                         T.C. Memo. 2020-25



                   UNITED STATES TAX COURT



            ALVIN E. KEELS, SR., Petitioner v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 15853-16.                      Filed February 19, 2020.



Alvin E. Keels, Sr., pro se.

Timothy B. Heavner and Robert J. Braxton, for respondent.
                                         -2-

[*2]        MEMORANDUM FINDINGS OF FACT AND OPINION


       COLVIN, Judge: Respondent determined that petitioner had income tax

deficiencies and is liable for additions to tax and penalties for taxable years 2012,

2013, and 2014 as follows:1

                                            Addition to tax      Penalty
                Year        Deficiency      sec. 6651(a)(1)    sec. 6662(a)
               2012           $117,659          $29,415          $23,532
               2013            62,642            12,528           12,528
               2014            98,732             4,932           19,746

       After concessions,2 the issues for decision are:

       1. Whether petitioner has substantiated any deductions in amounts greater

than respondent allowed. We hold that he has to the extent discussed below.

       2. Whether the yearend values of petitioner’s termination and extended

termination payments from the State Farm Insurance Co. (State Farm)

       1
       Section references are to the Internal Revenue Code in effect at all relevant
times, and Rule references are to the Tax Court Rules of Practice and Procedure.
We round all monetary amounts to the nearest dollar. Petitioner resided in
Virginia when he filed the petition.
       2
        Respondent concedes that petitioner may deduct: for 2012 bank fees of
$1,030, legal and professional services of $1,434, wages of $56,404, and mortgage
interest of $38,500; for 2013 bank fees of $1,220, legal and professional services
of $3,688, taxes and licenses of $1,746, and wages of $42,750; and for 2014 bank
fees of $1,679 and rent of $31,600.
                                         -3-

[*3] nonqualified deferred compensation program are taxable income for the years

at issue. We hold that they are not.

      3. Whether petitioner had $167,223 of income from PayPal, Inc. (PayPal),

for 2014. We hold that he did not.

      4. Whether petitioner is liable for additions to tax for failure to timely file

under section 6651(a)(1) and accuracy-related penalties under section 6662(a) for

tax years 2012, 2013, and 2014 (years at issue). We hold that he is.

                               FINDINGS OF FACT

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

A.    Petitioner’s State Farm Agency

      Petitioner was an independent State Farm agent from 1985 through the time

of trial. As a State Farm agent petitioner sells State Farm insurance products such

as automobile and life insurance.

      During the years at issue petitioner paid several individuals for various

services, which he calls “contract labor”. He made the following deductible

contract labor payments: (1) to J. Horne, $3,165 in 2012, $2,825 in 2013, and

$2,468 in 2014 for referrals; (2) to Peggy Scarborough, $1,164 in 2012 for

referrals and bookkeeping services; (3) to his accountant, Len Brite, $500 in 2012

for a referral; and (4) to Chris Arrington, $38 in 2012 for answering the phone.
                                          -4-

[*4] In 2013 petitioner relocated his State Farm agency. He paid $800 to

J. Harrold to assist him with the move.

B.    Jazz Legacy Foundation

      Petitioner is an officer of the Jazz Legacy Foundation (JLF). JLF was

formed in fall 2013 to foster interest in jazz and to encourage jazz-related music

education. JLF sponsors concerts and an annual four-day fundraiser.

      Petitioner used a PayPal account to receive payments for JLF. He provided

his personal taxpayer identification number to PayPal when he established that

account. Petitioner sold tickets for the JLF fundraiser in 2014. Patrons sent their

payments for the JLF fundraiser to the PayPal account. For tax year 2014 PayPal

sent petitioner a Form 1099-K, Payment Card and Third Party Network

Transactions, showing that $167,223 in payments had been received by that

account.

