T.C. Memo. 2001-147
UNITED STATES TAX COURT
DANIEL R. BLODGETT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1859-00. Filed June 21, 2001.
Daniel R. Blodgett, pro se.
Michael D. Zima, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FOLEY, Judge: By notice dated November 19, 1999, respondent
determined deficiencies, additions, and penalties relating to
petitioner’s Federal income taxes as follows:
Sec. 6651(a)(1) Sec. 6662(a)
Year Deficiency Addition Penalty
1994 $10,291 $2,573 $2,058
1995 131,218 4,371 26,244
1996 94,529 -- 18,906
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Unless otherwise indicated, 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. After concessions, the issues are whether petitioner
is: (1) Entitled to certain sole proprietorship expense
deductions; (2) entitled to employee business expense deductions;
(3) liable for section 6651(a)(1) addition to tax; and (4) liable
for section 6662(a) accuracy-related penalties.
FINDINGS OF FACT
When the petition was filed, petitioner resided in Orlando,
Florida. During the years in issue, he was an investment broker
and was married to Norma Blodgett.
I. Background
In December 1991, petitioner agreed to operate a branch
office of Quantum Financial Services, Inc. (Quantum). In the
middle of 1992, Quantum terminated the agreement. In 1994,
petitioner made a claim against Quantum in an arbitration hearing
before the National Futures Association. In the arbitration,
petitioner’s counsel was Thomas Kolter.
After the termination by Quantum, petitioner operated a sole
proprietorship called Equator Capital Management (Equator). From
mid-1994 through 1996, he was an employee of Daiwa Securities,
Inc. (Daiwa). During the years in issue, petitioner paid and
documented business expenses.
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II. Returns
Petitioner hired certified public accountants and provided
them with the information to prepare his returns. On October 15,
1995, petitioner’s 1994 return was due (i.e., after extensions).
On November 22, 1997, petitioner signed his 1994 return. In a
letter dated July 15, 1998, respondent stated that he was
beginning to examine the 1994 return.
On October 15, 1996, petitioner’s 1995 return was due (i.e.,
after extensions). On November 22, 1996, respondent received the
1995 return. Petitioner filed his 1996 return in a timely
manner. In a letter dated February 11, 1999, respondent stated
that he was beginning to examine petitioner’s 1995 and 1996
returns.
OPINION
Petitioner contends that he is entitled to all of the
deductions shown on his returns. Respondent contends that
petitioner is entitled only to the deductions conceded by
respondent.
I. Burden of Proof and Production
Section 7491(a)(1), relating to examinations commenced after
July 22, 1998, provides that if, “in any court proceeding, a
taxpayer introduces credible evidence with respect to any factual
issue relevant to ascertaining the liability of the taxpayer for
any tax * * * the Secretary shall have the burden of proof with
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respect to such issue.” The burden, however, shall not be on the
Secretary unless, among certain other conditions, “the taxpayer
has complied with the requirements under this title to
substantiate any item”. Sec. 7491(a)(2)(A). Petitioner,
however, did not comply, as set forth below, with the
substantiation requirements relating to certain items. See secs.
6001, 274(d); Higbee v. Commissioner, 116 T.C. ___ (2001); H.
Conf. Rept. 105-599, at 241 (1998), 1998-3 C.B. 747, 995 (stating
that “taxpayers must meet applicable substantiation requirements,
whether generally imposed or imposed with respect to specific
items, such as * * * meals, entertainment, travel, and certain
other expenses” (fn. refs. omitted)).
Accordingly, respondent, pursuant to section 7491(a), does
not have the burden of proof as set forth below. Respondent
does, however, have the burden of production, pursuant to section
7491(c), relating to any 1995 or 1996 penalty or addition to tax.
II. Sole Proprietorship Expense Deductions
On his 1992, 1993, and 1994 returns (i.e., Schedule C,
Profit or Loss From Business), petitioner claimed expenses of
$164,666, $355,971, and $185,731, of which $32,123, $16,467, and
$13,070 were travel, meal, or entertainment expenses, relating to
Quantum and Equator. Respondent contends that the record
substantiates $31,318, $211,184, and $97,321 of 1992, 1993, and
1994 expenses, respectively, but no travel, meal, or
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entertainment expenses as required by section 274(d). Petitioner
contends that documents substantiating the rest of his expenses
are in the possession of Mr. Kolter, who will not return them.
