T.C. Memo. 2011-93



                       UNITED STATES TAX COURT



                   ANTHONY D. OGLESBY, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 30298-08.               Filed April 28, 2011.



     Anthony D. Oglesby, pro se.

     Michael T. Shelton, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     MORRISON, Judge:    In a notice dated September 12, 2008,

respondent (the IRS) determined a deficiency of $5,612 in the

federal income tax of petitioner, Anthony D. Oglesby, for tax

year 2005.    The IRS also determined that Oglesby was liable for a

$100 addition to tax and a $1,122.40 penalty.    At issue is

whether Oglesby is entitled to certain deductions, whether he had
                                 -2-

unreported income, and whether he is liable for an addition to

tax under section 6651(a)(1) and a penalty under section 6662.1

                          FINDINGS OF FACT

     The parties stipulated some facts; those facts are so found.

     In 2005 Oglesby was an “operating engineer”, which is a type

of heavy-equipment operator.    He was a member of the

International Union of Operating Engineers, which served as a

sort of employment agency.    Companies that needed operating

engineers would contact the union, which would dispatch members,

such as Oglesby, to the companies.      When union members completed

their jobs, the process repeated.      In 2005 Oglesby operated

equipment for three different companies and paid union dues of

$2,869.77.

     The union required its members to provide their own

transportation.   Oglesby owned an Isuzu Rodeo, which he used for

that purpose.    The Rodeo was the only vehicle he owned, and it

also served as a personal vehicle.

     Besides being an operating engineer, Oglesby was a landlord.

He owned a two-unit rental property in Chicago, which he sold in

February 2005.    As a condition of closing the sale, the buyer

required him to make certain repairs.      Oglesby paid a contractor



     1
      All section references are to the Internal Revenue Code, as
amended, effective during the year at issue. Rule references are
to the Tax Court Rules of Practice and Procedure unless otherwise
indicated.
                                -3-

to make those repairs, which consisted of replacing tile, tubs,

sinks, faucets, showers, toilets, baseboards, cabinets,

countertops, and kitchen flooring.

     Two other amounts in 2005 are relevant here.    First, Oglesby

received $3,620 of unemployment compensation for parts of 2005.

Second, he settled a debt to General Motors Acceptance

Corporation for $1,659 less than he owed.

     On June 27, 2007, Oglesby filed his 2005 tax return on Form

1040, U.S. Individual Income Tax Return.    He claimed a $4,150

deduction for repairs to the rental property and claimed $23,809

in various deductions on Schedule A, Itemized Deductions.      He

reported no income from cancellation of debt, reported no income

from unemployment compensation, and reported a $9,876 loss from

selling the rental property.   He reported a total tax of $8,954.

     The IRS mailed Oglesby a notice of deficiency dated

September 12, 2008.   The IRS determined that he was not entitled

to a deduction for the repair expenses and that he was not

entitled to $11,928 of the Schedule A deductions.    The IRS

determined that he must include the unemployment compensation and

the gain from the partial cancellation of his debt to General

Motors Acceptance Corporation in gross income.    Finally, the IRS

determined that he was liable for an addition to tax of $100

under section 6651(a)(1) and a penalty of $1,122.40 under section

6662.   Oglesby disputes those determinations.
                                  -4-

                                OPINION

I.   Evidentiary Issues

     A.      Exhibits 5-P and 6-P Are Admissible Under the Business
             Records Exception.

     The IRS objects to Exhibits 5-P and 6-P, which purport to be

invoices issued by Al Williams Maintenance & Home Improvement (Al

Williams Maintenance) for the repairs to the rental property.

The exhibits purport to show that Al Williams Maintenance billed

Oglesby for the services and that Oglesby paid the bills.    The

IRS raises two objections.

     First, the IRS objects that Oglesby did not authenticate the

documents.    A document is authentic if it is what its proponent

claims it to be.    The document’s proponent must produce evidence

sufficient to support a finding that the document is authentic.

Fed. R. Evid. 901(a).    For example, a witness with knowledge can

testify that the document is what its proponent claims it to be.

