T.C. Memo. 1997-557
UNITED STATES TAX COURT
JORDON JAY FINGAR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1507-95. Filed December 22, 1997.
Jordon Jay Fingar, pro se.
John T. Lortie, Avarian R. McKendrick, and Marjorie
Desporte-Bryan (specially recognized), for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
PARR, Judge: Respondent determined deficiencies in, and
additions to, petitioner's Federal income taxes as follows:
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Additions to Tax
Year Deficiency Sec. 6651(a)(1) Sec. 6653
1979 $25,292 $3,823 $1,745
1
1980 35,137 9,248 2,150
1
On brief, respondent argues that pursuant to sec. 6653(a),
petitioner is subject to a $1,150 addition to tax for 1980.
However, in the notice of deficiency, respondent determined the
sec. 6653(a) addition to tax for 1980 to be $2,150. We find the
$1,150 amount to be a typographical error.
All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated. All dollar amounts are rounded to the nearest dollar,
unless otherwise indicated.
For 1979 and 1980, petitioner made estimated tax payments of
$10,000 and $6,000, respectively. Petitioner, however, did not
file his 1979 and 1980 Federal income tax returns until January
10, 1992. Respondent issued the notice of deficiency for 1979
and 1980 on November 2, 1994. Accordingly, the notice of
deficiency is valid since it was issued within 3 years of the
date petitioner filed his returns for the taxable years in issue.
Sec. 6501(a).1
1
It appears respondent improperly assessed petitioner for
1979 and 1980 on the basis of a substitute return filed under
sec. 6020(b) without issuing a notice of deficiency, in violation
of sec. 6213(a). As a result of a question from the Court,
respondent released the lien for 1979 but did not release the
lien for 1980, apparently because petitioner's 1980 purported
liability, as determined by respondent, was not satisfied.
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After concessions by the parties,2 the issues for decision
are: (1) Whether petitioner may claim Schedule A deductions for
taxes and interest in excess of the amounts allowed by respondent
for the taxable years in issue. We hold he may, to the extent
set out below. (2) Whether pursuant to section 162, petitioner
may claim unreimbursed business expense deductions in excess of
the amounts allowed by respondent for the taxable years in issue.
We hold he may, to the extent set out below. (3) Whether
pursuant to section 280A, petitioner is entitled to deduct home
office expenses for the taxable years in issue. We hold he is
not. (4) Whether for 1980, petitioner had unreported interest
income of $853. We hold he did not. (5) Whether for 1979,
petitioner is entitled to a theft loss not previously claimed on
his return. We hold he is not. (6) Whether pursuant to section
6651(a)(1) petitioner is liable for additions to tax for his
failure to timely file Federal income tax returns for the taxable
2
At trial and on brief, respondent concedes that petitioner
correctly reported his share of his then law firm's partnership
income of $96,340 for 1979 and $88,428 for 1980.
Respondent further concedes that petitioner correctly
claimed Keogh plan deductions of $4,766 for 1979 and $4,150 for
1980.
Respondent further concedes that petitioner provided
receipts to verify the amounts set out below were spent by
petitioner for 1979 and 1980.
Item 1979 Amount Verified 1980 Amount Verified
Taxes $4,188 -0-
Interest 1,010 -0-
Auto 3,162 $1,739
Sailboat 13,572 17,270
T&E 3,109 1,950
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years in issue. We hold he is. (7) Whether pursuant to section
6653(a) petitioner is liable for additions to tax for negligence
or intentional disregard of rules and regulations for the taxable
years in issue. We hold he is.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulated facts and the accompanying exhibits3 are
incorporated into our findings by this reference. At the time
the petition in this case was filed, petitioner resided in
Surfside, Florida.
Petitioner
During 1979, petitioner was a real estate attorney and
partner at the law firm of Robinson, Silverman, Pearce, Aronsohn,
Sand & Berman (Robinson Silverman or the firm) in New York City.
