FRIEDMANN v. COMMISSIONER

T.C. Memo. 2001-207

UNITED STATES TAX COURT

GARY FRIEDMANN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 17486-96. Filed August 7, 2001.

Gary Friedmann, pro se.

Keith L. Gorman and George D. Curran, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WHALEN, Judge: Respondent determined the following

deficiencies in, additions to, and penalties with respect

to petitioner's Federal income tax for 1989 and 1990:

Additions to Tax Penalties
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)

1989 $33,472 $4,065 $6,694
1990 47,206 10,252 9,585
 - 2 -

Unless stated otherwise, all section references are to the

Internal Revenue Code as in effect during the years in

issue.

After concessions, the issues for decision are:

(1) Whether the period of limitations on assessment and

collection set forth in section 6501(a) expired as to both

of the years in issue, 1989 and 1990, before respondent

issued the subject notice of deficiency to petitioner; and

(2) whether petitioner is entitled to offset gross income

by, or to deduct as business expenses under section 162,

certain expenditures in the aggregate amount of $50,141

in 1989 and $97,854 in 1990 that respondent disallowed.

FINDINGS OF FACT

Some of the facts have been stipulated by the parties.

The Stipulation of Facts filed by the parties and the

exhibits attached thereto are incorporated herein by this

reference. Petitioner resided in Moorestown, New Jersey,

at the time he filed his petition in this case.

Petitioner graduated from Northeastern University in

1979 with a degree in business administration. He passed

the examination to become a certified public accountant

(C.P.A.) and was licensed as a C.P.A. by the State of New

York in 1980. He then worked for Arthur Anderson & Co. as

an auditor for 1 year, before matriculating at Georgetown
 - 3 -

University Law Center to study law. He graduated from

Georgetown in 1984 and was awarded a J.D. degree.

Petitioner then enrolled in Georgetown University's

graduate program in taxation, but he completed only one

semester of the two-semester program leading to an LL.M.

degree in taxation.

Petitioner is currently licensed as an attorney in

both the State of New Jersey and the Commonwealth of

Pennsylvania. He also holds an inactive license as a

C.P.A. from the State of New York.

Petitioner has been self-employed since graduating

from law school. His business involves providing various

financial and tax services to clients including: Preparing

personal, business, and employment tax returns, providing

personal and business tax planning advice, providing

investment advice, and reviewing and supervising the office

staffs of small businesses. Additionally, petitioner is a

member of the Bar of this Court, and he has represented

taxpayers as an attorney before the Court. Petitioner has

filed approximately 10 petitions on behalf of clients, and

he has tried at least one case. See Epstein v.

Commissioner, T.C. Memo. 1994-34.

Petitioner has also promoted various partnerships,

including Friedmann Financial Number 2, Friedmann Investors
 - 4 -

Number 1, and Friedmann Investors Number 2. It appears

that the business of these partnerships involved

investments in real estate. A number of clients of

petitioner's Schedule C business, including some clients on

behalf of whom the expenditures at issue in this case were

allegedly made, were investors in one or more of these

partnerships. Petitioner was also the sole owner and

employee of Friedmann Management Corp., which allegedly

provided management services to the partnerships.

In addition to the instant case, petitioner prosecuted

a suit in District Court for refund of taxes paid with

respect to his joint return for 1987. Friedmann v. United

States, 107 F. Supp. 2d 502 (D.N.J. 2000). In that case,

the court granted the Government's motion to dismiss one

count of the complaint on the ground that it raised issues

that had not been set forth in the claim for refund, and

the court granted summary judgment as to the other count

of the complaint, involving certain consulting fees that

petitioner claimed as an expense deduction on his Schedule

C, Profit or Loss From Business. According to the court,

the consulting fees were not deductible because petitioner

had admitted in his complaint that the consulting fees were

not income to, nor a business expense incurred by,
 - 5 -

petitioner but should have been reported by Friedmann

Management Corp. Id. at 511.

Petitioner also prosecuted a case in this Court

involving adjustments to his joint return for 1988 that

was settled before trial pursuant to an agreement of the

parties. Lastly, in 1996, he sued the United States to

quash two Internal Revenue Service summonses, one of which

demanded all documents and records regarding petitioner's

assets, liabilities, and accounts for purposes of preparing

a "collection information statement", and the other of

which sought all books, records, documents, and receipts

for income from all sources for purposes of preparing

Federal income tax returns for 1991 through and including

1995 that had not been filed by petitioner. Friedmann v.

United States, 79 AFTR 2d 97-895 (D.N.J. 1997). In that

case, the court granted the Government's motion to dismiss

petitioner's complaint. Id.

Petitioner failed to timely file his individual

Federal income tax returns for tax years 1989 through 1995.

He filed delinquent returns for 1989 and 1990, the years at

issue, as discussed below, but he had not yet filed his

returns for tax years 1991 through 1995 at the time this

case was tried.
 - 6 -

In 1992, during the audit of petitioner's 1988 income

tax return, respondent's revenue agent requested copies of

petitioner's 1989 and 1990 returns. In April 1992,

petitioner gave photocopies of those returns to the agent.

At that time, the agent believed that petitioner had

previously filed the returns with the Internal Revenue

Service. Petitioner gave the agent no indication

otherwise. Both returns had been signed before they were

photocopied, and neither return bore petitioner's original

signature. In September or October 1992, the agent began

an examination of petitioner's 1989 and 1990 returns.

In due course, the revenue agent found that the

Internal Revenue Service had no record of having received

either the 1989 or 1990 return. The agent notified

petitioner, by letter dated November 6, 1992, that the

photocopied returns would be processed as delinquent

returns once the agent received a copy of each return that

bore petitioner's original signature. The agent's letter

states as follows:

As per our telephone conversation yesterday,
I will process the previously submitted copies
of your 1989 & 1990 1040 income tax returns as
delinquent returns since our records do not
indicate receipt of the aforementioned at the
service centers. However, before I can process
the copies I need them to have original signa-
tures. Please provide same above the copied
signature (also date) and return them to me so
 - 7 -

that I can process them. Please return as soon
as possible.

On March 4, 1993, before the Internal Revenue Service

had received petitioner's signed 1989 and 1990 tax returns,

respondent prepared a substitute return for petitioner's

taxable year 1990, as authorized by section 6020(b). On

the basis of this substitute return, respondent issued a

notice of deficiency to petitioner for taxable year 1990.

Respondent mailed the notice of deficiency by certified

mail to petitioner's last known address. Petitioner did

not claim the notice from the U.S. Postal Service and it

was returned unopened to respondent by the Postal Service

on June 25, 1993.

On October 4, 1993, after attempting to reach

petitioner by telephone on two occasions and after writing

to petitioner about the unfiled returns, a second revenue

agent received copies of petitioner's 1989 and 1990 tax

returns. The copy of each return received by the agent is

identical to the photocopy that petitioner previously had

provided to the former revenue agent, except that it also

bears petitioner's original signature and the date,

October 1, 1993.

Respondent's transcript of petitioner's account for

1989 states that petitioner's 1989 return was filed on
 - 8 -

October 4, 1993. Respondent's transcript of petitioner's

account for 1990 does not reflect that petitioner filed a

return. This is due to the fact that respondent had filed

a substitute return for petitioner under section 6020(b)

on March 4, 1993.

