T.C. M em o . 2 0 1 8 -2 7 UNITED STATES TAX COURT

RJ CHANNELS, INC., ET AL., 1 Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo s . 2 5 1 5 1 -1 5 , 1 1 95 5 -1 6 , Fi l edM arch 1 4 , 2 01 8

.

1 19 5 7 -1 6

.
W al t er D. Ch an n el s , fo r p et i t i o n ers . M i n dy S. M ei g s , fo r res po n d en t
.

M EM ORANDUM FINDINGS OF FACT AND OPINION CHIECHI, J ud g e: Res p o n d en td et erm in eda d efi ci en cy i n , an dan accu racy rel at ed p en al t y

u n d er s ect io n 6 6 6 2 (a) 2 o n , th e Fed eral i n co m e t ax (t ax ) o f each p et i t i o n er fo r t h e t ax ab l e y ear i n d i cat ed , as fo l l o ws :

1 Cas es o f t h e fo l l owi ng p et i t i o n ers are co n s o l i d at edh erewi t h : Ch an n el s & Ch an n el s , In c., d o ck etNo . 1 1 9 5 5 -1 6 ; an dRJ Ch an n el s , In c., d o ck etNo
. 1 1 9 5 7 -1 6

.

2 Al l s ect i o n referen ces are t o t h e In tern al Rev en u e Co d e i n effect fo r t h e t ax ab l e y ears ati s s u e. Al l Ru l e referen ces are t o t h e Tax Co u rtRu l es o f Pract i ce an d Pro cedu re.- 2

-

[* 2] Pet i t i o n er Tax ab l e Y ear En d ed Defi ci en cy Accu racy -Rel at edPen al t y U nd er Sec. 6 6 6 2(a) RJ Ch an n el s , In c. 5 / 31 / 2 0 1 2 $ 2 3 4 , 9 4 0 $ 4 6 , 9 8 8 .0 0 Ch an n el s & Ch an n el s , In c. 1 2 / 31 / 2 0 1 2 2 1 5 , 0 8 1 4 3 ,0 1 5 .6 0 RJ Ch an n el s , In c. 5 / 31 / 2 0 1 3 1 3 6 , 1 5 1 2 7 ,2 3 0 .2 0 Th e i s s u es rem ai n i n g fo r d eci s i o n are: (1 ) Are cert ai n am o u nt s o f cl i en tfees t h atRJ Ch an nel s , In c., recei v ed du ri n g each o f i t s t ax ab l e y ears th aten d ed o n M ay 3 1 , 2 0 12 an d2 0 13 , i n cl u d i b l e i n i ts g ro s s i n co m e fo r t h e t ax ab l e y ear i n wh i ch i trecei v ed t ho s e fees ? W e h o l d t h atth ey are. (2 ) Is RJ Ch an n el s , In c., en t i tl edt o d edu ctfo r i t s t ax ab l e y ear t h aten d edo n M ay 3 1 , 2 0 1 2 , cert ai n ex p en s es p ai d o n b eh al f o f cert ai n o f i t s cl i en t s ? W e h o l d t h ati ti s n o t
. (3 ) Is RJ Ch an n el s , In c., en t i tl edt o d edu ctfo r i t s t ax ab l e y ear t h aten d edo n M ay 3 1 , 2 0 1 3 , a cert ai n am ou n twi t h res p ectt o a cl ai m edco n ti n g en tl i ab i l it y ? W e h o l dth ati ti s n o t
. (4 ) Is RJ Ch an n el s , In c., en t i tl edfo r each o f i t s t ax ab l e y ears t h aten d edo n M ay 3 1 , 2 0 1 2 an d2 0 1 3 , t o cert ai n cl ai m edm i scel l an eo u s d edu ct io n s i n ex ces s o f t h o s e t h atres p o nd en tal l o wed ? W e h o l dt h ati t i s n o t
.- 3

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[* 3 ] (5 ) Is RJ Ch an n el s , In c., l i ab le fo r each o f i ts t ax ab l e y ears t h aten d edo n M ay 3 1 , 2 0 1 2 an d2 0 1 3 , fo r t h e accu racy -rel at ed p en al t y u n d er s ect i o n 6 6 6 2 (a)? Pu rs u an t t o th e s t ip u l at i o n s o f t h e p art i es , i ti s l i ab l e fo r t h o s e p en al t i es . (6 ) Is Ch an nel s & Ch an n el s , In c., en t i t l edt o d edu ctfo r i t s t ax ab l e y ear 2 0 1 2 cert ai n ex p en s es p ai do n b eh al f o f cert ai n o f i t s cl i en t s ? W e h ol dt h ati ti s n o t
. (7 ) Is Ch an nel s & Ch an n el s , In c., en t i t l edfo r i t s t ax ab l e y ear 2 0 12 t o cert ai n cl ai m edm i s cel l an eo us d edu ct io n s i n ex ces s o f t h o se t hatres po n d en tal l o wed ? W e h o l dth ati ti s n o t
. (8 ) Is Ch an nel s & Ch an n el s , In c., l i ab l e fo r i t s t ax ab le y ear 2 01 2 fo r t h e
accu racy -rel at edp en al ty

u n d er s ect i o n 6 6 62 (a)? Pu rs uan tt o t h e s t i p u l at i o n s o f t h e p art i es , i t i s l i ab l e fo r t h atp en al t y . FINDINGS OF FACT 3 So m e o f t h e fact s h av e b een s ti p u lat ed an dare s o fo u n d. Th e p ri n ci p al o ffi ce o f p et i t i o n er, RJ Ch an n el s , In c. (RJ C), was i n Cal i fo rn i a atthe t i m e i tfi l edth e res pect i v e p et i t i o ns i n t h e cas es atd o ck etNo s . 2 5 1 5 1 -1 5

3 Un l es s o t h erwi s e i nd i cat ed , o u r fi nd i n g s o f fact as t h ey rel at e t o p et i t i o n er, RJ Ch an nel s , In c., p ert ai n t o i t s t ax ab l e y ears en d ed o n M ay 3 1 , 2 0 1 2 an d2 0 1 3 (TYE 5 / 3 1 / 1 2 an dTYE 5 / 3 1 / 1 3, res p ect i v el y ), t h e t ax ab l e y ears ati s su e i n t h e cas es atd o ck etNo s. 2 5 1 5 1 -1 5 an d1 1 9 5 7 -1 6 (s o m et i m es , RJ C’ s cas es ), an do u r fi nd i ng s o f fact as they

rel at e t o p et i ti o n er, Ch an n el s & Ch an n el s, In c., p ert ai n t o t h e t ax ab l e y ear 2 0 12 , th e t ax ab l e y ear at i s s u e i n t h e cas e atd ock etNo . 1 1 9 5 5 -1 6 (s o m et i m es , C&C’ s cas e).- 4

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[* 4 ] an d 1 1 9 57 -1 6 . Th e p ri n ci p al o ffi ce o f p et i t i o ner, Ch an n el s & Ch an n el s , In c. (C&C), was i n Cal i fo rn ia atth e t i m e i tfi l ed t h e p et i t io n i n t h e cas e atd o ck etNo
. 1 1 9 5 5 -1 6

. RJ C Back g ro u n d RJ C, wh i ch was t ax edas a s ub ch ap t er C co rp o rat io n , m ai n t ai n edi t s b o o k s
an d reco rd s an d fi l edi ts t ax retu rn s u s in g t h e accru al m etho do f acco u n t i n g an d

u s ed a fi s cal y ear an da t ax ab l e y ear en d i n g o n M ay 3 1 . Ro n al dJ . Ch an n el s (M r. Ch an n el s ), an en ro ll edag en tan dretu rnp rep arer, o wn ed1 0 0 p ercen t o f RJ C an d

was an o ffi cer o f t h atco m p an y . RJ C was en g ag edi n t h e b u s i n es s o f p ro v i d i n g t ax
s erv i ces , p ri m ari l y

retu rn p rep arat i o n s erv i ces . It m ai n t ai n edcert ai n acco un t s at

v ari o u s b an k s , i n cl u d i n g a ch eck i n g acco u ntatW el l s Farg o Ban k (RJ C’ s W el l s Farg o acco u nt ). Cert ai n Cl i en tFees Recei v edb y RJ C Eri c Bet zl er (M r. Bet zl er) ret ai n ed RJ C i n Feb ru ary 2 0 1 2 t o p ro v i d e cert ai n Fed eral t ax s erv i ces t o h i s wi fe, Cyn t h ia Bet zl er (M s . Bet zl er), an dh i m (RJ C’ s Bet zl er t ax s erv i ces ). 4 OnFeb ru ary 2 9 , 2 0 1 2 , M r. Bet zl er g av e M r. Ch an n el s a

4 W e s hal l s o m et i m es refer co l l ect i v el y t o M r. Bet zl er an d M s . Bet zl er as th e Bet zl ers .- 5

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[* 5 ] ch eckfo r $ 15 0 ,0 0 0 (TYE 5 / 3 1 / 1 2 Bet zl er fees ) as p aym en t fo r RJ C’ s Bet zl er t ax s erv i ces , wh ich was p ro m p t l y d ep o s i t edi n to RJ C’ s W el l s Farg o acco u n t . M r. Ch an n el s , o n b eh al f o f RJ C, i n fo rm edM r. Bet zl er t h ati f RJ C were u n ab l e t o
o b t ai n a fav o rab l e res ul t fo r t h em as a res ul to f RJ C’ s Bet zl er t ax s erv i ces , RJ C

wo u l drep ay

t o the Bet zl ers t h e TYE 5 /3 1 / 1 2 Bet zl er fees t h ati th adrecei v edfro m t h em . RJ C’ s retu rn o f t h e TYE 5 / 31 / 1 2 Bet zl er fees t h ati th adrecei v edwas t h u s
s ub jectt o a co n di ti o n s ub seq u en t
. Atn o t i m e d i dth e Bet zl ers p lace an y res t ri ct i on s o n RJ C’ s u s e o f th e TYE 5 / 3 1 / 1 2 Bet zl er fees th atthey h adp ai dt o i t
. RJ C i s s u edch eck s an d/ o r wi t h d rew
m o ney s fro m

RJ C’ s W el l s Farg o acco u n twh en ev er i td eem edi tap p ro p ri at e t o d o
s o . RJ C d i dn o tretu rn t o t h e Bet zl ers t h e TYE 5 / 3 1 /1 2 Bet zl er fees

