                               T.C. Memo. 2012-95



                         UNITED STATES TAX COURT



GALINA S. LUBYANITSKAYA AND PETRO V. LUBYANITSKIY, Petitioners
                           v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 18014-10.                          Filed March 28, 2012.



      Galina S. Lubyanitskaya and Petro V. Lubyanitskiy, pro se.

      Michael W. Lloyd, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      THORNTON, Judge: Respondent determined deficiencies in petitioners’

Federal income taxes of $8,080 and $2,071 for tax years 2007 and 2008,

respectively. Respondent also determined a $1,616 accuracy-related penalty

pursuant to section 6662(a) for tax year 2007. The issues for decision are: (1)
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whether petitioners are entitled to various deductions for 2007 and 2008 in excess of

those respondent allowed, and (2) whether petitioners are liable for an accuracy-

related penalty for tax year 2007.1 Unless otherwise indicated, all section

references are to the Internal Revenue Code in effect for the years at issue, and all

Rule references are to the Tax Court Rules of Practice and Procedure. All monetary

amounts have been rounded to the nearest dollar.

                                FINDINGS OF FACT

      The parties have stipulated some facts, which we incorporate by this

reference. When they petitioned this Court, petitioners, husband and wife, resided

in Washington State.

      During 2007 and 2008 Mrs. Lubyanitskaya worked for Ajinomoto Frozen

Foods USA, Inc. (Ajinomoto). Mr. Lubyanitskiy operated a construction business

with his brother, Pavel, under the name LPP Construction, LLC (LPP). On its

Form 1065, U.S. Return of Partnership Income, for tax year 2007, LPP listed

$99,410 of total income and $83,175 of deductions, including items for

automobile expense, taxes and licenses, meals and entertainment, interest, home

office expense,telephone expense, tools, nails, Internet, and uniforms. For 2007


      1
       Petitioners conceded that they received a $509 taxable refund from the State
of Oregon in 2007.
                                        -3-

Mr. Lubyanitskiy reported on Schedule C, Profit or Loss From Business, gross

receipts or sales from LPP of $49,705 and claimed $34,094 of LPP’s expenses and

a home office expense of $7,979. As a result, $7,632 of Schedule C income was

reported on petitioners’ joint return. Petitioners also claimed on Schedule A,

Itemized Deductions, among other deductions, an unreimbursed employee expense

deduction of $7,210 attributable to 14,866 business miles allegedly driven.

      In 2008 on Schedule E, Supplemental Income and Loss, petitioners’ joint

return listed $6,841 of income from LPP. In addition, on an attached Schedule C for

a “LONG TERM CARE GIVER” business, petitioners claimed a deduction for

$14,840 in car and truck expenses based on 27,816 business miles allegedly driven.

      On May 14, 2010, respondent sent petitioners a notice of deficiency (notice)

with respect to tax years 2007 and 2008. For 2007 the notice disallowed $27,882 of

petitioners’ claimed $42,073 of Schedule C deductions, resulting in the allowance of

$14,191 of their claimed deductions as follows:

               2007 Schedule C Deductions         Claimed    Allowed

               Car and truck expenses              $8,900       -0-
               Insurance                            2,324     $2,324
               Interest                               600        600
                                         -4-

                Office expense                       1,047       1,047
                Taxes and licenses                   1,421       1,421
                Meals and entertainment              6,500        -0-
                Other expenses                      13,302       4,869
                Home office deduction                7,979       3,930
                 Total                              42,073      14,191

The notice also disallowed the $7,210 Schedule A itemized deduction that

petitioners claimed for unreimbursed employee expenses for 2007 and disallowed

the $14,840 Schedule C deduction that petitioners claimed for car and truck

expenses for 2008. Respondent also imposed an accuracy-related penalty under

section 6662(a) for 2007.

      Petitioners timely petitioned the Court. At trial, at petitioners’ request, the

Court provided them with a Ukrainian-English interpreter.

                                      OPINION

I. Deductions

      Generally, the Commissioner’s determinations in a notice of deficiency are

presumed correct, and the taxpayer has the burden to prove that the determinations

are in error.2 Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

Deductions are a matter of legislative grace, and a taxpayer must prove entitlement


      2
        Petitioners have not claimed or shown that they meet the requirements under
sec. 7491(a) to shift the burden of proof to respondent as to any factual issue
relating to their tax liability.
                                         -5-

to claimed deductions. Rule 142(a)(1); INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 84 (1992). Taxpayers must keep sufficient records to substantiate any

deductions claimed. Sec. 6001. If a taxpayer establishes a deductible expense but

is unable to substantiate the precise amount, the Court generally may approximate

the deductible amount, but only if the taxpayer presents sufficient evidence to

establish a rational basis for making the estimate. Cohan v. Commissioner, 39 F.2d

540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743

(1985).

