PURSUANT TO INTERNAL REVENUE CODE
 SECTION 7463(b),THIS OPINION MAY NOT
  BE TREATED AS PRECEDENT FOR ANY
            OTHER CASE.
                          T.C. Summary Opinion 2014-68



                         UNITED STATES TAX COURT



                 PATRICIA DIANE ROSS, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 8728-13S.                          Filed July 10, 2014.


      Patricia Diane Ross, pro se.

      Adam P. Sweet, for respondent.



                              SUMMARY OPINION


      DEAN, 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.

Pursuant to section 7463(b), the decision to be entered is not reviewable by any

other court, and this opinion shall not be treated as precedent for any other case.

Unless otherwise indicated, subsequent section references are to the Internal
                                         -2-

Revenue Code in effect for the years at issue, and Rule references are to the Tax

Court Rules of Practice and Procedure.

      Respondent issued a statutory notice of deficiency to petitioner determining

deficiencies in income tax of $3,021 for 2007 and $7,348 for 2008. Respondent

determined an addition to tax under section 6651(a) for failure to file timely a

Federal income tax return for 2007 of $94 and for 2008 of $530.70. Respondent

also determined accuracy-related penalties under section 6662(a) of $604.20 for

2007 and $1,469.60 for 2008.

      After concessions,1 the issues remaining for decision are whether petitioner:

(1) is entitled to deduct for 2007 and 2008 expenses for the business use of her

home; (2) is entitled to deduct for 2007 and 2008 amounts paid to her minor

children as wages; (3) is liable for section 6651(a) additions to tax for failure to

file timely her Federal income tax returns for 2007 and 2008 without reasonable


      1
       Petitioner did not contest in the petition adjustments A and B on Form
4549B, Income Tax Examination Changes, of the notice of deficiency for either
year, and the issues are deemed conceded. See Rule 34 (b)(4). Respondent
determined in petitioner’s favor in the notice of deficiency adjustment D for 2007
and adjustments E, G, and H for both years. Adjustment F, self-employment tax,
is computational. Petitioner made no argument at trial and presented no evidence
with respect to adjustment I, and it is deemed conceded. See Bradley v.
Commissioner, 

, 370 (1993); Sundstrand Corp. v. Commissioner, 

, 344 (1991). The parties stipulated that the returns for both years were
not timely filed.
                                         -3-

cause and due to willful neglect; and (4) is liable for accuracy-related penalties

under section 6662(a) for 2007 and 2008.

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

facts and the exhibits received in evidence are incorporated herein by reference.

Petitioner resided in Washington, D.C., when the petition was filed.

                                     Background

        Petitioner was a sole proprietor engaged in multiple business activities in

the years at issue. She ran a business called Ross Professional Services, LLC

(RPS), that did Government “staffing” work involving things like résumé and

application preparation and background and reference checks. She was also

engaged in consulting and had a tax preparation business. In 2007 and most of

2008 RPS operated in rented space in a building near petitioner’s house.

Petitioner did her consulting and tax preparation work in the basement of her

home.

        Petitioner filed with her Federal income tax return for each year only one

Schedule C, Profit or Loss From Business, for all of her business activities under

the name RPS. The Schedules C filed for 2007 and 2008 claimed deductions for

home office expenses. On Forms 8829, Expenses for Business Use of Your

Home, on the line for “area used regularly and exclusively for business”,
                                         -4-

petitioner placed the number 33. On the line for “Total area of Home” petitioner

placed the number 100.2 She then computed the percentage use of her home for

business as 33%.

      Petitioner’s three children worked in her RPS operations. In 2007 the

children were ages 15, 11, and 8. In general, the children’s work included

shredding, stuffing envelopes, copying, sorting checks, filing, “pulling” trash,

carrying equipment, and helping to shop for supplies. Petitioner prepared

timesheets, Forms W-2, Wage and Tax Statement, and other employment tax

returns in the names of her children. After researching Internal Revenue Service

publications she did not withhold or pay over employment taxes or income tax in

connection with their work. Most of the amounts petitioner considered as wages

paid to her children were payments she made to third parties. Two of the children

had recorded earnings exceeding $3,000 in 2007, and all three had recorded

earnings exceeding $3,000 in 2008. Petitioner did not withhold Federal income

tax with respect to the amounts she considered as wages paid to her children.

