T.C. Memo. 2010-152
UNITED STATES TAX COURT
NATHAN E. LANG, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20117-08. Filed July 14, 2010.
Nathan E. Lang, pro se.
Michelle Maniscalco, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
WELLS, Judge: Respondent determined a deficiency in
petitioner’s Federal income tax of $8,153 for 2003, a failure to
file addition to tax pursuant to section 6651(a)(1) of $1,780,
and an accuracy-related penalty pursuant to section 6662(a) of
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$1,631.1 The issues remaining to be decided relate to
petitioner’s entitlement to deductions that he claimed on
Schedule A, Itemized Deductions, and Schedule C, Profit or Loss
From Business, of his return for the year in issue and whether he
is liable for the failure to file addition to tax pursuant to
section 6651(a)(1) and the accuracy-related penalty pursuant to
section 6662.2
FINDINGS OF FACT
Some of the facts and certain exhibits have been stipulated.
The stipulations of fact are incorporated in this opinion by
reference and are found accordingly.
At the time the petition was filed, petitioner lived in
Woodside, New York.
On his 2003 Federal income tax return petitioner listed his
occupation as graphics. Additionally, petitioner is a performing
artist who engages in “voice-over” and “on-camera” work.3
1
Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code (Code), in effect for
the year in issue. All amounts are rounded to the nearest whole
dollar.
2
Respondent determined that petitioner is liable for self-
employment tax and allowed a corresponding self-employment tax
deduction in the notice of deficiency. The self-employment tax
and its corresponding deduction are computational and will depend
on the Court’s resolution of the issues discussed herein.
3
On petitioner’s Schedule C, he listed his business as
theater. We interpret “theater” to include petitioner’s voice-
(continued...)
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Petitioner finds his voice-over and on-camera work through talent
agencies nationwide. Normally, petitioner auditions for the
voice-over work by recording the proposed job on his home studio
equipment and then emailing the talent agency the digital files.
On Schedule A of his 2003 Federal income tax return
petitioner claimed unreimbursed employee expenses of $15,700 as
miscellaneous itemized deductions. Petitioner also claimed as
miscellaneous itemized deductions expenses for union dues of $202
and tax preparation fees of $425. Petitioner claimed a total of
$16,327 in miscellaneous itemized deductions on Schedule A.
However, the total amount of petitioner’s itemized deductions was
reduced to $15,313 by the 2-percent-of-adjusted-gross-income
limitation pursuant to section 67(a). In the notice of
deficiency respondent disallowed petitioner’s claimed
miscellaneous itemized deductions of $15,313.4
On Schedule C of his 2003 return, petitioner claimed a
deduction for meals and entertainment of $1,600.5 Additionally,
3
(...continued)
over and on-camera work.
4
On Form 5278, Statement - Income Tax Changes, attached to
the notice of deficiency, respondent disallowed $15,313 of
itemized deductions. However, on Form 886-A, Explanation of
Items, attached to the notice of deficiency, respondent
specifically disallowed the unreimbursed employee expenses of
$15,700.
5
On his return, petitioner failed to apply to this amount
the 50-percent limitation of sec. 274(n)(1).
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petitioner claimed on Schedule C a deduction for other expenses
of $16,275. Respondent denied all of petitioner’s deductions for
meals and entertainment expenses and other expenses.
Petitioner timely filed a petition with this Court.
OPINION
Generally, the Commissioner’s determination of a deficiency
is presumed correct, and the taxpayer has the burden of proving
it incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933).
Deductions are a matter of legislative grace, and generally
taxpayers bear the burden of proving their entitlement to the
deductions claimed. Sec. 6001; INDOPCO, Inc. v. Commissioner,
503 U.S. 79, 84 (1992). Section 162(a) permits “as a deduction
all the ordinary and necessary expenses paid or incurred during
the taxable year in carrying on any trade or business”. To be
deductible, ordinary and necessary expenses must be “directly
connected with or pertaining to the taxpayer’s trade or
business”. Sec. 1.162-1(a), Income Tax Regs. Additionally,
section 212 generally allows deduction of ordinary and necessary
expenses paid or incurred during the tax year for the production
or collection of income. Sec. 1.212-1(d), Income Tax Regs. The
deduction for trade or business expenses must be reasonable in
amount and bear a reasonable and proximate relationship to the
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production or collection of taxable income. Id. However, a
taxpayer may not deduct personal expenses. Sec. 262(a).
