PURSUANT TO INTERNAL REVENUE CODE
 SECTION 7463(b),THIS OPINION MAY NOT
  BE TREATED AS PRECEDENT FOR ANY
            OTHER CASE.
                         T.C. Summary Opinion 2013-107



                         UNITED STATES TAX COURT



                    AMIR SAFAKISH, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 8032-10S.                        Filed December 23, 2013.



      Amir Safakish, pro se.

      Daniel J. Bryant, for respondent.



                               SUMMARY OPINION


      PANUTHOS, Chief Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in effect when the

petition was filed. Pursuant to section 7463(b), the decision to be entered is not

reviewable by any other court, and this opinion shall not be treated as precedent
                                         -2-

for any other case. Unless otherwise indicated, subsequent section references are

to the Internal Revenue Code (Code) in effect for the years in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

      In a notice of deficiency dated January 7, 2010, respondent determined a

deficiency of $40,077 in petitioner’s 2006 Federal income tax and a section

6662(a) accuracy-related penalty of $8,015. Respondent also determined a

deficiency of $16,371 in petitioner’s 2007 Federal income tax, a section

6651(a)(1) addition to tax of $3,785 for failure to timely file a return, and a section

6662(a) accuracy-related penalty of $3,274.

      After concessions, the issues remaining for decision are: (1) whether

petitioner overstated gross receipts on Schedules C, Profit or Loss From Business,

for 2006 and 2007, (2) whether petitioner is entitled to Schedule C business

expense deductions for 2006 and 2007 in excess of the amounts respondent

allowed, (3) whether petitioner is liable for the section 6651(a) failure to timely

file addition to tax for 2007, and (4) whether petitioner is liable for section

6662(a) accuracy-related penalties for 2006 and 2007.
                                         -3-

                                     Background

        Some of the facts have been stipulated, and we incorporate the stipulation of

facts, the supplemental stipulation of facts, and the stipulation of settled issues by

this reference. Petitioner resided in California at the time the petition was filed.

        During the years at issue, petitioner worked full time for ETA-USA (ETA)

as an engineer and a director. In addition to his work for ETA, petitioner operated

a sole proprietorship, Z-auto, engaging in the business of vehicle reconditioning

and auto leasing and sales. Petitioner operated Z-auto with the primary purpose of

providing reliable transportation for the employees of ETA. Petitioner provided

automobiles to ETA employees at or below cost, and ETA paid petitioner a fee for

these services. During the years at issue petitioner paid rent to Executive Suites

for an auto lot and for a small office. In 2006 and 2007 petitioner traveled to

various locations to perform his duties for ETA and to conduct the business of Z-

auto.

        In 2006 and 2007 petitioner earned $60,000 from ETA as an employee,

which was reported on Form W-2, Wage and Tax Statement, as wages, tips, other

compensation. Petitioner received additional income from ETA in 2006 of

$58,000, which was reported on Form 1099-MISC, Miscellaneous Income.
                                        -4-

      Petitioner timely filed a Federal income tax return for 2006. On Schedule C

petitioner reported gross receipts of $135,682 and cost of goods sold of $89,657.1

Petitioner also reported expenses for his business, including expenses for travel

and legal and professional fees.

      On his 2007 return, filed October 19, 2008, petitioner reported gross

receipts of $76,892 and cost of goods sold of $29,576 for his auto business.2

Petitioner reported business expenses for travel, legal and professional fees, rent

or lease, and car and truck.

      In a notice of deficiency, respondent disallowed in full the claimed costs of

goods sold for 2006 and 2007. Respondent disallowed the claimed 2006 Schedule

C business expense deductions for travel and legal and professional fees and the

claimed 2007 Schedule C business expense deductions for travel, legal and


      1
       The amount petitioner input on Schedule C line 4, which serves to reduce
gross receipts or sales by cost of goods sold, did not correspond with the amount
on Schedule C line 42, the line where the cost of goods sold is calculated. The
amount on line 42, which reflects the difference between beginning inventory and
ending inventory, was $12,267, rather than $89,657. It is unclear how petitioner
derived the amount of $89,657.