During the course of the audit of petitioner's

individual income tax returns for 1989 and 1990,

respondent's revenue agent discovered that the Internal

Revenue Service had no record of having received returns

from Friedmann Financial Number 2, Friedmann Investors

Number 1, or Friedmann Investors Number 2 for taxable year

1989. During a meeting with respondent's agent, petitioner

signed copies of the 1989 Forms 1065, U.S. Partnership

Return of Income, for Friedmann Financial Number 2 and

Friedmann Investors Number 2.

Petitioner's individual return for 1989 reports wages,

salaries, tips, etc. of $72,252. Attached to the return is

a Form W-2, Wage and Tax Statement, that reports wages of

$24,252 from an employer, Dr. Carey Strom, who is also a

client of petitioner's Schedule C business, as discussed

further below. Petitioner's 1989 return also reports wages

of $48,000 from Friedmann Management Corp.

There is attached to petitioner's return for both 1989

and 1990 a Schedule C, Profit or Loss From Business, for a
 - 9 -

business or profession listed as "CPA", operating under the

name of "Gary Friedmann CPA". Petitioner reported the

following income and expenses for that business on the

Schedules C:

1989 1990

Gross receipts or sales $177,072 $175,790
Returns and allowances 103,784 97,854
Gross income $73,288 $77,936
Car and truck expenses 7,946 8,584
Depreciation 5,096 5,096
Interest
Mortgage -0- -0-
Other 187 -0-
Legal and professional servs. 2,000 -0-
Office expenses 21,935 21,041
Rent
Machinery & equipment -0- -0-
Other business property 4,600 6,308
Repairs 403 632
Travel, meals & entertainment
Travel 6,089 17,940
Meals and entertainment $25,051 $27,359
20% of meals 5,010 5,472

20,041 21,887
Utilities 920
Other expenses
Telephone 6,025 3,100
Legal 1,600 5,000
Dues 132 600
Assoc. 3,600
Gifts 719 1,109
Publications 600 700
12,676 10,509
80,973 92,917
Net profit or (loss) -7,685 -14,981
 - 10 -

On May 15, 1996, respondent issued a notice of

deficiency to petitioner for taxable years 1989 and 1990.

This is the second notice of deficiency respondent issued

with respect to petitioner's 1990 return. Among other

adjustments made in this notice, respondent disallowed

$50,141 of the $103,784 claimed as returns and allowances

on petitioner's 1989 return, and respondent disallowed the

entire $97,854 claimed as returns and allowances on

petitioner's 1990 return. The notice of deficiency

describes this adjustment as follows:

The deductions of $103,784.00 and $97,854.00
shown on your 1989 and 1990 returns as returns
and allowances are reduced by $50,141.00 and
$97,854.00 because it has not been established
that any amount more than $53,643.00 for 1989 and
-0- for 1990 was for an ordinary and necessary
business expense, or was expended for the purpose
designated. Therefore, your taxable income is
increased $50,141.00 for 1989 and $97,854.00 for
1990.

OPINION

I. Period of Limitations on Assessment and Collection

The first issue for decision is whether respondent

issued the subject notice of deficiency after the period of

limitations on assessment and collection under section

6501(a) had expired for both of the taxable years in issue,

1989 and 1990. Petitioner's principal position is
 - 11 -

that the period of limitations on assessment began to run

in April 1992 when he submitted photocopies of his 1989 and

1990 returns to respondent's revenue agent and that the

period expired before the subject notice of deficiency was

issued. According to petitioner, respondent "treated these

tax returns 'as filed'", notwithstanding the fact that the

returns did not bear petitioner's original signature and

the fact that they were not filed at a location specified

by section 6091(b)(1). Alternatively, petitioner argues

that he filed each of the returns at issue by mail more

than 3 years before the date of the second notice of

deficiency with the result that the period of limitations

on assessment and collection under section 6501(a) bars

assessment of the deficiencies determined in that notice

by respondent for each of the years at issue.

Section 6501 provides rules limiting the time during

which the amount of any tax can be assessed. As a general

rule, section 6501(a) provides that the amount of any tax

shall be assessed "within 3 years after the return was

filed". Sec. 6501(a). In the case of a deficiency in tax,

the Internal Revenue Code further prohibits the assessment

of the deficiency until a notice of deficiency has been

mailed to the taxpayer and, if a petition is filed in this

Court, until the decision of the Court has become final.
 - 12 -

Sec. 6213(a). Thus, generally, a notice of deficiency must

be mailed to the taxpayer before the expiration of the

period of limitations on assessment and collection set out

in section 6501(a).

The bar of this statute of limitations on assessment

and collection is an affirmative defense, and the party

raising it must plead it and carry the burden of proving

its applicability. Rules 39, 142(a), Tax Court Rules of

Practice and Procedure; Amesbury Apts., Ltd. v. Commis-

sioner, 95 T.C. 227, 240 (1990); Adler v. Commissioner,

85 T.C. 535, 540 (1985); Schalekamp v. Commissioner, T.C.

Memo. 1998-277. In this opinion, all Rule references are

to the Tax Court Rules of Practice and Procedure. In this

case, petitioner must prove that the date on which each of

the subject returns was filed was more than 3 years before

respondent issued the subject notice of deficiency. See

United States v. Gurley, 415 F.2d 144, 147 (5th Cir. 1969);

Young v. Commissioner, 208 F.2d 795 (4th Cir. 1953), affg.

a Memorandum Opinion of this Court dated Apr. 10, 1953; BJR

Corp. v. Commissioner, 67 T.C. 111, 121 (1976).

We note that the substitute return respondent prepared

for petitioner's taxable year 1990 pursuant to section

6020(b) did not start the running of the period of

limitations on assessment and collection. Section
 - 13 -

6501(b)(3) provides: "Notwithstanding the provisions of

paragraph (2) of section 6020(b), the execution of a return

by the Secretary pursuant to the authority conferred by

such section shall not start the running of the period of

limitations on assessment and collection."

We begin with petitioner's alternative argument that

he filed his 1989 and 1990 returns by mail with the

Internal Revenue Service Centers more than 3 years before

respondent issued the subject notice of deficiency. The

evidence on which petitioner relies in support of this

factual assertion is his own testimony at trial.

Petitioner's testimony is vague, is not supported by any

documentary evidence, such as certified mail receipts, is

contradicted by respondent's records, which do not record

such filings, and is unbelievable.

In the case of his 1989 return, petitioner testified:

"I believe it's signed April 12th or 11th [of 1992] and

that's when I apparently mailed it." (Emphasis supplied.)

He further testified: "I believe I mailed it to Fresno,

California" (emphasis supplied), notwithstanding the fact

that he resided in New Jersey at the time. Petitioner's

1989 return states that his address is 1034 17th Street,

No. 102, Santa Monica, California 90828. Petitioner states

that he used a California address on his 1989 return
 - 14 -

because he "was spending a lot of time in California"

and "was intending to move there".

