                          T.C. Memo. 2015-150



                     UNITED STATES TAX COURT



VINCENTE OCAMPO JUNIOR a.k.a. VINCENTE OCAMPO AND ILLIANET
          PADILLA a.k.a. ILIANET OCAMPO, Petitioners v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



   Docket No. 20224-13.                        Filed August 11, 2015.



      In 2008 and 2009 P-H operated a landscaping business as a sole
   proprietorship. Ps reported gross receipts from and claimed
   deductions for expenses incurred by the landscaping business on their
   2008 and 2009 joint Federal income tax returns. Ps filed those tax
   returns untimely, and R audited them. On the basis of a bank deposits
   analysis R determined that Ps had received but failed to report
   additional business income and other income. R also disallowed for
   lack of substantiation many of Ps’ claimed business expense
   deductions, including portions of their deductions for car and truck,
   interest, and other expenses. R determined for each tax year a
   deficiency in income tax, an I.R.C. sec. 6651(a)(1) addition to tax,
   and an I.R.C. sec. 6662(a) accuracy-related penalty.

      Held: Ps established by a preponderance of the evidence that
   some of the unreported deposits consisted of nontaxable transfers and
   loan proceeds, and that some of the alleged unreported income R
   determined resulted from computational errors in the bank deposits
                                        -2-

      [*2] analysis. Ps failed to establish that the balance of the determined
      unreported income was nontaxable or resulted from computational
      errors.

         Held, further, with the exception of depreciation allowable for two
      vehicles used in P-H’s business, Ps failed to adequately substantiate
      car and truck expenses in excess of the amounts R has already
      allowed. Ps further failed to adequately substantiate interest or other
      business expenses in excess of the amounts R has already allowed.

         Held, further, Ps are liable for the I.R.C. sec. 6662(a) accuracy-
      related penalty for the 2008 tax year.



      Vincente Ocampo Junior a.k.a. Vincente Ocampo and Illianet Padilla a.k.a.

Ilianet Ocampo, pro sese.

      Michael K. Park and Casinova Henderson, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      WHERRY, Judge: For petitioners’ 2008 and 2009 taxable years respondent

determined deficiencies in income tax, section 6651(a)(1) additions to tax, and

section 6662(a) accuracy-related penalties as follows:1


      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code of 1986 (Code), as amended and in effect for the years at issue, and
all Rule references are to the Tax Court Rules of Practice and Procedure. We
round all amounts to the nearest dollar.
                                           -3-

 [*3]                                            Addition to tax       Penalty
                      Year        Deficiency     sec. 6651(a)(1)     sec. 6662(a)
                      2008         $35,100            $9,777            $7,020
                      2009          48,344            12,086             9,669

After the filing of a first stipulation of facts and a stipulation of settled issues,2 the

facts of which are agreed to by the parties and incorporated herein by this

reference, the issues remaining for decision are:




        2
        In the stipulation of settled issues: (1) petitioners conceded that they are
not entitled to deduct the $971 of gift/incentives expense claimed on Schedule C,
Profit or Loss From Business, of their jointly filed 2008 Form 1040, U.S.
Individual Income Tax Return; (2) respondent conceded that petitioners are
entitled to deduct on Schedule C $1,842 of check cashing fees for 2008; (3)
respondent conceded that for 2009 petitioners are entitled to deduct on Schedule C
other expenses of $4,763 in addition to the $18,783 respondent allowed on audit,
for a total allowed deduction of $23,546; (4) petitioners conceded that they are not
entitled to the $11,753 net operating loss carryforward claimed on their 2008 Form
1040; (5) respondent conceded that for 2008 petitioners are entitled to cost of
goods sold of $202,666, which is the amount claimed on their 2008 Schedule C;
(6) respondent conceded that for 2009 petitioners are entitled to cost of goods sold
of $156,133, which exceeds by $13,502 the amount reported on their 2009
Schedule C; (7) petitioners conceded that for 2009 they erroneously reported on
Schedule E, Supplemental Income and Loss, a $33,321 net loss; (8) respondent
conceded that for 2009 petitioners do not have qualified dividend income of
$19,100; (9) petitioners conceded that they are liable for the sec. 6651(a)(1)
additions to tax for failure to timely file their Federal income tax returns for 2008
and 2009; and (10) petitioners conceded that they are liable for the sec. 6662(a)
accuracy-related penalty for 2009. To the extent these stipulated concessions fully
resolve previously disputed issues, we will not further address them.
                                        -4-

[*4] (1) whether for each tax year at issue petitioners received but failed to report

additional gross receipts from Mr. Ocampo’s landscaping business (Ocampo’s

Landscaping) and other income;

      (2) whether for each tax year at issue petitioners are entitled to deduct other

expenses of Ocampo’s Landscaping in excess of the amounts respondent has

already allowed;

      (3) whether for each tax year at issue petitioners are entitled to deduct car

and truck expenses in excess of the amounts respondent has already allowed; and

      (4) whether for 2008 petitioners are liable for the section 6662(a) accuracy-

related penalty.

                               FINDINGS OF FACT

      During 2008 and 2009 Vincente Ocampo Junior, also known as Vincente

Ocampo, owned and operated a gardening and landscaping business as a sole

proprietorship. Petitioners’ joint 2008 and 2009 Federal income tax returns

identify the business as Ocampo’s Landscaping and report its address as

petitioners’ home address. Mr. Ocampo’s wife, Illianet Padilla, also known as

Ilianet Ocampo,3 was employed as an x-ray technician by the University of


      3
       For clarity, the Court will refer to her as “Ms. Padilla” throughout this
opinion.
                                         -5-

[*5] California, Los Angeles (UCLA), during 2008 and 2009. Mr. Ocampo and

Ms. Padilla lived in California when they filed their petition.

I.     Ocampo’s Landscaping

       During 2008 and 2009 Ocampo’s Landscaping performed high-end

landscaping work and also provided regular landscaping maintenance for some of

its clients. Ocampo’s Landscaping’s projects often involved masonry, such as for

fire pits, as well as the installation of outdoor lighting and speakers and built-in

barbeque grills. Approximately 85%-90% of its business consisted of large

projects at high-end homes. Its aggregate fees for these projects ranged from

about $20,000 to $200,000. Its clients typically paid by check, not in cash.

      On June 10, 2008, Mr. Ocampo established a business checking account for

Ocampo’s Landscaping at Washington Mutual Bank, which was later acquired by

Chase Bank (WAMU account). Both before he established that account and

afterward, Mr. Ocampo sometimes cashed at Sanchez Meat Market (Market)

checks he received from clients as payment for landscaping services.

      The years at issue were a financially difficult period for Ocampo’s

Landscaping. Because the WAMU account balance was often low, the bank would

sometimes wait seven or eight days before making the funds from a deposited

check available. Mr. Ocampo viewed the Market as a “quick bank”
                                        -6-

[*6] from which he could, in exchange for a fee, obtain the funds from a check

immediately rather than depositing the check into the WAMU account and waiting.

After cashing a check at the Market, Mr. Ocampo would use the cash to purchase

materials, to pay workers who helped him, and/or to pay himself, by depositing

some of the cash into his and Ms. Padilla’s joint checking account at University

Credit Union (UCU account). After establishing the WAMU account Mr. Ocampo

regularly wrote checks to his wife from that account, and she deposited them into

the UCU account to be used for petitioners’ personal expenses.

      At a time not established in the record, Mr. Ocampo performed landscaping

services for Ms. Padilla’s brother, Hector Padilla, at a single-family home on

Flicker Way in Los Angeles that Mr. Padilla had purchased in November 2005 with

the initial intention of redeveloping and then reselling it. Messrs. Ocampo and

Padilla did not enter into a written agreement at the outset. Instead, Mr. Ocampo

simply began doing work, and his final bill to Mr. Padilla for labor and materials

was $152,000. Mr. Padilla was unable to sell the property and, in his words, “ran

into money problems”; he temporarily moved into the house but by the time of trial

was renting it out and living elsewhere. Although Mr. Padilla signed a promissory

note obliging himself to make monthly payments of principal and interest to
                                        -7-

[*7] Mr. Ocampo for his work, he had made no payments as of the date of trial,

December 3, 2014.

II.   Home Mortgages

      During 2008 and 2009 petitioners owned their primary residence subject to

three mortgages. As reported to them on Forms 1098, Mortgage Interest Statement,

they paid mortgage interest on those loans to the following mortgage servicers in

the following amounts:

           Account No.           Account No.           Account No.
              6595                  3826                  7716              Total
  Year   Payee    Amount       Payee     Amount       Payee     Amount
  2008 Nat’l        $8,356   Aurora      $16,555 JP             $15,814   $40,725
       City                  Loan                Morgan
       Mortg.                Servs.              Chase
                             (Aurora)            Bank
                                                 N.A.
  2009 PNC           6,428   Aurora        16,272 Chase           8,352    31,052
       Mortg.                                     Home
       Servs.,                                    Finance
       Inc.                                       LLC

Loan account No. 7716 was a home equity line of credit (Chase HELOC).

      Petitioners applied for the Chase HELOC on March 14, 2003, and were

approved for an initial amount of $160,000. They used $54,499 from the Chase

HELOC to pay off a mortgage with World Savings & Loan. As of January 26,
                                          -8-

[*8] 2006, petitioners’ outstanding principal balance on the Chase HELOC was

$111,862. As a result of cash advances petitioners took and checks they wrote to

third parties throughout 2006, their balance on the Chase HELOC rose to $245,979

as of December 23, 2006. From January 26, 2008, through January 24, 2009, their

balance remained $245,979 because they made interest-only payments and took no

further advances.

       The record does not disclose any changes in the Chase HELOC’s principal

balance after January 24, 2009. It is also silent as to: (1) the initiation dates and

principal balances during the years at issue of petitioners’ other two mortgages, and

(2) the purpose(s) for which petitioners used the funds borrowed via the Chase

HELOC and the other mortgages.

III.   Business Vehicles

       During 2008 and 2009 Mr. Ocampo used at least three trucks in his business:

(1) a 1997 Chevy Cheyenne 3500, (2) a 1997 Ford F250, and (3) a 2006 Ford F250.

       Mr. Ocampo purchased the 1997 Ford F250 from a previous owner for

$4,200 on February 16, 2008. He acquired the 2006 Ford F250 new, on July 26,

2005, for $25,380 using a car loan from Chase. The promissory note and the

security agreement with Chase stated an annual interest rate of 7.5%, indicated that

Mr. Ocampo would use the truck for personal rather than business purposes, and
                                       -9-

[*9] called for 60 monthly installments of $510 on the ninth day of each month,

with the final installment due August 9, 2010. Petitioners’ WAMU and UCU

account records for the years at issue reflect the following payments to Chase Auto

Finance:

                          Date     Amount      Account
                         2/5/08     $510       UCU
                        3/14/08     1,035      UCU
                        4/15/08      525       UCU
                        5/30/08      510       UCU
                        6/27/08      510       UCU
                        7/10/08      510       WAMU
                         8/8/08      510       WAMU
                        9/10/08      510       WAMU
                      10/17/08       510       WAMU
                      11/14/08       510       WAMU
                        12/5/08      510       WAMU
                        1/18/09      510       WAMU
                        2/18/09      510       WAMU
                         3/6/09      510       WAMU
                         4/7/09      510       WAMU
                         5/5/09      510       WAMU
                         6/1/09      510       WAMU
                                         - 10 -

 [*10]          7/17/09           510             WAMU
                8/18/09           510             WAMU
                 9/3/09           510             WAMU
              10/18/09            510             WAMU

IV.   Tax Reporting

      Petitioners filed joint Federal income tax returns for 2008 and 2009 on May

4, 2011. Both returns were filed late.

