T.C. Memo. 2013-132
UNITED STATES TAX COURT
PAUL FREDRICK JONES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20591-10. Filed May 29, 2013.
Paul Fredrick Jones, pro se.
Randall B. Childs, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MORRISON, Judge: The respondent (the IRS) issued a notice of deficiency
to the petitioner, Mr. Paul Fredrick Jones, for the 2007 tax year. In the notice the
IRS determined a deficiency of $13,590, a section 6651(a)(1) addition to tax of
$3,057.75, a section 6651(a)(2) addition to tax of $1,630.80, and a section 6654(a)
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[*2] addition to tax of $618.52.1 Jones timely filed a petition under section
6213(a) requesting that we redetermine the deficiency and the additions to tax.
We have jurisdiction under section 6214.
After concessions,2 the issues for decision are:
(1) whether Jones is entitled to deduct $45,011.72 for business expenses
reported on Schedule C, Profit or Loss From Business;
(2) whether Jones is liable for the section 6651(a)(1) addition to tax;
(3) whether Jones is liable for the section 6651(a)(2) addition to tax; and
(4) whether Jones is liable for the section 6654(a) addition to tax.
Background
Preliminary matters
Before trial the Court ordered that paragraphs 1 through 12 of the IRS’s
proposed stipulation of facts be deemed admitted under Rule 90. The Court
1
All section references are to the Internal Revenue Code in effect for the
year at issue. Rule references are to the Tax Court Rules of Practice and
Procedure.
2
In his pretrial memorandum, Jones conceded that the notice of deficiency
was correct in its determination that he received $50,894 in nonemployee
compensation from Pre-Paid Legal Services. In its opening brief, the IRS
conceded that the notice of deficiency was incorrect in determining that Jones
earned $750 in nonemployee compensation from Life Care Retirement
Communities and $241 in dividend income.
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[*3] reserved ruling on whether paragraphs 13 and 14 should be deemed admitted.
The IRS has now conceded that paragraphs 13 and 14 are incorrect. Therefore, the
Court will order that these paragraphs shall not be deemed admitted.
Jones resided in Florida when he filed the petition.
Jones’s business
Jones worked as an independent sales associate for Pre-Paid Legal Services,
a publicly traded company that provided legal insurance to businesses and
individuals. Jones sold memberships to the customers of Pre-Paid Legal Services
and was entitled to commissions for these sales. He also recruited new sales
associates for Pre-Paid Legal Services and, pursuant to its multilevel marketing
arrangement, was entitled to a percentage of the revenue they generated. Jones
received nonemployee compensation of $50,894 from Pre-Paid Legal Services.
Besides Pre-Paid Legal Services, Jones participated in other multilevel
marketing arrangements. He did not earn any money, but his participation allowed
him to meet people to recruit as sales associates for Pre-Paid Legal Services.
Jones worked from his house in the area of Orlando, Florida.
Jones did not file a federal income tax return for 2006 or 2007. For 2007
the IRS prepared a substitute for return on Jones’s behalf, as authorized by section
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[*4] 6020(b). Jones did not make any payments of federal income tax or estimated
tax for 2007.
Discussion
1. Deficiency
In deficiency proceedings before the Tax Court, the burden of proof
generally rests with the taxpayer. Rule 142(a)(1); Welch v. Helvering, 290 U.S.
111, 115 (1933). Section 7491 imposes the burden of proof on the IRS with
respect to a given factual issue where a taxpayer (1) introduces credible evidence
with respect to that issue, (2) meets all applicable substantiation requirements, (3)
complies with all recordkeeping requirements, and (4) cooperates with any
reasonable requests for information. Sec. 7491(a); Higbee v. Commissioner, 116
T.C. 438, 440-441 (2001). The record reflects that Jones did not meet
recordkeeping and substantiation requirements. Thus, the burden of proof remains
on Jones.
Section 162(a) provides that “[t]here shall be allowed as a deduction all the
ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business, including * * * (2) traveling expenses
(including amounts expended for meals and lodging other than amounts which are
lavish or extravagant under the circumstances) while away from home in the
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[*5] pursuit of a trade or business”. No deduction is allowed for personal, living,
or family expenses. Sec. 262(a). The cost of a taxpayer’s own meals, unless the
taxpayer is on overnight business travel, is a nondeductible personal expense.
United States v. Correll, 389 U.S. 299, 299-307 (1967); Strohmaier v.