      Petitioner did not report receipts of his PayPal account as income. In the

notice of deficiency (notice) respondent determined that money received by the

PayPal account in 2014 was income to petitioner.
                                        -5-

[*5] C.      Petitioner’s 2012-14 Tax Returns and the Notice

      1.     Petitioner’s Tax Returns

      Petitioner filed Forms 1040, U.S. Individual Income Tax Return, for 2012,

2013, and 2014. Petitioner’s Form 1040 for 2012 was due April 15, 2013, and

was filed March 24, 2014. Petitioner’s Form 1040 for 2013 was due April 15,

2014, and was filed January 30, 2015. Petitioner’s Form 1040 for 2014 was due

April 15, 2015, and was filed November 5, 2015. He did not request extensions of

time to file those returns.

      Petitioner attached to his tax returns for 2012 and 2013 lists of expenses that

he classified as “other expenses”. He had already deducted some of these

expenses relating to utilities, advertising, and contract labor elsewhere on the

returns for 2012 and 2013.

      2.     The Notice of Deficiency

      In the notice respondent disallowed most of petitioner’s deductions claimed

on Schedules C, Profit or Loss From Business, and some deductions claimed on

Schedules A, Itemized Deductions, for the years at issue.

             i.     Undisputed Deductions

      Respondent conceded that petitioner may deduct the following amounts he

reported on his 2012-14 tax returns:
                              -6-

[*6]                                      Amount
                       Item               allowed
                  2012 Schedule C expenses
       Rent                               $37,300
       Returns and allowances                  6,001
                  2013 Schedule C expenses
       Rent                                   43,200
       Returns and allowances                  3,300
       Health insurance                        5,227
                  2013 Schedule A deduction
       Donations                               3,500
                  2014 Schedule C expenses
       Advertising                            20,212
       Car and truck                          18,144
       Commissions and fees                     800
       Insurance (other than health)           3,900
       Legal and professional services         2,800
       Repairs                                 1,735
       Supplies                                7,201
       Tax and licenses                        3,631
       Travel                                  4,804
       Meals and entertainment                 3,918
       Wages                                  47,468
                                        -7-

[*7]                        2014 Schedule A deductions
                   Mortgage interest                     41,000
                   Donations                                   489

             ii.     Disallowed Deductions

       The notice disallows the following deductions on petitioner’s Schedule C:

other expenses for 2012-14, utilities for 2012-14, office expenses for 2013 and

2014, interest--other for 2014, and contract labor for 2014.

       The notice also disallows deductions for “Unidentified Expenses”. The

notice specifies no line items for these amounts. Examples of “unidentified

expenses” are:

                            Item                      Amount deducted
                                   2012 Schedule C
          Advertising                                      $29,350
          Car and truck                                        23,866
          Contract labor                                       21,603
          Employee benefit programs                        154,780
          Interest--other                                      15,600
          Legal and professional services
           (partially conceded by respondent)                   4,400
          Repairs and maintenance                               3,000
          Supplies                                             20,300
                                            -8-

[*8]        Travel                                           3,853
            Deductible meals and entertainment               2,150
                              2013 Schedule C deductions
            Advertising                                      2,300
            Car and truck                                   23,504
            Commissions and fees                             2,350
            Contract labor                                  22,350
            Insurance (other than health)                    1,900
            Interest--Other                                 16,300
            Pension and profit-sharing plans                36,763
            Repairs and maintenance                          3,200
            Supplies                                         3,897
            Taxes and licences (partially
             conceded)                                       4,787
            Travel                                           6,200
            Meals and entertainment                          1,439

       One of these items for 2012 (employee benefit programs) and one for 2013

(pension and profit-sharing plans) are discussed infra Part D.

D.     State Farm Deferred Compensation Program

       1.     General Description of the State Farm Deferred Compensation
              Program

       When petitioner became a State Farm agent, he began participating in a

deferred compensation program under which he will receive termination payments
                                        -9-

[*9] for the first five years following the termination of his agency agreement and

extended termination payments thereafter. The only information in the record

from State Farm about the deferred compensation program is the following letter:

          We are writing in request to your email request regarding the
      Company’s [State Farm’s] reporting for 2012-2017.

