                              T.C. Memo. 2018-107



                        UNITED STATES TAX COURT



  MAGLOIRE K. AYISSI-ETOH AND KATRINA D. SHARPE, Petitioners v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 31090-15.                        Filed July 9, 2018.



      Magloire K. Ayissi-Etoh and Katrina D. Sharpe, pro sese.

      Rachel L. Rollins and Jeffrey E. Gold, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      LAUBER, Judge: With respect to petitioners’ 2012 and 2013 taxable years,

the Internal Revenue Service (IRS or respondent) determined the following defi-

ciencies and accuracy-related penalties:
                                         -2-

[*2]                                                Penalty
                          Year       Deficiency   sec. 6662(a)
                         2012         $25,083       $5,017
                         2013          49,028        9,806

       The issues for decision are whether petitioners: (1) underreported a taxable

refund of State income tax; (2) are entitled to deductions claimed on Schedules C,

Profit or Loss From Business; (3) are entitled to deductions claimed on Schedules

A, Itemized Deductions, for charitable contributions and unreimbursed employee

expenses; (4) are liable for self-employment tax on wages received from an inter-

national organization; and (5) are liable for accuracy-related penalties. We resolve

all issues in respondent’s favor.1

                                 FINDINGS OF FACT

       Some of the facts have been stipulated and are so found. The stipulation of

facts and the attached exhibits are incorporated by this reference. Petitioners re-

sided in Maryland when they petitioned this Court.

       During 2012-2013 petitioner husband worked full time for the International

Monetary Fund (IMF) in Washington, D.C., serving as an adviser to an executive



       1
        All statutory references are to the Internal Revenue Code (Code) in effect
for the tax years at issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure. We round all monetary amounts to the nearest dollar.
                                        -3-

[*3] director. For those services he received wages of $62,238 in 2012 and

$206,811 in 2013. The IMF did not withhold Federal income tax or employment

tax from these wages.

       In 2009 petitioner husband formed American Management & Consulting

LLC (AMC). He allegedly performed consulting services through AMC, but his

testimony about the nature and timing of these services was vague. He first testi-

fied that his consulting involved pension plans but later testified that AMC was

involved in attempting to build an oil refinery in Haiti. AMC reported no gross re-

ceipts during 2012 or 2013 or (as far as the record shows) in any other year.

      In November 2012 petitioner husband formed, and during 2012-2013 he

was chairman of, American Management & Consulting Foundation, Inc. (AMC

Foundation). Petitioners during 2012-2013 allegedly made charitable contribu-

tions to AMC Foundation, which purportedly directed those funds to projects in

sub-Saharan Africa. At no time during 2012-2013 was AMC Foundation recog-

nized by the IRS as a tax-exempt charitable organization under section 501(c)(3).

      During 2012-2013 petitioner wife worked for Leidos, a defense contractor.

She paid certain work-related travel expenses, all of which were fully reimbursed

by her employer. She occasionally worked from a home office, but petitioners
                                       -4-

[*4] also used that room for a variety of personal and family purposes. Petitioner

wife had no involvement with AMC or the AMC Foundation.

      Petitioners paid Maryland income taxes during the years at issue. In 2013

they received a refund of $9,323 from Maryland. The parties have stipulated that

this amount constituted a refund of payments petitioners had made toward their

2012 Maryland income tax liability.

      Petitioners timely filed Forms 1040, U.S. Individual Income Tax Return, for

2012 and 2013. On those returns they reported the wages petitioner husband had

received from the IMF, but they did not report or pay any self-employment tax on

these wages. On their 2013 return they reported $6,601 as a taxable refund of

State income tax.

