                         T.C. Memo. 2002-283




                       UNITED STATES TAX COURT



                VALENTINA PERRAH, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13127-00.               Filed November 18, 2002.



     Warren Nemiroff, for petitioner.

     Kevin W. Coy, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION

     GERBER, Judge:   Respondent determined deficiencies in

petitioner’s Federal income tax and penalties for the taxable

years 1994 and 1995 as follows:

                                             Penalty
          Year        Deficiency           Sec. 6662(a)
          1994          $5,734              $2,929.60
          1995           2,319               1,751.20
                                - 2 -



     The issues for our consideration are:    (1) Whether

petitioner has shown entitlement to various Schedule C, Profit or

Loss From Business, deductions; and (2) whether the resulting

underpayment was due to a substantial understatement of income

tax and/or negligence so as to make petitioner liable for the

accuracy-related penalties under section 6662(a).1

                          FINDINGS OF FACT

     Petitioner Valentina Perrah resided in Mira Loma,

California, at the time the petition was filed in this case.

Petitioner was a real estate broker who owned and operated a

Century 21 office in Mira Loma during taxable years 1994 and

1995.    This office operated under the name “Amera-Star Realty”,

and petitioner reported its income and deductions on a Schedule C

attached to her Federal income tax returns.

     For taxable years 1994 and 1995, petitioner’s original

individual income tax returns were prepared by petitioner’s

accountant of approximately 7 years, Ron Kington.    Her Schedule C

reflected $239,481 of deductions for taxable year 1994 which

included, inter alia, $15,303 for advertising costs, $4,390 in

car and truck expenses, and $27,960 for other expenses such as



     1
       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, unless otherwise
indicated.
                                - 3 -

$9,317 in telephone services and $4,072 in seminar costs.   Her

Schedule C reflected $313,217 of deductions for taxable year 1995

which included, inter alia, $13,737 for advertising and $7,579

for car and truck expenses.   Petitioner noticed that the amounts

of tax due reflected on her 1994 and 1995 returns were

significantly different from other years, but she did not

question the calculations.    Petitioner timely filed her 1994 and

1995 returns and paid the amount of tax shown due on the returns.

     Sometime before July 1998, respondent began the examination

of petitioner’s 1994 and 1995 tax years.   As a result petitioner

consulted Mary Crenshaw, an acquaintance through whom she

acquired insurance coverage and who petitioner believed was a

C.P.A.   Petitioner provided her bank statements to the

acquaintance who turned them over to respondent’s examiner.

Respondent’s examiner raised substantiation issues regarding

petitioner’s claimed Schedule C deductions and discovered a

reporting error.   In that regard, it was discovered that

petitioner did not report her Form 1099 income from her business.

Further, petitioner duplicated the omission error by deducting

the Form 1099 income on her Schedule C.

     After discovering these problems, petitioner hired attorney

Warren Nemiroff in July 1998.   Upon his advice, she submitted

amended returns on November 16, 1998, which reflected the

following revised calculations:   (1) Schedule C deductions for
                               - 4 -

1994, as amended, totaled $252,056, which included $14,506 for

advertising costs, $9,825 for car and truck expenses and $45,217

for other expenses such as $44,434 in rent, $770 in management

fees, and $13 in bank fees; and (2) Schedule C deductions for

1995, as amended, totaled $284,380, which included $16,161 for

advertising expenses, $7,171 for car and truck expenses and

$29,743 for other expenses, such as $4 in bank charges and

$28,671 in rent.

      Subsequent to the filing of these amended returns, Internal

Revenue Agent Francisco Rangel met with petitioner at her office

to discuss her claimed Schedule C deductions.   At this meeting,

no documents passed from petitioner to Mr. Rangel.   However,

based on the conversation with petitioner and observations he

made at her office, Mr. Rangel allowed some of her claimed

deductions.

      On November 6, 2000, respondent issued a statutory notice of

deficiency to petitioner for her 1994 and 1995 tax years.

