IQ Holdings, Inc.

United States Tax Court T.C. Memo. 2024-104 IQ HOLDINGS, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ————— Docket No. 10608-20. Filed November 7, 2024.

————— Larry A. Campagna, George R. Gibson, Peter A. Lowy, Leo Unzeitig, and Daizia M. Williams, for petitioner.

Steven D. Garza, Mary E. Morey, and William D. White, for respondent.

MEMORANDUM OPINION COPELAND, Judge: The Commissioner sent a Notice of Deficiency to Petitioner, IQ Holdings, Inc. (IQH), determining a deficiency of $2,869,975 for IQH’s 2014 tax year and a $622,061 accuracy-related penalty under section 6662(a). 1 The deficiency determination stems from the Commissioner’s disallowance of the following three categories of deductions: (1) writeoffs for damaged inventory, (2) charitable contributions, and (3) net operating loss (NOL) carryforwards. This case is before the Court on the Commissioner’s Motion for Summary Judgment.

Served 11/07/24 [*2] Background The following background statement is drawn from the parties’ pleadings and Motion papers and the attached Declarations and Exhibits. We state the background solely for purposes of ruling on the Commissioner’s pending Motion for Summary Judgment and not as findings of fact. IQH’s principal place of business was in Texas when it timely filed its Petition.

I. Entities During tax year 2014 IQH was a C corporation 2 based in Houston, Texas, and owned entirely by Pradeep Yohanne Gupta and his wife.

IQH filed its calendar-year 2014 Form 1120, U.S. Corporation Income Tax Return, as a consolidated return with its subsidiary, IQ Products Co. (IQP). In 2014 IQP was an active manufacturer of aerosol consumer products, including products for personal and home care and automotives. In 2012 Mr. Gupta founded IQ Life Sciences Corp. (IQLS), which he intended to be a nonprofit organization dedicated to designing and donating pharmaceutical and healthcare products, focusing particularly on respiratory ailments. IQLS applied for status as a tax- exempt private foundation under section 501(c)(3) in March 2012 and received approval from the Internal Revenue Service (IRS) on November 14, 2014.

II. Inventory Writeoffs While IQLS’s application for tax exemption was pending, IQP made a seller-financed sale (in exchange for a note) to IQLS of inventory consisting of more than 1,000 pallets of IQ-branded aerosol products and raw packaging materials. IQP intended to forgive the loan once IQLS received its section 501(c)(3) approval. However, by the time IQLS got that approval in 2014, some or all of the aerosol products and packaging materials were found to be rusted, leaking, broken, or otherwise damaged. As a result, IQLS and IQP decided to reverse the sale. 3 After reversal, IQP wrote off the cost of the aerosol products (in the amount of $3,401,095) and the raw packaging materials ($1,280,626) on its books

Also for the 2014 tax year IQP wrote off $1,672,555 worth of aerosol can inventory (approximately 1.5 million cans) that was originally manufactured for the WD–40 Co. (IQP again charged that amount to cost of goods sold on its 2014 return.) In 2012 IQP had discovered a design defect in the cans that left them in violation of Department of Transportation (DOT) regulations; that violation was communicated by letter from the DOT to IQP in October 2012. As of April 2017 IQP still had physical possession of the aerosol cans and was in litigation with the WD–40 Co. over who owned them. In a signed Declaration, Mr. Gupta explained: At the end of 2014, my team and I, based on our experience manufacturing and selling these products since 1989, determined that the WD–40 products were worthless.

They were defective, illegal to sell, and illegal to transport.

Any attempt to rehabilitate the products would have greatly exceeded the cost of producing new products.

III. Charitable Contribution Deductions IQH reported total charitable contributions of $2,932,168 on its 2014 tax return. As delineated on the return, this amount reflected (1) equipment valued at $162,725, (2) residential property at 720 Ourlane Circle, Houston, Texas, valued at $1,400,000, and (3) $1,369,443 in cash. IQH reported that all of these items were donated to IQLS. IQH claimed a 2014 deduction of $325,288, in accordance with the percentage limitation on the charitable contribution deduction for corporations under section 170(b)(2). 4 The equipment donation consisted of computer network equipment, computer software, and analytical laboratory equipment.

IQH did not obtain an appraisal of the equipment before filing its 2014 return. For the real estate at 720 Ourlane Circle, it attached a printout of a webpage from the Harris County (Texas) Appraisal District, indicating both a “market” and “appraised” valuation of the land and improvements at that address of $1,971,053 as of January 1, 2015.

