                             T.C. Summary Opinion 2019-12



                            UNITED STATES TAX COURT



                    STEVEN AUSTIN SMITH, Petitioner v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 12354-17S.                             Filed July 1, 2019.



      Steven Austin Smith, pro se.

      Huiwen A. Xi, Jamie A. Schindler, and John T. Arthur, for respondent.



                                 SUMMARY OPINION


      VASQUEZ, Judge: This case was heard pursuant to the provisions of

section 7463 of the Internal Revenue Code (Code) in effect when the petition was

filed.1 Pursuant to section 7463(b), the decision to be entered is not reviewable by


      1
          All section references are to the Code in effect for the year in issue, and all
                                                                            (continued...)
                                         -2-

any other court, and this opinion shall not be treated as precedent for any other

case.

        Respondent determined a deficiency of $7,756 in petitioner’s 2014 Federal

income tax and a section 6662(a) accuracy-related penalty of $1,551.20. The

issues for decision are: (1) whether petitioner’s exporting business was an active

trade or business for the 2014 tax year; (2) if so, whether petitioner is entitled to

deduct on a Schedule C, Profit or Loss From Business, travel expenses of $18,377,

meal and entertainment expenses of $2,790, and other expenses of $6,535; and

(3) whether petitioner is liable for the section 6662(a) accuracy-related penalty.

                                     Background

        Some of the facts have been stipulated and are so found. We incorporate

the stipulation of facts and the attached exhibits by this reference. When the

petition was timely filed, petitioner resided in Florida.

I.      Petitioner’s Background

        In 1985 petitioner earned a bachelor’s degree in chemical engineering from

Rutgers University. After a brief stint with Proctor & Gamble, petitioner began

working for PepsiCo. Petitioner started as a packaging engineer but later became

        1
       (...continued)
Rule references are to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated.
                                          -3-

a senior project manager for PepsiCo’s international division, focusing primarily

on international beverage sales. While working for PepsiCo, petitioner enrolled in

a doctoral program at Rutgers University, where he earned an M.B.A. and a Ph.D.

in strategy and international business.

      Since earning his Ph.D. in 1997, petitioner has worked as a full-time

professor of management at various universities. In 2014 petitioner was a tenure-

track professor at Southern Connecticut State University. He was also an adjunct

professor in the executive M.B.A. program at Florida Atlantic University.

II.   Vegan Worldwide

      Petitioner is also a vegan2 and an entrepreneur. In 2012, while teaching in

Brazil through an exchange program, petitioner had a difficult time obtaining

vegan food. The following year petitioner created Vegan Worldwide, LLC

(Worldwide), a Delaware limited liability company, which he formed to export

vegan food and beverage products for sale and distribution in foreign markets. In

the middle of 2013 petitioner completed his business plan for Worldwide.

      In January 2014 Worldwide entered into a private label reseller agreement

with Taft Foodmasters, LLC (Taft), under which Taft granted Worldwide an

exclusive license to sell certain Taft products in Brazil, Argentina, Colombia,

      2
          Vegans do not consume animal products; their diet is plant based.
                                       -4-

Jamaica, and the Dominican Republic. Taft produced a product called Seitan, a

wheat-based meat substitute, which Worldwide marketed under its own label.

Worldwide also had an agreement in 2014 with Butler Foods, LLC (Butler), a

domestic food manufacturer from which Worldwide purchased and marketed a

product called Soy Curls. Petitioner negotiated with several other domestic food

manufacturers in 2014 but did not finalize any agreements with them.

      During the year in issue petitioner traveled to Colombia, Brazil, Jamaica,

and the Dominican Republic, where he attended food shows and other meetings to

market Worldwide’s products to local distributors and retailers. Petitioner also

used a network of foreign business associates to market Worldwide’s products in

their countries and seek out potential customers. When he identified potential

customers, petitioner sent them samples of his products.

