TAX COURT OPINION

Case: Paul Rudnick
Docket Number: 17500-06
Judge: Marvel
Opinion Type: memo
Filed: 06/09/2009
Pages: 33

T .C . Memo . 2009-13 3 UNITED STATES TAX COURT PAUL RUDNICK, Petit' .oner v . COMMISSIONER OF INTERNAL REV,NUE, Responden t Docket No . 17500-06 . (Filed June 9, 2009 . Paul Rudnick, pro se . Margaret Burow , for respondent . MEMORANDUM FINDINGS OF FACT AND OPINION MARVEL, Judge : Respondent determined a deficiency of t $103,194 and a section 6662(a)' accuracy- related penalty o f $20,634 with respect to petitioner's 2 04 Federal income ta x 'Unless otherwise indicated, all s~ction references alt o the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure . 9 2009 After concession's,2 the issues for decision are : (1) Whether, andlito what extent,iipetitioner is entitled t o certain deductions claimed on his Schedule A, Itemize d Deductions ; (2) whether, andl!to what extent,petitioner is entitled to business expense deductions claimed with respect to a busines s .activity known as Eglobal Call Solutions ; ft,(3) whether petitione r is liable'ifor the 10-percen t it !additional tax under section 72(t) on early distributions fro m qualified retirement .plans ; and 4 whether petitioner is liable :; for the section 6662(a ) accuracy-related penalty . 11 FINDINGS OF FAC T facts have been stipulated . We incorporate th e stipulation of facts and supplemental ; stipulation of facts into lour findings by this reference . -,Petitioner resided in Californi a when he petitioned this Court . Before 2004 petitioner was employed as presiden t software development company, Five-by-Five Networks, Inc . (Five- 2 concedes the $lbl dividend income adjustment . Respondent also concedes that petitioner is entitled to :a home mortgage interest deduction of $32,905, and petitioner 'concedes that he is not entitled to the remaining home mortgage :interest deduction of $3,423 . Respondent concedes that petitioner is entitled to $10,998 of deductions claimed on Schedule C, Profit or Loss,, From Businessll; for a business'; activity known as 4-Play, ,and petitioner concedes that he .is not entitled to the remainde r of those deductions claimed . it - 3 - by-Five Networks) . Before and during 004 petitioner wa s involved in various business ventures elated to software , development and telephone call centerslin Vietnam and the Unite d States . Petitioner's Testimony at Tria l Petitioner testified regarding hi involvement with s'ev eral business entities during 2003 and 2004 Although we find ih at petitioner was engaged in a business a~tivity during 2004'un der the name Eglobal Call Solutions, petitioner did not introdu' c e documents to establish the relationship, if any, between Egil I I bbal Call-Solutions and other business acti ities mentioned durlin!g his testimony . We are not willing to make findings of fact regardin g those business activities based solely on petitioner' s uncorroborated testimony . However, we summarize petitioner s testimony to provide a framework for oir holdings . That 'summar y is set forth below . Five-by-Five Networks3 started a software developmenticenter in Vietnam . Sometime around December 003 or January 2004 ; when I Five-by-Five Networks ran out of money, petitioner acquired as severance from his employment with Five-by-Five Networks4 th e I 3The record does not show what kin of entity Five-by- :Five Networks was, nor does the record show who owned it . 4The record does not show in which year (2003 or 2004)1this occurred or whether petitioner include the value of the s'o'ftwar e program in his income . rights5 to a software development program that the Vietnam cente r was . developing . . Specifically, petitioner acquired the rights to two assets--I-Contact'i integrated software that assisted with Internet sales, and Hey-Voice, call center software that provided an automated list of options over the telephone . However, when petitioner acquired the rights to the software, it was not ready for immediate use . After receiving the rights to the software from Five-by-Five Networks, petitioner arranged for employees at a Vietnam cal l center to integrate the software petitioner had acquired from ;IFive-by-Five Networkslfinto a software :program called Integrate d ,Agent Desktop . Integrated Agent Desktop was necessary for petitioner's business, to operate . Development and testing of Integrated Agent Desktop occurred from early 2004 through August 2004 . In March 2004 ntegrated Agent,Desktop was brought onlin e in beta version, and in June 2004 it was formally launched . Around August or September 2004 Integrated Agent Desktop underwent a major revision .- I n In approximately' December 2003 or January 2004 petitioner also obtained6 for $250,000 the rights to several assets from Eglobal Call Networks, Inc . .(Eglobal Call Networks), a 5The record does N, not disclose how or in what name petitioner acquired the rights . 6The record does not disclose how or in what name petitioner acquired the assets . 5 - corporation that was in the business o selling calling card s . Those assets included a Voice Over IP etwork router in Vietnam, fiber optic links from San Francisco t Hong Kong and from HI n g Kong to Vietnam, and billing equipment in San Francisco . Petitioner made a downpayment of $125, 00 to Eglobal Call 'I . Networks and paid the balance of the purchase price by giving Eglobal Call Networks cash to keep its business afloat ." Petitioner and Eglobal Call Networks did not execute any agreement or bill of sale formalizing the purchase . Af,ter~ t e purchase, petitioner began operating t e assets jointly with Eglobal Call Networks . During 2004 petitioner effected several transactions' using the name Eglobal Call Networks . For e~ample , on February 19 and March 20, 2004, petitioner transacted ith Business Wire using Eglobal Call Networks's account . Petitioner also placed an rde r with Source Voice Data Systems Solutionls under the name Eglobal Call Networks and signed loan documents as president of Eglobal Call Networks . In addition, petitions had some control b f,,~, ~ Eglobal Call Networks ' s checking account and used EglobalCa1 1 Networks to transfer money to Vietnam . 