      Petitioners included in each return a Schedule C for AMC. On these Sched-

ules C they reported zero gross receipts for each year and expenses as follows:

                            Item                    2012     2013

            Meals and entertainment                 $110   $150
            Taxes and licenses                        300    300
            Supplies                                  265    300
            Repairs and maintenance                    60     40
            Office expenses                            60     50
            Depreciation and sec. 179 expense         200   ---
            Advertising                               125    124
            Travel                                  2,486 11,700
                                        -5-

[*5]         Car and truck expenses                17,633 20,527
             Expenses for business use of home     12,370 5,466
             Other expenses                           140    250
             Utilities                              2,140 1,380
              Total                                35,889 40,287

Petitioners also included in each return a Schedule A, on which they reported

(among other things) the following items:

                            Item                   2012      2013

             Cash charitable contributions    $21,300 $55,400
             Noncash charitable contributions  14,000   9,280
             Unreimbursed employee expenses 23,288 15,282

       The IRS selected both returns for examination. As a result of this examina-

tion the IRS: (1) determined that petitioners in 2013 had received a taxable State

income tax refund of $7,165 (or $564 more than they had reported); (2) disallowed

all claimed Schedule C deductions for lack of substantiation and because AMC

was not “an activity engaged in for profit” within the meaning of section 183(a);

(3) disallowed for lack of substantiation all claimed deductions for cash charitable

contributions and all claimed deductions for noncash charitable contributions in

excess of $250 annually; (4) disallowed for lack of substantiation and business

purpose most claimed deductions for unreimbursed employee expenses; (5) deter-

mined that petitioner husband was liable for self-employment tax, in the amounts
                                          -6-

[*6] of $7,644 and $19,638, for 2012 and 2013, respectively, on his wages from

the IMF; and (6) determined accuracy-related penalties for both years.

      On September 9, 2015, the IRS issued petitioners a timely notice of defici-

ency setting forth these adjustments, and they timely petitioned this Court for re-

determination. At the close of trial the Court directed the parties to file seriatim

post-trial briefs. Petitioners failed to file a brief as directed by the Court.2

                                       OPINION

I.    Burden of Proof

      The IRS’ determinations in a notice of deficiency are generally presumed

correct, and taxpayers bear the burden of proving them erroneous. Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933). Petitioners do not contend (and

could not plausibly contend) that they have satisfied the requirements of section

7491 for shifting the burden of proof. See Rule 142(a)(1) and (2). Accordingly,

the burden of proof for all factual issues remains with them.




      2
       Because petitioners failed to file a brief as directed by the Court, we could
enter decision against them for that reason alone. See Rule 123(b); Stringer v.
Commissioner, 84 T.C. 693, 708 (1985), aff’d without published opinion, 789
F.2d 917 (4th Cir. 1986).
                                        -7-

[*7] II.     State Income Tax Refund

       Gross income generally includes income from whatever source derived. See

sec. 61(a); Commissioner v. Glenshaw Glass, 348 U.S. 426 (1955). Under the tax

benefit rule, gross income may include the recovery of an amount that gave rise to

a tax benefit in a prior year. See sec. 111 (excluding from gross income the reco-

very of amounts deducted in a prior year that gave rise to no tax benefit); Maines

v. Commissioner, 144 T.C. 123, 130-131 (2015).

       On their 2012 Federal income tax return petitioners claimed and were al-

lowed a deduction of $7,165 for State and local income taxes paid to Maryland. In

2013 they received from Maryland a refund of $9,323 attributable to 2012. Re-

spondent contends that for 2013 they have gross income of $7,165, the amount of

deduction allowed for the prior year.

       At trial petitioners contended that $2,722 of the refund corresponded to a

tax payment they made to Maryland in 2013, leaving only $6,601 as a taxable re-

covery of the deduction claimed for 2012. As respondent notes, petitioners have

supplied no evidence concerning the amount of their 2013 tax payment to Mary-

land. Moreover, because they neglected to file a post-trial brief, they have not

rebutted respondent’s alternative argument that the refund must be allocated pro

rata across all tax payments. We conclude that petitioners have not carried their
                                         -8-

[*8] burden of showing error in respondent’s determination that for 2013 they

under-reported by $564 the taxable refund they received from Maryland.

III.   Schedule C Expenses

       Deductions are a matter of legislative grace. The taxpayer bears the burden

of proving that reported business expenses were actually incurred and were “ordi-

nary and necessary.” Sec. 162(a); Rule 142(a); INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992). The taxpayer must substantiate the expenses underlying

his claimed deductions by keeping and producing records sufficient to enable the

IRS to determine the correct tax liability. Sec. 6001; sec. 1.6001-1(a), (e), Income

Tax Regs. The failure to keep and present such records counts heavily against a

taxpayer’s attempted proof. Rogers v. Commissioner, T.C. Memo. 2014-141, 108

T.C.M. (CCH) 39, 43.

