T.C. Summary Opinion 2008-8
UNITED STATES TAX COURT
PETER SHOWLER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19480-04S. Filed January 29, 2008.
Peter Showler, pro se.
Kris H. An, for respondent.
CARLUZZO, Special Trial Judge: This case was heard
pursuant to the provisions of section 7463.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, section references are to the
Internal Revenue Code of 1986, as amended, in effect for the
relevant period. Rule references are to the Tax Court Rules of
Practice and Procedure.
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other court, and this opinion shall not be cited as precedent for
any other case.
Respondent determined a $15,841 deficiency in petitioner’s
2002 Federal income tax. The issue for decision is whether
petitioner is entitled to certain deductions claimed on a
Schedule C, Profit or Loss From Business, included with his 2002
Federal income tax return.
Background
Some of the facts have been stipulated and are so found.
At the time the petition was filed, petitioner resided in
California.
During the year in issue petitioner sold securities and/or
financial products as an independent contractor for National
Planning Corp. (NPC). His compensation for doing so was paid in
the form of commissions that were directly deposited into one or
another of two “regular personal” checking accounts maintained at
China Trust, U.S.A. (Trust). One of those accounts was
petitioner’s individual account; the other was a joint account
that petitioner maintained with three business associates.
Petitioner and those three business associates each owned
25 percent of the stock of Wise Steward Corp. (Wise), a
California corporation that offered financial planning services
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to its customers. Wise conducted business through its employees,
one of whom was petitioner, and independent contractors. Wise
maintained a “business checking” account at Trust.
During 2002, NPC paid commissions totaling $75,929 to
petitioner and issued a Form 1099-MISC, Miscellaneous Income, to
petitioner evidencing those payments. As an NPC sales
representative, petitioner had two “rep codes”, one that tracked
the payment of “regular” commissions and the other that tracked
“override” commissions. The difference, if any, between the two
types of commission payments has not been made entirely clear.
Of the total commissions paid to petitioner by NPC during 2002,
regular commissions totaling $45,862 were directly deposited into
petitioner’s individual checking account at Trust, and override
commissions totaling $30,067 were directly deposited in the
joint checking account that petitioner maintained at Trust with
the other shareholders of Wise. Except for five direct deposits
that total $1,714, the funds directly deposited as override
commissions into the joint checking account were, within days of
each direct deposit, electronically transferred to Wise’s
business checking account at Trust.
The services that petitioner performed for Wise as one of
its employees are not entirely clear, but the services appear to
overlap to some extent with the services he performed for NPC.
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In any event, Wise paid petitioner a salary or wages totaling
$24,916 during 2002.
From time to time throughout the year petitioner entertained
and/or provided gifts to his clients, clients and independent
contractors of Wise, and other independent contractors of NPC.
As relevant here, the income reported on petitioner’s timely
filed 2002 Federal income tax return includes the wages he
received from Wise and $14,515 of “business income”, the
computation of which is detailed on a Schedule C included with
that return.
The Schedule C identifies petitioner’s principal business as
“investment manager & sale” and shows the accounting method for
the business as “cash”. The $75,929 in commissions received from
NPC is reported as gross income, and as relevant here, the
following deductions are claimed: (1) “Commissions and fees”--
$30,067; (2) “travel, meals, and entertainment”--$7,217;
(3) “donations to non-profit”--$2,750; (4) “bonuses”--$1,500; (5)
“gifts”--$3,690; and (6) “memberships”--$410.
The amount of the deduction for commissions and fees equals
the amount of “override” commissions that petitioner received
from NPC that were first directly deposited into petitioner’s
joint checking account but then, and with the exceptions noted
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above, were electronically transferred to Wise’s business
checking account.
All of the above-referenced deductions were disallowed in
the notice of deficiency. According to an explanation included
in the notice of deficiency, the deduction for commissions and
fees was disallowed because “no deduction is allowed for any
compensation that is unreasonable or excessive”. The explanation
for the disallowance of that deduction went on to note that
petitioner had failed to “establish that the amount shown was (a)
compensation, and (b) paid”. Various reasons are given in the
notice of deficiency for the disallowances of the other
deductions listed above, including petitioner’s failure to
substantiate the payments of the underlying expenses.
Discussion
In general, a taxpayer is entitled to a deduction for all
ordinary and necessary expenses paid or incurred in carrying on
any trade or business. Sec. 162(a). Depending upon the nature
of the business, the disallowed deductions here in dispute fall
into categories of expenses generally recognized as deductible
under section 162(a).
The nature of and the manner in which petitioner conducted
his business, as either an employee of Wise or an independent
contractor of NPC, have been described only in general terms, and
many details are unknown. At trial petitioner attempted to
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distinguish among his clients, NPC’s clients, and Wise’s clients,
but his attempts, for the most part, were lost on the Court.
This lack of detail, exacerbated by a lack of precision, does
little to demonstrate how many of the disallowed deductions
relate to petitioner’s trade or business. Furthermore,
complications between the parties that arose in the pretrial
stipulation process, see Rule 91, resulted in a hodgepodge of
exhibits, some of which duplicate others in content if not
format, many of which are illegible or incomplete, and many of
which, although it might come as a surprise to the parties, are
hardly self-explanatory.
