                                T.C. Memo. 2013-65


                         UNITED STATES TAX COURT



                  VLADIMIR GOROKHOVSKY, Petitioner v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 24015-10.                           Filed February 28, 2013.



      Vladimir Gorokhovsky, pro se.

      Frederic J. Fernandez and Mark J. Miller, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


      GOEKE, Judge: Respondent determined deficiencies and accuracy-related

penalties under section 6662(a)1 for petitioner’s taxable years 2006, 2007, and 2008

as follows:


      1
       Unless otherwise indicated, all section references are to the Internal Revenue
Code (Code) in effect for the years at issue. All Rule references are to the Tax
Court Rules of Practice and Procedure.
                                        -2-

           [*2]
                                                           Accuracy-related penalty
           Year                       Deficiency                sec. 6662(a)
           2006                        $55,153                   $11,030.60
           2007                          89,567                    17,913.40
           2008                          55,938                    11,187.60

The deficiencies stem from respondent’s disallowance of various expenses and costs

of goods sold petitioner reported on his Schedule C, Profit or Loss From Business,

for each of the years at issue. Respondent also adjusted petitioner’s income to

account for certain alleged unreported items of income for each of the years at issue.

We must determine:2

      (1) whether petitioner may deduct Schedule C expenses, related to his law

practice, of $132,162, $145,536, and $112,164 for taxable years 2006, 2007, and

2008, respectively.3 We hold that petitioner may deduct some of those expenses;




      2
        Our determinations result in corresponding computational adjustments to
petitioner’s self-employment tax liability.
      3
        Following trial, respondent conceded $400 in supply expenses for
petitioner’s taxable year 2006 and $257 in office expenses for taxable year 2007.
Respondent also conceded $844 in either supply expenses or office expenses for
taxable year 2008; the exact item is unclear from respondent’s posttrial brief.
                                                 -3-

[*3] (2) whether petitioner may deduct Schedule C expenses related to his then

wife’s sale of skin care products4 of $4,477 and $4,018 for taxable years 2006 and

2007, respectively. We hold that he may not;

          (3) whether petitioner may deduct Schedule C depreciation related to his

import-export business, Gorokhovsky Imports, of $7,807 and $7,863 for taxable

years 2006 and 2007, respectively. We hold that he may not;

          (4) whether petitioner failed to report gross receipts from his law practice of

$40,894, $122,425, and $88,779 for taxable years 2006, 2007, and 2008,

respectively.5 We hold that petitioner failed to report some of those receipts;

          (5) whether petitioner failed to report interest income of $5, $4, and $49 for

taxable years 2006, 2007, and 2008, respectively. We find that respondent

conceded this issue on brief; and,

          (6) whether petitioner is liable for accuracy-related penalties under section

6662(a) for taxable years 2006, 2007, and 2008. We hold that petitioner is so

liable.




          4
              Petitioner jointly filed his tax returns for the taxable years at issue.
          5
       Following trial, respondent conceded that petitioner accurately reported
deposits of $7,034.29 and $16,279.47 for taxable years 2007 and 2008,
respectively.
                                         -4-

[*4]                            FINDINGS OF FACT

       At the time petition was filed, petitioner resided in Wisconsin.

       Petitioner, an attorney since 2002, has maintained a solo practice in

Wisconsin and the Northern District of Illinois. Specializing in criminal defense and

aviation law, petitioner practices out of an office subleased from a law firm in

Milwaukee, Wisconsin, and, purportedly, in a home office in Mequon, Wisconsin.

He also maintains a condominium in Chicago which he uses primarily to facilitate

his Federal law practice in a nearby Federal court. In addition to his law degree,

petitioner has undergraduate degrees in accounting and business administration.

       During the years at issue petitioner was married to Larissa Ocheretner. Ms.

Ocheretner allegedly operated a skin care product business in 2006 and 2007.

Petitioner managed his import-export business, Gorokhovsky Imports, during those

two years as well.

       Petitioner filed his taxable year 2006 and 2007 returns with three separate

Schedules C: the first (Schedule C1) related to Gorokhovsky Imports; the second

(Schedule C2) related to his law practice; and the third (Schedule C3) related to Ms.

Ocheretner’s skin care product business. Petitioner filed his taxable year 2008

return with only a Schedule C2.
                                        -5-

[*5] I. Schedule C1--Gorokhovsky Imports

      On petitioner’s 2006 and 2007 Schedules C1, he claimed depreciation and

cost of goods sold deductions for his import business in the following amounts:

            Item                       2006                           2007
 Depreciation and sec.
   179 expense deduction                $807                          $527
 Cost of goods sold                    7,000                          7,336

Respondent disallowed all petitioner’s claimed deductions.