            For tax years 2012-2017, State Farm Mutual Automobile
      Insurance Company reported income to * * * [petitioner]. Of this,
      $154,724 (2012), $36,763 (2013), [and] $28,124 (2014) * * *
      represents the yearend value of termination payments and extended
      termination payments (less the 2004 value).

      * * * [Petitioner] is an independent contractor for State Farm Mutual
      Automobile Insurance Company and its subsidiaries and affiliates
      (State Farm). Under the terms of his State Farm Agent’s Agreement
      if he satisfied certain requirements, he will be entitled to termination
      and extended termination payments from State Farm. Assuming
      qualification, the termination payments begin at termination of the
      State Farm Agent’s Agreements; extended termination payments
      would begin in the 61st month following termination of the State Farm
      Agent’s Agreement.

             IRC 409A broadly defines nonqualified deferred compensation
      payments and provides the payments of nonqualified deferred
      compensation cannot begin until separation from service.
      Termination of the State Farm Agent’s Agreement usually (but not
      always) results in a separation from service. * * * [Petitioner]’s
      agreement does not specify that termination payments will not begin
      until separation from service. Consequently, State Farm reported the
      409A value of his termination and extended termination payments to
      him in Box 15b. He has not yet received any of these funds.
                                        - 10 -

[*10] Neither party offered into evidence any Forms 1099-MISC or petitioner’s

State Farm agent’s agreement referred to in the letter.

      2.     Petitioner’s Reporting of the State Farm Deferred Compensation
             Program Amounts

      In response to receiving at least one Form 1099-MISC, petitioner reported

$440,537 of gross receipts or sales on his Schedule C for 2012. He labeled

$154,724 of that amount as “State Farm Mutual” and that amount is also the 2012

yearend value of petitioner’s termination and extended termination payments.

Petitioner deducted that amount3 on his Schedule C as an employee-benefit

program expense.

      Petitioner reported $324,567 of gross receipts on his Schedule C for 2013.

It appears and we will assume that amount includes the $36,763 yearend value of

his termination and extended termination payments for 2013. Petitioner deducted

that amount as a pension and profit-sharing plan expense. The yearend value for

petitioner’s termination and extended termination payments for 2014 was $28,124.

Petitioner neither deducted that amount nor included it in income for 2014.




      3
       Petitioner deducted $154,780 on his Schedule C. The parties do not
address the $56 difference.
                                       - 11 -

[*11] 3.    No Reference in Notice to Termination and Extended Termination
            Payment Balances, Deferred Compensation, Pension and Profit-
            Sharing Plan, or Employee Benefit Programs

      The notice does not refer to petitioner’s yearend termination or extended

termination payment balances, deferred compensation, pension and profit-sharing

plan, employee benefit programs, or section 409A. Respondent accepted

petitioner’s reporting as income of the yearend termination and extended

termination payment balances for 2012 and 2013 but denied the deduction of those

amounts as part of the denial of the deduction of “unidentified expenses”.

      Beneath the disallowed “unidentified expenses” respondent stated:

      Since your 2012 and 2013 Federal Tax Returns were submitted on
      paper a portion of your Schedule C1 expenses could not be traced to a
      specific line item and have been grouped as “Unidentified Expenses.”
      We will be able to better identify these individual expenses once you
      submit complete copies of these returns. Since we could not verify
      whether these Unidentified Expenses were (a) ordinary and necessary
      to your business, and (b) paid, we have disallowed the amount shown.

It is not apparent how respondent meant these statements to apply to petitioner’s

deduction of the 2012 and 2013 yearend balances in his termination and extended

termination payment accounts. For example, the text questioning whether the

“expense” was ordinary and necessary to petitioner’s business and whether the

“expense” was paid has no bearing on petitioner’s reporting of his deferred

compensation account balances. Further, petitioner filed his returns in paper form
                                        - 12 -

[*12] and complete paper copies of the returns are in the record; thus it is unclear

what is meant by the statement in the notice that “[w]e will be able to better

identify these individual expenses once you submit complete copies of these

returns”. In any event, after the notice was sent respondent abandoned all of those

points with respect to this issue and adopted a different basis for the tax treatment

of those balances.