Generally, a taxpayer must keep records sufficient to
establish the amounts of the items reported on his Federal income
tax return. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs.
In the event that a taxpayer establishes that a deductible
expense has been paid but is unable to substantiate the precise
amount, we generally may estimate the amount of the deductible
expense, bearing heavily against the taxpayer whose inexactitude
in substantiating the amount of the expense is of his own making.
Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). We
generally will not estimate a deductible expense, however, unless
the taxpayer presents sufficient evidence to provide some basis
upon which an estimate may be made. Vanicek v. Commissioner, 85
T.C. 731, 743 (1985).
Section 274(d) supersedes the Cohan doctrine for certain
categories of expenses. Sanford v. Commissioner, 50 T.C. 823,
827-828 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969).
Generally, a deduction is disallowed for travel expenses, meals
and entertainment, and listed property unless the taxpayer
properly substantiates: (1) The amount of such expense; (2) the
time and place of the expense; (3) the business purpose; and (4)
in the case of meals and entertainment, the business relationship
between the taxpayer and the persons being entertained. Sec.
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274(d). Section 280F(d)(4) includes cellular telephones as
listed property. Generally, deductions for expenses subject to
the strict substantiation requirements of section 274(d) must be
disallowed in full unless the taxpayer satisfies every element of
those requirements. Sanford v. Commissioner, supra at 827-828;
Larson v. Commissioner, T.C. Memo. 2008-187; sec. 1.274-5T(a),
Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
Deductions for listed property that is used both personally and
in the taxpayer’s business are disallowed unless a taxpayer
establishes the amount of business use of the property. Kinney
v. Commissioner, T.C. Memo. 2008-287; Olsen v. Commissioner, T.C.
Memo. 2002-42, affd. 54 Fed. Appx. 479 (9th Cir. 2003); sec.
1.274-5T(b)(6)(i)(B), Temporary Income Tax Regs., 50 Fed. Reg.
46016 (Nov. 6, 1985).
Taxpayers may substantiate their deductions by either
adequate records or sufficient evidence that corroborates the
taxpayer’s own statement. Sec. 274(d). To satisfy the adequate
records requirement, a taxpayer must maintain records and
documentary evidence that in combination are sufficient to
establish each element of an expenditure or use. Larson v.
Commissioner, supra; sec. 1.274-5T(c)(2)(i), Temporary Income Tax
Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). A contemporaneous log
is not required, but corroborative evidence used to support a
taxpayer’s reconstruction of the expenditure “‘must have a high
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degree of probative value to elevate such statement’” to the
level of credibility of a contemporaneous record. Larson v.
Commissioner, supra (quoting section 1.274-5T(c)(1), Temporary
Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
In the absence of adequate records, a taxpayer may
alternatively establish an element of an expenditure by “his own
statement, whether written or oral, containing specific
information in detail as to such element” and by “other
corroborative evidence sufficient to establish such element.”
Larson v. Commissioner, supra; sec. 1.274-5T(c)(3), Temporary
Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985). However, we
do not estimate under the Cohan doctrine expenses that are
subject to the requirements of section 274(d). Sanford v.
Commissioner, supra at 827; Larson v. Commissioner, supra.
Petitioner contends that the burden of proof regarding the
substantiation of his expenses should be placed on respondent
pursuant to section 7491(a). Section 7491(a) does not alter the
taxpayer’s burden of proof where the taxpayer has not complied
with all substantiation requirements, including those of section
274(d), and where the taxpayer has not maintained all records
required by the Code. Sec. 7491(a)(2)(A) and (B); see also
Higbee v. Commissioner, 116 T.C. 438, 442-443 (2001).
Additionally, the burden of proof is determinative only when
there is an evidentiary tie. Knudsen v. Commissioner, 131 T.C.
