Petitioner's2014 Tax Ct. Summary LEXIS 98">*107 testimony at trial about the conduct of his business was vague and confusing. Petitioner initially testified that he had purchased damaged cars from a company called Copart, Inc.: "I buy used cars from a place called Copart, cars that has an accident. When I buy them, I go to junkyard to buy the parts and fix it in order to resell it."

Petitioner then testified that he had actually purchased the damaged cars through another company, Sanchase Auto. Petitioner explained that Sanchase Auto had a "license" to buy cars from Copart and Sanchase Auto allowed him to use its license. Petitioner referred to two receipts issued by Sanchase Auto to "Wally A Akanji." One receipt, dated June 3, 2009, is for the purchase of 7 cars in the aggregate amount of $33,135, and a second receipt, dated December 3, 2010, is for the purchase 10 cars in the aggregate amount of $55,360.

After that, petitioner testified: "When I bid for car, I went for the car, then I go to Copart and pay with my money." Thus, he seemed to contradict himself by stating that he paid Copart for the cars, not Sanchase Auto. According to petitioner, he paid Copart with cashier's checks obtained from Bank of America. He explained: "That's2014 Tax Ct. Summary LEXIS 98">*108 the only way you can pay to Copart." If petitioner paid Copart for the cars, we do not understand the purpose of the invoices from Sanchase Auto.

Petitioner explained that he kept copies of the cashier's checks used to pay Copart in a briefcase in his personal car but they were lost when the briefcase was stolen from his automobile. According to petitioner, he used cash to purchase the cashier's checks from Bank of America. Petitioner did not explain why he chose to pay for the cashier's check with cash instead of simply causing the money for the cashier's checks to be withdrawn from his Bank of America account. In any event, petitioner is now unable to show that he purchased any of the cashier's checks that he claims to have given to Copart. In passing, we note that the Court had continued this case from a prior calendar for the express purpose of giving petitioner additional time to obtain bank documents.

We find curious another aspect of petitioner's testimony about the business of OMA Enterprises. The record contains invoices dated during 2009 for the purchase of 11 cars through Copart by another company called Discount Motors, Inc., in Washington, D.C. These 11 invoices total $90,689.98.2014 Tax Ct. Summary LEXIS 98">*109 Petitioner did not mention these invoices during his testimony or explain what connection, if any, he had to Discount Motors, Inc. None of these invoices is in petitioner's name and, as with the Sanchase Auto invoices, there is nothing in the record to show that petitioner paid the invoices or purchased any of the automobiles described in the invoices.

As discussed above, respondent determined in the notice of deficiency that the records submitted during petitioner and his spouse's audit were "incomplete and inadequate" and did not substantiate the costs of goods sold reported on the Schedules C for OMA Enterprises. As a result, respondent recomputed the gross profit for the business using industry averages and adjusted the costs of goods sold in accordance with that computation. Petitioner and his spouse bear the burden of showing that respondent's adjustments to the costs of goods sold are wrong and that they are entitled to claim more than the amounts respondent allowed . See Rule 142.

Petitioner's description of the business of OMA Enterprises suggests that the cost of goods sold for the business would consist of the cost of the damaged automobiles and the parts2014 Tax Ct. Summary LEXIS 98">*110 used to repair them. As discussed above, the invoices submitted are not sufficient to prove that petitioner purchased any such goods. Furthermore, petitioner's testimony was vague and contradictory. On the basis of the record in this case, we find that petitioner and his spouse have not substantiated cost of goods sold for either year in excess of the amount respondent allowed.

On the Schedules C for OMA Enterprises, petitioner and his spouse claimed deductions for office expenses of $3,161 for 2009 and $4,813 for 2010. As mentioned above, petitioner was unable to show the Court which of the invoices correspond to the expenditures reported as office expenses. Nevertheless, using the invoices and petitioner's testimony, the Court has identified the following invoices for purchases that appear to have been classified as office expenses:

The above2014 Tax Ct. Summary LEXIS 98">*111 invoices purport to show expenditures of $953.37 in 2009 and $3,166.13 in 2010. According to these invoices, petitioner purchased two laptop computers in 2009, two laptop computers in 2010, two printers in 2010, and something from Oscar's Carpet One in 2010. As to those expenditures, petitioner's testimony about what type of computers he purchased was confusing. The invoices show that he purchased four laptops whereas petitioner testified that he purchased two desktops and one laptop. We find the above invoices and petitioner's testimony to be insufficient to substantiate the deduction for office expenses claimed for each of the subject years.

