                             T.C. Memo. 2017-186



                       UNITED STATES TAX COURT



           JOE POKAWA AND NANCY FATOMA, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 9920-16.                       Filed September 21, 2017.



      Joe Pokawa and Nancy Fatoma, pro sese.

      Marty Jane Dama, for respondent.



           MEMORANDUM FINDINGS OF FACT AND OPINION


      THORNTON, Judge: Respondent determined deficiencies in petitioners’

2013 and 2014 Federal income tax of $37,210 and $15,897, respectively.
                                         -2-

[*2] Respondent further determined penalties pursuant to section 6662(a) of

$7,244 and $2,193 for tax years 2013 and 2014, respectively.1

      The issues for decision are: (1) whether petitioners are entitled to

deductions claimed on Schedules C, Profit or Loss From Business, greater than

respondent has allowed; (2) whether petitioners are entitled to deductions for

unreimbursed employee business expenses and mortgage interest and points as

claimed on Schedules A, Itemized Deductions; (3) whether petitioners are entitled

to dependency exemption deductions; (4) whether petitioners are entitled to

education credits; (5) whether petitioners are liable for the section 72(t) additional

tax on premature distributions from a qualified retirement plan; and (6) whether

petitioners are liable for accuracy-related penalties pursuant to section 6662(a).2




      1
       All section references are to the Internal Revenue Code in effect for the
years at issue, and all Rule references are to the Tax Court Rules of Practice and
Procedure, unless otherwise indicated. Monetary amounts are rounded to the
nearest dollar.
      2
        Respondent made additional adjustments that are merely computational and
depend upon our resolution of the remaining issues. We do not discuss the
computational adjustments further. In addition, the adjustment in the notice of
deficiency for “XXX-XX-3272” for 2013 of $1,500--which the parties have not
addressed--appears to duplicate the computational adjustment for the education
credit for 2013 of $1,500; we expect the Rule 155 computations will so reflect.
                                        -3-

[*3]                           FINDINGS OF FACT

       The parties have stipulated some facts, which we incorporate by this

reference. When they timely petitioned the Court, petitioners resided in Texas.

       During the years at issue Ms. Fatoma was employed as a nurse aide. She

earned wages of $10,023 in 2013 and $8,159 in 2014.

       At the start of 2013 Mr. Pokawa was employed by AT&T, but he lost that

job later in the year. He earned wages of $53,114 from AT&T in 2013 and $5,984

from Ad Susman & Associates, Inc., in 2014.

       After losing his job with AT&T Mr. Pokawa withdrew money from a

retirement account to invest in various business activities. The withdrawals were

reported on Forms 1099-R, Distributions From Pensions, Annuities, Retirement or

Profit-Sharing Plans, IRAs, Insurance Contracts, etc. The Forms 1099-R reported

gross distributions of $83,480 and $12,448 for 2013 and 2014, respectively, and

indicated distribution code 1 for an early distribution with no known exception. In

2014 Mr. Pokawa turned 49 years of age.

       In 2013 Mr. Pokawa operated a business called United Banquet Hall. He

began operating United Banquet Hall as early as 2010 and realized a net loss for

each year of operation.
                                          -4-

[*4] During 2013 and 2014 Mr. Pokawa operated a tax return preparation

business, 1st Class Tax Services, out of his home. He began operating that

business as early as 2008, but 2013 was the first year for which he reported any

profit.

          During 2013 and 2014 Mr. Pokawa also operated a business called Sierra

Outreach Center (sometimes referenced in the record as Sierra (Leone) Outreach

Center). Through September 2013 Sierra Outreach Center was at an address on

Broadway Boulevard in Garland, Texas. In October 2013 Sierra Outreach Center

moved to a location on National Drive, also in Garland, Texas. Mr. Pokawa

described the Sierra Outreach Center as a furnished warehouse that he rented for

meetings. The Sierra Outreach Center began operating as early as 2012 and

realized a net loss for each year of operation.

          During 2014 Mr. Pokawa briefly, “for like a week or month”, operated an

Uber driving business.3




          3
       Mr. Pokawa testified that he had to purchase a car in order to begin the
Uber driving business but after the car “broke down because of the excessive
driving, * * * [he] did not continue with it.”
                                           -5-

[*5] During 2013 Mr. Pokawa’s daughter, H.J., who was born in 1996, resided

with petitioners at their residence.4 During 2014 Mr. Pokawa’s son, A.P., who

was born in 2002, resided with petitioners.