Commissioner, 113 T.C. 106, 114-116 (1999). Taxpayers are required to maintain
records sufficient to establish the amounts of allowable deductions and to enable
the IRS to determine the correct tax liability. Sec. 6001; Shea v. Commissioner,
112 T.C. 183, 186 (1999).
It is a general rule, established in Cohan v. Commissioner, 39 F.2d 540,
543-544 (2d Cir. 1930), that if the trial record provides sufficient evidence that the
taxpayer has incurred a deductible expense, but the taxpayer is unable to fully
substantiate the precise amount of the deduction, the Court should estimate the
amount of the deductible expense and allow a deduction to that extent. In making
such estimates, the Court may bear heavily against the taxpayer, who caused the
inexactitude. Id. at 544. For the Court to estimate the amount of an expense, there
must be some basis on which an estimate may be made. Williams v. United States,
245 F.2d 559, 560 (5th Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731, 742-
743 (1985).
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[*6] In an exception to the Cohan rule, section 274(d) provides that a taxpayer
must satisfy strict substantiation requirements for certain kinds of expenses, such
as for travel away from home, for entertainment, for gifts, and for “listed property”
(as that term is defined in section 280F(d)(4)). To deduct these expenses the
taxpayer “[must] substantiate[] by adequate records or by sufficient evidence
corroborating the taxpayer’s own statement” the amounts, times, places, and
purposes related to the expenses. Sec. 274(d); 26 C.F.R. sec. 1.274-5T(b), (c)(1)
and (2) (2010); Dowell v. United States, 522 F.2d 708, 715 (5th Cir. 1975)
(holding each separate expense must be substantiated).
The expenses of traveling away from home are subject to strict
substantiation requirements. Sec. 274(d)(1); 26 C.F.R. sec. 1.274-5T(a)(1), (b)(2)
(2010). To deduct travel expenses the taxpayer must substantiate the amount of
each expense, the dates of departure and return for each trip, the destination of
travel, and the business reason for the trip. Sec. 274(d); 26 C.F.R. sec. 1.274-
5T(b)(2) (2010).
Entertainment expenses are subject to strict substantiation requirements.
Sec. 274(d)(2). Entertainment expenses include the costs of business meals. See
Sanford v. Commissioner, 50 T.C. 823, 827 (1968), aff’d, 412 F.2d 201 (2d Cir.
1969). To deduct entertainment expenses the taxpayer must substantiate the
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[*7] amount of each expense, the date of the entertainment, the place where the
entertainment occurred, the business reason for the entertainment, the nature of
any business discussion or activity, and enough information about the person
entertained to establish the business relationship of that person to the taxpayer.
Sec. 274(d); 26 C.F.R. sec. 1.274-5T(b)(3) (2010).
Gift expenses are subject to strict substantiation requirements. Sec.
274(d)(3). To deduct gift expenses, the taxpayer must substantiate the cost of the
gift, the date of the gift, a description of the gift, the business reason for the gift,
and enough information about the recipient of the gift to establish the business
relationship of that person and the taxpayer. Sec. 274(d); 26 C.F.R. sec. 1.274-
5T(b)(5) (2010).
Passenger automobile expenses require strict substantiation. Secs.
274(d)(4), 280F(d)(4)(A)(i).3 A taxpayer is permitted to use the standard mileage
rate in lieu of substantiating the actual cost of using a passenger automobile. See
26 C.F.R. sec. 1.274-5(j)(2) (2010). A taxpayer who opts to use the standard
3
As explained in UAL Corp. v. Commissioner, 117 T.C. 7, 16 n.13 (2001)
(Ruwe, J., concurring), sec. 274(d) did not require strict substantiation of the
expenses of listed property such as passenger automobiles for tax year 1985 and
prior years; thus, passenger automobile expenses related to travel within the
locality in which the taxpayer lived and worked were not subject to the strict
substantiation requirements.
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[*8] mileage rate is not relieved of the obligation to substantiate the amount of
business mileage and the time and place of each business use of the passenger
vehicle. Id. Thus, these items of information (the amount of business mileage and
the time and place of each business use of the passenger vehicle) must be
substantiated through adequate records or sufficient evidence corroborating the
taxpayer’s own statement. See 26 C.F.R. sec. 1.274-5T(b)(2), (c) (2010).
Cellular telephone expenses are subject to strict substantiation requirements.
