T.C. Memo. 2002-239

UNITED STATES TAX COURT

ROBERT M. JOHNSON AND JANNA D. BEGOLE, f.k.a. 

JANNA D. JOHNSON, Petitioners v. 

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 20299-98. Filed September 24, 2002.

Robert M. Johnson and Janna D. Begole, pro sese.

Ross M. Greenberg, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

SWIFT, Judge: Respondent determined deficiencies in

petitioners’ Federal income taxes, an addition to tax, and

accuracy-related penalties for 1992 and 1993 in the following

amounts:
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Accuracy-Related

 Addition to Tax Penalty

 Year Deficiency Sec. 6651(a) Sec. 6662(a) 

 1992 $ 7,065 -- $1,413 

 1993 11,982 $1,325 2,396

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

The issues for decision are: (1) Whether petitioner

Robert M. Johnson’s S corporation had unreported income for 1992

and 1993; (2) whether petitioner Robert M. Johnson’s

S corporation overstated a portion of its deductions for 1992 and

1993; (3) whether petitioners are entitled to additional itemized

deductions for 1992 and 1993; and (4) whether petitioners are

liable for the addition to tax and accuracy-related penalties.

FINDINGS OF FACT

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

At the time the petition was filed, petitioners, former

husband and wife, resided in Florida. Hereinafter, all

references to petitioner in the singular are to Robert M.

Johnson.

During the years in issue, petitioner, an attorney, was the

sole shareholder of DUI Legal Centers, Inc. (DUI), an S law

corporation with multiple offices located in Tampa, Sarasota,
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Ft. Lauderdale, Orlando, and West Palm Beach, Florida. 

Petitioner and DUI specialized in representing clients charged

with driving under the influence of alcohol.

In connection with client representations, petitioner

frequently traveled to various courthouses throughout Florida,

including courthouses located in Clearwater, Dade City,

Ft. Lauderdale, Kissimmee, Manatee, New Port Richey, Orlando,

Plant City, Sanford, Sarasota, St. Petersburg, Tampa, Tarpon

Springs, Venice, and West Palm Beach. 

During 1992 and 1993, Janna D. Begole (Begole), petitioner’s

former wife, was a paralegal at DUI, and Louis Johnson (Johnson),

petitioner’s father, was the office manager at the DUI office

located in Sarasota, Florida. 

During the years in issue, DUI received payments for legal

services rendered. The payments were received via credit cards,

personal checks, and cash. DUI maintained bank accounts at banks

located in Tampa, Sarasota, and Orlando, Florida, and one of

those three accounts was the designated bank account for each of

DUI’s respective offices. 

During 1992 and 1993, all credit card authorization slips

received at the various DUI offices in payment for legal services

were forwarded to and deposited by Johnson into DUI’s account

located in Sarasota, Florida. In 1993, Johnson, on behalf of
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DUI, deposited $33,025 in credit card authorization slips into

DUI’s bank account. 

Cash and checks received at the various DUI offices for

legal services rendered were deposited into the DUI bank account

designated for that office. 

During 1992 and 1993, Johnson periodically wrote checks,

drawn on the DUI account in Sarasota in favor of DUI or cash, and

mailed the checks to DUI’s Tampa office for deposit by petitioner

or by other DUI personnel into DUI’s account in Tampa (interbank

transfers).

For 1992 and 1993, DUI’s books and records and petitioner’s

personal books and records were incomplete and inadequate. 

DUI reported on its 1992 and 1993 S corporation Federal

income tax returns gross receipts of $473,156 and $429,186,

respectively.

On audit, using the bank deposits method, respondent

determined that DUI had gross income not reported on DUI’s 1992

and 1993 tax returns of $8,343 and $18,232, respectively.

Respondent calculated the amount of DUI’s interbank

transfers after meeting with Nick Ligori (Ligori), petitioner’s

accountant. Ligori provided respondent with a record prepared by

Ligori that established interbank transfers of $40,850 for 1992

and $12,356 for 1993, including transfers of funds from DUI’s

account in Sarasota to its account in Tampa. For 1993, Ligori
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provided to respondent’s Appeals officer a canceled check as

evidence of an additional $4,000 interbank transfer, and

respondent credited DUI for the additional $4,000 interbank

transfer when determining DUI’s unreported income for 1993.