      Although petitioner secured an oral commitment from a hotel group in

Colombia to purchase Soy Curls in 2014, an actual deal did not materialize. In

fact Worldwide did not make any sales in 2014. Vegans represent a small (albeit

growing) percentage of the population in Worldwide’s target countries. Thus,

retailers were hesitant to clear shelf space for Worldwide’s products. Nonetheless,

Worldwide remains in business, having secured a Colombian distributor for Soy

Curls after the year in issue.
                                        -5-

III.   Tax Return and Notice of Deficiency

       Petitioner timely filed his 2014 income tax return, on which he reported

wage income of $166,424. Petitioner’s return includes a Schedule C for

Worldwide reporting a loss of $39,423. On the Schedule C petitioner reported

gross receipts or sales of $2,1253 and the following expenses:

                     Item                                  Amount

           Advertising                                     $4,402
           Legal and professional
            services                                        4,485
           Office expenses                                  2,013
           Supplies                                         1,538
           Travel                                          18,377
           Meals and entertainment                          2,790
           Utilities                                        1,408
           Other expenses1                                  6,535

       1
       This category consists of deductions of $889 for subscriptions and
memberships, $301 for service charges, $60 for education, $12 for bank fees,
$1,408 for cell phone expenses, $750 for food exports, $3,000 for a wire transfer
to a Colombian entity called Invima, $15 for wire fees, and $100 for a “Verizon
fee”.

       Respondent selected petitioner’s 2014 return for examination and timely

issued a notice of deficiency. Respondent attached to the notice of deficiency



       3
       The parties agree that Worldwide did not generate any revenue from the
export of its products in 2013 or 2014. At trial petitioner could not recall the
source of the reported gross receipts.
                                        -6-

copies of Form 4549, Income Tax Examination Changes, and Form 886-A,

Explanation of Items. The Form 4549 reveals that the deficiency arises from

respondent’s disallowance of petitioner’s Schedule C deductions for travel

expenses, meals and entertainment, and “other expenses”. Respondent also

determined that petitioner was liable for a section 6662(a) and (b)(2) accuracy-

related penalty for a substantial understatement of income tax. The parties

stipulated that the penalty “was automatically calculated through electronic means

when petitioner did not respond during [the] correspondence exam.”

      The only meaningful explanation for respondent’s disallowance of the

deductions at issue appears on the Form 886-A and reads as follows:

      We disallowed the amount shown on your return because we did not
      receive an answer to our request for supporting information. To be
      allowed a deduction, expense, exemption, credit, or other tax benefit,
      you must establish that you have met all requirements of the law. If
      you furnish the necessary information, we will be glad to reconsider
      the proposed adjustment.

      Petitioner timely petitioned this Court, and a trial was held in Miami,

Florida.
                                        -7-

                                    Discussion

I.    Burden of Proof

      Respondent argues that petitioner is not entitled to the deductions at issue

on his 2014 return because the underlying expenditures were startup expenses

under section 195. Respondent also contends that petitioner failed to substantiate

the expenses at issue.

      In general, the Commissioner’s determinations set forth in a notice of

deficiency are presumed correct, and the taxpayer bears the burden of showing that

the determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933). However, when the Commissioner relies on a basis or theory at trial

which was not stated or described in the notice of deficiency and the new basis or

theory requires the presentation of different evidence, the Commissioner has

raised a “new matter”, and the burden of proof falls on him with respect to that

new matter. Rule 142(a); Shea v. Commissioner, 112 T.C. 183, 197 (1999);

Wayne Bolt & Nut Co. v. Commissioner, 93 T.C. 500, 507 (1989). In determining

whether the Commissioner has given a taxpayer sufficient notice of his basis for

determining a deficiency, we examine a notice of deficiency in conjunction with

documents provided to a taxpayer or his representative during the examination of

the taxpayer’s return. Bitker v. Commissioner, T.C. Memo. 2003-209.
                                           -8-

      A.       Startup Expenditures

      Amounts paid or incurred in connection with creating an active trade or

business are startup expenditures. See sec. 195(c). Section 195(a) generally

precludes taxpayers from deducting startup expenditures.4

      In the matter before us, respondent’s notice of deficiency makes no mention

of section 195, the text of section 195, or the principles upon which section 195

rests. The record does not establish that respondent raised section 195 during the

examination of petitioner’s income tax return or otherwise notified petitioner that

section 195 was relevant to his determination. In fact, respondent’s allowance of

petitioner’s Schedule C deductions for advertising, legal and professional services,

office expenses, supplies, and utilities in the notice of deficiency contradicts

respondent’s section 195 argument. Accordingly, respondent’s section 195

argument is a new matter, and respondent bears the burden of proof with respect to

that argument.5 See Rule 142(a); Shea v. Commissioner, 112 T.C. at 197.


