T.C. Memo. 2009-218
UNITED STATES TAX COURT
VON H. ARGYLE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6820-08. Filed September 17, 2009.
Von H. Argyle, pro se.
Edward J. Laubach, Jr., for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined deficiencies and
penalties with respect to petitioner’s Federal income taxes as
follows:
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Penalty
Year Deficiency I.R.C. Sec. 6662(a)
2004 $7,478 $1,495.60
2005 3,606 721.20
2006 10,607 2,121.40
Except as otherwise stated, 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.
After concessions, the issues for decision are:
(1) Whether petitioner’s filing status was single during the
years in issue, when he was separated from but still married to
his spouse;
(2) whether petitioner is entitled to deduct attorney’s fees
and related expenses incurred in defending a criminal proceeding;
(3) whether petitioner is entitled to deduct expenses on
Schedule C, Profit or Loss From Business, beyond those conceded
by respondent;
(4) whether petitioner is entitled to deduct a net operating
loss carryforward from 2005 to 2006;
(5) whether petitioner is liable for the additional tax
under section 72(t) for early withdrawals from a retirement plan;
and
(6) whether petitioner is liable for the section 6662
accuracy-related penalty for each of the years in issue.
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FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference.
Petitioner resided in Pennsylvania at the time that he filed his
petition. Petitioner has a master’s degree in accounting with a
major in tax and has been a certified public accountant (C.P.A.)
since 1983. During 2004, 2005, and 2006, petitioner was a
practicing C.P.A. licensed in the State of Ohio.
From January through August 2004, petitioner used
residential property on Washington Boulevard in Grove City,
Pennsylvania, as his office. From September 1, 2004, through at
least December 31, 2006, petitioner used the same property as his
residence.
At all material times petitioner has been married. Although
petitioner’s wife filed for divorce in August 2004 and petitioner
and his wife lived separate and apart during the years in issue,
they were neither divorced nor parties to a decree of separate
maintenance.
During 2004, petitioner performed accounting and tax
preparation services for a medical services client in Newcastle,
Pennsylvania, approximately 40 miles from petitioner’s home in
Grove City. Among the client’s employees was a 20-year-old woman
whose job included transcribing doctors’ notes, maintaining
patient charts, and observing examinations of female patients by
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doctors. Before May 28, 2004, petitioner and the client’s
employee had meals together on two occasions. Petitioner gave the
employee $1,000 so that she could buy a car.
On May 28, 2004, petitioner allowed the employee to drive
him to his home in his BMW automobile. They arrived at his home
about 5 p.m., and she stayed until 10 p.m. or 11 p.m., leaving in
his automobile. While she was at petitioner’s home, petitioner
kissed the employee. Thereafter, the employee instituted
criminal charges against petitioner. Petitioner pleaded “no
contest” and was convicted of simple assault relative to the
events of May 28, 2004. More serious charges that had been filed
against him were dismissed and expunged from his record.
During the criminal proceedings against him, petitioner was
represented by Paul Gettleman. Petitioner paid Gettleman $12,500
during 2004, $25,000 in 2005, and $25,000 in 2006. In 2004,
petitioner also paid $645 to an investigator hired by Gettleman.
On Schedules C attached to his Federal income tax returns for the
years in issue, petitioner deducted the fees paid to Gettleman
and to the investigator as “legal and professional services”
without any further disclosure of the context in which they were
incurred. Petitioner also deducted an additional $10,000 in
legal fees that he claims was paid in 2005, but he has no
evidence substantiating that payment.
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During 2004, 2005, and 2006, petitioner withdrew $10,000,
$25,000, and $20,000, respectively, from his individual
retirement accounts. Petitioner was under 59-1/2 years old
during those years. Petitioner paid qualified higher education
costs for his son totaling $6,001 in 2004, $8,693 in 2005, and
$4,526 in 2006.
