                          T.C. Memo. 2010-37



                      UNITED STATES TAX COURT



                GEORGIA C. FARBER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14681-07.                Filed February 24, 2010.



     Clark Garen, for petitioner.

     Michael S. Hensley, for respondent.



                          MEMORANDUM OPINION


     FOLEY, Judge:   The issues for decision are whether, relating

to 2003, petitioner is:    (1) Entitled to deduct expenses relating

to her retail activity, (2) entitled to certain itemized

deductions, and (3) liable for an accuracy-related penalty
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pursuant to section 6662(a).1   The parties submitted this case

fully stipulated pursuant to Rule 122.

                            Background

     In 2003 petitioner was employed as a professor of nursing at

Santa Monica Community College and began a retail activity

selling candles.   Petitioner did not maintain a general ledger,

financial statements, records of insurance, records of appraisal,

records of advertising, or a separate bank account relating to

her retail activity.   Further, petitioner did not create income

and expense worksheets, business or marketing plans, operating

budgets, cost-benefit analyses, or financial projections relating

to the activity, nor did she obtain a business license or

fictitious business name relating to her retail activity.

Expenses relating to petitioner’s retail activity were billed to

her and paid out of her personal accounts.

     On August 13, 2004, petitioner filed her 2003 Federal income

tax return (2003 return), which included a Schedule C, Profit or

Loss From Business, and a Schedule A, Itemized Deductions.    On

Schedule C petitioner reported $2,351 of gross receipts and

claimed $33,475 of expense deductions for advertising, insurance,

taxes, licenses, travel, utilities, and other expenses relating


     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 -

to her retail activity (Schedule C expenses).     On Schedule A

petitioner deducted charitable contributions, tax preparation

fees, and unreimbursed employee expenses.     In 2007 respondent

conducted an examination of petitioner’s 2003 return.

     In a notice of deficiency dated June 15, 2007, and relating

to petitioner’s 2003 return, respondent stated:

     It is determined that you realized neither a gain nor
     loss from the operation of your candle activity for the
     tax year ending December 31, 2003. Since you failed to
     maintain adequate book [sic] and records, we have
     determined that you have not established that you were
     carrying on a business within the provisions of the
     Internal Revenue Code. We are eliminating your
     reported gross receipts of $2,351.00 and disallowing
     all of your operating expenses of $33,475.00.
     Accordingly, your taxable income is increased
     $31,124.00 for tax year 2003. * * *

Respondent further disallowed, for lack of substantiation,

deductions relating to charitable contributions, tax preparation

fees, and unreimbursed employee expenses; determined a $5,688

deficiency; and determined a $1,138 section 6662(a)

accuracy-related penalty.

     On June 27, 2007, petitioner, while residing in California,

filed her petition with the Court.     Respondent, in his answer

filed December 26, 2007, asserted primary and alternative

positions which took into account the $2,351 of gross receipts,

increased the deficiency to $6,326, and increased the accuracy-

related penalty to $1,265.   As his primary position, respondent

asserted that petitioner’s retail activity was a business.     As
                                 - 4 -

his alternative position, respondent asserted that petitioner’s

retail activity “was an activity not engaged in for profit

pursuant to * * * [section] 183”.

                            Discussion

     We note at the outset that respondent’s determinations in

this matter, in both the notice of deficiency and the answer, are

confusing and, in certain respects, conflicting.    In the notice

of deficiency, respondent determined that petitioner was “not

* * * carrying on a business”.    Respondent also stated that he

was “eliminating * * * [petitioner’s] reported gross receipts of

$2,351.00 and disallowing all of * * * [petitioner’s] operating

expenses of $33,475.00.”   Respondent’s determination was, in

essence, a section 183 adjustment (i.e., tantamount to including

the gross receipts as income but allowing expenses to the extent

of that income).   In the answer, however, respondent alleged, as

his primary position, that petitioner’s retail activity was a

business and asserted, as an alternative position, a section 183

adjustment.   The parties stipulated a number of issues which

relate to whether petitioner was engaged in an activity for

profit, yet respondent’s primary position is that petitioner’s

retail activity was a business.    We must address both

respondent’s primary and alternative positions.

     Respondent’s primary position (i.e., that petitioner was

engaged in a business, had gross receipts, and failed to
                               - 5 -

substantiate her Schedule C expenses) is a new theory that is

inconsistent with the original determination and increases the

deficiency.   Therefore, respondent’s primary position is a new

matter with respect to which respondent has the burden of proof.

See Rule 142; Va. Educ. Fund v. Commissioner, 85 T.C. 743, 751

(1985), affd. per curiam 799 F.2d 903 (4th Cir. 1986); McSpadden

v. Commissioner, 50 T.C. 478, 492-493 (1968).   Petitioner, on her

2003 return, included gross receipts relating to her retail

activity.   While respondent met his burden with respect to the

gross receipts, he did not establish that petitioner failed to

substantiate her Schedule C expenses.   Thus, we turn to

respondent’s alternative position that petitioner was not engaged

in an activity for profit.

     Various factors may indicate whether a taxpayer had an

intent to make a profit.   See sec. 1.183-2(b)(1), Income Tax

Regs.   Petitioner failed to maintain books and records, financial

statements, or other documents relating to her retail activity

and did not conduct her activity in a businesslike manner.    In

short, petitioner did not have the requisite intent to make a

profit.   As previously stated, respondent bears, and has met, his

burden with respect to the inclusion of the gross receipts.     See

Rule 142(a)(1).   Petitioner, however, substantiated her expenses

relating to her retail activity.   Accordingly, pursuant to
                                 - 6 -

section 183(b)(2), she is entitled to deduct these expenses to

the extent of the gross income derived from the activity.

     Respondent disallowed, for lack of substantiation,

petitioner’s deductions relating to charitable contributions, tax

preparation fees, and unreimbursed employee expenses.2      With

respect to petitioner’s claimed charitable contributions,

petitioner verified $815 of contributions and is entitled to a

deduction of that amount.   See sec. 170(a)(1); sec. 1.170A-

13(a)(1)(ii), Income Tax Regs.    With respect to the tax

preparation fees and unreimbursed employee expenses, petitioner’s

records set forth a number of payments but fail to identify to

whom or for what purpose those payments were made.    Because the

evidence relating to the payment of these expenses is

insufficient, petitioner is not entitled to deductions.      See sec.

6001; Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. 540

F.2d 821 (5th Cir. 1976); sec. 1.6001-1(a), Income Tax Regs.

     Respondent also determined that petitioner is liable for an

accuracy-related penalty pursuant to section 6662(a).    Respondent

bears, and has met, the burden of production relating to this

penalty.   See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438,

446 (2001).   Petitioner failed to exercise due care in reporting


     2
      Pursuant to sec. 7491(a), taxpayers have the burden of
proof unless they introduce credible evidence relating to an
issue that would shift the burden to the Commissioner. See Rule
142(a).
                                 - 7 -

her expenses and failed to show that she acted with reasonable

cause and in good faith.   See secs. 6662(b) and (c), 6664(c);

Neely v. Commissioner, 85 T.C. 934, 947 (1985); secs. 1.6662-

3(b)(1), 1.6664-4(b)(1), Income Tax Regs.       Accordingly,

petitioner is liable for the 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.