While at Robinson Silverman, petitioner began working on
transactions of the Bank of New York (the bank), one of the
firm's larger and more active clients. At that time, petitioner
was representing the bank in negotiating and closing multi-
million dollar construction loans for large hotels, condominiums,
and office buildings all over the country.
Robinson Silverman was not the only firm representing the
bank during 1979. Robert Greenbaum (Greenbaum), a partner at
3
At trial, petitioner offered Exs. 11, 12, 13, 14, 86, 89,
and 90 into evidence. Respondent objected on the grounds of
relevancy. Upon consideration, we find that the exhibits fail to
address the issues in the instant case. Accordingly,
respondent's objections are sustained.
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another New York law firm, also represented the bank on
construction loan transactions. Petitioner and Greenbaum had
been friends for some time. They had worked together at a firm
in Brooklyn, New York, after graduating from law school, and
petitioner was the best man at Greenbaum's wedding.
Sometime before 1979, Jimmy Hamilton (Hamilton), an officer
at the bank, approached petitioner and Greenbaum with a
proposition. The bank was dissatisfied with the way Robinson
Silverman and Greenbaum's firm were handling the bank's business.
Knowing that petitioner and Greenbaum were old friends, Hamilton
suggested that they both leave their respective firms and form a
boutique law firm which would represent the bank. The bank was
starting a new project in Miami, Florida, known as the Turnberry
Isle Yacht and Racquet Club (Turnberry Isle), a planned luxury
condominium complex on the Intercoastal Waterway. The Turnberry
Isle Project alone would entail construction loans in excess of
$300 million, to be financed by the bank, with the legal
representation of the bank to be exclusively by petitioner and
his new law firm. The bank had other similar construction deals
in Florida, which would be directed to their new firm. If
petitioner and Greenbaum agreed, they would be permitted to
represent other clients with the bank's approval. Petitioner and
Greenbaum immediately accepted the bank's offer. Until
petitioner and Greenbaum left their respective jobs the bank
continued to give their firms business.
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Sometime in 1980 petitioner, Greenbaum, and Dickey, another
attorney, formed the new law firm known as Dickey, Greenbaum &
Fingar (Dickey Greenbaum). Dickey Greenbaum was located in a
downtown office space selected by the bank and close to it.
The Blue Chip
In 1976, petitioner purchased the Blue Chip (Blue Chip or
the boat), a year-old, 37-foot sailboat for $29,000. Petitioner
paid $5,000 in cash and financed the rest at an interest rate of
9½ percent. During the taxable years in issue, petitioner used
the boat to entertain clients.
OPINION
At the outset, we note that the recordkeeping by petitioner
for the years in issue was inconsistent and disorganized. While
we found petitioner generally to be a credible witness, his lack
of consistent recordkeeping and his disorganized presentation at
trial caused the Court much additional effort in reviewing the
record and sorting out the issues. Thus, the responsibility for
any omissions in the record lies with petitioner. Given that
petitioner has the burden of proof, such omissions weigh against
him.
Issue 1. Schedule A Deductions
Respondent determined that for 1979 and 1980, petitioner is
not entitled to deduct taxes and interest in excess of the
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amounts allowed in the notice of deficiency.4 Petitioner asserts
that the amounts claimed for taxes and interest have been
sufficiently substantiated, both through his oral testimony and
the documentary evidence presented at trial.
As a general rule, the Commissioner's determinations are
presumed correct, and the taxpayer bears the burden of proving
that those determinations are erroneous. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933); Nickeson v. Commissioner,
962 F.2d 973, 976 (10th Cir. 1992), affg. Brock v. Commissioner,
T.C. Memo. 1989-641. Moreover, deductions are a matter of
legislative grace, and the taxpayer bears the burden of proving
that he is entitled to any deduction claimed. Rule 142(a); New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). This
includes the burden of substantiation. Hradesky v. Commissioner,
65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir.
1976).