On audit, IQH provided the IRS with a letter from IQLS to IQH dated December 29, 2014, stating in relevant part as follows: This letter serves to confirm receipt of the listed items below as a donation from IQ Holdings, Inc. • Residential property located at 720 Ourlane Circle, Houston, Texas 77024.

• Various equipment valued at $162,725.

IQ Life Sciences Corporation intends to sell the residential properties and equipment and use this money strictly for IQ Life Sciences Corporation’s charitable Mission.

IV. NOLs IQH claimed an NOL carryforward deduction of $4,702,585 on its 2014 tax return. IQH and the IRS later agreed that the highest potential NOL carryforward for 2014, $4,897,991, is based on a potential carryforward of the following NOLs: Year Potential NOL Carryforward 2010 $415,755 2011 1,785,353 2012 423,591 2013 2,273,292 Total $4,897,991 IQH did not check the box on line 11 of Schedule K, Other Information, of any of its 2010–13 Forms 1120. On each of those Forms that line instructed, in relevant part: “If the corporation has an NOL for the tax year and is electing to forgo the carryback period, check here.” 8 Nor did IQH attach a statement to any of those Forms 1120 indicating its intent to forgo the carryback period. IQH never submitted an amended return or other filing to claim a tax refund on account of carrying back any of the 2010–13 NOLs to a previous tax year.

The Commissioner alleges that (1) IQH’s net income reported for tax year 2008 exceeds the 2010 NOL, and IQH’s 2008 tax year remains open for refund claims because of a mutual agreement to extend the period of limitations; (2) IQH’s net income reported for tax year 2009

The record to date does not contain IQH’s return for tax year 2008 nor 2009 nor any evidence relevant to the 2012 inventory writeoff.

II. Inventory Writeoffs Section 471(a) provides: Whenever in the opinion of the Secretary [of the Treasury] the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer on such basis as the Secretary may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

Treasury Regulation § 1.471-2(a) states that section 471(a) provides “two tests to which each inventory must conform: (1) It must conform as nearly as may be to the best accounting practice in the trade or business, and (2) It must clearly reflect the income.” The Supreme Court has remarked that “best accounting practice” is synonymous with “generally accepted accounting principles” (GAAP) and that section 471 “vest[s] the Commissioner with wide discretion in determining whether a particular method of inventory accounting should be disallowed as not clearly reflective of income.” Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 532 (1979). [*8] IQH contends that its $6,354,276 writeoff of inventory for 2014 was consistent with GAAP. 12 The Commissioner does not dispute that contention but supports his deficiency determination by arguing that the writeoff does not clearly reflect IQH’s income. He points to Treasury Regulation § 1.471-2(c), which generally provides that businesses may value inventory at either (1) cost or (2) the lower of cost or market price.

However, that regulation then sets forth a significant caveat: Any goods in an inventory which are unsalable at normal prices or unusable in the normal way because of damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes, including second-hand goods taken in exchange, should be valued at bona fide selling prices less direct cost of disposition . . . or if such goods consist of raw materials or partly finished goods held for use or consumption, they shall be valued upon a reasonable basis, taking into consideration the usability and the condition of the goods, but in no case shall such value be less than the scrap value. Bona fide selling price means actual offering of goods during a period ending not later than 30 days after inventory date. The burden of proof will rest upon the taxpayer to show that such exceptional goods as are valued upon such selling basis come within the classifications indicated above, and he shall maintain such records of the disposition of the goods as will enable a verification of the inventory to be made.

This is generally accomplished by stating such goods at a lower level commonly designated as market.

FASB, Accounting Standards Codification, 330-10-35-1 (Mar. 13, 2015), https://asc.fasb.org/archiveContent/3123462/1618858; see United States v. Winstar Corp., 518 U.S. 839, 855 (1996) (describing the FASB as “the font of GAAP”). [*9] Id. The Commissioner notes that IQP never offered for sale the damaged aerosol products or WD–40 cans, and he therefore concludes that IQH’s writeoff did not comply with the regulation. 13 However, we first note that Treasury Regulation § 1.471-2(c) encompasses inventory “unsalable at normal prices” but does not explicitly deal with inventory that is unsalable at any price, as IQH contends was the case with its aerosol products and WD–40 cans. The parties agree that the Supreme Court has recognized that defective inventory may be written down for tax purposes in some circumstances.

