Respondent disallowed charitable contribution deductions of $358,472 and $333,672 for 2004 and 2005, respectively. Petitioners conceded that they are not entitled to some of the claimed charitable contribution deductions. However, the parties disagree with respect to (1) whether petitioners are bound by certain monetary concessions in the petition and (2) whether certain of the claimed charitable contributions should be disallowed for reasons that are unrelated 2013 Tax Ct. Memo LEXIS 231">*242 to the parties' primary dispute. The parties contend that the charitable deductions properly at issue are as follows:

Respondent contends that petitioners conceded in their petition that they are not entitled to $140,958 and $183,627 of the claimed charitable contribution deductions for 2004 and 2005, respectively. ⁸ Accordingly, respondent contends *235 that only $217,514 and $150,045 of the claimed charitable contribution deductions for 2004 and 2005, respectively, are at issue.

Petitioners contend that respondent will not be prejudiced if we disregard the monetary amounts of the concessions set forth in the petition because they are challenging respondent's deficiency determinations only with respect to the charitable contribution deductions that respondent determined 2013 Tax Ct. Memo LEXIS 231">*243 to be the charitable contributions of ASB.

Respondent did not explain in the notice of deficiency his reasons for disallowing the charitable contribution deductions. Petitioners in their petition attempted to quantify the amounts at issue. In doing so petitioners made it clear that they were contesting respondent's determinations only with respect to the charitable contributions that respondent disallowed because he determined that they were the charitable contributions of ASB. Respondent does not contend that he previously allowed any of the contributions that petitioners listed in their summary of contributions at issue or that he in any way relied on petitioners' concessions in preparing this case for trial. We find that respondent will not be *236 prejudiced by our consideration of all of the charitable contribution deductions that were disallowed for the reason identified in the petition, and we conclude therefore that with the exception of certain contributions discussed below, see infra part II.B.2, all such contributions are properly at issue. ^{92013 Tax Ct. Memo LEXIS 231">*244}

Petitioners introduced summary exhibits purporting to list charitable contribution deductions at issue of $237,305 and $171,572 for 2004 and 2005, respectively. At trial petitioners conceded the following adjustments to their summary exhibits: ^{102013 Tax Ct. Memo LEXIS 231">*245}

In their reply brief petitioners concede that they are not entitled to deduct additional contributions because either (1) the corresponding receipts lacked the required section 170(f)(8) statement or (2) the contributions were not charged to Mr. Zavadil's ASB ledger account. Petitioners' concessions are as follows:

*239 Petitioners' contentions with respect to the amounts of charitable contributions at issue for 2004 and 2005, respectively, can be summarized as follows:

Respondent contends that additional contributions are not properly at issue because either (1) the receipts for the contributions lacked the required section 170(f)(8) statement or (2) the contributions were not charged to Mr. Zavadil's ASB ledger account. The contributions that respondent contends are not properly at issue but not conceded by petitioners are as follows:

With respect to the contribution receipts that respondent contends lack the required section 170(f)(8) statement, we note that the contributions covered by *242 those receipts were for less than $250. Accordingly, section 170(f)(8) statements were not required, seesec. 170(f)(8)(A); sec. 1.170A-13(f)(1), Income Tax Regs., and these contributions are therefore properly at issue.

With respect to the contributions that respondent contends were not charged to Mr. Zavadil's ASB ledger account, we find that only the following contributions were not charged to the ledger account:

Petitioners contend that these contributions were not charged to Mr. Zavadil's ASB ledger account because they were paid by ASB in cash, rather than by check or credit card. Petitioners have not introduced any evidence to support their contention that Mr. Zavadil bore the economic burden of the cash contributions. Accordingly, we find that petitioners are not entitled to a deduction for these contributions. SeeRule 142(a)(1).

Petitioners contend that they properly deducted the charitable contributions at issue because Mr. Zavadil bore the economic burden of the charitable contributions that were charged to his ASB ledger account and therefore ASB paid the amounts in question as Mr. Zavadil's agent. Respondent contends that (1) ASB, and not Mr. Zavadil, bore the economic burden of the charitable contributions; (2) even if ASB did not bear the economic burden of the charitable contributions, Zavadil Development, and not Mr. Zavadil, bore that burden; and (3) petitioners did not show that ASB acted as an agent of Mr. Zavadil.