Fed. R. Evid. 901(b)(1).    Oglesby, a witness with knowledge, gave

credible testimony that Exhibits 5-P and 6-P are the receipts he

received from Al Williams Maintenance.     He further testified that

the receipts correctly reflected the services he received and the

amounts and dates of payment.2    Oglesby has more than satisfied

the test for admitting the documents.     See United States v.


     2
      Oglesby also testified regarding some inconsistencies on
the receipts regarding payment. See infra part II.A.1.
(discussing inconsistencies).
                                 -5-

Safavian, 

, 38 (D.D.C. 2006) (“The Court need

not find that the evidence is necessarily what the proponent

claims, but only that there is sufficient evidence that [a] jury

ultimately might do so.”).    The authentication objection will be

overruled.

     Second, the IRS objects that the documents are hearsay.

Its objection is that the documents are not business records

because Oglesby has not shown by the testimony of an employee of

Al Williams Maintenance that the documents are business records

of that company.

     Generally, hearsay is a statement that was not made by the

declarant while testifying at trial and that is offered into

evidence to prove the truth of the matter asserted.    Fed. R.

Evid. 801(c).    The term “statement” includes written assertions.

Fed. R. Evid. 801(a)(1).    Hearsay is not admissible unless an

exception to the hearsay rule permits the statement to be

admitted.    See Fed. R. Evid. 802, 803, 804, 807.

     The receipts marked as Exhibits 5-P and 6-P are hearsay.

Oglesby offered them into evidence to prove the truth of the

matters asserted--that Al Williams Maintenance performed the

services and that Oglesby paid for those services.    They are thus

inadmissible unless one of the exceptions to the hearsay rule

applies.    Fed. R. Evid. 802.
                                 -6-

      One exception to the hearsay rule is the so-called business

records exception.   A document is a business record if it is a

record “in any form, of acts, events, conditions, opinions, or

diagnoses, made at or near the time by, or from information

transmitted by, a person with knowledge”.   Fed. R. Evid. 803(6).

To be admissible, the business record must be “kept in the course

of a regularly conducted business activity”, and it must be “the

regular practice of that business activity” to make the record.

Id.

      It is true that Oglesby did not show that the receipts were

the business records of Al Williams Maintenance.    That is, he did

not show that Al Williams Maintenance made the receipts near the

time of the events they described, that the receipts were kept in

the course of business by Al Williams Maintenance, and that the

receipts were the type of documents regularly made by Al Williams

Maintenance.   This, however, is irrelevant.   Oglesby showed by

his own testimony that the receipts satisfied these requirements

as his own business records.   The receipts were incorporated into

the records of his rental business and relied upon in the

operation of that business.    See United States v. Jakobetz, 

, 800 (2d Cir. 1992) (holding that a toll receipt

incorporated into a company’s records qualified as a business

record, even though the receipt’s custodian had no knowledge of

its preparation, because the receipt had been embedded in the
                                  -7-

company’s business records).   It was therefore unnecessary for

Oglesby to call a witness from Al Williams Maintenance to build

the foundation for the receipts.    See United States v.

Adefehinti, 

, 325 (D.C. Cir. 2007); Thanongsinh v.

Bd. of Educ., 

, 777 (7th Cir. 2006); United States v.

Williams, 

, 34-35 (2d Cir. 2000).      Thus the IRS’s

objection that Oglesby failed to have a witness from Al Williams

maintenance testify about the receipts will be overruled.

      B.   We Will Not Consider Documents Attached to Oglesby’s
           Brief Because They Are Not in Evidence.

      Oglesby attached a large number of documents to his brief

that he did not offer into evidence.3   Documents attached to a

party’s brief are not evidence.    Rule 143(c).    And we will not

consider them.   See Godwin v. Commissioner, T.C. Memo. 2003-289,

affd. 132 Fed. Appx. 785 (11th Cir. 2005).