. M r. Bet zl er d i edo n J u ly

2 4 , 2 0 1 2 . Aro un d Sep t em b er 7 , 2 0 1 2 , M s . Bet zl er, wh o wan t edRJ C t o co n ti n u e t o p ro v i de t o h er RJ C’ s Bet zl er t ax s erv i ces , g av e M r. Ch an n el s a ch eckfo r $ 1 5 3 ,6 0 0 (TYE 5 / 3 1 / 1 3 Bet zl er fees ) as an ad d i t i o n al p aym en t fo r t h o s e s erv i ces , wh i ch was p ro m p tl y d ep o s i tedi n t o RJ C’ s W el l s Farg o
acco u n t
. M r. Ch an n el s, o n b eh al f o f RJ C, i n fo rm edM s . Bet zl er t h ati f RJ C were

u n ab le t o o b t ai n a fav o rab l e res u l t fo r h er as a res u l to f t h e RJ C Bet zl er t ax
s erv i ces , RJ C wo u l d rep ay t o h er n o t o n ly

t h e TYE 5 / 3 1 / 1 2 Bet zl er fees b u tal s o t h e TYE 5 / 3 1 / 13 Bet zl er fees (s o m et i m es co l l ect i v el y , RJ C’ s t o t al Bet zl er fees )- 6

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[* 6 ] th ati th adrecei v edfro m them . RJ C’ s ret u rn o f t h e TYE 5 / 3 1 / 1 3 Bet zl er fees t h ati th adrecei v edwas t h u s s ub jectt o a co n d i t i on s ub s equ en t
. Atn o t i m e d i dM s . Bet zl er p l ace an y res t ri ct i o n s o n RJ C’ s u s e o f t h e TYE 5 / 3 1 / 1 3 Bet zl er fees th ats h e h adp ai dt o i t . RJ C d i dn o tretu rn t o M s . Bet zl er t h e TYE 5 / 3 1 / 1 3 Bet zl er fees

. Caren Wy at t(M s. Wy at t ) ret ai nedRJ C aro u n dAp ri l 2 01 2 t o p ro v i de cert ai n Fed eral t ax s erv i ces t o h er (RJ C’ s Wy at t t ax s erv i ces ). OnAp ri l 1 2 , 2 0 1 2 , M s . Wy at t g av e M r. Ch an n el s a ch eckfo r $ 6 5 ,0 0 0 (TYE 5 / 31 / 1 2 Wy at tfees ) as p ay m en tfo r RJ C’ s Wy at t t ax s erv i ces , wh i ch was p ro m pt l y d ep o si t edi n t o RJ C’ s W el l s Farg o acco u n t
. M r. Ch an n el s , o n b eh al f o f RJ C, i n fo rm edM s . Wy at tt h ati f RJ C were u n ab l e t o o b t ai n a fav o rab l e res ul tfo r h er as a res u l to f RJ C’ s Wy at tt ax
s erv i ces , RJ C wo u l d rep ay t o h er t h e TYE 5 / 3 1 / 1 2 Wy at tfees t h at i th adrecei v ed fro m h er. RJ C’ s ret u rno f t h e TYE 5 / 3 1 / 1 2 Wy at t fees t h ati th adrecei v edwas t h u s s ub ject t o a co nd i t i o n s ub s eq u en t. Atn o t i m e d i dM s . Wy at tp l ace an y res t ri ct io n s o n RJ C’ s u s e o f th e TYE 5 / 3 1 / 1 2 Wy at tfees th ats h e h adp ai dt o i t . RJ C d i d n o t ret u rn t o M s . Wy at tt h e TYE 5 / 3 1 / 1 2 Wy at t fees

. As o f t h e cl o se o f RJ C’ s TYE 5 / 3 1 / 1 3 , RJ C’ s W el ls Farg o acco u n ts h o wed

a n eg at i v e b al an ce.- 7

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[* 7 ] Paym en to f Cert ai n Cl i en tEx p en s es Du ri n g i t s TYE 5 / 3 1 / 1 2 , RJ C p ai do n b eh al f o f cert ai n o f i t s cl i en t s cert ai n
o b l i g at i o ns o f t h o s e cl ien t s (1 ) fo r “ Leg al an dPro fes s i on al Fees ” t o t al i n g $ 7 7 5

an d (2 ) fo r “ Tax es ” t o tal i n g $ 1 ,7 5 0 .4 6 (co l l ect i vel y , TYE 5 /3 1 / 1 2 cl i en tex p en s es p ai db y RJ C). Att im es n o tes t ab l i s hedb y t h e reco rdaft er RJ C p ai dt h o s e cl i en t
ex p en s es , RJ C’ s cl i en ts wh os e res p ect i ve ex p en s es i th adp ai do n t h ei r b eh al f rei m b u rs edRJ C fo r t h o s e ex p en s es . Du ri n g RJ C’ s TYE 5 / 3 1 / 1 2 , M r. Ch an n el s p ai d o n b eh al f o f cert ai n o f RJ C’ s cl i en t s cert ai n o b li g at i o ns o f t h o s e cl i en t s fo r “ Leg al an dPro fes s i o n al Fees ” t o t al i n g $ 2 ,9 0 0 .1 1 (TYE 5 / 31 / 1 2 cl i en tex p en s es p ai d b y M r. Ch an n el s ). Att i m es
n o tes t ab l i s h edb y

th e reco rd aft er M r. Ch an n el s p ai dt h o s e cl i en tex p en s es , RJ C’ s cl i en ts wh o s e res p ect i ve ex pen s es M r. Ch an n el s h adp ai do n t h ei r b eh al f rei m b u rs edth o s e ex pen s es . 5 RJ C’ s Cl ai m edCo nt in g en tLi ab i l i t y On Decem

b er 3 1, 2 01 2 , Den i s e Bo gard (M s . Bo g ard ) co m m en ced a l aws u i t (Bo gard l aws u i t ) ag ai n s tv ari o u s d efen d an t s , i n cl u d i n g an o rg an i zat i o n kn own as Ch an n el s & Bart h , LLP (C&B), an dM r. Ch an n el s, b ot h i n h i s i n d i v i du al cap aci t y

5 Th e reco rdd o es n o t es t ab l i s h wh et h er RJ C’ s cl i en t s rei m b u rs edRJ C o r M r. Ch an n el s fo r cert ai n ex p en s es o f cert ai n o f RJ C’ s cl ien t s t h atM r. Ch an n el s p ai d du ri n g RJ C’ s TYE 5 / 3 1/ 1 2

.- 8

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[* 8 ] an d as an ex ecu t i v e o f C&B. RJ C was n o tn am edas a d efen dan ti n t h e Bo g ardl aws u i t
. RJ C’ s Tax Retu rn s In Fo rm 1 1 20 , U.S. Co rp o rat i o n In co m e Tax Return (Fo rm 1 1 20 ), t h atRJ C fi led fo r i t s TYE 5 / 3 1 / 1 2 (TYE 5 / 3 1 / 1 2 ret u rn ), RJ C rep o rt ed$ 4 47 ,5 7 0 i n “ Gro s s recei p t s”. In t h at ret u rn , RJ C cl ai m edt h e fo ll o wi n g “ Ot h er d edu ct i o n s”, wh i ch i n cl u d edd edu ct i o n s t o t al i n g $ 5 ,4 2 5 .1 1 6 fo r “ T ax es fo r cl i en t s ” an d “ Leg al an d p ro fes s i on al ” cl ai m ed fo r t h e TYE 5 / 31 / 1 2 cl i en tex p en s es p ai d b y RJ C an dt h e TYE 5 / 3 1 / 1 2 cl i en tex p en s es p ai db y M r. Ch an n el s : 7

6 In i t s TYE 5 / 3 1 / 1 2 retu rn , RJ C ro u n d ed t o t h e n eares td o l l ar each o f t h e “ Ot h er d edu ct i o n s ” t hati t cl ai m ed

.

7 W e s hal l refer co l l ect i v el y t o t h e d educt i o n s t h atRJ C cl ai m edi n i ts TYE 5 / 3 1 / 1 2 retu rn fo r t h e TYE 5 /3 1 / 1 2 cl i en tex p en ses p ai db y RJ C an dt h e TYE 5 / 3 1 / 1 2 cl i en t ex p en s es p ai db y M r. Ch an n el s as t h e t o t al TYE 5 / 3 1 / 12 cl ai m ed cl i en t ex p en s e d edu ct i on s .- 9

- C l a i m e d “ O t h e r d e d u c t i o n s ” A m o u n t U t i l i t i e s $ 5 0 0 T r a v e l 1 3 , 3 4 0 T e l e p h o n e 4 , 5 5 4 T a x e s f o r c l i e n t s 1 , 7 5 0 S o f t w a r e 3 , 1 6 0 P r o f e s s i o n a l d e v e l o p m e n t 2 0 0 P r i n t i n g 2 5 8 P o s t a g e 2 , 4 8 1 P a r k i n g a n d t o l l s 1 6 3 O u t s i d e s e r v i c e s 5 , 1 3 3 O t h e r e x p e n s e s 3 , 6 8 7 O f f i c e e x p e n s e 8 , 0 2 7 M e d i c a l e x p e n s e 8 , 8 0 0 M e a l s a n d e n t e r t a i n m e n t 5 , 5 5 7 L e g a l a n d p r o f

e s s i o n a l 3 , 6 7 5 I n t e r n e t c o n n e c t i o n s 1 , 7 4 1 I n s u r a n c e 1 0 , 4 5 7 G i f t s 1 , 0 6 4 D u e s a n d s u b s c r i p t i o n s 2 , 4 3 5 C o n t r a c t l a b o r 2 0 8 , 1 1 6 C o n t i n u i n g e d u c a t i o n 4 , 7 9 7 C o m p u t e r s e r v i c e s 2 8 , 7 1 0 B a n k c h a r g e s 4 , 8 4 8 A u t o a n d t r u c k 2 2 , 4 6 9 T o t a l 3 4 5 , 9 2 2 [* 9]- 1 0 -

[* 1 0 ] In th e ret u rn th atRJ C fi ledfo r i t s TYE 5 / 3 1 /1 3 (TYE 5 / 31 / 13 retu rn ), RJ C rep o rt ed$ 1 4 6 , 4 1 2 i n “ Gro s s recei p t s ”. In t hatretu rn , RJ C cl ai m edt h e fo l l o wi ng

“ Ot h er d edu ct i o n s ”, wh i ch i n cl u d eda d edu ct i o n fo r $ 32 5 ,0 0 0 t h atRJ C cl ai m ed as
a co n ti n g en tl i ab i l i ty

wi t h res p ectt o t h e Bo g ardl aws u i t (cl ai m ed$ 32 5 ,0 0 0 Bo g ard l aws u i td edu ct io n ):
C l a i m e d “ O t h e r d e d u c t i o n s ” A m o u n t