II. Schedule C2--Petitioner’s Law Practice

      In connection with his law practice, petitioner claimed a $139,199 business

expense deduction on his 2006 Schedule C2. Respondent disallowed $132,162 of

this amount. Respondent also disallowed all of petitioner’s claimed business

expense deductions totaling $146,536 and $112,164 reported on his 2007 and 2008

Schedules C2, respectively. The following table demonstrates the composition of

respondent’s negative adjustments:

       Expense                                 2006          2007             2008
 Travel                                        $6,664        $9,493           $2,270
 Taxes and licenses                             6,384         -0-              -0-
 Repairs and maintenance                        7,168         8,123           2,276

 Interest--other                                 340         2,129              139
                                     -6-

[*6] Insurance (other than health)          4,359    4,752   10,050
Advertising                                 1,303     700     9,932
Business use of home                       10,445    7,615   11,954
Office                                     21,583   22,996   20,099
Depreciation and sec. 179                  17,445    8,392    4,557
Car and truck                               2,990   18,534    6,975
Other--tools                                1,105     -0-      -0-
Other--telephone                            3,138    3,124    5,396
Other--storage                              1,086    1,099     -0-
Other--printing                             1,456    1,587     -0-
Other--postage                               469     1,970    1,154
Other--parking                              5,211    4,328    2,918
Other--outside services                    18,018    5,369     -0-
Other-misc.                                 1,562     -0-      -0-
Other--license                               400        50      50
Other--laundry                               774     1,316     -0-
Other--filing fees                           369     1,448   3,902
Other--education                           10,126    1,405   2,016
Other--client                               3,675    8,783   1,356
Other--books                                 935      -0-      -0-
Other--bank charges                          820      674    1,207
Accounting                                   265      300      350
Meals and entertainment                     4,372    1,817   2,511
Utilities                                    -0-     1,880     -0-
                                          -7-

 [*7] Supplies                                      -0-        10,715         2,078
 Legal and professional services                    -0-         2,737         4,388
 Other--dues                                        -0-         2,853         3,497
 Rent/lease--other business property                -0-        11,090         8,484
 Other--janitorial                                  -0-           -0-         1,164
 Other--client settlements                          -0-           -0-         2,597

         At trial petitioner produced Excel spreadsheets listing the monthly sums for

each category of expense reported on his Schedules C2. Petitioner meticulously and

contemporaneously maintained these documents so that he could monitor the

financial health of his law practice. The spreadsheets, however, neither itemize

expenses nor provide details as to the nature of any expenditure. Petitioner also

offered at trial monthly bank statements, credit card statements, and copies of

canceled checks and check registers.

         Regarding his car and truck expenses, petitioner produced coded mileage logs

which list the starting point and destination of each of his business trips and the

distance traveled between such points.

         Respondent also determined that petitioner had unreported income from

his law practice for each of the years at issue and correspondingly adjusted

result of several unidentified deposits in petitioner’s bank accounts during those

years.
                                         -8-

[*8] III. Schedule C3--Ms. Ocheretner’s Skin care Product Business

      On his taxable year 2006 and 2007 Schedules C3, petitioner claimed business

expense deductions of $4,477 and $4,018, respectively, for his then wife’s skin care

product business. Respondent disallowed those claimed deductions. The following

table demonstrates the composition of respondent’s negative adjustments:

            Expense                     2006                         2007
 Other expenses                         $118                          -0-
 Taxes and licenses                      149                          -0-
 Supplies                                387                          -0-
 Rent/lease--other
  business property                    1,381                          -0-
 Car and truck                         1,363                          -0-
 Cost of goods sold                      699                       $3,638
 Depreciation and sec.
   179                                   380                          380

      As with his attempt to substantiate his law practice expenses, petitioner

produced Excel spreadsheets listing the monthly sum of each category of expense

reported on his Schedules C3 at trial. The spreadsheets again neither itemized

expenses nor provided details as to the nature of any of petitioner’s expenditures.
                                           -9-

[*9] IV. Interest Income

       Respondent adjusted petitioner’s interest income to purportedly reflect

amounts shown on Forms 1099-INT, Interest Income. These adjustments resulted

in increases in interest income of $5, $4, and $49 for taxable years 2006, 2007, and

2008, respectively.

