OSBORNE v. COMMISSIONER

T.C. Memo. 2002-11

UNITED STATES TAX COURT

KEVIN P. OSBORNE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5964-00. Filed January 10, 2002.

Kevin P. Osborne, pro se.

Peter C. Rock, for respondent.

MEMORANDUM OPINION

DINAN, Special Trial Judge: Respondent determined

deficiencies in petitioner’s Federal income taxes of $10,267 and

$11,057, and penalties under section 6662(a) of $498.40 and

$259.40, for the taxable years 1996 and 1997. Unless otherwise

indicated, section references are to the Internal Revenue Code in

effect for the years in issue.
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The issues for decision are: (1) Whether petitioner is

entitled to deductions for “business promotion” expenses in

excess of the amounts allowed by respondent; (2) whether

petitioner is entitled to deduct amounts representing the

repayment of loan principal; and (3) whether petitioner is liable

for the penalties under section 6662(a).1

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

The stipulations of fact and the attached exhibits are

incorporated herein by this reference. Petitioner resided in

Burlingame, California, on the date the petition was filed in

this case.

Petitioner is an insurance broker and operates a business

named Osborne Insurance Agency. The business is operated as a

sole proprietorship; there is no legal entity separate from

petitioner himself, such as a corporation, limited liability

company, or partnership. Petitioner filed a Schedule C, Profit

or Loss from Business, in each of the years in issue for the

business.

The first issue for decision is whether petitioner is

entitled to deductions for “business promotion” expenses in

excess of the amounts allowed by respondent.

1
Petitioner concedes respondent’s adjustments to his
deductions for taxes and licenses. Respondent’s adjustments to
the amounts of self employment income tax, and the deductions
therefor, are computational and will be resolved by the Court’s
holding on the issues in this case.
 - 3 -

Petitioner claimed meal and entertainment expenses of $1,720

in 1996 and $1,274 in 1997. Subtracting 50 percent of these

expenses pursuant to the section 274(n) limitation, he claimed

deductions of $860 and $637, respectively. Separately from these

deductions, petitioner also claimed deductions for “business

promotion” in the amounts of $2,544 and $2,120. In the statutory

notice of deficiency, respondent disallowed half of each of the

business promotion deductions.

Generally, expenses which are ordinary and necessary in

carrying on a trade or business are deductible. Sec. 162(a).

However, subject to exceptions not applicable here, a deduction

for any expense related to food, beverages, entertainment,

amusement, or recreation is limited to 50 percent of the amount

of the expense. Sec. 274(n). “Entertainment” includes

entertainment, amusement, or recreational activities at golf and

country clubs. Sec. 1.274-2(b)(1)(i), Income Tax Regs.

Respondent argues that the business promotion deductions are

subject to the 50-percent limitation because they are for meal

and entertainment expenses; namely, restaurant and golf-related

expenses. A summary prepared by petitioner’s representative

during the audit of petitioner’s return lists the amounts

constituting the total deduction claimed in 1996. The majority

of the expenses were in fact from restaurants and a country club.

The remaining expenses are of an unknown nature; petitioner did
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not identify these as other than meal or entertainment expenses,

or otherwise argue that the expenses should be allowed in full.

We find petitioner’s summary to be support for respondent’s

determination that the business promotion expenses are subject to

the 50-percent limitation under section 274(n). Based on this

record, we sustain that determination.2

The second issue for decision is whether petitioner is

entitled to deduct amounts representing the repayment of loan

principal.

Petitioner testified that he lent his business $31,712 in

1990 and $55,293 in 1992, and that his business partially repaid

these loans in the years in issue in the amount of $30,000 in

each year. Petitioner claimed a Schedule C deduction of $30,000

for each payment; respondent disallowed the deductions in full.

Petitioner is not entitled to the deductions for the alleged

loan payments for two primary reasons. First, and most

fundamentally, there was no loan for Federal income tax purposes.

Petitioner’s business was a sole proprietorship--not an entity

separate from petitioner--and as such petitioner and his business

share an identity for tax purposes. Fairchild v. Commissioner,

T.C. Memo. 2001-237. Thus, any loan effectively would have been

2
There is no credible evidence in the record to rebut
the presumption of correctness which would attach to respondent’s
determination. Therefore, the provisions of sec. 7491(a),
placing the burden of proof on respondent, do not apply.
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made by petitioner to himself. Furthermore, even if there had

been a separate entity to which a loan could have been made,

petitioner has not provided any reliable evidence of a loan. The

alleged loan document provided by petitioner (which relates only

to the alleged 1990 loan) is not reliable because it consists of

one paragraph, does not require interest payments, does not

require the repayment of principal at any time certain, and

although it refers to a secured party does not provide security

for the loan. Furthermore, petitioner’s testimony concerning

David Killian, who signed the document as a witness, suggests

that the document may have been signed at a later time and

backdated to 1990. Petitioner also produced as evidence copies

of two amended returns allegedly filed in 1993 for the taxable

years 1990 and 1992. Attached to each return was a sheet of

paper on which the amount of reported Schedule C income was

divided into two categories: “1099 Farmers” and “Loan Kevin”.

