                               T.C. Memo. 2013-132



                         UNITED STATES TAX COURT



                 PAUL FREDRICK JONES, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 20591-10.                          Filed May 29, 2013.



      Paul Fredrick Jones, pro se.

      Randall B. Childs, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      MORRISON, Judge: The respondent (the IRS) issued a notice of deficiency

to the petitioner, Mr. Paul Fredrick Jones, for the 2007 tax year. In the notice the

IRS determined a deficiency of $13,590, a section 6651(a)(1) addition to tax of

$3,057.75, a section 6651(a)(2) addition to tax of $1,630.80, and a section 6654(a)
                                        -2-

[*2] addition to tax of $618.52.1 Jones timely filed a petition under section

6213(a) requesting that we redetermine the deficiency and the additions to tax.

We have jurisdiction under section 6214.

      After concessions,2 the issues for decision are:

      (1)    whether Jones is entitled to deduct $45,011.72 for business expenses

             reported on Schedule C, Profit or Loss From Business;

      (2)    whether Jones is liable for the section 6651(a)(1) addition to tax;

      (3)    whether Jones is liable for the section 6651(a)(2) addition to tax; and

      (4)    whether Jones is liable for the section 6654(a) addition to tax.

                                    Background

Preliminary matters

      Before trial the Court ordered that paragraphs 1 through 12 of the IRS’s

proposed stipulation of facts be deemed admitted under Rule 90. The Court



      1
        All section references are to the Internal Revenue Code in effect for the
year at issue. Rule references are to the Tax Court Rules of Practice and
Procedure.
      2
       In his pretrial memorandum, Jones conceded that the notice of deficiency
was correct in its determination that he received $50,894 in nonemployee
compensation from Pre-Paid Legal Services. In its opening brief, the IRS
conceded that the notice of deficiency was incorrect in determining that Jones
earned $750 in nonemployee compensation from Life Care Retirement
Communities and $241 in dividend income.
                                        -3-

[*3] reserved ruling on whether paragraphs 13 and 14 should be deemed admitted.

The IRS has now conceded that paragraphs 13 and 14 are incorrect. Therefore, the

Court will order that these paragraphs shall not be deemed admitted.

      Jones resided in Florida when he filed the petition.

Jones’s business

      Jones worked as an independent sales associate for Pre-Paid Legal Services,

a publicly traded company that provided legal insurance to businesses and

individuals. Jones sold memberships to the customers of Pre-Paid Legal Services

and was entitled to commissions for these sales. He also recruited new sales

associates for Pre-Paid Legal Services and, pursuant to its multilevel marketing

arrangement, was entitled to a percentage of the revenue they generated. Jones

received nonemployee compensation of $50,894 from Pre-Paid Legal Services.

      Besides Pre-Paid Legal Services, Jones participated in other multilevel

marketing arrangements. He did not earn any money, but his participation allowed

him to meet people to recruit as sales associates for Pre-Paid Legal Services.

      Jones worked from his house in the area of Orlando, Florida.

      Jones did not file a federal income tax return for 2006 or 2007. For 2007

the IRS prepared a substitute for return on Jones’s behalf, as authorized by section
                                         -4-

[*4] 6020(b). Jones did not make any payments of federal income tax or estimated

tax for 2007.

                                     Discussion

1.    Deficiency

      In deficiency proceedings before the Tax Court, the burden of proof

generally rests with the taxpayer. Rule 142(a)(1); Welch v. Helvering, 290 U.S.

111, 115 (1933). Section 7491 imposes the burden of proof on the IRS with

respect to a given factual issue where a taxpayer (1) introduces credible evidence

with respect to that issue, (2) meets all applicable substantiation requirements, (3)

complies with all recordkeeping requirements, and (4) cooperates with any

reasonable requests for information. Sec. 7491(a); Higbee v. Commissioner, 116

T.C. 438, 440-441 (2001). The record reflects that Jones did not meet

recordkeeping and substantiation requirements. Thus, the burden of proof remains

on Jones.

