T.C. Summary Opinion 2021-16
UNITED STATES TAX COURT
TRAVIS BRIDGES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18999-19S. Filed June 29, 2021.
Travis Bridges, pro se.
D’Aun E. Clark, Daniel C. Munce, and Lauren B. Epstein, for respondent.
SUMMARY OPINION
GUY, 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.1 Pursuant to section 7463(b), the decision to be entered is not reviewable by
1 Unless otherwise indicated, all section references are to the Internal (continued...)
Served 06/29/21 -2-
any other court, and this opinion shall not be treated as precedent for any other
case.
Respondent determined that petitioner is liable for Federal income tax
deficiencies and penalties for the taxable years and in the amounts as follows:
Penalty Year Deficiency sec. 6662(a)
2016 $11,682 $2,336 2017 10,032 2,006
Petitioner invoked the Court’s jurisdiction by filing a timely petition for
redetermination pursuant to section 6213(a).2
After concessions,3 the issues remaining for decision are whether petitioner
is (1) entitled to deductions for certain business expenses (in excess of amounts
1 (...continued) Revenue Code of 1986 (Code), as amended and in effect at all relevant times. All Rule references are to the Tax Court Rules of Practice and Procedure. Dollar amounts are rounded to the nearest dollar. 2 Petitioner resided in Florida when the petition was filed. 3 Respondent concedes that petitioner is entitled to deductions for depreciation expenses of $4,228 and $3,603 for 2016 and 2017, respectively, and deductions for “Other” expenses of $1,976 and $925 for 2016 and 2017, respectively. Other adjustments are computational and depend on the resolution of the issues remaining in dispute. -3-
respondent conceded) for the taxable years 2016 and 2017 (years in issue), and
(2) liable for accuracy-related penalties under section 6662(a).
Background
Petitioner is self-employed, and he earns a living producing commercials for
radio and television and providing entertainment services as an audio technician
and as a musician.
I. Petitioner’s Tax Returns
Petitioner filed Federal income tax returns for the years in issue and
attached Schedules C, Profit or Loss From Business, to those returns reporting
gross receipts and expenses attributable to his business activities.
On Schedule C for the taxable year 2016, petitioner reported gross receipts
of $76,598, offset by expenses of $67,515, resulting in a net profit of $9,083. As
relevant here, petitioner deducted advertising expenses of $4,750, depreciation and
amortization expenses of $12,350, legal and professional expenses of $12,715, and
“Other” expenses of $12,700 (comprising bank charges, cell phone expenses,
uniforms, reeds/cases/cables costs, software subscription charges, miscellaneous
expenses, and collection expenses).
On Schedule C for the taxable year 2017, petitioner reported gross receipts
of $84,696, offset by expenses of $73,995, resulting in a net profit of $10,701. As -4-
relevant here, petitioner deducted advertising expenses of $5,250, depreciation and
amortization expenses of $8,000, legal and professional expenses of $14,000, and
“Other” expenses of $15,600 (comprising bank charges, cell phone expenses,
uniforms, reeds/cases/cables costs, software subscription charges, miscellaneous
II. Supervisory Approval of Penalties and Notice of Deficiency
On March 29, 2019, the revenue agent who examined petitioner’s tax
returns for the years in issue submitted Form 200, Civil Penalty Approval Form, to
his immediate supervisor recommending that section 6662(a) penalties be imposed
on petitioner because the examination showed that he had substantially
understated his tax liabilities for the years in issue. On April 2, 2019, the revenue
agent’s immediate supervisor approved and signed the aforementioned Form 200.
Thereafter, on July 22, 2019, respondent issued the notice of deficiency to
petitioner that led to this action.
Discussion
I. Schedule C Deductions
As a general rule, the Commissioner’s determination of a taxpayer’s liability
in a notice of deficiency is presumed correct, and the taxpayer bears the burden of
proving that the determination is incorrect. Rule 142(a); Welch v. Helvering, 290 -5-
U.S. 111, 115 (1933).4 Deductions are a matter of legislative grace, and the
taxpayer generally bears the burden of proving entitlement to any deduction
claimed. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);
New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Under section 162(a), a deduction is allowed for ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or
business. A taxpayer must substantiate deductions claimed by keeping and
producing adequate records that enable the Commissioner to determine the
taxpayer’s correct tax liability. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87,
89-90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976). A taxpayer claiming
a deduction on a Federal income tax return must demonstrate that the deduction is
allowable pursuant to a statutory provision and must further substantiate that the
expense to which the deduction relates has been paid or incurred. Sec. 6001;
Hradesky v. Commissioner, 65 T.C. at 89-90.
When a taxpayer establishes that he or she paid or incurred a deductible
expense but fails to establish the amount of the deduction, the Court may
sometimes estimate the amount allowable as a deduction. Cohan v.
