t c summary opinion united_states tax_court robert b and betty d harris petitioners v commissioner of internal revenue respondent docket no 19681-98s filed date robert d hyde for petitioners martha j weber for respondent couvillion special_trial_judge this case was heard pursuant to sec_7463 in effect at the time the petition was filed ' the decision to be entered is not reviewable by any other court and this opinion should not be cited as authority unless otherwise indicated subsequent section references are to the internal_revenue_code in effect for the years at issue all rule references are to the tax_court rules_of_practice and procedure respondent determined deficiencies of dollar_figure dollar_figure and dollar_figure in petitioners' federal income taxes for and respectively and accuracy-related_penalties under sec_6662 of dollar_figure dollar_figure and dollar_figure for those years following concessions by the parties the issues for decision are whether the tax_home and principal_place_of_business of robert b harris petitioner was memphis tennessee or los angeles california during whether petitioners are entitled to deductions for home_office expenses under sec_280a for each of the years at issue whether petitioners are entitled to deductions for schedule c expenses for and in excess of amounts allowed by respondent and whether petitioners are liable for the accuracy-related_penalty under sec_6662 for negligence or disregard of rules and regulations for each of the years at issue the remaining adjustments in the notice_of_deficiency for the years at issue are computational and will be resolved by the court's holdings on the aforementioned issues in the stipulation of facts respondent conceded a dollar_figure unreported income adjustment for at trial respondent conceded petitioners’ entitlement to a deduction for meals and entertainment_expenses of dollar_figure for on brief petitioners conceded that during and petitioner’s tax_home and principal_place_of_business was los angeles california some of the facts were stipulated and those facts with the annexed exhibits are so found and are incorporated herein by reference at the time the petition was filed petitioners’ legal residence was memphis tennessee petitioner has a bachelor of science degree in accounting from fast tennessee state university and since the mid-1960's has worked in the field of accounting and tax_return preparation in or petitioner was employed by the internal_revenue_service irs as a revenue_agent in memphis tennessee in the early 1970's he left the irs to work as a comptroller for stax records stax in memphis after about months with stax he left that employment and started a business known as memphis talent consultants to provide business financial and tax_advice to recording artists during the 1970's and 1980's petitioner traveled to various cities in the united_states including nashville tennessee los angeles california washington d c and detroit michigan in an attempt to attract clients for his consulting business from the early to mid-1980's petitioner rented an apartment in nashville where he set up an office in the living and dining room areas he used the apartment bedrooms as living quarters when he stayed overnight in nashville that office was closed during or during the late 1980's and early 1990's petitioner had various clients in memphis and los angeles for whom he performed business consulting tax_advice and return preparation during these years petitioner traveled to los angeles from memphis once or twice a year during petitioner decided to resume his activity at nashville petitioner began renting a condominium there in late also during one of his los angeles clients isabell records inc d b a bellmark records bellmark began experiencing financial success with one of its recordings and thus had an increasing need for petitioner’s services due to the prospect of bellmark’s increasing revenues the owner of bellmark alexander bell mr bell requested during the latter part of that petitioner devote his full time to bellmark matters and that petitioner remain in los angeles to be on call for mr bell and bellmark mr bell believed that bellmark was on the verge of generating significant revenues which had not previously been the case and he wanted petitioner to work full time in setting up an accounting department structuring business administration policies and so forth after discussing the matter with his wife petitioner betty d harris petitioner agreed to work for bellmark full time and live in los angeles provided that he would be compensated dollar_figure per year for his services plus expenses no time limitation was placed on this arrangement rather the arrangement between petitioner and bellmark was to last for an indefinite period of time mr bell anticipated that it would take a minimum of to months to structure accounting and administrative departments and have them running smoothly enough that petitioner’s full-time presence and participation would no longer be required during and petitioner worked for bellmark in los angeles and days respectively he was paid dollar_figure for his los angeles work during however he did not receive the agreed upon compensation_for or moreover petitioner was not reimbursed by bellmark for any expenses_incurred in the years at issue nevertheless petitioner continued to devote the majority of his time to bellmark in the hopes of eventually receiving such moneys on their joint federal_income_tax return for petitioners included a schedule c profit or loss from business schedule c in connection with petitioner’s financial and tax consultant business that schedule c included the following income and expenses the principal reason why petitioner was not compensated and reimbursed was that some of the recordings of bellmark contained the musical talents of several artists and each of those artists was entitled to royalties an element which was apparently not anticipated by mr bell or petitioner and that apparently heavily drained bellmark’s resources income gross_receipts dollar_figure cost_of_goods_sold gross_income s dollar_figure bxpenses advertising sdollar_figure car and truck expenses dollar_figure insurance dollar_figure legal professional dollar_figure office expense dollar_figure rent or lease vehicles dollar_figure rent or lease other dollar_figure repairs maintenance dollar_figure supplies dollar_figure travel dollar_figure meals entertainment dollar_figure other expenses dollar_figure total expenses dollar_figure net profit dollar_figure includes los angeles apartment rental payments and dollar_figure per day claimed as per_diem for days away from home fifty percent of dollar_figure expenses consisted of expenses for equipment miscellaneous parking telephone and dues subscriptions petitioners also included schedules c with their and joint federal_income_tax returns for the schedule c included income gross_receipts dollar_figure cost_of_goods_sold -q- other income dollar_figure gross_income dollar_figure bxpenses advertising sdollar_figure car and truck expenses dollar_figure insurance dollar_figure legal professional dollar_figure office expense dollar_figure rent or lease other dollar_figure supplies dollar_figure travel dollar_figure meals entertainment dollar_figure other expenses dollar_figure total expenses dollar_figure net_loss dollar_figure t fifty percent of dollar_figure expenses consisted of expenses for dues subscriptions equipment lodging miscellaneous parking security and telephone for petitioners reported the following schedule c income and expenses income gross_receipts dollar_figure cost_of_goods_sold --oq- other income -q- gross_income dollar_figure bxpenses car and truck expenses sdollar_figure insurance dollar_figure legal professional dollar_figure office expense dollar_figure rent or lease other dollar_figure supplies dollar_figure travel dollar_figure meals entertainment dollar_figure utilitie sec_3 dollar_figure other expenses dollar_figure total expenses dollar_figure net_loss dollar_figure t fifty percent of dollar_figure expenses consisted of expenses for dues publications lodging miscellaneous parking security shipping postage and telephone in the notice_of_deficiency respondent made the following adjustments to petitioners’ income and expenses for each of the years at issue adjustments schedule c exp dollar_figure dollar_figure dollar_figure unreported income --q- dollar_figure --q- one-half se tax big_number total adjustments dollar_figure dollar_figure dollar_figure in the explanation of items the disallowed deductions totaled dollar_figure however in the statement of income_tax changes the adjustment to income was dollar_figure the record does not contain an explanation for this 90-cent discrepancy for dollar_figure of the deductions claimed on schedule c were allowed and the dollar_figure total adjustments shown above for include dollar_figure claimed by petitioner for los angeles expenses that he listed on schedule c as cost_of_goods_sold for the total schedule c expenses was dollar_figure respondent allowed dollar_figure and disallowed dollar_figure for respondent disallowed all the deductions claimed on schedule c as a result of these adjustments respondent determined that petitioners were liable for additional self-employment taxes and the accuracy-related_penalty under sec_6662 for each of the years in question in the stipulation of facts respondent conceded an unreported income adjustment of dollar_figure for at trial respondent conceded that petitioners were entitled to schedule c deductions for meals and entertainment_expenses prior to the percent limitation totaling dollar_figure for on brief petitioners conceded that during and petitioner’s principal_place_of_business or tax_home was los angeles california the first issue is whether the tax_home or principal_place_of_business of petitioner was memphis tennessee or los angeles california during petitioners contend the tax_home ‘ since petitioners conceded that petitioner’s tax_home for and was los angeles petitioners are not entitled to the claimed deductions for away from home expenses relating to petitioner’s employment in los angeles for those years this would include for dollar_figure apartment rental expenses and an dollar_figure per_diem amount for meals prior to the 50-percent limitation as well as approximately dollar_figure of travel_expenses for car rental and air travel between los angeles and memphis continued -- - during was memphis and thus expenses_incurred in los angeles are deductible conversely respondent contends that petitioner’s tax_home during was los angeles and as such petitioners are not entitled to deduct expenses_incurred in los angeles that year for petitioners reported dollar_figure for petitioner’s los angeles apartment rent and dollar_figure as per_diem expense for meals away from home which they subtracted from gross_receipts as cost_of_goods_sold on schedule c of their return additionally petitioners deducted the following expenses in connection with petitioner’s los angeles activities dollar_figure of their total car and truck expenses dollar_figure of their total rent or lease for car rental expenses dollar_figure of their total travel_expenses which represented dry cleaning in los angeles and airline tickets between memphis and los angeles and dollar_figure of their total meals and entertainment_expenses prior to the 50-percent limitation during petitioner was in los angeles days continued petitioners failed to satisfy the strict substantiation requirements of sec_274 with respect to travel_expenses between los angeles and memphis particularly the business_purpose for such travel see infra and for dollar_figure for meals prior to the 50-percent limitation dollar_figure for car and truck expenses and dollar_figure of travel_expenses for car rental -tt is notable that petitioner was also in los angele sec_281 continued