T.C. Memo. 2002-57
UNITED STATES TAX COURT
INTEREX, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17030-99. Filed February 27, 2002.
Paul J. Dee, Jr., for petitioner.
Carina J. Campobasso, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined a deficiency of $67,473
in petitioner’s Federal income taxes for 1994 and a penalty of
$5,070 under section 6662. After concessions, the issues for
decision are whether petitioner is entitled to a deduction for
professional fees in the amount of $65,000 for 1994 and whether
petitioner is liable for the penalty. Unless otherwise
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indicated, all section references are to the Internal Revenue
Code in effect for the year in issue.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference.
Petitioner is a corporation located in Amesbury, Massachusetts,
at the time that its petition was filed.
Petitioner was in the business of designing, storing, and
refurbishing trade show exhibits. Petitioner began its business
in mid-September 1993. Tamara C. Olbres (Olbres) was the
100-percent shareholder and president of petitioner.
In 1994, petitioner was a C corporation. Petitioner used
the accrual method of accounting. On its Form 1120, U.S.
Corporation Income Tax Return, for 1994, petitioner claimed a
deduction for professional fees in the amount of $66,865. The
amount deducted was based in part on an adjusting entry to accrue
a professional fee in the amount of $65,000. The Form 1120
reported compensation paid to Olbres in the amount of $42,000,
salary and wages expense of $6,723, and taxable income of
$75,689. Petitioner’s Form 1120 was prepared and signed by
George Coupounas (Coupounas), who represented himself to be a
knowledgeable certified public accountant and attorney.
An audit of petitioner’s Federal income tax return for 1994
was commenced in early 1997, and an inquiry was made into the
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accrual of the $65,000 professional fee. During the audit,
petitioner was represented by Coupounas. Coupounas stated that
the $65,000 was for his services and that he had never billed
petitioner and had not been paid for the services. He declined
to provide time sheets reflecting services performed for
petitioner. In August 1998, Olbres signed a check payable to
Coupounas for $65,000. At the direction of Coupounas, Olbres
dated the check December 31, 1998. The check was delivered to
Coupounas in August 1998 and was negotiated by him and cleared
petitioner’s bank account in August 1998. Before delivering the
check to Coupounas, Olbres did not receive from Coupounas any
invoice or other itemization of the services for which payment
was allegedly made.
OPINION
Petitioner argues that the professional fees were incurred
during the year in issue.
Under the accrual method of accounting, a liability is
incurred, and generally is taken into account for Federal income
tax purposes, in the taxable year in which all the events have
occurred that establish the fact of the liability, the amount of
the liability can be determined with reasonable accuracy, and
economic performance has occurred with respect to the liability.
Sec. 1.461-1(a)(2), Income Tax Regs.
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The only evidence offered at trial by petitioner was the
canceled check and the testimony of Olbres. Olbres testified
that she never had any discussions with Coupounas as to how he
would charge petitioner for accounting and legal services. She
acknowledged that it was not petitioner’s standard business
practice to retain service providers or suppliers without knowing
what they were going to charge. She attempted to explain her
reliance on Coupounas by reference to his history of preparation
of tax returns for her parents and for her. Coupounas declined
to cooperate with petitioner’s counsel, and there are no
documents in the record reflecting services allegedly performed
by Coupounas for petitioner other than the tax return prepared by
him.
We are not persuaded that economic performance with respect
to the professional fees claimed had occurred during the year in
issue. Coupounas never submitted an invoice to petitioner,
unlike other suppliers with whom petitioner did business. Based
on the testimony and lack of contemporaneous documentation, we
conclude that the amount of the professional fees for services
allegedly rendered by Coupounas could not have been determined
with reasonable accuracy by the end of 1994. Olbres also
testified that, at the time she signed the return, she was not
aware that more than $65,000 in professional fees expense was
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claimed as a deduction. She testified that she looked only at
the bottom line.
With respect to the check written to Coupounas in August
1998, Olbres testified as follows:
Q When did you first become aware that the
corporation owed Mr. Coupounas $65,000 for professional
fees from the calendar year 1994?
A It was some time in August 1998.
Q And how did you become aware of that?
A Mr. Coupounas arrived at my office one day
and told me that the corporation owed him $65,000 for
services rendered that was claimed on the 1994 tax
return, and he asked me to write him a check.
Q Now, at the time Mr. Coupounas came to you
in August of 1998, and said “You owe me $65,000 for
legal and accounting services,” were you aware that
Mr. Coupounas had rendered services to Interex, Inc.
for which he had not been paid?
A Yes, I was.
Q When he told you you owed him $65,000 or
the corporation owed him $65,000, did you ask him what
services is this for, or what did you do for this
money?
A No, I didn’t.
Q Did you ask him whether he had kept any
time records or any other types of records which would
support that amount of $65,000?
A No, I didn’t.
* * * * * * *
Q Is it your testimony that you paid
Mr. Coupounas on December 31, 1998?
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A No. I wrote the check sometime in August
1998.
Q Who printed that date, December 31, 1998 on
the check?
A I did.
Q Now, why would you give Mr. Coupounas a
check in August of 1998 and date that check
December 31, 1998?
A That’s the date that Mr. Coupounas asked me
to reflect on the check.
Q Mr. Coupounas asked you to put that date on
the check?
A Yes, he did.
Q Did he tell you why he wanted you to put
that date on the check?
A No, he didn’t.
Q Did you ask him?
A No, I didn’t.
Q Didn’t that seem unusual to you writing a
check in August and putting a December 31, 1998 date on
it?
A Yes, it seemed unusual.
Q But even though it was unusual, you still
didn’t ask him?
A That’s correct.
Q Why not?
A It seemed unusual but I didn’t think it was
illegal, especially where the same year is reflected on
the check, the year I wrote it.
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Although Olbres identified a few services performed for
petitioner by Coupounas, none of these services were specialized,
unique, or otherwise reasonably valued at $65,000 during 1994.
Her testimony does not support a finding that an expense in any
amount was incurred during petitioner’s 1994 tax year that would
support a deduction by an accrual basis taxpayer. See sec.
461(a); sec. 1.461-1(a)(2)(i), Income Tax Regs.
Olbres’ testimony concerning her unquestioning reliance on
Coupounas is either improbable or indicative of unreasonable
conduct. Her testimony that she did not look at anything other
than the bottom line on the tax return that she signed is also
improbable or indicative of negligence. According to the return,
the professional fees claimed during the year in issue exceeded
150 percent of the compensation that she received as the
executive and operating employee of the corporation. Although
Coupounas was an accountant and an attorney, under the facts of
this case we do not believe that Olbres reasonably relied on him
with respect to the propriety of deducting $65,000 in accrued
professional fees that were allegedly payable to Coupounas.
Under these circumstances, a penalty for negligence under section
6662(a) is appropriate.
Decision will be entered
for respondent.