Chiu v. Commissioner

T.C. Memo. 1997-199

UNITED STATES TAX COURT

DAVID W. CHIU, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5197-95. Filed April 30, 1997.

David W. Chiu, pro se.

Jason M. Silver, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GALE, Judge: Respondent determined a deficiency in

petitioner's 1990 Federal income taxes in the amount of

$15,211.20 and additions to tax under section 6651(a)1 and

1
Unless otherwise noted, section references are to the
Internal Revenue Code in effect for the year in issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
 - 2 -

section 6654(a) in the amounts of $3,081.80 and $790.55,

respectively.

After concessions, the issues for decision are as follows:

(1) Whether funds withdrawn by petitioner from a qualified

individual retirement account (IRA) are includable in his gross

income, and if so, whether petitioner is subject to a 10-percent

additional tax on early distributions under section 72(t). We

hold that the funds are includable and that petitioner is subject

to the 10-percent additional tax under section 72(t).

(2) Whether petitioner is allowed deductions for moving expenses,

real estate taxes, home mortgage interest, charitable

contributions, and trade or business expenditures. We hold that

petitioner has substantiated the deduction for home mortgage

interest in the amount of $7,414.77. We hold that the remainder

of the aforementioned deductions are not allowed. (3) Whether

petitioner is liable for an addition to tax for failure to timely

file his 1990 Federal income tax return under section 6651(a)(1).

We hold that he is. (4) Whether petitioner is liable for an

addition to tax for failure to pay estimated income tax under

section 6654(a). We hold that he is.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. We

incorporate by this reference the stipulation of facts and
 - 3 -

attached exhibits. At the time of filing the petition,

petitioner resided in San Gabriel, California.

Petitioner was born in China in 1950 and came to the United

States in 1970. Petitioner received a bachelor of science degree

in engineering in the United States and, after graduation, took

graduate courses in business and corporate finance.

In 1986, petitioner commenced employment with Varian

Associates, Inc. (Varian), in Palo Alto, California.

Petitioner's 1990 Federal income tax return correctly lists his

W-2 wage income for the 1990 taxable year from Varian as $35,181,

from which amounts were withheld for Federal income tax purposes.

In the fall of 1990, petitioner moved from San Francisco to

Los Angeles where he remained for approximately 3 weeks before

moving to Hong Kong. Petitioner arrived in Hong Kong on November

28, 1990. Petitioner did not move to Hong Kong in connection

with a job transfer or to accept new employment and did not

become an employee of any business while in Hong Kong. At the

time petitioner moved to Hong Kong, he intended to start a

business of his own, although he did not have specific plans to

start any particular business. On his 1990 Federal income tax

return, petitioner claimed a deduction for moving expenses in

connection with the moves to Los Angeles and to Hong Kong in the

amount of $3,184, of which $500 was estimated as the cost of his

move to Los Angeles.
 - 4 -

On November 28, 1990, petitioner withdrew $17,558 from a

U.S. bank, representing money from an IRA established on his

behalf by Varian (Varian IRA). On December 18, 1990, petitioner

transferred $23,000 from the Bank of America to an account at a

branch of the Hong Kong & Shanghai Banking Corp. located in Hong

Kong.

While in Hong Kong, petitioner undertook steps to develop a

computer software package designed to handle currency exchange

transactions. Petitioner intended to market the software package

once developed. On Schedule C of his 1990 Federal income tax

return, petitioner claimed a deduction of $2,618 consisting of

expenses for advertising, bad debts, commissions and fees,

depreciation and/or section 179 expenses, and meals and

entertainment. Petitioner returned to the United States for

approximately 1 month in 1991 in order to purchase a computer

system for use in the development of the software package.

Petitioner returned to the United States on a permanent basis in

October of 1992.