II.   Deficiency in Tax

      The following issues are in dispute:   (i) whether Oglesby is

entitled to a $4,150 deduction for repair expenses (we find that

he is not and that the $4,150 should instead be added to his

basis in the rental property), (ii) whether Oglesby is entitled

to $11,928 of disputed Schedule A deductions (we find that he is

entitled to a deduction of $2,869.77 and that the IRS properly


      3
      At trial the Court instructed Oglesby that we could not
consider documents not in the record unless we granted a motion
to reopen the record. Oglesby made no such motion and gave no
reasons for granting such a motion.
                                -8-

disallowed the remaining $9,058.23), (iii) whether Oglesby must

include $1,659 from the cancellation of debt in gross income (we

find that he must), and (iv) whether Oglesby must include $3,620

of unemployment compensation in gross income (we find that he

must).

     A.   Deductions

     Generally, a taxpayer must prove that the determinations in

the notice of deficiency are wrong.    Rule 142(a)(1); Welch v.

Helvering, 

, 115 (1933).

          1.   Schedule E Expenses--The IRS Properly Disallowed
               Oglesby’s Claimed Repair Expense Deductions.

     The IRS determined that Oglesby was not entitled to a

deduction of $4,150 for repair expenses.   As we explain below, we

uphold the IRS’s determination that he is not entitled to a

deduction under section 162 for the $4,150 but hold that the

$4,150 is properly included in his basis in the rental property.

Thus Oglesby’s loss from the sale of the rental property--which

he reported as $9,876--should be increased to $14,026.

     A taxpayer must maintain records sufficient to enable the

IRS to determine the taxpayer’s correct tax liability.   Sec.

6001; sec. 1.6001-1(a), Income Tax Regs.   To substantiate the

deductions, Oglesby offered his own testimony and Exhibits 3-P,

4-P, 5-P, and 6-P.   Exhibits 5-P and 6-P, which are invoices that

show the billing and payment for the repairs, have unexplained

inconsistencies.   For example, Exhibit 5-P is dated before
                                -9-

Exhibit 6-P, yet the invoice number on Exhibit 5-P (05-OGL918) is

higher than the invoice number on Exhibit 6-P (05-OGL205).      The

documents have two inconsistencies regarding payment.    First,

both invoices show the payment method as “Check”, but Oglesby

testified that he paid cash.   Second, Exhibit 6-P has a small

inconsistency in what it shows as the amount Oglesby paid.

Exhibit 6-P is an invoice dated February 17, 2005.    It shows the

billing and payment history for some of the repairs to the rental

property.   It lists the following events and amounts:

     C      “[b]illing for services rendered” for $6,197.32;

     C      “[l]ess down payment on 07-Jan.-05” of $3,500;

     C      “[p]ayment received on 10-Feb.-05” of $1,500; and

     C      “[p]ayment received on 17-Feb.-05” of $1,197.32.

Below these items, it lists a “total” of “$0.00”.    A total of

zero is consistent with the parts of the invoices just described,

which show that Oglesby was billed for $6,197.32 and that he made

payments totaling $6,197.32 (i.e., $6,197.32 ! $3,500 ! $1,500 !

$1,197.32 = 0).   But in a box marked “Amount paid”, the invoice

states that the amount paid is only $2,697.32 as of February 17,

2005, which is the date of the invoice.   The $2,697.32 it lists

as the “Amount paid” is the sum of the February 10 and 17

payments without including the January 7 downpayment.    Oglesby

did not explain the inconsistencies other than to say that they

were errors, but he testified that he indeed paid all four
                               -10-

amounts (i.e., a total of $6,197.32) and that he paid those

amounts in cash.

     We find Oglesby’s testimony to be credible.    Although the

documents have inconsistencies as to the method and amounts of

payment, the inconsistencies are small:     both could be simple

entry errors.   Oglesby’s credible testimony combined with the

documents is sufficient to show that he did indeed pay $6,197.32

for the repairs described by Exhibit 6-P and $1,490 for the

repairs described by Exhibit 5-P.4    But, as we explain below, he

is not entitled to a deduction under section 162 because the

expenditures are capital expenditures.