      Section 162(a) provides that “[t]here shall be allowed as a deduction all the

ordinary and necessary expenses paid or incurred during the taxable year in

carrying on any trade or business, including * * * (2) traveling expenses

(including amounts expended for meals and lodging other than amounts which are

lavish or extravagant under the circumstances) while away from home in the
                                         -5-

[*5] pursuit of a trade or business”. No deduction is allowed for personal, living,

or family expenses. Sec. 262(a). The cost of a taxpayer’s own meals, unless the

taxpayer is on overnight business travel, is a nondeductible personal expense.

United States v. Correll, 389 U.S. 299, 299-307 (1967); Strohmaier v.

Commissioner, 113 T.C. 106, 114-116 (1999). Taxpayers are required to maintain

records sufficient to establish the amounts of allowable deductions and to enable

the IRS to determine the correct tax liability. Sec. 6001; Shea v. Commissioner,

112 T.C. 183, 186 (1999).

      It is a general rule, established in Cohan v. Commissioner, 39 F.2d 540,

543-544 (2d Cir. 1930), that if the trial record provides sufficient evidence that the

taxpayer has incurred a deductible expense, but the taxpayer is unable to fully

substantiate the precise amount of the deduction, the Court should estimate the

amount of the deductible expense and allow a deduction to that extent. In making

such estimates, the Court may bear heavily against the taxpayer, who caused the

inexactitude. Id. at 544. For the Court to estimate the amount of an expense, there

must be some basis on which an estimate may be made. Williams v. United States,

245 F.2d 559, 560 (5th Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731, 742-

743 (1985).
                                        -6-

[*6] In an exception to the Cohan rule, section 274(d) provides that a taxpayer

must satisfy strict substantiation requirements for certain kinds of expenses, such

as for travel away from home, for entertainment, for gifts, and for “listed property”

(as that term is defined in section 280F(d)(4)). To deduct these expenses the

taxpayer “[must] substantiate[] by adequate records or by sufficient evidence

corroborating the taxpayer’s own statement” the amounts, times, places, and

purposes related to the expenses. Sec. 274(d); 26 C.F.R. sec. 1.274-5T(b), (c)(1)

and (2) (2010); Dowell v. United States, 522 F.2d 708, 715 (5th Cir. 1975)

(holding each separate expense must be substantiated).

      The expenses of traveling away from home are subject to strict

substantiation requirements. Sec. 274(d)(1); 26 C.F.R. sec. 1.274-5T(a)(1), (b)(2)

(2010). To deduct travel expenses the taxpayer must substantiate the amount of

each expense, the dates of departure and return for each trip, the destination of

travel, and the business reason for the trip. Sec. 274(d); 26 C.F.R. sec. 1.274-

5T(b)(2) (2010).

      Entertainment expenses are subject to strict substantiation requirements.

Sec. 274(d)(2). Entertainment expenses include the costs of business meals. See

Sanford v. Commissioner, 50 T.C. 823, 827 (1968), aff’d, 412 F.2d 201 (2d Cir.

1969). To deduct entertainment expenses the taxpayer must substantiate the
                                           -7-

[*7] amount of each expense, the date of the entertainment, the place where the

entertainment occurred, the business reason for the entertainment, the nature of

any business discussion or activity, and enough information about the person

entertained to establish the business relationship of that person to the taxpayer.

Sec. 274(d); 26 C.F.R. sec. 1.274-5T(b)(3) (2010).

       Gift expenses are subject to strict substantiation requirements. Sec.

274(d)(3). To deduct gift expenses, the taxpayer must substantiate the cost of the

gift, the date of the gift, a description of the gift, the business reason for the gift,

and enough information about the recipient of the gift to establish the business

relationship of that person and the taxpayer. Sec. 274(d); 26 C.F.R. sec. 1.274-

5T(b)(5) (2010).

       Passenger automobile expenses require strict substantiation. Secs.

