TAX COURT OPINION

Case: Timothy J. Goumas & Meredith E. Goumas
Docket Number: 29100-21
Judge: Toro
Opinion Type: bench
Filed: 07/31/2023
Pages: 34

United States Tax Court Washington, DC 20217 TIMOTHY J. GOUMAS & MEREDITH E. GOUMAS, COMMISSIONER OF INTERNAL REVENUE, Petitioners v. Docket No. 29100-21. Respondent ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is hereby ORDERED that the Clerk of the Court shall transmit to petitioners and respondent a copy of the pages of the transcript of the trial in the above-referenced case, held before Judge Emin Toro remotely (via ZoomGov) on July 21, 2023, containing the Court's Oral Findings of Fact and Opinion, rendered at the trial session at which this case was heard. In accordance with the Oral Findings of Fact and Opinion, a Decision will be entered under Rule 155. It is hereby ORDERED that, on or before September 14, 2023, the parties shall submit the computations under Rule 155. (Signed) Emin Toro Judge Served 07/31/23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Bench Opinion by Judge Emin Toro July 21, 2023 3 Timothy J. Goumas & Meredith E. Goumas v. Commissioner of Internal Revenue Docket No. 29100-21 THE COURT: The Court has decided to render oral findings of fact and opinion in this case and the following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. The oral findings of fact and opinion are made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Tax Court Rule 152. Rule references in this opinion are to the Tax Court Rules of Practice and Procedure, section references are to the Internal Revenue Code, in effect at all relevant times, and all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times. All monetary figures are rounded to the nearest dollar. The Commissioner of Internal Revenue determined deficiencies in, and accuracy-related penalties with respect to, federal income tax for petitioners Timothy J. and Meredith E. Goumas's 2018 and 2019 tax years. After concessions reflected in a Stipulation of Settled Issues filed on June 7, 2023, and a concession 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 with respect to travel expenses the Goumases made at 4 trial, three issues remain for our decision: (1) Whether the Goumases have substantiated the deductions for car and truck expenses they claimed on Schedules C, Profit or Loss From Business, for 2018 and 2019, respectively; (2) Whether the Goumases have substantiated the deductions for meals and entertainment expenses they claimed on Schedules C for 2018 and 2019, respectively; and (3) Whether the Goumases are liable for accuracy- related penalties under section 6662(a) for substantial understatements of tax or for negligence for 2018 and 2019. For the reasons described below, we find in the Commissioner's favor on each issue. FINDINGS OF FACT On the evidence before us, and using the burden-of-proof principles explained below, the Court finds the following facts. We draw the facts from the testimony and other evidence admitted at trial, as well as the parties' pleadings and their Stipulation of Facts and all attached Exhibits thereto. I. Mr. Goumas's Work Mr. Goumas worked as a recruiter and 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 consultant during 2018 and 2019. For part of 2018, Mr. 5 Goumas was a recruiter with a staffing agency, iWorkGlobal USA, LLC, doing work for Samsung. In 2019, he was a recruiter for another staffing agency, Axelon Services Corporation, doing work for Liberty Mutual. He also undertook recruiting work on his own account. Mr. Goumas's office was located in his home in Rochester, NH. II. The Goumases' Returns for 2018 and 2019 The Goumases timely e-filed their individual income tax returns for 2018 and 2019, reporting total tax of $10,168 and $10,978, respectively. They prepared their own returns using TurboTax. Each return included a Schedule C. On each Schedule C, Mr. Goumas reported that he operated a "Consulting" business and identified expenses he claims to have incurred in connection with the business during 2018 and 2019. The reported expenses included car and truck expenses and meals and entertainment expenses. The Schedules C reported no income for either year, although amounts paid to Mr. Goumas by iWorkGlobal ($44,495) and Axelon ($65,881) were reported as wages elsewhere on the returns. The returns reported no other income for Mr. Goumas's work during 2018 and 2019. 24 A. Car and Truck Expenses 1. Return Reporting 25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 The Schedules C for 2018 and 2019 reflected 6 car and truck expenses of $20,916 and $19,869, respectively. The expenses were calculated using the IRS's standard mileage rate, which for 2018 was 54.5 cents per mile and for 2019 was 58 cents per mile. For 2018, the Goumases reported that Mr. Goumas used four vehicles in his consulting business: a Toyota Sienna, a BMW 335xi, a Jeep Wrangler, and a Dodge Ram. See 2018 Form 4562, Depreciation and Amortization (Including Information on Listed Property), Ex. 1-J, at 12. For the Toyota Sienna, they reported 10,716 business miles and 15,002 personal miles. For the BMW, they reported 16,391 business miles and 2,921 personal miles. For the Jeep Wrangler, they reported 3,917 business miles and 13,395 personal miles. And for the Dodge Ram, they reported 8,217 business miles and 8,002 personal miles. In total, the Goumases reported driving 78,561 miles for business and personal reasons in 2018. For 2019, the Goumases reported that Mr. Goumas again used four vehicles in his consulting business: the Toyota Sienna, the BMW, the Dodge Ram, and an Infiniti. See 2019 Form 4562, Ex. 2-J, at 6. For the Toyota Sienna, they reported 9,526 business miles and 4,845 personal miles. For the BMW, they reported 18,412 business miles and 2,588 personal miles. For the Dodge 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Ram, they reported 8,591 business miles and 10,158 7 personal miles. And for the Infiniti, they reported 1,280 business miles and 341 personal miles. The Goumases also reported that the Infiniti was "placed in service" on December 14, 2019. In total, the Goumases reported driving 55,741 miles for business and personal reasons in 2019. 