                          T.C. Summary Opinion 2014-7



                         UNITED STATES TAX COURT



     MARVIN DOUGLAS, JR. AND K. ELDER-DOUGLAS, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 12600-10S.                         Filed January 15, 2014.



      Marvin Douglas, Jr., and K. Elder-Douglas, pro sese.

      Audra M. Dineen, 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 in effect for the years in issue, and all Rule

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

      Respondent determined a deficiency in Marvin Douglas (petitioner) and K.

Elder-Douglas’ (Ms. Elder-Douglas) 2007 Federal income tax of $15,232 and an

accuracy-related penalty under section 6662(a) of $3,046.40. Respondent also

determined a deficiency in their 2008 Federal income tax of $22,885 and an

accuracy-related penalty under section 6662(a) of $4,577.

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

entitled to deductions claimed on Schedules C, Profit or Loss From Business, for

the years in issue; (2) whether petitioner is entitled to unreimbursed employee

business expense deductions claimed on Schedule A, Itemized Deductions, greater

than those respondent allowed for the years in issue; (3) whether petitioner is

entitled to a casualty loss deduction for 2008; and (4) whether petitioners are




      1
       Ms. Elder-Douglas was granted innocent spouse relief for 2007 and 2008
with respect to certain adjustments attributable to petitioner. Ms. Elder-Douglas
has conceded any remaining adjustments attributable to her for the years in issue,
and petitioner did not dispute these adjustments. Thus, the only remaining issue
with respect to Ms. Elder-Douglas is whether the accuracy-related penalty under
sec. 6662(a) applies with respect to any underpayments attributable to her for the
years in issue.
                                           -3-

liable for the accuracy-related penalties under section 6662(a) for the years in

issue.

                                       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.2 At the time the petition was filed, petitioner resided in California

and Ms. Elder-Douglas resided in Illinois.

         Petitioner worked full time as an air traffic controller for the Federal

Aviation Administration (FAA). The FAA did not require petitioner to travel

during the years in issue. Petitioner also pursued various multilevel marketing

activities during the years in issue.3 On petitioner’s 2007 Schedules C he reported

losses with respect to five multilevel marketing activities. These activities



         2
        On November 1, 2011, respondent filed a request for admissions.
Petitioners filed no response, and the requested matters were deemed admitted.
See Rule 90(c). Some of the matters deemed admitted here have been stipulated in
the stipulation of settled issues and the stipulation of facts. In the stipulation of
settled issues, with respect to an unreported State tax refund petitioners received in
2007, petitioners agreed to an amount of $2,748, while in the stipulation of facts
and the request for admissions petitioners agreed to and admitted to an amount of
$2,781. We presume the correct amount is $2,781.
         3
       Multilevel marketing generally refers to direct sales where the sales force is
compensated for sales they personally generate as well as for sales of the other
salespeople that they recruit.
                                          -4-

included: (1) Sales Prepaid Legal, a company that sold prepaid legal services; (2)

American Travel Bureau, a company that provided travel services; (3) World

Leadership Group (WLG), a company that marketed real estate, financial services,

insurance, and investments and sold mortgages; (4) Global Domains International,

a company that sold domain names; and (5) Veretekk, a company that provided

online marketing services. During 2008 petitioner continued to participate in the

five foregoing activities and began participating in two additional activities:

Direct Sales, a company for which there is no description, and Cyberwize Sales, a

company that sold nutritional products.

      Petitioner traveled throughout 2007 and 2008 to attend meetings and

training seminars for his multilevel marketing activities. He spent amounts on

airfare, hotel accommodations, and rental vehicles.4

      4
       After trial the parties filed a supplemental stipulation of facts attaching
numerous documents. Respondent objected to virtually all of the proposed
exhibits on the basis of lack of foundation and hearsay. Some of the proposed
exhibits were copies of hotel, car rental, and airline receipts.