deductions are a matter of legislative grace see 292_us_435 petitioners bear the burden of proving that petitioner's tax_home was not in los angeles during see rule a 290_us_111 72_tc_190 affd 662_f2d_253 4th cir the cost of goods purchased for resale in a taxpayer's business is an offset to gross_receipts in computing gross_income see 88_tc_654 petitioner's purported travel_expenses are not cost_of_goods_sold but are expenses that would reduce petitioner's income if at all as a deduction pursuant to sec_162 thus we shall discuss the cost_of_goods_sold and deductions together a taxpayer ordinarily may not deduct a personal_expense see sec_262 sec_162 however allows a taxpayer to deduct traveling expenses_incurred while away from home a taxpayer may deduct a traveling expense under sec_162 a if the following three conditions are satisfied the expense must be reasonable eg lodging transportation fares and food it must be incurred while away from home and it must be an ordinary_and_necessary_expense incurred in the pursuit of a trade_or_business see commissioner v flowers u s continued and days during and respectively the rationale in allowing such a deduction is to alleviate the burden falling upon a taxpayer whose business requires that he or she incur duplicate living_expenses see 55_tc_783 49_tc_557 whether the taxpayer satisfies the three recited conditions is purely a question of fact see commissioner v flowers supra pincite see also 411_f2d_537 9th cir affg 48_tc_308 for purposes of sec_162 generally a taxpayer’s tax_home is the vicinity of his principal_place_of_business rather than the location of his personal_residence see 74_tc_578 kroll v commissioner supra pincite however an exception to this general_rule exists where a taxpayer's employment in another area is temporary as opposed to indefinite see 358_us_59 86_tc_589 a taxpayer's tax_home is his or her personal_residence if the employment at a different location is temporary ie the taxpayer's presence at the other location is considered to be away from home and the taxpayer may deduct the expenses associated with traveling to and living at a temporary job site see kroll v commissioner supra pincite a taxpayer's tax_home is the location of his or her employment if the employment is indefinite or permanent ie the taxpayer's presence at a second location is not considered away from home see id a place of business is a temporary place of business if the employment is such that termination within a short_period of time can be foreseen see 13_tc_129 conversely employment is categorized as indefinite substantial or indeterminate if its termination cannot be foreseen within a fixed or reasonably short_period of time see 54_tc_355 affd f 2d 6th cir employment which is temporary may become indefinite due to changed circumstances or the passage of time see 66_tc_467 when that occurs the location of the taxpayer's employment becomes his or her tax_home see kroll v commissioner supra pincite whether a taxpayer’s employment is temporary or indefinite is a question of fact see peurifoy v commissioner supra pincite cf 283_f2d_491 9th cir revg 32_tc_1368 however a taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceed sec_1 year sec_162 petitioners contend that even though petitioner’s employment in los angeles eventually lasted several years it was temporary during because at that time it could not have reasonably been foreseen nor was it intended by the parties that petitioner would work in los angeles for more than year the record of this case however proves otherwise mr bell who testified at trial anticipated in late that petitioner’s full-time services in los angeles would be required for at least to months in order to develop a rolls royce accounting department for bellmark moreover both petitioner and mr bell agreed that the compensation arrangement of dollar_figure per year plus living_expenses was an open-ended arrangement on which no time limitation was placed the court is satisfied that it was certainly foreseeable in late that petitioner’s full-time services in los angeles would be reguired beyond a period of year additionally petitioner’s full-time services in los angeles did exceed or extend beyond year on this record the court holds that petitioner’s employment in los angeles during was indefinite and not temporary since petitioner conducted business activities in both los angeles and memphis during the court deems it prudent to also examine whether petitioner's principal_place_of_business during was los angeles or memphis in the event that a taxpayer possesses two places of business or employment separated by considerable distances his choice of one as his tax_home carries little weight instead courts often apply an objective test in which they consider the length of time spent at each -- - location the degree of activity in each place and the relative proportion of taxpayer's income derived from each place see 490_f2d_1249 6th cir revg tcmemo_1972_154 64_tc_175 affd 532_f2d_1088 6th cir 16_tc_332 sargent v commissioner tcmemo_1984_390 although no single factor is dispositive particular emphasis sometimes is placed on the amount of time spent by a taxpayer at a given location see markey v commissioner supra pincite in general a taxpayer is required to establish his tax_home at his major duty post so as to minimize the amount of business travel away from home that must be undertaken see 411_f2d_537 9th cir affg 48_tc_308 petitioner spent days in los angeles during but only days in memphis petitioner's degree of activity in connection with bellmark in los angeles during far exceeded the degree of any other activity conducted by petitioner during that year including any memphis activity petitioner's nearly full-time efforts during were devoted to bellmark in los angeles finally petitioner earned dollar_figure from his los angeles activity for but only dollar_figure from his memphis activity in that year thus the court finds that petitioner's principal_place_of_business during was los angeles -- - on this record the court holds that petitioner’s tax_home during was los angeles petitioners are not entitled to deduct the los angeles living_expenses of petitioner or expenses for travel between los angeles and memphis during that year respondent is sustained on this issue the second issue is whether petitioners are entitled to deductions for home_office expenses under sec_280a for each of the years at issue for and petitioners claimed various expenses on schedule c that petitioners contend were in conjunction with an office petitioner maintained in their personal_residence at memphis the claimed expenses were expense insurance dollar_figure --- dollar_figure telephone dollar_figure --- dollar_figure security -- dollar_figure dollar_figure utilities -- -- dollar_figure t petitioners deducted of their total homeowner’s insurance and percent of their total telephone expenses to the extent that the per_diem amount deducted by petitioners for dollar_figure x days dollar_figure exceeded the number of days petitioner was in los angeles - days and would thus be attributable to other cities petitioners failed to produce evidence that would satisfy the strict substantiation requirements of sec_274 with respect to these expenses additionally with respect to travel_expenses between los angeles and memphis petitioners failed to produce evidence to satisfy the strict substantiation reguirements of sec_274 particularly in connection with the business_purpose for such travel see discussion infra petitioners deducted percent of their total home- security expenses petitioners deducted percent of their total homeowner’s insurance percent of their total telephone expenses percent of their total home-security expenses and percent of their total utilities petitioners contend that petitioner maintained office space in three separate areas of their personal_residence for the purpose of conducting a tax_return preparation business a room directly adjacent to the front entry hall of petitioners’ home was a waiting room and a smaller room directly adjacent thereto adjacent to the kitchen and eating area was an office additionally a room adjacent to the guest bedroom and bathroom was a computer and files room other than the described rooms petitioners’ home consisted of a garage utility room kitchen eating area family room master bedroom master bathroom guest bedroom and guest bathroom under sec_162 a taxpayer is permitted to deduct all ordinary and necessary expenses paid_or_incurred in carrying_on_a_trade_or_business under sec_280a a however deductions associated with a home_office are generally disallowed unless the home_office is used exclusively and regularly as the principal_place_of_business of the taxpayer respondent contends that the residence areas claimed by petitioners as a home_office for petitioner’s tax_return preparation business were not used -- - exclusively or regularly for such activity nor did these areas constitute petitioner’s principal_place_of_business where a taxpayer’s business is conducted in part in the taxpayer’s residence and in part at another location the following two primary factors are considered in determining whether the home_office qualifies under sec_280a a as the taxpayer’s principal_place_of_business the relative importance of the functions or activities performed at each business location and the amount of time spent at each location see 506_us_168 whether the functions or activities performed at the home are necessary to the business is relevant but not controlling the location at which goods and services are delivered to customers generally will be regarded as an important indicator of the principal place of the taxpayer’s business and is given great weight in most cases see id pincite the relative importance of business activities engaged in at the home may be substantially outweighed by business activities engaged in at another location the supreme court has stated if the nature of the business requires that its services are rendered or its goods are delivered at a facility with unique or special characteristics this is a further and weighty consideration in finding that it is the delivery point or facility not the taxpayer’s residence where the most important functions of the business are undertaken id pincite one of petitioners’ memphis neighbors jerrel walker mr walker testified that petitioner prepared his tax returns during each of the years at issue mr walker contacted petitioner both at his memphis residence and in los angeles during the years at issue mr walker verified that the room in petitioners’ home claimed as an office contained a desk and file cabinets and the waiting room had a dining room table also mr walker and petitioners were personal friends and he visited petitioners’ home on social occasions a business contact of petitioner’s david porter mr porter testified that petitioner had prepared his tax returns for many years and that he had visited petitioners’ memphis residence for such purposes however mr porter had business meetings with petitioner at locations outside of petitioners’ home including but not limited to los angeles and the memphis international airport during the years at issue mr porter frequently contacted petitioner by telephone in both los angeles and nashville in a tax_return preparation business the most important function is the delivery of the completed return to the taxpayer for signature and filing no matter how much preparatory work is performed none is of any value unless the completed return is - - delivered to the taxpayer who then executes and files the same see 113_tc_106 the delivery of a completed return is the service for which petitioner would ultimately have been paid however no evidence was produced to show where or in what manner petitioner delivered completed tax returns to his clients however it is clear from the record that petitioner spent