In the case of his 1990 return, petitioner testified

that he prepared this return approximately 10 days after

he prepared his 1989 return. The address listed on

petitioner's 1990 return is 7 Baldwin Hill Place,

Morristown, New Jersey 08057.

Petitioner testified that he gave his 1990 return to

the revenue agent who was auditing his 1988 return "and

mailed a copy". Petitioner's testimony regarding the

filing of his 1990 return also includes the following:

Q And for the 1990 return, you prepared that in
New Jersey, as well, correct?

A The actual return, yes.

Q And you mailed that in New Jersey, correct?

A My recollection is I gave this directly to
Mr. Brokowski [i.e., the revenue agent] in New
Jersey.

Q So you're saying, then, for 1990, that you never
filed a return without giving one to Brokowski
first. You never filed one independently for
1990.

A I think I mailed it in, as well, but I gave
him a copy. I gave two-–I think I gave him the
original and mailed a copy, it is my
recollection.

Q Would you mail a copy of a 1040 to a Service
Center? Why?
 - 15 -

A I didn't mail it initially. Subsequently, I
mailed it. I actually think I sent it by
certified mail, as I've indicated, and I cannot
locate those records.

Q Let's go back to 1990 again. What was-–when was
the first time that you filed your 1990 tax
return?

A I believe I gave it directly to Mr. Brokowski.

[Emphasis supplied.]

On the basis of the above discussion, we find that

petitioner has failed to establish that he filed his 1989

and 1990 returns by mail with the Internal Revenue Service

Centers more than 3 years before respondent issued the

subject notice of deficiency.

Petitioner's principal argument is that he filed his

1989 and 1990 returns, and the period of limitations on

assessment and collection under section 6501(a) began to

run as to each tax year, in April 1992, when petitioner

submitted photocopies of the returns to respondent's

revenue agent. If measured from April 1992, the period of

limitations on assessment and collection expired before the

subject notice of deficiency was issued.

Petitioner argues that, if respondent treats a return

"as filed", then the period of limitations on assessment

and collection under section 6501(a) begins to run,

irrespective of whether the return was filed in a location
 - 16 -

specified by section 6091 and the regulations promulgated

thereunder, or whether it contains the taxpayer's original

signature. Petitioner contends that respondent used the

photocopies of petitioner's 1989 and 1990 returns in

formulating the audit of petitioner's returns and, thus,

treated the returns "as filed".

It has long been held that in order for the period of

limitations on assessment and collection prescribed by

section 6501 and its predecessors to run against the United

States, a taxpayer must meticulously comply with all

conditions for application of the statute. See Lucas v.

Pilliod Lumber Co., 281 U.S. 245, 249 (1930); Florsheim

Bros. Drygoods Co. v. United States, 280 U.S. 453 (1930);

Bachner v. Commissioner, 81 F.3d 1274, 1280 (3d Cir. 1996).

As mentioned above, section 6501(a) prescribes that

the tax "shall be assessed within 3 years after the return

is filed". As the Supreme Court has noted, "The word

'return' is not a technical word of art." Florsheim Bros.

Drygoods Co. v. United States, supra at 462. There are

four elements in determining whether a document is

sufficient for statute of limitations purposes: First,

the document must contain sufficient data to calculate the

taxpayer's tax liability; second, it must purport to be a

return; third, there must be an honest and reasonable
 - 17 -

attempt to satisfy the requirements of the tax law; and

fourth, the taxpayer must execute the document under

penalties of perjury. Beard v. Commissioner, 82 T.C. 766,

777 (1984), affd. 793 F.2d 139 (6th Cir. 1986). In order

to have the effect of a return for statute of limitations

purposes, a key element is that the document "must honestly

and reasonably be intended as such" by the taxpayer.

Florsheim Bros. Drygoods Co. v. United States, supra at

462.

Among other filing requirements, the Internal Revenue

Code specifies that a return "shall be signed in accordance

with forms or regulations prescribed by the Secretary",

sec. 6061(a), it "shall contain or be verified by a written

declaration that it is made under the penalties of

perjury", sec. 6065, and it shall be filed at the place

specified by the Internal Revenue Code and the regulations

promulgated thereunder, sec. 6091. In the case of the

return of an individual, the general rule is that the

return shall be made to the Secretary in the internal

revenue district in which is located the taxpayer's legal

residence or principal place of business, or it shall be

made at the service center serving one of those districts.

Sec. 6091(b)(1).
 - 18 -

A return form that is not signed or sworn to, as

required by the statute, does not meet the plain

requirements for the filing of a return and does not

start the period of limitations on assessment and

collection. See Lucas v. Pilliod Lumber Co., supra; Doll

v. Commissioner, 358 F.2d 713 (3d Cir. 1966), affg. T.C.

Memo. 1965-191; Richardson v. Commissioner, 72 T.C. 818,

823-824 (1979). Similarly, a return that is delivered to

an office other than the one specified by the Code and the

regulations for filing of that return is not considered

filed and does not commence the period of limitations. See

O'Bryan Bros., Inc. v. Commissioner, 127 F.2d 645 (6th Cir.

1942) (gift tax return given to revenue agent), affg. 42

B.T.A. 18 (1940); W.H. Hill Co. v. Commissioner, 64 F.2d

506 (6th Cir. 1933) (return given to examining agent),

affg. 23 B.T.A. 605 (1931); Winnett v. Commissioner, 96

T.C. 802 (1991) (return mailed to wrong service center);

Espinoza v. Commissioner 78 T.C. 412 (1982) (taxpayer

failed to prove that amended returns were filed when they

were handed to a revenue agent); Green v. Commissioner,

T.C. Memo. 1993-152 ("giving a delinquent return to an IRS

agent does not constitute filing"); Metals Refining Ltd. v.

Commissioner, T.C. Memo. 1993-115 ("Even if the IRS agents

received properly executed [partnership] returns, delivery
 - 19 -

to such agents does not necessarily constitute proper

filing"); see also Kotovic v. Commissioner, T.C. Memo.

1959-177.

In this case, we find that there was no filing of

the subject returns in April 1992 when petitioner gave

photocopies of his 1989 and 1990 returns to respondent's

revenue agent. Clearly, the revenue agent was not the

prescribed place for filing those returns pursuant to

section 6091(b)(1). O'Bryan Bros., Inc. v. Commissioner,

supra; W.H. Hill Co. v. Commissioner, supra; Winnett v.

Commissioner, supra; Espinoza v. Commissioner, supra;

Green v. Commissioner, supra; Metals Refining Ltd. v.

Commissioner, supra.

Moreover, there is nothing in the record to show that

petitioner intended his delivery of those documents to the

agent in April 1992 to constitute the filing of his

returns. See Berenbeim v. Commissioner, T.C. Memo. 1992-

272. Petitioner gave them to the revenue agent who had

requested copies of the returns, and petitioner did not

tell the agent that petitioner had not previously filed the

returns with the Internal Revenue Service. Respondent's

agent received the returns thinking that they were the

copies that he had requested. The revenue agent reviewed

the copies of petitioner's 1989 and 1990 returns and may
 - 20 -

have used information from the returns in formulating his

request for information from petitioner, but there is no

evidence that respondent ever treated the copies "as

filed". To the contrary, for example, respondent took the

step of filing a substitute return for 1990, pursuant to

section 6020(b).