      2
       The amount petitioner input on Schedule C line 4, which serves to reduce
gross receipts or sales by cost of goods sold, did not correspond with the amount
on Schedule C line 42, the line where the cost of goods sold is calculated. The
amount on line 42, which reflects the difference between beginning inventory and
ending inventory, was $19,664, rather than $29,576. It is unclear how petitioner
derived the amount of $29,576.
                                        -5-

professional fees, rent or lease, and car and truck. With respect to cost of goods

sold for 2006 and 2007, petitioner did not contest respondent’s disallowance but

rather asserted that he had overstated gross receipts for Z-auto.

                                     Discussion

      In general, the Commissioner’s determination set forth in a notice of

deficiency is presumed correct, and the taxpayer bears the burden of proving that

the determination is in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). Pursuant to section 7491(a), the burden of proof as to factual matters

shifts to the Commissioner under certain circumstances. Petitioner did not allege

that section 7491(a) applies. See sec. 7491(a)(2)(A) and (B). Therefore, petitioner

bears the burden of proof. See Rule 142(a).

I.    Gross Receipts3

      Petitioner reported Schedule C gross receipts of $135,682 for 2006 but

asserted at trial that he should have reported only $58,000 as reflected by ETA on


      3
        In calculating gross income, taxpayers may offset gross revenue with cost
of goods sold. B.C. Cook & Sons, Inc. v. Commissioner, 65 T.C. 422, 428 (1975),
aff’d, 584 F.2d 53 (5th Cir. 1978). Cost of goods sold is computed with reference
to the value of a taxpayer’s opening and closing inventories for the year. The cost
of goods purchased for resale, with an adjustment for the difference between
opening and closing inventories for the year, is then deducted from gross sales in
computing gross income. Sec. 1.162-1(a), Income Tax Regs.; see sec. 1.61-3,
Income Tax Regs.
                                           -6-

Form 1099-MISC. Petitioner reported Schedule C gross receipts of $76,892 for

2007 but asserted at trial that he did not have gross receipts other than amounts

paid to him by ETA for his Schedule C activity.4 Petitioner was uncertain how

much ETA had paid him in 2007 but thought it was possible that ETA had paid

him the same amount he was paid in 2006, $58,000.5

      Petitioner provided copies of his bank records and credit card statements for

2006 and 2007 in an attempt to support his assertion that he had overstated his

gross receipts. A review of petitioner’s bank records for 2006 reflect deposits

totaling $261,328.6 Petitioner’s 2006 return reflects that $223,337 of proceeds

was eligible for deposit.7 Petitioner’s records indicate that deposits to his bank

account exceeded the amount of gross receipts reported on his 2006 return.

Petitioner failed to identify or specify particular deposits that were nonincome

items. Accordingly, petitioner failed to establish that he overstated gross receipts

on his 2006 return.

      4
          Petitioner testified that he may have sold a car in 2007 or 2008.
      5
          It is unclear whether ETA issued petitioner a Form 1099-MISC for 2007.
      6
        This excludes amounts attributable to cash advances of $39,000 and Visa
instant cash transfers of $13,000.

      7
       This comprises $60,000 of Form W-2 income, $135,682 reported on
Schedule C as gross receipts or sales, $655 of taxable interest, and $27,000 of rent
received.
                                        -7-

      A review of petitioner’s bank records for 2007 reflect deposits totaling

$247,677.8 Petitioner’s 2007 return reflects that $181,059.78 of proceeds was

eligible for deposit.9 Petitioner’s records indicate that deposits to his bank account

exceeded the amount of gross receipts reported on his 2007 return. Petitioner

failed to identify or specify particular deposits that were nonincome items.

Accordingly, petitioner failed to establish that he overstated gross receipts on his

2007 return.

II.   Schedule C Expenses

      A taxpayer must substantiate amounts claimed as deductions by maintaining

the records necessary to establish he or she is entitled to the deductions. Sec.