      Most of the receipts represented as expenditures for the benefit of

petitioner’s children are petitioner’s credit card purchases for meals at restaurants,

      2
        Petitioner submitted at trial separate Schedules C for RPS and her
“consultant and tax preparer” business claiming business use of her home only for
the latter.
                                         -5-

many of them for pizza. Although most of the expenditures are in the local,

Washington, D.C., area there are receipts for expenditures in New Jersey, Florida,

North Carolina, California, and the State of Washington. A large number and

amount of other payments are to “Score Learning I”, which petitioner described as

a “tutoring play activity service”.

      Petitioner provided receipts for purchases that she made, largely by credit

card, from January through September of 2007 and for the full year 2008. She

also provided for both years checking account statements from her bank on which

she made the notation “kids” or their initial next to check card purchases, “point of

sale debits”, and ATM cash withdrawals.

                                      Discussion

      Generally, the Commissioner’s determinations in a notice of deficiency are

presumed correct, and the taxpayer has the burden of proving that those

determinations are erroneous. See Rule 142(a); Welch v. Helvering, 

,

115 (1933). In some cases the burden of proof with respect to relevant factual

issues may shift to the Commissioner under section 7491(a). The Court finds that

petitioner has not argued or shown that she has met the requirements of section

7491(a) and the burden of proof does not shift to respondent.
                                        -6-

      Section 162 generally allows a deduction for ordinary and necessary

expenses paid during the taxable year in carrying on a trade or business.

Generally, no deduction is allowed for personal, living, or family expenses. See

sec. 262. The taxpayer must show that any claimed business expenses were paid

primarily for business rather than personal, living, or family reasons. See Rule

142(a); Walliser v. Commissioner, 

, 437 (1979). To show that an

expense was not personal, the taxpayer must show that the expense was paid

primarily to benefit his business, and there must have been a proximate

relationship between the claimed expense and the business. See Walliser v.

Commissioner, 

.

Home Office Expenses

      Generally, section 280A(a) prohibits individuals from deducting expenses

for the use of a dwelling unit that is the taxpayer’s residence. But the prohibition

on deductions does not apply to an item of expense allocable to a portion of the

dwelling that is used “exclusively” and “on a regular basis” as the principal place

of business of the taxpayer’s trade or business. Sec. 280A(c)(1)(A).

      Assuming that a taxpayer has a qualifying trade or business, allowable home

office deductions are strictly limited under the statute. Home office deductions are

limited to the amount of gross income from the use of the dwelling for a trade or
                                         -7-

business, reduced by deductions allocable to the unit regardless of its use as the

location of a trade or business, and further reduced by allocable business

deductions not related to the use of the unit itself. See sec. 280A(c)(5).3

      Where a portion of a residence is devoted to business purposes on a regular

basis, the portion of the costs incurred in maintaining the residence which is

properly attributable to the space used in business is a question of fact to be

decided in each case. Feldman v. Commissioner, 

, 8 (1985), aff’d, 

(9th Cir. 1986). In making an allocation of expenses, it would generally

be proper to compare the number of rooms or square feet of space devoted to a

business purpose to the total number of rooms (assuming rooms of approximately

equal size) or square feet in the residence and apply the ratio derived to the total

expenses properly attributable to the use of part of the residence for business

purposes. Id.; Rodriguez v. Commissioner, T.C. Memo. 2009-22; Swain v.

Commissioner, T.C. Memo. 1996-22, aff’d without published opinion, 

(4th Cir. 1996). Other methods may be reasonable under the circumstances

and may be acceptable. Feldman v. Commissioner, 

.




      3
      Amounts not allowable because of the limitation may be carried over to the
succeeding taxable year subject to the limitation of that taxable year. Sec.
280A(c)(5).
                                        -8-

      On Forms 8829 on the line for “area used regularly and exclusively for

business”, petitioner placed the number 33. On the line for “Total area of Home”

petitioner placed the number 100.4 She then computed the percentage use of her

home for business as 33%. Although there is no evidence in the record on the

issue, the Court infers that petitioner’s computation is based on the number of

floors in her house rather than the “area” of the house or the area of the basement

used for business.

      Petitioner has not offered a sufficient description of her house or her

basement to make a determination that her apparent “floor” method is a reasonable

one, and she has not established that any other reasonable method was used.

Petitioner’s basement may include a bathroom, a laundry or utility room, or other

areas that were not used in her business.