V. Procedural Matters

       Petitioner produced several documents at trial in an attempt to substantiate his

claimed deductions and evidence that certain items of income were not earned

during the years at issue. We repeatedly apprised petitioner of the importance of

correlating the expenses listed on such documents with the deductions claimed on

his tax returns and fully articulating on brief his position regarding the alleged

unreported items of income. At trial petitioner requested and was granted additional

time to prepare his posttrial briefs. We also advised petitioner that absent unforseen

circumstances we would not further extend the filing deadline. Following trial,

petitioner filed a posttrial motion to extend time to file a trial brief citing his health

as interfering with his ability to meet set deadlines. We granted petitioner’s motion;

however, he failed to file a posttrial brief on the ensuing extended filing date or at

any point thereafter.
                                         - 10 -

[*10]                                   OPINION

        The Commissioner’s determinations in a notice of deficiency are presumed

correct, and taxpayers bear the burden of proving that the Commissioner’s

determinations are incorrect. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111,

115 (1933).6 Under section 7491(a), if the taxpayer produces credible evidence

with respect to any factual issue relevant to ascertaining the taxpayer’s liability for

tax and meets other requirements, the burden of proof shifts from the taxpayer to the

Commissioner as to that factual issue. Petitioner has neither alleged that




        6
        On rare occasions this Court has recognized an exception to these rules in
cases involving unreported income where the Commissioner introduces no
substantive evidence but relies solely on the presumption of correctness. Jackson v.
Commissioner, 73 T.C. 394, 401 (1979). In such cases, if the taxpayers challenge
the notice of deficiency on the ground that it is arbitrary, then the determination is
treated as a “naked” assessment and the presumption of correctness does not attach.
Id. However, this is a limited exception, and it does not apply when the
Commissioner has provided a minimal evidentiary foundation. Petzoldt v.
Commissioner, 92 T.C. 661, 687-688 (1989); Fankhanel v. Commissioner, T.C.
Memo. 1998-403, 1998 Tax Ct. Memo LEXIS 424, aff’d without published
opinion, 205 F.3d 1333 (4th Cir. 2000).

       Presently, respondent relies on bank deposits to determine petitioner’s
unreported income for the years in issue. “A bank deposit is prima facie evidence
of income and respondent need not prove a likely source of that income.” Tokarski
v. Commissioner, 87 T.C. 74, 77 (1986) (citing Estate of Mason v. Commissioner,
64 T.C. 651, 656-657 (1975), aff’d, 566 F.2d 2 (6th Cir. 1977)). Accordingly, the
limited exception does not apply in this case.
                                        - 11 -

[*11] section 7491(a) applies nor established his compliance with its requirements.

Therefore, the burden of proof remains on petitioner.7

I. Deductions

      Section 162(a) provides a deduction for certain business-related expenses. In

order to qualify for the 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);

Deputy v. du Pont, 308 U.S. 488, 495 (1940) (to qualify as “ordinary”, the expense

must relate to a transaction “of common or frequent occurrence in the type of

business involved”). Whether an expense is ordinary is determined by time, place,

and circumstance. Welch v. Helvering, 290 U.S. at 113-114. Taxpayers also must

maintain sufficient records to substantiate their deductions. See sec. 6001; Petzoldt

v. Commissioner, 92 T.C. 661, 686 (1989); see also Hradesky v. Commissioner, 65

T.C. 87 (1975), aff’d, 540 F.2d 821 (5th Cir. 1976).



      7
        As noted supra, petitioner failed to file a posttrial brief. Accordingly, it is
within our discretion to dismiss this case entirely. See Rules 123, 151(a); Stringer
v. Commissioner, 84 T.C. 693, 704-708 (1985), aff’d without published opinion,
789 F.2d 917 (4th Cir. 1986). However, we will decide the case on the merits. See,
e.g., D’Errico v. Commissioner, T.C. Memo. 2012-149, 2012 Tax Ct. Memo
LEXIS 149, at *17-*18.
                                         - 12 -

[*12] Certain expenses described in section 274 are subject to strict substantiation

rules. No deductions are allowed for, among other things, traveling expenses

(including meals and lodging away from home), entertainment expenses, gifts, and

expenses with respect to “listed property” 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 the expense or other item; (2) the

time and place of the travel, entertainment or use, or date and description of the gift;

(3) the business purpose of the expense or other item; and (4) in the case of

entertainment or gifts, the business relationship to the taxpayer of the recipients or

persons entertained. Sec. 274(d). If a taxpayer cannot satisfy the substantiation

burden imposed by section 274(d) with respect to an expense to which it applies, he

fails to carry his burden of establishing that he is entitled to deduct that expense,

regardless of any equities involved. Id.; Nicely v. Commissioner, T.C. Memo.

2006-172, 2006 Tax Ct. Memo LEXIS 174, at *7-*8; sec. 1.274-5T(a), Temporary

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

      Nonetheless, with respect to expenses not covered by section 274(d), this

Court may estimate the amount of allowable deductions where there is evidence
                                         - 13 -

[*13] that deductible expenses were incurred. Cohan v. Commissioner, 39 F.2d

540, 543-544 (2d Cir. 1930). In order to do so, however, we must have some

rational basis upon which to make such an estimate. Vanicek v. Commissioner, 85

T.C. 731, 742-743 (1985). In estimating the amount allowable, we bear heavily

against the taxpayer where the inexactitude of the record is of his or her own

making. See Cohan v. Commissioner, 39 F.2d at 544.

