                         T.C. Summary Opinion 2018-40



                         UNITED STATES TAX COURT



     HORACE R. WEAVER AND CANDACE M. WEAVER, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 262-15S.                           Filed August 27, 2018.



      Horace R. Weaver and Candace M. Weaver, pro sese.

      Jason M. Kuratnik and Gary J. Merken, for respondent.



                              SUMMARY OPINION


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

section 74631 of the Internal Revenue Code in effect when the petition was filed.



      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure. We round all dollar amounts to the
nearest dollar.
                                        -2-

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

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

      Respondent determined deficiencies of $9,010 and $6,370 in petitioners'

2012 and 2013 Federal income tax, respectively, and accuracy-related penalties for

those years of $1,802 and $1,274, respectively. We must decide whether

petitioners are (1) entitled to deductions for unreimbursed employee business

expenses claimed for each of the years in issue, (2) entitled to deductions for trade

or business expenses claimed on their 2012 and 2013 returns in excess of the

amounts respondent allowed, and (3) liable for the accuracy-related penalties

respondent determined.

                                    Background

Petitioners' 2012 Return

      Petitioners' Federal income tax return for 2012, as originally filed, reported

tax of $15,801. They later filed an amended return for 2012 that reported reduced

wages and thus reduced tax of $15,476. On Schedule A, Itemized Deductions, of

their 2012 return, petitioners claimed a deduction for unreimbursed employee

business expenses of $11,590. The return also includes a Schedule C, Profit or

Loss From Business, related to a music production business Mr. Weaver

conducted that reports the following amounts:
                                       -3-

                     Description                             Amount
      Gross receipts or sales                       $1,510
      Returns and allowances                           300
      Gross profit                                                $1,210
      Expense:
       Advertising                                   1,500
       Car and truck                                 9,612
       Contract labor                                7,500
       Depreciation and section 179                    156
       Office                                          400
       Rent or lease                                 4,800
       Repairs and maintenance                       1,600
       Supplies                                         50
       Travel                                          150
       Deductible meals and entertainment            3,105
       Utilities                                     1,550
       Wages                                           -0-
        Cell phone                                   2,575
          Total                                                  (32,998)
      Net loss                                                   (31,788)

      The $9,612 deduction Mr. Weaver claimed on his 2012 Schedule C for car

and truck expenses equals the sum of a standard mileage deduction of $8,436

(based on 15,200 business/investment miles2) and out-of-pocket expenses for


      2
        The regulations authorize the Commissioner to establish methods under
which taxpayers can compute vehicle expenses using a standard mileage rate. See
sec. 1.274-5(g), (j), Income Tax Regs. The Commissioner issues annual notices
announcing the standard mileage rate for each taxable year. The rate for 2012 was
55.5 cents per mile. See Notice 2012-1, sec. 2, 2012-2 I.R.B. 260. The $8,436
                                                                     (continued...)
                                        -4-

garage rent, tolls, hourly parking, and interest of $1,176. (Petitioners' 2012

amended return reported no changes to petitioners' unreimbursed employee

business expenses or the loss from Mr. Weaver's business.)

Petitioners' 2013 Return

      Petitioners' 2013 Federal income tax return reported tax of $8,981. Their

2013 Schedule A claimed a deduction of $9,083 for unreimbursed employee

business expenses. The Schedule C included in petitioners' 2013 return for Mr.

Weaver's music production business reports the following amounts:




      2
       (...continued)
standard mileage deduction reported on Mr. Weaver's 2012 Schedule C equals the
product of 15,200 business/investment miles and 55.5 cents.
                                     -5-

                     Description                           Amount
      Gross receipts or sales                      $550
      Returns and allowances                         150
      Gross profit                                                  $400
      Expense:
       Advertising                                   500
       Car and truck                               9,442
       Contract labor                              4,250
       Depreciation and section 179                   78
       Office                                        250
       Rent or lease                               4,800
       Repairs and maintenance                       350
       Supplies                                      150
       Travel                                        550
       Deductible meals and entertainment          1,600
       Utilities                                   1,100
       Wages                                         -0-
        Cell phone                                 1,535
        Subscriptions                                190
        Internet                                     290
          Total                                                (25,085)
      Net loss                                                 (24,685)

      The 2013 car and truck expense deduction again equals the sum of two

amounts: a standard mileage deduction of $8,023 (based on 14,200
                                          -6-

business/investment miles3) and out-of-pocket expenses for garage rent, tolls,

hourly parking, and interest of $1,419.