the substantial majority of his time during each of the years at issue conducting his tax_return preparation business at locations other than memphis tennessee primarily at los angeles thus most of petitioner’s business activities were performed outside of his claimed home_office at memphis on this record the court finds that the areas of petitioners’ memphis residence that they claim constituted a home_office were not used exclusively and regularly in petitioner’s tax_return preparation business during or moreover the court finds that petitioners’ home was not petitioner’s principal_place_of_business during any of the years at issue conseguently respondent is sustained on the disallowance of the home_office expenses claimed by petitioners for and ’ for and portions of the claimed telephone expenses consisted of monthly payments to cellular one of memphis for a mobile phone all checks to cellular one were signed by continued --- - the third issue is whether petitioners are entitled to deductions for other schedule c expenses for and in excess of amounts allowed by respondent the remaining schedule c expenses for each of the years at issue mainly constitute expenses in connection with petitioner’s business activities at memphis and nashville tennessee as well as certain other various business_expenses the amounts disallowed by respondent are as follows expense car truck dollar_figure --- dollar_figure legal prof dollar_figure dollar_figure dollar_figure office -- -- dollar_figure rent or lease dollar_figure dollar_figure dollar_figure supplies -- -- dollar_figure travel dollar_figure dollar_figure dollar_figure meals ent dollar_figure zi dollar_figure dollar_figure other dollar_figure dollar_figure dollar_figure prior to the 50-percent limitation consists of dollar_figure for equipment dollar_figure for miscellaneous dollar_figure for parking and dollar_figure for dues publications consists of dollar_figure for lodging and dollar_figure for miscellaneous consists of dollar_figure for dues publications dollar_figure for lodging dollar_figure for miscellaneous dollar_figure for parking and dollar_figure for shipping postage ‘ continued petitioner wife and were written on petitioners’ joint checking account petitioners produced no evidence to show that this cellular phone was used in connection with any business activity of petitioner as noted earlier to qualify for deduction an expense must be both ordinary and necessary within the meaning of sec_162 a see 308_us_488 whether an amount claimed constitutes an ordinary and necessary business_expense is a question of fact to be determined from the evidence presented with the burden being on the taxpayer see rule a 290_us_111 allen v commissioner tcmemo_1988_166 additionally a taxpayer is required to maintain records sufficient to establish the amount of his or her income and deductions sec_6001 under certain circumstances where a taxpayer establishes entitlement to a deduction but does not establish the amount of the deduction the court is permitted to estimate an allowable_amount see 39_f2d_540 2d cir however there must be sufficient evidence in the record to permit the court to conclude that a deductible expense was incurred for at least the amount allowed see 245_f2d_559 5th cir in estimating the amount allowable the court bears heavily against the taxpayer whose inexactitude is of his or her own making see cohan v commissioner supra pincite however in the case of travel_expenses specifically including meals_and_lodging while away from home as well as in - - the case of entertainment_expenses and expenses with respect to listed_property sec_274 overrides the so-called cohan doctrine see 50_tc_823 affd per curiam 412_f2d_201 2d cir sec_1_274-5t temporary income_tax regs fed reg date sec_274 imposes stringent substantiation requirements for deductions related to travel entertainment gifts and listed_property as defined in sec_280f passenger automobiles are listed_property under sec_280f sec_274 denies these deductions unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer's own statement a the amount of such expense or other item b the time and place of the travel entertainment amusement recreation or use of the facility or property or the date and description of the gift c the business_purpose of the expense or other item and d the business relationship to the taxpayer of persons entertained using the facility or property or receiving the gift thus under sec_274 deductions for automobile expenses travel_expenses and meals and entertainment_expenses may not be estimated instead the taxpayer must provide adequate_records or corroborate testimony with other evidence of the schedule c expenses at issue the following are subject_to the strict substantiation requirements of sec_274 -- - expense car truck dollar_figure --- dollar_figure travel dollar_figure dollar_figure dollar_figure meals ent dollar_figure dollar_figure dollar_figure other parking dollar_figure --- dollar_figure lodging -- dollar_figure dollar_figure in support of these expenses petitioners produced various receipts and statements purporting to show the actual expenditures however petitioners failed to produce credible_evidence if any evidence at all as to the business_purpose of each expense moreover petitioners failed to introduce evidence establishing the business relationship to petitioner with any persons purportedly being entertained or using the facilities or property rented by petitioner petitioners’ evidence with respect to these expenses does not satisfy the stringent substantiation requirements of section z274 d moreover as noted earlier the court cannot allow or estimate an allowable deduction for any of these expenses under the cohan_rule thus the court holds that petitioners are not entitled to deduct any of the claimed expenses for the years at issue in excess of what was allowed by respondent as stated previously respondent conceded that petitioners are entitled to deductions for meals and entertainment_expenses prior to the 50-percent limitation totaling dollar_figure for this amount will be taken into continued - - the following claimed schedule c expenses are not subject_to the substantiation requirements of sec_274 but are nevertheless deductible only if they are ordinary and necessary under sec_162 and not personal expenses under sec_262 expense legal prof dollar_figure dollar_figure s dollar_figure office -- -- dollar_figure rent or lease dollar_figure dollar_figure dollar_figure supplies -- -- dollar_figure other equipment dollar_figure --- --- misc dollar_figure dollar_figure dollar_figure dues sub dollar_figure -- dollar_figure shipping --- --- dollar_figure for petitioners deducted legal and professional expenses of dollar_figure petitioners submitted copies of canceled checks dated date to pamela shell in the amount of dollar_figure and date to raymond a harris in the amount of dollar_figure both checks were signed by petitioner however neither check listed in the memo section the reason or purpose for the payment no evidence was presented to show the relationship of the payees to petitioner’s business activities or to show that the payments were incurred in carrying on petitioner’s trade_or_business thus the court holds that these expenses have not been substantiated under sec_162 and are not deductible continued account in a rule computation - - for petitioners deducted legal and professional expenses of dollar_figure of which respondent allowed dollar_figure the remaining dollar_figure amount was disallowed in the notice_of_deficiency in support of the deductibility of this dollar_figure petitioners produced canceled checks showing the following payments date payee amount susan javellana s betty crutcher jim costa tanya l lynch antonio cristi tanya oliver vanessa m taylor titi oconnor total dollar_figure all of these checks were signed by petitioner however none listed a notation in the memo section as to the purpose or reason for payment nor whether the payees were attorneys moreover no evidence was presented to show the relationship of most of these payees to petitioner’s business activities finally no evidence was presented that would indicate these payments were incurred in petitioner’s trade_or_business thus the court holds that these expenses are not deductible for petitioners deducted dollar_figure in legal and professional expenses all of which was disallowed by respondent -- p7 - in support of the deductibility of this amount petitioners produced canceled checks showing the following payments date payee amount ron lawson s dollar_figure seymour rosenberg dollar_figure aaa auto club south dollar_figure sam's club dollar_figure total s dollar_figure the check to ron lawson was signed by petitioner however the others were signed by petitioner wife and were written on petitioners’ joint account the check to ron lawson listed no notation in the memo section the checks to sam's club and aaa auto club south respectively listed 9-digit and 11-digit numbers in the memo section which appear to be account numbers the check to seymour rosenberg has a notation of business advice in the memo section no evidence was presented to show the relationship of ron lawson or seymour rosenberg to petitioner’s business activities moreover no evidence was presented that would indicate any of these payments was incurred in petitioner’s trade_or_business the court holds that these expenses are not deductible the remaining rent or lease expenses at issue ie dollar_figure for dollar_figure for and dollar_figure for constitute amounts paid_by petitioner for rental property in nashville tennessee throughout the years at issue petitioner rented a - - condominium pincite south timber drive in nashville petitioner began renting this condominium during the latter part of petitioner contends he used this condominium as an office during the years at issue even though he was in nashville only days days and days respectively for the years and petitioner contends he maintained this office as a point_of_contact in nashville for potential clients the condominium was located in a residential area of nashville petitioner claims that he set up the downstairs portion of the condominium as an office and kept an air mattress upstairs where he slept when he stayed overnight in nashville there was a telephone and answering machine but no fax machine or copy machine in the condominium petitioner contended that no one lived in the condominium when he was not in nashville petitioner testified that a woman named debra push ms push who petitioner identified as a songwriter would occasionally check the mail and answering machine for petitioner when he was not in nashville ms push was not compensated monetarily for this service the court notes however that petitioner incurred additional lodging_expenses in nashville during the years at issue at embassy suites crowne plaza wyndham garden hotels and similar establishments ’ petitioner testified that the reason for incurring these additional lodging sometimes these expenses were dollar_figure or more per night - - expenses was that his condominium wasn’t up to snuff to the point that he was comfortable meeting there with new clients or other clients he wanted to impress ms toya turney ms turney of the nashville electric service nes who was called by respondent testified based on the records of nes that ms push had electrical power activated in her name pincite south timber drive on date the records of nes further reflected that up until the trial date of this case on date ms push’s utility account pincite south timber drive remained active finally ms turney testified that the nes electricity usage records for south timber drive indicated that someone was living at that location during each of the years at issue this testimony contradicts petitioner's testimony that he used this property only to days per year on this record the court