      A. Schedule C2: Petitioner’s Law Practice

             1. General Business Deductions

      Petitioner produced numerous bank statements, canceled checks, check

registers, contemporaneous personal records, credit card statements, and Excel

spreadsheets in an attempt to substantiate his reported business expenses. We

indicated the probative limitations of petitioner’s isolated, nonitemized Excel

spreadsheets in a previous, similar matter before the Court. See Gorokhovsky v.

Commissioner, T.C. Memo. 2012-206, 2012 Tax Ct. Memo 208, at *11-*13. In the

present case, however, petitioner supplemented his Excel spreadsheets with

further supportive documentation. Nonetheless, petitioner made no attempt to use

the evidence in the record to brief his legal position following trial. While we need

not undertake the work of sorting through every piece of evidence petitioner

provided in an attempt to find support for his ultimate legal positions, see, e.g.,
                                         - 14 -

[*14] Hale v. Commissioner, T.C. Memo. 2010-229, 2010 WL 4120880, at *2

(refusing to sort through 317 pages of disorganized evidence in an attempt to

determine whether a taxpayer provided adequate substantiation when that taxpayer

failed to file a brief), petitioner’s canceled checks and/or check registers clearly

substantiate certain business expenses he incurred for his law practice in the taxable

years at issue. In particular, petitioner’s Continental Bank account records evidence

substantiated expenses of $12,066.18 for taxable year 2006, see infra app. A,

$7,405 for taxable year 2007, see infra app. B), and $5,544.97 for taxable year

2008, see infra app. C. Petitioner’s Wells Fargo account records also evidence

additional substantiated expenses of $4,269.38 for taxable year 2006.

See infra app. D.8 Petitioner may correspondingly deduct these amounts pursuant to

section 162.




      8
       Petitioner submitted a Wells Fargo account check register for his taxable
year 2007 which superficially demonstrates that he made certain expenditures
during that year; however, the corresponding canceled checks were not offered into
evidence. While we find elsewhere that various other check registers showing
expenditures in other years supported deductions even though certain canceled
checks were not before the Court, those other registers on a whole were congruous
with the catalog of canceled checks from the corresponding accounts. We cannot
ascribe the same credibility to the 2007 Wells Fargo account check register without
any correlative documentation.
                                         - 15 -

[*15] Notwithstanding this finding, most of petitioner’s general business deductions

remain unsubstantiated. Though we may estimate additional expenses if we have a

rational basis to do so, see Vanicek v. Commissioner, 85 T.C. at 742-743, the

record before us does not permit us to formulate reasoned conclusions as to

petitioner’s incurred expenses.

             2. Home Office Deduction

      Section 280A generally provides that no deduction otherwise allowable shall

be allowed with respect to the business use of a taxpayer’s residence. Sec.

280A(a). However, as relevant to this case, a deduction may be allowed to the

extent it is allocable to a portion of a dwelling unit which is exclusively used on a

regular basis as: (1) the principal place of business for any trade or business of the

taxpayer; or (2) a place of business which is used by patients, clients, or customers

in meeting or dealing with the taxpayer in the normal course of his trade or business.

Sec. 280A(c)(1)(A) and (B).

      Petitioner maintains that he used an office located in the basement of his

home as his principal place of business.9 The evidence concerning this point is


      9
        Petitioner did not assert at trial that expenses related to his condominium in
Chicago qualified as a deduction pursuant to sec. 280A(c)(1). Furthermore, it is
unclear from the record whether petitioner ever claimed an expense deduction
related to the Chicago condominium.
                                         - 16 -

[*16] limited to petitioner’s testimony that the office has a law library and “four

computers”. No evidence was submitted demonstrating the nature or extent of the

work performed in the basement, whether petitioner met clients there, or any other

facts which might shed light on the purported business use of the area. Furthermore,

petitioner admitted that he subleased a separate office in Milwaukee for his law

practice and offered no evidence to negate the inference that office functioned as his

principal place of business. According to the limited record in this case, we cannot

find that petitioner is entitled to home office deductions pursuant to section

280A(c)(1) for the years at issue.10

             3. Meal and Travel Expenses

      Petitioner’s reported meal and travel expenses are subject to heightened

substantiation requirements, noted supra. See sec. 274(d)(1). Petitioner failed to

adduce any evidence purporting to substantiate his meal expenses for the years at

issue. Without any corroborative documentation, we find that petitioner has failed

to substantiate these expenses.

