                                  T.C. Memo. 2019-131



                            UNITED STATES TAX COURT



              GEORGIA SARKIN AND SUNEET JAIN, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 427-16.                               Filed October 1, 2019.



      Georgia Sarkin and Suneet Jain, pro sese.

      Adam B. Landy, Nancy M. Gilmore, and Thomas R. Mackinson, for

respondent.


               MEMORANDUM FINDINGS OF FACT AND OPINION


      NEGA, Judge: Respondent determined deficiencies in petitioners’ Federal

income tax for tax years 2012 and 2013 and accuracy-related penalties under

section 6662(a)1 as follows:


      1
          Unless otherwise indicated, all section references are to the Internal
                                                                           (continued...)
                                         -2-

[*2]                                                   Penalty
                        Year         Deficiency      sec. 6662(a)
                        2012           $7,578          $1,151.80
                        2013           13,656           2,731.20

       After concessions,2 the issues remaining for decision for petitioners’ tax

years 2012 and 2013 (years at issue) are whether: (1) Mr. Jain’s business reported

in Schedule C, Profit or Loss From Business, constituted an activity not engaged

in for profit within the meaning of section 183; (2) petitioners are entitled to

deductions for moving expenses claimed in their returns; (3) petitioners are

entitled to deductions for unreimbursed employee expenses claimed in their

Schedules A; and (4) petitioners are liable for the accuracy-related penalties.




       1
      (...continued)
Revenue Code in effect for the years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
       2
        Before trial respondent conceded that petitioners are entitled to: (1) a
reduction of $785 in State refunds, credits, or offsets for tax year 2012 and (2) an
increased itemized deduction of $598 for investment interest claimed on their
Schedule A, Itemized Deductions, for tax year 2012. At trial petitioners conceded
that they are not entitled to an investment interest deduction of $5,657 claimed on
their Schedule A for tax year 2012.
                                        -3-

[*3]                           FINDINGS OF FACT

       Some of the facts are stipulated and are so found. The stipulation of facts

and the attached exhibits are incorporated herein by this reference. Petitioners

resided in New York when the petition was timely filed.

I.     Background

       A.    Petitioners’ Educational Background

       Petitioners are both professional architects and design planners. Suneet Jain

received his bachelor’s degree in architecture from the New Delhi School of

Planning and Architecture in 1991. Georgia Sarkin received bachelor’s degrees in

architectural studies and architecture from the University of Cape Town in 1984

and the University of KwaZulu Natal in 1987, respectively, as well as her master’s

degree in architecture in urban design from the Harvard Graduate School of

Design in 1994.

       B.    Sarkin & Jain Architects & Urban Planners

       In 1997 after they each had worked for various private firms around the

world as architects and design planners, petitioners founded Sarkin & Jain

Architects & Urban Planners (Sarkin Jain) in South Africa. The firm’s focus was

largely on the design and implementation of development projects in postapartheid
                                          -4-

[*4] South Africa, including large-scale urban renewal projects and the

reconstruction of inner cities.

        C.    Petitioners’ Immigration to the United States

        In 2002 Ms. Sarkin immigrated to the United States to accept a position as

an architect and planner with an architecture firm in New York. In 2004 Mr. Jain

immigrated to the United States to join his wife and to help raise the couple’s

young children in New York. During that time Mr. Jain enrolled at Columbia

University to pursue a master’s degree in business administration while Ms. Sarkin

continued to work as an architect and planner at her architecture firm in New

York.

        In 2006 Mr. Jain received his master’s degree in business administration

from Columbia University. Thereafter, from 2006 through 2009 he worked as

associate director in New York, New York, for General Electric’s Commercial

Finance & Real Estate Group (GE).

II.     Mr. Jain’s Move to South Africa

        In 2009 Mr. Jain lost his job at GE in the aftermath of the financial crisis.