      A.     Mortgage Interest

      On Schedules A, Itemized Deductions, petitioners claimed deductions for

home mortgage interest of $24,229 for 2008 and $11,745 for 2009. On Forms

8829, Expenses for Business Use of Your Home, they reported deductible

mortgage interest of $33,896 for 2008 and $16,431 for 2009 and computed the

business percentage as 28.52% for both years. As a result of this computation, of

the aggregate $13,026 of expenses for business use of their home for which

petitioners claimed a deduction on their 2008 Schedule C, $9,667 consisted of

home mortgage interest. Of the aggregate $7,611 of expenses for business use of

their home for which petitioners claimed a deduction on their 2009 Schedule C,

$4,686 consisted of home mortgage interest. Hence, on Schedules A and C,
                                       - 11 -

[*11] petitioners deducted aggregate mortgage interest expense of $33,896 for

2008 and $16,431 for 2009.

      With their 2008 Form 8829 petitioners provided a supporting statement

indicating that they had computed total deductible mortgage interest as the sum of

(1) $15,814 paid to JPMorgan/Chase, which was the amount reported on Form

1098 for the Chase HELOC, (2) $16,556 paid to Aurora, which was the amount

reported on Form 1098 for the Aurora mortgage, and (3) $1,526 paid on a

“HELOC” (apparently a second one), which was less than the $8,356 reported by

National City Mortgage Services on petitioners’ third 2008 Form 1098.

      With their 2009 Form 8829 petitioners provided a supporting statement

indicating that they had computed deductible mortgage interest as equal to the sum

of $16,431 of interest paid on the Aurora mortgage--more than the $16,272

reported to them by Aurora on Form 1098--and zero interest paid to

JPMorgan/Chase, even though Chase Home Finance LLC reported receiving

$8,352 of mortgage interest in 2009 on Form 1098. The statement does not include

petitioners’ third mortgage.

      B.     Gross Income

      Among other items, petitioners reported the following income on their 2008

and 2009 Forms 1040:
                                        - 12 -

                 [*12]        Income              2008           2009
                 Wages, salaries, tips, etc.     $34,659     $37,039
                 Taxable interest                    51                 2
                 Business income                  96,473         29,458

The amounts petitioners reported as wage income match the amounts UCLA

reported having paid Ms. Padilla on Forms W-2, Wage and Tax Statement. Bank

records for the UCU account reflect that UCU paid petitioners interest of $17

during 2008 and $3 during 2009.

      On their Schedules C for Ocampo’s Landscaping petitioners reported gross

receipts of $384,107 for 2008 and $289,255 for 2009.

      C.    Business Expenses

      On their Schedules C petitioners claimed deductions for, among others, the

following expenses:

                           Expense                   2008          2009
              Car and truck                         $32,106 $38,989
              Other:                                 21,075        59,241
                  Additional auto                          421       -0-
                  Additional supplies                      762       -0-
                  Bank service charges                      97      1,040
                  Cell phone/Sprint                      1,826       -0-
                                         - 13 -

              [*13] Computer/Internet                       80     918
                  Dues/subscriptions                   155         717
                  Fees                                -0-          249
                  Gifts/incentives                     971         785
                  Interest                          11,647        8,176
                  Janitorial expense                   359        -0-
                  Miscellaneous                       -0-         -0-
                  Office supplies                     2,284        533
                  Outside services                    -0-         6,285
                  Parking                                    3    -0-
                  Payroll expense                     -0-        25,212
                  Postage and delivery                 303          43
                  Printing/reproduction                      6    -0-
                  Professional fees                   -0-         9,365
                  Rubbish removal                     2,036       2,892
                  Telephone                           -0-         2,656
                  Tools equipment                     -0-          370
                  Uniforms/protective clothing         125        -0-

      Petitioners did not separately claim depreciation for either year. On their

2008 Schedule C, Part IV, “Multiple Auto Statement”, petitioners reported using

five vehicles for Ocampo’s Landscaping, as follows:
                                       - 14 -

 [*14]                     Veh. 1      Veh. 2      Veh. 3      Veh. 4       Veh. 5
 Date placed in service    1/1/06       1/1/08     1/1/97       1/1/08      1/1/08
 Business miles            25,104      20,597      15,147      20,214       3,052
 Commuting miles             -0-         -0-         -0-         -0-         -0-
 Personal miles              -0-         -0-         -0-         -0-        4,982

      On their 2009 Schedule C, Part IV, “Multiple Auto Statement”, petitioners

again reported using five vehicles for Ocampo’s Landscaping, as follows:

                           Veh. 1      Veh. 2      Veh. 3      Veh. 4       Veh. 5
 Date placed in service     1/1/06      1/1/08     1/1/08       1/1/08      1/1/08
 Business miles            30,547      25,147      20,569      10,254       3,057
 Commuting miles             -0-         -0-         -0-         -0-         -0-
 Personal miles              -0-         -0-         -0-         -0-        9,490

      On neither tax return did petitioners report having placed a vehicle in service

on or after February 16, 2008, the date on which Mr. Ocampo purchased the 1997

Ford F250.

V.    Return Examination

      Internal Revenue Service (IRS) Revenue Agent Dominique Franks (RA

Franks), who holds a bachelor’s degree in business administration, business, and

accounting and a master’s degree in business administration and accounting,

examined petitioners’ 2008 and 2009 Federal income tax returns. On July 17,
                                       - 15 -

[*15] 2013, respondent mailed petitioners a notice of deficiency for their 2008 and

2009 tax years determining deficiencies, additions to tax, and penalties as noted

above.

      A.     Bank Deposits Analysis

      As part of her examination, on the basis of records obtained via subpoena

from WAMU, UCU, and the Market, RA Franks prepared summaries and analyses

of petitioners’ bank deposits and of checks cashed at the Market.4

             1.    2008

                   a.     Examiner’s Computations

      For 2008 RA Franks classified as taxable all checks deposited into the

WAMU account, with the exception of a $32 refund from AT&T deposited July 3,

2008. She computed total WAMU deposits during 2008 of $192,795, computed

the sum of all checks deposited in 2009 but dated for (and ostensibly,

constructively received by petitioners in) 2008 as $36,700, then added the two

amounts to reach net taxable deposits into the WAMU account of $229,495. She

         4
        In disputing respondent’s determinations of unreported income for both tax
years, petitioners allege that: (1) RA Franks made computational errors in the
bank deposits analysis, and (2) some deposits she classified as taxable were in fact
nontaxable. The Court has examined both petitioners’ bank account records and
the bank deposits analysis and has identified computational and transcription
errors as well as apparently inadvertent omissions. We address these factual
findings here.
                                       - 16 -

[*16] did not subtract the amount of the AT&T refund she had herself classified as

nontaxable. After analyzing and classifying the 2008 deposits into the UCU

account, RA Franks computed total deposits and interest of $114,799, from which

she debited $17,714 of nontaxable transfers, leaving net taxable deposits of

$97,085.

      RA Franks computed petitioners’ total taxable deposits into their two

accounts as $326,580. She then added $4,928, the approximate amount of Federal

tax withheld from Ms. Padilla’s 2008 wages,5 to reach total net taxable deposits of

$331,508. RA Franks computed the total amount of checks cashed at the Market

during 2008 as $152,057, then debited the sum of two checks petitioners received

as reimbursements to reach a net taxable amount of $139,057. She computed

petitioners’ unreported Schedule C gross receipts and other income as,

respectively, $38,594 and $14,544.6 Consistent with RA Franks’ computations, in


       5
        Ms. Padilla’s 2008 Form W-2, which petitioners filed with their 2008
return, reflects withholding amounts of: (1) $2,185 for Federal income tax, (2)
$2,224 for Social Security tax, and (3) $520 for Medicare tax, for total Federal tax
withheld of $4,929. Also reflected on the Form W-2 was California State income
tax withholding of $246, which RA Franks was aware of but elected not to
consider or adjust for.
       6
        On another page of her workpaper RA Franks appears to have mistakenly
replaced the total for checks cashed at the Market, $139,057, with $192,795, the
total deposits into the WAMU account, in computing “Net Taxable Including the
                                                                     (continued...)
                                       - 17 -

[*17] the notice of deficiency respondent determined that for 2008 petitioners had

received but failed to report additional business gross receipts of $38,594 and other

income of $14,544.

                   b.     Correct Computations

      In computing net taxable deposits into the WAMU account, RA Franks

failed to reduce total deposits by the $32 AT&T refund. Had she done so, she

would have computed net taxable deposits into that account as $192,763.

Otherwise, petitioners’ WAMU account records and the records supplied by the

Market in response to RA Franks’ subpoena align with her computations and

conclusions. Considered alongside these other records, however, petitioners’ UCU

account records and RA Franks’ workpapers reflect that RA Franks should have

computed their net taxable deposits for that account as follows:7




      6
      (...continued)
checks cashed” of $524,302, resulting in an incorrect total potential unreported
income for 2008 of $105,485. In computing the actual unreported income, it
appears that RA Franks corrected this mistake, and the unreported income
determined in the notice of deficiency matches the corrected computation
described in the text.
          7
      Spreadsheets reflecting the Court’s classification of deposits and
computations for the UCU account are attached as appendixes.
                                        - 18 -

             [*18]          Items                             Amount

             Cash1                                            $30,100
             Interest                                                 17
                                                               2
             Nontaxable transfers, refunds, etc.                   33,914
             Schedule C gross receipts                             21,049
             Unknown                                                1,344
             Wages                                                 28,375
                Total                                         114,799
                 Net taxable deposits                              80,885

   1
     RA Franks classified all cash deposits as gross receipts of Ocampo’s
Landscaping. Petitioners contend that these deposits consisted of cash obtained by
cashing checks at the Market and that if the amounts of checks cashed at the
Market are included in their income, then these deposits should be treated as
nontaxable transfers. We list cash deposits separately because of this dispute as to
their classification.
   2
     RA Franks’ workpapers describe several deposits as “Missing” or “Unable to
locate”, and although she did not expressly classify these deposits as taxable, she
did not debit them from total deposits in computing net taxable deposits.
Petitioners’ WAMU account records for 2008, which include canceled checks
written on that account, reflect that, of the deposits into the UCU account that RA
Franks identified as missing or unknown, the following were in fact additional
nontaxable transfers from the WAMU account: $2,000 of the $2,472 deposit on
August 14 (WAMU check No. 1014); $1,000 deposit on September 19 (WAMU
check No. 1030); $2,000 deposit on September 26 (WAMU check No. 1031);
$2,500 of the $2,686 deposit on October 14 (WAMU check No. 1036); $2,000 of
the $2,148 deposit on October 21 (WAMU check No. 1038); and $3,700 deposit
on December 10 (WAMU check No. 1055).
        Together with petitioners’ UCU account records for 2008, which include
copies of checks deposited into that account, the WAMU records also reflect that
the $3,000 deposit made on August 29, 2008, which RA Franks noted as a $3,000
check from Jacob Gooze and classified as taxable gross receipts of Ocampo’s
Landscaping, was in fact a nontaxable transfer from the WAMU account. When
UCU provided petitioners’ account records to RA Franks pursuant to a subpoena, it
erroneously included one canceled check that had been deposited into an account
other than the UCU account. Jacob Gooze in fact wrote check No. 501, for $3,000,
to Cari Chanin, who signed the back of the check and marked it “for deposit only”
                                           - 19 -

      [*19] into an account with an account number ending in 0801. Petitioners’ UCU
      account number ends with 3734. Petitioners’ WAMU account records include a
      copy of the $3,000 check to Ms. Padilla, dated August 28, 2008, that was deposited
      into the UCU account on August 29, 2008.
              In total, of the missing or unknown deposits into the UCU account that RA
      Franks treated as taxable income, $16,200 was in fact from nontaxable transfers
      from the WAMU account.

