Kirman v. Comm'r

T.C. Memo. 2011-128

UNITED STATES TAX COURT

AARON KIRMAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 22461-08. Filed June 8, 2011.

R found additional interest income, disallowed certain
business expense deductions and itemized deductions P
claimed on his 2005 tax return, and determined a deficiency
in income tax and an accuracy-related penalty under sec.
6662(a), I.R.C., for P’s 2005 tax year.

Held: P is liable for the deficiency to the
extent decided herein.

Held, further, P is liable for the accuracy-related
penalty under sec. 6662(a), I.R.C.

Adam L. Karp and Samuel C. Landis, for petitioner.

Sarah A. Herson, for respondent.
 - 2 -

MEMORANDUM FINDINGS OF FACT AND OPINION

WHERRY, Judge: This case is before the Court on a petition

for redetermination of an income tax deficiency and a section

6662(a) accuracy-related penalty that respondent determined for

petitioner’s 2005 tax year.1 After concessions by the parties,2

the issues for determination are: (1) Whether petitioner is

entitled to certain deductions claimed on Schedule C, Profit or

Loss From Business; (2) whether petitioner is entitled to a

deduction claimed on Schedule A, Itemized Deductions, for

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the year at issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
2
At the recall of this case on Mar. 8, 2010, the parties
presented a stipulation of settled issues which is incorporated
by this reference. The parties later agreed to two additional
oral stipulations which were read into the record at trial on
Mar. 12, 2010, and which are also incorporated by this reference.
The parties agreed to the following: (1) Petitioner is entitled
to a $1,750 Schedule C deduction for insurance expenses; (2)
petitioner is liable for income taxes on $2,301 of interest
income; (3) petitioner is not entitled to a $38,740 Schedule C
deduction for wage expenses; (4) petitioner is entitled to a
$1,200 Schedule C deduction for travel expenses; (5) petitioner
is entitled to a $13,418 Schedule C deduction for legal and
professional services expenses; (6) petitioner is entitled to a
$55,177 Schedule C deduction for commissions and fees expenses;
(7) petitioner is not entitled to a $40,000 deduction for self-
employed SEP, simple, and qualified plans expenses; (8)
petitioner is not entitled to a $3,228 Schedule A deduction for
home mortgage interest; (9) petitioner is entitled to an $8,170
Schedule C deduction for car and truck expenses; and (10)
petitioner is entitled to a $5,168 Schedule C deduction for meals
and entertainment expenses, computed after the 50 percent
limitation.
 - 3 -

charitable contributions; and (3) whether petitioner is liable

for a section 6662(a) accuracy-related penalty.

FINDINGS OF FACT

Some of the facts have been stipulated. The stipulated

facts, with accompanying exhibits, are incorporated herein by

this reference. At the time his petition was filed, petitioner

resided in California.

During 2005 petitioner worked as a real estate agent,

working at two different agencies during the year. He began the

2005 tax year working at Mossler, Deasy, & Doe but then

transferred to Hilton & Hyland.

Petitioner hired Raul Urquiola to prepare his 2005 Form

1040, U.S. Individual Income Tax Return. Mr. Urquiola graduated

from California State University in 1974 with a degree in

accounting. Mr. Urquiola did not prepare tax returns full time;

rather, he did it “on the side”. Petitioner told Mr. Urquiola

that his files were unorganized; but Mr. Urquiola assured

petitioner that if he brought his source documentation, they

would “go through it together”. Petitioner, who had never

prepared a tax return, relied entirely on Mr. Urquiola to prepare

his 2005 tax return.

Respondent received petitioner’s 2005 Form 1040 on June 5,

2006. On the attached Schedule C, petitioner reported gross

receipts or sales of $608,683 and claimed total business expense
 - 4 -

deductions of $335,942. On the attached Schedule A, petitioner

claimed total itemized deductions of $38,859.

Respondent inter alia disallowed $231,445 of petitioner’s

claimed Schedule C deductions and $21,197 of petitioner’s claimed

Schedule A deductions and on August 19, 2008, issued a notice of

deficiency showing a deficiency in income tax of $105,889 and a

section 6662(a) accuracy-related penalty of $21,177.80 for

petitioner’s 2005 tax year. Petitioner timely petitioned this

Court. Trial was held on March 12, 2010, in Los Angeles,

California. The parties have conceded several issues. See supra

note 2. The remaining issues center around whether petitioner

has adequately substantiated certain deductions that he claimed

on Schedules A and C of his 2005 tax return and the applicability

of the section 6662(a) accuracy-related penalty.

OPINION

I. Preliminary Evidentiary Matters

At trial petitioner attempted to introduce into evidence

stipulated Exhibits 3-P through 8-P, 10-P, and 12-P, which in the

stipulations noted certain objections by respondent. Respondent

objected, and the Court reserved ruling on the admissibility of

the exhibits. We apply the Federal Rules of Evidence applicable

in nonjury trials in the U.S. District Court for the District of

Columbia. Sec. 7453; Rule 143(a); see Clough v. Commissioner,

119 T.C. 183, 188 (2002).
 - 5 -

A. Exhibits 3-P and 4-P

Exhibit 3-P is a one-page document dated February 1, 2010,

entitled “Aaron B. Kirman Profit & Loss January through December

2005”. Exhibit 4-P is a 66-page document dated February 1, 2010,

entitled “Aaron B. Kirman General Ledger as of December 31,

2005”. Respondent, in the stipulation, objected to both exhibits

on the grounds of hearsay and relevancy, and at trial on the

additional ground of authentication.

Rule 801(c) of the Federal Rules of Evidence defines

“Hearsay” as “a statement, other than one made by the declarant

while testifying at the trial or hearing, offered in evidence to

prove the truth of the matter asserted.” Hearsay is generally

excluded from evidence unless an exception applies. See Fed. R.

Evid. 802; Snyder v. Commissioner, 93 T.C. 529, 532 (1989).