2. Related Public Records According to New Hampshire Department of Motor Vehicles (DMV) records, a 2017 Toyota Sienna, a 2008 BMW 3-Series, a 1999 Jeep Wrangler, a 2016 Dodge Ram, and a 2019 Infiniti were registered in the Goumases' names at various points from 2017 to 2020. A 2015 Toyota Sienna was also registered to the Goumases in 2017, but was transferred to a third-party on or about January 11, 2018. The State of New Hampshire requires motor vehicles to undergo annual inspections. For automobiles, the inspection process varies based on whether the vehicle is powered by gasoline or diesel. For a gasoline-powered vehicle that is less than 25-years old, during an inspection, equipment running what is known as an onboard diagnostics (OBD) program is connected directly to the vehicle's computer system. The OBD program then extracts certain information from the vehicle's computer system, including a current odometer reading. For a diesel- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 powered automobile, the equipment running the OBD program 8 is not connected directly to the vehicle's computer system during an inspection. Instead, a certified motor vehicle inspector manually enters information from the vehicle into the OBD program, including a current odometer reading. Irregularities in odometer readings (for example, when a subsequent manually entered odometer reading is lower than a previous one) trigger fraud alerts that are transmitted to the DMV, which regularly investigates such alerts. The DMV maintains records from vehicle inspections. These records include, among other information, the vehicle's identification number (VIN), the registration number, the vehicle's make and model, the inspection date, and information from the OBD program, including a current odometer reading. In the inspection records, the figures shown for the odometer readings represent the inspected vehicle's mileage in thousands of miles. For example, when an inspection record states that the odometer read 010, that indicates that the inspected vehicle had approximately 10,000 miles at the time of 22 inspection. 23 24 25 The vehicles registered to the Goumases underwent inspections at various times between 2017 and 2020. The charts below show information for the Goumases' 1 2 3 4 5 vehicles from the DMV records. The charts include the 9 inspected vehicles, the dates of the inspections, and the odometer readings as of the dates of those inspections. Inspection Date Nov. 29, 2017 June 18, 2018 July 12, 2019 2017 Toyota Sienna Odometer Reading (in thousands of miles) 001 011 030 2008 BMW 3-Series June 19, Aug. 9, Sept. 17, April 1, April 4, May 12, 2017 2017 2018 2019 2019 2020 078 078 081 082 082 087 6 7 8 9 Inspection Date Odometer Reading (in thousands of miles) 10 11 12 13 14 15 1999 Jeep Wrangler July 28, 2017 July 25, 2018 Aug. 3, 2018 139 140 140 Inspection Date Odometer Reading (in thousands of miles) 2016 Dodge Ram July 28, July 17, Aug. 26, May 12, 2020 2017 021 2018 026 2019 039 042 Inspection Date Odometer Reading (in thousands of miles) 16 2019 Infiniti 17 18 19 20 21 22 23 24 25 For the 2019 Infiniti, the DMV records show a first registration date of December 3, 2019. While the Infiniti was inspected on August 13, 2020, there are no records of other relevant inspections during the years at issue. At the time of the August 13, 2020, inspection the odometer read approximately 22,000 miles. 2015 Toyota Sienna The DMV records show that the 2015 Toyota Sienna underwent inspections in 2017 while registered to 1 2 3 4 5 6 Mrs. Goumas. The last date of inspection in 2017 was 10 December 30, 2017, and the odometer read approximately 41,000 miles. The next vehicle inspection record shows an inspection date of March 29, 2019, which is more than 14 months after the vehicle registration was transferred to the third-party. 7 B. Meals and Entertainment 8 9 The Goumases' Schedules C for 2018 and 2019 claimed deductions for meals and entertainment expenses of 10 $1,569 and $1,741, respectively. 11 C. Examination of the Goumases' Returns 12 13 14 15 16 17 18 19 20 21 22 23 24 25 The IRS selected the Goumases' 2018 and 2019 returns for audit. During the examination, IRS Revenue Agent Stephen Rubel made the initial determination that accuracy-related penalties under section 6662 applied to both years. Specifically, he determined that penalties for substantial understatement of tax applied and, in the alternative, that penalties for negligence applied. Supervisory Tax Specialist Mark N. Otis, Revenue Agent Rubel's immediate supervisor, approved the assertion of the proposed penalties in writing before they were first formally communicated to the Goumases. On September 3, 2021, the Commissioner issued a Notice of Deficiency determining income tax deficiencies for 2018 and 2019, respectively, and (as 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 relevant here) penalties under section 6662. 