Docket No . 24201-055 . Filed June 29, 2010 .

CARLUZZO, Special Trial'Judcre : This case for th e

UNITED STATES TAX COUR T

SHANNON B . ANDRITA L . BYRD, Petitioners v, COMMISSIONER OF INTERNAL REVENUE, Responden t redetermination of deficiencies was . heard pursuant to th e provisions of section 7463 .1 Pursuant to section 7463(b), th e 'Unless otherwise indicated, section references are to the Internal Revenue Code of 1986, as amended, in effect for the relevant period . Rule references are to the Tax Court Rules of Practice and Procedure .

decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case .

.In .a notice of deficiency dated . November 28, 2005, respondent determined deficiencies- in petitioners' Federal income taxes and penalties as follows :

Penalt y

Year Deficiency Sec . 6662(a )

2002 $11,512 $1,391 .6 0 2003 10,046 2,009,2 0 2004 11,359 -0 -The issues for decision are : (1)° Whether for 2002 petitioners are entitled to a home mortgage interest deduction in excess of the amount respondent allowed ; (2) whether for 200 4 petitioners are entitled to a`depreciation deduction-in excess o f the amount respondent allowed for a certain automobile awarded to and used by Mrs . Byrd in connection with her trade or business ; (3) whether for 2002 petitioners are liable for the section"72(t) additional tax with respect to a distribution from a qualifie d retirement plan ; (4) whether for each'year in issue, petitioner s properly computed amounts shown for cost of goods sold and gross income on a Schedule C, Profit or Loss From Business, include d with their joint Federal income tax return ; and (5 ) whether fo r 2002 and/or 2003 petitioners are liable for a section 6662(a) accuracy-related penalty .

Backgroun d

Some of ,the facts have been ° :stipulated 'and are so found . Petitioners are, and were at all times relevant, ; married to each other . . They filed a joint Federal : income . tax return for each year in issue . At the time the petition was'filed, they reside d in Tennessee .

Mr . Byrd suffered a serious heart attack during"2002 . After recovering he resumed his full-time employment but, for . healt h reasons, terminated his part-time job . . 'Before . the close of52002 he requested and received a $22,779%distribution from a .qualified .retirement plan '(the pension distribution) 'He-was-51-years old when he received the . pension distributionIn 2002, following Mr .-Byrd's heart attack, . Mrs . Byrd,,-concerne d concerned about .the family's loss .of .income, and "[seeing-] a n opportunity to make some extra income", became an "independent [sales] consultant" for BeautiControl Cosmetics (BeautiControl) As a BeautiControl`consultant!she'purchased-various cosmetic products from the'-company for resale to her customers and engaged in activities designed to"encourage other individuals to become . BeautiControl sale's consultants--in a distribution network headed by her ."-For the most part,-her activities in connection with her position,'with BeautiControl, were conducted from her residence . At some-point between~2003-and 2004 there were`62 BeautContro l P consultants within her distribution network .

As a result of her sales levels,'BeautiControl awarded her a 2004 red Ford Mustang convertible ., She . .used the Mustang, adorned with logos identified with .BeautiControl, for transportation to meet with prospective or existing, customers, . to ,attend meetings and presentations, and to deliver products, all .in connection with her BeautiControl activities . BeautiControl issued Mrs . Byrd a Form 1099„-MISC, Miscellaneous- :Income,~-for 2004 reporting the value of the Mustang .

For each year in issue, petitioners reported the income and, expenses attributable to Mrs . Byrd' s BeautiControlactivities on, a Schedule C . included with their joint Federal income tax return . The amounts shown for gross,receipts,~cost-of goods sold, an d gross income on each Schedule C are as follows :

Year Gross Receipts . Cost of Goods Sold . . Gross Incom e

2002 :

2003 $12,52 2 12,395 $25,27 4 34,087 ($12,752 )

(21,692 )

2004 41,116 13,32 .4 27,79 2 The amounts shown as cost of goods sold were computed with reference only to the total annual, cost of the BeautiControl products that she purchased for resale or .,promotionalpurposes . , Petitioners included the pension distribution in the income reported on their 2002 joint Federal income tax return, .but the tax shown on that return does not include :the section 72(t)-additional tax imposed on early distr-ibutions from qualified retirement plans .

On the Schedule A, Itemized Deductions, attached to their

2002 , return, petitioners claimed a homemortgage . interest .-deduction of $15102 . Respondent " received information fro m etitioners ' mortgagee that indicated `-they- naid $11023 o f mortgage interest during 2002 .

