                  T.C. Summary Opinion 2006-88



                      UNITED STATES TAX COURT



            LAMPANH AND SYKHANE PCHAN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7640-05S.                Filed May 25, 2006.


     Lampanh and Sykhane Pchan, pro sese.

     Thomas L. Fenner, for respondent.



     DEAN, Special Trial Judge:    This case was heard pursuant to

the provisions of section 7463.    Unless otherwise indicated, all

section references are to the Internal Revenue Code in effect for

the years in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.   The decision to be entered is

not reviewable by any other court, and this opinion should not be

cited as authority.
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     Respondent determined the following deficiencies in

petitioners’ Federal income taxes and penalties for 2002 and

2003:

                                                  Penalty
          Year        Deficiency                 Sec. 6662

          2002         $6,423                    $1,284.60
          2003          6,702                     1,340.40

     The issues for decision are whether petitioners:         (1) Are

entitled to deductions they claimed on Schedules C, Profit or

Loss From Business, for 2002 and 2003, in excess of those allowed

by respondent, and (2) are liable for accuracy-related penalties

under section 6662(a).

                                Background

     The stipulation of facts and the exhibits received into

evidence are incorporated herein by reference.         At the time the

petition in this case was filed, petitioners resided in Houston,

Texas.

     Lampanh Pchan (petitioner) was employed as a machinist at

all relevant times.   For 2002 and 2003, petitioners jointly filed

Forms 1040, U.S. Individual Income Tax Return, which were

prepared by a tax return preparer.         In addition to his regular

employment, petitioner operated his own business.        On the 2002

Schedule C for that business, petitioner reported both gross

receipts and gross income of $14,175, car and truck expenses of

$17,739, and other expenses of $10,101.         On the 2003 Schedule C,
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petitioner reported both gross receipts and gross income of

$26,656, car and truck expenses of $17,181, and other expenses of

$7,085.

     During the examination of the tax returns, petitioner did

not present any documentation for the car and truck expenses.

Respondent’s examining agent, however, accepted petitioner’s

representation that petitioner drove from his place of employment

to his Schedule C activity at the rate of 4 miles per day, 6 days

a week.   Petitioner was accordingly allowed deductions for car

and truck expenses of $455 for 2002, and $449 for 2003, based on

the applicable standard mileage rates for those years.

     With respect to other expenses deducted on the Schedules C,

the only evidence presented during examination was an earnings

statement for the period ending December 15, 2002.   The earnings

statement indicated that “receivables” of $1,754.10 and the cost

of tools of $118.21 were withheld from petitioner’s paycheck.

The examining agent accepted petitioner’s explanation that the

withheld amounts represented money that petitioner borrowed from

his employer to pay for a computer and tools.   Petitioner was

allowed deductions for other expenses of $1,872 for each of 2002

and 2003.

     Respondent issued to petitioner statutory notices of

deficiency for 2002 and 2003 determining that petitioner failed
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to substantiate his claimed deductions, in excess of those

allowed by respondent, and that petitioner was liable for section

6662(a) accuracy-related penalties due to substantial

understatements of income tax.

                            Discussion

     The Commissioner’s determinations are presumed correct, and

generally taxpayers bear the burden of proving otherwise.1     Rule

142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).

     Tax deductions are a matter of legislative grace with a

taxpayer bearing the burden of proving entitlement to the

deductions claimed.   Rule 142(a)(1); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992).

     Section 162 allows a deduction for “all ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business”.      Taxpayers bear the burden of

substantiating the amount and purpose of any claimed deduction.

See Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), affd. per

curiam 540 F.2d 821 (5th Cir. 1976).      A taxpayer is required to

maintain sufficient records to establish that he is entitled to

the claimed deductions.   Sec. 6001; Higbee v. Commissioner, 116




     1
      Petitioner has not raised the issue of sec. 7491(a), which
shifts the burden of proof to the Commissioner in certain
situations. This Court concludes that sec. 7491 does not apply
because petitioner has not produced any evidence that establishes
the preconditions for its application.
                              - 5 -

T.C. 438, 440 (2001); sec. 1.6001-1(a), Income Tax Regs; see also

secs. 274(d), 280F(d)(4).

