                        T.C. Memo. 2016-68



                  UNITED STATES TAX COURT



           TRACIA CALLENDER, Petitioner v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 25348-12.                         Filed April 18, 2016.



       After examining P's returns for 2009 and 2010, R disallowed
all or most of the miscellaneous itemized deductions she claimed for
those years.

      Held: P failed to substantiate the expenses underlying the
miscellaneous itemized deductions she claimed for 2009 and 2010 in
excess of the amounts allowed by respondent.

      Held, further, I.R.C. sec. 6662(a) accuracy-related penalty for
2010 sustained.



Tracia Callender, pro se.

James P.A. Caligure and Peggy J. Gartenbaum, for respondent.
                                         -2-

[*2]         MEMORANDUM FINDINGS OF FACT AND OPINION


        HALPERN, Judge: Respondent determined deficiencies of $2,909 and

$15,025 in petitioner's 2009 and 2010 Federal income tax, respectively, and an

accuracy-related penalty of $3,005 for 2010. After concessions by the parties, we

must decide (1) whether petitioner is entitled to miscellaneous itemized deductions

of $15,119 and $12,200 for 2009 and 2010, respectively, in excess of the amounts

respondent allowed and (2) whether petitioner is liable for a section 6662(a)

accuracy-related penalty on her underpayment of tax for 2010. 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.

                                FINDINGS OF FACT

        When petitioner filed her petition in this case, she resided in Brooklyn, New

York.

Petitioner's Employment

        Petitioner was employed by Queens Legal Services Corp. (QLS) from June

2000 until September 30, 2009. Her final position at QLS was senior staff

attorney. On February 1, 2010, petitioner began work as a trial attorney for the
                                          -3-

[*3] State of New York Unified Court System. Between 2007 and 2011, petitioner

worked on a case in Albany, New York, that was unrelated to her employment and

for which she received no compensation.

Petitioner's Injuries and Workers' Compensation Claim

      Petitioner was treated for leg and knee sprains in March 2009 and was "able

to perform * * * [her] usual work" by August 31, 2009. In September 2009,

petitioner filed workers' compensation claims against QLS that she agreed to

withdraw as part of an agreement and release with QLS dated October 26, 2010.

The agreement does not describe the nature of any injuries underlying the

withdrawn claims.

Petitioner's 2009 and 2010 Federal Income Tax Returns

      On her Federal income tax return for 2009, petitioner reported adjusted

gross income of $37,906 and no taxable income or tax liability. On her 2010

return, she reported adjusted gross income of $53,641, no taxable income, and tax

liability of $1,832 attributable to a qualified plan distribution.

      In computing her tax liability for 2009 and 2010, petitioner claimed

miscellaneous itemized deductions of $19,580 and $14,237, respectively. On her

2010 return, petitioner also claimed the following deductions:
                                         -4-

            [*4]          Deduction                    Amount
            Schedule A--Mortgage interest              $36,709
            Schedule C                                  33,243
            Schedule E--Auto and travel                  6,700
            Schedule E--Management fees                  1,200
            Schedule E--Legal and professional           1,100
            Schedule E--Commissions                      1,100

      At trial, petitioner submitted spreadsheets captioned "Job Expenses and

Miscellaneous Deductions". Each spreadsheet lists individual expenditures,

grouped by category. The subtotals for each category are as follows:

                      Category                 2009              2010
           Bar dues and admissions, fees,
             expenses, and continuing
             legal education expenses          $3,302        $1,896
           Travel                               1,942              28
           Car expense                          2,495            2,315
           Gas                                    587             751
           Parking                              1,254             361
           Car expense--Sirius radio              245            -0-
           Supplies                             5,560            3,521
           Post office/Federal Express            147             167
           Fee for background check
             for courts                          -0-               75
                                         -5-

           [*5] Food                              1,432            533
           Repair work bag                            35          -0-
           Internet service                         546            549
           Telephone                              1,875          2,247
           Union dues                             1,041           -0-
           TurboTax                                 118            141
           Attorney's fees                        1,730            950
              Total                              22,309         13,534

At trial, petitioner claimed that the expenses listed above related to her

employment, but she did not explain individual expenditures in detail. She

admitted that some of the expenses related to the Albany case and that she had

mistakenly failed to attach a Schedule C, Profit or Loss From Business, to her

returns reporting income and expenses of her own legal practice.