See Thor Power Tool Co. v. Commissioner, 439 U.S. at 535. Not addressed by the Supreme Court in Thor Power Tool Co. are situations in which the inventory is completely obsolete, hazardous, or illegal to sell, or in which the inventory’s scrap value is zero. IQH posits that those are instances to which the regulation’s general requirement to hold the property out for sale cannot apply, since holding such items out for sale would be nonsensical. IQH cites a district court case in support of its proposed exception. 14 We agree with IQH that Treasury Regulation § 1.471-2(c) cannot be read to require a taxpayer to offer for sale items that, in their current condition, would be tortious or illegal to sell. Moreover, solely for purposes of ruling on the Commissioner’s Motion for Summary Judgment, we construe the record in the light most favorable to IQH.

See Sundstrand Corp., 98 T.C. at 520. Consequently, we must assume that both the IQ-branded aerosol products and the WD–40 cans were tortious or illegal to sell in 2014, precluding us from resolving the issue summarily on the basis that the goods were not actually held out for sale.

However, as to the WD–40 cans only, we must also address the Commissioner’s contention that even if IQH was not required to offer In the Commissioner’s Sur-Reply to IQH’s Objection to Motion for Summary Judgment, the Commissioner conceded that the raw packaging materials in the amount of $1,280,626 written off by IQP are exempt from the “actual offering of goods” provision of the regulation. (Rather, they need only be “valued upon a reasonable basis.”) The Commissioner therefore retracted his Motion with respect to those raw material costs. Further references to “inventory” in this Opinion will exclude the raw materials.

Therefore, we cannot grant the Commissioner summary judgment with respect to the writeoff of either the IQ-branded aerosol products or the WD–40 cans. Rather, we must await further evidence regarding the salability of these products as well as IQH’s knowledge of (and efforts to determine) whether they could be feasibly rehabilitated. 16 III. Charitable Contribution Deductions Section 170(a) allows a deduction for contributions made to charitable organizations during the tax year. While deductible contributions typically occur by outright conveyance of cash or property, deductions may be allowed in certain other cases, such as gratuitous debt forgiveness. See Story v. Commissioner, 38 T.C. 936, 942 (1962).

In order for a taxpayer to claim a charitable contribution deduction for forgiving debt owed by a qualified charitable organization, we require that the initial loan be valid and enforceable, but not that forgiveness be Our caselaw supports reviewing a deduction for an earlier year that affects an NOL carryover deduction for the current year. See I.R.C. § 6214(b) (“The Tax Court in redetermining a deficiency of income tax for any taxable year . . . shall consider such facts with relation to the taxes for other years . . . as may be necessary correctly to redetermine the amount of such deficiency . . . .”); see also Zarlengo v. Commissioner, T.C. Memo. 2014-161, at *26 (denying carryover deductions for the taxpayer’s 2005– tax years (which were before the Court) after finding that she did not meet the requirements for a deduction for her 2004 tax year (which was not before the Court)).

Section 170(f) denies a deduction under section 170(a) for any contribution of $250 or more unless the taxpayer receives from the donee a “contemporaneous written acknowledgment” (Acknowledgment) of the contribution that “includes the following information”: (i) The amount of cash and a description (but not value) of any property other than cash contributed. (ii) Whether the donee organization provided any goods or services in consideration, in whole or in part, for any property described in clause (i). (iii) A description and good faith estimate of the value of any goods or services referred to in clause (ii) . . . .

I.R.C. § 170(f)(8)(B). The donor must be in receipt of the Acknowledgment by the earlier of the date it files the relevant tax return or the return’s due date. I.R.C. § 170(f)(8)(C).

Further, section 170(f)(11)(C) denies a charitable contribution deduction of $5,000 to $500,000 for a contribution of property unless the taxpayer obtains a “qualified appraisal” of the property and attaches to its return a summary of the appraisal. See Treas. Reg. § 1.170A- 13(c)(2). 17 Under section 170(f)(11)(D), a deduction of over $500,000 requires the taxpayer to attach both an appraisal summary and a copy of the full appraisal report. According to Treasury Regulation § 1.170A- 13(c)(3), a qualified appraisal generally is a valuation document prepared by a qualified appraiser not more than 60 days before the contribution and not later than the due date of the relevant tax return.