Failure to prove the exact amount of an otherwise deductible
item is not fatal, because generally, unless precluded by section
274, we may estimate the amount of such an expense and allow the
deduction to that extent. Finley v. Commissioner, 255 F.2d 128,
4
In the notice of deficiency, respondent allowed petitioner
to deduct the following amounts:
Item 1979 Amount Allowed 1980 Amount Allowed
Taxes $5,091 $422
Interest 1,010 -0-
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133 (10th Cir. 1958), affg. 27 T.C. 413 (1956); Cohan v.
Commissioner, 39 F.2d 540 (2d Cir. 1930). The estimate, however,
must have some reasonable evidentiary basis. Vanicek v.
Commissioner, 85 T.C. 731, 743 (1985).
A. Taxes
Respondent determined that petitioner is entitled to deduct
taxes of $5,091 and $422 for 1979 and 1980, respectively.
Petitioner deducted taxes of $17,000 for 1979 and $17,300 for
1980.5
Section 164(a) generally permits taxpayers to deduct State
and local income taxes, general sales taxes, and taxes on the
sale of gasoline paid or accrued within the taxable year. Sec.
1.164-1(a), Income Tax Regs.
Petitioner estimated his deduction for general sales tax, on
the basis of a sales tax of 6 percent multiplied by the various
purchases he made for the boat, the car, and other miscellaneous
expenditures he incurred during the taxable years in issue.
Petitioner's explanation, although logical, is implausible. He
deducted $10,000 in general sales tax for each year. Assuming a
sales tax of 6 percent, petitioner would have had to purchase
$166,666 worth of items subject to sales tax in 1979 and 1980 to
have incurred $10,000 in general sales tax for each of those
5
The $17,000 in taxes that petitioner deducted in 1979
includes $6,000 for State and local income taxes, $1,000 for
State and local gasoline tax, and $10,000 for general sales tax.
The $17,300 in taxes that petitioner deducted in 1980
includes $6,000 for State and local income taxes, $1,300 for
personal property tax, and $10,000 for general sales tax.
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years. This is unlikely, given that petitioner reported income
for 1979 and 1980 of $99,558 and $89,779, respectively. It is
reasonable to infer, however, that petitioner made purchases in
connection with his boat and car, and for other miscellaneous
items. Accordingly, we hold that petitioner may deduct general
sales tax of $1,000 for 1979 and $1,000 for 1980. Cohan v.
Commissioner, supra.
For 1979, respondent concedes that petitioner paid New York
State income taxes of $4,188. For 1980, respondent did not allow
petitioner to deduct any State income taxes, because he failed to
substantiate that he incurred such expenditures. Petitioner
testified, however, that he paid State and local income taxes for
1980 but was unable to get a copy of his cashed checks because
the bank he had used went out of business. Given that
petitioner's income did not substantially fluctuate from 1979 to
1980, it is reasonable to infer that petitioner paid
approximately the same amount of State income taxes in 1980 as he
did in 1979. Accordingly, we allow petitioner to deduct $4,000
in State income taxes for 1980.
B. Interest
Respondent determined that petitioner is entitled to deduct
interest of $1,010 and zero for 1979 and 1980, respectively.
Petitioner deducted interest of $7,200 for 1979 and $10,000 for
1980.
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Section 163(a) generally permits taxpayers to deduct
interest paid or accrued within the taxable year on indebtedness.
Sec. 1.163-1(a), Income Tax Regs.; see also Eboli v.
Commissioner, 93 T.C. 123, 129 (1989).
Petitioner presented no documentation to substantiate the
interest deductions claimed, except for $1,010 which respondent
conceded for 1979. Petitioner testified that he tried to obtain
a copy of his cashed checks for 1979 and 1980 from his bank, but
the bank was no longer in existence. During these years
petitioner had outstanding a $25,000 loan on his sailboat and a
$7,000 loan on his car. It is thus reasonable to infer that
petitioner incurred interest expenses in excess of the amounts
allowed by respondent in the notice of deficiency. Using our
best estimate, we hold that petitioner may deduct interest of
$3,200 in 1979 and $3,200 in 1980. Cohan v. Commissioner,
supra.