      4
       However, under sec. 195(b), taxpayers may elect to deduct for the taxable
year in which the active trade or business begins up to $5,000 of startup
expenditures, reduced by the amount by which those expenditures exceed $50,000.
The remainder is allowable as a deduction ratably over the 180-month period
beginning with the month in which the active trade or business begins. Sec.
195(b).
      5
          Respondent first raised the sec. 195 issue in his pretrial memorandum, and
                                                                          (continued...)
                                        -9-

      B.     Substantiation

      Taxpayers must maintain records sufficient to enable the Commissioner to

determine their correct tax liability. Sec. 6001; Higbee v. Commissioner, 116 T.C.

438, 440 (2001); sec. 1.6001-1(a), Income Tax Regs. Taxpayers must “keep such

permanent books of account or records * * * as are sufficient to establish the

amount of gross income, deductions, credits, or other matters required to be shown

by such person in any return of such tax or information.” Sec. 1.6001-1(a),

Income Tax Regs.

      The notice of deficiency in this matter, combined with information on the

attached Form 4549 and Form 886-A, adequately reveals that respondent

disallowed petitioner’s Schedule C deductions because of petitioner’s failure to

substantiate the underlying expenses. The Form 886-A states that respondent

disallowed the Schedule C expense amounts shown on petitioner’s 2014 return

because petitioner failed to provide respondent with “supporting information”.

See supra p. 6. The Form 886-A also states that petitioner “must establish that

* * * [his claimed deductions have] met all requirements of the law.” This

substantially corresponds with the text and principles of section 6001 and the

      5
        (...continued)
petitioner did not object. Accordingly, we find that the issue was tried by consent.
See Rule 41(b).
                                         - 10 -

regulations issued thereunder. Petitioner therefore bears the burden of proof with

respect to substantiating his claimed business deductions.6 See Rule 142(a).

II.   Schedule C Deductions

      A.     Startup Expenditures

      We first address whether Worldwide’s expenses were nondeductible startup

expenditures during the year in issue.

      Taxpayers may neither deduct nor amortize startup expenditures if the

activities to which the expenditures relate fail to become an “active trade or

business”. See sec. 195(a), (c). Congress, through section 195(c)(2)(A),

authorized the Secretary to issue regulations to guide the determination of when an

active trade or business begins. No such regulations have yet been issued.

      In determining when an activity becomes an “active trade or business” for

the purpose of section 195(a), this Court has sought guidance from cases

interpreting the “engaged in a trade or business” requirement for deduction under

section 162. Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987); see Yapp v.

      6
       Sec. 7491(a) provides that if, in any Court proceeding, “a taxpayer
introduces credible evidence with respect to any factual issue relevant to
ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B”
and meets other prerequisites, the Commissioner shall have the burden of proof
with respect to that issue. Higbee v. Commissioner, 116 T.C. 438, 440-441
(2001). However, petitioner has neither claimed nor shown that he satisfied the
requirements of sec. 7491(a) to shift the burden of proof to respondent.
                                        - 11 -

Commissioner, T.C. Memo. 2018-147, at *14; Weaver v. Commissioner, T.C.

Memo. 2004-108. For the purpose of section 162, the U.S. Supreme Court has

held that the question of whether a taxpayer is “engaged in a trade or business”

requires examination of the facts in each particular case. Commissioner v.