      Had she used these numbers, RA Franks should have computed total net

taxable deposits, including checks cashed at the Market, of $412,705,8 unreported

Schedule C gross receipts of $35,562, and unreported other income of $1,344.

             2.     2009

                    a.      Examiner’s Computations

      For 2009 RA Franks computed total deposits into the WAMU account of

$269,323. She classified as nontaxable the $36,700 deposited in 2009 but dated for

2008 that she had allocated to 2008 income. She also classified as nontaxable an

$802 reimbursement check from La Casa Investments, LLC, a $1,660 temporary

credit MC, and a $503 payment from “Waterside/Mdr”, computing the total of

these payments as $2,965. Treating all other check and cash deposits into the

WAMU account as taxable, RA Franks then subtracted the 2008 dated checks and

the other three items she had classified as nontaxable to reach net taxable deposits


       8
       $192,763 (net taxable WAMU deposits) + $80,885 (net taxable UCU
deposits) + $139,057 (net taxable amount for checks cashed at the Market) =
$412,705.
                                       - 20 -

[*20] of $229,658. For the UCU account RA Franks computed total 2009 deposits

of $69,160. In her final computations for that account, she treated $15,058 of

deposits as nontaxable and determined net taxable deposits of $54,101.

      RA Franks computed petitioners’ total net taxable deposits into their two

accounts as $283,759. She then added $4,790, the approximate amount of Federal

tax withheld from Ms. Padilla’s 2008 wages,9 again ignoring California State

withholding, to reach total net taxable deposits of $288,549. RA Franks computed

the total amount of checks cashed at the Market during 2009 as $92,112. She

added this amount to petitioners’ total net taxable deposits to reach taxable income

of $380,661. Of this amount, she classified all deposits into the WAMU account

and checks cashed at the Market as Schedule C gross receipts. She computed

petitioners’ unreported Schedule C income as $32,515 and their unreported other

income as $4,387. Consistent with these computations, in the notice of deficiency

respondent determined that for 2009 petitioners had received but failed to report

additional business income of $32,515 and other income of $4,387.




       9
        The photocopy in the record of Ms. Padilla’s 2009 Form W-2, which
petitioners filed with their 2009 return, is cut off and so does not show the actual
amounts of Federal income tax, Social Security tax, and Medicare tax withheld.
Petitioners’ 2009 Form 1040, at line 61, reports Federal income tax withholding of
$1,860.
                                          - 21 -

[*21]               b.     Correct Computations

        For the UCU account, RA Franks computed net taxable deposits of $54,101,

treating only $15,058 as nontaxable. Her item-by-item analysis, however,

identifies the following deposits as nontaxable:

              Check date   Deposit date                 Payor                Amount

                 1/12/09      1/13/09     Ocampo’s (check No. 1067)          $1,500
                 1/24/09      1/27/09     Ocampo’s (check No. 1076)               1,500
                 2/13/09      2/13/09     Ocampo’s (check No. 1080)               3,800
                                                                              1
                  3/9/09       3/9/09     Ocampo’s (check No. 1093)               2,600
                 4/10/09      4/10/09     Ocampo’s (check No. 1112)               2,000
                              4/13/09     Deposit L-9 (line of credit)             240
                  5/5/09       5/5/09     Ocampo’s (check No. 1114)               2,000
                               5/5/09     Deposit L-9 (line of credit)              48
                               5/5/09     UCU (fee refund)                          20
                 5/14/09      5/14/09     Ocampo’s (check No. 1120)               3,000
                 6/20/09      6/22/09     Ocampo’s (check No. 1140)               1,500
                  7/9/09       7/9/09     Ocampo’s (check No. 1154)               2,000
                              7/29/09     Deposit L-9 (line of credit)              13
                  8/6/09       8/6/09     Ocampo’s (check No. 1163)               3,000
                              8/11/09     Target (purchase return)                  42
                  9/4/09       9/4/09     Ocampo’s (check No. 1195)               3,000
                              9/17/09     Office Depot (purchase return)            36
                 10/7/09      10/9/09     Ocampo’s (check No. 1236)               1,800
                10/21/09     10/23/09     Ocampo’s, Inc.2 (check No. 1006)        1,600
                                              - 22 -

    [*22]        11/17/09        11/18/09      Ocampo’s, Inc. (check No. 1029)          2,200

                                 11/23/09      Deposit L-9 (line of credit)                    21

                                  12/7/09      Deposit L-9 (line of credit)               219

                 12/14/09        12/15/09      Ocampo’s, Inc. (check No. 1049)          4,000

                                 12/22/09      Petco (purchase return)                         20

                 Total                                                                  36,159

        1
         RA Franks’ item-by-item analysis does not expressly denote this $2,600 check
      as nontaxable but instead interprets the “exp.” on the memo line as “expenses”.
      On brief respondent contends that RA Franks treated the check as taxable other
      income. RA Franks classified all other checks from Ocampo’s (before its
      incorporation, see infra) as nontaxable transfers, and she explained that for 2009
      she classified as other income only those deposits which were missing or for which
      she “could not get * * * an explanation” from either UCU or petitioners. We
      therefore see no basis for respondent’s contention and in any event no reason to
      treat the transfer as taxable.
       2
         The California secretary of state’s online business entity records reflect that Mr.
      Ocampo organized a corporation, Ocampo’s, Inc., on August 25, 2009, and he
      opened a new bank account for the corporation. Petitioners did not file an S
      election for the corporation until 2012. RA Franks concluded that the checks
      petitioners received from the corporation were “constructive dividends”. In the
      notice of deficiency respondent determined that petitioners had received but failed
      to report $19,100 of qualified dividends from their wholly owned corporation.
      Although it is unclear from the record how respondent arrived at the amount of
      $19,100, we presume that respondent classified the checks from Ocampo’s, Inc.,
      that were deposited into the UCU account, among others, as dividends.
      Respondent conceded his qualified dividend income determination in the
      stipulation of settled issues, see supra note 2, and has neither proposed nor argued
      for an alternative characterization of the funds transferred from Ocampo’s, Inc.
      The Court will therefore treat these transfers as nontaxable returns of capital.

      In sum, RA Franks’ item-by-item analysis reflects corrected total nontaxable

deposits of $36,159. Had RA Franks used this number for nontaxable deposits, she

would have computed net taxable deposits into the UCU account of $33,001. The
                                       - 23 -

[*23] UCU account records show that, of this amount, $30,612 consisted of Ms.

Padilla’s wages and $3 consisted of interest. Hence, had RA Franks computed

petitioners’ unreported income consistent with her item-by-item analysis, she

would have determined unreported other income of $2,38710 rather than $4,387.

      B.    Expense Examination

      In addition to conducting a bank deposits analysis, RA Franks examined the

deductions petitioners claimed on Schedule C.

            1.     Car and Truck Expense

      Petitioners presented receipts and invoices to RA Franks to substantiate their

claimed deduction for car and truck expense. She allowed deductions for some of

the expenses reflected in these records but disallowed others because she could not

read them, because they had already been allowed, or because they were not, in her

determination, ordinary and necessary business expenses. In the notice of

deficiency respondent allowed deductions for $10,055 of car and truck expenses

for 2008 and $14,544 for 2009.




       10
        UCU paid petitioners $2.67 of interest during 2009. On their 2009 Federal
income tax return they rounded that amount down to $2 instead of up to $3, so $1
of the $2,387 of unreported income consists of interest. Respondent treated this
$1 as other income in the notice of deficiency, and for simplicity, we will do the
same.
                                             - 24 -

[*24] The portions of petitioners’ receipts and invoices that respondent entered

into evidence--some (but not necessarily all) of which represent expenses RA

Franks allowed--reflect the following odometer readings for some of petitioners’

vehicles:

                                2008                                2009
            Vehicle      2/23          8/14           5/4    12/18     12/22     12/31
   1997 Chevy 3500        ---          ---            ---   121,090        ---    ---
   1997 Ford F250      113,687         ---            ---     ---          ---    ---
   2006 Ford F250         ---      55,598 66,295              ---      74,822 75,115

      After RA Franks had reviewed their evidence of vehicle operating expenses,

petitioners submitted to respondent handwritten, detailed daily mileage logs

showing the following business miles driven:11




       11
        Respondent objected to the logs’ admission into evidence on the basis that
they were irrelevant and prepared in anticipation of litigation. We provisionally
admitted the exhibits subject to respondent’s objection. On brief respondent
contends the logs should be excluded because they are not credible. The Federal
Rules of Evidence do not specifically provide for the exclusion of evidence on the
basis that it was prepared in anticipation of litigation or lacks credibility. These
are bases for giving the evidence little weight, not for excluding it. As for
respondent’s relevancy objection, Fed. R. Evid. 401 sets a low bar for relevancy,
and the logs clear it because they support petitioners’ claim for car and truck
expense deductions under the standard mileage method. We give them weight
commensurate with their probative value.
                                        - 25 -

 [*25]                       Vehicle             2008        2009
                        1997 Chevy 3500          10,875.8   10,963.5
                        1997 Ford F250           11,380.0   11,749.0
                        2006 Ford F250           55,107.5   28,580.2
                        1995 Nissan                 ---     27,809.3

Most of petitioners’ mileage logs appear to have been created in spiral notebooks

and list addresses and locations along with daily mileage numbers. Petitioners’

2009 log for the 1995 Nissan, however, appears to have been created by hand on

computer-generated weekly and monthly calendar pages. The date stamp in the

lower right-hand corner of each calendar page indicates that the pages were printed

on July 15, 2014, from 12:47 p.m. to 3:24 p.m., with each page having been printed

at 3:24 p.m. except the first page, printed at 12:47 p.m.

      RA Franks rejected and did not consider petitioners’ mileage logs, which she

had never seen before the trial. She rejected them both because she believed that

petitioners were bound by their original claim for actual car and truck expenses and

because neither petitioners nor the logs themselves provided opening and closing

odometer readings for each tax year.
                                         - 26 -

[*26]         2.    Other Expenses

        For both 2008 and 2009 RA Franks disallowed deductions for the interest

expenses claimed on petitioners’ Schedules C for lack of substantiation and for

failure to prove to her they were ordinary and necessary. She did not examine and

made no adjustments to the mortgage interest expense deductions petitioners

claimed on their Schedules A or to the deductions for business use of their home--

which were attributable in part to mortgage interest expenses reported on Forms

8829--claimed on their Schedules C.

