T.C. Summary Opinion 2004-55

UNITED STATES TAX COURT

MICHAEL T. HINES, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16172-02S. Filed May 12, 2004.

Michael T. Hines, pro se.

Ron S. Chun, for respondent.

PAJAK, Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed. Unless otherwise

indicated, section references are to the Internal Revenue Code in

effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure. The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.
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Respondent determined a deficiency of $9,500 in petitioner’s

2000 Federal income tax and an accuracy-related penalty of

$1,897. After concessions by petitioner of many items of

unreported income, this Court must decide: (1) Whether

petitioner may deduct unreimbursed partnership expenses which

were not claimed on his individual income tax return, and (2)

whether petitioner is liable for the accuracy-related penalty

under section 6662(a).

Some of the facts in this case have been stipulated and are

so found. Petitioner resided in Glendale, California, at the

time he filed his petition. 

Because petitioner has not complied with the substantiation

requirements of section 7491(a)(2), the burden of proof as to

facts relevant to the deficiency remains on petitioner. Rule

142(a). Petitioner also has the burden of proof as to liability

for the penalty, although respondent has the initial burden of

production with respect to its applicability. Sec. 7491(c);

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

During taxable year 2000, petitioner was a general partner

in the partnership Hines & Hunt Entertainment (Hines & Hunt). 

Hines & Hunt was in the business of entertainment management. 

Petitioner was a personal manager and represented actors and

actresses. 

For taxable year 2000, Hines & Hunt filed a Form 1065, U.S.
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Return of Partnership Income, which showed total income of

$332,973, total deductions of $233,899, and ordinary income of

$99,074. The Schedule K-1, Partner’s Share of Income, Credits,

Deductions, etc., attached to Form 1065, reported petitioner’s

half share of the $99,074 as $49,537. 

Petitioner reported total partnership income of $16,122 on

Schedule E, Supplemental Income and Loss, attached to his Form

1040, U.S. Individual Income Tax Return. Petitioner now concedes

that the $49,537 reported on Schedule K-1 should have been

reported on Schedule E, but claims that only $16,122 should be

subject to income tax because petitioner incurred unreimbursed

partnership expenses totaling $33,415. 

It is well settled that a partner may not directly deduct

partnership expenses on his individual tax return. Cropland

Chem. Corp. v. Commissioner, 75 T.C. 288, 295 (1980), affd.

without published opinion 665 F.2d 1050 (7th Cir. 1981);

Wallendal v. Commissioner, 31 T.C. 1249, 1252 (1959). An

exception applies when there is an agreement among the partners

in a partnership agreement, or in a routine partnership practice

tantamount to an agreement, which calls for a partner to pay

partnership expenses from his own funds. Cropland Chem. Corp. v.

Commissioner, supra at 295; Wallendal v. Commissioner, supra at

1252; Klein v. Commissioner, 25 T.C. 1045, 1051-1052 (1956).

The partnership claimed total deductions of $233,899 on its
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tax return. The partnership agreement specifically provides that

“The Partnership shall have a non-reimbursement policy when

expenses are incurred outside the partnership.” There is no

partnership provision requiring petitioner as a partner to pay

partnership expenses from his own funds.

Petitioner contends that he and his partner had a verbal

agreement that petitioner would not seek reimbursement from the

partnership for expenses he paid. Petitioner offered no

evidence, other than his own oral testimony, that such an

agreement existed or that he was required under such agreement to

pay partnership expenses from his own funds. It is well

established that this Court is not bound to accept a taxpayer’s

self-serving, unverified, and undocumented testimony. Shea v.

Commissioner, 112 T.C. 183, 189 (1999); Tokarski v. Commissioner,

87 T.C. 74, 77 (1986). Whether or not petitioner ever made any

alleged unreimbursed payments, petitioner was not required by the

partnership agreement to make such payments, nor did petitioner

prove there was a level of routine partnership practice

tantamount to an agreement to do so. 

On this record, we conclude that petitioner is not entitled

to deduct the unreimbursed partnership expenses in issue on his

individual income tax return. 

We next consider whether petitioner is liable for the

accuracy-related penalty under section 6662(a). Respondent has
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satisfied his burden of production with respect to this penalty. 

Section 6662(a) imposes a 20-percent penalty on the portion of

any underpayment of tax attributable to negligence or disregard

of rules or regulations. Sec. 6662(b)(1). Negligence is any

failure to make a reasonable attempt to comply with the

provisions of the internal revenue laws. Sec. 6662(c). 

Moreover, negligence is the failure to exercise due care or

failure to do what a reasonable and prudent person would do under

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

(1985). Disregard includes any careless, reckless, or

intentional disregard of rules or regulations. Sec. 6662(c);

sec. 1.6662-3(b)(2), Income Tax Regs. No penalty will be imposed

with respect to any portion of any underpayment if it is shown

that there was a reasonable cause for such portion and that the

taxpayer acted in good faith with respect to such portion. Sec.

6664(c).

In this case, section 6664(c) has not been satisfied. 

Although petitioner had access to tax advisers, nothing in the

record indicates that he had any basis for believing that he

could personally deduct the alleged expenses in issue. Such

action is not that of a prudent and reasonable person in

business. We conclude that petitioner was negligent and is

liable for the accuracy-related penalty under section 6662(a) as

determined by respondent.
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Contentions we have not addressed are irrelevant, moot, or

meritless.

Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered

for respondent.