finds that the amounts expended by petitioner during and for the rental of a condominium pincite south timber drive in nashville were not ordinary and necessary expenses_incurred in the conduct of petitioner's trade_or_business thus the court holds these expenses are not deductible by petitioners for petitioners deducted other expenses of dollar_figure for equipment dollar_figure for miscellaneous and dollar_figure for dues and subscriptions the equipment expenses consisted of several - - amounts paid to unidentified recipients for unidentified merchandise or services dollar_figure paid to a pharmacy for unidentified merchandise dollar_figure paid to an unidentified recipient for reading glasses dollar_figure to costco wholesale for sheets pillows a rug and some kitchen supplies and oscar dollar_figure to costco for unidentified merchandise the miscellaneous expenses included dollar_figure paid to this court for a johnson - filing fee dollar_figure to the city of los angeles for an undisclosed purpose a dollar_figure automatic teller machine withdrawal dollar_figure for a one-way greyhound bus ticket for petitioner wife from nashville to memphis and dollar_figure to the u s postal service petitioners failed to prove that any of these expenses were ordinary and necessary expenses_incurred in the conduct_of_a_trade_or_business of petitioner moreover with respect to the dollar_figure for dues and subscriptions petitioners produced no evidence to show that this amount was actually expended thus the court holds that petitioners are not entitled to deduct any of these expenses the court surmises that this was some type of oscar de la renta merchandise which would indicate that it was either housewares such as sheets or towels clothing or fashion accessories jewelry perfume or a similar item that would be personal in nature i no documentary proof was submitted to show that any of the remaining claimed amount was actually expended - - for petitioners deducted other miscellaneous expenses of dollar_figure these expenses consisted mainly of a dollar_figure payment to bellmark for an undisclosed purpose as well as payments by petitioner wife to the u s postal service a dollar_figure dollar_figure for a frequent flyer guide a dollar_figure credit payment to avis ’ card late fee dollar_figure for a federal express package from al bell and a dollar_figure credit card charge for farm gusher in tijuana mexico totaling dollar_figure none of these expenses was established as an ordinary_and_necessary_expense incurred in the conduct_of_a_trade_or_business conseguently petitioners are not entitled to deduct these expenses for petitioners deducted office expenses of dollar_figure supplies expenses of dollar_figure miscellaneous expenses of dollar_figure dollar_figure for dues and publications and dollar_figure for shipping and postage the claimed office expenses consisted mostly of several amounts paid to unidentified recipients for unidentified merchandise or services four rolls of film purchased from a kroger grocery store a watch battery plastic tape a padlock and other merchandise purchased from a staples office supply store the claimed supplies expenses consist of amounts paid to sam’s club for unidentified merchandise the notation bellmark was listed in the memo section of this canceled check - - the only evidence presented with respect to miscellaneous expenses of dollar_figure consisted of dollar_figure paid to the u s postal service and dollar_figure to seessel’s grocery store in memphis both checks were signed by petitioner wife and were written on petitioners’ joint checking account the check to seessel’s contained a notation in the memo section that the purchase was for flowers the dues and publications expense consisted of dollar_figure paid to rodale books the shipping and postage expenses consisted of numerous payments to the postal service and mail boxes etc for various mailing and shipping charges as well as for postage stamps at least one shipping charge was from petitioner to petitioners’ daughter the evidence is insufficient to show that any of these expenses were ordinary and necessary expenses_incurred in the conduct_of_a_trade_or_business and therefore these expenses are not deductible on this record the court holds that petitioners are not entitled to schedule c deductions for and in nothing further was submitted with respect to the remaining amount claimed - - excess of the amounts allowed by respondent ' respondent is sustained on this issue the final issue is whether petitioners are liable for the accuracy-related_penalty under sec_6662 for negligence or disregard of rules or regulations for each of the years at issue sec_6662 provides that if it is applicable to any portion of an underpayment in taxes there shall be added to the tax an amount equal to percent of the portion of the underpayment to which sec_6662 applies sec_6662 provides that sec_6662 shall apply to any underpayment attributable to negligence or disregard of rules or regulations sec_6662 provides that the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws and the term disregard includes any careless reckless or intentional disregard of rules or regulations negligence is the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances see neely v commissioner im some of the claimed deductions were for expenses of bellmark petitioners are not entitled to deduct such expenses both petitioner and mr bell testified that petitioner was to be reimbursed by bellmark for all expenses_incurred by him during the years at issue on behalf of bellmark it is well established that a trade_or_business deduction is not allowable to the extent that an employee is entitled to reimbursement from his employer see 788_f2d_1406 9th cir affg tcmemo_1984_533 79_tc_1 - - t c negligence also includes any failure by the taxpayer to keep adequate books_and_records or to substantiate items properly see sec_1_6662-3 income_tax regs however under sec_6664 no penalty shall be imposed under sec_6662 with respect to any portion of an underpayment if it is shown that there was a reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion the determination of whether a taxpayer acted with reasonable_cause and in good_faith depends upon the facts and circumstances of each particular case see sec_1_6664-4 b income_tax regs relevant factors include the taxpayer's efforts to assess his or her proper tax_liability the knowledge and experience of the taxpayer and reliance on the advice of a professional such as an accountant see drummond v commissioner tcmemo_1997_71 however the most important factor is the extent of the taxpayer's effort to determine the taxpayer's proper tax_liability see sec_1_6664-4 income_tax regs an honest misunderstanding of fact or law that is reasonable in light of the experience knowledge and education of the taxpayer may indicate reasonable_cause and good_faith see remy v commissioner tcmemo_1997_72 for all years the underpayments resulted from respondent's disallowance of petitioners’ schedule c deductions -- - and additionally in from respondent’s determination of unreported income respondent conceded that petitioners are entitled to deductions for meals and entertainment_expenses totaling dollar_figure for and that petitioners did not have unreported income for petitioners conceded that during and petitioner’s tax_home was los angeles and thus petitioners were not entitled to deduct los angeles living_expenses for those years the remainder of respondent's adjustments at issue for and have been sustained petitioners’ evidence was far short of what was required to sustain the disputed adjustments in the notice_of_deficiency for and furthermore petitioners presented no evidence to show that they used due care in claiming deductions on their returns for and that were subsequently adjusted in the notice_of_deficiency and either conceded by petitioners or sustained by this court in favor of respondent nor did petitioners present evidence to show that they had reasonable_cause to claim such deductions petitioner failed to maintain adegquate books_and_records to reflect his business_expenses for any of the relevant years petitioner was an experienced tax_return_preparer who was or should have been abundantly familiar with the substantiation requirements of sec_274 and the necessity of maintaining - - sufficient books_and_records to accurately reflect his income and expenses moreover petitioner should certainly have been aware of the controlling factors in determining a taxpayer’s tax_home and of the stringent regquirements surrounding a home_office deduction under sec_280a if petitioner had not been familiar with these rules and requirements his many years of experience in preparing returns should have led him to research the law on these matters before filing returns claiming such deductions the court finds that petitioners made an insufficient effort to determine their proper tax_liabilities in filing their returns for and moreover in light of petitioner’s experience knowledge and education the court finds that petitioners’ claiming deductions which were disallowed by respondent and subsequently conceded by petitioners or sustained by this court in favor of respondent did not constitute a reasonable and honest misunderstanding of fact or law on this record the court holds that petitioners negligently or intentionally disregarded rules or regulations with regard to the adjustments in the notice_of_deficiency for and that were either conceded by petitioners or sustained by this court in favor of respondent accordingly the imposition of the accuracy-related_penalties under sec_6662 for and is sustained -- - finally to the extent the court has failed to address any argument of petitioners herein the court concludes such argument is without merit reviewed and adopted as the report of the small_tax_case division decision will be entered under rule


internal_revenue_service national_office technical_advice_memorandum date third party communication none date of communication not applicable tam-118524-04 cc pa apjp b-2 number release date index uil no case-mis no --------------------------------------------------------------------------------------------- ------------- ------------------------ ---------------------------- taxpayer's name taxpayer's address taxpayer's identification no year s involved date of conference ------------------------------------------ -------------------------------------- ----------------------------------- ---------------- ------- ------------------ legend legend issuer ------------------------------------------ date ----------------------- date ---------------------- date ----------------------- date ------- date -------------------- amount dollar_figurea ------------------- amount dollar_figureb ------------------ amount dollar_figurec --------------- amount dollar_figured --------------- issues whether the period of limitations for an issuer of bonds to bring suit to recover an overpayment of an arbitrage rebate paid to the service is the two-year period tam-118524-04 under sec_6532 or the general six-year period under u s c and if we conclude under issue that the general six-year period applies when does the period of limitations for bringing suit to recover an overpayment of an arbitrage rebate begin conclusions the period of limitations for an issuer of bonds to bring suit to recover an overpayment of an arbitrage rebate paid to the service is the general six-year period under u s c and the period of limitations for bringing suit to recover an overpayment of an arbitrage rebate under u s c and begins upon payment of the rebate with the submission of form 8038-t the arbitrage rebate form consequently any suit brought by issuer at this time would be untimely as more than six years have passed since issuer submitted form 8038-t and its final arbitrage rebate payment facts on date issuer issued