We find that petitioner has failed to establish that

he filed his 1989 and 1990 tax returns more than 3 years

before the date the subject notice of deficiency was

issued. Thus, petitioner has failed to prove that

respondent's notice of deficiency for 1989 and 1990 is

untimely under section 6501(a).

II. Returns and Allowances

The second issue in this case, the only substantive

issue presented, involves certain payments that are

reported as "returns and allowances" on the Schedules C

filed as part of petitioner's 1989 and 1990 tax returns.

As mentioned above, petitioner's Schedules C for 1989 and

1990 report "returns and allowances" of $103,784 and

$97,854, respectively. Respondent allowed $53,643 of the

amount reported for 1989, consisting of a check drawn by

petitioner on January 18, 1989, to Hackett & Co., but

disallowed the rest, i.e., $50,141 in 1989 and $97,854 in

1990, on the ground that petitioner had not "established
 - 21 -

that any amount more than 53,643.00 for 1989 and -0- for

1990 was for an ordinary and necessary business expense,

or was expended for the purpose designated."

At trial, petitioner was not able to identify the

amounts reported as returns and allowances on his 1989 and

1990 returns. Although petitioner's Schedules C for 1989

and 1990 report returns and allowances of $103,784 and

$97,854, respectively, he introduced documents that show

aggregate expenditures of $118,817.83 in 1989 (including

the payment of $53,643 to Hackett & Co. that respondent

allowed) and $103,349.71 in 1990. Petitioner failed to

offer an acceptable explanation for these discrepancies.

According to petitioner, the subject payments can be

grouped into three categories: (1) Direct refunds to

clients and unreimbursed payments on behalf of clients to

the Internal Revenue Service and to State tax authorities;

(2) payments on behalf of one client for which petitioner

was reimbursed; and (3) payments to clients for the

purchase of supplies and services. Petitioner refers to

the payments in the first category as "direct payments"

and for convenience, we will do the same. The following

is a list of the payments that petitioner claims as

"returns and allowances" for each of the years at issue.

The list shows the check number, date, payee, and amount
 - 22 -

of each payment, and groups each payment into one of

petitioner's three categories:

Reimbursed Supplies
1989 Check Date Payee Amount Direct Payments Payments and Services

1931 1/7 Mass. Div. of
Employ. Security $221.00 $221.00 -0- -0-
2200 11/19 Jepsco 4,500.00 -0- -0- $4,500
1938 1/28 IRS 54.00 54.00 -0- -0-
2083 5/12 IRS 3,585.99 3,585.99 -0- -0-
2085 5/12 State of R. I. 75.01 75.01 -0- -0-
2101 11/10 IRS 10,831.60 10,831.60 -0- -0-
2102 11/10 IRS 3,930.09 3,930.09 -0- -0-
Wire 12/12 Hospital Trust RI 5,010.00 5,010.00 -0- -0-
Wire 12/14 Hospital Trust
Providence, RI 12,010.00 12,010.00 -0- -0-
2082 5/12 IRS 35.66 35.66 -0- -0-
2476 8/9 N.Y. State 576.16 576.16 -0- -0-
2174 7/14 IRS 2,382.18 2,382.18 -0- -0-
2201 12/1 N.Y. State 388.29 388.29 -0- -0-
2135 6/3 Steven Dana 500.00 -0- -0- 500
1957 6/17 IRS 7,687.75 7,687.75 -0- -0-
1958 6/17 IRS 278.92 278.92 -0- -0-
2203 12/1 Franchise Tax Board 371.55 371.55 -0- -0-
1974 6/30 Jeff Kolton 500.00 -0- -0- 500
2403 7/14 Sec. of State 5.00 5.00 -0- -0-
2122 12/5 Employment Dev. Dept. 28.16 28.16 -0- -0-
2405 7/14 Franchise Tax Board 122.71 122.71 -0- -0-
2175 7/14 Franchase Tax Board 250.00 250.00 -0- -0-
2404 7/14 Sec. of State 5.00 5.00 -0- -0-
2436 10/17 Gary Chang 3,500.00 3,500.00 -0- -0-
1959 6/17 Employment Dev. Dept. 458.82 458.82 -0- -0-
2401 7/15 Franchise Tax Board 1,472.94 1,472.94 -0- -0-
2402 7/15 IRS 198.09 198.09 -0- -0-
2442 10/1 IRS 4,639.91 4,639.91 -0- -0-
2443 10/1 Mass DOR 1,156.00 1,156.00 -0- -0-
2202 12/1 Habhac 400.00 400.00 -0- -0-
1536 1/18 Hackett & Co. 53,643.00 53,643.00 -0- -0-

Total 118,817.83 113,317.83 -0- 5,500
Amount reported 103,784.00
on return

Difference 15,033.83
 - 23 -

Reimbursed Supplies
1990 Check Date Payee Amount Direct Payments Payments and Services

1758 2/20 State of Cal. $5.00 $5.00 -0- -0-
1730 2/28 N.Y. State 470.29 470.29 -0- -0-
1731 2/28 N.Y. State 114.70 114.70 -0- -0-
1732 2/28 N.Y. State 2,850.38 2,850.38 -0- -0-
1738 3/7 IRS 791.12 791.12 -0- -0-
1737 3/7 Mass. 2,350.00 2,350.00 -0- -0-
2269 3/9 Jeffrey Kolton 12,500.00 12,500.00 -0- -0-
124 7/10 N.Y. State 5,337.57 5,337.57 -0- -0-
125 7/15 N.Y. State 1,128.13 1,128.13 -0- -0-
189 11/20 Said Dermarkar 2,000.00 2,000.00 -0- -0-
209 12/10 IRS 235.08 235.08 -0- -0-
217 12/21 N.Y. State 150.00 150.00 -0- -0-
215 12/12 IRS 228.64 228.64 -0- -0-
1878 1990 Carey Storm 930.00 930.00 -0- -0-
242 12/31 Employment Dev. Dept. 7,000.00 -0- $7,000.00 -0-
164 10/1 US Dept. of Treasury 12,000.00 -0- 12,000.00 -0-
163 9/26 City of Beverly Hills 2,679.75 -0- 2,679.75 -0-
1799 5/12 Employment Dev. Dept. 59.02 59.02 -0- -0-
Wire 2/16 Shawmut Bros. 30,010.00 30,010.00 -0- -0-
2292 2/20 Stewart Gleischman 18,500.00 18,500.00 -0- -0-
Wire 11/28 Security–Los Angeles 4,010.00 4,010.00 -0- -0-

Total 103,349.68 81,669.93 21,679.75 -0-
Amount reported 97,854.00
on return

Difference 5,495.68

At the outset, we note that there is a fundamental

difference between expenditures that constitute "returns

and allowances" and expenditures that are treated as

business deductions under section 162. See Beatty v.