Respondent contends 2013 Tax Ct. Memo LEXIS 231">*251 that ASB bore the economic burden of the charitable contributions at issue because Mr. Zavadil used a circular flow of funds to ensure that he did not bear the economic burden of the contributions. In particular, respondent contends that Mr. Zavadil would regularly (1) issue checks from account No. XXXX at the end of the month to pay off his ledger; (2) advance sufficient funds from ASB to account No. XXXX at the beginning of the next month to cover the check drawn on account No. XXXX ; and then (3) cause ASB to cash the check from account No. XXXX . For example, Mr. Zavadil's ASB ledger account *244 shows that an outstanding balance of $1,813,757 was paid with a check from account No. XXXX on November 30, 2005. ¹¹ The ledger account further shows that ASB advanced $1,800,000 to Mr. Zavadil on December 5, 2005. The bank statement for account No. XXXX reflects a deposit of $1,800,000 on December 5, 2005. The bank statement for account No. XXXX further shows that $1,813,757 (check No. 16743) was debited from the account on December 5, 2005.

Respondent's argument is too broad and fails to recognize that Mr. Zavadil at certain times 2013 Tax Ct. Memo LEXIS 231">*252 during the years at issue fully paid his ASB ledger account balances with his own funds. The record shows that the alleged circular flow of funds of which respondent complains did not become a regular pattern until the second half of 2005. Moreover, the record shows that Mr. Zavadil paid his ASB ledger account balances as of December 31, 2004, and June 30, 2005, without the benefit of any advances from ASB to cover the payments. Because Mr. Zavadil's ASB ledger account balances were fully paid off at the end of December 2004 and June 2005 without an advance to cover those months' payments, any previous advances were necessarily paid off. Accordingly, we conclude that ASB did not bear the economic burden of the charitable contributions charged to Mr. Zavadil's ASB ledger account before July 2005.

*245 We reach a different conclusion, however, with respect to the charitable contributions made from Mr. Zavadil's ASB ledger account after June 2005. From July 2005 through at least November 2005 Mr. Zavadil caused ASB to advance funds to account No. XXXX to cover the checks drawn on that account to pay off his ASB ledger balance for those months. ¹² This circular flow of funds resulted in ASB's 2013 Tax Ct. Memo LEXIS 231">*253 assumption of most, if not all, of the economic burden of the charitable contributions charged to Mr. Zavadil's ASB ledger account after June 2005.

Petitioners failed to prove what portion, if any, of the charitable contributions made after June 2005 Mr. Zavadil effectively paid with his own funds and not funds advanced by ASB. Petitioners also introduced no credible evidence that Mr. Zavadil's ASB ledger account balance at the end of 2005 represented bona fide indebtedness of Mr. Zavadil. We therefore conclude that petitioners have failed to carry their burden of showing that Mr. Zavadil, and not ASB, bore the economic burden of the charitable contributions at issue that were made after June 2005. SeeRule 142(a)(1).

Respondent contends that even if we find that ASB did not bear 2013 Tax Ct. Memo LEXIS 231">*254 the economic burden of the charitable contributions at issue, Zavadil Development, and not Mr. Zavadil, bore that burden because Mr. Zavadil paid off the balance of his ASB ledger account from an account of Zavadil Development.

Respondent's contention is based on his assertion that account No. XXXX was owned by Zavadil Development. However, the parties stipulated that account No. XXXX was a "Zavadil Sales Company account", and Mr. Zavadil and Colette Carlson, a certified public accountant who has prepared petitioners' tax returns since the early 1990s, both credibly testified that account No. XXXX was Mr. Zavadil's business account for his unincorporated sales activities that he first started using in 1981, if not earlier. ¹³ Moreover, the name appearing on the bank statements for account No. XXXX does not include Zavadil Development until at least November or December 2005. And although Mr. Zavadil testified that he *247 used some of the funds that he deposited into account No. XXXX to fund Zavadil Development's real estate investments, there is nothing in the record that contradicts the parties' stipulation and Mr. Zavadil and Ms. Carlson's testimony that account No. XXXX was an account 2013 Tax Ct. Memo LEXIS 231">*255 of Zavadil Sales. Zavadil Sales is not an incorporated entity. We therefore find that Mr. Zavadil, and not Zavadil Development, bore the economic burden of the charitable contributions charged to his ASB ledger account before July 2005.

