                                 T.C. Memo. 2015-139



                           UNITED STATES TAX COURT



                    SHERI FLYING HAWK, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 8793-09.                             Filed August 4, 2015.



      Sheri Flying Hawk, pro se.

      Elizabeth Wickstrom, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


      GALE, Judge: Respondent determined deficiencies in petitioner’s Federal

income tax for 2006 and 2007 of $3,094 and $36,036, respectively, and accuracy-

related penalties under section 6662(a) of $618.80 and $7,207.20, respectively.1


      1
          All section references are to the Internal Revenue Code of 1986, as in
                                                                        (continued...)
                                          -2-

[*2] Following concessions by the parties,2 the issues for decision are: (1)

whether petitioner is entitled to deductions for the business use of her homes of

$7,919 and $9,829 for 2006 and 2007, respectively; (2) whether petitioner is

entitled to deduct car and truck expenses for 2006 and 2007 in amounts greater

than those respondent allowed; (3) whether petitioner is entitled to deduct on

Schedule C, Profit or Loss From Business, “other expenses” of $2,320 for 2006;

and (4) whether petitioner is liable for accuracy-related penalties under section

6662(a) for 2006 and 2007.

                                FINDINGS OF FACT

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

in California at the time she filed her petition.



      1
        (...continued)
effect for the years at issue. All Rule references are to the Tax Court Rules of
Practice and Procedure. All dollar amounts are rounded to the nearest dollar.
      2
        Petitioner concedes that she had unreported income consisting of $11 in
interest and a $110 State tax refund for 2006. She further concedes that she is not
entitled to a $12,000 depreciation deduction for a gravel trailer for 2007.
Respondent concedes that petitioner is entitled to an additional $2,825 of
depreciation deductions for 2007. Petitioner concedes that she is not entitled to a
$72,055 deduction for wage expenses for 2007. Respondent concedes that
$69,884 that petitioner reported as gross receipts for 2007 should not be included
in her gross income for that year. Respondent also concedes that petitioner is
entitled to a $472 charitable contribution deduction for 2006, $450 of which was
claimed on petitioner’s Schedule C and disallowed in the notice of deficiency.
                                          -3-

[*3] Business use of residences

      In 2006 and 2007 petitioner was an accountant who provided, among other

services, tax return preparation services to her clients. Petitioner had an office in

Moss Beach, California (Moss Beach office), throughout 2006 and 2007 which

she rented for $715 per month. She claimed, and respondent allowed, deductions

for this office rent expense for both years. Petitioner performed 50% of her work

from the Moss Beach office in 2006 and 75% in 2007. Additionally, in 2007

petitioner hired temporary assistants for her bookkeeping activities for the

business, including reviewing credit card statements covering 2006 and posting

the data therein to the appropriate expense accounts of the business. These

assistants did their work at the Moss Beach office.

      Petitioner also owned a mobile home in Susanville, California (Susanville

residence), and a house in Clearlake Oaks,3 California (Clearlake Oaks residence),

      3
        Before trial petitioner signed a stipulation to the effect that this house was
in nearby Clearlake, California, rather than in Clearlake Oaks. At trial, however,
petitioner gave sworn testimony that her house was in Clearlake Oaks and her
father’s residence was in Clearlake. As will be seen infra, this distinction is
important in view of petitioner’s claims concerning the business and personal use
of her automobile.
       We will disregard the stipulation in view of petitioner’s testimony. See
Jasionowski v. Commissioner, 66 T.C. 312, 318 (1976). We note, however, that
this episode reflects a recurrent lack of clarity on petitioner’s part with respect to
important details--in her discussions with respondent that gave rise to the
                                                                            (continued...)
                                        -4-

[*4] in 2006 and 2007.4 During those years she had clients in each location, but

she did not use the Susanville residence or the Clearlake Oaks residence for client

meetings. Instead, she met with clients at their places of business or residence and

then did some of the accounting work for them at the residences she owned.