                              OPINION

       We consider here whether petitioner is entitled to Schedule

C deductions in excess of those allowed by respondent and whether

petitioner is liable for the accuracy-related penalties under

section 6662(a).

I.   Substantiation of Schedule C Deductions

      Section 162 permits a deduction for ordinary and necessary
                                 - 5 -

expenses incurred in carrying on a trade or business during the

taxable year.   The question of whether an expenditure satisfies

the requirements of section 162 is one of fact.      Commissioner v.

Heininger, 320 U.S. 467 (1943).     Section 274(d) provides guidance

with respect to certain deductions.      Specifically, it sets forth

technical rules for substantiation of expenses relating to travel

and meals.

     Deductions are a matter of legislative grace, and a taxpayer

bears the burden of proving that he or she is entitled to any

deductions claimed.2   Rule 142(a); INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992).    Accordingly, petitioner must show that

she incurred and/or paid the expense as an ordinary and necessary

expense of her business.     For expenses covered under section

274(d), petitioner must produce (1) adequate records or (2)

sufficient evidence to corroborate her own statements.     Sec.

1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016

(Nov. 6, 1985).   Adequate records include such things as an

account book, diary, log, statement of expense, or other similar

record in which entries of expenses are recorded at or near the

time of the expense.   Id.    In addition, petitioner must produce

documentary evidence such as receipts or paid bills.     Sec. 1.274-



     2
       Because the examination commenced prior to July 22, 1998,
sec. 7491 burden of proof and production standards are not
applicable. See sec. 7491.
                                   - 6 -

5T(c)(2)(i) through (iii), Temporary Income Tax Regs., 50 Fed.

Reg. 46017 (Nov. 6, 1985).

       Petitioner argues that her claimed deductions have been

substantiated.    Yet, the only evidence that petitioner has

submitted to this Court is her own self-serving testimony

regarding the deductions.    We do not have to accept such

testimony without corroborating evidence.      Niedringhaus v.

Commissioner, 99 T.C. 202 (1992).      Further, aside from

petitioner’s argument that Mr. Rangel’s allowance of some

deductions is proof that her deductions were substantiated in

full, petitioner has not presented any corroborating evidence.

       As such, petitioner does not meet the substantiation

requirements of section 162 or section 274(d).     Accordingly, we

hold that petitioner did not substantiate her disallowed Schedule

C deductions and has, therefore, not shown respondent’s

determination to be in error.

II.    Accuracy-Related Penalty of Section 6662(a)

       Section 6662 provides for an accuracy-related penalty equal

to 20 percent of the underpayment if such underpayment was due to

taxpayer’s negligence or substantial understatement of income

tax.    Sec. 6662(a) and (b)(1).    For the purposes of this section,

a taxpayer is negligent when he or she fails “to do what a

reasonable and ordinarily prudent person would do under the

circumstances.”    Korshin v. Commissioner, 91 F.3d 670, 672 (4th
                                  - 7 -

Cir. 1996), affg. T.C. Memo. 1995-46.     An understatement of

income tax is substantial if it exceeds 10 percent of the tax

required to be shown on the return for the taxable year or

$5,000, whichever is greater.     Sec. 6662(d)(1)(A).3

     As pertinent here, “negligence” includes the failure to make

a reasonable attempt to comply with the provisions of the

Internal Revenue Code and also includes any failure to keep

adequate books and records or to substantiate items properly.

Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.      It is the

taxpayer’s responsibility to establish that he is not liable for

the accuracy-related negligence penalty imposed by section

6662(a).    See Rule 142(a); Tweeddale v. Commissioner, 92 T.C.

501, 505 (1989).4    As we have held that petitioner failed to

comply with the basic requirements of substantiation and record-

keeping contained in the Internal Revenue Code, we find that

petitioner’s underpayment was due to negligence and is subject to

the accuracy-related penalty under section 6662(a).

