T.C. Summary Opinion 2009-3
UNITED STATES TAX COURT
YORK T. HUANG, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14252-07S. Filed January 7, 2009.
York T. Huang, pro se.
Brooke S. Laurie, for respondent.
PANUTHOS, Chief Special Trial Judge: This case was heard
pursuant to the provisions of section 7463 of the Internal
Revenue Code in effect when the petition was filed.1 Pursuant to
section 7463(b), the decision to be entered is not reviewable by
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the year in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
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any other court, and this opinion shall not be treated as
precedent for any other case.
Respondent determined a deficiency of $17,706 in
petitioner’s 2004 Federal income tax and a $3,541.20 accuracy-
related penalty.
After concessions,2 the issues for decision are: (1)
Whether petitioner is entitled to claimed miscellaneous itemized
deductions; (2) whether petitioner is entitled to business
expense deductions in amounts greater than respondent allowed;
and (3) whether petitioner is liable for the penalty under
section 6662.
Background
Some of the facts have been stipulated, and we incorporate
the stipulations and accompanying exhibits by this reference.
Petitioner lived in California when he filed the petition.
In 2004 petitioner had a degree in business administration
and worked full time for Sun Microsystems, Inc. (Sun), as an
executive security specialist. Petitioner provided personal
security for certain Sun executives. Minimum qualifications for
2
Petitioner accepted respondent’s determination as to
unreported qualified dividends and capital gains and with respect
to taxes deducted as itemized deductions.
Changes to petitioner’s adjusted gross income resulted in
adjustments to the amounts of self-employment tax owed and self-
employment deduction allowed. Petitioner did not challenge these
adjustments, and we will not address them further because they
are purely computational.
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this job included proficiency in first aid, defensive driving,
martial arts, and the use of firearms. Sun also required
petitioner to have a concealed weapons license and a U.S.
passport and to maintain the skills necessary for the job.
Petitioner first obtained a license for his business,
Archangel Risk Management and Security Consultant (Archangel), in
1997, and he continued that activity through 2004, the year in
issue. Archangel provided two lines of service: (1) Business
consulting from the perspective of risk management; and (2)
personal, physical security for business people. From 1997
through 2004 Archangel’s expenses consistently exceeded its
income. Petitioner did not maintain any books or accounts for
Archangel in 2004; rather, he measured his income by the sums he
deposited in the bank, and he stored documentation for his
expenses in a big box.
In 1992 petitioner purchased a three-bedroom house. In 2004
he sold the house in order to reduce his expenses and purchased a
one-bedroom condominium (condo). Petitioner used his house and
his condo for business, for storing supplies, and for maintaining
his physical fitness and martial arts skills. He also lived in
the house and the condo. Petitioner leased a BMW X5 sport
utility vehicle (SUV) and purchased a Honda Civic, both of which
he used for Archangel: the SUV for high-end clientele and the
Honda sedan for clients demanding a lower profile.
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Petitioner entertained individuals, including current and
prospective Archangel clients, in attempts to solicit business.
At times he also paid to entertain their children so that he
could discuss business with his clients. Petitioner traveled to
events where at-risk individuals could be found, hoping to be
hired to provide security. Petitioner occasionally learned he
was improperly attired on arriving for a protection detail and
purchased appropriate clothing or footwear. Petitioner
consolidated the insurance on his real estate, automobiles, boat,
and possibly a motorcycle in order to purchase an additional
umbrella policy that would provide blanket liability coverage,
including coverage for his actions on behalf of Archangel.
Petitioner used some proceeds from Archangel to contribute to an
annuity for himself.
Petitioner prepared and timely filed his 2004 Federal income
tax return. He reported his wages from working at Sun. On
Schedule A, Itemized Deductions, petitioner claimed some
deductions that are not at issue but also claimed $6,778 for
unreimbursed job expenditures for uniforms, tools, and safety
equipment.3 On Schedule C, Profit or Loss From Business,
petitioner reported gross receipts of $7,825, cost of goods sold
3
After exceeding the 2-percent floor for miscellaneous
itemized deductions, petitioner deducted $5,946 for job-related
expenses.
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of $225, gross income of $7,600, and total expenses of $60,249.