274(d)(4), 280F(d)(4)(A)(i).3 A taxpayer is permitted to use the standard mileage

rate in lieu of substantiating the actual cost of using a passenger automobile. See

26 C.F.R. sec. 1.274-5(j)(2) (2010). A taxpayer who opts to use the standard



      3
        As explained in UAL Corp. v. Commissioner, 117 T.C. 7, 16 n.13 (2001)
(Ruwe, J., concurring), sec. 274(d) did not require strict substantiation of the
expenses of listed property such as passenger automobiles for tax year 1985 and
prior years; thus, passenger automobile expenses related to travel within the
locality in which the taxpayer lived and worked were not subject to the strict
substantiation requirements.
                                        -8-

[*8] mileage rate is not relieved of the obligation to substantiate the amount of

business mileage and the time and place of each business use of the passenger

vehicle. Id. Thus, these items of information (the amount of business mileage and

the time and place of each business use of the passenger vehicle) must be

substantiated through adequate records or sufficient evidence corroborating the

taxpayer’s own statement. See 26 C.F.R. sec. 1.274-5T(b)(2), (c) (2010).

      Cellular telephone expenses are subject to strict substantiation requirements.

Secs. 274(d)(4), 280F(d)(4)(A)(v).4 To deduct cell phone expenses a taxpayer

must substantiate the amount of business use and the total use for the cell phone.

See Trupp v. Commissioner, T.C. Memo. 2012-108, slip op. at 14; 26 C.F.R. sec.

274-5T(b)(6)(i)(B) (2010).

      The expenses of internet service are not subject to strict substantiation

requirements. See Bogue v. Commissioner, T.C. Memo. 2011-164, slip op. at 41

(strict substantiation does not apply to utility expenses, such as home internet

service).




      4
       Sec. 280F(d)(4)(A) was amended by the Small Business Jobs Act of 2010,
Pub. L. No. 111-240, sec. 2043(a), 124 Stat. at 2560, which removed cellular
phones (and similar telecommunications equipment) from the definition of listed
property. The amendment is effective beginning with the 2010 year. Id. sec.
2043(b). The amendment therefore does not apply for 2007, the year at issue.
                                        -9-

[*9] Section 280A(a) provides that for individual taxpayers “no deduction

otherwise allowable under this chapter [which includes section 162] shall be

allowed with respect to the use of a dwelling unit which is used by the taxpayer

during the taxable year as a residence.” Section 280A(c)(1) contains an exception

to section 280A(a). It provides: “Subsection (a) shall not apply to any item to the

extent such item is allocable to a portion of the dwelling unit which is exclusively

used on a regular basis * * * (A) as the principal place of business for any trade or

business of the taxpayer”. Some portion of the dwelling unit must be used

exclusively for business; otherwise, no deductions for expenses related to the

dwelling unit are excepted by section 280A(c)(1). See Sam Goldberger, Inc. v.

Commissioner, 88 T.C. 1532, 1557 (1987).

      The expense of telephone service (other than cellular telephone service) is

not subject to strict substantiation requirements. See, e.g., Lang v. Commissioner,

T.C. Memo. 2010-152, slip op. at 14-15; Aref v. Commissioner, T.C. Memo.

2009-118, slip op. at 11. Section 262(b) provides that the expense of the first

telephone line in a taxpayer’s residence is treated as a personal expense.

      Jones had only one bank account, which was at Bank of America. He had

two credit cards: an American Express card and a Chase card. Neither the bank

account nor the two credit cards were used exclusively for business expenses.
                                        - 10 -

[*10] At trial Jones moved for the admission of a spreadsheet that the Court

marked as Exhibit 13-P and received into evidence for the limited purpose of

illustrating Jones’s litigating position. The spreadsheet lists 58 categories of

expenses that Jones claims are the business expenses of his work for Pre-Paid

Legal Services. Each category has an associated amount. The total of the amounts

for all 58 categories is $45,011.72.5 By contrast, the notice of deficiency

determined (and the IRS contends) that Jones is entitled to zero in business-

expense deductions. At trial Jones’s monthly statements from the two credit cards

were received into evidence. Jones moved that some statements for his bank

account be received into evidence, but these statements were excluded from

evidence. Jones moved for the admission of an auto mileage log, but it was

excluded from evidence. With the possible exception of the auto mileage log,

Jones did not maintain any contemporaneous records that showed which of his

expenses were business expenses. The only witness at trial was Jones himself. He

testified that he incurred the expenses in the amounts listed in 58 categories in

Exhibit 13-P. He also testified in some detail about the nature of these expenses.