11 III. Tax Court Proceedings The Goumases timely petitioned our Court to redetermine the deficiencies and penalties. They resided in New Hampshire when they filed the Petition. We began trial of this case remotely (via ZoomGov) on July 17, 2023, during the Court's remote special session for Boston, Massachusetts. The Goumases represented themselves. Brian M. Howell and Stefan G. Herlitz represented the Commissioner. Once trial began, the Goumases indicated that they had additional records (in the form of two unscanned day planners) supporting the claimed deductions that were not in a usable form for a remote trial. In the interests of justice, we announced a recess and gave the Goumases until 5 pm Eastern Time on July 18, 2023, to turn the records over to the Commissioner in a usable form. We continued the trial of this case remotely on July 19, 19 2023. 20 21 22 23 24 25 I. Burden of Proof OPINION As a general rule, the Commissioner's determinations in a notice of deficiency are presumed correct, and taxpayers bear the burden of proving that the determinations are erroneous. See Rule 142(a); Welch v. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Helvering, 290 U.S. 111, 115 (1933). Typically, taxpayers 12 also bear the burden of proving their entitlement to any deductions claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). Under section 7491(a)(1), "[i]f, in any court proceeding, a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B, the Secretary shall have the burden of proof with respect to such issue." See Higbee v. Commissioner, 116 T.C. 438, 442 (2001). The Goumases have neither claimed, nor introduced credible evidence sufficient to show, that the burden of proof should shift to the Commissioner under section 7491(a) as to any relevant issue. Therefore, the Goumases generally bear the burden of proof. II. Ordinary and Necessary Business Expense Deductions 19 A. General Rules 20 21 22 23 24 25 Section 162(a) allows a taxpayer to deduct all ordinary and necessary expenses paid or incurred in carrying on a trade or business. A trade or business expense is ordinary if it is normal or customary within a particular trade, business, or industry. Welch v. Helvering, 290 U.S. at 114. A trade or business expense 1 2 3 4 5 6 7 8 9 10 11 12 13 is necessary if it is appropriate and helpful for the 13 development of the business. Commissioner v. Heininger, 320 U.S. 467, 471 (1943); Welch, 290 U.S. at 113. No deduction is allowed for "personal, living, or family expenses." I.R.C. § 262(a). Taxpayers must generally maintain records sufficient to substantiate the amounts of any deduction or credits claimed. I.R.C. § 6001; Treas. Reg. § 1.6001- 1(a), (e). If, however, the taxpayers can prove that they paid or incurred a deductible business expense but are unable to prove the amount of the expense, we may estimate the amount allowable in some circumstances under the Cohan rule. See Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 14 1930). 15 B. Heightened Substantiation Requirements 16 17 18 19 20 21 22 23 24 25 For certain kinds of business expenses, including automobile expenses, section 274(d) overrides the Cohan rule and instead imposes heightened substantiation requirements. See, e.g., Kamal v. Commissioner, T.C. Memo. 2023-80, at *21. For the 2018 and 2019 taxable years, section 274(d)(4) provided, among other things, that no deduction is allowed with respect to certain vehicle expenses unless the taxpayer establishes (A) the amount of the expense or other item, (B) the time and place of the travel, (C) the business purpose of the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 expense or other item, and (D) the business relationship 14 to the taxpayer of the person receiving the benefit. I.R.C. § 274(d) (flush language); id. § 280F(d)(4); Temp. Treas. Reg. § 1.274-5T(b)(6); cf. Boyd v. Commissioner, 122 T.C. 305, 313, 320 (2004) (discussing the relationship between section 162 and section 274). Deductions relating to property subject to the heightened substantiation requirements of section 274(d) are disallowed in full unless the taxpayer establishes each element of the requirements. See Sanford v. Commissioner, 50 T.C. 823, 827-28 (1968), aff'd per curiam, 412 F.2d 201 (2d Cir. 1969); Fleming v. Commissioner, T.C. Memo. 2010-60; see also Temp. Treas. Reg. § 1.274-5T(a). To satisfy the heightened substantiation requirements, a taxpayer may substantiate his expenses either (1) by adequate records or (2) by sufficient evidence that corroborates his own statements. I.R.C. § 274(d) (flush language); Temp. Treas. Reg. § 1.274- 5T(c)(1). For purposes of this analysis, written evidence generally has considerably more probative value than oral evidence. Temp. Treas. Reg. § 1.274-5T(c)(1). Also, while a contemporaneous log is not required, "the probative value of written evidence is greater the closer in time it relates to the expenditure or use." Id.; see also Larson v. Commissioner, T.C. Memo. 2008-187. Taken 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 alone, a taxpayer's unsupported testimony is insufficient 15 to substantiate his entitlement to the deduction. See Temp. Treas. Reg. § 1.274-5T(a)(4). To meet the "adequate records" test under section 274(d) and the relevant regulations, the taxpayer must maintain an account