Fernandez v. Comm'r

T.C. Memo. 2011-216

UNITED STATES TAX COURT

ALBERT FERNANDEZ, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 21646-08. Filed September 1, 2011.

Albert Fernandez, pro se.

Lisa M. Goldberg, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

CARLUZZO, Special Trial Judge: In a notice of deficiency

dated June 2, 2008, respondent determined a deficiency in

petitioner’s 2005 Federal income tax and imposed additions to tax

as follows:1

1
Unless otherwise indicated, section references are to the
(continued...)
 - 2 -

Additions to Tax
Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2) Sec. 6654

$39,716 $8,936.10 $4,765.92 $1,593.09

With the exception of the above-listed additions to tax,

issues relating to adjustments made in the notice of deficiency

have been resolved by the parties. The issues addressed in this

opinion arise from items shown on a 2005 Federal income tax

return petitioner submitted to respondent after the notice of

deficiency was issued. Those issues are: (1) Whether petitioner

is entitled to a charitable contribution deduction in excess of

the amount now allowed by respondent; (2) whether petitioner is

entitled to trade or business expense deductions in excess of the

amounts now allowed by respondent; and (3) whether petitioner is

liable for any of the additions to tax shown in the above table.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

At the time the petition was filed, petitioner resided in

Florida.

Petitioner is a self-employed, licensed clinical social

worker and psychotherapist. For the most part, the services he

provided to his patients during 2005 were conducted at various

1
(...continued)
Internal Revenue Code of 1986, as amended, in effect for 2005.
Rule references are to the Tax Court Rules of Practice and
Procedure.
 - 3 -

assisted living facilities in southern Florida. On any given

day, he routinely drove from one facility to another in order to

do so. Petitioner maintained offices at some of these

facilities. Some of the facilities charged rent; others did not.

Petitioner did not maintain a separate checking account for his

business; personal and business expenses were paid from the same

account.

Petitioner’s 2004 Federal income tax return was timely

filed. That return shows an $8,323.14 Federal income tax

liability.

On or about December 1, 2009, after respondent had prepared

a section 6020(b) return and on a date more than 1 year after the

petition in this case was filed, petitioner submitted to

respondent a long-overdue 2005 Federal income tax return. The

return, prepared by a paid Federal income tax return preparer,

includes a Schedule A, Itemized Deductions, and a Schedule C,

Profit or Loss From Business. Income and deductions attributable

to the services petitioner provided as a psychotherapist are

reported on the Schedule C.

As relevant here, the Schedule A includes a $2,031 deduction

for charitable contributions, and the Schedule C includes the

following deductions:
 - 4 -

Expense Amount

Car and truck $18,303
Depreciation and section 179 4,400
Insurance (other than health) 3,247
Legal and professional services 6,650
Office 1,419
Rent or lease of other business 5,100
property
Repairs and maintenance 2,554
Supplies 2,010
Travel 1,006
Deductible meals and 2,786
entertainment
Other 26,009

The deduction for other expenses includes: (1) $12,782 for

billing services, (2) $5,368 for phone and cellular service fees,

(3) $720 for Sunpass fees, (4) $6,000 for consultant fees, (5)

$719 for bank charges, and (6) $420 for membership fees.

Respondent now agrees that petitioner is entitled to deduct

portions of some of the above-shown expenses, as will be further

discussed below.

OPINION

According to respondent, petitioner is not entitled to the

deductions, or the portions of deductions, that remain in dispute

because petitioner has failed to substantiate the expenses to

which the deductions relate. Petitioner claims that he is

entitled to all of the deductions mentioned above in the amounts

shown on his return. According to petitioner, many of the

records that would have substantiated those deductions were

either destroyed or damaged because of flooding.
 - 5 -

As we have observed in countless opinions, deductions are a

matter of legislative grace, and the taxpayer bears the burden of

proof to establish entitlement to any claimed deduction. Rule

142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);

New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).2

This burden requires the taxpayer to establish that the expense

to which the deduction relates is allowable as a deduction under

some provision of the Internal Revenue Code and further to

maintain adequate records in order to substantiate that the

expense has been paid or incurred. Sec. 6001; Hradesky v.

Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d

821 (5th Cir. 1976); Meneguzzo v. Commissioner, 43 T.C. 824,

831-832 (1965); sec. 1.6001-1(a), Income Tax Regs. If a

taxpayer’s records are no longer available on account of

circumstances beyond the taxpayer’s control, such as a fire,

flood, or other casualty, then the taxpayer is expected to

substantiate deductions by records reconstructed through contacts

with third parties and other reasonable means. Gizzi v.

Commissioner, 65 T.C. 342, 345 (1975).

If a taxpayer establishes that a trade or business expense

allowable as a deduction under section 162(a) has been paid or

incurred, but has no records to substantiate the payment of the

2
Petitioner does not claim that the provisions of sec.
7491(a) are applicable, and we proceed as though they are not.
 - 6 -

expense, we may approximate the amount of the allowable deduction

if there is sufficient evidence to provide a basis for the

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

1930); Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).

Allowance of a deduction for an expense subject to the strict

substantiation requirements of section 274(d), however, may not

be based upon an estimate. See sec. 280F(d)(4)(A); Sanford v.

Commissioner, 50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d

201 (2d Cir. 1969).

Taking these fundamental principles into account, we turn

our attention to the deductions remaining in dispute.

Charitable Contribution Deduction

Section 170 allows deductions for contributions made during

a taxable year to qualifying organizations. Cash contributions

must be substantiated by: (1) Canceled checks, (2) receipts from

the donee (showing the donee’s name and the date and amount of

the donation), or (3) other reliable written records. Sec.

1.170A-13(a)(1), Income Tax Regs. In general, gifts of property

must be substantiated by receipts from the donee showing the

donee’s name, the date and location of the contribution, and a

description of the property contributed. Sec. 1.170A-13(b)(1),

Income Tax Regs. For charitable contributions over $250,

additional substantiation is required. Sec. 170(f)(8).
 - 7 -

Petitioner claimed a $2,031 charitable contribution

deduction on the Schedule A attached to his 2005 Federal income

tax return. Respondent now concedes that petitioner is entitled

to a $1,107 charitable contribution deduction. Other than his

uncorroborated testimony on the point, which we are free to

disregard, see Tokarski v. Commissioner, 87 T.C. 74, 77 (1986),

petitioner has failed to produce any canceled checks, receipts,

or other reliable documents either originally maintained or

reconstructed that substantiate any contributions in excess of

the amount now allowed by respondent. Accordingly, petitioner’s

allowable charitable contribution deduction for 2005 is limited

to the amount respondent now concedes.

Schedule C Deductions

Section 162(a) generally allows a deduction for ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business. The determination of whether

an expenditure satisfies the requirements for deductibility under

section 162 is a question of fact. See Commissioner v.

Heininger, 320 U.S. 467, 475 (1943). On the other hand, section

262(a) generally disallows a deduction for personal, living, or

family expenses.

Although respondent has conceded that petitioner is entitled

to some of the expense deductions, a few remain in dispute, and

we address those below.
 - 8 -

1. Vehicle Expenses, Travel, and Meals and Entertainment

Section 274(d) imposes strict substantiation requirements

with respect to deductions for travel, meals, entertainment, and

“listed property” expenses. Sec. 1.274-5T(a), Temporary Income

Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). “Listed property”

includes passenger automobiles and cellular telephones. Sec.

280F(d)(4)(A)(i), (v).

If otherwise deductible, then expenses subject to section

274(d) must be substantiated either by adequate records or by

sufficient evidence corroborating the taxpayer’s own statement

showing: (A) The amount of the expense; (B) the time and place

the expense was incurred; (C) the business purpose of the

expense; and (D) in the case of an entertainment or gift expense,

the business relationship to the taxpayer of each expense

incurred. For “listed property” expenses, in addition to the

recordkeeping requirements in section 274(d), the taxpayer must

establish the amount of business use and the amount of total use

for such property. See sec. 1.274-5T(b)(6)(i)(B), Temporary

Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).