The Examination, Notice of Deficiency, and Petition

      During the examination of petitioners' 2012 and 2013 returns, respondent's

revenue agent initially took the position that the deductions claimed on Mr.

Weaver's Schedules C were subject to the limitation provided in section 183,

which applies to activities not engaged in for profit. Mr. Weaver, however, was

able to establish the requisite profit motive for his music production business and

then provided the examining agent with documentation in an effort to substantiate

his claimed deductions.

      The materials Mr. Weaver submitted included mileage logs for 2012 and

2013 that purported to document his business use of his automobile. The logs

show total business miles of 15,062 and 14,067 for 2012 and 2013, respectively.

Each log bears the legend "Prepared by Horace Weaver 5/23/14". According to

Mr. Weaver, his mileage logs were formatted with automatic date codes so that

they would bear the current date whenever printed out.


      3
       The standard mileage rate for 2013 was 56.5 cents per mile. See Notice
2012-72, sec. 2, 2012-50 I.R.B. 673. The $8,023 standard mileage deduction
claimed on Mr. Weaver's 2013 Schedule C is the product of 14,200 business/
investment miles and 56.5 cents per mile.
                                       -7-

      Mr. Weaver's testimony regarding how he maintained his mileage logs was

inconsistent. He claimed that the information reported was "logged at the time".

But he acknowledged that it was not logged "exactly". "I mean," he admitted, "I

don't go out the door and then check the mileage." Therefore, the mileage "might

not have been exact".

      The descriptions of the trips reported on Mr. Weaver's mileage logs tend to

be generic. Many bear the description "Promotion/Scouting". Others are

described as "Meetings/Rehearsal/Studio/Meetings/Mentoring & Meals". Only a

few provide locations, such as "NJ Meeting" or "South philly Meeting". In

addition, the miles given for each trip tend to be round numbers. For example, the

miles given for over 98% of the entries on Mr. Weaver's 2012 mileage log end in

either five or zero.

      Mr. Weaver provided respondent's examining agent with the following

documentation regarding his deduction for contract labor expenses for 2012: (1) a

self-prepared schedule that itemizes the amounts that sum to the $7,500 claimed

deduction, including $6,220 of payments to MilkBoy Recording (MilkBoy),

(2) another schedule styled as a "transaction detail" of Mr. Weaver's account with

MilkBoy covering the period from January 1 through May 10, 2012, (3) copies of

credit card charge slips for payments Mr. Weaver made to MilkBoy, (4) an invoice
                                       -8-

(marked "paid") for $599 issued by Mirror Image to a Rick Weaver4 for graphic

design services, and (5) an email from Thomas Volpicelli, president of the

Mastering House, Inc., with the salutation "Hi Rick", in which Mr. Volpicelli

states: "I just sent out the PayPal invoice for $566.74. Sometimes AOL marks

emails from PayPal as spam, please let me know if you received it."

      The transaction detail for Mr. Weaver's account with MilkBoy does not

include a business logo but appears in plain typeface. The document does not list

all of the payments Mr. Weaver made to MilkBoy during the period it purports to

cover: a payment evidenced by one of the charge slips Mr. Weaver submitted,

made on March 29, 2012, does not appear on the transaction detail.

      Not all of the charge slips Mr. Weaver submitted are fully legible. Those on

which both the date and the amount of payment are legible sum to $4,713.

      Mr. Weaver also provided respondent's examining agent with a schedule

titled "Meals and Entertainment". That schedule lists amounts and attendees for

various dates in 2012. The separate amounts sum to $3,486. All but one of the

entries lists as attendees "Horace weaver & Killa Cash Reapaz". (The other entry




      4
      We assume Rick to be a nickname used by Mr. Weaver, whose middle
name is Richard.
                                        -9-

refers only to "18 [unnamed] people".) The schedule, like Mr. Weaver's mileage

logs, bears the legend "Prepared by Horace Weaver 5/23/14".

      The notice of deficiency disallowed in full the deductions petitioners

claimed for 2012 and 2013 for unreimbursed employee business expenses and all

of the deductions claimed on Mr. Weaver's Schedules C for those years other than

the office expenses claimed for each year and $5,475 of contract labor expenses

for 2012. The notice of deficiency also eliminates the offset to gross receipts or

sales reported on Mr. Weaver's Schedule C for each year for returns and

allowances. The stated ground for all of those adjustments is petitioners' failure to

substantiate each item beyond the allowed amount. On August 21, 2014,

respondent's examining agent received from his immediate supervisor approval for

the accuracy-related penalties determined in the notice of deficiency.