book, diary, log, statement of expense, trip sheets, or similar records, as well as, in certain cases, documentary evidence such as receipts or bills. See Temp. Treas. Reg. § 1.274-5T(c)(2)(i). In combination, these items must be sufficient to establish each element of an expenditure or use-specifically, the amount, time, and business use or purpose. See id.; Temp. Treas. Reg. § 1.274-5T(b)(6). To qualify as an adequate record, an account book, diary, log, or similar record must be prepared and maintained in such manner that each entry is made at or near the time of the expenditure or use. See Temp. Treas. Reg. § 1.274-5T(c)(2)(ii)(B). In order to establish business use, the record must contain sufficient information as to each element of every business use, but the level of detail required may vary depending on the facts and circumstances. See Temp. Treas. Reg. § 1.274- 5T(c)(2)(ii)(C). In the absence of adequate records to establish each element of an expense under section 274(d), 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 a taxpayer may alternatively establish an element "(A) 16 [b]y his own statement, whether written or oral, containing specific information in detail as to such element; and (B) [b]y other corroborative evidence sufficient to establish such element." Temp. Treas. Reg. § 1.274-5T(c)(3)(i). If the element the taxpayer seeks to establish is "the cost or amount, time, place, or date of an expenditure or use, the corroborative evidence shall be direct evidence, such as a statement in writing or the oral testimony of persons entertained or other witnesses setting forth detailed information about such element, or the documentary evidence described in paragraph (c)(2)" of Temp. Treas. Reg. § 1.274-5T, which includes an account book, diary, log, statement of expense, trip sheets, or similar records. See Temp. Treas. Reg. § 1.274- 5T(c)(3)(i) (flush language). By contrast, circumstantial evidence may be sufficient to establish the business purpose of an expenditure. Id. In the event of the destruction of a taxpayer's records by fire, flood, earthquake, or other casualty, the taxpayer has the right to substantiate a deduction by reasonable reconstruction of the expenditures. See Temp. Treas. Reg. § 1.274-5T(c)(5); see also, e.g., Probandt v. Commissioner, T.C. Memo. 2016-135, 25 at *21-37. 17 1 A. Car and Truck Expenses 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Passenger automobiles are among the listed property included in section 280F(d)(4), see I.R.C. § 280F(d)(4)(A)(i), and the heightened substantiation requirements of section 274(d) must be met for automobile expenses even when the optional standard mileage rate is used, see Treas. Reg. § 1.274-5(j)(2). A review of the entire record in this case leaves us unpersuaded that Mr. Goumas has met his burden of proof with respect to the claimed deductions for mileage. Mr. Goumas testified that many of his records in support of the deductions were destroyed when his home flooded, first in 2016 and 2017, then again in 2018 or 2019, as well as in 2020. Therefore, to support his claim for car and truck deductions, Mr. Goumas produced reconstructed mileage logs he created during the IRS's audit of his 2018 and 2019 tax years as well as planners he used while conducting his business in 2018 and 2019. But significant inconsistencies exist among the DMV records, Mr. Goumas's business records, and the Goumases' tax returns. Because of the many conflicts present among these documents, which we will soon discuss, and Mr. Goumas's inconsistent testimony, we conclude that the Goumases have failed to meet their burden of proving that the Commissioner's determination was incorrect. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 To begin with, Mr. Goumas reported on his 18 2018 and 2019 returns more than 134,000 total miles and more than 77,000 business miles on the five cars he reported to have driven during those years: the Toyota Sienna, the BMW, the Jeep, the Dodge, and the Infiniti. His logs are mostly consistent with these amounts, which is unsurprising given that they were prepared during the audit of the Goumases' returns to support the numbers reported on those returns. The DMV records, however, tell an entirely different story. We take the records for the relevant vehicles in turn. Consider first the 2017 Toyota Sienna. The DMV records show the Sienna was driven 11,000 miles from November 2017 until June 2018. They further show the Toyota Sienna was driven approximately 19,000 miles from June 2018 until July 2019. The record does not reflect the Toyota Sienna's mileage as of 2020, but annualizing based on the average miles driven from November 2017 to July 2019, we estimate the Toyota Sienna would have been driven 34,800 total miles for both 2018 and 2019. (Our computation is as follows: We start with the July 2019 mileage reading of 30,000 miles. Subtracting from that reading the November 2017 mileage reading of 1,000 miles leaves 29,000 miles. Dividing the 29,000 miles by 20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 months-the period between November 29, 2017, and July 12, 19 2019-yields a monthly average of 1,450 miles. Multiplying this monthly average by 24 months yields 34,800 miles.) We note that this computation is generous to Mr. Goumas because he testified that he did not drive his vehicles for business reasons in the last quarter of 2018 or in the second half of 2019, and his 2019 planner and log include no mileage after