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185, 189 (2008). When there is an evidentiary tie, we consider
whether petitioner introduced credible evidence on that issue in
order to shift the burden of proof. However, most of the issues
can be decided on the basis of the record in the instant case.6
Petitioner claimed deductions on Schedule A for union dues
of $202, unreimbursed employee business expenses of $15,700, and
tax preparation fees of $425, for a total miscellaneous itemized
deduction expense of $16,327. After the 2-percent-of-adjusted-
gross-income limitation was applied pursuant to section 67(a),
the amount deducted was $15,313. The total amount of $15,313 was
disallowed by respondent in the Form 5278, Statement - Income Tax
Changes, attached to the notice of deficiency. However, the Form
886-A, Explanation of Items, attached to the notice of
deficiency, mentions only unreimbursed employee expenses.
Additionally, at trial respondent did not dispute the
deductibility of the union dues or the tax preparation fees.
Accordingly, we deem the deductibility of the union dues and the
tax preparation fees conceded by respondent.7
6
Petitioner’s claimed deduction for cellular telephone
expenses is subject to the heightened substantiation requirements
of sec. 274(d). Petitioner has offered limited substantiation,
but it does not meet the requirements of sec. 274(d).
Accordingly, sec. 7491(a)(1) does not apply to petitioner’s claim
to this deduction. See sec. 7491(a)(2)(A).
7
To the extent that petitioner claimed additional tax
preparation fees at trial, petitioner failed to substantiate any
amount above the $425 that we deem conceded by respondent.
(continued...)
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As to petitioner’s claimed unreimbursed employee business
expenses, they include expenses for uniforms of $920, shoes of
$640, uniform cleaning of $2,250, emergency cab fares of $1,860,
professional books and catalogs of $520, tuition of $2,830,
educational books and supplies of $2,780, supplies and equipment
of $3,760, and telephone service of $740.8 Petitioner testified
that the receipts he offered were for his Schedule C business
expenses. Petitioner failed to offer testimony or documentary
evidence specifically relating to his unreimbursed employee
business expenses that he claimed on Schedule A. Accordingly,
we sustain respondent’s determination denying petitioner’s
deduction for unreimbursed employee business expenses claimed on
Schedule A.
On Schedule C petitioner claimed a deduction for meals of
$1,600. Petitioner testified that he claimed meals expenses of
7
(...continued)
Petitioner provided a receipt for tax preparation fees from 2001
and claimed that his tax preparation fees for 2003 must have been
higher. However, such speculative evidence is inadequate for us
to make an estimate of additional tax preparation expenses beyond
those conceded by respondent for tax year 2003. See Vanicek v.
Commissioner, 85 T.C. 731, 743 (1985).
8
As noted above, petitioner listed his occupation on his
Form 1040, U.S. Individual Income Tax Return, as graphics.
Additionally, petitioner is a performing artist who engages in
“voice-over” and “on-camera” work. The record does not establish
that petitioner was employed for purposes of the claimed
expenses; however, even if those expenses should have been
classified as Schedule C expenses, petitioner has failed to show
that he is entitled to any deduction for them.
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$15 a day relating to a play for which he volunteered his
services. Petitioner testified that his involvement was for the
3 days that the play was performed, December 12, 13, and 14, and
for 1 hour every Tuesday from September 16 through December 9,
2003 for rehearsals. Generally, expenses for meals away from
home must meet the heightened substantiation requirements of
section 274(d). However, unreimbursed expenditures, including
expenses for meals while away from home, made incident to the
rendition of services to a charitable organization may constitute
a charitable contribution deduction. Sec. 1.170A-1(g), Income
Tax Regs. Petitioner failed to offer any documentary evidence or
testimony adequate to substantiate his meals expenses that relate
to the play under either section 274(d) or section 1.170A-1(g),
Income Tax Regs. Petitioner’s testimony does not prove that the
expenses for meals were incurred while he was “away from home” or
prove that his volunteer work was in service to a qualifying
donee of tax-deductible contributions.9 See sec. 274(d); sec.
