T.C. Memo. 2006-87
UNITED STATES TAX COURT
JOEL RAPPAPORT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10777-04. Filed April 25, 2006.
Martin A. Stoll, for petitioner.
Willie Fortenberry, Jr., for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COLVIN, Judge: Respondent determined a deficiency of
$47,650 in petitioner’s Federal income tax for 2001 and additions
to tax (1) for failure to file under section 6651(a)(1)1 in the
1
Section references are to the Internal Revenue Code as
amended. Rule references are to the Tax Court Rules of Practice
and Procedure.
- 2 -
amount of $5,096.25; (2) for failure to pay tax under section
6651(a)(2) in the amount of $1,812; and (3) for failure to pay
estimated tax under section 6654(a) in the amount of $786.40.
Less than a month before trial, petitioner submitted an
income tax return for 2001 to respondent in which he reported
more income than respondent had determined and deducted expenses
that flowed through to his return from two S corporations.
Respondent asserted in an amendment to answer filed 5 days before
trial that petitioner’s deficiency for 2001 is $168,424 and that
he is liable for additions to tax of $42,106 under section
6651(a)(1) and $2,317 under section 6654(a).
After concessions,2 the issues for decision are:
1. Whether petitioner may deduct a greater amount of
expenses flowing through to him from his S corporations than
respondent allowed. We hold that he may not.
2. Whether petitioner is liable for the addition to tax
for failure to timely file his 2001 return under section
6651(a)(1). We hold that he is.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
2
Among other concessions, petitioner concedes he is liable
for the addition to tax for failure to pay estimated tax under
sec. 6654(a), and respondent concedes that petitioner is not
liable for the addition to tax under sec. 6651(a)(2).
- 3 -
A. Petitioner
Petitioner lived in Florida when he filed the petition.
Petitioner graduated from New York University and received a
master’s degree from a second institution. He is a certified
public accountant (C.P.A.), and practices in Florida and New
York. He had specialized in taxation for about 40 years. He
represented taxpayers before the Internal Revenue Service (IRS)
during 2001-04.
B. Petitioner’s Businesses
1. Joel Rappaport & Co. and Rappaport, Steele & Co.
Petitioner is the sole owner and president of Joel Rappaport
& Co., P.A. (JRC), a Florida corporation, and Rappaport, Steele &
Co., P.C. (RSC), a New York corporation. JRC and RSC performed
tax, accounting, and return preparation services.
Petitioner performed services for JRC in 2001-04. He
received $160,000 per year in wages from JRC. In April of each
year from 1996 to 2004, petitioner signed annual reports for JRC
and filed them with the secretary of state of Florida. JRC
timely filed employment tax returns for 2002-04. Petitioner
signed those returns.
RSC provided tax and accounting services. RSC was
profitable in 2001. In 2001-04, John Glasner and Bob Steele
(Steele) were RSC employees who provided accounting services and
prepared tax returns for RSC clients. Steele represented clients
- 4 -
before the IRS during those years. RSC timely filed employment
tax returns for 2001-04. Petitioner signed all of those
employment tax returns. RSC paid JRC $192,500 for services that
petitioner performed in 2001.
2. Consulting for Business, Inc.
Petitioner’s wife and two children owned a business called
Consulting for Business, Inc. (CFB).3 CFB provides marketing
activities (e.g., direct mail services) to JRC and RSC.
Petitioner has been president of CFB since its inception around
1995.
C. Petitioner’s Illness
In June 2002, petitioner sought treatment at the Mayo Clinic
for pain in his left leg and his back. The pain worsened in July
2002. He had difficulty walking in August 2002. Petitioner was
soon diagnosed with multiple myeloma, which he was told is an
incurable blood disorder. He received radiation therapy 22 times
over a 45-day period beginning in September 2002. Petitioner
changed medications several times because he had adverse
reactions. From August 2002 to April 2004, the medication
affected petitioner’s personality and caused petitioner to have
difficulty sleeping, bending, walking, and traveling.
3
Apparently petitioner was not a shareholder of CFB. Exh.
18-P, General Ledger for Consultants for Business, Inc., refers
to petitioner’s wife, but not petitioner, as a CFB shareholder.