Petitioner signed his 1990 Federal income tax return on

April 1, 1995, and the return was stamped received at the

Internal Revenue Service Center in Fresno, California, on July 8,

1995. On his 1990 Federal income tax return, petitioner reported

his filing status as single and claimed Schedule A deductions in

the amount of $2,046 for State and local income taxes, $1,130 for
 - 5 -

real estate taxes, $5,760 for home mortgage interest, and $2,568

for charitable contributions, in addition to the previously

outlined Schedule C deductions totaling $2,618 and the deduction

for moving expenses in the amount of $3,184.

OPINION

There are two evidentiary matters we must address at the

outset. First are the objections raised by respondent in

paragraphs 4 and 5 of the stipulation of facts to the admission

of Joint Exhibits 3-C and 4-D. Joint Exhibit 3-C consists of a

copy of a "Statement of AssetVantage Account" from the Hong Kong

& Shanghai Banking Corp. dated December 1, 1990, bearing

petitioner's name and an account number (AssetVantage Account).

Joint Exhibit 4-D consists of a copy of a transfer payment order

dated December 18, 1990, from the Bank of America to the Hong

Kong & Shanghai Banking Corp., showing a transferred amount of

$23,000, listing David W. Chiu as remitter and David Woon Chiu as

beneficiary, to the benefit of an account number identical to

that shown on the AssetVantage Account. Respondent objects to

the admissibility of the handwritten marks on Exhibit 3-C on the

grounds of relevance, authenticity, completeness, and hearsay.

Respondent also objects to the admissibility of the entire

document comprising Exhibit 3-C on the ground of hearsay.

Respondent objects to the admissibility of Exhibit 4-D on the

grounds of relevance and hearsay. We hereby overrule
 - 6 -

respondent's objections, except as to the handwritten marks on

Joint Exhibit 3-C, and admit Joint Exhibit 3-C, excluding the

handwritten marks thereon, and Joint Exhibit 4-D.2

The second evidentiary matter is the admissibility of the

following evidence offered by petitioner in his post-trial

request to reopen the record:

(1) A document denominated "Marine Midland Bank"
and "Corporate Data" listing the address and certain
financial information for Marine Midland Bank (marked
as petitioner's Exhibit 8);

(2) A document denominated "Annual Statement of
Account for 1990" and "Substitute Form 1098", listing
the recipient's/lender's name as Bank of America and
the payer's/borrower's name as David Woon Chiu or
Shere-Ling Yau, and showing an account number (marked
as petitioner's Exhibit 9); and,

(3) Copies of receipts bearing the logo of
"Goodwill Industries", and dated within the 1990
calendar year, with the names of David Chiu, or David
Chiu and Shere Yau, listed and a description of various
items (marked as petitioner's Exhibit 10).

Respondent objects to the admission of the foregoing on the

grounds of relevance, authentication, hearsay, and completeness.

We conclude that respondent is not prejudiced by the reopening of

the record for the admission of the exhibits.3 We overrule

2
We note that admission of these exhibits does not, in any
event, enable petitioner to prevail on the issue to which they
relate.
3
Reopening the record for submission of additional proof is
within the discretion of the Court. Zenith Radio Corp. v.
Hazeltine Research, Inc., 401 U.S. 321, 331 (1971).
 - 7 -

respondent's objections regarding Exhibit 94 and sustain

respondent's objections regarding Exhibits 8 and 10.5

IRA

The first issue we must decide is whether the $17,558

petitioner withdrew from the Varian IRA is includable in gross

income, and if so, whether petitioner is subject to the 10-

percent additional tax on early distributions under section

72(t). The parties do not dispute that petitioner withdrew

$17,558 on November 28, 1990, from a qualified IRA. Petitioner

testified that he transferred the entire amount on December 18,

1990, to an account at the Hong Kong & Shanghai Banking Corp.,

which, he argues, should qualify him to exclude the withdrawn

amounts from income as a rollover contribution. Respondent first

disputes whether such a transfer has been demonstrated by the

evidence but more importantly contends that a valid rollover did

not occur in any event because the transfer was to a foreign

bank.