bonds in the amount of amount dollar_figurea the last bond of the issue was redeemed on date a final computation under sec_148 was made and a final arbitrage rebate of amount dollar_figureb was remitted on date which was within days of date issuer submitted its final arbitrage rebate payment with form 8038-t arbitrage rebate in date which was more than seven years after date the final computation for the period date to date was reviewed and it was discovered that issuer appeared to have overpaid the rebate by amount dollar_figurec issuer filed a claim on date to recover the overpayment issuer did not submit its claim in accordance with revproc_92_83 1992_2_cb_487 the service reviewed the computation and found the overpayment to be amount dollar_figured and issuer now agrees the service believes however that the claim is untimely because the claim was not submitted before the six-year period in u s c and expired if issuer filed suit now such suit would be untimely and thus the service does not believe the claim should be allowed the service has not sent a notice of claim disallowance to issuer to date issuer has not instituted a refund_suit to recover amount dollar_figured issuer’s position is that because the service has not sent a notice of claim disallowance for the refund claim filed on date the two-year period for filing suit under sec_6532 has not begun to run and any refund_suit filed now would be timely tam-118524-04 background sec_103 excludes from gross_income interest on any state_or_local_bond this exclusion however does not apply to an arbitrage_bond as defined by sec_148 in general sec_148 defines an arbitrage_bond as any bond issued as part of an issue any portion of the proceeds of which are reasonably expected at the time of issuance of the bond to be used directly or indirectly to acquire higher_yielding_investments or to replace funds which were used directly or indirectly to acquire higher_yielding_investments sec_148 a bond which is part of an issue is treated as an arbitrage_bond unless the issuer rebates turns over to the service any arbitrage profits earned from investing the proceeds of the tax-exempt issue in higher_yielding_investments sec_148 the computation to determine if an arbitrage rebate is due is made at the end of every fifth year during the term of the issue a required computation and when the last bond in the issue is discharged the final computation the computations are based on future values a rebate amount must be paid no later than days after each required computation_date as well as the final computation_date sec_148 a rebate payment is paid when it is filed with the service at the place designated by the commissioner sec_1_148-3 a rebate payment must be accompanied by form 8038-t arbitrage rebate the failure to pay a rebate amount when required can result in the bonds being classified as arbitrage_bonds and the interest_paid on bonds may lose the sec_103 exemption the service does not make any assessment as described in sec_6201 or undertake any collection activity under sec_6301 against the issuer for failure to pay the rebate but the service would assess the bondholders for the interest_income after following the deficiency procedures in i r c proposed and temporary sec_1 -13t prescribed in treasury_decision fr date provided for the recovery_of an overpayment the preamble to treasury_decision explained that the regulation provides authority for the commissioner to make refunds of rebate overpayments provided that certain conditions are satisfied the issuer must have made an overpayment as a result of a mistake of law or fact in order to qualify for a refund also in many instances the service is not required to refund an overpayment until after the final computation_date or until after an issuer's rebate obligation is otherwise finally determined the regulation does not prescribe a time by which a request must be filed with the service the service subsequently published revproc_92_83 1992_2_cb_487 to explain how to request a recovery_of overpayment the revenue_procedure does not however prescribe a time by which a request for refund must be filed with the service the temporary_regulation was replaced with the present sec_1_148-3 which became effective on date which was before date currently sec_1_148-3 provides that an issuer may recover an overpayment for an issue tam-118524-04 of tax-exempt_bonds by establishing to the satisfaction of the commissioner that the overpayment occurred an overpayment is the excess of the amount_paid to the united_states for an issue under sec_148 over the sum of the rebate amount for the issue as of the most recent computation_date and all amounts that are otherwise required to be paid under sec_148 as of the date the recovery is requested the regulation does not prescribe a time by which a request for recovery must be filed with the service form 8038-r request for recovery_of overpayments under arbitrage rebate provisions replaced the procedures provided in revproc_92_83 see announcement 2001_2_cb_539 the instructions for form 8038-r do not prescribe a time by which a request must be filed with the service law and analysis issue u s c sec_1346 and sec_1491 provide the district courts and the court of federal claims respectively with jurisdiction over any civil_action against the united_states for any internal-revenue tax alleged to have been erroneously or illegally assessed or collected or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws the jurisdiction granted under these two sections however is limited for purposes of the internal_revenue_code by sec_7422 which provides that until a claim_for_refund_or_credit has been duly filed with the secretary no suit or proceeding shall be maintained in any court for the recovery_of any internal revenue tax alleged to have been erroneously or illegally assessed or collected or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected sec_6532 provides that no suit or proceeding under sec_7422 for the recovery_of any internal revenue tax penalty or other sum shall be begun before the expiration of six months from the date of filing the claim required under such section tam-118524-04 unless the secretary renders a decision thereon within that time nor after the expiration of two years from the date of mailing by certified mail or registered mail by the secretary to the taxpayer of a notice of the disallowance of the part of the claim to which the suit or proceeding relates sec_6402 authorizes the secretary_of_the_treasury to make refunds when a taxpayer overpays taxes the regulations on procedure and administration under sec_6402 provide that refunds of overpayments may not be allowed or made after the expiration of the statutory period of limitation properly applicable unless before the expiration of such period a claim therefor has been filed by the taxpayer sec_301_6402-2 sec_6511 provides a claim for credit or refund of an overpayment of any_tax imposed by title_26 in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within three years from the time the return was filed or two years from the time the tax was paid whichever of such periods expires later for purposes of sec_6511 the term tax expressly includes certain penalties imposed by the code as well as interest see sec_6601 the service and issuer agree that an arbitrage rebate is not an internal revenue tax or penalty for purposes of sec_7422 and sec_6532 or sec_28 u s c sec_1346 and sec_1491 consequently the requirement to file a claim under sec_6402 and the timing of the filing of that claim under sec_6511 are not applicable issuer contends however that an arbitrage rebate is any sum under those sections and consequently that the two-year period under sec_6532 for filing suit has not started because the service has not issued a notice of claim disallowance neither the internal_revenue_code nor the treasury regulations define any sum however the supreme court described the phrase as a catchall phrase but to say this is not to define what it catches 362_us_145 aff'g 362_us_63 at issue in both flora cases was whether a taxpayer must pay the full amount of a tax_deficiency before challenging the correctness by a suit_for_refund under u s c sec_1346 the taxpayer contended that the use of the words any sum in u s c sec_1346 meant that the payment of the full assessment was not required before filing suit the supreme court rejected the taxpayer’s argument holding that full payment of the deficiency was required before filing suit in reaching this conclusion the court recognized that the phrase any sum was ambiguous but noted that interest was one example of such a sum that was neither a tax nor a penalty id pincite the court found it significant that many old tax statutes described the amount which was to be assessed under certain circumstances as a ‘sum’ to be added to the tax simply as a ‘sum ’ as a ‘percentum ’ or as ‘costs ’ id pincite we note that the supreme court’s conclusions in both flora cases were made after a thorough consideration of the history of the various tax_refund provisions because little other guidance on the meaning of any sum exists we find the supreme court’s review tam-118524-04 of those provisions instructive given the ambiguity of the any sum phrase the supreme court examined the legislative_history of u s c sec_1346 which was enacted in the revenue act of however the court found that history barren of any clue to congressional intent flora u s pincite the court also examined the ancestry of the language of u s c sec_1346 a which stems from a predecessor of sec_7422 but found that ancestry no more enlightening than the legislative_history id pincite the court noted that the any sum language was taken from section of the revised statutes from a predecessor to sec_7422 the predecessor to section of the revised statutes was section of the revenue act of july 14_stat_152 which did not contain the any sum phrase in that same revenue act however a predecessor to sec_6402 was enacted as follows that the commissioner of internal revenue shall be and is hereby authorized on appeal to him made to remit refund and pay back all taxes erroneously or illegally assessed or collected all penalties collected without authority and all taxes that shall appear to be unjustly assessed or excessive in amount or in any manner wrongfully collected and all judgments and moneys recovered or received for taxes costs forfeitures and penalties shall be paid to the collector as internal taxes are required to be paid section of the revenue act of july 14_stat_101 section also authorized the commissioner to repay collectors and deputy collectors the following the full amount of such sums of money as shall or may be recovered against them or any of them in any court for any internal taxes or licenses collected by them with the costs and expenses of suit and all damages and costs recovered against assessors assistant assessors collectors deputy collectors and inspectors in any suit which shall be brought against them or any of them by reason of anything that shall or may be done in the due performance of their official duties id emphasis added section of the act amended a provision that appeared in the revenue act of june at sec_44 13_stat_239 the revenue act referred to all duties instead of all taxes but otherwise read much the same as the amendment the first use of the term sums appears in this provision regarding repaying collectors but a n examination of the legislative_history discloses no indication of the purpose flora u s pincite n the first use of the phrase any sum in the same manner as it appears today was in sec_44 of the revenue act of june which was a predecessor to sec_6532 again nothing in the legislative_history of the act gives any indication of the significance of the use of the phrase any sum based on the evolution of sec_7422 and sec_6532 from these earlier revenue acts however