U t i l i t i e s $ 3 , 6 8 0 T e l e p h o n e 4 5 4 S e c u r i t y 6 , 2 8 9 P a r k i n g a n d t o l l s 3 0 O u t s i d e s e r v i c e s 4 , 6 6 5 O t h e r e x p e n s e s 8 7 O f f i c e e x p e n s e 4 6 9 M e d i c a l e x p e n s e 7 , 0 1 1 M e a l s a n d e n t e r t a i n m e n t 1 , 5 1 2 I n t e r n e t c o n n e c t i o n s 1 , 1 9 4 I n s u r a n c e 4 , 8 9 3 D u e s a n d s u b s c r i p t i o n s 2 , 4 8 6 C o n t r a c t l a b o r 9 , 2 2 6 C o n t i n u i n g e d u c a t i o n 5 7 6 C o n t i n g e n t l i a b i l i t y - - B o g a r d l a w s u i t 3 2 5 , 0 0 0 B a n k c h a r g e s 4 1 A u t o a n d t r u c k 8 , 1 6 4 T o t a l 3 7 5 , 7 7 7- 1 1 -

[* 1 1 ] RJ C No t i ces o f Defi ci en cy Res p o n d en ti s su eda n o t i ce o f d efi ci en cy (n o t i ce) t o RJ C fo r i t s TYE 5 / 3 1 / 1 2 (TYE 5 / 3 1 /1 2 n ot i ce). In t h atn ot i ce, res p o n den td et erm i n ed , i n t er al i a, t o i n cl u d e i n RJ C’ s g ro ss i n co m e t h e TYE 5 / 3 1 / 1 2 Bet zl er fees an d t h e TYE 5 / 3 1 / 12 Wy at t fees

. In th e TYE 5 /3 1 / 1 2 n o t i ce, res po n d en t al s o d et erm i nedt o d is al l o w th e
en t i re am o u n t (i .e., $ 34 5 ,9 2 2 ) o f t h e cl ai m ed“ Ot her d edu ct i o n s ”. 8 Res p o n d en t

8 As a res u l to f cert ai n co n ces s i o n s , o n l y t h e fo l lo wi n g d educt i o n s i n cl u d ed i n “ Ot h er d edu ct i on s ” th atres po n d en td i s al l o wedrem ai n ati s s u e fo r RJ C’ s TYE 5 / 3 1 / 1 2 wh i ch i ncl u d e t h e t o t al TYE 5 / 3 1 / 1 2 cl ai m edcl i en t ex p en s e d edu ct i o n s fo r “ T ax es fo r cl i en t s ” an d“ Leg al an dp ro fes s i o nal ”:

Cl ai m ed“ Ot h er d educt i o n s ” Am o u nt Tel ep h on e $ 1 ,2 9 1 .4 0 Tax es fo r cl i en t s 1 ,7 5 0 .0 0 So ft ware 3 ,1 6 0 .0 0 Leg al an dp ro fes s i o n al 3 ,6 7 5 .0 0 In s u ran ce 3 ,4 7 7 .0 0 Du es an ds ub s cri p ti o ns 2 ,1 8 1 .1 7 Co n t ract l ab o r 3 ,5 6 2 .0 5 Co m p u t er s erv i ces 2 8 ,7 1 0 .0 0 Ban kch arg es 8 9 4 .4 0 To tal 4 8 ,7 0 1 .0 2 Th ere ap pear t o b e d is crep an ci es b et ween cert ai n am o u n ts o f cert ai n “ Ot h er (co n ti n u ed ...)- 1 2 -

[* 1 2 ] fu rt h er d et erm in edi n th e TYE 5 / 31 / 1 2 n o t ice t h atRJ C i s l i ab l e fo r t he

accu racy -rel at edp en al ty

u n d er s ect i o n 6 6 62 (a). 9 Res p o n d en ti s su eda n o t i ce t o RJ C fo r i t s TYE 5 /3 1 / 1 3 (TYE 5 /3 1 / 1 3

n o t i ce). In th atn o ti ce, res p o n den td et erm i n ed , i n t er al i a, t o i n cl u d e i n RJ C’ s g ro s s i n co m e th e TYE 5 / 3 1/ 13 Bet zl er fees . Int h e TYE 5 / 3 1 / 1 3 n o t ice, res p o nd en tal s o d et erm i n edt o d i s al l o w th e en t i re am o u n t(i

. e., $ 3 75 ,7 7 7 ) o f t h e cl ai m ed“ Ot h er

8 (...co n t in u ed ) d educt i o n s ” t h atrem ai n ati s su e fo r RJ C’ s TYE 5 / 3 1 / 1 2 an d t h e res p ect i v e am ou n t s o f s u ch “ Ot h er d edu ct i o n s ” th atres p o n den tas s ert s o n b ri ef rem ai n at i s su e fo r t h at y ear. W e ex p ect t h e p art ies t o reco nci l e an y s u ch d i screp an ci es as p arto f t he res p ect i v e co m p u t at i o n s u n d er Ru l e 1 5 5 t hatwi l l b e req ui redi n t h es e cas es (Ru l e 1 5 5 co m

p ut at i o n s ). (W e s h al l refer t o t h e d edu ct i o n s t h atRJ C i n cl u d edi n “ Ot h er d edu ct i o n s ” fo r i ts TYE 5 / 3 1 /1 2 t h atres p o n d en td i s al l o wed , an d t h atrem ai n ati s s u e fo r i t s TYE 5 / 3 1 / 12 ex cep tfo r t h e t o tal TYE 5 / 3 1 / 1 2 cl ai m edcl ien tex p en se d edu ct i o n s , as t h e TYE 5 / 3 1 / 1 2 cl ai m edm i s cel lan eo u s d educt i o n s ati s s u e o r th e TYE 5 / 3 1 / 1 2 d edu ct i o n s ati s s u e cl ai m edfo r cert ai n m i s cel l an eo u s ex p en s es . )

9 Th e p art i es ag ree t h atRJ C wo u l db e l iab l e fo r i t s TYE 5 / 3 1 / 1 2 fo r t h e accu racy -rel at edp en al ty

u n d er s ec. 6 6 6 2 (a) i n t h e ev en t t here i s a d efi ci en cy fo r t h aty ear.- 1 3 -

[* 1 3 ] d edu ct i o ns ”. 1 0 Res p o n d en tfu rt h er d et erm i n edi n t h e TYE 5 / 3 1 / 1 3 n o t i ce t h atRJ C i s l iab l e fo r t h e accu racy -rel at edp en al t y u n d er s ect i o n 6 6 6 2(a). 1 1 C&C Back g ro u n d C&C, wh i ch was t ax edas a s ub ch ap t er C co rp o rat i o n , m ai n tai n edi t s b o o k s
an d reco rd s an d fi l edi ts t ax retu rn s u s in g t h e accru al m etho do f acco u n t i n g an d

u s ed a cal en d ar fi s cal y ear an da cal en d ar t ax ab le y ear. M r. Ch an n el s an dh i s

1 0 As a res u l to f cert ai n co n ces s i o n s , o n ly t h e fo l l o w i n g d edu ct i o n s i n cl u d ed i n “ Ot h er d edu ct i on s ” th atres po n d en td i s al l o wedrem ai n ati s s u e fo r RJ C’ s TYE 5 / 3 1 / 1 3 wh i ch i ncl u d e t h e cl ai m ed$ 3 2 5 ,0 0 0 Bo g ardl aws u i td educt i o n :

Cl ai m ed“ Ot h er d educt i o n s ” Am ou n t In s u ran ce $ 3 ,4 77 Du es an d sub scri p t i o n s 8 36 Co n t i n gen tl i ab i l i t y --Bo g ard l aws u i t 3 2 5 ,0 00 To t al 3 2 9 ,3 13 (W e s h al l refer t o th e d edu ct io n s t h at RJ C i n cl u dedi n “ Ot h er d edu ct i o n s ” fo r i t s TYE 5 / 3 1 / 1 3 thatres p o n den td i s al l o wed , an dt h at rem ai n ati s s u e fo r i t s TYE 5 / 3 1 / 1 3 ex cep t fo r t h e cl ai m ed$ 3 2 5 ,0 0 0 Bo g ardl aws u i t d edu ct i o n , as t h e TYE 5 / 3 1 / 1 3 cl ai m edm i s cel l an eo u s d edu ct i on s ati s s u e o r t h e TYE 5 /3 1 / 1 3 d edu ct i o n s ati ss u e cl ai m edfo r cert ai n m i s cel l an eo us ex p en s es .)

1 1 Th e p art i es ag ree t hatRJ C wo u l d b e l i ab l e fo r i t s TYE 5 / 3 1 / 13 fo r t h e accu racy -rel at edp en al ty

u n d er s ec. 6 6 6 2 (a) i n t h e ev en t t here i s a d efi ci en cy fo r t h aty ear.- 1 4 -

[* 1 4 ] d au g h t er, Su s an Gy o r, a.k .a. Su s an Ch an n el s (M s . Gy or), wh o i s a cert i fi ed p ub l i c acco u n tan t , each o wn ed5 0 p ercen t o f C&C. M s . Gy o r was s ecret ary o f C&C, an dM r. Ch an n el s h el dth e rem ai n i n g o ffi ces o f t h atco m p an y . C&C was

en g ag edi n th e b u si n es s o f p ro vi d i n g t ax s erv i ces , p ri m ari l y retu rn p rep arat i o n
s erv i ces . Paym en to f Cert ai n Cl i en tEx p en s es Du ri n g 2 0 1 2 , C&C p ai do n b eh al f o f cert ai n o f i t s cl ien t s cert ai n o b l i g at i o ns
o f t h o s e cl ien t s fo r “ Cl i en t s ’ Ob l i gat i o n s” t o t al i n g $ 3,1 3 8 .6 4 (2 01 2 cl i en tex p en s es p ai db y C&C). Att i m es n o tes t ab l i s h edb y t h e reco rdaft er C&C p ai dt ho s e cl i en t
ex p en s es , C&C’ s cl i en t s wh o s e res p ect i v e ex p en s es i th adp ai do n t h ei r b eh al f rei m b u rs edC&C fo r t h os e ex p en s es . Du ri n g 2 0 1 2 , M s . Gy o r p ai do n b eh al f o f cert ai n o f C&C’ s cl i en t s cert ai n
o b l i g at i o ns o f t h o s e cl ien t s fo r “ Cl i en t s ’ Ob l i g at io n s ” t o t al i n g $ 7 3 7 (2 0 1 2 cl i en t
ex p en s es p ai d b y M s . Gy o r). Att i m es n otes t ab l i s h edb y t he reco rdaft er M s . Gy or p ai dth o s e cl i en tex p en s es , C&C’ s cl i en t s wh os e res p ect i v e ex p en s es M s . Gy or h adp ai do n t h ei r b eh al f rei m b u rs edt ho s e ex p en s es . 1 2

1 2 Th e reco rdd oes n o tes tab l i sh wh et h er C&C’ s cl i en t s rei m b u rs edC&C o r M s . Gy o r fo r cert ai n ex pen s es o f cert ai n o f C&C’ s cl i en t s t h atM s . Gy o r p ai d du ri n g C&C’ s t ax ab le y ear 2 0 1 2

.- 1 5 -

[* 1 5 ] C&C’ s Tax Return In Fo rm 1 1 20 th atC&C fi l edfo r i t s t ax ab l e y ear 2 01 2 (2 01 2 retu rn ), C&C cl ai m edth e fo l l o wi n g “ O t h er d edu ct i o n s ”, wh i ch i n cl u d edd edu ct io n s t o t al i n g $ 3 ,8 9 8 1 3 co m

p ri s i ng (1 ) “ Cl i en to b l i g at i o n s p ai d ” cl ai m edfo r t h e 2 0 1 2 cl i en t
ex p en s es p ai d b y C&C an dthe 2 0 1 2 cl ien tex p en s es p ai d b y M s . Gy o r, wh i ch t o t al ed$ 3 ,8 7 5.6 4 , an d (2 ) $ 2 2 p ai db y C&C t o M s . Gy o r: 1 4

1 3 In C&C’ s 2 0 1 2 ret u rn , C&C ro u n d edt o t h e n eares td o l l ar each o f t h e “ Ot h er d edu ct i o n s ” t hati t cl ai m ed

.