       In order to deduct business expenses under section 162, the taxpayer must

carry on a trade or business. An activity is a trade or business if the taxpayer is

engaged in the activity for the primary purpose of making a profit. Absent that

showing, expenses are deductible only to the extent of income derived from the

activity. Sec. 183(b)(2); see Dreicer v. Commissioner, 78 T.C. 642, 645 (1982),

aff’d without published opinion, 702 F.2d 1205 (D.C. Cir. 1983); Golanty v. Com-

missioner, 72 T.C. 411, 426 (1979), aff’d without published opinion, 647 F.2d 170
                                         -9-

[*9] (9th Cir. 1981). The existence of a profit motive turns on the taxpayer’s

subjective intent, but in discerning that intent we give less weight to self-serving

statements than to objective facts. Sec. 1.183-2(a), Income Tax Regs. Relevant

objective factors include (among other things) the time, effort, and manner in

which the taxpayer carries on the activity and whether the taxpayer has had a

history of financial success in carrying on the activity or related activities. Sec.

1.183-2(b), Income Tax Regs.

      Petitioners have provided no evidence, other than petitioner husband’s self-

serving testimony, that AMC was operated for the purpose of making a profit. It

had no gross receipts during 2012 or 2013, and (as far as the record shows) it gen-

erated no profit in any year. Petitioners have supplied no evidence that AMC had

a bank account, books and records, business plans, marketing strategies, or cus-

tomer lists. There is no evidence that AMC carried on business activity during the

years at issue or held itself out as a going concern. Because AMC had no gross

income during 2012 or 2013, the IRS properly denied under section 183(a) all de-

ductions claimed on petitioners’ Schedules C.

      Even if petitioner husband had a profit motive in operating AMC, we would

deny the claimed Schedule C deductions for lack of substantiation. Petitioners

produced no evidence whatever to substantiate the deductions claimed for taxes
                                        - 10 -

[*10] and licenses, repairs and maintenance, supplies, office expense,

depreciation, advertising, utilities, meals and entertainment, “other expenses,” or

home office expense.3 Their claimed car and truck expenses are subject to the

strict substantiation requirements of section 274(d). See sec. 280F(d)(4)

(including passenger automobiles as “listed property”); Fernandez v.

Commissioner, T.C. Memo. 2011-216. Petitioners produced a rental car receipt,

which had no apparent connection to AMC’s business, and a mileage log. The

mileage log vaguely describes almost every trip as involving a “business

presentation” or “meeting.” These documents fall far short of satisfying the strict

requirements of section 274(d). See sec. 1.274-5T(a), (b), and (c), Temporary

Income Tax Regs., 50 Fed. Reg. 46014-46017 (Nov. 6, 1985). We accordingly

sustain respondent’s disallowance of all Schedule C deductions claimed with

respect to AMC.

IV.   Schedule A Deductions

      A.     Charitable Contributions

      Petitioners claimed deductions for cash charitable contributions of $21,300

and $55,400 and for noncash charitable contributions of $14,000 and $9,280 in

      3
      The IRS disallowed the deductions claimed for home office expense, but
allowed a larger deduction for home mortgage interest on Schedule A for each
year.
                                        - 11 -

[*11] 2012 and 2013, respectively. For each year respondent disallowed all of the

cash contributions and all but $250 of the noncash contributions.

       Section 170 allows as a deduction any contribution made within the taxable

year to a charitable organization. Sec. 170(a)(1), (c). Such deductions are al-

lowable only if the taxpayer satisfies statutory and regulatory substantiation re-

quirements. See sec. 170(a)(1); sec. 1.170A-13, Income Tax Regs. The nature of

the required substantiation depends on the size of the contribution and on whether

it is a gift of cash or property.

       For contributions of any kind, the taxpayer must maintain reliable records

indicating (among other things) the donee organization and the value and date of

the contribution. See sec. 1.170A-13(a) and (b), Income Tax Regs. For all contri-

butions of property, the taxpayer must maintain reliable written records that in-

clude the name of the donee, the date and location of the contribution, and a de-

scription of the property “in detail reasonable under the circumstances.” Sec.

