T.C. Memo. 1998-33
UNITED STATES TAX COURT
BENJAMIN H. SMITH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14945-96. Filed January 27, 1998.
Benjamin H. Smith, pro se.
Ron J. Mizrachi, for respondent.
MEMORANDUM OPINION
PAJAK, Special Trial Judge: This case was heard pursuant to
section 7443A(b)(3) of the Code and Rules 180, 181, and 182. All
section references are to the Internal Revenue Code in effect for
the years in issue. All Rule references are to the Tax Court
Rules of Practice and Procedure.
Respondent determined deficiencies in and accuracy-related
penalties on petitioner's Federal income taxes as follows:
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Accuracy-Related Penalty
Year Deficiency Sec. 6662(a)
1992 $3,122 $624
1993 3,138 628
The Court must decide: (1) Whether petitioner is entitled
to deduct Schedule C expenses; (2) whether petitioner is entitled
to additional itemized deductions; (3) whether petitioner is
entitled to deduct rental expenses; and (4) whether petitioner is
liable for the accuracy-related penalties under section 6662(a).
Some of the facts have been stipulated and are so found.
Petitioner resided in New York, New York, when his petition was
filed.
During the taxable years in issue, petitioner was a teacher
for the New York City Board of Education. Petitioner also was an
attorney admitted to practice in the State of Connecticut.
Petitioner's solo law practice was located in Bridgeport,
Connecticut. During 1992 and 1993, petitioner was involved in
the litigation of two civil cases on a contingency-fee basis.
One case involved a medical malpractice claim in which petitioner
claimed his client sought damages, and the case eventually was
settled for $70,000 in 1995. The other case involved a personal
injury claim against the State of Connecticut. The amount of
damages sought was $248,000.
On his Form 1040, U.S. Individual Income Tax Return,
petitioner reported $32,281 in 1992 and $37,030 in 1993, in gross
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income from his job as a teacher. On his 1992 and 1993 Schedules
C, Profit or Loss From Business, petitioner reported total gross
receipts of $3 and $5, respectively, from his law practice, and
claimed business expenses of $29,351 and $28,587, respectively.
Respondent disallowed the Schedules C expenses because
petitioner had not established that the expenses were ordinary
and necessary business expenses and that they were paid or
incurred. Respondent's alternative position was that
petitioner's activity was "not engaged in for profit" within the
meaning of section 183. Respondent also reduced petitioner's
taxable income by $8,556 for 1992 and $8,242 for 1993, because
petitioner's verified itemized deductions exceeded his standard
deductions as shown on his returns. Finally, respondent
determined that petitioner was liable for the accuracy-related
penalties due to negligence.
The Commissioner's determinations are presumed correct, and
the taxpayer bears the burden to prove that those determinations
are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111,
115 (1933). Deductions are strictly a matter of legislative
grace, and the taxpayer bears the burden to prove that he is
entitled to the deductions claimed. INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.
Helvering, 292 U.S. 435, 440 (1934). Included within this burden
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is the requirement that petitioner substantiate his claimed
deductions. Hradesky v. Commissioner, 65 T.C. 87 (1975), affd.
per curiam 540 F.2d 821 (5th Cir. 1976).
Section 6001 imposes upon every person liable for any tax a
duty to maintain records that are sufficient to enable the
Commissioner to determine the taxpayer's correct tax liability.
Meneguzzo v. Commissioner, 43 T.C. 824, 831 (1965); sec. 1.6001-
1(a), Income Tax Regs.
Section 162(a) provides for the deduction of all ordinary
and necessary expenses paid or incurred during the taxable year
in carrying on a trade or business. Only ordinary and necessary
business expenditures directly connected with or pertaining to
the taxpayer's trade or business are deductible from gross
income. Sec. 1.162-1(a), Income Tax Regs. Whether or not a
payment constitutes an ordinary and necessary business expense
is, in most instances, a question of fact.
After a review of the record, we conclude that petitioner
failed to meet his burden of proof. Petitioner failed to
produced any documentary or corroborative evidence to
substantiate that the claimed expenses were ordinary and
necessary, and that they were in fact paid or incurred in the
course of his law practice.
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At trial, petitioner testified that the reason he could not
substantiate the expenses was that most of his records and
receipts had been destroyed. Petitioner stated that the U-Haul
trailer, which contained most of his records and receipts, became
unhitched and overturned, destroying all of its contents.
We note for the record that petitioner failed to produce any
evidence of the destruction of the trailer. Notwithstanding the
lack of such evidence, we recognize that when a taxpayer's
records have been lost or destroyed through circumstances beyond
his control, he is entitled to substantiate a deduction by
reconstruction of his expenditures through other credible
evidence. Watson v. Commissioner, T.C. Memo. 1988-29. Absent
the availability of further documentation, although not required
to do so, this Court may accept credible testimony of a taxpayer.
Watson v. Commissioner, supra.
On this record, we find that petitioner failed to provide
any information or credible testimony regarding the expenses
associated with his law practice. Petitioner provided no
receipts, bills, journals, ledgers, canceled checks, or expense
statements. Moreover, petitioner failed to reconstruct any
portion of his expenses.
Instead, petitioner submitted to the Court copies of court
pleadings involving the litigation of his two civil cases.