1.170A-1(g), Income Tax Regs. Additionally, petitioner failed to
offer any testimony or documentary evidence for meals expenses
greater than those relating to the play. Accordingly, we sustain
9
Petitioner provided an advertisement for the play in which
he was involved. On the advertisement, the organization, the
52nd Street Project, claims to be a “non-profit organization”.
Petitioner failed to prove that the 52nd Street Project meets the
requirements of sec. 170(c)(2).
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respondent’s denial of a deduction for meals claimed on
petitioner’s Schedule C.
On Schedule C petitioner also claimed a deduction for other
expenses of $16,275. Expenses included in that amount are for
postage of $684, books and stationery of $620, supplies of
$1,891, actor’s miscellaneous items of $5,320, telephone and
cellular telephones of $2,670, studio expenses of $3,410, and
training workshops of $1,680.
Petitioner contends that we can use his limited
substantiation to make an estimation of his Schedule C expenses,
pursuant to the Cohan doctrine. However, petitioner failed to
specify which of the receipts that he offered substantiate the
particular expenses claimed on Schedule C. Some of his
substantiation fits neatly into the categories claimed on
Schedule C, such as cellular telephone expenses that fit into his
claimed deduction for telephone and cellular telephones, while
others, such as expenses for trade newspapers, do not fit into a
specific category but could belong in multiple categories, such
as claimed deductions for books and stationery, supplies, actor’s
miscellaneous expenses, or studio expenses. Accordingly, we will
analyze petitioner’s substantiation by individual receipts and
then determine whether any further estimation, pursuant to the
Cohan doctrine, is warranted.
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According to petitioner’s testimony, he purchased weekly and
monthly trade newspapers that contained detailed industry
information as well as casting calls. Petitioner testified that
he purchased Ross Reports, monthly for $8 per issue, and
Backstage, weekly for $2 per issue. Petitioner offered two
receipts for Ross Reports which show a cost of $8 per issue
during tax year 2003. On the basis of the foregoing, we conclude
that petitioner may deduct $96 for Ross Reports magazine, which
we conclude is an ordinary and necessary business expense. See
Cohan v. Commissioner, 39 F.2d at 543-544. However, petitioner
failed to provide evidence substantiating any payments for issues
of Backstage, and we, therefore, sustain respondent’s
disallowance of a deduction for that publication.
Petitioner offered a receipt for $34 for the transfer of a
recorded audition from video tape to a digital video disc (DVD).
According to petitioner’s testimony, he transferred the audition
to a DVD so that it could be easily viewed by producers and
casting directors.10 On the basis of the foregoing, we conclude
that petitioner’s expenses for the video-to-DVD transfer are
ordinary and necessary expenses of petitioner’s voice-over
business. Consequently, we hold that petitioner may deduct $34
for the media transfer.
10
Petitioner offered the original tape and a copy of the
DVD.
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Petitioner also claimed $22 per day for local transportation
expenses for the play, discussed above, for which he volunteered
his services. Generally, commuting expenses between the
taxpayer’s residence and place of business are personal expenses,
and, therefore, are nondeductible. Sec. 262(a); sec. 1.262-
1(b)(5), Income Tax Regs. However, taxpayers are allowed a
deduction for unreimbursed transportation expenses incident to
the performance of charitable services as long as there is not a
significant element of personal pleasure, recreation, or vacation
in such travel. Sec. 170(j); Cavalaris v. Commissioner, T.C.
Memo. 1996-308; sec. 1.170A-1(g), Income Tax Regs. As proof of
his eligibility for the transportation expenses, petitioner
offered solely his testimony. As noted above, petitioner failed
to prove that his services were performed for a qualified donee
of tax-deductible contributions. We, therefore, sustain
respondent’s disallowance of petitioner’s transportation
expenses.
Petitioner testified that he spent $700 on the design of his
Internet Web site. Petitioner offered printouts of his Web site
as proof of the design expenses. However, petitioner failed to
provide any documentary evidence showing the amount paid, or, if
it was paid, when it was paid. See Vanicek v. Commissioner, 85
T.C. at 743. Additionally, given petitioner’s overall lack of
substantiation, we give little credence to his testimony
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regarding the cost of his Internet Web site. We, therefore,
sustain respondent’s disallowance of petitioner’s claimed expense
for Internet Web site design.