        Petitioners’ claimed $11,647 deduction for interest is the only other expense

remaining in dispute for 2008. For 2009 $16,912 of petitioners’ claimed other

expense deduction, including the $8,176 claimed for business interest, remains in

dispute.12


        12
         The stipulation of settled issues frames the amount of other expense for
2009 remaining in dispute as follows: “For tax year 2009, petitioners claimed
Schedule C other expenses in the amount of $59,241.00 on their income [tax]
* * * return. The notice of deficiency sets forth an adjustment for disallowed
Schedule C other expenses in the amount of $40,458.00. Respondent concedes
that petitioners are entitled to Schedule C other expenses in the amount of
$23,546.00.” The final sentence could be interpreted in either of two ways:
Respondent has conceded petitioners are entitled to either other expenses of
$23,546 in total, such that $35,695 remains in dispute, or other expenses of
$23,546 in addition to the $18,783 allowed in the notice of deficiency, such that
$16,912 remains in dispute. In his posttrial brief respondent adopts the latter
interpretation, so the Court will follow suit.
                                         - 27 -

[*27] VI.    Disputed Amounts

      Petitioners timely petitioned this Court on August 30, 2013. We tried their

case December 3, 2014. To summarize, after the Court’s corrections to RA Franks’

incorrect factual statements and computations, the amounts of income and expense

remaining at issue and analyzed in this opinion are as follows:

                              Item                 2008      2009
                   Sched. C gross receipts        $35,562 $32,515
                   Other income                     1,344     2,387
                   Car and truck expenses          22,051    24,445
                   Other expenses (total):         11,647    16,912
                      Interest                     11,647     8,176
                      Other                         -0-       8,736

                                      OPINION

      The Commissioner’s determination of a taxpayer’s tax liability is generally

presumed correct, and the taxpayer bears the burden of proving the determination

improper. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). This rule

generally governs the nonpenalty issues in this case.13

       13
        In their posttrial briefs petitioners assert “[t]hat the appropriate standard of
review to be applied by this Court in this case is whether or not the respondent’s
revenue agent had the skills and knowledge to conduct this examination with
accuracy to determine the correct amount of tax liability owed by the petitioners
                                                                           (continued...)
                                       - 28 -

[*28] I.    Unreported Income

      Because of the difficulty inherent in proving a negative, where the

Commissioner determines that a taxpayer received unreported income he must

“offer some substantive evidence showing that the taxpayer received income from

the charged activity” before he may rely upon the presumption of correctness.

Weimerskirch v. Commissioner, 596 F.2d 358, 360 (9th Cir. 1979), rev’g 67 T.C.

672 (1977).14 If the Commissioner provides a “minimal factual foundation” for his


      13
        (...continued)
for the tax years 2008 and 2009.” Although we recognize that unrepresented
taxpayers such as petitioners may view proceedings in this Court as an opportunity
to redress perceived unfairness during the audit process, that is not how the
governmental proceedings work.
       “[A] trial before the Tax Court is a proceeding de novo”, and “[a]s a general
rule, this Court will not look behind a deficiency notice to examine the evidence
used or the propriety of respondent’s motives or of the administrative policy or
procedure involved in making his determinations.” Greenberg’s Express, Inc. v.
Commissioner, 62 T.C. 324, 327-328 (1974). For an exception to this rule see
Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987), rev’g 81 T.C. 855 (1983).
We thus consider a taxpayer’s tax liability afresh, on the basis of evidence
introduced at trial, without regard to what happened during the examination or
during any interactions between the taxpayer and the IRS Appeals Office. We
weigh that evidence subject to our Rules and the U.S. Supreme Court’s decision in
Welch v. Helvering, 290 U.S. 111, 115 (1933), which provide that the taxpayer
has the affirmative obligation to prove the Commissioner’s determinations
incorrect.
       14
        This Court “follow[s] a Court of Appeals decision which is squarely in
point where appeal from our decision lies to that Court of Appeals and to that
court alone.” Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d
                                                                     (continued...)
                                       - 29 -

[*29] determination, the burden of proof shifts to the taxpayer. Palmer v. United

States, 116 F.3d 1309, 1312 (9th Cir. 1997); accord Petzoldt v. Commissioner, 92

T.C. 661, 689 (1989). At this second stage, the taxpayer must endeavor to rebut the

presumption in favor of the Commissioner’s determination “by establishing by a

preponderance of the evidence that the deficiency determination is arbitrary or

erroneous.” Rapp v. Commissioner, 774 F.2d 932, 935 (9th Cir. 1985).

      A.    Respondent’s Evidentiary Foundation

      The Commissioner may employ any reasonable method to reconstruct a

taxpayer’s income and thereby lay the requisite evidentiary foundation. See

Petzoldt v. Commissioner, 92 T.C. at 693; see also Palmer, 116 F.3d at 1312

(stating that the method of reconstructing income need only be “rationally based”).

For example, “[t]he use of the bank deposit method for computing unreported

income has long been sanctioned by the courts.” Clayton v. Commissioner, 102

T.C. 632, 645 (1994); see also Weimerskirch v. Commissioner, 596 F.2d at 362

(listing the taxpayer’s bank deposits as one means by which the Commissioner

could have attempted to substantiate the charge of unreported income). The


      14
       (...continued)
985 (10th Cir. 1971). When they filed their petition, petitioners lived in
California, a State within the jurisdiction of the Court of Appeals for the Ninth
Circuit, so we will follow decisions of that court. See sec. 7482(b)(1)(A).
                                       - 30 -

[*30] method “assumes that all money deposited in a taxpayer’s bank account

during a given period constitutes taxable income”. Clayton v. Commissioner, 102

T.C. at 645. Although the Commissioner must “take into account any nontaxable

source or deductible expense of which * * * [he] has knowledge”, “[b]ank deposits

are prima facie evidence of income”. Id. at 645-646.

      RA Franks employed the bank deposits method to reconstruct petitioners’

2008 and 2009 income. She computed total deposits into the WAMU and UCU

accounts as well as total checks cashed at the Market. To the extent of her

knowledge, she attempted to eliminate nontaxable deposits and receipts. She

strived to follow the procedure we sanctioned in Clayton. In our factual findings

we have addressed and corrected the numerous errors in her transcription and

computations. Even after these corrections, her bank deposits analysis, which rests

upon records supplied by petitioners’ banks and the Market, reveals receipts in

excess of the amounts petitioners reported on their Federal income tax returns.

Consequently, we conclude that respondent has established the requisite minimal

evidentiary foundation for his determination of unreported income.

      B.    Petitioners’ Evidentiary Riposte

      Petitioners have the burden of showing that the unreported deposits and

receipts were not taxable income. To that end, for 2008, they contend that (1) a
                                        - 31 -

[*31] $3,000 check from Marisol Ocampo that Mr. Ocampo cashed at the Market

was a loan from his sister; (2) the cash deposited into the UCU account came from

checks cashed at the Market, not from clients of Ocampo’s Landscaping; and (3) an

$8 deposit into the UCU account, the canceled check or other source document for

which is missing from the record, was too small in amount to be a payment from

one of Mr. Ocampo’s clients.

      Petitioners have offered no argument concerning the unreported business and

other income respondent determined for 2009. Consequently, we treat these

determinations as conceded.

             1.    Marisol Ocampo Loan

      During 2008, on a date not revealed in the record, Mr. Ocampo cashed at the

Market a $3,000 check from Marisol Ocampo made out to “Vincente Ocampo”.

The check is dated July 25, 2008, and the memo line is blank. The address printed

below Marisol Ocampo’s name is approximately 1.5 miles and 5 minutes by car

from petitioners’ home address. Marisol Ocampo shares Mr. Ocampo’s surname,

and Mr. Ocampo identified her at trial as his sister and stated that the check

represented a personal loan.

      For tax purposes, a loan is “‘an agreement, either expressed or implied,

whereby one person advances money to the other and the other agrees to repay it
                                         - 32 -

[*32] upon such terms as to time and rate of interest, or without interest, as the

parties may agree.’” Commissioner v. Valley Morris Plan, 305 F.2d 610, 618 (9th

Cir. 1962) (quoting Nat’l Bank of Paulding v. Fid. & Cas. Co., 131 F. Supp. 121,

123-124 (S.D. Ohio 1954)), rev’g in part 33 T.C. 720 (1960) and 33 T.C. 572

(1959). Whether an advance constitutes a loan is a question of fact. Fisher v.

Commissioner, 54 T.C. 905, 909 (1970).

      In determining whether a payment constitutes a loan, “we examine the

transaction as a whole.” Welch v. Commissioner, 204 F.3d 1228, 1230 (9th Cir.

2000), aff’g T.C. Memo. 1998-121.

      The conventional test is to ask whether, when the funds were
      advanced, the parties actually intended repayment. * * *

             However, courts have considered a number of other factors as
      relevant in assessing whether a transaction is a true loan, such as: (1)
      whether the promise to repay is evidenced by a note or other
      instrument; (2) whether interest was charged; (3) whether a fixed
      schedule for repayments was established; (4) whether collateral was
      given to secure payment; (5) whether repayments were made; (6)
      whether the borrower had a reasonable prospect of repaying the loan
      * * *; and (7) whether the parties conducted themselves as if the
      transaction were a loan.” * * * [Id.]

“No one factor is necessarily determinative, and the factors considered do not

constitute an exclusive list.” Calloway v. Commissioner, 135 T.C. 26, 37 (2010),

aff’d, 691 F.3d 1315 (11th Cir. 2012).
                                          - 33 -

[*33] The Court credits Mr. Ocampo’s statement that Marisol Ocampo is his sister.

It is not apparent from the record, however, that the siblings intended repayment at

the time the funds were transferred. Petitioners did not introduce any written

instrument memorializing the alleged loan although, given the parties’ relationship

and the relatively modest sum involved, the absence of a writing is hardly

surprising. As a result, we do not know whether interest was charged, collateral

was given, or a fixed payment schedule was agreed upon. The record before the

Court contains no evidence of any payments to Marisol Ocampo during 2008 or

2009, and Mr. Ocampo did not testify to having made payments on the alleged loan

during the years at issue or afterward.

      Nevertheless, given the parties’ relationship and the relatively modest sum

involved, the Court finds that--if Mr. Ocampo and his sister did not intend at the

time of the advance that he would repay her--the $3,000 check was a (nontaxable)

gift. See sec. 102(a). Some of Mr. Ocampo’s landscaping clients (who may have

been maintenance clients) did write checks in amounts less than or equal to $3,000,

so the amount of the Marisol Ocampo check does not rule out its being for services.

But generally Mr. Ocampo’s landscaping clients wrote him multiple checks during

the years at issue, with their periodicity suggesting either regular landscaping

maintenance work and/or installment payments on a large project. Marisol
                                       - 34 -

[*34] Ocampo’s single check does not fit this pattern and was made out to

petitioner in his individual name. There is no evidence in the record that he ever

performed any services for her or ever sold her anything. Moreover, given that Mr.

Ocampo performed $152,000 worth of landscaping work for his brother-in-law

and, despite the lapse of several years, has taken no formal steps to secure payment,

we doubt that he would have charged his sister for a $3,000 job.

      From all the evidence before us, we conclude that, whether as a loan or a

gift, the $3,000 check from Marisol Ocampo was not income to petitioners.

            2.     Cash Deposits

      During the 2008 tax year Mr. Ocampo cashed checks at the Market and cash

deposits were made into petitioners’ UCU account. Respondent classified these

deposits as Schedule C gross receipts of Ocampo’s Landscaping, but petitioners

contend they were instead deposits of cash obtained from the Market, such that

respondent has double-counted the underlying income. The evidence in the record

supports petitioners’ argument.