Set forth below is a summary schedule that reflects

respondent’s calculation of DUI’s unreported gross income for

1992 and 1993:

 1992 1993 

Bank Deposits $ 548,309 $ 488,841

Less Reductions 

 Returned Checks (18,812) (17,179)

 Refunds to Clients (7,148) (7,888)

 Interbank Transfers (40,850) (16,356)

Gross Receipts $ 481,499 $ 447,418

Gross Receipts as Reported (473,156) (429,186)

 Unreported Gross Income $ 8,343 $ 18,232

 On its S corporation tax returns for 1992 and 1993, DUI

claimed as “other deductions” business expenses of $27,020 and

$65,336, respectively. 

On audit, respondent determined that a portion of DUI’s

claimed business deductions for the years in issue was not

allowable. The deductions claimed by DUI and the amounts

disallowed and allowed by respondent are reflected in the

schedule below: 
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 1992 

 Respondent Respondent

 Claimed Disallowed Allowed 

Credit Card Charges $ 8,177 $ 6,711 $ 1,466

Client Costs 1,069 489 580

Expense Reimbursement 10,319 1,170 9,149

Miscellaneous 1,845 966 879

Meals/Entertainment 5,610 2,906 2,704

 Total $27,020 $12,242 $14,778

 1993 

 Respondent Respondent

 Claimed Disallowed Allowed 

Credit Card Charges $ 9,705 $ 6,781 $ 2,924

Client Costs 22,925 17,797 5,128

Expense Reimbursement 10,927 2,365 8,562

Professional Dues 20,124 8,001 12,123

Meals/Entertainment 1,655 331 1,324

 Total $65,336 $35,275 $30,061

On their individual joint Federal income tax returns for

1992 and 1993, petitioners claimed $20,792 and $25,594,

respectively, as Schedule A itemized deductions for vehicle

expenses, parking fees, travel expenses, and meals and

entertainment expenses (hereinafter collectively referred to as

job expenses) incurred by petitioners in their capacities as

employees of DUI.

On audit, relying largely on petitioner’s travel log,

respondent allowed for each year $2,054 for vehicle expenses and

$223 for parking fees after determining that petitioner in 1992

and in 1993, in his capacity as an employee of DUI, made 21 trips 

in his personal vehicle at an average of 300 miles per trip. 
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1 Respondent’s examination of petitioners’ 1992 and 1993

joint Federal income tax returns began in 1996. Accordingly, the

shift in the burden of proof or of production that is available

in some circumstances under sec. 7491 is not applicable. 

Respondent disallowed the balance of the claimed Schedule A

itemized deductions relating to job expenses.

Petitioners filed their 1993 joint Federal income tax return

on November 9, 1994, almost 7 months late.

OPINION

Generally, respondent’s deficiency determinations are

presumed correct, and the burden of proof is on taxpayers to show

that respondent’s determinations are incorrect.1 Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933). Taxpayers are

expected to keep adequate records reflecting their income and

expenses. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs. 

Where taxpayers fail to maintain adequate books and records,

respondent is allowed to reconstruct the taxpayers’ income by any

reasonable method. Sec. 446(b); Erickson v. Commissioner, 937

F.2d 1548, 1553 (10th Cir. 1991), affg. T.C. Memo. 1989-552;

Parks v. Commissioner, 94 T.C. 654, 658 (1990).

DUI’s Gross Income

The bank deposits method has long been sustained by the

courts as a means of computing unreported income. Clayton v.

Commissioner, 102 T.C. 632, 645 (1994); DiLeo v. Commissioner, 96
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T.C. 858, 867 (1991), affd. 959 F.2d 16 (2d Cir. 1992). 

Particularly where taxpayers fail to keep adequate records, bank

deposits constitute prima facie evidence of income. Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986). 