1.170A-13(b)(2)(ii)(A) through (C), Income Tax Regs. The taxpayer must also

maintain records to establish “the fair market value of the property at the time the

contribution was made” and “the method utilized in determining the fair market

value.” Id. subdiv. (ii)(D).
                                       - 12 -

[*12] For all contributions valued at $250 or more, the taxpayer must obtain a

“contemporaneous written acknowledgment” (CWA) from the donee. Sec.

170(f)(8). The CWA must include (among other things) a description of any pro-

perty other than cash contributed. Id. subpara. (B)(i). In the absence of a CWA

meeting the statute’s requirements, “[n]o deduction shall be allowed.” Id. subpara.

(A).

       Additional substantiation requirements are imposed for contributions of pro-

perty with a claimed value exceeding $500. Sec. 170(f)(11)(B). Still more rigor-

ous substantiation requirements are imposed for contributions of property with a

claimed value exceeding $5,000. Id. subpara. (C). In determining whether dona-

tions of property exceed these thresholds, “similar items of property” (other than

cash and publicly traded securities) must be aggregated. See id. subpara. (F). The

term “similar items of property” is defined to mean “property of the same generic

category or type,” such as clothing or electronic equipment. Sec. 1.170A-

13(c)(7)(iii), Income Tax Regs.

       If contributed property is valued in excess of $500, the taxpayer must in-

clude with his return “a description of such property and such other information as

the Secretary may require.” Sec. 170(f)(11)(B). The Secretary has prescribed reg-

ulations requiring that the taxpayer maintain records establishing “[t]he manner of
                                        - 13 -

[*13] acquisition” of the property (e.g., by purchase, gift, or inheritance), the

approximate date of the property’s acquisition, and the cost or adjusted basis of

the property. Sec. 1.170A-13(b)(3)(i), Income Tax Regs.; see Gaerttner v.

Commissioner, T.C. Memo. 2012-43, 103 T.C.M. (CCH) 1223, 1226.

      If property or similar items of property are valued in excess of $5,000, the

taxpayer must substantiate the value of the property with a “qualified appraisal of

such property.” Sec. 170(f)(11)(C). He must also attach to his return a fully com-

pleted “appraisal summary” on Form 8283, Noncash Charitable Contributions.

See Costello v. Commissioner, T.C. Memo. 2015-87, 109 T.C.M. (CCH) 1441,

1445; sec. 1.170A-13(c)(2)(i)(B), Income Tax Regs.

      The bulk of petitioners’ alleged cash contributions ($14,100 for 2012 and

$40,600 for 2013) were purportedly made to AMC Foundation. But AMC Foun-

dation was not a qualified organization under section 170(c) during the years at

issue. The IRS did not issue a determination letter recognizing AMC Foundation

as tax-exempt under section 501(c)(3) until May 2016, with an effective date of

exemption of November 23, 2015. Petitioners therefore were not entitled to de-

duct any contributions made to it during 2012 or 2013. See sec. 170(c)(2).4

      4
       Petitioners in any event did not substantiate the alleged gifts. We question
the authenticity of the “receipts” that petitioner husband signed in his capacity as
                                                                         (continued...)
                                       - 14 -

[*14] The balance of the claimed cash contributions consisted of alleged weekly

donations to “St. Martin’s Church.” To substantiate these gifts petitioners sup-

plied no receipt or other document from the church, but only a self-created spread-

sheet listing the amount and date of each alleged contribution. We do not find this

spreadsheet to be a reliable record, see sec. 1.170A-13(a)(2)(i), Income Tax Regs.,

and we find that it does not substantiate the purported contributions. Accordingly,

we sustain respondent’s disallowance of all claimed cash contributions.

      Petitioners also claimed deductions for contributions to Goodwill Industries

(Goodwill) of clothing and electronic equipment valued at $14,000 for 2012 and

$9,280 for 2013. The only evidence petitioners offered to substantiate these gifts

was a self-prepared spreadsheet, a Goodwill “valuation guide,” and several par-

tially completed Forms 8283. The Forms 8283 were not signed by any Goodwill

official, and petitioners produced no receipt, CWA, or other document from Good-

will acknowledging any of these alleged gifts.