Petitioner attached Forms 5329, Additional Taxes on
Qualified Plans (Including IRAs) and Other Tax-Favored Accounts,
to his Federal income tax returns for the years in issue. As
directed on those Forms 5329, petitioner reported the “Early
distributions included in income” on line 1. On line 2 of the
Forms 5329, he claimed “Early distributions included on line 1
that are not subject to the additional tax” in amounts equal to
the amounts reported on line 1, thus reporting that he owed no
additional tax under section 72(t).
OPINION
In the stipulation, respondent has conceded various
deductions disallowed in the statutory notice of deficiency.
Respondent has also stipulated payments substantiated by
petitioner but disputed as to deductibility. Certain of the
issues, as discussed below, are legal issues not dependent on
burden of proof.
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As applicable to the factual issues, section 7491(a)
provides in relevant part that the burden of proof shifts from
the taxpayer to the Commissioner if the “taxpayer introduces
credible evidence”, has complied with the requirements to
substantiate items, and has maintained required records. Section
7491(c) imposes on the Commissioner the burden of production with
respect to any penalty, but the taxpayer must then establish that
the penalty does not apply. See generally Higbee v.
Commissioner, 116 T.C. 438 (2001).
Unless the burden of proof has shifted under section 7491(a)
or some exception not present in this case exists, the taxpayer
has the burden of proving that the claimed expenses were ordinary
and necessary business expenses rather than nondeductible
personal expenses. New Colonial Ice Co. v. Helvering, 292 U.S.
435, 440 (1934); Welch v. Helvering, 290 U.S. 111, 113-114
(1933); see Rule 142(a).
We are not required to accept testimony that is improbable
or implausible. See Geiger v. Commissioner, 440 F.2d 688, 689-
690 (9th Cir. 1971), affg. T.C. Memo. 1969-159; Shea v.
Commissioner, 112 T.C. 183, 189 (1999). In this case,
particularly in view of his training and experience as a C.P.A.,
the absence of corroboration of his testimony by witnesses or
reliable records leads us to conclude that petitioner has not
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carried his burden of proof as to the factual issues. See Shea
v. Commissioner, supra at 188.
Filing Status
Petitioner stipulated that he was married during the years
in issue, but he contends that he was entitled to file his
Federal income tax returns for 2005 and 2006 using rates
applicable to single taxpayers. Respondent contends that
petitioner’s filing status is married filing separately. This
issue is thus one of law.
Petitioner relies on Pennsylvania law and cases in other
contexts to argue that his “separate and apart” status determines
his rights and those of his wife and “confers single filing
status.” It appears, however, that the authorities on which
petitioner relies recognize “separate and apart” as a factor only
in determining property rights of the spouses.
Section 7703(a) states the general rule for determination of
marital status as of the close of a taxable year and provides
that “an individual legally separated from his spouse under a
decree of divorce or of separate maintenance shall not be
considered as married.” Sec. 7703(a)(2). Section 7703(b) sets
out the conditions under which married individuals living apart
shall not be considered married for purposes of section 151,
personal exemptions and head of household filing status. Neither
subsection allows petitioner to be treated as not married.
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In Keibler v. Commissioner, T.C. Memo. 1980-75, we concluded
that only an absolute divorce effects a legal separation in
Pennsylvania as relevant to a taxpayer’s filing status on his
Federal income tax return. Although we there applied former
section 153, as applicable to 1974, the decisive language now
appears in section 7703(a). We rejected the taxpayer’s argument
that living separate and apart was the equivalent of an absolute
divorce under Pennsylvania law. Petitioner has not cited any
authority that would lead to a different result in this case, and
he acknowledges that “Pennsylvania cases suggest that there is no
such thing as a decree of ‘legal separation’ which a court can
order for married parties who live apart”. Because petitioner is
neither divorced nor a party to a decree of separate maintenance,
he is not entitled to single filing status.
Legal Fees
The parties agree that the test for deductibility of the
legal expenses petitioner claimed in relation to the criminal
proceedings brought against him is the origin and character of
the claim involved, under United States v. Gilmore, 372 U.S. 39
(1963). Petitioner asserts that the proceedings against him were
instituted as retaliation by the client’s employee because he
reprimanded her for misconduct in the client’s business. Thus,
he argues, the origin of the claim is his business activity,
rendering the legal fees that he incurred deductible.