Commissioner, 106 T.C. 268, 273 (1996); Max Sobel

Wholesale Liquors v. Commissioner, 69 T.C. 477 (1977),

affd. 630 F.2d 670 (9th Cir. 1980); B.C. Cook & Sons, Inc.

v. Commissioner, 65 T.C. 422, 428 (1975), affd. per curiam

584 F.2d 53 (5th Cir. 1978); see also sec. 1.61-3(a),

Income Tax Regs. The former expenditures are taken into

account in computing the gross income from a business

activity. See B.C. Cook & Sons, Inc. v. Commissioner,

supra at 428. Strictly speaking, they are not deductions
 - 24 -

and are not subject to the various limitations on

deductions claimed under section 162. See Metra Chem Corp.

v. Commissioner, 88 T.C. 654, 661 (1987); B.C. Cook & Sons,

Inc. v. Commissioner, supra.

As to returns and allowances, a taxpayer is required

to maintain records that are sufficient to substantiate

the amount claimed on his or her return. Sec. 6001. A

taxpayer must establish a direct connection between an

expenditure claimed as an offset of gross receipts and the

activity giving rise to the gross receipt. See Max Sobel

Wholesale Liquors v. Commissioner, supra at 483 (rebate

treated as a reduction of gross income "where the rebate

was a part of the transaction of sale"); see also Shriver

v. Commissioner, 85 T.C. 1, 8 (1985).

As to deductions under section 162(a), a taxpayer

is required to maintain records that are sufficient to

substantiate the deductions claimed on his or her return.

Sec. 6001. Section 162 generally allows a deduction for

all the ordinary and necessary expenses paid or incurred

during the taxable year in carrying on a trade or business.

Such expenses must be directly connected with or pertain to

the taxpayer's trade or business. Sec. 1.162-1(a), Income

Tax Regs. Petitioner bears the burden of proving his
 - 25 -

eligibility for offsets to gross income or deductions under

section 162(a).

Petitioner reported the subject expenditures as

returns and allowances for both 1989 and 1990 and reduced

the gross income reported on his Schedule C for each year

by the total expenditures for the year. In his posttrial

briefs, petitioner's principal position is that the subject

expenditures are "ordinary and necessary and deductible

under section 162." It is not clear whether petitioner

also takes the position that the subject expenditures are

"returns and allowances" that offset the gross receipts

realized from the business reported on petitioner's

Schedules C. However, it is not necessary to sort out

petitioner's legal position because we find that petitioner

has failed to adequately substantiate any of the subject

expenditures either as an offset of the gross receipts of

his Schedule C business or as an ordinary and necessary

business deduction.

During his testimony at trial, petitioner sometimes

compared the fees that he claims to have received during

1989 and 1990 from the clients of his Schedule C business

with the payments treated as returns and allowances that

he claims to have made to, or on behalf of, some of those

clients. As was true in the case of the returns and
 - 26 -

allowances, at trial petitioner was unable to itemize the

fees composing the gross receipts reported on his Schedules

C for 1989 and 1990. The totals from the two lists of fees

that petitioner introduced at trial do not match the gross

receipts reported on the Schedules C filed with his

returns.

In any event, for both of the years in issue, the

following schedule repeats the lists of fees that

petitioner introduced at trial, it shows the payments

allegedly made by petitioner to, or on behalf of, each of

his clients, and it shows the net amounts for each client:
 - 27 -
Fees Payments Net

Client 1989 1990 1989 1990 1989 1990

Jeff Abrams $12,213 -0- $650.47 $228.67 $11,562.53 $-228.67
Automatic systems 24,375 -0- -0- -0- 24,375.00 -0-
David Baumberg 500 $1,500 -0- -0- 500.00 1,500.00
Faith Burns 2,815 -0- 5,795.91 -0- -2,980.91 -0-
Gary Chang -0- 25,830 3,872.71 -0- -3,872.71 25,830.00
Norman Dana 4,122 2,442 -0- -0- 4,122.00 2,442.00
Eric Friedmann 7,374 -0- 3,585.99 8,772.94 3,788.01 -8,772.94
Mark Grayson -0- 4,703 -0- -0- -0- 4,703.00
Bill Habelow 2,000 -0- 7,687.75 2,350.00 -5,687.75 -2,350.00
Hackett & Co. 61,643 -0- 400.00 -0- 61,243.00 -0-
Habsco -0- -0- 53,643.00 -0- -53,643.00 -0-
Emily Harris -0- 2,880 -0- -0- -0- 2,880.00
Thomas Hickey 14,000 -0- -0- -0- 14,000.00 -0-
Robert Hastings -0- 7,955 3,382.29 941.12 -3,382.29 7,013.88
High Comps-Callan 16,000 31,278 54.00 -0- 15,946.00 31,278.00
Art Jacob 4,500 -0- -0- -0- 4,500.00 -0-
Jeff Kolton 4,272 -0- 500.00 12,500.00 3,772.00 -12,500.00
Margaret Lynch 5,159 -0- 31,856.70 -0- -26,697.70 -0-
Jeanne Lynch 400 16,961 -0- -0- 400.00 16,961.00
Scott Mitchell -0- 1,000 -0- -0- -0- 1,000.00
Albert Pachew -0- 4,980 -0- -0- -0- 4,980.00
Victoria Shulman -0- 6,627 -0- -0- -0- 6,627.00
Carey Strom -0- 28,560 38.16 22,668.77 -38.16 5,891.23
Corey Tynam -0- 51,250 -0- -0- -0- 51,250.00
Brain Wayset 6,374 -0- -0- -0- 6,374.00 -0-
Steven Dana -0- -0- 500.00 -0- -500.00 -0-
Said Dermarkar -0- -0- -0- 2,000.00 -0- -2,000.00
Carissa Drucker -0- -0- 1,671.03 4,010.00 -1,671.03 -4,010.00
Stewart Gleischman -0- -0- 458.82 18,740.08 -458.82 -18,740.08
Jepsco/Epstein -0- -0- 4,721.00 30,010.00 -4,721.00 -30,010.00
Joblon -0- -0- -0- 1,128.13 -0- -1,128.13
Total 165,747 185,966 118,817.83 103,349.71 46,929.17 82,616.29
Amount reported 177,076 175,790 103,784.00 97,857.00
Difference -11,329 10,176 15,034.00 5,493.00

As shown above, petitioner claims to have made pay-

ments in 1989 of $118,817.83 or 71.68 percent of the fees

received in that year and payments in 1990 of $103,349.71

or 55.57 percent of the fees received in that year. The

above schedule shows that petitioner allegedly made

substantial payments to persons from whom no fees are
 - 28 -

listed for 1989 or 1990. The net payments to clients in

this category are as follows:

1989 1990

Steven Dana $-500.00 -0-
Said Dermarkar -0- $-2,000.00
Carissa Drucker -1,671.03 -4,010.00
Stewart Gleischman -458.82 -18,740.08
Jepsco/Epstein -4,721.00 -30,010.00
Joblon -0- -1,128.13
-7,350.85 -55,888.21

The above schedule also shows that petitioner allegedly

made payments to a number of clients, including his

parents, that substantially exceeded the amount of fees

petitioner received from those clients. The net payments

to clients in this category are as follows:

1989 1990

Faith Burns -$2,980.91 -0-
Eric Friedmann 3,788.01 -$8,722.94
Bill Habelow -5,687.75 -2,350.00
Jeff Kolton 3,772.00 -12,500.00
Margaret Lynch -26,697.70 -0-

Another preliminary point should be noted. In his

reply brief, petitioner implies that he was unable to

produce some records necessary to substantiate the "returns

and allowances" reported on his returns because certain of

his records had been lost. In discussing the evidence that

he adduced to substantiate the direct payments, petitioner

states that his "business records were lost when he shipped
 - 29 -

the records from California to New Jersey with the United

Parcel Service." In discussing the evidence adduced to

substantiate the payments to clients for professional

services and supplies, he also states that "his original

books and records were lost by United Parcel Service when

the records were shipped from California to New Jersey."