1 4 W e s h al l refer co l l ect i vel y t o t he d edu ct i on s t h atC&C cl ai m edi n C&C’ s 2 0 1 2 retu rn fo r (1 ) t he 2 0 1 2 cl i en tex p en s es p ai d b y C&C an d t h e 2 0 1 2 cl i en t ex p en s es p ai d b y M s . Gy o r, wh i ch t o t al ed$ 3 ,8 7 5 .6 4 , an d(2 ) th e $ 22 p ai db y C&C t o M s . Gy o r as th e 2 0 12 cl ai m edcl i en tex p en s e d educt i o n s .- 1 6 - C l a i m e d “ O t h e r d e d u c t i o n s ” A m o u n t U t i l i t i e s 3 2 8 T r a v e l 4 , 8 4 3 T e l e p h o n e 4 , 1 0 7 S e c u r i t y 7 8 0 P r i n t i n g 1 , 0 2 3 P o s t a g e 2 , 6 0 9 P a r k i n g a n d t o l l s 1 0 4 O f f i c e e x p e n s e 3 , 5 1 4 M i s c e l l a n e o u s 1 , 7 9 3 M e d i c a l e x p e n s e s 1 , 0 9 2 M e a l s a n d e n t e r t a i n m e n t 3 , 9 2 1 L e g a l a n d p r o f

e s s i o n a l 7 8 5 I n s u r a n c e 4 , 5 7 6 G i f t s 4 1 4 D u e s a n d s u b s c r i p t i o n s 2 , 0 6 7 C o n t r a c t l a b o r 2 2 5 , 9 3 1 C o n t i n u i n g e d u c a t i o n 5 , 0 0 9 C o m p u t e r & i n t e r n e t e x p e n s e s 1 1 , 1 0 1 C l i e n t o b l i g a t i o n s p a i d 3 , 8 9 8 B o n u s e s 3 , 8 8 7 B a n k c h a r g e s 2 , 7 0 5 A u t o a n d t r u c k 3 , 4 1 5 A m o r t i z a t i o n 6 7 A c c r u e d p a y r o l l 7 2 , 0 0 0 T o t a l 3 5 9 , 9 6 9 [* 1 6 ]- 1 7 -

[* 1 7 ] C&C No t i ce o f Defi ci en cy Res p o n d en ti s su eda n o t i ce t o C&C fo r i t s t ax ab le y ear 2 01 2 (2 0 1 2 n o t i ce). In th at n o t ice, res p o n d en t d et erm i n ed , i nt er al i a, t o d is al lo w th e en t i re am o u n t(i .e., $ 3 5 9 ,9 6 9 ) o f t h e cl ai m ed“ O t h er d edu ct i o n s ”. 1 5 In t h e 2 0 1 2 n o t i ce, res p o n d en t al s o d et erm i n ed t h at C&C i s l i ab l e fo r th e accu racy -rel at edp en al ty u nd er s ect i on 6 6 6 2 (a). 1 6

1 5 As a res u l to f cert ai n co n ces s i o n s , o n ly t h e fo l l o w i n g d edu ct i o n s i n cl u d ed i n “ Ot h er d edu ct i on s ” th atres po n d en td i s al l o wedrem ai n ati s s u e fo r C&C’ s t ax ab l e y ear 2 01 2 , wh i ch i n cl u d e t h e 2 01 2 cl ai m ed cl i en tex p en s e d edu ct i o n s fo r “ Cl i en t ob l i g at i o n s p ai d”:

Cl ai m ed“ Ot h er d educt i o n s ” Am o u nt In s u ran ce $ 2 ,1 0 5 .5 8 Du es an ds ub s cri p ti o ns 2 ,0 2 2 .0 2 Co n t i n ui ng edu cat i on 2 ,9 5 6 .5 2 Cl i en to b l i g at i o n s p ai d 3 ,8 9 7 .6 4 Ban kch arg es 1 ,5 1 0 .7 4 To tal 1 2 ,4 9 2 .5 0 (W e s h al l refer t o th e d edu ct io n s t h at C&C i n cl u d ed i n “ Ot h er d edu ct i o n s” fo r i t s t ax ab l e y ear 2 01 2 , th atres p o nd en td i s al lo wed , an dt h atrem ai n ati s s u e fo r i t s t ax ab l e y ear 2 01 2 , ex cep tfo r t h e 2 0 1 2 cl ai m edcl i en tex p en s e d edu ct i o n s , as 2 01 2 cl ai m edm i s cel l an eo us d edu ct io n s at i s s u e o r 2 0 1 2 d edu ct i o n s at i ss u e cl ai m edfo r cert ai n m i s cel l an eo u s ex p en s es .)

1 6 Th e p art i es ag ree t hatC&C wo u ldb e l i ab l e fo r i t s t ax ab le y ear 2 0 12 fo r (co n ti n u ed ...)- 1 8 - OPINION RJ C h as th e b u rd en o f es t ab l i sh i n g t h at res p on d en t ’ s res p ect i v e d et erm i n at i on s i n t he TYE 5 / 3 1/ 12 n ot i ce an dt h e TYE 5 / 3 1/ 1 3 n o t i ce t h atrem ai n at i s s u e i n t h e res p ect i v e cas es atd o ck etNo s . 2 5 1 5 1 -1 5 an d 1 1 9 5 7 -1 6 are i n erro r. C&C h as t h e b u rd en o f es t ab l i sh i ng th at res po n d en t ’ s d et erm i n at i o ns i n t h e 2 0 1 2 n o ti ce t h at
rem ai n ati s s u e i n t h e cas e atd o ck etNo . 1 1 9 55 -1 6 are i n erro r. 1 7 See Ru l e 1 4 2 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3). Befo re ad d res s i ng th e i s su es p res en t ed , we s h al l ev al u at e th e t es ti m o n y o f M r. Ch an n el s , th e o n l y

wi t nes s att h e t ri al i n t h es e cas es . W e fo u n d M r. Ch an n el s ’ t es t i m o ny t o b e att i m es ev as i v e an di n cert ai n m at eri al res p ect s g en eral , co n cl u s o ry , an d/ o r v ag u e. W e are n o treq u i red t o , an d we s hal l n o t, rel y o n an y s u ch t es t i m o ny o f M r. Ch an n el s t o es t ab l is h t he res p ect iv e p o s i t i o n s o f RJ C an d C&C wi t h res p ect t o th e i s s u es rem ai n i n g i n t hei r res p ect i v e cas es . See, e.g ., To k ars k i

v . Co m m i s s i o n er, 8 7 T.C. 7 4 , 7 7 (1 9 8 6 ). W e al s o fo u n d M r. Ch an n el s ’ t es t i m o n y [* 18 ]

1 6 (...co n t i nu ed ) t h e accu racy -rel at edp en al t y u nd er s ec. 6 66 2 (a) i n t h e ev en tt h ere i s a d efi ci en cy fo r t h aty ear.

1 7 RJ C an dC&C, as p et i ti o n ers i n t h es e co n s o l i d at edcas es , p ro p erl y fi l ed o n e s im ul t an eo u s o p en i n g b ri ef an do n e s im u l t an eo u s rep ly

b ri ef. No n et h el es s , we s h al l refer t o RJ C wh en we are ad d res s i n g t he i ss u es p res en t edi n RJ C’ s cas es an d t o C&C wh enwe are ad dres s i n g t h e i ss u es i n C&C’ s cas e.- 1 9 -

[* 1 9 ] t o b e i n cert ai n m at eri al res p ect s n o th el p fu l t o t h e res p ect iv e p o s i t i o n s o f RJ C an d C&C wi t h res p ectt o cert ai n i s s u es . Infact , cert ai n o f M r. Ch an n el s ’ t es t i m o ny s up p o rt s res p o n d en t ’ s p o si t i o n wi t h res p ectt o cert ai n i s s u es . RJ C Cert ai n Cl i en tFees Recei v edb y RJ C W e b eg i n b y

s et t in g fo rt h o u r u n d ers t an d i n g o f wh atwe are n o tb ei ng as k ed t o d eci d e. W e are n o tb ei ng as k edt o d eci d e wh et her (1 ) t h e TYE 5 / 3 1/ 1 2 Bet zl er fees an dth e TYE 5 / 3 1 / 1 2 Wy at tfees t h atRJ C recei v eddu ri n g i t s TYE 5 / 31 / 1 2

an d (2 ) th e TYE 5 / 3 1 / 1 3 Bet zl er fees t hati t recei v edduri n g i t s TYE 5 / 3 1/ 1 3 1 8

co n st i tu t e i n co m e. 1 9 W e are b ei n g as k edt o d eci de wh en t h o s e fees are i ncl u d i b l e

1 8 W e s h al l s o m et i m es refer co l l ect iv el y t o t h e TYE 5 / 3 1 / 1 2 Bet zl er fees an d t h e TYE 5 / 3 1 / 12 Wy at t fees th atRJ C recei v eddu ri n g i t s TYE 5 /3 1 /1 2 an d (2 ) t h e TYE 5 / 3 1 / 1 3 fees th ati trecei v edduri n g i t s TYE 5 / 3 1/ 1 3 as t he cl ien tfees i n qu es t i o n .