       In general, the Court conducts trials in accordance with the rules of
evidence for trials without a jury in the U.S. District Court for the District of
Columbia, and accordingly, follows the Federal Rules of Evidence. Sec. 7453;
Rule 143(a); Clough v. Commissioner, 119 T.C. 183, 188 (2002). However, Rule
174(b) carves out an exception for trials of small tax cases under the provisions of
sec. 7463(a). Under Rule 174(b), the Court conducts small tax cases as informally
as possible and consequently may admit any evidence that the Court deems to
                                                                         (continued...)
                                             -5-

      Petitioner claimed deductions for the following expenses on his 2007 and

2008 Schedules C for his multilevel marketing activities:

                                  Sales Prepaid Legal

                                                   2007      2008

                   Advertising                       $17       $20
                   Car and truck                      ---       64
                   Depreciation                      142       101
                   Office                             ---       25
                   Supplies                            64       65
                   Travel                              75       13
                   Meals and entertainment             27       41
                   Utilities                         239       540
                   Other                             469       829
                   Business use of home              ---     1,526
                     Total                         1,033     3,224

                                  American Travel Bureau

                                                   2007      2008

                   Advertising                   $486        1,386
                   Car and truck                9,642       22,587
                   Commissions and fees           ---           20
                   Depreciation                12,930        7,758
                   Legal and professional          174         179
                   Rent or lease                  ---        2,156
                   Supplies                        210         175
                   Taxes and licenses              120         110
                   Travel                          600       1,526
                   Meals and entertainment          45          42
                   Utilities                    1,389        1,320
                   Other                           144          98
                   Business use of home         1,292        5,950
                     Total                     27,032       43,307


      4
       (...continued)
have probative value. Schwartz v. Commissioner, 128 T.C. 6, 7 (2007). The
documents that petitioners offered are highly probative of expenses petitioner
seeks to deduct for his multilevel marketing activities. Therefore, we overrule
respondent’s evidentiary objections, and the exhibits are admitted into evidence.
                          -6-
               World Leadership Group

                                2007           2008

Advertising                   $672              644
Car and truck                9,114            21,413
Depreciation                   410               246
Legal and professional         174               174
Office                           90               90
Rent or lease                  ---               275
Supplies                       608               226
Taxes and licenses             510               510
Travel                       2,800             5,037
Meals and entertainment        225             1,380
Utilities                    3,712             3,389
Other                          ---               455
Business use of home           ---             1,526
                            18,315            35,365

               Global Domains International

                                2007           2008

Advertising                      $205           $205
Car and truck                   4,477          5,512
Supplies                           160           140
Meals and entertainment            160           217
Utilities                          252           220
Business use of home              ---          1,526
                                5,254          7,820


                      Veretekk

                                2007           2008

Car and truck                    $949         1,453
Depreciation                    1,200           ---
Legal and professional            ---           312
Meals and entertainment           ---             67
Business use of home              ---           883
  Total                         2,149         2,715
                                            -7-
                                           Direct Sales

                                                           2008

                            Car and truck                 $2,481
                            Supplies                       3,559
                            Business use of home           1,526
                              Total                        7,566


                                           Cyberwize Sales

                                                           2008

                            Car and truck                 $2,443
                            Commissions and fees             200
                            Depreciation                   5,060
                            Interest                         510
                            Supplies                       1,495
                            Travel                          1,895
                            Meals and entertainment            62
                            Utilities                         816
                            Other                           2,694
                            Business use of home           1,526
                               Total                       16,701

         Petitioner also claimed deductions for job expenses and certain

miscellaneous deductions on his 2007 and 2008 Schedules A of $12,654 and

$24,834, respectively. These deductions related to travel, job training,

membership dues for the National Black Coalition of Federal Aviation Employees

(NBCFAE), union dues, tax preparation fees, and attorney’s and accountant’s

fees.5


         5
       Petitioner did not contest respondent’s disallowance of deductions for tax
preparation fees and attorney’s and accountant’s fees for 2007 and 2008.
Accordingly, the disallowed amounts are deemed conceded by petitioner. See
                                                                     (continued...)
                                        -8-

      Petitioner’s insurance company determined that his vehicle was

unsalvageable after it was involved in an auto accident in 2008, and he claimed a

$12,020 casualty loss deduction on his 2008 Schedule A for this loss.