There is an exemption from the qualified appraisal rules for contributions of (among other things) cash, publicly traded securities, and inventory. I.R.C. § 170(f)(11)(A)(ii)(I).

The Commissioner argues that the entirety of IQH’s 2014 charitable contribution deduction should be disallowed because (1) the Treasury Regulation §§ 1.170A-16 and 1.170A-17 contain rules similar to those in Treasury Regulation § 1.170A-13 but apply to contributions made after July 30, 2018, and January 1, 2019, respectively. See Treas. Reg. §§ 1.170A-16(g), 1.170A- 17(c). [*12] contributions occurred in 2012 and 2013; (2) IQH did not relinquish dominion and control over the equipment by 2014 and so did not make a completed gift in that year; (3) the letter from IQLS to IQH dated December 29, 2014, does not specify whether IQLS provided any goods or services in consideration for the donations and so fails the Acknowledgement requirement of section 170(f)(8)(B); and (4) IQH neither obtained nor attached a qualified appraisal and/or proper appraisal summary for the equipment or the 720 Ourlane property. 18 We agree with the Commissioner that the Acknowledgment requirement of section 170(f)(8)(B) precludes any 2014 charitable contribution deduction for IQH. The letter of December 29, 2014, from IQLS to IQH “confirm[s] receipt of the listed items below as a donation” but nowhere explicitly indicates whether IQLS “provided any goods or services in consideration, in whole or in part,” I.R.C. § 170(f)(8)(B)(ii), for the three listed items (equipment, 720 Ourlane Circle property, and cash for the purchase of the 728 Ourlane Circle property). 19 As we have said many times, an Acknowledgment must explicitly state whether consideration was provided for the contributed property even if the donor did not actually receive any consideration. 20 No deduction will be allowed if the Acknowledgment does not include this mandatory statement. See, e.g., Campbell v. Commissioner, T.C. Memo. 2020-41, at *24; French v. Commissioner, T.C. Memo. 2016-53, at *8; Crimi v. Commissioner, T.C. Memo. 2013-51, at *92–93; Durden v. Commissioner, T.C. Memo. 2012-140, 103 T.C.M. (CCH) 1762, 1764; Friedman v. Commissioner, T.C. Memo. 2010-45, 99 T.C.M. (CCH) 1175, 1178. “The deterrence value of [a total denial of a deduction in the case of an improper Acknowledgment] comports with the effective administration of a self-assessment and self-reporting system.” Addis v. Commissioner, 374 F.3d 881, 887 (9th Cir. 2004), aff’g 118 T.C. 528 (2002).

Reg. § 1.170A-1(h)(2). [*13] IQH contends that because IQLS’s letter used the word “donation,” the letter sufficiently implied that IQLS gave no goods or services in exchange for the contributions. However, the word “donation” is consistent with a gratuitous transfer that is nonetheless reciprocated to some extent by the donee. Cf. Brooks v. Commissioner, T.C. Memo. 2022-122, at *12 (“We do not find that use of the word ‘donation’ necessarily implies that there was no consideration given, in whole or in part.”), aff’d, 109 F.4th 205 (4th Cir. 2024); Campbell, T.C.