1 9 Co u n s el o f reco rdfo r p et i t i o n ers i n d i cat edat t ri al t h att h e i s s u e i nv o l v i n g t h e TYE 5 / 3 1 / 12 Bet zl er fees , th e TYE 5 / 3 1 / 1 2 Wy at tfees , an dt he TYE 5 / 3 1 / 1 3 Bet zl er fees was a “ p rep ai di n co m e” i ss u e. Onb ri ef, RJ C s eem s t o s u g g es tt h at t h e i s s ue i n v o l v i n g th o s e fees i s n o ta “ p rep ai d i n co m e” i s s ue b u ti s wh et h er t h ey co n st i tu t e i n co m e. Onth e reco rdb efo re u s , we rejectan y s u ch co n t en t i o n . Th e reco rdes t ab li s hes , an dwe h av e fo u n d , th atRJ C recei v ed(1 ) t h e TYE 5 /3 1/ 1 2 Bet zl er fees an dth e TYE 5 / 3 1 / 1 3 Bet zl er fees as p aym en tfo r RJ C’ s Bet zl er t ax s erv i ces an d (2 ) t h e TYE 5 / 3 1 / 1 2 Wy at tfees as p aym en t fo r RJ C’ s Wy at tt ax s erv i ces . Onthatreco rd , we fi n dt h att h o s e fees co n s ti tut e i n co m e. See s ec. 6 1 (a)(1 ). W e p ro ceed n o w t o co n s i d er t h e i s s u e o f wh en t h o se fees are i n cl u d i b l e i n RJ C’ s g ro s s i n co m e.- 2 0 -

[* 2 0 ] i n RJ C’ s g ro ss i n co m e. Th ati s t o s ay , we m u s td eci d e wh et h er t h e cl i en t fees i n qu es t i o n are i n cl u d i b le i n RJ C’ s g ro s s i n co m e fo r s o m e t ax ab l e y ear aft er t h e t ax ab l e y ear o f recei ptb y RJ C, as RJ C m ai n t ai n s , o r fo r t h e t ax ab l e y ear o f recei p t , as res p o n den tm ai n t ai ns . W e s t arto u r co n s i d erat i o n o f wh en t h e cl i en tfees i n qu es t i on are i n cl u d i b l e i n RJ C’ s g ro s s i n co m e b y s umm ari zi n g cert ai n ap po s i te au th o ri t i es . Pu rs u an tt o
s ect i on 1 .4 4 6 -1 (c)(1 )(i i), In co m e Tax Reg s ., a t ax p ay er o n t h e accru al m et h o do f

acco u n t in g 2 0 i s req u i redt o i n cl u d e i n co m e fo r t he t ax ab l e y ear wh en (1 ) al l t h e
ev en ts h av e o ccu rred th atfi x t h e ri g h tt o t he i nco m e an d(2 ) t h e am o un to f i n co m e
can b e d et erm i n edwi t h reas on ab l e cert ai n t y . Un d er th e al l ev en t s t es t , i ti s t he fi xedri g h t o f a t ax p ay er o n t he accru al

m et h o d o f acco u n ti n g t o recei ve t h e i n co m e t h ati s co n t ro l l i n g , n o twh et h er t h ere h as b een actu al recei p t t h ereo f. Sp ri n g Ci t y Fo u n dry Co . v . Co m

m is s i o n er, 2 9 2 U.S. 1 8 2 , 1 8 4 -1 85 (1 9 3 4). In Ch arl es Sch wab Co rp . & Sub s. v . Co m m i s s io n er, 1 0 7 T.C. 2 8 2 , 2 9 3 (1 9 9 6 ), aff’ d , 1 6 1 F.3 d1 2 31 (9 t h Ci r. 1 9 9 8), we o b s erv edt h at

“ [i ] n ap p l y i n g t h e al l ev en t s t es t , th i s an do t h er co urt s h av e d i s t i ng u is h ed b et ween
co n di t i o n s p reced en t , wh i ch m u s to ccu r b efo re t h e ri g h tt o i n co m e ari s es , an d

2 0 RJ C m ai n t ai nedi ts b oo k s an dreco rd s an dfi l edi ts t ax retu rn s u s i n g t h e accru al m et h odo f acco un ti n g .- 2 1 -

[* 2 1 ] co nd i t i o ns s ub seq uen t , th e o ccu rren ce o f wh i ch wi ll t erm i nat e an ex i s t i n g ri gh t t o i n co m e, b u tth e p res en ce o f wh i ch d o es n o tp recl u de accru al o f i n co m e.” Th e ri g h t o f a t ax p ay er o n t h e accru al m eth o do f acco u n ti n g t o recei ve i n co m e i s fi x edup o n th e earl i es to f (1 ) t h e t ax p ay er’ s recei p t o f p aym en t , (2 ) t h e
co n tract ual du e d at e o f t h e p aym en t , o r (3 ) t h e t ax p ay er’ s p erfo rm an ce. See Sch lu d e v . Co m

m is s i o n er, 3 7 2 U.S. 1 2 8 , 1 3 3 , 1 3 7 (1 96 3 ); Ch arl es Sch wab Co rp . & Su b s . v . Co m

m i s s io n er, 1 0 7 T.C. at2 9 2; Co x v . Co m m is s i o n er, 4 3 T.C. 4 4 8 , 4 5 5 -4 5 6 (1 9 6 5 ). Wh ere a t ax pay er recei v es m o n ey u n der a cl ai m

o f ri gh tan dwi t ho u t
res t ri ct i o n o r l i m i t at io n as t o t h e d i s po s it i on o f t h e m o n ey , t h e t ax pay er m u s t i n cl u d e t h e m o n ey in g ro s s i n co m e fo r t h e y ear i n wh i ch t h e t ax pay er recei v es i t , ev en th o u g h th e t ax p ay er m ay n o tb e en t it l edt o ret ai n t h e m o n ey an dev en t h o u g h t h e t ax p ay er m ay

b e l i ab l e t o retu rn i t s eq u i v al en t. See N. Am . Oi l Co n s ol . v . Bu rn et , 2 8 6 U.S. 4 1 7 , 4 24 (1 9 3 2 ). In ad v an ci n g i t s p os i ti on o n b ri ef, RJ C fai l s t o d i s cu s s s o m e o f t h e ap p o s i t e
au t h o ri t ies d i s cu s s edab ov e an d/ o r m i s co n s t ru es an d/ o r m i s ap p l i es s o m e o f t h o s e
au t h o ri t ies o r o t her au t h ori ti es th ati tci t es . Equ al ly t ro ub l es o m e i s t h at , i n ad v an ci ng i t s p o s i t io n t h atth e cl i en tfees i n qu es ti on are n o ti n cl u d i b le i n i n co m e- 2 2 -

[* 2 2 ] up o n recei p t , RJ C rel i es p ri n ci p al l y o n Co m m i s s i o n er v . In di an ap ol i s Po wer & Li g h tCo ., 4 9 3 U.S. 2 0 3 (1 9 90 ), an dcert ai n o th er cas es t hat , as we ex p l ai n b el o w, we fi n dt o b e i n ap p os i te t o res o l v i n g wh en t h e cl i en tfees i n qu es t io n are i n cl u d i b l e i n RJ C’ s g ro s s i n co m e. 2 1 Th e Sup rem e Co u rto f t h e Un i t edSt at es (Sup rem e Co u rt ) b eg an i t s o p i n i o n i n In d i an ap o l i s Po wer b y p o i n t i n g o u tt h att h e t ax p ay er i n v o l v edt h ere h ad ack n owl ed gedth atth e cu s t o m er d ep o s i ts i n qu es t io n i n t h atcas e wo u l d b e t ax ab l e
up o n recei p ti f t h atCo urt were t o h o l d t hatt h ey co n s t i tu t edad v an ce p aym en t s fo r el ect ri ci ty . See i d . at2 0 7 . Th e Sup rem e Co u rt al s o p o i n t edo u t i n In d i an ap o l i s Po wer t h ati th adp rev i o u s l y “ h el d t h atan accru al -b as i s t ax p ay er i s req u i redt o t reat ad v an ce p aym en t s as i n co m e i n t h e y ear o f recei p t . See Sch l u d e v . Co m m i s s i on er, 3 7 2 U. S. 1 2 8 (1 96 3 ); Am eri can Au to m o b il e As s n . v . Un it edSt at es , 3 6 7 U. S. 6 87 (1 9 6 1 ); Au t o m o b i l e Cl ub o f M i ch i g an v . Co m m i s s io n er, 3 5 3 U. S. 1 8 0

2 1 Fo r ex am

pl e, RJ C rel i es o n M i l en b ach v . Co m m i s s io n er, 1 0 6 T.C. 1 8 4 (1 9 9 6), aff’ di n p art , rev ’ di n p arto n o th er g ro u n d s , 3 18 F.3 d 9 2 4 (9 t h Ci r. 2 0 0 3 ), wh i ch h el d , i n ter al i a, th ata cert ai n am o u n trecei v edb y t h e Lo s An g el es Rai d ers i n 1 9 8 4 co n s t i tu t edi n co m e, n o ta l o an . See i d . at1 9 7 . As d i s cu s s edb el o w , we fi ndi n o u r Op in i o n M i l en b ach an d i n t h e o p i n i o n s i n cert ai n o th er cas es o n wh i ch RJ C rel i es t o b e i nap p o s i t e. M o reo v er, RJ C fai l s t o p o i n to u tt h att h e U.S. Co u rt o f Ap peal s fo r t h e Ni n t h Ci rcu i t , th e co u rtt o wh i ch an ap p eal i n t h es e cas es wo u l d n o rm al l y l i e, rev ers edth i s Co urto n t he i s s u e o f wh eth er a cert ai n am o u n trecei v ed b y th e Lo s An g el es Rai d ers i n 1 9 8 4 co n st i tu t edi n co m e, n o ta l oan . See M i l enb ach v . Co m

m is s i o n er, 3 1 8 F.3 dat9 3 0-9 3 1

.- 2 3 -

[* 2 3 ] (1 9 5 7 ).” Id . n . 3 . Itth en o b s erv ed : “ Th es e cas es co n cern edp aym en t s --
n o n refu nd ab l e fees fo r s erv i ces --t h ati n d i s p u t ab l y co n s t i tu t edi n co m e; t he i s s u e
was wh en th at i n co m e was t ax ab l e. Here, i n co nt ras t , th e i s s u e i s wh et h er th es e d ep os i t s , as s u ch , are i nco m e atal l .” Id