Petitioners’ 2013 and 2014 Federal Income Tax Returns

      Petitioners filed joint Federal income tax returns for 2013 and 2014

reporting income from wages, unemployment compensation, and pensions and

annuities. Petitioners also reported Schedule C losses for 2013 and 2014 of

$68,080 and $5,132, respectively.

Schedule C Expenses

      Petitioners attached three Schedules C to their 2013 return. The 2013

Schedule C for United Banquet Hall reported no gross income and total expenses

of $7,765, including expenses for, among other things, contract labor, rent or lease

of other business property, and rent or lease of vehicles, machinery, and

equipment. The 2013 Schedule C for 1st Class Tax Services reported gross

income of $12,256 and total expenses of $9,190 for, among other things,

advertising, car and truck, and meals and entertainment. The 2013 Schedule C for

Sierra Outreach Center reported gross income of $3,060 and total expenses of




      4
          The Court refers to minor children by their initials. See Rule 27(a)(3).
                                          -6-

[*6] $66,441 for, among other things, car and truck, contract labor, rent or lease of

other business property, and utilities.

         Petitioners also attached three Schedules C to their 2014 return. The 2014

Schedule C for 1st Class Tax Services reported gross income of $35,056 and total

expenses of $14,426 for, among other things, commissions and fees, rent or lease

of other business property, and utilities.5 The 2014 Schedule C for Sierra

Outreach Center reported gross income of $7,146 and total expenses of $24,315

for, among other things, car and truck, rent or lease of other business property, and

utilities. The 2014 Schedule C for the Uber driving business reported gross

income of $442 and total expenses of $9,035 for, among other things, car and

truck.

Itemized Deductions

         On Schedules A for 2013 and 2014 petitioners claimed itemized deductions

for, among other things, mortgage interest and unreimbursed employee business

expenses. For 2013 petitioners claimed a deduction of $3,846 for mortgage

interest, and for 2014 they claimed a deduction of $5,421 for mortgage interest

and mortgage insurance premiums.


         5
        Unlike the corresponding 2013 Schedule C, petitioners’ 2014 Schedule C
for 1st Class Tax Services did not include deductions for car and truck expenses.
                                       -7-

[*7] For 2013 and 2014 petitioners reported unreimbursed employee business

expenses of $20,891 and $9,678, respectively. Petitioners attached to their 2013

return two Forms 2106, Employee Business Expenses, one for Mr. Pokawa and

one for Ms. Fatoma. Mr. Pokawa’s 2013 Form 2106 reported unreimbursed

employee business expenses of $8,089, comprising vehicle expenses, parking fees

and tolls, travel expenses while away from home, other business expenses, and

meals and entertainment.6 Ms. Fatoma’s 2013 Form 2106 reported unreimbursed

employee business expenses of $5,217, comprising vehicle expenses, parking fees

and tolls, other business expenses, and meals and entertainment. The 2013

Schedule A included an additional $7,585 that was not reported on the 2013

Forms 2106. Petitioners attached to their 2014 return a single Form 2106 for Ms.

Fatoma which reported unreimbursed employee business expenses of $5,238,

comprising vehicle expenses, parking fees and tolls, other business expenses, and

meals and entertainment. The 2014 Schedule A included an additional $4,440 that

was not reported on Ms. Fatoma’s 2014 Form 2106.




      6
        The amounts of the reported expenses for meals and entertainment on
petitioners’ Forms 2106 were calculated by applying the 50% limitation prescribed
by sec. 274(n).
                                         -8-

[*8] Dependency Exemption Deductions

        Petitioners claimed two dependency exemption deductions for both 2013

and 2014. They claimed one of Mr. Pokawa’s parents as a dependent for each

year. They also claimed H.J. as a dependent for 2013 and A.P. as a dependent for

2014.

Education Credits

        On Forms 8863, Education Credits (American Opportunity and Lifetime

Learning Credits), attached to their 2013 and 2014 returns, petitioners claimed the

refundable American Opportunity Credit of $1,000 for each year. The 2013 Form

8863 reported that Mr. Pokawa attended “Kaplan Financial Education” in La

Crosse, Wisconsin, and the 2014 Form 8863 reported that he attended “Dallas

County Community College”.

