TAX COURT OPINION

Case: Orlando F. Cabanday & Teresa H. Cabanday
Docket Number: 5068-18
Judge: Buch
Opinion Type: bench
Filed: 04/28/2020
Pages: 11

JRB UNITED STATES TAX COURT WASHINGTON, DC 20217 ORLANDO F. CABANDAY & TERESA H. CABANDAY, Petitioners, v. ) ) ) ) ) Docket No. 5068-18. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit with this order to petitioners and respondent a copy of the pages of the transcript of the trial in this case before Judge Ronald L. Buch at Los Angeles, California, containing his oral fimdings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) Ronald L. Buch Judge Dated: Washington, D.C. April 28, 2020 SERVED Apr 28 2020 3 1 2 3 4 5 6 7 8 a Bench Opinion by Judge Ronald L. Buch March 11, 2020 Orlando F. Cabanday & Teresa H. Cabanday v. Commissioner Docket No. 5068-18 THE COURT: The following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion may not be relied on as precedent in any other case. This opinion is in conformity with Internal Rex7pnne rode sention 7499(b) and Rn19 192(a) of the Tax 10 Court Rules of Practice and Procedure. Any section 11 rererences rerer to tne internal Revenue Coae or tne 12 Treasury regulations in effect during the years at issue, 13 14 15 and Rule references are to the Tax Court Rules of Practice and Procedure. The Commissioner issued a notice of deficiency 16 for 2014 and 2015 to Orlando and Teresa Cabanday on 17 December 12, 2017. The principal adjustments set forth in 1R 19 21 22 23 that notice are an increase to Schedule C aross receipts, a decrease to returns and allowances, a decrease to related penalty. The remaining adjustments are computational. The parties have reached agreement as to the gross receipts and accuracy-related penalties. During 24 his testimony, Mr. Cabanday conceded the returns and 25 allowances. We must decide to what extent the Cabandays cr or-us 9733406-2250|operations@escribers.net!wwwescribers.net substantiated their Schedule C expenses. 4 Background Mr. Cabanday is an attorney. He has an undergraduate degree in accounting and received his juris doctor from University of California at Davis. Although not licensed as a CPA, he passed three parts of the CPA exam. Mr. Cabanday practices as a litigator. In 2014, Mr. Cabanday left his former law firm and honan a solo nracrire. He rnnk clients with him in 1 2 3 4 5 6 7 8 o 10 what appears to have been a contentious departure. Mr. 11 Uacanaay's worK ror tnose c11ents was principally civ11 12 13 14 litigation defense. During 2014 and 2015, Mr. Cabanday's work transitioned more to litigation on behalf of plaintiffs 15 for which he was paid by contingency fee. 16 17 Mrs. Cabanday's background is as a schoolteacher. When Mr. Cabanday began his solo practice, la Mrs. Cabanday helped by workina as office manaaer, 19 bookkeeper, and paralegal. Although she has little memory ZU ut nei spec111u wurs dd d auusseeper, due reud11s ud ne 21 22 23 three principal types of vendors she paid were court reporters, a contract attorney, and process servers. According to the Cabandays' testimony and tax 24 returns, times were lean. Mrs. Cabanday testified that 25 they relied on family for financial assistance while they waited for the contingency fee cases to generate revenue. This testimony, however, was contradicted by both of the Cabandays' testimony that the early clients were "billing clients" for whom Mr. Cabanday did defense work. 5 Substantiated Expenses In 2014, Mr. Cabanday's law practice incurred the types of expenses that might be considered typical of a sole practitioner lawyer and litigator. The practice snone monov nn nourt renorrors. nrnness servers. and contract staff. Mr. Cabanday provided cancelled checks ano crealt cara statements tnat snow nz,9z3 pala to 1 2 3 4 5 6 7 8 a 10 11 12 Nationwide Legal Services, $24,323 paid to Abrams Mah & 13 14 Kahn, $25,025 paid to Interactive Presentation Solutions, $11,800 paid to On Demand Group, and $32,461 paid to Fred 15 Choi, all in 2014. 