      Petitioners' petition expresses disagreement with "[e]ach item on the notice

of deficiency".

Trial Preparation

      The case was initially scheduled for trial in November 2015. At the

calendar call, Jason Kuratnick, representing respondent, advised the Court that his

previous efforts to contact Mr. Weaver, including four voicemails and two letters,

had been unsuccessful. When the Court recalled the case two days later, Mr.
                                        - 10 -

Kuratnick reported that, while the parties had met and made progress, they had

been unable to resolve all of their differences. We thus continued the case and

advised the parties of the need for further meetings and communications.

      During the summer of 2016, Gary Merken, who had taken responsibility for

the case on behalf of respondent, made several efforts to contact petitioners. They

did not respond to Mr. Merken or attend either of two meetings he attempted to

schedule with them. When we questioned Mr. Weaver about his failure to attend

the scheduled meetings, his testimony was evasive, so that we found it necessary

to demand yes or no answers and threaten to hold him in contempt if he did not

provide them. Mr. Weaver did not specifically deny having received the letters

Mr. Merken sent but said he had "no recollection of reading" them and assured us

"I don't blow off meetings".

      Contrary to the standing pretrial order that we issued to the parties before

each session at which the case was scheduled for trial, petitioners did not submit a

pretrial memorandum or agree, before trial, to a stipulation of facts.

      Respondent, by contrast, submitted a pretrial memorandum before each

session. Both of respondent's memoranda allege that petitioners had not assigned
                                         - 11 -

error to his penalty determinations and that, consequently, we should treat them as

having conceded their liability for penalties. But those same memoranda also

identify petitioners' liability for penalties as one of the issues presented in the case.

Trial Proceedings

      At trial, Mr. Weaver submitted a schedule labeled "Repairs" that shows

dates and amounts in four columns: "2012 Actual", "2012 Tax Reported", "2013

Tax Adjusted", and "Labor not reported". The 2012 Tax Reported column lists

two amounts, $322 and $1,287, the first dated March 30, 2012, and the second

April 2, 2012. The corresponding amounts in the 2012 Actual column for those

items are $321 and $1,286, respectively (each a dollar less than the reported

amounts). The schedule provides no explanation for the slight difference between

the actual and reported amounts. It also labels as a "rounding adjustment" of $9

the difference between the sum of the 2012 Tax Reported amounts ($322 + $1,287

= $1,609) and the $1,600 figure reported on Mr. Weaver's 2012 Schedule C.

      The figures listed in the 2013 Tax Adjusted column sum to $2,761. Mr.

Weaver provided no explanation, either in the schedule itself or in his testimony at

trial, of the difference between the $2,761 repair expenses shown on the schedule

for 2013 and the $350 deduction reported on his 2013 Schedule C.
                                       - 12 -

      Mr. Weaver also submitted at trial a statement of checking account activity

between March 30 and April 9, 2012. The statement lists three payments to Home

Depot: a payment of $321 on March 30, 2012, and two payments on April

2, 2012, in the amounts of $1,286 and $144. All three payments appear in the

2012 Actual column of Mr. Weaver's schedule of repair expenses, although only

two appear (with $1 discrepancies) in the 2012 Tax Reported column.

      At trial, Mr. Merken cross-examined Mr. Weaver regarding his background

in tax and accounting and offered into evidence Mr. Weaver's LinkedIn profile.

We allowed that evidence over Mr. Weaver's relevance objection on the basis of

Mr. Merken's explanation that he was offering the evidence in support of

respondent's penalty determinations.

                                     Discussion

I.    Petitioners' Entitlement to the Deductions in Issue

      A.     Burden of Proof

      Rule 142(a)(1) provides: "The burden of proof shall be upon the petitioner,

except as otherwise provided by statute or determined by the Court; and except

that, in respect of any new matter, increases in deficiency, and affirmative

defenses, pleaded in the answer, it shall be upon the respondent." Section 7491

may shift the burden of proof to the Commissioner if, among other things, the
                                       - 13 -

taxpayer complies with substantiation requirements, maintains all required

records, and cooperates with the Commissioner's requests for witnesses,

information, documents, meetings and interviews. See sec. 7491(a)(2)(A) and (B).

A taxpayer seeking to shift the burden of proof under section 7491(a)(1) has the

burden of showing that he satisfied the paragraph (2) preconditions. E.g., Allnutt

v. Commissioner, T.C. Memo. 2004-239, 2004 WL 2339813, at *4.

