Lance Stevens

United States Tax Court T.C. Summary Opinion 2026-10 LANCE STEVENS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ————— Docket No. 10807-25S. Filed November 2, 2026. ————— Lance Stevens, pro se. Patrick F. Gallagher, Melanie M. Garger, and Christopher J. Hoffler, for respondent. SUMMARY OPINION LEYDEN, Special Trial Judge: This case was heard pursuant to the provisions of section 7463 1 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 in any other court, and this Opinion shall not be treated as precedent for any other case. After concessions, 2 the issues for tax year 2023 remaining for decision are whether petitioner is (1) entitled to certain Schedule C 1 Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C. (I.R.C.), 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. 2 Respondent concedes that petitioner earned the disputed $9,968 in gross receipts reported on Schedule C, Profit or Loss From Business; therefore, the amount of Schedule C gross receipts petitioner reported on his 2023 federal income tax return, $64,000, was correct as filed. This increase in Schedule C gross receipts led to Served 11/02/26  2 expense deductions and (2) liable for an accuracy-related penalty under section 6662(a). All other adjustments for petitioner’s taxable year 2023 determined in the Notice of Deficiency, dated April 21, 2025, upon which this case is based, are computational. The Court concludes that petitioner (1) is not entitled to the Schedule C deductions, (2) is liable for the accuracy-related penalty under section 6662(a) determined in the Notice of Deficiency, and (3) is not liable for any additional accuracy-related penalty asserted by respondent in his First Amendment to Answer. Background The parties did not file a stipulation of facts or joint exhibits. Petitioner did not introduce any exhibits at trial or provide testimony about his disallowed Schedule C deductions. The Court admitted respondent’s Proposed Trial Exhibits 1-R through 4-R into evidence at trial. The Court did not admit into evidence respondent’s Proposed Trial Exhibits 5-R and 6-R. The following facts are derived from the documents and testimony admitted into evidence at trial and the pleadings. Petitioner resided in New Hampshire when the Petition was filed. I. 2023 Tax Return Petitioner filed his 2023 federal income tax return, signed and dated April 14, 2024, and the Internal Revenue Service (IRS) 3 received it on April 26, 2024. He attached Schedule C to his return. During 2023 petitioner operated an appliance repair business that earned $64,000 in gross receipts. He claimed a deduction for business expenses of $24,775 on Schedule C of his 2023 federal income tax return, consisting of (1) car and truck expenses of $15,323, (2) insurance of $835, (3) office expenses of $1,780, (4) deductible meals of $1,765, (5) utilities of $3,746, and (6) other expenses (credit card respondent’s asserting an increased deficiency in his First Amendment to Answer. See I.R.C. § 6214(a). Petitioner agrees that the amount of gross receipts he reported on the Schedule C is correct, but he did not concede the increased deficiency. 3 The Court uses the term “IRS” to refer to administrative actions taken outside of these proceedings. The Court uses the term “respondent” to refer to the Commissioner of Internal Revenue, who is the head of the IRS and is respondent in this case, and to refer to actions taken in connection with this case.  3 processing fees) of $1,326. He also reported that he drove his vehicle 22,467 miles in 2023. Additionally, petitioner claimed an Earned Income Credit and an Additional Child Tax Credit on his return on the basis of his reported net profit. II. Examination and Notice of Deficiency IRS Correspondence Examination Technician Townsend (Technician Townsend) performed a correspondence examination for petitioner’s taxable year 2023. Technician Townsend proposed to disallow any deduction for petitioner’s reported Schedule C expenses and reduce his reported gross receipts by $9,968 (although respondent now concedes the adjustment with respect to the gross receipts). These adjustments resulted in a proposed change to the claimed earned income credit and the additional child tax credit. As part of the examination, Technician Townsend also proposed a section 6662(a) penalty. On March 11, 2025, Technician Townsend’s immediate supervisor reviewed and approved the penalty. After concluding the correspondence examination, the IRS mailed petitioner a Notice of Deficiency dated April 21, 2025, that determined a deficiency of $6,636 and a section 6662(a) accuracy-related penalty of $1,327.20 for taxable year 2023. 4 III. Pleadings Petitioner timely filed a Petition on July 20, 2025, contesting the Notice of Deficiency. Respondent filed an Answer on August 11, 2025. On April 3, 2026, before the trial, respondent filed a Motion for Leave to File First Amendment to Answer and lodged a First Amendment to Answer. In the First Amendment to Answer respondent conceded that petitioner properly reported gross receipts on his 2023 return and that the proposed reduction in gross receipts and attendant change in self-employment tax should not be made. At trial petitioner acknowledged respondent’s First Amendment to Answer and agreed that he had properly reported on Schedule C his total gross receipts. By Order served April 9, 2026, the Court granted that Motion and filed the First Amendment to Answer. Respondent affirmatively asserted under 4 The proposed deficiency resulted from three adjustments: (1) a $2,309 increase due to the difference between the tax liability as determined and the tax shown on the return; (2) a change of $2,895 to the Earned Income Credit; and (3) a change of $1,432 to the Additional Child Tax Credit.  