t c memo united_states tax_court ragnhild a westby petitioner v commissioner of internal revenue respondent docket nos filed date ragnhild a westby pro_se john c schmittdiel for respondent memorandum findings_of_fact and opinion marvel judge in notices of deficiency dated date respondent determined the following deficiencies additions to tax and penalties with respect to petitioner’s federal income taxes docket no additions to tax accuracy- related year deficiency sec_6651 sec_6653 sec_6662 delinquency negligence_penalty dollar_figure big_number big_number 1dollar_figure big_number big_number dollar_figure -- -- -- dollar_figure big_number 1respondent determined that petitioner was liable for the addition_to_tax under sec_6651 for each of the years in an amended answer respondent therefore bears the burden_of_proof with respect to the imposition of the sec_6651 addition_to_tax for those years rule a docket no delinquency negligence year deficiency sec_6651 sec_6653 dollar_figure dollar_figure 1dollar_figure 1for in addition to imposing the 5-percent negligence addition_to_tax under sec_6653 respondent also imposed an addition_to_tax equal to percent of the interest due on the tax_deficiency of dollar_figure see sec_6653 petitioner timely filed petitions seeking a redetermination of respondent’s adjustments for we consolidated the resulting cases for purposes of trial briefing and opinion 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure some monetary amounts have been rounded to the nearest dollar pursuant to rule a and shall refer to the consolidated cases in the singular in this opinion the issues for decision are whether and to what extent petitioner failed to report income from her law practice for the years at issue whether and to what extent petitioner is entitled to business_expense deductions claimed with respect to her law practice for the years at issue whether and to what extent petitioner is entitled to net_operating_loss carryforward deductions claimed for the years at issue and whether petitioner is liable for the addition_to_tax for negligence under sec_6653 for and the 2for the notice_of_deficiency denies a deduction for dollar_figure of rowe rent expenses and for it lists rowe unreported income of dollar_figure the rowe adjustments those amounts are included in respondent’s computation of tax deficiencies for and as set forth in the notice_of_deficiency for those years thomas g rowe rowe with whom petitioner filed joint returns for through and respondent entered into a separate settlement of rowe’s joint_and_several tax_liabilities for consequently rowe is not a party to this litigation respondent states that the rowe adjustments are not at issue in this case it is not clear however on what basis respondent relies in making this statement although petitioner stated during the trial that she is not claiming that she is an innocent spouse there is no indication in the record that petitioner knew about or intended to waive her right to request relief under sec_6015 regarding the rowe adjustments consequently if respondent intends to hold petitioner liable for the rowe adjustments we shall give petitioner the opportunity to file a request for relief under sec_6015 before we enter a decision in this matter accuracy-related_penalty under sec_6662 and b for and and or the delinquency addition_to_tax under sec_6651 for each of the years at issue findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the first supplemental stipulation of facts are incorporated herein by this reference when the petitions in this case were filed petitioner resided in st paul minnesota petitioner was married to thomas g rowe rowe during the years at issue but she and rowe filed joint returns only for petitioner’s filing_status for was married filing separate i petitioner’s reporting of income and expenses from her law practice schedule c during the years at issue and for a number of earlier years petitioner maintained a sole_proprietorship family law practice although she regularly retained other attorneys to provide services in connection with certain of her cases each of the federal_income_tax returns filed by petitioner and by petitioner and rowe jointly included a schedule c profit or loss from business or profession sole 3respondent also made adjustments to petitioner’s schedule a itemized_deductions and recomputed petitioner’s self- employment_tax for each of the years at issue those adjustments are derivative of the schedule c profit or loss from business or profession sole_proprietorship adjustments and will be resolved by our resolution of the latter proprietorship reporting the income expenses and profit or loss from petitioner’s law practice petitioner’s schedules c listed gross_income deductions and net profit loss in the following amounts year gross_income deductions net profit loss dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number ii respondent’s adjustments to petitioner’s schedule c income and deductions in the notices of deficiency a adjustments to income respondent increased petitioner’s schedule c gross income4 for the years in issue in the following amounts year adjustment dollar_figure big_number big_number big_number respondent based the adjustments to petitioner’s schedule c gross_income on two personal financial statements that petitioner submitted to american national bank anb in st paul the financial statements petitioner submitted the first financial statement dated date the financial statement in connection with her purchase of a home and the 4petitioner’s gross_income equaled her gross_receipts in each of the years at issue because she was a cash_basis taxpayer and had no cost_of_goods_sold during those years second financial statement dated date the financial statement in connection with a refinancing the financial statements listed employment income of dollar_figure and dollar_figure for and respectively the employment income shown on each financial statement represented petitioner’s estimate of the gross_income unreduced by any expenses generated by her law practice as of the date of the financial statement in his notice_of_deficiency for respondent determined that