      Petitioners make no argument that they have met the requirements of section

7491: Their briefs (apparently written by Mr. Weaver) make no mention of that

section.5 One of petitioners' proposed finding of facts, however, states: "My wife

and I request all expense deductions originally and erroneously classified as 183

adjustments, because if evidence led the IRS to change the adjustment then I

believe the burden of proof should shift to the IRS and they did not present any

evidence at all in the trial on the schedule C adjustments that was not derived from

the petitioner."




      5
        In any event, the record demonstrates petitioners' failure to meet the
conditions necessary to shift the burden of proof to respondent under sec. 7491.
We have already described petitioners' failure to cooperate in the preparation of
their case. Moreover, as explained in the text below, petitioners neither
established their compliance with applicable substantiation requirements nor
introduced credible evidence to substantiate the deductions in issue.
                                       - 14 -

      We understand petitioners to claim that respondent's disallowance of their

Schedule C deductions by reason of their failure to provide adequate

substantiation represents a "new matter" within the meaning of Rule 142(a)

because respondent initially challenged those deductions on the ground that Mr.

Weaver did not conduct his music production activity for profit. But the notice of

deficiency explains the disallowance of Mr. Weaver's claimed Schedule C

deductions on substantiation grounds, and respondent now seeks only that we

affirm his disallowance of those deductions on the grounds stated in the notice.

Respondent thus has not raised a "new matter" in regard to which he bears the

burden of proof under Rule 142(a). See Shea v. Commissioner, 112 T.C. 183, 191

(1999) ("When the Commissioner attempts to rely on a basis that is beyond the

scope of the original deficiency determination, the Commissioner must generally

assume the burden of proof as to the new matter.").

      B.    Substantiation Requirements

      In general, section 162(a) allows a deduction for "all the ordinary and

necessary expenses paid or incurred during the taxable year in carrying on any

trade or business". Because any employee is engaged in the business of earning

her pay, expenses related to a taxpayer's employment and not reimbursable by the

employer have long been deductible under section 162 and its predecessors. E.g.,
                                       - 15 -

Noland v. Commissioner, 269 F.2d 108, 111 (4th Cir. 1959) ("[E]very person who

works for compensation is engaged in the business of earning his pay, and that

expense which is essential to the continuance of his employment is deductible

under * * * [the predecessor of section 162]."), aff'g T.C. Memo. 1958-60. When

called upon by the Commissioner, a taxpayer must substantiate his expenses. See,

e.g., Park v. Commissioner, T.C. Memo. 2012-279, at *4; see also sec. 6001; sec.

1.6001-1(a), Income Tax Regs. Moreover, some expenses, including those

relating to travel, meals and entertainment, passenger automobiles, and computers,

are subject to heightened substantiation requirements. See secs. 274(d),

280F(d)(4)(A)(i), (iv). In the case of expenses not covered by section 274(d), we

may estimate the amounts of allowable deductions when provided with evidence

that the taxpayer incurred deductible expenditures. Cohan v. Commissioner, 39

F.2d 540, 543-544 (2d Cir. 1930). To do so, however, we must have some basis

on which to make an estimate. Vanicek v. Commissioner, 85 T.C. 731, 742-743

(1985).

      C.    Unreimbursed Employee Expenses

      Because petitioners introduced no evidence at trial to substantiate the

deductions they claimed for unreimbursed employee business expenses, we sustain

respondent's disallowance of those deductions.
                                        - 16 -

      D.     Schedule C Deductions

             1.    Expenses Subject to Section 274(d)

                    a.    Applicable Substantiation Requirements

      Section 274(d) provides heightened substantiation requirements for

deductions or credits for traveling expenses, expenses for gifts, amounts with

respect to "listed property", and items "with respect to an activity which is of a

type generally considered to constitute entertainment, amusement, or recreation, or

with respect to a facility used in connection with an activity". To meet those

requirements, a taxpayer must

      substantiate[] by adequate records or by sufficient evidence
      corroborating the taxpayer's own statement (A) the amount of such
      expense or other item, (B) the time and place of the travel,
      entertainment, amusement, recreation, or use of the facility or
      property, or the date and description of the gift, (C) the business
      purpose of the expense or other item, and (D) the business
      relationship to the taxpayer of persons entertained, using the facility
      or property, or receiving the gift.