Distributions From Retirement Plan

        Petitioners’ 2013 Form 1040 included in gross income an early distribution

of $83,480; the attached Form 5329, Additional Taxes on Qualified Plans

(Including IRAs) and Other Tax-Favored Accounts, indicated exception No. 12

(“Other”) and additional tax of $8. Petitioners’ 2014 Form 1040 included in gross

income an early distribution of $12,448; the attached Form 5329 indicated
                                         -9-

[*9] exception No. 7 (“IRA distributions made to certain unemployed individuals

for health insurance premiums”) and additional tax of $1.

Notice of Deficiency

      For 2013 respondent disallowed all of petitioners’ claimed Schedule C

deductions for 1st Class Tax Services, United Banquet Hall, and Sierra Outreach

Center. For 2014 respondent disallowed all their claimed Schedule C deductions

for 1st Class Tax Services and Sierra Outreach Center and $6,439 of the Schedule

C deductions for car and truck expenses for the Uber driving business.

Respondent also disallowed the dependency exemption deductions for Mr.

Pokawa’s children and the refundable education credits for lack of substantiation.

Respondent disallowed Schedule A mortgage interest deductions of $2,001 for

2013 and $2,672 for 2014 on the grounds that these deductions were not “verified

or determined to be reasonable based on all available information.” Respondent

disallowed all of petitioners’ claimed unreimbursed employee business expense

deductions. Respondent also determined that petitioners were liable for the

section 72(t) additional tax on early distributions from a qualified retirement plan

and for section 6662(a) accuracy-related penalties.
                                         -10-

[*10]                                 OPINION

        The Commissioner’s determinations in a notice of deficiency are generally

presumed correct, and the taxpayer bears the burden of proving those

determinations erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).

        Pursuant to section 7491(a)(1), the burden of proof as to factual matters may

shift from the taxpayer to the Commissioner under certain circumstances.

Petitioners did not allege that section 7491 shifts the burden of proof to

respondent, nor does the record establish that petitioners satisfy the prerequisites

under section 7491 for any such burden shift.

        Deductions are allowed as a matter of legislative grace, and the taxpayer

bears the burden of proving entitlement to any claimed deduction. 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). This burden requires the taxpayer to

substantiate expenses for deductions claimed by keeping and producing adequate

records that enable the Commissioner to determine the taxpayer’s correct tax

liability. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff’d

per curiam, 540 F.2d 821 (5th Cir. 1976); Meneguzzo v. Commissioner, 43 T.C.

824, 831-832 (1965); sec. 1.6001-1(a), (e), Income Tax Regs.
                                        -11-

[*11] Section 162(a) allows a deduction for ordinary and necessary business

expenses paid or incurred during the taxable year in carrying on any trade or

business. An expense is ordinary if it is a common or frequent occurrence in the

type of business involved. Deputy v. du Pont, 308 U.S. 488, 494-495 (1940). An

expense is necessary if it is appropriate and helpful to the taxpayer’s business.

Commissioner v. Heininger, 320 U.S. 467, 471 (1943).

      If a taxpayer establishes that a deductible expense has been paid but is

unable to substantiate the precise amount, we generally may estimate the amount

of the deductible expense, bearing heavily against the taxpayer responsible for the

inexactitude. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). We

cannot estimate deductible expenses, however, unless the taxpayer presents

evidence providing a sufficient basis for making an estimate. Vanicek v.

Commissioner, 85 T.C. 731, 742-743 (1985). Without such basis, any allowance

would amount to unguided largesse. Williams v. United States, 245 F.2d 559, 560

(5th Cir. 1957).

I.    Schedules C

      Respondent disallowed all of petitioners’ claimed Schedule C deductions

relating to 1st Class Tax Services, Sierra Outreach Center, and United Banquet

Hall and a large part of their claimed Schedule C deductions for the Uber driving
                                         -12-

[*12] business. Respondent has not disputed that these various activities

represented bona fide trades or businesses but has based his disallowance of the

claimed deductions on petitioners’ failure to establish that these amounts were

paid or incurred during the relevant taxable year as ordinary and necessary

business expenses.

      The documentary evidence petitioners provided to substantiate the expenses

underlying the claimed Schedule C deductions is scant.7 Mr. Pokawa testified that

in 2014 the building in which he kept most of his tax records flooded, destroying

his documents.

      If a taxpayer’s records are lost or destroyed through circumstances beyond

his or her control, the taxpayer may substantiate expenses through reasonable

reconstruction. See Malinowski v. Commissioner, 71 T.C. 1120, 1124-1125

(1979). The burden is on the taxpayer to show that the documents were actually

destroyed because of circumstances beyond his or her control. See Adler v.