      Respondent disallowed all of the claimed 2007 and 2008 Schedule C

expense deductions. Respondent also disallowed certain Schedule A expense

deductions for 2007 and 2008 and the casualty loss deduction for 2008.

                                     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. Petitioners did not allege

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

petitioners bear the burden of proof. See Rule 142(a).

      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.


      5
      (...continued)
Rule 149(b).
                                        -9-

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, 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, 290 U.S. at 113-114. Generally, the performance of

services as an employee constitutes a trade or business, Primuth v. Commissioner,

54 T.C. 374, 377 (1970), and the ordinary and necessary expenses paid in

connection with that trade or business are deductible, sec. 162(a); Boyd v.

Commissioner, 122 T.C. 305, 313 (2004).

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

things, expenses for gifts, listed property and travel (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 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).
                                        - 10 -

I.    Schedules C Travel Expenses--2007 and 2008

      Petitioner traveled in 2007 and 2008, attending seminars and conferences

for his multilevel marketing activities. Petitioner provided documentation and

substantiation that he incurred expenses of $705.606 for hotel stays, $631.46 for

car rental, and $872.25 for airfare for WLG conferences in 2007, and $933 for

airfare for a WLG conference in 2008.

      We are satisfied that petitioner has met the strict substantiation requirements

of section 274(d) for the foregoing expenses by providing a combination of airfare

tickets, hotel receipts, car rental receipts, seminar brochures, and his own

testimony.

      With respect to the remaining claimed travel expense deductions on his

2007 and 2008 Schedules C, petitioner did not substantiate the expenses or satisfy

the substantiation requirements of section 274(d). Therefore, the Court sustains

respondent’s disallowance of the remaining claimed travel expense deductions.

II.   Remaining Schedule C Expenses--2007 and 2008

      Petitioner claimed expense deductions on his 2007 and 2008 Schedules C

related to his multilevel marketing activities. The expense deductions were for


      6
        This cost relates to two conferences petitioner attended in 2007. The costs
of the respective hotel stays were $281.94 and $423.66.
                                        - 11 -

advertising, car and truck, commissions and fees, depreciation, legal and

professional, rent or lease, supplies, taxes and licenses, meals and entertainment,

utilities, business use of home, and other expenses.

       Petitioner provided documentation that he paid $299 and $98 in 2007 for

accreditation to perform his WLG activity in two States and that he paid a $175

WLG conference registration fee in 2007. Petitioner also provided documentation

that he paid a $50 registration fee in 2008 for a WLG event.

       The Court is satisfied that the foregoing expenses were ordinary and

necessary for petitioner’s WLG activity in the years indicated.7 Petitioner did not

substantiate the remaining claimed Schedule C expense deductions or otherwise

contest respondent’s determination, and we sustain respondent’s disallowance of

the remaining expense deductions.

III.   Schedule A Unreimbursed Employee Business Expenses

       Petitioner claimed unreimbursed employee business expense deductions for

2007 and 2008 for travel, job training, and union and membership dues. We

discuss each item below in turn.




       7
       To the extent these expenses are subject to the strict substantiation
requirements of sec. 274(d), we are satisfied that petitioner has satisfied the
requirements of that section.
                                       - 12 -

      A.     Travel

      It has been deemed admitted that petitioner was not required to travel for

employment during the years in issue. In any event, petitioner failed to provide

any evidence to substantiate the business purpose of the travel. Respondent’s

determination is sustained.

      B.     Job Training and Union and Membership Dues

      Subject to certain exceptions, education expenditures may be deducted as

trade or business expenses if the education maintains or improves the skills

required by a taxpayer in his or her employment or if the education meets the

express requirements of the taxpayer’s employer. Sec. 1.162-5(a)(1) and (2),

Income Tax Regs.