petitioner had unreported schedule c income of dollar_figure equal to the amount of employment income listed in the financial statement respondent calculated the adjustment to petitioner’s schedule c income for by treating the employment income shown on the financial statement as additional unreported income from petitioner’s law practice respondent did not reduce the income adjustment to take into account petitioner’s reported schedule c gross_income of dollar_figure in his notice_of_deficiency for respondent determined that petitioner had unreported schedule c income for each year based upon the dollar_figure listed as employment income in the financial statement for respondent determined 5petitioner explained the entries to anb the financial_institution to which she submitted the financial statements and to the revenue_agent who was assigned to conduct the examination of her returns for the years at issue the unreported income adjustment of dollar_figure by subtracting petitioner’s reported schedule c net profit of dollar_figure for from the employment income of dollar_figure shown on the financial statement for respondent determined the unreported income adjustment of dollar_figure by subtracting petitioner’s reported schedule c net profit of dollar_figure from dollar_figure for respondent determined the unreported income adjustment of dollar_figure by adding petitioner’s reported schedule c net_loss of dollar_figure to dollar_figure b disallowance of petitioner’s schedule c deductions for respondent disallowed dollar_figure of petitioner’s total schedule c deductions of dollar_figure but the notice_of_deficiency does not indicate which schedule c deductions were disallowed for and respondent disallowed all of petitioner’s schedule c deductions the sole basis for respondent’s disallowance of petitioner’s schedule c expenses for each of the years at issue set forth in the notices of deficiency was since you did not establish that the business_expense shown on your tax_return was paid_or_incurred during the taxable_year and that the expense was ordinary and necessary to your business we have disallowed the amount shown iii description of petitioner’s business records petitioner a cash_basis taxpayer did not maintain formal journals and ledgers with respect to her law practice or record the results of her law practice using a formal bookkeeping system instead petitioner entered business receipts client payments in handwritten ledger books on occasion petitioner also entered nonbusiness receipts receipts other than client payments in the ledger books petitioner also retained deposit slips reflecting the deposit of client payments into various bank accounts in support of her schedule c deductions petitioner retained canceled checks and other bank records cash receipts invoices credit card statements credit card receipts and other pertinent documents petitioner’s practice was to make a notation eg the client’s name on a canceled check that would explain the purpose of the check thus later she would be able to determine whether it represented a deductible expense of her law practice petitioner numerically coded certain of the canceled checks and many of her business-related cash and credit card receipts and statements each number represented a specific type of expense eg for client entertainment for office expenses etc petitioner divided the checks and cash receipts by type or category of expense placed them in separate envelopes and submitted the envelopes to her husband’s accountant john r aunan mr aunan for his use in preparing the tax returns for the years at issue during the years at issue petitioner maintained banking relationships with at least two financial institutions--anb at which petitioner maintained two checking accounts nos and a payroll account no and several personal and commercial loan accounts and first bank at which she maintained a checking account no iv respondent’s review of petitioner’s business records although petitioner produced her business records ledger books checks cash receipts credit card receipts credit card statements and other documents to the revenue_agent in connection with the examination of her returns for the revenue_agent failed to examine and or utilize petitioner’s records for and to ascertain the accuracy of the income and expenses claimed on petitioner’s schedules c for those years with the possible exception of for which a portion of petitioner’s schedule c deductions was allowed respondent issued the notices of deficiency without examining petitioner’s business records a schedule c income sometime after respondent issued the notices of deficiency respondent undertook to reconstruct petitioner’s schedule c 6the record does not disclose when the accounts were opened and does not include complete records for the accounts petitioner also maintained other financial accounts during the years at issue but the record contains minimal information concerning them income for the years at issue by analyzing petitioner’s bank_deposits during those years the bank_deposits analyses the resulting bank_deposits analyses dated date purport to list total monthly deposits subtract non-taxable deposits and reduce the resulting adjustment by the amount of schedule c gross_income reported on petitioner’s return for each of the years at issue the bank_deposits analyses developed proposed adjustments to petitioner’s schedule c income enumerated below that were dramatically lower than the proposed adjustments to petitioner’s schedule c income contained in the notices of deficiency year proposed_adjustment notice_of_deficiency deposit_method dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number immediately before trial the parties submitted a first supplemental stipulation of facts in which respondent conceded the and proposed adjustments for unreported income in their entirety revised the proposed and adjustments 7respondent’s counsel acknowledged at trial that concerns about a possible shift of the burden_of_proof to respondent certainly came into play when we decided to concede the and unreported income adjustments in fact respondent’s counsel candidly explained the concessions