As to petitioner’s claimed expenses for cellular telephone,
such expenses are subject to heightened substantiation
requirements. See secs. 274(d), 280F(d)(4). Petitioner’s bank
statements reveal monthly charges from AT&T Wireless, and he
testified that 40 percent of his cellular telephone use was for
business purposes, for a total of $453. However, petitioner
failed to provide adequate records or other sufficient evidence
to corroborate his claimed 40-percent business use. See sec.
274(d); sec. 1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed.
Reg. 46016 (Nov. 6, 1985). We conclude that petitioner has
failed to meet the heightened substantiation requirements for his
cellular telephone expenses and, therefore, sustain respondent’s
determination as to those expenses.
As to petitioner’s landline telephone and Internet service
provider expenses, according to petitioner’s testimony the
claimed expenses were “70 to 80%” for business purposes.
Additionally, petitioner testified that the total amounts of
landline telephone expenses and Internet service provider
expenses were documented through his bank statements. However, a
review of petitioner’s bank statements reveals two separate
charges from RCN listed as being for cable, Internet, and phone
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services for a total of $205.11 Petitioner failed to offer any
evidence of the cost of cable, which would be a nondeductible
personal expense pursuant to section 262(a), as opposed to his
Internet and telephone costs, which would, if anything, be mixed
personal and business expenses. We will not estimate a
deductible expense unless the taxpayer presents sufficient
evidence to provide some basis upon which an estimate may be
made. Vanicek v. Commissioner, supra at 743. Additionally, any
expense for basic local telephone service with respect to the
first telephone line to a residence is treated as a nondeductible
personal expense. Sec. 262(b). On the basis of the foregoing,
we sustain respondent’s denial of petitioner’s deduction for
landline telephone expenses and Internet service expenses.
Petitioner offered pictures of his audio equipment used in
his voice-over business. However, petitioner failed to provide
testimony or documentation regarding the costs of the audio
equipment. Accordingly, we sustain respondent’s denial of a
11
On Oct. 17, 2003, petitioner paid RCN $94, and on Dec. 10,
2003, petitioner paid RCN $111.
The Court has characterized Internet service provider
expenses as utility expenses. Verma v. Commissioner, T.C. Memo.
2001-132. Strict substantiation therefore does not apply, and
the Court may estimate a taxpayer’s deductible expenses, provided
that the Court has a reasonable basis for making an estimate.
Vanicek v. Commissioner, 85 T.C. at 743.
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deduction for his audio equipment.12 See Vanicek v.
Commissioner, supra at 743.
Petitioner also claimed deductions for various classes.13
According to petitioner’s testimony, he attended Saturday morning
voice-over copy reading classes with Jennifer Duckworth and Kevin
Taylor from 10 a.m. to 12 noon, and Saturday afternoon skill
study and technique concentration classes at HB Studios from 1
p.m. until 5 p.m. Expenditures made by a taxpayer for education
are deductible, with certain exceptions not relevant here,14 if
the education either:
(1) Maintains or improves skills required by the
individual in his employment or other trade or business; or
(2) Meets the express requirements of the individual’s
employer, or the requirements of applicable law or
regulations, imposed as a condition to the retention by the
individual of an established employment relationship,
status, or rate of compensation.
12
Petitioner’s audio equipment appears to include computers
and computer peripheral equipment. See sec. 280F(d)(4). Such
property would be “listed property” subject to the heightened
substantiation requirements of sec. 274(d). However, because
petitioner’s expenses for audio equipment fail to meet general
substantiation requirements, we need not address whether they
would have met the requirements of sec. 274(d).
13
Petitioner testified that these receipts substantiated his
expenses for “performing classes and expenses”; however, this
category does not appear on petitioner’s return.
14
The classes do not qualify petitioner for a new trade or
business. Thus, deductions associated with the classes are not
prohibited under sec. 1.162-5(b), Income Tax Regs.