Petitioner claimed the following business expense deductions on
Schedule C:
Expense description Amount claimed
Advertising $1,500
Contract labor 1,950
Employee benefit programs 2,000
Insurance (other than health) 8,190
Legal and professional services 7,245
Office expenses 5,411
Vehicle leasing 5,400
Supplies 8,262
Taxes and licenses 1,131
Travel 7,020
50% of meals and entertainment 9,510
Utilities 2,630
Total 60,249
In a notice of deficiency for 2004, respondent allowed a
$293 deduction for cellular telephone expenses that petitioner
substantiated, in lieu of the $2,630 utilities expense petitioner
claimed; allowed an $88 deduction for substantiated taxes and
licenses, rather than the $1,131 petitioner claimed; disallowed
the remaining Schedule C deductions; and disallowed in full
petitioner’s claimed job-expense deduction.
In a timely petition, petitioner alleged that “All the
disallowed expenses are ordinary and necessary business cost
[sic] that are supported with receipts and are all at risk as the
investment for the business.”
At trial respondent asserted that petitioner failed to
maintain adequate records of Archangel’s income and expenses and
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that many of petitioner’s job-related expenses and Schedule C
expenses were not only inadequately substantiated but also
nondeductible personal, family, and living expenses.
Discussion
In general, the Commissioner’s determinations set forth in a
notice of deficiency are presumed correct, and the taxpayer bears
the burden of proving that these determinations are in error.
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Pursuant to section 7491(a), the burden of proof as to factual
matters shifts to the Commissioner under certain circumstances.
Petitioner has neither alleged that section 7491(a) applies nor
established his compliance with its requirements. Petitioner
therefore bears the burden of proof.
Deductions are a matter of legislative grace, and taxpayers
bear the burden of proving that they are entitled to any
deduction claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934). Taxpayers are required to maintain records sufficient to
enable the Commissioner to determine their correct tax liability.
Sec. 6001; sec. 1.6001-1(a), Income Tax Regs. Such records must
substantiate both the amount and purpose of the claimed
deductions. Higbee v. Commissioner, 116 T.C. 438, 440 (2001).
When a taxpayer establishes that he has incurred a
deductible expense but is unable to substantiate the exact
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amount, we are generally permitted to estimate the deductible
amount. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.
1930). To apply the Cohan rule, however, the Court must have a
reasonable basis upon which to make an estimate. Vanicek v.
Commissioner, 85 T.C. 731, 742-743 (1985).
Congress overrode the Cohan rule with section 274(d) which
requires strict substantiation for certain categories of
expenses; in the absence of evidence demonstrating the exact
amount of those expenses, deductions are to be disallowed
entirely. Sanford v. Commissioner, 50 T.C. 823, 827 (1968),
affd. per curiam 412 F.2d 201 (2d Cir. 1969). Expenses subject
to section 274(d) include travel and meal expenses, as well as
expenses for listed property, such as passenger automobiles,
computers, and cellular telephones. Secs. 274(d), 280F(d)(4).
The taxpayer must substantiate the amount, time, place, and
business purpose of these expenditures and must provide adequate
records or sufficient evidence to corroborate his own statement.
See sec. 274(d); sec. 1.274-5T(c)(1), Temporary Income Tax Regs.,
50 Fed. Reg. 46016 (Nov. 6, 1985).
I. Unreimbursed Employee Business Expenses
Section 162 allows deductions for all ordinary and necessary
business expenses paid or incurred during the taxable year in
carrying on a trade or business. Performing services as an
employee constitutes a trade or business. Primuth v.
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Commissioner, 54 T.C. 374, 377-378 (1970). Those expenses that
are (1) ordinary and necessary to the taxpayer’s business and (2)
paid or incurred in a given year are deductible that year. Sec.
162(a); see sec. 1.162-17(a), Income Tax Regs. However,
personal, living, or family expenses are not deductible. See
secs. 162(a), 262(a); sec. 1.162-17(a), Income Tax Regs.
On his Schedule A for 2004, petitioner described his job
expenses as “Uniform, tool, safety equipment”.
Where business clothes are suitable for general wear, their
cost is typically not deductible. However, where custom and
usage forbid wearing a uniform when off duty, deduction is
allowed. The cost of maintaining clothes for work is deductible
when the purchase price was deductible. Hynes v. Commissioner,
74 T.C. 1266, 1290 (1980). Petitioner did not introduce any
testimony or other evidence proving that the clothing he
purchased for work was not suitable for everyday wear or that Sun
required him to wear anything other than normal business attire.