As we have noted in countless cases, deductions must be
substantiated by adequate records. Sec. 6001; Hradesky v.
Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d
821 (5th Cir. 1976). Not only does the taxpayer bear the burden
to substantiate any deduction claimed, but in proceedings such
as this one, the taxpayer has the burden to present the
substantiating records in an organized manner that clearly
demonstrates the relationship of the record to the disputed
deduction.
1. Deductions for Expenses Other Than for Commissions and Fees
The documents that petitioner produced to substantiate the
deductions claimed for expenses other than for commissions and
fees consist of: (1) Copies of receipts from various restaurants
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for meals paid for by credit card or cash; (2) copies of receipts
from various retail stores or supermarkets for food, beverages,
and other household items; (3) copies of receipts from golf
courses; (4) copies of receipts from cigar stores and other gift
shops; (5) copies of checking account statements showing payment
for items by debit card; (6) copies of canceled checks; and (7)
spreadsheets which appear to list some of the items reflected in
the first six categories of documents.
We begin by noting that the totals shown on the spreadsheets
for various categories of expenses do not match the deductions
claimed for those expenses on petitioner’s return. Furthermore,
nothing has been submitted that ties the disallowed deductions
to specific copies of receipts, checks, or other documents that
have been admitted into evidence.
Careful review of the restaurant receipts demonstrates many
duplications. The following two examples of such duplications
are representative of many others: (1) The February 15, 2002,
dinner at Saddle Peak Lodge in Calabasas, California, shown on
one receipt for $159.13 that details the items consumed is
duplicated by a receipt for $183.13 that summarizes the amount of
the dinner check, plus tip; and (2) a dinner receipt dated
February 22, 2002, from Café Bellissimo, in Woodland Hills,
California, showing items totaling $49.20 consumed by two
individuals, marked “client meeting--Faupel”, is duplicated on a
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receipt that shows the cost of the dinner, plus tip (total
$59.20), marked “client meeting--Brennan”.2
There are other unexplained irregularities in the documents
that petitioner produced to support the disallowed deductions.
One receipt for a purchase of an item from Liberty Leather in
Torrence, California, is dated in 2001 and signed by someone
other than petitioner. Supermarket receipts marked as “training”
expenses for Wise employees include expenditures for items the
deduction of which would, without explanation, seem to be
prohibited by section 262(a).3 We could go on and on but see
little point in doing so. The many duplications and other
irregularities in the records that petitioner produced to support
the deductions claimed for expenses other than for commissions
and fees lead us to conclude that the records are unreliable.
Because petitioner has otherwise failed to substantiate the
deductions for those expenses, respondent’s disallowances of
those deductions are sustained.
2. Deduction for Commission and Fees Expenses
Trust checking account statements demonstrate that $28,353
($30,067 minus $1,714) of the $30,067 “override” commissions was
transferred from petitioner’s joint checking account to Wise’s
2
This pattern is repeated numerous times in the exhibits.
3
Sec. 262(a) provides in part that “no deduction shall be
allowed for personal, living, or family expenses.”
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business account. Consequently, petitioner has substantiated the
payment of that expense to that extent. Although the record is
not as complete as we would like concerning exactly to what
the expense relates, it is clear that it is some form of
compensation; and contrary to the explanation given in the notice
of deficiency for the disallowance of the deduction, nothing in
the record suggests that the compensation was not reasonable.
See sec. 162(a)(1). It follows that the reasons given in the
notice of deficiency (unreasonable compensation and lack of
substantiation) for the disallowance of the deduction have been
overcome by the evidence, or lack thereof, presented.
Although it is not a ground listed in the notice of
deficiency, respondent also argues that petitioner is not
entitled to the deduction because the payments of the underlying
expenses in some manner or another violated various provisions of
the Securities Exchange Act of 1934 (the 1934 Act), ch. 404, 48
Stat. 881 (current version at 15 U.S.C. secs. 78a-78lll (2000)).
According to respondent, the expense to which the deduction
relates is a nondeductible “illegal” payment within the meaning
of section 162(c)(2). Respondent bears the burden of
establishing by clear and convincing evidence that the expenses
to which the commission deduction relates constitute illegal
payments. Secs. 162(c)(2), 7454(a); Rule 142(b).
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In support of his burden, respondent relies upon an opinion
letter from the Securities and Exchange Commission (SEC) issued
in response to a “No-Action Request” made on behalf of an
individual and an organization involved in the sale of
securities. According to the opinion letter, the “facts and
circumstances” presented, which might or might not be similar
to petitioner’s, could result in an SEC enforcement action for
violation of the 1934 Act. We cannot help but wonder whether the
circumstances described in the opinion letter are, in fact, so
similar to petitioner’s that the conclusion reached in the letter
has application to petitioner’s situation. Even if applicable,
the conclusion is hardly determinative of whether payment of the
commission expense should be treated as an illegal payment within
the meaning of section 162(c), and the opinion letter, in and of
itself, hardly satisfies respondent’s burden on the point.
Respondent’s disallowance of the commissions expense
deduction claimed on the Schedule C is rejected. Petitioner is
entitled to a deduction for commission expenses to the extent the
payment of those commissions has been substantiated.
To reflect the foregoing,
Decision will be entered
under Rule 155.