      4.     First Mention of Section 409A

      Respondent did not mention petitioner’s yearend termination or extended

termination payment balances, deferred compensation, pension and profit-sharing

plan, employee benefit programs, or section 409A in the notice, in respondent’s

pretrial memo, or otherwise before trial. At trial petitioner contended that

respondent’s determination in the notice that his deduction of the yearend balances

in his termination and extended termination payment account for 2012 and 2013

was improper.

      Respondent first referred to section 409A when petitioner offered the State

Farm letter into evidence at trial. Respondent included arguments relating to

section 409A in respondent’s posttrial brief.
                                        - 13 -

[*13] E.     Managerial Approval of Penalties

      More than one month before the notice was sent to petitioner a group

manager signed Form 300, Civil Penalty Approval Form, approving an addition to

tax under section 6651(a)(1) and an accuracy-related penalty under section

6662(d) for each year at issue.

                                      OPINION

      Our opinion is organized as follows: (A) burden of proof, (B) petitioner’s

substantiation of his deductions, (C) tax treatment of petitioner’s yearend

termination and extended termination payment balances for 2012 and 2013,

(D) PayPal account receipts, and (E) additions to tax and penalties.

A.    Burden of Proof

      The Commissioner’s determination in a notice of deficiency is generally

presumed correct, and the taxpayer bears the burden of proving otherwise. Rule

142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v.

Helvering, 290 U.S. 111, 115 (1933). However, under section 7491(a), the burden

of proof may shift to the Commissioner if the taxpayer complies with all

substantiation requirements in the Internal Revenue Code, introduces credible

evidence with respect to factual issues relevant to ascertaining their liability, and

cooperates with reasonable requests by the Commissioner for information,
                                        - 14 -

[*14] documents, and meetings. Sec. 7491(a)(1). Petitioner does not contend that

he has satisfied the requirements of section 7491 for shifting the burden of proof.

See Rule 142(a)(2). Thus, except as discussed below in relation to the yearend

termination and extended termination payment balances and the additions to tax

and penalties, the burden of proof for all factual issues remains with petitioner.

B.    Petitioner’s Substantiation

      A taxpayer is required to substantiate expenses underlying each claimed

deduction by maintaining records sufficient to establish the amount of the expense

to enable the Commissioner to determine the correct tax liability. See sec. 6001;

Higbee v. Commissioner, 116 T.C. 438, 440 (2001); sec. 1.6001-1(a), Income Tax

Regs. In addition the taxpayer bears the burden of substantiating the amount and

purpose of the claimed deduction. Higbee v. Commissioner, 116 T.C. at 440;

Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff’d, 540 F.2d 821 (5th

Cir. 1976). The fact that a taxpayer claims a deduction on his income tax return is

not sufficient to substantiate the deduction. Wilkinson v. Commissioner, 71 T.C.

633, 639 (1979); Roberts v. Commissioner, 62 T.C. 834, 837 (1974).

      Petitioner’s evidence comprised his (1) testimony, (2) credit card, bank, and

PayPal account statements, and (3) canceled checks. Petitioner did not offer into

evidence any receipts, invoices, bills or other statements showing what goods or
                                        - 15 -

[*15] services he paid for by using his credit cards, checks, and PayPal accounts,

nor did he offer into evidence any other books or records showing the purpose of

each expense. Petitioner’s checks and credit card statements show he paid the

amounts thereon but do not show whether the payment was business related. For

example, petitioner’s utility expenses consist of payments for natural gas,

electricity, water, and sewage, but the record does not show whether these services

were for his business or his home.

      Petitioner double deducted several expenses during the years at issue.

Petitioner double deducted his utilities by including them as part of his other

expenses and utilities. He double deducted moving expenses by including them

under other expenses and contract labor, and he double deducted some advertising

expenses by including them under advertising and other expenses.

