T.C. Memo. 2002-239
UNITED STATES TAX COURT
ROBERT M. JOHNSON AND JANNA D. BEGOLE, f.k.a.
JANNA D. JOHNSON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20299-98. Filed September 24, 2002.
Robert M. Johnson and Janna D. Begole, pro sese.
Ross M. Greenberg, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined deficiencies in
petitioners’ Federal income taxes, an addition to tax, and
accuracy-related penalties for 1992 and 1993 in the following
amounts:
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Accuracy-Related
Addition to Tax Penalty
Year Deficiency Sec. 6651(a) Sec. 6662(a)
1992 $ 7,065 -- $1,413
1993 11,982 $1,325 2,396
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.
The issues for decision are: (1) Whether petitioner
Robert M. Johnson’s S corporation had unreported income for 1992
and 1993; (2) whether petitioner Robert M. Johnson’s
S corporation overstated a portion of its deductions for 1992 and
1993; (3) whether petitioners are entitled to additional itemized
deductions for 1992 and 1993; and (4) whether petitioners are
liable for the addition to tax and accuracy-related penalties.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
At the time the petition was filed, petitioners, former
husband and wife, resided in Florida. Hereinafter, all
references to petitioner in the singular are to Robert M.
Johnson.
During the years in issue, petitioner, an attorney, was the
sole shareholder of DUI Legal Centers, Inc. (DUI), an S law
corporation with multiple offices located in Tampa, Sarasota,
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Ft. Lauderdale, Orlando, and West Palm Beach, Florida.
Petitioner and DUI specialized in representing clients charged
with driving under the influence of alcohol.
In connection with client representations, petitioner
frequently traveled to various courthouses throughout Florida,
including courthouses located in Clearwater, Dade City,
Ft. Lauderdale, Kissimmee, Manatee, New Port Richey, Orlando,
Plant City, Sanford, Sarasota, St. Petersburg, Tampa, Tarpon
Springs, Venice, and West Palm Beach.
During 1992 and 1993, Janna D. Begole (Begole), petitioner’s
former wife, was a paralegal at DUI, and Louis Johnson (Johnson),
petitioner’s father, was the office manager at the DUI office
located in Sarasota, Florida.
During the years in issue, DUI received payments for legal
services rendered. The payments were received via credit cards,
personal checks, and cash. DUI maintained bank accounts at banks
located in Tampa, Sarasota, and Orlando, Florida, and one of
those three accounts was the designated bank account for each of
DUI’s respective offices.
During 1992 and 1993, all credit card authorization slips
received at the various DUI offices in payment for legal services
were forwarded to and deposited by Johnson into DUI’s account
located in Sarasota, Florida. In 1993, Johnson, on behalf of
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DUI, deposited $33,025 in credit card authorization slips into
DUI’s bank account.
Cash and checks received at the various DUI offices for
legal services rendered were deposited into the DUI bank account
designated for that office.
During 1992 and 1993, Johnson periodically wrote checks,
drawn on the DUI account in Sarasota in favor of DUI or cash, and
mailed the checks to DUI’s Tampa office for deposit by petitioner
or by other DUI personnel into DUI’s account in Tampa (interbank
transfers).
For 1992 and 1993, DUI’s books and records and petitioner’s
personal books and records were incomplete and inadequate.
DUI reported on its 1992 and 1993 S corporation Federal
income tax returns gross receipts of $473,156 and $429,186,
respectively.
On audit, using the bank deposits method, respondent
determined that DUI had gross income not reported on DUI’s 1992
and 1993 tax returns of $8,343 and $18,232, respectively.
Respondent calculated the amount of DUI’s interbank
transfers after meeting with Nick Ligori (Ligori), petitioner’s
accountant. Ligori provided respondent with a record prepared by
Ligori that established interbank transfers of $40,850 for 1992
and $12,356 for 1993, including transfers of funds from DUI’s
account in Sarasota to its account in Tampa. For 1993, Ligori
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provided to respondent’s Appeals officer a canceled check as
evidence of an additional $4,000 interbank transfer, and
respondent credited DUI for the additional $4,000 interbank
transfer when determining DUI’s unreported income for 1993.