we believe the any sum phrase relates to costs incidental to the recovery_of an internal revenue tax an tam-118524-04 arbitrage rebate under sec_148 is not incidental to the recovery_of an internal revenue tax the payment of a rebate is an alternative to a payment of tax and stands apart from any_tax the rebate cannot be collected from an issuer using the tax collection procedures provided by the internal_revenue_code moreover we have found nothing in the ancestry of the any sum language to indicate that the phrase applies to nontax claims thus any sum does not encompass an arbitrage rebate our interpretation is supported by a recent united_states court of federal claims case that suggests congress has viewed the tax penalty and any sum language as either synonymous with or at least not significantly different from an overpayment_of_tax see 54_fedclaims_373 in usibelli coal mine the court of federal claims considered whether a plaintiff prevailing on a refund claim was entitled to interest under u s c a provision that is similar to sec_6611 interest on an administratively determined refund section of title provides that overpayment interest shall be allowed on any judgment of a court for any overpayment in respect of any internal-revenue tax the plaintiff sought prejudgment overpayment interest in connection with the overpayment of a coal_tax the plaintiff brought the action as a damages action under an export_clause and not as an action for a tax_refund even though the coal_tax was imposed by the internal_revenue_code therefore the requirements of sec_7422 did not have to be met the court did not accept the plaintiff’s argument that a judgment rendered for a damage action was a judgment for an overpayment of internal revenue tax under u s c because basically if the judgment did not involve an assessment or collection of a tax under sec_7422 it could not involve an overpayment_of_tax under u s c the court of federal claims considered the legislative_history of u s c and found the language varied several times and without reason between the current language and language that is essentially identical to that in sec_7422 usibelli coal mine fed cl pincite the court then traced the operations and history of several provisions of the internal_revenue_code that are operatively interwoven feeding into and interacting with each other noting that even the language of sec_6402 sec_6511 sec_6611 and sec_7422 are not wholly consistent in their terminology id pincite the court demonstrated an apparent lack of any reason behind the variations noting that the same phraseology often appeared in two or more provisions dealing with exactly the same subject and found t here is no pattern to when and how they changed some shifts in closely-related provisions occurred decades apart and as reflected in the accompanying legislative reports without the slightest indication that congress intended anything more than housekeeping footnote omitted id consequently the use of the term sum in certain provisions of the various revenue acts or the internal_revenue_code but not in others cannot be said to have any decisive meaning our conclusion that a payment of an arbitrage rebate does not constitute any sum is consistent with the service’s long-standing position regarding claims for refund of overpayment interest under sec_6611 an amount that is not a tax or a penalty see revrul_56_506 1956_2_cb_959 see also revrul_57_242 1957_1_cb_452 tam-118524-04 similarly a deposit although not a payment of tax is not any sum sufficient to come within the purview of sec_7422 see 118_f3d_1553 fed cir cert_denied 523_us_1094 holding that sec_7422 does not apply to a suit for recovery_of a deposit in the nature of a cash bond because it is not a tax_refund suit and consequently the timeliness of the suit is governed by the six-year period of limitations for a cause of action brought under u s c sec_1491 further look-back interest owed to the taxpayer on a completed long- term contract is a general claim against the government that is subject_to the six-year period in u s c and sec_1_460-6 thus our conclusion that a payment of an arbitrage rebate does not fall within the purview of any sum is consistent with the treatment of claims for refund of other non-tax amounts for each of those non-tax amounts the service does not issue a notice of claim disallowance even though taxpayers can file claims for refund with the service we see no reason to draw a distinction between claims for refund filed in the sec_148 context and those other non-tax amounts for which sec_6532 is not applicable consequently the timeliness of any refund_suit filed by issuer would be governed by the six-year period of limitations in u s c and issue in general a civil_action commenced against the united_states shall be barred unless the complaint is filed within six years after the right of action first accrues u s c a the starting date for the six-year period is based on the common_law rule for when the period for the cause of action begins ie when all the events which fix the government's alleged liability have occurred and the taxpayer was or should have been aware of their existence 33_fedclaims_4 in the instant case issuer made its final computation under sec_148 and paid the rebate with the form 8038-t on date at that time all the events which fixed the government's alleged liability had occurred and issuer was or should have been aware of their existence these events were the discharge of the last bond in the issue the requirement to do the final computation under sec_148 and the requirement to pay the arbitrage rebate within days after the final computation_date the discovery of an error necessitating a recalculation of an amount due to the government does not change the time when the government’s liability for any overpayment came into existence 312_f3d_447 d c cir at issue in norwest supra was whether a suit_for_refund of an overpayment of amounts paid to the federal deposit insurance corporation fdic was timely in january of norwest was required to pay a series of premiums to insure deposits of savings-and-loan associations norwest timely submitted its payment but misinterpreted the formula to be used for calculating the premiums due and consequently overpaid its premiums norwest then filed suit against the fdic on june tam-118524-04 while the court relied upon a five-year statute_of_limitations which applied specifically to an action for recovery_of an amount_paid to the fdic in excess of the amount due rather than the six-year period in u s c a to dismiss the action as untimely the rationale for when the cause of action accrued in norwest’s situation is equally applicable in the instant case in holding that norwest’s cause of action accrued in january of when the miscalculation of the premiums occurred the court drew the following analogy norwest's complaint is like a claim ‘for restitution of money paid through mistake ’ in such cases courts generally regard the statutory period to begin to run when the payment is made norwest f 3d pincite citations omitted similarly any complaint filed by issuer now would be a claim for restitution of money paid through mistakenly calculating the rebate due thus the statutory period in issuer’s case began to run on date when issuer submitted its final arbitrage rebate payment issuer has raised several arguments in support of concluding that the cause of action has not yet accrued but we do not find these arguments persuasive first issuer believes that sec_1_148-3 clearly evidences that the service neither intends that an issuer seek recovery_of a rebate overpayment directly from the courts nor that an issuer has the right to do so in addition issuer contends that even if a refund_suit is appropriate the service must recognize two separate time periods the period for an issuer to request a recovery_of overpayment for which issuer contends the service failed to set a deadline and the period for an issuer to contest the denial of the administrative claim in a court of law issuer believes that the failure to separate the periods blurs the distinction between the initiation of an administrative adjudication process and the subsequent commencement of a lawsuit to challenge the service’s adverse determination issuer cites 205_f3d_1358 fed cir cert_denied 531_us_1036 as an example of an agency failing to establish a time limit for filing an administrative claim and therefore failing to set a deadline for beginning the statutory period in which to bring a refund_suit issuer also cites 386_us_503 as an example of when a claimant must be allowed to exhaust administrative remedies before accruing the right to bring suit we do not believe that the rationale of swisher int’l inc supra applies to claims filed in the sec_148 context swisher paid to the customs service an excise_tax on imports from the fourth quarter of through the second quarter of swisher then filed a claim_for_refund of those taxes on date on the ground that the tax was unconstitutional as applied to exports the customs service denied swisher’s refund claim on date and swisher filed suit in the court of international trade on date at the time swisher filed its claim_for_refund the customs service allowed a claimant to file for a refund under either of two procedures a court- approved claims resolution procedure which provided a two-year statute_of_limitations for bringing an action over the act of payment of the tax or an administrative refund procedure which inadvertently did not contain a statute_of_limitations for filing the claim_for_refund but did impose a 180-day period of limitations for filing suit that did not tam-118524-04 commence until the customs service denied a claimant’s protest if the customs service denied the claim administratively the claimant could protest the denial and then appeal to the united_states court of international trade the court_of_appeals_for_the_federal_circuit held that swisher’s cause of action accrued on date when the customs service denied swisher’s protest and therefore swisher’s suit before the court of international trade was not barred by a statute_of_limitations as swisher filed suit within the 180-day period swisher f 3d pincite the administrative refund procedure in swisher is distinguishable from the refund procedure prescribed in the sec_148 context in swisher if a claimant chose to recover an overpayment through the prescribed refund procedures the claimant had to file suit within days after the denial of its protest thus a period of limitations did exist that was distinct from the period of limitations applicable if swisher had chosen to forego the administrative procedures and proceed directly to court in issuer’s situation as we discussed above in issue no period of limitations existed for the prescribed refund procedures that was distinct from the period of limitations if issuer had chosen to forego the administrative refund process thus the only way issuer could fully protect its rights was to file a civil suit against the united_states prior to the termination of the six-year period under u s c and see also revrul_57_242 1957_1_cb_452 in addition we do not believe the rationale of crown coat front co supra applies to issuer’s situation crown coat front co was a contractor that completed a contract on date and then filed a claim_for_refund in october of arising from a price reduction agreement entered into after the contract began the contracting officer denied the claim on date the board_of contract appeals affirmed the denial on date crown coat front co filed suit the government argued the six-year period in u s c ran from date the date of completion of the contract in concluding that the contractor’s claim arose under the contract the supreme court held that the claim first accrued on date when the board_of contract appeals made its final_decision and therefore the suit was untimely the court based its holding on the purpose of the disputes clause in the contract which clearly provided that a contractor had to seek relief provided for under the contract or be barred from any relief in the courts in issuer’s situation however there was no requirement that issuer exhaust its administrative remedies within the service before filing suit we do not read the regulations under sec_148 or any of the service's existing procedures to find that the service has mandated the submission of an arbitrage rebate claim prior to instituting a refund_suit sec_1 148-13t a merely provided that an issuer could recover an overpayment of an amount_paid under sec_148 by filing a claim moreover nothing in revproc_92_83 nor form 8038-r indicates that the filing of a claim is a prerequisite to filing suit tam-118524-04 caveat s a copy of this technical_advice_memorandum is to be given to the taxpayer s sec_6110 of the code provides that it may not be used or cited as precedent