'Petitioner did not introduce any l his investment, nor did he explain the Eglobal Call Solutions (the business he Call Networks . Sank records to . documen t relationship between operated) and Eglobal Petitioner also formed a ,company called Eglobal Vietnam , Ltd . (Eglobal Vietnam) . Petitioner needed Eglobal Vietnam i n order to conduct business in Vietnam .' Eglobal Vietnam operated qr the call center in Vietnam . Although petitioner provided funding to Eglobal Vietnam, he held no ownership interest . 8 In 2004 Eglobal Vietnam entered into a lease agreement with II ,Quang Trung Software City Development Co . for a facility in Vietnam . Eglobal Vietnam also contracted with Quang Trun g 'Software City Development Co . to construct a call center facilit y in Vietnam . In July ,2004 Eglobal Vietnam moved into the newly it constructed call center facility, and in September 2004„the call ,center started generating customer traffic . In October 2004 Eglobal Call Solutions began to generate revenue . During .20041~Eglobal Call,Solutions's revenue came from two customers, Tata Consulting and H & R Block . Eglobal Cal l tSolutions earned income when employees of the two customer s contacted the call center in Vietnam for technical support involving software operation . 9 Petitioner employed a bookkeeper in Vietnam to help keep hi s business records . The bookkeeper used Quickbooks to kee p 'Petitioner did not introduce any documentation regarding the formation and ownership of Eglobal Vietnam . 'Petitioner-did not explain the relationship between Eglobal Call Solutions, Eglobal Call Networks, and Eglobal Vietnam, but his testimony implied'!that Eglobal Call Solutions income was generated by the business activity in Vietnam . li records, and petitioner reviewed the r cords when he visite d Vietnam . The bookkeeper provided peti loner information from th e Quickbooks records to complete his tax returns . In 2005 Vietnamese authorities raided the Vietnam facility because, unbeknownst to petitioner, a anager of Eglobal Vie nam was operating without a required license . During the raid' the authorities seized various business records . Petitioner's 2004 Return I Petitioner, a cash basis taxpayer, prepared his 2004 FoJm 1040, U .S . Individual Income Tax Retur (2004 return) . Petitioner's Schedule A attached to h i following : 2004 return showedithe i l l Schedule A Expenses Amoun t Medical and dental expenses' $41,000 Taxe s State and local income taxes 2,621 Real estate taxes 10,144 Personal property taxes 3,45 0 Home mortgage interest and points 36,32 8 Gifts to charity Gifts by cash or check 1,360 Other than cash or check 11 2 Job expenses and most other miscellaneous deductions 2 Unreimbursed employee expenses 118,052 Attorney's and accountant', fees 26,575 'After the application of the 7 .5- ercent floor under s ec . 213(a) . 2Amounts reflect deductions as rep rted before application of the 2-percent limitation under sec . 67(a) . I On the Schedule C, Profit or Loss From Business , for Egloba l Ca11j~Solutions attached to his 2004 return, petitioner reporte d gross receipts of .$45 , 060 and the following Schedule C expenses : Schedule C Expenses Amoun t Advertising? Commissions'and fees Contract labor Employee benefit programs Insurance Legal and professional services Office expenses Rent or leas e Other business property Supplies Taxes and licenses Travel Meals and entertainment Utilities Wages $34,09 0 1,22 2 4,53 4 4,53 2 12,38 9 1,45 9 8,12 3 88,04 5 2,33 3 3,12 3 6,12 3 16,74 5 13,45 5 96,05 0 'Amount reflects'the deductions for meals and entertainment expenses as reported before application of the 50-percent ,limitation under sec .274(n) . Petitioner, who was not yet 59-1/2, reported $208,226 o f taxable pension and annuity income on his 2004 return . Petitioner attached to his 2004 return Form 5329, Additiona l Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored :Accounts . On Form 5329 petitioner reported early distribution s $2,895 that were subject to the section 72(t) additional ta x ,and early distributions of $28,900 that were not subject to section 72(t) additional tax .1 0 P11 '°It appears that~there is a mistake on petitioner's Form ;[5329 . He was supposed to report on line 1 all early (continued . . . ) 1! I' 9 - In a notice of deficiency dated J it disallowed the medical and dental expe ses, unreimbursed employe e expenses, attorney's and accountant's ees, and part of th e home mortgage interest and points reported petitioner's Schedule A . Respondent also disallowed all deducti ns relating to Eglobal Call Solutions claimed on petitioner' s Schedule C .11 Responden t also determined that petitioner was li ble for section '72 (t) additional tax of $20,823 and a sectio 6662 ( a) accuracy - relate d penalty of $20,634 . Petitioner timely petitioned thi s Court, and a trial wa s held . After trial we kept the record pen t o allow petitioner t o introduce additional . evidence to subst ntiate his Schedule A an d Schedule C deductions . Specifically, e instructed petitione r (1) to arrange for respondent to conduct a telephone in'terv w of the bookkeeper in Vietnam, (2) to obtain health insurance records to substantiate his medical . expenses, and (3) to provide 2004 and 2005 bank statements with respect to the Eglobal Call Soluti~ns account and his personal account . Petitioner did not provide an y 1O( . .continued ) distributions included in income and t reported on line 1, report on line 2 th not subject to the additional tax . en, of those distributions e distributions that :ar e "Respondent also disallowed all e penses claimed on ai separate Schedule C relating to a busin ss called 4-Play . However, the parties have resolved this issue by agreement . 