Glass Warehouse, LLC

United States Tax Court T.C. Memo. 2026-111 GLASS WAREHOUSE, LLC, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent __________ Docket No. 23707-22. Filed November 2, 2026. __________ Marcus E. Dyer, for petitioner. Jennifer A. Brooker, Monica D. Polo, and Sheri A. Wight, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION FUNG, Judge: Petitioner challenges a Notice of Deficiency (Notice) issued by the Internal Revenue Service (respondent) for tax years ending June 30, 2018 and 2019. 1 For tax year 2018, respondent determined a tax deficiency of $67,354 and an accuracy-related penalty under section 6662(a) 2 of $13,471. For tax year 2019, respondent determined a tax deficiency of $24,844 and an accuracy-related penalty under section 6662(a) of $4,969. After concessions, two issues remain for decision: (1) whether petitioner may deduct $118,302 in subcontractor expenses for tax year 2019 and (2) whether petitioner is liable for the 1 For ease of readability, we will refer to the tax year ending June 30, 2018, as tax year 2018 and the tax year ending June 30, 2019, as tax year 2019. 2 Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C. (I.R.C. or Code), in effect at all relevant times, regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar. Served 11/02/26  2 [*2] section 6662(a) penalty for tax year 2018. 3 We hold that petitioner has not substantiated the claimed subcontractor-expense deduction and is therefore not entitled to that deduction for tax year 2019. We further hold that petitioner is liable for the section 6662(a) penalty for tax year 2018. FINDINGS OF FACT Some of the facts are stipulated and are so found. They are incorporated herein by this reference. Other facts are drawn from sworn testimony and the documentary evidence admitted at trial. Petitioner’s principal place of business was in California when the Petition was timely filed. 4 I. Petitioner’s Business Operations Petitioner is a closely held C corporation with annual gross receipts of $4.1 million for tax year 2019. Petitioner sells glass shower doors and enclosures through third-party retail platforms, such as Home Depot, Wayfair, and Houzz. During the tax years at issue, petitioner’s principal place of business was in San Diego, California, and petitioner maintained warehouses for inventory in both California and Texas. Petitioner’s two shareholder-officers manage its operations: Ryan Thatcher, as president, owns 80%, and Nidal Hanna, as vice president, owns 20%. Mr. Thatcher and Ms. Hanna were married to each other during the tax years at issue. Both worked for petitioner full time, managing every aspect of the day-to-day operations, including sales, inventory purchasing, employee management, and customer attraction and retention. During the tax years at issue, petitioner had approximately ten employees. Among them was Mallory Copeland, an accounting manager who oversaw, and continues to oversee, payroll and employee compensation, including compensation paid to Mr. Thatcher and Ms. Hanna, as shareholder-officers, and to employees receiving Forms W–2, Wage and Tax Statement. Ms. Copeland managed petitioner’s accounts payable and accounts receivable using QuickBooks software, later 3 On October 16, 2025, the parties filed a Stipulation of Settled Issues resolving all issues for tax year 2018, except petitioner’s liability for the section 6662(a) penalty. Respondent also conceded the section 6662(a) penalty for tax year 2019. 4 Absent any stipulation to the contrary, our decision in this case is appealable to the U.S. Court of Appeals for the Ninth Circuit. See I.R.C. § 7482(b)(1)(B), (2).  3 [*3] exporting data from QuickBooks to an Excel spreadsheet. Petitioner’s certified public accountant (CPA) during the years at issue, Ahuja & Clark, PLLC (Ahuja & Clark), also had access to petitioner’s QuickBooks records. After Mr. Thatcher and Ms. Hanna, Ms. Copeland was petitioner’s next highest compensated employee. II. 2019 Tax Reporting Petitioner timely filed its Forms 1120, U.S. Corporation Income Tax Return, for 2018 and 2019. On Line 12 of its 2019 Form 1120, petitioner reported $71,250 in officer compensation. Petitioner’s accompanying 2019 Form 1125–E, Compensation of Officers, reported that the compensation paid to each of Mr. Thatcher and Ms. Hanna was $35,625. Petitioner issued Forms W–2, reporting wages