MEMORANDUM FINDINGS OF FACT AND OPINION
The petitioners, Laurel Alterman and William A. Gibson, filed joint income-tax returns for 2010 and 2011. On March 13, 2014, the respondent (hereinafter, the "IRS") issued a notice of deficiency to Alterman and Gibson. The notice of deficiency made adjustments to the income of a Colorado medical-marijuana business, owned by Alterman, income that was reported on Schedules C, "Profit or Loss From Business", of both returns. The IRS determined the following income-tax deficiencies and accuracy-related penalties under section 6662(a) for tax years 2010 and 2011.
Alterman and Gibson filed a petition under section 6213(a) for redetermination of the deficiencies for both years. We have jurisdiction under section 6214(a).
1. What are the amounts of deductible business expenses for Alterman's medical-marijuana business for tax years 2010 and 2011? We hold that petitioners are not entitled to any business-expense deductions.
2. Are Alterman and Gibson entitled to cost-of-goods-sold allowances for the medical-marijuana business in excess of the amounts conceded by the IRS in its briefs for tax years 2010 and 2011? The conceded amounts are $452,292 for 2010 and $232,772 for 2011. We hold that they are not entitled to additional allowances.
3. Are Alterman and Gibson liable for accuracy-related penalties under section 6662(a) for tax years 2010 and 2011? We hold that they are liable.
FINDINGS OF FACT
The parties stipulated some facts, and those facts are incorporated by reference. At all times during 2009, 2010, and 2011 Alterman and Gibson were married and resided in Colorado. They filed joint returns for these years.
Setting Up Altermeds, LLC
During the years at issue, it was not illegal under Colorado law for people to use marijuana medically and for a medical-marijuana business to sell marijuana.
Operation of the Medical-Marijuana Dispensary
Around September 2009, Altermeds, LLC, opened a retail store under the business name "Altermeds". We refer to this retail store as the "dispensary". The dispensary was in Louisville, Colorado, which is near Boulder, Colorado. The dispensary had regular operating hours of Monday through Saturday from 11 a.m. to 7 p.m., and on Sunday from 12 p.m. to 5 p.m.
The dispensary sold smokable marijuana, either as prerolled marijuana cigarettes (i.e., joints) or as dried marijuana buds. It also sold marijuana in edible form, such as brownies and cakes, and orally-consumed tinctures
During 2010 and 2011, the dispensary also sold products that contained no marijuana, such as pipes, papers, and other items used to consume marijuana. We refer to this type of merchandise as the "non-marijuana merchandise". In 2009, 2010, and 2011 Altermeds, LLC, acquired all of its non-marijuana merchandise from third-party sellers.
Altermeds, LLC, did not provide any services.
Alterman shared the management responsibilities for the dispensary with her son, Jack Alterman. Jack worked at the dispensary during the years at issue. It was he who usually made the decisions concerning the purchase of marijuana and non-marijuana merchandise.
Purchases and Production of Marijuana Merchandise By Altermeds, LLC
During 2009, Altermeds, LLC, did not grow or produce any of its marijuana merchandise. It bought all of its marijuana merchandise during that year exclusively from third parties.
During 2010, Altermeds, LLC, continued to acquire marijuana merchandise from third-party sellers.
Effective September 2010, Colorado required medical-marijuana businesses to grow at least 70% of the marijuana they sold. Colo. Rev. Stat. sec. 12-43.3-103(b)(2) (2010). Anticipating this 70% requirement, Altermeds, LLC, began renting a warehouse in June 2010 to grow its own marijuana. The warehouse, which was in Boulder, was referred to as the "grow site". When Altermeds, LLC, first rented the warehouse, the warehouse needed modifications before it could produce marijuana. Altermeds, LLC, hired Michael Boughton and Tiffany Weaver in June 2010 to make the necessary modifications. Boughton was a person who had previously sold marijuana merchandise to Altermeds, LLC. In September 2010, Altermeds, LLC, also hired Joseph Ingoglia to assist with the grow site. The only employees who worked at the grow site during 2010 were Boughton, Weaver, and Ingoglia.
While the grow site was being modified, Boughton and Weaver agreed to sell marijuana merchandise to Altermeds, LLC, on credit, pursuant to an oral agreement with Alterman. In 2010, marijuana was grown in tents in the warehouse while the grow site was being modified. The record is unclear as to whether the marijuana grown in the tents in 2010 was owned by Boughton and Weaver (who then sold it to Altermeds, LLC, on credit) or by Altermeds, LLC. It is also unclear whether any of the marijuana grown in the tents during 2010 was transferred to the dispensary in 2010.