     Section 162(a) allows a deduction for the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.     Incidental repairs to property

can be deductible under section 162(a) if the repairs (i) keep

the property in an ordinarily efficient operating condition and

(ii) do not appreciably prolong its life or materially add to its

value.   Sec. 1.162-4, Income Tax Regs.   Expenditures for repairs

that appreciably prolong the property’s life or materially add to

its value are capital expenditures and are not immediately

deductible.   See sec. 263(a)(1); sec. 1.263(a)-1(b), Income Tax


     4
      On his return Oglesby did not claim a deduction for the
full amount that he paid--he claimed a deduction of only $4,150.
In court Oglesby did not assert that he is entitled to a
deduction for more. We address only the tax consequences of the
$4,150 for which he claimed a deduction.
                                -11-

Regs.    Generally, a taxpayer must add a capital expenditure to

basis.    Sec. 1.263(a)-1(b), Income Tax Regs.    And a taxpayer’s

cost recovery of capital expenditures, if allowable, will

generally come over time through deductions for amortization or

depreciation.    See, e.g., secs. 167, 168, and 169.   Otherwise a

taxpayer recovers the cost of capital expenditures through

increased basis when disposing of the property.     See sec. 1001

(defining gain on the sale of property as the excess of the

amount realized over the adjusted basis); sec. 1011 (giving

general rule that the adjusted basis is basis under section 1012

as adjusted by section 1016); sec. 1012 (defining basis as the

cost of property); sec. 1016(a)(1) (increasing basis by

expenditures properly chargeable to capital).

     The invoices that Oglesby provided describe the repairs as

the replacement of tile, tubs, sinks, faucets, showers, toilets,

baseboards, cabinets, countertops, and kitchen flooring.     The

regulations under section 162(a) state that repairs “in the

nature of replacements, to the extent that they arrest

deterioration and appreciably prolong the life of the property,

shall * * * be capitalized and depreciated in accordance with

section 167”.    Sec. 1.162-4, Income Tax Regs.   We believe that

the repairs at issue, which involved the replacement--not

repair--of a large number of items, not only appreciably

prolonged the life of the property, but materially added to its
                                 -12-

value.   See, e.g., Jacobson v. Commissioner, T.C. Memo. 1983-719

(allowing deduction for the cost of various repairs to rental

property but requiring capitalization of the cost of installing

new cabinet doors and countertops in the kitchen of one unit).

Oglesby--who has the burden of proof--has not given evidence that

the expenditures were for “incidental repairs” rather than

substantial renovations.    See, e.g., Bennett v. Commissioner,

T.C. Memo. 2010-114.    And we therefore find that the costs were

capital expenditures, not immediately deductible expenses.

     We uphold the IRS’s determination that Oglesby is not

entitled to a deduction under section 162 but find that the

$4,150 is properly included in his basis in the rental property.

See sec. 1016(a)(1).    Because Oglesby sold the rental property

for a tax loss during 2005, we hold that his loss should be

increased by $4,150, the amount for which he claimed a deduction.

          2.   Schedule A Itemized Deductions

     The IRS determined that Oglesby was not entitled to various

itemized deductions totaling $11,928.    As we explain below,

Oglesby is entitled to a deduction of $2,869.77 for union dues

paid, and we uphold the IRS’s determination disallowing the

remaining $9,058.23 of Schedule A deductions.

               a.      Oglesby Is Entitled to a Deduction of
                       $2,869.77 for Union Dues.

     The parties stipulated that Oglesby substantiated a

deduction of $2,869.77 for union dues.    Dues and other payments
                                    -13-

to labor unions are deductible if they otherwise satisfy the

regulations under section 162.       Sec. 1.162-15(c), Income Tax

Regs.    We therefore find that Oglesby was entitled to a deduction

of $2,869.77.

                  b.   The IRS Properly Disallowed the Other
                       Schedule A Deductions.

     The IRS disallowed Oglesby’s deductions for vehicle mileage.

No deduction is allowed under section 162 for travel expenses

unless the taxpayer satisfies the substantiation requirements of

section 274(d).    Sec. 274(d)(1); sec. 1.274-5T(b)(1), Temporary

Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).      To do so,

the taxpayer must substantiate the amount of the expense and the

time, place, and business purpose of the travel.      Sec. 274(d).5

The substantiation must take the form of either (i) adequate

records or (ii) other sufficient evidence corroborating the

taxpayer’s own statement.     Id.

     Oglesby used his Isuzu Rodeo for travel to and from job

locations.   But he did not keep a contemporaneous mileage log.

