                              T.C. Memo. 2016-220



                        UNITED STATES TAX COURT



                 CHINWEIKE NWABASILI, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 13227-14.                         Filed December 5, 2016.



      Chinweike Nwabasili, for himself.

      Christopher M. Groboske, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      MORRISON, Judge: The respondent (referred to here as the “IRS”) issued

a notice of deficiency to the petitioner, Mr. Chinweike Nwabasili, for the 2011 tax

year determining an income-tax deficiency of $5,002 and an accuracy-related
                                        -2-

[*2] penalty under section 6662(a) of $1,000.40.1 Nwabasili timely filed a petition

under section 6213(a) for redetermination of the deficiency and the penalty.2 We

have jurisdiction under section 6214(a).

      As to the amount of the deficiency, the sole issue to resolve is whether the

notice of deficiency correctly disallowed the deductions that Nwabasili claimed on

his 2011 Schedule C, “Profit or Loss From Business”, in the following expense

categories: (1) travel, (2) meals and entertainment, and (3) other expenses. We

hold that the notice of deficiency correctly disallowed these deductions. We also

hold that Nwabasili is liable for the accuracy-related penalty.

                               FINDINGS OF FACT

      During 2011 Nwabasili worked as an engineer at Met Laboratories, Inc.,

which paid him wages of $70,403. He was also involved in two businesses with

his brother. The first business was promoting events such as musical

performances. In the case of musical performances, Nwabasili and his brother



      1
      Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
      2
       He was a resident of California when he filed the petition. Therefore, an
appeal of our decision in this case would go to the U.S. Court of Appeals for the
Ninth Circuit, see sec. 7482(b)(1), unless the parties designate the Court of
Appeals for another circuit, see id. para. (2).
                                        -3-

[*3] would rent a bar and pay a band to play there. They would advertise the

performance, sell tickets, and collect the proceeds of the ticket sales. The second

business was reselling cars. They would buy used cars in the United States, ship

them to Nigeria, and sell them. Nwabasili attached a single Schedule C to his

2011 Form 1040, “U.S. Individual Income Tax Return”, to report his income and

expenses for both businesses. The Schedule C showed receipts of only $6,350.

However, it showed business expenses of $56,252 from various expense

categories on the Schedule C. The categories of expenses and the amounts that

Nwabasili reported in each category were as follows:

                  Nwabasili’s Schedule C expenses (as reported)

                     Expense category               Amount

                 Advertising                         $4,840
                 Commissions and fees                 3,300
                 Office                               9,140
                 Repairs and maintenance              4,800
                 Supplies                             5,220
                 Taxes and licenses                     300
                 Travel                               3,455
                 Meals and entertainment                392
                 Utilities                            2,365
                 Other                               22,440
                  Total                              56,252

The IRS audited Nwabasili’s tax return but scrutinized only three Schedule C

expense categories: (1) travel, (2) meals and entertainment, and (3) other
                                          -4-

[*4] expenses. The IRS issued a notice of deficiency disallowing all deductions in

these three categories. It made no adjustments in any other categories. At trial

Nwabasili contended that he was entitled to a total of $25,336 of deductions in

these three disputed categories.3 The $25,336 consists of the following 12 alleged

payments:

                       Business-expense deductions sought by Nwabasili
                       Schedule C
           Business     category                     Nature of alleged payment
 1        Event       Other          $6,000 cash payment by Nwabasili to his brother for his
          promotion   expenses       brother to pay for musician Flavour Nabania and his band
                                     to perform at the bar New Karibbean City in Oakland,
                                     California, on Thursday, Nov. 24, 2011
 2        Event       Other          $1,195 cash payment by Nwabasili to his brother for his
          promotion   expenses       brother to pay New Karibbean City to rent the bar for the
                                     night of Flavour Nabania’s performance and to pay for
                                     security for the night
 3        Event       Travel         $3,749 of debit card payments by Nwabasili for flights for
          promotion                  Flavour Nabania and his band from Houston to Oakland
                                     the day before Flavour Nabania’s performance and from
                                     Oakland to Los Angeles the day after Flavour Nabania’s
                                     performance. The cost of each flight was $249.50 for the
                                     Houston to Oakland flights and $95.70 for the Oakland to
                                     Los Angeles flights.
 4        Event       Meals and      $552.26 cash payment by Nwabasili to the Boko
          promotion   entertain-     restaurant in Oakland, California, the day before Flavour
                      ment           Nabania’s performance, for food for Flavour Nabania and
                                     his band