4 Petitioner does not contend, and the record does not suggest, that the burden of proof should shift to respondent pursuant to sec. 7491(a). -6-
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner,
85 T.C. 731, 742-743 (1985). There must be sufficient evidence in the record,
however, to permit the Court to conclude that a deductible expense was paid or
incurred in at least the amount allowed. Williams v. United States, 245 F.2d 559,
560 (5th Cir. 1957).
As summarized above, respondent disallowed deductions that petitioner
claimed for the years in issue including those for advertising expenses,
depreciation and amortization expenses, legal and professional expenses, and
“Other” expenses. Petitioner admitted at trial that his recordkeeping left much to
be desired and that he was unable to produce invoices, receipts, or similar records
to substantiate most of the expenses in question. The Court carefully reviewed the
business records that petitioner produced at trial, consisting primarily of PayPal
receipts, and did not find adequate substantiation for any expenses in excess of the
items respondent conceded. Consequently, respondent’s determination to disallow
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T.C. Summary Opinion 2021-16
UNITED STATES TAX COURT
TRAVIS BRIDGES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18999-19S. Filed June 29, 2021.
Travis Bridges, pro se.
D’Aun E. Clark, Daniel C. Munce, and Lauren B. Epstein, for respondent.
SUMMARY OPINION
GUY, 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.1 Pursuant to section 7463(b), the decision to be entered is not reviewable by
1 Unless otherwise indicated, all section references are to the Internal (continued...)
Served 06/29/21 -2-
any other court, and this opinion shall not be treated as precedent for any other
case.
Respondent determined that petitioner is liable for Federal income tax
deficiencies and penalties for the taxable years and in the amounts as follows:
Penalty Year Deficiency sec. 6662(a)
2016 $11,682 $2,336 2017 10,032 2,006
Petitioner invoked the Court’s jurisdiction by filing a timely petition for
redetermination pursuant to section 6213(a).2
After concessions,3 the issues remaining for decision are whether petitioner
is (1) entitled to deductions for certain business expenses (in excess of amounts
1 (...continued) Revenue Code of 1986 (Code), as amended and in effect at all relevant times. All Rule references are to the Tax Court Rules of Practice and Procedure. Dollar amounts are rounded to the nearest dollar. 2 Petitioner resided in Florida when the petition was filed. 3 Respondent concedes that petitioner is entitled to deductions for depreciation expenses of $4,228 and $3,603 for 2016 and 2017, respectively, and deductions for “Other” expenses of $1,976 and $925 for 2016 and 2017, respectively. Other adjustments are computational and depend on the resolution of the issues remaining in dispute. -3-
respondent conceded) for the taxable years 2016 and 2017 (years in issue), and
(2) liable for accuracy-related penalties under section 6662(a).
Background
Petitioner is self-employed, and he earns a living producing commercials for
radio and television and providing entertainment services as an audio technician
and as a musician.
I. Petitioner’s Tax Returns
Petitioner filed Federal income tax returns for the years in issue and
attached Schedules C, Profit or Loss From Business, to those returns reporting
gross receipts and expenses attributable to his business activities.
On Schedule C for the taxable year 2016, petitioner reported gross receipts
of $76,598, offset by expenses of $67,515, resulting in a net profit of $9,083. As
relevant here, petitioner deducted advertising expenses of $4,750, depreciation and
amortization expenses of $12,350, legal and professional expenses of $12,715, and
“Other” expenses of $12,700 (comprising bank charges, cell phone expenses,
uniforms, reeds/cases/cables costs, software subscription charges, miscellaneous
expenses, and collection expenses).
On Schedule C for the taxable year 2017, petitioner reported gross receipts
of $84,696, offset by expenses of $73,995, resulting in a net profit of $10,701. As -4-
relevant here, petitioner deducted advertising expenses of $5,250, depreciation and
amortization expenses of $8,000, legal and professional expenses of $14,000, and
“Other” expenses of $15,600 (comprising bank charges, cell phone expenses,
uniforms, reeds/cases/cables costs, software subscription charges, miscellaneous
II. Supervisory Approval of Penalties and Notice of Deficiency
On March 29, 2019, the revenue agent who examined petitioner’s tax
returns for the years in issue submitted Form 200, Civil Penalty Approval Form, to
his immediate supervisor recommending that section 6662(a) penalties be imposed
on petitioner because the examination showed that he had substantially
understated his tax liabilities for the years in issue. On April 2, 2019, the revenue
agent’s immediate supervisor approved and signed the aforementioned Form 200.
Thereafter, on July 22, 2019, respondent issued the notice of deficiency to
petitioner that led to this action.
