                         T.C. Memo. 2009-32



                      UNITED STATES TAX COURT



         EDWARD T. AND JENNIFER B. GARRISON, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3745-07.                Filed February 10, 2009.



     Edward T. and Jennifer B. Garrison, pro se.

     Edwina L. Jones, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     WELLS, Judge:   Respondent determined a deficiency of $48,341

in petitioners’ 2002 Federal income tax and a $9,668.20 accuracy-

related penalty under section 6662(a).1   The issues we must



     1
      All section references are to the Internal Revenue Code in
effect for the year in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
                               - 2 -

decide are:   (1) Whether petitioners are entitled to deduct for

taxable year 2002 contract labor expenses in excess of those

allowed by respondent; and (2) if not, whether, pursuant to

section 6662(c), petitioners were negligent.   For the reasons set

forth below, we sustain respondent’s determinations.

                         FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   Petitioners are husband

and wife and resided in North Carolina at the time they filed the

petition.

     On April 15, 2003, petitioners timely filed their joint 2002

Federal income tax return.   During 2002 petitioners owned and

operated a construction business known as Mecklenburg Framing.

On Schedule C, Profit or Loss From Business, of their 2002 joint

return, petitioners reported gross receipts from Mecklenburg

Framing of $881,439 and a claimed deduction for contract labor

expenses of $885,035.

     During respondent’s examination of petitioners’ 2002 Federal

income tax return, petitioners submitted copies of Forms 1099-

MISC, Miscellaneous Income, showing nonemployee compensation paid

by Mecklenburg Framing to various contract laborers.2     The



     2
      Petitioners did not file the Forms 1099-MISC with
respondent.
                                - 3 -

nonemployee compensation reported on the Forms 1099-MISC was as

follows:

                 Recipient                   Amount

            Sanchez Framing               $480,958.06
            D & D Construction              54,215.71
            Jesus Garcia Rosales d.b.a.
             Garcia Construction            35,838.09
            Luis Felipe Rosales Zarate      15,300.15
            Rigoberto Arreola               66,080.33
              Total                        652,392.34

     Petitioners also created and provided respondent a

comprehensive list of those contract laborers allegedly paid by

Mecklenburg Framing for services rendered during taxable year

2002.    The aggregate amount of contract labor expenses provided

on the list equaled that claimed on Schedule C of petitioners’

2002 joint return.    Petitioners did not, however, submit any

canceled checks or other documentation substantiating the claimed

expenses.

     On November 15, 2006, respondent sent petitioners a notice

of deficiency for taxable year 2002.3     Respondent allowed a

deduction for contract labor expenses of $652,414 that was based

on the aforementioned Forms 1099-MISC petitioners submitted.4


     3
      On Sept. 14, 2005, petitioners executed a Form 872, Consent
to Extend the Time to Assess Tax, which extended the time within
which respondent could assess any Federal income tax due with
respect to petitioners’ 2002 tax year to Dec. 31, 2007.
     4
      Respondent notes that there is a $21.66 difference between
the amount allowed as a deduction in the notice of deficiency
($652,414) and the amount set forth on Forms 1099-MISC prepared
                                                   (continued...)
                                - 4 -

Respondent disallowed the remaining $232,621 of petitioners’

claimed contract labor expenses, resulting in a deficiency

determination of $48,341.    Respondent also imposed an accuracy-

related penalty of $9,668.20.    Petitioners timely petitioned the

Court.

     On October 15, 2007, 1 day before trial, petitioners

provided respondent a document entitled “Mecklenburg Framing

Employee Contact List”, which included the names of alleged

contract laborers and their corresponding Social Security

numbers.    Respondent discovered, however, that most of the Social

Security numbers did not match the corresponding names of the

contract laborers.    Moreover, Mecklenburg Framing did not issue

Forms 1099-MISC to any of the contract laborers listed on the

Mecklenburg Framing Employee Contact List.

     Petitioners also produced a document entitled “Mecklenburg

Framing 1099 Detail for the period from January through December

2002”.5    Petitioners did not, however, produce or offer at trial

any canceled checks or testimony from any contract laborer to

substantiate the amounts allegedly paid by Mecklenburg Framing as

set forth in that document.