Issue 2. Unreimbursed Business Expenses
Respondent determined that for 1979 and 1980, petitioner is
not entitled to deduct automobile expenses, travel and
entertainment expenses, and expenses incurred in connection with
his boat in excess of the amounts allowed in the notice of
deficiency.6
6
In the notice of deficiency, respondent allowed petitioner
to deduct the following amounts:
Item 1979 Amount Allowed 1980 Amount Allowed
(continued...)
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A. Automobile Expenses
Respondent determined that petitioner may deduct $530 in
automobile expenses for 1979 and $0 for 1980. Petitioner asserts
that he used his Jaguar XJ-12-L (the car) solely for business
purposes; therefore his deductions for the taxable years in issue
are fully allowable.
Section 162 generally allows a taxpayer to deduct all
ordinary and necessary expenses incurred during the taxable year
in carrying on a trade or business. Sec. 162(a). An expense is
ordinary if it is considered to be "normal, usual, or customary"
in the context of the particular business out of which it arose.
Deputy v. Du Pont, 308 U.S. 488, 495-496 (1940). An expense is
necessary if it is appropriate and helpful to the operation of
the taxpayer's trade or business. Commissioner v. Tellier, 383
U.S. 687, 689 (1966). A taxpayer's general statement that his
expenses were incurred in pursuit of a trade or business normally
is not sufficient to establish that the expenses had a reasonably
direct relationship to that trade or business. Ferrer v.
Commissioner, 50 T.C. 177, 185 (1968), affd. per curiam 409 F.2d
1359 (2d Cir. 1969). Rather, a taxpayer ordinarily must maintain
records sufficient to permit verification of income and expenses.
6
(...continued)
Auto $530 -0-
T&E 1,136 $1,950
Sailboat -0- -0-
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Sec. 6001; sec. 1.6001-1, Income Tax Regs.7 Accordingly, we
must determine whether petitioner has met his burden of proving
that such expenses satisfy the requirements of section 162(a).
For 1979 and 1980, petitioner deducted $23,000 and $30,000,
respectively, for business travel and entertainment expenses.
Petitioner's automobile expenses are included in these amounts.
The record, however, is unclear as to the specific amount that
petitioner claimed for automobile expenses. In the notice of
deficiency for 1979, respondent allowed petitioner as a
reasonable deduction 55 miles per week at 18.5 cents per mile or
$530. For 1980, respondent did not allow petitioner a deduction
for any expenses he incurred in connection with the car.
Respondent argues that petitioner did not maintain a mileage
log nor did he record the business purpose of his auto expenses.
Accordingly, respondent contends that petitioner failed to
establish the total business miles driven during the taxable
years in issue.
At trial, petitioner testified that he used his car to
transport clients to and from closings. He further testified
that he did not drive to work but used the subway to commute.
Furthermore, petitioner stressed that because he lived in
Manhattan, he did not need a car; that maintaining a car in New
7
Sec. 274(d)(4) was added to apply to years beginning after
1985. Sec. 274(d)(4) requires specific substantiation for
expenses "with respect to any listed property (as defined in
section 280F(d)(4))". Sec. 280F(d)(4) includes any passenger
automobile as listed property.
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York City was extremely expensive; and that he used the car
solely for business to transport clients. Given the availability
of mass transportation in New York City, the constant traffic
congestion, and the high cost of, as well as the restrictions on,
parking, we find highly persuasive petitioner's testimony that he
did not use his car for commuting.
At trial, respondent conceded that for 1979 and 1980,
petitioner substantiated automobile expenses of at least $3,162
and $1,739 respectively. Thus, on the basis of the entire
record, we hold that petitioner may deduct $3,162 in 1979 and
$1,739 in 1980.
B. Sailboat
Respondent determined that for 1979 and 1980 petitioner is
not entitled to deduct any expenses incurred in connection with
the ownership and operation of the Blue Chip, because he failed
to establish that the expenses he incurred in connection with the
boat were ordinary and necessary under section 162. Petitioner
asserts that he used the boat solely for business purposes;
therefore, he contends that his deductions for the taxable years
in issue are fully allowable. However, section 162 does not
control this issue.