Groetzinger, 480 U.S. at 36. To be engaged in a trade or business, a taxpayer

must: (1) undertake an activity intending to make a profit, (2) be regularly and

actively involved in the activity, and (3) actually have commenced business

operations. McManus v. Commissioner, T.C. Memo. 1987-457, aff’d without

published opinion, 865 F.2d 255 (4th Cir. 1988). Respondent does not dispute

that petitioner satisfied the first and second of these requirements but contends that

Worldwide did not commence business operations in 2014.

      A taxpayer is not engaged in a trade or business “until such time as the

business has begun to function as a going concern and performed those activities

for which it was organized.” Richmond Television Corp. v. United States, 345

F.2d 901, 907 (4th Cir. 1965), vacated and remanded on other grounds, 382 U.S.

68 (1965). An enterprise need not have generated sales or other revenue to have

begun to carry on a business. Cabintaxi Corp. v. Commissioner, 63 F.3d 614, 620

(7th Cir. 1995), aff’g in part, rev’g in part, and remanding T.C. Memo. 1994-316;

Jackson v. Commissioner, 864 F.2d 1521, 1526 (10th Cir. 1989), aff’g 86 T.C. 492
                                        - 12 -

(1986). However, mere research into or investigation of a potential business is

insufficient to demonstrate that a taxpayer is engaged in a trade or business. Dean

v. Commissioner, 56 T.C. 895, 902-903 (1971).

      The record in this case establishes that petitioner, through Worldwide, was

actively engaged in the trade or business of selling vegan products in Colombia,

Brazil, Jamaica, and the Dominican Republic during 2014. In 2013 petitioner

completed his business plan for Worldwide, according to which he would

purchase vegan products from domestic manufacturers and sell them for a profit in

certain foreign countries. During 2014 petitioner had an agreement with Butler,

which permitted Worldwide to sell and market Butler’s Soy Curls product in

foreign countries. Worldwide also received an exclusive license from Taft to sell

Seitan products in Brazil, Argentina, Colombia, Jamaica, and the Dominican

Republic in the beginning of 2014.

      Having secured products to sell, petitioner actively marketed those products

in several foreign countries through his own efforts and those of business

associates. Petitioner credibly testified that he attended food shows and other

meetings in Colombia, Brazil, Jamaica, and the Dominican Republic, where he

provided samples of Worldwide’s products to local distributors and retailers.

Petitioner also credibly testified that he used a network of foreign business
                                        - 13 -

associates to market Worldwide’s products and find potential customers. The

record in this case includes emails that corroborate petitioner’s extensive efforts to

sell Worldwide’s products.

       Respondent, who bears the burden of proof on this issue, has not persuaded

us that Worldwide did not have the capability to export vegan products in 2014 or

that petitioner’s activities for Worldwide amounted to mere research into a

potential business. Accordingly, Worldwide’s expenditures for 2014 are not

subject to the limitations of section 195.

       B.    Substantiation

       We next address whether petitioner substantiated the Schedule C expenses

at issue.

       Deductions are a matter of legislative grace, and taxpayers generally bear

the burden of proving that they are entitled to any deductions claimed. Rule

142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial

Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). Taxpayers must maintain

sufficient records to enable the Commissioner to determine their correct tax

liability. Sec. 6001.

       Section 162 generally allows a deduction for ordinary and necessary

expenses paid or incurred during the taxable year in carrying on a trade or
                                          - 14 -

business. A trade or business expense is ordinary if it is normal or customary

within a particular trade, business, or industry; and it is necessary if it is

appropriate and helpful for the development of the business. Commissioner v.

Heininger, 320 U.S. 467, 471 (1943); Welch v. Helvering, 290 U.S. at 113-114.

Such expenses must be directly connected with or pertain to the taxpayer’s trade or

business. Sec. 1.162-1(a), Income Tax Regs.

      Generally, no deduction is allowed for personal, living, or family expenses

nor for expenditures that are properly categorized as capital expenditures. See

secs. 262 and 263. The determination of whether an expenditure satisfies the

requirements of section 162 is a question of fact. Commissioner v. Heininger, 320

U.S. at 475.