During 2010, Altermeds, LLC, made payments to Boughton, Weaver, and Ingoglia. The payments to Ingoglia were treated as wage payments by Altermeds, LLC. The payments to Boughton and Weaver included payments treated by Altermeds, LLC, for federal tax purposes as wage payments and included payments not so treated.
In 2011, Altermeds, LLC, continued to purchase marijuana merchandise from third-party sellers. It is unclear whether Altermeds, LLC, purchased marijuana from Boughton and Weaver during 2011. From January until May 2011, Altermeds, LLC, made payments to Boughton and Weaver. All of these payments were treated as wage payments for federal tax purposes by Altermeds, LLC, although the record does not allow us to say how much of the payments were actually for Boughton's and Weaver's services as employees.
Around May 2011, the Colorado Medical Marijuana Board certified that Altermeds, LLC's grow site met the structural and mechanical requirements for marijuana cultivation facilities. Altermeds, LLC, fired Boughton and Weaver around the same time. Boughton and Weaver credibly testified that when they were fired, Altermeds, LLC, still owed them for marijuana that they had sold Altermeds, LLC, on credit. The record does not allow us to calculate the exact amount owed. Ingoglia continued to work at the grow site for some time after April 2011 but ended his employment with Altermeds, LLC, before the end of 2011. After Ingoglia stopped working for Altermeds, LLC, it is unclear which Altermeds, LLC employees worked at the grow site.
Employees of Altermeds, LLC
In 2010 and 2011, Altermeds, LLC, employed Boughton, Weaver, Ingoglia, and others. The following table summarizes the Forms W-2, "Wage and Tax Statement", issued by Altermeds, LLC, for the years at issue:
The record confirms that Altermeds, LLC, made payments in these amounts to these persons. The record does not allow us to say how much of these payments was actually for these persons' services as employees. The overall amounts reported on the Forms W-2 as wages equal the wage deductions reported on Altermeds, LLC's Schedules C: $95,186 in 2010 and $232,358 in 2011.
Some employees worked at the dispensary, some worked at the grow site, and some worked at both. Employees at the dispensary sold marijuana merchandise and non-marijuana merchandise. According to Alterman, employees at the dispensary also engaged in the "trimming" of marijuana. "Trimming" is the process of removing stems, seeds, and twigs from a marijuana plant to convert marijuana to final, salable form. Alterman estimated that of the time spent by any particular employee at the dispensary, 40% of that time was occupied by trimming. We do not believe that employees working at the dispensary spent substantial time trimming because (1) no evidence other than Alterman's testimony supports the assertion that employees working at the dispensary trimmed marijuana and (2) other witnesses credibly testified that no trimming took place at the dispensary.
Neither Altermeds, LLC employees nor Alterman recorded the hours worked by particular employees at the grow site versus the dispensary. Given the lack of information in the record, we cannot determine what part of the payments treated by Altermeds, LLC, as employee wages was paid for work performed at the grow site versus the dispensary.
Records of Altermeds, LLC
During examination, Alterman provided the IRS with receipts that corroborated some of the expenses paid by Altermeds, LLC, and some of the purchases of merchandise made by Altermeds, LLC.
The record contains Altermeds, LLC's general ledger for 2010 and 2011.
We first discuss the notations made in the general ledger for purchases of marijuana and non-marijuana merchandise. We refer to these notations as "purchase notations". For each purchase of merchandise, the general ledger recorded (1) the date, (2) the dollar amount, and (3) the method of payment. Each purchase of merchandise was given one of four types of descriptions in the general ledger: (1) smokable, for marijuana buds and pre-rolled joints; (2) edible, for food items, tinctures, and other infused items; (3) non-marijuana, for papers and other paraphernalia; and (4) a fourth grouping mysteriously labeled "Meds-C" (hereinafter, the "undefined merchandise"). The record is unclear as to whether the undefined merchandise contained marijuana. Sometimes the identity of the seller was noted in the purchase notation; sometimes it was not. The general ledger aggregated the total amounts paid for merchandise purchases in a year in each of the four descriptive categories of merchandise. The general ledger also aggregated the total amounts paid for all merchandise purchases in a year.