For the two years that followed, Mr. Jain was unable to find employment in the

commercial real estate sector in New York. Ultimately, Mr. Jain concluded that he
                                          -5-

[*5] would not be able to find such employment in New York for the foreseeable

future because of the lingering effects of the financial crisis.

      In 2011 Mr. Jain decided he should move back to South Africa. He hoped

he could create new business opportunities as an architect and planner for himself

and his family by capitalizing on the goodwill that he and Ms. Sarkin had created

for themselves during their time there.

      Accordingly, in late 2011 Mr. Jain moved back to South Africa. Ms. Sarkin

continued to raise petitioners’ children and work as an architect in New York.

      Upon his return to South Africa in late 2011, Mr. Jain converted a portion of

his previously owned apartment into an office and reported in Schedule C of his

Federal income tax return for the years at issue that he was conducting an offshoot

of Sarkin Jain’s business as his sole proprietorship. The Schedules C reported that

Mr. Jain’s business was a real estate consulting business based in New York, New

York. Mr. Jain had various meetings with other individuals related to his reported

Schedule C business. During that time, however, Mr. Jain failed to record the

dates, times, and individuals that he met, and the record does not reflect the

amount of time that he spent day to day carrying out the reported Schedule C

business. Moreover, while during the years at issue Mr. Jain traveled between the

United States and South Africa, petitioners did not keep a contemporaneous log of
                                         -6-

[*6] his travel between the United States and South Africa. Further, during the

years at issue Mr. Jain did not maintain a separate bank account, hire an

accountant, or hire a bookkeeper with respect to the reported Schedule C business.

       Mr. Jain used his time in South Africa to remodel Ms. Sarkin’s mother’s

home located there (renovation project). The renovation project consisted of:

(1) evicting former tenants; (2) creating the design aspects of the property;

(3) gathering the necessary permit approvals from the city; and (4) executing of

the renovations. In exchange for his work on the renovation project, petitioner

was entitled to 50% of the rental income from the property once Ms. Sarkin’s

mother began renting the home, as well as 50% of the profit when Ms. Sarkin’s

mother chose to sell the home. At most, petitioners for the respective years at

issue realized gross income of $250 and $4,500, and the record does not reflect

that the renovation project ever resulted in a profit for them.

III.   Tax Returns, Notice, and Petition

       Petitioners timely filed their joint Forms 1040, U.S. Individual Income Tax

Return (return) for tax years 2012 and 2013, which they prepared.3 Petitioners

attached to each of those returns a Schedule C, a Schedule A, Form 2106,

       3
        We understand petitioners’ filing of the joint returns to be their admission
that Mr. Jain is subject to the U.S. taxing regime for the years at issue. We add
that petitioners have not argued to the contrary.
                                       -7-

[*7] Employee Business Expenses, and Form 3903, Moving Expenses. In each of

those Schedules C, petitioners reported the following:

                                                2012           2013
 Gross income                                   $250          $4,500
 Expense:
  Advertising                                     110            200
  Car and truck                                 1,790          1,139
  Contract labor                                5,000            250
  Depreciation & sec. 179                       1,114          2,150
  Legal & professional services                   450          4,400
  Office                                          550          1,200
  Repairs & maintenance                         7,500          5,500
  Supplies                                        655            350
  Taxes & licenses                               -0-             440
  Travel                                        4,500          1,200
  Deductible meals and entertainment              275            125
  Utilities                                     2,055            600
  Other--Bank fees                                250            128
  Other--Printing & reproduction                  350            155
  Other--Internet service provider                350            300
  Other--Business cards & stationery               50             45
  Other--Cell phones                             -0-             450
                                           -8-

 [*8]
 Total expenses                                  24,999                18,632
  Total profit (loss)                            (24,749)             (14,132)

      Petitioners used their losses to offset other income for the years at issue.