Sec. 274(d). Thus, a taxpayer can meet the substantiation requirement in either of

two ways: by means of adequate records, or by the taxpayer's own statement,

corroborated by "sufficient evidence". Section 280F(d)(4) defines the term "listed

property" to include, among other things, passenger automobiles and computer or

peripheral equipment. Sec. 280F(d)(4)(A)(i), (iv).
                                       - 17 -

      The regulations detail how a taxpayer can meet the "adequate records"

requirement of section 274(d). See sec. 1.274-5T(c)(2), Temporary Income Tax

Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). Those regulations require a taxpayer to

maintain "an account book, diary, log, statement of expense, trip sheets, or similar

record" in which the taxpayer records an expenditure or use of property "at or near

the time of the expenditure or use." Sec. 1.274-5T(c)(2)(i) and (ii), Temporary

Income Tax Regs., supra. To meet the requirement of contemporaneous recording,

the taxpayer must record "the elements of an expenditure or use * * * at a time

when, in relation to the use or making of an expenditure, the taxpayer has full

present knowledge of each element of the expenditure or use, such as the amount,

time, place, and business purpose of the expenditure and business relationship."

Sec. 1.274-5T(c)(2)(ii)(A), Temporary Income Tax Regs., 50 Fed. Reg. 46018

(Nov. 6, 1985).

      The regulations also provide guidance on how a taxpayer that does not meet

the adequate records requirement can substantiate a claimed deduction by meeting

the alternative "sufficient evidence" test. See sec. 1.274-5T(c)(3), Temporary

Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985). To meet that test, the

taxpayer must comply with each of the elements required by section 274(d), in

regard to an expenditure or use of property, by a combination of the taxpayer's
                                        - 18 -

"own statement, whether written or oral" and "other corroborative evidence". Sec.

1.274-5T(c)(3)(i)(A) and (B), Temporary Income Tax Regs., 50 Fed. Reg. 46020

(Nov. 6, 1985). To establish the amount, time, place, or date of an expenditure or

use, the taxpayer's own statement must be corroborated by direct evidence. Sec.

1.274-5T(c)(3)(i), Temporary Income Tax Regs., supra. A taxpayer's statement in

regard to his business relationship to persons entertained or the business purpose

of an expenditure, however, may be corroborated by circumstantial evidence. Id.,

50 Fed. Reg. 46021.

                   b.     Application of Requirements to Amounts in Issue

                          i.    Car and Truck Expenses

      Respondent advances several reasons why, in his view, the mileage logs that

Mr. Weaver submitted do not meet the adequate records requirement of section

1.274-5T(c)(2), Temporary Income Tax Regs., supra. For example, he contends

that the legend on each log, referring to a date in May 2014, calls into question

whether it was prepared at or near the time of the trips it reports. Respondent also

claims that the descriptions the logs provide "do not sufficiently describe the

business purpose for the expenditures." He notes the discrepancy between the

business miles reported on each year's log and those reported on Mr. Weaver's

Schedule C.
                                        - 19 -

       Although Mr. Weaver offered an explanation for the logs' legend, his

contradictory testimony regarding how he prepared and maintained the logs does

not convince us that he made each entry in the log at or near the time of the

reported trip. Moreover, the logs on their face show signs that the data they report

are after-the-fact reconstructions. As respondent observes, the descriptions

provided for the listed trips tend to be vague and the miles shown tend to be round

numbers. Therefore, we agree with respondent that Mr. Weaver's mileage logs do

not meet the requirements of section 1.274-5T(c)(2)(i) and (ii), Temporary Income

Tax Regs., supra. Mr. Weaver has thus failed to substantiate by adequate records

the standard mileage deductions claimed on his Schedules C for 2012 and 2013.

       Nor have petitioners satisfied the alternative "sufficient evidence" test.

While we might accept Mr. Weaver's mileage logs as his own "written statement"

for purposes of that test, petitioners presented no evidence that would corroborate

the information set forth on the logs. And they presented no evidence at all to

support the deductions they claimed for garage rent, tolls, hourly parking, and

interest.

       We thus conclude that respondent properly disallowed the deductions

claimed for car and truck expenses on Mr. Weaver's Schedules C for 2012 and
                                        - 20 -

2013 because of petitioners' failure to substantiate those deductions in the manner

required by section 274(d).