      3
        By comparison Nwabasili had reported deductions totaling $26,287 in
these three categories.
                                      -5-

[*5] Event            Other      $1,837.78 of debit card payments by Nwabasili to
         promotion    expenses   Oakland hotels for the hotel stay of Flavour Nabania and
5                                his band the nights before and after Flavour Nabania’s
                                 performance
6        Event        Other      $1,000 cash payment by Nwabasili to his brother so that
         promotion    expenses   his brother could pay a musician named London to
                                 perform at New Karibbean City in Oakland, California, on
                                 Nov. 19, 2011. A receipt signed by Nwabasili’s brother
                                 says that Nwabasili made the payment to his brother, but
                                 Nwabasili testified that he paid London directly. (Given
                                 this testimony we do not find credible his initial claim that
                                 he made a payment to his brother. We consider his claim
                                 to be that he made the $1,000 payment directly to
                                 London.)
7        Car export   Other      $2,000 payment by check from Nwabasili to American
                      expenses   Auto Link for the purchase of a Honda CRV
8        Car export   Other      $3,000 payment (a $2,700 cash payment and a $300
                      expenses   payment by check) from Nwabasili to his brother so his
                                 brother could pay American Auto Link for a Toyota
                                 Sienna
9        Car export   Other      $1,700 cash payment by Nwabasili to his brother so that
                      expenses   his brother could pay American Auto Link for an Acura
                                 TL
10       Car export   Other      $2,300 payment by check from Nwabasili to Inter Global
                      expenses   Logistics. This relates to a $2,300 invoice sent by Inter
                                 Global Logistics to Nwabasili’s brother for the service of
                                 shipping the three cars (Honda CRV, Toyota Sienna, and
                                 Acura TL) from the United States to Nigeria.
11       Both         Other      $1,281.96 of payments for internet and television service
                      expenses   to Nwabasili and his brother at their residence in
                                 Alameda, California. There are 12 monthly payments of
                                 $106.83 per month.
12       Both         Other      $720 of payments for cell phone service. There are 12
                      expenses   monthly payments of $60 per month.
 Total                           $25,336
                                         -6-

[*6] Nwabasili thus alleges that several of the payments--(1), (2), (8), and (9)--

were actually two payments: first, his payment to his brother; second, his

brother’s payment to a third party. For example, as to payment (1), Nwabasili

alleges that he paid his brother $6,000 and that his brother paid $6,000 to Flavour

Nabania (or his agent) to perform music.

      We find that Nwabasili or his brother made all the payments to the third

parties described in the above table. Thus, we find that Nwabasili or his brother

made the following payments: (1) $6,000 for Flavour Nabania and his band to

perform in Oakland on November 24, 2011, (2) $1,195 to New Karibbean City for

rent and a security fee, (3) $3,749 for the flights for Flavour Nabania and his band,

(4) $552.26 to a restaurant in Oakland, (5) $1,837.78 to Oakland hotels, (6) $1,000

to a musician named London, (7) $2,000 for a Honda CRV, (8) $3,000 for a

Toyota Sienna, (9) $1,700 for an Acura TL, (10) $2,300 to ship the three vehicles

to Nigeria, (11) $1,281.96 for internet and television services, and (12) $720 for

cell phone service. That these payments were made is supported by documentary

evidence and by Nwabasili’s testimony.