11 - 10 - additional evidence, nor did he file a posttrial brief with th e . Court . 'I . Exhibits 6-P, 7-P, and 8- P OPINION At trial we reserved ruling on petitioner's Exhibits 6-P, 7-P, and 8-P . Exhibit 6-P is a computer spreadsheet showing ,various expenses for A 12-month period . Respondent objected t o Exhibit 6-P on grounds of authenticity, best evidence, an d hearsay and because it was prepared in anticipation o f ,litigation . In his brief respondent contends that Exhibit 6-P i s an improper summary, ,chart, or calculation under rule 1006 of the Federal Rules of Evidence because the underlying documents use d to prepare the spreadsheet were not made available to respondent and petitioner provided no testimony regarding the preparation o f the spreadsheet . .Rule 1006 of the, Federal Rules of Evidence provides that th e contents of voluminous writings that cannot conveniently be examined in court may be presented in ; the form of a chart , summary, or calculation . It also provides that the originals or duplicates of the summarized writings must be made available fo r examination or copying, or both, by other parties at a reasonable time![°and place . Exhibit 6-P doesunot show the year to which the spreadshee t relates or who prepared the spreadsheet . Petitioner did not present any credible testimony about tie source of the amount s 1 11 - shown in the spreadsheet or what the e :pensesrepresented . jtn addition, even though we gave petitioner a posttrial opportunit y to provide to respondent and to the Co rt documentation substantiating the expenses he claimed, petitioner did not take advantage of the opportunity . Because petitioner did not ploduc e I the underlying documentation that Exhi it 6-P purportedlyf~ . summarized as required by rule 1006 of the Federal Rules of'- Evidence, we conclude that Exhibit 6-P is inadmissible . ' At trial respondent also-objected to Exhibits 7-P and 8IP o n the basis of relevancy because they related to 2003 and notl2004 . Exhibit 7-P is a credit card statement showing charges forij December 2003 . Petitioner argued at trial that Exhibit'7-P's relevant because he paid the credit caiqd statement in 200 W However, petitioner did not prove that he paid the credit bir d statement in 2004 . We conclude that Exhibit 7-P is not' relevan t and therefore is inadmissible . Exhibit 8-P consists of cop s o f the following receipts : (1) Radioshack ~ receipt dated January 9, 2004, paid in cash, (2) San Francisco I nternational Airport ( Parking Receipt dated December 20, 2003 paid in cash, and i(, ) Dougherty Shell receipt dated January 2 9, 2004, paid by credit card . We conclude that the San Francis co International ; Airpor t Parking Receipt is not relevant because it was paid in 20031 However, because the other receipts reflect payments in1 ;2004, we 12 - shall admit Exhibit 8Lp . !III . Burden of Proo f In general, the Commissioner's determination of a deficiency is presumed correct, and the taxpayer bears the burden of proving otherwise . Rule 142( .) ; Welch v . Helvering , 290 U .S . 111, 115 (1933) . Petitioner does not contend that section 7491(a), which shifts the burden of proof to respondent if its requirements are met, applies, and petitioner has not produced evidence to show h e h meets the requirements of section 7491(a) . The burden of proo f with, respect to the deficiency in his tax, therefore, remains on petitioner . III .,, Schedule A Deductions A . Medical Expense s Expenses paid during the taxable year , not compensated for ,,by insurance or otherwise, for medical care of the taxpayer shal l be allowed as a deduction to the extent that such expenses exceed 7 .5 percent of adjusted gross income . ;. Sec . 213(a) . A deduction is allowed only with respect to medical expenses actually pai d during the taxable year, regardless of when the incident or event which occasioned the expenses occurred . Sec . 1 .213-1(a)(1), Income Tax Regs . is Petitioner deducted $41,000 of medical expenses on-hi s 'I Schedule A . In support of this deduction, petitioner introduced - 1 3 into evidence several documents evidence ing that he underwent outpatient surgery in December 2004 . T hose documents incl ulde d documents titled "Outpatient Surgery Pd stoperative Orders/Discharge Instructions", "Anes t esia Risk Information' and "Consent to Surgery/Special Proced res/Anesthesia", thre e Explanation of Benefit forms .from petit ioner's health insure ,l z and a medical invoice for $10 .49 . Pet' tioner, however , introduced no credible evidence to pro e that he paid any medical expenses in 2004 . Although we allowed petitioner an opportunit y after trial to offer substantiation of the medical expense e allegedly paid in 2004, petitioner fail ed to do so . Because petitioner did not prove e paid any medical expenses in 2004, we sustain respondent 's determinatio n disallowing petitioner's medical expen s e deduction . B . Unreimbursed Employee Expenses A taxpayer may deduct unreimburse employee expenses a an ordinary and necessary business . expense under section 162 . uca s v . Commissioner , 79 T .C . 1, 6 (1982) . However, an employee cannot deduct such expenses to the exte nt that the empl'oyee' is entitled to reimbursement from his or h er employer fo r expenditures related to his or her status as an employee . Id . 