of $92,712 to Mr. Thatcher and $73,962 to Ms. Hanna for 2019. Petitioner also claimed a deduction for $173,974 in subcontractor fees. That figure presumably included $109,819 of the claimed subcontractor fees as reported by Mr. Thatcher and Ms. Hanna—$98,774 to Mr. Thatcher and $11,045 to Ms. Hanna. Petitioner did not issue either Mr. Thatcher or Ms. Hanna Form 1099 for 2019 for these amounts. On their 2019 joint return, Mr. Thatcher and Ms. Hanna reported $166,674 in wages from petitioner and $109,819 in “Other income” from petitioner, the same subcontractor fee amounts described above. On August 18, 2022, respondent issued petitioner the Notice, wherein respondent disallowed $118,302 of petitioner’s claimed $173,974 subcontractor-expense deduction for lack of substantiation. 5 On November 9, 2022, petitioner timely filed the Petition. 5 In summary, petitioner contends that the following amounts were paid to Mr. Thatcher and Ms. Hanna for 2019: Officer Purported Recipient W–2 Wages Compensation Subcontractor Fees Ryan Thatcher $35,625 $92,712 $98,774 Nidal Hanna 35,625 73,962 11,045 Total 71,250 166,674 109,819  4 [*4] OPINION I. Burden of Proof The Commissioner’s determinations in a Notice of Deficiency are generally presumed correct, and the taxpayer bears the burden of proving them erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). The taxpayer can shift this burden to the Commissioner by satisfying specified conditions set forth in section 7491(a), including providing credible evidence for material facts. Section 7491(a) applies, however, only if the taxpayer complies with all substantiation and recordkeeping requirements under the Code. Deductions are a matter of legislative grace, and taxpayers bear the burden of proving entitlement to each deduction claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Doing so requires showing both that a statute authorizes the deduction and that the taxpayer maintained sufficient records substantiating income and expenses. See I.R.C. § 6001; Treas. Reg. § 1.6001-1(a). Adequate substantiation must establish the nature, amount, and purpose of a claimed deduction. See, e.g., Higbee v. Commissioner, 116 T.C. 438, 440 (2001). When evidence presented at trial is insufficient to support the claim that a particular expense is deductible, we must sustain the Commissioner’s determination and disallow the deduction. Rogers v. Commissioner, T.C. Memo. 2014-141, at *16. The Notice disallowed deductions of $118,302 in subcontractor expenses for 2019. Petitioner contends that this amount was substantiated at trial through testimony, accounting records, and a payee statement. But at trial petitioner did not provide any testimony, accounting records, or statements to show any subcontractor services in 2019. Therefore, the burden of proof remains with petitioner. II. Section 162 Deduction A taxpayer, including a corporation, can deduct “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business,” including a reasonable allowance for salaries or other compensation for personal services “actually rendered.” I.R.C. § 162; accord O.S.C. & Assocs. v. Commissioner, 187 F.3d 1116, 1119 (9th Cir. 1999), aff’g T.C. Memo. 1997-300; Treas. Reg. §§ 1.162- 7(a), 1.162-9. Whether an expenditure satisfies the requirements for deductibility under section 162 is a question of fact. Commissioner v. Heininger, 320 U.S. 467, 475 (1943). As stated above, petitioner bears  5 [*5] the burden of substantiating the expenses underlying its claimed section 162 deductions. See generally Sparkman v. Commissioner, 509 F.3d 1149, 1159 (9th Cir. 2007), aff’g T.C. Memo. 2005-136; Treas. Reg. § 1.6001-1(a). As to compensation, the Ninth Circuit applies a two-prong test for deductibility under section 162(a)(1): (1) the amount of compensation must be reasonable; and (2) the payments must be made with the intent to compensate for services rendered. O.S.C. & Assocs. v. Commissioner, 187 F.3d at 1119–20; see also Elliotts, Inc. v. Commissioner, 716 F.2d 1241, 1243 (9th Cir. 1983), rev’g T.C. Memo. 1980-282. The parties agree that the first prong is not at issue. 6 Thus, at issue is only whether petitioner paid the subcontractor fees with the intent to compensate Mr. Thatcher and Ms. Hanna for their supposed services. 