Respondent's Adjustments

      After examining petitioner's returns, respondent disallowed all of the

miscellaneous itemized deductions petitioner claimed for 2009 and 2010 other

than the $1,041 of union dues that petitioner deducted for 2009. Respondent

allowed $12,237 of the mortgage interest deduction claimed by petitioner on her

2010 Schedule A, Itemized Deductions, but disallowed the remaining $24,472.

Respondent also disallowed the deductions petitioner claimed on her 2010
                                        -6-

[*6] Schedule E, Supplemental Income and Loss, for auto and travel expenses,

management fees, legal and professional fees, and commissions. On the basis of

these and other adjustments, respondent determined that petitioner's corrected tax

liability is $2,909 and $16,457 for 2009 and 2010, respectively.

The Parties' Concessions

      At trial, respondent conceded that, for each of the two years in issue,

petitioner could deduct the bar dues and continuing legal education expenses she

reported and the amounts she paid for tax return preparation software. Petitioner

conceded that, for 2010, she was not entitled to deduct the $24,472 of Schedule A

mortgage interest respondent disallowed, the $33,243 of Schedule C expenses she

reported, or the Schedule E expenses that respondent disallowed.

                                     OPINION

I.    Substantiation

      A.    Burden of Proof

      In general, the taxpayer bears the burden of proof. See Rule 142(a).

Section 7491(a)(1), however, may shift the burden of proof to the Commissioner

if, among other things, the 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.
                                        -7-

[*7] 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 she has satisfied the paragraph

(2) preconditions. E.g., Allnutt v. Commissioner, T.C. Memo. 2004-239, 2004

WL 2339813, at *4.

      Petitioner has failed to establish her compliance with the record

maintenance requirement that is a prerequisite to shifting the burden of proof to

respondent. Accordingly, petitioner bears the burden of proof.

      B.     Petitioner's Entitlement to the Claimed Deductions

      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

his pay, expenses related to a taxpayer's employment and not reimbursed by the

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

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.
                                         -8-

[*8] 1.6001-1(a), Income Tax Regs. Moreover, some expenses, including those

relating to travel, meals, and entertainment, are subject to heightened

substantiation requirements. See sec. 274(d).

      Petitioner has failed to carry her burden of substantiating the expenses

underlying the miscellaneous itemized deductions she claimed in excess of the

amounts respondent allowed. At trial, she described the amounts in issue only in

general terms but did not provide supporting documentation for each item or

establish how it was related to her employment. Moreover, she admitted that she

had incurred some of the claimed expenses in connection with a case that was

unrelated to her employment and for which she received no compensation. Thus,

in regard to the amount remaining in issue for each year, petitioner has failed to

establish both the fact of the expenditures themselves and that any such

expenditures were ordinary and necessary business expenses. In Patterson v.

Commissioner, T.C. Memo. 1979-362, 1979 Tax Ct. Memo LEXIS 162, at *7, we

considered the case of a taxpayer who had "chosen to rely on what may be termed

the 'shoebox method' of attaching photocopies of numerous cash register tapes and

of similar bits of paper to his returns, without making any effort on the returns or

on brief, and only a slight effort in oral testimony, to link any item to a deductible

trade or business expense transaction." We concluded that the taxpayer in
                                        -9-

[*9] Patterson failed to carry his burden of substantiating trade or business items.

See also Dowell v. United States, 522 F.2d 708, 714 (5th Cir. 1975) (holding that

section 274(d) requires substantiation of the amount, date, place, business purpose,

and business relationship of each and every expenditure). Petitioner's position is

similar to that of the taxpayer in Patterson. Therefore, we sustain respondent's

disallowance of the deductions in issue.

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) 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 of income tax 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". Sec. 6662(d)(2)(B)(i).

Section 6664(c)(1) provides an exception to the imposition of the section 6662(a)
                                       - 10 -

[*10] 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,

446 (2001). The taxpayer's concessions may be taken into account in determining

whether the Commissioner has met that burden. Oria v. Commissioner, T.C.

Memo. 2007-226, 2007 WL 2318367, at *4. Once the Commissioner carries his

burden of production, the taxpayer bears the burden of proving that she is entitled

to relief because of substantial authority or under section 6664(c)(1). See Higbee

v. Commissioner, 116 T.C. at 446.

      A.     Substantial Understatement

      The deficiency respondent determined for petitioner's 2010 taxable year far

exceeded 10% of the total corrected tax liability shown on the notice of deficiency

(which amount, in turn, is greater than $5,000). It appears unlikely that the
                                        - 11 -

[*11] concessions respondent made will reduce petitioner's understatement below

the substantiality threshold.1

      In any event, because we find that petitioner's underpayment for 2010 is

attributable to negligence, the section 6662(a) accuracy-related penalty applies to

that underpayment regardless of whether it is also attributable to a substantial

understatement of income tax within the meaning of section 6662(d)(1)(A).