4
The Substitute Form 1098 marked as Exhibit 9 bears the same
account number as that written on six of petitioner's checks
offered by him at trial to substantiate his mortgage interest
payments and received into evidence without objection by
respondent.
5
Respondent's hearsay objections to Exhibits 8 and 10 are
well taken, and there was no advance notice of the evidence to
respondent as required for the invocation of the hearsay
exception under rule 803(24) of the Federal Rules of Evidence.
 - 8 -

The documentary evidence regarding the transfer does not

entirely corroborate petitioner's testimony. A copy of a

"Statement of AssetVantage Account" appended to the parties'

stipulation indicates that petitioner was the holder of such an

account located at the "Hong Kong Office" branch and gives the

account number and other account information as of December 1,

1990. Also appended to the stipulation is a copy of a Bank of

America Transfer Payment Order showing a transfer on December 18,

1990 of $23,000 by petitioner to the account number in

petitioner's name at the Hong Kong branch office of the Hong Kong

& Shanghai Banking Corp., described as an AssetVantage Account.

Thus we conclude that petitioner had such an account located at

the Hong Kong branch of the Bank and made a transfer to it of

$23,000 on December 18, 1990. Petitioner did not explain the

difference between the IRA withdrawal of $17,558 and the

subsequent transfer of $23,000.

Even if we were to assume that the $23,000 transfer

consisted in part of the Varian IRA proceeds, petitioner has

nonetheless failed to show that the transfer was made to another

qualified IRA, as required for the withdrawn amounts to qualify

as a rollover contribution. Sec. 408(d)(3)(A)(i). Section

408(a) defines an IRA as "a trust created or organized in the

United States for the exclusive benefit of an individual or his

beneficiaries" (emphasis added) which meets certain other
 - 9 -

requirements set forth in that section.6 Regulations under

section 408 further clarify that such a trust "must be maintained

at all times as a domestic trust in the United States." Sec.

1.408-2(b), Income Tax Regs.7

Petitioner maintains that the amounts withdrawn from his

Varian IRA were transferred to an account at the Hong Kong &

Shanghai Banking Corp., located in Hong Kong. Even if we were to

assume that the account at the Hong Kong bank was set up as a

trust or a custodial account8 (and petitioner has provided no

evidence in that regard), petitioner's rollover claim would fail

because he has not shown that the transfer was to a domestic

entity. The situs of a trust is generally defined to be the

place of performance of the active duties of the trustee, and

where the settlor selects a bank as the trustee, the location of

the bank has been held to be the situs of the trust. 90 C.J.S.

Trusts, sec. 160(b) at 12 (1955). Thus, the available evidence

strongly suggests that the situs of any trust to which the Varian

IRA proceeds were transferred is the Hong Kong branch office of

6
Sec. 408(h) further provides that a "custodial account" may
be treated as a "trust" for purposes of sec. 408, but such
custodial account must also be maintained in the United States.
7
In certain circumstances, a tax-free rollover from an IRA
may also be made into a qualified pension or profit-sharing plan.
See sec. 408(d)(3)(A)(ii). However, a qualified plan likewise
denotes a "trust created or organized in the United States".
Sec. 401(a).
8
See supra note 6.
 - 10 -

the Hong Kong & Shanghai Banking Corp. Petitioner argued that

the Hong Kong & Shanghai Banking Corp. owns Midland Bank, a U.S.

bank, but this factor does not affect our conclusion regarding

the probable situs of any trust created in connection with the

IRA funds transfer. On this record, we conclude that petitioner

has failed to show that the $17,558 that he withdrew from the

Varian IRA was paid into a trust or custodial account created and

maintained in the United States, as required by section 408(a)

and (d)(3)(A)(i), and section 1.408-2(b), Income Tax Regs., and

therefore such amount is includable in his gross income.

Amounts paid or distributed out of an IRA must be included

in gross income "in the manner provided under section 72". Sec.

408(d)(1). A 10-percent tax on "early distributions" generally

applies where a taxpayer receives a distribution from a qualified

retirement plan which is includable in his gross income. Sec.

72(t)(1). For purposes of the 10-percent tax, a qualified

retirement plan includes an IRA described under section 408(a).