Secs. 274(d)(4), 280F(d)(4)(A)(v).4 To deduct cell phone expenses a taxpayer
must substantiate the amount of business use and the total use for the cell phone.
See Trupp v. Commissioner, T.C. Memo. 2012-108, slip op. at 14; 26 C.F.R. sec.
274-5T(b)(6)(i)(B) (2010).
The expenses of internet service are not subject to strict substantiation
requirements. See Bogue v. Commissioner, T.C. Memo. 2011-164, slip op. at 41
(strict substantiation does not apply to utility expenses, such as home internet
service).
4
Sec. 280F(d)(4)(A) was amended by the Small Business Jobs Act of 2010,
Pub. L. No. 111-240, sec. 2043(a), 124 Stat. at 2560, which removed cellular
phones (and similar telecommunications equipment) from the definition of listed
property. The amendment is effective beginning with the 2010 year. Id. sec.
2043(b). The amendment therefore does not apply for 2007, the year at issue.
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[*9] Section 280A(a) provides that for individual taxpayers “no deduction
otherwise allowable under this chapter [which includes section 162] shall be
allowed with respect to the use of a dwelling unit which is used by the taxpayer
during the taxable year as a residence.” Section 280A(c)(1) contains an exception
to section 280A(a). It provides: “Subsection (a) shall not apply to any item to the
extent such item is allocable to a portion of the dwelling unit which is exclusively
used on a regular basis * * * (A) as the principal place of business for any trade or
business of the taxpayer”. Some portion of the dwelling unit must be used
exclusively for business; otherwise, no deductions for expenses related to the
dwelling unit are excepted by section 280A(c)(1). See Sam Goldberger, Inc. v.
Commissioner, 88 T.C. 1532, 1557 (1987).
The expense of telephone service (other than cellular telephone service) is
not subject to strict substantiation requirements. See, e.g., Lang v. Commissioner,
T.C. Memo. 2010-152, slip op. at 14-15; Aref v. Commissioner, T.C. Memo.
2009-118, slip op. at 11. Section 262(b) provides that the expense of the first
telephone line in a taxpayer’s residence is treated as a personal expense.
Jones had only one bank account, which was at Bank of America. He had
two credit cards: an American Express card and a Chase card. Neither the bank
account nor the two credit cards were used exclusively for business expenses.
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[*10] At trial Jones moved for the admission of a spreadsheet that the Court
marked as Exhibit 13-P and received into evidence for the limited purpose of
illustrating Jones’s litigating position. The spreadsheet lists 58 categories of
expenses that Jones claims are the business expenses of his work for Pre-Paid
Legal Services. Each category has an associated amount. The total of the amounts
for all 58 categories is $45,011.72.5 By contrast, the notice of deficiency
determined (and the IRS contends) that Jones is entitled to zero in business-
expense deductions. At trial Jones’s monthly statements from the two credit cards
were received into evidence. Jones moved that some statements for his bank
account be received into evidence, but these statements were excluded from
evidence. Jones moved for the admission of an auto mileage log, but it was
excluded from evidence. With the possible exception of the auto mileage log,
Jones did not maintain any contemporaneous records that showed which of his
expenses were business expenses. The only witness at trial was Jones himself. He
testified that he incurred the expenses in the amounts listed in 58 categories in
Exhibit 13-P. He also testified in some detail about the nature of these expenses.
5
Jones moved for the admission of Exhibit 12-P, a spreadsheet that has
month-by-month amounts for each of the 58 categories. Exhibit 12-P was also
received for the purpose of illustrating Jones’s litigating position.
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[*11] The table below sets forth the 58 categories and corresponding amounts
Jones listed in the spreadsheet identified as Exhibit 13-P. The first column,
“Expense category”, has the headings Jones listed for each category. The second
column, “Amount claimed”, has the amounts Jones listed as deductible business
expenses for each category. The third column, “Amount deductible”, has the
amounts we find that Jones paid during 2007 for ordinary and necessary business
expenses that are deductible under section 162. The fourth column, “Court’s
description of amount; reasons not deductible”, is (1) our description of the
amounts listed in the second column, and (2) the reasons that we determine that
the difference between the amount claimed and the amount deductible in each
category, for those categories for which there is a difference, is not deductible.
The factual conclusions in the third and fourth columns constitute findings of fact.
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[*12] Business-expense deductions
Amount Amount
Expense category claimed deductible Court’s description of amount; reasons not deductible
1. Leads $12,000.00 $12,000.00 This amount was paid to Lead to the Top in Cheyenne,
Wyoming, for customer “leads”, i.e., contact information for
potential customers.