Set forth below is a summary schedule that reflects
respondent’s calculation of DUI’s unreported gross income for
1992 and 1993:
1992 1993
Bank Deposits $ 548,309 $ 488,841
Less Reductions
Returned Checks (18,812) (17,179)
Refunds to Clients (7,148) (7,888)
Interbank Transfers (40,850) (16,356)
Gross Receipts $ 481,499 $ 447,418
Gross Receipts as Reported (473,156) (429,186)
Unreported Gross Income $ 8,343 $ 18,232
On its S corporation tax returns for 1992 and 1993, DUI
claimed as “other deductions” business expenses of $27,020 and
$65,336, respectively.
On audit, respondent determined that a portion of DUI’s
claimed business deductions for the years in issue was not
allowable. The deductions claimed by DUI and the amounts
disallowed and allowed by respondent are reflected in the
schedule below:
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1992
Respondent Respondent
Claimed Disallowed Allowed
Credit Card Charges $ 8,177 $ 6,711 $ 1,466
Client Costs 1,069 489 580
Expense Reimbursement 10,319 1,170 9,149
Miscellaneous 1,845 966 879
Meals/Entertainment 5,610 2,906 2,704
Total $27,020 $12,242 $14,778
1993
Respondent Respondent
Claimed Disallowed Allowed
Credit Card Charges $ 9,705 $ 6,781 $ 2,924
Client Costs 22,925 17,797 5,128
Expense Reimbursement 10,927 2,365 8,562
Professional Dues 20,124 8,001 12,123
Meals/Entertainment 1,655 331 1,324
Total $65,336 $35,275 $30,061
On their individual joint Federal income tax returns for
1992 and 1993, petitioners claimed $20,792 and $25,594,
respectively, as Schedule A itemized deductions for vehicle
expenses, parking fees, travel expenses, and meals and
entertainment expenses (hereinafter collectively referred to as
job expenses) incurred by petitioners in their capacities as
employees of DUI.
On audit, relying largely on petitioner’s travel log,
respondent allowed for each year $2,054 for vehicle expenses and
$223 for parking fees after determining that petitioner in 1992
and in 1993, in his capacity as an employee of DUI, made 21 trips
in his personal vehicle at an average of 300 miles per trip.
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Respondent disallowed the balance of the claimed Schedule A
itemized deductions relating to job expenses.
Petitioners filed their 1993 joint Federal income tax return
on November 9, 1994, almost 7 months late.
OPINION
Generally, respondent’s deficiency determinations are
presumed correct, and the burden of proof is on taxpayers to show
that respondent’s determinations are incorrect.1 Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933). Taxpayers are
expected to keep adequate records reflecting their income and
expenses. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs.
Where taxpayers fail to maintain adequate books and records,
respondent is allowed to reconstruct the taxpayers’ income by any
reasonable method. Sec. 446(b); Erickson v. Commissioner, 937
F.2d 1548, 1553 (10th Cir. 1991), affg. T.C. Memo. 1989-552;
Parks v. Commissioner, 94 T.C. 654, 658 (1990).
DUI’s Gross Income
The bank deposits method has long been sustained by the
courts as a means of computing unreported income. Clayton v.
Commissioner, 102 T.C. 632, 645 (1994); DiLeo v. Commissioner, 96
1
Respondent’s examination of petitioners’ 1992 and 1993
joint Federal income tax returns began in 1996. Accordingly, the
shift in the burden of proof or of production that is available
in some circumstances under sec. 7491 is not applicable.
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T.C. 858, 867 (1991), affd. 959 F.2d 16 (2d Cir. 1992).
Particularly where taxpayers fail to keep adequate records, bank
deposits constitute prima facie evidence of income. Tokarski v.
Commissioner, 87 T.C. 74, 77 (1986).
For 1992, petitioners do not contest respondent’s bank
deposits calculation of DUI’s gross income. For 1993,
petitioners argue that $16,669 of the $18,232 unreported income
of DUI as calculated by respondent represents additional
nontaxable interbank transfers for which petitioners should be
given credit. Petitioner testified generally that the standard
practice of DUI was to transfer all of the funds received in the
form of credit card authorization slips and initially deposited
into DUI’s bank account located in Sarasota, Florida, to DUI’s
bank account located in Tampa, Florida. Begole testified only
that some of DUI’s funds received and deposited represented
interbank transfers, and petitioner did not call Johnson or
Ligori to testify even though they likely were in the best
positions to know the specifics relating to the interbank
transfers. Petitioner did not offer sufficient corroborating
evidence regarding the alleged additional interbank transfers to
the DUI bank account located in Tampa, Florida, and we find
petitioner’s testimony unpersuasive.