      In their Schedules A, petitioners claimed deductions for unreimbursed

employee expenses of $17,640 and $27,217 for tax years 2012 and 2013,

respectively.4 In the Forms 2106, petitioners claimed deductions for unreimbursed

employee expenses which consisted of:

                   Expense                            2012                2013
 Vehicle                                               -0-               $4,238
 Parking fees, tolls, and transportation              $550                 3,086
 Business (not including vehicle, parking           16,840               19,137
  fees, tolls, and transportation, and travel)
 Meals and entertainment                                500                1,510
  Total                                              17,890              27,971

      In their Forms 3903 petitioners claimed deductions for moving expenses of

$10,850 and $8,746 for tax years 2012 and 2013, respectively.

      On October 1, 2015, respondent issued petitioners a notice of deficiency for

tax years 2012 and 2013. In that notice, respondent disallowed all of the Schedule


      4
      Mr. Jain filed a Form 2106 for both years at issue while Ms. Sarkin filed a
Form 2106 for tax year 2013.
                                        -9-

[*9] C deductions because respondent determined that the Schedule C activity did

not meet the guidelines of carrying on a trade or business within the meaning of

section 162. Further, respondent denied all of petitioners’ deductions for moving

expenses and employee business expenses and determined that petitioners are

liable for accuracy-related penalties under section 6662(a).

      On January 5, 2016, petitioners timely filed a petition for redetermination of

the deficiencies and the accuracy-related penalties.5

                                     OPINION

I.    Section 183

      Section 162(a) allows a taxpayer to deduct “all the ordinary and necessary

expenses paid or incurred during the taxable year in carrying on any trade or

business”. In general, however, a taxpayer may not deduct expenses incurred in

connection with activities not engaged in for profit, such as activities primarily

carried on as sport, as a hobby, or for recreation, to offset taxable income from

other sources. Sec. 183(a) and (b); sec. 1.183-2(a), Income Tax Regs. Section

183(c) defines an “activity not engaged in for profit” as “any activity other than

      5
       The last day for petitioners to file a petition with the Court was December
30, 2019. The Court received petitioners’ petition on January 5, 2016. Because
the envelope in which it was mailed bore a United States Postal Service postmark
dated December 26, 2015, the petition is treated as timely filed. See sec. 7502(a);
sec. 301.7502-1(c)(1), Proced. & Admin. Regs.
                                        - 10 -

[*10] one with respect to which deductions are allowable for the taxable year

under section 162 or under paragraph (1) or (2) of section 212.”

      The expectation of profit need not have been reasonable; however, the

taxpayer must have entered into the activity, or continued it, with the actual and

honest objective of making a profit. Ranciato v. Commissioner, 52 F.3d 23, 25

(2d Cir. 1995), vacating and remanding T.C. Memo. 1993-536; Hulter v.

Commissioner, 91 T.C. 371, 393 (1988); sec. 1.183-2(a), Income Tax Regs.

Whether the taxpayer had the requisite profit objective is determined by looking at

all the facts and circumstances. Golanty v. Commissioner, 72 T.C. 411, 426

(1979), aff’d without published opinion, 647 F.2d 170 (9th Cir. 1981); sec. 1.183-

2(a), Income Tax Regs. We give greater weight to objective facts than to a

taxpayer’s statement of intent. Thomas v. Commissioner, 84 T.C. 1244, 1269

(1985), aff’d, 792 F.2d 1256 (4th Cir. 1986); sec. 1.183-2(a), Income Tax Regs.

Evidence from years outside the years at issue is relevant to the extent it allows

inferences regarding the taxpayer’s requisite profit objective in the subject years.

See, e.g., Smith v. Commissioner, T.C. Memo. 1993-140.

      Pursuant to section 183(d), an activity is presumed to be engaged in for

profit if the activity produces gross income in excess of deductions for any three of

the five consecutive years which end with the taxable year, unless the
                                        - 11 -

[*11] Commissioner establishes to the contrary. See Wadlow v. Commissioner,

112 T.C. 247, 250 (1999). Mr. Jain’s reported Schedule C business failed to

produce gross income in excess of deductions during the years at issue. Nor does

the record establish that it ever produced gross income in excess of deductions for

purposes of invoking the presumption. Accordingly, the presumption does not

apply in this case.