March 2019. Thus, we could have stopped counting at 29,000 miles for both years. Nevertheless, for consistency, we will use the 34,800 miles we just derived for purposes of our subsequent discussion. Take next the Dodge Ram. From July 2017 to July 2018, DMV records show the Dodge Ram was driven 5,000 miles. From July 2018 to August 2019, the Dodge Ram was driven 13,000 miles. And from August 2019 to May 2020, the Dodge Ram was driven 3,000 miles. Because the inspections did not take place on January 1 or December 31, we cannot know for certain how many of the 5,000 miles driven from July 2017 to July 2018 were driven in 2018 or how many of the 3,000 miles driven from August 2019 to May 2020 were driven in 2019, but even assuming that all of them were driven in the years before us (that is in 2018 and 2019), again a generous assumption that favors Mr. Goumas, the Dodge Ram would have been driven a total of just 21,000 miles in 2018 and 2019 (3,000 miles + 13,000 miles + 5000 miles = 21,000 miles). 20 Let's turn next to the BMW. As we have previously found, the BMW's odometer read 78,000 in August 2017 and 87,000 miles in May 2020, indicating a change of 9,000 miles. We will assume for purposes of our analysis (again favoring Mr. Goumas) that all of these 9,000 were driven during 2018 and 2019. Finally, the DMV records show that the Jeep Wrangler was driven a mere 1,000 miles between 2017 and 2018. We will assume for purposes of our analysis that all these miles were driven in 2018 because the Goumases did not claim any miles for the Jeep Wrangler in 2019. Taking into account all of the miles assumed to have been driven in 2018 and 2019 based on the analysis of the DMV records reflected above, one obtains 65,800 miles for both 2018 and 2019 (34,800 miles for the Toyota Sienna + 21,000 miles for the Dodge Ram + 9,000 miles for the BMV + 1,000 miles for the Jeep Wrangler = BMW 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 65,800 miles). 20 21 22 23 24 25 But the Goumases claimed on their returns that they drove more than 134,000 miles for those years (78,561 in 2018 and 55,741 in 2019), more than twice the number one can reasonably calculate based on the DMV records (65,800 miles). Indeed, just the business miles the Goumases reported on their returns, 39,241 miles for JT 1 2 3 4 5 6 7 8 9 10 11 2018 and 37,809 miles for 2019, or a total of just over 21 77,000 miles for the two years, exceed the total miles one can reasonably calculate based on the DMV records by a good margin. And if one credits the Goumases' return reporting that they drove these vehicles for personal reasons for 57,252 miles during the two years (39,320 miles in 2018 and 17,932 miles in 2019), one is left to conclude that business miles for the two years were just over 8,500 miles (65,800 total miles - 57,252 reported personal miles = 8,548 purported business miles), a far cry from the more than 77,000 business miles shown on the 12 returns. 13 14 15 16 17 18 19 20 21 22 23 24 25 Faced with such wide discrepancies, we simply cannot credit the numbers Mr. Goumas reported. And his efforts to explain these issues at trial only increase our doubts. For example, when asked to compare the numbers reported on his return to the DMV records, Mr. Goumas eventually admitted that he had estimated the numbers reported on his returns by looking at appointments in his planners and "just put a number in." He further admitted that he had no idea how many miles were attributable to each car and had simply estimated the allocations he reported on the returns. And when asked how, in light of this unconventional approach, he had come up with the odometer readings for each vehicle reflected 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 in his retroactively prepared logs for each trip, which 22 are precise down to the decimal point, Mr. Goumas said "we kinda winged it." This is only the beginning of the discrepancies in the Goumases' testimony and records. At trial, for example, when faced with the mileage discrepancies related to his 2017 Toyota Sienna, Mr. Goumas said they were likely due to the Goumases' ownership of a second Toyota Sienna (the 2015 Toyota Sienna) for the first part of 2018. He initially testified that "my 2015 Sienna, that was most of the mileage for 2018 before we traded it in," and later he reiterated that, for his 2018 return, "that was my 2015 Toyota Sienna, absolutely, because that car was not traded in until then." But DMV records obtained by the Commissioner show that the 2015 Toyota Sienna was registered to another owner by January 2018, and the Goumases eventually admitted that they must have transferred it around that time. Similarly, the Goumases alleged that the low mileage shown for 2018 and 2019 in the BMW inspections was due to a broken odometer. But they also testified that they replaced the odometer approximately six months after purchasing the car in 2017. And based on the testimony of a DMV representative as well as a review of the inspection 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 reports, there is no indication of any odometer issues 23 from at least August 9, 2017 (when the odometer read approximately 78,000 miles) onward. Nor would a broken odometer explain the vast discrepancy in the mileage given the age of the vehicle and the availability and age of other vehicles the Goumases used. Mr. Goumas's explanation for the discrepancies in his returns and records is that his basement flooded during the