And he did not offer any other evidence to establish the number

of miles traveled or the date, place, and business purposes of



     5
      Sec. 274(d) does not apply to qualified nonpersonal use
vehicles. A qualified nonpersonal use vehicle is a vehicle,
which “by reason of its nature, is not likely to be used more
than a de minimis amount for personal purposes.” Sec. 274(i);
see also sec. 1.274-5T(k)(2)(ii), Temporary Income Tax Regs., 50
Fed. Reg. 46033 (Nov. 6, 1985) (listing examples). Oglesby’s
vehicle--an SUV--is not a qualified nonpersonal use vehicle.
                                  -14-

the travel.      Because he offered no evidence to satisfy section

274(d), we uphold the IRS’s determination that he is not entitled

to the mileage deduction.

     Oglesby offered no testimony or evidence about any other

deductions.

     We find that Oglesby is entitled to a deduction of $2,869.77

for union dues paid, and we uphold the IRS’s determination

disallowing the remaining $9,058.23 of Schedule A deductions.

     B.     Unreported Income--The IRS Properly Determined That
            Oglesby Failed To Report $5,279 of Income.

            1.     Oglesby Failed To Report $1,659 of Cancellation of
                   Debt Income.

     Gross income includes all income from whatever source

derived.    Sec. 61(a).   Gross income generally includes discharge

of debt.6   Sec. 61(a)(12).    A discharge of debt for these

purposes includes situations where a taxpayer satisfies an

obligation for less than its face value.     See Warbus v.

Commissioner, 

, 284 (1998); see also sec. 1.61-12(a),

Income Tax Regs.

     Oglesby testified that, in 2005, he settled a debt to

General Motors Acceptance Corporation by paying $1,659 less than



     6
      Sec. 108(a) excludes certain discharges of debt from gross
income. For example, sec. 108(a)(1)(A) excludes discharges in a
title 11 case and sec. 108(a)(1)(B) excludes discharges occurring
when the taxpayer is insolvent. Oglesby has not alleged--and the
record does not show--that sec. 108(a) excludes his discharge of
debt from gross income.
                                -15-

he owed.    He did not report the $1,659 on his return.     We

therefore uphold the IRS’s determination that Oglesby failed to

report $1,659 of gross income from the cancellation of debt.

            2.   Oglesby Failed To Report $3,620 of Income From
                 Unemployment Compensation.

     In 2005 Oglesby received $3,620 in unemployment

compensation, which he did not report on his tax return.         Gross

income includes unemployment compensation.    Sec. 85(a).    Section

85(b) defines unemployment compensation as “any amount received

under a law of the United States or of a State which is in the

nature of unemployment compensation.”    The parties do not dispute

that the $3,620 Oglesby received is unemployment compensation

within the meaning of section 85(b).    We therefore uphold the

IRS’s determination that Oglesby failed to report $3,620 of

income from unemployment compensation.

III. Additions to Tax and Penalties

     The IRS has the burden of producing evidence that taxpayers

are liable for additions to tax and penalties.    Sec. 7491(c).

The IRS satisfies its burden by producing “sufficient evidence

indicating that it is appropriate to impose the relevant

penalty.”   Higbee v. Commissioner, 

, 446 (2001).

Once the IRS satisfies its burden of production, taxpayers have

the burden of persuading the fact finder that they are not liable

for additions or penalties.    Id. at 446-447.
                                   -16-

        The IRS determined that Oglesby was liable for additions to

tax of $100 under section 6651(a)(1) and a penalty of $1,122.40

under section 6662.

        A.     Addition to Tax Under Section 6651(a)(1)

       When a taxpayer is late in filing a return, section

6651(a)(1) imposes an addition to tax unless the taxpayer had a

reasonable cause for failing to file on time.        For each month the

taxpayer is late, the addition is 5 percent of the tax due,7 up

to 25 percent.       Sec. 6651(a)(1).   If a return is more than 60

days late, the minimum addition under section 6651(a)(1) is the

lesser of $100 or the tax due.       Sec. 6651(a).

       The IRS has met its burden of production for imposing the

addition to tax under section 6651(a)(1).        Oglesby filed his 2005

federal income tax return on June 27, 2007, more than a year

late.