      Nwabasili contends that it was he, not his brother, who paid the third party

regarding payments (3), (4), (5), (6), (7), (10), (11), and (12). We agree with

Nwabasili that he made payments (3), (4), (5), (7), and (10). For the other
                                        -7-

[*7] payments--(6), (11), and (12)--we do not find which brother made them. As

explained below, all expenses of the event-promotion and car-export businesses

are expenses of the partnership between the brothers. Therefore, the expenses are

deductible to the partnership no matter which brother paid the expenses. To the

extent payments (6), (11), and (12) are deductible business expenses, they are

deductions of the partnership no matter which partner paid the expenses.

      As explained above, for several of the payments Nwabasili contends his

brother made a payment to the third party and that he made a reimbursement

payment to his brother. These are payments (1), (2), (8), and (9).4 It is

      4
        The documentary record of these brother-to-brother payments is meager.
All of the brother-to-brother payments were alleged to have been made in cash
except for a $300 payment made by a check dated September 9, 2011. Allegedly
the $300 check was a partial reimbursement of the $3,000 cost of a Toyota Sienna.
Although Nwabasili showed that he withdrew money from his bank account in
amounts that mostly matched the amounts he claimed he paid his brother, that
proves only that he withdrew the money from his bank account. It does not show
that he paid over the money he withdrew to his brother. To show that he paid over
the withdrawn cash to his brother, Nwabasili produced receipts from his brother.
Each of the receipts had the following information: (1) the amount of the alleged
cash payment from Nwabasili to his brother, (2) the date of the alleged cash
payment, and (3) the alleged purpose of the alleged cash payment. Thus, for the
$6,000 cash payment that Nwabasili made to his brother to allegedly reimburse his
brother for paying for the performance of Flavour Nabania, the receipt includes
the following information:

      “six thousand dollars”
      “date”: “11/23/2011”
                                                                       (continued...)
                                        -8-

[*8] unnecessary to determine whether Nwabasili made a reimbursement payment

to his brother. To the extent the brother’s payment to the third party is a

      4
       (...continued)
      “for”: “flavour balance payment”
      “by”: [brother’s signature]

If we believe the receipts are reliable, then the receipts prove that the brother-to-
brother payments were made. However, the IRS contends the receipts are
unreliable for two reasons. First, Nwabasili testified that the receipts were filled
out on the dates written on the receipts. The receipts are from a preprinted book of
consecutively numbered receipts. But the dates written on the receipts are in an
order different from the receipt numbers. For example, receipt No. 395951 is
dated November 23, 2011. Receipt No. 395983 is dated November 17, 2011.
This, the IRS suggests, means that the receipts were not filled out on the dates
written on the receipts. Second, Nwabasili initially attempted to convince the
Court that the receipts were signed not by his brother, but by the ultimate payee.
For example, Nwabasili initially testified that the November 23, 2011 receipt for
$6,000 was signed by an agent for Flavour Nabania and that Nwabasili, and not
his brother, had made the $6,000 payment. But under cross-examination,
Nwabasili admitted that his brother had signed this receipt. Consistent with this
admission, he made other changes to his version of events. He abandoned his
claim that he had paid Flavour Nabania directly. He admitted that his brother had
made the $6,000 payment to Flavour Nabania. But he testified that he had
reimbursed his brother for the payment. The IRS concludes that all the receipts
ostensibly showing that Nwabasili paid his brother are false. And although
Nwabasili testified that he made the payments to his brother, the IRS contends that
Nwabasili’s testimony is unbelievable.
       As explained above, Nwabasili initially alleged that he made payments (1),
(2), (8), and (9) to the respective third parties himself, and he submitted receipts
that he initially claimed were signed by the third parties. But later Nwabasili
conceded that the receipts had been signed by his brother rather than the third
parties and alleged that actually his brother had made the payments to the third
parties and that he made matching reimbursement payments to his brother. For
these payments, we consider Nwabasili’s final allegation to be that his brother
paid the third parties and that he paid his brother.
                                       -9-

[*9] deductible business expense, it is a partnership expense even if Nwabasili did

not reimburse his brother.