The general ledger tracked the dispensary's daily receipts in the same four merchandise categories as the purchase notations. The general ledger does not reflect the dollar amount of each particular transaction. According to the gross receipts in the 2010 general ledger, Altermeds, LLC, derived 86.5% of its gross receipts from smokable marijuana merchandise, 8.6% from edible marijuana merchandise, 1.4% from non-marijuana merchandise, and 3.6% from the undefined merchandise. For 2011, the percentages are 81.7% from smokable marijuana merchandise, 14.2% from edible marijuana merchandise, 3.6% from non-marijuana merchandise, and 0.6% from the undefined merchandise.
We now discuss the notations made in the general ledger with respect to expenses (as distinguished from the purchase of merchandise). For each payment of an expense, the general ledger shows (1) the date, (2) the dollar amount, (3) the type of expense (e.g., utilities, rent, etc.), (4) the payment method (i.e., cash, check, credit card, or electronic funds transfer), and (5) sometimes, the identity of the payee.
Altermeds, LLC, paid its expenses, and paid for its merchandise, through various alternative methods: (1) checks from three checking accounts written directly to vendors, (2) checks from one of three checking accounts (i.e., the dispensary account, as described below) to Jack, who then paid cash to the vendor, (3) electronic funds transfers from the three checking accounts, (4) a Visa credit card, (5) cash paid out of the cash register at the dispensary, or (6) cash paid from an unknown source.
As discussed above, checks were written from three checking accounts. The first checking account was often used to pay the expenses of the dispensary and for merchandise purchases. We refer to this checking account as the dispensary account. Checks were written from this account during both 2010 and 2011. The record contains check-register entries for the checks written during 2010. The record contains check-register entries for some, but not all, of the checks written during 2011. The information in each check-register entry included the date and the amount of the check. For checks written for merchandise purchases, the check-register entries also sometimes showed the payees. For checks written for smokable marijuana, the check-register entries also sometimes showed the strains and weights of marijuana purchased. For checks written for edibles and non-marijuana merchandise, the check-register entries also sometimes showed the quantities purchased. For checks written to pay expenses (as distinguished from the purchases of merchandise), the check-register entries also showed the general purposes of the payments (e.g., "Costco — supplies"), and sometimes showed the payees.
The second checking account was often used to pay the costs of the grow site and also for merchandise purchases. We refer to this second checking account as the grow-site account. Although checks were written from this account in 2010 and 2011, there is no check register in the record for this account.
The third checking account was first used in December 2011. It was sometimes used to pay expenses and also for merchandise purchases. No check register is in the record for this account.
In both years at issue, some merchandise purchases and expenses were paid with electronic funds transfers, made from all three checking accounts.
The record contains banks statements for all three checking accounts. For the dispensary account, the bank statements cover January 2010 to December 2011. For the grow-site account, the bank statements cover the period from when the account was opened, June 2010, until December 2011. For the third account, the bank statements cover December 2011, which is when the account was first used. The bank statements contain entries corresponding to all checks written from the three accounts during 2010 and 2011. The bank statements contain entries corresponding to all electronic funds transfers from all three accounts during 2010 and 2011.
For electronic funds transfers, the bank statements show the date of each transfer, the amount of the transfer, and the payee. This set of information is not more detailed than the corresponding information in the general ledger for the identical electronic funds transfers. A number of entries recorded in the 2011 general ledger as purchases of smokable marijuana merchandise were paid with electronic funds transfers. For some of these entries, the payees were home improvement stores, such as Home Depot or Lowe's. We find it improbable that these stores sold smokable marijuana to Altermeds, LLC.
In both years at issue, some merchandise purchases were made with cash taken from the dispensary's register. Altermeds, LLC, kept a daily sales record for its dispensary. In addition to recording gross receipts (on a daily basis), this daily sales record noted the amount of cash taken from the register for merchandise purchases and classified the purchased merchandise into one of the four merchandise categories. Occasionally additional details concerning the purchased merchandise were recorded on the daily sales record.
Some edible marijuana merchandise was purchased during 2011 using cash. The source of the cash is unclear.
Some merchandise was purchased during 2010 by Jack, using cash that he acquired when Alterman wrote a check to him. Merchandise was purchased in this way when the third-party seller did not wish to receive a check. It appears that the checks used in such an intermediary purchase were drawn from the dispensary account and were recorded in the check register.