7 . Along with other miscellaneous itemized deductions, 12Although petitioner provided several forms from his health insurer, petitioner testified that the cost of his procedure was disallowed by his insurer because he had not paid the premiums . - 14 - unreimbursed employee expenses are . subject to the 2-percent o f adjusted gross income? limitation under section 67_(a) . Petitioner claimed a $118,052 deduction for unreimburse d employee expenses . Petitioner testified that some of th e unreimbursed employees ;expenses related to his employment wit h Five-by-Five Networks! and were expenses not paid by Five-by-Fiv e .Networks . Petitioner1 however, did not introduce any credibl e evidence that he actually paid any employee expenses or that h e was not entitled to reimbursement from Five-by-Five Networks fo r those expenses . In addition, petitioner did not introduce any it ,credible evidence regarding that part of his unreimbursed lemployee expense deduction that did not relate to his employment c with Five-by-Five Networks . Because petitioner failed to prove he is entitled to a deduction for unreimbursed employee expenses, we sustai n ;;respondent's determination disallowing the deduction . C . Attorney's and Accountant's Fee s Petitioner claimed a $26,575 deduction for attorney's and accountant's fees as other miscellaneous itemized deductions . Petitioner testified that at least some of those fees related t o two lawsuits involving his neighbor, one dealing with a sprinkler system and the other involving a dispute over petitioner's tree . Petitioner did not introduce documentation of his legal expenses from the attorney representing him in those matters, nor did he - 15 - introduce any credible evidence establishing that he actually paid any fees to a professional or that the fees, if paid, were deductible .. 1 3 Because petitioner failed to intr duce credible evidence to prove that he paid attorney's and accountant's fees during pP0 4 and that the fees, if paid, werel deductible, we sustain respondent's determination disallowing the deduction . IV . Schedule C Deductions for E global Call Solution s Section 162(a) permits a taxpayer to deduct the ordin r and necessary expenses paid or incurred during the taxable yearlin carrying on a trade or business . See commissioner v . Lincol n Sav . & Loan Association , 403 U .S . 345, 352 (1971) . In ordler fo r a taxpayer "to be engaged in a trade o business, the taxpayer . must be involved in the activity with continuity and regularity and * * * the taxpayer's primary purpose for engaging in th e activity must be for income or profit ." Commissioner v' . Groetzinger , 480 U .S . 23, 35 (1987) . expense is ordinary s i i f it is normal, usual, or . customary within a particular tirade ; business , or industry or arises from a transaction " of '.common or frequent occurrence in the type of busi ess involved ." Deputy v . du Pont , 308 U .S . 488, 495 (1940) . A n expense is necessarylif it is appropriate and helpful for the dev e lopment of the business i "Legal expenses that are personal are not deductible .', 'lec . 262(a) . 11 - 16 - ,See Commissioner v . Lincoln Sav . & Loan Association , supra at 353 ; Commissioner v . Heininger , 320 U .S . 467, 471 (1943) . .Section 262(a) disallows deductions for personal, living, or family expenses . Seedalso sec . 1 .162 ;-17(a), Income Tax Regs . When a taxpayer establishes that-he paid or incurred a °deductible expense but does not establish the amount of th e expense, we may estimate the amount allowable in som e .circumstances (the Cohan rule) . See Cohan v . Commissioner , 39 F .2dij-540, 543-544 (2diCir . 1930) . There must be sufficient evidence in.,the record, however, to permit us to conclude that the taxpayer paid or incurred a deductible expense in at leas t .the amount allowed . See Williams v . United States , 245 F .2d 559, 560 (5th Cir . 1957) . In estimating the amount allowable, we bear heavily upon the taxpayer who failed to maintain required records .and to substantiate deductions as the', Code requires . See Cohan v . Commissioner , supra at 544 . if For certain kinds of business expenses, such as travel , meals, and entertainment expenses, section 274(d) overrides the ( Cohan rule . See Sanford v . Commissioner , 50 T .C . 823, 82 7 (1968), affd . per curiam 412 F .2d 201 (2d Cir . 1969) ; sec . 1 .274- 5T(a), Temporary Income Tax Regs ., 5&Fed . Reg . 46014 (Nov . 6, 1985) . Under section . 274(d), a taxpayer must satisfy strict substantiation requirements before a deduction is allowable . Se e also sec . 6001 ; sec . 1 .6001-1(a), (e), Income Tax Regs . ii -17 Respondent does not dispute that etitioner had a business or that he was involved in that business with continuity and regularity and for profit . Respondent contends, however, th t petitioner has not substantiated the e penses he claimed on1 is Schedule .C relating to Eglobal Call So utions and that pet 'itione r has provided only self-serving testimo y that he is entitled to the deductions . In addition responder contends that the i ite d documentation introduced into evidence appears to reflect the payment of startup expenditures that axe not deductibld, under section 195 . Section 195(a) provides that, exc pt as otherwise provided therein, no deduction is allowed for startup expenditures . See also Hardy v . Commissioner , 93 T .C . 684, 687-693 (1989), affd . in part and remanded in part per order (10th Cir ., Oct . 