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Sec. 1.162-5(a), Income Tax Regs. Whether education maintains or
improves skills required by the taxpayer in his business is a
question of fact. Boser v. Commissioner, 77 T.C. 1124, 1131
(1982), affd. without published opinion (9th Cir., Dec. 22,
1983); Joseph v. Commissioner, T.C. Memo. 2005-169. The fact
that a taxpayer’s education is helpful to him in the performance
of his duties does not establish that its cost is a deductible
business expense. Joseph v. Commissioner, supra. Taxpayers must
show that there is a direct and proximate relationship between
the education expenses and the skills required in their business;
however, a precise correlation is not necessary. Boser v.
Commissioner, supra at 1131.
Petitioner testified that the classes are essential to
continued improvement of skills required in his business as a
performing artist. According to petitioner: “one of the
requirements for artists, for continuing employment, is steady
work with auditioning, performing, training, and self-
improvement.” Accordingly, we conclude that petitioner’s
participation in the classes maintained or improved his skills.
Additionally, petitioner testified that the classes occurred
weekly and that they were helpful. See Boser v. Commissioner,
supra at 1132-1133; Ford v. Commissioner, 56 T.C. 1300, 1305-1307
(1972), affd. per curiam 487 F.2d 1025 (9th Cir. 1973); sec.
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1.262-1(b)(9), Income Tax Regs. (“Expenditures * * * are not
deductible unless they qualify under section 162 and § 1.162-5
[, Income Tax Regs.]”). On the basis of the foregoing, we
conclude that petitioner’s expenses for the classes are ordinary
and necessary business expenses and petitioner should be allowed
a deduction for those expenses to the extent that he has
substantiated them.
Petitioner offered receipts for the voice-over classes
bearing dates from calendar year 2001. However, petitioner
failed to offer any documentation that corroborates his testimony
regarding the cost of the voice-over classes for the year in
issue. We will not estimate deductible expenses unless the
taxpayer offers sufficient evidence to provide some basis upon
which an estimate may be made. Vanicek v. Commissioner, 85 T.C.
at 743. Accordingly, we sustain respondent’s determination
regarding the voice-over classes.
As to the classes at HB Studios, petitioner provided
receipts totaling $248 for the year in issue. We conclude that
these receipts and petitioner’s testimony are sufficient to
substantiate a deduction of $248. However, the record contains
no evidence of the costs of individual classes. Petitioner
testified that he occasionally prepaid for the classes so that he
would not have to pay for them in cash. We will not estimate
deductible expenses unless the taxpayer offers sufficient
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evidence to provide some basis upon which an estimate may be
made. Id. Accordingly, on the basis of the foregoing receipts,
we conclude that petitioner may deduct $248 for classes at HB
Studios.
Petitioner also offered receipts for various acting books
purchased at Drama Books. According to petitioner’s testimony,
the books were used in the voice-over classes discussed above.
Accordingly, we conclude that petitioner should be allowed to
deduct $67 for books purchased at Drama Books used in his voice-
over classes.
As to the remaining expenses not specifically discussed
above, petitioner contends that we may use the limited
substantiation he offered to estimate his expenses under the
Cohan doctrine. However, as discussed above, petitioner failed
to specify which of the receipts that he offered substantiate the
particular expenses claimed on Schedule C. Indeed, petitioner
failed to provide the Court with any evidence as to how he
arrived at the numbers he claimed as deductions on Schedule C.
We will not estimate deductible expenses unless the taxpayer
offers sufficient evidence to provide some basis upon which an
estimate may be made. Vanicek v. Commissioner, supra at 743.
Accordingly, we sustain respondent’s denial of deductions for
other expenses claimed on Schedule C beyond those specifically
allowed above.
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As to the failure to file addition to tax, section
6651(a)(1) imposes an addition to tax for failure to file a
return by the date prescribed (determined with regard to any
extension of time for filing). The addition to tax is 5 percent
of the ultimately determined tax if the failure to file does not
exceed 1 month, with an additional 5 percent per month for each
month the failure continues, up to a maximum of 25 percent. Id.