      The purported donations--including three dozen suits valued up to $600

apiece, three dozen pairs of basketball shoes valued up to $280 apiece, a dozen

winter jackets, and 15 pairs of jeans--are implausible on their face. All items of

      4
      (...continued)
chairman of AMC Foundation. Petitioners produced no checks, bank records, or
CWAs meeting the requirements of section 170(f)(8)(B).
                                        - 15 -

[*15] clothing and electronic equipment must be aggregated for purposes of

determining satisfaction of the relevant substantiation requirements. Petitioners

have woefully failed to satisfy those requirements for gifts of this magnitude. See

sec. 170(f)(11)(B) and (C); sec. 1.170A-13(b)(2)(i), (ii)(B), (b)(3)(i)(A), (c)(2),

Income Tax Regs. Respondent allowed petitioners a deduction of $250 for non-

cash contributions each year. We find no justification for allowing anything more.

      B.     Unreimbursed Employee Expenses

      Section 162 permits employees to deduct ordinary and necessary expenses

paid or incurred in the course of employment, but only to the extent the employee

is not entitled to reimbursement from his or her employer. See Orvis v. Commis-

sioner, 788 F.2d 1406, 1408 (9th Cir. 1986), aff’g T.C. Memo. 1984-533; Lucas v.

Commissioner, 79 T.C. 1, 6-7 (1982). For both years at issue petitioners filed

Form 2106-EZ, Unreimbursed Employee Business Expenses. For 2012 they

claimed a deduction of $23,288, of which $9,158 was for travel expenses and

$14,130 was for other expenses. For 2013 they claimed a deduction of $15,282, of

which $7,910 was for travel expenses and $7,372 was for other expenses. The

IRS disallowed all deductions claimed for 2012 and all but $90 of the deductions

claimed for 2013.
                                        - 16 -

[*16] All of the expenses at issue were allegedly connected to petitioner wife’s

employment at Leidos, where she worked as a senior compensation analyst. At

trial she testified that her employer fully reimbursed her for all business travel ex-

penses. She stated that she did not recognize any of the trips listed in the mileage

logs produced to substantiate these deductions.

      Petitioners contend that some of the expenses at issue were attributable to

petitioner wife’s use of a home office. But she credibly testified that she used that

space for personal and family purposes, and the Code expressly prohibits a home

office deduction for such mixed-use spaces. See sec. 280A(c)(1). We accordingly

sustain respondent’s determinations regarding deductions for unreimbursed em-

ployee business expenses.

V.    Self-Employment Taxes

      Petitioners challenge the IRS’ determination that petitioner husband is liable

for self-employment taxes on his wages from the IMF. Self-employment taxes

apply to all net earnings from a “trade or business” as defined in section 1402.

See sec. 1402(a), (c) (cross-referencing sec. 162). Section 1402(c)(2) generally

excludes from the definition of a “trade or business” services performed by a tax-

payer as an employee. But this exclusion does not apply to services performed in
                                        - 17 -

[*17] the United States by an employee of an “international organization.” See

sec. 1402(c)(2)(C) (cross-referencing sec. 3121(b)(15) and (y)).

      Petitioner husband does not dispute that he received wages from the IMF, as

shown on his Forms W-2, Wage and Tax Statement. Nor does he dispute that the

IMF is an “international organization.” See sec. 7701(a)(18); Chien v. Com-

missioner, T.C. Memo. 2012-277, 104 T.C.M. (CCH) 385, 388. Instead, he asserts

that his wages are exempt from self-employment tax because they were attributa-

ble to services that he performed abroad. See sec. 1402(c)(2)(C).

      There is no factual support for this assertion. At trial petitioner husband

supplied receipts for one trip he took to Cameroon by way of Paris. This docu-

mentation does not establish that he took this trip in the service of the IMF or that

it had any business purpose whatever. We find no credible evidence that he per-

formed services for the IMF at any location other than his office in Washington,

D.C. We thus sustain respondent’s determination that petitioner husband is liable

for self-employment taxes on all wages he received from the IMF during 2012 and

2013. See Chien, 104 T.C.M. (CCH) at 388.

VI.   Penalties

      The Code imposes a 20% penalty on the portion of any underpayment of tax

attributable to “[n]egligence or disregard of rules and regulations” or “[a]ny sub-
                                        - 18 -

[*18] stantial understatement of income tax.” Sec. 6662(a) and (b)(1) and (2).