2. Internet 494.45 -0- This amount was paid to Bright House Network for internet
service to Jones’s house. Jones used the internet for both
business and personal use; there is no basis in the record on
which to estimate the portion of the charge that corresponds to
business use.
3. Phone 898.92 -0- This amount was paid for cellular telephone service. The
amount of business use of the cellular telephone to which this
expense corresponds is not supported by adequate records or
sufficient evidence corroborating Jones’s own statement.
Therefore, the strict substantiation requirements of sec. 274(d)
for cellular telephone expenses have not been met.
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[*13] 4. Mileage 8,758.61 -0- According to Jones’s testimony, this amount is the product of
the standard mileage rate and the number of miles Jones drove
his car for business. We need not determine whether this
testimony is correct because the strict substantiation
requirements of sec. 274(d) for passenger automobile expenses
have not been met. The business mileage and the times and
places of business use of the car are not supported by adequate
records or sufficient evidence corroborating Jones’s own
statement.
5. Entertainment 1,118.60 -0- Jones did not testify what exactly these expenses were for
except that they were for “entertainment”. A review of Jones’s
credit-card statements might reveal evidence of the amount of
each expense, the date of entertainment, and the place of
entertainment. However, not all of the strict substantiation
requirements of sec. 274(d) for entertainment expenses have
been met for these alleged expenses. The business reason for
the entertainment, the nature of the business discussion (or
activity), and the business relationship between Jones and the
person entertained are not supported by adequate records or
sufficient evidence corroborating Jones’s own statement (or by
any evidence whatsoever).
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[*14] 6. Travel 1,631.56 -0- This amount was paid for travel away from Jones’s home in the
Orlando area. The business purposes of the trips are not
supported by adequate records or sufficient evidence
corroborating Jones’s own statement. Therefore, the strict
substantiation requirements of sec. 274(d) for travel expenses
have not been met.
7. PPL fees 431.30 431.30 This amount was paid to Pre-Paid Legal Services (hereinafter
“PPL”) for Jones’s membership in that organization as a sales
associate.
8. Vonage phone 388.75 -0- This amount was paid to Vonage America for telephone service.
Jones used this service for both business and personal calls.
There is no basis in the record on which to estimate the portion
of the expense corresponding to business calls.
9. 800 Phone 326.00 -0- This amount was paid to Covista Telephone in Chattanooga,
Covista Tennessee, for an 800 telephone number so that persons could
call Jones long distance for free. Jones used this service for
both business and personal calls. There is no basis in the record
on which to estimate the portion of the expense corresponding
to business calls.
10. Office 212.13 -0- This amount was paid to an office supply store. Some of the
supplies items purchased were not used in Jones’s business. There is no
basis in the record on which to estimate the portion of the
expense attributable to items used in Jones’s business.
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[*15] 11. PPL 239.40 239.40 This amount was paid to PPL to use its website.
WEB
12. UPS 230.25 -0- This is the amount paid to UPS to ship Jones’s packages. Some
shipments were of business materials, such as PPL contracts, but
we find that some shipments were personal. There is no basis in
the record on which to estimate the ratio of business shipments
to personal shipments.
13. Newspaper 160.55 -0- This amount was paid for Jones’s subscription to the Orlando
Sentinel newspaper. Jones testified that he reviewed the
advertisements in the newspaper to find businesses to which he
could sell PPL services. This testimony, although believable, is
all we know about Jones’s use of the newspaper. In the absence
of other information, we do not conclude (1) that Jones used the
newspaper exclusively for businesses purposes or (2) that there
is a basis on which to estimate how much Jones used the
newspaper for business purposes compared to personal
purposes.
14. Priceless 539.40 539.40 This is the amount paid to Priceless Possibilities in Fallbrook,
Possibilities California, for marketing services.
15. Printing 459.22 459.22 This amount was paid to print marketing materials.
16. Long distance -0- -0- We infer from the zero amount in Jones’s spreadsheet that he
does not claim a deduction related to this category of expenses.
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[*16] 17. 1,200.00 -0- This amount was allegedly paid to charity. Jones has conceded
Donations that he is not seeking a business-expense deduction for the
alleged payments to charity. There is no evidence of a business
purpose for the alleged donations in any case.