Discussion
I. Schedule C Deductions
As a general rule, the Commissioner’s determination of a taxpayer’s liability
in a notice of deficiency is presumed correct, and the taxpayer bears the burden of
proving that the determination is incorrect. Rule 142(a); Welch v. Helvering, 290 -5-
U.S. 111, 115 (1933).4 Deductions are a matter of legislative grace, and the
taxpayer generally bears the burden of proving entitlement to any deduction
claimed. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);
New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Under section 162(a), a deduction is allowed for ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or
business. A taxpayer must substantiate deductions claimed by keeping and
producing adequate records that enable the Commissioner to determine the
taxpayer’s correct tax liability. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87,
89-90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976). A taxpayer claiming
a deduction on a Federal income tax return must demonstrate that the deduction is
allowable pursuant to a statutory provision and must further substantiate that the
expense to which the deduction relates has been paid or incurred. Sec. 6001;
Hradesky v. Commissioner, 65 T.C. at 89-90.
When a taxpayer establishes that he or she paid or incurred a deductible
expense but fails to establish the amount of the deduction, the Court may
sometimes estimate the amount allowable as a deduction. Cohan v.
4 Petitioner does not contend, and the record does not suggest, that the burden of proof should shift to respondent pursuant to sec. 7491(a). -6-
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner,
85 T.C. 731, 742-743 (1985). There must be sufficient evidence in the record,
however, to permit the Court to conclude that a deductible expense was paid or
incurred in at least the amount allowed. Williams v. United States, 245 F.2d 559,
560 (5th Cir. 1957).
As summarized above, respondent disallowed deductions that petitioner
claimed for the years in issue including those for advertising expenses,
depreciation and amortization expenses, legal and professional expenses, and
“Other” expenses. Petitioner admitted at trial that his recordkeeping left much to
be desired and that he was unable to produce invoices, receipts, or similar records
to substantiate most of the expenses in question. The Court carefully reviewed the
business records that petitioner produced at trial, consisting primarily of PayPal
receipts, and did not find adequate substantiation for any expenses in excess of the
items respondent conceded. Consequently, respondent’s determination to disallow
deductions for the expenses remaining in dispute is sustained.
II. Section 6662(a) Penalties
Section 6662(a) and (b)(2) impose an accuracy-related penalty equal to 20%
of the amount of an underpayment of tax required to be shown on a return that is
attributable to a substantial understatement of income tax. By definition, an -7-
understatement of income tax means the excess of the amount of the tax required
to be shown on the return, over the amount of the tax imposed which is shown on
the return, reduced by any rebate. Sec. 6662(d)(2)(A). An understatement is
substantial in the case of an individual if the amount of the understatement for the
taxable year exceeds the greater of 10% of the tax required to be shown on the
return or $5,000. Sec. 6662(d)(1)(A).
With respect to a taxpayer’s liability for any penalty, section 7491(c) places
on the Commissioner the burden of production, thereby requiring the
Commissioner to come forward with sufficient evidence indicating that it is
appropriate to impose the penalty. Higbee v. Commissioner, 116 T.C. 438,
446-447 (2001). The Commissioner’s burden of production includes showing that
the immediate supervisor of the IRS employee who made the “initial
determination” of a penalty (including a section 6662(a) penalty) approved that
penalty in compliance with section 6751(b)(1). Clay v. Commissioner, 152 T.C.
223, 248 (2019), aff’d, 990 F.3d 1296 (11th Cir. 2021); see also Chai v.
Commissioner, 851 F.3d 190, 221 (2d Cir. 2017), aff’g in part, rev’g in part T.C.
Memo. 2015-42.
Once the Commissioner has met the burden of production, the taxpayer
must come forward with persuasive evidence that the penalty is inappropriate -8-
because, for example, he acted with reasonable cause and in good faith. Sec.
6664(c)(1); Higbee v. Commissioner, 116 T.C. at 448-449. The decision as to
whether a taxpayer acted with reasonable cause and in good faith is made on a
case-by-case basis, taking into account all of the pertinent facts and circumstances.
Respondent has met his initial burden of production. The record shows that
the immediate supervisor of the IRS employee who made the “initial
determination” to impose the section 6662(a) penalties in dispute approved those
penalties in compliance with section 6751(b)(1). See, e.g., Cuthbertson v.
Commissioner, T.C. Memo. 2020-9, at *68-*69. Whether the understatements of
income tax on petitioner’s returns are substantial within the meaning of the Code
will be determined when petitioner’s tax liabilities for the years in issue are
recomputed under Rule 155.
Petitioner did not offer a meaningful defense to the imposition of the
accuracy-related penalties at issue. In short, petitioner failed to show that he
reasonably attempted to ascertain the correctness of the disallowed deductions or
to comply with the provisions of the Code. Accordingly, respondent’s
determination that petitioner is liable for accuracy-related penalties under section
6662(a) is sustained so long as the computations show a substantial
understatement of income tax for each year. -9-
To reflect the foregoing,
Decision will be entered
under Rule 155.