      5
       Jones moved for the admission of Exhibit 12-P, a spreadsheet that has
month-by-month amounts for each of the 58 categories. Exhibit 12-P was also
received for the purpose of illustrating Jones’s litigating position.
                                        - 11 -

[*11] The table below sets forth the 58 categories and corresponding amounts

Jones listed in the spreadsheet identified as Exhibit 13-P. The first column,

“Expense category”, has the headings Jones listed for each category. The second

column, “Amount claimed”, has the amounts Jones listed as deductible business

expenses for each category. The third column, “Amount deductible”, has the

amounts we find that Jones paid during 2007 for ordinary and necessary business

expenses that are deductible under section 162. The fourth column, “Court’s

description of amount; reasons not deductible”, is (1) our description of the

amounts listed in the second column, and (2) the reasons that we determine that

the difference between the amount claimed and the amount deductible in each

category, for those categories for which there is a difference, is not deductible.

The factual conclusions in the third and fourth columns constitute findings of fact.
                                                    - 12 -

[*12]                                    Business-expense deductions
                    Amount       Amount
Expense category    claimed     deductible         Court’s description of amount; reasons not deductible
1. Leads           $12,000.00 $12,000.00 This amount was paid to Lead to the Top in Cheyenne,
                                         Wyoming, for customer “leads”, i.e., contact information for
                                         potential customers.
2. Internet            494.45      -0-        This amount was paid to Bright House Network for internet
                                              service to Jones’s house. Jones used the internet for both
                                              business and personal use; there is no basis in the record on
                                              which to estimate the portion of the charge that corresponds to
                                              business use.
3. Phone               898.92      -0-        This amount was paid for cellular telephone service. The
                                              amount of business use of the cellular telephone to which this
                                              expense corresponds is not supported by adequate records or
                                              sufficient evidence corroborating Jones’s own statement.
                                              Therefore, the strict substantiation requirements of sec. 274(d)
                                              for cellular telephone expenses have not been met.
                                         - 13 -

[*13] 4. Mileage   8,758.61   -0-   According to Jones’s testimony, this amount is the product of
                                    the standard mileage rate and the number of miles Jones drove
                                    his car for business. We need not determine whether this
                                    testimony is correct because the strict substantiation
                                    requirements of sec. 274(d) for passenger automobile expenses
                                    have not been met. The business mileage and the times and
                                    places of business use of the car are not supported by adequate
                                    records or sufficient evidence corroborating Jones’s own
                                    statement.
5. Entertainment   1,118.60   -0-   Jones did not testify what exactly these expenses were for
                                    except that they were for “entertainment”. A review of Jones’s
                                    credit-card statements might reveal evidence of the amount of
                                    each expense, the date of entertainment, and the place of
                                    entertainment. However, not all of the strict substantiation
                                    requirements of sec. 274(d) for entertainment expenses have
                                    been met for these alleged expenses. The business reason for
                                    the entertainment, the nature of the business discussion (or
                                    activity), and the business relationship between Jones and the
                                    person entertained are not supported by adequate records or
                                    sufficient evidence corroborating Jones’s own statement (or by
                                    any evidence whatsoever).
                                           - 14 -

[*14] 6. Travel   1,631.56   -0-     This amount was paid for travel away from Jones’s home in the
                                     Orlando area. The business purposes of the trips are not
                                     supported by adequate records or sufficient evidence
                                     corroborating Jones’s own statement. Therefore, the strict
                                     substantiation requirements of sec. 274(d) for travel expenses
                                     have not been met.
7. PPL fees        431.30    431.30 This amount was paid to Pre-Paid Legal Services (hereinafter
                                    “PPL”) for Jones’s membership in that organization as a sales
                                    associate.
8. Vonage phone    388.75    -0-     This amount was paid to Vonage America for telephone service.
                                     Jones used this service for both business and personal calls.
                                     There is no basis in the record on which to estimate the portion
                                     of the expense corresponding to business calls.
9. 800 Phone       326.00    -0-     This amount was paid to Covista Telephone in Chattanooga,
Covista                              Tennessee, for an 800 telephone number so that persons could
                                     call Jones long distance for free. Jones used this service for
                                     both business and personal calls. There is no basis in the record
                                     on which to estimate the portion of the expense corresponding
                                     to business calls.
10. Office         212.13    -0-     This amount was paid to an office supply store. Some of the
supplies                             items purchased were not used in Jones’s business. There is no
                                     basis in the record on which to estimate the portion of the
                                     expense attributable to items used in Jones’s business.
                                           - 15 -