During 2006 and 2007 she rented out the Susanville residence to a close friend but

also used it herself for occasional overnight occupancy and for storing workpapers

and client files.

       Petitioner claimed deductions of $7,919 and $9,829 on her Federal income

tax returns for 2006 and 2007, respectively, for the business use of her Susanville

and Clearlake Oaks residences. Respondent disallowed the deductions in notices

of deficiency issued with respect to 2006 and 2007.




       3
        (...continued)
stipulations and in her trial testimony. Consequently, we have generally accorded
less weight to her testimony than would otherwise be the case.
       4
        We find on the basis of the preponderance of the evidence that petitioner
used these dwellings for more than 14 days in both 2006 and 2007 for personal
purposes, which results in each having been “used * * * as a residence” within the
meaning of sec. 280A. See sec. 280A(d). For example, petitioner admits in her
brief that each dwelling had “personal use areas”.
                                        -5-

[*5] Business use of vehicles

      Petitioner claimed Schedule C deductions for car and truck expenses of

$14,246 and $23,117 for 2006 and 2007, respectively. For 2006 respondent

allowed an $11,793 deduction as reflecting petitioner’s business use of a Ford

Thunderbird she owned but disallowed the remaining $2,453. Petitioner

calculated the $14,246 deduction for 2006 using the business standard mileage

allowance for 32,013 miles which, according to the return, constituted 100% of the

vehicle’s use in 2006. For 2007 respondent allowed an $8,406 deduction of the

$23,117 in car and truck expenses petitioner reported as reflecting business use of

the Thunderbird and disallowed the remaining $14,711, including all amounts

petitioner reported with respect to a Ford Taurus. Petitioner calculated the

$23,117 deduction claimed on the return using the business standard mileage

allowance for 26,726 miles she reported as driven for business purposes in the

Thunderbird and 18,880 miles she reported as driven for business purposes in a

Ford Taurus titled in the name of another individual.5 According to the return, the


      5
        The standard mileage rate for 2007 for business miles was 48.5 cents per
mile. Rev. Proc. 2006-49, 2006-2 C.B. 936. The 45,606 in total business miles
that petitioner reported on her 2007 return would produce a deduction of $22,119
at the standard mileage rate. The amount petitioner claimed as a deduction on her
2007 Schedule C, however, was $23,117. This discrepancy is not explained in the
record.
                                        -6-

[*6] business miles reported for the Thunderbird represented 100% of its use in

2007 and those reported for the Taurus represented 90.6% of its use.

      The Thunderbird was the only vehicle petitioner owned in 2006 and 2007.

Petitioner conceded at trial that at least 5% of her use of the Thunderbird during

2006 and 2007 was for personal purposes including visiting her father in Clearlake

(a city near Clearlake Oaks) and taking him to the grocery store. She did not

maintain a contemporaneous mileage log, account book, or diary for the

Thunderbird for 2006 or 2007.

      During 2007 the Taurus was owned and driven by an individual who,

according to petitioner, did some tax work for her and provided assistance in

servicing other clients of her accounting business during 2007. Petitioner did not

issue a Form W-2, Wage and Tax Statement, or a Form 1099-MISC,

Miscellaneous Income, to this individual for that year, however. Petitioner did not

drive the Taurus, and she did not reimburse this individual for any business miles

driven in the Taurus for 2007. Petitioner did not produce a contemporaneous

mileage log for the Taurus for 2007.

Other expenses

      Respondent disallowed $2,770 of petitioner’s claimed deduction for

Schedule C “Other expenses” for 2006. Respondent subsequently conceded that
                                         -7-

[*7] $450 of that figure was allowable.6 The remaining $2,320 that was

disallowed consists of $770 reported on the return for “health maintenance” items

and $1,550 reported for “cultural supplies”. The health maintenance items

consisted of vitamins and nutritional supplements that petitioner had purchased for

personal use. The cultural supplies included ti leaves and other plants, some of

which petitioner used personally for medicinal purposes and some of which she

claims she gave as gifts to clients. Petitioner did not maintain contemporaneous

records of the recipients of the claimed gifts or the business purpose of the gifts.

