TAX COURT OPINION

Case: Ron C. Touchard & Misty Touchard
Docket Number: 14013-15
Judge: Goeke
Opinion Type: bench
Filed: 04/30/2018
Pages: 10

CZ UNITED STATES TAX COURT WASHINGTON, DC 20217 RON C. TOUCHARD & MISTY TOUCHARD, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 14013-15. ) ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Joseph Robert Goeke at Los Angeles, California containing his 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. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. April 30, 2018 SERVED May 01 2018 1 2 3 4 5 6 7 8 Bench Opinion by Judge Joseph Robert Goeke April 12, 2018 Ron C. Touchard & Misty Touchard v. Commissioner of 3 Internal Revenue Docket No. 14013-15 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 10 be relied upon as precedent in any other case. This 11 OPinion is rendered pursuant to Internal Revenue Code 12 section 7459(b) and Rule 152 of the Tax Court Rules of 13 Practice and Procedure. Section references hereinafter 14 15 16 are to the Internal Revenue Code in effect for the years 2010 and 2011. The present case is before the Court based upon 17 the petitioner's timely petition of a notice of deficiency 18 which was issued to them regarding their joint federal 19 income tax returns for 2011 and 2010. The respondent 20 21 22 determined deficiencies of $495,572 and $231,188 in income tax for 2010 and 2011 respectively. Respondent also determined additions to tax under section 6651(a)(1) and 23 6662(a) for 2010 and under 6662(a) for 2011. At the time 24 that petitioners filed their position in this case they 25 were residents of California. cribers (973)406-2250|operatiempestrberunt[wwwescribersmet 4 2 3 4 5 6 7 In the petitioner's notice of deficiency, the respondent made adjustments to gross income, Schedule A expense, and Schedule C expenses. All of the expenses that were at issue and the gross income adjustments have been resolved but for Schedule C expenses and one itemized deduction expense in the amount of $41,085 for State tax deductions in 2010. In addition to the resolution of the gross income adjustments and other adjustments as reflected in the stipulation of settlement filed by the 10 parties, the parties have agreed that Mrs. Touchard was an 11 12 13 innocent spouse under section 6015(c) in both of the years in question, There's no dispute in this case that the burden 14 of proof is on the petitioners regarding the remaining 15 deductions which are in dispute. Pursuant to 142(a)(1) 16 the petitioners bear the burden of proving their 17 entitlement to the claimed deductions. Petitioners did 18 not maintain that section 7491(a)(1) would alter the 19 burden of proof, and we find that based upon the evidence 20 21 22 in the record, section 7491(a)(1) is not applicable to in any way modify the burden of proof. Respondent does have the burden of production relative to the addition to tax, 23 and that burden is met based upon the stipulation of facts 24 25 paragraph 4 which indicates that the petitioners did not timely file their joint Federal Income Tax Return for - (973)4002250loperationseescr&msmetiwwwescribetsmet . 5 1 2 3 4 5 6 9 10 11 12 2010. So to the extent there is any deficiency, the addition to tax under section 6651(a)(1) would be applicable if the petitioners have not demonstrated a reasonable cause for their untimely filed return. Likewise, to the extent the record demonstrates a deficiency in this case, based upon the settled issues and the resolution of the deductions remaining in issue, respondent has demonstrated that section 6662(a) would be applicable if the petitioners do not establish reasonable cause and good faith for their failure to properly report their tax liabilities in 2010 and 2011. The case centers on the business activities of 13 Mr. Touchard. He was involved in various stock 14 15 transactions involving entities which operated out of the Bahamas. He claims numerous expenses relating to those 16 business activities and was given ample time to develop 17 evidence to support his claimed expenses. The case was 18 previously continued based upon his request to be given 19 additional time to develop evidence to support the 20 Schedule C expenses claimed on his return. That 21 continuance did result in a stipulation of facts and a 22 stipulation of a general ledger which was prepared by the 23 petitioners' return preparer for the year 2010. 24 Unfortunately, the petitioners were not able to produce 25 any records to support the deductions on their return for cribers (973)406-2250|operationseescribersnet|terw.escribersmet 6 1 2 3 4 5 6 7 8 2011. The expenses in question, as reflected in the general ledger, include virtually all the expenditures by the petitioners for the year 2010, and as demonstrated by the testimony of Mr. Touchard, in his own admissions, many of these expenses were personal in nature. The fact that the return preparer reflected these expenses in the general ledger and then reported these expenses as business expenses on the return causes us to question the 10 veracity of the representations made to the return 11 preparer or the return preparer's good faith in actually 12 Preparing the return. In any event, it appears difficult 13 14 for the petitioners to rely upon their relationship with the return preparer to support a reasonable cause 15 exception to the application of section 6662(a). Leading 16 case in this area in the tax court is Neonatology 17 Associates, P.A. v. Commissioner; 115 T.C. 43, 99 (2000) 18 aff'd 299 F.3d 221 (3rd Cir. 2002). In Neonatology the 19 court summarized the requirements for a taxpayer to rely 20 21 22 23 24 reasonably upon the advice of a professional as a defense to the application of section 6662(a). The court provided that the taxpayer must prove by a preponderance of the evidence that the taxpayer meets a three-prong test. The