7 As the parties 6 At trial and in his Opening Brief, filed April 13, 2026, respondent conceded that reasonableness of the compensation is not at issue. Further, the Notice disallowed the subcontractor expenses only on the ground of substantiation, not for the reasonableness of the amount. 7 The parties devoted substantial portions of their briefs and trial presentations to whether the payments reflected compensatory intent or, instead, constituted disguised dividends to shareholder-officers, so we briefly note those arguments for completeness. See Menard, Inc. v. Commissioner, 560 F.3d 620, 621–22 (7th Cir. 2009) (discussing the use of compensation deductions to disguise dividends), rev’g T.C. Memo. 2004-207; O.S.C. & Assocs. v. Commissioner, 187 F.3d at 1120 (setting forth numerous factors for courts to consider when evaluating compensatory intent). To show that petitioner’s reported subcontractor expenses were disguised dividends, respondent relied in part on petitioner’s “Shareholder Distributions” spreadsheet (Exhibit 1005-R), which includes a June 30, 2018, entry stating “to reclass Distributions to Contract Labor,” and petitioner’s subcontractor spreadsheet (Exhibit 1006-R), which includes a January 30, 2019, entry stating “Reclassing Ryan’s shareholder distributions to subcontractor for 2020 1099.” In response, petitioner’s counsel contended that those entries were bookkeeping errors and not indicative of petitioner’s intent to disguise dividends as subcontracting payments. However, Ms. Copeland did not offer any testimony regarding these specific line items, except to confirm their existence. Though we admitted these Exhibits and allowed the parties a robust discussion, we did not rely on them in our decision. We also note some curiosities from the parties’ documentary evidence presented and Ms. Copeland’s testimony in the light of some of the factors the Ninth Circuit considers in determining compensatory intent. See O.S.C. & Assocs. v. Commissioner, 187 F.3d at 1120. The parties stipulated, and Ms. Copeland testified, that petitioner had never declared or paid dividends or a distribution. Nor was there any evidence of a bonus plan or bonus structure. The payments closely tracked Mr. Thatcher’s and Ms. Hanna’s ownership percentages, which might suggest a distribution. No employees other than the two shareholder-officers received payments outside their Form W–2 wages, and 2019 was the only year in which Mr. Thatcher and Ms. Hanna received both Form W–2 wages and purported subcontractor fees; but Ms.  6 [*6] agree, respondent denied the section 162 deduction for subcontractor expenses solely for lack of substantiation. Because petitioner also failed to substantiate such subcontractor expenses, we need not decide compensatory intent. Petitioner contends that Ms. Copeland’s testimony established that the services Mr. Thatcher and Ms. Hanna provided were subcontractor expenses deductible by petitioner. But Ms. Copeland’s only testimony describing Mr. Thatcher’s services concerned his day-to- day work for the petitioner—“manag[ing] every aspect of the company, customers, inventory buying, all of it”—including managing employees and “responsibility for attracting or retaining customers.” She similarly did not offer any specific information about services provided by Ms. Hanna. And Ms. Copeland testified that she did not see Mr. Thatcher or Ms. Hanna involved in the business in any capacity beyond their day- to-day operations work. Notably, neither performed any groundskeeping or maintenance work for petitioner. A corporation, like any other taxpayer, is free to structure its business operations, including compensation arrangements, as best fits its needs. See generally Gregory v. Helvering, 293 U.S. 465, 469 (1935); Jones v. Helvering, 71 F.2d 214, 217 (D.C. Cir. 1934), rev’g and remanding 18 B.T.A. 1225 (1930). We recognize that “[a]ll businesses are different, all CEOs are different, and all compensation packages for CEOs are different.” Menard, Inc. v. Commissioner, 560 F.3d at 623. Thus, petitioner was free to make additional payments to petitioner’s officers, Mr. Thatcher and Ms. Hanna, for subcontractor fees for additional services actually rendered. The record does not contain any documents or any testimony showing that such an arrangement existed. For 2019, Mr. Thatcher and Ms. Hanna received Form W–2 wages from petitioner, presumably for the services Ms. Copeland described. Copeland was unable to explain why the