      Petitioner timely petitioned this Court for redetermination of the

deficiencies respondent determined for 2006 and 2007.

                                      OPINION

Business use of residences

      As a general rule, section 280A(a) provides that no deduction shall be

allowed with respect to the business use of a dwelling unit that is used by the

taxpayer as a residence during the year. However, section 280A(c)(1) provides an




      6
       Respondent conceded at trial, with respect to a $450 “Other expense”
deduction for “Charitable donations”, that petitioner had shown entitlement to a
charitable contribution deduction on Schedule A, Itemized Deductions, of $472
for 2006.
                                        -8-

[*8] exception for certain business uses of a dwelling unit, provided the dwelling

unit has a portion which is exclusively used on a regular basis:

             (A) as the principal place of business for any trade or business
      of the taxpayer,

            (B) as a place of business which is used by patients, clients, or
      customers in meeting or dealing with the taxpayer in the normal
      course of his trade or business, or

            (C) in the case of a separate structure which is not attached to
      the dwelling unit, in connection with the taxpayer’s trade or business.

      The Supreme Court has laid out a two-part test to determine whether such a

“home office” constitutes a taxpayer’s principal place of business: (1) the relative

importance of the activities performed at each business location, and (2) the

amount of time spent at each place. Commissioner v. Soliman, 506 U.S. 168, 175

(1993). However, Congress adjudged the Soliman standard too rigid and enacted

flush language following section 280A(c)(1)(C) designed to liberalize it. The

Taxpayer Relief Act of 1997, Pub. L. No. 105-34, sec. 932(a), 111 Stat. at 881; see

H.R. Rept. No. 105-148, at 407 (1997), 1997-4 C.B. (Vol. 1) 319, 729. This flush

language provides that

      the term “principal place of business” includes a place of business
      which is used by the taxpayer for the administrative or management
      activities of any trade or business of the taxpayer if there is no other
      fixed location of such trade or business where the taxpayer conducts
                                        -9-

      [*9] substantial administrative or management activities of such trade
      or business.

Sec. 280A(c)(1).

      Petitioner has not satisfied any of the section 280A(c)(1) exceptions that

would allow a deduction for the business use of the Susanville or Clearlake Oaks

residences. There was no separate structure at either residence, nor did she use

either to meet with clients. See sec. 280A(c)(1)(B) and (C). That leaves only the

exception for the use of a portion of each residence exclusively and on a regular

basis “as the principal place of business for any trade or business of the taxpayer”

as used in section 280A(c)(1)(A), as further modified in the flush language

thereafter.

      For the reasons discussed below, we conclude that neither the Susanville

residence nor the Clearlake Oaks residence was petitioner’s principal place of

business within the meaning of section 280A(c)(1) during 2006 and 2007. The

Moss Beach office was a fixed location, and according to petitioner’s own

testimony she performed 50% of her work there in 2006 and 75% in 2007. It can

be readily inferred, especially in the absence of any contrary evidence, that

petitioner performed the administrative and management activities relating to her

accounting business ratably over the year--with the result that approximately 50%
                                        - 10 -

[*10] and 75% of these activities would have been performed at the Moss Beach

office in 2006 and 2007, respectively. Indeed, petitioner testified that she hired

temporary assistants to perform significant bookkeeping tasks for the business in

2007 and that that work was done at the Moss Beach office. Therefore, we

conclude on this record that petitioner conducted substantial administrative and

management activities at a fixed location (the Moss Beach office) other than the

Susanville and Clearlake Oaks residences. Accordingly, neither of the two

residences was petitioner’s principal place of business as defined in the flush

language.