[*15] 11. PPL       239.40   239.40 This amount was paid to PPL to use its website.
WEB
12. UPS             230.25   -0-      This is the amount paid to UPS to ship Jones’s packages. Some
                                      shipments were of business materials, such as PPL contracts, but
                                      we find that some shipments were personal. There is no basis in
                                      the record on which to estimate the ratio of business shipments
                                      to personal shipments.
13. Newspaper       160.55   -0-      This amount was paid for Jones’s subscription to the Orlando
                                      Sentinel newspaper. Jones testified that he reviewed the
                                      advertisements in the newspaper to find businesses to which he
                                      could sell PPL services. This testimony, although believable, is
                                      all we know about Jones’s use of the newspaper. In the absence
                                      of other information, we do not conclude (1) that Jones used the
                                      newspaper exclusively for businesses purposes or (2) that there
                                      is a basis on which to estimate how much Jones used the
                                      newspaper for business purposes compared to personal
                                      purposes.
14. Priceless       539.40   539.40 This is the amount paid to Priceless Possibilities in Fallbrook,
Possibilities                       California, for marketing services.
15. Printing        459.22   459.22 This amount was paid to print marketing materials.
16. Long distance   -0-      -0-      We infer from the zero amount in Jones’s spreadsheet that he
                                      does not claim a deduction related to this category of expenses.
                                               - 16 -

[*16] 17.            1,200.00    -0-      This amount was allegedly paid to charity. Jones has conceded
Donations                                 that he is not seeking a business-expense deduction for the
                                          alleged payments to charity. There is no evidence of a business
                                          purpose for the alleged donations in any case.
18. Stemtech          377.46     377.46 This amount was paid to Stemtech Health Sciences in San
                                        Clemente, California, to participate in its multilevel marketing
                                        arrangement for nutritional supplements.
19. Video Plus        870.00     870.00 This amount was paid to Video Plus in Lake Dallas, Texas, for
                                        PPL marketing materials.
20. Gluc Leads        -0-        -0-      We infer from the zero amount in Jones’s spreadsheet that he
                                          does not claim a deduction related to this category of expenses.
21. PPL              1,502.00   1,502.00 This amount was paid for marketing supplies related to PPL.
marketing
supplies
22. Web site           20.39      20.39 This amount was paid to the company godaddy.com for
                                        business-related web services.
23. Build Success     200.60     200.60 This amount was paid to Build Lasting Success for marketing
marketing                               services.
24. Tolls, parking    404.00     -0-      This amount was paid for tolls and parking in Florida. Jones has
                                          not satisfied his burden of proving that these expenses are the
                                          ordinary and necessary expenses of his business.
                                               - 17 -

[*17] 25.            248.70     248.70 This amount was paid for insurance licenses necessary for Jones
Insurance license                      to sell PPL services.
26. Freedom         1,289.00   1,289.00 This amount was paid to Freedom Rocks to participate in its
Rocks                                   multilevel marketing arrangement.
27. Stratus          119.90     119.90 This amount was paid to Stratus Marketing for marketing
Marketing                              services.
28. USPS              81.88     -0-      This amount was paid to the United States Postal Service for
                                         postage fees. Some of the services were not related to Jones’s
                                         business. There is no basis in the record on which to estimate
                                         the portion of the fees that are attributable to Jones’s business.
29. Office           352.26     -0-      This amount was paid to an office supply store. Some of the
supplies 2                               purchases were items not used in Jones’s business. There is no
                                         basis in the record on which to estimate the portion of the
                                         expense attributable to items used in Jones’s business.
30. Verizon          737.54     -0-      This amount was paid to Verizon for telephone service to
                                         Jones’s house. He used this telephone service mainly to receive
                                         and send faxes. The telephone service is for the first (and only)
                                         telephone line in Jones’s house. It is therefore classified as a
                                         personal expense under sec. 262(b).
                                       - 18 -

