Miller v. Commissioner

T.C. Memo. 2000-1

UNITED STATES TAX COURT

LARRY CHARLES MILLER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 24610-96, 3155-98. Filed January 3, 2000.

Larry Charles Miller, pro se.

Michael D. Baker, for respondent.

MEMORANDUM OPINION

RUWE, Judge: In these consolidated cases, respondent

determined deficiencies in petitioner's Federal income taxes and

accuracy-related penalties as follows:

Accuracy-related Penalty
Docket No. Year Deficiency Sec. 6662(a)

24610-96 1993 $78,220 $15,644
3155-98 1994 80,056 16,011
 - 2 -

After concessions,1 the issues for decision are: (1)

Whether petitioner is entitled to various deductions claimed on

Schedule C in 1993 and 1994; (2) whether petitioner is entitled

to claim a Schedule A deduction of $5,280 in 1994; and (3)

whether petitioner is liable for the accuracy-related penalty

under section 6662(a)2 for the taxable years 1993 and 1994.

Some of the facts have been stipulated3 and are so found.

The stipulation of facts and attached exhibits are incorporated

herein by this reference. Petitioner resided in Philadelphia,

Pennsylvania, at the time he filed his petition.

1
Initially, respondent disallowed $220,717 and $224,480
in Schedule C deductions due to lack of substantiation for the
tax years 1993 and 1994, respectively. See appendix A.
The parties have agreed on the amount of certain of these
deductions in their stipulation. Respondent now agrees that
petitioner substantiated $119,347 and $94,499 of the Schedule C
deductions for 1993 and 1994, respectively. See appendix B.

Petitioner concedes that he received interest income of $16
from Minnesota Mutual Life Insurance Co. in 1993, none of which
was reported on his tax return. Additionally, the parties agree
that petitioner can deduct $10,830 under Schedule A for
charitable donations made in 1993, not $14,571 under Schedule C
as initially claimed and disallowed. Finally, the parties agree
that petitioner is entitled to claim the following 1994 Schedule
A itemized deductions: $169 for State taxes and $12,843 for
charitable contributions.
2
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
3
Stipulation No. 65 incorrectly indicates that Exhibits 43-J
through 68-J, which are copies of 26 of petitioner's checks,
totaled $12,736. The total amount is $5,767.43.
 - 3 -

Background

During 1993 and 1994, petitioner was engaged in the practice

of law. Petitioner operated two law offices that were located at

5526 Spruce Street, Philadelphia, Pennsylvania, and 4429

Westfield Avenue, Pennsauken, New Jersey.

Petitioner reported 1993 and 1994 gross receipts and

expenses associated with his law practice on Schedules C. On his

1993 Schedule C, petitioner reported gross receipts of

$226,739.09 and deductions of $220,717. On his 1994 Schedule C,

petitioner reported gross receipts of $244,569 and expenses of

$224,480.

In August of 1998, petitioner was notified that these cases

were set for the trial session starting on January 11, 1999. The

notice contained the Standing Pre-Trial Order requiring

petitioner to exchange documents expected to be utilized at trial

with respondent at least 15 days prior to the first day of the

trial session. Notwithstanding those explicit instructions,

petitioner neglected to timely present all such documents. As a

result, we excluded certain documents from evidence.

For convenience, we will combine the facts regarding each

issue with our opinion.
 - 4 -

Discussion

Deductions are a matter of legislative grace, and the burden

of showing the right to deductions is on the taxpayer. See Rule

142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

A. Schedule C Deductions

The Schedule C deductions that remain in issue fall into

four broad categories: (1) Office expenses; (2) meals and

entertainment; (3) repairs and maintenance; and (4)

parking/tolls.

1. Office Expenses

Total office expense deductions at issue are $73,294.50 for

1993, and $23,815.97 for 1994, and fall into two broad

categories: (a) Office expense deductions allegedly taken to

offset improperly reported income items; and (b) other office

expenses.

a. Office Expense Deductions Allegedly Taken To Offset
Improperly Reported Income Items

The first issue is whether petitioner can deduct $72,516 and

$15,956.97 in office expense deductions allegedly taken to offset

improperly reported income items in 1993 and 1994, respectively.