as follows we felt that given the size of the discrepancy and the fact that if the burden_of_proof were shifted we likely would not carry it consistent with the bank_deposits analyses for those years and in addition conceded dollar_figure of the revised proposed_adjustment for during the trial respondent conceded dollar_figure of the revised proposed_adjustment for as a result of respondent’s bank_deposits analyses and respondent’s concessions respondent’s proposed adjustments for unreported schedule c income that remain at issue are as follows year proposed_adjustment dollar_figure big_number in preparing the bank_deposits analysis for respondent did not obtain or review all of the relevant bank records with respect to petitioner’s accounts and did not adequately adjust the analysis for nontaxable items most significantly respondent did not analyze retained copies of petitioner’s deposit slips and bank statements did not obtain missing bank statements or copies of deposited items from the financial institutions with which petitioner maintained her bank accounts and did not adjust the deposits analysis for all of the income sources reported on petitioner’s return in preparing the bank_deposits analysis for respondent attached a list of deposits made to one of the two accounts included in the analysis on which some but not all of the deposit sources were listed the deposits list apparently was prepared from retained copies of deposit tickets respondent did not obtain or review copies of deposited items from all of the financial institutions with which petitioner maintained accounts during in preparing the original bank_deposits analysis respondent failed to identify and subtract numerous nontaxable items and did not adjust the analysis for all of the income sources reported on petitioner’s tax_return b schedule c deductions petitioner deducted the following schedule c expenses on her federal_income_tax returns for the years at issue sch c expense category dollar_figure big_number dollar_figure big_number big_number dollar_figure big_number dollar_figure big_number advertising bank charges car truck collection fees -- -- -- deprec sec_179 dues pubs employee_benefits insurance interest legal prof rent supplies taxes travel meals enter utilities telephone wages moving expense process services contract services court fees miscellaneous total sch c deductions big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number -0- big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number -- big_number big_number big_number -0- big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number -0- big_number big_number big_number big_number big_number big_number before the trial in this case commenced petitioner again produced for review by respondent’s employees including a revenue_agent and an appeals officer voluminous records in support of the schedule c deductions claimed on her returns for the years at issue respondent’s review of petitioner’s records resulted in the preparation of itemized lists of some of petitioner’s canceled checks credit card expenditures and receipts the lists were revised on several occasions and admitted into evidence during trial the lists were prepared without any reference to the categorization of expenses claimed on petitioner’s schedules c for the years at issue because respondent claimed that he could not tell how petitioner’s expenses were grouped for reporting purposes on petitioner’s returns at the beginning of trial respondent conceded that petitioner had deductible schedule c expenses for the years at issue in the following amounts year amount exhibit no 1dollar_figure dollar_figure dollar_figure dollar_figure 38-r 39-r 40-r 41-r 1respondent used a subtotal dollar_figure instead of the total dollar_figure from sec b of ex 38-r in calculating the amount of schedule c expenses he conceded for dollar_figure following trial respondent conceded additional schedule c deductions for each of the years at issue as follows year additional expenses additional total additional_depreciation deductions dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure as a result of respondent’s concessions regarding petitioner’s deductible schedule c expenses the deduction amounts still in dispute are as follows year per return dollar_figure big_number big_number big_number respondent’s concessions amount in dispute dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number 1the court’s date order erroneously stated that after giving effect to respondent’s concessions none of the deductions claimed on petitioner’s schedule c remained in dispute v return preparation and accountant workpapers petitioner’s income_tax returns for the years at issue were prepared by mr aunan petitioner gave mr aunan her canceled checks cash and credit card receipts and other documents categorized in the manner described above mr aunan prepared accounting workpapers based on his review of petitioner’s records in so doing mr aunan grouped various categories of petitioner’s schedule c expenses into return preparation categories as reflected in his workpapers mr aunan’s 8throughout the trial in this case however respondent continued workpapers include a schedule summarizing petitioner’s documentation of her schedule c income and expenses by category and by year that schedule shows for each of the years at issue preliminary figures adjusting entries and final figures for each category of income and expense the workpapers also include a summary schedule for the years at issue showing the income and expense information used by mr aunan to prepare petitioner’s schedule c including depreciation claimed a workpaper entitled business_interest that lists interest_paid on petitioner’s credit cards a depreciation schedule that shows how mr aunan calculated the depreciation claimed on petitioner’s schedules c a workpaper entitled personal that lists information regarding various schedule a itemized_deductions for each of the years at issue a workpaper labeled dayton relating to a rental property that petitioner owned and sold in and a schedule c workpaper relating to the law practice of petitioner’s husband continued maintained that