      Generally, the Court may estimate the amount of an expense and allow the

deduction to that extent. See Finley v. Commissioner, 

, 133 (10th

Cir. 1958), aff’g 

(1956); Cohan v. Commissioner, 

, 543-

544 (2d Cir. 1930). In order for the Court to estimate the amount of an expense,

however, there must be some basis upon which an estimate may be made. Vanicek

      4
        Petitioner submitted at trial separate Schedules C for RPS and her
“consultant and tax preparer” business claiming business use of her home only for
the latter.
                                        -9-

v. Commissioner, 

, 742-743 (1985). Without such a basis, an

allowance would amount to unguided largesse. Williams v. Commissioner, 

, 560 (5th Cir. 1957). Because there is an insufficient basis on which to

base an estimate of the space used in petitioner’s business, respondent’s

determination on this issue is sustained. See Swain v. Commissioner, T.C. Memo.

1996-22.

Children’s Wage Expenses

      Petitioner deducted wage expenses on Schedules C for 2007 and 2008 for

amounts she said were earned by her minor children doing work for RPS. She

described their work as, among other things, shredding, filing, and helping her

shop for supplies, carry equipment and take out the RPS trash. Their

compensation, however, is not represented by paychecks issued to them. Almost

all of the amounts that petitioner claimed as wage deductions for pay to her

children are payments in kind or irregular cash withdrawals of unstated purpose.

      Compensation is deductible as a trade or business expense only if it is: (1)

reasonable in amount, (2) based on services actually rendered, and (3) paid or

incurred. See O’Connor v. Commissioner, T.C. Memo. 1986-444; sec. 1.162-7(a),

Income Tax Regs. Compensation meeting those requirements is deductible even if

the employer is a parent and the employee his or her child. Eller v. Commissioner,
                                        - 10 -

, 962 (1981); Hamdi v. Commissioner, T.C. Memo. 1993-38, aff’d

without published opinion, 

(6th Cir. 1994). When a familial

relationship is involved, however, the Court closely scrutinizes the transaction.

Denman v. Commissioner, 

, 450 (1967); Hamdi v. Commissioner, T.C.

Memo. 1993-38. Section 262(a) generally disallows deductions for personal,

living, or family expenses. A normal supposition when payments are made to

dependent children or when items are purchased for them is that the money or

items are in the nature of support and thus nondeductible under section 262. Holtz

v. Commissioner, T.C. Memo. 1982-436.

      According to petitioner, she kept receipts of expenditures that the children

“directed” her to make, matched them against their “earnings” and made the

appropriate charges against them. Petitioner explained that because her children’s

bank accounts are in Hampton, Virginia, if she paid them in cash or by check she

would have to send a wire transfer. She testified that it was more convenient to

have her children “direct her what to do with their money” and that she was so

busy she did not have time to open up local accounts for them. Petitioner testified

that before the years at issue she paid the children by check or in cash but that she

always “found myself having to go to the bank to get their money.” Petitioner’s
                                       - 11 -

bank records nevertheless show frequent bank transactions, including deposits,

ATM withdrawals, and the use of check cards.

      In deciding whether payments to a child are deductible, the court examines

all the facts and circumstances. Eller v. Commissioner, 

. Facts that

militate against the deductibility of such payments include: (1) failing to pay

employment taxes5 and file information returns6 with respect to the child; (2)

paying the child a flat amount determined at the beginning of the year that is not

based on the services actually performed; (3) a lack of correlation between the

dates and amounts of payments and the hours allegedly worked by the child; (4)

failing to maintain adequate records of the child’s hours worked and amounts


      5
       Employment tax secs. 3111 and 3301 impose taxes on employers under the
Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax
Act (FUTA), respectively, based on wages paid to employees. See Images in
Motion of El Paso, Inc. v. Commissioner, T.C. Memo. 2006-19. Sec. 3101
imposes a tax on employees under FICA based on their wages paid, which the
employer is required to collect under sec. 3102. 

of FICA,
employment does not include service performed by a child under the age of 18 in
the employ of his father or mother. Sec. 3121(b)(3)(A). For purposes of FUTA,
employment does not include service performed by a child under the age of 21 in
the employ of his father or mother. Sec. 3306(c)(5).
      6
       The return of the FUTA tax is required to be filed on Form 940,
Employer’s Annual Federal Unemployment (FUTA) Tax Return. Sec.
601.401(a)(3), Statement of Procedural Rules. All other returns of Federal
employment taxes generally are required to be filed on Form 941, Employer’s
Quarterly Federal Tax Return. 

wages paid to an employee are
required to be reported on Form W-2. Sec. 1.6041-2(a)(1), Income Tax Regs.
                                        - 12 -

earned; and (5) compensating the child for services which are in the nature of

routine family chores. See Denman v. Commissioner, 

; O’Connor v.