      Because petitioner estimates that she performed at least half the work of her

business at the Moss Beach office during each of the years at issue, she has not

shown that the remaining work split between the Susanville and Clearlake Oaks

residences exceeded the work performed at the Moss Beach office in importance

or time expended. Accordingly, neither of the residences was petitioner’s

principal place of business for either year without regard to the flush language.

      We therefore sustain respondent’s disallowance of the deductions claimed

for business use of a residence for 2006 and 2007.
                                        - 11 -

[*11] Business use of vehicles

      Generally, a taxpayer is permitted to deduct the ordinary and necessary

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

business. Sec. 162(a). When deductions are claimed for the business use of

property that is also readily used for personal purposes, the requirements for

substantiating business use are stricter. Such property--denoted “listed property”

in section 274--includes “passenger automobiles” such as the Thunderbird and the

Taurus for which petitioner claimed business use deductions. See secs.

280F(d)(4)(A)(i), 274(d)(4).

      To substantiate deductions for the business use of passenger automobiles, a

taxpayer must prove various elements of business use including, inter alia, the

amount of business mileage and the total mileage for the taxable year. Sec. 1.274-

5T(b)(6)(i)(B), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).

Each such element must be substantiated by “adequate records” or by “sufficient

evidence corroborating * * * [the taxpayer’s] own statement.” Id. para. (c)(1), 50

Fed. Reg. 40017. Adequate records for this purpose include account books,

diaries, logs, statements of expense, trip sheets, or similar records and

documentary evidence made at or near the time of the expenditure. Id. subpara.

(2)(i). If a taxpayer is unable to satisfy the “adequate records” standard, he must
                                        - 12 -

[*12] establish each element of the expenditure by: (1) his own statement,

including specific and detailed information and (2) by other corroborative

evidence sufficient to establish each element. Id. subpara. (3)(i), 50 Fed. Reg.

46020. When the element to be established is the amount of business use, this

corroborative evidence must be direct evidence--such as a statement in writing or

oral testimony of witnesses setting forth detailed information about the use--or

documentary evidence. Id. Such documents “must contain sufficient information

as to each element of every business/investment use.” Id. subpara. (2)(ii)(C), 50

Fed. Reg. 46018.

      With respect to petitioner’s deductions for business use of the Thunderbird

for 2006 and 2007, respondent allowed $11,793, or approximately 83% of the

$14,246 petitioner claimed as a deduction for 2006, and he allowed $8,406, or

approximately 65% of the $12,962 petitioner apparently7 claimed as a deduction

for 2007. To substantiate her claim that she is entitled to larger deductions,

petitioner testified at trial that she used the Thunderbird--the only vehicle she

owned during 2006 and 2007--exclusively for business purposes. In the same

testimony, she later contradicted herself by conceding that 5% of her use of the

vehicle each year was personal, including visits to her father in which she took

      7
          See supra note 5.
                                         - 13 -

[*13] him to buy groceries. Apparently realizing the difficulties her trial

testimony presented for her claim of 100% business use of the Thunderbird,

petitioner offered a third version of events in her posttrial brief in which she

claims for the first time that the trips to visit her father occurred when the

Thunderbird was in the shop for repairs and that the trips to the grocery store were

made in his vehicles.

      Statements in posttrial briefs are, of course, not evidence, see, e.g., Rule

143(b); Niedringhaus v. Commissioner, 99 T.C. 202, 214 n.7 (1992), except to the

extent they may constitute an admission by a party, see Fed. R. Evid. 801(d)(2).

Nonetheless, petitioner’s evolving explanations concerning the use of the

Thunderbird confirm the initial skepticism triggered by the claim that the only

vehicle she owned was never used for personal purposes. Considering all the facts

and circumstances, we conclude that petitioner’s own statement concerning the

business use of the Thunderbird is not credible. Moreover, the documentary

evidence she offers to corroborate her statement--repair invoices recording the

Thunderbird’s odometer readings at various times and some receipts for vehicle-

related expenditures--shed no light whatsoever on the portions of Thunderbird’s

business use during 2006 and 2007. Consequently, petitioner has failed to
                                        - 14 -

[*14] substantiate that she is entitled to any deductions for business use of the

Thunderbird beyond those respondent allowed.