      The following table summarizes Nwabasili’s allegations and our findings as

to who made the 12 alleged payments:
                                - 10 -

[*10]

           Amount of    Cashflows as alleged   Cashflows as determined
 Payment    payment        by Nwabasili              by the Court
    1       $6,000.00         N6B63                    N6B63
                                                          or
                                                          B63
    2        1,195.00         N6B63                    N6B63
                                                          or
                                                          B63
    3        3,749.00         N!!63                    N!!63
    4         552.26          N!!63                    N!!63
    5        1,837.78         N!!63                    N!!63
    6        1,000.00         N!!63                    N!!63
                                                          or
                                                         B63
    7        2,000.00         N!!63                    N!!63
    8        3,000.00         N6B63                    N6B63
                                                          or
                                                          B63
    9        1,700.00         N6B63                    N6B63
                                                          or
                                                          B63
    10       2,300.00         N!!63                    N!!63
    11       1,281.96         N!!63                    N!!63
                                                          or
                                                          B63
    12        720.00          N!!63                    N!!63
                                                          or
                                                          B63
   Total    25,336.00
                                        - 11 -

[*11]                                 OPINION

        The taxpayer has the burden of proving that the IRS’s determinations in the

notice of deficiency are incorrect. See Rule 142(a)(1); Welch v. Helvering, 290

U.S. 111, 115 (1933). However, the IRS bears the burden of proof if, for a

particular fact issue, the taxpayer (a) introduces credible evidence, (b) meets all

applicable substantiation requirements, (c) complies with all recordkeeping

requirements, and (d) cooperates with any reasonable request for information from

the IRS. Sec. 7491(a). Nwabasili does not assert, and the record does not

demonstrate, that the requirements of section 7491(a) have been met. Therefore,

the burden of proof remains on Nwabasili.

        Section 162(a) allows a deduction for expenses paid or incurred by the

taxpayer in carrying on a business. The IRS concedes that Nwabasili carried on an

event-promotion business and a car-export business but contends that Nwabasili’s

brother also carried on an event-promotion business and a car-export business. In

the IRS’s view, the two brothers have their own businesses.5 Consistent with this

        5
       Although in the IRS’s view Nwabasili’s businesses are separate from his
brother’s businesses, this does not necessarily mean that the IRS views the
businesses as unrelated. For example, if Nwabasili were providing services to his
brother by helping his brother with his brother’s event-promotion and car-export
businesses, then providing these services could constitute Nwabasili’s own
business. Nwabasili could be entitled to deduct the expenses of providing these
                                                                      (continued...)
                                        - 12 -

[*12] view, the IRS contends that Nwabasili must prove that the disputed expenses

relate to his businesses, not his brother’s. Furthermore, the IRS contends that

Nwabasili failed to prove he made any of the payments. Nwabasili contends that

he and his brother were partners in both the event-promotion business and the car-

export business. He also contends that he personally paid the disputed expenses,

either directly, or indirectly through a reimbursement payment to his brother.

      We first consider Nwabasili’s contention that he and his brother are

partners. A partnership is created “when persons join together their money, goods,

labor, or skill for the purpose of carrying on a trade, profession, or business and

when there is community of interest in the profits and losses.” Commissioner v.

Tower, 327 U.S. 280, 286 (1946). Whether parties have formed a partnership is a

question of fact, and while all circumstances are to be considered, the essential

question is whether the parties intended to, and did in fact, join together for the

present conduct of an undertaking or enterprise. Luna v. Commissioner, 42 T.C.

1067, 1077 (1964). It is not necessary for partners to file a partnership tax return

for their partnership to be respected for federal tax purposes. See Ayrton Metal

Co. v. Commissioner, 299 F.2d 741, 742 (2d Cir. 1962), aff’g in part, rev’g in part

      5
       (...continued)
services under sec. 162(a), which provides that the ordinary and necessary
expenses of carrying on a business are deductible.
                                         - 13 -

[*13] 34 T.C. 464 (1960). Nwabasili credibly testified that he and his brother

were partners in the two businesses. He credibly testified that he and his brother

agreed to share the income and expenses of the two businesses. He explained how

they divided the tasks with respect to the businesses. Although many of the

business documents referred to his brother and not him, Nwabasili explained that

this was because his brother was the front man for the businesses even though they

considered themselves equal partners.