Accordingly, petitioner is not entitled to deduct his expenses
for buying or maintaining the clothes he wore when working for
Sun.
Most of the other receipts petitioner submitted in support
of his unreimbursed employee business expenses appear completely
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unrelated to his work for Sun.4 The remaining receipts indicate
that he went to firing ranges, rented range time, and purchased
flashlights, knives, ammunition, and possibly firearms. He did
not introduce any evidence that Sun required him to purchase
these items, however, nor any evidence that Sun did not provide
him with the equipment necessary to perform his job. Although
the record contains some information regarding Sun’s policy with
respect to reimbursement for Sun-related travel expenses,
petitioner did not provide any evidence about whether Sun would
reimburse him for purchasing tools and equipment or for
maintaining his job-related skills, nor did he testify that he
sought reimbursement. A taxpayer’s failure to seek reimbursement
from his employer prevents him from deducting those expenses as
unreimbursed employee business expenses. Orvis v. Commissioner,
788 F.2d 1406 (9th Cir. 1986), affg. T.C. Memo. 1984-533; Lucas
v. Commissioner, 79 T.C. 1, 7 (1982).
Respondent’s determination disallowing petitioner’s job-
related expenses is sustained.
II. Business Expenses
Petitioner began Archangel in 1997. The expenses from this
activity exceeded the gross receipts every year from 1997 through
4
Petitioner submitted myriad receipts but generally failed
to show how any of the documented expenses were business related.
Clear documentation of what each expenditure purchased and how
each purchase was an ordinary and necessary business expense does
not appear in the record.
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the year in issue. Petitioner admitted at trial that he did not
keep track of Archangel’s income during the year; rather, he
computed his income by reviewing his bank deposits. He did,
however, place all his expense receipts in a big box.
A. Advertising Expenses
Petitioner claimed a $1,500 advertising expense deduction
for Archangel in 2004. He introduced a credit card statement
showing a $1,500 charge to Clear Channel Radio and a computer-
screen printout of an April 2004 e-mail titled “Summary Invoice”.
This printout lists the “Bill To” party as Sugar’s Magazine
(Sugar), and addresses the invoice to the attention of petitioner
and another individual but at a mailing address that does not
match either of petitioner’s residences (which were also
Archangel’s addresses). The printout states “2004 billing: Net
amount paid: $1,500” and reports that Sugar purchased fifty 60-
second commercial announcements between April 14 and 25, 2004, on
KYLD Wild 94.9FM in San Francisco. Petitioner offered vague
testimony that Sugar purchased bulk advertising and he purchased
advertising at a discount from Sugar. However, the evidence
petitioner introduced indicates that Sugar bought $1,500 of radio
commercials. It does not show that petitioner bought any of this
time for Archangel or that the announcements were for Archangel
rather than Sugar or some other party. Respondent’s
determination disallowing this deduction is sustained.
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B. Contract Labor
Petitioner deducted $1,950 for contract labor expenses but
did not introduce any evidence or provide any testimony proving
that he actually incurred any contract labor expenses.
Respondent’s determination is sustained.
C. Employee Benefit Programs
A taxpayer, including the owner of an unincorporated
business, is entitled to deduct all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on
a trade or business, sec. 162(a), including any amount paid to an
employee pursuant to an employee benefit plan, sec. 162(a)(1);
sec. 1.162-10, Income Tax Regs.
Petitioner introduced evidence showing that he paid $150 per
month for part of 2002 and part of 2004 into a “privileged assets
annuity” with American Partners Life Insurance Co. He claimed an
expense of $2,000 for employee benefit programs.5
Section 162, however, does not allow deductions for amounts
which may be used to provide benefits under an annuity plan.
Sec. 1.162-10(a), (c), Income Tax Regs. Rather, such
contributions are controlled by section 404. Id. However,
5
It is not clear why petitioner introduced evidence
relating to 2002, considering that only tax year 2004 is at
issue. We note that even if petitioner contributed $150 monthly
to the annuity for all of 2004, as his evidence seems to ask us
to conclude, the total for 2004 would be $1,800, not the $2,000
petitioner claimed. No Code section authorizes petitioner to
round these expenditures up before claiming a deduction.
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petitioner did not introduce any evidence that the annuity he
contributed to was a retirement annuity and part of a qualified
plan, as required by section 404(a)(2).
Petitioner is not entitled to deduct any amount for employee
benefit plans for 2004.