     At trial, petitioner failed to offer any evidence to

substantiate the car and truck expense deductions claimed on the

Schedules C.

     As for the substantiation of other expenses on the Schedules

C, petitioner relied on an earnings statement for the period

ending December 15, 2002, which respondent had already examined

and accounted for in the statutory notice of deficiency.

Petitioner testified that he did not maintain any records or

receipts for his other expenses.   Although tools were a large

component of petitioner’s other expenses, petitioner claimed that

he lacked documentation, because the tools were paid for in cash

and purchased from friends and coworkers.

     Petitioner, instead, presented copies of invoices, receipts,

and sales contracts from 2005, which he contends were the same

type of expenses that he paid in 2002 and 2003.   These documents,

however, are not relevant, because they fail to substantiate the

amount of other expenses that petitioner may have paid in 2002

and 2003.

     The Court sustains respondent’s determination that

petitioner is not entitled to Schedule C deductions for car and

truck expenses, and other expenses in excess of the amounts

allowed by respondent.
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Accuracy-Related Penalty

     Section 7491(c) imposes the burden of production in any

court proceeding on the Commissioner with respect to the

liability of any individual for penalties and additions to tax.

Higbee v. Commissioner, supra at 446; Trowbridge v. Commissioner,

T.C. Memo. 2003-164, affd. 378 F.3d 432 (5th Cir. 2004).   In

order to meet the burden of production under section 7941(c), the

Commissioner must come forward with sufficient evidence

indicating that it is appropriate to impose the relevant penalty.

Higbee v. Commissioner, supra.

     Pursuant to section 6662(a), a taxpayer may be liable for a

penalty of 20 percent of the portion of an underpayment of tax

(1) due to negligence or disregard of rules or regulations, or

(2) attributable to a substantial understatement of income tax.

See sec. 6662(b)(1) and (2); see also DeCleene v. Commissioner,

115 T.C. 457, 476 (2000).   A substantial understatement of tax

exists if the amount of the understatement of tax exceeds the

greater of 10 percent of the tax required to be shown on the tax

return, or $5,000.   See sec. 6662(d)(1)(A).

     Respondent has met his burden of production, because he has

shown that petitioner has mathematically understated his income

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

     Once the Commissioner meets his burden of production, the

taxpayer must come forward with evidence sufficient to persuade
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the Court that the Commissioner’s determination is incorrect.

Higbee v. Commissioner, supra at 446-447.

      The accuracy-related penalty is not imposed with respect to

any portion of the understatement as to which the taxpayer acted

with reasonable cause and in good faith.    See sec. 6664(c)(1).

The decision as to whether the taxpayer acted with reasonable

cause and in good faith depends upon all the pertinent facts and

circumstances.   See sec. 1.6664-4(b)(1), Income Tax Regs.

Generally, the most important factor is the extent of the

taxpayer’s efforts to evaluate his proper tax liability.       Id.

     The taxpayer, generally, must bear the consequences of any

negligent errors committed by his or her agent.     Pritchett v.

Commissioner, 63 T.C. 149, 173-175 (1974); Ellwest Stereo

Theatres v. Commissioner, T.C. Memo. 1995-610.    For a taxpayer to

rely reasonably upon advice so as to negate a section 6662(a)

accuracy-related penalty determined by the Commissioner, the

taxpayer must prove by a preponderance of the evidence that the

taxpayer meets all of the following requirements:    (1) The

adviser was a competent professional who had sufficient expertise

to justify reliance, (2) the taxpayer provided necessary and

accurate information to the adviser, and (3) the taxpayer

actually relied in good faith on the adviser’s judgment.     See

Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 99
                                 - 8 -

(2000), affd. 299 F.3d 221 (3d Cir. 2002); Ellwest Stereo

Theatres v. Commissioner, supra.

     Petitioner contends that he relied on the tax return

preparer to prepare his tax return and to ensure tax compliance

since he has no knowledge of tax laws.       Petitioner has not

presented any evidence that he had provided necessary and

accurate information to the preparer or that the preparer

possessed sufficient relevant information or expertise to warrant

petitioners’ reliance on the preparer’s judgment.

     Respondent’s determination that petitioners are liable for

accuracy-related penalties under section 6662(a) is accordingly

sustained.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                              Decision will be entered

                                         for respondent.