      As for petitioner’s claimed deduction for business use of the Taurus in

2007--based on the standard mileage rate for business use--respondent contends

that the deduction is not allowable because a taxpayer may not claim the standard

mileage rate for more than one vehicle, citing Rev. Proc. 70-25, sec. 3.03, 1970-2

C.B. 506, 507. The revenue procedure governing the use of the standard mileage

rate for 2007, however, is Rev. Proc. 2006-49, sec. 11, 2006-2 C.B. 936, 944.

Rev. Proc. 2006-49, sec. 5.06(1), 2006-2 C.B. at 938, allows a taxpayer to claim

the business standard mileage rate for up to four vehicles. Although the vehicle

limit would not bar petitioner’s use of the business standard mileage rate for 2007,

other clear terms of the revenue procedure render her ineligible to use that rate for

the Taurus. Rev. Proc. 2006-49, sec. 5.02, 2006-2 C.B. at 938, provides that a

taxpayer may use the business standard mileage rate “with respect to an

automobile that is either owned or leased by the taxpayer.” The ownership

requirement of Rev. Proc. 2006-49, sec. 5.02, supra, reflects the fact that the

deduction using the standard mileage rate “is in lieu of all fixed and variable costs

of the automobile allocable to business purposes * * * . Items such as

depreciation * * * are included in fixed and variable costs for this purpose.” Id.
                                       - 15 -

[*15] sec. 5.03, 2006-2 C.B. 938. A taxpayer may not claim depreciation

deductions for property he does not own. Arevalo v. Commissioner, 124 T.C. 244,

251 (2005), aff’d, 469 F.3d 436 (5th Cir. 2006).

      Petitioner did not own or lease the Taurus in 2007. She is therefore not

eligible to use the business standard mileage rate to compute the deduction

claimed on her 2007 return, and she has produced no other competent evidence to

substantiate a business expense deduction for the Taurus for 2007.8 Consequently,

we sustain respondent’s disallowance of a deduction for the car and truck

expenses that petitioner claimed for 2007 for the business use of the Taurus.

Other expenses

      As discussed in our findings of fact, respondent disallowed petitioner’s

2006 Schedule C “Other expense” deductions of $1,550 for “cultural supplies”

and $770 for “health maintenance” items.


      8
        At trial petitioner introduced various credit card statements with
handwritten notations purporting to indicate that she had paid certain vehicle-
related expenses with respect to the Taurus. However, before trial petitioner
stipulated that she did not reimburse the owner of the Taurus for any business use
of the vehicle during 2007. Because the timing of the handwritten notations on
the credit card statements rests entirely on petitioner’s self-serving testimony and
is not otherwise corroborated, we conclude that this evidence is insufficiently
probative to warrant disregarding the parties’ stipulation. See Jasionowski v.
Commissioner, 66 T.C. at 318. Accordingly, we find that no reimbursements for
business use were made.
                                        - 16 -

[*16] The “cultural supplies” consisted of ti leaves and other plants, some of

which petitioner used personally as apparel9 and/or for medicinal purposes and

some of which she contends she gave as gifts to clients.10

      To the extent petitioner used any of the ti leaves or other plants for personal

medicinal purposes, they constitute nondeductible personal expenses. See sec.

262. Such expenditures are not business expenses, nor are they deductible as

medical expenses because there is no evidence that they were a prescribed drug.