. W e fi n dRJ C’ s rel i an ce o n In d i an ap o l i s Po wer, M i len b ach v . Co m m i s s i o n er, 1 0 6 T.C. 1 8 4 , an dan y o t h er cas e wh ere t h e i s s u e was wh et h er cert ai n p aym en ts are “ in co m e atal l ” t o b e m i s p l aced b ecau s e th o s e au th ori t i es are i n ap po s it e t o th e i s su e h ere i n v o l vi n g th e cl i en tfees i n qu es t io n . See Al ex an der Sh o k ai , In c. v . Co m m i s s i o n er, T.C. M em o . 1 9 9 2 -4 1 , 6 3 T.C.M . (CCH) 1 8 7 0 , 1 88 1 (1 9 9 2 ), aff’ d , 3 4 F.3 d1 4 8 0 (9 th Ci r. 1 9 9 4). Un d er th e au t h o ri t i es th atwe co n cl u d e are ap po s i te t o res o l vi n g t he i s s u e i n v o l v i n g th e cl i en t fees i n ques t i o n an dt h atwe s umm ari zedat t he b eg i n n i n g o f

o u r d is cu s s i o n o f t h i s i s s u e, we fi n do n t h e reco rdb efo re u s t h atRJ C i s req u i red t o i n cl u d e t h o s e fees i n i t s g ro s s i n co m e fo r t h e t ax ab l e y ear o f recei pt . Th e reco rd

es t ab l i s h es , an d we h av e fo u n d , th e fo l l o wi ng fact s t h atreq u i re o u r s o fi n d i n g
u n d er t h o s e au t h o ri t i es . Du ri n g RJ C’ s TYE 5 / 3 1 / 1 2 , M r. Bet zl er ret ai n edRJ C t o p ro v id e RJ C’ s Bet zl er t ax s erv i ces fo r h i m an dM s . Bet zl er. Du ri ng t h att ax ab le y ear, M r. Bet zl er g av e M r. Ch an n el s a ch eckfo r $ 15 0 ,0 0 0 (i .e., th e TYE 5 / 3 1 / 1 2- 2 4 -

[* 2 4 ] Bet zl er fees ) as p aym en tfo r RJ C’ s Bet zl er t ax s erv i ces , wh i ch was p ro m p t l y d ep os i t edi n t o RJ C’ s W el ls Farg o acco un t
. M r. Ch an n el s , o n b eh al f o f RJ C, i n fo rm edM r. Bet zl er t h ati f RJ C were u nab l e t o o b t ai n a fav o rab l e res u l tfo r t h em
as a res ul to f RJ C’ s Bet zl er t ax s erv i ces , RJ C wo ul drep ay t o t h e Bet zl ers t h e TYE 5 / 3 1 / 1 2 Bet zl er fees th ati t h adrecei v edfro m t hem . RJ C’ s return o f t h e TYE 5 / 3 1 / 1 2 Bet zl er fees th ati t h adrecei v edwas t h u s s ub j ectt o a co n d i ti o n s ub s equ en t. Atn o t i m e d i dth e Bet zl ers p lace an y res t ri ct i on s o n RJ C’ s u s e o f th e TYE 5 / 3 1 / 1 2 Bet zl er fees th atthey h adp ai dt o i t
. RJ C i s s u edch eck s an d/ o r wi t h d rew
m o ney s fro m

RJ C’ s W el l s Farg o acco u n twh en ev er i td eem edi tap p ro p ri at e t o d o
s o . RJ C d i dn o tretu rn t o t h e Bet zl ers t h e TYE 5 / 3 1 /1 2 Bet zl er fees

. Du ri n g RJ C’ s TYE 5 / 3 1 / 1 2 , M s . Wy at t ret ai n edRJ C t o p ro v i d e RJ C’ s Wy at t t ax s erv i ces . Du ri n g th att ax ab l e y ear, M s . Wy at tg av e M r. Ch an n el s a ch eckfo r $ 6 5 ,0 00 (i .e., th e TYE 5 / 3 1 / 1 2 Wy at tfees ) as p aym en tfo r RJ C’ s Wy at t t ax s erv i ces , wh ich was p ro m p t l y d ep o s i t edi n to RJ C’ s W el l s Farg o acco u n t . M r. Ch an n el s , o n b eh al f o f RJ C, i n fo rm edM s . Wy at t t h ati f RJ C were u n ab l e t o o b t ai n a fav o rab l e res u l tfo r h er as a res u l to f RJ C’ s Wy at tt ax s erv i ces , RJ C wo ul drep ay t o h er t h e TYE 5 / 3 1 / 12 Wy at t fees t h ati th adrecei v edfro m h er. RJ C’ s retu rn o f- 2 5 -

[* 2 5 ] th e TYE 5 / 3 1 / 1 2 Wy at t fees t h ati t h adrecei v edwas t hu s s ub ject t o a
co n di t i o n s ub s eq u en t
. Atn o t i m e d i dM s . Wy at tp l ace an y res t ri ct io n s o n RJ C’ s u s e o f th e TYE 5 / 3 1 / 1 2 Wy at tfees th ats h e h adp ai dt o i t . RJ C d i d n o t ret u rn t o M s . Wy at tt h e TYE 5 / 3 1 / 1 2 Wy at t fees

. M r. Bet zl er d i edo n J u ly

2 4 , 2 0 1 2 . Aro un d Sep t em b er 7 , 2 0 1 2 , M s . Bet zl er, wh o wan t edRJ C t o co n ti n u e t o p ro v i de t o h er RJ C’ s Bet zl er t ax s erv i ces , g av e M r. Ch an n el s a ch eckfo r $ 1 5 3 ,6 0 0 (i .e., th e TYE 5 /3 1 / 1 3 Bet zl er fees ) as an ad d it i o n al p aym en tfo r t h os e s erv i ces , wh ich was p ro m p t l y d ep o s i tedi n t o RJ C’ s W el l s Farg o acco u n t
. M r. Ch an n el s , o n b eh al f o f RJ C, i n fo rm edM s . Bet zl er t h at i f RJ C were u n ab l e t o o b t ai n a fav o rab le res u l tfo r h er as a res u l to f t h e RJ C Bet zl er t ax s erv i ces , RJ C wo u l drep ay t o h er RJ C’ s t o t al Bet zl er fees (i .e., th e TYE 5 / 3 1 / 1 2 Bet zl er fees an dthe TYE 5 / 3 1/ 1 3 Bet zl er fees ) t h ati trecei v edfro m t h em i n i ts TYE 5 / 3 1 /1 2 an di t s TYE 5 / 3 1 / 1 3 , res p ect i v el y . RJ C’ s retu rn o f t h e TYE 5 / 3 1 / 1 3 Bet zl er fees th ati t h adrecei v edwas t h u s s ub j ectt o a co n d i ti o n s ub s equ en t. Atn o t i m e d i dM s . Bet zl er p l ace an y res t ri ct i o n s o n RJ C’ s u s e o f t h e TYE 5 / 3 1 / 1 3 Bet zl er fees th ats h e h adp ai dt o i t . RJ C d i dn o tretu rn t o M s . Bet zl er t h e TYE 5 / 3 1 / 1 3 Bet zl er fees

.- 2 6 -

[* 2 6 ] As o f t h e cl o se o f RJ C’ s TYE 5 / 3 1 / 1 3 , RJ C’ s W el ls Farg o acco u n ts h o wed

a n eg at i v e b al an ce. On th e reco rdb efo re u s , we fi n dt h at RJ C i s req u i redt o i n cl ud e i n i t s g ro s s i n co m e (1 ) fo r i t s TYE 5 / 3 1/ 12 th e TYE 5 / 3 1 /1 2 Bet zl er fees o f $ 15 0 ,0 0 0 an dth e TYE 5 / 3 1 / 1 2 Wy at t fees o f $ 6 5,0 00 , o r a t o t al o f $ 2 1 5 ,0 0 0 , th ati trecei v eddu ri ng t h att ax ab l e y ear an d (2 ) fo r i t s TYE 5 / 3 1 / 1 3 t h e TYE 5 / 31 / 1 3 Bet zl er fees o f $ 1 5 3 ,6 0 0 th ati trecei v eddu ri n g t h att ax ab l e y ear. Cl ai m edDedu ct i o n s Th atRem ai n atIs s u e Befo re tu rn i n g t o t h e d edu ct i o ns t h atRJ C cl ai m edfo r each o f i t s TYE 5 / 3 1 / 1 2 an di t s TYE 5 /3 1 / 1 3 , th atres p on d en td i s al l o wed , an dt h atrem ai n ati s s u e,
we s h al l b ri efl y

s u m m ari ze cert ai n ap p l i cab l e au t h o ri t i es . Dedu ct i o n s are a m at ter
o f l eg i sl at i v e g race, an da t ax p ay er b ears t h e b u rd eno f p ro v in g en ti t l em en t t o an y d educt i o n cl ai m ed . See INDOPCO, In c. v . Co m m i s s i o n er, 5 0 3 U.S. 7 9 , 8 4 (1 9 9 2 ). M o reo v er, a t ax pay er i s req u iredt o m ai n t ai n reco rd s s u ffi ci en tt o es t ab l i s h t h e
am ou n to f an y

d edu ct i on cl ai m ed

. See s ec. 6 0 0 1; s ec. 1 .6 0 0 1 -1 (a), In co m e Tax Reg s. Sect io n 1 6 2 (a) g en eral l y al lo ws a d edu ct io n fo r o rd i n ary an d n eces s ary
ex p en s es p ai d o r i n cu rred du ri n g t he t ax ab l e y ear i n carry in g o n an y t rad e o r b u s i n es s . Inad d i t i o n , fo r cert ai n k i n d s o f ex p en s es t h at are o t h erwi s e d edu ct i b l e- 2 7 -

[* 2 7 ] u n d er s ect i o n 1 6 2 (a), s u ch as t h o s e fo r “ l i s t edp ro pert y ”, as d efi n edi n
s ect i on 2 8 0 F(d )(4 ), a t ax p ay er m u s ts at i s fy

cert ai n ad d i ti o n al s ub s t an t iat i o n req u i rem en t s s etfo rt h i n s ect i o n 2 7 4 (d ) b efo re s u ch ex p en s es wi l l b e al l o wedas d educt i o n s . Sect io n 1 7 0 (a) al l o ws a d edu ct i o n fo r an y ch ari t ab l e co n tri b u t i o n , as d efi n ed i n s ect io n 1 7 0 (c), p aym en to f wh i ch i s m ad e wi th i n t h e t ax ab l e y ear i n qu es t i o n . Sect i o n 1 7 0 (a) fu rt h er p ro v id es t h at a d edu ct i o n wi l l b e al l owedfo r a ch ari t ab l e
co n tri b u t i o n “ o nl y

i f v eri fi edu n d er reg u l at io ns p res cri b ed b y t h e Secret ary .” To t al TYE 5 / 3 1/ 1 2 Cl ai m ed Cl i en tEx p en s e Dedu ct io n s W e co ns i der n o w wh et h er RJ C i s en t i t ledt o d edu ctu n d er s ect i on 1 6 2 (a) fo r i t s TYE 5 / 3 1 / 1 2 the t o tal TYE 5 / 3 1/ 1 2 cl ai m edcl ien t ex p en se d edu ct io n s . RJ C ad v an ces n o arg u m en to n b ri ef i n s up p o rto f i t s p o s i t i o n t h ati t i s en t i t l edfo r t h at t ax ab l e y ear t o t h o s e cl ai m edcl i en tex p en s e d edu ct i o n s , ch o o si n g i ns t eadt o “ rel y [o n l y ] o n t h e ev i d en ce ad m i t t ed ”. W e h av e fo u n d o n th e reco rdb efo re u s t h e fo l l o wi n g fact s rel at i n g t o RJ C’ s t o t al TYE 5 / 3 1 / 1 2 cl ai m edcl i en tex p en s e d edu ct i o ns . Du ri n g i t s TYE 5 / 3 1/ 1 2 , RJ C p ai do n b eh al f o f cert ai n o f i t s cl i en t s cert ai n o b li g at i o n s o f t ho s e cl i en t s (1 ) fo r “ Leg al an dPro fes si o nal Fees ” t o t al i ng $ 7 7 5 an d(2 ) fo r “ Tax es ” t ot al i n g $ 1 ,7 5 0 .4 6 . Att i m es n o tes tab l i s h edb y t h e reco rdaft er RJ C p ai dt h o s e cl i en t- 2 8 -