he could not tell how mr aunan had combined petitioner’s expenses to arrive at the numbers reported on her income_tax returns for the years at issue respondent’s claimed inability to understand how petitioner’s business_expenses were categorized for return filing purposes led to the detailed listing of petitioner’s expense records without regard to actual reporting of the expenses on the relevant tax returns vi net operating losses petitioner and rowe deducted net_operating_loss nol carryforwards on their joint returns the nol carryforwards were derived from losses claimed on schedules c and schedules e supplemental income schedule of petitioner’s and separate returns petitioner’s returns utilized the nol carryforwards as follows year schedule c income loss carryforward utilization dollar_figure dollar_figure loss big_number big_number loss big_number loss big_number loss 9mr aunan erroneously used dollar_figure of petitioner’s loss carryforward to offset rowe’s schedule c income see 354_f2d_202 10th cir cited with approval by rose v commissioner t c memo the potential nol carryforward to the years at issue based upon petitioner’s returns as filed is dollar_figure there was no examination of the nol carryforwards during the audit and only a minimal examination of a portion of the nol carryforwards by the irs appeals_office in support of the alleged nol carryforwards petitioner testified that because of serious medical problems she experienced during her law practice during those years operated at a loss generating part of the nol carryforwards petitioner testified that the schedule e supplemental income and loss losses generating the remaining part of the nol carryforwards arose from the rehabilitation of a rental property toward the end of the trial petitioner introduced documentation in the form of deposit slips canceled checks and payment receipts for both her schedule c and schedule e income and expenses during but she did not offer any 10petitioner’s potential loss carryforward arises out of the following reported results for year reported operating income loss operating loss utilization dollar_figure big_number big_number big_number big_number big_number big_number dollar_figure carried back to offset by loss -- -- offset by loss -- -- petitioner also reported operating losses in and which were carried back to and testimony to explain the documentation petitioner did not offer into evidence any documentation of her business income and expenses for vii late filing of petitioner’s returns petitioner filed her return on date having requested and received two extensions the second of which expired on date petitioner and rowe filed their joint_return on date and their and joint returns on date neither petitioner and rowe nor mr aunan requested extensions of time to file the returns for each year at issue petitioner gathered organized and summarized her schedule c information and delivered it to mr aunan for his use in preparing that year’s return for the years however petitioner did not actually deliver her schedule c information to mr aunan until after the return due dates after petitioner submitted her schedule c information to mr aunan she followed up by asking him periodically what additional information he needed to complete the returns mr aunan normally responded with more requests for information within a day or two petitioner would supply the requested information to him in petitioner threatened mr aunan and the returns for all years were finally completed and filed in august of that year at one point during petitioner’s testimony the following exchange occurred between the court and petitioner the court all right now let me ask another question you’re a lawyer with a license at risk you knew you had an obligation to file a return and that that return had to be filed timely or you were going to have a problem the witness right the court why didn’t you protect yourself better the witness i suppose i’ve asked myself that a million times it -- i think part of -- when i think back on it i was very used to going ahead and doing things but in this particular situation rowe had paid in no money for the self-employment_tax and it appeared that he was going to have a liability on his side of the fence and my push to get done and his reluctance and his being the primary contact with aunan was not a good combination but you know all excuses aside i have to be responsible for myself and i did not do in my own mind which is -- what i should have done is -- i did not fire him i did not report him and i did not go to my old accountant and file a separate_return no matter what the economic consequences viii date order after respondent filed his status report and supplemental status report ssr describing the results of the parties’ posttrial efforts to resolve outstanding issues we issued an order dated date which listed the schedule c income and deduction amounts remaining in dispute after respondent’s further concessions ruled upon various exhibits the admissibility of which had been left open at trial closed the trial record invited but did not require the parties to file posttrial briefs and set a schedule for the filing of briefs only respondent filed a posttrial brief in his posttrial brief respondent continued to argue that some of petitioner’s alleged business_expenses should be disallowed but with regard to certain expenses asserted grounds for the disallowance that were different from the ground asserted in the notices of deficiency opinion i schedule c income and deductions a burden_of_proof normally in a case before this court the taxpayer bears the burden_of_proof rule a dollar_figure that burden has often been interpreted to mean that the taxpayer bears the ultimate burden of persuasion ie the risk of nonpersuasion as well as the initial burden of production see eg 86_tc_468 n in this case petitioner bears the burden_of_proof rule a because petitioner bears the burden_of_proof petitioner has the initial burden of production which requires her to 11under certain circumstances sec_7491 which was enacted in shifts the burden_of_proof to respondent sec_7491 applies to court proceedings arising in connection