D. Insurance
Petitioner claimed an expense deduction of $8,190 for
insurance expenditures in 2004. Petitioner testified that
business insurance is particularly expensive whenever firearms
are involved and that obtaining vehicle insurance for this type
of business is difficult. As a result, petitioner alleged that
he was required to place all of his insurance (auto, home, boat,
commercial) with one company so that he could purchase a special
umbrella policy covering his use of any of his property in the
business, including two cars, both residences, his boat, and
possibly a motorcycle. It appears that petitioner claimed all of
his insurance expenses (for both cars, both residences, his boat,
etc.) as business expenses because of his need to consolidate
policies in order to purchase the umbrella coverage. Petitioner
also claimed that he used both automobiles only for Archangel
business, because he lived across the street from a mall and
because Sun provided him a company vehicle to use for his full-
time job.
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While there is no dispute that petitioner incurred insurance
expenses in 2004, respondent argues that these expenditures are
not all ordinary and necessary business expenses and that
petitioner is attempting to deduct personal and living expenses
as business expenses. Petitioner did not introduce any evidence
to show that he used his boat for business, nor did he justify
deducting real estate insurance or substantiate any business use
of his automobiles. Furthermore, in the absence of corroborating
evidence, we are not required to accept, and do not accept,
petitioner’s self-serving testimony that he used his automobiles
exclusively for Archangel business.6 See Tokarski v.
Commissioner, 87 T.C. 74, 77 (1986); Madden v. Commissioner, T.C.
Memo. 2006-4.
Petitioner asserts that because he used most of both of his
residences for Archangel he may deduct the costs to insure his
properties. Yet he has not claimed any home office deduction.
Finally, the documentation petitioner introduced in support
of his insurance expenses indicates that he paid between $27 and
$28 to Farmers Insurance for each of 3 months in 2004 for a
6
Petitioner did not claim any deduction for car and truck
expenses for 2004.
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policy listed on three bills as “Commercial”. While this policy
may be some form of business insurance, petitioner did not
provide any details of the coverage he purchased.
On the basis of the entire record, we are satisfied that
petitioner claimed a plethora of personal insurance items as
business expenses. Under these circumstances, we are unwilling
to assume that the unexplained commercial line item on three
bills was business insurance, and we decline to estimate an
annual deduction for insurance for Archangel.
Respondent’s determination that petitioner is not entitled
to a deduction for insurance is sustained.
E. Legal and Professional Services
Petitioner claimed a business expense deduction for $7,245
for legal and professional services. He presented some vague
testimony that when his business consulting and risk management
advice to a business owner proved inaccurate, Archangel had to
pay for legal services to resolve the problem for its client.
Petitioner then explained inconsistently that Archangel would
pass this cost on to its clients and later that Archangel would
not be paid if the legal challenge failed.
Petitioner’s documentation supporting Archangel’s legal
expenses consisted of copies of some bank statements with mostly
illegible handwritten notations; one statement with the words
“Attorney Fernando Hernandez” below the line reporting a $2,500
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check; and a copy of that check for $2,500 payable to and
endorsed by Fernando Hernandez, but with a notation in the memo
field of the check that appears to refer to “Sugar’s U.S.
Landlord”. This documentation does not support any deduction for
legal expenses incurred by Archangel in 2004.
Petitioner testified that maintaining his protection skills
required him to take regular refresher courses. He included
receipts showing $270 paid for firearms, baton, and chemical
agents training, and we allow this amount as a professional
expense. Otherwise, respondent’s determination is sustained.
F. Office Expenses
As indicated, petitioner did not claim any home office
deduction, but he did deduct $5,411 as office expenses in 2004.
Petitioner’s office expense documentation included receipts for
parking, tolls, his AAA membership, and canceled checks
reflecting unspecified payments to the California Department of
Motor Vehicles. These items might be for car and truck expenses
(but petitioner did not deduct any car and truck expenses on
Schedule C) or for travel expenses. Critically, these documents
do not identify any business purpose for the expenditures.
Likewise, the miscellaneous receipts submitted ostensibly to
support Archangel’s office expenses do not bear any indication of
what legitimate business expenses they represent. Petitioner
introduced an undated bill for $100 from the Fictitious Business
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Name Renewal Service for the renewal of Archangel’s business name
but did not introduce any documents to show he paid that bill.7
Petitioner also included a receipt from the John Elway Foundation
Auction which appears to document his purchase of five signed
items of sports and music memorabilia for $1,350.64. This
receipt appears to be from September 2003 and does not indicate
any business purpose for this expenditure.