relevant years, destroying all his records except the planners. But his description of the flooding shifted over time, moving from a claim that they experienced one flood in 2018 or 2019 to a claim of up to three or four floods spanning 2016 to 2020. Mr. Goumas also provided inconsistent accounts of whether his records were destroyed before or after he filed each of the returns in this case. And there are problems no matter which of his accounts is correct. For example, if there was only one flood in 2018 or 2019, it would not have destroyed all the Goumases' records. A flood in 2018 would not have destroyed their 2019 records or, presumably, the mileage log Mr. Goumas was currently keeping for 2018 or that he kept after the flood. Similarly, a flood in 2019 would not, if it was at the beginning of the year, prevent Mr. Goumas from keeping records for the rest of the year. And 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 if the flood was in late 2019 or any time in 2020, Mr. 24 Goumas would have had his 2018 records when preparing the 2018 returns. By contrast, if Mr. Goumas's account of multiple floods in multiple years is correct, we question why the Goumases continued to store important records in a basement that experienced destructive flooding on a near- annual basis. We also find significant problems with the records that did survive, Mr. Goumas's 2018 and 2019 planners. Many of the appointments listed in the planners are indecipherable, do not indicate a point of origin, include just a name and title with no location, or are described as "sales calls." Other appointments are labeled as "interviews" or "meetings." Some appointments include an address, and some do not. Mr. Goumas testified that he spends a significant portion of his work on the phone talking to prospective candidates and clients, and Mrs. Goumas credibly testified that she urged Mr. Goumas to stay home as much as possible during the relevant years due to the illness of their young child. This testimony, coupled with the planner entries, supports an inference that a number of the appointments reflected in the planner likely were calls rather than trips. Mr. Goumas, however, appears to have included mileage for many of these appointments in his 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 claimed deductions, and he testified that he drove long 25 distances to attend them. As one example, his planner and mileage logs reflect that he drove from Rochester, New Hampshire, to Baltimore, Maryland, and back (a distance of more than 900 miles) for a "sales call" on February 28, 2019, and then from Rochester, New Hampshire, to Pittsburgh, Pennsylvania, and back (a distance of more than 1,200 miles) for another "sales call" on March 1, 2019, the very next day. We note that Baltimore and Pittsburgh are only about 250 miles apart, calling into question why Mr. Goumas drove all the way home between the two trips. While we found Mrs. Goumas's testimony regarding their child's illness credible, that explanation rings hollow with respect to these particular trips, given that, estimating a generous average speed of 60 miles-per- hour, the Baltimore trip would have required approximately 15 hours of driving, and the Pittsburgh trip would have required approximately 20 hours of driving. Adding Mr. Goumas's meetings and any stops for gas or meals into the mix, that leaves essentially no time for Mr. Goumas to recuperate at home between the trips. Even more troubling, several planner entries appear to have been modified after they were originally created, in a different color ink, to add information (such as an address) to suggest a physical 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 trip. Mr. Goumas did not mention any such modifications 26 in his testimony, stating instead that "my planners are never recreated." And he presented no evidence other than the planners to show that the appointments involved physical trips, again citing the floods. But even assuming that every receipt Mr. Goumas generated from 2018 to 2019 was destroyed, he could have provided credit or debit card records showing transactions in the places he claimed to visit (for example, expenses for gas, meals, tolls, or similar expenses). This he did not do, despite submitting debit card records for meal expenses incurred closer to home during those years. To summarize, although we believe Mr. Goumas did drive to some of his appointments, in light of the numerous discrepancies in the testimony and records, we simply cannot conclude that the Goumases have satisfied their burden of proof with respect to the claimed deductions for car and truck expenses. 19 B. Meals and Entertainment Expenses 20 21 22 23 24 25 A taxpayer must meet the requirements of section 274(d) for meal expenses incurred while on business travel. I.R.C. § 274(d)(1). For meals not connected with travel, taxpayers may claim a deduction for food and beverages provided the expense "is not lavish or extravagant under the circumstances" and "the taxpayer (or 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 an employee of the taxpayer) is present at the furnishing 27 of such food or beverages." I.R.C. § 274(k)(1). However, such a deduction generally is limited to 50 percent of the amount of the expense. Id. § 274(n)(1). On the other hand, no deduction is allowed for "personal, living, or family expenses." I.R.C. § 262(a). And for taxable years beginning after December 31, 2017, section 274(a)(1) generally