with examinations beginning after date because the examination of petitioner’s returns commenced before date sec_7491 is inapplicable to this case introduce evidence sufficient if believed to demonstrate by a preponderance_of_the_evidence that respondent’s determination is excessive ie erroneous and or arbitrary without rational foundation 293_us_507 see also 100_f3d_1308 7th cir affg tcmemo_1995_243 58_f3d_1342 8th cir affg tcmemo_1993_398 if petitioner successfully carries her initial burden of production as to a particular adjustment the burden of production ie the burden of introducing evidence showing an adjustment is warranted shifts to respondent helvering v taylor supra pincite 91_tc_179 affd without published opinion 872_f2d_411 3d cir 88_tc_435 73_tc_394 b unreported income adjustments for and in this case the parties agree that the unreported income adjustments arise from petitioner’s law practice our review of the record confirms that there is a sufficient evidentiary base if one is required to support a conclusion that petitioner was engaged in an income-generating activity during each of the years at issue and that petitioner has the burden of proving that income adjustments in the notices of deficiency were arbitrary and or excessive rule a 290_us_111 at trial petitioner proved and respondent admitted that the income adjustments proposed in respondent’s notices of deficiency for all of the years at issue were derived from two financial statements prepared by petitioner in and for respondent determined that petitioner had unreported schedule c income equal to the employment income listed on the financial statement for and respondent added the employment income listed on the financial statement to the net_profit_or_loss reported on petitioner’s schedules c for and to arrive at the income adjustments for during trial respondent’s counsel abandoned the income adjustments as originally determined in the notices of deficiency and offered as stipulated exhibits what purported to be bank_deposits analyses for the years at issuedollar_figure based on the bank_deposits analyses respondent conceded the income adjustments for and in their entirety and substantially reduced the income adjustments for and 12in his opening statement respondent’s counsel stated that the bank_deposits analyses were prepared because respondent’s appeals_office recognized that the income adjustments contained in the notice_of_deficiency that were based on the and financial statements were not a strong position for the service because petitioner proved that respondent’s reliance on the and financial statements under the circumstances involved in this case was unreasonable and resulted in substantially distorted income adjustments we conclude that the adjustments to petitioner’s schedule c income as determined by respondent in the notices of deficiency were arbitrary and excessive therefore the burden of producing credible_evidence showing that respondent’s revised adjustments to petitioner’s schedule c income in each of the years and were warranted shifted to respondent helvering v taylor supra pincite 374_f2d_161 8th cir affg in part revg in part and remanding tcmemo_1964_190 respondent contends that even if the burden of production shifted to respondent regarding the income adjustments in the notice_of_deficiency his revised income adjustments for each of the years and are supported by the bank_deposits analyses respondent introduced into evidence according to respondent those analyses prove that petitioner deposited into her bank accounts substantially more money during and than she reported as gross_receipts on her schedules c for those years the bank_deposits method has long been recognized as an acceptable indirect method of proving a taxpayer’s understatement of income see 80_f2d_394 8th cir see also 801_f2d_1020 8th cir 33_f3d_991 8th cir the bank_deposits method is often used in cases in which the taxpayer maintained inadequate incomplete or unclear records see eg 348_us_121 96_tc_858 affd 959_f2d_16 2d cir 64_tc_651 affd 566_f2d_2 6th cir in this case petitioner produced records of her taxable_income including her schedule c income the records included handwritten ledger books as well as bank records such as bank statements and deposit tickets a review of petitioner’s income records establishes to the court’s satisfaction that the gross_income reported on petitioner’s schedules c for and was derived from petitioner’s handwritten ledger books and was not calculated based on deposits into petitioner’s bank accounts the return preparer mr aunan took the gross_receipts numbers that petitioner derived from her ledger books for the years at issue and adjusted the numbers for any refunds made to petitioner’s clients during the taxable years in mr aunan made no adjustments to petitioner’s schedule c gross_receipts of dollar_figure but in mr aunan reduced the preliminary gross_receipts figure of dollar_figure by client refunds of dollar_figure and dollar_figure to arrive at petitioner’s reported schedule c gross_receipts of dollar_figure respondent arbitrarily used entries from the and financial statements to substantially increase petitioner’s schedule c income in the notices of deficiency when respondent recognized the inherent weakness of his position respondent attempted to salvage his position that income adjustments were warranted by arranging for the preparation of what purported to be bank_deposits analyses the analyses however failed adequately to adjust for nontaxable items failed to analyze all of petitioner’s bank accounts and failed to adjust for all of petitioner’s reported taxable_income respondent did not obtain and review all of petitioner’s bank records including copies of deposited items and it is apparent from a review of the analyses that respondent did not obtain the information necessary to prepare a proper bank_deposits analysis for either or a review of respondent’s bank_deposits analysis for which was similar in method to the one for illustrates why we assign no credibility to respondent’s bank_deposits analyses and related_income determinations for and the bank_deposits analysis is an analysis