      During trial petitioner testified concerning various expenses he deducted on

his 2012, 2013, and 2014 tax returns. Respondent points out that petitioner’s

testimony was “self-serving”. Witness testimony could almost always be said to

be “self-serving”, but that factor alone is not a reason to automatically reject the

evidence as unreliable. Lupyan v. Corinthian Colls. Inc., 761 F.3d 314, 320-321,

321 n.2 (3d Cir. 2014). We decide whether a witness’ testimony is credible by

relying on objective facts, the reasonableness of the testimony, the consistency of
                                         - 16 -

[*16] the witness’ statements, and the witness’ demeanor. See Quock Ting v.

United States, 140 U.S. 417, 420-421 (1891); Wood v. Commissioner, 338 F.2d

602, 605 (9th Cir. 1964), aff’g 41 T.C. 593 (1964); Pinder v. United States, 330

F.2d 119, 124-125 (5th Cir. 1964); Concord Consumers Hous. Coop. v.

Commissioner, 89 T.C. 105, 124 n.21 (1987). We may discount testimony which

we find to be unworthy of belief, see Tokarski v. Commissioner, 87 T.C. 74, 77

(1986), but we may not arbitrarily disregard testimony that is competent, relevant,

and uncontradicted, see Conti v. Commissioner, 39 F.3d 658, 664 (6th Cir. 1994),

aff’g and remanding 99 T.C. 370 (1992), and T.C. Memo. 1992-616.

      Except as discussed below, much of petitioner’s testimony was not

sufficiently credible to substantiate his reported expenses. Petitioner’s testimony

was sometimes argumentative and was sprinkled with bluster and sarcasm. For

example, when asked how he knows that his OfficeMax expenses were for items

used at his State Farm office he stated: “The title of OfficeMax is enough to know

that it’s something for an office, more than likely.” Petitioner provided a check

made payable to Cape School, but the check does not show the purpose. When

asked if the purpose was for business petitioner stated (addressing respondent’s

counsel): “If you want to do some research, you can look up Cape School, and

they’ll tell you what they do.” Petitioner stated that he did not bring all of his
                                         - 17 -

[*17] credit card statements to avoid having a pile of papers at the trial. When

respondent asked why petitioner relied on a bank statement to show he had paid

electric bills instead of the electrical bills themselves, petitioner said if requested

he can provide the bills. However, petitioner was unresponsive when respondent

requested the underlying bills on August 25, 2017, and again when respondent file

a motion on December 29, 2017, seeking the documents.

      Petitioner initially testified that he used his American Express credit card

solely for his State Farm agency during the years at issue, but later he said that he

used it “mostly” for business. The American Express account statements in the

record appear to include several purchases for personal purposes, such as

purchases from sporting goods stores, restaurants, gas stations, and a car

dealership.

      Petitioner testified that a bank account in his name was his State Farm

operating account, but he also appears to have used that account for personal

expenses such as payments for a doctor, gas stations, and several charges to

Neiman Marcus. Petitioner testified that one of those charges to Neiman Marcus

may have been for a client.

      Petitioner’s bank statements show payments he made to airlines and hotels,

but the record does not show who traveled or the purpose of the travel. He
                                       - 18 -

[*18] provided no receipts or other records relating to meals he claimed that he

paid for clients or potential clients. For 2012 he deducted $23,866 in car and truck

expenses. To calculate that amount he included all of the 37,625 miles he drove

that year and testified that each of those miles was for business. The record does

not show how many miles he drove for business or to and from work.

      Therefore, except for the issues discussed below and conceded by

respondent, petitioner did not meet his burden of proof, and the expense

deductions disallowed by the notice are sustained.