prohibits all deductions for expenses incurred for activities that "constitute entertainment, amusement, or recreation." See Tax Cuts and Jobs Act, Pub. L. No. 115-97, § 13304, 131 Stat. 2054, 2124 (2017); Treas. Reg. § 1.274-11(a). For 2018 and 2019, the Goumases claim that Mr. Goumas incurred meal and entertainment expenses of $1,569 and $1,741, respectively. To substantiate these expenses, Mr. Goumas produced lists of debit card transactions that show the dates of alleged expenses, the amounts of those expenses, and a description of the location of the expenses. For 2018, the list shows total expenditures of $3,136. Among these expenditures are $720 spent on tickets from Stubhub, $180 spent at flower shops, $43 spent at Harry and David, $602 spent at an equipment rental facility, and $22 spent on transit tickets through the Massachusetts Bay Transportation Authority (MBTA). The remaining expenses shown for 2018 were made at 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 restaurants. 28 For 2019, the list provided by Mr. Goumas shows total expenditures of $1,213 spent at restaurants. This amount is $528 less than what the Goumases reported on their 2019 Schedule C. The Goumases have not produced any additional records accounting for the difference. To the extent that Mr. Goumas claims a deduction for amounts he spent on tickets through Stubhub, section 274(a) disallows any such entertainment expenses, and he has not shown that the expense otherwise qualifies for a deduction. For the amounts spent at flower shops, Harry and David, an equipment rental facility, and on transit tickets, we will deny Mr. Goumas a corresponding deduction because he has not demonstrated that these constitute deductible business expenses under section 162. See also I.R.C. § 262(a). With respect to the remaining restaurant expenditures, Mr. Goumas initially told the Court that he had submitted no supporting documentation other than the list of debit card transactions because he had already provided photocopies of his annual planners to the IRS audit team, and he assumed that the Commissioner had the copies and would offer them as evidence at trial. As we have described, the Court ordered a recess to allow Mr. Goumas to re-scan his planners and submit them to the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Court. When trial resumed, the parties included 29 photocopies of the planners in their Stipulation of Facts, and Mr. Goumas argued that entries in the planners substantiate his restaurant expenditures. We disagree. To begin with, some of the restaurant expenditures have no corresponding planner entry. For those that do have an entry, the text is difficult to decipher and sometimes indicates only a name and location. Even more troubling, however, multiple entries that describe meals appear to have been added at some time after the original planner entries, with different colored (typically darker) ink, and in some cases, differently angled handwriting, leaving the impression that they were filled in after-the-fact to support the debit card transactions. Mr. Goumas made no mention of such supplemental annotations in his testimony, saying only that he used many different colors of pens when writing in 18 his planners. 19 20 21 22 23 24 25 As one example, Mr. Goumas's debit card transactions reflect a claimed expenditure of $5.11 at Subway that was incurred and posted to his bank account on January 23, 2018, before being processed by the bank on January 24, 2018. The 2018 planner includes an entry in dark blue ink that appears to read "Subway - S.A [illegible]." in cramped handwriting between two other 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 entries in lighter ink. The entry appears on January 24, 30 2023, the date Mr. Goumas's Subway transaction was processed, not the date it was incurred. When pressed on cross-examination regarding this entry, Mr. Goumas initially treated it as substantiating his Subway expense, but, after apparently realizing that the entry had been made on the wrong day, he changed course, arguing that it read "Subaka" rather than Subway. As another example, Mr. Goumas's debit card transactions reflect a claimed expenditure of $114.83 at the 110 Grill in Rochester, New Hampshire, incurred on March 21, 2018. Mr. Goumas's 2018 planner includes an entry on that date listing five names in faded blue ink. But someone subsequently traced over the fifth name in darker blue ink-by all appearances the same ink that was used to add the Subway expense- with the "110 Grill" added at the same time. The same ink appears to have been used to add restaurant notations on multiple other days to corroborate the debit card transactions, including, but not limited to, an MTBA expense on April 7, 2018, a Starbucks expense on April 8, 2018, a Garwoods expense on May 16, 2018, a Sea Ketch expense on May 25, 2018, a The Burleigh expense on June 2, 2018, and a Lilac City Grill expense on June 14, 2018. We also observe that Mr. Goumas, somewhat 1 2 3 4 5 6 7 8 9 10 11 unusually, incurred many of the claimed meal expenses on 31 Saturdays and Sundays. And despite the numerous long business trips he has reported taking, nearly all of the meal expenses were incurred near his home, in Rochester, New Hampshire. Mr. Goumas did not explain these points at trial, other than to say that most of the meal expenses were incurred for his local clients. In short, based on these and other discrepancies, we conclude that Mr. Goumas's planner entries are generally unreliable for our purposes and are insufficient to substantiate his claimed deductions for 12 meals. 