[* 2 8 ] ex pen ses , RJ C’ s cl i en t s wh o s e res p ect i v e ex p en s es i th adp ai do n t hei r b eh al f rei m

b u rs edRJ C fo r th o s e ex p en s es . Du ri n g RJ C’ s TYE 5 / 3 1 / 1 2 , M r. Ch an n el s p ai d o n b eh al f o f cert ai n o f RJ C’ s cl i en t s cert ai n o b li g at i o ns o f t h o s e cl i en t s fo r “ Leg al an dPro fes s i o n al Fees ” t o t al i n g $ 2 ,9 0 0 .1 1. At t i m es n o tes t ab l i s h edb y t h e reco rdaft er M r. Ch an n el s p ai d t h o s e cl i en tex p en s es , RJ C’ s cl i en t s wh o s e res p ect i v e ex p en s es M r. Ch an nel s h ad p ai do n t h ei r b eh al f rei m

b u rs edt h o s e ex p en s es . 2 2 Gen eral ly , wh ere a t ax p ay er p ay s t h e o b li g at i o n s o f an ot h er t ax p ay er, th e p aym en t s o f t h o s e o bl ig at i o n s are n o to rd i n ary an dn eces s ary

ex p en s es i n cu rred i n carry i n g o n th e t ax p ay er’ s b u s in es s u n der s ect i o n 1 6 2 (a). See, e.g

. , In t ers t at e Tran s i tLi n es v . Co m

m i s s i o n er, 3 19 U.S. 5 9 0 , 5 9 3 (1 9 4 3 ); Dep u t y v . Du Po n t , 3 0 8 U.S. 4 8 8 (1 9 4 0 ); Co l u m

b i an Ro p e Co . v . Co m

m i s s i on er, 4 2 T.C. 8 0 0 , 8 1 5 (1 9 6 4). On th e reco rdb efo re u s , we fi n dt h at RJ C h as fai l edt o carryi t s b u rd en o f

es t ab l i s h in g fo r i t s TYE 5 / 3 1 /1 2 t h ati tp ai do r i ncu rred t h e t o t al TYE 5 / 3 1 / 1 2 cl ai m edcl ien tex p en se d edu ct i o n s i n carry i ng o n i t s t rad e o r b u s i n es s . Ont h at
reco rd , we fu rt h er fi n dth atRJ C h as fai l edt o carryi t s b u rd en o f es t ab l i s h i n g t h ati t i s en t i t l edu n d er s ect io n 1 6 2(a) fo r i t s TYE 5 / 3 1 / 1 2 t o d eductt h o s e cl ai m edcl i en t
ex p en s es .

2 2 See s up ra n o t e 5
.- 2 9 -

[* 2 9 ] RJ C’ s Cl ai m ed$ 3 2 5 ,0 0 0 Bo g ardLaws ui tDedu ct i o n W e ad dres s n ex twh et her RJ C i s en t i tl ed t o d edu ct u n d er s ect i o n 1 6 2 (a) fo r i t s TYE 5 / 3 1 / 1 3 $ 3 2 5 ,0 0 0 thati tcl ai m ed as a co n t in g en t l i ab i l i ty wi t h res p ectt o t h e Bo g ardl aws u i t
. In s up p o rto f i t s p o si t i o n th ati ti s en t it l edt o t h e cl ai m ed$ 3 25 ,0 0 0 Bo g ard l aws u i td edu ct io n , RJ C rel i es o n b ri ef o n cert ai n al l eg ed fact s t hatwe h av e n o t fo u n d b ecau se t h o s e al l eg edfact s are n o tes t ab l i s h edb y t h e reco rd . W e h av e fo u n d o n the reco rdb efo re u s th e fo l l o wi n g fact s rel at i n g t o RJ C’ s cl ai m ed $ 3 2 5 ,0 0 0 Bo gard l aws u i td edu ct i o n . OnDecem b er 3 1 , 2 0 1 2 , M s . Bo g ardco m m en cedth e Bo g ardl aws u i tag ai n s t v ari o us d efen d an t s , i n cl u di n g C&B an dM r. Ch an n el s , b o t h i n h is i n d i v i dual cap aci t y an das an ex ecu t i v e o f C&B. RJ C was

n o tn am edas a d efen d an ti n th e Bo g ardl aws ui t
. RJ C co m p ou nd s i t s fai l u re t o rel y o n fact s es tab l i s h edb y t h e reco rdb y rel y i n g o n b ri ef o n “ t h e U.S. Secu ri t i es an dEx ch an g e Co m m i s s i o n Ru les ”, i n s tead

o f ap p li cab l e t ax l aw, t o s up p o rti t s p o s i t i o n t h ati ti s en t i t l edt o t h e cl ai m ed $ 3 2 5 ,0 0 0 Bo gard l aws u i td edu ct i o n . W e fi n d RJ C’ s p o s it i o n t h ati ti s en t i t l edt o t h e cl ai m ed$ 3 25 ,0 00 Bo g ardl aws u i td edu ct i o n an d t h e co n t en t i o n s o n b ri ef i n
s up p orto f t h atp o s i t i o n t o b e g ro u n d l es s , i f n otfri v o l o u s.- 3 0 -

[* 3 0 ] On th e reco rdb efo re u s , we fi n dt h at RJ C h as fai l edt o carryi t s b u rd en o f

es t ab l i s h in g th ati t w ou l dh av e an y l i ab i l i t y wi th res p ect t o t he Bo gard l aws u i t . On t h atreco rd , we fu rt h er fi n dth atRJ C, wh i ch was o n t h e accru al m etho d o f acco u n t
i n g , h as fai l edt o carryi ts b u rd en o f es t ab l is h i n g fo r i t s TYE 5 / 3 1 / 1 3 (1 ) t h atal l t h e ev en ts o ccu rred thates t ab l i s h t h e fact o f i ts l i ab i l it y wi t h res p ect t o t h e Bo g ard l aws u i t , (2 ) th atth e am o u n to f an y s uch l i ab i li t y co u l dh av e b een d et erm in edwi t h

reas on ab l e accu racy , an d(3 ) t h ateco n o m i c p erfo rm an ce o ccu rred wi t h res p ectt o t h e l i ab i l i t y . See s ec. 1 .4 6 1 -1 (a)(2 ), In co m e Tax Reg s . Ont h e reco rdb efo re u s , we fi n dth atRJ C h as fai l edt o carryi t s b u rd en o f es t ab l i s h in g t h ati ti s en t i t l edt o d eductu n d er s ect i o n 1 6 2(a) fo r i t s TYE 5 / 31 / 1 3 $ 3 2 5 ,0 0 0 wi th res p ectt o t h e Bo g ardl aws u i t
.

RJ C’ s TYE 5 / 3 1 / 1 2 Cl ai m ed M i s cel l an eo u s Deduct i o n s atIs s u e an dTYE 5 / 3 1 /1 3 Cl ai m edM i s cel l an eo u s Dedu ct io n s atIs s u e W e tu rn n o w t o wh et h er RJ C i s en ti t ledu n d er s ect i o n 1 6 2(a) o r an y o t h er
s ect i on fo r i t s TYE 5 / 3 1 / 1 2 an d i t s TYE 5 / 3 1 / 13 t o t h e res p ect iv e TYE 5 /3 1 / 1 2 cl ai m edm i s cel l an eo us d edu ct io n s at i s s u e an dTYE 5 / 3 1/ 1 3 cl ai m edm i scel l an eo us d edu ct i o n s ati s s u e. 2 3 As was t ru e wi t h res p ect t o i t s t ot al TYE 5 / 31 / 1 2

2 3 Th ere ap p ear t o b e cert ai n d i s crep an ci es b et ween t h e res p ect iv e am o u n t s o f cert ai n o f RJ C’ s TYE 5 / 3 1 / 1 2 cl ai m edm i s cel l an eo u s d edu ct i o n s ati ss u e an d i t s TYE 5 / 3 1 / 1 3 cl ai m ed m is cel l an eo us d edu ct i o n s ati s s u e t h atres p o nd en t cl ai m s o n (co n ti n u ed ...)- 3 1 -

[* 3 1 ] cl ai m edcl i en tex p en s e d edu ct i o n s , RJ C ad van ces n o arg u m en t o n b ri ef i n
s up p orto f i t s p o s i t i o n t h ati ti s en t i t l edfo r i t s TYE 5 / 3 1/ 1 2 an di t s TYE 5 / 3 1 / 1 3 t o t h e res p ect i v e TYE 5 / 3 1 / 12 cl ai m edm i s cel l an eo u s d edu ct i o n s ati ss u e an dt h e TYE 5 / 3 1 / 1 3 cl ai m ed m is cel l an eo us d edu ct i o n s ati s s u e, ch o os i n g i n s t eadt o “ rel y [o n l y ] o n t h e ev i d en ce ad m i t t ed ”. On th e reco rdb efo re u s , we fi n dt h at RJ C h as fai l edt o carryi t s b u rd en o f

es t ab l i s h in g fo r i t s TYE 5 / 3 1 /1 2 an di t s TYE 5 / 3 1 / 1 3 t h ati tp ai do r i n cu rred t h e
res p ect i ve TYE 5 / 3 1 /1 2 d edu ct i o n s ati s s u e cl ai m edfo r cert ai n m i s cel l an eo u s
ex p en s es an d TYE 5 / 3 1 / 1 3 d edu ct i o n s ati s su e cl ai m edfo r cert ai n m i s cel l an eo u s
ex p en s es i n carry in g o n i t s trad e o r b u s i n es s. On t h atreco rd , we fu rt her fi n dt h at RJ C h as fai l edt o carryi t s b u rd en o f es t ab l i s h i n g t h ati ti s en t i t l edu n der s ect i o n 1 6 2 (a) o r an y

o t h er s ect io n fo r i t s TYE 5 / 3 1 / 1 2 an d i t s TYE 5 / 3 1/ 1 3 t o d edu ct t h o s e res p ect i v e cl ai m edex p en s es .

