T.C. Memo. 2006-265

UNITED STATES TAX COURT

KAI-CHUNG C. AND MEEKHING T. LAM, Petitioners v. 

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 14711-03. Filed December 14, 2006. 

 Forest J. Dorkowski, for petitioners.

 Caroline R. Krivacka, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

KROUPA, Judge: Respondent determined deficiencies in and

penalties with respect to petitioners’ Federal income tax for

1994, 1995, and 1996 (the years at issue). For 1994, respondent

determined a $15,300 deficiency and a $3,060 accuracy-related
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1All section references are to the Internal Revenue Code in

effect for the years at issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure, unless otherwise

indicated. Amounts have been rounded to the nearest dollar.

2Petitioners conceded the increases in rental income

respondent determined for 1994 and 1995 and certain business

expenses respondent disallowed for each of the years at issue. 

Respondent conceded certain disallowed business expenses that

petitioners claimed for each of the years at issue. 

penalty under section 6662(a).1 For 1995, respondent determined

a $25,759 deficiency and a $5,152 accuracy-related penalty. For

1996, respondent determined a $24,587 deficiency and a $4,917

accuracy-related penalty. 

After concessions,2 there are three issues for decision. 

The first issue is whether petitioners substantiated various

business expenses they claimed in each of the years at issue. We

hold that petitioners did not substantiate any of these expenses. 

The second issue is whether petitioners failed to report $3,424

of rental income in 1996. We hold that they did. The third

issue is whether petitioners are liable for the accuracy-related

penalty for each of the years at issue. We hold that they are. 

FINDINGS OF FACT

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

The stipulation of facts and accompanying exhibits, the

supplemental stipulation of facts, and the second supplemental

stipulation of facts are incorporated by this reference. 
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3Mrs. Lam is a party to this case because she filed joint

returns with petitioner.

Petitioners resided in Cordova, Tennessee, at the time they filed

the petition. 

Mr. Lam (petitioner) was self-employed during the years at

issue.3 Petitioner owned and operated two businesses during the

years at issue; an investment and insurance business, and a real

estate business. All the business income and expenses in dispute

relate to the operation of these two businesses. 

Petitioner’s “major business” is the investment and

insurance business, in which petitioner, a certified financial

planner, provided clients investment services and sold insurance

products. Petitioner also is a licensed realtor and operated his

real estate business, Cordova Realty, as a “sideline.” Cordova

Realty’s business included renting, managing, and selling

properties. 

I. Income Tax Returns for the Years at Issue

Petitioners filed joint income tax returns that petitioner

prepared, including detailed depreciation schedules. Petitioners

reported the income and expenses from petitioner’s two businesses

on Schedule C, Profit or Loss From Business. 

A. Schedule C Deductions

Petitioners claimed deductions for, among other things,

repair and maintenance, supplies, bad debt, office, insurance,
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interest, taxes and licenses, depreciation, advertising, legal

and professional, car and truck, travel, and meals and

entertainment expenses. 

Petitioner presented documents and offered testimony

regarding the repair and maintenance expenses claimed as

deductions. Petitioner did not introduce a single receipt,

though, that showed he paid a repair or maintenance expense for

either of his businesses. 

Petitioner suggested that some of the individuals and

businesses with whom he dealt did not differentiate between

receipts and invoices. Petitioner suggested that we therefore

treat the invoices he submitted as receipts. 

Petitioner testified that he used service providers who did

not know how to read or write, so petitioner would occasionally

himself prepare the invoice for the work done. Petitioner also

presented invoices from a numbered “receipt book” he kept for use

by service providers who did not produce their own documentation. 

Petitioner submitted a few documents that appear to have

been drafted by third parties, but the amounts listed were

crossed out, and petitioner wrote in different amounts.

Petitioner explained that he made these alterations after

negotiating a better price for the services, but he did not

explain why he, and not the third party, made the alteration. 
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Petitioners introduced many undated documents. Petitioner

testified that he incurred some expenses in 1994 because he had

placed the documents for those expenses in the box meant to

contain only documentation of expenses incurred in 1994. Other

expenses, however, were supposedly incurred in 1995 because

petitioner had placed the documents for those expenses in the box

meant to contain only documentation of expenses incurred in 1995. 