29, 1990 . Section 195(c)(1) defines startup expe ditures to mean any a oun t paid or incurred in connection with (i) investigating the creation or acquisition of an active .tiade or business, o r ii ) creating an active trade or business, or (iii) any activity engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipatio n of becoming an active trade or business , which if paid or ' JJ incurred in connection with the operation of an existing active trade or business would be allowed as deduction for the taxable - 18 - 'year in which paid or!incurred .14 Under section 195(c)(2)(B), an ,,acquired trade or business is treated as beginning when th e taxpayer acquires it .l s Although petitioner testified he acquired various asset s during 2004, he also testified that the software assets he acquired were still under development until approximately September 2004 when aj,revision of the integrated software wa s completed . According, to petitioner, the Vietnam call center did not begin to service customers until September .2004 and'did not generate any revenue until October 2004 . Even if we accep t petitioner's general and very vague testimony as credible and .assume that the Vietnam call center's business activity was a ,'part . of petitioner's Schedule C business, Eglobal Call Solutions , the testimony reveals,, that call center did not begin to function until,September 2004 at the earliest and did not generate revenue until October 2004 . Consequently, we conclude on the recor d Ih 14Sec . 195(b)(1) was amended by the American Jobs Creatio n Act of 2004, Pub . L . 08-357, sec . 902(a)(1), 118 Stat . 1651, ,ii effective for amounts'~'paid or incurred after Oct . 22, 2004 . Under sec . 195(b)(l),,as in effect both before and after the 2004 amendment, a taxpayer may elect to treat startup expenditures as deferred expenses that may be amortized as provided therein, and ,the amortization period cannot begin any earlier than the month ,i nin which the active trade or business' begins . It does not appear elected to amortize any startup expenditures with respect to Eglobal Call Solutions, and petitioner does not argue that he made the election . 15Petitioner testified that he acquired various assets . We ;,infer from this testimony that he did not acquire an active trade for business during or''before 2004 . nondeductible startup expenditures and r section 195(a) ; . . We turn now to specific expenses etitioner deducted Schedule C for Eglobal Call Solutions . A . Advertisin g Petitioner claimed a $34,090 deduction for advertising including : ( 1) An invoice dated February 19, 2004 , from Bu l Wire addressed to Eglobal' Call Network fee of $120, (2) a confirmation dated arch 25, 2004, of payment with petitioner's credit card or promoting an I Web site address described as "www .egl balcallsolutions .corn " showing the company name as "eglobalca invoice dated March 31, 2004, from Bu s ness Wire for $4"40, I(4) a confirmation dated April 28, 2004 , $49 .95 payment with ) petitioner's credit card for promoting the Internet Web s i "www .eglobalcallsolutions .com", and (5) an invoice for $11,081 .42- dated April 30, 2004, from Focus Prin t n Copy primarily foi "70 0 Brochures 'eGlobalCall Solutions'" that was stamped paid . Because the Business Wire invoic e show that the amount s were paid on behalf of Eglobal Call Ne t works and not Eglobal Cal l Solutions or petitioner himself, we cannot determine whether) the y were paid by petitioner or whether they related to EglobalCall 20 - Solutions . And although the payment for promoting Eglobal Call j~Solutions's Internet Web site and the payment for the Focus Print n Copy invoice appear to relate to Eglobal Call Solutions, all of the expenses were paid before September 2004 . In addition to the expenses discussed above, petitione r testified that most of the advertising expenses related to the !a purchase of four customer lists at $5,000 each . Petitione r testified that he paid for the customer lists by wire transfer s from,,,his personal checking account ;16 but even after we gave petitioner a second opportunity to substantiate the payment s ,after trial, petitioner never introduced evidence of the wir e transfers that he claims he made, nor did he submit any othe r .documentation to establish he paid for the customer lists .17 All of the documentation of advertising expenses in the record relates to expenses paid before petitioner's busines s ,became operational . 'See, e .g ., Feerick v . Commissioner , T .C . ,Memo . 1991-330 . We conclude, therefore, that petitioner ha s failed .to prove he paid deductible advertising expenses durin g 16Petitioner testified that in the beginning he used his ,personal checking account to pay expenses, but then he started ;using one of Eglobal Call Networks's checking accounts . 1 .7 Even if petitioner were able to substantiate that he paid for four customer lists, it appears that petitioner would not be entitled a full deduction in 2004 for those payments . Customer lists are generally considered sec . 197 intangibles that must be amortized over a 15-year' period . Sec" . 197(a), (d) (1) (C) (ii) ; sec . 1 .197-2(b)(4), income Tax Regs . 2004, and we sustain respondent's dete mination disallowinglth e 21 - deduction . B . Commissions and Fees Petitioner claimed a $1,222 dedu c ion for commissions and fees on his Schedule C . Petitioner to tified that this deduction h l represented payments made by check to wo people who helpedl h m generate deals . Petitioner, however, estified that he did not have copies of the checks or any other evidence to show whetie r i I or when he paid any commissions or fee Petitioner's testimony about the commissions and fees he suppgsedly paid is insuffi ient for the Court to make an estimate of tis expense under thei toha n rule . See Norgaard v . Commissioner , 939 F .2d 874, 879 ;(9thj ir . 1991), affg . in part and revg . in part T .C . Memo . 1989-3901 . 