      In the case of expenses paid or incurred with respect to listed property, e.g.,

passenger automobiles or other property used as a means of transportation, section

274(d) overrides the Cohan doctrine and provides that these expenses are deductible

only if the taxpayer meets stringent substantiation requirements. Secs. 274(d),

280F(d)(4); see Lewis v. Commissioner, 560 F.2d 973, 977 (9th Cir. 1977), rev’g

on other grounds T.C. Memo. 1974-59; Sanford v. Commissioner, 50 T.C. 823,

827-828 (1968), aff’d, 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary

Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).

      Petitioners presented no evidence to establish that they are entitled to deduct

expenses in amounts greater than respondent has allowed. Petitioners offered no

receipts or testimony to substantiate their claimed deductions and have provided no
                                          -6-

basis on which we might estimate those claimed expenses that are not subject to the

stricter substantiation requirements of section 274(d). See Cohan v. Commissioner,

39 F.2d at 543-544. Instead of attempting to substantiate their deductions,

petitioners argue that Mr. Lubyanitskiy’s income from LPP was erroneously double

counted in determining petitioners’ taxable income. Petitioners, however, presented

no credible evidence in this regard. The record convinces us that income from LPP

was not double counted. We sustain respondent’s determinations disallowing a

portion of the claimed deductions.

      Petitioners’ testimony at trial related largely to the alleged misconduct of

respondent’s agents during the audit. As a general rule, this Court does not look

behind a notice of deficiency 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 (1974); see also Riland v. Commissioner, 79 T.C. 185, 201 (1982).

“[W]hat goes on during audits is immaterial to the de novo record on which we

decide deficiency cases.” Kovacevich v. Commissioner, T.C. Memo. 2009-160 n.6.

The rationale for this rule is that a trial before the Tax Court is a de novo

proceeding, and our decision is based on the merits of the record before us and not
                                         -7-

on the merits of the administrative record. Jackson v. Commissioner, 73 T.C. 394,

400 (1979); Greenberg’s Express, Inc. v. Commissioner, 62 T.C. at 328.

      Petitioners contend that “all the communications and letters” received from

respondent during the audit were in a language they “didn’t understand”. But during

the audit petitioners had an English-speaking representative with whom they were

satisfied. During the audit petitioners did not request any documents in Ukrainian.

Furthermore, according to her manager at Ajinomoto, Mrs. Lubyanitskaya regularly

speaks English at her job, has completed tests in English, and does her work-related

writing in English. In any event, petitioners were afforded a de novo trial before this

Court and were provided with a Ukrainian-English interpreter during the trial.

II. Accuracy-Related Penalty

      Section 6662(a) and (b) imposes a 20% accuracy-related penalty on any

portion of a tax underpayment that is attributable to, among other things, negligence

or a substantial understatement of income tax. “Negligence” includes the failure to

make a reasonable attempt to comply with the provisions of the Internal Revenue

Code and also includes any failure to keep adequate books and records or to

substantiate items properly. Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.

A substantial understatement is defined in section 6662(d)(1)(A) as an
                                         -8-

understatement that exceeds the greater of 10% of the tax required to be shown on

the return or $5,000.

      Under section 7491(c), respondent bears the burden of production with

respect to the section 6662(a) penalty. Generally, this means that he must come

forward with sufficient evidence indicating that it is appropriate to impose the

relevant penalty. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

Respondent has met his burden of production on the section 6662(a) penalty, as he

has provided evidence of both a substantial understatement and petitioners’

negligence in failing to comply with recordkeeping requirements.3

      The accuracy-related penalty does not apply with respect to any portion of the

underpayment if it is shown that the taxpayer had reasonable cause and acted in

good faith. Sec. 6664(c)(1). The burden of proof is upon petitioners to establish

reasonable cause. See Rule 142(a); Bixby v. Commissioner, 58 T.C. 757, 791-792

(1972). They have not shown or even expressly claimed that they had reasonable

cause or acted in good faith with respect to their understatement of income tax for



      3
       The tax required to be shown on petitioners’ 2007 return was $9,158. The
tax shown on the return was $1,078, creating a deficiency of $8,080. As the
deficiency exceeds both 10% of the tax required to be shown on the return
($915.80), and $5,000, respondent has shown a substantial understatement. See
sec. 6662(d)(1).
                                       -9-

2007. We therefore sustain respondent’s imposition of the accuracy-related penalty

for 2007.

      To reflect the foregoing,


                                                         Decision will be entered

                                                  for respondent.