Memo. 2020-41, at *24 (finding the phrase “generous gift” insufficient to satisfy the requirement that the Acknowledgment specify whether any goods or services were given in exchange). 21 IQH argues that the omission in the letter should be excused by the doctrine of substantial compliance. That doctrine is designed to avoid hardship in cases where a taxpayer does all that is reasonably possible to comply with the specific requirements of a provision but nonetheless fails to comply. Samueli v. Commissioner, 132 T.C. 336, 345 (2009). This Court has held that “substantial rather than literal compliance may be sufficient to substantiate a charitable contribution deduction in certain instances.” Consol. Invs. Grp. v. Commissioner, T.C. Memo. 2010-158, 100 T.C.M. (CCH) 51, 54. However, we have generally held that the doctrine of substantial compliance does not apply to excuse a failure to strictly comply with the Acknowledgment requirement of section 170(f)(8)(B), because that requirement is more than merely procedural and instead goes to the heart of the statutory purpose. See 15 W. 17th St. LLC v. Commissioner, 147 T.C. 557, 562– (2016); French, T.C. Memo. 2016-53, at *8; Crimi, T.C. Memo. 2013- 51, at *85; Averyt, 104 T.C.M. (CCH) at 67; Durden, 103 T.C.M. (CCH) at 1763–64. We have observed that the essential statutory purpose of the Acknowledgment requirement is to assist taxpayers in determining the deductible amounts of their charitable contributions and to assist It appears that this Court has permitted only one narrow exception to the requirement that the Acknowledgment contain an explicit statement regarding quid pro quos. Specifically, we have held that a deed of gift (such as a deed granting a conservation easement) that does not recite specific consideration nonetheless can suffice as an Acknowledgment when it states that the grant is unconditional and also includes an “integration” or “merger” clause to the effect that the deed constitutes the entire agreement between the parties. See, e.g., RP Golf, LLC v. Commissioner, T.C. Memo. 2012-282, at *10–11; Averyt v. Commissioner, T.C. Memo. 2012-198, 104 T.C.M. (CCH) 65, 68; see also Brooks, T.C. Memo. 2022-122, at *11–13 (finding that an easement deed failed as an Acknowledgment because it lacked a merger clause); French, T.C. Memo. 2016-53, at *12–13 (same). In those cases where we allowed an exception, the merger clause did not merely imply but entailed that no consideration was given. The IQLS letter does not support a comparable logical deduction. [*14] the IRS in processing tax returns on which charitable contribution deductions are claimed. Durden, 103 T.C.M. (CCH) at 1763 (citing, inter alia, H.R. Rep. No. 103-111, at 785 (1993), reprinted in 1993-3 C.B. 167, 361); see also Treas. Reg. § 1.170A-1(h)(2).

Apart from this Court’s own precedents on the substantial compliance doctrine, we are precluded from applying that doctrine in this case by precedent from the U.S. Court of Appeals for the Fifth Circuit, to which this case is appealable absent a contrary stipulation by the parties. See I.R.C. § 7482(b)(1)(B). 22 The Fifth Circuit recently concluded, in reference to the Acknowledgment requirement, that “[t]he doctrine of substantial compliance may support a taxpayer’s claim where he or she acted in good faith and exercised due diligence but nevertheless failed to meet a regulatory requirement. We cannot accept the argument that substantial compliance satisfies statutory requirements.” Izen v. Commissioner, 38 F.4th 459, 462 (5th Cir. 2022) (footnote omitted), aff’g 148 T.C. 71 (2017).

Finally, we note that there is no “reasonable cause” exception to the Acknowledgment requirement, as there is to the requirement for qualified appraisals. See I.R.C. § 170(f)(11)(A)(ii)(II); Campell, T.C.

Memo. 2020-41, at *28 n.16 (noting that the reasonable cause exception for qualified appraisals does not apply to the Acknowledgment requirement). We therefore will grant summary judgment to the Commissioner on the issue of fully disallowing IQH’s 2014 charitable contribution deduction. 23 See I.R.C. § 170(f)(8)(A) (“No deduction shall be allowed under subsection (a) for any contribution of $250 or more unless the taxpayer substantiates the contribution by [an Acknowledgement].”); Treas. Reg. § 1.170A-13(f)(1) (“No deduction is allowed under section 170(a) for all or part of any contribution of $250 or more unless the taxpayer substantiates the contribution with [an Acknowledgment].” (Emphasis added.)).

IV. NOLs The Code generally defines an NOL for a given tax year as the excess of the taxpayer’s allowable deductions (other than the NOL

(2) Amount of carrybacks and carryovers.— The entire amount of the net operating loss for any taxable year . . . shall be carried to the earliest of the taxable years to which (by reason of paragraph (1)) such loss may be carried. The portion of such loss which shall be carried to each of the other taxable years shall be the excess, if any, of the amount of such loss over the sum of the taxable income for each

Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-136, § 2303(b), 134 Stat. 281, 353–54 (2020). Henceforth, all references to and citations of section 172 will be to the relevant provisions as in effect during 2010–14.

....

(3) Election to waive carryback.—Any taxpayer entitled to a carryback period under paragraph (1) may elect to relinquish the entire carryback period with respect to a net operating loss for any taxable year. Such election shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extensions of time) for filing the taxpayer’s return for the taxable year of the net operating loss for which the election is to be in effect. Such election, once made for any taxable year, shall be irrevocable for such taxable year.