Commissioner, T.C. Memo. 2010-47, aff’d, 443 F. App’x 736 (3d Cir. 2011).

      7
        At trial the Court sustained respondent’s objections to certain documents
on the grounds that the documents had not been exchanged pursuant to the Court’s
standing pretrial order of November 28, 2016, were incomplete, or summarized
documents that were not also offered as evidence. Even if these proffered
documents had been admitted, they would do very little to assist petitioners’ case;
in fact, several of the receipts appear to be for a business called “Sierra Autos” for
which no Schedules C were included with the returns for 2013 and 2014.
                                          -13-

[*13] The circumstances surrounding Mr. Pokawa’s assertion of a flood are vague,

and petitioners have offered no evidence, apart from this testimony, that their tax

records were destroyed in a flood. It remains unclear why petitioners could not

have reconstructed, in a timely manner, at least some of their records by obtaining

bank records and contacting third-party payees, such as property managers and

insurance and utility companies. Indeed, Mr. Pokawa testified that just one week

before trial he hired “a taskmaster approved to help * * * [him] put * * * [his]

documents together”. Moreover, petitioners have failed to explain the dearth of

records for the period after the alleged flood.

      Nevertheless, after carefully reviewing petitioners’ scant documentation,

which includes portions of a lease agreement, some utility bills, and carbon copies

of checks for rent payments, along with Mr. Pokawa’s testimony, and bearing

heavily against petitioners, whose inexactitude is of their own making, we are

satisfied that there is a sufficient evidentiary basis to permit us to estimate the

following amounts of deductible expenses: (1) rent as claimed on the 2013

Schedule C for Sierra Outreach Center; (2) utilities of $1,050 for the 2013

Schedule C for Sierra Outreach Center; (3) rent as claimed on the 2014 Schedule

C for Sierra Outreach Center; and (4) utilities as claimed on the 2014
                                       -14-

[*14] Schedule C for Sierra Outreach Center.8 See Cohan v. Commissioner, 39

F.2d 540.

      Petitioners produced no evidence to substantiate the remaining Schedule C

expenses for which respondent disallowed deductions for 2013 and 2014 or to

provide us any basis for estimating any such deductible expenses.9 Accordingly,

we sustain respondent’s determinations regarding the remaining Schedule C

expenses not discussed above.




      8
       Petitioners produced evidence that Sierra Outreach Center occupied and
paid rent for a building on Broadway Boulevard until October 2013, at which time
it moved to an address on National Drive, where it remained through 2014. The
evidence permits us to conclude that petitioners have substantiated the rent
deductions claimed with respect to Sierra Outreach Center on their 2013 and 2014
returns. Petitioners also produced utility bills for the National Drive address
showing an average utility expense of $350 per month. The evidence permits us
to conclude that petitioners have substantiated utilities expenses for Sierra
Outreach Center as deducted on their 2014 return and, for their 2013 taxable year,
three additional months of those utilities expenses, at $350 per month, for
October, November, and December 2013. The record contains no evidence
whereby we might estimate any utility expenses incurred at the Broadway
Boulevard address.
      9
        The limited evidence in the record also makes us think that even if
petitioners had substantiated the expenses reported for United Banquet Hall and
the Uber driving business--which they have not--any such expenses would have
constituted nondeductible startup expenses or possibly, in the case of certain
amounts claimed for the Uber driving business, capital expenditures. See secs.
179, 195, 263.
                                       -15-

[*15] II.   Schedule A Deductions

      A.    Mortgage Interest and Points

      At trial petitioners made no argument and provided no substantiation for the

portion of the mortgage interest deduction that respondent disallowed. Petitioners

have not established entitlement to mortgage interest deductions greater than

respondent allowed in the notice of deficiency.

      B.    Unreimbursed Employee Business Expenses

      Petitioners claimed, and respondent disallowed, unreimbursed employee

business expense deductions of $20,891 for 2013 and $9,678 for 2014.

      The performance of services as an employee is considered a trade or

business. Primuth v. Commissioner, 54 T.C. 374, 377-378 (1970). An employee

business expense is not ordinary and necessary, however, if the employee is

entitled to reimbursement from his or her employer. See Podems v.

Commissioner, 24 T.C. 21, 22-23 (1955); Noz v. Commissioner, T.C. Memo.

2012-272, at *22. Furthermore, personal, living, or family expenses are generally

not deductible. Sec. 262(a).