“Negligence includes “any failure to make a reasonable attempt to comply” with

the internal revenue laws, and “disregard” includes “any careless, reckless, or

intentional disregard.” Sec. 6662(c). 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. Sec. 6662(d)(1)(A).

      Under section 7491(c) respondent bears the burden of production with re-

spect to the liability of an individual for any penalty, thereby requiring him to

come forward with sufficient evidence indicating that imposition of the penalty is

appropriate. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Respondent

has satisfied his burden of production as to negligence by showing that petitioners

failed to maintain adequate books and records regarding AMC and failed to prop-

erly substantiate their charitable contributions. See sec. 1.6662-3(b)(1), Income

Tax Regs.

       In Graev v. Commissioner, 149 T.C. ___ (Dec. 20, 2017), supplementing

and overruling in part 147 T.C. 460 (2016), we held that respondent’s burden of

production under section 7491(c) includes establishing compliance with section

6751(b), which requires that penalties be “personally approved (in writing) by the

immediate supervisor of the individual making such determination.” See Chai v.
                                        - 19 -

[*19] Commissioner, 851 F.3d 190, 217 (2d Cir. 2017), aff’g in part, rev’g in part

T.C. Memo. 2015-42. The record includes a copy of a Civil Penalty Approval

Form, executed by the immediate supervisor of the revenue agent who examined

petitioners’ 2012 and 2013 returns, which approved imposition of accuracy-related

penalties against petitioners for both years. We thus conclude that respondent has

met his burden of production.

      Section 6664(c)(1) provides an exception to the imposition of the accuracy-

related penalty if the taxpayer establishes that there was reasonable cause for, and

that he acted in good faith with respect to, the underpayment. The decision as to

whether the taxpayer acted with reasonable cause and in good faith is made on a

case-by-case basis, taking into account all pertinent facts and circumstances. See

sec. 1.6664-4(b)(1), Income Tax Regs. Circumstances that may signal reasonable

cause and good faith “include an honest misunderstanding of fact or law that is

reasonable in light of all of the facts and circumstances, including the experience,

knowledge, and education of the taxpayer.” Ibid.

      Petitioners have not shown reasonable cause. They presented no credible

evidence that any Schedule C expenses were actually paid. They woefully failed

to substantiate their purported charitable contributions and unreimbursed em-
                                       - 20 -

[*20] ployee business expenses. Petitioner husband’s argument for avoiding

payment of self-employment tax did not pass the straight-face test.

      Petitioners did not seek advice from a qualified tax professional, but relied

entirely on tax preparation software. That software “is only as good as the infor-

mation one puts into it,” and it provides no general defense to taxpayer negligence.

See Bunney v. Commissioner, 114 T.C. 259, 267 (2000). We find that petitioners

were negligent in preparing their 2012 and 2013 returns and that no portion of

their respective underpayments met the “reasonable cause” exception.

      We also find that the underpayments at issue are attributable to substantial

understatements of income tax for which reasonable cause has not been shown.

The deficiencies in petitioners’ 2012 and 2013 income tax, which we have sus-

tained in full, are $25,083 and $49,028, respectively. There being no dispute over

any claimed refundable credits, those deficiency amounts equal petitioners’ under-

statements of income tax. See generally Gassoway v. Commissioner, T.C. Memo.

2015-203. Petitioners reported tax due of $3,986 and $39,313 on their 2012 and

2013 returns, respectively. The deficiency amounts clearly exceed both $5,000

and 10% of the amounts required to be shown on their returns. See sec. 1.6662-

4(b)(3), Income Tax Regs. As a result, petitioners’ understatements of income tax

are substantial within the meaning of section 6662(d)(1)(A).
                                  - 21 -

[*21] To reflect the foregoing,


                                           Decision will be entered

                                  for respondent.