payments were structured in that manner for 2019 but not for other years. Finally, neither Mr. Thatcher nor Ms. Hanna testified on behalf of petitioner’s compensatory intent. In these circumstances the Court can draw only a limited inference regarding compensatory intent and cannot determine on this record whether the payments were intended as compensation or as disguised dividends to petitioner’s shareholder- officers. We express no view on the proper characterization of the payments, but even if petitioner could establish the requisite compensatory intent to satisfy the requirements of section 162(a)(1), petitioner has nonetheless failed to substantiate the reported expense. Accordingly, we do not reach the parties’ competing arguments regarding compensatory intent, disguised dividends, or the significance of the bookkeeping entries reflected in Exhibits 1005-R and 1006-R.  7 [*7] And Ms. Copeland further testified that she was unaware of any subcontractor agreements between petitioner and either Mr. Thatcher or Ms. Hanna. The parties also stipulated that Mr. Thatcher and Ms. Hanna were not issued any Forms 1099, which one would presumably receive for subcontractor services. Ms. Copeland likewise had no knowledge of the nature of any subcontractor services that Mr. Thatcher or Ms. Hanna may have or could have performed, other than their day- to-day operational duties. In contrast, when Ms. Copeland issued Forms 1099 to different employees, she was aware of the subcontractor work those employees performed. Petitioner points to the 2019 joint return of Mr. Thatcher and Ms. Hanna, on which they reported the $109,819 as “Other income” and paid employment taxes, arguing that this substantiates petitioner’s entitlement to deduct the same amount. How a shareholder reports an item on a personal tax return does not control how the corporation reports that same item on its own tax return because a corporation is generally recognized as a tax entity separate from its shareholders. Moline Props., Inc. v. Commissioner, 319 U.S. 436, 438–39 (1943). Mr. Thatcher and Ms. Hanna’s tax position thus has no bearing on whether petitioner may deduct the expense. 8 “A taxpayer is free to adopt [any] organization for his affairs as he may choose and having elected to do some business as a corporation, he must accept the tax disadvantages.” Higgins v. Smith, 308 U.S. 473, 477 (1940); see also Moline Props., Inc. v. Commissioner, 319 U.S. at 439. Petitioner presented no testimony or other evidence regarding the nature, contractual agreement, amount, or provider of the purported subcontractor services. It failed to produce any business records, payroll records, contracts, invoices, Forms 1099, or other reliable documents in support of its position. Ms. Copeland’s testimony as to Mr. Thatcher’s and Ms. Hanna’s general duties does not substantiate the subcontractor 8 Petitioner’s counsel argued that the reporting of subcontractor expenses was a case of worker misclassification and that section 3509 provides a remedy such that there is no loss to the Treasury for an employer’s failure to pay withholding taxes. Section 3509 determines an employer’s liability for its failure to withhold employment taxes “by reason of treating [an] employee as not being an employee.” When that happens, the employer is liable for an increased percentage of the withholding taxes and Social Security taxes required to be deducted or imposed. I.R.C. § 3509(a). Section 3509 does not turn amounts that would otherwise not be subject to withholding tax, such as contractor expenses, into deductible Form W–2 wages just because the Code provides a mechanism to hold an employer liable in an actual worker misclassification situation. We note that petitioner did not offer any testimony or other evidence that it misclassified Mr. Thatcher or Ms. Hanna.  8 [*8] expenses that petitioner’s counsel represented it would prove. Thus, we find that petitioner is not entitled to deduct its subcontractor expenses. 