The invoices for repair and maintenance expenses that were

on another company’s letterhead and were dated did not show

whether petitioner actually paid them. For example, petitioner

submitted a $252 invoice for painting and a $145 invoice for lawn

care, but he introduced no corresponding documentary proof that

he paid for the services. Petitioner’s testimony was the only

evidence petitioner submitted indicating that he paid the repair

and maintenance expenses.

Petitioner also submitted more than 20 different invoices

from a hardware store to support his deduction for supplies.

Petitioner did not, however, submit corresponding receipts,

canceled checks, or credit card statements that would have shown

he paid the amounts indicated on these invoices. 

Regarding bad debt expenses, petitioner testified that he

occasionally made small loans in his real estate business to

potential home buyers. He further testified that when a

purchaser needed larger sums of money, $10,000 or greater, he
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would have the purchaser sign a note and “put me on the lien on

the house.” Petitioner did not, however, introduce any of these

alleged notes or any other documentation regarding these “loans.”

Regarding office expenses, petitioner explained he operated

both of his businesses from one office and testified that the two

businesses shared expenses, such as phone lines, secretaries, and

other office workers. Petitioner did not introduce any

documentation, however, to show the amount of any of these office

expenses. 

In addition, petitioner testified that he was licensed with

“realty commissions,” the “Insurance Department,” and the

National Association of Securities Dealers. Yet petitioner did

not introduce photocopies of any of these licenses, nor did

petitioner have any invoices or documented proof of payment for

the alleged annual licensing fees. Petitioner also testified

that he was annually assessed personal property tax on the assets

in his businesses, yet he did not introduce any documentation

regarding these expenses. 

Regarding advertising expenses, petitioner testified that he

spent money on “leads”--mass mailings undertaken by advertising

companies, as part of his insurance and investment business, but

he did not testify or submit documentation regarding the

advertising expenses he incurred in his real estate business.
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For other categories of expenses, including insurance,

interest, depreciation, legal and professional, car and truck,

travel, and meals and entertainment expenses, petitioner offered

no testimony and submitted no documentation. 

B. 1996 Rental Income

Petitioner did not present any documentation or offer any

testimony regarding the $3,424 of additional rental income

respondent determined petitioner earned in 1996. 

II. Audit and Deficiency Notice

Respondent began examining petitioners’ returns for the

years at issue in October 1997. Respondent repeatedly asked

petitioners to submit documentation to support each of the items

they claimed on the returns. Petitioners failed to submit

documentation that would substantiate many of their expenses. 

Respondent issued a deficiency notice in which he made

adjustments to the Schedule C expenses petitioners claimed,

increased petitioners’ income by the amounts of rental payments

they failed to include, and determined that petitioners are

liable for the accuracy-related penalty. Respondent disallowed

the Schedule C expenses on the grounds that they were not

ordinary and necessary business expenses, lacked sufficient

substantiation, or were personal in nature. 

Petitioners timely filed a petition. 
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4This principle is not affected by sec. 7491(a), because

respondent initiated the examination of petitioners’ returns for

the years at issue in October 1997, which is before the July 22,

1998, effective date of the Internal Revenue Service

Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.

3001(a), 112 Stat. 726. 

OPINION

This is a substantiation case in which we are asked to

decide whether petitioners substantiated nearly a quarter of a

million dollars of business expenses that remain in dispute. The

business expenses that remain in dispute include $53,371 repair

and maintenance, $52,366 supplies, $48,486 bad debt, $19,579 

office, $4,463 insurance, $650 interest, $12,583 taxes and

licenses, $7,552 depreciation, $693 advertising, $1,601 legal and

professional, $18,272 car and truck, $15,979 travel, and $5,390

meals and entertainment. We also must decide whether petitioners

failed to include $3,424 rental payments in income in 1996 and

are liable for the accuracy-related penalty. We first address

the general deductibility rules of business expenses under

section 162, then examine the additional strict substantiation

requirements of section 274(d). 

I. Business Expenses Under the General Rule

We begin with two fundamental principles of tax litigation. 

First, as a general rule, the Commissioner’s determinations are

presumed correct, and the taxpayer bears the burden of proving

that these determinations are erroneous.4 Rule 142(a); see
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INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Second,

deductions are a matter of legislative grace, and the taxpayer

must show that he or she is entitled to any deduction claimed. 

Rule 142(a); Deputy v. du Pont, 308 U.S. 488, 493 (1940). This

includes the burden of substantiation. Hradesky v. Commissioner,

65 T.C. 87, 89-90 (1975), affd. per curiam 540 F.2d 821 (5th Cir.

1976).