On the Schedule C for OMA Enterprises for 2010, petitioner and his spouse claimed a deduction for depreciation and section 179 expense of $4,595. Section 179 provides that a taxpayer may elect to treat the cost of any section 179 property as an expense which is not chargeable to a capital account. If a taxpayer makes this election, the cost shall be allowed as a deduction for the taxable year in which the section 179 property is placed in service. Sec. 179(a). Section 179 property is defined in pertinent part as "tangible property",2014 Tax Ct. Summary LEXIS 98">*112 which is section 1245 property (as defined in section 1245(a)(3)) and which is acquired by purchase for use in the active conduct of a trade or business. Sec. 179(d)(1).

According to the Form 4562, Depreciation and Amortization (Including Information on Listed Property), and the depreciation schedule filed with petitioner and his spouse's return, the subject deduction for the costs of a "Computer", purchased for $943 on February 1, 2010, and "Equipment", purchased for $3,652 on January 15, 2010. The record contains no further description of these assets. At trial, petitioner stated that the items must be "spare car parts". Petitioner then concluded: "I'm not sure." We find that petitioner and his spouse have not met the burden of proving that respondent's disallowance of this deduction was wrong.

On the Schedules C for OMA Enterprises, petitioner and his spouse claimed deductions for car and truck expenses of $7,314 for 2009 and $15,399 for 2010. There is no other mention of these car and truck expenses in the record of this case, except for the statement in the stipulation of facts that "[p]etitioners did not provide documents, such as contemporaneous mileage log, in an attempt2014 Tax Ct. Summary LEXIS 98">*113 to substantiate 'Car and Truck' expenses." Because there is nothing in the record to substantiate these expenses, we find that petitioner and his spouse have not established entitlement to the car and truck expense deduction claimed on the subject returns.

On the Schedules C for OMA Enterprises, petitioner and his spouse claimed deductions for legal and professional services of $1,541 for 2009 and $3,633 for 2010. Petitioner conceded these deductions at trial.

Respondent determined in the notice of deficiency that the underpayments of tax in this case are attributable to negligence or disregard of rules or regulations, or to substantial understatements of income tax. Accordingly, respondent added to the tax deficiencies accuracy-related penalties imposed by section 6662(a).

Under section 6662(a) and (b)(1) and (2) a taxpayer may be liable for a penalty of 20% of the portion of an underpayment of tax due to negligence or disregard of rules or regulations, or due to any substantial understatement of income tax. The term "negligence" in section 6662(b)(1) includes any failure to make a reasonable attempt to comply2014 Tax Ct. Summary LEXIS 98">*114 with the Internal Revenue Code; this may include a failure to keep adequate books and records or to substantiate items properly. Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs. Negligence has also been defined as the failure to exercise due care or the failure to do what a reasonable person would do under the circumstances. See Allen v. Commissioner, 92 T.C. 1">92 T.C. 1, 92 T.C. 1">12 (1989), aff'd, 925 F.2d 348">925 F.2d 348 (9th Cir. 1991); Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 85 T.C. 934">947 (1985). The term "disregard" includes any careless, reckless, or intentional disregard. Sec. 6662(c). In the case of an individual, the phrase "substantial understatement of income tax" is defined as an understatement that exceeds the greater of $5,000 or 10% of the tax required to be shown on the return. Sec. 6662(d)(1)(A).