      Petitioner credibly testified about some of his reported contract labor

expenses. He sufficiently substantiated the following expenses: referral fees paid

to J. Horne ($3,165 for 2012, $2,825 for 2013, and $2,468 for 2014), referral fees

and bookkeeping services paid to Peggy Scarborough ($1,164 for 2012), a referral

fee to Len Brite ($500 for 2012), and a payment to Chris Arrington for answering

the phone ($38 for 2012). In addition petitioner testified, and we find, that he paid

$800 to J. Harrold in fall 2013 as a moving fee.
                                        - 19 -

[*19] C.     Nonqualified Deferred Compensation Payments for 2012-14

      1.     Positions of the Parties Regarding the Deferred Compensation
             Balances

      Respondent contends for the first time in the posttrial brief that under

section 409A the yearend termination and extended termination payment balances

in petitioner’s State Farm deferred compensation program are income to him of

$154,724 for 2012, $36,763 for 2013, and $28,124 for 2014. Petitioner argued at

trial that he is not taxable on these amounts because he had not received any of

these payments and would not receive them until the termination of his State Farm

agency agreement. Neither party offered into evidence any Forms 1099-MISC

reporting these yearend balances or the deferred compensation program

agreement.

      2.     Section 7522

      The basis for tax due in a notice of deficiency must be stated in the notice.

Sec. 7522(a) and (b)(1). Failure to state the basis does not invalidate the notice,

sec. 7522(a), but the burden of proof shifts to the Commissioner, Shea v.

Commissioner, 112 T.C. 183, 197 (1999). In Shea we said that the assertion of a

new basis after issuance of a notice is similar to raising new matter on which the

Commissioner bears the burden of proof. Id. at 196-197.
                                       - 20 -

[*20] In Shea the Commissioner issued a notice of deficiency which disallowed

various Schedule C deductions. Id. at 191. The only basis provided in the notice

for disallowing those deductions was that the taxpayer had not substantiated them.

Id. However, in the posttrial brief the Commissioner argued that the deduction

should be disallowed solely on the basis of section 66(b).4 Id. at 190-191. We

said that “it appear[ed] * * * [the Commissioner] gave no thought to * * *

section 66(b) when the notice of deficiency was prepared.” Id. at 192. We held

that the Commissioner bore the burden of proof because the Commissioner had

raised a new basis for disallowing the deductions.5 Id. at 197.

      Respondent’s late assertion of the section 409A theory in this case closely

mirrors the facts in Shea. The notice disallows petitioner’s deduction for

“unidentified expenses” of $278,933 for 2012 and $131,947 for 2013. The notice

states that the unidentified expenses were disallowed because respondent “could

not verify whether these Unidentified Expenses were (a) ordinary and necessary to


      4
       Sec. 66(b) establishes that the Secretary may disregard community property
laws in certain situations and does not address substantiation.
      5
       In Shea v. Commissioner, 112 T.C. 183 (1999), the taxpayers were on
notice before trial that the Commissioner would rely upon sec. 66(b); but because
the pretrial notice did not provide sufficient warning, the Commissioner bore the
burden of proof nonetheless. The facts are even more favorable to petitioner in
our case because he did not have prior warning that respondent would rely upon
sec. 409A.
                                        - 21 -

[*21] * * * [petitioner’s] business, and (b) paid”. The notice did not identify any

issues relating to deferred compensation or section 409A. Because the notice did

not include the basis on which respondent relies, respondent bears the burden of

proof on that issue.

      3.     Section 409A

      To prevail under section 409A, a taxpayer must show all three of the

following: first, that distributions from the plan may not occur before the

taxpayer’s separation from service, disability, death, an unforeseen emergency, or

a change in ownership of the corporation, sec. 409A(a)(2)(A)(i)-(vi); second, that

the plan does not permit acceleration of benefits except to the extent provided by

regulations, sec. 409A(a)(3); and third, that the election to deferred compensation

must be timely made, sec. 409A(a)(4)(B)(i). These requirements do not apply if

the benefits are subject to substantial risk of forfeiture or were previously taxable.

Sec. 409A(a)(1)(A)(i).