- 5 -
From July through December 2002, petitioner reduced the
amount of his business travel and primarily worked from home.
Petitioner used video conferencing to reduce stress and the need
to travel. He worked an average of about 15 hours per week from
September to November 2002, about 20 hours per week from November
2002 to August 2003, about 10 to 15 hours per week from August
2003 to March 2004, about 30 hours per week from March to
November 2004, and about 40 hours per week after November 2004.
Petitioner’s income was fairly stable throughout 2002-04. As of
the date of trial, no one associated with JRC or RSC knew about
petitioner’s illness.
D. Income Tax Returns
1. Petitioner’s Tax Return for 2000
Stan Hester (Hester), a JRC employee, prepared petitioner’s
Form 1040, U.S. Individual Income Tax Return, for 2000. JRC
employed Hester in 2001, 2002, and until October 2003.
Petitioner signed his Federal income tax return for 2000 on
February 12, 2002, and untimely filed it on a date not stated in
the record. Petitioner reported in that return that he had
received wages of $160,000 from JRC.
2. JRC’s and RSC’s Forms 1120S for 2001
On January 3, 2003, petitioner filed Forms 1120S, U.S.
Income Tax Return for an S Corporation, for 2001 for JRC and RSC.
- 6 -
3. Petitioner’s Tax Returns for 2001-04
On a date not stated in the record, petitioner received an
extension to file his 2001 return on or before October 15, 2002.
Petitioner did not file income tax returns for tax years 2002-04.
E. Notice of Deficiency for Petitioner’s Tax Year 2001 and the
Pleadings in This Case
Respondent determined a deficiency in petitioner’s income
tax for 2001 on the basis of information reported by third
parties. Respondent mailed the notice of deficiency to
petitioner on March 22, 2004. Petitioner had not filed an
individual income tax return for 2001 at that time.
Petitioner filed a petition in which he contends that he is
entitled to deduct certain expenses. Petitioner faxed a Form
1040 for 2001 to respondent’s Appeals Office less than a month
before the trial of this case. He reported income of $317,525,
which included amounts not previously reported to respondent by
third-party payers. The $317,525 consisted of: $160,000 of
wages paid by JRC; $4,033 of interest; $4 of dividends; $25,613
of capital gains; and $127,875 from rent.
On his Form 1040 for 2001, petitioner deducted the following
expenses that flowed through to him from JRC and RSC:
- 7 -
JRC
Rent $45,441
Marketing 41,335
Professional fees 16,008
Auto rental and expenses 20,893
Total 123,677
RSC
Rent $82,252
New York apartment tax 3,121
Lodging 8,419
Professional fees 18,037
Transportation 24,905
Travel 20,929
Marketing 141,707
Management, staff, and 192,500
administration
Interest 36,392
Total 528,262
Respondent asked petitioner to substantiate the deductions
that flowed through from JRC and RSC to his delinquent Form 1040
for 2001. Petitioner did not do so.
Respondent filed an amendment to answer. In it, respondent
asserts that petitioner’s 2001 deficiency and additions to tax
were larger than respondent had determined in the notice of
deficiency on the basis of the amount of income first reported to
respondent in the Form 1040 petitioner had faxed to respondent.
Respondent also asserted in the answer that, although requested
to do so by respondent, petitioner did not provide documents
substantiating any deductions for 2001.
- 8 -
OPINION
A. Whether Petitioner May Deduct Various Expenses That CFB Paid
for Him in 2001
Petitioner contends that he may deduct mortgage interest
under section 163(h)(3), real estate tax under section 164(a)(1),
and condominium fees under section 162(a) paid for him by CFB in
2001. We disagree. Petitioner may not deduct these items
because they were paid by CFB, not petitioner. See Doggett v.
Commissioner, 275 F.2d 823, 827 (4th Cir. 1960), affg. T.C. Memo.
1958-176; Citizens Nat. Trust & Sav. Bank v. Welch, 119 F.2d 717,
719 (9th Cir. 1941); Kniffen v. Commissioner, 39 T.C. 553, 567
(1962); Budner v. Commissioner, T.C. Memo. 1984-542. Petitioner
disagrees and contends he can deduct CFB’s payments because they
were loans to him, which, because of the obligation to repay the
loans, were constructively paid by him. We disagree.