      When a taxpayer establishes that he has incurred deductible expenses but is

unable to substantiate the exact amounts, we can estimate the deductible amount,

but only if the taxpayer presents sufficient evidence to establish a rational basis for

making the estimate (Cohan rule). See Cohan v. Commissioner, 39 F.2d 540,

543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

In estimating the amount allowable, we bear heavily against the taxpayer whose

inexactitude is of his own making. See Cohan v. Commissioner, 39 F.2d at 544.
                                        - 15 -

      For certain kinds of business expenses, section 274(d) overrides the Cohan

rule. See Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968), aff’d per

curiam, 412 F.2d 201 (2d Cir. 1969). Section 274(d) provides that no deduction is

allowed with respect to travel, entertainment, or listed property (as defined in

section 280F(d)(4)) unless the taxpayer substantiates by adequate records or by

sufficient evidence corroborating the taxpayer’s own statement (1) the amount of

expense or item, (2) the time and place of the travel, entertainment, or expense,

(3) the business purpose of the entertainment or expense, and (4) the business

relationship to the taxpayer of the person or persons entertained.

      To substantiate by adequate records, the taxpayer must provide (1) an

account book, log, or similar record prepared at or near the time of the expenditure

and (2) documentary evidence, which together are sufficient to establish each

element of an expenditure. Sec. 1.274-5T(c)(2), Temporary Income Tax Regs., 50

Fed. Reg. 46017 (Nov. 6, 1985). Documentary evidence includes receipts, paid

bills, or similar evidence. Sec. 1.274-5(c)(2)(iii), Income Tax Regs. To

substantiate by sufficient evidence corroborating the taxpayer’s own statement, the

taxpayer must establish each element by his or her own statement and by

documentary evidence or other direct evidence. Sec. 1.274-5T(c)(3)(i), Temporary

Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985). To establish the business
                                       - 16 -

purpose of an expenditure, however, a taxpayer may corroborate his or her own

statement with circumstantial evidence. Id.

             1.    Travel Expenses

      Petitioner claimed a travel expense deduction of $18,377, which respondent

disallowed in full. At trial petitioner produced a summary7 of his Worldwide-

related expenses, 16 hotel invoices, an agenda relating to several supermarket

visits in Cali, Colombia, two flight confirmations, and several emails. Petitioner

testified generally about his business travel for Worldwide; he also testified about

the specific business trips for which he produced invoices.

      Respondent concedes on brief that petitioner substantiated $183.32

pertaining to a trip to Cali and $92.62 pertaining to a trip to Medellin, Colombia.

With respect to the remaining reported travel expenses, respondent does not

dispute the amounts but contends that petitioner failed to substantiate the business

purposes of the trips and the places of travel. With the exception of one additional

expense, we agree with respondent.

      One of the hotel invoices in the record shows that petitioner paid $149.17

for a hotel in New Orleans in February 2014. At trial petitioner credibly testified


      7
       Petitioner testified that he created the summary in 2015 for purposes of
preparing his 2014 return.
                                        - 17 -

that the business purpose of this trip was to meet a potential supplier of coffee.

The record includes an email from petitioner to a business associate referencing

this particular meeting. We find this email to be credible circumstantial evidence

of the business purpose of the trip. Furthermore, the invoice establishes the

amount of the expense and the time and place of travel. We therefore find that

petitioner substantiated $149.17 in travel expenses by sufficient evidence

corroborating his own statement.

      As for the remaining reported travel expenses, petitioner failed to

substantiate the business purposes of his trips by adequate records or by sufficient

evidence corroborating his own statement. Petitioner’s expense summary does not

satisfy the adequate records test because it was not prepared at or near the times of

the reported expenditures. Neither the summary nor the hotel invoices specify the

business purposes of the reported expenditures. With the exception of the above-

described trips to Colombia and New Orleans, the record lacks direct or

circumstantial evidence of the business purpose for each reported expenditure.

The record also lacks documentary evidence, such as receipts, for most of the

entries in petitioner’s summary.

      We do not doubt that petitioner’s stewardship of Worldwide required

extensive travel during 2014. However, other than travel expenses of $425.11, we
                                         - 18 -

find that he has not met the strict substantiation requirements of section 274(d).