      The Commissioner’s determinations in a notice of deficiency are generally

presumed correct, and the taxpayer ordinarily bears the burden of proving those

determinations erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). If, however, the taxpayer produces credible evidence with respect to any

factual issue relevant to ascertaining his tax liability and meets certain other

requirements, the burden of proof shifts from the taxpayer to the Commissioner as

to that factual issue. Sec. 7491(a)(1) and (2). Because we decide the section 183

issue on the preponderance of the evidence, the burden of proof is irrelevant. See

Knudsen v. Commissioner, 131 T.C. 185, 188-189 (2008), supplementing T.C.

Memo. 2007-340.

      Petitioners testified that their plan required Mr. Jain to physically move to

Durban, South Africa, as opposed to conducting work remotely from the United

States or through periodic visits because petitioners believed it was necessary to
                                        - 12 -

[*12] have a physical presence in order to bid on, engage in, and acquire new

projects in the area. Further, petitioners testified that because of the country’s

isolation during the apartheid years, the people of South Africa would prefer to

conduct business with people that had a local presence instead of working with

those located abroad. Upon arrival in South Africa, Mr. Jain testified, he intended

to form a consortium with other local companies to revive certain development

projects that were planned by Sarkin Jain but not carried out in the early 2000s.

Further, he testified, petitioners planned to engage in any project in South Africa,

including the renovation project, to reinstate and reinforce his company’s position

within the community as it had previously been with Sarkin Jain before petitioners

moved from South Africa. Mr. Jain testified that he believed the renovation

project would show the community of Durban that: (1) Mr. Jain is back in Durban

with a new firm; (2) his new firm has the resources to complete such projects just

as Sarkin Jain had from 1996 through 2001; and (3) his new firm is already

engaged in projects within the community, no matter how small.

      We heard Mr. Jain’s testimony but decline to rely solely on his spoken

words. Section 1.183-2(b), Income Tax Regs., provides a nonexclusive list of

factors to consider in evaluating a taxpayer’s profit objective, such as: (1) the

manner in which the taxpayer carried on the activity; (2) the expertise of the
                                        - 13 -

[*13] taxpayer or his or her advisers; (3) the time and effort expended by the

taxpayer in carrying on the activity; (4) the expectation that the assets used in the

activity may appreciate in value; (5) the success of the taxpayer in carrying on

other similar or dissimilar activities; (6) the taxpayer’s history of income or loss

with respect to the activity; (7) the amount of occasional profits earned, if any;

(8) the financial status of the taxpayer; and (9) whether elements of personal

pleasure or recreation were involved. No single factor is determinative of the

taxpayer’s intention to make a profit, and more weight may be given to some

factors than others. Golanty v. Commissioner, 72 T.C. at 426; see Dunn v.

Commissioner, 70 T.C. 715, 720 (1978), aff’d on another issue, 615 F.2d 578 (2d

Cir. 1980); sec. 1.183-2(b), Income Tax Regs. We examine each of these factors

in turn.

       A.    Manner in Which Activity Is Conducted

       The fact that the taxpayer carries on an activity in a businesslike manner

may indicate a profit motive. Sec. 1.183-2(b)(1), Income Tax Regs. This

determination requires that we consider whether the taxpayer: (1) maintained

complete and accurate books and records; (2) conducted the activity in a manner

resembling that in which successful practitioners conduct similar business

activities; (3) changed operating methods, adopted new techniques, or abandoned
                                          - 14 -

[*14] unprofitable activities in a manner consistent with an intent to improve

profitability; and (4) prepared a business plan. Id.; see Keating v. Commissioner,

T.C. Memo. 2007-309, 2007 WL 2962774, at *4 (“Numerous court opinions

mention that a businesslike operation often would involve a business plan.”),

aff’d, 544 F.3d 900 (8th Cir. 2008).