[*18] 31.        281.38   -0-     There is very little in the record about the expenses
Miscellaneous                     corresponding to this claimed amount. Jones has failed to prove
                                  that any of the amount was paid for business expenses.
32. Other misc   -0-      -0-     We infer from the zero amount in Jones’s spreadsheet that he
                                  does not claim a deduction related to this category of expenses.
33. Utilities    180.00   -0-     This amount is 15% of the amount paid for electric, water, and
                                  garbage service to Jones’s house. Although Jones testified that
                                  he used one bedroom of the house as an “office”, he did not
                                  testify that the room was used exclusively for his business (as
                                  opposed to personal clerical or nonclerical matters). On the
                                  basis of the evidence we find that Jones did not use any portion
                                  of his house exclusively for his business. See sec. 280A(a),
                                  (c)(1).
34. Taxes        441.00   -0-     This amount is 15% of the amount paid for property taxes on
                                  Jones’s house. This amount is not deductible as a business
                                  expense because Jones did not use any portion of his house
                                  exclusively for his business. See sec. 280A(a), (c)(1).
35. Books        300.74   300.74 This amount was paid for business-related books.
                                       - 19 -

[*19] 36. PPL   635.00   -0-     Although Jones testified that he spent this amount on PPL
meetings                         meetings in Tampa, Florida, and Altamonte Springs, Florida,
                                 and other cities, he did not explain what specific goods and
                                 services the amount was expended for (e.g., travel costs or
                                 attendance fees). Furthermore, his payment of the amount is not
                                 generally corroborated by other evidence. We conclude that
                                 Jones has not met his burden of proving (1) he paid the alleged
                                 expenses, (2) the amounts of the alleged expenses, and (3) that
                                 the alleged expenses were the ordinary and necessary expenses
                                 of his business.
37. Lodging     343.02   -0-     This amount is alleged by Jones to be the expense of staying at
                                 hotels during out-of-town PPL conventions. We need not
                                 decide whether this allegation is true. The strict substantiation
                                 requirements of sec. 274(d) for travel expenses have not been
                                 met. The amount of each alleged hotel expense, the date of
                                 departure and date of return for the trip that corresponds to the
                                 hotel stay, the destination of the trip, and the business reason for
                                 the trip are not all supported by adequate records or sufficient
                                 evidence corresponding Jones’s own statement.
38. Stemtech    434.77   434.77 This amount was paid to Stemtech Health Sciences in San
                                Clemente, California, to participate in its multilevel marketing
                                arrangement for nutritional supplements.
39. PPL tools    40.44    40.44 This amount was paid to PPL for PPL materials.
                                             - 20 -

[*20] 40. Voice     400.00     400.00 This amount was paid to Voiceshot LLC for a marketing
Shot                                  service.
41. Sprint phone     37.28     -0-      This is the amount paid to purchase a cellular telephone. The
                                        amount of business use of the cellular telephone is not supported
                                        by adequate records or sufficient evidence corroborating Jones’s
                                        own statement. Therefore, the strict substantiation requirements
                                        of sec. 274(d) for cellular telephone expenses have not been
                                        met.
42. Signup leads     89.00      89.00 This amount was paid to Signup Leads for customer leads.
43. Movie Views     425.00     425.00 This amount was paid to Movie Views Leads for customer
Leads                                 leads.
44. Quantum          99.00      99.00 This amount was paid to Quantum Leads for customer leads.
Leads
45. Burg/Lehr      1,535.26   1,535.26 This amount was paid to Burg Communication in Florida and to
                                       Lehr Witten Team in Phoenix, Arizona, for marketing services.
                                               - 21 -