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Petitioner’s posttrial brief asserts many facts that are
not in the record and cannot be considered. See Rules 143(b),
151(e)(3). Petitioner’s factual assertions, however, suggest
that corroborating witnesses should have been available if his
claims are accurate. He did not call Gettleman as a witness,
even though an unsubstantiated amount of $10,000 allegedly paid
to Gettleman in 2005 is in dispute. He did not call any other
witness who might have been available to corroborate his claim
that the employee was dishonest in her services to the client.
Respondent contends that the fees relating to the criminal
proceedings were nondeductible personal expenses comparable to
those in cases involving criminal assault charges, such as Nadiak
v. Commissioner, 356 F.2d 911 (2d Cir. 1966), affg. T.C. Memo.
1964-291; Kelly v. Commissioner, T.C. Memo. 1999-69; Siket v.
Commissioner, T.C. Memo. 1978-124; and Michaelis v. Commissioner,
T.C. Memo. 1971-199. As demonstrated in the cases cited by
respondent, successful defense of criminal charges is not
determinative under the origin of the claim test.
Respondent relies on petitioner’s testimony regarding the
events of May 28, 2004, as establishing the personal nature of
the relationship between petitioner and his client’s employee.
As petitioner testified: The alleged assault occurred at
petitioner’s residence 40 miles from the client’s place of
business, after the employee drove petitioner to his residence in
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petitioner’s car and spent 5 or more hours at his house between 5
p.m. and 11 p.m. Petitioner had gone to dinner with the employee
on at least two prior occasions, kissed her on May 28, 2004, and
did not deny kissing her on other occasions. Petitioner had
given the employee $1,000 so that she could buy a car.
We agree with respondent. The preponderance of the evidence
is that the legal fees for defending the criminal proceedings
arose out of a personal relationship and are not deductible
business expenses.
Other Schedule C Expenses
At trial petitioner presented a spreadsheet representing
various items claimed as business expense deductions. He did
not, however, establish by his testimony any items that
respondent had not previously conceded in the stipulation. He
asserts that all of the claimed deductions were ordinary,
necessary, and substantiated and that his returns were correct
when filed. He admitted during his testimony, however, that a
portion of his deductions for mortgage interest on the property
that he occupied as his office and his residence had been
duplicated as itemized deductions on Schedule A, Itemized
Deductions, and as business expenses on Schedule C. He deducted
vehicle expenses using a combination of actual expenses and
business mileage, rather than an acceptable alternative of either
but not both. See sec. 1.274-5(j)(2), Income Tax Regs.; Rev.
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Proc. 2004-64, sec. 5.03, 2004-2 C.B. 898, 900; Rev. Proc. 2005-
78, sec. 5.03, 2005-2 C.B. 1177, 1179; see also, e.g., Nash v.
Commissioner, 60 T.C. 503, 520 (1973); Clark v. Commissioner,
T.C. Memo. 2002-32. He claims that he is entitled to use section
280A(d)(4)(A) to deduct all of the expenses concerning the home
used as an office before September 1, 2004, but that section
relates only to rental property. The property petitioner
occupied was not rental property during any of the years in
issue.
Petitioner did not establish during trial the portion of the
residential property that was used exclusively for business, as
required by section 280A(c), and he apparently deducted as
business expenses unallocated items, such as utilities and
repairs, that related to the residence. Respondent nonetheless
conceded a portion of the claimed home office expense, and
petitioner has not shown that he is entitled to a greater amount.
Petitioner did not substantiate travel and meals expenses by
time, place, and business purpose as required by section 274(d),
and he testified that he did not know whether he reduced the cost
of business meals by 50 percent as required by section 274(n).
He also testified that some of the other amounts claimed on his
returns were only estimates. Petitioner’s general assertions as
to deductibility are thus unreliable, and no deductions beyond
those respondent conceded are allowed.