Respondent contends that petitioners have not shown that ASB acted as Mr. Zavadil's agent in making the charitable contributions at issue. Respondent notes that although an agency relationship does not require a written agreement, see PMH Props. v. Nichols, 263 N.W.2d 799">263 N.W.2d 799, 263 N.W.2d 799">803 (Minn. 1978), there still must be evidence that the agent assented to the 2013 Tax Ct. Memo LEXIS 231">*256 undertaking, see id. However, Mr. Zavadil credibly testified that he directed ASB employees to make the charitable contributions on his behalf. Moreover, Mr. Zavadil's testimony was corroborated by the testimony of Ms. Freese and Ms. Carlson and by the introduction of the ledger itself into evidence. We infer that, as CEO of ASB, Mr. Zavadil could *248 cause ASB to assent to being his agent in making the charitable contributions at issue. ¹⁴

Respondent further contends that this case is distinguishable from cases such as Skripak v. Commissioner, 84 T.C. 285">84 T.C. 318, and Weitz v. Commissioner, 56 T.C.M. 1422">56 T.C.M. (CCH) at 1426-1427, 2013 Tax Ct. Memo LEXIS 231">*257 where we held that charitable contributions can be effected through an agent of the taxpayer, because the agents in those cases contributed the principals' assets whereas ASB contributed its own money and not Mr. Zavadil's money. But by agreeing to act as Mr. Zavadil's agent in making the charitable contributions at issue, ASB also agreed to advance the contributed amounts to Mr. Zavadil. We therefore find that ASB acted as an agent of Mr. Zavadil when it made the charitable contributions at issue. Accordingly, we (1) conclude that petitioners are entitled to deduct the charitable contributions at issue that were charged to Mr. Zavadil's ASB ledger account before July 2005 and (2) sustain respondent's disallowance of the charitable contribution deductions at *249 issue that were charged to Mr. Zavadil's ASB ledger account after June 2005.

Respondent disallowed the unreimbursed expenses of $220,684 and $165,259 that petitioners claimed on the Schedules E attached to their Forms 1040 for 2004 and 2005, respectively. After concessions, the unreimbursed expenses remaining at issue are the $35,800 paid to Ms. DePree in 2004 and the $150,000 and $75,000 paid to NBD&F2013 Tax Ct. Memo LEXIS 231">*258 in 2004 and 2005, respectively. ¹⁵

Section 162(a) provides a deduction for ordinary and necessary expenses that a taxpayer pays or incurs during the taxable year in carrying on a trade or business. Section 162(a) requires a taxpayer to prove that the expenses deducted (1) were paid or incurred during the taxable year, (2) were incurred to carry on the taxpayer's trade or business, and (3) were ordinary and necessary expenditures of the business. See also Commissioner v. Lincoln Sav. & Loan Ass'n, 403 U.S. 345">403 U.S. 345, 403 U.S. 345">352, 91 S. Ct. 1893">91 S. Ct. 1893, 29 L. Ed. 2d 519">29 L. Ed. 2d 519 (1971). An expense is ordinary if it is customary or usual within a *250 particular trade, business, or industry or relates to a transaction "of common or frequent occurrence in the type of business involved." Deputy v. du Pont, 308 U.S. 488">308 U.S. 488, 308 U.S. 488">495, 60 S. Ct. 363">60 S. Ct. 363, 84 L. Ed. 416">84 L. Ed. 416, 1940-1 C.B. 118 (1940). An expense is necessary if it is appropriate and helpful for the development of the business. See Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467, 320 U.S. 467">471, 64 S. Ct. 249">64 S. Ct. 249, 88 L. Ed. 171">88 L. Ed. 171, 1944 C.B. 484">1944 C.B. 484 (1943).

Generally, 2013 Tax Ct. Memo LEXIS 231">*259 a taxpayer who pays another taxpayer's business expenses may not treat those payments as ordinary and necessary expenses incurred in the payor's business. See Columbian Rope Co. v. Commissioner, 42 T.C. 800">42 T.C. 800, 42 T.C. 800">815 (1964); see also Interstate Transit Lines v. Commissioner, 319 U.S. 590">319 U.S. 590, 319 U.S. 590">593-594, 63 S. Ct. 1279">63 S. Ct. 1279, 87 L. Ed. 1607">87 L. Ed. 1607, 1943-1 C.B. 1016 (1943); Deputy v. du Pont, 308 U.S. 488">308 U.S. at 494-495; S. Am. Gold & Platinum Co. v. Commissioner, 8 T.C. 1297">8 T.C. 1297, 8 T.C. 1297">1301-1302 (1947), aff'd, 168 F.2d 71">168 F.2d 71 (2d Cir. 1948). However, where a taxpayer pays the ordinary and necessary business expenses of another taxpayer in order to protect or promote the payor's own business, the payment may be deductible. See, e.g., Scruggs—Vandervoort—Barney, Inc. v. Commissioner, 7 T.C. 779">7 T.C. 779, 7 T.C. 779">787 (1946); Maloney Elec. Co. v. Commissioner, 42 B.T.A. 78">42 B.T.A. 78, 42 B.T.A. 78">83 (1940), aff'd in part, rev'd in part on another issue, 120 F.2d 617">120 F.2d 617 (8th Cir. 1941); First Nat'l Bank of Skowhegan, Me. v. Commissioner, 35 B.T.A. 876">35 B.T.A. 876, 35 B.T.A. 876">884-885 (1937). In Lohrke v. Commissioner, 48 T.C. 679">48 T.C. 679, 48 T.C. 679">688 (1967), we articulated a two-part test for determining whether a taxpayer's payments are *251 eligible for this exception: (1) the taxpayer's primary motive for paying the expenses was to protect or promote the taxpayer's 2013 Tax Ct. Memo LEXIS 231">*260 business and (2) the expenditures constituted ordinary and necessary expenses in the furtherance or promotion of the taxpayer's business.