See sec. 213(b). To the extent any of the ti leaves or other plants were given as

gifts to clients, a deduction for those expenditures would need to be substantiated

pursuant to the strict requirements of section 274. Sec. 274(d)(3). Thus, petitioner

would need documentation prepared at or near the time of the expenditure

indicating: (1) the amount of the expense, (2) a description of the gift, (3) the

business purpose of the gift, and (4) her business relationship to the persons

receiving the gift. See sec. 274(d)(4); sec. 1.274-5T(c)(2)(ii)(A), Temporary


      9
       Petitioner concedes in her posttrial brief that the ti leaves she wore as
apparel would constitute a nondeductible expense.
      10
        For the first time in her posttrial brief, petitioner also claims that some of
the plants were used to decorate her office or offices. As there is no sworn
testimony or other evidence to support this claim we do not consider it further.
See Rule 143(b); Niedringhaus v. Commissioner, 99 T.C. 202, 214 n.7 (1992)
(“Statements in briefs * * * do not constitute evidence and cannot be used as such
to supplement the record.”).
                                         - 17 -

[*17] Income Tax Regs., supra. The allowable deduction for business gifts is also

limited to $25 per recipient. Sec. 274(b).

      By her own admission, the substantiation petitioner provided for her

claimed business gifts--which consisted of marked-up credit card statements--was

prepared approximately a year after she received the credit card statements. The

substantiation was therefore not prepared at or near the time of the gift. Moreover,

it does not identify the recipients of the business gifts or the value of the gift given

to a particular client. We therefore sustain respondent’s disallowance of the

deduction petitioner claimed for “cultural supplies” for 2006.

      Petitioner has also not shown entitlement to her 2006 Schedule C “Other

expense” deduction of $770 for “health maintenance” items. The items in

question were vitamins and nutritional supplements that petitioner purchased for

personal consumption. These items were personal expenditures, see sec. 262, and

vitamins or organic foods purchased and consumed pursuant to a self-imposed

regimen rather than a physician’s recommendation or prescription are not

deductible, sec. 213(b); Lingham v. Commissioner, T.C. Memo. 1977-152.

Therefore, the “health maintenance” item expenses are not deductible.
                                       - 18 -

[*18] Penalties

      Respondent determined accuracy-related penalties under section 6662(a)

and (b)(1) and (2) on the basis of negligence or disregard of rules and regulations

and a substantial understatement of income tax for both 2006 and 2007. On brief

respondent argues for the substantial understatement penalty only with respect to

2007. As a general rule, the Commissioner has the burden of production and must

offer sufficient evidence to indicate that imposing a penalty is appropriate. Higbee

v. Commissioner, 116 T.C. 438, 446 (2001); see also sec. 7491(c). Once the

Commissioner meets this burden of production, the burden shifts to the taxpayer to

show that it is inappropriate to impose the penalty because of exculpatory factors,

including reasonable cause. Higbee v. Commissioner, 116 T.C. at 446-447.

      Section 6662(a) and (b)(1) and (2) imposes a 20% penalty on any

underpayment of tax attributable to negligence or disregard of rules and

regulations or a substantial understatement of income tax, respectively.

“‘[N]egligence’ includes any failure to make a reasonable attempt to comply” with

the internal revenue laws. Sec. 6662(c). It connotes “‘a lack of due care or the

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

circumstances.’” Freytag v. Commissioner, 89 T.C. 849, 887 (1987) (quoting

Marcello v. Commissioner, 380 F.2d 499, 506 (5th Cir. 1967), aff’g 43 T.C. 168
                                        - 19 -

[*19] (1964) and T.C. Memo. 1964-299), aff’d, 904 F.2d 1011 (5th Cir. 1990),

aff’d, 501 U.S. 868 (1991). This 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. Disregard of rules and regulations includes any

careless, reckless, or intentional disregard of the Internal Revenue Code, the

regulations, or certain Internal Revenue Service administrative guidance. Id.

subpara. (2). In general, an “understatement” of income tax is the excess of the

amount of tax required to be shown on the return over the amount of tax actually

shown on the return. Sec. 6662(d)(2)(A). An understatement of income tax is

“substantial” if it exceeds the greater of $5,000 or 10% of the tax required to be

shown on the return. Id.