Rule 401 of the Federal Rules of Evidence defines “Relevant

evidence” as “evidence having any tendency to make the existence

of any fact that is of consequence to the determination of the

action more probable or less probable than it would be without

the evidence.”

Rule 901(a) of the Federal Rules of Evidence provides that

“The requirement of authentication or identification * * * is

satisfied by evidence sufficient to support a finding that the

matter in question is what its proponent claims.” Rule 901(b) of

the Federal Rules of Evidence sets forth a nonexclusive list of
 - 6 -

“examples of authentication or identification conforming with the

requirements of [rule 901]”.

We first address respondent’s assertion that Exhibits 3-P

and 4-P were not properly authenticated. In the stipulation, the

parties stipulated that “all exhibits referred to herein and

attached hereto may be accepted as authentic and are incorporated

in this stipulation and made a part hereof; provided, however,

that either party has the right to object to the admission of any

such facts and exhibits in evidence on the grounds of materiality

and relevancy”. Therefore, we find that respondent has conceded

the authenticity of all the stipulated exhibits.

We now turn to respondent’s hearsay objection. We find that

Exhibits 3-P and 4-P are hearsay. We have not found an

applicable exception to the hearsay rule, nor has petitioner

advanced one. Petitioner might conceive that Exhibit 4-P is a

record of his regularly conducted activities. However, because

Exhibit 4-P was not made “at or near the time” the expenses

listed on Exhibit 4-P were allegedly incurred, it does not fall

within the exception to hearsay for records of regularly

conducted activities. See Fed. R. Evid. 803(6).

Finally, we look to see whether rule 1006 of the Federal

Rules of Evidence, which provides that the contents of voluminous

writings that cannot conveniently be examined in court may be

presented in the form of a chart, summary, or calculation, is
 - 7 -

grounds for admitting either exhibit. We find that rule 1006

does not justify the admission of this evidence. Petitioner

provided no information about who created either exhibit or when

either was created. He further provided no information about the

sources of all of the amounts listed in Exhibit 3-P. While we

can ascertain that most of the amounts listed in Exhibit 4-P came

from Exhibits 5-P and 6-P, there is information in Exhibit 4-P

such as payee names that we do not know the source of.

Additionally, Exhibit 4-P is a breakdown of petitioner’s

expenses, yet petitioner never provided information as to how he

categorized each expense. Accordingly, we sustain respondent’s

objections to Exhibits 3-P and 4-P.

B. Exhibits 5-P, 6-P, 7-P, and 8-P

Exhibit 5-P is copies of petitioner’s monthly American

Express credit card statements for January 3 through December 18,

2005. Exhibit 6-P is copies of petitioner’s monthly bank

statements for a Platinum Checking Account at Washington Mutual

Bank for December 21, 2004, through December 20, 2005. Exhibit

7-P is copies of petitioner’s monthly bank statements for a Gold

Overdraft Line of Credit Checking Account at Washington Mutual

Bank for December 8, 2004, through December 7, 2005. Exhibit 8-

P is copies of petitioner’s monthly bank statements for a

Portfolio Management Account with Wells Fargo for January 1

through December 31, 2005.
 - 8 -

Respondent objected to Exhibits 5-P through 8-P on the

grounds of hearsay, relevancy, and authentication. As discussed

above, we find that respondent has conceded the authenticity of

the disputed exhibits. All four exhibits are relevant because

they tend to make the issue of whether petitioner incurred and

paid deductible expenses more or less likely.

With regard to the hearsay objection, respondent asserts

that the exhibits do not fit within rule 803(6) of the Federal

Rules of Evidence because petitioner has not provided

declarations or certifications that the four exhibits meet the

requirements of that rule.

Rule 803(6) of the Federal Rules of Evidence is a hearsay

exception for records of regularly conducted activity. Pursuant

to rule 803(6), the following are not excluded on the basis of

hearsay:

A memorandum, report, record, or data compilation, in any
form, of acts, events, conditions, opinions, or diagnoses,
made at or near the time by, or from information transmitted
by, a person with knowledge, if kept in the course of a
regularly conducted business activity, and if it was the
regular practice of that business activity to make the
memorandum, report, record or data compilation, all as shown
by the testimony of the custodian or other qualified
witness, or by certification that complies with Rule
902(11), 902(12), or a statute permitting certification
* * *

Under rules 902(11) and (12) of the Federal Rules of

Evidence, a certification includes a written declaration of a

custodian or other qualified person certifying that a record
 - 9 -

(A) was made at or near the time of the occurrence of
the matters set forth by, or from information transmitted
by, a person with knowledge of those matters;

(B) was kept in the course of the regularly conducted
activity; and

(C) was made by the regularly conducted activity as a
regular practice.

Petitioner did not provide any declarations or

certifications that Exhibits 5-P through 8-P meet the

requirements of rule 803(6) of the Federal Rules of Evidence.

Consequently, respondent was never afforded a fair opportunity to

challenge them and the underlying exhibits. We recognize that in

Oglesby v. Commissioner, T.C. Memo. 2011-93, we held that the

business records exception was satisfied when the taxpayer

established through testimony that receipts from a maintenance

shop should be considered the taxpayer’s own business records.

In Oglesby, we held it irrelevant that a representative from the

maintenance shop failed to build a foundation for the receipts.

Here, because we find that rule 807 of the Federal Rules of

Evidence provides a basis for admitting Exhibits 5-P through 8-P,

we need not reach a decision as to whether Oglesby and the cases

cited therein could potentially apply in this case. We note that

petitioner did not testify regarding the documents or his

business records, unlike the taxpayer in Oglesby.

Under rule 807 of the Federal Rules of Evidence, hearsay not

covered by the exceptions in rules 803 or 804 of the Federal
 - 10 -

Rules of Evidence, but having equivalent circumstantial

guaranties of trustworthiness, is not excluded by rule 802 of the

Federal Rules of Evidence

if the court determines that (A) the statement is offered as
evidence of a material fact; (B) the statement is more
probative on the point for which it is offered than any
other evidence which the proponent can procure through
reasonable efforts; and (C) the general purposes of * * *
[the Federal Rules of Evidence] and the interests of justice
will best be served by admission of the statement into
evidence. * * *

Rule 801(a) of the Federal Rules of Evidence defines

“statement” as “(1) an oral or written assertion or (2) nonverbal

conduct of a person, if it is intended by the person as an

assertion.” As Exhibits 5-P through 8-P are written assertions,

they are statements within the meaning of rule 807 of the Federal

Rules of Evidence.