A taxpayer must substantiate amounts claimed as deductions

by maintaining the records necessary to establish he or she is

entitled to the deductions. Sec. 6001; Hradesky v. Commissioner,

supra. A taxpayer shall keep such permanent records or books of

account as are sufficient to establish the amount of deductions

claimed on the return. Sec. 6001; sec. 1.6001-1(a), (e), Income

Tax Regs. The Court need not accept a taxpayer’s self-serving

testimony when the taxpayer fails to present corroborative

evidence. Beam v. Commissioner, T.C. Memo. 1990-304 (citing

Tokarski v. Commissioner, 87 T.C. 74, 77 (1986)), affd. without

published opinion 956 F.2d 1166 (9th Cir. 1992).

If a taxpayer establishes that he or she paid or incurred a

deductible business expense but does not establish the amount of

the deduction, this Court may approximate the amount of the

allowable deduction, bearing heavily against the taxpayer whose

inexactitude is of his or her own making. Cohan v. Commissioner,

39 F.2d 540, 543-544 (2d Cir. 1930). For the Cohan rule to
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apply, however, a basis must exist on which this Court can make

an approximation. 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

(5th Cir. 1957). Against this background, we consider the

categories of expense for which there remain amounts in dispute.

First, petitioners contest respondent’s disallowance of

repair and maintenance expenses. At trial, petitioner presented

documents regarding these expenses, all of which we find

insufficient. Almost all the documents submitted were invoices

rather than receipts. While petitioner would have us believe

that receipts and invoices are one and the same thing, we

disagree. An invoice is a “written account of goods or services

to be provided,” while a receipt is a “writing acknowledging the

receiving of *** money.” Webster’s New International Dictionary

1190, 1894 (3d ed. 1993). 

In addition to petitioner’s erroneous usage of invoices as

receipts, we find petitioner’s documents lacking in other

respects. Many of the documents are undated. Petitioner assured

the Court that each of these expenses was properly claimed in the

year it was allegedly incurred because he found the documentation

in a box with other dated documents. Yet petitioner offered no

testimony or evidence showing this record-keeping “system” was

free from error or manipulation. Petitioner introduced some
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dated documentation but failed to provide proof of payment. For

expenses attributed to a document that lacks a date or is

otherwise inadequate proof of payment, the only available

evidence that the expense was incurred in the year it was claimed

or was actually paid is petitioner’s own self-serving testimony,

which we are not required to accept, and which we do not, in

fact, find to be credible. See Niedringhaus v. Commissioner, 99

T.C. 202, 219 (1992). 

Petitioner introduced some documents that indicate date and

payment; yet we find the documents or petitioner’s explanations

not credible. For example, petitioner submitted documents he

himself wrote because he claimed he used service providers that

could not read or write but did not offer testimony from any of

these alleged service providers. We also do not find

petitioner’s explanations for the invoices from his invoice book

and those with alterations to be credible. None of these

invoices was accompanied by third-party testimony. 

Second, petitioners contest respondent’s disallowance of

supplies expenses. We note that petitioner submitted many

invoices to support his deductions for supplies. Petitioner

failed, however, to submit corresponding receipts, canceled

checks, or credit card statements that would have shown he paid

the amounts indicated on these invoices. The only available
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evidence to that effect is petitioner’s own self-serving

testimony, which we do not find to be credible. Id.

Finally, with respect to the office, bad debt, advertising,

and taxes and licenses expenses, petitioner vaguely described

what he incurred. Petitioner did not, however, introduce any

documentation to show the amount of any of these expenses. For

the insurance, interest, depreciation, and legal and professional

expenses, petitioners offered nothing. 

We conclude that petitioners failed to substantiate any

repair and maintenance, supplies, bad debt, office, insurance,

interest, depreciation, advertising, taxes and licenses, and

legal and professional expenses, and thus they are not entitled

to any deduction beyond what respondent previously allowed. No

additional amount may be estimated under the Cohan rule because

there is no basis to do so. See Vanicek v. Commissioner, supra

at 742-743. 

II. Section 274(d) Expenses

 We turn next to the business expenses that are subject to the

strict substantiation requirements of section 274(d). In

addition to the general substantiation requirements, taxpayers

must substantiate certain business expenses, such as car and

truck, travel, and meals and entertainment expenses, by adequate

records or by sufficient evidence corroborating the taxpayer’s

own statement. Sec. 274. The substantiation must show the
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amount of such expense or other item, the time and place of the

expense, the business purpose of the expense, and the business

relationship to the taxpayer of the person entertained. See sec.