of one of petitioner’s bank accounts that she used during that year anb account no 13respondent has conceded that client refunds of dollar_figure are deductible was an account maintained by petitioner throughout into which petitioner deposited client fees as well as amounts unrelated to her law practice the deposits analysis purports to add up all of the deposits made into the account during by month subtract identified nontaxable deposits from the computed total deposits and arrive at gross revenues per the audit the analysis subtracts from that number the gross revenues per the tax_return to arrive at respondent’s revised income adjustment respondent’s calculation of total deposits as reflected on the bank_deposits analysis contains several obvious errors for example for january and july respondent erroneously listed total deposits shown on the relevant bank statements for march and december respondent did not have copies of the relevant bank statements so respondent used petitioner’s income listing from her ledger book for those months when respondent’s calculation of nontaxable items is compared to the relevant bank statements for account no even more troublesome concerns arise petitioner had a ready cash line of credit that among other uses covered overdrafts on the account respondent treated some but not all of the ready cash deposits during as nontaxable deposits respondent also failed to subtract as nontaxable deposits a dollar_figure disbursement on a note date a dollar_figure disbursement on a note date and several transfers from account no totaling dollar_figure respondent also failed adequately to adjust his calculation for the total amount of rental income loan repayments and installment_sale income that petitioner received during similar mistakes were made in the bank_deposits analysis for our review confirms that the simplistic bank_deposits analyses prepared and relied upon by respondent to support his restated income adjustments against petitioner for and are simply not credible we conclude therefore that respondent’s determinations that petitioner had unreported schedule c income for and are erroneous and we hold that respondent’s determinations of unreported income for and are not sustained c schedule c deduction sec_1 applicable legal principles the only basis asserted by respondent in the notices of deficiency for disallowing petitioner’s schedule c expenses was petitioner’s alleged failure to establish that the expenses were paid_or_incurred during the taxable_year and were ordinary and necessary to petitioner’s business sec_162 authorizes a taxpayer to deduct ordinary and necessary business_expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business an ordinary_expense is one incurred in a transaction that commonly or frequently occurs in the type of business involved 308_us_488 a necessary expense is one that is appropriate and helpful to the taxpayer’s business welch v helvering u s pincite expenses allowable under sec_162 must be directly connected with or pertaining to the taxpayer’s trade_or_business sec_1_162-1 income_tax regs personal_living_and_family_expenses are not deductible sec_262 generally if a claimed business_expense is deductible but the taxpayer is unable to substantiate it fully the court is permitted to make an approximation of an allowable_amount the cohan_rule 39_f2d_540 2d cir the estimate however must have a reasonable evidentiary basis 85_tc_731 respondent asserts for the first time in his trial memorandum that certain of petitioner’s schedule c deductions are also subject_to the requirements of sec_274 sec_274 supersedes the cohan_rule see sec_1_274-5t temporary income_tax regs fed reg date and imposes more stringent substantiation requirements for travel meals and entertainment gifts and with respect to any listed_property as defined in sec_280f sec_274 listed_property includes any passenger_automobile sec_280f sec_274 provides in pertinent part that no deduction otherwise allowable shall be allowed for entertainment amusement or recreation expense unless the taxpayer establishes that the expense was directly related to the active_conduct of the taxpayer’s trade_or_business sec_274 provides in pertinent part that no deduction shall be allowed under sec_162 for any gift to the extent that the gift together with other gifts to the same individual for the same taxable_year exceeds dollar_figure sec_274 requires a taxpayer to substantiate a claimed expense that is covered by sec_274 by adequate_records or by sufficient evidence corroborating the taxpayer’s own statement establishing the amount time place business_purpose of the expense and the business relationship to the taxpayer of the persons entertained or receiving the gift sec_274 provides in pertinent part that no deduction is allowed for any food or beverage expense unless the expense is not lavish_or_extravagant under the circumstances and the taxpayer or an employee of the taxpayer is present at the furnishing of the food or beverage expense sec_274 provides that the amount allowable as a deduction for food and beverage expense and entertainment expense shall not exceed percent of the amounts that would be deductible but for sec_274 however meals that qualify as de_minimis_fringe_benefits are not subject_to the 20-percent deduction disallowance imposed by sec_274 see sec_274 sec_132 generally defines the term de_minimis_fringe as any property or service the value of which is after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees so small as to make the accounting for it unreasonable or administratively impracticable see also sec_1_132-6 income_tax regs analysis it is well established that the burden_of_proof with respect to deductions claimed on a tax_return generally rests on the taxpayer the general_rule was succinctly stated by this court in 62_tc_834 as follows taxpayers have no inherent right to deductions they are matters of legislative grace 319_us_590 292_us_435 the taxpayer must be able to point to some particular statute to justify his deduction and establish that he comes within its terms 308_us_488 305_us_281 in roberts the taxpayer argued that the commissioner’s blanket