Respondent’s determination disallowing petitioner’s claimed
office expense deduction is sustained.
G. Vehicle Leasing
Petitioner submitted a (largely illegible) copy of what the
parties describe as petitioner’s lease agreement for his SUV.
Petitioner claimed a $5,400 deduction for vehicle rental,
suggesting that the lease payment for his 2002 SUV was $450 per
month in 2004. Passenger automobiles are listed property, and
related expenses must be strictly substantiated or they may not
be deducted. Secs. 274(d), 280F(d)(4). Petitioner did not
provide any substantiation of the amount, time, place, and
business purpose of the use of his SUV. Thus, even if the record
supported his paying $450 monthly lease payments, petitioner is
7
Petitioner also submitted two documents from April 2004:
One a handwritten receipt for a payment of $25 allegedly for a
fictitious business name, the other a printed receipt for $37 for
a fictitious business name. Neither receipt indicates what
fictitious name it paid for or whether the fee covered an initial
registration or a renewal. This is not reliable evidence that
would support our estimating this expense.
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not entitled to deduct his cost to lease this passenger
automobile because he failed to maintain or provide adequate
business records.
H. Supplies
Petitioner claimed a deduction for spending $8,262 on
supplies for Archangel. Petitioner’s documentation supporting
his supplies deduction includes several documents regarding the
installation of fencing, apparently at the house petitioner
bought in 1992 and sold in 2004. However, some of the documents
are in another person’s name, with an address different from
petitioner’s. Petitioner also included a receipt for a garage-
door opener. The business purposes of these expenses is unclear.
In any event, because fencing and garage door openers have useful
lives substantially beyond the year of installation, these are
capital expenditures, see sec. 1.263(a)-2(a), Income Tax Regs.,
and expenses that would otherwise be deductible under section 162
are not currently deductible if they are capital, secs. 261,
263(a).
Petitioner’s remaining supplies receipts are predominantly
for the purchase of flowers, live Maine lobsters, and alcohol.
Petitioner did not explain or document any business purpose for
these expenses or identify the persons involved.
Petitioner has not substantiated any legitimate supplies
expenses. Respondent’s determination is sustained.
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I. Taxes and Licenses
Petitioner claimed $1,131 in taxes and licenses for 2004.
Respondent allowed a deduction of $88 for the renewal of
petitioner’s firearms license. With his office expense
documentation, petitioner substantiated paying $150 to the City
of San Jose for business tax and paying $35 to the California
Bureau of Security and Investigative Services to renew his
security guard credentials.8
We allow petitioner a deduction of $185 for Archangel’s
expenses for taxes and licenses in addition to the $88 allowed by
respondent. Otherwise, respondent’s determination is sustained.
J. Meals and Entertainment
The parties stipulated that petitioner expended $8,753 for
meals and entertainment expenses in 2004. Petitioner claimed
business meals and entertainment expenses of $19,021, of which he
deducted 50 percent, $9,511. Petitioner’s documentation included
a number of movie ticket stubs and hundreds of receipts for
eating and drinking at restaurants and bars. Petitioner did not
provide any evidence of the persons entertained or the business
purpose of the meals, drinks, or movies, and the receipts do not
include any legible record of petitioner’s recording this
information. Meals and entertainment expenses are subject to the
8
The remaining documents petitioner submitted to
substantiate his expenditures for taxes and licenses appear to
support his real estate taxes, itemized on Schedule A.
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strict substantiation requirements of section 274(d). Petitioner
is not entitled to any deduction for meals and entertainment
because of his failure to maintain adequate records of the people
invited and entertained and of the business purpose of these
expenditures.
K. Utilities
Petitioner claimed business expense deductions for utilities
for Archangel amounting to $2,630. Respondent allowed $293 in
substantiated cellular telephone expenses. Petitioner’s evidence
includes water, electric, gas, cable television, telephone, and
cellular telephone bills, together with assessment statements
apparently from his condominium association. Most of the bills
are in petitioner’s name, but some appear to be in the name of
one or more relatives at petitioner’s residential address. None
is in the name of Archangel.
