                    T.C. Summary Opinion 2010-71



                       UNITED STATES TAX COURT



                  ISSA K. SHOKEH, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 29666-08S.              Filed June 9, 2010.



     Issa K. Shokeh, pro se.

     Jon D. Feldhammer, for respondent.



     LARO, Judge:   This case was heard pursuant to the provisions

of section 7463 of the Internal Revenue Code in effect when the

petition was filed.1   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.



     1
      Unless otherwise indicated, section references are to the
applicable versions of the Internal Revenue Code, and Rule
references are to the Tax Court Rules of Practice and Procedure.
                                     -2-

       Respondent determined a $8,746 deficiency in petitioner’s

2005 Federal income tax and a $1,749 accuracy-related penalty

under section 6662(a).       The issues for decision are whether

petitioner:       (1) Failed to include $1,503 of a State income tax

refund in his gross income, (2) may deduct $40,665 in expenses

reported on his amended 2005 Schedule C, Profit or Loss From

Business (Sole Proprietorship), and (3) is liable for the

accuracy-related penalty.

                                Background

I.    Preliminaries

       Some facts were stipulated and are so found.     The stipulated

facts and the accompanying exhibits are incorporated herein by

this reference.       Petitioner resided in California when he filed

his petition.       He filed a 2005 Form 1040, U.S. Individual Income

Tax Return (2005 return).       He later filed an amended 2005 return

(amended 2005 return) in July 2007.

II.    Petitioner’s Employment

       A.     Full-time Occupation

       Petitioner has a college degree in engineering, and he

worked in and around San Jose, California, as an engineer during

2005.       He was a full-time employee during that year, and his

employer paid him a salary of $120,556.
                                    -3-

       B.    Claimed Second Occupation

       Petitioner claims for 2005 that he also was a self-employed

consultant.      He claims that his consulting business for 2005

consisted primarily of keeping track of the payroll, current

orders, and sales tax information for two clients, ToolBar, Inc.

(ToolBar), and Service Island, Inc. (Service Island).2      He claims

that he operated his consulting business out of his home in

Milpitas, California, and that his consulting business required

that he travel twice a month to his clients’ location in

Escondido, California.       Escondido, California, is a city in San

Diego County, and the business addresses of ToolBar and Service

Island were practically next to each other.      The distance from

petitioner’s home to those business addresses is 450 miles.

III.       ToolBar and Service Island

       A.    ToolBar

       Petitioner and two other individuals formed ToolBar in 2004,

and petitioner had a significant (and apparently controlling)

ownership interest in ToolBar during 2005.      ToolBar operated as

Precision Tune Auto Care.




       2
      We herein use the words “business” and “clients” to refer
respectively to petitioner’s claimed consulting business and to
petitioner’s relationship with ToolBar and Service Island. We
use those words for convenience and neither find nor mean to
suggest that petitioner actually had a consulting business or
that either referenced entity was actually petitioner’s client.
                                  -4-

      B.   Service Island

      Petitioner had no ownership interest in Service Island

during 2005.     He acquired a one-third ownership interest in 2006.

The record does not reveal the nature of Service Island’s

business or whether that business was operating during 2005.

IV.   Petitioner’s 2005 Return

      A.   Overview

      Petitioner reported on his 2005 return that his gross income

included his $120,556 salary, $5,656 of a $7,159 State income tax

refund, a $3,000 capital loss, and a $46,643 loss from a sole

proprietorship.    His amended 2005 return reported $21 of interest

income that was not reported on the 2005 return, and it reported

that the sole proprietorship’s loss was actually $40,665.

      B.   Petitioner’s Schedule C

            1.   Overview

      Petitioner’s 2005 return included a Schedule C that reported

that petitioner owned a sole proprietorship with $46,643 of

expenses and no gross income.    The Schedule C listed that

“service” and “repair and maintenance of automobiles” was the

business of the sole proprietorship and that “Toolbar, Inc.” was

the sole proprietorship’s name.      The Schedule C listed the sole

proprietorship’s business address as a post office box in San

Jose that petitioner reported on his 2005 return was his personal
                                  -5-

address.   The Schedule C broke down the $46,643 of expenses as

follows:

            Expenses                                 Amount

     Car and truck expense                          $17,515
     Depreciation                                       450
     Other interest                                   8,500
     Legal and professional services                    500
     Office expense                                     100
     Repairs and maintenance                          4,000
     Supplies                                           500
     Travel                                           2,000
     Meals and entertainment                            270
     Utilities                                        2,000
     Business use of home                            10,808
       Total                                         46,643

     Petitioner’s amended 2005 return included an amended

Schedule C.     The amended Schedule C reported the same list of

expenses reported on the original Schedule C but stated that the

amounts of expenses for car and truck and business use of home

were $9,720 and $12,625, respectively.     The amended Schedule C

listed “Business Services” and “repair and maintenance of

automobiles” as the businesses of the sole proprietorship and

“Issa K Shokeh” as the sole proprietorship’s name.     The amended

2005 return listed the sole proprietorship’s business address as

the same post office box listed on the 2005 return.