                          ii.    Meals and Entertainment

      Petitioners include in their proposed findings of fact the observation that

"[l]awful for profit business's like * * * [Mr. Weaver's] are allowed to deduct

100% of the expenses paid for food for its employees". We assume that

petitioners intended that observation as an argument of law rather than a proposed

finding of fact, despite its location in their brief. Nonetheless, if we understand

petitioners correctly, they have confused a substantive standard for deductibility

with requirements for substantiating deductible expenses. Section 274(a)

disallows any deduction for activities "of a type generally considered to constitute

entertainment, amusement, or recreation" unless the expense in question was

"directly related to" (or, in some cases, "associated with") "the active conduct of

the taxpayer's trade or business". Section 274(e)(1) provides that the business

nexus standard of section 274(a) does not apply to "[e]xpenses for food and

beverages (and facilities used in connection therewith) furnished on the business

premises of the taxpayer primarily for his employees." Petitioners have failed to

establish that the persons who received the meals for which they claim deductions

were Mr. Weaver's employees. Mr. Weaver's Schedules C for the years in issue do
                                       - 21 -

not report the payment of wages. Moreover, petitioners have failed to establish

that Mr. Weaver provided the meals for which they claim deductions on his

business premises. We thus conclude that, as a substantive matter, the expenses in

issue are deductible only if they satisfy the applicable business nexus standard of

section 274(a). Moreover, even when applicable, section 274(e)(1) does not

provide an exemption from the substantiation rules of section 274(d).

      As with Mr. Weaver's mileage logs, respondent argues that his schedule of

meals and entertainment expenses does not meet the adequate records requirement

of section 1.274-5T(c)(2), Temporary Income Tax Regs., supra. Respondent again

views the legend with a May 2014 date as evidence that the schedule "was not

made at or near the time of the purported expenditures". He also observes that the

schedule does not list the location at which each expenditure was incurred, the

expenditure's business purpose, or the business relationship between Mr. Weaver

and the attendees.

      Mr. Weaver offered no testimony regarding the creation and maintenance of

the schedule he submitted to support the claimed meals and entertainment expense

deduction for 2012. Given Mr. Weaver's explanation of the legend, we need not

view it as evidence that he did not prepare the schedule of meals and entertainment

expenses at or near the time of each expenditure. But we have no affirmative
                                          - 22 -

evidence before us that Mr. Weaver prepared and maintained the schedule

contemporaneously with the events it lists. Therefore, we agree with respondent

that the schedule does not qualify as "an account book, diary, log, statement of

expense, trip sheets, or similar record" for purposes of the adequate records test.

Moreover, because the schedule is not corroborated by any other evidence,

petitioners have not satisfied the alternative "sufficient evidence" test to support

the claimed meals and entertainment expense deduction for 2012.

      Petitioners presented no evidence at all to support the meals and

entertainment expense deduction claimed on Mr. Weaver's 2013 Schedule C. We

thus conclude that, as with the reported deductions for car and truck expenses,

respondent properly disallowed the deductions claimed for meals and

entertainment expenses on Mr. Weaver's Schedules C for 2012 and 2013 because

of petitioners' failure to substantiate those deductions in the manner required by

section 274(d).

                          iii.   Travel

      Petitioners provided no substantiation for the deductions for travel expenses

reported on Mr. Weaver's Schedules C for 2012 and 2013. Therefore, we sustain

respondent's disallowance of those deductions.
                                       - 23 -

             2.    Other Schedule C Items

                   a.     Contract Labor

      Obviously, Mr. Weaver's self-prepared itemization of the amounts included

in the deduction for contract labor expense reported on his 2012 Schedule C is not

adequate to substantiate that deduction. For two reasons, we also decline to give

any weight to the transaction detail of Mr. Weaver's MilkBoy account. First,

because the record provides no evidence of its provenance, we cannot be confident

that it was issued to Mr. Weaver by MilkBoy (rather than, for example, prepared

by Mr. Weaver himself). In addition, the omission from the document of a

payment evidenced by one of the charge slips Mr. Weaver submitted calls into

question the document's reliability.

      We do, however, accept the charge slips themselves as adequate

substantiation that Mr. Weaver made payments to MilkBoy. We might surmise

that Mr. Weaver made those payments in pursuit of his music management

business. But without further evidence of their nature, we cannot be sure that the

payments were deductible and not capitalizable.6 Respondent, however, appears


      6
       Secs. 263 and 263A generally deny current deductions for amounts that
produce benefits beyond the close of the taxable year in which they are paid or
incurred. These capital expenditures must be added to the basis of the property to
                                                                      (continued...)
                                       - 24 -

to have allowed the deduction of some of Mr. Weaver's payments to MilkBoy,7

and the record provides no grounds for differentiating between them on the basis

of current deductibility. Therefore, we assume that respondent's grounds for

disallowing Mr. Weaver's deduction of some of those payments was not that he

was required to capitalize them but instead that he failed to substantiate them

adequately. On the basis of those charge slips that Mr. Weaver submitted on

which both the date and the amount of payment are legible, we conclude that Mr.