Petitionerstincluded the-value ofl .the .Mustang as shown on

. .the Form 1099-MISC inthe .income reportedaon their .2004 joint''-Federal income tax return . -On theSchedule-C attached to that . return they claimed a $15,084 depreciation deduction-attributable to that car .' The depreciation deduction is computed as though the car was used 100 . percent in Mrs .-Byrd's°-BeautiContro l activity .and,,eligiblefor .aspecial depreciation allowance discussed infra .

In . the above-referenced notice of deficiency ;' respondent : (1) Disallowed $4,079 of .the mortgage'interest deduction claimed .` on the Schedule A,included with petitioners' 2002 return ; (2) disallowed a portion of the depreciationdeduct,ion',claimed on the Schedule C included with petitioners" 2004'return ; (3)-'-increased petitioners" 2004'tax liability"by ;imposing the section 72(t ) additional 'tax on-the- pension 'di'stribution ; °(4) adjusted the amounts shown for cost of goods 'sold and=gross income shown=°on .F .

the Schedule C included with petitioners' return . .for" .each year in issue ; and' (5) imposed a-section 6662(a)',accuracy-relate d penalty on various grounds for 2002 .and .2003 .

Discussion .

I . Disallowed Deductions .

Two of the issues listed above involve . deductions, . . portions,,,, of which . have been 'disallowed, and . .we turn our ;attention first t o those issues .

Respondent's determinations, having been made . jna notice o f deficiency, are presumed correct, and . petitioners bear the burden of proving those determinations to be .erroneous . . See-Rule 142(a) ; Welch v . Helvering, 290 U .S . 111, 115 .(1933) Their . . burden of proof includes establishing both the . right to and the amount of 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) ;, Welch v . Helverina , supra . This includes the burden of°,substantiation .- See= Hradesky v . Commissioner , 65 T .C . 87 90 (1975) affd .=°per curiam ., 540 F .2 d 821 (5th Cir . 1976) .-A . Home Mortgage Interest Deduction .

'In general ., a taxpayer is entitled to a deduction for , qualified ' residence interest (referred to on the Schedule Aas "Home mortgage interest") Sec . 163(a) ., .(h)(2)(D) . .Taxpayers must be able to substantiate the amount claimed . -See sec . .6001 ; sec . 1 .6001-1(a)', Income °Tax . .,Regs .

Respondent disallowed $4,079 .of the, .$15,102 home mortgage interest deduction petitioners claimed on .their 2002 return for, 168 (k) . Furthermore, respondent .,argues that the Mustang -is .--predominantly used in a qualified business if the business .us e section=168(g) must be . .used to calculate-the depreciation deduction . ; Sec . 280F (b),(1) . , Property is treated as . qualified, business, the alternative depreciation system unde r If any listed property is not , . predominantly used in a and therefore does not qualify for,the bonus depreciation afforded by section 168(k) .

listed property within :the meaning of section 280F(d) (4) (A) (i)-exceeds 50 percent . Sec . 280F :(b),,(3) . Section 168(k) except s the applicable periods . .Petitioners allege that the . Mustangwa s unless'the taxpayer elected to use the alternative depreciation system .

The .Mustang is MACRS property with an applicable recovery period of5 years and was acquired and placed .-in service durin g alternative!depreciation s Y stem -under section168(g) applies , from . the bonus depreciation allowance any, property to,which the . . Although the Mustang is,listed property under section 280F(d)(4) , used almost exclusively for, business purposes, and we agree . it was used predominantly for business purposes and therefore it is not subject to section 168(g) . Accordingly, petitioners' . Mustang satisfies the definition of qualified property within th e meaning of section -1_68,()S) µ (2) . .(_A)

Petitioners` have satisfied the requirements ofsection

168(k) and therefore-are entitled to the bonus depreciation afforded by .section 168 .(k) (4) , limited-only by sectio n 280F(a) (1) (A .) (i )

II . Early Distribution Pursuant to Section 72(t )

-Generally, amounts distributed from "a qualified retirement, plan (as defined in section 4974(c))" are includable in gross income as provided in section 72 . . . .Sec . .408 (d) .(1) . a A 10-percent additional tax is imposed under section 72(t)-on any distribution that fails to satisfy .one_of theexceptions for premature distributions -as provided :in section 72 (t) (2) . This Court .has° consistently held that its bound"by . .the .list of statutory exceptions .,' See, e .g .,, : Arnold v . C .ommissioner ,,111 T .C . 250,255 (1998) Schoof v . Commissioner ; 110-T .C . ;1,, 11 (1998) Clark v . Commissioner , .101 T .'C . .215, 224-225 (1993 )