For tax years beginning in 1979, section 274(a)(1)(B)
strictly disallows the deduction, otherwise allowable, of an item
with respect to a facility used for, or in connection with,
entertainment as defined in section 274(a)(1)(A), such as a boat.
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Harrigan Lumber Co. v. Commissioner, 88 T.C. 1562, 1565 (1987),
affd. without published opinion 851 F.2d 362 (11th Cir. 1988);
see also sec. 1.274-2(e)(2), Income Tax Regs.
Accordingly, we hold that petitioner cannot deduct any
expenses incurred in connection with the Blue Chip.8
C. Travel and Entertainment
Respondent determined that petitioner is entitled to deduct
$1,136 in travel and entertainment (T&E) expenses for 1979 and
$1,950 for 1980. Petitioner deducted T&E expenses of $23,000 for
1979 and $30,000 for 1980. Petitioner asserts that he provided
respondent with receipts to verify that he incurred such
expenses; therefore, he argues that his T&E deductions for the
taxable years in issue are fully allowable.
A taxpayer is required under section 274(d) to substantiate
entertainment expenses by adequate records to corroborate his or
her own testimony as to: (1) The amount of the expense, (2) the
time and place the expense was incurred, (3) the business purpose
of the expense, and (4) the business relationship to the taxpayer
of each expense incurred. Sec. 1.274-5(b)(1), Income Tax Regs.
For travel expenses incurred while away from home, a taxpayer
must maintain adequate records reflecting: (1) The amount of
each separate expenditure of transportation and lodging, (2) the
8
At trial and on brief, petitioner asserts that he is
entitled to a depreciation deduction for the Blue Chip not
previously claimed on his 1979 and 1980 returns. Given our
holding, however, that petitioner's boat is an entertainment
facility within the meaning of sec. 274(a)(1)(B), a depreciation
deduction with respect to the boat is disallowed.
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dates of departure and return for each trip, and the number of
days spent on business, (3) the place of travel, and (4) the
business benefit derived by the taxpayer for each trip. Sec.
1.274-5(b)(2), Income Tax Regs.
At trial, petitioner's testimony regarding his travel, meal,
and entertainment expenses was vague and in many instances
incoherent. Although petitioner submitted various receipts and a
personal diary for each tax year establishing that he incurred
expenses, these documents fail to establish the business purpose
and business relationship of these expenses. Accordingly,
petitioner has failed to meet the strict substantiation
requirements of section 274(d), and we, therefore, sustain
respondent's determination for the taxable years in issue.
Issue 3. Home Office Deductions
Respondent determined that petitioner is not entitled to a
home office deduction for the taxable years in issue. Petitioner
asserts that during 1979 his home office was used for many
meetings "with the bank people, and with Greenbaum and Dickey,
plotting our escape from our respective firms." Similarly, in
1980, petitioner asserts that he used his home office to meet
with clients from Robinson and Silverman and to wind down his old
business.
Section 280A generally prohibits the deduction of otherwise
allowable expenses with respect to the use of an individual
taxpayer's home. Section 280A(c)(1) provides a narrow exception
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to the disallowance of home office deductions where a taxpayer
can establish that a portion of the home is used exclusively on a
regular basis as: (1) The taxpayer's principal place of
business, or (2) as a place of business which is used by clients
or customers in meeting or dealing with the taxpayer in the
normal course of business. While determination of a taxpayer's
principal place of business for purposes of section 280A depends
upon the particular facts of the case, the two primary factors
applied in determining whether a home office qualifies as a
taxpayer's principal place of business are: (1) The relative
importance of the activities performed at each business location,
and (2) the time spent at each location. Commissioner v.
Soliman, 506 U.S. 168, 175 (1993).
Petitioner has failed to establish that he used a portion of
his apartment exclusively on a regular basis for business.