     4
      (...continued)
by petitioners ($652,392.34). Respondent offers no explanation
as to the discrepancy and concedes the issue.
     5
      Notably, this document did not include any of the
individuals listed on the Mecklenburg Framing Employee Contact
List.
                               - 5 -

                              OPINION

     We consider whether petitioners are entitled to Schedule C

deductions for contract labor expenses in excess of those allowed

by respondent for taxable year 2002 and whether petitioners are

liable for an accuracy-related penalty under section 6662(a).

1.   Disallowed Deductions

     Deductions are a matter of legislative grace, and a taxpayer

bears the burden of proving that he or she has complied with the

specific requirements for any deduction claimed.   See Rule

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

New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).        A

taxpayer may deduct all ordinary and necessary expenses paid or

incurred during the taxable year in carrying on a trade or

business if the taxpayer maintains sufficient records to

substantiate the expenses.   Secs. 162(a), 6001; Deputy v. du

Pont, 308 U.S. 488, 495-496 (1940); Hradesky v. Commissioner, 65

T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir.

1976); sec. 1.6001-1(a), Income Tax Regs.

     Petitioners have provided no credible evidence

substantiating their claimed contract labor expenses for

Mecklenburg Framing.   Petitioners did not offer any canceled

checks corroborating their disallowed expense deductions.     Nor

did they offer any testimony from any of the alleged contract

laborers to confirm payment for services.   Indeed, the only
                                - 6 -

evidence petitioners submitted to verify the deductions in issue

was self-serving documents they generated themselves.6

     In sum, petitioners failed to offer any credible evidence to

substantiate the amounts paid by Mecklenburg Framing for the

contract labor expenses in issue.   Consequently, we hold that

petitioners have failed in their burden of proof and, therefore,

are not entitled to a deduction in excess of the amount

respondent allowed in the notice of deficiency.

2.   Accuracy-Related Penalty

     Section 6662 provides for an accuracy-related penalty equal

to 20 percent of an underpayment if the underpayment is due to a

taxpayer’s negligence or disregard of rules or regulations.    Sec.

6662(a) and (b)(1).   For purposes of section 6662, 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 Cir. 1996)

(quoting Schrum v. Commissioner, 33 F.3d 426, 437 (4th Cir.

1994), affg. in part and vacating in part T.C. Memo. 1993-124),

affg. T.C. Memo. 1995-46; Neely v. Commissioner, 85 T.C. 934, 947

(1985) (quoting Marcello v. Commissioner, 380 F.2d 499, 506 (5th


     6
      Under sec. 7491(a)(1), if a taxpayer introduces credible
evidence with respect to any factual issue, the burden of proof
shifts to the Commissioner. In the instant case, the burden of
proof does not shift to respondent because petitioners did not
maintain adequate books and records and were unable to
substantiate by credible evidence $232,621 of their claimed
Schedule C contract labor expenses. See sec. 7491(a)(1) and (2).
                                  - 7 -

Cir. 1967), affg. in part and remanding in part 43 T.C. 168

(1964) and T.C. Memo. 1964-299).     “Negligence” 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.

     A taxpayer may avoid the application of an 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

relevant facts and circumstances and, most importantly, the

extent to which a taxpayer attempted to assess his or her proper

tax liability.    See Neely v. Commissioner, supra; Stubblefield v.

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

Regs.

     As noted above, petitioners failed to keep adequate books

and records or to substantiate the claimed contract labor

expenses for Mecklenburg Framing.     Such a failure is prima facie

evidence of negligence.    See sec. 1.6662-3(b), Income Tax Regs.

On the basis of the record, we conclude that petitioners have

failed to meet their burden of proving that they acted with

reasonable cause and in good faith.       We therefore sustain

respondent’s determination that petitioners are liable for the

$9,668.20 accuracy-related penalty pursuant to section 6662(a) on
                                 - 8 -

the underpayment associated with the disallowed contract labor

expenses.

     We have considered all of the contentions and arguments of

the parties that are not discussed herein, and we conclude that

they are without merit, irrelevant, or moot.

     To reflect the foregoing,


                                              Decision will be entered

                                         for respondent.