      The following table sets out, for 2008, (1) the dates on and amounts of some

of the checks cashed at the Market, (2) the dates of cash deposits into the UCU

account, and (3) the deposit dates for transfers from the WAMU account to the

UCU account:
                           - 35 -

[*35] Checks cashed        Cash deposits             Transfers
  Date on                Date                     Date
   check        Amount deposited       Amount   deposited      Amount
     ---          ---            1/3   $5,000      ---           ---
     ---          ---           1/11    5,000      ---           ---
         2/6    $5,000           2/6    2,800      ---           ---
     3/12        9,000          3/14    5,000      ---           ---
         4/2     9,000           4/9    4,000      ---           ---
         5/2     9,000     ---           ---       ---           ---
         5/8     8,000          5/22    2,400      ---           ---
                                5/28    1,700      ---           ---
         6/5     3,175          6/11    3,000      ---           ---
                                                         7/9   $3,000
                                                     8/14       2,000
     1                      1
         8/13    8,000          8/20    1,200        8/29       3,000
     ---          ---      ---           ---             9/9    2,000
     ---          ---      ---           ---         9/19       1,000
     ---          ---      ---           ---         9/26       2,000
     ---          ---      ---           ---       10/14        2,500
     ---          ---      ---           ---       10/21        2,000
     ---          ---      ---           ---       11/19        1,400
     ---          ---      ---           ---       12/10        3,700
     ---          ---      ---           ---       12/22        2,000
     ---          ---      ---           ---       12/31        2,000
                                         - 36 -
           1
[*36]      This table depicts only some--not all--of the checks cashed at the
        Market, but it depicts all of the 2008 cash deposits into the UCU
        account. Because no cash deposits were made after August 20, 2008,
        we have not presented any checks cashed at the Market after that date.

        From this data, we observe the following: (1) all but two of the cash

deposits into the UCU account occurred before Mr. Ocampo established the

WAMU account on June 10, 2008; (2) the amounts of the cash deposits varied

from $1,200 to $5,000; (3) cash was deposited once or twice each month from

January through June, then once in August, and never thereafter; (4) each cash

deposit occurred within one to three weeks after the date written on a check that

was cashed at the Market; (5) the amount of each cash deposit was less than the

amount of the most recently cashed check; (6) after Mr. Ocampo established the

WAMU account, petitioners wrote checks from that account to the UCU account

one to three times each month; and (7) the amounts of those checks varied from

$1,000 to $3,700.

        Mr. Ocampo was a sole proprietor and did not receive a regular paycheck.

Instead, he testified that he would periodically deposit moneys earned in his

business into petitioners’ UCU account to “pay” himself and to be used for

petitioners’ personal expenses. Mr. Ocampo testified that because of the size of

most projects he took on, his business earnings came in the form of checks, not
                                        - 37 -

[*37] cash, and RA Franks, who had interviewed some of his clients in connection

with her examination of other tax years, admitted that none of those clients told her

they had paid in cash. Before Mr. Ocampo established the WAMU account, he

could have “paid” himself from checks received from clients through either of two

different means: (1) by depositing a check from a client directly into the UCU

account, or (2) by cashing the check at the Market and then depositing some of the

cash. As RA Franks’ bank deposits analysis and petitioners’ account records

reflect, he chose the first alternative on four occasions, depositing checks from

clients totaling $21,049 into the UCU account on February 8, April 9, April 14, and

June 18. Mr. Ocampo testified that he chose the second alternative on several other

occasions; and given the pattern apparent from the table above, we credit this

testimony.

      We conclude that petitioners have adequately established that, of the cash

deposits into the UCU account, all but the first two--on January 3 and 11, 2008--

consisted of cash obtained from cashing checks at the Market. Therefore, the

amounts of these checks, $20,100 in total, are not includible in their income.

Because the record does not reflect any possible nontaxable source for the January

3 and 11 deposits, the dates of which precede the dates on all checks cashed at the
                                          - 38 -

[*38] Market that are in the record, these deposits, which total $10,000, are

includible in petitioners’ income.

             3.     De Minimis Deposit

       Finally, petitioners contend that an $8 deposit into the UCU account on

April 11, 2008, was too small in amount to be a payment from one of Mr.

Ocampo’s clients and so should not be treated as taxable income. We agree that

the amount of that deposit--for which no canceled check or other source document

is in the record--strongly suggests that it does not represent gross receipts of

Ocampo’s Landscaping. But that the deposit was not business income does not

mean that it was not income at all. In her bank deposits analysis, RA Franks

classified it as other income.15 Petitioners bear the burden of showing that the $8

deposit was not income--i.e., that it was a transfer, a loan, or a gift or that it was

otherwise nontaxable. They have not proposed an alternative characterization for




       15
        In addition to the $13,200 of ostensibly missing or unknown deposits that
was in fact transferred from the WAMU account and $3,000 that was never
deposited into their WAMU account at all total of the two amounts $16,200, see
supra pp. 18-19, RA Franks classified the following five missing or otherwise
unidentified deposits as other income: an $8 deposit on April 11, a $530 deposit
on August 4, the remaining $472 of the $2,472 deposit on August 14, the
remaining $186 of the $2,686 deposit on October 14, and the remaining $148 of
the $2,148 deposit on October 21. She thus computed total unreported other
income of $14,544.
                                        - 39 -

[*39] this deposit, let alone offered any evidence to support that characterization.

Consequently, the deposit is includible in their 2008 income.

             4.     Summary

      Petitioners have established by a preponderance of the evidence that the

$3,000 check from Marisol Ocampo cashed at the Market during 2008 and $20,100

of the cash deposits into the UCU account during 2008 were nontaxable. We will

therefore sustain respondent’s determination of unreported income only to the

following extent:

                     Unreported income            2008      2009
                    Sched. C gross receipts      $12,462 $32,515
                    Other income                   1,344     2,387
                      Total                       13,806    34,902

II.   Disallowed Deductions

      Deductions are a matter of legislative grace, and taxpayers bear the burden of

proving their entitlement to any claimed deduction. Rule 142(a); INDOPCO, Inc.

v. Commissioner, 503 U.S. 79, 84 (1992). A taxpayer must identify each deduction

available, show that he or she has met all requirements therefor, and keep books or

records that substantiate the expenses underlying the deduction. Sec. 6001;

Roberts v. Commissioner, 62 T.C. 834, 836 (1974). Under Cohan v.
                                        - 40 -

[*40] Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930), if a taxpayer claims a

deduction but cannot fully substantiate the underlying expense, the Court may

generally approximate the allowable amount, “bearing heavily if it [so] chooses

upon the taxpayer whose inexactitude is of his own making.” The Court must have

some factual basis for its estimate, however, else the allowance would amount to

“unguided largesse”. Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957);

Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

      Section 162(a) permits a taxpayer to deduct all of the ordinary and necessary

expenses paid or incurred during the taxable year in carrying on the taxpayer’s

trade or business. “To qualify as an allowable deduction under [section] * * *

162(a) * * * an item must (1) be ‘paid or incurred during the taxable year,’ (2) be

for ‘carrying on any trade or business,’ (3) be an ‘expense,’ (4) be a ‘necessary’

expense, and (5) be an ‘ordinary’ expense.” Commissioner v. Lincoln Sav. & Loan

Ass’n, 403 U.S. 345, 352 (1971). An expense satisfies the second element only if it

is “directly connected with or pertaining to the taxpayer’s trade or business”. Sec.

1.162-1(a), Income Tax Regs. An expense qualifies as necessary if it is

“appropriate and helpful” to the taxpayer’s business, Welch v. Helvering, 290 U.S.

at 113, and as ordinary if the underlying transaction is a “common or frequent
                                        - 41 -

[*41] occurrence in the type of business involved”, see Deputy v. du Pont, 308 U.S.

488, 495 (1940).

       While business expenses are generally deductible, personal, living, and

family expenses are typically nondeductible. See sec. 262(a). A business expense

claimed as a deduction must be incurred primarily for business rather than personal

reasons. See Walliser v. Commissioner, 72 T.C. 433, 437 (1979). Where an

expense exhibits both personal and business characteristics, the “test[] requires a

weighing and balancing of all the facts * * * bearing in mind the precedence of

section 262, which denies deductions for personal expenses, over section 162,

which allows deductions for business expenses.” Sharon v. Commissioner, 66 T.C.

515, 524 (1976) (citing costs of commuting and ordinary clothing as examples of

expenses helpful and necessary to an individual’s employment that are “essentially

personal” and hence nondeductible), aff’d per curiam, 591 F.2d 1273 (9th Cir.

1978).

       We apply the foregoing rules to each category of disputed business expenses

in turn.

       A.    Other Expenses

       As set forth above, the $11,647 of other expenses that remains at issue for

2008 consists entirely of business interest. For 2009 the $16,912 of other expenses
                                        - 42 -

[*42] that remains at issue consists of $8,176 of business interest and $8,736 of

other, unidentified expenses. Petitioners have offered no explanation for, let alone

any evidence to substantiate, this $8,736 of reported expenses, so we will sustain

respondent’s disallowance of a deduction for them and move on to the interest

expense.

      For each of 2008 and 2009 petitioners claimed a deduction for an interest

expense on their Schedule C, and in their posttrial briefs they contend that both

should be allowed as business interest. Specifically, petitioners point to Hector

Padilla’s testimony that he failed to pay Mr. Ocampo for $152,000 worth of work

performed at some point after November 2005. Petitioners reason that, as a result

of Mr. Padilla’s nonpayment, Mr. Ocampo must have had to borrow to finance the

business, so deductions for business interest should be allowed.

      Petitioners’ substantiation burden requires them to offer evidence, not just

commonsense reasoning. Aside from petitioners’ tax returns, which represent

merely their claims, see Roberts v. Commissioner, 62 T.C. at 837, nothing in the

record shows that any business interest was paid in either 2008 or 2009.16

       16
        Exhibit 38-R contains a copy of Mr. Ocampo’s car loan agreement with
Chase, and that agreement does provide for interest. Mr. Ocampo incurred the
loan to purchase the 2006 Ford F250, which he used in his business even though
the loan agreement indicates that the truck was for personal use. Although
                                                                      (continued...)
                                        - 43 -

[*43] Petitioners allege that the claimed business interest is reported on the Forms

1098 in the record,17 but they offered no evidence of the purposes for which the

funds obtained from those mortgages were used. Nothing ties any of the Forms

1098 to a loan of which some portion was used for business purposes.



      16
        (...continued)
petitioners’ bank records reflect that they made payments on this loan, see supra
p. 10, they have not established how much of those payments consisted of interest,
nor the extent to which Mr. Ocampo used the Ford F250 for business rather than
personal purposes. As set forth more fully infra part II.B, expenses with respect to
passenger motor vehicles are subject to heightened substantiation requirements
that apply equally to interest expenses incurred with respect to such vehicles. See,
e.g., Jackson v. Commissioner, T.C. Memo. 2014-160, at *10. Evidence that
petitioners must have paid interest, in some amount, some of which was allocable
to their business, does not meet these requirements.
       17
         They further contend, presumably in the alternative, that the balance of
interest reported on those forms should be allowed as Schedule A deductions.
Sec. 163(h) does not, however, permit a deduction for all home mortgage interest.
Among other limitations, the statute disallows deductions for interest paid on
mortgage loans the funds from which were used to acquire, construct, or
substantially improve a taxpayer’s home, to the extent the mortgages’ aggregate
principal balance exceeds $1,000,000. Sec. 163(h)(3)(B)(ii). Further, for home
equity loans not used to acquire, construct, or substantially improve the taxpayer’s
home, the statute disallows interest deductions to the extent the loans’ aggregate
principal balance exceeds $100,000. Sec. 163(h)(3)(C)(ii). Petitioners offered no
evidence that they used the funds from the Chase HELOC or either of their other
two mortgages to purchase, construct, or substantially improve their home. They
have not established that the balance on the Chase HELOC fell below $100,000
during 2009 or what the balances on their other two loans were in either 2008 or
2009. In short, petitioners have not shown that they are entitled to deduct sec.
163(h) home mortgage interest in any amount greater than the amounts respondent
has already allowed.
                                        - 44 -

[*44] Petitioners have failed to carry their burden of proof with respect to

deductions for the interest expenses remaining in dispute for both 2008 and 2009.