4 section 6214(a) an increase in the deficiency of $4,508 and an increase in the accuracy-related penalty of $901.60. The basis for the increase was respondent’s concession that petitioner did earn the gross receipts reported on Schedule C and that the IRS should not have disallowed the amount stated in the Notice of Deficiency. Discussion I. Jurisdiction and Burden of Proof In general, the Commissioner’s determination set forth in a Notice of Deficiency is presumed correct, and the taxpayer bears the burden of proving that the determination is in error, except that the Commissioner bears the burden of production in any court proceeding with respect to an individual taxpayer’s liability for any “penalty, addition to tax, or additional amount.” I.R.C. § 7491(c); see Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions are a matter of legislative grace, and a taxpayer bears the burden of proving that he is entitled to any deduction claimed. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). However, “in respect of any new matter, increases in deficiency, and affirmative defenses, pleaded in the answer,” the burden of proof shall be with the Commissioner. Rule 142(a)(1). Pursuant to section 6214(a), the Court has jurisdiction to consider a claim by the Commissioner for an increased deficiency and penalties asserted at or before the hearing or a rehearing. See Estate of Petschek v. Commissioner, 81 T.C. 260, 271–72 (1983), aff’d, 738 F.2d 67 (2d Cir. 1984); see also Kramer v. Commissioner, T.C. Memo. 2012-192, slip op. at 8. In general, the purpose of section 6214(a) is to provide the taxpayer with an opportunity to answer and resist the claim before it is considered by the Court. See Ferrill v. Commissioner, 684 F.2d 261, 265 (3d Cir. 1982), aff’g per curiam T.C. Memo. 1979-501. In his First Amendment to Answer respondent affirmatively asserted an increase in the deficiency and an increase in the accuracy- related penalty. Respondent also indicated that he was conceding the adjustment with respect to the Schedule C gross receipts proposed in his Pretrial Memorandum, filed March 12, 2026. Petitioner objected to the granting of the Motion for Leave to File First Amendment to Answer and at trial stated that he objected because the IRS never notified him of an audit and argued that the IRS violated his rights. However, the  5 parties agree that petitioner properly reported the disputed Schedule C gross receipts. Accordingly, petitioner had an opportunity to address the asserted increase to his gross receipts, and he did not disagree with it before or at the trial. Therefore, because respondent asserted the increases in the First Amendment to Answer and petitioner had notice and opportunity to respond, the Court has jurisdiction over respondent’s asserted increased deficiency under section 6214(a). Pursuant to section 7491(a), the burden of proof as to factual matters shifts to the Commissioner under certain circumstances. With respect to the Commissioner’s determination set forth in the Notice of Deficiency, petitioner has not contended, and the record has not established, that the burden of proof should shift to respondent under section 7491(a)(1). Therefore, petitioner bears the burden of proof with respect to the deficiency and penalty determined in the Notice of Deficiency. See Rule 142(a). However, pursuant to Rule 142(a)(1), respondent bears the burden of proof with respect to the increase in the deficiency and the increase in the penalty asserted in the First Amendment to Answer. Regarding the increase in the deficiency asserted in the First Amendment to Answer, respondent met his burden of proof because he provided a copy of petitioner’s 2023 income tax return as filed, which reported $64,000 of gross receipts, and petitioner conceded that amount was correct. However, the Court will address whether respondent met his burden of production for the increase in the accuracy-related penalty asserted in the First Amendment to Answer infra Part III. II. Schedule C Business Expenses A. Generally Generally, taxpayers may deduct ordinary and necessary expenses paid or incurred during the taxable year in connection with operating a trade or business. I.R.C. § 162(a); Boyd v. Commissioner, 122 T.C. 305, 313 (2004). Taxpayers bear the burden of proving that the expenses are connected with an operational business and are substantiated. See I.R.C. § 6001; Rule 142(a); Welch v. Helvering, 290 U.S. at 115; Hradesky v. Commissioner, 65 T.C. 87, 89–90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); Meneguzzo v. Commissioner, 43 T.C. 824, 831–32 (1965); Treas. Reg. § 1.6001-1(a). An ordinary expense must be of a common or frequent occurrence in the type of business involved. Deputy v. du Pont, 308 U.S. 488, 495  6 (1940). To qualify as necessary an expense must be appropriate and helpful to the taxpayer’s business. Welch v. Helvering, 290 U.S. at 113. It must be “directly connected with or pertaining to the taxpayer’s trade or business.” Treas. Reg. § 1.162-1(a). However, if an expense is a personal, living, or family expense, it may not be deducted. I.R.C. § 262(a). If a taxpayer incurs a trade or business expense contemplated by section 162(a) but is unable to adequately substantiate the amount, as to certain expenses the Court may estimate the amount and allow a deduction to that extent. Cohan v. Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930). However, there must be some basis upon which an estimate may be made. Vanicek v. Commissioner, 85 T.C. 731, 742–43 (1985). Section 6001 requires taxpayers to establish their entitlement to deductions and substantiate the amounts of their claimed deductions by keeping and providing books of accounts or records sufficient to establish “matters required to be shown by such person in any return of such tax or information.” Treas. Reg. § 1.6001-1(a), (e); see also INDOPCO, Inc. v. Commissioner, 503 U.S. at 84. The failure to keep and present accurate records counts heavily against a taxpayer’s attempted proof. See Rogers v. Commissioner, T.C. Memo. 2014-141, at *17. B. Expenses Subject to Strict Substantiation For certain expenses, section 274(d) overrides the Cohan doctrine. Sanford v. Commissioner, 50 T.C. 823, 827 (1968), aff’d per curiam, 412 F.2d 201 (2d Cir. 1969); Temp. Treas. Reg. § 1.274-5T(a). 5 For expenses governed by section 274(d), “[w]ritten evidence has considerably more probative value than oral evidence,” and “the probative value of written evidence is greater the closer in time it relates to the expenditure.” Temp. Treas. Reg. § 1.274-5T(c)(1). Deductions for expenses with respect to the use of passenger automobiles, if otherwise allowable, are subject to strict substantiation rules. See I.R.C. §§ 274(d), 280F(d)(4); Sanford, 50 T.C. at 827–28; Temp. Treas. Reg. § 1.274-5T(a). For expenses relating to passenger 5 Section 7805(e)(2) provides that temporary regulations expire within three years after the date of issuance. However, that rule applies only to regulations issued after November 20, 1988. See Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, § 6232(b), 102 Stat. 3342, 3735. The provisions of Temporary Treasury Regulation § 1.274-5T referenced here were first issued in 1985, see T.D. 8061, 1985-2 C.B. 93, 100–09, and none of those provisions has since been amended.  7 automobiles, a taxpayer must substantiate with adequate records or by sufficient evidence corroborating the taxpayer’s own statement: (1) the amount of each separate expense; (2) the mileage for each business use of the passenger automobile and the total mileage for all purposes during the taxable period; (3) the date of the business use; and (4) the business purpose of the use. See Temp. Treas. Reg. § 1.274-5T(b)(6). Substantiation by adequate records generally requires a taxpayer to “maintain an account book, diary, log, statement of expense, trip sheets, or similar record” prepared contemporaneously with the use of the passenger automobile as well as documentary evidence of the individual, actual expenses. Id. para. (c)(2). An actual contemporaneous log is not strictly required, but records made at or near the time of the expenditure have greater probative value than records created subsequently. Id. subparas. (1) and (2). In the absence of adequate records, a taxpayer may substantiate passenger automobile expenses with sufficiently detailed written or oral statements and other collateral evidence establishing that the expenses were incurred. Dyer v. Commissioner, T.C. Memo. 2012-224, at *22; see Temp. Treas. Reg. § 1.274-5T(c)(3). Deductions for meal expenses while traveling away from home are also subject to strict substantiation rules of section 274(d). With respect to deductions for these types of expenses, section 274(d) requires that the taxpayer substantiate either by adequate records or by sufficient evidence corroborating the taxpayer’s own statement (1) the amount of the expense; (2) the time and place the expense was incurred; and (3) the business purpose of the expense. Temp. Treas. Reg. § 1.274- 5T(a) and (b). For business meals not connected with travel, taxpayers may generally claim a deduction for food or beverages provided that “such expense is not lavish or extravagant under the circumstances,” and “the taxpayer (or an employee of the taxpayer) is present at the furnishing of such food or beverages.” I.R.C. § 274(k)(1). Such deductions are generally limited to 50% of the amount paid. I.R.C. § 274(n)(1). There are also several exceptions to the section 274(k) and (n) limitations, which are not applicable in this case. I.R.C. § 274(k)(2), (n)(2). C. Analysis of Petitioner’s Claimed Deductions Petitioner claimed deductions for (1) car and truck expenses, (2) insurance, (3) office expenses, (4) deductible meals, (5) utilities, and  8 (6) other expenses (credit card processing fees). Petitioner testified that he ran an appliance repair business but did not provide any testimony or documentary