         Petitioners did not have a written business plan. The reported Schedule C

business did not have its own bank account; instead, all of the expenses were paid

from petitioners’ personal checking account and with their credit cards. In fact,

the record is devoid of any credible evidence that petitioners engaged in any

meaningful financial management with respect to the reported Schedule C

business. See Foster v. Commissioner, T.C. Memo. 2012-207, 2012 WL 3000350,

at *5.

         Further, although Mr. Jain testified that he kept track of his reported

Schedule C business’ income and expenses, along with the underlying source

documentation, the evidence demonstrates that his recordkeeping was nothing

more than a conscious attention to detail. See Golanty v. Commissioner, 72 T.C.

at 430.

         While a taxpayer need not maintain a sophisticated cost accounting system,

the taxpayer should keep records that make informed business decisions possible.
                                        - 15 -

[*15] See Burger v. Commissioner, 809 F.2d 355, 359 (7th Cir. 1987), aff’g T.C.

Memo. 1985-523. For a taxpayer’s books and records to indicate a profit motive,

the books and records should enable the taxpayer to cut expenses, generate or

increase profits, or evaluate the overall performance of the operation. See Abbene

v. Commissioner, T.C. Memo. 1998-330, 1998 WL 643647, at *6. Mr. Jain did

not use the reported Schedule C business’ records to do any of these things, nor

does the record show that the records kept were sufficient to enable him to manage

the financial aspects of the reported Schedule C business. See Keating v.

Commissioner, 2007 WL 2962774, at *5.

      Accordingly, this factor favors respondent.

      B.     Expertise of Taxpayer or His Advisers

      Preparation for an activity by the study of its accepted business, economic,

and scientific practices, or consultation with those who are experts therein, may

indicate a profit motive. Sec. 1.183-2(b)(2), Income Tax Regs.; see Engdahl v.

Commissioner, 72 T.C. 659, 668 (1979).

      We decline to find that Mr. Jain conducted a basic investigation of the

potential profitability of the Schedule C activity. Instead, the record establishes

that he relied on his extensive knowledge, familiarity, and expertise with respect

to city planning and development in South Africa. We note that Mr. Jain has
                                        - 16 -

[*16] relevant work experience as well as the requisite educational background to

conduct a city planning and architecture business. However, the record is devoid

of documentation or other evidence to corroborate previous dealings within South

Africa.

      Mr. Jain had no expertise or experience in renovation of personal residences

such as the renovation project. Further, Mr. Jain did not undertake any other

projects while in South Africa.

      We find this factor to be neutral.

      C.     Taxpayer’s Time and Effort Devoted to the Activity

      The fact that a taxpayer devotes much of his personal time and effort to

carrying on an activity may indicate an intention to derive a profit, particularly if

the activity does not have substantial personal or recreational aspects. Sec. 1.183-

2(b)(3), Income Tax Regs. If, however, a taxpayer spends little time on the

activity but hires a competent and qualified person to carry on the activity, a profit

motive may still be indicated. Id.

      While the record does indicate Mr. Jain returned to South Africa in 2011, he

did not spend the following two-year period entirely in South Africa. Even if we

assume arguendo that he did, the record does not indicate how many hours per day
                                        - 17 -

[*17] he actually spent on his reported Schedule C business, and our impression

from the record is that he did not spend much time at all.

      Accordingly, this factor favors respondent.

      D.     Expectation That Assets Used in the Activity May Appreciate

      An expectation that assets used in the activity will appreciate in value and

therefore may produce an overall economic profit may indicate a profit motive

even if the taxpayer derives no operational profit. Sec. 1.183-2(b)(4), Income Tax

Regs. A profit objective, however, may be inferred from such expected

appreciation of the activity’s assets only where the expected appreciation exceeds

the operating expenses and would be sufficient to recoup the accumulated losses

of prior years. Foster v. Commissioner, 2012 WL 3000350, at *7; see Golanty v.