In 2010 and 2011, Altermeds, LLC, used a Visa credit card to pay some of its expenses and for merchandise purchases. The credit card statements (hereinafter, the "Visa statements") in the record were incomplete, as pages were missing for both years. Alterman wrote on the Visa statements descriptions of the categories of some of the expenses. Either Alterman or Mark Pendleton, Altermeds, LLC's bookkeeper, went through the Visa statements and aggregated certain expenses or merchandise purchases into single sums. These sums were then transferred to the general ledger. Thus, for these sums, the general ledger entries are not specific to particular payments, but rather a group of payments. Pendleton used Alterman's initial categorizations of Visa card charges when he transferred the amounts to the expense or merchandise purchase categories in the general ledger.
As discussed above, the dispensary used daily sales records that tracked its gross receipts. Alterman gave the daily sales records to Pendleton to enter into the general ledger. Pendleton used the daily sales records to prepare monthly statements, but these monthly statements are not in the record. To prepare the general ledger, Pendleton relied on documents that Alterman provided to him, including daily sales records, Visa statements, and receipts. (It is unclear whether Alterman provided Pendleton with bank statements. It appears that Alterman did provide Pendleton with some deposit slips, i.e., records given to Alterman by the bank when Alterman made a particular deposit. However, no deposits slips are in the record.) Alterman herself did not verify whether the gross receipts in the general ledger were consistent with the amounts stated in the daily sales records.
The income of Altermeds, LLC, was reported on Schedules C attached to Alterman and Gibson's 2010 and 2011 joint returns.
For 2010, the Schedule C reported gross receipts of $894,922. The Schedule C reduced gross receipts by cost of goods sold of $464,119. The Schedule C also reported business-expense deductions of $385,489.
For 2011, the Schedule C reported gross receipts of $657,126. The Schedule C reduced gross receipts by cost of goods sold of $253,089. The Schedule C also reported business-expense deductions of $384,817.
The Schedules C reported that cost of goods sold for each year at issue (and 2009) was computed as follows:
The Schedules C reported that Altermeds, LLC's income had been calculated using the cash method of accounting.
For the 2009 tax year, the first year that Altermeds, LLC, was in business, Alterman and Gibson's tax return was prepared by Pendleton.
For the 2010 tax year, Alterman decided instead to use the services of Comiskey & Co. (hereinafter, "Comiskey") to prepare the return.
For the 2011 return, Alterman decided to have Pendleton prepare the return instead of Comiskey.
We are uncertain why the 2011 Schedule C reported $0 as the beginning and ending inventories for 2011. That would mean, implausibly, that Altermeds, LLC, had no merchandise on hand at the beginning and end of 2011. As for the $253,089 reported on the 2011 Schedule C for purchase costs, we are unsure where this amount came from. The analogous entry in the 2011 general ledger recorded the amount as $217,089.
Audit and Statutory Notice of Deficiency
In 2012, the IRS examined Alterman and Gibson's 2010 and 2011 returns. It focused exclusively on Altermeds, LLC's Schedules C. Revenue Agent Kelly Tipton (hereinafter, "RA Tipton") was the principal revenue agent who examined the returns. Alterman provided RA Tipton with documents, such as receipts and daily sales records.
The notice of deficiency determined that Altermeds, LLC, underreported gross receipts by $24,663 and $8,359 for 2010 and 2011, respectively. The notice allowed costs of goods sold of $388,231 and $1,021 for tax years 2010 and 2011, respectively. Furthermore, the notice disallowed all of Altermeds, LLC's Schedule C business-expense deductions for tax years 2010 and 2011 on section 280E grounds, except for depreciation and section 179 expenses in the amounts of $49,671 and $719 for tax years 2010 and 2011, respectively.
The notice also determined accuracy-related penalties under section 6662(a). RA Tipton made the initial determination to impose accuracy-related penalties. The determination was approved by RA Tipton's supervisor, Tommy D. McDonald. Both the initial determination and the approval of the initial determination were made before the notice of deficiency was mailed.
In the petition, Gibson sought innocent-spouse relief from joint and several liability for the deficiencies and penalties in the notice of deficiency. At trial, Gibson conceded his claim for innocent-spouse relief for both years at issue. At trial, Alterman and Gibson conceded that Altermeds, LLC, underreported its gross receipts in the amounts stated in the notice of deficiency.