13 14 15 16 III. Accuracy-Related Penalties Finally, we must determine if the Goumases are liable for the section 6662 penalties determined by the Commissioner for both 2018 and 2019. 17 A. The Commissioner's Burden of Production 18 19 20 21 22 23 24 25 Section 6662 imposes a 20% penalty on the portion of an underpayment of tax attributable to "[n]egligence or disregard of rules or regulations" or "[a]ny substantial understatement of income tax." I.R.C. § 6662(a), (b)(1) and (2). Negligence includes "any failure to make a reasonable attempt to comply with the provisions of this title." I.R.C. § 6662(c). An understatement of income tax is a "substantial 1 2 3 4 5 6 7 8 9 understatement" if it exceeds the greater of "10 percent 32 of the tax required to be shown on the return for the taxable year" or $5,000. I.R.C. § 6662(d)(1)(A). The Commissioner here has asserted section 6662(a) penalties based on substantial understatement, and in the alternative negligence, for 2018 and 2019. Under section 7491(c), the Commissioner bears the burden of production with respect to the liability of an individual for any penalty. See Higbee v. Commissioner, 116 T.C. 438, 446 10 (2001). 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 It appears that even after reducing the tax liabilities to reflect the Commissioner's concessions, the Goumases understatements of tax for 2018 and 2019 exceed the statutory threshold set forth in section 6662(d). In addition, we conclude that the Goumases were negligent in preparing their returns. Specifically, Mr. Goumas testified that the Goumases estimated the mileage claimed on the returns when they prepared them and that the mileage on the returns is not accurate. He further testified that they did not have records when preparing the 2018 return because of the flood in their basement that occurred beforehand, and he "just put a number in" when prompted by TurboTax to input mileage. Although Mr. Goumas also testified that he used his planners and MapQuest to determine the mileage, when asked by the Court 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 he said that they did not maintain any records from 33 MapQuest showing the mileage calculations. And, as we have already discussed, we find Mr. Goumas's planner unreliable for purposes of calculating the claimed Schedule C deductions. Thus, the Goumases failed to reasonably attempt to comply with their reporting, recordkeeping, and substantiation obligations. The Commissioner therefore has carried his burden of production to show that the Goumases' tax underpayments were attributable to negligence. To satisfy his burden of production, the Commissioner must also show compliance with the procedural requirements of section 6751(b)(1). See I.R.C. § 7491(c); Graev v. Commissioner, 149 T.C. 485, 493 (2017), supplementing and overruling in part 147 T.C. 460 (2016). The record establishes that the Commissioner has done so, a point the Goumases have not disputed. We now turn to whether there was reasonable cause for the underpayments of tax for 2018 or 2019. 20 B. Reasonable Cause and Good Faith 21 22 23 24 25 A taxpayer may avoid penalties under section 6662(a) by showing that there was reasonable cause for the underpayment and that the taxpayer acted in good faith. I.R.C. § 6664(c)(1). The determination of whether a taxpayer acted with reasonable cause and in good faith 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 is made on a case-by-case basis, taking into account all 34 of the pertinent facts and circumstances, including the taxpayer's efforts to assess the proper tax liability as well as the taxpayer's knowledge, experience, and education. Treas. Reg. § 1.6664-4(b)(1). Mr. Goumas testified that he and Mrs. Goumas prepared their own returns for 2018 and 2019 and that some of the expenses claimed on the returns, including the mileage expenses, were estimates and inaccurate. The Goumases have not demonstrated why the underpayments for 2018 and 2019 may be attributable to reasonable cause and good faith, nor is it apparent from a review of the record in this case. Mr. Goumas's claim that he was following the IRS's advice when he reconstructed the mileage logs and that the IRS examiner and Appeals officer were aware that the logs were reconstructed fails to explain why his actions were reasonable at the time he prepared the returns, long before he spoke with anyone at the IRS about his lost records. Also, Mr. Goumas's assertion that he discussed these matters with a certified public accountant does not excuse his actions as, by his own admission, those discussions took place after the IRS began its examination and could not have provided reasonable cause for the Goumases' actions at the time they filed their returns. Because the Goumases have not demonstrated 35 reasonable cause, we conclude that they are liable for the penalty under section 6662 based on substantial understatement of tax. However, if after considering the Commissioner's concessions, the Goumases' underpayments of tax are not substantial understatements, then we conclude that they are liable for penalties under section 6662 on account of negligence. To reflect the foregoing, decision will be entered under Rule 155. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 3:32 p.m., the above-entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25