At trial, petitioner made no suggestion that any

records necessary to substantiate the returns and

allowances claimed on his return had been lost. To the

contrary, during his opening statement, petitioner

mentioned certain business records that allegedly had been

lost, but he limited that discussion to the substantiation

of certain business deductions that are no longer at issue

in this case. When it came to the returns and allowances

at issue here, petitioner made it clear that he never had

records of any of these expenditures. Petitioner stated as

follows:

In other areas, for example, we'll get to
the area of returns and allowances. In this
area, often the client had a problem with the IRS
or a government agency and I advanced taxes on
their behalf, without any expectation of getting
the money back from them, it--from them. And
unfortunately, at that time, I was perhaps lax
that I didn't have business contracts or even key
business records. There were just oral agree-
ments with respect to the treatment of these
items. Obviously, it's a practice of–-it's not
an ideal practice and it's not that these records
were lost. It's just that I didn't keep them at
 - 30 -

the time. They were oral agreements. [Emphasis
supplied.]

Furthermore, after petitioner completed his direct

testimony regarding returns and allowances, and before

discussing the records that he allegedly lost in ship-

ping, he stated: "As mentioned earlier, I shipped some

information–-I'm done with the returns and allowances at

this point." Thus, petitioner again made it clear that

the records allegedly lost in shipping did not involve

"returns and allowances." Finally, at trial, petitioner

stated: "As such, my business logs were in there detailing

in the instance of travel and entertainment, who I

entertained and what-–and all the other requirements of

Section 274(d)." Petitioner did not testify at trial that

any of the documents that were allegedly lost involved

amounts reported on his returns as "returns and

allowances".

Moreover, on the basis of the record of this case,

we would have difficulty finding that petitioner lost any

business records as a result of a shipment from California

to petitioner's home in Moorestown, New Jersey. None of

the documents introduced by petitioner substantiate a lost

shipment of records from California to Moorestown. The

documents on which petitioner relies, consisting of two
 - 31 -

receipts for the shipment that were filled out by

petitioner on United Parcel Service forms and a Damage

Tracer Copy that was issued by UPS, fail to show that any

part of the shipment was lost. To the contrary, according

to a handwritten phone message, a representative of UPS

telephoned petitioner and stated that all seven boxes of

the shipment had been delivered. The only formal

communication from UPS concerning this shipment is the

Damage Tracer Copy which states that petitioner had

reported damage to a "Panasonic EASA Phone". There is no

document from UPS to substantiate petitioner's assertion

that "two bags" were lost and never recovered.

A. Refunds to Clients and Unreimbursed Payments to the
Internal Revenue Service and to State Tax Authorities

As shown in the above schedules, petitioner claims

offsets to gross receipts or deductions under section 162

for the aggregate amounts of direct payments in 1989 and

1990. For 1989, petitioner claims offsets or deductions in

the form of direct payments totaling $113,317.83, including

the $53,643 payment to Hackett and Co., sometimes referred

to as Habsco, that was allowed by respondent, and for 1990

he claims offsets or deductions in the form of direct

payments in the aggregate amount of $81,669.93. In his

posttrial briefs, petitioner asserts that he made the
 - 32 -

subject payments to clients, to the Internal Revenue

Service, or to State tax authorities in order to resolve

"tax problems that was [sic] due to an error or omission

made by the Petitioner." According to petitioner: "These

[payments] were for tax services that I performed that

there was some kind of problem with." According to

petitioner, in each case after "negotiations with client(s)

and once the Petitioner and the client came to an oral

agreement that the Petitioner would pay the tax bill", "the

direct payment was made to fully settle the legal dispute

between the Petitioner and his client." Petitioner asserts

that "he did not carry professional malpractice insurance",

and he orally agreed with his clients to make each of the

payments "to avoid litigation and to retain customers."

Furthermore, according to petitioner, each of the direct

payments was made "to resolve a tax problems [sic] that

was due to an error or omission made by the petitioner."

Petitioner states: "There was no connection between the

'direct payment' and billing", except in the case of the

reimbursed payments, discussed below.

To prove the nature of the subject direct payments,

petitioner relies on his own testimony, copies of

canceled checks or other evidence of payment, such as wire

transfers, and in several instances, copies of the bills
 - 33 -

or statements issued by the taxing authority. The

documentary evidence petitioner introduced supports a

finding that petitioner made payments to his clients, to

the Internal Revenue Service, and to various State tax

administrators. However, the documentary evidence does not

explain why the payments were made, what connection any of

the payments had to petitioner's Schedule C business, or

why these payments are ordinary and necessary business

expenses. For this, petitioner relies upon his own

uncorroborated testimony at trial. As we have often

stated, we are not required to accept a taxpayer's

self-serving testimony. See, e.g., Neidringhaus v.

Commissioner, 99 T.C. 202, 219-220 (1992); Tokarski

v. Commissioner, 87 T.C. 74, 77 (1986); Hradesky v.

Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam

540 F.2d 821 (5th Cir. 1976).

We have difficulty accepting petitioner's testimony

that he made 27 payments totaling $59,674.83 (i.e., total

direct payments of $113,317.83 less the amount allowed by

respondent, $53,643) in 1989 and 18 payments totaling

$81,669.93 in 1990 to settle malpractice claims with 17

clients. Petitioner claims to have made these payments,

but he failed to produce documents of any kind, such as

agreements, correspondence, or memoranda, to substantiate
 - 34 -

the nature of any of the payments. We also find it

significant that petitioner introduced no testimony or

corroboration from any of his clients concerning the nature

of these payments. We agree with respondent that this

raises an inference that such testimony would not support

petitioner's case. See McKay v. Commissioner, 89 T.C.

1063, 1069 (1987), affd. 886 F.2d 1237 (9th Cir. 1989);

Wichita Terminal Elevator Co. v. Commissioner, 6 T.C.

1158 (1946), affd. 162 F.2d 513 (10th Cir. 1947);

Metals Refining Ltd. v. Commissioner, T.C. Memo. 1993-115.

As mentioned above, petitioner relies entirely on

his own testimony at trial to substantiate the subject

payments. However, petitioner's testimony is extremely

vague. He does not describe the services that he provided

to the subject clients or the nature of the problem with

those services that prompted him to make the payment or

payments with respect to that client. The following

example illustrates petitioner's vague testimony.