Petitioners contend that they can deduct $35,800 that Mr. Zavadil charged to his ASB ledger account in 2004 for payments to Ms. DePree because the payments satisfied an obligation of ASB that it refused to pay. Additionally, petitioners contend that ASB would have been allowed to deduct the payments to Ms. DePree had it made the payments itself because ASB originally agreed to make the payments on account of Mr. DePree's long and valuable service to ASB.

The payments to Ms. DePree were recorded on Mr. Zavadil's ASB ledger account. Mr. Zavadil testified that, after Mr. DePree died in 1999, he promised to pay Ms. DePree $250,000 over five years to provide additional compensation for Mr. DePree's hard, and often undercompensated, work for ASB during its early years. ¹⁶ Mr. Zavadil further testified that, when the ESOP acquired the *252 outstanding shares of ASB, the ESOP declined to continue making payments to Ms. DePree because ASB's board of directors (board) concluded that (1) the payments to Ms. DePree were the personal obligations 2013 Tax Ct. Memo LEXIS 231">*261 of Mr. Zavadil and (2) it would be better if the ESOP were not burdened with these payment because the ESOP already carried significant debt.

Petitioners contend that they disagreed with the board's decision to terminate ASB's payments to Ms. DePree and that, therefore, Mr. Zavadil was simply paying Ms. DePree what ASB had previously agreed to pay her. Petitioners further contend that Mr. Zavadil continued paying Ms. DePree to protect his reputation as a salesperson. However, Mr. Zavadil did not testify that he continued paying Ms. DePree because he was concerned about his 2013 Tax Ct. Memo LEXIS 231">*262 business reputation, and there is no factual basis in the record to support a finding that Mr. Zavadil made the payments to protect his reputation.

We conclude that petitioners have failed to satisfy the first part of Lohrke's two-part test. SeeRule 142(a)(1); Lohrke v. Commissioner, 48 T.C. 679">48 T.C. 688. *253 Accordingly, we sustain respondent's disallowance of the unreimbursed expense deduction petitioners claimed for the amount paid to Ms. DePree in 2004.

Petitioners contend that they can deduct $150,000 and $75,000 charged to Mr. Zavadil's ASB ledger account in 2004 and 2005, respectively, for payments to NBD&F because the payments were compensation for services actually rendered to Mr. Zavadil's various wholly owned business entities.

NBD&F was Mr. Briggs' consulting company. The payments to NBD&F were recorded on Mr. Zavadil's ASB ledger account. Mr. Zavadil testified that Mr. Briggs mostly provided consulting services for entities belonging to Mr. or Mrs. Zavadil, and therefore the payments to Mr. Briggs were charged to his ASB ledger account. Mr. Zavadil further testified that Mr. Briggs was a member of ASB's board of directors when the ESOP was formed in 2000.

We infer 2013 Tax Ct. Memo LEXIS 231">*263 from Mr. Zavadil's vague testimony that Mr. Briggs provided some services to ASB during the years in issue. Mr. Zavadil, however, did not call Mr. Briggs to testify as to the nature of the payments NBD&F received and he did not otherwise introduce any credible evidence about the nature of the payments. Petitioners do not contend, and have introduced no credible evidence showing, that Mr. Zavadil paid ASB's NBD&F consulting expenses to protect or promote *254 his other business activities. See Lohrke v. Commissioner, 48 T.C. 679">48 T.C. 688. Because petitioners have failed to introduce any credible evidence regarding the nature and purpose of the payments at issue, we sustain respondent's disallowance of the unreimbursed expenses that petitioners claimed for the amounts paid to NBD&F in 2004 and 2005, respectively.