           2.    Car and Truck Expenses

     Petitioner claimed the car and truck expenses for travel

from his home to San Diego County.      Petitioner’s brother moved to

San Diego County in 2005, and during that year petitioner

regularly traveled to San Diego County, taking either his
                                 -6-

children or another person with him.   Petitioner knew that 450

miles was the distance between his home and the Escondido

business addresses, but he consciously used 500 miles to

calculate the car and truck expenses he reported on both his 2005

return and on his 2005 amended return.   Petitioner initially

claimed that he drove back and forth between those locations 3

times each month during 2005 (or a total of 36 times), and one

exhibit in this case is a rudimentary “mileage log” that

petitioner prepared to support that claim.   Petitioner now claims

(inconsistently with his “mileage log”) that he went back and

forth to San Diego County only twice a month (or a total of 24

times).   Petitioner’s amended 2005 return states that his

business mileage was 24,000 (i.e., 24 trips at 1,000 miles round

trip) and that his resulting deduction (on the basis of a

standard mileage rate of 40.5 cents per mile) was $9,720.

           3.   Business Use of Home

     Petitioner claimed his “Business Use of Home” expenses for

some of his home expenses.   For most of 2005, petitioner lived in

his home with his mother, his two children, his niece, and his

nephew.   The home is 2,400 square feet, and one room in the house

is 600 square feet.   Petitioner calculated his business use of

home deductions on the basis of those numbers.

     Petitioner reported on his 2005 tax return that his expenses

for business use of home totaled $10,808, and he reported on his
                                 -7-

amended 2005 return that those expenses totaled $12,625.     The

difference between these amounts is attributable to petitioner’s

claim in the amended 2005 return that his deductible mortgage

interest was $1,817 higher than initially reported.

          4.   Travel Expenses

     For 13 months beginning on April 1, 2004, petitioner and

ToolBar rented an apartment in San Diego at a monthly rent of

$1,055.   Petitioner included that rent in the $2,000 he deducted

as travel expenses.

          5.   Other Expenses

     The record contains no evidence as to the other expenses

that petitioner reported on Schedule C.    Those other expenses are

other interest, repairs and maintenance, utilities, legal and

professional services, supplies, depreciation, office expense,

and meals and entertainment.

                            Discussion

I.   Burden of Proof on Tax Liability

     The Commissioner’s deficiency determination is presumed

correct, and taxpayers generally bear the burden of proving

otherwise in order to prevail.   See Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).     In addition, an individual

taxpayer generally bears the burden of “clearly showing the

right” to any deduction that he or she claims.    See Interstate

Transit Lines v. Commissioner, 319 U.S. 590, 593 (1943).     If an
                                 -8-

individual taxpayer meets certain requirements, the burden of

proof may shift to the Commissioner as to factual issues relevant

to ascertaining the taxpayer’s income tax liability.    See sec.

7491(a).    Petitioner does not argue (nor do we find) that he

meets the requirements under section 7491(a) for a shifting of

the burden of proof.    We conclude that petitioner has the burden

of proof.

II.    State Income Tax Refund

       Petitioner does not dispute that he received a $7,159 State

income tax refund.    He argues that $1,503 of the refund is not

taxable to him because he never received a tax benefit from the

$1,503.    Petitioner relies upon a worksheet which shows his

calculation that only $5,656 of the $7,159 is taxable to him.

The worksheet, however, shows a clear error in petitioner’s

calculation.    When we correct this error, we find that the full

$7,159 is taxable to petitioner.    We sustain respondent’s

determination of the same.

III.    Schedule C Expenses

       Respondent determined that petitioner did not operate a

consulting business during the subject year.    We agree.   While

section 162 generally lets a taxpayer deduct the ordinary and

necessary expenses of a consulting business that he operated

during 2005, we are unable to find in the limited record before

us that petitioner had a consulting business during 2005.
                                 -9-

     Petitioner essentially relies upon his testimony and two

exhibits to support his claim that he had a consulting business

during 2005.   The first exhibit purports to be a “Contract”

between petitioner and ToolBar, stating that petitioner will

provide certain services to ToolBar for an undisclosed term in

exchange for “a fee not to exceed $10,000 per year”.   The second

exhibit purports to be a “Consulting Agreement” between

petitioner and Service Island, stating that petitioner will

provide certain services to Service Island for a 5-year term

beginning January 1, 2005, in exchange for $10,000 per year.