      10
         The flush language of sec. 280A indicates that the term “principal place of
business” includes “a place of business which is used by the taxpayer for the
administrative or management activities of any trade or business of the taxpayer if
there is no other fixed location of such trade or business where the taxpayer
conducts substantial administrative or management activities of such trade or
business.” There is no evidence in the record indicating that petitioner performed
any administrative or management activities in his home basement.
                                        - 17 -

[*17] However, petitioner meticulously maintained coded travel logs which

superficially support his travel expense deductions.11 Following trial, petitioner

submitted additional documentation which supplements his logs and expressly

articulates the business purpose of each of his business trips. Each entry in

petitioner’s submitted records is categorized into one of three codes. At trial

petitioner explained that “code 1” represented travel from his home to his subleased

office in Milwaukee or the Milwaukee county courthouse; “code 2” represented

travel from his condo in Chicago to the Daley Center or to a Federal courthouse;

and, “code 3” represented all other business travel neither originating nor

concluding at his home. We find that petitioner’s entries labeled “code 2”12 and

“code 3” in Exhibits 58-J, 60-J, and 66-J specify the time, place, and business



      11
         When respondent questioned petitioner about two random items on the 2006
mileage spreadsheet, petitioner, unable to quickly cross-reference other
documentation immediately available, admitted that those specific mileage log
entries were in error; however, we do not believe such minor errors infect the
entirety of the logs.
      12
         A taxpayer may deduct travel expenses that are reasonable, necessary, and
directly attributable to the taxpayer’s business. Sec. 162(a)(2); sec. 1.162-2(a),
Income Tax Regs. If a trip is undertaken for both business and personal reasons,
travel expenses are deductible only if the primary purpose of the trip is business.
See sec. 1.162-2(b)(1), Income Tax Regs. Petitioner convincingly testified that he
used his Chicago condominium “primarily” for his practice in Federal court. The
credibility of this testimony is amplified by petitioner’s meticulous records
evidencing the business purpose of his “code 2” travel in Chicago.
                                        - 18 -

[*18] purpose of petitioner’s business travels and, accordingly, satisfy the

heightened substantiation requirements of section 274(d)(1).

      Code 1, however, represents travel to or from petitioner’s home. As a

general rule, expenses for traveling between one’s home and one’s place of business

or employment constitute commuting expenses and are, consequently, nondeductible

personal expenses. See sec. 262(a); Fausner v. Commissioner, 413 U.S. 838

(1973); Commissioner v. Flowers, 326 U.S. 465 (1946); Feistman v. Commissioner,

63 T.C. 129, 134 (1974). Three jurisprudential or administrative exceptions to this

rule have developed over time: (1) the home office exception; (2) the temporary

distant worksite exception; and (3) the regular work location exception. See Bogue

v. Commissioner, T.C. Memo. 2011-164, 2011 Tax Ct. Memo LEXIS 164, at *16-

*17. We address the applicability of each to petitioner’s “code 1” travel.

                    a. The Home Office Exception

      The first judicially created exception permits taxpayers to deduct expenses

incurred traveling between their residence and a place of business if the residence

has a home office which serves as the taxpayer’s principal place of business. See

Strohmaier v. Commissioner, 113 T.C. 106, 113-114 (1999); Wis. Psychiatric

Servs., Ltd. v. Commissioner, 76 T.C. 839, 849 (1981); Curphey v. Commissioner,
                                        - 19 -

[*19] 73 T.C. 766, 777-778 (1980). We have consistently equated the “principal

place of business” requirement for the home office exception with the “principal

place of business” requirement under section 280A. See Walker v. Commissioner,

101 T.C. 537, 546 (1993); Curphey v. Commissioner, 73 T.C. at 777.

      As noted supra, we found that petitioner’s purported basement office in

Mequon, Wisconsin, did not qualify as a “principal place of business” pursuant to

section 280A. Accordingly, the home office exception is not applicable regarding

petitioner’s expenses incurred during his “code 1” travel.

                   b. The Temporary Distant Worksite Exception

      Taxpayers are entitled to deduct travel and lodging expenses stemming from

work at a series of temporary worksites during the year, all of which were distant

from the taxpayer’s residence. Schurer v. Commissioner, 3 T.C. 544 (1944).13 The

IRS has memorialized the temporary distant worksite exception in Rev. Rul. 99-7,

1999-1 C.B. 361, stating: “A taxpayer * * * may deduct daily transportation

expenses incurred in going between the taxpayer’s residence and a temporary work

location outside the metropolitan area where the taxpayer lives and normally

works.” The revenue ruling thereafter defines a temporary work location as one

      13
        Our decision in Schurer v. Commissioner, 3 T.C. 544, 547 (1944), was
based in part on the fact that the taxpayer had no “principal place of business”
during the taxable year at issue.
                                          - 20 -

[*20] that “is realistically expected to last (and does in fact last) for 1 year or

less”. Id.