Petitioner introduced in evidence some pages from CFB’s
general ledger for 2001 that show that CFB routinely paid
petitioner’s personal expenses. The balance sheet on CFB’s Form
1120S for 2001 states that these payments were loans to
petitioner. However, neither those pages nor any other evidence
show that petitioner is obligated to repay CFB. Thus, petitioner
has not shown that CFB’s payments on his behalf were loans to
him.
Petitioner contends that Budner v. Commissioner, supra, on
which respondent relies, is distinguishable on two grounds.
- 9 -
First, in Budner, we held that a taxpayer (partner) may not
deduct payments by a third party (a partnership) unless there is
an arrangement for charging the partner. We found that there was
no such arrangement in Budner. Petitioner contends that CFB’s
payment of his expenses was a loan to him, unlike the
circumstances in Budner. We disagree because petitioner has not
shown that he was obligated to repay CFB.
Second, in Budner, we found no evidence that the expenses
the partnership paid for the taxpayer had not been deducted at
the partnership level, and thus the expenses at issue could have
been improperly deducted twice. Id. Petitioner testified and
contends that CFB did not deduct the expenses it paid that are at
issue in this case. We disagree. Petitioner is an experienced
C.P.A. who should have known that he is required to keep and
produce records to substantiate his claims. See sec. 6001. He
did not offer CFB returns in evidence. He did not corroborate
his testimony or explain how he knew that CFB did not deduct
those items. Petitioner’s attempt to distinguish Budner is
without merit.
We conclude that petitioner may not deduct mortgage
interest, real estate tax, and condominium fees that CFB paid in
2001.
- 10 -
B. Whether Items Deducted on the Forms 1120S for 2001 for JRC
and RSC Flow Through to Petitioner’s Individual Tax Return
1. Background
JRC and RSC delinquently filed their Forms 1120S for 2001,
and petitioner delinquently submitted his Form 1040 for 2001. In
his Form 1040, petitioner reported flow-through expenses from JRC
and RSC. Respondent disregarded those expenses in the amended
answer because petitioner did not respond to respondent’s request
to substantiate them. After trial, this Court gave petitioner 4
months to provide respondent with substantiation of the flow-
through items. Petitioner failed to do so.
2. Burden of Proof
Petitioner filed a motion to shift the burden of proof to
respondent 2 months after the deadline for providing the
additional substantiation. Petitioner contends that respondent
bears the burden of proving the increased deficiency respondent
asserted in the amendment to answer. Petitioner contends that
respondent bears the burden of proof under Rule 142(a)(1) because
the denial of deductions is a new matter which, if sustained,
would increase the deficiency. We disagree.4
Respondent did not allow petitioner any deductions for 2001
in the notice of deficiency, the answer, or the amendment to
4
Petitioner concedes he is taxable on the increased income
reported on his Form 1040 for 2001. Thus, the burden of proof
does not affect whether he is taxable on those amounts.
- 11 -
answer. Petitioner claimed deductions in his Form 1040 for 2001,
which he submitted after respondent filed the amendment to
answer. Thus, petitioner, not respondent, changed positions
belatedly. Petitioner’s assertion that respondent bears the
burden of disproving his belatedly claimed deductions is
untenable; those deductions are not new matter under Rule 142(a).
See Comtek Expositions, Inc. v. Commissioner, 99 Fed. Appx. 343,
345-346 (2d Cir. 2004), affg. T.C. Memo. 2003-135; Widemon v.
Commissioner, T.C. Memo. 2004-162.
Petitioner points out that the Commissioner asserted new
matter in Hurst v. Commissioner, 124 T.C. 16 (2005), and Shea v.
Commissioner, 112 T.C. 183 (1999). Those cases are
distinguishable because the taxpayers in those cases did not file
returns after the notices of deficiency were issued.
Petitioner contends that respondent knew or should have
known about the expenses of JRC and RSC which flowed through to
petitioner because respondent had the Forms 1120S and Schedules
K-1, Shareholder’s Share of Income, Credits, Deductions, Etc.,
for JRC and RSC more than 14 months before respondent issued the
notice of deficiency. We disagree; respondent could not have
disallowed petitioner’s deduction of the flow-through items when
respondent issued the notice of deficiency because petitioner had
not yet deducted them.