We find that rule 807 provides a sound basis for admitting

these documents.3 We are convinced that the exhibits possess

circumstantial guaranties of trustworthiness equivalent to those

of the other hearsay exceptions. According to their dates, they

were produced by financial institutions at or near the time the

3
Fed. R. Evid. 807 also provides that “a statement may not
be admitted under this exception unless the proponent of it makes
known to the adverse party sufficiently in advance of the trial
or hearing to provide the adverse party with a fair opportunity
to prepare to meet it, the proponent’s intention to offer the
statement, and the particulars of it, including the name and
address of the declarant”. Respondent did not argue that he did
not receive the stipulated exhibits in time. Further, it appears
that the exhibits were submitted at least 2 weeks before trial in
accordance with this Court’s pretrial order.
 - 11 -

event recorded occurred, are material, and are probative on the

issue of whether petitioner incurred and paid deductible

expenses. Accordingly, we admit Exhibits 5-P through 8-P into

evidence. See Karme v. Commissioner, 673 F.2d 1062, 1065 (9th

Cir. 1982) (rule 807 of the Federal Rules of Evidence authorizes

a court to admit a record into evidence so long as the record is

material, probative, and trustworthy), affg. 73 T.C. 1163 (1980);

see also United States v. Linn, 880 F.2d 209, 216 (9th Cir. 1989)

(the Court of Appeals for the Ninth Circuit has granted lower

courts broad discretion to decide whether a particular record is

trustworthy).

C. Exhibit 10-P

Exhibit 10-P is a 34-page document apparently printed from

the Internet on February 15, 2010. Each page of Exhibit 10-P

contains information such as prices and closing dates, as well as

handwritten notes, for various houses petitioner claims to have

sold during 2005. Respondent objected on grounds of hearsay and

authentication. As discussed above, we find that respondent has

conceded that the exhibits were properly authenticated.

Petitioner argues that Exhibit 10-P meets the hearsay exceptions

under rules 803(6), 803(8), and 807 of the Federal Rules of

Evidence.

As with Exhibits 5-P through 8-P, petitioner provided no

declaration or certification that Exhibit 10-P meets the
 - 12 -

requirements of rule 803(6) of the Federal Rules of Evidence.

Accordingly, Exhibit 10-P does not meet the rule 803(6) exception

for records of regularly conducted activity. Rule 803(8) of the

Federal Rules of Evidence provides an exception to the hearsay

rule for: “Records, reports, statements, or data compilations,

in any form, of public offices or agencies, setting forth (A) the

activities of the office or agency”. Petitioner has not

presented any evidence to establish that the Web site from which

Exhibit 10-P was printed is that of a public office or agency,

and therefore Exhibit 10-P does not meet the exception to hearsay

provided in rule 803(8) of the Federal Rules of Evidence.

We are not convinced that rule 807 of the Federal Rules of

Evidence provides a basis for admitting Exhibit 10-P. Exhibit

10-P contains handwritten notes that petitioner never even

attempted to explain to the Court, and the Web site from which

it was printed is not generally accessible absent registration

and payment of a fee. And while Exhibit 10-P does contain prices

of certain properties petitioner sold, a price is not proof of

actual payment or even who was paid a commission upon sale of the

property. Accordingly, we sustain respondent’s objection that

Exhibit 10-P is hearsay that does not fit within an exception.4

4
At trial, petitioner placed emphasis on the Web site from
which Exhibit 10-P was printed, comparing a price listed in
Exhibit 10-P to a stock price, stating: “without having a
(continued...)
 - 13 -

Even though we have found that Exhibit 10-P constitutes

hearsay, we realize that some of the information in Exhibit 10-P

can be verified and confirmed through other publicly available

sources such as county government recording and assessment

records, various real estate listing services, and news media

reports. Therefore, we will, to the extent possible, take

judicial notice that certain properties were sold for certain

prices and on certain dates. See Fed. R. Evid. 201(b) (matters

may be so capable of verification by resort to sources whose

accuracy cannot reasonably be questioned as to be beyond

reasonable dispute and hence proper subjects of judicial notice).

D. Exhibit 12-P

Exhibit 12-P is a 25-page document consisting of third-party

declarations and invoices. Exhibit 12-P contains 12

declarations, 3 from witnesses and 9 from nonwitnesses.

Respondent objected to the declarations on the grounds of hearsay

that he was prejudiced because he did not have an opportunity to

4
(...continued)
witness here to testify from the Securities or Exchange
Commission or an affidavit signed by an employee of the SEC, I
believe the Court might be able to consider evidence of the price
of a stock at the time in question.” One problem with this
Court’s accepting as evidence the price and sell date of houses
listed in Exhibit 10-P is that we have found conflicting
information. For example, 1900 Westholme Avenue is listed in
Exhibit 10-P as having been sold for $1,475,126 on Feb. 3, 2005,
but other Internet sources apparently list this same property as
having been sold for $1,475,500 on Dec. 14, 2004. The
discrepancies are exacerbated by the fact that petitioner himself
and not a third party prepared the information in Exhibit 10-P.
 - 14 -

cross-examine the declarants and that petitioner made no showing

that the declarants were unavailable. See Fed. R. Evid. 804,

806. The declarations from the three witnesses follow their

trial testimony and add no new evidence to the record. With

regard to the additional declarations, respondent was denied the

chance to cross-examine those witnesses, and petitioner provided

no evidence that any of the declarants was unavailable.

Additionally, Exhibit 12-P was not provided to respondent within

14 days of trial. Accordingly, we sustain respondent’s

objections to the declarations.