       Petitioner lives in Wisconsin and has maintained his law practice there for

almost a decade. Consequently, petitioner’s code 1 travel does not fit within this

exception.

                     c. The Regular Work Location Exception

       The regular work location exception was originally articulated by the

Commissioner in Rev. Rul. 90-23, 1990-1 C.B. 28. The current iteration is found in

Rev. Rul. 99-7, 1999-1 C.B. at 362, which states: “If a taxpayer has one or more

regular work locations away from the taxpayer’s residence, the taxpayer may deduct

daily transportation expenses incurred in going between the taxpayer’s residence

and a temporary work location in the same trade or business, regardless of the

distance.”14

       As noted supra, petitioner has not suggested that any of his travel was to a

temporary work location. Therefore, petitioner’s code 1 travel does not fit within

this exception.


       14
        We have previously questioned the rationale of this exception and have
simply treated it as a concession by the Commissioner. See Bogue v.
Commissioner, T.C. Memo. 2011-164, 2011 Tax Ct. Memo LEXIS 164, at *16-
*17.
                                          - 21 -

[*21]                d. Conclusion

        In sum, we conclude that petitioner has failed to establish that his “code 1”

travel meets any exception to the general rule treating commuting expenses as

nondeductible personal expenses.

        B. Petitioner’s Schedules C1 and C3

        Petitioner provided no documentation regarding expenses reported on his

Schedules C1 and C3 for the years at issue. Accordingly, we find that petitioner

failed to substantiate those expenses.

II. Unreported Income

        Section 61(a)(1) defines gross income as all income from whatever source

derived, including compensation for services, such as wages, salaries, and bonuses.

See also sec. 1.61-2(a)(1), Income Tax Regs. Bank deposits serve as prima facie

evidence of income. Tokarski v. Commissioner, 87 T.C. 74, 77 (1986) (citing

Estate of Mason v. Commissioner, 64 T.C. 651, 656-657 (1975), aff’d, 566 F.2d 2

(6th Cir. 1977)); see also Clayton v. Commissioner, 102 T.C. 632, 645 (1994).

        In a posttrial brief respondent itemized unidentified deposits to petitioner’s

various bank accounts for the taxable years at issue and determined that those

deposits totaled $40,894.17, $90,295.89, and $72,500 for taxable years 2006,
                                          - 22 -

[*22] 2007, and 2008, respectively. Respondent’s totals on brief for taxable years

2006 and 2008 are consistent with his assertions following posttrial concessions;

however, the itemized totals on brief for taxable year 2007 differ from those

following concessions by approximately $25,095 ($115,391 following concessions

and $90,295.89 on brief). We construe respondent’s position on brief as an

additional concession in this case.

      At trial petitioner identified various deposits at issue as nontaxable balance

transfers or payments relating to his wife’s business. Nonetheless, petitioner never

submitted any credible evidence establishing that such transfers were legitimately

effected nor explained how his wife’s alleged payments were reported on the

relevant tax returns.

      Petitioner also indicated that separate deposits of $5,000 and $11,000 from

taxable year 2007 represent payments from a debtor on a loan he had previously

advanced. Petitioner supplemented the record following trial with an undated,

unsigned “commercial promissory note” purporting to memorialize his $15,000

advance. Nonetheless, petitioner failed to submit any financial documents evincing

either the actual transfer of $15,000 or payments of interest on the alleged loan. We

find that the record is insufficient to support petitioner’s position.
                                         - 23 -

[*23] Petitioner further referenced a deposit of $55,000 in taxable year 2008,

testifying that the deposit represented a retainer from a Chinese company that had

hired him to perform a “due diligence and feasibility study” regarding the potential

importation of their products. However, petitioner did not submit a copy of the

alleged retainer agreement to the Court nor provide any probative evidence

pertaining to his alleged work on the project.15 We decline to accept petitioner’s

self-serving, unverified, and undocumented testimony. See Tokarski v.

Commissioner, 87 T.C. at 77.

      In sum, we find that petitioner failed to report income in the itemized amounts

represented by respondent in his posttrial brief.

III. Interest Income

      In the introductory statement of issues in respondent’s posttrial brief, he

indicated that the question of whether petitioner failed to report interest income of

$5, $4, and $49 for taxable years 2006, 2007, and 2008, respectively, remained

unresolved. However, at no point in the remainder of his brief did he address this

issue. Indeed, the Forms 1099 upon which respondent purportedly made his




      15
         The only evidence in the record regarding this study is petitioner’s vague
self-created timesheet labeled “Shanghai”.
                                         - 24 -

[*24] determinations were never offered into evidence. Accordingly, we find that

respondent has conceded the issue.

IV. Section 6662(a) Penalty

      Section 6662(a) and (b)(1) and (2) provides for an accuracy-related penalty

of 20% of the portion of any underpayment attributable to, among other things,

negligence or intentional disregard of rules or regulations or any substantial

understatement of income tax. Negligence includes any failure to make a reasonable

attempt to comply with the provisions of the Code, including any failure to maintain

adequate books and records or to substantiate items properly. Sec. 6662(c); sec.