     We are unpersuaded by petitioner’s testimony and by the

referenced exhibits.   His testimony was limited and vague.    The

exhibits are unreliable.   The exhibits, while claimed to be bona

fide agreements between petitioner and his related (and

apparently controlled) entities, are not indicative of agreements

that would be entered into by persons acting at arm’s length.     In

fact, neither “agreement” sets forth a provision under which

petitioner’s compensation would be ascertained on the basis of

the quantity or quality of the services that he actually

performed for the entities.   The “agreements” simply state that

petitioner will receive set payments for the entire year,

payments in the total which cannot exceed an average of

approximately $385 a week.    Moreover, neither “agreement” appears

to be signed by an officer or employee of ToolBar or Service
                                -10-

Island.   We also note that petitioner did not receive any

payments under the “agreements” during 2005 and that, even if he

did receive the maximum amount payable under the “agreements”, he

would have realized a substantial loss from his claimed

consulting business.

     Nor do the other facts support a conclusion that petitioner

actually had a consulting business during 2005.   First,

petitioner reported no Schedule C income for 2005, and he

admitted during his testimony that he did not intend to receive

any income from the “agreements” during 2005.   We also do not

find that petitioner even billed the entities for any consulting

services that he performed during 2005, let alone that he

performed any such services in the first place.   Second, we find

in the record no reliable documentation that ordinarily would be

kept by a bona fide business.   Such documentation, at a minimum,

would include documentation of the time that petitioner spent

consulting pursuant to the “agreements” and accurate

documentation of at least some business expenses.   Third,

petitioner worked full time as an engineer, and he traveled to

San Diego County, the home of his brother, many times with his

children.   Petitioner has not explained why he would have to

travel to San Diego County so often on business or, if he did,

why he would have to bring his children with him.   Fourth,

petitioner reported the Schedule C expenses on his 2005 return as
                                  -11-

if those expenses were incurred in ToolBar’s business (rather

than in a business of his).      Fifth, petitioner’s claimed

consulting business had no established physical location or any

clients other than the two related entities.

      We sustain respondent’s determination that petitioner is not

entitled to deduct any of his claimed Schedule C expenses for

2005.

IV.   Accuracy-Related Penalty

      Respondent determined that petitioner is liable for an

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

and (b)(1) imposes a 20-percent accuracy-related penalty on the

portion of an underpayment of tax attributable to negligence or

disregard of rules or regulations.       Negligence connotes a lack of

due care or failure to do what a reasonable and prudent person

would do under the circumstances.        See Allen v. Commissioner, 92

T.C. 1, 12 (1989), affd. 925 F.2d 348 (9th Cir. 1991).       An

accuracy-related penalty shall not be imposed on any portion of

an underpayment for which the taxpayer had reasonable cause and

acted in good faith with respect thereto.       See sec. 6664(c)(1).

      Respondent bears the burden of production with respect to

the applicability of the accuracy-related penalty.       See sec.

7491(c).   That burden requires that respondent produce sufficient

evidence that it is appropriate to impose the accuracy-related

penalty.   See Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
                                -12-

Once respondent meets this burden, the burden of proof falls upon

petitioner.   See id. at 447.   Petitioner may carry his burden by

proving he was not negligent and did not act carelessly,

recklessly, or in intentional disregard of rules or regulations.

See sec. 6662(c).   Alternatively, petitioner may establish that

his underpayment was attributable to reasonable cause and his

acting in good faith.   See sec. 6664(c)(1).

     Respondent has met his burden of production in that the

record establishes that petitioner understated his gross income

through, in part, his claim to undocumented (and sometimes

intentionally inflated) Schedule C expenses for a fictitious

business.   Petitioner argues that he should not be liable for the

accuracy-related penalty because he relied upon the advice of his

accountant.   We are unpersuaded.   Although reliance on the advice

of a professional as to the tax treatment of an item may

sometimes be enough to escape the imposition of a section 6662(a)

accuracy-related penalty, see United States v. Boyle, 469 U.S.

241, 250 (1985); sec. 1.6664-4(b), Income Tax Regs., individual

taxpayers relying upon this exception must prove by a

preponderance of evidence that:     (1) The adviser was a competent

professional who had sufficient expertise to justify reliance;

(2) the taxpayer provided necessary and accurate information to

the adviser; and (3) the taxpayer actually relied in good faith

on the adviser’s judgment, see Neonatology Associates, P.A. v.
                                 -13-

Commissioner, 115 T.C. 43, 99 (2000), affd. 299 F.3d 221 (3d Cir.

2002).   On the basis of the record at hand, we are unable to

conclude that any of these requirements has been met.      We sustain

respondent’s determination as to the accuracy-related penalty.

V.   Conclusion

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

the extent not discussed above, conclude they are without merit.

     To reflect the foregoing,


                                             Decision will be entered

                                        under Rule 155.