Petitioner testified that he routinely drove from one

assisted living facility to another on any given day in order to

treat his patients, and we have no doubt that he did. However,

it does not appear that he kept any contemporaneous records

showing the dates and locations of his many trips between those
 - 9 -

facilities. If he kept such records, he did not present them to

the Court; and if such records were kept but damaged or destroyed

in a flood, he made no attempt to reconstruct them. Petitioner

failed to present sufficient evidence substantiating the

deductions claimed for vehicle, travel, and meals and

entertainment expenses. Pursuant to section 274(d), no

deductions are allowable for those expenses. Expenses

attributable to the use of a cellular telephone are addressed

elsewhere in this opinion.

2. Depreciation and Depreciation Deduction

There is allowed as a depreciation deduction a reasonable

allowance for the exhaustion and wear and tear (including

obsolescence) of property used in a trade or business. Sec.

167(a). As relevant here, the basis for depreciation is the cost

of the property. Secs. 167(c), 1011.

According to the Schedule C, the $4,400 depreciation

deduction here in dispute is attributable to the purchase of

$22,000 of office furniture placed in service during 2005. The

evidence, however, shows purchases of office furniture totaling

only $11,000. Taking into account the method of depreciation

contemplated on the Schedule C, petitioner’s allowable

depreciation deduction is computed with reference to property

with an $11,000 basis.
 - 10 -

3. Insurance Expenses

Petitioner claims entitlement to a $3,247 deduction for

insurance (other than health) expenses. At trial petitioner

testified that this expense relates to the cost of automobile

insurance and malpractice insurance, but he could not specify

what portion of the expense is attributable to automobile

insurance and what portion is attributable to malpractice

insurance. Neither did he provide any substantiating records

either originally maintained or reconstructed with regard to

these expenses even though it would seem that in the absence of a

taxpayer’s own records, payments made to an insurance company

could be easily substantiated by the records of the insurance

company. Accordingly, petitioner is not entitled to deduct any

amount related to automobile insurance.3 Although it is more

likely than not that petitioner incurred some expense for

malpractice insurance, because he did not present sufficient

evidence to allow the expense to be estimated, see Vanicek v.

Commissioner, 85 T.C. at 743, he is not entitled to deduct any

amount attributable to the cost of malpractice insurance.

3
Passenger automobiles are included as listed property under
sec. 280F(d)(4)(A)(i), and related expenses, including automobile
insurance, are therefore subject to the stringent substantiation
requirements of sec. 274(d), which petitioner did not satisfy.
 - 11 -

4. Legal and Professional Services

On the Schedule C petitioner claims a $6,650 deduction for

legal and professional services. Other than to note that he

“paid for the preparer to make the tax return”, petitioner had a

difficult time explaining the specific expenses included in this

deduction. At the suggestion of the Court, he agreed that it

might have included consultation fees paid to other medical

service providers in connection with some of his patients. He

first testified that the consultations were free, but later

testified that fees were charged. We note that petitioner also

included amounts for “consulting fees” in the deduction for

“other expenses” discussed later in this opinion. In any event

he provided no substantiating documents to support the deduction;

and because his recollection on the point is less than definite,

we find that he is not entitled to a deduction for expenses

related to legal and professional services.

5. Office Expenses

On Schedule C petitioner deducted $1,419 for office

expenses. Petitioner’s vague testimony regarding the items

included in this deduction was not much better than his

explanation of many of the other deductions here under

consideration. However, from what little information he

provided, we are satisfied that the amount deducted, measured

against the income earned, is reasonable. See Cohan v.
 - 12 -

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

at 743. Petitioner is entitled to a $1,419 deduction for office

expenses.

6. Rent or Lease of Other Business Property

On Schedule C petitioner deducted $5,100 for rent or lease

of other business property. Again petitioner’s testimony with

respect to this deduction was not as specific as we would like,

but we are satisfied that he paid rent for some of the offices

that he maintained at some of the assisted living facilities

where he treated his patients. We find that petitioner is

entitled to a $4,000 deduction for rent or lease of other

business property. See Cohan v. Commissioner, supra at 543.