[*21] 46. Cab/bus       115.70   -0-     Jones testified that he paid this amount for cab and bus fare for
                                         travel to and from his hotels and the convention sites at out-of-
                                         state PPL conventions. We need not decide whether this
                                         testimony is true because the strict substantiation requirements
                                         of sec. 274(d) for travel expenses have not been met. The
                                         amount of each cab and bus expense, the date of departure and
                                         return for each trip to which the expense relates, the destination
                                         of the trip, and the business reason for the trip are not all
                                         supported by adequate records or sufficient evidence
                                         corroborating Jones’s own statement.
47. Finance             151.34   -0-     This amount was paid as a credit-card finance charge. We find
charge                                   that this expense is not related to Jones’s business.
48. SWREG               158.77   158.77 This amount was paid to SWREG, Inc., for business software.
49. Rental car          -0-      -0-     Jones paid $58.92 to rent a car in Dallas, Texas. The business
                    (amount              reason for traveling to Dallas is not supported by adequate
                    corrected            records or sufficient evidence corroborating Jones’s own
                    in hand-             statement. Therefore, the strict substantiation requirements of
                    writing to           sec. 274(d) for travel expenses have not been met.
                    $58.92)
50. GTI Travel          149.00   149.00 This amount was paid to GTI Travel to participate in its
                                        multilevel marketing arrangement.
                                              - 22 -

[*22] 51. Awards    128.00     -0-      This amount was paid for gifts for other PPL sales associates.
                                        The date of each gift, a description of the gift, the business
                                        reason for the gift, and the business relationship with the person
                                        receiving the gift are not supported by adequate records or
                                        sufficient evidence corroborating Jones’s own statement.
                                        Therefore the strict substantiation requirements of sec. 274(d)
                                        for gifts have not been met.
52. Soho            259.95     259.95 This amount was paid to Soho Solutions in Texas for marketing
                                      services.
53. Vayan leads     500.00     500.00 This amount was paid to Vayan Network in Boca Raton,
                                      Florida, for customer leads.
54. Passport To    1,388.79   1,388.79 This amount was paid to Passport To Wealth to participate in its
Wealth                                 multilevel marketing arrangement.
55. Software         70.00     -0-      This amount was paid for software. Jones, who has the burden
                                        of proof, did not testify about the purpose of this software. We
                                        find it was not business related.
56. Education        55.31     -0-      This amount was paid for online education to learn about
                                        personal income tax returns. We find this expense is not related
                                        to Jones’s business.
                                                        - 23 -

 [*23] 57. Petty          780.00        -0-       This amount was withdrawn from Jones’s bank account in cash
 cash                                             and used for business meals. The expenses of business meals
                                                  must satisfy the strict substantiation requirements for
                                                  entertainment expenses. The amount of each expense, the date
                                                  of the meal, the place of the meal, the business reason for the
                                                  meal, the nature of the business discussion or activity, and the
                                                  business relationship with the persons at the meal are not
                                                  supported by adequate records or sufficient evidence
                                                  corroborating Jones’s own statement. Therefore, the strict
                                                  substantiation requirements of sec. 274(d) for entertainment
                                                  expenses have not been met.
 58. Johnson              720.00        -0-       This is the amount Jones paid for the use of a cellular telephone
                                                  owned by his friend, Christopher Johnson. The amount of
                                                  business use of the cellular telephone to which this expense
                                                  corresponds is not supported by adequate records or sufficient
                                                  evidence corroborating Jones’s own statement. Therefore, the
                                                  strict substantiation requirements of sec. 274(d) for cellular
                                                  telephone expenses have not been met.
                      1
 Total                   45,011.62 24,078.09
         1
       We note that there is a 10-cent difference between the total on Exhibit 13-P, $45,011.72, and computer-
generated total in the table above. We assume that the total listed on Exhibit 13-P contained an error of 10 cents.
                                         - 24 -

[*24] 2.     Additions to tax

      The burden of production with respect to the imposition of each addition to

tax rests with the IRS. See sec. 7491(c); Higbee v. Commissioner, 116 T.C. at

446-447. With respect to the section 6651 additions to tax, the IRS’s burden does

not require it to establish the absence of reasonable cause. See Higbee v.

Commissioner, 116 T.C. at 447; Davis v. Commissioner, 81 T.C. 806, 820 (1983),

aff’d without published opinion, 767 F.2d 931 (9th Cir. 1985).

      a.     The addition to tax for failure to timely file a return under section
             6651(a)(1)

             Section 6651(a)(1) imposes an addition to tax for failure to timely file

a required return,6 unless the taxpayer can establish that the failure is due to

reasonable cause and not due to willful neglect.