Sec. 4974(c)(4). Although section 72(t)(2) sets forth certain

exceptions to the 10-percent tax on early distributions,

petitioner has presented no evidence to suggest he fits within

any of these exceptions. Therefore, we find that petitioner is

liable for the 10-percent additional tax under section 72(t).
 - 11 -

Moving Expenses

Petitioner claimed $3,184 for moving expenses associated

with moves to Los Angeles and to Hong Kong, of which $500 is

estimated to relate to his move to Los Angeles.9 Respondent

disputes whether petitioner has substantiated payment of the

claimed expenditures and whether petitioner has met the

requirements for deductibility under section 217.

Respondent's position regarding the failure to substantiate

these expenses is well taken. Other than the bare numbers

claimed on the Form 3903F attached to his return, petitioner

provided no evidence that would substantiate these amounts or

offer a basis on which the Court could make an estimate under the

Cohan10 rule, notwithstanding the fact that the Court left the

record open an additional 30 days after the trial for petitioner

to submit such evidence and, indeed, reopened the record for

receipt of evidence on other matters. Moreover, with respect to

the evidence that petitioner did provide, such evidence either

demonstrates that the requirements of section 217 were not met

(in the case of certain pre-move househunting expenses claimed on

the return) or is insufficient to show that the requirements of

9
Some portion of the expenses claimed was for "Pre-move
Househunting Expenses and Temporary Quarters", but the exact
amount cannot be ascertained because of the haphazard placement
of figures on the Form 3903F submitted with petitioner's return.
10
Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).
 - 12 -

section 217 have been satisfied (in the case of all remaining

moving expenses claimed).

With respect to the pre-move househunting expenses claimed,

such expenses are deductible only if incurred after the taxpayer

has obtained employment at the new location. If the new work is

self-employment, the taxpayer is treated for this purpose as

having obtained new employment when substantial arrangements to

commence such work have been made. Sec. 217(b)(1)(C), (f)(2).

For these purposes, the new principal place of work for

petitioner would be Hong Kong. In light of petitioner's

testimony that at the time of his move to Hong Kong he had no

specific plans to begin any particular business, we conclude that

petitioner had not made "substantial arrangements" within the

meaning of section 217(f)(2) at the time of the move, and

consequently he has failed to show his entitlement to a deduction

for any pre-move househunting expenses.

As for petitioner's claimed deduction for expenses of

temporary quarters, the record is devoid of any substantiation of

the actual expenditures for such quarters, or of any evidence

from which the Court could determine the point in time (after

arrival) when substantial arrangements to commence work had been

made so that the expenditures might be eligible for deduction.

Sec. 217(b)(1)(D), (f)(2). Thus, petitioner has failed to show

his entitlement to a deduction for temporary quarters expenses.
 - 13 -

With respect to the remaining amounts claimed on the return

as moving expenses, since petitioner claims his move to Hong Kong

was in connection with the commencement of self employment,

section 217(c)(2)(B) would require that petitioner perform

services as a self-employed individual on a full-time basis, in

the general location of Hong Kong, for at least 78 weeks of the

24-month period following his arrival there, of which at least 39

weeks must occur during the first 12 months. Although petitioner

was present in Hong Kong for a sufficient period to meet the 78-

week requirement, the evidence falls far short of establishing

that he was working full time for 39 weeks during the first 12

months. Petitioner testified that he returned to the United

States "sometime" in 1991 for approximately 1 month to purchase a

computer system, and that he started his business "shortly" after

his return to Hong Kong. On this evidence, it follows that

petitioner necessarily failed the 39-week test if his return to

the United States was much later than late February 1991. In any

event, the evidence presented by petitioner, either at trial or

in the opportunities presented to him post-trial, fails to

demonstrate that he met the requirements of section 217.