      We find that the brothers intended to join together to conduct the

businesses. The event-promotion business and the car-export business were

conducted in partnership.

      Although a partnership is not itself subject to income tax, sec. 701, the

income or loss of a partnership is computed as an initial step in calculating the

partners’ tax liabilities, sec. 1.703-1(a)(1), Income Tax Regs. The partnership’s

income for a year is equal to the excess of its gross income over its deductions. Id.

subdiv. (i). The partnership’s loss for a year is equal to the excess of its

deductions over its gross income. Id. subdiv. (ii). In computing their tax

liabilities, the partners take into account their distributive shares of the

partnership’s income or loss. Sec. 702(a)(7); sec. 1.702-1(a)(9), Income Tax Regs.
                                       - 14 -

[*14] The disputed $25,336 in payments related to businesses conducted by the

partnership (except for payments of any personal expenses). An expense of a

partnership cannot be deducted directly by a partner on the partner’s tax return.

Klein v. Commissioner, 25 T.C. 1045, 1051 (1956).6 Any deduction resulting

from the $25,336 in payments is a deduction of the partnership.7 It is included in

the computation of the partnership’s income or loss. See sec. 1.703-1(a)(1)(i) and

(ii), Income Tax Regs. The partnership’s income or loss, computed including the

deductible portion of the $25,336 in payments, should ordinarily be passed




      6
       There is an exception to this rule where the partnership agreement requires
partners to bear their own costs. Klein v. Commissioner, 25 T.C. 1045, 1051-1052
(1956). This exception does not apply to the alleged expenses in dispute here
because there is no evidence of such an agreement requiring the brothers to bear
their own costs.
      7
        Although we find that either Nwabasili or his brother made all of the 12
disputed payments, this does not mean that all the payments are deductible against
the income of the partnership. First, some of the payments may not be entirely
related to the brothers’ businesses. See sec. 262(a) (no deduction for personal
expenses). These are payments (11) for internet and television service at the
brother’s residence and (12) for cell phone service. Second, some of the payments
are for the types of expenses that are deductible only if proof of the expense is
made through specified types of evidence. See sec. 274(d). These are payments
(3) for air travel, (4) for meals, and (5) for hotels. Third, any deduction for
payment (4) for meals is subject to a 50% limitation. See sec. 274(n)(1)(A). We
need not decide whether all 12 payments are deductible against the income of the
partnership because, as we hold below, Nwabasili has not shown that he had a
sufficient adjusted basis in his partnership interest at the end of 2011.
                                        - 15 -

[*15] through to Nwabasili and his brother in proportion to each brother’s

distributive share. See sec. 702(a)(7); sec. 1.702-1(a)(9), Income Tax Regs.8

      The calculation of the partnership’s income or loss requires us first to

calculate the gross income of the partnership. Nwabasili appears to have reported

some of the gross income (i.e., receipts) for the two businesses operated in

partnership on his Schedule C attached to his Form 1040. But Nwabasili admitted

that he did not report all of the gross income for the two businesses on his

Schedule C. And the record does not give us any further information with which

to calculate the gross income of the partnership.

      There is also a problem with calculating the deductions of the partnership.

Although Nwabasili testified generally that the businesses lost money, he did not

supply us with information about the amounts of the deductions that correspond to

the losses other than the $25,336 in payments he seeks to deduct in the three

disputed categories.

      8
         A partner’s distributive share is determined by the partnership agreement,
or, if there is no partnership agreement, by the partner’s interest in the partnership.
Sec. 704(a) and (b); sec. 1.704-1(b)(3)(ii), Income Tax Regs. (setting forth factors
considered in determining a partner’s interest in a partnership). There is no formal
partnership agreement between Nwabasili and his brother. The exact distributive
share does not matter because, as we explain below, Nwabasili has not proven the
gross income of the partnership, the deductions of the partnership, and his adjusted
basis in his interest in the partnership, and this failure is fatal to his claiming
deductions for the expenses of the partnership for tax year 2011.
                                         - 16 -

[*16] Even if we could calculate the partnership’s loss, we face another problem

in determining the deductible portion of Nwabasili’s distributive share of the loss.