The total Schedule C income was $57,504 in 1990 and $162,650 in

1992. The loan income was listed as $31,712 in 1990, and $55,293

in 1992. It is unclear why these returns were to be filed

because no changes in taxable income or tax liability were shown

on them. In any event, these are mere uncorroborated assertions

by petitioner and are not reliable evidence.

Second, assuming arguendo that a loan had in fact been made,

the repayment of one’s own debt generally is not deductible.
 - 6 -

Brenner v. Commissioner, 62 T.C. 878 (1974); Crawford v.

Commissioner, 11 B.T.A. 1299 (1928). Petitioner argues that out

of fairness he nonetheless should be entitled to a deduction

because he included the loan amounts in the income of the

business when they were received by the business. We do not

accept petitioner’s evidence that he included the amounts in

income in 1990 and 1992. First, as noted above, the proffered

documents are not reliable evidence. Second, petitioner did not

treat the loan payments consistently. If he believed that the

business was required to report income when the loan was

received, and entitled to a deduction when the loan was repaid,

then it is unclear why petitioner as an individual did not do the

reverse--claim a deduction upon initial disbursement, and report

income upon repayment. These actions, of course, would have

canceled each other out for tax purposes because each would have

been reported on the same tax return. In any event, even if we

assumed arguendo that petitioner overreported income for 1990 or

1992, neither of those years is within our jurisdiction here.

The final issue for decision is whether petitioner is liable

for the penalties under section 6662(a).

Respondent determined that petitioner was liable for the

penalties only with respect to the portions of the underpayments

attributable to petitioner’s deduction of the business promotion

expenses and the tax and license expenses. Petitioner concedes
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the latter underlying adjustment, but he disputes the imposition

of the penalties.

Section 6662(a) imposes a 20-percent penalty on the portion

of an underpayment attributable to any one of various factors,

one of which is negligence or disregard of rules or regulations.

Sec. 6662(b)(1). “Negligence” includes any failure to make a

reasonable attempt to comply with the provisions of the Internal

Revenue Code, including any failure to keep adequate books and

records or to substantiate items properly. Sec. 6662(c); sec.

1.6662-3(b)(1), Income Tax Regs. Section 6664(c)(1) provides

that the penalty under section 6662(a) shall not apply to any

portion of an underpayment if it is shown that there was

reasonable cause for the taxpayer’s position and that the

taxpayer acted in good faith with respect to that portion. The

determination of whether a taxpayer acted with reasonable cause

and in good faith is made on a case-by-case basis, taking into

account all the pertinent facts and circumstances. Sec.

1.6664-4(b)(1), Income Tax Regs. The most important factor is

the extent of the taxpayer’s effort to assess his proper tax

liability for the year. Id. Finally, a taxpayer may avoid the

accuracy-related penalty under section 6662(a) by showing

reliance on the advice of a professional which was reasonable and

in good faith. Sec. 1.6664-4(b)(1), Income Tax Regs.
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As discussed above, the business promotion expense

deductions were adjusted by respondent to reflect the 50-percent

limitation under section 274(n). The cause for the adjustment to

the tax and license deductions is not as clear because petitioner

concedes this issue and it was not argued at trial. Petitioner

claimed deductions of $7,517 in 1996 and $4,323 in 1997;

respondent allowed only $2,454 and $1,412, respectively. Neither

petitioner’s tax return nor respondent’s notice of deficiency

enumerates the individual expenses constituting the total claimed

and allowed deductions for taxes and licenses. Respondent,

however, argues in his trial memorandum that the totals were

derived from the following with respect to 1996:3

Claimed Allowed

Federal income tax withholding $1,300 $-0-
Employees’ FICA 1,829 -0-
Employer’s FICA 1,829 1,829
FUTA 121 121
State income tax withholding 165 -0-
State unemployment insurance 377 377
State employee training tax 15 15
State disability insurance 191 -0-
Licenses 112 112
Petitioner’s Federal income tax 1,578 -0-
7,517 2,454

Petitioner primarily argues that he is not liable for the

negligence penalty because he relied on his tax return preparer.

Limiting our review to the two items for which respondent found

petitioner to be negligent, we agree with petitioner. Blind

3
Some of the corresponding individual amounts were
stipulated by the parties as having been paid.
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reliance on a return preparer is not a defense to negligence, and

taxpayers retain a duty to file an accurate return and generally

are required to review their return before signing it. E.g.,

Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662 (1987).

However, in this case and with respect to these two items on

petitioner’s tax returns, petitioner’s reliance was reasonable.

Petitioner provided his return preparer with his business

records, and the preparer computed the amounts of the deductions.

Petitioner was reasonable in not questioning the preparer’s

classification of some meal and entertainment expenses as

“business promotion” expenses; because of the location of these

expenses on the return, the 50 percent limitation was not

obviously applicable. Petitioner was also reasonable in not

questioning the preparer’s classification of the various tax

expenses as deductible: Requiring petitioner to question and

research the deductibility of each individual item would render

his use of a preparer pointless. The record does not support

respondent’s determination of negligence in this case.

To reflect the foregoing,

Decision will be entered

for respondent with respect to the

deficiencies and for petitioner

with respect to the penalties.