Temporary Treasury Regulation § 301.9100-12T(d) provides the following directions for making the NOL carryback waiver election: Unless otherwise provided in the return or in a form accompanying a return for the taxable year, the elections described in paragraphs (a) and (c) [including the election under section 172(b)(3)] . . . shall be made by a statement attached to the return (or amended return) for the taxable year. The statement required when making an election pursuant to this section shall indicate the section under which the election is being made and shall set forth information to identify the election, the period for which it applies, and the taxpayer’s basis or entitlement for making the election.

In the Forms 1120 that IQH filed for tax years 2010–13, line 11 of Schedule K instructed: “If the corporation has an NOL for the tax year and is electing to forgo the carryback period, check here.” Moreover, the Instructions for those Forms 1120 stated the following with respect to line 11 of Schedule K: “To [elect to waive the NOL carryback], check the box on line 11 and file the tax return by its due date, including extensions. Do not attach the statement described in Temporary Regulations section 301.9100-12T.” Therefore, strict compliance with Temporary Treasury Regulation § 301.9100-12T(d) (which includes the qualifier “Unless otherwise provided in the return or in a form [*17] accompanying a return for the taxable year”) would have required IQH to check the box on line 11 of Schedule K. 26 IQH argues that it substantially complied with the requirements for making the section 172(b)(3) election for each of its 2010–13 tax years because (1) at all times it intended to forgo the carrybacks, (2) it consistently carried forward its 2010–13 NOLs on subsequent years’ returns, and (3) it never filed for a refund based on a carryback of any of those NOLs. However, this Court and the Fifth Circuit have held that for purposes of the NOL carryback waiver, substantial compliance requires some unequivocal manifestation of the taxpayer’s intent to irrevocably forgo the potential benefits of the carryback. See Young v. Commissioner, 783 F.2d 1201, 1205–06 (5th Cir. 1986), aff’g 83 T.C. 831 (1984); Young, 83 T.C. at 839. The Fifth Circuit explained the matter as follows: The legislative history [of the Tax Reform Act of 1976] indicates that Congress intended to give taxpayers an option to exclusively carry forward net operating losses “in lieu of” first carrying them back as would otherwise be required. In providing this choice, Congress made it irrevocable; moreover, Congress required that it be made within the time allowed for filing the return in the year of loss. The statutory intent was to require the taxpayer, when making the election, to assume the risk that a carryback would later prove preferable. For example, if a taxpayer were to experience losses in succeeding years rather than the profits he expected when making the election, the irrevocability of his choice would prevent him from later changing course and carrying back a net operating loss to prior years as he might wish to do absent the election. The essence of the statute, then, is that a taxpayer unequivocally communicates his election and binds himself to his decision concerning the best use of his net operating loss.

IQH urges that no harm was done because in fact it did not “later change course” to claim a carryback of any of the 2010–13 NOLs.

However, if we were to hold that taxpayers may effectively elect the carryback waiver without any contemporaneous manifestation of intent, we would render the election eminently abusable: Taxpayers could “wait and see” whether a carryback or, instead, a carryforward would be preferable and choose accordingly. See Young, 83 T.C. at 839 (“[A]ny other rule ‘would leave room for the taxpayer to argue later that * * * [he] had never intended to make an election.’” (second and third alterations in original) (quoting Knight-Ridder Newspapers, Inc. v. United States, 743 F.2d 781 (11th Cir. 1984))). IQH protests that the Young decisions were made at a time before Form 1120 contained a check-the-box mechanism for the carryback waiver and so must be revisited because there is no longer any scope for “substantial compliance” as envisioned by the courts in Young. That is, the box on line 11 of Schedule K is either checked or it is not. However, IQH overlooks the possibility of substantially complying with Temporary Treasury Regulation § 301.9100-12T(d) by attaching the statement described therein, rather than by checking the box.

IQH contends that the “essence” of the carryback waiver, as indicated by the legislative history of the Tax Reform Act of 1976 (which introduced the waiver election, see Tax Reform Act of 1976, Pub. L. No. 94-455, § 806(c), 90 Stat. 1520, 1598), is to help taxpayers best use their NOLs. Thus, IQH concludes, the requirements for the carryback waiver should be construed to be as taxpayer friendly as possible. However, we must give effect to Congress’s official pronouncement that the election “shall be made in such manner as may be prescribed by the Secretary” and “shall be irrevocable.” I.R.C. § 172(b)(3). If Congress wanted to make the carryback waiver as taxpayer friendly as possible, it would not have made the election irrevocable.