- 12 -
Petitioner also contends that the fact that respondent had
JRC and RSC Forms 1120S and Schedules K-1 for 2001 when
respondent issued the notice of deficiency causes the notice of
deficiency to be inadequate under section 7522(a). Petitioner
gives no reason to support that contention. We conclude that
petitioner’s reliance on section 7522(a) is misplaced.
3. Conclusion
We conclude that petitioner bears the burden of proving he
is entitled to deductions he claimed on his late return, and that
he has not carried that burden. Thus, he may not deduct expenses
that flowed through from JRC and RSC in 2001.
C. Whether Petitioner Is Liable for the Addition to Tax for
Failure To Timely File His 2001 Return
1. Burden of Production
Section 7491(c) places on the Commissioner the burden of
producing evidence that a taxpayer is liable for an addition to
tax or penalty. Respondent has met the burden of production
under section 7491(c) with respect to the addition to tax for
failure to timely file a return under section 6651(a)(1) by
showing that petitioner filed his 2001 return on March 2, 2005.
2. Whether Petitioner Had Reasonable Cause for Failure To
Timely File His 2001 Return
Once the Commissioner meets the burden of production, the
taxpayer must, in order to not be found liable for the addition
to tax, produce evidence that the Commissioner’s determination is
- 13 -
incorrect; e.g., that the failure was due to reasonable cause and
not willful neglect. United States v. Boyle, 469 U.S. 241, 245
(1985); Higbee v. Commissioner, 116 T.C. 438, 446 (2001); H.
Conf. Rept. 105-599, at 241 (1998), 1998-3 C.B. 747, 995.
Reasonable cause may exist if the taxpayer exercised ordinary
business care and prudence but nevertheless could not file the
return when due. United States v. Boyle, supra at 246; Bank of
the West v. Commissioner, 93 T.C. 462, 471 (1989).
Petitioner contends that his illness was reasonable cause
for failure to timely file his 2001 return. We disagree. A
taxpayer’s disability may constitute reasonable cause for failure
to file returns. United States v. Boyle, supra at 248 n.6.
However, a taxpayer does not have reasonable cause for failing to
file tax returns if he or she was performing normal business
operations. See Paradiso v. Commissioner, T.C. Memo. 2005-187;
Kemmerer v. Commissioner, T.C. Memo. 1993-394; Bear v.
Commissioner, T.C. Memo. 1992-690, affd. 19 F.3d 26 (9th Cir.
1994); Bloch v. Commissioner, T.C. Memo. 1992-1.
Petitioner operated JRC and RSC in 2002 and through the date
of trial. He continued to work on a reduced schedule after his
illness was diagnosed. He operated successful tax and accounting
practices in New York and Florida from 2002 through 2004. He
also (1) represented clients before the IRS; (2) traveled between
his offices in Florida and New York; (3) signed all of JRC’s
- 14 -
timely filed employment tax returns for 2002-04; (4) signed and
filed annual reports with the State of Florida for his Florida
corporation; and (5) received wages from JRC of $160,000 per year
for his work in 2002, 2003, and 2004.
Petitioner testified that he had not prepared his or any
taxpayers’ returns in more than 30 years and that he had others
at JRC and RSC prepare them. Petitioner does not explain why
someone at JRC or RSC did not prepare his 2001 return. Hester
prepared petitioner’s 2000 return and apparently was available to
prepare and timely file petitioner’s 2001 return.
Petitioner contends that United States v. Isaac, 68 AFTR 2d
91-5094, 91-2 USTC par. 50,314 (E.D. Ky. 1991), affd. without
published opinion 968 F.2d 1216 (6th Cir. 1992), “is virtually on
‘all fours’ with Petitioner’s situation” and thus controls here.
We disagree. In Issac, the District Court found that the
taxpayer could not function during the 3 years for which the
Commissioner contended he should have filed his income tax
returns. Petitioner continued to function during the time at
issue here. We conclude that petitioner lacked reasonable cause
for his failure to file a return for 2001.
- 15 -
To reflect concessions and the foregoing,
An appropriate order
will be issued, and
decision will be entered
under Rule 155.