We sustain respondent’s determinations of DUI’s unreported
gross income for 1992 and 1993.
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DUI’s Claimed Business Expenses
Section 162 allows deductions for ordinary and necessary
expenses incurred in carrying on a trade or business. Deductions
are a matter of legislative grace, and taxpayers generally have
the burden of showing they are entitled to the deductions
claimed. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S.
79, 84 (1992).
Where taxpayers are unable to fully justify their
entitlement to claimed business deductions, this Court may
approximate the amount of allowable business deductions, bearing
heavily against the taxpayer whose inexactitude is of his own
making. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.
1930). For the Cohan rule to apply, however, a basis should
exist on which an approximation can be made by this Court.
Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).
Petitioner has not established any evidentiary basis
justifying an application of the Cohan rule, and petitioner has
not met his burden of proving his entitlement to additional
business expense deductions. We sustain respondent’s
determination of DUI’s allowable business expense deductions.
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Claimed Schedule A Itemized Deductions
Petitioner’s claimed additional travel, meal, and
entertainment expenses are deductible under section 162 only to
the extent petitioner satisfies the heightened substantiation
requirements of section 274(d).
Thereunder, to support their deductibility, taxpayers are
required to substantiate by adequate records or by sufficient
evidence corroborating their own statements, the amount, time,
place, and business purpose of the claimed expenses. The section
274(d) substantiation requirements supersede the Cohan rule
making the Cohan rule generally inapplicable for expenses covered
by section 274(d). Sec. 1.274-5T(a), Temporary Income Tax Regs.,
50 Fed. Reg. 46014 (Nov. 6, 1985).
Generally, taxpayers are required to maintain records such
as account books, diaries, logs, statements of expenses, or trip
sheets, and documentary evidence, which, in combination, are
sufficient to establish the fact and business nature of the
claimed expenses. Sec. 1.274-5T(c)(2), Temporary Income Tax
Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).
Petitioner argues that the claimed expenses were incurred
in his occupation as an attorney and that the expenses related to
his extensive travel making court appearances throughout Florida.
Petitioner argues that it is obvious that he incurred more
business travel expenses than those allowed by respondent. No
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records, however, substantiate business travel expenses beyond
those allowed by respondent. Begole testified generally to
petitioner’s work schedule and travel but did not offer specific
details that would adequately substantiate the claimed expenses.
Petitioner has not adequately substantiated travel expenses
other than those vehicle expenses and parking fees allowed by
respondent.
Addition to Tax and Penalties
Section 6651(a)(1) imposes additions to tax where taxpayers
fail to timely file income tax returns unless the failure is due
to reasonable cause. To establish reasonable cause, taxpayers
must show that they exercised ordinary business care and prudence
but were still unable to file their tax returns by the due dates.
Sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Whether the
untimely filing of tax returns is due to reasonable cause raises
a question of fact. Denenburg v. United States, 920 F.2d 301,
303 (5th Cir. 1991).
Petitioner cites “unusual” personal circumstances and
excessive work for DUI as the reasons for his lack of records and
his and Begole’s inability to timely file their 1993 income tax
return.
Petitioners have not established reasonable cause as to why,
with the help of their accountant, they were unable to file on
time their 1993 Federal income tax return. We sustain
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respondent’s determination of the addition to tax for
petitioners’ failure to timely file their 1993 Federal income tax
return.
Section 6662(a) imposes a penalty of 20 percent on
underpayments of tax attributable to negligence or to disregard
of rules and regulations. The definition of negligence includes
the failure by taxpayers to properly and adequately maintain
books and records. Sec. 1.6662-3(b)(1), Income Tax Regs.
We sustain respondent’s determination of the accuracy-
related penalties for 1992 and 1993.
Decision will be entered for
respondent.