Petitioner argues that he included nontaxable items in gross

receipts and then deducted the same amount on Schedule C as an

office expense because the items included in income were

nontaxable. From this, we conclude that petitioner acknowledges
 - 5 -

that he did not really have $72,516 and $15,956.97 in office

expenditures as he claimed on his returns and that his claimed

office expense deductions were false.

According to petitioner, the sources of nontaxable items

that he included in his 1993 gross receipts are: $6,250 in life

insurance proceeds from Cigna,4 $1,266 in life insurance proceeds

from Minnesota Life Insurance,5 and $65,000 in loan proceeds from

Sinh Hang.6 Additionally, petitioner asserts that the sources of

nontaxable items that he included in his 1994 gross receipts are:

4
Petitioner produced a copy of a death certificate for Ms.
Aretha Payne and a life insurance certificate schedule issued by
the Life Insurance Co. of North America reflecting a policy limit
of $25,000 on the life of Aretha Payne. Petitioner testified
that upon the death of his mother, he and his three siblings
shared the proceeds from the $25,000 policy equally. However, the
life insurance certificate does not indicate who benefits under
the policy.
5
Petitioner testified that he received $1,266 from Minnesota
Life Insurance.
6
Petitioner produced a copy of a loan agreement for $65,000
dated Nov. 1, 1993. The loan agreement consists of a one-page,
unnotarized document between petitioner and one of his clients,
Sinh Hang. While the agreement does indicate a willingness on
the part of Mr. Hang to lend petitioner $65,000 in 1993, it does
not demonstrate that petitioner received $65,000 in loan
proceeds. Petitioner did not provide a deposit slip or bank
statement, nor did he provide a cash receipts journal entry
reflecting that the loan, if received, was included in gross
receipts.
 - 6 -

$6,956.97 in auto insurance proceeds from State Farm Insurance7

and $9,000 in loan repayment proceeds from his sister.8

Petitioner has not convinced us that he reported nontaxable

items in gross receipts. Petitioner testified that he kept a

cash receipts journal and bank statements to determine his gross

receipts. Petitioner did not provide a copy of his cash receipts

journal or any bank statements to show that nontaxable items were

in fact included in his gross receipts. Furthermore, petitioner

is a tax lawyer9 who testified that he knows that some items,

particularly repayment of loans, are not includable in gross

income. In light of petitioner's knowledge of the tax laws and

his experience in preparing tax returns, we do not find his

explanation credible. Therefore, on the basis of this record, we

7
Petitioner produced a check, drawn on his account, payable
to "Lumpkins" in the amount of $6,956.97. The check contained a
notation indicating that it was for "car repair/State Farm".
Petitioner testified that he received $6,956.97 from State Farm
Insurance and then paid Lumpkins, an auto repair shop, the exact
same amount. However, petitioner did not provide a copy of the
draft from State Farm Insurance.
8
Petitioner provided a check payable to "Larry Miller
Attorney-at-Law" for $9,000, with the notation, that in part
indicated, that it was for "repayment of loan". The check was
drawn on the High Fashions' account in Memphis, Tennessee.
Petitioner testified that his sister issued the check.
9
Petitioner testified that he has been practicing law since
1985, and, as part of his practice, he prepares tax returns
including Forms 1040 with Schedules C.
 - 7 -

find that petitioner has not proven that he is entitled to the

$72,516 and $15,956.97 in office expense deductions.

b. Other Office Expenses

Other office expenses consist of deductions taken for: (I)

storage facility expenses; (II) the purchase of oriental rugs and

art; and (III) language lessons.