Page 11 of Exhibit 12-P is a declaration of Michael J Park,

and pages 12 through 22 are invoices of “M.J. PARK GENERAL

CONTRACTOR/RESIDENTIAL INSPECTION SERVICE”. Petitioner requested

that the Court admit pages 11 through 22 under the business

records exception to hearsay, asserting that page 11 of Exhibit

12-P meets the declaration or certification requirement of rule

803(6) of the Federal Rules of Evidence because it was signed and

dated. We are not persuaded by petitioner that signing and

dating something satisfies rule 803(6) of the Federal Rules of

Evidence. Accordingly, we sustain respondent’s objection.

II. Burden of Proof

In general, the Commissioner’s determination of a taxpayer’s

tax liability is presumed correct, and the taxpayer bears the

burden of proving that the Commissioner’s determination is
 - 15 -

improper. 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 the

substantiation and recordkeeping requirements. See sec.

7491(a)(2)(A) and (B). Petitioner therefore bears the burden of

proof.

This case revolves around certain claimed deductions on

Schedules A and C of petitioner’s 2005 tax return. Deductions

are a matter of legislative grace, and taxpayers bear the burden

of proving entitlement to any claimed deduction. Rule 142(a);

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Taxpayers

are required to identify each deduction available and show that

they have met all requirements as well as to keep books or

records to substantiate all claimed deductions. Sec. 6001;

Roberts v. Commissioner, 62 T.C. 834, 836-837 (1974).

Under Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.

1930), if a taxpayer claims a deduction but cannot fully

substantiate it, the Court, subject to certain exceptions, may

approximate the allowable amount, bearing heavily against the

taxpayer whose inexactitude in substantiating the amount of the

deduction is of his own making. However, in order for the Court

to estimate the amount of a deduction, the Court must have some
 - 16 -

basis upon which an estimate may be made. Vanicek v.

Commissioner, 85 T.C. 731, 742-743 (1985). Without such a basis,

any allowance would amount to unguided largesse. Williams v.

United States, 245 F.2d 559, 560-561 (5th Cir. 1957).

III. Whether Petitioner Is Entitled to Certain Expense Deductions
Claimed on Schedule C

After the parties’ concessions, the remaining issues

relating to expense deductions claimed on Schedule C are: (1)

Whether petitioner is entitled to deduct $7,665 for travel

expenses in addition to $1,200 already conceded by respondent;

(2) whether petitioner is entitled to deduct $5,750 for insurance

(other than health) expenses in addition to $1,750 already

conceded by respondent; (3) whether petitioner is entitled to

deduct $90,781 for commissions and fees expenses in addition to

$55,177 already conceded by respondent; (4) whether petitioner is

entitled to deduct $13,750 for advertising expenses; and (5)

whether petitioner is entitled to deduct $133,500 for repairs and

maintenance expenses.

Section 162(a) authorizes a deduction for “all the ordinary

and necessary expenses paid or incurred during the taxable year

in carrying on any trade or business”. A trade or business

expense is ordinary for purposes of section 162 if it is normal

or customary within a particular trade, business, or industry and

is necessary if it is appropriate and helpful for the development
 - 17 -

of the business. Commissioner v. Heininger, 320 U.S. 467, 471

(1943); Deputy v. du Pont, 308 U.S. 488, 495 (1940).

A. Travel Expenses

On his 2005 Schedule C petitioner claimed an $8,865

deduction for travel expenses, but he now contends he should have

claimed $11,092. Respondent conceded that petitioner was

entitled to a $1,200 deduction for travel expenses he incurred on

a trip to Las Vegas. Petitioner testified that in 2005 he

traveled to Brazil, Sydney, and London on business matters and to

Greece for personal matters. He spent 12 days in Brazil, 5 days

in Sydney, and 2 days in London. Petitioner asserts that his

trip to Brazil was 70 percent business and his trip to London 100

percent business; and while he first claimed his trip to Sydney

was 100 percent business, he later acknowledged that he also did

sightseeing there.

A deduction is allowed for ordinary and necessary travel

expenses incurred while away from home in the pursuit of a trade

or business. Sec. 162(a)(2); see Bruns v. Commissioner, T.C.

Memo. 2009-168. If a taxpayer travels to a destination at which

he engages in both business and personal activities, the travel

expenses to and from the destination are deductible only if the

trip is related primarily to the taxpayer’s trade or business.

Sec. 1.162-2(b)(1), Income Tax Regs.
 - 18 -

In order to deduct travel expenses, taxpayers must not only

satisfy the general requirements of section 162; they must also

satisfy the strict substantiation requirements of section 274(d).

No deduction is allowed for expenses incurred for travel away

from the taxpayer’s home (including meals and lodging) unless the

taxpayer substantiates, by adequate records or by sufficient

evidence corroborating the taxpayer’s own statement, each of the

following elements: (1) The amount of each separate expenditure;

(2) the dates of departure and return and the number of days

spent on business; (3) the place of destination by name of city

or town; and (4) the business reason or expected business benefit

from the travel. Sec. 274(d); sec. 1.274-5T(b)(2), (c),

Temporary Income Tax Regs., 50 Fed. Reg. 46014, 46016 (Nov. 6,

1985).

Additionally, for foreign travel, section 274(c)(1)

generally disallows a deduction for the portion of the foreign

travel expenses that is not allocable to the income-producing

activity. See sec. 1.274-4(f), Income Tax Regs. Section

274(c)(1) does not apply if the travel does not exceed 1 week or

the portion of the time of travel outside the United States which

is not attributable to the pursuit of the taxpayer’s trade or

business is less than 25 percent of the total time on such

travel. The Cohan doctrine cannot be used to estimate a

deduction for travel expenses. Schladweiler v. Commissioner,
 - 19 -

T.C. Memo. 2000-351, affd. 28 Fed. Appx. 602 (8th Cir. 2002);

sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014

(Nov. 6, 1985).

Petitioner never provided evidence to establish the dates he

departed and returned or the cities in Brazil he visited.