     A taxpayer may avoid the application of the accuracy-related

penalty by proving that he or she acted with reasonable cause and

in good faith.    Sec. 6664(c).   Whether a taxpayer acted with

reasonable cause and good faith is measured by examining the


     3
       We need not address whether petitioner’s understatement of
income was substantial because we hold that she is liable for the
accuracy-related penalty due to negligence.
     4
         See supra note 2.
                               - 8 -

relevant facts and circumstances, and most importantly, the

extent to which he attempted to assess his proper tax liability.

See Neely v. Commissioner, 85 T.C. 934 (1985); Stubblefield v.

Commissioner, T.C. Memo. 1996-537; sec. 1.6664-4(b)(1), Income

Tax Regs.   As petitioner has not shown this Court the method by

which she kept track of her business profits and losses, we are

unable to find that petitioner attempted, in good faith, to

properly assess her tax liability.

     Despite this, petitioner maintains that there are other

factors which show she acted in good faith.   Petitioner points

out that (1) she relied upon an accountant who prepared her

original Federal income tax returns; (2) she submitted bank

statements to respondent’s examiner upon notice of audit; (3) she

corrected the discrepancies on her returns; (4) she paid the tax

due; and (5) she hired and relied on tax professionals.

     Reliance on the advice of a competent adviser can be a

defense to the accuracy-related penalty.   United States v. Boyle,

469 U.S. 241, 252 (1985); Zfass v. Commissioner, 118 F.3d 184

(4th Cir. 1997), affg. T.C. Memo. 1996-167; sec. 1.6664-4(b)(1),

Income Tax Regs.   However, it must be established that the

reliance was reasonable, in good faith, and based upon full

disclosure.   Ewing v. Commissioner, 91 T.C. 396, 423-424 (1988),

affd. without published opinion 940 F.2d 1534 (9th Cir. 1991);

Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662 (1987);
                               - 9 -

Pritchett v. Commissioner, 63 T.C. 149, 175-176 (1974).

     The record reflects that Mr. Kington, the preparer of her

original Federal income tax returns, was petitioner’s accountant

for 7 years.   However, petitioner has not shown Mr. Kington’s

qualifications or what records she provided to him in order to

prepare her returns.5   Therefore, we are unable to find that

petitioner’s reliance on Mr. Kington was in fact reasonable.

     The record also reflects that petitioner relied on Mr.

Nemiroff, her attorney, in submitting amended returns for 1994

and 1995.6   However, in the context of this case, petitioner’s

reliance on her attorney and her willingness to correct her

mistakes are irrelevant.   As respondent has applied the section

6662(a) penalty to the underpayment reflected on petitioner’s

original returns, we measure petitioner’s good faith and

reasonable reliance as of the date of filing her original

returns.

     In that regard, petitioner argues that the penalty should

apply to the underpayment reflected on petitioner’s amended, as




     5
       The credentials of Ron Kington are unclear from the
record.
     6
       Petitioner also contends that, on the advice of her
attorney, she hired a new accountant to prepare her amended
returns. Other than petitioner’s testimony, there is no evidence
that she did so. In that regard, petitioner’s amended returns are
not even signed by a tax preparer.
                               - 10 -

opposed to original, returns.7    However, an amended return can

only be used to determine a taxpayer’s underpayment for purposes

of section 6662(a) if it is a “qualified amended return”.    Sec.

1.6664-2(c)(2), Income Tax Regs.    A qualified amended return is

one that is filed before “The time the taxpayer is first

contacted by the Internal Revenue Service concerning an

examination of the return”.    Sec. 1.6664-2(c)(3)(i), Income Tax

Regs.    As petitioner filed her amended returns after she was

notified of examination, petitioner’s amended returns are not

qualified.

     We hold that respondent’s application of the section 6662(a)

penalty to the underpayment reflected in petitioner’s original

returns is correct, and petitioner’s good faith and reasonable

reliance, if any, after she filed her original returns and was

notified of an audit is of no consequence.

     To reflect the foregoing,

                                      Decision will be entered

                                 for respondent.




     7
       While the statutory notice of deficiency reflects the
income tax deficiency reflected on petitioner’s amended returns,
the penalty has been applied to petitioner’s underpayment
reflected on the original returns.