(I). Storage Facilities

Petitioner claimed storage facility expenses of $478 in 1993

and $409 in 1994. Petitioner testified that in 1993 he closed an

office at Ventnor, New Jersey, and then stored the office

furniture at Access Storage.10 To substantiate his deductions,

petitioner provided copies of checks totaling $478.5011 in 1993

and $409.5012 in 1994. The checks were drawn on the checking

account that petitioner maintains for his law practice: "Larry

Charles Miller, Attorney at Law". However, petitioner also

testified that in the middle of 1994 he moved to a new house and

that he also paid household expenses and personal expenses such

as credit card debts and automobile expenses from the same

10
The deductions in 1993 and 1994 allegedly relate to the
same office closing.
11
This amount consists of one check payable to Access Black
Horse for $132, and two additional checks payable to Black Horse
Self Storage for $165 and $181.50.
12
This amount consists of checks payable to Black Horse
Storage and Black Horse Pike Storage for $181.50 and $228,
respectively.
 - 8 -

checking account. In fact, other than an escrow account,

petitioner did not maintain any other checking account.

Assuming that all the checks in fact relate to storage

expenses, we have only petitioner’s uncorroborated testimony that

the expenses were incurred in carrying on a trade or business as

opposed to personal expenses incurred in anticipation of, and

during, his change of personal residence. Petitioner testified

that he was requested to provide respondent with information that

would serve to substantiate his claimed office expenses.

However, petitioner also testified that he did not attempt to

contact Black Horse Self Storage to secure any documentation,

even though he signed a lease agreement with the storage facility

company. Based on this record, petitioner has not met his burden

and established his entitlement to these claimed deductions.

(II). Oriental Rugs and Art

The third office expense at issue relates to items allegedly

purchased by petitioner in 1994. Petitioner testified that he

purchased three used oriental rugs for $6,050 and art for $1,400

and then placed these items in his Pennsauken, New Jersey and

Philadelphia, Pennsylvania offices. Petitioner produced copies

of two checks, one payable to Togar, Inc., for $6,050 and one

payable to Lucien Crup for $1,400. Neither check contained a

notation regarding its intended purpose.
 - 9 -

Petitioner has not proven that these items were purchased

and used in his place of business, as opposed to the new home

that he purchased in the same year. Petitioner did not provide

any invoices which might have confirmed that Togar, Inc., sells

oriental rugs and that Lucien Crup sells artwork, and shown a

delivery address or the address of petitioner’s offices. Given

petitioner’s experience as a tax attorney and the amount of the

deduction at issue, we would have expected petitioner to have

such evidence. Petitioner has not proven that he is entitled to

the claimed deduction.13

(III). Language Lessons

The final office expense at issue is a claimed deduction of

$300 in 1993 for language lessons. Petitioner testified that

more than 90 percent of his clients are Asian, and as a result,

he took lessons on Chinese, specifically Cantonese and Mandarin.

To substantiate petitioner's claim, he provided copies of three

checks issued to Fang Huang. Petitioner’s creditablity is

suspect in light of the other explanations he has provided.

Petitioner has not proven that he is entitled to this deduction.

13
We note that even if the expenses were substantiated, they
appear to be capital in nature.
 - 10 -

2. Meals and Entertainment

The next issue is whether petitioner can deduct meals and

entertainment expenses of $10,270 in 1993 and $6,242 in 1994.14

Petitioner argues on brief that he failed to produce adequate

records to substantiate his expenses because the records were

lost in the process of closing an office and moving to another

one.15

Section 162(a) allows a deduction for all ordinary and

necessary expenses paid or incurred in carrying on a trade or

business. However, no deduction is allowed under section 162

with respect to any traveling expense, including meals while away

from home, or for any entertainment expenses, unless the taxpayer

meets strict substantiation requirements. See sec. 274(d); sec.

1.274-5T(b) and (c), Temporary Income Tax Regs., 50 Fed. Reg.

46014, 46016 (Nov. 6, 1985). Section 274(d) provides that no

deduction will be allowed for any traveling expense,16 or for any

activity which is generally considered to constitute

14
Petitioner deducted $10,270 in 1993 and $6,242 in 1994,
and respondent disallowed both deductions. In order to
substantiate his deductions, petitioner submitted checks drawn in
1993 and 1994 totaling $12,286.76 and $9,492.32, respectively.
15
Petitioner testified that he was unable to provide
receipts for the expenses because they were lost in the process
of closing an office and moving to another office. Petitioner
testified that he moved his office in 1993.
16
See sec. 274(d)(1).
 - 11 -

entertainment,17 unless the taxpayer maintained records

sufficient to establish (1) the amount of each expense, (2) the

time and place of the activity, (3) the business purpose of the

activity, and (4) the business relationship of the person

entertained to the taxpayer.