Petitioner argues that he is entitled to deduct most of his
residential expenses (such as repairs, improvements, utilities,
and insurance) because his residences were used mostly for
business. As noted, he did not claim any home office deduction
in 2004. Petitioner alleged that he used 85 percent of his
three-bedroom house exclusively for Archangel. This is
implausible. He testified that when he moved himself and
Archangel into a one-bedroom condo, he continued to use 85
percent of his new residence exclusively for Archangel; i.e., his
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living needs occupied an even smaller space. This is simply not
credible.9 Petitioner alleges that most of his living space was
converted to a training area for self-defense practice and that
most of the bedroom space was occupied by firearms storage and
client paperwork. He admitted that his living room continued to
hold normal furniture, including a couch. Petitioner also
testified that the sole purpose of cable television service was
to enable him to monitor news and events and gather information
on potential threats and possible business opportunities.
Respondent asserts that petitioner attempted to claim many
personal, family, and living expenditures as deductible business
expenses. Petitioner has not introduced any evidence to convince
us that respondent is incorrect, and he has not shown that he is
entitled to these deductions.10 Respondent’s determination is
sustained.
9
The fact that some bills were in the name of one or more
of petitioner’s relatives suggests that petitioner may not have
been the sole occupant of these residences and casts further
doubt on petitioner’s allegation that nearly all of each
residence was used exclusively for Archangel.
10
Petitioner’s complaint that respondent is being unfair
and unreasonable in allowing only a few hundred dollars in
business expenses misses the point. Respondent allowed those
expenses that petitioner proved he incurred and that he
demonstrated were legitimate business expenses. Petitioner’s
failure to maintain accounting records for Archangel and his
failure to record and document the specific business purpose of
each of his expenditures compelled respondent’s disallowance of
the majority of petitioner’s deductions.
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L. Travel
Although the record includes some documents potentially
related to petitioner’s claimed business travel in 2004,
petitioner did not provide any explanation, and the documents do
not include any description of any business purpose for any of
this travel. Petitioner’s vague testimony and this meager
evidence fail to satisfy the strict substantiation required by
section 274(d). Respondent’s determination is sustained.
III. Accuracy-Related Penalty
The Commissioner bears the burden of production and must
produce sufficient evidence showing that the imposition of any
penalty is appropriate in a particular case. Sec. 7491(c);
Higbee v. Commissioner, 116 T.C. at 446. Once the Commissioner
meets this burden, the taxpayer must come forward with persuasive
evidence that the Commissioner’s determination is incorrect.
Rule 142(a); Higbee v. Commissioner, supra at 447. To the extent
the taxpayer shows there was reasonable cause for an underpayment
and that he acted in good faith, section 6664(c)(1) prohibits the
imposition of a penalty under section 6662.
Respondent determined a 20-percent penalty under section
6662(a) on the underpayment of tax resulting from petitioner’s
disallowed itemized and business expense deductions. Respondent
asserts that the underpayment is attributable to negligence or
disregard of rules or regulations or to a substantial
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understatement of income tax. See sec. 6662(b)(1) and (2). For
the purpose of section 6662, negligence includes any failure to
make a reasonable attempt to comply with tax laws, and disregard
includes any careless, reckless, or intentional disregard of
rules or regulations. Sec. 6662(c). A substantial
understatement of income tax is defined as an understatement
exceeding the greater of 10 percent of the tax required to be
shown on the return or $5,000. Sec. 6662(d)(1).
Respondent satisfied his burden of production under section
7491(c) because the record shows that petitioner substantially
understated his income tax for the year in issue. See sec.
6662(d)(1)(A)(ii); Higbee v. Commissioner, supra at 446.
Furthermore, a review of this record reflects that petitioner
claimed substantial deductions for which he apparently maintained
no business records beyond storing receipts in a big box.11 There
is little dispute that petitioner paid the expenses claimed, yet
most of the claimed deductions for alcohol, boat insurance,
clothes, contributions to his personal annuity, flowers, signed
memorabilia, and utilities, for example, are clearly for
nondeductible personal items. On the basis of the entire record,
we conclude that petitioner did not act with reasonable cause or
11
Petitioner’s failure to maintain books and records is
particularly significant in the light of his claim to holding a
degree in business administration and his allegedly providing
business consulting services to Archangel’s clients.
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exercise good faith in claiming these deductions and that he is
liable for the penalty under section 6662(a).
To reflect our disposition of the issues,
Decision will be entered
under Rule 155.