6001. Section 162(a) provides a deduction for certain business-related expenses.

In order to qualify for the deduction under section 162(a), “an item must (1) be

‘paid or incurred during the taxable year,’ (2) be for ‘carrying on any trade or

business,’ (3) be an ‘expense,’ (4) be a ‘necessary’ expense, and (5) be an

‘ordinary’ expense.” Commissioner v. Lincoln Sav. & Loan Ass’n, 403 U.S. 345,



      8
       The bank records do not reflect deposits attributable to cash advances or
Visa instant cash transfers.

      9
       This comprises $60,000 of Form W-2 income, $76,892 reported on
Schedule C as gross receipts or sales, $455 of taxable interest, $470 of taxable
refunds, $35,000 of rents received, and $8,242.78 of proceeds from stock sales.
                                        -8-

352 (1971); Deputy v. du Pont, 308 U.S. 488, 495 (1940) (to qualify as “ordinary”,

the expense must relate to a transaction “of common or frequent occurrence in the

type of business involved”). Whether an expense is ordinary is determined by

time, place, and circumstance. Welch v. Helvering, 290 U.S. at 113-114.

      If a taxpayer establishes that he or she paid or incurred a deductible business

expense but does not establish the amount of the expense, we may approximate the

amount of the allowable deduction, bearing heavily against the taxpayer whose

inexactitude is of his or her own making. Cohan v. Commissioner, 39 F.2d 540,

543-544 (2d Cir. 1930). In order for the Cohan rule to apply, there must be

sufficient evidence in the record to provide a basis for the estimate. Vanicek v.

Commissioner, 85 T.C. 731, 743 (1985). Certain expenses may not be estimated

because of the strict substantiation requirements of section 274(d). See Sanford v.

Commissioner, 50 T.C. 823, 827 (1968), aff’d per curiam, 412 F.2d 201 (2d Cir.

1969).

      Section 274(d) applies to certain business expenses including, among other

things, expenses for gifts and listed property and travel expenses (including meals

and lodging while away from home). To substantiate a deduction attributable to

travel expenses, a taxpayer must maintain adequate records or present

corroborative evidence to show the following: (1) the amount of each travel
                                        -9-

expense; (2) the time and place of travel; and (3) the business purpose for travel.

Sec. 1.274-5T(b)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6,

1985).

      A.     Legal and Professional Fees--2006 and 2007

      Petitioner claimed deductions for legal and professional fees on his 2006

and 2007 Schedules C. He testified that in 2006 he incurred approximately $7,000

to $8,000 for legal expenses related to a 1997 tax dispute; however, petitioner

admitted that the legal fees for which he claimed a deduction for 2006 were

unrelated to his Schedule C activity. Petitioner did not provide further evidence or

documentation that he incurred legal or professional fees in connection with his

Schedule C activity for 2006 or 2007. Accordingly, the Court sustains

respondent’s disallowance of the deductions for legal and professional fees for

2006 and 2007.

      B.     Travel--2006 and 2007

      Petitioner testified that he traveled to various locations for ETA and for his

Schedule C activity.

      Most of petitioner’s travel, primarily to Japan, was related to his

employment at ETA, and ETA reimbursed him for these expenses. While

petitioner provided credit card statements evidencing car rentals and plane ticket
                                       - 10 -

purchases, he failed to explain the business purpose of the travel expenses and

how the expenses related to his Schedule C activity at Z-auto. We sustain

respondent’s determinations in this regard.

      C.    Car and Truck Expenses--2007

      Petitioner claimed a deduction for car and truck expenses on his 2007

Schedule C. Petitioner did not provide any documents demonstrating the business

purpose of the car and truck expenses. He did not provide a mileage log, nor did

he provide any detailed explanation to support the claimed car and truck expense

deduction for 2007. Therefore, the Court sustains respondent’s disallowance of

the car and truck expense deduction.

      D.    Rent Expenses--2007

      Petitioner testified that he rented space for Z-auto from Executive Suites

and wrote out monthly checks for rent to Executive Suites. These checks were

given to the manager of the property, Scott Voigt. At one time, petitioner issued a

check directly to Mr. Voigt because he had missed two rent payments. Petitioner

provided carbon copies of three rent checks he issued to Executive Suites and Mr.