Commissioner, T.C. Memo. 1986-444; Hable v. Commissioner, T.C. Memo. 1984-

485; Furmanski v. Commissioner, T.C. Memo. 1974-47.

      Petitioner did not withhold Federal income tax with respect to the amounts

paid for the benefit of her children because she said they were not required to file

tax returns. But, except for one child for 2007, they were required to file. A

single person who is not married, not a surviving spouse, and not the head of a

household must file if his or her gross income exceeds the sum of the exemption

amount and the standard deduction. Sec. 6012(a)(1)(A)(i). For both 2007 and

2008 the standard deduction was $3,000. Sec. 63(c)(2)(C). Because the children

are petitioner’s dependents, the exemption amount is zero. Secs.

6012(a)(1)(D)(ii), 152(d)(2).

      Because petitioner’s children were minors during the years at issue,

however, she was not required to withhold and pay over employment taxes from

amounts credited to the children or to file information returns for them. Petitioner

also maintained records of the amounts of alleged payments she made for the

benefit of the children and the hours allegedly worked by the children. Whether

petitioner has shown, however, that the alleged payments are based on services
                                         - 13 -

actually performed or that the children were not compensated for services which

are in the nature of routine family chores is less than clear.

      Petitioner stated that she paid her office workers $15 to $20 an hour to do

some of the same types of work as her children performed. According to

petitioner’s testimony, she paid the two younger children $8 an hour and the oldest

child $10 an hour to shred paper and stuff envelopes. Using the total pay and total

hours shown on petitioner’s documents the Court computes: (1) the youngest

child as having earned $4 an hour in 2007 and $10 an hour in 2008 even though

she worked fewer hours in 2008; (2) the middle child as having earned about

$8.50 an hour in 2007 and about $9.50 an hour in 2008 having worked fewer

hours in 2008; and (3) the oldest child as having earned almost $30 an hour in

2007 and only $9 an hour in 2008 having worked over three times as many hours.

      There appears to be no consistent correlation between the hours worked by a

child and the amount recorded as paid for the benefit of the child. For example, in

January 2008 the oldest child was “paid” $132.27 and worked, according to

petitioner’s time sheets, 39 hours, a rate of about $3.40 an hour. The same child

was “paid” $515.21 for 20.5 hours of work in May 2008, a rate of about $25 an

hour. The lack of correlation between the dates and amounts of payments and the
                                       - 14 -

hours allegedly worked by the children militates against the deductibility of the

payments. See O’Connor v. Commissioner, T.C. Memo. 1986-444.

      In Denman v. Commissioner, 

, the taxpayer’s three minor

children performed tasks around the home and office including washing windows;

cleaning screens; shoveling snow; mowing grass; tending shrubs, trees and

underbrush; assembling papers; picking up mail; and stuffing, stamping, and

labeling envelopes. The Court characterized these activities as “in the main part of

parental training and discipline rather than the services rendered by an employee

for an employer.” The activities performed by petitioner’s children seem

analogous to some of those performed by the Denman children.

      It appears to the Court that one of the main reasons for the lack of

correlation between the dates and amounts of “payments to the children” and the

hours allegedly worked by the children is that the children were not actually paid.

Petitioner argues that they were paid because she bought them things of value “at

their direction”. Petitioner prepared for 2008 a spreadsheet showing the

composition of the earnings attributed to each child. Over 50% of the earnings

attributed to the oldest child and 62% of the earnings of the middle child were

made up of petitioner’s payments to Score Learning I. Half of the earnings

attributed to the youngest child were made up of cash withdrawals by petitioner.
                                        - 15 -

Most of the balance of payments attributable to each respective child consisted of

amounts petitioner spent on food for the child.

      A parent has a legal duty to support his or her children if able to do so.

Sollars v. Cully, 

, 375 (D.C. 2006). Wages paid by a parent to a

minor child for services actually performed, however, may be a deductible

business expense regardless of the parent’s legal obligation to support the child.

The use to which the child puts the wages does not affect their deductibility.