Commissioner, 72 T.C. at 427-428.

      The only asset petitioners owned was their previously owned apartment that

Mr. Jain was using as an office for the tax years at issue. Aside from that,

petitioners did not hold any assets, much less indicate whether those assets were

expected to appreciate.6


      6
       To the extent petitioners contend that they had expectations that the subject
property in the renovation project would appreciate, we note that that property is
not an asset of the reported Schedule C business; rather it is an asset of Mr. Jain’s
mother-in-law, the owner of that property.
                                        - 18 -

[*18] Accordingly, this factor favors respondent.

      E.     Taxpayer’s Success in Carrying On Similar or Dissimilar Activities

      The fact that a taxpayer engaged in similar activities and converted them

from unprofitable to profitable enterprises may indicate that the taxpayer is

engaged in the present activity for profit, even though the activity is presently

unprofitable. Sec. 1.183-2(b)(5), Income Tax Regs.

      Petitioners testified that their previous business activity in South Africa

designed and developed plans for many projects, but only a few were actually

executed and constructed, because of the city of Durban’s alleged inability to

gather the requisite financing and private investment. However, the record lacks

any documentation, records, or books of petitioners’ previous South African

activity. Thus, the Court cannot determine whether the previous dealings in South

Africa were successful.

      However, the renovation project does not resemble the kind of work

petitioners testified to completing in the past or the type of work they were seeking

in South Africa. Further, most of the reported expenses related to the renovation

project, as there is no evidence outside of preliminary emails relating to any other

project. The Court finds that the renovation project, the only project Mr. Jain
                                        - 19 -

[*19] undertook, was not similar to the work he testified to completing previously

in South Africa.

      Accordingly, this factor favors respondent.

      F.     Taxpayer’s History of Income or Loss From the Activity

      A taxpayer’s history of income or loss with respect to an activity may

indicate the presence or absence of a profit motive. Sec. 1.183-2(b)(6), Income

Tax Regs. A series of losses during the initial stage of an activity does not

necessarily indicate a lack of profit motive. Engdahl v. Commissioner, 72 T.C. at

669; sec. 1.183-2(b)(6), Income Tax Regs. The goal, however, must be to realize a

profit on the entire operation, which presupposes not only future net earnings but

also sufficient net earnings to recoup losses incurred in the intervening years. See

Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965), aff’d, 379 F.2d 252 (2d Cir.

1967).

      For the years at issue petitioners reported net losses of $24,749 and $14,132

in the 2012 and 2013 Schedules C, respectively. Further, Mr. Jain abandoned the

reported Schedule C business in 2014 to move back to the United States to be with

his wife and children. The record is devoid of evidence that these losses were

recouped.

      Accordingly, this factor favors respondent.
                                         - 20 -

[*20] G.     Amount of Occasional Profits Earned

      The amount of occasional profits earned in relation to the amount of losses

incurred, the amount of investment, and the value of assets used in the activity

may indicate a profit motive. Sec. 1.183-2(b)(7), Income Tax Regs. The

opportunity to earn substantial profits in a highly speculative venture may

ordinarily be sufficient to indicate that the activity is engaged in for profit even

though losses or only occasional small profits are actually generated. Id.

      Mr. Jain never earned a profit from the reported Schedule C business.

      Accordingly, this factor favors respondent.

      H.     Taxpayer’s Financial Status

      A lack of substantial income from sources other than the activity may

indicate that the activity is engaged in for profit. Id. subpara. (8). Substantial

income from sources other than the activity (particularly if losses from the activity

generate substantial tax benefits) may indicate the activity is not engaged in for

profit, especially if personal or recreational elements are involved. Id.; see

Golanty v. Commissioner, 72 T.C. at 429.