Normally, the Commissioner bears the burden of production with respect to the liability of an individual taxpayer for the accuracy-related penalty. Sec. 7491(c). To meet that burden, the Commissioner must produce sufficient evidence indicating that it is appropriate to impose the penalty. See Higbee v. Commissioner, 116 T.C. 438">116 T.C. 446. Once the Commissioner meets the burden of production, the taxpayer must come forward with persuasive evidence that the Commissioner's determination is incorrect. Rule 142(a); see Higbee v. Commissioner, 116 T.C. 438">116 T.C. 446-447. The taxpayer may meet this burden by proving that he acted with reasonable cause and in good faith.2014 Tax Ct. Summary LEXIS 98">*115 See sec. 6664(c)(1); sec. 1.6664-4(a), Income Tax Regs.

Petitioner and his spouse failed to take issue in the petition with respondent's determination in the notice of deficiency imposing accuracy-related penalties under section 6662(a). Furthermore, petitioner did not take issue with the penalties at trial. He made no mention of them. In Funk v. Commissioner, 123 T.C. 213">123 T.C. 213, 123 T.C. 213">218 (2004), the Court stated:

where a petition fails to state a claim in respect of penalties, additions to tax, and/or additional amounts, the Commissioner incurs no obligation to produce evidence in support of such determinations pursuant to section 7491(c). See, e.g., Parker v. Commissioner, 117 F.3d 785">117 F.3d 785, 117 F.3d 785">787 (5th Cir. 1997) (the Commissioner has no obligation to investigate (or produce evidence with respect to) a third-party payment report that is not disputed by the taxpayer).

We need not decide that issue because there is more than enough evidence to show that accuracy-related penalties under section 6662(a) should be imposed2014 Tax Ct. Summary LEXIS 98">*116 in this case. For example, as discussed above, petitioner and his spouse failed to keep adequate books and records and failed to properly substantiate expenses relating to the cost of goods sold and deductions claimed. Thus, it is clear, for purposes of section 6662(b)(1), that all of each underpayment is due to negligence, and we so find. Furthermore, alternatively, even though the exact amounts of the underpayments will depend upon Rule 155 computations, taking into account our findings and conclusions herein, it appears to be the case that, for purposes of section 6662(b)(2), there is a substantial understatement of income tax for both 2009 and 2010.

Notwithstanding the above findings, no penalty will be imposed under section 6662(a) with respect to any portion of an underpayment if it is shown that there was reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion. See sec. 6664(c). Whether a taxpayer acted in good faith depends upon the facts and circumstances of each case. Seesec. 1.6664-4(b)(1), Income Tax Regs.

Petitioner did not explicitly argue reasonable cause and good faith. Nevertheless, on occasion during his testimony, he mentioned the fact that he had retained2014 Tax Ct. Summary LEXIS 98">*117 a return preparer to prepare the tax returns. Reliance on a professional return preparer may constitute reasonable cause and good faith if the taxpayer establishes: (1) the return preparer had sufficient expertise to justify reliance; (2) the taxpayer provided necessary and accurate information to the return preparer; and (3) the taxpayer actually relied in good faith on the return preparer's judgment. E.g., Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43">115 T.C. 43, 115 T.C. 43">99 (2000), aff'd, 299 F.3d 221">299 F.3d 221 (3d Cir. 2002).

Apart from passing references in petitioner's testimony to the tax return preparer, the record is devoid of any evidence to support a finding that any reliance by petitioner and his spouse on a return preparer was reasonable and in good faith. Petitioner did not call the tax return preparer as a witness. There is no evidence as to the advice the tax return preparer might have given; no evidence to support a determination that petitioner and his spouse acted reasonably or in good faith in relying upon it; no evidence about the tax return preparer's qualifications; no evidence that all relevant facts and circumstances were disclosed to the tax return preparer; and no evidence that the advice was based on reasonable factual or legal assumptions. See id. More fundamentally,2014 Tax Ct. Summary LEXIS 98">*118 petitioner and his spouse have not shown reasonable cause for the failure to keep adequate records to substantiate expenses relating to the claimed deductions. Accordingly, we hold petitioner and his spouse liable for section 6662(a) penalties for negligence and, alternatively, for substantial understatements of income tax insofar as the Rule 155 computations show any.

On the basis of the above concessions by the parties,

Decision will be entered under Rule 155.