Sect io n 6 6 6 2 (a) Th e p art i es ag ree t h atRJ C wo u l db e l i ab le fo r each o f i t s TYE 5 / 31 / 1 2 an d i t s TYE 5 / 3 1 / 1 3 fo r th e accu racy -rel at edp en al t y u n d er s ect i o n 6 6 62 (a) i n t h e

2 3 (...co n t i nu ed ) b ri ef an dth e res p ect i v e am o u n t s o f t h o s e cert ai n d edu ct i o n s t h atRJ C cl ai m edi n i t s TYE 5 / 3 1 / 1 2 retu rnan di t s TYE 5 / 3 1 / 1 3 ret urn , res p ect iv el y . W e ex p ectt h e p art i es t o reco n ci l e an y

s u ch d i s crep an ci es as p arto f t he res pect i v e co m p u t at i o n s u n d er Ru l e 1 5 5
.- 3 2 -

[* 3 2 ] ev en tthere i s a d efi ci en cy fo r ei t h er o f t h o se y ears . Int h e l i gh to f RJ C’ s
co n ces si o n s an do u r h o l di n g s h erei n wi th res p ectt o t h e i s s u es p res en t edwi t h

res p ectt o RJ C, we co n cl u d e t h att h ere wi l l b e a d efi ci en cy fo r each o f i t s TYE 5 / 3 1 / 1 2 an di t s TYE 5 /3 1 / 1 3

. Co n s eq u en tl y , p u rs u an tt o t h e s t i pu l at i o ns o f t h e p art i es , RJ C wi l l b e l i ab l e fo r each o f t ho s e t ax ab l e y ears fo r t h e accu racy -rel at ed p en al t y d et erm i n ed u n d er s ect i o n 6 6 6 2 (a). 2 4 C&C C&C’ s 2 0 1 2 Cl ai m edCl i en tEx p en s e Deduct i o n s W e co ns i der n o w wh et h er C&C i s en t i t l edt o d edu ctu n d er s ect i o n 1 6 2 (a) fo r i t s t ax ab l e y ear 2 01 2 C&C’ s cl ai m edcl i en t ex pen s e d edu ct i o n s . As was t ru e
o f RJ C, C&C ad v an ces n o arg u m en t o n b ri ef i n s up po rto f i t s p o s it i on t h ati ti s
en t i t l edfo r i t s t ax ab l e y ear 2 0 1 2 t o d edu ctt h o s e cl i en tex p en s es , ch oo s i ng i n s t ead t o “ rel y [o n l y ] o n th e ev id en ce ad m i t t ed ”. W e h av e fo u n d o n th e reco rdb efo re u s t h e fo l l o wi n g fact s rel at i n g t o C&C’ s 2 0 1 2 cl ai m edcl ien tex pen s e d edu ct i o ns . Du ri n g 2 0 1 2 , C&C p ai d o n b eh al f o f cert ai n o f i ts cl i en t s cert ai n o b l ig at i o n s o f t ho s e cl i en ts fo r “ Cl i en t s ’ Ob l ig at i o n s ” t ot al i n g $ 3 ,1 3 8 .6 4. Att i m es n o tes t ab li s h edb y t h e reco rdaft er C&C

2 4 Th e res p ect i v e am o u nt s o f t h e p en al ti es u n d er s ec. 6 6 6 2 (a) fo r wh i ch RJ C wi l l b e l i ab l e fo r i t s TYE 5 /3 1 / 1 2 an di t s TYE 5 / 3 1/ 1 3 wi l l b e d et erm i n edas p art o f t h e Ru l e 1 5 5 co m

pu t at i o n s.- 3 3 -

[* 3 3 ] p ai dth os e cl i en tex pen s es , C&C’ s cl ien t s wh o se res p ect iv e ex p en ses i th ad p ai do n t h ei r b eh al f rei m

b u rs edC&C fo r th o s e ex p en ses . Du ri n g 2 0 1 2 , M s . Gy o r p ai do n b eh al f o f cert ai n o f C&C’ s cl i en t s cert ai n
o b l i g at i o ns o f t h o s e cl ien t s fo r “ Cl i en t s ’ Ob l i g at io n s ” t o t al i n g $ 7 3 7 . Att i m es n o t
es t ab l i s h edb y t h e reco rdaft er M s . Gy or p ai d t h o se cl i en t ex p en ses , C&C’ s cl i en t s wh o s e res p ect i v e ex p en s es M s . Gy o r h adp ai d o n t h ei r b eh al f rei m b u rs ed t h o s e
ex p en s es . 2 5 As d i s cu s s edab ov e as p arto f o u r co ns i d erat i o n o f RJ C’ s t o t al TYE 5 / 3 1 / 1 2 cl ai m edcl ien tex p en se d edu ct i o n s , wh ere a t ax p ay er p ay s t h e o b li g at i o n s o f

an o th er t ax p ay er t h e p aym en t s o f t h o s e o b l i g at i o n s g en eral l y are n oto rd i n ary

an d

n eces s ary ex p en ses i ncu rred i n carry i n g o n t h e t ax p ay er’ s b u s i n es s u n d er s ect i o n 1 6 2 (a). See, e.g ., In t ers t at e Tran s i tLi n es v . Co m m i s s i o n er, 3 1 9 U.S. at5 9 3 ; Dep ut y v . Du Po n t , 3 0 8 U.S. 4 8 8 ; Co l u m b i an Ro p e Co

. v . Co m

m i s s i o n er, 4 2 T.C. at8 1 5
.

2 5 See s up ra n o t e 1 2

. C&C cl ai m edi n i t s 2 0 1 2 ret u rn d edu ct i o ns fo r n o to n l y t he 2 0 1 2 cl i en t ex p en s es p ai d b y C&C an dthe 2 0 1 2 cl ien tex p en s es p ai d b y M s . Gy o r, wh i ch t o t al ed$ 3 ,8 7 5.6 4 , b u tal s o th e $ 2 2 p ai db y C&C t o M s . Gy or, o r t h e 2 0 1 2 cl ai m ed cl i en t ex p en s e d edu ct i on s o f $ 3 ,8 9 8 , ro u nd edt o t he n eares td o l l ar. See s up ra n o t e 1 3

.- 3 4 -

[* 3 4 ] On th e reco rdb efo re u s , we fi n dt h at C&C h as fai l edt o carryi t s b urd en o f

es t ab l i s h in g fo r i t s t ax ab l e y ear 2 0 1 2 t h ati tp ai do r i n cu rred C&C’ s 2 0 1 2 cl ai m ed cl i en t ex p en s e d edu ct i on s i n carry i n g o n i t s t rad e o r b u s i nes s . Ont h atreco rd , we fu rt her fi n dthatC&C h as fai l edt o carryi ts b u rd eno f es t ab l i s h i ng t h at i ti s
en t i t l edu n d er s ect i on 1 62 (a) fo r i t s t ax ab l e y ear 2 0 12 t o d edu ctt h os e cl ai m ed cl i en t ex p en s es . C&C’ s 2 0 1 2 Cl ai m edM i s cel l an eo u s Dedu ct i o n s atIs s u e W e tu rn n ex tt o wh et her C&C i s en t i tl edu n der s ect io n 1 62 (a) o r an y o t h er
s ect i on fo r i t s t ax ab l e y ear 2 01 2 t o t h e 2 0 1 2 cl ai m edm is cel l an eo u s d edu ct i o n s at i s su e. As was t ru e wi t h res p ectt o cert ai n o t h er d educt i on i s s u es p res en t edwi t h

res p ectt o RJ C an d C&C, C&C ad v an ces n o arg u m en to n b ri ef i n s up p orto f i t s p o s i t i on th ati ti s en t i t l edfo r i t s t ax ab l e y ear 2 0 1 2 t o t h e 2 0 1 2 cl ai m edm i scel l an eo us d edu ct i o n s ati s s u e, ch o o s i n g i n s t ead t o “ rel y [o n l y ] o n t h e ev i d en ce ad m i t
t ed ”. On th e reco rdb efo re u s , we fi n dt h at C&C h as fai l edt o carryi t s b urd en o f

es t ab l i s h in g fo r i t s t ax ab l e y ear 2 0 1 2 t h ati tp ai do r i n cu rred t h e 2 0 1 2 d educt i o n s ati ss u e cl ai m edfo r cert ai n m i s cel l an eo us ex p en s es i n carry i n g o n i t s t rad e o r b u s i n es s . Onth atreco rd , we fu rt h er fi n dt hatC&C h as fai l edt o carryi ts b u rd en- 3 5 -

[* 3 5 ] o f es tab l i s hi n g i ti s en t it l edu n d er s ect i o n 1 6 2(a) o r an y o t her s ect i o n fo r i t s t ax ab l e y ear 2 01 2 t o d edu ctth os e cl ai m edex p en s es . Sect io n 6 6 6 2 (a) Th e p art i es ag ree t h atC&C wo u l db e l i ab l e fo r i t s t ax ab l e y ear 2 0 1 2 fo r t h e
accu racy -rel at edp en al ty

u n d er s ect i o n 6 6 62 (a) i n t h e ev en t t h ere i s a d efi ci en cy fo r t h aty ear. In the l i g h to f C&C’ s co n ces s i o n s an do ur h o l d in g s h erei n wi t h

res p ectt o t h e i s s u es p res en t edwi t h res p ectt o C&C, we co n cl ud e t h att h ere wi l l b e a d efi ci en cy

fo r C&C’ s t ax ab l e y ear 2 0 1 2 . Co n s eq u en t l y , p u rs u an t t o t h e s t i p u l at i on s o f t h e p art i es , C&C wi l l be l iab l e fo r t h att ax ab le y ear fo r t h e accu racy rel at ed p en al t y

d et erm i n edu n d er s ect i o n 6 6 6 2(a). 2 6 W e h av e co n s id ered al l o f t h e co n t en ti o n s an darg u m en t s o f t h e p art i es th at
are n o td i s cu ss edh erei n , an dwe fi n dt h em t o b e wi t h o u tm eri t, i rrel ev an t , an d/ o r
m o ot
. To refl ectthe fo reg o i n g an d t h e co n ces s i o n s o f t h e p art i es , Deci s i o n s wi l l b e en t ered

u n der Ru l e 1 5 5
.

2 6 Th e am o u nto f t he p en al t y u n d er s ec. 6 6 6 2(a) fo r wh i ch C&C wi l l b e l i ab l e fo r i ts t ax ab l e y ear 2 0 1 2 wi l l b e d et erm i n edas p arto f th e Ru l e 1 5 5 co m p u t at i o n s .