      At trial petitioners made no argument and provided no substantiation for the

unreimbursed employee business expenses. They have not established that the

reported expenses were incurred or, if incurred, were not reimbursed by their
                                         -16-

[*16] employers. Consequently, we sustain respondent’s determination that

petitioners are not entitled to deductions for unreimbursed employee business

expenses for 2013 and 2014.

III.   Dependency Exemption Deduction for Qualifying Child

       An individual is allowed a deduction for an exemption for “each individual

who is a dependent (as defined in section 152) of the taxpayer for the taxable

year.” Sec. 151(c). Section 152(a) defines a “dependent” to include a “qualifying

child”. Generally, a “qualifying child” must: (1) bear a specified relationship to

the taxpayer; (2) have the same principal place of abode as the taxpayer for more

than one-half of the taxable year; (3) meet certain age requirements; (4) not have

provided over one-half of his or her own support for the year at issue; and (5) not

have filed a joint return (other than a claim for refund) with a spouse for the

taxable year. Sec. 152(c)(1).

       The notice of deficiency included an adjustment for “Dependent Children--

Live with Taxpayer”, explaining: “We disallowed the amount shown on your

return because we did not receive an answer to our request for supporting

information. To be allowed a deduction, expense, exemption, credit, or other tax
                                        -17-

[*17] benefit, you must establish that you have met all requirements of the law.”10

Respondent’s answer and pretrial memorandum provided no further clarification

or explanation of the grounds upon which the dependency exemption deductions

were disallowed. Respondent appears to dispute whether Mr. Pokawa and his

children had the same principal place of abode for more than one-half of the

taxable year.

      Mr. Pokawa has two children: a daughter, H.J., born in 1996, and a son,

A.P., born in 2002. In 2013 H.J. resided with petitioners for the entire year. In

2014 A.P. resided with petitioners for the entire year. Mr. Pokawa explained that

this living arrangement was dictated by the family members’ preferences. We are

satisfied that Mr. Pokawa’s daughter and son each satisfy the relationship

requirement and the principal place of abode requirement.

      To be a qualifying child, an individual must not have attained age 19 as of

the close of the calendar year in which the taxpayer’s taxable year begins or else

be a student who has not attained age 24 during that same year. Sec. 152(c)(1)(C),

(3)(A). In 2013 H.J. turned 17, and in 2014 A.P. turned 12. Accordingly, each

child met the age requirement for the year for which he or she was claimed as a


      10
        A similar explanation was included in the notice of deficiency for most of
the proposed adjustments.
                                         -18-

[*18] qualifying child. Respondent has not expressly contended and nothing in

the record suggests that H.J. or A.P. provided more than one-half of his or her own

support for the years at issue or that H.J. or A.P. filed a joint return with a spouse

for the years at issue.

      In sum, we conclude and hold that H.J. was a “qualifying child” for

petitioners’ 2013 tax year and A.P. was a “qualifying child” for their 2014 tax

year; consequently, petitioners are entitled to the disputed dependency exemption

deductions for 2013 and 2014.

IV.   Education Credits

      The American Opportunity Credit is a modified version of the Hope

Scholarship Credit. Sec. 25A(i). The American Opportunity Credit provides for a

credit against tax equal to “(A) 100 percent of so much of the qualified tuition and

related expenses paid by the taxpayer during the taxable year * * * as does not

exceed $2,000, plus (B) 25 percent of such expenses so paid as exceeds $2,000 but

does not exceed $4,000.” Sec. 25A(i)(1). The credit phases out for a taxpayer

whose modified adjusted gross income exceeds $80,000, or $160,000 for married

taxpayers filing joint returns. Sec. 25A(i)(4). In addition, up to 40% of this credit

may be refundable. Sec. 25A(i)(5).
                                        -19-

[*19] Petitioners claimed, and respondent disallowed, the American Opportunity

Credit for 2013 and 2014. Petitioners introduced no evidence tending to show that

they were eligible for this credit for 2013 or 2014. They produced no records of

tuition payments or educational expenses related to Mr. Pokawa’s claimed

educational activities. Petitioners have not met their burden of proving

entitlement to the American Opportunity Credits. Accordingly, we sustain

respondent’s disallowance of the credits.

V.    Section 72(t) Additional Tax

      Generally, section 72(t)(1) imposes an additional tax on an early distribution

from a qualified retirement plan equal to 10% of the portion of the distribution that

is includible in gross income. The additional tax is intended to discourage

taxpayers from taking premature distributions from retirement plans. Dwyer v.