       Oglesby did not prove that he is exempt from the addition to

tax.       The section 6651(a)(1) addition to tax does not apply if

the taxpayer shows that the failure to timely file was due to

reasonable cause and not due to willful neglect.        Sec.

6651(a)(1); sec. 301.6651-1(c), Proced. & Admin. Regs.         But



       7
      For sec. 6651(a)(1), the tax due is “the amount of tax
required to be shown on the return * * * reduced by the amount of
any part of the tax which is paid on or before the date
prescribed for payment of the tax and by the amount of any credit
against the tax which may be claimed on the return”. Sec.
6651(b)(1); see also sec. 301.6651-1(d), Proced. & Admin. Regs.
                                -17-

Oglesby did not adduce evidence that the reasonable cause

exception applies.   He testified that nothing stopped him from

filing his 2005 tax return on time, and he offered no other cause

for the delay.

     We therefore uphold the IRS’s determination that Oglesby was

liable for an addition to tax under section 6651(a)(1).    Because

the exact amount required to be shown on the return will depend

on the results of the Rule 155 computation, the addition to tax

under section 6651(a)(1) will depend on the results of that

computation.

     B.   Penalty Under Section 6662

     Section 6662 imposes a penalty equal to 20 percent of the

part of an underpayment attributable to either (i) negligence or

disregard of rules or regulations or (ii) a substantial

understatement of income tax.   Sec. 6662(a) and (b)(1) and (2).

The IRS determined that Oglesby was liable for the section 6662

penalty for negligence, or alternatively, substantial

understatement of income tax.

          1.     Negligence

     The IRS has produced sufficient evidence that it is

appropriate to impose the section 6662 penalty on parts of the

underpayment because those parts are attributable to negligence.

     Negligence, for section 6662 purposes, is the lack of due

care or the failure to do what a reasonably prudent person would
                                -18-

do under like circumstances.    Hofstetter v. Commissioner, 

, 704 (1992); Neely v. Commissioner, 

, 947 (1985).

And negligence includes “any failure to make a reasonable attempt

to comply with the provisions of the internal revenue laws”.

Sec. 1.6662-3(b)(1), Income Tax Regs.; see also sec. 6662(c).

                a.    Underpayment Attributable to Repair Expense
                      Deductions

     The IRS has demonstrated that Oglesby improperly claimed a

deduction of $4,150 for the cost of the repairs to the rental

property.   But it has presented no evidence that Oglesby’s

reporting was attributable to negligence as opposed to a

reasonable and honest misunderstanding that the costs of the

repairs should be deducted rather than capitalized.   Thus the

portion of the underpayment that resulted from Oglesby’s

improperly claiming a deduction of $4,150 for repair costs is not

attributable to negligence.

                b.    Underpayment Attributable to Various Schedule
                      A Deductions

     The IRS properly disallowed $9,058.23 of Oglesby’s Schedule

A deductions.   See supra part II.A.2.   Negligence includes

failing to keep adequate books and records or failing to properly

substantiate items.   Sec. 1.6662-3(b)(1), Income Tax Regs.    The

IRS has shown that Oglesby did not keep adequate books and

records and did not properly substantiate the $9,058.23 of

deductions that we have disallowed.    In fact, Oglesby failed to
                               -19-

produce records to substantiate any of the Schedule A deductions

disallowed by this Court.   Thus the IRS has provided sufficient

evidence that it is appropriate to impose the negligence penalty

on the part of the underpayment attributable to the $9,058.23 of

Schedule A deductions properly disallowed by the IRS.

               c.    Underpayment Attributable to Failing To
                     Report Income

     The IRS properly determined that Oglesby failed to report

income from cancellation of debt and unemployment compensation.

In testifying, Oglesby offered no explanation for his failure to

report the income.   The IRS has provided sufficient evidence that

it is appropriate to impose the negligence penalty on the part of

the underpayment attributable to the unreported income.

          2.   Substantial Understatement

     Section 6662(d) defines “substantial understatement”.

Generally, an “understatement” is the excess of tax required to

be shown on the return over the tax shown on the return.     Sec.