Accordingly, petitioner is not entitled to deduct travel expenses in excess of

$425.11.

              2.     Meals

        Petitioner claimed a deduction of $2,790 for meals and entertainment after

the 50% limitation under section 274(n). Respondent disallowed the deduction in

full.

        As with travel expenses, expenses for meals and entertainment are subject to

strict rules of substantiation. See sec. 274(d); Sanford v. Commissioner, 50 T.C.

at 827; sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov.

6, 1985).

        To substantiate his expenses for meals and entertainment, petitioner relies

on his expense summary. The summary, which he created in 2015, is not an

adequate record because it was not prepared at or near the times of the reported

expenditures. Furthermore, the summary lacks information about the business

purpose of each expense and the business relationship of petitioner to the person

or persons who were entertained.

        We therefore hold that petitioner is not entitled to a deduction for meals and

entertainment.
                                       - 19 -

            3.     Other Expenses

      Respondent also disallowed petitioner’s deduction of $6,535 for other

expenses. That deduction comprises the following reported expenditures:

                  Item                                     Amount

       Subscription and membership                          $889
       Service charges                                        301
       Education                                               60
       Bank fees                                               12
       Cell phone                                           1,408
       Food export fees                                       750
       Invima registration fee                              3,000
       Invima wire fee                                         15
       Verizon fees                                           100

      On brief respondent concedes that petitioner substantiated the “Invima

registration fee” of $3,000, the “Invima wire fee” of $15, and food export fees of

$750. We accept respondent’s concessions and find that petitioner has

substantiated other expenses of $3,765.

      Respondent contends that petitioner failed to substantiate the remainder of

the reported expenses. We agree.

      Petitioner did not testify about his reported expenditures for subscription

and membership, service charges, education, bank fees, and Verizon fees. While

petitioner’s summary contains breakdowns of those expense categories, the entries

therein are vague and give us no indication of how the expenditures pertained to
                                        - 20 -

Worldwide’s trade or business. For example, one of the subscription and

membership charges in the summary is described as “GS1 US US-09374353870-

NJ”. Without petitioner’s testimony or other evidence, we have no way of

knowing how this expense was an ordinary and necessary business expense of

Worldwide.

       With respect to petitioner’s reported cell phone expense of $1,408, we note

that respondent allowed a Schedule C deduction for utilities in that same amount.

At trial petitioner acknowledged that the reported cell phone expense at issue

might be a duplicate deduction. In the light of this admission and the lack of

evidentiary support for the expense in the record, we find that petitioner is not

entitled to deduct his reported cell phone expenditures.

       We therefore conclude that petitioner is not entitled to a deduction for other

expenses in excess of the amount respondent has conceded.

III.   Accuracy-Related Penalty

       Finally we address whether petitioner is liable for an accuracy-related

penalty under section 6662(a). The notice of deficiency contains a boilerplate

statement that the underpayment of tax is attributable to four alternative causes:

(1) negligence or disregard of rules or regulations, (2) substantial understatement

of income tax, (3) substantial valuation misstatement (overstatement), or
                                       - 21 -

(4) transaction lacking economic substance. However, throughout this litigation,

respondent has argued that petitioner is subject to the section 6662(a) penalty only

for a substantial understatement of income tax.8

      Section 6662(a) and (b)(2) provides that a taxpayer will be liable for a

penalty equal to 20% of the portion of an underpayment of tax attributable to a

substantial understatement of income tax. Section 6662(d)(1)(A) provides that an

understatement of income tax is substantial if the amount of the understatement

exceeds the greater of (1) 10% of the tax required to be shown on the return or

(2) $5,000.