Where the taxpayer establishes that the failure to produce

adequate records is due to the loss of such records through

circumstances beyond the taxpayer's control, such as destruction

by fire, flood, earthquake, or other casualty, the taxpayer shall

have the right to substantiate a deduction by reasonable

reconstruction of his expenditures. See sec. 1.274-5(c)(5),

Income Tax Regs. The loss of records in connection with a move

is not a casualty beyond the taxpayer's control. See Gizzi v.

Commissioner, 65 T.C. 342, 345-346 (1975); see also Olivares v.

Commissioner, T.C. Memo. 1983-649.

Even if the Court were to view the loss of petitioner's

records as a casualty, petitioner has failed to fulfill the

additional requirement of reasonably reconstructing records. In

an effort to reconstruct his records, petitioner provided copies

of several checks payable to Diners Club, Citibank, MBNA,

American Express, and one check payable to Claire Bixby. Most,

17
See sec. 274(d)(2).
 - 12 -

but not all, of the checks18 contained a notation indicating that

they were for either travel, entertainment, or travel and

entertainment. However, petitioner did not provide any

information regarding the amount of each expense, the time and

place of each activity, the business purpose of the activity, or

petitioner’s business relationship to the person entertained.

Petitioner did not produce copies of the receipts and/or monthly

account statements from Diners Club, Citibank, MBNA, or American

Express. Rather, petitioner simply asserts that it would have

been impossible to reconstruct his meals and entertainment

expenses without receipts. We sustain respondent's disallowance

of these deductions.

3. Repairs and Maintenance

Petitioner claims repair and maintenance expenses of $396.40

in 1993 and $5,767.43 in 1994. Petitioner testified that his

office incurred water damage, and in order to minimize the cost

18
The checks in 1993 totaled $12,286.76, while petitioner
reported total travel, meals, and entertainment expenses of
$18,797 before application of the limit on meals and
entertainment expenses under sec. 274(n). Additionally, the
checks in 1994 totaled $9,492.32, while petitioner reported total
travel, meals, and entertainment expenses of $16,042 before
application of the limit on meals and entertainment expenses
under sec. 274(n). Petitioner offered no explanation for the
difference in the amounts reported and the checks provided to
substantiate his expenses.
 - 13 -

of repairs, he purchased the materials himself and hired

individuals to provide the labor.

To substantiate the deduction for 1993, petitioner provided

copies of two checks. One check was for $100 and payable to an

individual, while the other check was for $296.40 and payable to

a building and supply store. To substantiate his deductions for

1994, petitioner provided copies of 26 checks totaling $5,767.43,

all payable to businesses such as Hechinger, Home Depot, and

Providence Lighting. All of these businesses sell goods which

can be used to repair or renovate an office or a personal

residence.19

All the checks were drawn on the same checking account that

petitioner used to pay personal and business expenses. None of

the checks contained any notations identifying their intended

purpose, and petitioner did not provide any invoices from the

persons who did the repair work. In the case of taxable year

1994, petitioner did not indicate what his cost of labor was or

provide a check payable to a contractor or individual for the

repair work allegedly done.

In short, we cannot tell from the record whether petitioner

bought several fixtures for his new home or whether he in fact

repaired one of his offices. Petitioner has not met his burden

19
Petitioner testified that he had some renovation work done
on his Pennsauken, New Jersey, office in 1993.
 - 14 -

of proving that he is entitled to the claimed deduction for

either year.

4. Parking/Tolls

Petitioner claimed a deduction for parking/tolls of $2,978

for the 1993 taxable year. Neither petitioner nor respondent

conceded the issue in their stipulations, or argued the point in

brief or at trial. However, petitioner has the burden of proof.