disallowance of his business_expense deductions and a casualty_loss without benefit of audit was arbitrary and unreasonable and therefore could not form the basis for a deficiency in roberts we noted that the commissioner’s failure to audit the taxpayer’s records was due solely to the latter’s refusal to furnish any records in support of the claimed deductions we held that when a taxpayer refuses to substantiate his claimed deductions the commissioner is not arbitrary and unreasonable in determining that the deductions should be denied id pincite unlike the taxpayer in roberts petitioner did not refuse to substantiate her deductions in fact she provided voluminous documentation on several occasions and for extended periods of time to respondent’s revenue_agent appeals officer trial counsel and to this court respondent’s blanket disallowance of petitioner’s schedule c deductions in the notices of deficiency for of the years at issue was preceded by the revenue agent’s apparent failure or refusal to examine the expense records that petitioner had produced for his inspection although petitioner’s expense records consisting for the most part of canceled checks cash receipts credit card statements and other pertinent documents may not have been kept in a form pleasing to the revenue_agent they were coded and organized by category they satisfied the books_and_records requirement of sec_1_6001-1 income_tax regs and they were auditable see 59_tc_312 respondent’s disallowance of all of petitioner’s schedule c expenses for of the years at issue without any meaningful examination of petitioner’s business records for those years appears unwarranted and arbitrary as arbitrary as respondent’s blanket disallowance of petitioner’s schedule c expenses for of the years at issue appears on these facts however it is nevertheless clear under our jurisprudence and that of the court_of_appeals for the eighth circuit that petitioner bears the burden_of_proof as to her deductions we are obligated to analyze the evidentiary record and to weigh the evidence in order to decide if petitioner has carried her burden of persuading this court that respondent’s disallowance of her schedule c deductions for the years at issue was erroneous and or arbitrary see 364_f2d_575 8th cir affg tcmemo_1965_83 the record in this case establishes that petitioner maintained an active law practice during the years at issue in connection with that law practice petitioner paid business_expenses that were categorized and deducted on her schedules c as advertising car and truck depreciation sec_179 employee_benefits insurance interest legal and professional rent supplies taxes travel meals and entertainment utilities wages dues and subscriptions process services contract services court fees collection fees bank charges and miscellaneous expenses with the assistance of mr aunan’s workpapers we were able to ascertain to a large extent how petitioner’s expenses were grouped for tax_return purposes we shall review each schedule c expense category14 and the evidence in support of each category to reach a conclusion regarding the parties’ respective positions our conclusions are summarized in a chart that appears at the end of this subsection on page a depreciation and sec_179 expense for the years at issue petitioner claimed depreciation expense deductions in the following amounts year amount dollar_figure big_number big_number big_number the depreciation schedule included as part of mr aunan’s workpapers shows that the depreciation expense deductions were calculated as follows 14we have not addressed separately the schedule c category of collection fees that was included only on petitioner’s return but we have considered any such expenses as part of other categories year acq asset cost depreciation expense furniture fixtures dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure computer big_number furniture fixtures big_number big_number computer big_number big_number total depreciation and sec_179 exp big_number big_number big_number big_number 1these amounts were claimed as sec_179 expenses the detail in mr aunan’s workpapers shows that during petitioner purchased furniture costing dollar_figure and a copier costing dollar_figure and made leasehold improvements costing dollar_figure the total of these three items is dollar_figure the amount used by mr aunan in calculating the depreciation expense attributable to furniture and fixtures for the years at issue the detail also shows that during petitioner purchased a computer costing dollar_figure a figure that ties into mr aunan’s depreciation schedule documents introduced into evidence at trial establish the following petitioner purchased a computer for dollar_figure during ex 38-r line dollar_figure 15ordinarily we do not include citations to the record in our opinions in this case however references to line items in continued petitioner expended dollar_figure for office improvements during ex 38-r lines petitioner purchased a copier for dollar_figure during ex 38-r lines petitioner purchased computer furniture for dollar_figure during ex 38-r lines petitioner purchased office furniture and computer- related items during totaling at least dollar_figuredollar_figure respondent has conceded that petitioner expended the above- listed amounts and that petitioner may depreciate these items but attempts to reconfigure petitioner’s deduction by offering a different depreciation alternative 7-year depreciation we reject respondent’s attempt to recalculate petitioner’s depreciation and sec_179 expense deduction because respondent who raised this issue for the first time in a supplemental status report filed after trial had the burden of producing evidence regarding the proposed recalculation and continued the summary exhibits exhibits 38-r through 41-r will assist the parties in understanding which items we are allowing petitioner to deduct and in preparing the rule_155_computations 16our inability to account for the full cost of items purchased during and included in the sec_179 expense deduction claimed by petitioner is attributable to the fact that petitioner’s depreciation and sec_179 records were unbundled during the