Accordingly, petitioner is not entitled to any deduction for

moving expenses because of both a failure to substantiate actual
 - 14 -

expenditures and a failure to demonstrate that he met the

requirements of section 217.11

Real Estate Taxes

Petitioner claimed real estate taxes of $1,130 on Schedule A

of his 1990 return, which respondent disallowed for failure to

substantiate. Section 164(a)(1) allows a deduction for State and

local real property taxes paid or accrued within the taxable

year. Petitioner has failed to produce any evidence to show that

he paid the real property taxes claimed on his return. In fact,

petitioner indicated in his testimony that he was uncertain

whether, and to what extent, he or his ex-wife paid the 1990 real

estate taxes. We conclude that petitioner has failed to

substantiate the payment of real estate taxes in 1990 and is

therefore not entitled to any deduction for them.

Mortgage Interest

Petitioner claimed a deduction for mortgage interest on

Schedule A of his 1990 return, which respondent challenges on the

grounds that petitioner has failed to substantiate the payment of

any mortgage interest or to provide sufficient evidence from

which a reasonable estimate could be made.

11
With respect to the $500 in expenses claimed with respect
to the move from San Francisco to Los Angeles, petitioner has not
shown that he commenced new employment in Los Angeles or that
such employment continued for the minimum periods required under
sec. 217(c)(2).
 - 15 -

The amount of mortgage interest claimed by petitioner as a

deduction on the return was $5,760.12 As substantiation,

petitioner offered into evidence, and respondent did not object

to, six canceled checks that petitioner testified were written to

make payments on his home mortgage to Bank of America. The

checks had only petitioner's name printed on them, were signed by

petitioner, and were made payable to the Bank of America. The

six checks bore the following dates and amounts:

January 31, 1990 $1,894.48
April 1, 1990 1,894.48
May 2, 1990 914.48
June 1, 1990 949.48
July 6, 1990 1,292.53
August 5, 1990 1,128.53

Pursuant to a post-trial order to reopen the record,

petitioner's Exhibit 9, a document entitled "Annual Statement of

Account for 1990" from the Bank of America as lender, was

received into evidence.13 The statement contains an account

number matching the last seven digits of the number handwritten

on the top of each check admitted into evidence and lists

petitioner and another individual (presumably petitioner's wife)

as borrowers. The statement further indicates it is a

12
Although petitioner's trial memorandum listed the claimed
mortgage interest deduction as $3,176, we believe this figure
resulted from a clerical error. Petitioner's 1990 return claimed
a deduction for State and local income and real estate taxes of
$3,176 and a deduction for mortgage interest of $5,760. The
trial memorandum mistakenly reversed these figures.
13
See discussion supra p. 7.
 - 16 -

"Substitute Form 1098". We accordingly conclude that the

document is a Form 1098 covering petitioner's mortgage loan

account activity in 1990.

The Form 1098 lists the amount of each monthly mortgage

payment paid in 1990 and a breakdown of each payment into

principal versus interest. The Form 1098 also shows that no

amounts were escrowed for any purpose. The Form 1098 thus

provides evidence as to the amount of interest paid each month.

On this record, we are satisfied that petitioner is entitled

to a deduction for some mortgage interest. According to

petitioner's testimony, he was uncertain regarding the extent to

which his wife may have made mortgage payments. He testified

that he thought she paid half, but was uncertain on this point.

He also testified that he and his wife sometimes split up payment

of the mortgage and real estate taxes.14

Given that the Form 1098 contains the name of another

individual (presumably petitioner's wife), we conclude on this

record that petitioner is not entitled to deduct half of the

mortgage interest shown on the Form 1098, as he now contends on

brief,15 but instead is entitled to a deduction for mortgage

14
We conclude elsewhere that petitioner is not entitled to
any deduction for real estate taxes, due to a lack of
substantiation. See supra p. 13.
15
Petitioner claimed $5,760 in mortgage interest on his 1990
return. See supra note 12. Petitioner then offered six checks
(continued...)
 - 17 -

interest in an amount that we can estimate, under the Cohan rule,

based upon the six checks drawn on petitioner's own account and

the Form 1098 received into evidence. Based upon the record, we

conclude that petitioner has provided adequate proof of mortgage

payments for the 6 months covered by the checks. There is

insufficient proof for the remaining months. Petitioner's

checks, when compared to the total monthly payments listed on

the Form 1098, indicate that he paid varying portions of the

total mortgage payments, ranging from 100 percent to just under

50 percent, as follows:

Payment Total Payment By Petitioner's
Due Date Payment Petitioner Percentage
Feb.1, 1990 $1,894.48 $1,894.48 100%
Apr.1, 1990 1,894.48 1,894.48 100%
May 1, 1990 1,894.48 914.48 48.27%
June 1, 1990 1,894.48 949.48 50.12%
July 1, 1990 2,256.53 1,292.53 57.28%
Aug.1, 1990 2,256.53 1,128.53 50.01%

15
(...continued)
into evidence totaling $8,073.98, which he testified represented
payments on his mortgage. Respondent did not object to the
admission of the checks into evidence. Respondent now contends
on brief that the amount of mortgage interest at issue is limited
to the amount claimed in petitioner's trial memorandum.
Under Rule 41(b), issues not raised by the pleadings which
are nonetheless tried by express or implied consent of the
parties shall be treated in all respects as if they had been
raised in the pleadings. The issue as to the amount of the
mortgage interest paid by petitioner was raised at trial upon
petitioner's offer into evidence of six checks totaling $8,073.98
that petitioner testified were payments for his mortgage. The
admission of such checks into evidence, without limitation or
objection by respondent, placed the amount in issue by implied
consent, and we treat the higher amount as if raised in the
pleadings, pursuant to Rule 41(b).
 - 18 -

The Form 1098 also indicates the amount of each monthly

payment attributable to interest. Therefore, by multiplying the

percentage of each mortgage payment paid by petitioner times the

interest component of the payment, one can derive the amount of

interest appropriately treated as paid by petitioner, as follows:

Payment Due Interest Petitioner's Petitioner's
Date Component of Percentage Interest
Payment Payment
Feb. 1,1990 $1,719.51 100% $1,719.51
Apr. 1,1990 1,717.13 100% 1,717.13
May 1,1990 1,715.93 48.27% 828.28
June 1,1990 1,714.72 50.12% 859.42
July 1, 1990 2,135.29 57.28% 1,223.09
Aug. 1, 1990 2,134.26 50.01% 1,067.34
$7,414.77

Therefore, using our discretion under the Cohan rule, we

find that petitioner made total interest payments of $7,414.77 in

1990. Petitioner is entitled to a deduction in that amount.

Charitable Contributions

The next issue for decision concerns petitioner's claimed

deduction for charitable contributions, which respondent

disallowed for lack of substantiation. On his return, petitioner

claimed a deduction for gifts to charity in the amount of $2,568,

of which $2,132 was listed under contributions by cash or check

and $436 was listed under contributions by other than cash or

check. To substantiate the deduction, petitioner testified that

the claimed contributions were donations to "church and Goodwill,

stuff like that". When questioned how he arrived at the figure

of $2,568, petitioner testified that he based it on amounts
 - 19 -

claimed on his Federal income tax returns for prior years. We

accordingly disregard the $2,568 figure in deciding the amount of

any charitable deduction to which petitioner may be entitled.

Section 170(a)(1) provides that a charitable deduction is

allowed "only if verified under regulations prescribed by the

Secretary." For contributions by cash or check, the regulations

require the taxpayer maintain for each contribution one of the

following: (i) a canceled check, (ii) a receipt, letter or other

communication from the donee, showing the name of the donee, the

date of the contribution and the amount of the contribution, or

(iii) other reliable written records showing the name of the

donee, the date of the contribution, and the amount of the

contribution. Sec. 1.170A-13(a), Income Tax Regs. Petitioner

did not produce any evidence, beyond his vague and incomplete

testimony, to substantiate the $2,132 for claimed contributions

of money. Accordingly, he has failed to substantiate the claimed

money contribution and is not entitled to a deduction therefor.