Weaver substantiated $4,713 of the payments he claims to have made to MilkBoy.

      We also accept the invoice from Mirror Image as adequate substantiation

that Mr. Weaver paid $599 for graphic design services. Again, respondent made

no claim that any portion of Mr. Weaver's claimed deduction for contract labor

should be disallowed for reasons other than a failure of substantiation. Cf. RJR

Nabisco, Inc. v. Commissioner, T.C. Memo. 1998-252, 1998 WL 376351, at *11,


      6
       (...continued)
which they relate and recovered only as the property is used or when the taxpayer
disposes of it.
      7
        The record does not indicate the specific payments for which respondent
would allow a deduction. Nonetheless, because the difference between the
deduction for contract labor costs claimed on Mr. Weaver's 2012 Schedule C and
the total payments shown on Mr. Weaver's detailed schedule as having been made
to MilkBoy ($7,500 ! $6,220 = $1,280) is less than the $5,475 deduction that
respondent would allow, it follows that respondent must have allowed a deduction
for some of Mr. Weaver's payments to MilkBoy.
                                        - 25 -

*19 (holding that expenditures related to the graphic design of cigarette packaging

materials are deductible ordinary business expenses under authorities applicable to

advertising expenditures).

      We do not view the email from Mr. Volpicelli as adequate substantiation

that Mr. Weaver made a deductible payment to the Mastering House. In his email,

Mr. Volpicelli indicates the amount of the invoice he attempted to send but

provides no description of the nature of that amount or its relation to Mr. Weaver's

business. If Mr. Weaver did not receive the invoice Mr. Volpicelli reported

having sent, he should have contacted Mr. Volpicelli (as Mr. Volpicelli had

requested) and obtained another copy.

      Because the amount of the payments Mr. Weaver claims to have made for

"contract labor" that we view as having been adequately substantiated is less than

the deduction respondent would allow, we will sustain his disallowance of $2,025

of the claimed deduction.

                   b.       Repairs and Maintenance

      The documentation Mr. Weaver submitted in support of the $1,600

deduction claimed on his 2012 Schedule C for repairs and maintenance expenses

is insufficient to support that deduction. Petitioners established that Mr. Weaver

paid more than $1,600 to Home Depot during 2012 but provided no evidence as to
                                       - 26 -

the nature of those payments or how they related to the business activity reported

on his Schedule C. Mr. Weaver's deduction of only two of the three payments to

Home Depot shown on his checking account statement suggests that he recognized

that he made the third payment for personal reasons. But he has given us no

reason to believe that the other two payments were not also personal. The only

basis on which we can distinguish the payments is his deduction of two of the

three. His claiming a deduction for an amount obviously does not establish its

deductibility.

      Petitioners presented no substantiation at all for the deduction claimed on

Mr. Weaver's 2013 Schedule C for repair and maintenance expenses. Nor have

they provided us with grounds to estimate Mr. Weaver's deductible expenses for

either of the years in issue. Therefore, we sustain respondent's disallowance of the

deductions for repair and maintenance expenses claimed on Mr. Weaver's 2012

and 2013 Schedules C.

                   c.    Other Items

      Because petitioners have provided no substantiation of the remaining

Schedule C items that respondent adjusted and have given us no basis for

estimating Mr. Weaver's various expenses, we sustain respondent's adjustments of

those items.
                                       - 27 -

II.   Accuracy-Related Penalty

      Section 6662(a) and (b)(1) provides for an accuracy-related penalty of 20%

of the portion of an underpayment of tax attributable to negligence or disregard of

rules and regulations. Section 6662(a) and (b)(2) provides for the same penalty on

the portion of an underpayment of tax attributable to "[a]ny substantial

understatement of income tax." Section 6662(d)(2)(A) generally defines the term

"understatement" as the excess of the tax required to be shown on the return over

the amount shown on the return as filed. In the case of an individual, an

understatement is "substantial" if it exceeds the greater of 10% of the tax required

to be shown on the return or $5,000. Sec. 6662(d)(1)(A). An understatement is

reduced, however, by the portion attributable to the treatment of an item for which

the taxpayer had "substantial authority" or, in the case of items adequately

disclosed, a "reasonable basis". Sec. 6662(d)(2)(B). Section 6664(c)(1) provides

an exception to the imposition of the section 6662(a) accuracy-related penalty if it

is shown that there was reasonable cause for the underpayment and the taxpayer

acted in good faith.