      B.     Car and Truck Expenses

      Section 274(d) sets forth heightened substantiation requirements and

overrides the Cohan rule with respect to certain kinds of business expenses,

including expenses with respect to “listed property” such as passenger automobiles

or other property used as a means of transportation.18 See secs. 274(d),

280F(d)(4)(A); Sanford v. Commissioner, 50 T.C. 823, 827 (1968), aff’d per

curiam, 412 F.2d 201 (2d Cir. 1969). To deduct these expenses, a taxpayer must


       18
         Petitioners contend that because their vehicles were trucks, they do not
qualify as passenger automobiles. The Code’s definition of a passenger
automobile includes “any 4-wheeled * * * [truck] * * * manufactured primarily for
use on public streets, roads, and highways, and * * * rated at 6,000 pounds * * *
gross vehicle weight or less.” Sec. 280F(d)(5)(A). From the make and model
information in the record, the Court can conclude only that petitioners’ trucks fell
within that definition; petitioners have not provided evidence to the contrary.
Moreover, petitioners acknowledge that the trucks were used as means of
transportation. For purposes of sec. 280F, property used as a means of
transportation includes “trucks * * * for transporting persons or goods.” Sec.
1.280F-6(b)(2), Income Tax Regs. Petitioners assert that Mr. Ocampo used the
trucks to transport equipment to various jobsites, and it seems likely that he also
used them to transport materials and workers. They have not established that any
of their vehicles had “been specially modified” such that it was “not likely to be
used more than a de minimis amount for personal purposes” and therefore exempt
from the substantiation requirements of sec. 274(d). See sec. 1.274-5T(k)(7),
Temporary Income Tax Regs., 50 Fed. Reg. 46035 (Nov. 6, 1985). Consequently,
sec. 274(d) applies.
                                        - 45 -

[*45] “substantiate[] by adequate records or by sufficient evidence corroborating

the taxpayer’s own statement”: (1) the amount of the expense, (2) the time and

place of the use of the vehicle, (3) the business purpose of that use, and (4) the

business relationship of the taxpayer to the person(s) using the vehicle. Sec.

274(d). The taxpayer must establish both the amount of business use of the vehicle

and the amount of total use. See sec. 1.274-5T(b)(6)(i)(B), Temporary Income Tax

Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).

      Substantiation by adequate records generally requires the taxpayer to

“maintain an account book, diary, log, statement of expense, trip sheet, or similar

record” prepared contemporaneously with the use of the vehicle as well as

documentary evidence of individual, actual expenditures. See id. para. (c)(2), 50

Fed. Reg. 46017. In lieu of substantiating actual expense, a taxpayer may elect to

claim a deduction for business use of a passenger automobile using the standard

mileage rate established by the Commissioner. See sec. 1.274-5(j)(2), Income Tax

Regs. Electing this method does not, however, relieve the taxpayer “of the

requirement to substantiate the amount of each business use (i.e., the business

mileage), or the time and business purpose of each use.” Id.

      A taxpayer “is entitled to only one deduction” and may claim it on the basis

of either actual expenses or standard mileage, not both. Nash v. Commissioner, 60
                                        - 46 -

[*46] T.C. 503, 520 (1973); accord Larson v. Commissioner, T.C. Memo. 2008-

187, 96 T.C.M. (CCH) 73, 77 (2008). If the taxpayer elects the actual expense

method, he must substantiate his business use percentage for the vehicle. Larson v.

Commissioner, 96 T.C.M. (CCH) at 77; sec. 1.274-5T(d)(2), Temporary Income

Tax Regs., 50 Fed. Reg. 46025 (Nov. 6, 1985).

      During the examination of their tax returns petitioners initially sought to

substantiate their claimed car and truck expense deductions using the actual

expense method. On the basis of the evidence they provided, respondent, as to

some claimed expenses, accepted petitioners’ records as meeting the section 274(d)

requirements and allowed deductions of $10,055 for 2008 and $14,544 for 2009.

Petitioners subsequently provided mileage logs for certain vehicles in an effort to

substantiate larger amounts of expenses, but RA Franks did not consider the logs.

      If petitioners were able to substantiate greater car and truck expenses using

the standard mileage method, we could possibly allow them the larger deductions,

depending on whether they were actually using four vehicles or five. But we need

not resolve this issue here because the mileage logs are not credible. See Larson v.

Commissioner, 96 T.C.M. (CCH) at 77 (allowing taxpayer to claim “the lesser of

the mileage shown on his returns, the mileage used to calculate his deduction, or

the mileage substantiated by his monthly mileage logs” (emphasis added)). See
                                        - 47 -

[*47] also Rev. Proc. 2007-70, sec. 5.06(1), 2007-2 C.B. 1162, 1165, Rev. Proc.

2008-72, sec. 5.06(1), 2008-2 C.B. 1286, 1288, limiting the use of the standard

mileage rate where more than four vehicles are being used at once as in, for

example, fleet operations, and Garner v. Commissioner, T.C. Memo. 1981-542, 42

T.C.M. (CCH) 1181, 1185-1186 (1981). The mileage logs, however, do not satisfy

section 274(d) because they do not reliably establish the time, amount, and

business purpose of each use of petitioners’ vehicles. See sec. 1.274-5(j)(2),

Income Tax Regs.; sec. 1.274-5T(c)(2), Temporary Income Tax Regs., supra.

      As an initial matter, it appears that petitioners did not create the mileage logs

contemporaneously with the trips they purport to record. For the 1995 Nissan Mr.

Ocampo handwrote entries on computer-generated weekly and monthly calendar

pages that had been printed on July 15, 2014. It seems extremely unlikely that,

more than six years after some of the dates in question, he could have reconstructed

with any degree of accuracy the daily travels of each of petitioners’ vehicles. See

sec. 1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6,

1985).

      The logs are also inconsistent with petitioners’ tax returns and other

evidence in the record. On their 2008 and 2009 Federal income tax returns

petitioners reported on Schedule C, Part IV, “Multiple Auto Statement”, using five
                                        - 48 -

[*48] vehicles for Ocampo’s Landscaping, only one of which they contend was

also used for personal purposes. They produced mileage logs for only three

vehicles for 2008 and for four vehicles for 2009 and provided no explanation for

the discrepancy.19 The totals in petitioners’ mileage logs diverge widely from the

mileage totals reported on their Federal income tax returns:20

               Mileage shown in logs                  Mileage recorded on returns
            Vehicle           2008        2009        Vehicle       2008       2009
  1997 Chevy 3500           10,875.8    10,963.5     Vehicle 1      25,104    30,547


       19
         Petitioners attributed all of their personal mileage for both years to the 5th
vehicle but also indicated that it was also used for business mileage; thus, a
mileage log for this vehicle regarding the claimed 3,052 and 3,057 business miles
for the years 2008 and 2009, respectively, was also needed in order to deduct
expenses with respect to this vehicle. See Renner v. Commissioner, T.C. Memo.
2015-102.
       20
        Contrary to petitioners’ assertion on brief, it appears that petitioners’ tax
return preparer did not compute their claimed car and truck expense deductions
using the standard mileage method. Petitioners recorded on their tax returns total
business mileage of 84,114 for 2008 and 89,574 for 2009. For 2008 the business
standard mileage rate was initially set at 50.5 cents per mile, so if petitioners had
elected the standard mileage method and used the 50.5 cent rate for the entire year,
they would have computed their deduction as $42,478. See Rev. Proc. 2007-70,
2007-2 C.B. 1162, 1163-1164. However, that rate was changed effective July 1,
2008 to 58.5 cents per mile through the end of that year. See Announcement
2008-63, 2008-2 C.B. 114. For 2009 the business standard mileage rate was 55
cents per mile, so if petitioners had elected the standard mileage method, they
would have computed their deduction as $49,266. See Rev. Proc. 2008-72, sec.
5.01, 2008-2 C.B. 1286, 1286, 1288. On their returns petitioners claimed car and
truck expense deductions of only $32,106 for 2008 and $38,989 for 2009.
                                       - 49 -

  [*49] 1997 Ford F250     11,380.0    11,749.0    Vehicle 2     20,597    25,147
  2006 Ford F250            55,107.5   28,580.2    Vehicle 3      15,147    20,569
  1995 Nissan                  ---     27,809.3    Vehicle 4      20,214    10,254
                                                   Vehicle 5       3,052     3,057

The mileage dates and numbers recorded in the logs also do not square with the

maintenance and purchase records petitioners provided to RA Franks during the

audit. In the logs petitioners claim to have driven the 2006 Ford F250 83,687.7

business miles during 2008 and 2009, but a December 31, 2009, maintenance

record for that truck reflects an odometer reading of only 75,115 miles. The 2009

log for the 2006 Ford F250 reports 28,580.2 business miles driven for the year, but

given the odometer reading recorded on a maintenance record for August 14, 2008,

petitioners could have driven that vehicle no more than 19,517 miles between

August 14, 2008, and December 31, 2009. Petitioners’ log for the 1997 Ford F250

begins on January 2, 2008, but Mr. Ocampo did not purchase that vehicle until

February 16, 2008.

      In sum, petitioners’ mileage logs are not credible. Lacking reliable evidence

of petitioners’ business mileage, we will evaluate their allowable car and truck

expense deductions under the actual expense method.
                                        - 50 -

[*50] At trial respondent introduced documents reflecting some operating expenses

for petitioners’ vehicles for 2008 and 2009. RA Franks testified that some of the

expenses represented by these documents had already been allowed. Although the

record is unclear as to which of these expenses, if any, were disallowed, we decline

to allow any beyond what respondent has already conceded. First, petitioners have

not credibly established the business use percentage for three of their five vehicles

which the Court concludes were used for at least some personal trips.

       Even if the Court were to accept their mileage logs, they have not provided

the beginning and ending odometer readings for each year, from which

nonbusiness mileage could be computed. Second, petitioners have offered no

evidence of the particular business purpose of each documented expenditure. See

Renner v. Commissioner, T.C. Memo. 2015-102. Because section 274(d) governs,

the Court cannot apply the Cohan rule to estimate additional allowable amounts on

the basis of the documents in respondent’s or petitioners’ exhibits. See Sanford v.

Commissioner, 50 T.C. at 827-828.
                                         - 51 -

[*51] We will, however, allow depreciation.21 Petitioners did not report

depreciation on their Federal income tax returns for 2008 or 2009, but evidence in

the record substantiates depreciation for both years with respect to two of the

vehicles. While their mileage logs were not credible a preponderance of the

evidence indicates that these two vehicles were used exclusively for business

purposes. Petitioners purchased the 2006 Ford F250 for $25,380 on July 26, 2005.

Treating the vehicle as five-year property placed in service during 2005 and

applying the half-year convention and the 200% declining balance method, see sec.

168(b)(1), (d)(1), (4)(A), (e)(3)(B)(i), petitioners are entitled to deduct depreciation

of $2,924 for 2008 and $2,924 for 2009. Petitioners purchased the 1997 Ford F250

for $4,200 on February 16, 2008. Again treating the vehicle as five-year property

placed in service during 2008 and applying the half-year convention and the 200%

declining balance method, see sec. 168(b)(1), (d)(1), (4)(A), (e)(3)(B)(i),


       21
        Respondent objects that petitioners did not claim depreciation on their tax
returns or plead it in their petition or any amendment thereto. Petitioners did,
however, claim deductions for car and truck expenses, and the parties litigated
their entitlement to use the actual expense method or the standard mileage method.
Because we have concluded that petitioners are entitled to deductions only under
the actual expense method, they may deduct depreciation under that method in
addition to the expenses respondent has allowed. See, e.g., Campana v.
Commissioner, T.C. Memo. 1990-395, 60 T.C.M. (CCH) 289, 291 (1990) (noting
that actual expense method includes depreciation); Gresen v. Commissioner, T.C.
Memo. 1986-152, 51 T.C.M. (CCH) 860, 861 (1986) (same).
                                        - 52 -

[*52] petitioners are entitled to deduct depreciation of $840 for 2008 and $1,344

for 2009. In total, we will allow petitioners to deduct $3,764 of depreciation as

additional car and truck expenses for 2008 and $4,268 for 2009.