Section 704(d) provides that a partner’s distributive share of a partnership loss is

allowed as a deduction only to the extent of the adjusted basis of the partner’s

interest in the partnership at the end of the tax year.

      To be entitled to his share of any partnership loss, Nwabasili had to have a

sufficient adjusted basis in his partnership interest at the end of 2011. See sec.

704(d). The basis of a partner’s interest in the partnership acquired by a

contribution of money is initially equal to the money the partner initially

contributed. Sec. 722. It is increased by any other contributions by the partner to

the partnership. Secs. 722, 705(a); William S. McKee, et al., 1 Federal Taxation

of Partnerships and Partners (4th ed. 2007) para. 6.02[1], at 6-5 (“The partner’s

initial basis for his interest is adjusted by taking into account all subsequent

contributions by the partner to the partnership, distributions from the partnership

to the partner, and the partner’s shares of taxable and nontaxable income and

expense of the partnership, up to the date as of which the partner’s outside basis is

to be determined.”). It is generally increased by the sum of the partner’s shares of

taxable income for the year and prior years. Sec. 705(a)(1)(A). It is generally

decreased by the sum of the partner’s distributive shares of the partnership losses
                                        - 17 -

[*17] for the year and prior years. Sec. 705(a)(2). It is generally decreased by any

distributions by the partnership to the partner during the year and prior years.

Secs. 705(a)(2), 722. When a partner pays an expense of the partnership, that

payment is considered a contribution by the partner to the partnership that

increases the adjusted basis of the partner’s interest in the partnership. Secs. 722,

705(a); McKee et al., supra at 6-7 n.22 (“Payment of a partnership liability by a

partner is the equivalent of a cash contribution for § 705(a) basis computation

purposes.”). Thus, Nwabasili could argue that the $25,336 in payments, if made

by him (as opposed to his brother), should increase his adjusted basis in his

interest in the partnership. We need not reach the question of whether the $25,336

in payments should increase his adjusted basis in the partnership because this is

only one potential component of Nwabasili’s adjusted basis in his interest in the

partnership. For example, had Nwabasili received distributions from the

partnership, the distributions would have decreased his adjusted basis and could

have completely offset any increase to adjusted basis. If Nwabasili’s brother made

a payment to him, for example, to reimburse him for partnership expenses he paid,

then this could be treated as a distribution from the partnership to Nwabasili.

Nwabasili seemed to claim that the brothers often made reimbursement payments

to each other. So it is plausible that Nwabasili received reimbursement payments
                                         - 18 -

[*18] from his brother that would be deemed to be distributions from the

partnership. The record does not reveal the contributions that Nwabasili made to

the partnership or the distributions that the partnership made to him. Without this

information, we cannot calculate his adjusted basis in his partnership interest.

Because Nwabasili has the burden of proof, we hold that section 704(d) precludes

him from deducting any part of the partnership loss.9 Because the $25,336 in

payments is part of the partnership loss (if the payments are deductible at all, see

supra note 7), Nwabasili is not entitled to deduct the $25,336 in payments. See

sec. 704(d).

      In summary we have identified three obstacles to determining how much of

the $25,336 of disputed payments should be passed through to Nwabasili even if

these payments are deductible: (1) lack of information as to the gross income of

the partnership, (2) lack of information as to deductions for expenses other than

the $25,336 of disputed payments, and (3) lack of information about Nwabasili’s

adjusted basis in his partnership interest.