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Net Operating Losses
Petitioner claimed a $25,744 net operating loss carryover
from 2005 to 2006. The loss claimed for 2005 included $35,000
of erroneously deducted legal fees, $10,000 of which was
unsubstantiated. The claimed loss also included lesser items now
disallowed. Therefore petitioner did not establish that he was
entitled to any net operating loss carryover.
Section 72(t)
Section 72(t) imposes a 10-percent additional tax on early
distributions from retirement plans, subject to certain
exceptions. The exceptions petitioner asserts are for
distributions used to pay qualified higher education expenses
under section 72(t)(2)(E) and medical insurance costs for
unemployed individuals under section 72(t)(2)(D).
Respondent has conceded the amounts petitioner paid for his
son’s tuition, fees, books, supplies, and equipment and an
allowance for room and board, less scholarships received. The
parties dispute whether transportation expenses incurred in
relation to petitioner’s son’s attendance at college are
qualified higher education expenses.
Section 72(t)(2)(E) provides the exception to the 10-percent
additional tax on early distributions from retirement plans for
higher education expenses defined under section 72(t)(7), which
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in turn incorporates section 529(e). Respondent argues that
transportation costs are not included in the definitions of
qualified expenses in section 72(t)(7) or 529(e)(3) and, in any
event, petitioner has not proven the amount of transportation
expenses he actually incurred. Petitioner wishes to incorporate
transportation expenses into the definition of qualified expenses
on the basis of section 472 of the Higher Education Act of 1965,
20 U.S.C. section 1087ll, and claims deductions based on
estimates in the catalog of the college attended by his son.
Section 529(e)(3) does not include transportation expenses
as qualified higher education expenses and incorporates section
472 of the Higher Education Act of 1965 only as a limitation on
an allowance for room and board. There is neither logic nor
authority supporting petitioner’s attempt to add transportation
expenses as a qualified higher education expense for purposes of
section 72(t)(2)(E), and he is not entitled to use third-party
estimates rather than evidence to prove that he actually incurred
expenses.
Section 72(t)(2)(D) provides that the 10-percent additional
tax on early distributions does not apply to distributions for
health insurance premiums. Under section 72(t)(2)(D)(iii) a
self-employed individual may qualify for this exception if he
would have received unemployment compensation but for the fact
that he was self-employed. Petitioner has not established that
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he would be eligible for unemployment compensation if he had not
been self-employed or that he used any part of the distributions
from his retirement plan to purchase health insurance.
Petitioner claims that he receives health insurance through his
spouse’s employer and seeks to deduct amounts that he paid to his
spouse for homeowner’s and automobile insurance as the equivalent
of health insurance premiums. Again petitioner’s uncorroborated
testimony and generalized assertions do not satisfy his burden of
proving the amount of the expenditures or that they qualify for
the exemption from the section 72(t) additional tax.
Finally, petitioner argues that respondent incorrectly
calculated the section 72(t) additional tax on the early
distribution after allowing for conceded qualified higher
education expenses. Section 72(t) imposes a tax on early
withdrawals because they “frustrate the intention of saving for
retirement, and section 72(t) discourages this from happening.”
Dwyer v. Commissioner, 106 T.C. 337, 340 (1996) (citing S. Rept.
93-383, at 134 (1973), 1974-3 C.B. (Supp.) 80, 213). The tax is
imposed on “the portion of such amount [received from a qualified
plan] which is includible in gross income.” Sec. 72(t)(1).
Respondent does not contest the portion includible in gross
income as reported by petitioner on his returns.
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Petitioner argues that the amounts excepted under section
72(t)(2) should be deducted solely from the distribution
includible in gross income. For example, the portion of the
withdrawal of $10,000 for 2004 that was includible in gross
income was $6,400. The conceded amount of qualified higher
education expenses is $6,001. Petitioner argues that the tax is
10 percent of $399 ($6,400 - $6,001).