1 We conclude, therefore, that petitioner fa iled to substantiate! the deduction he claimed for commissions a d fees, and we sustain respondent's determination disallowing the deduction . I h C . Contract Labo r Petitioner claimed a $4,534 deduct ion for contract lab o on his Schedule C . Petitioner testified t hat this deductio n probably represented payments to people he paid by the hour! H e testified that he would have paid those people from the . Egloba l Call Solutions account that he had set up with U . S . Bank . Petitioner did not have those bank .sta t ements because he claimed that the bank statements were seized by Vietnamese authoriti s in - 22 - the 20,05 raid . on his office . Even if we accept as credibl e petitioner's testimony regarding the raid in Vietnam, we are no t convinced that all relevant business records were in Vietnam or were seized in the raid . Moreover, we gave petitioner a n ,opportunity after trial to obtain duplicate bank records from U .S . Bank, but he did not do so .. We conclude therefore that ;petitioner failed to substantiate that he paid any contract labo r expenses during 2004,!and we sustain respondent's determinatio n disallowing the deduction . 1,D . . Employee Benefit Program s Petitioner claimed a $4,532 deduction for employee benefits on his Schedule C . Petitioner testified that this expense included cash payments to the Vietnamese Government for-health insurance . However, petitioner did not present any credibl e evidence to prove thell:nature, amount, and purpose of the healt h insurance he . allegedly paid in 2004 . ,!Consequently, we conclude that petitioner failed to substantiate the deduction he claimed for employee benefits, and we sustain respondent's determination . E . Insuranc e Petitioner claimed a $12,389 deduction for insurance on his Schedule C . Petitioner testified that the insurance expense mostly represented insurance that he paid on his automobile i n Vietnam . However, petitioner did not introduce any documentation or other credible evidence to prove that he paid insurance o r I - 23 - that he even had an insurable interest Consequently, we conclude that petitio substantiate the deduction he claimed or an insurance expense , and we sustain respondent's determina t on F . Legal and Professional Serv i e s Petitioner claimed a $1,459 deduc ion for legal an d professional services on his Schedule In support of thi s deduction, petitioner introduced into vidence an invoice 'd'ated 1 1 February 26, 2004, from Sedgwick Deter , Moran & .Arnold LLP and Affiliated Entities for professional s rvices through January 31 , 2004 . Petitioner testified the invoic€ related to expenses , incurred in establishing the organization and dissolving h'i s i I;, relationship with Five-by-Five Networks . However, peti'tione~r di d not introduce any evidence substantiat : ng that he paid the'! invoice in 2004 or showing that the pr fessional services related to Eglobal Call Solutions . Consequent y, we conclude tha t petitioner has failed to substantiat e he deduction he 'claime d for legal and professional services, aid determination . G . Office Expenses Petitioner claimed an $8,123 deduction for office expense s on his Schedule C . Petitioner testified that the office expense s included payments for utilities in bot his Vietnam and U .S . offices . Petitioner also testified th t he made the payment I i - 24 - from either his personal checking account or the account established under the name Eglobal Call Solutions, but petitioner could not produce any canceled checks, bank statements,,ior .other payment records . As we have already stated several times , petitioner was given an opportunity to obtain his bank statements 11 ,after trial and present them to respondent and the Court, bu t ,;petitioner did not do so . - Petitioner also introduced into evidence various receipts, such,, as receipts from,, Staples, Radioshack, CompUSA, Fry's Electronics, and the U .S . Postal Service, that may,have,been included in office expenses . However, because we have no way of determining whether those receipts represented business o r ,personal expenses, we cannot conclude that those receipt s substantiate petitioner's office expense deduction . " We conclude that ;; petitioner has failed to substantiate hi s .deduction for office expenses , and we sustain respondent' s determination . H . Rent or Lease for Other Business Property Petitioner claimed an $88,045 deduction for rent or leas e for other business property . Petitioner testified that th e .property in question included land in Vietnam on which petitione r 18Several of the -receipts showed purchases of, items, that were personal and not'related .to Eglobal Call Solutions . For example, one receipt from Fry's Electronics included a purchase of a Euro Pro Shark Professional Iron, and another . included a !purchase of a DVD entitled "Matrix Revolutions" . constructed a building . Petitioner .te tified that in 2004':h - 25 - paid about $ 90,000 to Quang Trung Soft are City Development C I I i 0 . for the lease . In support of his testimony, petitioner introduced into evidence an unsigned c py of a lease that sh wed Eglobal Vietnam as the lessor . Petitioner testified that : 1 although the lease showed Eglobal Viet n am as the lessor , petitioner paid the rent . Petitioner Maimed that he had bank statements that would prove those payments, but he did no t introduce any documentation at trial t substantiate the leas e payments he allegedly made . Although ye gave petitioner a~!