tcmemo_2009_217 united_states tax_court alphonse mourad petitioner v commissioner of internal revenue respondent docket no 18038-05l filed date alphonse mourad pro_se louise r forbes for respondent memorandum findings_of_fact and opinion gale judge pursuant to sec_6330 petitioner seeks review of respondent’s determination to proceed with a levy to collect unpaid income_tax with respect to petitioner’s 1unless otherwise noted section references are to the internal_revenue_code_of_1986 as amended and rule references are to the tax_court rules_of_practice and procedure and taxable years respondent concedes that petitioner is entitled to challenge the underlying tax_liability for those years findings_of_fact some of the facts have been stipulated and are so found petitioner resided in massachusetts when he filed the petition petitioner was the sole shareholder of v m management inc v m management an s_corporation from and at all relevant times thereafter v m management owned and operated a 275-unit apartment complex known as mandela apartments in roxbury massachusetts on date v m management filed a petition for reorganization pursuant to chapter of the u s bankruptcy code in the u s bankruptcy court for the district of massachusetts in boston the bankruptcy court appointed an independent_trustee the bankruptcy trustee to administer the reorganization on date the bankruptcy court confirmed a plan_of_reorganization the crux of which involved selling mandela apartments and its related property on date the bankruptcy trustee sold mandela apartments and its related property by means of an installment_sale in the 2v m management’s corporate_income_tax returns list the sale of mandela apartments and related property such as appliances on several different forms installment_sale income for continued bankruptcy trustee and a limited_partnership were coapplicants on a low-income_housing tax_credit application seeking to secure low-income_housing tax_credits for mandela apartments in subsequent years the trustee intended to syndicate the tax_credits to provide the funds to make payments to v m management’s creditors the bankruptcy trustee prepared and filed forms 1120s u s income_tax return for an s_corporation on behalf of v m management for taxable years through v m management’s income_tax returns for each of those years reported income from the installment_sale v m management did not claim any low- income housing tax_credits on its income_tax returns for any of the years through petitioner received an extension for filing his income_tax return for his taxable_year until date petitioner filed an income_tax return for that respondent received on date petitioner reported a dollar_figure income_tax_liability on his return but made no payment on date respondent assessed the reported dollar_figure tax continued convenience we refer to the sale of mandela apartments and related property in the singular throughout this opinion 3in connection with the redetermination of petitioner’s federal_income_tax liability the court_of_appeals for the first circuit found that the credits had been awarded to the mandela apartments’ new owners in 387_f3d_27 1st cir affg 121_tc_1 liability as well as additions to tax under sec_6651 and of dollar_figure and dollar_figure respectively and dollar_figure of interest petitioner filed an income_tax return for his taxable_year that was received by respondent on date petitioner reported adjusted_gross_income of dollar_figure and a tax_liability of dollar_figure on the return respondent adjusted petitioner’s reported tax_liability downward to dollar_figure and on date assessed that amount as well as additions to tax under sec_6651 and of dollar_figure and dollar_figure respectively and interest of dollar_figure respondent issued petitioner a notice_of_deficiency for his taxable_year and petitioner filed a tax_court petition in response thereto in this court issued its opinion in 121_tc_1 the court in mourad sustained respondent’s deficiency determination for petitioner’s taxable_year in doing so the court determined inter alia that petitioner was not entitled to claim low-income_housing tax_credits in the court’s decision was affirmed by the court_of_appeals for the first circuit 387_f3d_27 1st cir on date respondent sent petitioner a final notice_of_intent_to_levy and notice of your right to a hearing for petitioner’s and taxable years petitioner timely requested a hearing and a telephone conference was conducted on date the only issues petitioner raised during the hearing were challenges to the underlying tax_liabilities respondent issued petitioner a notice_of_determination sustaining the proposed levy on date and petitioner timely filed a petition in response thereto i background opinion sec_6331 authorizes the secretary to levy upon property and property rights of any person liable for taxes taxpayer who fails to pay those taxes after notice_and_demand for payment is made sec_6331 provides that the levy authorized by sec_6331 may be made with respect to any unpaid tax only if the secretary has given written notice to the taxpayer days before levy sec_6330 further requires that the notice advise the taxpayer of the amount of the unpaid tax and of the taxpayer’s right to a hearing if a hearing is requested the hearing is to be conducted by an officer_or_employee of the commissioner’s appeals_office with no prior involvement with respect to the unpaid tax at issue sec_6330 the appeals officer shall at the hearing obtain verification that the requirements of any applicable law or administrative procedure have been met sec_6330 the taxpayer may raise at the hearing any relevant issue relating to the unpaid tax or the proposed levy sec_6330 the taxpayer may also raise challenges to the existence or amount of the underlying tax_liability at the hearing if the taxpayer did not receive a statutory_notice_of_deficiency with respect to the underlying tax_liability or did not otherwise have an opportunity to dispute that liability sec_6330 amounts reported as due on the taxpayer’s original return may also be challenged 122_tc_1 at the conclusion of the hearing the appeals officer must determine whether and how to proceed with collection and shall take into account the verification that the requirements of any applicable law or administrative procedure have been met the relevant issues raised by the taxpayer challenges to the underlying tax_liability by the taxpayer where permitted and whether any proposed collection action balances the need for the efficient collection_of_taxes with the legitimate concern of the taxpayer that the collection action be no more intrusive than necessary sec_6330 with respect to determinations made before date we have jurisdiction to review the appeals office’s determination where we have jurisdiction over the type of tax 4pursuant to the pension_protection_act of publaw_109_280 120_stat_1019 this court has exclusive jurisdiction to review determinations under sec_6330 effective for determinations made after the date which is days after the date date of enactment or date involved in the case sec_6330 see 122_tc_287 generally we consider only those issues that the taxpayer raised during the sec_6330 hearing 129_tc_107 118_tc_488 however the appeals officer’s mandated verification under sec_6330 that the requirements of any applicable law or administrative procedure have been met is subject_to review without regard to a challenge by the taxpayer at the hearing hoyle v commissioner t c ___ where it is properly at issue we review the underlying tax_liability de novo the appeals officer’s determinations concerning collection matters are reviewed for abuse_of_discretion see eg 114_tc_176 ii challenges to the underlying tax_liability the parties agree that petitioner did not receive a notice_of_deficiency or otherwise have an opportunity to dispute his underlying tax_liabilities for and therefore the underlying tax_liabilities for and are properly at issue see montgomery v commissioner supra and we review them de novo petitioner bears the burden of proving that the 5however as discussed infra petitioner is collaterally estopped from contesting certain issues affecting his underlying continued underlying tax_liabilities are incorrect see rule a 290_us_111 however under sec_7491 the commissioner bears the burden of production with respect to the additions to tax in order to meet that burden the commissioner must offer sufficient evidence to indicate that it is appropriate to impose the relevant addition 116_tc_438 once the commissioner meets his burden of production the taxpayer bears the burden of proving error in the determination including evidence of reasonable_cause or other exculpatory factors id pincite a taxable_year petitioner reported a dollar_figure income_tax_liability on his return but made no payments toward the liability petitioner’s only challenge to the liability is his claim that he is entitled to an investment_interest expense continued tax_liability for 6petitioner failed to cooperate with respondent in preparing this case for trial including by his own admission spurning respondent’s counsel’s requests for information and meetings until the day before trial consequently petitioner is not entitled to any shift in the burden_of_proof with respect to the underlying tax_liabilities see sec_7491 and b see also eg connors v commissioner tcmemo_2006_239 affd 277_fedappx_122 2d cir krohn v commissioner tcmemo_2005_145 lopez v commissioner tcmemo_2003_142 affd on this issue without published opinion 116_fedappx_546 5th cir carryforward from his taxable_year to reduce the liability a noncorporate taxpayer may deduct investment_interest for any taxable_year only to the extent of any net_investment_income sec_163 any amount not allowed as a deduction because of sec_163 may be carried forward to succeeding taxable years sec_163 petitioner reported no investment_income on his return which could be offset by an investment_interest expense carryforward and petitioner has adduced no evidence in this proceeding that he had such investment_income in in sum petitioner has not shown that his underlying tax_liability for as reported on his return should be adjusted to account for an investment_interest expense carryforward accordingly the assessment of the amounts reported as due on the return was proper with respect to the addition_to_tax under sec_6651 that section provides for an addition_to_tax for a taxpayer’s failure_to_file a required return on or before the due_date of the return including extensions unless the failure to 7we note however that petitioner attached a form_4952 investment_interest expense deduction to his return claiming an investment_interest expense of dollar_figure which he intended to carry forward to petitioner was allowed to carry forward and deduct a dollar_figure investment_interest expense in his taxable_year see mourad v commissioner t c pincite n file is due to