      For respondent to meet the burden of proof respondent must show that the

plan fails to include any one of the three requirements above, that petitioner does

not have a substantial risk of forfeiture, and that petitioner was not previously

taxed on the deferred compensation. The record does not show whether

petitioner’s plan with State Farm meets the requirements of section 409A. The
                                       - 22 -

[*22] plan document probably provides these details, but it is not in the record;

neither is any Form 1099-MISC sent to petitioner by State Farm. The State Farm

letter does not include those details. Thus, respondent has not shown that the plan

fails to meet at least one of the requirements of section 409A or whether there is a

substantial risk of forfeiture. Therefore, respondent did not meet the burden of

proving that section 409A applies, and on this record petitioner is not taxable on

the yearend balances of his termination and extended termination accounts for the

years at issue.

D.    PayPal

      Respondent determined that petitioner had $167,223 in additional income

for 2014 from a PayPal account registered in petitioner’s name. Petitioner testified

that in 2014 the account was used to receive money from persons buying tickets

for a JLF fundraiser and that he had provided his taxpayer identification number to

PayPal when the PayPal account was established. Petitioner sponsored some jazz

concerts before JLF was founded in fall 2013, but it appears that the PayPal

receipts in 2014 belonged to JLF, not to petitioner. Thus we conclude that none of

the $167,223 was income to petitioner.

      The record is murky regarding petitioner’s use of one or more PayPal

accounts before JLF was established. Petitioner may have used a PayPal account
                                         - 23 -

[*23] to pay some of his personal expenses. Because of our holdings above

relating to the substantiation of his deductions, petitioner may not deduct

expenses, if any, paid through PayPal.

E.    Additions to Tax and Penalties

      Respondent determined that petitioner is liable for additions to tax for

failure to timely file under section 6651(a)(1) and accuracy-related penalties under

section 6662(a) for the years at issue. The Commissioner bears the burden of

production for these additions to tax and penalties. Sec. 7491(c); Higbee v.

Commissioner, 116 T.C. at 446-447. Once the Commissioner meets this burden,

the taxpayer has the burden of proving that any affirmative defenses apply, such as

reasonable cause. Higbee v. Commissioner, 116 T.C. at 446-447.

      Section 6651(a)(1) imposes an addition to tax when a taxpayer fails to

timely file a return unless the taxpayer establishes that the failure was due to

reasonable cause and not willful neglect. Respondent has shown that petitioner’s

return for each year at issue was filed late. Petitioner did not show any reasonable

cause for his failure to timely file the returns. Thus, he is liable for the additions

to tax under section 6651(a)(1) for 2012, 2013, and 2014.

      Section 6662(a) and (b)(2) imposes an accuracy-related penalty equal to

20% of the portion of an underpayment of tax attributable to a substantial
                                        - 24 -

[*24] understatement of income tax. An understatement of income tax is

substantial if it exceeds the greater of 10% of the tax required to be shown on the

return or $5,000. Sec. 6662(d)(1)(A). Respondent has shown that petitioner has

substantial understatements. An accuracy-related penalty does not apply,

however, to any portion of an underpayment of tax if the taxpayer shows he or she

acted with reasonable cause and in good faith with respect to that portion. Sec.

6664(c)(1); sec. 1.6664-4(b)(1), Income Tax Regs. Petitioner did not show he had

reasonable cause for the understatements.

      Section 6751(b)(1) provides that the Commissioner must show that there

was timely written supervisory approval of the initial section 6662 penalty

determination. See also sec. 7491(c); Frost v. Commissioner, 154 T.C. __, __

(slip op. at 20) (Jan. 7, 2020) (requiring the Commissioner to produce evidence of

penalty approval as part of the initial burden of production under section 7491(c));

Clay v. Commissioner, 152 T.C. 223, 249 (2019); Graev v. Commissioner, 149

T.C. 485, 493 (2017), supplementing and overruling in part 147 T.C. 460 (2016).

Respondent’s burden under section 6751(b)(1) was met when he produced a Form

300 signed by a group manager, which occurred over one month before the notice

was sent to petitioner. Thus, petitioner is liable for accuracy-related penalties

under section 6662(a) for 2012, 2013, and 2014.
                                  - 25 -

[*25] To reflect the foregoing,


                                           Decision will be entered under

                                  Rule 155.