~ posttrial opportunity to produce the documentation he claimed h e had, petitioner did not do so . We conclude that petitioner has failed to substantiate s he deduction for rent or lease expenses fo r other business property, and we sustain respondent's determination . I . Supplie s i I Petitioner claimed a $2,333 .deduction for supplies . Petitioner testified that he deducted mounts spent for generic office supplies used in his Vietnam an U .S . offices . Although petitioner introduced into evidence various receipts, we cannot determine from a review of those receipts whether they reflect business or personal purchases .' . Because petitioner did not ; introduce any evidence that would allow us to estimate the supplies .peti.tioner purchased for Eglo al Call Solutions, we will 26 - .not apply the Cohan rule . See Norgaard v . Commissioner , 939 F .2 d at 879 . We conclude that.ipetitioner has failed to substantiate th e deduction for supplies, and we sustain respondent' s determination . J . Taxes and License s Petitioner claimed a $3,123 deduction for taxes and licenses on his Schedule C . Petitioner testified that the taxes and licenses expense included a license fee that he paid to„th e u Vietnamese Government . However, because petitioner introduced n o evidence that he actually paid any license fee in 2004 or that a license fee was required, the Cohan rule is not applicable here . Consequently, we conclude that petitioner has failed t o substantiate his deduction for taxes and licenses, and we sustain respondent's determination . K . Trave l Petitioner claimed a $6,123 deduction . for travel . Petitioner testified that the travel expense related primarily t o this Vietnam trips and that he also attended a call cente r conference in Orlando, Florida . Petitioner introduced into evidence two credit car d statements showing purchases from China Air that he credibly testified were for airplane tickets to Vietnam . However, th e first credit card statement shows a China Air purchase on 4 (cid:127) December 13, 20 .03, and the second show - 27 - on February 2 and . February 6, 2004, of hin a Air purchases occurred before the Viet am call center became operational in approximately September 2004 . At best, these travel expenses are nondeductible star up expenditures unde r section 195 . See supra pp . 17-19 . Petitioner also introduced in evi ence a rental car receipt from Orlando, Florida, where he suppos dly attended a call iHcente r conference . Petitioner did not prese n corroborating evidenc e regarding the conference, nor did he s ow that the car rental wa s for business purposes . Consequently , e conclude that peti t ioner failed to prove that he is . entitled to deduct the rental ca r expense . See sec . 274(d) . Petitioner also introduced into e idence numerous receipts for gasoline purchases . Because petit oner did not produce any mileage or travel logs to substantiate that the gasolin e purchases related to his activities in Eglobal Call Solutions, we conclude that he has failed to prove that the gasoline purchases reflected on the receipts are deductib e . See id . We susIt a respondent's determination. jl L . Meals and Entertainmen t Petitioner claimed a $6,745 deduction for meals and entertainment expenses . Petitioner in roduced into evidence restaurant receipts that he claims were for various meetings - 28 - Although petitioner provided some testimony regarding the meal receipts, petitioner introduced no documentation to show with whom he met during these so-called meetings or whether th e meetings were related to his business activities . Petitioner has 11 !I not substantiated by adequate records or by sufficient evidenc e corroborating his own~statement'the business purpose of th e expenses as required under section 274(d) . Consequently, we !conclude that petitioner has failed to substantiate the deduction ,for meals and entertainment expenses, and we sustain respondent's determination . M . Utilitie s Petitioner claimed a $13,455 deduction for utilities . Petitioner testified that the utilities expenses primarily represented the electricity cost in V etnam .19 Becaus e 11 petitioner did not provide any credible evidence that he paid electricity bills in Vietnam, we conclude that petitioner has failed to substantiate- the deduction for utilities . We sustai n respondent 's determination . N . Wage s Petitioner claimed , a $96,050 deduction for wages . !'Petitioner testified that all wages were paid .in cash to ii 1, employees in Vietnam . :', Petitioner also testified that the record s 19Petitioner testified that the utility costs for his U .S . ,activities were de minimis in comparison to his utility costs in Vietnam . accounting records-seized by Vietnamese authorities . Petitione r did not introduce any other evidence t~ prove that he paid wage s to employees in Vietnam . Petitioner did not testify as to ';:hb w many employees he had or . the amounts o no effort to document this deduction b records . We conclude therefore-that p substantiate the deduction for wages, determination . 2 0 0 . Other Documents and Receipts Petitioner introduced in evidenc e additional documents ; and receipts to substantiate his expenses c laimed on the Schedu l C . To the extent we did not specifically address the documents i or receipts in this opinion, we conclude t hat the documents olr receipts do not substantiate that petit ioner was entitled t o a business expense deduction for Eglobal Call Solutions . V . Section 72(t) Additional Ta x Section 72(t)(1) imposes an additi nal tax of 10 percent on the portion of a distribution from a qu lified retirement plan that is includable in gross income, unl ss the distributioli ail s under one of the exceptions in section 72 (t) (2) . Under' certai n 20In his testimony petitioner made minimum monthly payment of $15,000 to E expenses including wages associated wit Petitioner has failed to substantiate h alleged . several references to a lobal Vietnam for variou s the Vietnam call center . made monthly payments as - 30 - circumstances, the section 72(t) additional tax does not apply to distributions made to!cover the costs ;of medical care or of higher education expenses . Sec . 