See Rule 142(a). Accordingly, in the absence of any evidence

offered by petitioner with respect to this issue, respondent's

determination is sustained. See Rule 149(b).

B. Mortgage Points

Petitioner claims he is entitled to a $5,280 deduction under

Schedule A for home mortgage points in 1994. Respondent

disallowed petitioner's deduction for mortgage points due to lack

of substantiation.

There is no evidence to substantiate petitioner's deduction

for mortgage points in 1994. As a result, we sustain

respondent's determination regarding this deduction.

C. Accuracy-Related Penalty

The final issue is whether petitioner is liable for the

accuracy-related penalty under section 6662(a) for 1993 and 1994.

Section 6662(a) imposes a penalty in an amount equal to 20

percent of the portion of the underpayment of tax attributable to

a taxpayer's negligence, disregard of rules and regulations, or
 - 15 -

any substantial understatement of income tax. See sec.

6662(a),(b)(1), and (b)(2).

Section 6662(c) provides that the term "negligence" includes

any failure to make a reasonable attempt to comply with the

provisions of this title, and the term "disregard" includes any

careless, reckless, or intentional disregard of rules or

regulations. The Commissioner's determination that a taxpayer

was negligent is presumptively correct, and the burden is on the

taxpayer to show lack of negligence. See Axelrod v.

Commissioner, 56 T.C. 248, 258 (1971). An understatement of tax

is substantial if it exceeds the greater of 10 percent of the tax

required to be shown on the return for the taxable year or

$5,000. See sec. 6662(d)(1)(A)(i) and (ii). The

accuracy-related penalty will apply unless petitioner can

demonstrate that there was reasonable cause for the underpayment

and that he acted in good faith with respect to the underpayment.

See sec. 6664(c)(1).

On the basis of the entire record, we conclude that

petitioner has not established that there was reasonable cause

and that he acted in good faith with respect to the underpayment

of tax. Petitioner did not meet his burden of proving that he

was not negligent. Respondent's deficiency determination exceeds

10 percent of the amount required to be shown on the return and

is more than $5,000. We, therefore, hold that petitioner is
 - 16 -

liable for an accuracy-related penalty of 20 percent of the

entire underpayment for each year.

Decisions will be entered

under Rule 155.
 - 17 -

APPENDIX A

Schedule C Deductions Initially Disallowed by Respondent

1993 1994

Advertising $838 $860

Bad debt 17,375 18,492

Car & truck 3,360 3,360

Insurance 7,174 1,478

Mortgage -0- 9,561

Office expense 98,939 99,403

Repairs and maintenance 3,014 5,224

Supplies 5,922 2,001

Taxes 100 947

Travel 5,960 3,557

Meals & entertainment 10,270 6,242

Utilities 5,187 5,751

Wages 31,627 34,980

Other expenses -0- 32,624

Postage 2,439 -0-

Filing fees 3,574 -0-

Donations 14,571 -0-

Telephone 7,389 -0-

Parking tolls 2,978 -0-

Amounts disallowed 220,717 224,480
 - 18 -

APPENDIX B

Schedule C Deductions Allowed by Respondent

1993 1994

Advertising $455 -0-
1
Bad debt -0- -0-

Insurance 3,883 $803
2
Office expense 39,249 22,165

Repairs and maintenance 9,245 7,111

Supplies 5,051 2,460

Taxes 266 1,519

Utilities 5,747 3,967

Wages 45,957 44,690

Postage 622 1,114

Filing fees 4,526 1,645

Natural gas 1,705

Telephone 4,346 7,320

Total 119,347 94,499
1
Petitioner incorrectly deducted a bad debt expense of
$17,375 in 1993 on Schedule C. The parties agree that petitioner
is not entitled to the deduction and that the items petitioner
claimed as a bad debt expense are deductible as office expenses.
2
This consists of $21,874 in expenses substantiated by
petitioner and the $17,375 bad debt expense reclassified as an
office expense and allowed as a deduction.