16 17 Again in 2015, Mr. Cabanday's law practice incurred the same types of expenses that might be la considered typical for his practice. The practice spent 19 money on many of the same court reporters, process 21 Provided records showing $32,700 paid to Nationwide Legal 22 Services, $16,586 paid to Abrams Mah & Kahn, $7,500 paid 23 24 to On Demand Group, and $39,983 paid to Fred Choi. The records provided by the Cabandays showed 25 other payments, however neither the records nor the criners 1973) 406-2 250 l operations@escribersnet ! wwwascabersa et 6 testimony explained why the payments were incurred. Although the names of some of the payees might imply that they relate to the law practice (for example, where the payee names includes words like "reporting") the Cabandays did not provide any specific evidence tying those payees to the law practice. Mr. Cabanday had other, personal litigation ongoing at the same time, and those payees may just as likely have been in relation to that personal litination. Reporting and Substantiation Problems we note several riaws witn tne Cananaays' tax reporting of the law practice and their attempts to reconstruct and substantiate expenses. Mr. Cabanday's law practice was reported on 1 2 3 4 5 6 7 8 a 10 11 12 13 14 15 Schedules C, Profit or Loss From Business, attached to the 16 Cabandays' joint Form 1040, U.S. Individual Income Tax 17 Returns for 2014 and 2015. The amounts shown on the 1R Schedules C appear to have been estimates, often rounded 19 to hundreds or thousands. The Cabandays did not attempt ZU Lu suppu 11e 11uittuels s11uw11 u11 11e e u 11s; tile uus111ess 21 22 23 24 25 expenses argued at trial varied widely from what was reported on the returns. And during Mr. Cabanday's own testimony, he disavowed the returns and allowances claimed on the returns. During the examination of his returns, Mr. e crærs (973)406-2250ioperations@escribersnet|www.escribetsmet Cabanday hired David Tossolini, a former financial analyst, to reconstruct his expenses. Mr. Tossolini used the bank and credit card records for the law practice to reconstruct expenses. Mr. Tossolini claims to have cross- 7 referenced every payment to an invoice. We do not find this testimony credible for three reasons. First, at times, Mr. Tossolini acknowledged instances when he did not refer to underlying invoices. Second, Mrs. Cabanday's restimnnu imnlipd that invoices worp not rpnnlarlv 1 2 3 4 5 6 7 8 o 10 maintained. And third, errors in Mr. Tossolini's 11 12 13 14 taculation or expenses woula 11xely nave oeen caugnt 1r ne had cross-referenced the payment records to the underlying invoices. In reconstructing Mr. Cabanday's expenses, Mr. 15 Tossolini had imperfect records to work with. For 16 example, the law firm wrote a check to 1nteractive 17 Presentation Solutions in the amount of $25,000, but on 1R the portion of the check where the amount is written in 19 words, the check merely said twenty-five. That check 21 22 23 24 he took the numeral amount of $25,000, resulting in an overstatement of $24,975. Also, a check to Mr. Choi for $8,050 was dated January 5, 2014, and Mr. Tossolini tabulated it in 2014. On closer examination, however, the 25 check sequence and the date the check cleared the bank 73)406-2250|operationseescreersaet|www.esenbersaet 8 show that the check was written in early 2015. Mr. Tossolini also made mistakes of his own. When Mr. Tossolini tabulated checks payable to On Demand Group, he mischaracterized a $200 check as $42,212. And in the Court's own tabulation of expenses itemized above, the Court found a $332 payment to Nationwide Legal Services and a $2,000 payment to Abrams Mah & Kahn omitted from Mr. Tossolini's summary. The nommissioner sunnesrs snmerhina nefarinus in 1 2 3 4 5 6 7 8 o 10 these errors. The $25,000 error relating to Interactive 11 Fresentation solutions is unaerstanaanle giving tne manner 12 13 in which the check was written. The $42,212 error relating to On Demand Group is more difficult to plausibly 14 explain, but the evidence is insufficient to conclude that 15 16 17 there was an affirmative intent to mislead. Regardless of these errors, Mr. Tossolini's summary was not admitted for the truth of the matters set forth therein. The Court la calculated the expenses described above directly from the 19 bank