For contributions of property other than money, the

regulations require that the taxpayer maintain a receipt from the

donee showing the name of the donee, the date and location of the

contribution, and a description of the contributed property in

sufficient detail based upon the circumstances. Sec. 1.170A-

13(b)(1), Income tax Regs. The receipts submitted after trial by

petitioner to substantiate the $436 for claimed contributions are
 - 20 -

inadmissable hearsay.16 Fed. R. Evid. 802. Therefore, based

upon the record, petitioner has failed to substantiate his

claimed deduction for contributions of property, and the

deduction is accordingly denied.

Schedule C Expenses

Petitioner claimed a deduction totaling $2,618 for expenses

listed on Schedule C of his return, in columns17 denominated

"Advertising", "Bad debts * * * ", "Commissions and fees",

"Depreciation and section 179 expense deduction * * * ", and

"Meals and entertainment". At trial, petitioner testified that

these expenses were "basically * * * all R and D", incurred for

"a lot of research" that petitioner undertook in an effort to

develop a computer software package. Petitioner also testified

that the Schedule C expenses were incurred in connection with a

"market survey" undertaken shortly after his arrival in Hong

Kong.

Respondent proposes to disallow any deduction for the

Schedule C expenses on the grounds that petitioner has failed

either to substantiate that the expenses were paid or incurred or

to demonstrate that they were paid or incurred in carrying on a

trade or business as required by section 162(a).

16
See supra note 5.
17
Certain dollar figures on the Schedule C were typed too
far from any column category to permit a determination of the
category under which petitioner meant to classify the expense.
 - 21 -

Other than the Schedule C, prepared over 4 years after the

period in question, petitioner offered no documentary evidence to

corroborate his testimony that the claimed expenses were paid.

Petitioner offered no testimony that would connect several of the

expense categories, such as bad debts, commissions and fees,

depreciation and section 179 expense, and meals and

entertainment, to the research activities he claimed were being

undertaken and which provided the rationale for claiming expense

treatment on the Schedule C. On this record, we conclude that

petitioner has failed to substantiate that the claimed expenses

were paid or incurred.

In addition, petitioner offered no evidence beyond his self-

serving testimony that these expenses were paid "in carrying on"

a trade or business within the meaning of section 162(a).

Petitioner reported no gross receipts on the Schedule C and

offered no documentary evidence whatsoever of the conduct of a

business. Petitioner testified that he did not have plans to

start a specific business when he arrived in Hong Kong, and given

that the parties have stipulated that his arrival occurred in

November 1990, the available evidence suggests that it was

unlikely that petitioner was actually engaged "in carrying on any

trade or business" for purposes of section 162(a) within the 1990

taxable year. Cf. Commissioner v. Groetzinger, 480 U.S. 23, 35

(1987). On this record, we conclude that petitioner has failed
 - 22 -

to demonstrate that the claimed Schedule C expenses were paid or

incurred "in carrying on any trade or business" within the

meaning of section 162(a).

Although neither party argued the point on brief, we believe

that petitioner's claim that these expenses were for "research

and development" warrants our consideration whether the expenses

may be deductible under section 174 as "research and

experimental" expenditures. Expenditures deductible under

section 174 need only be paid or incurred "in connection with"

the taxpayer's trade or business, whereas expenses deductible

under section 162 must be paid or incurred "in carrying on" such

trade or business. The section 174 requirement is less strict.

See Snow v. Commissioner, 416 U.S. 500 (1974); Diamond v.

Commissioner, 92 T.C. 423, 439 (1989), affd. 930 F.2d 372 (4th

Cir. 1991); Green v. Commissioner, 83 T.C. 667, 686-687 (1984).

Thus, section 174 might require a lesser showing than section 162

of the trade or business activities actually conducted by

petitioner in 1990. Nonetheless, we conclude that section 174

does not help petitioner because the record in this case does not

support the conclusion that the claimed expenses constitute

section 174 expenditures.

Research and experimental expenditures generally refer to

research and development costs in the experimental or laboratory

sense. Sec. 1.174-2(a)(1), Income Tax Regs. The term includes
 - 23 -

generally all costs associated with the actual development of a

new product, but not expenses for "efficiency surveys, management

studies, consumer surveys, advertising, or promotions." Id.