      The Commissioner bears the burden of production with respect to penalties.

See sec. 7491(c). To meet that burden, he must produce evidence regarding the

appropriateness of imposing the penalty. Higbee v. Commissioner, 116 T.C. 438,
                                        - 28 -

446 (2001). Once the Commissioner carries his burden of production, the

taxpayer bears the burden of proving entitlement to relief because of substantial

authority, adequate disclosure, or reasonable cause. See id. at 447.

      Respondent, relying on our decision in Swain v. Commissioner, 118 T.C.

358 (2002), argues that petitioners should be treated under Rule 34(b)(4) as having

conceded their liability for the accuracy-related penalties he determined. That rule

requires taxpayers to include in their petition "[c]lear and concise assignments of

each and every error which * * * [they] allege[] to have been committed by the

Commissioner in the determination of the deficiency or liability." Rule 34(b)(4)

further provides: "Any issue not raised in the assignments of error shall be

deemed to be conceded."

      We are not convinced that petitioners have conceded their penalty liability.

To begin with, while petitioners did not explicitly assign error to respondent's

penalty determinations, they did express disagreement with "[e]ach item on the

notice of deficiency".

      Moreover, even if we viewed petitioners as having failed to assign error to

respondent's penalty determinations, we could treat the issue of petitioners' penalty

liability as having been tried by the consent of the parties under Rule 41(b)(1).

That Rule states: "When issues not raised by the pleadings are tried by express or
                                         - 29 -

implied consent of the parties, they shall be treated in all respects as if they had

been raised in the pleadings."

      We relied on Rule 41(b) in El v. Commissioner, 144 T.C. 140, 149 (2015),

to reject the Commissioner's argument that the taxpayer's failure to assign error to

the additions to tax he had determined resulted in the taxpayer's concession of that

issue. We noted that respondent's answer and pretrial memorandum in that case

both identified the additions to tax as an issue. We thus concluded that, when the

parties submitted the case for decision without trial under Rule 122, they

"submitted the issue of * * * [the taxpayer's] liability for the additions to tax for

decision * * * by implied consent." El v. Commissioner, 144 T.C. at 149. We

distinguished our prior Opinion in Swain on the ground that the parties in that case

"did not try or submit the case by implied consent." Id.

      Respondent attempts to distinguish El on the ground that his pretrial

memoranda in the present case allege that petitioners had not assigned error to his

penalty determinations and that, consequently, they should be treated as having

conceded their liability for penalties. But those same memoranda identified

petitioners' liability for penalties as one of the issues presented in the case.

Moreover, at trial, respondent presented evidence that was relevant only to the

penalty issues.
                                        - 30 -

      Even if petitioners did not concede their liability for penalties, however, we

would sustain respondent's determinations. By upholding in full the $9,010

deficiency respondent determined for petitioners' 2012 taxable year, we confirm

that, as stated in respondent's notice of deficiency, petitioners were required to

show a tax of $24,486 on their return (that is, $9,010 more than the $15,476 they

reported on their amended return). Similarly, by upholding in full the $6,370

deficiency that respondent determined for petitioners' 2013 taxable year, we

confirm that petitioners were required to report a tax for that year of $15,351

($6,370 more than the $8,981 they reported). For each year, 10% of the tax

petitioners were required to show on their return is less than $5,000, so that the

latter amount serves as threshold for determining whether petitioners' reported tax

reflected a substantial understatement. And, for each year, the excess of the tax

petitioners were required to show on their return over the amount they did report

exceeds the applicable threshold. Therefore, respondent has met his burden of

production to establish the appropriateness of a substantial understatement penalty

under section 6662(a) and (b)(2) for each year. Petitioners make no argument that

they had substantial authority for their errors in reporting or that they had
                                       - 31 -

reasonable cause for those errors and acted in good faith regarding them.8

Therefore, we sustain respondent's determination that petitioners are liable for

accuracy-related penalties of $1,802 and $1,274 for their 2012 and 2013 taxable

years, respectively. For the reasons explained above,


                                                      Decision will be entered for

                                                respondent.




      8
       Because petitioners have failed to substantiate and keep adequate books
and records with respect to the items respondent adjusted, the exception from the
substantial understatement penalty for items adequately disclosed and supported
by a reasonable basis is not available to them. See sec. 1.6662-4(e)(2)(iii), Income
Tax Regs.