9 III. Section 6662(a) Penalty Respondent determined an accuracy-related penalty for 2018 on the basis of a substantial understatement of income tax under section 6662(a) and (b)(2). Alternatively, respondent contends that petitioner is liable on the grounds of negligence or disregard of rules and regulations. See I.R.C. § 6662(a) and (b)(1). Section 6662(a) imposes a 20% accuracy-related penalty on any portion of an underpayment of tax required to be shown on a return that is attributable, as relevant here, to negligence or disregard of rules or regulations under section 6662(b)(1) or to a substantial understatement of income tax under section 6662(b)(2). For a subchapter C corporation such as petitioner, an understatement is substantial if it exceeds the lesser of 10% of the tax required to be shown on the return for the tax year (or, if greater, $10,000) or $10,000,000. I.R.C. § 6662(d)(1)(B). Only one accuracy-related penalty may be applied with respect to any given portion of an underpayment, even if that portion could be penalized on more than one ground under section 6662(b). Treas. Reg. § 1.6662-2(c). The tax shown on petitioner’s 2018 Form 1120 was $92,775. The amount of tax required to be shown on the return was $107,775. 10 The resulting understatement of income tax for 2018 exceeds both 10% of the tax required to be shown on the return and $10,000 and is therefore substantial. The Commissioner generally bears the burden of production with respect to a taxpayer’s liability for an accuracy-related penalty. I.R.C. § 7491(c). But section 7491(c) applies only to individuals, not corporations, so respondent bears no burden of production here. See NT, Inc. v. Commissioner, 126 T.C. 191, 195 (2006) (noting that section 7491(c) by its terms does not apply to corporations). 11 Because 9 Petitioner did not address the $8,483 difference between the $118,302 disallowed for subcontractor expenses in the Notice and the $109,819 it disputed at trial and on brief. Similarly, it failed to substantiate the remaining $8,483. 10 This is the amount recomputed for 2018 from the Stipulation of Settled Issues, filed October 16, 2025. 11 Respondent provided a Civil Penalty Approval Form, which was admitted into evidence as Exhibit 4-J, to show that respondent complied with section 6751(b).  9 [*9] respondent has no burden of production, petitioner bears the burden of proving that respondent’s determination is incorrect or that petitioner has an affirmative defense such as reasonable cause. See I.R.C. § 6664(c); Rule 142(a); Higbee, 116 T.C. at 446–49; Treas. Reg. § 1.6664-4(a). A taxpayer may avoid section 6662 penalties by showing there was a reasonable cause for the underpayment and the taxpayer acted in good faith. I.R.C. § 6664(c)(1); Higbee, 116 T.C. at 448. We determine whether reasonable cause exists on a case-by-case basis, considering all pertinent facts and circumstances. Treas. Reg. § 1.6664-4(b)(1); see also Patel v. Commissioner, 165 T.C. 171, 207 (2025). Petitioner bears the burden of proving that reasonable cause precludes application of the negligence and substantial understatement penalties. See Patel, 165 T.C. at 207. “Reasonable cause requires that the taxpayer have exercised ordinary business care and prudence as to the disputed item.” Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 98 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002). Good-faith reliance on the advice of an independent, competent professional as to the tax treatment of an item may satisfy this requirement. Id.; Treas. Reg. § 1.6664-4(b)(1) (“Reliance on an information return or on the advice of a professional tax advisor or an appraiser does not necessarily demonstrate reasonable cause and good faith.”); see also United States v. Boyle, 469 U.S. 241, 250 (1985). The taxpayer must also reasonably rely on and act in good faith with respect to the advice. Treas. Reg. § 1.6664-4(b)(1) (“Reliance on an information return, professional advice, or other facts, however, constitutes reasonable cause and good faith if, under all the circumstances, such reliance was reasonable and the taxpayer acted in good faith.”). To reasonably rely on a qualified professional’s advice, the taxpayer must show that (1) the adviser was a competent professional with sufficient expertise to justify reliance; (2) the taxpayer provided necessary and accurate information to the adviser; and (3) the taxpayer However, petitioner did not dispute at trial or on brief that respondent met the requirements of section 6751(b). Because the Civil Penalty Approval Form was signed by the immediate supervisor of the individual making the penalty determination before the issuance of the Notice, we agree that respondent complied with section 6751(b). See Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066, 1074 (9th Cir. 2022) (holding that written supervisory approval is required before the assessment of the penalty or before the relevant supervisor loses discretion to approve the penalty assessment), rev’g and remanding 154 T.C. 68 (2020).  