18. Stemtech 377.46 377.46 This amount was paid to Stemtech Health Sciences in San
Clemente, California, to participate in its multilevel marketing
arrangement for nutritional supplements.
19. Video Plus 870.00 870.00 This amount was paid to Video Plus in Lake Dallas, Texas, for
PPL marketing materials.
20. Gluc Leads -0- -0- We infer from the zero amount in Jones’s spreadsheet that he
does not claim a deduction related to this category of expenses.
21. PPL 1,502.00 1,502.00 This amount was paid for marketing supplies related to PPL.
marketing
supplies
22. Web site 20.39 20.39 This amount was paid to the company godaddy.com for
business-related web services.
23. Build Success 200.60 200.60 This amount was paid to Build Lasting Success for marketing
marketing services.
24. Tolls, parking 404.00 -0- This amount was paid for tolls and parking in Florida. Jones has
not satisfied his burden of proving that these expenses are the
ordinary and necessary expenses of his business.
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[*17] 25. 248.70 248.70 This amount was paid for insurance licenses necessary for Jones
Insurance license to sell PPL services.
26. Freedom 1,289.00 1,289.00 This amount was paid to Freedom Rocks to participate in its
Rocks multilevel marketing arrangement.
27. Stratus 119.90 119.90 This amount was paid to Stratus Marketing for marketing
Marketing services.
28. USPS 81.88 -0- This amount was paid to the United States Postal Service for
postage fees. Some of the services were not related to Jones’s
business. There is no basis in the record on which to estimate
the portion of the fees that are attributable to Jones’s business.
29. Office 352.26 -0- This amount was paid to an office supply store. Some of the
supplies 2 purchases were items not used in Jones’s business. There is no
basis in the record on which to estimate the portion of the
expense attributable to items used in Jones’s business.
30. Verizon 737.54 -0- This amount was paid to Verizon for telephone service to
Jones’s house. He used this telephone service mainly to receive
and send faxes. The telephone service is for the first (and only)
telephone line in Jones’s house. It is therefore classified as a
personal expense under sec. 262(b).
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[*18] 31. 281.38 -0- There is very little in the record about the expenses
Miscellaneous corresponding to this claimed amount. Jones has failed to prove
that any of the amount was paid for business expenses.
32. Other misc -0- -0- We infer from the zero amount in Jones’s spreadsheet that he
does not claim a deduction related to this category of expenses.
33. Utilities 180.00 -0- This amount is 15% of the amount paid for electric, water, and
garbage service to Jones’s house. Although Jones testified that
he used one bedroom of the house as an “office”, he did not
testify that the room was used exclusively for his business (as
opposed to personal clerical or nonclerical matters). On the
basis of the evidence we find that Jones did not use any portion
of his house exclusively for his business. See sec. 280A(a),
(c)(1).
34. Taxes 441.00 -0- This amount is 15% of the amount paid for property taxes on
Jones’s house. This amount is not deductible as a business
expense because Jones did not use any portion of his house
exclusively for his business. See sec. 280A(a), (c)(1).
35. Books 300.74 300.74 This amount was paid for business-related books.
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[*19] 36. PPL 635.00 -0- Although Jones testified that he spent this amount on PPL
meetings meetings in Tampa, Florida, and Altamonte Springs, Florida,
and other cities, he did not explain what specific goods and
services the amount was expended for (e.g., travel costs or
attendance fees). Furthermore, his payment of the amount is not
generally corroborated by other evidence. We conclude that
Jones has not met his burden of proving (1) he paid the alleged
expenses, (2) the amounts of the alleged expenses, and (3) that
the alleged expenses were the ordinary and necessary expenses
of his business.
37. Lodging 343.02 -0- This amount is alleged by Jones to be the expense of staying at
hotels during out-of-town PPL conventions. We need not
decide whether this allegation is true. The strict substantiation
requirements of sec. 274(d) for travel expenses have not been
met. The amount of each alleged hotel expense, the date of
departure and date of return for the trip that corresponds to the
hotel stay, the destination of the trip, and the business reason for
the trip are not all supported by adequate records or sufficient
evidence corresponding Jones’s own statement.
38. Stemtech 434.77 434.77 This amount was paid to Stemtech Health Sciences in San
Clemente, California, to participate in its multilevel marketing
arrangement for nutritional supplements.
39. PPL tools 40.44 40.44 This amount was paid to PPL for PPL materials.
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[*20] 40. Voice 400.00 400.00 This amount was paid to Voiceshot LLC for a marketing
Shot service.