In the IRS's brief, the IRS increased the amounts of cost of goods sold it conceded for 2010 from $388,231 in the notice of deficiency to $452,292 and for 2011 from $1,021 to $232,772. The IRS's brief stated that, for tax year 2010, the amount conceded in excess of the cost-of-goods-sold allowance in the notice of deficiency was made up of the following: $9,580 for rent for the grow site; $2,010 for utilities at the grow site; $49,671 for depreciation and section 179 expenses (the same amount allowed as a deduction in the notice); and $2,800 for wages.
The taxpayer bears the burden of proving, by a preponderance of the evidence, that the IRS's determinations in the notice of deficiency are incorrect.
Section 162 allows a deduction for the expenses of carrying on a business. Sections 167 and 179 allow deductions for depreciation of assets used in a business. Section 280E, however, provides that no deduction is allowed for an amount paid or incurred in carrying on a business if the business consists of trafficking in controlled substances. Although Alterman and Gibson concede that Altermeds, LLC, trafficked in controlled substances, they contend that it had a separate business of selling non-marijuana merchandise and that the business-expense deductions of this separate business are not disallowed by section 280E. Whether selling non-marijuana merchandise was a separate business from selling marijuana merchandise is an issue of fact that depends on, among other things, the degree of economic interrelationship between the two activities.
If, however, selling non-marijuana merchandise were considered a separate business, then the expenses of that business would be deductible.
Alterman and Gibson's argument regarding the amounts of business-expense deductions attributable to a putative second business was not briefed properly.
We now consider whether Alterman and Gibson are entitled to any business-expense deductions for Altermeds, LLC, apart from the amounts of business-expense deductions allegedly attributable to the putative second business. Because we consider Altermeds, LLC's business to consist of trafficking in controlled substances, all such deductions are disallowed by section 280E. Furthermore, Alterman and Gibson, having failed to properly brief their entitlement to deductions for business expenses they claim relate to Altermeds, LLC's putative second business, have also failed to properly brief their entitlement to deductions for any other business expenses of Altermeds, LLC. They did not even allege the amounts of such deductions, much less any specific payments, provide record citations, or propose findings of fact. Therefore, we conclude Alterman and Gibson are not entitled to any business-expense deductions for Altermeds, LLC.
Cost of Goods Sold
Alterman and Gibson argue they are entitled to cost-of-goods-sold allowances in excess of the amounts the IRS conceded in its briefs. The individual income tax is computed on the basis of taxable income. Sec. 1. Taxable income is equal to gross income minus deductions. Sec. 63. Cost of goods sold is a reduction made in the course of computing gross income. Sec. 1.61-3(a), Income Tax Regs. It is not a deduction,
As the taxpayers, Alterman and Gibson must prove the amounts allowable as cost of goods sold.
Properly computed, cost of goods sold equals
Inventories must be recorded in a legible manner, properly computed and summarized, and these inventory records must be preserved by the taxpayer. Sec. 1.471-2(e), Income Tax Regs.
Alterman and Gibson contend that the cost-of-goods-sold allowances for 2010 and 2011 are:
By comparison the IRS concedes that the cost-of-goods-sold allowances for 2010 and 2011 are:
The IRS makes a threshold argument that the method of computing cost of goods sold urged by Alterman and Gibson is improper because it does not account for beginning and ending inventories. That their method ignores beginning and ending inventories can be seen from the formula
As an alternative argument, Alterman and Gibson contend that the Court should estimate, under
It is also impossible to estimate the ending inventory for 2010. We would first need to estimate the physical inventory at the end of 2010, i.e., unit quantities by product type. Then, using a cashflow assumption (such as first-in-first-out), we would assign a cost value to each unit of physical inventory at the end of 2010 by importing a cost value from (1) a unit in the beginning inventory for 2010, (2) a unit purchased during 2010, or (3) a unit produced during 2010. Secs. 1.471-1, 1.471-3, 1.471-11, Income Tax Regs.;
To estimate ending inventory for 2011, there are similar problems that are magnified by the lack of data from prior years. Furthermore, by 2011, Altermeds, LLC, was growing some of its own marijuana, but the record does not include inventory documentation for self-grown marijuana.
It is improper in this case for the Court to estimate beginning and ending inventories. The Court need not reach the question of the cost of purchasing merchandise or the cost of producing merchandise during the years at issue. These amounts are relevant to cost of goods sold only when they are used in combination with beginning and ending inventory.
We hold that the cost-of-goods-sold allowances for Altermeds, LLC, are $452,292 for 2010 and $232,772 for 2011, which are the amounts conceded by the IRS.
