T.C. Memo. 2009-204
UNITED STATES TAX COURT
WILLIAM G. HALBY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14785-07. Filed September 14, 2009.
William G. Halby, pro se.
Donald A. Glasel and James P. A. Caligure, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: Respondent determined the following income
tax deficiencies and penalties:
Penalty
Year Deficiency Sec. 6662(a)
2004 $12,656 $2,531
2005 8,835 1,767
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The issues for decision are: (1) Whether petitioner is
entitled to claimed medical expense deductions in 2004 and 2005
in amounts greater than those allowed by respondent; and (2)
whether petitioner is liable for the section 66621 accuracy-
related penalty for 2004 and 2005. For the reasons stated
herein, we find that petitioner is not entitled to deductions in
amounts greater than that allowed by respondent and is liable for
the accuracy-related penalties.
FINDINGS OF FACT
Petitioner is a lawyer admitted to practice in New York
State. Petitioner resided in New York at the time he filed his
petition.
During 2004 and 2005 petitioner frequented prostitutes in
New York. Petitioner did not visit these prostitutes as part of
a course of therapy prescribed by his doctor, nor did petitioner
ask his doctor to prescribe any sort of sex therapy. Petitioner
kept track of these visits in a journal. The journal included
the date, the name of the “service provider”, and the amount.
Petitioner did not discuss these visits with his doctors
afterwards to determine their impact on his health.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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During 2004 and 2005 petitioner purchased pornography and
books and magazines on sex therapy. Petitioner also recorded the
dates and amounts of the purchases in his journal.
Petitioner timely filed his Forms 1040, U.S. Individual
Income Tax Return, for 2004 and 2005. For 2004 petitioner
claimed medical expense deductions of $76,314 on his Schedule A,
Itemized Deductions. For 2005 petitioner claimed medical expense
deductions on his Schedule A of $49,203. Both the 2004 and 2005
returns included attachments to the respective Schedules A. The
attachments provided further detail on the costs that went into
petitioner’s claimed medical expense deductions. However, the
descriptions were not specific but provided only vague
descriptions of the types of costs petitioner was claiming as
deductions.
Respondent issued a notice of deficiency to petitioner on
June 21, 2007. The notice disallowed $73,934 of petitioner’s
$76,314 claimed medical expense deductions for 2004 and $47,024
of petitioner’s $49,203 claimed medical expense deductions for
2005.
The $73,934 disallowed by respondent for 2004 included: (1)
$2,368 for medical books, magazines, videos, and pornographic
material; (2) $65,934 for prostitutes; and (3) $5,632 in bank and
finance charges incurred in connection with loans used to pay for
the claimed medical expenses. Petitioner and respondent
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stipulated that petitioner provided receipts totaling $1,455.20
of the $2,368 for books, magazines, videos, and pornographic
materials; however, the actual receipts were not entered into
evidence. Petitioner concedes that he is not entitled to deduct
the $5,632 in bank and finance charges.
The $47,024 disallowed for 2005 included: (1) $5,005 for
books, magazines, videos, and pornographic materials; and (2)
$42,152 for prostitutes. Petitioner and respondent stipulated
that petitioner provided receipts for $2,325.58 of the claimed
$5,005 for medical books, magazines, videos, and pornographic
materials; however, the actual receipts were not entered into
evidence.
On June 28, 2007, petitioner filed a petition with this
Court challenging respondent’s determinations. A trial was held
on October 27, 2008.
OPINION
I. Medical Expense Deductions
The Commissioner’s determinations in a notice of deficiency
are presumed correct, and the taxpayer bears the burden of
proving, by a preponderance of the evidence that these
determinations are incorrect. Rule 142(a)(1); Welch v.
Helvering, 290 U.S. 111, 115 (1933). Tax deductions are a matter
of legislative grace, and a taxpayer has the burden of proving
that he is entitled to the deductions claimed. Rule 142(a)(1);
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INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). The
burden of proof on factual issues that affect a taxpayer’s
liability for tax may be shifted to the Commissioner where the
“taxpayer introduces credible evidence with respect to * * * such
issue.” Sec. 7491(a)(1). Petitioner does not claim that the
burden shifts to respondent under section 7491(a). In any event,
petitioner has failed to establish that he has satisfied the
requirements of section 7491(a)(2). On the record before us, we
find that the burden of proof does not shift to respondent under
section 7491(a).
Section 213(a) permits a deduction for a taxpayer’s medical
and dental expenses that were paid and not compensated for by
insurance, to the extent the expenses exceed 7.5 percent of the
taxpayer’s adjusted gross income. Section 213(d)(1) provides in
pertinent part that the term “medical care” means amounts paid
“for the diagnosis, cure, mitigation, treatment, or prevention of
disease, or for the purpose of affecting any structure or
function of the body”. Section 1.213-1(e)(1)(ii), Income Tax
Regs., provides that amounts expended for illegal operations or
treatments are not deductible and that deductions allowed under
section 213 will be confined strictly to expenses incurred
primarily for the prevention or alleviation of a physical or
mental defect or illness.
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To substantiate these expenses, the taxpayer must furnish
the name and address of each payee and the date and amount of
each payment. Sec. 1.213-1(h), Income Tax Regs. If requested by
the Commissioner, the taxpayer must also furnish a statement or
itemized invoice identifying the patient, the type of service
rendered, and the specific purpose of the expense. Id.