reasonable_cause and not due to willful neglect respondent introduced a form_4340 certificate of assessments payments and other specified matters for petitioner’s taxable_year which records that petitioner received an extension until date to file his return and that petitioner actually filed his return on date petitioner reported sufficient income on his return to obligate him to file an income_tax return for that year see sec_6012 accordingly respondent has met his burden of production under sec_7491 with respect to the sec_6651 addition_to_tax petitioner presented no evidence of reasonable_cause for his failure to timely file his return and we consequently conclude that the assessment of the sec_6651 addition_to_tax for was proper with respect to the addition_to_tax under sec_6651 that section provides for an addition_to_tax for a taxpayer’s failure to timely pay any amount shown as tax on an income_tax return unless such failure is due to reasonable_cause and not due to willful neglect we have found no error in the underlying tax_liability for and the form_4340 for records that petitioner failed to pay the tax reported on his return accordingly respondent has met his burden of production with respect to the sec_6651 addition_to_tax as petitioner has adduced no evidence indicating that his failure to pay the tax was due to reasonable_cause and not due to willful neglect the assessment of the sec_6651 addition_to_tax was proper b taxable_year petitioner filed his return for on date attached to the return was a schedule_k-1 form_1120s shareholder’s share of income credits deductions etc from v m management the return reported adjusted_gross_income of dollar_figure and a tax_liability of dollar_figure the amount listed as a net sec_1231 gain on the schedule_k-1 from v m management respondent reduced this liability to dollar_figure pursuant to sec_6213 notwithstanding the position he took on the return petitioner argues that he should not be taxed on passthrough income earned by his s_corporation while it was in chapter bankruptcy reorganization he contends that the bankruptcy trustee was the real owner of v m management when its assets were sold and that he was no longer the actual owner of v m management in petitioner further argues that the assets of v m management were sold in and he should therefore have no income from v m management in petitioner argues in the alternative that if he is liable for taxes in from the sale 8petitioner has made no claim_for_abatement or otherwise disputed the interest assessed with respect to the tax_liability of v m management’s assets then he should be entitled to offset the tax with low-income_housing credits petitioner has previously argued to this court that v m management’s bankruptcy filing caused him to cease to be obligated for v m management’s tax_liability petitioner’s argument was considered and rejected by this court and the court_of_appeals for the first circuit see 121_tc_1 affd 387_f3d_27 1st cir in mourad we held that the filing of a bankruptcy petition for reorganization neither terminates an s corporation’s tax status nor creates a separate taxable entity petitioner’s argument that v m management’s bankruptcy proceeding extinguished his obligation for v m management’s taxes is therefore incorrect petitioner was the sole shareholder of v m management an s_corporation when its assets were sold in and any installment_sale income passed through to petitioner see sec_1366 v m management reported the sale of its assets on its corporate_income_tax returns for and as an installment_sale with installment_sale income in each of those 9as this court observed in mourad v commissioner t c pincite there is no unfairness in taxing petitioner on his passthrough income from v m management while the corporation is in bankruptcy given petitioner’s receipt of prior tax benefits from v m management’s s_corporation status and the reduction of petitioner’s taxable_income from v m management’s depreciation_deductions years see generally sec_453 v m management’s return reported the installment_sale gain for that year as dollar_figure all of which was listed on the schedule_k-1 issued to petitioner for that year petitioner attached a copy of the schedule_k-1 to his return but reported the dollar_figure of installment_sale gain as his tax due for the year respondent adjusted the reported liability downward pursuant to the math error procedures of sec_6213 petitioner’s contention that he could not have had income from v m management in because the sale occurred in is contradicted by v m management’s returns petitioner has demonstrated no error in v m management’s reporting of its income or in respondent’s adjustment of petitioner’s tax_liability petitioner alternatively argues that he should be allowed to offset any_tax for by means of low-income_housing credits that the bankruptcy trustee secured for mandela apartments sec_38 provides for a general_business_credit which includes a low-income_housing_credit under sec_42 sec_39 provides rules under which an unused sec_38 credit may be carried back or forward to other taxable years under sec_42 an owner of a qualified_low-income_building is allowed to claim a low-income_housing_credit for any year only if and to the extent that the owner receives a housing_credit allocation from a state or local housing_credit_agency sec_42 d the credit allocation is deemed made when part i of form_8609 low-income_housing_credit allocation certification is completed and signed by an authorized officer of the housing_credit_agency sec_1_42-1t e temporary income_tax regs fed reg date further to be eligible for the credit a taxpayer is required to file a completed form_8609 and a form_8586 low-income_housing_credit with his return for each year the credit is claimed sec_1 1t h temporary income_tax regs fed reg date dollar_figure petitioner has not demonstrated his entitlement to a low- income housing_credit for v m management sold mandela apartments on date so v m management was not an owner of mandela apartments in thus the only way petitioner could be entitled to offset his tax with a low- income housing_credit attributable to the mandela apartments would be if he were entitled to carry forward a credit from or from an earlier year in which v m management owned mandela apartments in 121_tc_1 this court considered petitioner’s income_tax_liability for including 10as applicable for these requirements were contained in sec_1_42-1t temporary income_tax regs fed reg date effective date the temporary_regulation was replaced with sec_1_42-1 income_tax regs t d 2004_1_cb_523 his claim that he was entitled to a low-income_housing_credit for that year and determined that he was not entitled to any such credit the issue of petitioner’s entitlement to a low-income_housing_credit for was fully litigated and resolved in that case and petitioner is therefore precluded from relitigating it when an issue of fact or law is actually litigated and determined by a valid and final judgment and the determination is essential to the judgment the determination is conclusive to a subsequent action between the parties whether on the same or a different claim restatement judgment sec_2d sec_27 see also 440_us_147 the court’s determination that petitioner was not entitled to the credit for was a necessary component of the court’s determination of petitioner’s tax_liability in mourad and this court’s decision in that case is a valid and final judgment affirmed on this issue on appeal thus collateral estoppel11 bars petitioner from claiming that he was entitled to a low- income housing_credit in dollar_figure 11respondent has made no claim that sec_6330 limits the issues petitioner may raise and we therefore do not consider the applicability of that section 12petitioner attached to his posttrial brief a date letter that petitioner apparently believes shows that low- income housing credits were awarded to mandela apartments in notwithstanding the court_of_appeals finding that the credits were awarded in see supra note material attached to posttrial briefs is not competent evidence rule b evans continued with respect to years before petitioner has neither claimed nor introduced any evidence showing that he was entitled to low-income_housing credits for any pre-1997 year this precludes any demonstration that petitioner was entitled to a carryforward of a low-income_housing tax_credit from an earlier year to under section dollar_figure we therefore conclude that petitioner is not entitled to offset his tax by means of a low-income_housing_credit accordingly the assessment of the tax was proper with respect to the addition_to_tax under sec_6651 respondent introduced a form_4340 for petitioner’s taxable_year which recorded that petitioner filed hi sec_12 continued v commissioner 48_tc_704 affd per curiam 413_f2d_1047 9th cir hoang v commissioner tcmemo_2006_47 the letter was not offered as evidence at trial and is hearsay in any event because the issue of petitioner’s entitlement to low-income_housing credits in was litigated in 121_tc_1 petitioner is collaterally estopped from further contesting the issue in this proceeding the letter petitioner would have us consider was written before the decision in 387_f3d_27 1st cir and thus would not prevent the operation of collateral_estoppel see 69_tc_762 13in mourad v commissioner t c pincite this court also found that v m management never claimed low-income_housing tax_credits for or and that petitioner did not file a return for since petitioner makes no claim in this proceeding that he is entitled to low-income_housing tax_credit carryforwards from those years we find it unnecessary to decide whether he is collaterally estopped from doing so return on date the form_4340 does not indicate that petitioner had been granted an extension to file his return in the absence of any other evidence we conclude the return was due on date see sec_6072 petitioner’s income was sufficient to obligate him to file an income_tax return for that year see sec_6012 accordingly respondent has met his burden of production under sec_7491 with respect to the sec_6651 addition_to_tax petitioner presented no evidence of reasonable_cause for his failure to timely file his return and we consequently conclude that respondent’s assessment of the sec_6651 addition_to_tax was appropriate petitioner’s return showed dollar_figure as the tax due respondent reduced that amount to dollar_figure and computed an addition_to_tax under sec_6651 on the lesser amount the form_4340 for petitioner’s tax_year shows that he failed to pay any_tax with respect to accordingly respondent has met his burden of production with respect to the sec_6651 addition_to_tax as petitioner has adduced no evidence indicating that his failure to pay the tax was due to reasonable_cause and not due to willful neglect we conclude that respondent’s assessment of the sec_6651 addition_to_tax was appropriatedollar_figure iii other requirements petitioner did not raise any issues at his hearing other than the underlying tax_liabilities the appeals officer verified that the requirements of applicable law and administrative procedure had been met through the examination of computer records he further took into account whether the proposed collection action balanced the need for the efficient collection_of_taxes with the legitimate concern of petitioner that the collection action be no more intrusive that necessary see sec_6330 petitioner has identified no specific infirmities in the foregoing not heretofore addressed which would suggest any abuse_of_discretion by the appeals officer we therefore hold that respondent may proceed with the levy that is the subject of the notice_of_determination at issue to reflect the foregoing decision will be entered for respondent 14petitioner has made no claim_for_abatement or otherwise disputed the interest assessed with respect to the tax_liability