      Jones admitted that he did not file an income tax return for tax year 2007.

Therefore the IRS has met its burden of proof.

      Jones’s explanation for not filing a return is that the “Internal Revenue Code

is so complex and confusing no one can understand it or comply with its

multitudinous provisions.” Jones did not make reasonable efforts to determine his




      6
      Substitutes for returns are disregarded for the purpose of determining the
amount of this addition to tax. Sec. 6651(g)(1).
                                        - 25 -

[*25] tax liability under the Internal Revenue Code. There is no evidence that he

even calculated his tax liability, and we find that he did not. We find that he did

not have reasonable cause for failing to file his 2007 tax return. He is liable for

the addition to tax under section 6651(a)(1).

      b.     The addition to tax for failure to timely pay tax under section
             6651(a)(2)

      Section 6651(a)(2) imposes an addition to tax for failure to pay the tax

shown on a return on or before the date prescribed for payment, unless such failure

is due to reasonable cause and not willful neglect. For each month the taxpayer

fails to pay the tax shown on the return, the addition to tax is 0.5% of the portion

of the tax shown that is unpaid at the beginning of each month, not to exceed 25%

in the aggregate. Sec. 6651(a)(2), (b)(2).7 When a taxpayer does not file a return,

the IRS may prepare a substitute for return. Sec. 6020(b). Such a return is treated

as the return filed by the taxpayer for purposes of the section 6651(a)(2) addition

to tax. Secs. 6020(b), 6651(g)(2).

      Reasonable cause for the failure to timely pay tax exists if “the taxpayer has

made a satisfactory showing that he exercised ordinary business care and prudence



      7
       If the tax shown is greater than the tax required to be shown, the tax
required to be shown (i.e., the lesser of the two amounts) is substituted for the tax
shown in making this calculation. Sec. 6651(c)(2).
                                        - 26 -

[*26] in providing for payment of his tax liability and was nevertheless either

unable to pay the tax or would suffer an undue hardship * * * if * * * [the

taxpayer] paid on the due date.” 26 C.F.R. sec. 301.6651-1(c)(1) (2012).

      The IRS has met its burden of production for the section 6651(a)(2) addition

to tax. We find that the IRS prepared a valid substitute for return for Jones’s 2007

tax year and that he failed to timely make any tax payments. Jones has not shown

that he had reasonable cause for failing to timely pay his 2007 tax. We hold that

Jones is liable for the section 6651(a)(2) addition to tax.

      c.     The addition to tax for failure to pay estimated income tax under
             section 6654(a)

      Section 6654(a) imposes an addition to tax for failure to make timely and

sufficient payments of estimated tax. A taxpayer has an obligation to pay

estimated tax for a particular year only if the taxpayer has a “required annual

payment” for that year. Sec. 6654(b)(1), (c)(1), (d). A required annual payment is

equal to the lesser of: (1) 90% of the tax shown on the taxpayer’s return for the

year in issue (or, if no return is filed, 90% of the tax for such year); or (2) 100% of

the tax shown on the return for the immediately preceding taxable year (clause (2)

does not apply if the taxpayer did not file a return for the immediately preceding
                                       - 27 -

[*27] taxable year). Sec. 6654(d)(1)(B). Generally, section 6654 provides no

exception for reasonable cause. 26 C.F.R. sec. 1.6654-1(a)(1) (2012).

The IRS’s burden of production under section 7491(c) requires it to produce, for

each year for which the addition to tax is asserted, evidence that the taxpayer had a

required annual payment under section 6654(d).

      Jones made no estimated tax payments for 2007, had a tax liability for 2007,

and failed to file a 2006 tax return. Therefore, Jones had a required annual

payment for 2007 and is liable for the section 6654(a) addition to tax.

      We have considered all other arguments the parties have made, and to the

extent that we have not discussed them, we find them to be moot, irrelevant, or

without merit.

      To reflect the foregoing,


                                                An appropriate order will be issued

                                       regarding paragraphs 13 and 14 of

                                       respondent’s proposed stipulation of facts,

                                       and decision will be entered under Rule

                                       155.