The issue for decision is whether petitioner is entitled to
deduct amounts paid to prostitutes and for medical texts and
pornographic materials. Respondent argues that petitioner is not
entitled to deduct amounts paid to prostitutes because such
payments were illegal and petitioner has not provided
substantiation as required by section 1.213-1(h), Income Tax
Regs. Respondent argues that petitioner is not entitled to a
deduction for amounts paid for books on sex therapy and
pornographic material because those amounts were incurred for
petitioner’s general welfare, not pursuant to a doctor’s
prescription or for a specific medical condition.
Petitioner does not argue that section 213 and the
regulations thereunder allow a deduction for these costs.
Rather, petitioner points to book and magazine articles about the
positive health effects of sex therapy and argues that we should
allow him a deduction despite the illegality of his conduct or
the fact that petitioner’s doctor did not prescribe this
treatment.
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We agree with respondent that petitioner is not entitled to
deduct the amounts at issue. Patronizing a prostitute is illegal
in the State of New York. See N.Y. Penal Law sec. 230.04
(McKinney 2008). N.Y. Penal Law sec. 230.02 (McKinney 2008)
provides that a person is patronizing a prostitute when he: (1)
Pursuant to a prior agreement pays a fee for another person’s
having engaged in sexual conduct with him; (2) agrees to pay a
fee pursuant to an understanding that in return such person or a
third person will engage in sexual conduct with him; or (3)
solicits or requests another person to engage in sexual conduct
in return for a fee. Section 1.213-1(e)(1)(ii), Income Tax
Regs., provides that a taxpayer is not entitled to a deduction
for any illegal operation or treatment. Petitioner’s payments
to various prostitutes were personal expenses not prescribed by a
doctor and not intended to treat a medical condition. Petitioner
is not entitled to deductions for these amounts.
Petitioner is likewise not entitled to deductions for
amounts paid for books and magazines on sex therapy and
pornography. The purchases were not for the treatment of a
medical condition but were instead personal items. Sec. 1.213-
1(e)(1)(ii), Income Tax Regs.
II. Accuracy-Related Penalty
We next determine whether petitioner is liable for an
accuracy-related penalty. Section 6662(a) and (b)(2) provides
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that taxpayers will be liable for a penalty equal to 20 percent
of the portion of the underpayment of tax attributable to a
substantial understatement of income tax. Section 6662(d)(1)(A)
provides that a substantial understatement of income tax exists
if the amount of the understatement exceeds the greater of (1) 10
percent of the tax required to be shown on the return, or (2)
$5,000. Section 7491(c) provides that the Commissioner bears the
burden of production respecting an individual’s liability for the
penalty. As discussed above, we have upheld respondent’s
determinations of deficiencies in petitioner’s income tax;
respondent has thus met his burden of showing a substantial
understatement.
Section 6662(d)(2)(B)(ii) provides that the amount of the
understatement is to be reduced by that portion of the
understatement which is attributable to any item if the relevant
facts affecting the item’s tax treatment are adequately disclosed
on the return or in a statement attached to the return and there
is a reasonable basis for the tax treatment of such item by the
taxpayer. If an item is adequately disclosed and there is a
reasonable basis for its tax treatment, that item is treated as
having been reported properly on the return, and the
understatement of tax is computed without regard to that item.
See sec. 1.6662-4(e)(1), Income Tax Regs. Section 1.6662-
4(e)(2), Income Tax Regs., provides that an item will not be
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treated as adequately disclosed if a taxpayer does not have a
reasonable basis for the position as defined in section 1.6662-
3(b)(3), Income Tax Regs. Section 1.6662-3(b)(3), Income Tax
Regs., provides that reasonable basis is a relatively high
standard that is significantly higher than not frivolous. A
return position that is merely arguable does not satisfy the
reasonable basis standard. Id. A taxpayer can have a reasonable
basis if the position is reasonably based on one or more
authorities listed in section 1.6662-4(d)(3)(iii), Income Tax
Regs., which includes the Internal Revenue Code, temporary and
final regulations, revenue procedures and revenue rulings, and
court decisions.
The section 6662 penalty is inapplicable to the extent the
taxpayer had reasonable cause for the understatement and acted in
good faith. Sec. 6664(c)(1). The determination of whether the
taxpayer acted with reasonable cause and in good faith is made on
a case-by-case basis, taking into account the relevant facts and
circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs.
“Circumstances that may indicate reasonable cause and good faith
include an honest misunderstanding of fact or law that is
reasonable in light of all of the facts and circumstances,
including the experience, knowledge, and education of the
taxpayer.” Id. Generally, the most important factor is the
extent of the taxpayer’s efforts to assess the proper tax
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liability. Id. An honest misunderstanding of fact or law that
is reasonable in the light of the experience, knowledge, and
education of the taxpayer may indicate reasonable cause and good
faith. Remy v. Commissioner, T.C. Memo. 1997-72.
Petitioner did not have reasonable cause or a reasonable
basis for claiming the deductions at issue. Petitioner has been
an attorney for 40 years and specialized in tax law. Petitioner
should have known that his visits to prostitutes in New York were
illegal and that section 213, the regulations thereunder, and
caselaw do not support his claimed deductions. Accordingly,
petitioner is liable for the section 6662 penalty.
To reflect the foregoing,
Decision will be entered
for respondent.