      Petitioner paid membership dues and attended NBCFAE training. He

testified that the training was beneficial and qualified him for promotion.

Although petitioner undoubtedly benefited from the training, he did not

demonstrate that his membership and training were required by his employer, that

without the training he could not have maintained his then-established

employment relationship, or that the training maintained or improved the skills

required for his employment. See sec. 1.162-5(c)(2), Income Tax Regs. With

respect to union dues, petitioner did not substantiate these expenses for 2007 or
                                        - 13 -

2008. Therefore, we sustain respondent’s disallowance of the foregoing claimed

unreimbursed employee business expense deductions.

IV.   2008 Casualty Loss

      A taxpayer is allowed a deduction for an uncompensated loss that arises

from fire, storm, shipwreck, or other casualty. Sec. 165(a), (c)(3). However, any

“loss * * * shall be allowed only to the extent that the amount of the loss to such

individual arising from each casualty * * * exceeds $100” and only to the extent

that the net casualty loss “exceeds 10 percent of the adjusted gross income”.

Sec. 165(h).

      The amount of the casualty loss allowed under section 165 is the lesser of:

(1) the fair market value of the property immediately before the casualty reduced

by the fair market value of the property immediately after the casualty or (2) “[t]he

amount of the adjusted basis prescribed” in section 1.1011-1, Income Tax Regs.,

“for determining the loss from the sale or other disposition of the property

involved.” Sec. 1.165-7(b)(1), Income Tax Regs.

      Petitioner claimed a $12,020 deduction for the loss of his vehicle in 2008.

The amount claimed was the difference between the $60,020 original value of the

vehicle in 2006 and the $48,000 paid by insurance after it was determined that it

was unsalvageable in 2008. After petitioner paid a $50 deductible, his primary
                                       - 14 -

and gap insurance covered the remaining balance of $47,950. Petitioner offered

evidence of the value of the car at the time of the original lease. However, he

failed to establish the value immediately before the accident and the value

immediately following the accident. See sec. 1.165-7(b), Income Tax Regs.

Without further evidence we cannot conclude that the car’s value at the time of the

accident was that of a new car. Therefore, respondent’s determination on this

issue is sustained.

V.    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
                                        - 15 -

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

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 was due to

negligence or a substantial understatement of income tax. Respondent has

satisfied his burden by producing evidence that petitioners failed to maintain

adequate books and records. In addition, the underpayment of tax with respect to

petitioner8 is a result of substantial understatements of income tax for 2007 and

       8
        As a result of the mutual concessions wherein respondent granted partial
relief under sec. 6015 and Ms. Elder-Douglas conceded the remaining
                                                                     (continued...)
                                       - 16 -

2008 because the understatements of $15,232 and $22,885, respectively, exceed

$5,000, which is greater than 10% of the tax required to be shown on the returns.9

Accordingly, because respondent has met his burden of production, petitioners

must come forward with persuasive evidence that the accuracy-related penalties

should not be imposed with respect to the underpayments because they acted with

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

Commissioner, 116 T.C. at 446.

      Petitioners failed to provide evidence of most of the claimed expense

deductions on Schedules C and Schedule A and failed to explain the conceded

amounts. Petitioners have not demonstrated that they acted with reasonable cause

and in good faith with respect to the recordkeeping requirements; therefore, the

Court sustains respondent’s determination on this issue.

      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.




      8
       (...continued)
adjustments, the accuracy-related penalties under sec. 6662(a) do not apply to Ms.
Elder-Douglas as to the items for which respondent granted innocent spouse relief.
See sec. 1.6015-1(h)(4), Income Tax Regs.
      9
       The allowed expenses for 2007 and 2008 would not reduce either
understatement below $5,000 with respect to petitioner.
                            - 17 -

To reflect the foregoing,


                                          Decision will be entered

                                     under Rule 155.