41. Sprint phone 37.28 -0- This is the amount paid to purchase a cellular telephone. The
amount of business use of the cellular telephone is not supported
by adequate records or sufficient evidence corroborating Jones’s
own statement. Therefore, the strict substantiation requirements
of sec. 274(d) for cellular telephone expenses have not been
met.
42. Signup leads 89.00 89.00 This amount was paid to Signup Leads for customer leads.
43. Movie Views 425.00 425.00 This amount was paid to Movie Views Leads for customer
Leads leads.
44. Quantum 99.00 99.00 This amount was paid to Quantum Leads for customer leads.
Leads
45. Burg/Lehr 1,535.26 1,535.26 This amount was paid to Burg Communication in Florida and to
Lehr Witten Team in Phoenix, Arizona, for marketing services.
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[*21] 46. Cab/bus 115.70 -0- Jones testified that he paid this amount for cab and bus fare for
travel to and from his hotels and the convention sites at out-of-
state PPL conventions. We need not decide whether this
testimony is true because the strict substantiation requirements
of sec. 274(d) for travel expenses have not been met. The
amount of each cab and bus expense, the date of departure and
return for each trip to which the expense relates, the destination
of the trip, and the business reason for the trip are not all
supported by adequate records or sufficient evidence
corroborating Jones’s own statement.
47. Finance 151.34 -0- This amount was paid as a credit-card finance charge. We find
charge that this expense is not related to Jones’s business.
48. SWREG 158.77 158.77 This amount was paid to SWREG, Inc., for business software.
49. Rental car -0- -0- Jones paid $58.92 to rent a car in Dallas, Texas. The business
(amount reason for traveling to Dallas is not supported by adequate
corrected records or sufficient evidence corroborating Jones’s own
in hand- statement. Therefore, the strict substantiation requirements of
writing to sec. 274(d) for travel expenses have not been met.
$58.92)
50. GTI Travel 149.00 149.00 This amount was paid to GTI Travel to participate in its
multilevel marketing arrangement.
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[*22] 51. Awards 128.00 -0- This amount was paid for gifts for other PPL sales associates.
The date of each gift, a description of the gift, the business
reason for the gift, and the business relationship with the person
receiving the gift are not supported by adequate records or
sufficient evidence corroborating Jones’s own statement.
Therefore the strict substantiation requirements of sec. 274(d)
for gifts have not been met.
52. Soho 259.95 259.95 This amount was paid to Soho Solutions in Texas for marketing
services.
53. Vayan leads 500.00 500.00 This amount was paid to Vayan Network in Boca Raton,
Florida, for customer leads.
54. Passport To 1,388.79 1,388.79 This amount was paid to Passport To Wealth to participate in its
Wealth multilevel marketing arrangement.
55. Software 70.00 -0- This amount was paid for software. Jones, who has the burden
of proof, did not testify about the purpose of this software. We
find it was not business related.
56. Education 55.31 -0- This amount was paid for online education to learn about
personal income tax returns. We find this expense is not related
to Jones’s business.
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[*23] 57. Petty 780.00 -0- This amount was withdrawn from Jones’s bank account in cash
cash and used for business meals. The expenses of business meals
must satisfy the strict substantiation requirements for
entertainment expenses. The amount of each expense, the date
of the meal, the place of the meal, the business reason for the
meal, the nature of the business discussion or activity, and the
business relationship with the persons at the meal are not
supported by adequate records or sufficient evidence
corroborating Jones’s own statement. Therefore, the strict
substantiation requirements of sec. 274(d) for entertainment
expenses have not been met.
58. Johnson 720.00 -0- This is the amount Jones paid for the use of a cellular telephone
owned by his friend, Christopher Johnson. The amount of
business use of the cellular telephone to which this expense
corresponds is not supported by adequate records or sufficient
evidence corroborating Jones’s own statement. Therefore, the
strict substantiation requirements of sec. 274(d) for cellular
telephone expenses have not been met.
1
Total 45,011.62 24,078.09
1
We note that there is a 10-cent difference between the total on Exhibit 13-P, $45,011.72, and computer-
generated total in the table above. We assume that the total listed on Exhibit 13-P contained an error of 10 cents.
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[*24] 2. Additions to tax
The burden of production with respect to the imposition of each addition to
tax rests with the IRS. See sec. 7491(c); Higbee v. Commissioner, 116 T.C. at
446-447. With respect to the section 6651 additions to tax, the IRS’s burden does
not require it to establish the absence of reasonable cause. See Higbee v.