III.   Accuracy-Related Penalty

       For 2008 respondent determined an accuracy-related penalty under section

6662(a) and (b)(1), (2) and (3) on the “boilerplate” bases of negligence or disregard

of rules and regulations, a substantial understatement of income tax, or a

substantial valuation misstatement.22 As a general rule, the Commissioner bears the

burden of production and “must come forward with sufficient evidence indicating

that it is appropriate to impose the relevant penalty.” Higbee v. Commissioner, 116

T.C. 438, 446 (2001); see also sec. 7491(c). Once the Commissioner has met this

       22
          These represent alternative grounds for imposition of the penalty, as the
 accuracy-related penalties do not stack. See sec. 1.6662-2(c), Income Tax Regs.
        Sec. 6662(a) and (b)(3) provides for the imposition of a 20% penalty on the
 portion of an underpayment of tax required to be shown on a return that is
 attributable to a substantial valuation misstatement. For returns filed after August
 17, 2006, as is relevant here, a substantial valuation misstatement occurs when
 “the value of any property (or the adjusted basis of any property) claimed on any
 return of tax imposed by chapter 1 is 150 percent or more of the amount
 determined to be the correct amount of such valuation or adjusted basis (as the
 case may be)”. Sec. 6662(e)(1)(A). Unfortunately, the “boilerplate” notice of
 deficiency does not explain what property’s value or adjusted basis was allegedly
 misstated. Respondent did not discuss this issue at trial and has not addressed it
 on brief. As the Court can find no independent basis for this penalty in the record,
 we deem this issue conceded by respondent and find petitioners not liable for the
 substantial valuation misstatement penalty.
                                        - 53 -

[*53] burden of production, the burden will shift to the taxpayers to prove an

affirmative defense or that they are otherwise not liable for the penalty. See Higbee

v. Commissioner, 116 T.C. at 446-447.

      Section 6662(a) and (b)(1) and (2) provides for the imposition of a 20%

penalty on the portion of an underpayment of tax attributable to negligence or

disregard of rules and regulations or a substantial understatement of income tax.

“‘[N]egligence’ includes any failure to make a reasonable attempt to comply with

the provisions of * * * [the Internal Revenue Code]”. Sec. 6662(c). It constitutes

“‘a lack of due care or the failure to do what a reasonable and ordinarily prudent

person would do under the circumstances.’” Freytag v. Commissioner, 89 T.C.

849, 887 (1987) (quoting Marcello v. Commissioner, 380 F.2d 499, 506 (5th Cir.

1967), aff’g 43 T.C. 168 (1964) and T.C. Memo. 1964-299), aff’d, 904 F.2d 1011

(5th Cir. 1990), aff’d, 501 U.S. 868 (1991). “‘Negligence’ also includes any failure

by the taxpayer to keep adequate books and records or to substantiate items

properly.” Sec. 1.6662-3(b)(1), Income Tax Regs. Disregard of rules and

regulations “includes any careless, reckless or intentional disregard” of the Code,

regulations, or certain IRS administrative guidance. Id. subpara. (2). A substantial

understatement of income tax as to an individual taxpayer is generally an
                                        - 54 -

[*54] understatement that exceeds the greater of $5,000 or 10% of the tax required

to be shown on the return. Sec. 6662(d)(1)(A).

      Commencing with the negligence penalty, petitioners underreported their

income and were unable to substantiate all of their business deductions. Mr.

Ocampo effectively acknowledged that respondent’s determination of unreported

income was in part attributable to his cashing checks at the Market and then

dealing in cash without proper recordkeeping. Although petitioners succeeded in

demonstrating that some of their unreported deposits for 2008 were not taxable

income, Mr. Ocampo had no explanation for other unreported deposits. Moreover,

petitioners failed to substantiate or even coherently explain their claimed business

interest expenses, and the mileage logs they provided to substantiate their claimed

car and truck expenses lacked credibility. We think that a reasonable, prudent

taxpayer would have had some explanation for the additional unreported deposits,

and in any event, petitioners’ failure to maintain adequate books and records to

substantiate their expenses constitutes negligence for purposes of section 6662(a).

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

      Whether a substantial understatement exists, and if so, in what amount, will

depend upon the recalculation of petitioners’ 2008 tax liability in the light of the

stipulation of settled issues and the holdings reached in this opinion. We leave
                                        - 55 -

[*55] these calculations to the parties under Rule 155. To the extent a substantial

understatement within the meaning of section 6662(d)(1)(A) exists with respect to

the tax stated on the 2008 return, and in any event on the basis of negligence,

petitioners will be liable for the 20% penalty under section 6662(a) unless they can

establish an affirmative defense.

      A section 6662 penalty generally will not apply to any portion of an

underpayment resulting from positions taken on the taxpayer’s return for which the

taxpayer had reasonable cause, and with respect to which the taxpayer acted in

good faith. See sec. 6664(c). We determine “whether a taxpayer acted with

reasonable cause and in good faith * * * on a case-by-case basis, taking into

account all pertinent facts and circumstances.” Sec. 1.6664-4(b)(1), Income Tax

Regs. Reliance on professional advice will absolve the taxpayer if “such reliance

was reasonable and the taxpayer acted in good faith.” Id. Where a taxpayer claims

reliance on professional advice, section 6664(c) will apply if “the taxpayer meets

each requirement of the following three-prong test: (1) The adviser was a

competent professional who had sufficient expertise to justify reliance, (2) the

taxpayer provided necessary and accurate information to the adviser, and (3) the
                                        - 56 -

[*56] taxpayer actually relied in good faith on the adviser’s judgment.”23

Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299

F.3d 221 (3d Cir. 2002).

      In challenging the accuracy-related penalty, petitioners point out that

Benjamin Katz prepared their tax returns. Insisting that they had no reason to

doubt his professionalism, they plead that they should not be held liable for his

errors. Petitioners have not satisfied the Neonatology test with respect to Mr. Katz.

      The record discloses nothing concerning Mr. Katz’s qualifications. His

signature block on petitioners’ Federal income tax returns indicates only that he

belonged to a firm called “Tax Professionals” with an office in Los Angeles.

Jacques Behar, an enrolled agent who represented petitioners at the time of trial,

testified that Mr. Katz, who passed away in March 2012, had been a friend and that

Mr. Katz had allowed Mr. Behar to use his office when Mr. Behar visited Los

Angeles. He said nothing of Mr. Katz’s credentials or expertise, and petitioners

other witnesses offered no further information.




       23
         Petitioners also allude to reliance on Patrick McGinnis, the attorney who
assisted them during the audit. Because they retained Mr. McGinnis only once
their returns were under examination and do not contend that they relied on him in
taking the tax positions at issue, their claimed reliance upon his advice is
immaterial for sec. 6664(c) purposes.
                                        - 57 -

[*57] Further, Mr. Ocampo did not establish what information he and Ms. Padilla

provided to Mr. Katz, and petitioners offered no other evidence on this point.

Indeed, they assert that they never provided Mr. Katz with information concerning

the vehicles used in Ocampo’s Landscaping and that he simply made up the

number of vehicles reported on their returns without their knowledge. The record

is silent as to what petitioners communicated to Mr. Katz concerning their

Schedule C gross receipts, interest expenses, and car and truck expenses.

      The regulations under section 6664(c) emphasize that “[g]enerally, the most

important factor” in determining whether a taxpayer acted with reasonable cause

and good faith “is the extent of the taxpayer’s effort to assess the taxpayer’s proper

tax liability.” Sec. 1.6664-4(b)(1), Income Tax Regs. In that regard, we have

stated that “blind reliance on a professional does not establish reasonable cause.”

Estate of Goldman v. Commissioner, T.C. Memo. 1996-29, 71 T.C.M. (CCH)

1896, 1903 (1996). Together with petitioners’ assertion that Mr. Katz fabricated

the number of vehicle claimed on their tax returns, Mr. Ocampo’s lack of

knowledge, exhibited at trial, concerning where and in what amounts interest

expense had been reported on his tax returns, strongly suggests that petitioners did

not exercise due care in reviewing their tax returns before signing them. Although

we do not propose that petitioners should have second-guessed Mr. Katz’s work,
                                        - 58 -

[*58] see United States v. Boyle, 469 U.S. 241, 251 (1985), we do think that, had

they reviewed the 2008 return before signing it, they would have noticed the

number of vehicles reported and the interest expense claimed.

      For the foregoing reasons, we conclude that petitioners have not established

an affirmative defense to, and are liable for, the accuracy-related penalty for 2008.

The Court has considered all of the parties’ contentions, arguments, requests, and

statements. To the extent not discussed herein, we conclude that they are meritless,

moot, or irrelevant.

      To reflect the foregoing,


                                                      Decision will be entered under

                                                 Rule 155.
                                           - 59 -

[*59]                                 APPENDIX A

                   UCU Acct 83734 - 2008 Deposits (from Ex. 12-J)
  Deposit Check   Check       Category        Payor        Amount         Explanatory Note
   Date    No.    Date

                                     NONTAXABLE DEPOSITS


   2/5/08                 Transfer        Line of Credit     $92.48
  3/14/08                 Transfer        Line of Credit    $451.94
  3/25/08 1629    3/21/08Reimbursement La Casa             $2,874.04
                                         Investments
  5/14/08                Purchase Return Target credit        $16.23
                                         adjustment
  5/14/08                Purchase Return DSW credit           $33.50
                                         adjustment
   6/5/08                Purchase Return DSW credit           $16.24
                                         adjustment
   7/9/08 1008     7/9/08Transfer        Ocampo's          $3,000.00
                                         Trans
   8/7/08                ATM Withdrawal Cardtronics           $80.00
                         Reversal        refund
  8/14/08 1014    8/13/08Transfer        Ocampo's          $2,000.00Deposited at same time as
                                         Trans to W                 $472 amount listed as
                                                                    unknown; not identified in
                                                                    BDA as a nontaxable
                                                                    transfer; canceled check
                                                                    omitted from UCU account
                                                                    records, but included in
                                                                    WAMU account records
                                                                    (Ex. 3-J at 63)
  8/28/08                 Transfer        Line of Credit    $246.13
  8/29/08 1019    8/28/08Transfer         Ocampo's         $3,000.00Payor misidentified in BDA
                                          Trans to W                 because UCU included a
                                                                     canceled check from
                                                                     another person's account
                                                                     (Ex. 12-J at 13); correct
                                                                     canceled check in WAMU
                                                                     account records (Ex. 3-J at
                                                                     96)
   9/9/08 1021     9/9/08Transfer         Ocampo's         $2,000.00
                                       - 60 -