Section 6662(a) and (b)(1) and (2) authorizes the Commissioner to impose a 20% penalty on an underpayment of tax that is attributable to, among other things, (1) negligence or disregard of rules or regulations or (2) any substantial understatement of income tax. Only one section 6662 accuracy-related penalty may be imposed with respect 2013 Tax Ct. Memo LEXIS 231">*264 to any given portion of an underpayment. New Phoenix Sunrise Corp. v. Commissioner, 132 T.C. 161">132 T.C. 161, 132 T.C. 161">187 (2009), aff'd, 408 Fed. Appx. 908">408 Fed. Appx. 908 (6th Cir. 2010); sec. 1.6662-2(c), Income Tax Regs.

The term "negligence" includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws, and the term "disregard" includes any careless, reckless, or intentional disregard. Sec. 6662(c); sec. 1.6662-3(b)(1) and (2), Income Tax Regs. "'Negligence' also includes any failure by the taxpayer to keep adequate books and records or to substantiate items properly." Sec. 1.6662-3(b)(1), Income Tax Regs. Disregard of rules or regulations "is *255 'careless' if the taxpayer does not exercise reasonable diligence to determine the correctness of a return position" and "is 'reckless' if the taxpayer makes little or no effort to determine whether a rule or regulation exists, under circumstances which demonstrate a substantial deviation from the standard of conduct that a reasonable person would observe." Sec. 1.6662-3(b)(2), Income Tax Regs.; see also Nis Family Trust v. Commissioner, 115 T.C. 523">115 T.C. 523, 115 T.C. 523">542 (2000). An understatement means the excess of the amount of tax required 2013 Tax Ct. Memo LEXIS 231">*265 to be shown on a 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). An understatement is substantial in the case of a corporation 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 $10,000. Sec. 6662(d)(1)(B).

The accuracy-related penalty does not apply with respect to any portion of the underpayment for which the taxpayer shows that there was reasonable cause and that he or she acted in good faith. Sec. 6664(c)(1). 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. Seesec. 1.6664-4(b)(1)*256 , Income Tax Regs. "Circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances, including 2013 Tax Ct. Memo LEXIS 231">*266 the experience, knowledge, and education of the taxpayer." Id.

The Commissioner bears the burden of production with respect to the taxpayer's liability for the section 6662(a) penalty and must produce sufficient evidence indicating that it is appropriate to impose the penalty. Seesec. 7491(c); Higbee v. Commissioner, 116 T.C. 438">116 T.C. 446-447. Once the Commissioner meets his burden of production, the taxpayer must come forward with persuasive evidence that the Commissioner's determination is incorrect or that the taxpayer had reasonable cause or substantial authority for the position. See Higbee v. Commissioner, 116 T.C. 438">116 T.C. 447.

We have sustained, or petitioners have conceded, certain of respondent's adjustments to petitioners' claimed charitable contribution and unreimbursed business expense deductions for 2004 and 2005. The evidence shows that petitioners did not comply with the rules and regulations under sections 162 and 170 in claiming these deductions. Respondent has therefore met his burden of producing evidence showing that a section 6662(a) penalty for an underpayment of tax attributable to negligence or disregard of rules or regulations with respect to *257 the disallowed deductions 2013 Tax Ct. Memo LEXIS 231">*267 is appropriate. Petitioners have not shown that such a penalty is inappropriate, and they do not contend that they acted with reasonable cause and in good faith with respect to the underpayment. Accordingly, petitioners are liable for a section 6662(a) penalty for an underpayment of tax attributable to negligence or disregard of rules or regulations.

Alternatively, to the extent that the Rule 155 computations show that the understatement of tax for 2004 or 2005 exceeds the greater of 10% of the tax required to be shown on the return or $5,000, seesec. 6662(d)(1)(A), respondent has met his burden of producing evidence showing that a section 6662(a) penalty for an underpayment of tax attributable to a substantial understatement of income tax is appropriate. Petitioners do not contend that they acted with reasonable cause and in good faith with respect to the underpayments. Accordingly, petitioners would be liable for a section 6662(a) penalty for an underpayment of tax attributable to a substantial understatement of tax for such year or years. However, petitioners will be liable for only one section 6662(a) penalty with respect to any portion of the underpayment of tax.

*258 We have considered 2013 Tax Ct. Memo LEXIS 231">*268 the parties' remaining arguments, and to the extent not discussed above, conclude those arguments are irrelevant, moot, or without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.