Petitioner testified that the alleged home office was located in
a dining area between the living room and the kitchen. There is
no indication that the room was partitioned off from the rest of
the apartment. Furthermore, the evidence does not enable us to
find that petitioner used his home office to regularly meet with
clients. Finally, petitioner has failed to establish that his
home office was his principal place of business. The evidence is
clear that during the taxable years in issue, the principal
places of petitioner's law practice were at Robinson Silverman
and Dickey Greenbaum, where petitioner had an office and a
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secretary, spent most of his time, and earned his livelihood.
For the reasons discussed herein, we sustain respondent's
determination on this issue.
Issue 4. Unreported Interest Income
For 1980, respondent determined that petitioner failed to
report interest income of $853 from the Irving Trust Co.
Petitioner asserts that he received $2,291 of interest income in
1980 and that he correctly reported that amount on his 1980
Federal income tax return.
As a general rule, interest received by or credited to a
taxpayer within the taxable year, including interest on savings
or other bank deposits constitutes gross income and is fully
taxable. Sec. 1.61-7, Income Tax Regs.
At trial, respondent submitted five Forms 1099 totaling
$1,429 (the Forms 1099) to establish that petitioner has
unreported income of $853 for 1980. However, the Forms 1099 on
which respondent relies refer to 1979, not to 1980. Moreover,
none of the Forms 1099 are from the Irving Trust Co.
Accordingly, we hold that petitioner correctly reported his
interest income for 1980.
Issue 5. Theft Loss
As a general rule, in computing taxable income, a taxpayer
may deduct, pursuant to section 165(a), any loss sustained during
the taxable year, including a loss arising from theft which is
not compensated by insurance or otherwise, if the taxpayer meets
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the requirements of section 165 and the regulations thereunder.
If the theft loss is not connected with a taxpayer's trade or
business, a deduction shall be allowed only to the extent that
the amount of loss to the taxpayer arising from each casualty
exceeds $100. Sec. 165(c)(3).
At trial and on brief, petitioner asserts that he is
entitled to a $1,739 theft loss deduction not previously claimed
on his 1979 return for camera equipment allegedly stolen from his
car in March of 1979. Petitioner, however, has not established
that he has met the requirements of section 165 entitling him to
such a deduction. Petitioner did not submit a police report as
evidence that the theft actually occurred, nor did he submit
receipts to establish the amount spent for each item.
Accordingly, petitioner has failed to carry the burden of proof
on this issue.
Issue 6. Section 6651 (a)(1) Addition to Tax
For 1979 and 1980, respondent determined that petitioner,
pursuant to section 6651(a)(1), is liable for additions to tax of
$3,823 and $9,248, respectively.
Section 6651 imposes an addition to tax for failure to
timely file a Federal income tax return unless it is shown that
the failure is due to reasonable cause and not due to willful
neglect. Petitioner has the burden of proving that respondent's
determination of the addition to tax is erroneous. Rule 142(a);
Welch v. Helvering, 290 U.S. at 115.
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Petitioner did not file his income tax returns for 1979 and
1980 until January 10, 1992. He failed to present any evidence
that his failure to timely file was due to anything other than
willful neglect. Accordingly, we sustain respondent's
determination on this issue.
Issue 7. Section 6653(a) Addition to Tax
For 1979 and 1980, respondent determined that petitioner,
pursuant to section 6653(a), is liable for additions to tax of
$1,745 and $2,150, respectively.
Section 6653(a) imposes an addition to tax of 5 percent of
the underpayment if any part of the underpayment is due to
negligence or intentional disregard of rules or regulations.
Negligence is defined as lack of due care or the failure to do
what a reasonable and ordinarily prudent person would do under
the circumstances. Neely v. Commissioner, 85 T.C. 934, 947
(1985). The burden is on petitioner to show that he acted
reasonably and exercised due care. Id.
Petitioner did not address the section 6653 issue at trial
or on brief. Therefore, he failed to carry his burden of proof,
and we sustain respondent's determination on this issue.
To reflect the foregoing,
Decision will be entered
under Rule 155.