7. Repairs and Maintenance

On Schedule C petitioner deducted $2,554 for repairs and

maintenance. Petitioner did not provide any substantiating

records with regard to this deduction, but he testified that some

portion of this deduction relates to the cost of repairs made to

a bicycle owned or used by one of his patients. Petitioner has

failed to demonstrate, and we are at a loss to recognize on our

own, the connection between the expenditure and petitioner’s

trade or business. As best we can tell from what has been

presented, the cost of the repairs to the bicycle is a personal,

nondeductible expense. See sec. 262. Furthermore, because
 - 13 -

petitioner did not present sufficient evidence for the Court to

determine what other expenditures might be included in the

deduction or how those expenditures relate to his trade or

business, petitioner is not entitled to a deduction for repairs

and maintenance.

8. Supplies

On Schedule C petitioner deducted $2,010 for supplies.

Petitioner did not provide any substantiating records with regard

to this deduction but testified that this expense relates to the

purchase of supplies for patient care, including, but not limited

to: (1) Computer supplies; (2) reference materials; (3)

textbooks; and (4) professional periodicals. Measuring this

expense against the income earned in his trade or business, we

find that petitioner is entitled to a $2,010 deduction for

supplies. See Cohan v. Commissioner, supra at 543.

9. Other Expenses

On Schedule C petitioner deducted $26,009 for other expenses

attributable to: (1) Billing services ($12,782);4 (2) phone and

cellular service fees ($5,368); (3) Sunpass fees ($720); (4)

consultant fees ($6,000); (5) bank charges ($719); and (6)

membership fees ($420).

4
Because the parties now agree that petitioner is entitled
to a deduction for this expense in an amount that exceeds the
amount shown on his return, further discussion is not required.
 - 14 -

a. Phone and Cellular Service Fees

In support of his claim to a deduction for phone and

cellular service fees petitioner presented account statements

from T-Mobile and BellSouth. The statements for several months

of the year are missing, but the statements presented show

charges totaling $2,273.82. To the extent attributable to the

use of a cellular telephone, the statements sufficiently

substantiate the payment of the fees as required by section

274(d). Nevertheless, petitioner made no attempt to distinguish

between personal use and business use for any charges shown on

any of the statements, and we have insufficient information to

formulate a reasonable allocation. See sec. 1.274-

5T(b)(6)(i)(B), Temporary Income Tax Regs., supra. Consequently,

petitioner is not entitled to a deduction for phone and cellular

service fees. See sec. 262.

b. Sunpass Fees

According to petitioner the Sunpass charges were incurred

during the many trips he made between assisted living facilities

in order to treat his patients. As stated above, expenses

related to passenger automobiles, including expenses for highway

tolls, are subject to the stringent substantiation requirements

of section 274(d). Petitioner did not provide any substantiating

records either originally maintained or reconstructed with
 - 15 -

respect to these expenses. Accordingly, petitioner is not

entitled to a deduction for Sunpass fees.

c. Consultant Fees

According to petitioner, he paid consulting fees to various

professional and administrative assistants. He provided no

substantiating documents, either originally maintained or

reconstructed, and did not identify any specific individual to

whom the fees might have been paid. Petitioner is not entitled

to a deduction for fees paid to consultants in excess of the

amount now conceded by respondent.

d. Bank Charges

The deduction for bank charges relates to fees petitioner

paid in connection with a checking account used for both personal

and business reasons. He made no attempt to allocate between

personal and business use. Petitioner is not entitled to a

deduction for bank charges in excess of the amount allowed by

respondent.

Additions to Tax

The burden of production with respect to the imposition of

each addition to tax rests with respondent. See sec. 7491(c);

Higbee v. Commissioner, 116 T.C. 438, 446–447 (2001). With

respect to the section 6651 additions to tax, respondent’s burden

does not require him to establish the absence of reasonable

cause. See id. at 447; Davis v. Commissioner, 81 T.C. 806, 820
 - 16 -

(1983), affd. without published opinion 767 F.2d 931 (9th Cir.

1985).

1. Section 6651(a)(1)

Petitioner’s 2005 return was due to be filed on or before

April 17, 2006, but it was not submitted for filing until on or

about December 1, 2009. See secs. 6072(a), 7503. Consequently,

respondent imposed a section 6651(a)(1) addition to tax.