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Petitioner argues that although he does not have any documents to
evidence the expenses, the fact that he represented two clients
in their protracted civil matters necessarily sustains the
legitimacy and accuracy of the claimed expenses. Petitioner
claims the accuracy of these expenses is supported by the
extensive preparation, time, and energy involved, and the
expenditure of huge sums of money for expert testimony,
investigation, medical records, and research, in connection with
his cases. We disagree.
This Court has held that unverified oral testimony, with no
supporting documentary evidence is not enough. Hradesky v.
Commissioner, supra. We consider it incredulous that petitioner
could purportedly be so involved with the two civil cases, yet
cannot even produce any corroborative evidence to support the
expenses he allegedly incurred. We are cognizant of the
difficulty petitioner may have in reconstructing his expenses.
However, petitioner did not even attempt to convince the Court
that he made any effort whatsoever to do so. Petitioner claimed
that he expended huge sums of money, for example, to hire expert
witnesses to testify. We are perplexed as to why he did not
secure the testimony or affidavits of those expert witnesses to
prove that he did pay for their services.
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Petitioner also testified that he is a member of the State
of Connecticut Bar. He further testified that he attended
Continuing Legal Education seminars, Connecticut Bar Association
seminars, and subscribed to the Connecticut Bar Journal.
However, petitioner failed to submit any corroborative evidence
regarding his dues or the costs of attending those seminars.
Again, petitioner offered no testimony that he even attempted to
reconstruct or obtain any receipts from those organizations.
Petitioner raises Cohan v. Commissioner, 39 F.2d 540 (2d
Cir. 1930). Petitioner argues that he is entitled to his claimed
expenses despite the absence of any certainty as to the exact
amount of those expenses. We conclude that the so-called Cohan
rule has no application where, as here, the record lacks any
basis for estimation. Vanicek v. Commissioner, 85 T.C. 731,
742-743 (1985).
Given the lack of any substantiating evidence, we cannot
sustain any of petitioner's claimed expenses. Accordingly, we
conclude that petitioner has not met his burden of proof for
either year at issue. Respondent, therefore, is sustained. We
need not decide respondent's alternative argument.
We must next decide whether petitioner is entitled to
additional itemized deductions. In the notice of deficiency,
respondent reduced petitioner's income by $8,556 and $8,242 for
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1992 and 1993, respectively, which represents the excess of
petitioner's verified itemized deductions of $12,156 and $11,942,
respectively, over the standard deductions claimed by petitioner
for those years. Respondent concedes that during the Appeals
conference, respondent allowed itemized deductions in the total
amounts of $12,434 for 1992 and $12,273 for 1993. However, the
following itemized deductions were disallowed due to lack of
substantiation:
1992 1993
Safe deposit rental $ 119
Moving expenses 800
Charitable contributions $3,100 3,757
Casualty/theft loss 52,000
______ _______
Total $3,100 $56,676
On brief, petitioner mentioned without discussion the
additional itemized deductions issue, but did not address this
issue at trial. Accordingly, we conclude that petitioner has
conceded this issue. Petitioner is not entitled to any itemized
deductions other than those allowed by respondent.
Even though petitioner had not claimed rental expenses on
his 1992 and 1993 returns, at trial he raised the issue that he
was entitled to claim rental expenses as a lessor for those two
years. He admitted he rented the property for only two months in
1991. He presented no credible evidence of any expenses for 1992
and 1993. On this record, petitioner has failed to substantiate
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any expenses for the 2 years in question. We find that
petitioner is not entitled to any rental deductions.
Finally, we must decide whether petitioner is liable for the
accuracy-related penalties under section 6662(a). Section
6662(a) imposes a penalty of 20 percent on any portion of an
underpayment of tax that is attributable to negligence or
disregard of rules or regulations. Sec. 6662(a) and (b)(1).
Negligence includes any failure to make a reasonable attempt to
comply with the provisions of the Internal Revenue Code, and
disregard includes any careless, reckless, or intentional
disregard. Sec. 6662(c). Negligence also includes failure by
the taxpayer to keep adequate books and records or to
substantiate items properly. Sec. 1.6662-3(b)(1), Income Tax
Regs. The penalty does not apply, however, to any portion of an
underpayment for which there was reasonable cause and with
respect to which the taxpayer acted in good faith. Sec. 6664(c).
The determination of whether a taxpayer acted with reasonable
cause and in good faith is made on a case-by-case basis, taking
into consideration all of the relevant facts and circumstances.
Sec. 1.6664-4(b)(1), Income Tax Regs. Reasonable cause and good
faith can be found in circumstances involving an honest
misunderstanding of fact or law that is reasonable in light of
the experience, knowledge, and education of the taxpayer.
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On the facts before us, we conclude that petitioner has
failed to carry his burden of proof to establish that the
underpayment was due to reasonable cause and not negligence.
Petitioner has failed to maintain adequate books and records.
Further, he has failed to provide any documents or corroborative
evidence to substantiate any of the claimed expenses. Petitioner
gave the Court no explanation as to why he did not make any
attempts to reconstruct any records or receipts.
Petitioner is an attorney. He claims he has been in private
practice for several years. Although petitioner contends that he
lacks any proficiency with regard to the tax matters, we believe
that as a member of the legal profession, he should have
recognized the importance of substantiating his expenses.
Petitioner was given ample time and opportunity to procure and
reconstruct the necessary records and receipts. Petitioner chose
not to do so. Accordingly, petitioner is liable for the section
6662(a) accuracy-related penalties.
To reflect the foregoing,
Decision will be entered
under Rule 155.