However, the failure to file addition to tax is not imposed if
the taxpayer can establish that such failure is due to reasonable
cause and not due to willful neglect. Id. To prove reasonable
cause, the taxpayer must show that he exercised ordinary business
care and prudence but nevertheless could not file the return when
it was due. See Crocker v. Commissioner, 92 T.C. 899, 913
(1989). Respondent bears the burden of production pursuant to
section 7491(c), and petitioner bears the burden of proof. See
Higbee v. Commissioner, 116 T.C. at 446.
Petitioner admitted failing to file a timely return.
Accordingly, respondent has met his burden of production.
Petitioner testified that he relied on his tax return preparer to
timely file his return or request an extension. However,
petitioner’s reliance on his tax return preparer to timely file
his return is not reasonable. No particular expertise is
necessary to know that returns are due at prescribed times. See
United States v. Boyle, 469 U.S. 241, 251 (1985). Consequently,
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we hold that petitioner is liable for the failure to file
addition to tax pursuant to section 6651(a)(1).
As to the substantial understatement penalty, section
6662(a) and (b)(2) imposes a penalty of 20 percent on the portion
of an underpayment of tax attributable to a substantial
understatement of income tax.15 A substantial understatement of
income tax is defined as an understatement of tax that exceeds
the greater of 10 percent of the tax required to be shown on the
tax return or $5,000. Sec. 6662(d)(1)(A). The understatement is
reduced to the extent that the taxpayer has (1) adequately
disclosed his or her position and has a reasonable basis for such
position or (2) has substantial authority for the tax treatment
of the item. Sec. 6662(d)(2)(B).
The accuracy-related penalty is not 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 the taxpayer acted with reasonable cause
and in good faith depends upon all of the pertinent facts and
circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Relevant
factors include the taxpayer’s efforts to assess his proper tax
liability, including the taxpayer’s reasonable and good faith
15
“Understatement” means the excess of the amount of the tax
required to be shown on the return over the amount of the tax
imposed which is shown on the return, reduced by any rebate.
Sec. 6662(d)(2)(A).
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reliance on the advice of a professional such as an accountant.
Id. Furthermore, 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. See Remy v. Commissioner, T.C. Memo. 1997-72.
On his 2003 return petitioner reported total tax due of
$3,321. The record establishes that the total amount of tax due
from petitioner exceeds the $3,321 reported. Given the
deductions conceded by respondent and allowed in the instant
proceeding, the understatement may or may not be greater than
$5,000.16 If the understatement is greater than $5,000, as
determined given our holdings above, respondent will have met his
burden of production and petitioner will be liable for the
understatement penalty unless he can show reasonable cause,
reasonable basis, or substantial authority.
Petitioner testified that he relied on the advice of his tax
return preparer as to his claimed deductions and that his lack of
substantiation was due to the loss of many of his receipts
through no fault of his own. While a taxpayer’s reliance on the
specific advice of a tax return preparer may constitute
reasonable cause, petitioner has failed to offer testimony or
evidence regarding the qualifications of his tax return preparer
16
We therefore order below that the decision will be entered
under Rule 155.
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or the specific advice he relied upon. See sec. 1.6664-4(b)(2),
Example (1), Income Tax Regs. Petitioner’s general statements
that he relied on his tax return preparer are not sufficient to
prove a reasonable basis, substantial authority, or reasonable
cause for his disallowed deductions. Secs. 6662(d)(2)(B),
6664(c)(1). Petitioner testified that he lost a portion of his
receipts for his claimed deductions during June 2003. However,
petitioner provided limited substantiation of expenses incurred
after June 2003. Additionally, his efforts at re-creating his
expenses incurred before June 2003 were inadequate.
Consequently, we hold that petitioner is liable for the accuracy-
related penalty pursuant to section 6662(a) for taxable year 2003
if the understatement of his income tax exceeds $5,000.
The Court has considered all other arguments made by the
parties and, to the extent we have not addressed them herein, we
consider them moot, irrelevant, or without merit.
On the basis of the foregoing,
Decision will be entered
under Rule 155.