274(d); sec. 1.274-5T, Temporary Income Tax Regs., 50 Fed. Reg.

46014 (Nov. 6, 1985). We may not estimate expenses subject to

the strict substantiation requirements. Sanford v. Commissioner,

50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d 201 (2d Cir.

1969).

Petitioner contests respondent’s disallowance of car and

truck, travel, and meals and entertainment expenses. Petitioners

offered no testimony as to what car and truck, travel, and meals

and entertainment expenses were incurred and introduced no

documentation. We conclude that petitioners have failed to

substantiate any of the expenses subject to the strict

substantiation requirements of section 274(d) and therefore are

not entitled to any deduction beyond what respondent previously

allowed. 

III. Unreported Rental Income

We now address whether petitioners failed to report $3,424

of rental income in 1996 as respondent determined. Petitioners

did not introduce any evidence at trial regarding respondent’s

determination of the unreported rental income and did not address

this determination in their brief. We conclude that petitioners
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5Respondent determined in the alternative that petitioners

are liable for the accuracy-related penalty for substantial

understatements of income tax under sec. 6662(b)(2) for the years

at issue. Because of our holding on the negligence issue, we

need not consider whether the underpayments were also substantial

understatements.

have conceded this issue by not pursuing it on brief. See

Nicklaus v. Commissioner, 117 T.C. 117, 120 n.4 (2001); Rybak v.

Commissioner, 91 T.C. 524, 566 n.19 (1988). 

IV. Accuracy-Related Penalty

We next consider whether petitioners are liable for the

accuracy-related penalty under section 6662(a) due to negligence

for each of the years at issue, as respondent determined. 

Petitioners bear the burden of production as well as the burden

of proof with respect to the accuracy-related penalty because the

examination commenced before section 7491(c) became effective. 

Rule 142(a); Bixby v. Commissioner, 58 T.C. 757, 791-792 (1972). 

A taxpayer is liable for an accuracy-related penalty for any

part of an underpayment attributable to, among other things,

negligence or disregard of rules or regulations.5 Sec. 6662(a)

and (b)(1). Negligence is the lack of due care or failure to do

what a reasonable and ordinarily prudent person would do under

the circumstances. Neely v. Commissioner, 85 T.C. 934, 947

(1985). Negligence includes any failure by the taxpayer to keep

adequate books and records or to substantiate items properly. 

Sec. 1.6662-3(b)(1), Income Tax Regs. 
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Petitioners submitted insufficient documentation for a few

expenses, and had no documentation for the majority of the

expenses claimed. We have found that petitioners failed to

substantiate adequately any of the claimed business expense

deductions in dispute. Accordingly, we find that petitioners

were negligent in failing to substantiate any of their claimed

expenses. 

The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment, however, if there was

reasonable cause for the taxpayer’s position with respect to that

portion and the taxpayer acted in good faith with respect to that

portion. Sec. 6664(c)(1); sec. 1.6664-4(b), Income Tax Regs. 

The determination of whether a taxpayer acted with reasonable

cause and in good faith is made on a case-by-case basis, taking

into account all pertinent facts and circumstances, including the

taxpayer’s efforts to assess his or her proper tax liability and

the knowledge and experience of the taxpayer. Sec. 1.6664-

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

Petitioners argue that they acted with reasonable cause

regarding the disallowed deductions, citing respondent’s

concessions. We disagree. While petitioners correctly assert

that many of the expense adjustments respondent determined have

been reduced by agreement of the parties, petitioners failed to

substantiate any of the disputed expenses. Petitioner is a
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knowledgeable and experienced businessman. He is a certified

financial planner, runs his own businesses, and prepared

petitioners’ returns, which included detailed depreciation

schedules. Despite this, petitioners claimed deductions for

hundreds of thousands of dollars of business expenses, none of

which they could substantiate. Petitioners failed to convince

the Court they took the requisite effort to determine their

proper tax liability considering petitioner’s knowledge and

experience. We find that petitioners did not prove that the

underpayments of income tax for the years at issue were due to

reasonable cause and that they acted in good faith. Accordingly,

we conclude that petitioners are liable for the accuracy-related

penalty for each of the years at issue.

 To reflect the foregoing and the concessions of the

parties,

Decision will be entered

under Rule 155.