Thus, the expenses claimed by petitioner for "advertising" and a

"market survey" on their face do not qualify as research and

experimental expenditures under section 174. As to the remaining

expenses--for bad debts, commissions and fees, depreciation and

section 179 expense, and meals and entertainment--petitioner

offered no evidence to show how any of his expenditures of this

nature was connected with the research and development of a

computer software package. Accordingly, we conclude on this

record that petitioner has failed to show eligibility for a

deduction under section 174.

Failure To File

Respondent also determined that petitioner is liable for an

addition to tax under section 6651(a)(1) for failure to file his

1990 return by its due date. The parties have stipulated that

the 1990 return was signed by petitioner on April 1, 1995, and

stamped as received by respondent on July 8, 1995. Therefore,

petitioner is liable for the addition unless he can show that the

failure to timely file was due to reasonable cause, and not to

willful neglect, and he bears the burden of proving both. United

States v. Boyle, 469 U.S. 241, 245 (1985). A showing of

reasonable cause requires that the taxpayer demonstrate that he
 - 24 -

exercised ordinary business care and prudence, but nevertheless

was unable to file the return within the prescribed time. Sec.

301.6651-1(c)(1), Proced. & Admin. Regs.; see also United States

v. Boyle, supra at 246. Petitioner relies on two arguments to

establish reasonable cause.

First, petitioner claims that he based his decision not to

file on brochures he acquired before leaving the United States.

Petitioner described one of the brochures as covering U.S.

citizens living abroad and advising of an exemption from filing

for such citizens making less than $70,000 per year. Petitioner

has not produced the brochure. We take judicial notice of

Internal Revenue Publication 54 entitled "Tax Guide for U.S.

Citizens and Resident Aliens Abroad". Publication 54 states

clearly that an individual must file a return in order to claim a

$70,000 exemption (available under section 91118) and also that

the exemption applies only to foreign earned income. Without

more, we conclude that petitioner's testimony regarding the

brochure fails to establish reasonable cause.

Second, petitioner claims that he based his decision not to

file on advice he received from the U.S. consulate in Hong Kong

that a return was not required if his income was less than

18
Subject to certain limitations and restrictions, sec. 911
allows a citizen or resident of the United States living abroad
to exclude from gross income up to $70,000 in foreign earned
income. Sec. 911(a)(1), (b)(2)(A).
 - 25 -

$70,000. However, petitioner admits that he did not disclose the

fact that he had wage income from Varian in 1990, which was

earned in the United States. In light of this fact, it would not

have been reasonable for petitioner to rely on the advice

received at the U.S. consulate. Marprowear Profit-Sharing Trust

v. Commissioner, 74 T.C. 1086 (1980), affd. without published

opinion 673 F.2d 1300 (3d Cir. 1981).

On this record, we cannot conclude that petitioner, a

college-educated individual who had filed returns for the

previous 2 years, undertook a reasonable and sufficient inquiry

as to his obligation to file in 1990. Given that he earned

significant wage income in the United States during 1990, which

was subject to withholding, and resided in the United States for

over 10 months of that year, we do not believe that petitioner

had a reasonable basis for concluding that no income tax return

was due. Therefore, because petitioner has failed to establish

reasonable cause for his failure to timely file his 1990 return,

he is liable for the addition to tax under section 6651(a)(1).

Failure To Pay Estimated Tax

Respondent also determined an addition to tax for failure to

pay estimated income tax under section 6654(a). The addition to

tax under section 6654(a) is mandatory unless petitioner can show

that he comes within one of the exceptions of section 6654(e).

Hudson v. Commissioner, 103 T.C. 90, 110 (1994), affd. without
 - 26 -

published opinion 71 F.3d 877 (5th Cir. 1995). Petitioner bears

the burden of proof on this issue, Baldwin v. Commissioner, 84

T.C. 859, 871 (1985), and the record contains no evidence to

suggest that petitioner falls within one of these exceptions.

Therefore, he is liable for an addition to tax under section

6654(a).

To reflect the foregoing and concessions,

Decision will be entered

under Rule 155.