      Directly before the years at issue Mr. Jain was unemployed. During the

years at issue he did earn a limited income from the reported Schedule C business;

but the income was offset by the related expenses, and in the end that activity
                                         - 21 -

[*21] reported significant net losses. During those years, however, Ms. Sarkin, an

architect, had significant income, and the losses from the reported Schedule C

business generated substantial tax benefits to petitioners.

      Accordingly, this factor favors respondent.

      I.     Elements of Personal Pleasure or Recreation

      The presence of personal pleasure or recreational elements in carrying on an

activity may indicate the activity is not engaged in for profit. Sec. 1.183-2(b)(9),

Income Tax Regs. The fact that the taxpayer derives personal pleasure from

engaging in the activity is not by itself determinative that the activity is not

engaged in for profit. See id.

      We find credible the testimony of Mr. Jain that he did not derive any

personal pleasure from conducting the reported Schedule C business.

      Accordingly, this factor favors petitioners.

      J.     Conclusion

      Of the nine factors listed in section 1.183-2(b), Income Tax Regs., seven

favor respondent, one favors petitioners, and one is neutral. After considering the

factors and the facts and circumstances of this case, we conclude that Mr. Jain did

not have an actual, honest profit objective in operating the reported Schedule C
                                        - 22 -

[*22] business during the years at issue. Accordingly, the deductions for expenses

paid are subject to the limitations of section 183(b).

II.   Section 217 Moving Expenses

      Section 217(a) allows a deduction for “moving expenses paid or incurred

during the taxable year in connection with the commencement of work by the

taxpayer as an employee or as a self-employed individual at a new principal place

of work.” Section 217(b)(1) generally defines “moving expenses” as the

reasonable expenses of moving household goods and personal effects from the

former residence to the new residence and related travel. It does not include

meals. Sec. 217(b)(1).

      Section 217(c) provides conditions for the deductibility of moving

expenses. Moving expenses shall be deductible only if the taxpayer’s new

principal place of work is at least 50 miles farther from his residence than was his

former principal place of work or, if he had no former place of work, is at least 50

miles from his former residence. Sec. 217(c)(1)(A) and (B). Section 217(c)(2)

provides that no deduction shall be allowed unless (A) the taxpayer is a full-time

employee at the new principal place of work during the 12-month period following

his arrival in the general location of his new principal place of work for at least 39

weeks or (B) during the 24-month period following the taxpayer’s arrival in the
                                        - 23 -

[*23] general location of his new principal place of work, the taxpayer is a full-

time employed individual for at least 78 weeks and at least 39 weeks are in the

first 12-month period.

       Mr. Jain moved to South Africa in 2011 but reported moving expenses for

tax years 2012 and 2013, testifying that the move was completed over the two-year

period. Mr. Jain testified that the expenses were storage, shipping, and travel

costs. Significantly, petitioners did not provide documents for the Form 3902

amounts. Further, petitioners maintained their New York residence.

       Finally, the record is devoid of documentation or other evidence that Mr.

Jain stayed and worked in a new location for the requisite 39 weeks to be eligible

to deduct moving expenses. The conditions of section 217(c) have not been met.

       Accordingly, we sustain respondent’s disallowance of the deductions for

moving expenses.

III.   Unreimbursed Employee Expenses

       A taxpayer may deduct unreimbursed employee expenses as ordinary and

necessary business expenses under section 162. Lucas v. Commissioner, 79 T.C.

1, 6, (1982). An employee cannot deduct such expenses to the extent that the

employee is entitled to reimbursement from his or her employer for the

expenditures related to his or her status as an employee. Id. at 7.
                                        - 24 -

[*24] Section 274(d) provides that expenses attributable to travel, including meals

while traveling, and to certain “listed property” are not deductible unless the

taxpayer substantiates them in accordance with special rules. These rules require

the taxpayer to substantiate with adequate records or sufficient evidence

corroborating his own statement: (1) the amount of the expense, (2) the time and

place of the travel or use of the property, and (3) the business purpose of the

expenditure. Balyan v. Commissioner, T.C. Memo. 2017-140, at *7; sec. 1.274-

5T(b), Temporary Income Tax Regs., 50 Fed. Reg. 46014-46016 (Nov. 6, 1985).