Petitioner's testimony regarding two payments made on

behalf of Faith and Joseph Burns is as follows:

The next items is items 22-19, which has to
do with Faith and Joseph Burns. I paid the
Internal Service directly $4,640 and the State
of Massachusetts, which is item 20-22-20--
$1,156. They paid me fees in 1989 of $2,815.
 - 35 -

In response to questions from the Court about the fact

that petitioner's payments exceeded the fees received,

petitioner gave the following explanation:

They were paid out more in aggregate than I
received in fees, yes, and these had to do
with old matters existing prior to 1989 that
were ultimately paid or resolved in 1989.
It's not that I intended to lose money on this
proposition. It's just that old matters were
resolved.

Now, people say, Gary, you could have not
paid these matters, had the clients either pay
them or whatever, and let them sue you, and then
these would have been deductible at some time
down the road, you would have incurred legal
fees and the amounts may have been larger due to
interest and penalties and you would have been
caught up in court. But I decided to resolve
older matters probably pertaining to years '82
to '84, particularly in the-–well, these matters
were resolved-–well, problems arising from
earlier years were resolved and negotiated with
the clients in '89 and these were paid.

There is no real relationship to the $2,815
in fees received in 1989 and the amounts paid.
Obviously, in the case of Dr. Chang, which is
items 13, 14, and 15, which aggregate $400, and
item 21, which is a refund of $3,500–-well, those
three amounts are minuscule in comparison to the
1990 collections of $25,830.

So there is no correlation between the two.
The reason I mentioned the fees is to show that
they were, one, current clients, that I retained
them, not obviously to show that this agreement
had been reached and to show some perspective
that, by and large, for most of the clients, the
fees taken in and the retention of the relation-
ship exceeded the amounts that were paid out in
what would have been a divisive matter.
 - 36 -

Well, if these things were not resolved
amicably, it could have been a divisive matter,
which would have-–could have led to litigation,
as I said, I didn't have malpractice insurance,
and also, a loss of clients and client good will.
That's my rationale for paying them.

In effect, petitioner states that the subject payments were

made "to resolve older matters probably pertaining to years

'82 to '84". Petitioner gives no explanation of the

matters that were resolved.

Petitioner's testimony concerning the payments made

on behalf of his parents similarly fails to describe the

nature of those payments. Petitioner's testimony is as

follows:

The next check is 50-–is 22-3, which was
paid directly to the Internal Revenue Service
on behalf of my father, Eric Friedmann. It's
actually my parents, Eric and Phyllis Friedmann,
for a tax problem. I would just note that my
parents were clients and in the year 1989, they
paid me taxable fees of $7,374. When I say they
paid me fees, these are all reflected in my
income schedules that were reconstructed, that
are found in files 20-J for 1989 and 21-J for
1990. And these have been accepted by the
Internal Revenue Service for purpose-–as noted
in the audit work papers, although they don't tie
in precisely to the income per the tax return.

The next item has to do with Eric Friedmann,
who is, again, my father. These had to do with
items 15-A2, A3, A4, and A10. The first one
being payment directly to New York State on
behalf of him of $470.29. The next one is 15-A3,
had to do with payments directly to New York
State in the amount of $114.70. The next one is
15-A4, which is payment directly to New York
 - 37 -

State of $2,880.38, and the last one is 15-A10,
which has to do with payments directly to New
York State of $5,337.57. The checks are in this
file, Your Honor.

Petitioner claims an offset to income or a deduction

for payments made in 1989 in the amount of $31,856.70

allegedly on behalf of Ms. Margaret Lynch. His testimony

regarding those payments is as follows:

The next item is number 22-4. Again, these
are all within file 16-J, having to do with the
taxpayer Margaret Lynch, and I paid $75-–$75.01
to the State of Rhode Island on her behalf, for
a tax problem.

In items 23, I paid the IRS, Internal
Revenue Service, directly, $10,831.50 on her
behalf. Item 24, I paid the Internal Revenue
Service $3,930.09 on her behalf. Items 4-23 and
24 are direct checks to either Rhode Island or
the Internal Revenue Service.

In addition, items 30(a) and 30(b) are
direct wires or returns of funds to Margaret
Lynch, as agreed upon, in the amounts of $5,010,
in the instance of 30(a), and in the instance of
30(b), $12,010. Margaret Lynch, in 1989, paid
me fees-–and these were all, as I say, agreed
upon and accepted. Margaret Lynch paid me fees
of $5,159 and also in that period, her sister,
Jeanne Lynch, who is a client and had an
influence over her or their opinion of me
counted, they spoke quite frequently, paid me
fees of $400 in 1989 and in 1990, paid me fees
of $16,961.

Again, I believe these offsets-–there's two
components of the offsets here. One is money
given directly back to the client, which I
consider to be return of fees, and the other is
expenses that I paid directly for the client,
that would be items 24, 23 and 24, and the two
 - 38 -

wires, items 30 and 30(a) and 30(b) were funds
paid directly-–wired directly to the client's
personal account.

As true throughout petitioner's testimony at trial,

petitioner offers no explanation for the nature of the

services he provided to Ms. Lynch, the problems that arose

with respect to those services, or the reason for his

payment of those funds.

Finally, in one instance, petitioner claims to have

made a direct refund of fees to Dr. Strom in the amount of

$930. When asked about this payment at trial, petitioner

stated as follows:

Well, basically, it had to do with--I looked
after his investments and as well as doing his
personal-–doing his taxes and corporate work, and
he didn't feel the investments performed as well
as expected. Some of this had to do with
indemnities and the value of some of his
investments.

For the above reasons, we find that petitioner has

failed to meet his burden of proving that any of the direct

payments offset his gross receipts or can be deducted under

section 162. Accordingly, we hereby sustain respondent's

determination as to these payments.
 - 39 -

B. Supplies and Services

Included among the returns and allowances reported on

his 1989 return are payments that petitioner claims to have

made to clients to purchase "supplies and services".

Petitioner relies upon his own testimony and copies of

canceled checks to substantiate this claim. Petitioner

testified that the payments in this category, totaling

$5,500, consist of payments to three clients, Mr. Dana,

Mr. Kolton, and Jepsco, in the amounts of $500, $500, and

$4,500, respectively. At trial, petitioner testified that

the $500 payment to Mr. Dana was a fee "for supplies that

he provided for me in my business", the $4,500 payment to

Jepsco was "for consulting fees", and the $500 payment to

Mr. Kolton was "for legal services * * * in a probate

matter" rendered by Mr. Kolton. Petitioner testified

further that Mr. Kolton assisted petitioner with a probate

matter and "looked up some stuff and filed a paper".

Petitioner introduced copies of three canceled checks

payable to Mr. Dana, Mr. Kolton, and Jepsco containing the

notations "fee", "serv.", and "consulting", respectively,

in the memo section of the checks.

The evidence offered by petitioner is insufficient to

substantiate that petitioner is entitled to offset gross

income by, or to deduct, these amounts. Petitioner's
 - 40 -

testimony regarding the payments fails to provide

sufficient information regarding the "supplies" purchased

or the "consulting and legal work" actually performed.

As stated earlier, we are not required to accept a tax-

payer's self-serving testimony. See, e.g., Neidringhaus

v. Commissioner, 99 T.C. at 219-220; Tokarski v.

Commissioner, 87 T.C. at 77; Hradesky v. Commissioner, 65

T.C. at 90. For the above reasons, we hold that petitioner

has failed to establish that he is entitled to a deduction

for these payments, and we sustain respondent on this

issue.