      The Commissioner bears the burden of production with respect to the

accuracy-related penalty under section 6662 and must produce sufficient evidence

to establish that it is appropriate to impose such a penalty.9 Sec. 7491(c); Higbee


      8
       Having failed to address on brief the other three justifications for the
penalty listed in the deficiency notice, respondent has abandoned them. See
Thiessen v. Commissioner, 146 T.C. 100, 106 (2016) (“[I]ssues and arguments not
advanced on brief are considered to be abandoned.”).
      9
        The Commissioner’s burden of production generally includes establishing
compliance with the written supervisory approval requirement of sec. 6751(b)(1).
Graev v. Commissioner, 149 T.C. 485, 493 (2017), supplementing and overruling
in part 147 T.C. 460 (2016); see also Chai v. Commissioner, 851 F.3d 190, 222
(2d Cir. 2017) (citing Higbee v. Commissioner, 116 T.C. at 446), aff’g in part,
rev’g in part T.C. Memo. 2015-42. Sec. 6751(b) requires written supervisory
approval of the initial determination of certain penalties. However, this provision
                                                                       (continued...)
                                        - 22 -

v. Commissioner, 116 T.C. at 446. If the Commissioner satisfies his burden, the

taxpayer then bears the ultimate burden of persuasion. See Higbee v.

Commissioner, 116 T.C. at 446-447. The taxpayer may meet his burden by

proving that he acted with reasonable cause and in good faith with respect to the

underpayment. See sec. 6664(c)(1); see also Higbee v. Commissioner, 116 T.C. at

448; sec. 1.6664-4(b)(1), Income Tax Regs.

      The accuracy-related penalty is not imposed with respect to any portion of

the underpayment as to which the taxpayer shows that he acted with reasonable

cause and good faith. Sec. 6664(c)(1); Higbee v. Commissioner, 116 T.C. at 448.

Generally, the most important factor is the extent of the taxpayer’s effort to assess

his proper tax liability. Sec. 1.6664-4(b)(1), Income Tax Regs. Reliance upon the

advice of a tax professional may establish reasonable cause and good faith for the

purpose of avoiding liability for the section 6662(a) penalty. See United States v.


      9
       (...continued)
does not apply to a “penalty automatically calculated through electronic means.”
Sec. 6751(b)(2)(B). Because the parties stipulated that the penalty at issue was
automatically calculated through electronic means, respondent need not show
compliance with sec. 6751(b) to meet his burden of production. See also Walquist
v. Commissioner, 152 T.C. __, __ (slip op. at 20) (Feb. 25, 2019) (concluding that
a substantial understatement penalty under sec. 6662 that was “determined by an
IRS computer program without human input or review” was a “penalty
automatically calculated through electronic means” within the meaning of sec.
6751(b)(2)(B)).
                                        - 23 -

Boyle, 469 U.S. 241, 250-251 (1985). Whether reasonable cause exists when a

taxpayer has relied on a tax professional to prepare a return must be determined on

the basis of all the facts and circumstances. See Neonatology Assocs., P.A. v.

Commissioner, 115 T.C. 43, 98 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002).

      This Court has stated that reasonable cause and good faith are present where

the record establishes by a preponderance of the evidence that: (1) the taxpayer

reasonably believes that the professional upon whom the reliance is placed is a

competent tax adviser who has sufficient expertise to justify reliance, (2) the

taxpayer provides necessary and accurate information to the adviser, and (3) the

taxpayer actually relies in good faith on the adviser’s judgment. Id. at 99.

      If the Rule 155 computation confirms a substantial understatement for the

taxable year in issue, then respondent has met his burden of producing evidence

that the penalty is justified. See sec. 7491(c); Higbee v. Commissioner, 116 T.C.

at 446.

      Petitioner, on the other hand, has not offered any evidence that he acted

with reasonable cause. While his testimony includes a brief mention of an

“accountant”, he did not describe that person or offer any details about their

exchange of information. We are therefore unable to conclude that petitioner

provided necessary and accurate information to a competent tax adviser.
                                       - 24 -

      Accordingly, in the event the Rule 155 computation shows that petitioner’s

understatement of income tax exceeds the greater of $5,000 or 10% of the amount

of tax required to be shown on the return, we conclude that the underpayment is

attributable to a substantial understatement of income tax for which he has not

shown reasonable cause.

      We have considered all of the arguments made by the parties and, to the

extent they are not addressed herein, we find them to be moot, irrelevant, or

without merit.

      To reflect the foregoing,


                                                Decision will be entered under

                                      Rule 155.