Petitioners agree that the pension distribution was-made " from sources contemplated by section 72(t) .--They argue .that the additional tax does not'sapply`because they usedthe distribution : to .~supplement the .income from Mr . Byrd"'s . :second job that he "no longer was able to .do `because of illness" .~ The "illness" t o which petitioners refer is the heart attack-referenced above .__ Section 72 (t)(2) (A) (iii) provides an .-exception- for : : distributions todisabled taxpayers .(within the .meaning"of section 72(m)(7)) to which the 10 percent additional tax does not impairments . that . . .would ordinarily, . :be :

lvltyy . , Petitioners have, failed to substantiate~Mr . Byrd' s apply . Section 72 ( m)(7) ; . ` provide s considered- :disabled ,if (1') He "is "unable to engage `i n substantial gainful -activity . . by reason,, of any medically ; w determinable . physical or mental : impairment", and .(2) ° disability "can b ;e ,expected --to ._ result Tin death,-o"r . %t" o continuedaid :indef-inite duratio n 106 T . C : .

furnish Under section 72 (m)_ (7) ; . th e 17A(f) ( 2) Income Tax Reg .s, .

to be made . on,Athe basis . :of, . :all-°,the .,facts and,,includes . .a fis t nonexclusive examples=o f with ` a . physician' s note or , other .= evidence detailing hi s disability . He was able , to :return his,full 'tim e after re cove ring . from . : his heart-attack . ,, , Therefore ,,_ w e that, any . fdisabilitySMr . . ; :Byrd suffered as -a,, result -of hi s attack-In 2002°did<not render~hm " :disabled"*within the meanin g section X72 (m)-M, .- Accordingly, petitioners ,are liable for the, . 10-percent additional tax .on-an .early distributio n section 72 (t) in 2002 .

III . Schedule C Items--Gross Receipts . ;and .Cost, of Goods Sol d Respondent determined deficiencies in ;pe~titioners' Federa l income taxes for 2002 , and .2003, due to" :understatements of :gross-, 1 2 any , year .were sold before .the close, of that year ; , at ,leas t total purchase amounts would, in effect, reflect the cost o f nothing in the record suggests otherwise . That being so, the . Section 446(b) allows respondent . to recompute petitioners ' $34,359 .86,, and $18,778 .53, . respectively .

B Understatements of Incom e

C cost of goods . .,sold for, 2002, 2003, and 2,004 should be $4,748 , goods sold for each year . Therefore , we find that the .-Schedule s .certain businesses, including petitioners' ;,merchandisin g clearly reflect income . The percentage or markup approach is an acceptable method under section 446(b) to recompute income .'i n does clearly reflect income" if petitioners' method does no t income "under such method as, in the opinion of the Secretary , business . Webb v . Commissioner, 394 F . 2d 366 , 373' .(5th Cir . receipts for each of the .taxable years in issue to reflect th e F .2d 879 (5th Cir . 1959), .,, affg . . T .C . .Memo . 19561-260 ., .

In the notice of deficiency respondent adjusted gros s

1968) ;, affg .T . .,,C . Memo . 1966-81 ; Bernstein v . Commissioner , .26 7 average 50-percent markup for BeautiControl . In the notice o f by increasing .th e determination of cost of goods sold by 50 percent .

According to petitioners, respondent's calculation of gross . receipts does not accurately reflect the amount,of unreported income for the years in issue because`it~fails-to .consider gifts 13 -and : promotional„ materials given .away, . Theoretically= their= point is well made . ; But : their failure to-keep or produce,-any record s that quantify s~ch gifts and giveaways comels us to ignore thei r generalized claim . Gross receipts attributable to Mrs . Byrd's Schedule C business shall be determined as .computed by the metho d advanced by respondent but only after taking into account th e IV . Section 6662(a) Accuracy-Related Penalt y For each of the years 2002 and 200 .3 respondent determine d that petitioners are liable for a section 6662(a) accuracyrelated . penalty . Various grounds for the imposition of that penalty are set forth in the notice_of deficiency . Th e Commissioner has the burden of production to show-impositionof the penalty is appropriate ; but if it is shown that the taxpayer acted in good faith and there is reasonable cause for th e deficiency,, then the section 6662(a) accuracy-related penalty is not applicable . Secs . 6664(c), 7491(c) ; Higbee v .' Commissioner , 116 T .C . 438, 446-447 (2001) . .

Petitioners relied upon a paid income tax return preparer to compute their Federal income tax liability shown on their join t return for each year in issue . Given their backgrounds, we are satisfied that their reliance on their return preparer was reasonable . We are further satisfied that petitioners ha d reasonable cause and acted in good faith with respect to whatever deficiency ; remains wafter respondent' s "concessions' ° and, th e foregoing determinations, for ;each year in issue are, . taken- into account- ., -, :They'are not :liable .for ,tYie'section 666 .2 (a) .^ accuracyrelated`>penalty .for ahy .,year . in `issue . To-'"refle .ct,~ the . :-foregoing ., : i under Rule°155