72(t)(2)(B), (E ) Section 72(t)(2),(B) provides an exception to the section 72(t) additional tax for distributions made to the employee t o the extent such distributions do not exceed the amount allowabl e as a deduction under section 213 to the employee for amounts pai d during the taxable year for medical care . We have already found ,that petitioner is not entitled to a deduction for medical expenses claimed on his Schedule A under section 213 becaus e petitioner could not :isubstantiate that .: he paid any medical ,expenses in 2004 . Thus, petitioner is not eligible for°th e section 72(t)(2)(B) exception to the additional tax because his distribution exceeds the amount allowable as a deduction under section 213 . Section 72(t)"(2)(E) provides an exception to the section .72(t) additional tax for distributions from individual :retirement .plans used for qualified higher education expenses of th e it '',taxpayer for the taxable year . This exception applies to qual ;(cid:127)fied higher education expenses the taxpayer paid for the is taxpayer's children .' ; Sec . 72(t)(7)(A)(iii) . Qualified higher education expenses generally include expenses for tuition, fees, books, supplies, and iequipment required for the enrollment o r 11 - 31 - attendance at an eligible educational i nstitution . Secs . 1; 11 72(t) (7) (A) , 529(e)(3) . Petitioner contends that he paid e penses related to hi children's college education and theref 0 re he is entitled to the section 72(t) exception for at least pa t of his distribut e s . However, petitioner did not introduce a y evidence other tla hi s uncorroborated testimony regarding any igher education payment s he allegedly made on behalf of his two hildren . Without s'oie documentation to support petitioner's g neral testimony, w e cannot conclude that petitioner used th distribution to pa y college education expenses or that the xpenses , even if paid , are qualified higher education expenses within the meaning ofi section 529(e),(3) . See .sec . 72(t) .(7) ( A I!; , Because petitioner failed to prove that he qualifies fd : any exception under section 72(t)(2), we su tain respondent' s ibstantiate that he used 21Even if petitioner were able to s rement plan to pay Ih1is the distribution from his qualified ret penses, he would likely children's qualified higher education e eption because his not qualify for the sec . 72(t) (2) (E) ex bution from an indi1vlidua l distribution apparently was not a distr retirement plan . See, e .g ., Uscinski vi Commissioner, T .C ., Memo . 2005-124 ;'see also H . Rept . 105-148, at 288-289 (1997),1997 :-4 C .B . (Vol . 1) 319, 610-611 . The Intern 1 Revenue Code define s "individual retirement plan" as an indi idual retirement acco or annuity described in sec . 408 (a) and (b) . Sec . 7701(a) (~37 Petitioner attached to his 2004 return wo Forms 1099-R, ,{ Distributions From Pensions, Annuities, Retirement or ProfitSharing Plans, IRAs, Insurance Contract , etc ., which show tha t petitioner ' s distribution was not a dis ribution from an individual retirement account or annuit . Moreover , on his 2 return petitioner did not report receiving any distribution'f an individual retirement account or annuity . 004 rom un t I 32 - determination that petitioner is liable for the section,-72(t ) additional tax on the~fdistribution from his qualified retiremen t plan. II, f VI . Section 6662(a) Accuracy-Related Penalt y Respondent contends that petitioner is liable for the accuracy-related penalty under section 6662 on the ground tha t 'there was a substantial understatement of income tax in 2004 . Section 6662(a) and (!b)(2) authorizes the Commissioner to impose a 20-percent penalty .if there is a substantial understatement of income tax . A substantial understatement of income tax wit h respect to an individual taxpayer exists if, for any taxable year,'the amount of the understatement for the taxable yea r exceeds 10 percent of the tax required : to be shown on the return for the taxable year or $5,000, whichever is greater . Sec . 6662(d) (1) (A) . Respondent bears the initial burden of production with respect to petitioner's liability for the section 6662 penalty, in that respondent must first produce sufficient evidence to establish that the imposition of the section 6662 penalty is appropriate . Sec . 7491(c) . If respondent satisfies his initia l burden of production ; the burden of producing evidence " to refute respondent ' s evidence and to establish that petitioner is not liable for the section 6662 penalty'shifts to petitioner . Se e al Higbee v . Commissioner , 116 T .C . 438' 447 (2001) . uj 33 - Respondent has carried his burden of production by showing that petitioner substantially understated his 2004 Federal incom e tax . Because respondent has met his b rden of production, petitioner must come forth with suffic ent evidence to persu ad e the Court that respondent's determina t on is incorrect . See id . at 446-447 . Petitioner also bears the burden of producin g evidence to demonstrate reasonable cau e under section 6664(c)(1) . See id . Petitioner has not introduced any credible evidence t'~~ha t respondent's accuracy-related penalty etermination is incor rec t or that petitioner had reasonable cause for the substantial understatement of his 2004 income tax . Therefore, we sust ainI respondent's determination that petiti ner is liable for the section 6662(a) accuracy-related penal Y (cid:127) To reflect the foregoing, Decision will be .entered l under Ru : e 155 .