      The IRS did not raise these matters regarding the difficulty of calculating

Nwabasili’s distributive share of the partnership loss. Normally we do not


      9
      A similar approach was taken in Mladinich v. Commissioner, T.C. Memo.
1969-185, and Lemons v. Commissioner, T.C. Memo. 1997-404.
                                        - 19 -

[*19] consider matters not raised by the parties. We make an exception in this

instance. Nwabasili did not explain to the IRS until trial that he had a partnership

with his brother. He filed his tax return as if he was not in partnership with his

brother. This gave the IRS the false impression that his disputed Schedule C

expenses related to businesses that were exclusively his and that he had paid the

disputed expenses. He manipulated documents in an attempt to show that he had

made payments that were actually made by his brother. See supra note 4. Given

Nwabasili’s subterfuge, it is understandable that the IRS remained skeptical of

whether the disputed expenses related to Nwabasili at all, whether directly or

through a partnership. That the IRS did not contend that the disputed deductions

should be evaluated under the partnership tax rules (subchapter K of the Internal

Revenue Code, sections 701 to 777) and disallowed for lack of information about

the partnership’s gross income, the partnership’s deductions, or the adjusted basis

in the partnership, does not prevent us from holding that the deductions should be

denied on these grounds. After all, it was Nwabasili who presented persuasive

evidence that his businesses were conducted in partnership with his brother. For

us to sustain the deductions he seeks on the ground that his businesses were

conducted not in partnership with his brother would be contrary to what he argued

at trial. And it would be contrary to our view of the reality of the business
                                         - 20 -

[*20] arrangements. We believe that Nwabasili conducted his businesses in

partnership with his brother. Partnerships are taxed under the partnership tax

rules.

         We now consider whether Nwabasili is liable for the section-6662(a)

penalty for 2011. Section 6662(a) and (b)(1) and (2) imposes a 20% penalty on

the portion of an underpayment of tax attributable to (1) negligence or disregard of

rules or regulations or (2) any substantial understatement of income tax. The

penalty under section 6662(a) is not imposed on a taxpayer who had reasonable

cause for the underpayment and acted in good faith with respect to the

underpayment. Sec. 6664(c)(1).

         With respect to any penalty, the burden of production is on the IRS. Sec.

7491(c). The IRS must come forward with evidence that it is appropriate to

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

Once the IRS has met this burden, the taxpayer bears the burden of proving that

the penalty is inappropriate because, for example, the taxpayer acted with

reasonable cause and in good faith. Higbee v. Commissioner, 116 T.C. at 447.

         We hold that the underpayment, which was attributable to the disputed

Schedule C deductions, was due to Nwabasili’s negligence. At trial, Nwabasili

produced enough evidence for us to find that he and his brother operated the
                                        - 21 -

[*21] event-promotion business and the car-export business in partnership with

each other. However, the record does not show that he told his tax return preparer

that the businesses were operated as a partnership. Had this been known, the tax

return preparer could have prepared a partnership tax return; and, in the course of

preparing the partnership return and Nwabasili’s return, the preparer could have

calculated the partnership’s gross income, the partnership’s deductions, and

Nwabasili’s adjusted basis in his interest in the partnership.

      The underpayment may also be attributable to a substantial understatement

of income tax. An understatement of tax is generally equal to the correct tax

minus the tax shown on the return. Sec. 6662(d)(2)(A). To be substantial, an

understatement must exceed 10% of the tax shown on the return. Sec.

6662(d)(1)(A). It must also exceed $5,000. Id. The notice of deficiency does not

set forth a computation of the amount of the understatement. The IRS’s brief

calculates that the understatement is $26,287. But it appears that the IRS’s brief

calculated the amount of the understatement incorrectly by using amounts of

income instead of amounts of income tax. The parties shall address the amount of

the understatement and the existence of a substantial understatement of income tax

in the Rule 155 computations.
                                      - 22 -

[*22] We also hold that Nwabasili did not show that he had reasonable cause for

the underpayment or that he acted in good faith with respect the underpayment.

See sec. 6664(c)(1).

      We have considered all of the arguments the parties have made, and to the

extent that we have not discussed them, we find them to be irrelevant, moot, or

without merit.

      To reflect the foregoing,


                                               Decision will be entered under

                                      Rule 155.