10 [*10] actually relied in good faith on the adviser’s judgment. Neonatology Assocs., 115 T.C. at 99. Petitioner argues that penalties are unwarranted because it “reasonably relied on a qualified professional tax adviser, identified in the signature block on the taxpayer returns; The positions taken are supported by established legal authority as cited above.” Petitioner also contends that “[t]here is no evidence of negligence, disregard of rules, or intent to understate tax,” and that, under section 6664(c), “[r]eliance on competent professionals constitutes reasonable cause and good faith.” These sentences constitute the bulk of petitioner’s arguments on brief as to why penalties should not apply. The record is devoid of any testimony or other evidence of any information petitioner provided to an adviser regarding its tax position. At trial petitioner introduced no evidence showing that it sought or received any advice from Ahuja & Clark, the paid preparer identified on petitioner’s return, regarding the filing of its returns. There is no evidence that petitioner disclosed to Ahuja & Clark all the relevant facts and circumstances related to its returns or that Ahuja & Clark provided any advice at all. See Treas. Reg. § 1.6664-4(b)(1). And if any advice was given, there is no evidence as to whether that advice was based on reasonable or factual assumptions or that petitioner reasonably relied on such advice in good faith. See I.R.C. § 6664(c)(1); Treas. Reg. § 1.6664- 4(a). “[S]tatements in briefs . . . do not constitute evidence.” Rule 143(c); accord Niedringhaus v. Commissioner, 99 T.C. 202, 214 n.7 (1992). Taxpayers must provide evidence at trial to support their claimed position. See Rogers, T.C. Memo. 2014-141, at *15–16. Petitioner failed to do so. Petitioner’s sole witness, Ms. Copeland, was not asked about petitioner’s tax filings or return positions, and her testimony did not show that she would have had any interaction with Ahuja & Clark regarding petitioner’s returns. She did not provide, and petitioner did not introduce, the payee statement or accounting records referenced by petitioner’s counsel as the definitive substantiation for petitioner’s claimed subcontractor expenses. Petitioner’s counsel provided only the following statement at trial to show petitioner was not negligent with respect to its tax position: “He has an external CPA, and he has someone professionally prepare his tax returns. So that to me does not seem like a person who does not give due care to his tax reporting  11 [*11] responsibilities.” 12 No witness testified about any interaction with any return preparer regarding the preparation of, or the positions taken on, petitioner’s return. Petitioner has therefore failed to identify any reasonable cause for the underpayment. Simply hiring a tax preparer does not insulate a taxpayer from the consequences of the tax positions on its return. See Treas. Reg. § 1.6664-4(b)(1). We find that petitioner is liable for the section 6662(a) accuracy-related penalty for 2018 due to a substantial understatement of income tax. 13 See I.R.C. § 6662(b)(2), (d)(1)(B). IV. Conclusion For the reasons discussed above, we conclude that petitioner is not entitled to a deduction of $118,302 for subcontractor expenses for 2019 and is liable for an accuracy-related penalty under section 6662(a) for 2018 on the basis of a substantial understatement of income tax. We have considered all of the arguments made by the parties, and to the extent not addressed above, we conclude that they are moot, irrelevant, or without merit. To reflect the foregoing, Decision will be entered under Rule 155. 12 We assume the “he” to which petitioner’s counsel refers is Mr. Thatcher. Although Mr. Thatcher did not testify, we assume that, as an 80% shareholder-officer, Mr. Thatcher had some responsibility for hiring a return preparer on behalf of petitioner. 13 We therefore need not address whether petitioner is liable for the section 6662(a) penalty on the grounds of negligence or disregard of rules and regulations. See I.R.C. § 6662(b)(1), (c).