Petitioner further contends that he testified against Mr. Kolter
and that Mr. Kolter has been incarcerated for fraud.
Section 162(a) allows as a deduction all the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on any trade or business. Section 274(d), relating to
travel, meal, entertainment, and gift expenses, requires a
taxpayer to substantiate
by adequate records or by sufficient evidence
corroborating the taxpayer’s own statement[,] (A) the
amount of such expense or other item, (B) the time and
place of the travel, entertainment, amusement,
recreation, or use of the facility or property, or the
date and description of the gift, (C) the business
purpose of the expense or other item, and (D) the
business relationship to the taxpayer of persons
entertained, using the facility or property, or
receiving the gift. * * *
Section 1.274-5(c)(5), Income Tax Regs., states:
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.
Mr. Kolter’s representation of petitioner related to Quantum
(i.e., 1992) but not Equator (i.e., 1993 and 1994). Petitioner’s
failure to produce adequate records relating to 1992 is due to
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the loss of such records, but he has not offered any
reconstruction of his expenditures.
There is no evidence in the record to substantiate
adequately the section 162(a) expenses in excess of those
conceded by respondent. In addition, we believe that petitioner
did make some business trips during the years in issue, but there
is insufficient evidence to determine the facts required by
section 274(d). Thus, petitioner is not entitled to deduct such
expenses, and, pursuant to Lone Manor Farms, Inc. v.
Commissioner, 61 T.C. 436, 440 (1974) (stating that the Court may
compute “the correct tax liability for a year not in issue when
such a computation is necessary to a determination of the correct
tax liability for a year that has been placed in issue”), the
carryovers from 1992 and 1993 shall be computed accordingly.
III. Employee Business Expense Deductions
On Forms 2106, Employee Business Expenses, of his 1994,
1995, and 1996 returns, petitioner claimed employee business
expenses of $20,103, $56,137, and $24,903. We conclude that the
record contains evidence sufficient to substantiate section
162(a) deductions of $3,804, $33,419, and $6,056, relating to the
respective years in issue, but not the deductions governed by
section 274(d) (i.e., travel, meal, entertainment, and gift
expenses).
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IV. Addition to Tax
Section 6651(a)(1) imposes an addition to tax for failure to
file a required return on the date prescribed, unless it is shown
that such failure is due to reasonable cause and not willful
neglect. To meet his burden of production pursuant to section
7491(c), respondent “must come forward with sufficient evidence
indicating that it is appropriate to impose the relevant penalty”
but “need not introduce evidence regarding reasonable cause,
substantial authority, or similar provisions.” Higbee v.
Commissioner, supra at ___ (slip op. at 15).
Respondent concedes that petitioner is not liable for the
1994 addition to tax. Petitioner’s 1995 return was due on
October 15, 1996. Respondent has shown that he received the 1995
return on November 22, 1996. Petitioner has not shown that such
failure to file by the prescribed date was due to reasonable
cause and not willful neglect. See sec. 6651(a)(1).
Accordingly, we conclude that respondent has produced sufficient
evidence indicating that the section 6651(a)(1) addition is
appropriate, and petitioner is liable for the 1995 addition to
tax.
V. Accuracy-Related Penalties
Section 6662(a) imposes a penalty on an underpayment of tax
required to be shown on a return. Section 6664(c)(1) provides
that no penalty shall be imposed if it is shown that there was
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reasonable cause for the underpayment and that the taxpayer acted
in good faith. The determination of whether a taxpayer acted
with reasonable cause and in good faith depends upon the facts
and circumstances. See sec. 1.6664-4(b)(1), Income Tax Regs.
Reliance on the advice of an accountant may demonstrate
reasonable cause and good faith. See id.
Respondent concedes that petitioner is not liable for the
1994 accuracy-related penalty, but contends that “petitioner has
failed to substantiate even a third of the expenditures at issue
in this case.” We conclude that petitioner reasonably and in
good faith relied on his accountants. Accordingly, he is not
liable for the 1995 and 1996 accuracy-related penalties.
Contentions we have not addressed are moot, irrelevant, or
meritless.
To reflect the foregoing,
Decision will be entered
under Rule 155.