Section 6662(a) Penalties
The IRS takes the position that Alterman and Gibson are liable for 20% accuracy-related penalties under section 6662(a) because the underpayments of tax for 2010 and 2011 are attributable to negligence or, alternatively, to substantial understatements of income tax.
Section 6662(a) imposes a penalty equal to 20% of an underpayment that is attributable to negligence, or to a substantial understatement of income tax, or to various other causes. Sec. 6662(b). An understatement of income tax is generally the difference between the correct tax and the tax reported on the return. Sec. 6662(d)(2)(A). An understatement is substantial if it exceeds the greater of "(i) 10 percent of the tax required to be shown on the return for the taxable year, or (ii) $5,000." Sec. 6662(d)(1)(A). Negligence 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. The penalty is not imposed on any portion of an underpayment if there was a reasonable cause for such portion and the taxpayer acted in good faith with respect to that portion. Sec. 6664(c)(1). Section 6751(b)(1) provides that certain penalties cannot be assessed unless the initial determination of the assessment is personally approved in writing by the immediate supervisor of the individual making the determination.
The IRS has the burden of producing evidence that it is appropriate to impose the penalty. Sec. 7491(c);
The IRS's burden of producing evidence includes producing evidence that there was a substantial understatement of income tax.
Regardless of whether the underpayments were due to substantial understatements of income tax, we hold that they were due to negligence. Alterman and Gibson did not keep adequate records to compute reliable beginning and ending inventories for Altermeds, LLC. Alterman and Gibson acted negligently by failing to keep adequate books and records.
In a deficiency case, the IRS's burden of production includes the burden of producing evidence that it complied with the supervisory-approval requirement of section 6751(b)(1) for certain penalties.
At trial, Alterman and Gibson objected to the admissibility of the penalty approval form. They argued that the penalty approval form contains RA Tipton's expert opinions and that these opinions could be presented only through expert testimony. (RA Tipton testified at trial as a fact witness, not an expert witness.). We overruled the objection and admitted the penalty approval form into the record. In post-trial briefing, Alterman and Gibson urge us to reconsider the admissibility of the penalty approval form on the same grounds they gave for their objection at trial. Their objection was meritless. The IRS offered the penalty approval form to show that RA Tipton had initially determined that the penalties should be imposed (and that his supervisor approved the initial determination), not to show that the penalties are appropriate.
Alterman and Gibson argue that the IRS did not comply with the supervisory-approval requirement because RA Tipton did not allow petitioners enough time to fully present a reasonable-cause defense to the accuracy-related penalty before he submitted their case to his supervisor. But section 6751(b)(1) requires only that the penalty be "personally approved (in writing) by the immediate supervisor". It does not require the supervisor to follow any specific procedure in determining whether to approve the penalty.
Alterman and Gibson argue that there was reasonable cause for their underpayments and that they acted in good faith. Taxpayers can demonstrate reasonable cause and good faith if they reasonably relied on advice about the appropriate tax treatment of their business. Sec. 1.6664-4(c)(1), Income Tax Regs. However, Alterman and Gibson neither sought or received advice from Comiskey and Pendleton regarding appropriate inventory accounting or the effect of section 280E. Sec. 1.6664-4(c)(2), Income Tax Regs. Furthermore, Alterman and Gibson did not ask whether businesses that sell medical marijuana or violate federal drug trafficking laws are taxed differently from other businesses. This lack of inquiry evinces their lack of interest in complying with the federal tax laws. Sec. 1.6664-4(b)(1), Income Tax Regs. (providing that the most important factor in determining whether a taxpayer acted with reasonable cause and in good faith is the extent of the taxpayer's effort to assess his or her proper tax liability for the year).
Alterman and Gibson did not act with reasonable cause and in good faith with respect to the 2010 and 2011 underpayments. Therefore, we hold they are liable for the accuracy-related penalty for each year.
In reaching our holdings, we considered all arguments made, and, to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit.
To reflect the foregoing,
The Schedules C for Altermeds, LLC, reported that its income was calculated using the cash method of accounting. In certain situations, farmers may use the cash method of accounting as an alternative to the inventory method.
If we use the first-in-first-out cashflow assumption, then the two joints sold in 2010 were the $3 and $4 joints. The $5 joint remains in inventory in 2010 and it has an inventory cost of $5. The $5 amount is used to compute ending inventory for 2010 (along with the cost of all other products in ending inventory). Thus, we can compute ending inventory for 2010 only if we know beginning inventory for 2010.