Finally, IQH argues that there is a genuine dispute of fact relevant to whether we should apply the doctrine of equitable reformation to retroactively deem IQH to have checked the box on line 11 of Schedule K of its 2010–13 Forms 1120. Under that doctrine, courts in their discretion may admit extrinsic evidence to alter a document (typically a contract) in certain circumstances, such as when both parties were mistaken as to the document’s contents or when one party fraudulently misrepresented those contents to the other party.

See Woods v. Commissioner, 92 T.C. 776 (1989) (equitably reforming a [*19] Form 872–A, Special Consent to Extend the Time to Assess Tax, to correct a drafting error made by the IRS); Restatement (Second) of Contracts §§ 155, 166 (Am. L. Inst. 1981). 27 IQH alleges that it informed its certified public accountant (CPA) of its intention to waive the carryback period each year between 2010 and 2013 but that the CPA mistakenly failed to check the box on line 11 of each year’s Schedule K. However, this Court has repeatedly charged taxpayers with constructive knowledge of the contents of their returns and with the ultimate responsibility for reviewing those returns before filing. See, e.g., Allen v. Commissioner, 128 T.C. 37, 41 (2007) (“Taxpayers are charged with the knowledge, awareness, and responsibility for their tax returns.”). Therefore, even if IQH were to present convincing evidence of scrivener’s errors, we would decline to equitably reform the Forms 1120 in question.

We accordingly will grant summary judgment to the Commissioner insofar as he contends that IQH’s reported 2014 NOL deduction should be reduced by the portions of the $415,755 NOL from 2010 and the $1,785,353 NOL from 2011 that should have been carried back to earlier years. However, we note that the exact amounts of the 2010 and 2011 NOLs absorbed by the required carrybacks cannot be determined without further proceedings because IQH’s 2008 and 2009 returns are not in evidence.

As for the 2012 NOL carryforward to 2014, 28 the Commissioner has submitted no evidence to support his contention that IQH’s 2012 loss did not materialize. That loss is premised on an inventory writeoff that the Commissioner asserts was improper. Mr. Gupta has declared that the writeoff was “correctly reported” and “documented in contemporaneous records.” Because there is a genuine dispute of fact on this issue, we will deny the Commissioner summary judgment as to the amount of the 2012 NOL carryforward to 2014.

However, IQH’s 2009 tax year is not before us, so we lack jurisdiction to make any ruling with respect to that year. See I.R.C. § 6214(b); Farmer v. Commissioner, T.C. Memo. 1998-327, 76 T.C.M. (CCH) 435, 437.

The Commissioner also asks us to sustain his determination of an accuracy-related penalty under section 6662(a). The Commissioner’s grounds for this penalty are an underpayment of tax required to be shown on a return and attributable to (1) a substantial understatement of income tax, I.R.C. § 6662(b)(2), or alternatively (2) negligence or disregard of rules or regulations, I.R.C. § 6662(b)(1). IQH argues that it does not have an underpayment to which such penalties would apply and that even if it did, it has reasonable cause for its return positions.

A taxpayer can avoid the penalties under section 6662(a) and (b)(1) and (2) to the extent it can show that it had reasonable cause for the underpayment and that it acted in good faith. I.R.C. § 6664(c)(1).

Reasonable cause requires that the taxpayer have exercised 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 may be established by showing reliance on the advice of an independent, competent professional. Id. In support of the reasonable cause and good faith defense, IQH attached a Declaration of Mr. Gupta and indicated that it intended to introduce testimony from various corporate representatives and outside accountants to establish that it exercised ordinary business care and prudence and relied on the advice of its CPA in preparing its 2014 return. We agree that such testimony, if found credible at trial, could counter the Commissioner’s penalty determination. For this reason, we conclude that IQH’s ability to rely on the reasonable cause and good faith defense to reduce or eliminate the accuracy-related penalty under section 6662(a) presents a genuine dispute of material fact that is not susceptible to resolution by summary judgment.

Barring settlement, this case will need to go to trial on the inventory writeoff deductions, the NOL adjustments, and the accuracy- [*21] related penalty. Under these circumstances we will grant in part and deny in part the Commissioner’s Motion for Summary Judgment.

To reflect the foregoing, An appropriate order will be issued.