Section 6651(a)(1) authorizes the imposition of an addition

to tax for failure to file a timely return unless the taxpayer

proves that such failure is due to reasonable cause and is not

due to willful neglect. See also United States v. Boyle, 469

U.S. 241, 245 (1985); Harris v. Commissioner, T.C. Memo. 1998-

332. Section 6651(a)(1) imposes an addition to tax of 5 percent

of the tax required to be shown on the return for each month or

fraction thereof for which there is a failure to file, not to

exceed 25 percent in the aggregate.

Respondent’s records demonstrate that petitioner’s return

was not timely filed, and petitioner does not dispute the point.

Respondent’s section 7491(c) burden of production has been met

with respect to the imposition of the section 6651(a)(1) addition

to tax, and because petitioner has failed to demonstrate that his

failure timely to file his 2005 return was due to reasonable

cause, respondent’s imposition of a section 6651(a)(1) addition

to tax is sustained.
 - 17 -

2. Section 6651(a)(2)

In general, section 6651(a)(2) provides for an addition to

tax in the case of the failure to pay an amount of tax shown on a

return unless the taxpayer can establish that the failure is due

to reasonable cause and not due to willful neglect. The section

6651(a)(2) addition to tax accrues at the rate of 0.5 percent per

month of the unpaid amount until the maximum 25 percent is

reached.

Under section 6651(g)(2), a return the Commissioner prepares

under section 6020(b) is treated as the return filed by the

taxpayer for purposes of determining the amount of the addition

to tax under section 6651(a)(2). The section 6020(b) return

respondent prepared constitutes petitioner’s 2005 return for

purposes of section 6651(a)(2), and petitioner does not suggest

otherwise.

To prove reasonable cause for a failure to pay the tax, the

taxpayer must show that he or she exercised ordinary business

care and prudence in providing for payment of the tax and

nevertheless was either unable to pay the tax or would suffer

undue hardship if he or she paid the tax on the due date. Sec.

301.6651-1(c)(1), Proced. & Admin. Regs.

Petitioner did not provide any explanation as to why he

failed to pay the amount of tax shown on the return and therefore

did not establish that the failure is due to reasonable cause and
 - 18 -

not due to willful neglect. Respondent’s imposition of the

section 6651(a)(2) addition to tax for 2005 is sustained.

3. Section 6654

Section 6654 imposes an addition to tax on an individual

taxpayer who underpays his estimated tax. That addition to tax

is calculated with reference to four required installment

payments of the taxpayer’s estimated tax liability. Sec.

6654(c)(1); Wheeler v. Commissioner, 127 T.C. 200, 210 (2006),

affd. 521 F.3d 1289 (10th Cir. 2008). Each required installment

of estimated tax must equal 25 percent of the “required annual

payment” to avoid an addition to tax under section 6654. Sec.

6654(d)(1)(A). As relevant here, the required annual payment is

equal to the lesser of (i) 90 percent of the tax shown on the

taxpayer’s return for that year (or, if no return is filed, 90

percent of the tax due for such year), or (ii) 100 percent of the

tax shown on the taxpayer’s return for the preceding taxable

year.5 Sec. 6654(d)(1)(B).

The Commissioner’s burden of production under section

7491(c) requires him to produce, for each year for which the

addition to tax is asserted, evidence that the taxpayer had a

required annual payment under section 6654(d). In order to do so

he must demonstrate the tax shown on the taxpayer’s return for

5
Clause (ii) does not apply if the individual did not file a
return for the preceding taxable year.
 - 19 -

the preceding year, unless he can show that the taxpayer did not

file a return for that preceding year. Wheeler v. Commissioner,

supra at 210-212. Petitioner filed a 2004 return, and that

return shows an income tax liability of $8,323.14.

A section 6654 addition to tax is imposed on an individual

taxpayer who fails to make timely payments of estimated tax

unless the taxpayer demonstrates that one of the computational

exceptions provided for in subsection (e) is applicable.

Grosshandler v. Commissioner, 75 T.C. 1, 20-21 (1980). Nothing

in the record suggests that any exception is applicable.

Accordingly, respondent’s imposition of a section 6654 addition

to tax is sustained.

To reflect the foregoing,

Decision will be entered

under Rule 155.