[*60]
 9/17/08               Purchase Return Macy's West        $63.87
                                       credit
                                       adjustment
 9/19/08 1030   9/19/08Transfer        Ocampo's        $1,000.00Not identified in BDA as a
                                       Trans to W               nontaxable transfer;
                                                                canceled check omitted
                                                                from UCU account records
                                                                but included in WAMU
                                                                account records (Ex. 3-J at
                                                                84)
 9/22/08               Transfer       Line of Credit      $48.47
 9/26/08 1031   9/26/08Transfer       Ocampo's         $2,000.00Not identified in BDA as a
                                                                nontaxable transfer;
                                                                canceled check omitted
                                                                from UCU account records
                                                                but included in WAMU
                                                                account records (Ex. 3-J at
                                                                112)
10/14/08 1036 10/14/08Transfer        Ocampo's         $2,500.00Deposited at same time as
                                                                $186 amount listed as
                                                                unknown; not identified in
                                                                BDA as a nontaxable
                                                                transfer; canceled check
                                                                omitted from UCU account
                                                                records but included in
                                                                WAMU account records
                                                                (Ex. 3-J at 110)
10/21/08 1038 10/21/08Transfer        Ocampo's         $2,000.00Deposited at same time as
                                                                 $148 amount listed as
                                                                 unknown; not identified in
                                                                 BDA as a nontaxable
                                                                 transfer; canceled check
                                                                 omitted from UCU account
                                                                 records but included in
                                                                 WAMU account records
                                                                 (Ex. 3-J at 107)
10/23/08               Purchase Return Gymboree           $55.38
                                       credit
                                       adjustment
10/27/08               Purchase Return Party City          $4.33
                                       credit
                                       adjustment
                                           - 61 -

[*61]
 11/4/08                Transfer          Line of Credit      $95.33
 11/5/08 1043 11/4/08Transfer             Ocampo's           $500.00
 11/7/08 29- 10/28/08Refund - Tax         California FTB     $432.00
         488661
 11/7/08 230951 10/31/08Refund - Tax      US Treasury       $2,232.00
         426097
11/19/08 1049 11/18/08Transfer            Ocampo's          $1,400.00
 12/4/08                Purchase Return   TJ Maxx credit       $38.91
                                          adjustment
12/10/08 1055   12/8/08Transfer           Ocampo's          $3,700.00Not identified in BDA as a
                                                                     nontaxable transfer;
                                                                     canceled check omitted
                                                                     from UCU account records
                                                                     but included in WAMU
                                                                     account records (Ex. 3-J at
                                                                     164)
12/16/08              Purchase Return Target credit            $13.20
                                      adjustment
12/18/08              Purchase Return Macy's West              $20.24
                                      credit
                                      adjustment
12/22/08 1059 12/20/08Transfer        Ocampo's              $2,000.00
12/31/08 1061 12/31/08Transfer        Ocampo's              $2,000.00

TOTAL NONTAXABLE DEPOSITS:                                 $33,914.29

                            PRESUMPTIVELY TAXABLE DEPOSITS

 1/31/08                Interest          UCU                   $2.60
 2/29/08                Interest          UCU                   $3.42
 3/31/08                Interest          UCU                   $1.49
 4/30/08                Interest          UCU                   $3.51
 5/30/08                Interest          UCU                   $0.93
 6/30/08                Interest          UCU                   $0.93
 7/31/08                Interest          UCU                   $0.65
 8/29/08                Interest          UCU                   $0.75
 9/30/08                Interest          UCU                   $0.68
10/31/08                Interest          UCU                   $1.30
11/28/08                Interest          UCU                   $0.70
12/31/08                Interest          UCU                   $0.49
                        Total Interest:                        $17.45
                          - 62 -

[*62]
  1/9/08   Wages          UCLA      $1,245.51
 1/23/08   Wages          UCLA        $898.34
  2/6/08   Wages          UCLA      $1,083.56
 2/20/08   Wages          UCLA        $995.86
  3/5/08   Wages          UCLA      $1,201.27
 3/19/08   Wages          UCLA        $944.63
  4/2/08   Wages          UCLA      $1,052.60
 4/16/08   Wages          UCLA        $944.63
 4/30/08   Wages          UCLA      $1,065.00
 5/14/08   Wages          UCLA        $947.27
 5/28/08   Wages          UCLA      $1,052.61
 6/11/08   Wages          UCLA      $1,037.41
 6/25/08   Wages          UCLA        $971.06
  7/9/08   Wages          UCLA      $1,065.01
 7/23/08   Wages          UCLA      $1,202.13
  8/6/08   Wages          UCLA      $1,292.20
 8/20/08   Wages          UCLA        $944.62
  9/3/08   Wages          UCLA      $1,052.61
 9/17/08   Wages          UCLA      $1,045.40
 10/1/08   Wages          UCLA      $1,316.86
10/15/08   Wages          UCLA      $1,259.01
10/29/08   Wages          UCLA      $1,662.08
11/12/08   Wages          UCLA        $949.26
11/26/08   Wages          UCLA      $1,056.94
12/10/08   Wages          UCLA      $1,153.60
12/23/08   Wages          UCLA        $935.42
           Total Wages:            $28,374.89

  1/3/08   Cash                     $5,000.00
 1/11/08   Cash                     $5,000.00
  2/6/08   Cash                     $2,800.00
 3/14/08   Cash                     $5,000.00
  4/9/08   Cash                     $4,000.00
 5/22/08   Cash                     $2,400.00
 5/28/08   Cash                     $1,700.00
 6/11/08   Cash                     $3,000.00
 8/20/08   Cash                     $1,200.00
           Total Cash:             $30,100.00
                                           - 63 -

[*63]
 4/11/08               Unknown                                  $7.68
  8/4/08               Unknown                                $530.05
 8/14/08               Unknown                                $472.00Total deposit of $2,472 less
                                                                      $2,000 transfer, check no.
                                                                      1014.
10/14/08               Unknown                                $186.00Total deposit of $2,686 less
                                                                      $2,500 transfer, check no.
                                                                      1036.
10/21/08               Unknown                                $148.00Total deposit of $2,148 less
                                                                      $2,000 transfer, check no.
                                                                      1038.
                       Total Unknown:                       $1,343.73

  2/8/08 2254    2/7/08Schedule C          Jill Gordon      $7,049.00
  4/9/08 147     4/4/08Schedule C          Peter Skewes     $2,000.00
                                           Cox
 4/14/08 277    4/14/08Schedule C          Vanessa          $9,000.00
                                           Biddle
 6/18/08 4601   6/15/08Schedule C          Burt Berman      $3,000.00
                       Total Schedule C:                   $21,049.00


TOTAL PRESUMPTIVELY TAXABLE DEPOSITS:                      $80,885.07

TOTAL DEPOSITS (NONTAXABLE & TAXABLE):                    $114,799.36
                                              - 64 -

[*64]                                    APPENDIX B

                     UCU Acct 83734 - 2009 Deposits (from Ex. 13-J)
  Deposit    Check    Check       Category            Payor       Amount       Explanatory Note
   Date       No.     Date


                                        NONTAXABLE DEPOSITS

   1/13/09 1067       1/12/09Transfer            Ocampo's          $1,500.00Canceled check omitted
                                                                            from UCU account
                                                                            records but included in
                                                                            WAMU account records
                                                                            (Ex. 4-J at 35)
   1/27/09   1076     1/24/09Transfer            Ocampo's          $1,500.00
   2/13/09   1080     2/13/09Transfer            Ocampo's          $3,800.00
    3/9/09   1093      3/9/09Transfer            Ocampo's          $2,600.00
   4/10/09   1112     4/10/09Transfer            Ocampo's          $2,000.00
   4/13/09                   Transfer            Line of Credit      $240.11
    5/5/09                   Fee Reversal        UCU                  $20.00
    5/5/09   1114      5/5/09Transfer            Ocampo's          $2,000.00Deposited at same time
                                                                             as $600 amount listed
                                                                             as unknown.
    5/5/09                   Transfer            Line of Credit       $48.01
   5/14/09   1120     5/14/09Transfer            Ocampo's          $3,000.00
   6/22/09   1140     6/20/09Transfer            Ocampo's          $1,500.00
    7/9/09   1154      7/9/09Transfer            Ocampo's          $2,000.00
   7/29/09                   Transfer            Line of Credit       $13.05
    8/6/09   1163      8/6/09Transfer            Ocampo's          $3,000.00
   8/11/09                   Purchase Return     Target               $41.68
    9/4/09   1195      9/4/09Transfer            Ocampo's          $3,000.00
   9/17/09                   Purchase Return     Office Depot         $35.72
   10/9/09   1236     10/7/09Transfer            Ocampo's          $1,800.00
  10/23/09   1006    10/21/09Return of Capital   Ocampo's, Inc.    $1,600.00
  11/18/09   1029    11/17/09Return of Capital   Ocampo's, Inc.    $2,200.00
  11/23/09                   Transfer            Line of Credit       $21.29
   12/7/09                   Transfer            Line of Credit      $218.79
  12/15/09   1049    12/14/09Return of Capital   Ocampo's, Inc.    $4,000.00
  12/22/09                   Purchase Return     Petco                $19.74

 TOTAL NONTAXABLE DEPOSITS:                                       $36,158.39
                             - 65 -

[*65]
             PRESUMPTIVELY TAXABLE DEPOSITS

 1/30/09   Interest          UCU              $0.47
 2/27/09   Interest          UCU              $0.26
 3/31/09   Interest          UCU              $0.13
 4/30/09   Interest          UCU              $0.08
 5/29/09   Interest          UCU              $0.45
 6/30/09   Interest          UCU              $0.31
 7/31/09   Interest          UCU              $0.25
 8/31/09   Interest          UCU              $0.27
 9/30/09   Interest          UCU              $0.18
10/30/09   Interest          UCU              $0.13
11/30/09   Interest          UCU              $0.05
12/31/09   Interest          UCU              $0.09
           Total Interest:                    $2.67

  1/7/09   Wages             UCLA       $1,234.87
 1/21/09   Wages             UCLA         $919.21
  2/4/09   Wages             UCLA       $1,142.89
 2/18/09   Wages             UCLA       $1,232.11
  3/4/09   Wages             UCLA       $1,997.92
 3/18/09   Wages             UCLA       $1,003.75
  4/1/09   Wages             UCLA       $1,439.68
 4/15/09   Wages             UCLA       $1,061.00
 4/29/09   Wages             UCLA       $1,166.26
 5/13/09   Wages             UCLA       $1,038.82
 5/27/09   Wages             UCLA       $1,148.68
 6/10/09   Wages             UCLA       $1,424.51
 6/24/09   Wages             UCLA       $1,112.87
  7/8/09   Wages             UCLA       $1,182.08
 7/22/09   Wages             UCLA         $919.50
  8/5/09   Wages             UCLA       $1,177.60
 8/19/09   Wages             UCLA       $1,157.70
  9/2/09   Wages             UCLA       $1,179.61
 9/16/09   Wages             UCLA       $1,062.28
 9/30/09   Wages             UCLA       $1,250.52
10/14/09   Wages             UCLA       $1,058.64
10/28/09   Wages             UCLA       $1,176.73
11/10/09   Wages             UCLA       $1,227.94
11/25/09   Wages             UCLA       $1,023.67
 12/9/09   Wages             UCLA       $1,231.92
                                         - 66 -

[*66]
 12/23/09               Wages            UCLA      $1,040.99
                        Total Wages:              $30,611.75

  3/27/09               Unknown                       $50.00
   5/5/09               Unknown                      $600.00
  6/10/09               Unknown                    $1,600.00
  7/31/09               Unknown                       $72.87
 12/23/09               Unknown                       $63.94
                        Total Unknown:             $2,386.81

TOTAL PRESUMPTIVELY TAXABLE DEPOSITS:             $33,001.23

TOTAL DEPOSITS (NONTAXABLE & TAXABLE):            $69,159.62