      No penalty is imposed with respect to any portion of an underpayment if the

taxpayer acted with reasonable cause and in good faith in 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.

      Respondent has met his burden of production with respect to petitioner’s

negligence and disregard of rules or regulations for both 2006 and 2007.

Petitioner claimed substantial home office expense deductions for each year while
                                         - 20 -

[*20] simultaneously maintaining and deducting the costs of the Moss Beach

office, in violation of a statutory rule limiting such deductions to a home office

that either constitutes the taxpayer’s principal place of business, is used for client

meetings, or is a separate structure. As there is no evidence petitioner undertook

any investigation to determine the correctness of these return positions, this

portion of the understatement is attributable to a careless disregard of rules or

regulations. See sec. 1.6662-3(b)(2), Income Tax Regs. Her inflated claims of

business use of passenger automobiles were negligent under the circumstances, as

were her claims of deductions for business gifts, given the lack of records to

substantiate these deductions. See id. subpara. (1). Petitioner’s attempts to deduct

clearly personal items, such as nutritional supplements and ti leaves purchased for

her own use, were obviously negligent.

      In addition, petitioner conceded various challenged deductions at or before

trial. She conceded that she was not entitled to a $12,000 depreciation deduction

claimed for 2007 with respect to a “gravel trailer” in which she admitted she had--

at most--a security interest as a lender. Petitioner also conceded that she received

but failed to report interest income and income from a State tax refund in 2007.

Finally, petitioner conceded that she was not entitled to a $72,055 wage expense
                                        - 21 -

[*21] deduction for 2007 but, as discussed below, we conclude that she has shown

reasonable cause with respect to that erroneous deduction.

      With one exception, petitioner has failed to show that she acted with

reasonable cause and in good faith with respect to the underpayments for 2006 and

2007. See sec. 6664(c)(1). The determination of reasonable cause is made on a

case-by-case basis, considering circumstances such as the knowledge and

experience of the taxpayer. Sec. 1.6664-4(b)(1), Income Tax Regs. During the

years at issue petitioner was an accountant providing tax return preparation

services to others. Other than some vague assertions about how items are treated

for tax purposes in the case of nonprofit organizations, petitioner offered no

justification for what were substantial departures from well-settled tax rules. We

accordingly sustain respondent’s determination of negligence penalties for the

underpayments for 2006 and 2007 with one exception.

      Petitioner claimed an erroneous $72,055 deduction for a wage expense for

2007. However, the circumstances giving rise to that deduction were that

petitioner agreed to serve in effect as a payroll agent for a client. The client paid

over funds totaling $69,884 to petitioner during 2007, which she deposited into a

trust account. From this trust account, petitioner arranged, using the services of a

third-party payroll services firm, to pay out wages to the client’s employees
                                       - 22 -

[*22] totaling $72,055. On her 2007 Schedule C petitioner included in gross

receipts the $69,884 received from the client and claimed a wage expense

deduction for the $72,055 she arranged to be paid out to the client’s employees.

Respondent now concedes that the $69,884 is not includible in gross receipts, and

petitioner concedes that she is not entitled to a wage expense deduction of

$72,055. The discrepancy in the two figures is not otherwise explained in the

record, but we conclude that to the extent the discrepancy may give rise to an

underpayment for 2007, petitioner had reasonable cause for that portion of the

underpayment.

      In the event the Rule 155 computation indicates that petitioner’s

understatement of tax for 2007 exceeds the greater of $5,000 or 10% of the

amount of tax required to be shown on the return, we conclude that the

underpayment for 2007 is also attributable to a substantial understatement of

income tax for which she has not shown reasonable cause, except as found herein.

      To reflect the foregoing,


                                                Decision will be entered under

                                      Rule 155.