Further, while he testified as to his alleged business reasons

for each trip, he never provided any documentary evidence

supporting his testimony. Even if the Court were to admit

Exhibit 4-P into evidence, it does not contain the necessary

information including the business purpose behind each expense or

the city petitioner was in when each expense was incurred.

Because of these deficiencies, petitioner has not met his burden

of proof. We sustain respondent’s determination and hold that

petitioner is not entitled to a greater deduction for travel

expenses than that already conceded by respondent.

B. Insurance (Other Than Health) Expenses

On Schedule C, petitioner claimed a $7,500 deduction for

insurance (other than health) expenses. Mr. Urquiola arrived at

$7,500 on the basis of what petitioner told him; he does not

recall seeing a bill or a receipt. Respondent conceded that

petitioner is entitled to a $1,750 deduction for insurance (other

than health) expenses.5

5
Even though petitioner argues he is entitled to his total
claimed deduction of $7,500, petitioner also acknowledges that he
proved only an additional $3,000 of insurance (other than health)
(continued...)
 - 20 -

Petitioner’s claimed insurance expenses were for “errors and

omissions” insurance. The two real estate agencies petitioner

worked for during 2005 had different errors and omissions

insurance policies. Hilton & Hyland required agents to pay a

flat fee of $1,750 for the year no matter how many houses they

sold. Even though petitioner worked only part of the year at

Hilton & Hyland, the $1,750 fee was not prorated. Respondent’s

concession that petitioner was entitled to a $1,750 deduction for

insurance expenses was based on petitioner’s payment to Hilton &

Hyland for errors and omissions insurance.

Mossler, Deasy, & Doe charged $250 per transaction for

errors and omissions insurance. Petitioner did not write a check

or hand over cash each time he sold a house; rather, each time he

sold a house, the $250 was paid out of escrow.

From the record, petitioner’s argument appears to be that he

sold 12 houses while working at Mossler, Deasy, & Doe, that he

paid $3,000 for errors and omissions insurance on account of

these 12 houses, and therefore that he is entitled to a $3,000

deduction. However, petitioner never introduced documentation of

Mossler, Deasy, & Doe’s policy regarding errors and omissions

insurance. Further, even if we were to admit Exhibit 10-P,

because it contains no proof of payment it does not, by itself,

substantiate his claimed deduction.

5
(...continued)
expenses at trial.
 - 21 -

Most importantly, petitioner claims that he has no proof of

payment because the $250 per transaction was paid directly from

escrow before he received his commission. Petitioner never

provided documentation establishing this policy. In any event,

if $250 was paid directly out of escrow for errors and omissions

insurance before petitioner received his commission check,

petitioner would need to establish that he included $250 per sale

in his gross income. He did not do this. If petitioner never

included these amounts in gross income, he would not be entitled

to an offsetting deduction. Therefore, we sustain respondent’s

determination on this issue and hold that petitioner is not

entitled to a greater deduction for insurance (other than health)

expenses than that allowed by respondent.6

C. Commissions and Fees Expenses

On his 2005 Schedule C, petitioner claimed a $55,440

deduction for commissions and fees expenses. Mr. Urquiola

testified that he arrived at $55,440 on the basis of handwritten

receipts provided by petitioner. Respondent conceded that

petitioner is entitled to a deduction of $55,177 for commissions

and fees expenses. Petitioner now claims he is entitled to a

$145,958 deduction for commissions and fees expenses, a $90,781

increase from $55,177 conceded by respondent.

6
The lack of evidence precludes the application of the Cohan
doctrine. See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d
Cir. 1930).
 - 22 -

Generally, in a real estate transaction a contract is signed

with a specified commission; and when the property is sold, the

selling agent and the buying agent split the commission in a

predetermined manner. Further, agents will sometimes split their

commission with other agents who assisted them with the listing

or referred the property to them. Petitioner testified that he

paid approximately 30 percent of his commission in referral fees.

Additionally, the real estate agency receives an override of the

agent’s commission, in this instance 20 percent.

The record does not reveal exactly how petitioner handled

his commissions. Petitioner testified about four specific houses

he sold in 2005. The first was 15560 Woodvale Road, from the

sale of which petitioner made a commission of $44,000, keeping

$17,600 and paying $26,400 to other agents. On the second, 1151

Maybrook Drive, the total commission was allegedly $60,000, of

which petitioner kept $24,000 and paid $36,000 to other agents.

On the third, 11535 Rochester Avenue No. 301, the total

commission was $16,975, of which petitioner claimed he kept

$6,790 and paid $10,185 to other agents. On the fourth, 1900

Westholme Avenue, the total commission was $36,878, of which

petitioner testified he kept $14,751 and paid $22,127 to other

agents.7

7
Petitioner claims he sold 1900 Westholme Avenue in 2005.
However, the record is not clear whether 1900 Westholme Avenue
was sold in 2005 or in 2004.
 - 23 -

David Mimoun, another agent who worked with petitioner on

the sales of the four houses, testified that the commissions were

split 50-50 between himself and petitioner but that his father

(Mr. Mimoun Senior) always took half of his commissions and may

have taken some portion of petitioner’s commissions. Hence,

petitioner’s and Mr. Mimoun’s memories regarding how much

commission petitioner paid to other agents may in some respects

contradict each other.

Petitioner relies on his self-serving and uncorroborated

testimony as well as Exhibits 9-P and 10-P to substantiate his

claimed deduction. However, the exhibits do not support

petitioner’s position as neither contains proof of payment. In

fact, petitioner has not provided this Court with any proof of

payment and admits that he does not have any canceled checks or

other documentation. Petitioner claims he is entitled to a

$145,958 deduction. But Mr. Urquiola testified that at most

petitioner had provided to him documentation indicating he was

entitled to a deduction of $55,440.