Respondent contends that section 72(t)(2)(E) refers to gross
or total distributions, not just distributions includible in
gross income. Respondent’s position is that the additional tax
imposed by section 72(t)(1) is on the lesser of the distribution
includible in gross income or the gross distribution remaining
after reduction for qualified higher education expenses. As a
result, the amounts excepted from the 10-percent additional tax
are deducted first from the portion of the distribution not
includible in gross income. Respondent does not cite, and we
have not found, any authority supporting respondent’s
calculation.
The amount subject to additional tax under section 72(t)(1),
i.e., the amount includible in gross income, is reduced for
distributions used for certain specified purposes listed in
section 72(t)(2), including qualified higher education expenses
specified in section 72(t)(2)(E). Respondent has given us no
reason why, in the context of section 72(t), exceptions to the
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10-percent additional tax should be used first to offset
nontaxable distributions. Petitioner’s methodology is consistent
with the Forms 5329 prescribed by the Internal Revenue Service
and submitted with petitioner’s returns for the years in issue.
On this point, we agree with petitioner.
Section 6662 Accuracy-Related Penalty
Section 6662(a) and (b)(1) and (2) imposes a 20-percent
accuracy-related penalty on any underpayment of Federal income
tax attributable to a taxpayer’s negligence or disregard of rules
or regulations, or a substantial understatement of income tax.
Section 6662(d)(1)(A) defines “substantial understatement of
income tax” as an amount exceeding the greater of 10 percent of
the tax required to be shown on the return or $5,000. In this
case, a Rule 155 computation will be required because of
respondent’s concessions and our determination with respect to
the section 72(t) additional tax computation. Respondent asserts
that a substantial understatement of income tax will exist for
2006 but that the penalty should be based on negligence for 2004
and 2005.
Respondent argues that petitioner was a well-educated
C.P.A., with a master’s degree in accounting and a major in
taxation, who has practiced since 1983. Respondent points out
that petitioner deducted travel expenses without maintaining the
substantiating records required under section 274(d) or reducing
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the amounts claimed by 50 percent of the meals as required under
section 274(n); he duplicated mortgage expense deductions; he
deducted utilities and repairs on his office in the home without
regard to the income limitations of section 280A(c)(5); he used
an improper method for vehicle expenses; and he claimed legal
fees as a business deduction when he should have known that those
expenses were personal.
The accuracy-related penalty under section 6662(a) will not
be imposed with respect to any portion of the underpayment as to
which the taxpayer acted with reasonable cause and in good faith.
Sec. 6664(c)(1). The decision as to whether a taxpayer acted
with reasonable cause and in good faith is made by taking into
account all of the pertinent facts and circumstances. Sec.
1.6664-4(b)(1), Income Tax Regs.
Petitioner asserts that “All accounting measures are
estimates subject to multiple interpretations.” He claims to
have researched all of the contested deductions, but he has
provided no substantial authority for those that have been
disallowed as being personal legal expenses or deductions claimed
contrary to the express provisions of section 274(d) or 280A. See
sec. 6662(d)(2)(B)(i); sec. 1.6662-4(d)(3), Income Tax Regs. He
claims that “disclosure was complete” for the deduction of legal
fees paid to Gettleman, but there is no disclosure on his returns
of “the relevant facts affecting the item’s tax treatment”. See
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sec. 6662(d)(2)(B)(ii). He claims that “all contested deductions
were supported by documentation”, but that claim is contradicted
by the record. Petitioner’s training and experience are relevant
factors in considering whether he is liable for the penalty. See
sec. 1.6664-4(b)(1), Income Tax Regs.; see also Reynolds v.
Commissioner, 296 F.3d 607, 618 (7th Cir. 2002), affg. T.C. Memo.
2000-20. His training and experience support the conclusion that
he was negligent in claiming the disallowed deductions. The
penalty under section 6662(a) will be sustained for each year.
In reaching our decision, we have considered all arguments
made by the parties. To the extent not mentioned or addressed,
they are irrelevant or without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.