and credit card records; they were not taken from any 21 22 23 24 Discussion As a general matter, the Commissioner's determinations in the notice of deficiency are presumed correct, and the taxpayer bears the burden of proving an 25 error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 crïners 73)406-2250|operations@escribersnet|www.escribersaet 9 (1933). In limited situations, the burden can shift to the Commissioner under section 7491(a), but the record does not establish that the criteria under section 7491 have been established, therefore, the burden of proof remains on the Cabandays. The only issue remaining for the Court to decide is whether the Cabandays have substantiated, and thus can deduct, the $150,000 and $247,870 of expenses for 2014 and 2015 that were disallowed hv thp Commissinnpr. Income tax deductions are considered a "matter or leglslative grace," ana tne taxpayers near tne curaen 1 2 3 4 5 6 7 8 a 10 11 12 of proving that they are entitled to any deductions. Rule 13 14 15 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Taxpayers can deduct "ordinary and necessary 16 expenses paid or incurred during the taxable year in 17 1R 19 21 22 23 24 carrying on any trade or business." Sec. 162(a). Taxpavers are reauired to maintain sufficient records to "show whether or not such person is liable for tax". Sec. contents may become material and must be kept available for inspection. In some instances the Court may approximate the amount if the taxpayer can establish a deductible expense 25 but cannot substantiate the precise amount. Cohan v. . cnners 733406-2250|operations@escritersnet|www.escribers 1et Commissioner, 39 F.2d 540, 543-544 (2d. Cir. 1930). However, the taxpayer must provide some basis for that estimate. vanicek v. Commissioner, 85 T.C. 731, 742-743 10 (1985). And, the Court is precluded from making estimates of expenses that are subject to section 274(d) strict substantiation rules. Deely v. Commissioner, 73 T.C. 1081, 1101 (1980); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). For 2014. Mr. Cahandav substantiated $2.927 naid to Nationwide Legal Services, $24,323 paid to Abrams Mah & nann, nzo,uza pala to interactive Fresentation solutions, $11,800 paid to On Demand Group, and $32,461 paid to Fred 1 2 3 4 5 6 7 8 o 10 11 12 13 Choi. 14 For 2015, Mr. Cabanday substantiated $32,700 15 Paid to Nationwide Legal Services, $16,586 paid to Abrams 16 Mah & Kahn, $7,500 paid to On Demand Group, and $39,983 17 paid to Fred Choi. 1R 19 The Cabandays provided records of additional payments that, on their face, appear to possibly be zu relä eu o mt. äueuuey s 1ew präu 1ce. eu uuse väte 21 records were not enough to establish that those expenses 22 were, in fact, related to their business or that they were 23 ordinary and necessary. The Cabandays' testimony about 24 SPecific vendors noted above and their nexus to the law 25 Practice was credible. Because the credit card statements cnor-ns (973) 406-2 250 { operations®escribermet j www.esaibernet and cancelled checks verify those specific payments, the Cabandays met their burden of proof as to those expenses. As to the remaining expenses, they did not, and therefore 11 the Commissioner's disallowance is sustained. Decision will be entered under Rule 155. (Whereupon, at 9:44 a.m., the above-entitled matter was concluded.) 1 2 3 4 5 6 7 8 O 10 11 12 13 14 15 16 17 1 R 19 ZU 21 22 23 24 25 e cr ners CERTIFICATE OF TRANSCRIBER AND PROOFREADER 12 CASE NAME: Orlando F. Cabanday & Teresa H. Cabanday v. Commissioner DOCKET NO.: 5068-18 We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 12 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by ,Tancmpline nonlincTor on March 11. 2020 bef~nre the Unitpci 1 2 3 4 5 6 7 8 o 10 States Tax Court at its session in Los Angeles, CA, in 11 12 13 14 15 17 1R 19 21 22 23 24 25 accoraance witn tne appilcaole provlslons or tne current verbatim reporting contract of the Court and have verified the accuracy of the transcript by comparing the typewritten transcript against the verbal recording. Meribeth Ashley, CET-507 3/18/20 Lori Rahtes, CDLT-108 Proofreader 3/18/20 Date e cr r,ers