1.6662-3(b)(1), Income Tax Regs. A substantial understatement of income tax

exists for an individual if the amount of the understatement exceeds the greater of

10% of the tax required to be shown on the return or $5,000. See sec.

6662(d)(1)(A). We will focus our inquiry on whether petitioner exhibited

negligence or intentional disregard of rules or regulations for the years at issue.16

      Section 6664(c)(1) provides that the penalty shall not be imposed with

respect to any portion of an underpayment if the taxpayer shows that there


      16
        Only one accuracy-related penalty may be applied with respect to any given
portion of an underpayment, even if that portion is subject to the penalty on more
than one of the grounds set forth in sec. 6662(b). Sec. 1.6662-2(c), Income Tax
Regs.
                                        - 25 -

[*25] was reasonable cause for, and that he acted in good faith with respect to, that

portion.

      The determination of whether a taxpayer acted with reasonable cause
      and in good faith is made on a case-by-case basis, taking into account
      all pertinent facts and circumstances. * * * Circumstances that may
      indicate reasonable cause and good faith include an honest
      misunderstanding of * * * law that is reasonable in light of all the
      facts and circumstances, including the experience, knowledge, and
      education of the taxpayer. * * *

Sec. 1.6664-4(b)(1), Income Tax Regs.

      Respondent bears the burden of production with respect to the penalty. Sec.

7491(c). The burden imposed by section 7491(c) is “only to come forward

with evidence regarding the appropriateness of applying a particular addition to tax

or penalty to the taxpayer.” Good v. Commissioner, T.C. Memo. 2008-

245, 2008 WL 4756483, at *9. Once that burden is met, petitioner bears the burden

of proving that he is entitled to relief under section 6664(c)(1). Higbee v.

Commissioner, 116 T.C. 438, 446 (2001).

      Respondent submits that petitioner’s background as an attorney with

undergraduate accounting degrees and a degree in business administration

demonstrates that he should have recognized the importance of maintaining

adequate records and substantiating all items reported on his return. While petitioner

did meticulously maintain records evidencing certain expenses, he failed
                                         - 26 -

[*26] to offer records supporting many claimed expenses as well as credible

documentation which might shed light on the unidentified deposits at issue. As a

result, we find that respondent met his burden of production on this issue.

      Petitioner did not address the section 6662 penalties at trial and failed to file

a posttrial brief. However, petitioner’s tax returns for the taxable years at issue

were prepared by an accountant.17 Good-faith reliance on the advice of an

independent professional, such as an accountant, may demonstrate reasonable

cause. United States v. Boyle, 469 U.S. 241, 251 (1985); Canal Corp. & Subs. v.

Commissioner, 135 T.C. 199, 218 (2010); sec. 1.6664-4(b), Income Tax Regs. To

prevail in this effort, however, the taxpayer must show that he: (1) selected a

competent adviser with sufficient expertise to justify reliance; (2) supplied the

adviser with necessary and accurate information; and (3) actually relied in good

faith on the adviser’s judgment. Neonatology Assocs., P.A. v. Commissioner, 115

T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002); see Sanford v.

Commissioner, T.C. Memo. 2008-158, 2008 Tax Ct. Memo LEXIS 159, at *17.

Petitioner offered no testimony or other evidence concerning the expertise of his


      17
        At trial petitioner indicated that the expense of having his Wisconsin-based
accountant travel to the place of trial in Chicago was prohibitive. Nonetheless,
petitioner requested that the trial take place in Chicago and should have anticipated
the expense at that time.
                                          - 27 -

[*27] accountant, the information he allegedly provided to his accountant, or his

actual good-faith reliance on his accountant’s advice. Accordingly, we find that

petitioner has failed to satisfy his burden.

V. Conclusion

         In reaching our holdings herein, we have considered all arguments made, and,

to the extent not mentioned above, we conclude they are moot, irrelevant, or without

merit.

         To reflect the foregoing,


                                                   Decision will be entered

                                         under Rule 155.
                          - 28 -

         [*28] APPENDIX A--2006 Continental Bank

Check No.         Transaction description          Amount
  1252           Business Cards                    $211.00
  1257           Sarah Decorah1                     146.91
  1258           Fred Tabak2                        400.00
  1274           Sarah Decorah                      113.00
  1275           Fred Tabak                         400.00
  1276           Clerk of Court                     259.00
  1279           Citi Business Card                 701.31
  1284           Clerk of Federal Court             250.00
  1288           Office Depot                        36.09
  1298           Fred Tabak                         400.00
  1305           Cook County Sheriff                 33.40
  1310           Clerk of U.S. Dist. Court          250.00
  1312           Office Depot                       126.67
  1321           Fred Tabak                         400.00
  1323           Sarah Decorah                     1,020.63
  1330           Clerk of Circuit Court             175.00
  1333           Sarah Decorah                      444.59
  1334           Sarah Decorah                      115.08
  1335           Sarah Decorah                      106.56
  1346           Home Depot                         166.40
  1347           Clerk of City Court                250.00
                         - 29 -