If a taxpayer establishes a deductible expense but is

unable to substantiate the precise amount, we may, after “bearing

heavily * * * upon the taxpayer whose inexactitude is of his own

making”, estimate the amount, provided we are convinced that the

taxpayer incurred such an expense and we have a basis upon which

to make an estimate. Cohan v. Commissioner, 39 F.2d at 543-544;
 - 24 -

Vanicek v. Commissioner, 85 T.C. at 743. We believe that

petitioner incurred the commissions and fees expenses originally

claimed on his 2005 Schedule C and, therefore, hold that he is

entitled to a total deduction for commissions and fees expenses

of $55,440, an increase of $263 from that conceded by respondent.

D. Advertising Expenses

On his 2005 Schedule C, petitioner claimed a $12,756

deduction for gifts. At trial and on brief, petitioner claimed

that the amount expended was actually $13,750 and that the

expenditure should have been classified as an advertising expense

and not a gift expense.

The $13,750 expenditure arises from petitioner’s claim that

he bought two pictures for a client in an attempt to get the

client to let petitioner retain the client’s real estate listing

when petitioner transferred to another real estate agency.

According to petitioner, he “bought what was some expensive art

as an alternative marketing means to be able to show my

commitment to selling the property”. Petitioner does not know

whether the paintings will stay with the house when it is sold or

the client is going to take them along with other personal

property.

Advertising expenses to promote a taxpayer’s trade or

business are deductible pursuant to section 162(a). Brallier v.

Commissioner, T.C. Memo. 1986-42; sec. 1.162-1(a), Income Tax
 - 25 -

Regs. The test for deductibility is whether the taxpayer

reasonably intended that the expenditure would advertise his

business. See Rodgers Dairy Co. v. Commissioner, 14 T.C. 66

(1950).

Petitioner argues that the paintings given to his client

were “not a gift in the traditional sense [and limited to a

deductible maximum amount of $25 by section 274(b)(1)], but

rather a needed advertising expense to sell the house”. Yet

petitioner never established that the paintings promoted his

business or even helped sell the house. He even acknowledged it

was unclear whether the paintings would be sold with the house or

retained by his client. Even if petitioner had proven that the

paintings generated business and were therefore “advertising”

expenses, petitioner has not substantiated this deduction.

Petitioner relies on his testimony and a line in Exhibit 4-P,

which was not admitted into evidence, stating that two checks for

$6,875 each, dated April 1, 2005, were paid to Scott Lurie and

Craig Lurie but does not indicate what the payment was for.

Petitioner has not sufficiently substantiated his claimed

deduction, and accordingly, we sustain respondent’s determination

and hold that petitioner is not entitled to an additional $13,750

deduction for advertising expenses.8

8
The lack of evidence precludes the application of the Cohan
doctrine. See Cohan v. Commissioner, 39 F.2d at 543-544.
 - 26 -

E. Repairs and Maintenance Expenses

On his 2005 Schedule C, petitioner claimed a $57,546

deduction for repairs and maintenance expenses. Mr. Urquiola

testified that he arrived at this number on the basis of “Ninety

percent of receipts”. Later, at trial and on brief, petitioner

argued that he had incurred at least $133,500 of repairs expenses

even though petitioner’s attorney, Mr. Karp, acknowledged that

there “is very little documentation to substantiate” even the

$57,546 claimed as a deduction on petitioner’s tax return.

Petitioner arrived at $133,500 by relying on his memory and trial

testimony as to different properties he repaired before selling.

Petitioner testified as to the following properties and

amounts: (1) 17450 Rancho Street--between $12,000 and $15,000;

(2) 1151 Maybrook Drive--$10,000; (3) 527 Whiting Woods--$3,000;

(4) 1061 Laguna Avenue--$3,000; (5) 15045 Sunstone Place--$5,000;

(6) 9091 Wonderland Park Avenue--$3,000; (7) 3012 Roscomare

Road--$7,000; (8) 5757 Trancas Canyon Road--$10,000; (9) 17425

Tramonto Drive--$10,000; (10) 21900 Briarbluff Street--$5,500;

(11) 666 Sarbonne Road-–$7,000; and (12) 5371 Vanalden

Avenue–$1,000.9 Yet petitioner never offered any receipts or

other documentary evidence as to the repairs he allegedly made.

9
Petitioner’s testimony regarding 5757 Trancas Canyon Road
and 17425 Tramonto Drive is confusing. He initially testified he
spent $10,000 in grading repairs for 5757 Trancas Canyon Road but
then retracted his testimony, correcting it by stating that he
actually spent $10,000 in grading repairs for 17425 Tramonto
Drive and did not make repairs for 5757 Trancas Canyon Road.
 - 27 -

According to petitioner, he had receipts but “lost [my] box”, and

while he allegedly paid with checks, he could not find or made no

attempt to find copies of the canceled checks.

Mr. Mimoun testified that 1151 Maybrook Drive had several

problems including the tennis courts, a pool, the driveway, and

water pumps. He stated that he contributed $10,000 to help cover

the cost of the repairs and that petitioner was required to match

this amount, yet Mr. Mimoun also indicated that the cost of the

repairs was paid out of “the syndicate checkbook” and his father

“controlled the funds”. Woodvale Road was a property petitioner

bought into as an investment property for which, according to Mr.

Mimoun’s “best * * * knowledge”, petitioner contributed $30,000

for repairs.

Mr. Mimoun explained that two of the properties petitioner

sold needed repairs, but it is unclear who actually paid for the

repairs. Petitioner did not carry his burden of proving that he

paid for the repairs, as opposed to having the cost of the

repairs taken out of his commission, or that he alone paid for

the repairs instead of splitting the cost with other agents. If

the costs were paid from his commission, the record does not

explain whether he reported the gross or the net commission as

his taxable income. This shortcoming is exacerbated by real

estate agent David Kramer’s testimony that it is “rare that [we

will] pay in advance” for repairs and similar things.
 - 28 -

In total the record does establish that in order to prepare

some of the properties for sale, petitioner incurred some repairs

and maintenance expenses. The Court will not, however, allow

petitioner a $133,500 deduction that is based almost exclusively

on his and Mr. Mimoun’s testimony. Using our best judgment and

the record before us, we hold that petitioner is entitled to a

repairs and maintenance expenses deduction of $19,182, none of

which is attributable to the Woodvale Road property.10 See Cohan

v. Commissioner, 39 F.2d at 543-544.