      The strict substantiation rule requires the taxpayer to maintain records or

other documentary evidence adequate to establish the business purpose and other

elements of the reported expenditures. See sec. 1.274-5(c)(2), Income Tax Regs.

To meet the adequate records requirements, a taxpayer must maintain an account

book, a log, or other documentary evidence which, in combination, is sufficient to

establish each element of an expenditure. Sec. 1.274-5T(c)(2), Temporary Income

Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).

      A.     Mr. Jain’s Forms 2106

      Mr. Jain claimed total deductions of $40,028 in his Forms 2106 for the

years at issue. Mr. Jain was not an employee during the years at issue.
                                        - 25 -

[*25] Accordingly, petitioners are not entitled to Mr. Jain’s Form 2106

deductions.

      B.      Mrs. Sarkin’s Form 2106

      Ms. Sarkin filed a Form 2106 for the 2013 tax year in which she claimed a

deduction of $2,868 for vehicle expenses and parking fees, tolls, and

transportation expenses and a deduction of $755 for meals and entertainment

expenses. Petitioners’ testimony is unsupported by the type of substantiation

required by section 274 and is insufficient for us to allow deductions in any

amount.

      Accordingly, petitioners are not entitled to a deduction for vehicle expenses

and parking fees, tolls, and transportation and meals and entertainment expenses

for tax year 2013 as they did not substantiate the expenses as required by section

274 and its corresponding regulations. Further, Ms. Sarkin claimed $955 of

deductions for other business expenses for which petitioners did not specify the

business purposes, nor did petitioners provide any testimony or other proof to

substantiate that her employer would not offer reimbursement.

IV.   Section 6662(a) Accuracy-Related Penalty

      Respondent bears the burden of production with respect to petitioners’

liability for the accuracy-related penalties at issue and must produce sufficient
                                       - 26 -

[*26] evidence indicating that it is appropriate to impose them. See sec. 7491(c);

Higbee v. Commissioner, 116 T.C. at 446. As part of that burden, respondent

must also show that the written approval requirement of section 6751(b)(1) was

timely complied with. See Graev v. Commissioner, 149 T.C. 485, 493 (2017),

supplementing and overruling in part 147 T.C. 460 (2016); see also Clay v.

Commissioner, 152 T.C. __, __ (slip op. at 44) (Apr. 24, 2019). Respondent aims

to meet his burden of production through the Court’s acceptance into evidence of a

Civil Penalty Approval Form, dated September 9, 2015, and signed by the acting

group manager one day later.

      On May 7, 2019, the Court ordered the parties to set forth their positions on

the impact of Clay in this case. In response thereto, respondent has informed the

Court that on July 31, 2015, he mailed to petitioners a 30-day letter notifying them

of the revenue agent’s proposal of the penalties and their right to challenge the 30-

day letter in the Internal Revenue Service Office of Appeals. Respondent has

made no attempt to include the 30-day letter in the record although he

acknowledged the 30-day letter is in his administrative files; and he makes no

argument that the proposed penalties as set forth in the 30-day letter were

“personally approved (in writing) by the immediate supervisor of the individual

making such determination” for purposes of section 6751(b)(1). On the record
                                       - 27 -

[*27] before us, we therefore cannot conclude that written supervisory approval

for the penalties was given before the first formal communication of the penalties

to petitioners. See Clay v. Commissioner, 152 T.C. at __ (slip op. at 39-45).

Therefore, we find that respondent has failed to meet his burden of production as

to the penalties.

      We have considered all the other arguments of the parties and, to the extent

not discussed above, find those arguments to be irrelevant, moot, or without merit.

      To reflect the foregoing,


                                                Decision will be entered

                                      under Rule 155.
