## Facts

- The Commissioner determined deficiencies for 1996 ($10,796) and 1997 ($12,443), an addition to tax for late filing under I.R.C. § 6651(a)(1) for 1996, and an accuracy-related penalty under I.R.C. § 6662(a) for 1997.
- The taxpayers petitioned the United States Tax Court for redetermination and proceeded pro se.
- Before trial, the parties resolved most issues concerning disallowed deductions except a remaining dispute involving certain Schedule C deductions.
- At trial, the taxpayers also sought additional deductions not previously claimed on the returns or raised in the notice of deficiency, including a casualty loss, charitable contributions, unreimbursed employee expenses, expenses related to a failed business in a Chapter 13 bankruptcy, and rental expenses.
- To support a claimed casualty loss, the taxpayers offered a small-claims-court form that lacked official certification, relevant dates, and any reliable appraisal or repair-cost estimate.
- To support charitable contributions beyond amounts the Commissioner allowed, the taxpayers relied largely on their testimony and documents they created or completed on preprinted forms, along with purchase receipts.
- The examination and trial occurred after enactment of I.R.C. § 7491, raising questions about shifting the burden of proof on factual issues and the IRS’s burden of production on penalties.

## Issues

1. Whether the taxpayers substantiated entitlement to the disputed deductions (including casualty loss, charitable contributions, unreimbursed employee expenses, bankruptcy-related business expenses, and rental expenses).
2. Whether the burden of proof on the factual issues relating to the deductions shifted to the Commissioner under I.R.C. § 7491(a).
3. What the Commissioner must show to satisfy the burden of production for penalties and additions to tax under I.R.C. § 7491(c).
4. Whether the taxpayers were liable for the I.R.C. § 6651(a)(1) addition to tax (1996) and the I.R.C. § 6662(a) accuracy-related penalty (1997).

## Decision

- The court held the taxpayers did not meet the requirements of I.R.C. § 7491(a) and therefore did not shift the burden of proof to the Commissioner on the factual deduction issues.
- The court disallowed the additional deductions at issue because the taxpayers failed to provide credible, reliable substantiation, including failure to establish the items contributed and their fair market values for charitable contributions beyond the amount already allowed.
- The court held that, under I.R.C. § 7491(c), the Commissioner must produce sufficient evidence indicating that imposition of a penalty or addition to tax is appropriate.
- The court found the Commissioner satisfied the § 7491(c) burden of production for both the § 6651(a)(1) late-filing addition and the § 6662(a) accuracy-related penalty.
- The court sustained the addition to tax and accuracy-related penalty and entered decision for the Commissioner.

## Legal Principles

- Deductions are allowed only when the taxpayer proves entitlement and substantiates the amounts and factual predicates required by the Internal Revenue Code and regulations.
- Under I.R.C. § 7491(a), the burden of proof on factual issues may shift to the Commissioner only if the taxpayer introduces “credible evidence” and satisfies applicable substantiation and recordkeeping requirements.
- “Credible evidence” for § 7491(a) purposes is evidence that, after critical analysis, would be sufficient to support a decision on the issue if uncontradicted; self-serving or unreliable materials may be insufficient.
- Under I.R.C. § 7491(c), the Commissioner bears a burden of production on penalties and additions to tax and must come forward with evidence showing that imposing the penalty or addition is appropriate; the taxpayer retains the burden of persuasion on defenses such as reasonable cause and good faith.

## Conclusion

The Tax Court held the taxpayers failed to produce credible, substantiated evidence sufficient to shift the burden of proof under § 7491(a) or to support their additional deductions, and it sustained the late-filing addition and accuracy-related penalty because the Commissioner met the § 7491(c) production burden and the taxpayers did not establish a defense.


Higbee v. Commissioner, 116 T.C. 438 (2001)