first prong is that the advisor was a competent 25 professional who had sufficient expertise to justify the (973}406-2250|operatiorseeserbersnetj WWWASQibef5Aet 7 taxpayer's reliance. The second prong is that the taxpayer provided necessary and accurate information to the advisor. And the third prong is that the taxpayer actually relied in good faith on the advisor's judgment. Based upon Mr. Touchard's testimony in this case and the stipulated facts, we do not find that the petitioners have met any of these three prongs and that the petitioners have aer-erttrer defense to the application of no the accuracy- g(y related penalty. Regarding the delinquent return for 2010, in his testimony, Mr. Touchard stated that there was difficulty 1 2 3 4 5 6 8 10 11 12 obtaining the appropriate records to file the return from 13 his business associates in the Bahamas. We found his 14 15 16 17 18 19 testimony to be vague and self-serving and not sufficient to establish a reasonable cause for the delinquent filing in 2010. We have carefully reviewed the stipulated general ledger and Mr. Touchard's testimony in order to determine what, if any, expenses claimed under Schedule C 20 and Schedule A, which have been disallowed, would be 21 allowable. We first focus on the $41,085 in State tax 22 deduction on the 2010 Schedule A. We believe Mr. 23 Touchard's testimony in this regard and the fact that he 24 had significant income, which would have generated 25 California State taxes, SedGCÀtn is eeek to substantiate the cribers 4973)4¾2250joperatiom®escribermet|wwwsscribersmet 8 1 2 3 4 5 6 claimed expense, and we allow the $41,085 as claimed on Schedule A for State tax deductions. Because there is little evidence to support the other expenses claimed, we will briefly discuss the requirements of section 274 as they apply to the business phone, automobile, and travel and entertainment expenses claimed by the petitioners as part of the business 8 expenses. Under section 274 (d) (1) no deduction is allowed under section 162 for travel expenses unless the taxpayer 10 11 12 13 14 substantiates by adequate records or by sufficient evidence corroborating the taxpayer's own statements the amount of the expense, the time and place of the travel, and the business purpose of the expense. This is also true with respect to business entertainment. In the 15 Present case, there's little evidence to tie the claimed 16 expenses to actual business travel or business 17 entertainment. While Mr. Touchard testified that he 18 19 sometimes needed to have people travel for his business, and he testified he had to entertain clients and even 20 Professionals who work for him, there's no evidence that 21 22 23 24 comes close to meeting the standards required by section 274(d), and no deduction is allowable for the travel and business entertainment. With respect to the telephone-related expenses 25 reflected in the general ledger, we note that section (973)406-2250|operatiompescrbetsmet|www.escribetsnet 9 1 2 3 4 5 6 274(d)(4) provides that unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer's own statement the amount of the expense and the business purpose of the expenditures, they are not allowable. See also section 280F(d)(4) and Bogue v. Commissioner, T.C. Memo 2007-150. Mr. Touchard provided no evidence beyond the general ledger relative to the telephone expenses in question. And based upon other 9 testimony, it is clear that the general ledger included 10 many personal expenses, and the Court has no way of 11 knowing whether the claimed telephone expenses were 12 personal in nature. 13 14 15 16 17 18 Regarding the claimed automobile expenses, section 274 requires contemporaneous records or substantiation to reflect the business nature of the travel. Mr. Touchard's testimony that he made regular trips to San Diego is too vague and inadequate to support the fact that he's entitled to any business mileage 19 expense for his automobiles. 20 Carefully reviewing the other expenses, which 21 would not necessarily be subject to the requirements of 22 section 274, the Court determines that based upon Mr. 23 Touchard's business activities certain expenses are 24 allowable as fol.lows: 25 For 2010, bank fees in the amount of $1,551; ||)cribers 73)406-2250}ope stfompescrbersmet|weswescribetsmet 10 1 2 3 4 5 6 8 storage fees in the amount of $9,600; legal fees in the amount of $11,500; postage and shipping expenses in the amount of $350; and office supplies in the amount of $5,000. For 2011 the Court would allow the same amounts based upon Mr. Touchard's testimony, but for the legal fees in the amount of $11,500 for which there is no substantiation and no basis to determine the correct amount, if any, of legal fees actually incurred in 2011. 10 The Court's determinations relative to the 11 expenses in issue would require a Rule 155 computation 12 after this daséesen has been served upon the parties. 13 However, to the extent any deficiency remains in 2010, it 14 will be subject to the additions to tax for delinquency 15 16 17 under section 6651(a)(1) and for accuracy under section 6662(a). Likewise, with respect to any deficiency for 2011, the addition to tax for accuracy will be applicable 18 under section 6662(a). While we believe that Mr. Touchard 19 made efforts to be thorough in his testimony before the 20 Court, we find that his recordkeeping was totally 21 22 inadequate to the requirements for the business he was engaged in and that he was callous to checking the return 23 on which many personal expenses were claimed. This causes 24 us to find that the accuracy-related penalty is 25 aPPlicable. cribers 4973}406-2250|operationseescrbetsmet[wwmescribersmt This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 2:26 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 $73)4¾2250|operationseescrbersnetlwww.escrbersaet