For 1992, petitioners do not contest respondent’s bank

deposits calculation of DUI’s gross income. For 1993,

petitioners argue that $16,669 of the $18,232 unreported income

of DUI as calculated by respondent represents additional

nontaxable interbank transfers for which petitioners should be

given credit. Petitioner testified generally that the standard

practice of DUI was to transfer all of the funds received in the

form of credit card authorization slips and initially deposited

into DUI’s bank account located in Sarasota, Florida, to DUI’s

bank account located in Tampa, Florida. Begole testified only

that some of DUI’s funds received and deposited represented

interbank transfers, and petitioner did not call Johnson or

Ligori to testify even though they likely were in the best

positions to know the specifics relating to the interbank

transfers. Petitioner did not offer sufficient corroborating

evidence regarding the alleged additional interbank transfers to

the DUI bank account located in Tampa, Florida, and we find

petitioner’s testimony unpersuasive.

We sustain respondent’s determinations of DUI’s unreported

gross income for 1992 and 1993. 
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DUI’s Claimed Business Expenses

Section 162 allows deductions for ordinary and necessary

expenses incurred in carrying on a trade or business. Deductions

are a matter of legislative grace, and taxpayers generally have

the burden of showing they are entitled to the deductions

claimed. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 84 (1992).

Where taxpayers are unable to fully justify their

entitlement to claimed business deductions, this Court may

approximate the amount of allowable business deductions, bearing

heavily against the taxpayer whose inexactitude is of his own

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

1930). For the Cohan rule to apply, however, a basis should

exist on which an approximation can be made by this Court. 

Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

 Petitioner has not established any evidentiary basis

justifying an application of the Cohan rule, and petitioner has

not met his burden of proving his entitlement to additional

business expense deductions. We sustain respondent’s

determination of DUI’s allowable business expense deductions. 
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Claimed Schedule A Itemized Deductions

Petitioner’s claimed additional travel, meal, and

entertainment expenses are deductible under section 162 only to

the extent petitioner satisfies the heightened substantiation

requirements of section 274(d).

Thereunder, to support their deductibility, taxpayers are

required to substantiate by adequate records or by sufficient

evidence corroborating their own statements, the amount, time,

place, and business purpose of the claimed expenses. The section

274(d) substantiation requirements supersede the Cohan rule 

making the Cohan rule generally inapplicable for expenses covered

by section 274(d). Sec. 1.274-5T(a), Temporary Income Tax Regs.,

50 Fed. Reg. 46014 (Nov. 6, 1985).

Generally, taxpayers are required to maintain records such

as account books, diaries, logs, statements of expenses, or trip

sheets, and documentary evidence, which, in combination, are

sufficient to establish the fact and business nature of the

claimed expenses. Sec. 1.274-5T(c)(2), Temporary Income Tax

Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). 

Petitioner argues that the claimed expenses were incurred 

in his occupation as an attorney and that the expenses related to

his extensive travel making court appearances throughout Florida. 

Petitioner argues that it is obvious that he incurred more

business travel expenses than those allowed by respondent. No
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records, however, substantiate business travel expenses beyond

those allowed by respondent. Begole testified generally to

petitioner’s work schedule and travel but did not offer specific

details that would adequately substantiate the claimed expenses.

Petitioner has not adequately substantiated travel expenses

other than those vehicle expenses and parking fees allowed by

respondent.

Addition to Tax and Penalties

Section 6651(a)(1) imposes additions to tax where taxpayers

fail to timely file income tax returns unless the failure is due

to reasonable cause. To establish reasonable cause, taxpayers

must show that they exercised ordinary business care and prudence 

but were still unable to file their tax returns by the due dates. 

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

untimely filing of tax returns is due to reasonable cause raises

a question of fact. Denenburg v. United States, 920 F.2d 301,

303 (5th Cir. 1991).

Petitioner cites “unusual” personal circumstances and

excessive work for DUI as the reasons for his lack of records and

his and Begole’s inability to timely file their 1993 income tax

return.

Petitioners have not established reasonable cause as to why,

with the help of their accountant, they were unable to file on

time their 1993 Federal income tax return. We sustain
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respondent’s determination of the addition to tax for

petitioners’ failure to timely file their 1993 Federal income tax

return.

Section 6662(a) imposes a penalty of 20 percent on

underpayments of tax attributable to negligence or to disregard

of rules and regulations. The definition of negligence includes

the failure by taxpayers to properly and adequately maintain

books and records. Sec. 1.6662-3(b)(1), Income Tax Regs. 

We sustain respondent’s determination of the accuracyrelated penalties for 1992 and 1993.

Decision will be entered for

respondent.