                        T.C. Memo. 2010-66



                      UNITED STATES TAX COURT



               KEVIN RUSSELL DERBY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13698-07.               Filed April 5, 2010.



     Kevin Russell Derby, pro se.

     Michael S. Hensley, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:   After concessions, the issues for decision

are whether Derby, Inc., correctly reported gross receipts and

cost of goods sold, whether Derby, Inc., is entitled to

deductions relating to car and truck expenses, and whether
                               - 2 -

petitioner is liable for a section 6662(a)1 accuracy-related

penalty relating to 2004.

                         FINDINGS OF FACT

     In 2003 petitioner incorporated Derby, Inc. (Derby), his

landscaping and construction business, as an S corporation.

During 2004 petitioner was the sole shareholder of Derby.   At all

relevant times, Derby maintained a checking account (bank

account) with Washington Mutual Bank and employed Cheryl Haimsohn

of SDC Tax and Business Services, Inc., to maintain Derby’s books

and records.

     Ms. Haimsohn prepared and timely filed petitioner’s and

Derby’s 2004 Federal income tax returns (collectively, the 2004

returns).   On its 2004 return Derby reported $1,113,457 of gross

receipts, $727,308 of cost of goods sold, and $386,149 of total

income.   In addition, Derby deducted $53,656 as car and truck

expenses.

     In 2006 the Internal Revenue Service conducted an audit of

the 2004 returns.   Respondent’s Revenue Agent, Steven Oloya, was

assigned to the case.   During the examination Mr. Oloya performed

a bank deposits and cash expenditures analysis to reconstruct

Derby’s income.   On March 7, 2007, respondent issued petitioner a



     1
      Unless otherwise indicated, 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.
                               - 3 -

notice of deficiency relating to 2004.    In the notice of

deficiency respondent determined that Derby underreported gross

receipts by $103,968.   In addition, respondent disallowed, for

lack of substantiation, $177,585 of cost of goods sold and

$24,622 of deductions relating to car and truck expenses.

Respondent further determined a $108,950 deficiency and a $20,521

section 6662(a) accuracy-related penalty.

     On June 15, 2007, petitioner, while residing in California,

filed his petition with the Court.

                              OPINION

     Petitioner, as Derby’s sole shareholder, is required to take

into account all of Derby’s items of income, loss, deduction, or

credit.   See secs. 1363, 1366(a).   Respondent determined that

Derby had $103,968 of unreported gross receipts relating to 2004.

Respondent, as part of his analysis, evaluated Derby’s cash

expenditures and contends that $49,990 of the expenditures were

made with income not previously deposited.    Respondent and

petitioner agree that petitioner had $49,990 of cash

expenditures, but respondent contends that this amount was never

taken into account as gross receipts.    Petitioner, however,

established that the $49,990 had previously been deposited, was

reported, and was subsequently used to make cash expenditures.
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Therefore, we reject respondent’s determination with respect to

$49,990 of the alleged gross receipts.2

     Cost of goods sold is an offset to gross receipts in

determining gross income.     Metra Chem Corp. v. Commissioner, 88

T.C. 654, 661-662 (1987); sec. 1.61-3(a), Income Tax Regs.

Respondent disallowed, for lack of substantiation, $177,585 of

Derby’s cost of goods sold.    Petitioner, however, established

that Derby is entitled to $27,691 of the cost of goods sold

disallowed by respondent.

     Respondent also disallowed, for lack of substantiation, a

portion of Derby’s deductions relating to car and truck expenses.

With respect to the disallowed deductions, petitioner has not met

the section 274(d) substantiation requirements, and thus we

sustain respondent’s determination.      See secs. 162, 274(d),

280F(d)(4); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed.

Reg. 46014 (Nov. 6, 1985).

     Respondent further determined that petitioner is liable for

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

imposes a 20-percent penalty on the portion of an underpayment of

tax which is attributable to a substantial understatement of


     2
      Pursuant to sec. 7491(a), petitioner has the burden of
proof unless he introduces credible evidence and satisfies other
requirements that would shift the burden relating to that issue
to respondent. See Rule 142(a). Our conclusions, however, are
based on a preponderance of the evidence, and thus the allocation
of the burden of proof is immaterial. See Estate of Bongard v.
Commissioner, 124 T.C. 95, 111 (2005).
                                 - 5 -

income tax.   See sec. 6662(b)(2).   Petitioner substantially

understated his income tax.   See sec. 7491(c); Higbee v.

Commissioner, 116 T.C. 438, 446 (2001).       Section 6664(c)(1),

however, provides that no penalty shall be imposed if there was

reasonable cause for the underpayment and the taxpayer acted in

good faith.   Ms. Haimsohn maintained Derby’s books and records

and prepared petitioner’s and Derby’s 2004 returns.        Given

petitioner’s inexperience with and minimal knowledge of tax law,

we conclude that petitioner took reasonable efforts to assess his

proper tax liability and reasonably relied on Ms. Haimsohn’s

expertise.    See Freytag v. Commissioner, 89 T.C. 849, 888 (1987),

affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991);

sec. 1.6664-4(b)(1), Income Tax Regs.       Thus, petitioner acted in

good faith, had reasonable cause for the underpayment, and is not

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

     Contentions we have not addressed are irrelevant, moot, or

meritless.

     To reflect the foregoing,


                                              Decision will be entered

                                         under Rule 155.
