative of the charges for the various bundled
services during 2010, and we use the bill to determine the amount of petitioner’s
deduction for utilities expenses for 2010. The bill shows that the monthly cost for
digital cable, Internet service, and one telephone line is $115.77, that the monthly
cost of the second telephone line is $29.95, and that petitioner paid for each month
tax and various fees at a rate that we calculate as 7.86%. For 2010 we allow
petitioner to deduct for each month 80% of the $115.77 and all of the $29.95, plus
an additional amount for tax and fees. Stated differently, we hold that petitioner
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may deduct $1,586 for the bundled package (([80% × $115.77] + $29.95) × 1.0786
× 12 months).
In sum, we compute petitioner’s deduction for utilities expenses as follows:
Electricity $541
Cellular phone 1,154
Bundled package 1,586
Total 3,281
3. Mileage
Petitioner claimed a $2,150 deduction for mileage related to the repair
business. Respondent concedes that petitioner may deduct $1,075 of the $2,150 as
a business expense and asserts that the remaining $1,075 is a nondeductible
personal expense. Respondent objects to petitioner’s mileage summary because,
respondent states, it was not prepared contemporaneously with petitioner’s travels.
Respondent’s disallowance of part of petitioner’s reported vehicle expense
is based on respondent’s objection to petitioner’s mileage summary. The
regulations provide specifically that “[a] contemporaneous log is not required”,
sec. 1.274-5T(c)(1), Temporary Income Tax Regs., supra, and focus more
appropriately on the need to record the requisite information at or near the time of
each business use of the vehicle, see sec. 1.274-5T(c), Temporary Income Tax
Regs., supra. Petitioner met the “at or near” requirement in that he typically
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recorded on each of his receipts the business miles that he traveled with regard to
the receipt and did so contemporaneously with his travels related to the receipts.7
The receipts meet the regulatory requirements for petitioner’s vehicle expense
deduction in that they embody the requisite statements of expenses (or similar
records) by establishing the actual business miles that petitioner traveled on each
trip, the time and place of the travel, and the business purpose of the travel. The
mileage summary was not necessary to support the deduction further but was
simply a more efficient restatement of the miles and the other information listed on
the receipts.
We conclude that petitioner may deduct his reported mileage with one
adjustment. The adjustment takes into account petitioner’s concession that he may
not deduct mileage for any day after he was deployed to the Middle East. We
ascertain from the mileage summary that petitioner claimed the standard mileage
rate with respect to 1,280 miles reported for days traveled after September 25,
2010. The standard mileage rate for 2010 is 50 cents per mile. See Rev. Proc.
2009-54, sec. 2.01, 2009-51 I.R.B. 930, 930. See generally sec. 1.274-5(j)(2),
Income Tax Regs. (stating that the Commissioner may establish a procedure for
7
While respondent questions the accuracy of the reported mileage, we find
nothing in the record from which to conclude that the reported mileage failed to
accurately measure petitioner’s business mileage.
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taxpayers to use mileage rates to compute vehicle expenses). We reduce by $640
(1,280 miles × .50 per mile) petitioner’s reported vehicle expense of $2,150 and
hold that petitioner may deduct $1,510 as a vehicle expense.
II. Accuracy-Related Penalty
Respondent determined that petitioner is liable for a 20% accuracy-related
penalty under section 6662(a) and (b)(1) and (2) on account of negligence or,
alternatively, of a substantial understatement of income tax. Respondent stated at
trial that he was still pursuing the penalty but only for negligence. Negligence
includes any failure to make a reasonable attempt to comply with the provisions of
the Code or to exercise ordinary and reasonable care in the preparation of a tax
return. See sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs. Negligence also
includes a failure to keep adequate books and records or a failure to substantiate
items properly. See sec. 1.6662-3(b)(1), Income Tax Regs.
The Commissioner bears the burden of production with respect to a
taxpayer’s liability for an accuracy-related penalty. See sec. 7491(c); Higbee v.
Commissioner, 116 T.C. 438, 446 (2001). Respondent asserts that petitioner was
negligent because he failed to keep adequate books and records and failed to
substantiate the expenses underlying his deductions. We disagree that petitioner
was negligent with respect to the 2010 return.
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Petitioner has produced receipts for most of his reported expenses, and his
failure to present a handful of receipts to substantiate all of his expenses does not
necessarily mean that he failed to keep adequate books and records or failed to
substantiate the expenses underlying his deductions. The lion’s share of the
missing receipts related to relatively small-dollar items of depreciable property
which we have found that petitioner did in fact purchase. Moreover, petitioner’s
bookkeeper testified credibly and without contradiction that, during respondent’s
audit of the 2010 return, she saw all of the missing receipts, with the exception of
the receipt for the brick lathe table. Our holding that petitioner was not negligent
as to the 2010 return is further supported by the facts that petitioner retained a
C.P.A. to prepare the 2010 return, that petitioner and the C.P.A. met to discuss the
receipts and the other information that would eventually form the basis of the
amounts shown in the 2010 return, and that petitioner proffered those receipts and
other information to the C.P.A. for his consideration. Petitioner’s actions as to the
preparation of the 2010 return show us that he knew that he had an obligation to
file a correct Federal income tax return for 2010 and that, while he was relatively
unsophisticated as to tax matters, he was reasonably attempting to comply with the
provisions of the Code and to exercise ordinary and reasonable care in the
preparation of the 2010 return.
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We hold that petitioner is not liable for the accuracy-related penalty that
respondent determined.
III. Conclusion
Petitioner may deduct the disputed expenses to the extent stated herein. In
addition, petitioner is not liable for the accuracy-related penalty that respondent
determined.
To reflect the foregoing,
Decision will be entered
under Rule 155.