Commissioner, 106 T.C. 337, 340 (1996); see also S. Rept. No. 93-383, at 134

(1974), 1974-3 C.B. (Supp.) 80, 213. The additional tax under section 72(t) does

not apply to certain distributions from qualified retirement plans, including

distributions: (1) to an employee age 59-1/2 or older or (2) to unemployed

individuals for health insurance premiums. Sec. 72(t)(2)(A)(i), (D). There is no

exception under section 72(t) for financial hardship. See Arnold v. Commissioner,
                                         -20-

[*20] 111 T.C. 250, 255 (1998); Gallagher v. Commissioner, T.C. Memo. 2001-

34; Deal v. Commissioner, T.C. Memo. 1999-352.

      Petitioners do not dispute that the distributions in 2013 and 2014 of $83,480

and $12,448, respectively, were early distributions from a qualified retirement

plan. Indeed, they properly included the distributions in gross income for both

2013 and 2014. On Forms 5329 petitioners indicated exception No. 12 for

“Other” without further explanation for 2013 and exception No. 7 for “IRA

distributions made to unemployed individuals for health insurance premiums” for

2014. Mr. Pokawa testified that he “spent all the money * * * [he] was able to get

from * * * [his] 401(k) or retirement” on his various business ventures.

Petitioners produced no evidence to show that they meet any of the exceptions

under section 72(t)(2). Accordingly, we sustain respondent’s determination that

petitioners are liable for the section 72(t) additional tax for 2013 and 2014.

VI.   Section 6662(a) Penalties

      Respondent determined that for each year at issue petitioners are liable for a

20% accuracy-related penalty pursuant to section 6662(a) and (b)(1) and (2) for an

underpayment attributable to negligence or a substantial understatement of income

tax. Respondent bears the burden of production with respect to this penalty. See

sec. 7491(c). To meet this burden, respondent must produce evidence establishing
                                        -21-

[*21] that it is appropriate to impose this penalty. Once respondent has done so,

the burden of proof is upon petitioners to show that they are not liable for the

penalty. See Higbee v. Commissioner, 116 T.C. 438, 449 (2001).

      Negligence includes any failure to make a reasonable attempt to comply

with the provisions of the internal revenue laws and is the failure to exercise due

care or the failure to do what a reasonable and prudent person would do under the

circumstances. Sec. 6662(c); Neely v. Commissioner, 85 T.C. 934, 947 (1985);

sec. 1.6662-3(b)(1), Income Tax Regs. Negligence also includes any failure by

the taxpayer to keep adequate books and records or to substantiate items properly.

Sec. 1.6662-3(b)(1), Income Tax Regs. Petitioners exhibited a lack of due care in

failing to keep adequate books and records and in failing to properly substantiate

expenses underlying claimed deductions and credits. Respondent has carried his

burden of production with respect to the section 6662(a) penalty for negligence.

      Section 6662(a) and (b)(2) imposes the accuracy-related penalty on any

portion of a tax underpayment that is attributable to any substantial understatement

of income tax, defined in section 6662(d)(1)(A) as an understatement that exceeds

the greater of 10% of the tax required to be shown on the return or $5,000. The

exact amounts of petitioners’ underpayments will depend upon the Rule 155

computations, in accordance with our findings and conclusions. To the extent that
                                       -22-

[*22] those computations establish that petitioners have substantial

understatements of income tax, respondent has also met his burden of production

in this regard. See Prince v. Commissioner, T.C. Memo. 2003-247.

      The accuracy-related penalty does not apply with respect to any portion of

an underpayment if the taxpayer acted with reasonable cause and in good faith

with regard to that portion. Sec. 6664(c)(1). That determination is made case by

case, depending on the facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax

Regs. Those circumstances include the experience, knowledge, and education of

the taxpayer. Id. Petitioners have made no attempt to establish reasonable cause

and good faith. Moreover, Mr. Pokawa, despite having a tax return preparation

business, failed to keep adequate books and records and to properly substantiate

expenses underlying claimed deductions and credits.

      Accordingly, we sustain respondent’s determination that petitioners are

liable for the section 6662(a) penalties for 2013 and 2014 for negligence and,

alternatively, for substantial understatements of income tax insofar as the Rule 155

computations show substantial understatements.
                                  -23-

[*23] To reflect the foregoing,


                                              Decision will be entered under

                                         Rule 155.