Voigt throughout 2007. Two checks were for $350 each, while the remaining

check was for $700, for a total of $1,400 in rent payments for 2007. Petitioner has

not otherwise provided support for his claimed rental expense deduction.
                                         - 11 -

       The Court is satisfied that petitioner incurred $1,400 of rent expenses and

that the payments were ordinary and necessary business expenses of Z-auto. The

Court sustains respondent’s disallowance of a deduction for the claimed rent

expenses to the extent the claim exceeds $1,400.

III.   Failure To File Addition to Tax

       Section 6651(a)(1) imposes an addition to tax of 5% per month of the

amount of tax required to be shown on the return, not to exceed 25%, for failure to

timely file a return. The addition to tax under section 6651(a)(1) is imposed

unless the taxpayer establishes that the failure to timely file was due to reasonable

cause and not willful neglect. Section 7491(c) provides that the Commissioner has

the burden of production in any Court proceeding with respect to liability for an

addition to tax.

       The record reflects that the Internal Revenue Service received petitioner’s

return on October 19, 2008. Petitioner did not provide any explanation of the

reasons for the delinquent filing. The record does not establish that petitioner’s

failure to timely file his 2007 Federal income tax return was due to reasonable

cause and not willful neglect. Therefore, petitioner is liable for the section

6651(a)(1) addition to tax.
                                        - 12 -

IV.   Section 6662(a) Accuracy-Related Penalty

      Section 6662(a) and (b)(1) and (2) imposes a penalty of 20% of the portion

of an underpayment of tax attributable to the taxpayer’s negligence, disregard of

rules or regulations, or substantial understatement of income tax. “Negligence”

includes any failure to make a reasonable attempt to comply with the Code,

including any failure to keep adequate books and records or to substantiate items

properly. See sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs. A “substantial

understatement” includes an understatement of income tax that exceeds the greater

of 10% of the tax required to be shown on the return or $5,000. See sec. 6662(d);

sec. 1.6662-4(b), Income Tax Regs.

      The section 6662(a) accuracy-related penalty does not apply with respect to

any portion of an underpayment if the taxpayer proves that there was reasonable

cause for such portion and that he acted in good faith with respect thereto. Sec.

6664(c)(1). The determination of whether a taxpayer acted with reasonable cause

and in good faith depends on the pertinent facts and circumstances, including the

taxpayer’s efforts to assess the proper tax liability; the knowledge and the

experience of the taxpayer; and any reliance on the advice of a professional, such

as an accountant. Sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the most
                                        - 13 -

important factor is the taxpayer’s effort to assess the taxpayer’s proper tax

liability. Id.

       The Commissioner has the burden of production under section 7491(c) with

respect to the accuracy-related penalty under section 6662. To satisfy that burden,

the Commissioner must produce sufficient evidence showing that it is appropriate

to impose the penalty. Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

Respondent determined the accuracy-related penalty for each year due to

negligence or a substantial understatement of income tax. Respondent has

satisfied his burden with respect to negligence by producing evidence that

petitioner failed to maintain adequate books and records. See sec. 1.6662-3(b)(1),

Income Tax Regs. In addition, the underpayments of tax are a result of

substantial understatements of income tax for 2006 and 2007 because the

understatements of $40,077 and $16,371, respectively, exceed $5,000, which is

greater than 10% of the tax required to be shown on the returns.10 Accordingly,

because respondent has met his burden of production, petitioner was required to

come forward with persuasive evidence that the accuracy-related penalty should

not be imposed with respect to the underpayment because he acted with reasonable

       10
        The allowance of rental expenses of $1,400 for 2007 would not reduce the
understatement of income tax below $5,000. The amount required to be shown on
the returns for 2006 and 2007 was $42,374 and $18,602, respectively.
                                       - 14 -

cause and in good faith. See sec. 6664(c)(1); Rule 142(a); Higbee v.

Commissioner, 116 T.C. at 446.

      Petitioner offered no argument or other evidence to show that there was

reasonable cause for the deductions claimed and that he acted in good faith with

respect to the underpayments. Respondent’s determination of accuracy-related

penalties under section 6662(a) for 2006 and 2007 will be sustained.

      We have considered all of the parties’ arguments, and, to the extent not

addressed herein, we conclude that they are moot, irrelevant, or without merit.

      To reflect the foregoing,


                                                     Decision will be entered

                                                under Rule 155.