10
We would treat the Woodvale Road property expenses to the
extent, if any, that they have been substantiated as an
investor’s capital contribution. See, e.g., secs. 162, 704,
1001.
We come up with $19,182 on the basis of petitioner’s
testimony, Mr. Urquiola’s testimony, Mr. Mimoun’s testimony, and
petitioner’s supporting statement to his 2005 Schedule C
contained in Exhibit 1-J. The supporting statement indicates
that his originally claimed repairs and maintenance expenses
comprised painting--$8,943, landscaping--$9,894, fences--$7,340,
doors and windows--$6,990, pool maintenance and repairs--$5,922,
carpet repairs--$5,128, tile floor repairs--$3,784, and
occasional labor--$9,545 for total expenses of $57,546. This
Court is persuaded that petitioner incurred some maintenance and
repairs expenses although he does not provide receipts or
canceled checks. On the basis of petitioner’s testimony
(including the additional amounts claimed at trial, but excluding
the claimed $30,000 Woodvale Road property expense) and that of
Mr. Mimoun regarding repairs made to specific houses, and Mr.
Urquiola’s testimony that he arrived at $57,546 using “ninety
percent of receipts”, we will allow petitioner one-third of the
amount listed on Schedule C, or $19,182. In doing so we have
borne heavily upon the taxpayer whose lack of records is the
principal cause of our inexactitude.
 - 29 -

IV. Whether Petitioner Is Entitled to A Deduction for Charitable
Contributions

After the parties’ concessions, the sole issue remaining

with regard to petitioner’s claimed Schedule A deductions is

whether petitioner is entitled to a $9,850 itemized deduction for

charitable contributions by cash or check. Section 170(a)(1)

allows a deduction for a charitable contribution as defined in

section 170(c) if verified under applicable regulations.

Generally, a cash contribution can be substantiated by (1) a

canceled check, (2) a receipt from the donee organization, or (3)

other reliable written records showing the name of the donee, the

date of the contribution, and the amount of the contribution.

Sec. 1.170A-13(a)(1), Income Tax Regs. For a contribution of

$250 or more, a taxpayer must substantiate the contribution by a

written acknowledgment by the donee organization.11 Sec.

170(f)(8)(A). The written acknowledgment must include:

(i) The amount of cash and a description (but not
value) of any property other than cash contributed.

(ii) Whether the donee organization provided any goods
or services in consideration, in whole or in part, for any
property described in clause (i).

(iii) A description and good faith estimate of the
value of any goods or services referred to in clause (ii)
or, if such goods or services consist solely of intangible
religious benefits, a statement to that effect.

11
Separate contributions of less than $250 are not subject
to the requirements of sec. 170(f)(8), regardless of whether the
sum of the contributions made by a taxpayer to a donee
organization during a taxable year equals $250 or more. See sec.
1.170A-13(f)(1), Income Tax Regs.
 - 30 -

Sec. 170(f)(8)(B). To be considered contemporaneous, the written

acknowledgment must be obtained by the taxpayer before the

earlier of the due date of the return, including extensions, or

the filing of the return. Sec. 170(f)(8)(C).

Petitioner testified that he donated money to the

Architectural Historical Society in “an attempt to get into the

right community that” had access to architectural homes. He

claimed that the amount he donated was $7,000 or $8,000 but

admitted that he could neither “remember the exact amount” nor

find the canceled check.12

Petitioner has not met the requirements of section 170.

First, he failed to prove that the Architectural Historical

Society was an organization specified in section 170(c). Second,

he failed to adequately substantiate his claimed charitable

contribution or meet the requirements of section 170(f)(8)(A).

The evidence relating to the claimed charitable contribution is

limited to petitioner’s trial testimony and is unsupported by any

written substantiation in the form of canceled checks, bank

records, or receipts from the donee organization.

12
While petitioner testified that he donated money to the
Architectural Historical Society, Mr. Urquiola testified that he
arrived at petitioner’s claimed charitable contribution using
petitioner’s statements that he gave money to churches, schools,
Goodwill, the Salvation Army, and like charities. Mr. Urquiola
remembered that there was some documentation presented to him
regarding the claimed charitable contribution but it was “not 100
percent”.
 - 31 -

Petitioner urges application of the doctrine of Cohan v.

Commissioner, supra at 543-544. Under the Cohan doctrine, if a

taxpayer claims a deduction but cannot fully substantiate it, the

court may approximate the allowable amount. Here the single

contribution claimed is over $250; thus by statute it does not

qualify as a section 170 charitable contribution absent a written

receipt from the donee. See sec. 170(f)(8)(A).13

Because petitioner failed to meet the requirements of

section 170, he is not entitled to a charitable contribution

deduction. Accordingly, we sustain respondent’s adjustment with

regard to this issue.

V. Section 6662 Accuracy-Related Penalty

Under section 7491(c), respondent bears the burden of

production with respect to petitioner’s liability for the section

6662(a) penalty. This means that respondent “must come forward

with sufficient evidence indicating that it is appropriate to

impose the relevant penalty.” See Higbee v. Commissioner, 116

T.C. 438, 446 (2001).

13
In order for Cohan to apply, the taxpayer must provide
reasonable evidence from which to estimate the deductible amount,
and even then the court will bear heavily against the taxpayer.
Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). Even if
Cohan were applicable, the lack of evidence with respect to the
claimed charitable contribution in this case would preclude us
from even attempting to approximate the allowable amount of the
deduction.
 - 32 -

Section 6662(a) imposes an accuracy-related penalty of 20

percent on any underpayment that is attributable to causes

specified in subsection (b). Respondent asserts two causes

justifying the imposition of the penalty: Negligence and a

substantial understatement of income tax. Sec. 6662(b)(1) and

(2).

“[N]egligence” includes “any failure to make a reasonable

attempt to comply with the provisions of * * * [the Internal

Revenue Code]”. Sec. 6662(c). Under caselaw, “‘Negligence is a

lack of due care or failure to do what a reasonable and

ordinarily prudent person would do under the circumstances.’”