[*29] 1349   Fred Tabak                400.00
  1359       Home Depot                201.50
  1361       Wis. Legal Forms            5.25
  1379       Fred Tabak                400.00
   1380      State Bar of Wis.          25.00
  1383       Sarah Decorah             237.89
  1384       Sarah Decorah             179.56
  1390       Clerk of Circuit Court    259.50
  1396       Sarah Decorah             245.92
  1397       Sarah Decorah             128.20
  1398       State Bar                 199.00
  1399       Sarah Decorah             217.36
  1400       Clerk of Court            122.00
  1402       Fred Tabak                400.00
  1407       Clerk of Court              5.00
  1408       Attorney Assist            39.80
  1409       Attorney Assist            82.74
  1410       Attorney Assist           334.34
  1411       Attorney Assist          1225.96
  1415       Attorney Assist           216.09
  1418       Dr. S. Lisowski3          300.00
  1426       Office Depot               65.43
                                 - 30 -

    [*30] 1432         Attorney Assist                         427.86
      1433             Attorney Assist                         129.12
      1434             Attorney Assist                         206.48
      1437             Office Depot                              6.54
         Total                                             12,066.18

1
  Ms. Decorah worked for Attorney Assist.
2
  Petitioner subleased his Milwaukee office from Mr. Tabak.
3
  Petitioner consulted Dr. Lisowski regarding various cases.
                              - 31 -

            [*31] APPENDIX B--2007 Continental Bank

Check No.             Transcript description          Amount
  1431              Suzanne Lisowski                  $81.25
  1432              Attorney Assist                   527.86
  1433              Attorney Assist                   206.48
  1436              Clerk of Traffic Court            236.40
  1437              Office Depot                        6.54
  1440              Fred Tabak                        450.00
  1441              Supreme Court of Wis.               6.00
  1442              V. Publishing                     350.00
  1447              Fred Tabak                        450.00
  1452              Clerk of Court                    158.50
  1468              Clerk of Federal Court            250.00
  1469              Fred Tabak                        450.00
  1482              Attorney Assist               1,254.53
  1484              Clerk of Court of Appeal          150.00
  1520              Fred Tabak                        450.00
  1541              State Bar of Wis.                  25.00
  1546              Office Depot                      201.56
  1555              Francine L. O’Claire1              18.50
  1556              Fred Tabak                        450.00
  1558              Clerk of Court                    524.00
                                    - 32 -

     [*32] 1563          Lake County Sheriff          44.10
        1608             Fred Tabak                  500.00
        1610             Clerk of Court                5.00
        1611             Clerk of Court                5.00
        1629             Ref. and Info. Service      79.00
        1631             Fred Tabak                 500.00
        1660             Lowe’s                      25.28
           Total                                   7,405.00

1
    This payment was for a copy of a transcript.
                              - 33 -

            [*33] APPENDIX C--2008 Continental Bank

Check No.            Transaction description          Amount
  1690              Clerk of Court                    189.50
  1691              Fred Tabak                        500.00
  1714              Fred Tabak                        500.00
  1721              Office Depot                       43.22
  1745              Luxury Furnishings                950.00
  1746              Clerk of Milwaukee Cty.           158.50
  1748              Office Dept Credit Plan            50.68
  1760              Office Depot                       15.84
  1823              V. Publishing                     450.00
  1829              Fred Tabak                        500.00
  1830              Clerk of Cook County              319.00
  1831              Clerk of Cook County              319.00
  1843              Office Dept. Credit Plan          458.77
  1869              Clerk of Circuit Court            123.50
  1870              Fred Tabak                        500.00
  1906              Sarah Decorah                      73.89
  1912              Office Depot                      269.57
  1933              Clerk of Circuit Court            123.50
     Total                                        5,544.97
                             - 34 -

             [*34] APPENDIX D--2006 Wells Fargo

Check No.           Transaction description       Amount
  1001             State Bar of Wis.              $441.00
  1018             Fred Tabak                      400.00
  1039             Wash. County Sheriff             22.57
  1047             Office Depot                     69.66
  1055             Fred Tabak                      400.00
  1071             Office Depot                     47.27
  1078             Fred Tabak                      750.00
  1090             Office Depot                       9.70
  1103             Fred Tabak                      450.00
  1108             Home Depot                     1,229.18
  1109             Fred Tabak                      450.00
     Total                                        4,269.38