6662(d)(2)(A); sec. 1.6662-4(b)(2), Income Tax Regs.    An

understatement is substantial if it exceeds $5,000 and it exceeds

10 percent of the tax required to be shown on the return.     Sec.

6662(d)(1)(A); sec. 1.6662-4(b)(1), Income Tax Regs.

     The exact amount of Oglesby’s understatement will depend on

the results of the Rule 155 computation.    To the extent his

understatement was substantial, the IRS has provided sufficient

evidence that it is appropriate to impose the substantial
                               -20-

understatement penalty.   See, e.g., Jarman v. Commissioner, T.C.

Memo. 2010-285; Prince v. Commissioner, T.C. Memo. 2003-247.

           3.   Exceptions

     There are several exceptions to the section 6662 penalty.    A

position with a reasonable basis is not due to negligence.    Sec.

1.6662-3(b)(1), Income Tax Regs.   Also, no penalty is imposed on

a part of the underpayment if the taxpayer (i) had a reasonable

cause for and (ii) acted in good faith regarding that part of the

underpayment.   See sec. 6664(c)(1); sec. 1.6664-4(a), Income Tax

Regs.   Regarding the substantial understatement component of the

penalty, if (i) there is substantial authority for the taxpayer’s

treatment of an item on the return or (ii) there is a reasonable

basis for the tax treatment of an item and the relevant facts

affecting that item’s tax treatment are adequately disclosed in

the return or in a statement attached to the return, the tax

attributable to the item is not included in the understatement.

Sec. 6662(d)(2)(B).

     The taxpayer bears the burdens of both production and proof

as to whether an exception to the penalty applies.   See Higbee v.

Commissioner, 116 T.C. at 446 (stating that the IRS “need not

introduce evidence regarding reasonable cause, substantial

authority, or similar provisions”).

     Oglesby did not show by a preponderance of the evidence that

the parts of the underpayment resulting from his failure to
                                 -21-

report income and his failure to substantiate deductions were not

attributable to negligence.     And Oglesby has not shown that any

penalty exception applies to any part of the underpayment.      He

offered no reason for failing to report income, he did not

explain his failure to substantiate deductions, and he offered no

reason for deducting rather than capitalizing the repair

expenditures.

      We therefore uphold the IRS’s determination that the

following parts of Oglesby’s underpayment are attributable to

negligence:     (i) the part attributable to the $9,058.23 of

disallowed Schedule A itemized deductions, (ii) the part

attributable to the $3,620 of unreported income from unemployment

compensation, and (iii) the part attributable to the $1,659 of

unreported income from the cancellation of debt.     And to the

extent the results of the Rule 155 computation show that his

understatement was substantial, we will uphold the IRS’s

determination that Oglesby’s underpayment is attributable to a

substantial understatement of income tax.

IV.   Summary

      We find (i) that Oglesby is entitled to a deduction of

$2,869.77 for payment of union dues; (ii) that Oglesby is not

entitled to a deduction under section 162 for the $4,150 for

which he claimed a repair expense deduction; (iii) that the

$4,150 is properly included in Oglesby’s basis in the rental
                                 -22-

property; (iv) that the IRS properly disallowed $9,058.23 of

Schedule A itemized deductions; and (v) that the IRS properly

determined that Oglesby had income of $3,620 from unemployment

compensation and $1,659 from cancellation of debt.

     As to penalties and additions to tax, we uphold the IRS’s

determination that Oglesby is liable for an addition to tax under

section 6651(a)(1).   And we uphold the IRS’s determination that

Oglesby is liable for the section 6662 penalty on the following

parts of the underpayment, which are attributable to negligence:

(i) the part attributable to the $9,058.23 of disallowed Schedule

A itemized deductions, (ii) the part attributable to the $3,620

of unreported income from unemployment compensation, and (iii)

the part attributable to the $1,659 of unreported income from the

cancellation of debt.   Alternatively, to the extent the

understatement was substantial, we uphold the IRS’s determination

that Oglesby is liable for the section 6662 penalty on the entire

underpayment.

     To reflect the foregoing,


                                         Decision will be entered

                                    under Rule 155.