Freytag v. Commissioner, 89 T.C. 849, 887 (1987) (quoting

Marcello v. Commissioner, 380 F.2d 499, 506 (5th Cir. 1967),

affg. on this issue 43 T.C. 168 (1964) and T.C. Memo. 1964-299),

affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991).

Negligence can also include any failure by the taxpayer to keep

adequate records and to substantiate items properly. Sec.

1.6662-3(b)(1), Income Tax Regs. A substantial understatement of

income tax is an understatement that exceeds the greater of

$5,000 or 10 percent of the tax required to be shown on the

return. Sec. 6662(d)(1)(A). In the light of petitioner’s

failure to keep tax records and substantiate his claimed

deductions, respondent has met his burden of production with

regard to the section 6662(a) accuracy-related penalty.
 - 33 -

There is an exception to the section 6662(a) penalty when a

taxpayer can demonstrate: (1) Reasonable cause for the

underpayment and (2) that the taxpayer acted in good faith with

respect to the underpayment. Sec. 6664(c)(1). Regulations

promulgated under section 6664(c) provide that the determination

of reasonable cause and good faith “is made on a case-by-case

basis, taking into account all pertinent facts and

circumstances”. Sec. 1.6664-4(b)(1), Income Tax Regs.

Reliance on professional advice may constitute reasonable

cause and good faith, but “it must be established that the

reliance was reasonable.” Freytag v. Commissioner, supra at 888;

see also United States v. Boyle, 469 U.S. 241, 251 (1985); sec.

1.6664-4(b)(1), Income Tax Regs.

In sum, for a taxpayer to rely reasonably upon advice so as
possibly to negate a section 6662(a) accuracy-related
penalty determined by the Commissioner, the taxpayer must
prove * * * that the taxpayer meets each requirement of the
following three-prong test: (1) The adviser was a competent
professional who had sufficient expertise to justify
reliance, (2) the taxpayer provided necessary and accurate
information to the adviser, and (3) the taxpayer actually
relied in good faith on the adviser’s
judgment. * * *

Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 99,

affd. 299 F.3d 221 (3d Cir. 2002); see also Charlotte’s Office

Boutique, Inc. v. Commissioner, 425 F.3d 1203, 1212 & n.8 (9th

Cir. 2005) (quoting with approval the above three-prong test),

affg. 121 T.C. 89 (2003).
 - 34 -

Petitioner argues that he should not be held liable for the

section 6662(a) penalty because “he was reasonable and prudent

[in] hiring an accountant to file his tax return”. We analyze

petitioner’s claims using the three-prong test listed above.

With regard to the first prong, petitioner has failed to

establish that Mr. Urquiola was a competent professional who had

sufficient expertise to justify reliance. “[R]eliance may not be

reasonable or in good faith if the taxpayer knew, or reasonably

should have known, that the advisor lacked knowledge in the

relevant aspects of Federal tax law.” Sec. 1.6664-4(c)(1),

Income Tax Regs. Petitioner hired Mr. Urquiola because he

“realized [he] was about to be out of compliance in getting [his]

2005 tax return done” and had been referred to Mr. Urquiola by

his mother’s boyfriend. While Mr. Urquiola has a degree in

accounting, there is no evidence that he is a certified public

accountant. Mr. Urquiola did not prepare tax returns full time;

rather, he did them “on the side”. Accordingly, we find that

petitioner has not established that his reliance on Mr. Urquiola

was justified.

With regard to the second prong, petitioner must establish

that he provided necessary and accurate information with respect

to all items reported on his tax return, such that the incorrect

return resulted from error on the part of the adviser. See,

e.g., Westbrook v. Commissioner, 68 F.3d 868, 881 (5th Cir.
 - 35 -

1995), affg. T.C. Memo. 1993-634; Ma-Tran Corp. v. Commissioner,

70 T.C. 158, 173 (1978); Pessin v. Commissioner, 59 T.C. 473, 489

(1972). On the basis of the record, we cannot conclude that

petitioner provided Mr. Urquiola with all of the necessary and

accurate information. For example, Mr. Urquiola did not remember

seeing a bill or receipt for petitioner’s claimed insurance

expenses; petitioner did not provide him with any Forms 1099 for

the claimed commissions and fees expenses; and the documentation

presented to Mr. Urquiola regarding the claimed charitable

contribution was “not 100 percent”. Further, petitioner conceded

that he was not entitled to certain of his claimed deductions and

that he was liable for tax on interest income that he had not

reported on his Form 1040. See supra note 2.

Turning to the third prong, petitioner had a duty to read

his tax return to ensure that it was correct. See Magill v.

Commissioner, 70 T.C. 465, 479-480 (1978), affd. 651 F.2d 1233

(6th Cir. 1981). Unconditional reliance on a preparer or adviser

does not always constitute reasonable reliance; the taxpayer must

also exercise “Diligence and prudence”. Marine v. Commissioner,

92 T.C. 958, 992-993 (1989), affd. without published opinion 921

F.2d 280 (9th Cir. 1991). Petitioner did not sign the original

return and relied entirely on Mr. Urquiola. In the end, reliance

on his accountant does not excuse petitioner’s failure to closely

examine his 2005 tax return. See Pritchett v. Commissioner, 63
 - 36 -

T.C. 149, 174 (1974) (“The general rule is that the duty of

filing accurate returns cannot be avoided by placing

responsibility on an agent.”). Petitioner is not permitted to

ignore his obligation to ensure that his tax return accurately

reflected his income for the 2005 tax year.

On the basis of the above, we hold that petitioner has

failed to meet the burden of proof with regard to the section

6664(c)(1) exception. Therefore, we sustain respondent’s

imposition of a section 6662(a) accuracy-related penalty for

petitioner’s 2005 tax year.

The Court has considered all of petitioner’s contentions,

arguments, requests, and statements. To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.

To reflect the foregoing,

Decision will be entered

under Rule 155.