C. Reimbursed Payments Allegedly Made on Behalf of One
Client

Included among the subject returns and allowances for

1990 are payments totaling $21,679.75, that petitioner

allegedly made on behalf of a client, Dr. Strom, for

licensing fees and tax liabilities. Petitioner asserts

that Dr. Strom reimbursed petitioner for these payments,

as discussed below, and that they should be treated as

offsets to gross income or as ordinary and necessary

business expenses under section 162. In passing, we

note that petitioner allegedly made two other payments

on behalf of or to Dr. Strom in 1990, $59.02, and $930,

that petitioner also treated as "direct payments".
 - 41 -

The evidence presented by petitioner regarding the

payments totaling $21,679.75 consists of petitioner's

testimony, copies of canceled checks, and a copy of a check

stub. Petitioner testified that he made three separate

payments on behalf of Dr. Strom in order to avoid penalty

and interest charges that Dr. Strom had incurred in prior

years for late fee payments and tax deposits. According

to petitioner's testimony and the copies of the canceled

checks petitioner offered as evidence, petitioner paid

$2,679.75, on September 26, 1990, to the City of Beverly

Hills for Dr. Strom's personal medical licensing fee, he

paid $12,000 to the U.S. Department of the Treasury on

October 1, 1990, for Dr. Strom's 1990 third quarter Federal

payroll tax deposit, and he paid $7,000 on December 31,

1990, to the Employment Development Department for

Dr. Strom's California employment tax liability.

Petitioner claims to have reported receipts in 1990

from Dr. Strom in the aggregate amount of $28,560.

Petitioner testified that "Dr. Strom paid me in two checks

that year". According to petitioner, the second check in

the amount of $26,700 or $26,200 was paid on December 19,

1990. Petitioner testified:

I actually wrote out the name to Gary Friedmann,
wrote the word fee, wrote the amount and wrote
out the check. Dr. Strom signed the check and
gave it to me and it's his handwriting in there
 - 42 -

on check 3009 where he writes in the date of
12/19/90, and writes out reimbursement, and then
$6,500 annual.

* * * * * * *

It's the check stub that I'm referring to. The
check-–the original check was returned to
Dr. Carey Strom. There is my writing on this
register and in addition to that, Dr. Strom, in
aggregate, paid me, in 1990, $28,560 for-–that
is-–there are two payments to me at least equal
that amount. This amount represents $26,200.
There was also other checks representing $2,300
that reflected in income.

Petitioner summarized his testimony regarding this matter

as follows:

Getting back to returns and allowances for 1990,
I just have one point. On December 19th, 1990,
Dr. Strom paid me the $26,700, of which 6,500 was
fees and the rest was reimbursement.

That was attributable, and this was our
agreement, this is my testimony, the reimburse-
ment component was attributable to taxes paid to
Beverly Hills, the City of Beverly Hills in
September of that year of $2,679. Withholding
taxes or payroll taxes the entity owed that I
paid on October 1st of that year, 1990, of
$12,000 and it contemplated me paying state
unemployment tax-–state employment taxes of
$7,000 on December 31st, 1990, which was
subsequent to the payment that was made on
December 19th, 1990.

You have checks that I paid all those three
amounts. That's all I wish to say about that.

And I believe that the total amount was an
advance, aside from the $6,500 fee, and that
these other amounts were just paid as a flow-
through.
 - 43 -

As we understand it, petitioner claims that the second

payment that he received from Dr. Strom in the amount of

$26,700 consisted of an annual fee of $6,500 and the

reimbursement of three payments that petitioner allegedly

made on behalf of Dr. Strom in the aggregate amount of

$21,679.75 (viz, $2,679.75, $12,000, and $7,000). One

problem we have with petitioners's testimony is that the

total of the fees and reimbursements is $28,179.75, or

$1,479.75 more than Dr. Strom's check of $26,700. Another

problem we have with petitioner's testimony is that he does

not explain why, in preparing the check for Dr. Strom's

signature, to reimburse himself for payments made on

Dr. Strom's behalf, petitioner included the $7,000 payment

to the Employment Development Department that would be due

on December 31, 1990, several days later. We do not

understand why petitioner did not simply prepare a check

for this upcoming payment directly from Dr. Strom to the

Employment Development Department.

Petitioner contends that the payments made on

Dr. Strom's behalf in 1990 are deductible because

petitioner received reimbursement for those payments from

Dr. Strom, and petitioner included the reimbursements in

computing gross income for that year. Petitioner states in

his posttrial brief that he included fees of $28,560, from
 - 44 -

Dr. Strom as gross receipts on Schedule C of his 1990

return. As mentioned above, petitioner produced a

handwritten list of the names of his clients and the

amounts that petitioner allegedly received from these

clients in 1990. According to the handwritten list,

petitioner included $28,560 from Dr. Strom in the

calculation of his gross receipts for that year.

We find that the evidence petitioner adduced is

insufficient to establish that amounts reimbursed by

Dr. Strom were included in the computation of petitioner's

gross receipts for 1990. According to the handwritten

list, petitioner's gross receipts for 1990, $185,966, does

not equal the gross receipts reported on Schedule C of

petitioner's 1990 return, $175,790. Petitioner has failed

to adequately explain this inconsistency. Furthermore,

the handwritten list of fees introduced at trial is not

supported by any other evidence, such as books, receipts,

or other documentation.

In addition, petitioner's testimony regarding the fees

of $28,560 received from Dr. Strom in 1990 and allegedly

included in his gross receipts for that year is confusing.

At trial, petitioner testified that Dr. Strom's fees of

$28,560 consisted of a $26,200 payment and "other checks

representing $2,300". In his opening brief, however,
 - 45 -

petitioner contends that the $28,560 payment comprised a

$960 payment and a $27,600 payment. Subsequently, in his

answering brief, petitioner contends that the $28,560

payment comprised a $26,700 payment, consistent with the

amount listed on the copy of the check stub introduced at

trial, and a $1,860 payment.

Furthermore, petitioner maintained a multifaceted

business relationship with Dr. Strom. Petitioner's returns

report wages from Dr. Strom's professional corporation

totaling $24,252 in 1989 and $18,409 in 1990. Dr. Strom

was also a client of petitioner's Schedule C business and,

in that connection, petitioner claims to have made a direct

payment to Dr. Strom of $930 because Dr. Strom "didn't feel

the investments performed as well as expected". Dr. Strom

was also an investor in one or more of the partnerships

petitioner promoted. In view of these relationships,

petitioners's testimony is too vague to substantiate the

offset or deductions he claimed for 1990 in the aggregate

amount of $21,679.75. In this connection, we also note the

fact that petitioner did not produce to respondent the

retainer agreement between himself and Dr. Strom or seek

to introduce the agreement at trial.

As a result of the inconsistent and insufficient

evidence he presented, petitioner has failed to establish
 - 46 -

that he is entitled to a deduction for the payments,

totaling $21,679.75, that he made on behalf of Dr. Strom.

We hereby sustain respondent on this issue.

On the basis of the foregoing, and concessions,

Decision will be entered

under Rule 155.