      B.     Negligence

      Section 1.6662-3(b)(1), Income Tax Regs., provides that "negligence"

includes a "failure to make a reasonable attempt to comply with the provisions of

the internal revenue laws or to exercise ordinary and reasonable care in the

preparation of a tax return." See also Marcello v. Commissioner, 380 F.2d 499,

506 (5th Cir. 1967) ("Negligence is lack of due care or failure to do what a

reasonable and ordinarily prudent person would do under the circumstances."),

aff'g in part, remanding in part 43 T.C. 168 (1964), and T.C. Memo. 1964-299. A

"failure * * * to keep adequate books and records or to substantiate items

properly" also constitutes negligence. Sec. 1.6662-3(b)(1), Income Tax Regs.




      1
       Petitioner makes no argument that her deduction of the amounts respondent
disallowed or any of the positions she conceded were supported by substantial
authority.
                                        - 12 -

[*12] Petitioner conceded at trial that she was not entitled to $67,815 of

deductions that she claimed on her 2010 return. Respondent has shown that

petitioner failed to keep adequate books and records to substantiate the expenses

underlying those miscellaneous itemized deductions she claimed on her 2010

return that remained at issue after concessions. Petitioner's failure to substantiate

the expenses underlying the deductions in issue and her admission before trial of

the impropriety of other deductions both evidence negligence. See id. Thus, we

conclude that respondent has met his burden of production in regard to the

accuracy-related penalty he determined.

      C.     Reasonable Cause

      Although petitioner does not specifically invoke the reasonable cause

defense of section 6664(c)(1), she does ask, in one of the issues identified in her

opening brief, whether alleged injuries and offenses she suffered are "sufficient for

penalties not to apply". In addition, she claims to have "relied on turbo tax expert

CPAs in good faith."

      In determining whether a taxpayer's underpayment is attributable to

negligence, "we must take into account th[e] taxpayer's mental and physical

condition and sophistication with the tax laws during the time that the return was

filed." Gray v. Commissioner, T.C. Memo. 1982-392, 1982 Tax Ct. Memo LEXIS
                                        - 13 -

[*13] 350, at *16. Thus, "[p]roof of mental incapacitation or disability" can

support a finding of reasonable cause. Carnahan v. Commissioner, T.C. Memo.

1994-163, 1994 WL 135342, at *3, aff'd, 70 F.3d 637 (D.C. Cir. 1995).

      Although petitioner's brief describes hardships she claims to have suffered

that, in her view, should relieve her of liability for the penalty respondent

determined, she failed to present evidence that would support her claim. Her

opening brief did not propose numbered findings of fact with citations to the

record, as Rule 151(e)(3) requires. Moreover, we find nothing in the record that

would support her claim of reasonable cause on the basis of her physical and

mental condition when she filed her 2010 return. The record provides evidence

only that petitioner was treated for leg and knee sprains in March 2009 and was

"able to perform * * * [her] usual work" by August 31, 2009. The other hardships

petitioner alleges on brief (which, unlike leg and knee sprains, might support a

finding of reasonable cause) are not documented in the record.

      In some circumstances, a taxpayer's reliance on a competent and

experienced accountant in the preparation of the taxpayer's return may constitute

reasonable cause and good faith. See, e.g., Weis v. Commissioner, 94 T.C. 473,

487 (1990); see also Westbrook v. Commissioner, 68 F.3d 868, 881 (5th Cir.

1995), aff'g T.C. Memo. 1993-634. By contrast, in Bunney v. Commissioner, 114
                                        - 14 -

[*14] T.C. 259 (2000), we rejected a taxpayer's argument that his use of a tax

software program to prepare his return should excuse him from the accuracy-

related penalty. As we observed in that case: "Tax preparation software is only as

good as the information one inputs into it." Id. at 267.

       In sum, the evidence before us fails to demonstrate that the errors petitioner

made in the preparation of her 2010 return were attributable to reasonable cause

and that she acted in good faith. Petitioner thus failed to carry her burden of

showing that she is entitled to relief under section 6664(c)(1). Therefore, we

sustain respondent's determination that the section 6662(a) penalty applies to

petitioner's underpayment for 2010.

III.   Conclusion

       For the reasons explained above, we conclude that petitioner (1) is not

entitled to deduct the miscellaneous itemized deductions she claimed for 2009 and

2010 in excess of the amounts respondent allowed and (2) is liable for the section

6662(a) accuracy-related penalty on her underpayment of tax for 2010.


                                                      Decision will be entered under

                                                 Rule 155.