evidence to explain or support his claimed deductions. The deductions petitioner claimed with respect to insurance, office expenses, utilities, and other expenses (credit card processing fees) are subject to the general rules outlined supra Part II.A. The deductions for passenger automobile expenses are subject to the stricter section 274(d) substantiation rules. Regarding the deduction for meal expenses, the record does not contain any explanation that would assist the Court in determining whether it should apply the stricter substantiation rules of section 274(d) or the Cohan rule. Because petitioner did not present any evidence to support his deduction, the Court need not determine which rule applies because under either rule petitioner has not met his burden of proof. Petitioner’s testimony focused on asserting, without elaboration, that his rights were violated, that he was never notified that he needed to provide documentation about his expenses, and that he never received any letters or notices from the IRS asking for substantiating documentation. Although the Court understands petitioner’s frustration with the process involved in the audit for his 2023 federal income tax return and his case before the Court, he did not meet his burden of proof with respect to his claimed deductions under either rule; therefore, the Court finds for respondent on this issue. III. Accuracy-Related Penalty Section 6662(a) and (b)(2) imposes an accuracy-related penalty equal to 20% of the amount of any underpayment of tax required to be shown on a return that is attributable to any substantial understatement of income tax. An understatement is “substantial” if it exceeds the greater of $5,000 or 10% of the tax required to be shown on the return. I.R.C. § 6662(d)(1)(A). Respondent has determined an accuracy-related penalty on the basis of a substantial understatement of income tax. The Commissioner bears the burden of production with respect to an individual taxpayer’s liability for any penalty. I.R.C. § 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446–47 (2001). To meet that burden the Commissioner must produce sufficient evidence indicating  9 that it is appropriate to impose the penalty against the taxpayer. See I.R.C. § 7491(c); Higbee, 116 T.C. at 446–47. The Commissioner’s burden of production under section 7491(c) also generally includes establishing compliance with the supervisory approval requirement of section 6751(b)(1). Bass v. Commissioner, T.C. Memo. 2023-41, at *19; see also Walker v. Commissioner, T.C. Memo. 2022-63, at *9. Section 6751(b)(1) provides that no penalty shall be assessed unless the initial determination of the penalty was personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate before the IRS formally communicates the penalty to the taxpayer. See Walker, T.C. Memo. 2022-63 at *9. If he seeks to increase a penalty amount, the Commissioner must also obtain section 6751(b)(1) approval for the increased penalty amount(s). See Bass, T.C. Memo. 2023-41, at *20. Once the Commissioner meets his burden of production, the taxpayer must come forward with persuasive evidence that the Commissioner’s determination is incorrect. See Rule 142(a); Welch v. Helvering, 290 U.S. at 115. Respondent has asserted, and the record supports, that the accuracy-related penalty of $1,327.20 determined in the Notice of Deficiency was approved in writing by the immediate supervisor of the individual who made the penalty determination, as required by section 6751(b)(1). Respondent met the burden of production for the $1,327.20 penalty amount by providing evidence that the immediate supervisor of Technician Townsend approved the penalty before formal communication to petitioner. Petitioner did not provide any evidence to show that respondent’s determination was incorrect. Respondent has not argued, and the record does not support, that the additional accuracy-related penalty of $901.60 asserted in the First Amendment to Answer was approved in writing by the immediate supervisor of the individual who made the penalty determination, or by a designated higher level official, as required by section 6751(b)(1). Therefore, the Court finds that respondent did not meet his burden of production with respect to the increase in the accuracy-related penalty asserted in his First Amendment to Answer. See Bass, T.C. Memo. 2023- 41, at *20. Petitioner did not assert that he was entitled to relief under the reasonable cause exception to the accuracy-related penalty; therefore, the Court will not address that issue. The Court notes that this  10 reasonable cause exception need not be considered as to the increased penalty amount for which respondent has not met his burden, as discussed above. Accordingly, the Court finds that petitioner is liable for the amount of the accuracy-related penalty reflected in the Notice of Deficiency ($1,327.20) but not liable for the additional amount of the accuracy-related penalty reflected in the First Amendment to Answer ($901.60). IV. Conclusion The Court has considered all the parties’ arguments, and, to the extent not addressed herein, the Court concludes that they are moot, irrelevant, or without merit. To reflect the foregoing, Decision will be entered under Rule 155.