However, the value of meals and education furnished by a parent to a minor child

is not income to the child or a deduction allowable to the parent. See sec. 262(a).

      Despite petitioner’s substantial documentation, considering all the facts and

circumstances, the Court concludes that she has not shown by a preponderance of

the evidence that the amounts she claimed as expenses for wages to her minor

children are deductible as business expenses.

Additions to Tax

      Section 7491(c) imposes on the Commissioner the burden of production in

any court proceeding with respect to the liability of any individual for penalties

and additions to tax. Higbee v. Commissioner, 

, 446 (2001);

Trowbridge v. Commissioner, T.C. Memo. 2003-164, aff’d, 

(5th Cir.

2004). In order to meet the burden of production under section 7491(c), the
                                        - 16 -

Commissioner need only make a prima facie case that imposition of the penalty or

the addition to tax is appropriate. Higbee v. Commissioner, 

.

      Section 6651(a)(1) provides for an addition to tax of 5% of the tax required

to be shown on the return for each month or fraction thereof for which there is a

failure to file, not to exceed 25%. The addition to tax for failure to file a timely

return will be imposed if a return is not timely filed unless the taxpayer shows that

the delay was due to reasonable cause and not willful neglect. See sec. 6651(a)(1).

      It is petitioner’s burden to prove that she had reasonable cause and lacked

willful neglect in not filing timely. See United States v. Boyle, 

, 245

(1985); Higbee v. Commissioner, 

; sec. 301.6651-1(a)(1), Proced. &

Admin. Regs. The parties agree that petitioner did not timely file her Federal

income tax returns for 2007 and 2008.

      Because petitioner failed to offer any evidence of reasonable cause and lack

of willful neglect for her failure to file timely, respondent’s determination that she

is liable for the addition to tax under section 6651(a)(1) for 2007 and 2008 is

sustained.
                                       - 17 -

Accuracy-Related Penalties

      Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-related penalty

on “any portion of an underpayment of tax required to be shown on a return” if the

underpayment is due to, among other reasons, negligence, disregard of rules or

regulations, or any substantial understatement of income tax. Respondent bears

the burden of production as to the penalty. Sec. 7491(c).

      Negligence is defined as any failure to make a reasonable attempt to comply

with the provisions of the Internal Revenue Code, and the term “disregard”

includes any careless, reckless, or intentional disregard. Sec. 6662(c). 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.

      Petitioner did not contest the adjustments for misclassified deductions for

commissions and fees, failed to offer evidence of a reasonable allocation of home

office expenses, and failed to show that she was entitled to deduct as wage

expenses amounts she expended for her children. Respondent has met his burden

of production on this issue.

      The accuracy-related penalty is not imposed with respect to any portion of

an underpayment if a taxpayer demonstrates that there was reasonable cause for
                                         - 18 -

that portion of the underpayment and that he or she acted in good faith with

respect to that portion. See sec. 6664(c). Section 1.6664-4(b)(1), Income Tax

Regs., specifically provides: “Circumstances that may indicate reasonable cause

and good faith include an honest misunderstanding of fact or law that is

reasonable in light of * * * the experience, knowledge, and education of the

taxpayer.” The most important factor is the extent of the taxpayer’s effort to

assess his proper tax liability for the year. 

some documentation with respect to the amounts she

paid for the benefit of her children and the hours of their activities. Petitioner

researched Internal Revenue Service publications and the requirements for

withholding and reporting employment taxes for the employment of minor

children. As the resolution of the wage issue benefits from the application of

caselaw, petitioner may not have appreciated that for what and how the children

were paid would be such important factors. The Court concludes that petitioner’s

treatment of the value of her expenditures for her children as wages was the result

of a good-faith misunderstanding of the law. The Court finds that petitioner made

a reasonable effort to treat these amounts properly on her tax returns.

      The other items on her returns were more basic. Petitioner is a paid income

tax preparer. Petitioner has not shown, in the light of her experience and
                                         - 19 -

knowledge, that she made a reasonable attempt to comply with the provisions of

the Internal Revenue Code with respect to the preparation of her Federal income

tax returns for 2007 and 2008 except for the amounts for her minor children that

she treated as wages. The Court sustains respondent’s determination that

petitioner is liable for the accuracy-related penalties with respect to the

adjustments in the notice of deficiency except for the amounts she treated as wages

to her minor children.

      To reflect the foregoing,


                                                       Decision will be entered under

                                                  Rule 155.