Commissioner, 116 T.C. at 447; Davis v. Commissioner, 81 T.C. 806, 820 (1983),
aff’d without published opinion, 767 F.2d 931 (9th Cir. 1985).
a. The addition to tax for failure to timely file a return under section
6651(a)(1)
Section 6651(a)(1) imposes an addition to tax for failure to timely file
a required return,6 unless the taxpayer can establish that the failure is due to
reasonable cause and not due to willful neglect.
Jones admitted that he did not file an income tax return for tax year 2007.
Therefore the IRS has met its burden of proof.
Jones’s explanation for not filing a return is that the “Internal Revenue Code
is so complex and confusing no one can understand it or comply with its
multitudinous provisions.” Jones did not make reasonable efforts to determine his
6
Substitutes for returns are disregarded for the purpose of determining the
amount of this addition to tax. Sec. 6651(g)(1).
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[*25] tax liability under the Internal Revenue Code. There is no evidence that he
even calculated his tax liability, and we find that he did not. We find that he did
not have reasonable cause for failing to file his 2007 tax return. He is liable for
the addition to tax under section 6651(a)(1).
b. The addition to tax for failure to timely pay tax under section
6651(a)(2)
Section 6651(a)(2) imposes an addition to tax for failure to pay the tax
shown on a return on or before the date prescribed for payment, unless such failure
is due to reasonable cause and not willful neglect. For each month the taxpayer
fails to pay the tax shown on the return, the addition to tax is 0.5% of the portion
of the tax shown that is unpaid at the beginning of each month, not to exceed 25%
in the aggregate. Sec. 6651(a)(2), (b)(2).7 When a taxpayer does not file a return,
the IRS may prepare a substitute for return. Sec. 6020(b). Such a return is treated
as the return filed by the taxpayer for purposes of the section 6651(a)(2) addition
to tax. Secs. 6020(b), 6651(g)(2).
Reasonable cause for the failure to timely pay tax exists if “the taxpayer has
made a satisfactory showing that he exercised ordinary business care and prudence
7
If the tax shown is greater than the tax required to be shown, the tax
required to be shown (i.e., the lesser of the two amounts) is substituted for the tax
shown in making this calculation. Sec. 6651(c)(2).
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[*26] in providing for payment of his tax liability and was nevertheless either
unable to pay the tax or would suffer an undue hardship * * * if * * * [the
taxpayer] paid on the due date.” 26 C.F.R. sec. 301.6651-1(c)(1) (2012).
The IRS has met its burden of production for the section 6651(a)(2) addition
to tax. We find that the IRS prepared a valid substitute for return for Jones’s 2007
tax year and that he failed to timely make any tax payments. Jones has not shown
that he had reasonable cause for failing to timely pay his 2007 tax. We hold that
Jones is liable for the section 6651(a)(2) addition to tax.
c. The addition to tax for failure to pay estimated income tax under
section 6654(a)
Section 6654(a) imposes an addition to tax for failure to make timely and
sufficient payments of estimated tax. A taxpayer has an obligation to pay
estimated tax for a particular year only if the taxpayer has a “required annual
payment” for that year. Sec. 6654(b)(1), (c)(1), (d). A required annual payment is
equal to the lesser of: (1) 90% of the tax shown on the taxpayer’s return for the
year in issue (or, if no return is filed, 90% of the tax for such year); or (2) 100% of
the tax shown on the return for the immediately preceding taxable year (clause (2)
does not apply if the taxpayer did not file a return for the immediately preceding
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[*27] taxable year). Sec. 6654(d)(1)(B). Generally, section 6654 provides no
exception for reasonable cause. 26 C.F.R. sec. 1.6654-1(a)(1) (2012).
The IRS’s burden of production under section 7491(c) requires it 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).
Jones made no estimated tax payments for 2007, had a tax liability for 2007,
and failed to file a 2006 tax return. Therefore, Jones had a required annual
payment for 2007 and is liable for the section 6654(a) addition to tax.
We have considered all other arguments the parties have made, and to the
extent that we have not discussed them, we find them to be moot, irrelevant, or
without merit.
To reflect the foregoing,
An appropriate order will be issued
regarding paragraphs 13 and 14 of
respondent’s proposed stipulation of facts,
and decision will be entered under Rule
155.