pretrial review of petitioner’s records and mixed in with petitioner’s office supplies records we have no doubt however that petitioner expended the amounts claimed for ex 39-r lines failed to introduce any evidence to show that the recalculation is required petitioner has substantiated her depreciation and sec_179 expense deduction for each of the years at issue and the deductions in the amounts claimed are allowed b bank service charges petitioner deducted bank service charges on her schedules c for the years at issue as follows year amount dollar_figure big_number a review of petitioner’s bank records establishes that petitioner incurred service charges insufficient funds charges returned item charges and miscellaneous other charges such as those for check orders for example during with regard to petitioner’s anb account no alone petitioner paid dollar_figure in service charges dollar_figure in insufficient fund and returned item charges and dollar_figure in check charges for months bank statements for months were missing although all of petitioner’s bank records were not introduced into evidence we have no doubt that in each of the years at issue petitioner paid bank charges related to her law practice applying the cohan_rule we allow petitioner the deductions claimed for bank service charges for each of the years at issue c dues and publications for the years at issue petitioner claimed deductions for dues and publications as follows year amount dollar_figure big_number big_number big_number mr aunan’s workpapers reveal that the dues and publications category on petitioner’s returns included expenses paid_by petitioner during the years at issue for her law library bar and other dues continuing professional education and her reception room subscriptions as follows year law library cpe dues subs total dollar_figure big_number big_number big_number dollar_figure big_number dollar_figure big_number big_number big_number 1it appears from a review of mr aunan’s workpapers that he erroneously included the amount of dollar_figure twice when calculating petitioner’s deduction for dues and publications the record establishes that a during petitioner paid office book expenses of dollar_figure ex 38-r lines continuing education expenses of dollar_figure ex 38-r lines office magazine expenses of dollar_figure ex 38-r lines and dues and publications expenses of dollar_figure ex 38-r lines for a total amount documented of dollar_figure b during petitioner paid office book expenses of dollar_figure and subscriptions and memberships of dollar_figure for a total amount documented of dollar_figure ex 39-r lines c during petitioner paid office book and subscription expenses of dollar_figure ex 40-r lines and a fee of dollar_figure to the minnesota women lawyers association ex 40-r line for a total amount documented of dollar_figure in addition mr aunan’s workpapers suggest that when he was working on petitioner’s return for petitioner also had given him documentation of two other expense items of dollar_figure and dollar_figure d during petitioner paid office book and subscription expenses of dollar_figure professional organization fees of dollar_figure continuing legal education expenses of dollar_figure and office book expenses of dollar_figure for a total amount documented of dollar_figure ex 41-r lines petitioner is entitled to deduct dues and subscriptions expenses in each of the years at issue in the amounts summarized above and set forth in the chart on page of this opinion d legal and professional for the years at issue petitioner claimed deductions for legal and professional fees paid in connection with her law practice as follows year amount dollar_figure big_number big_number big_number mr aunan’s workpapers reveal that the following entries comprised the deducted amounts a for amounts of dollar_figure dollar_figure dollar_figure and dollar_figure for a total amount deducted of dollar_figure b for amounts of dollar_figure and dollar_figure for a total amount deducted of dollar_figure c for amounts of dollar_figure dollar_figure and dollar_figure for a total amount deducted of dollar_figure d for amounts of dollar_figure and dollar_figure reduced by a dollar_figure payment to james van valkenburg for a total amount deducted of dollar_figure our review of the record reveals the following a during petitioner paid fees to other attorneys of dollar_figure fees to law clerks of dollar_figure fees to experts of dollar_figure and fees for medical records of dollar_figure for a total expenditure of dollar_figure ex 38-r lines b during petitioner paid fees to other professionals of dollar_figure and printer expenses of dollar_figure for a total expenditure of dollar_figure ex 39-r lines c during petitioner paid fees to other professionals in the aggregate amount of dollar_figure ex 40-r lines d during petitioner paid fees to other professionals in the aggregate amount of dollar_figure after reducing the amount_paid by the dollar_figure payment to mr van valkenburg the total expenditure documented by petitioner was dollar_figure ex 41-r lines petitioner is entitled to deduct legal and professional fees in each of the years at issue in the amounts summarized above and set forth in the chart at page of this opinion e process services for the years at issue petitioner claimed deductions for process services obtained as part of her law practice as follows year amount dollar_figure big_number big_number mr aunan’s workpapers reveal that the following entries comprised the deducted amounts a for a cumulative amount of dollar_figure b for amounts of dollar_figure and dollar_figure for a total amount deducted of dollar_figure c for amounts of dollar_figure dollar_figure and dollar_figure for a total amount deducted of dollar_figure d for amounts of dollar_figure and dollar_figure for a total amount of dollar_figure our review of the record reveals the following a during petitioner paid and respondent concedes the deductibility of courier services totaling dollar_figure ex 38-r lines b during petitioner paid and respondent concedes the deductibility of process service fees totaling dollar_figure ex 39-r lines c during petitioner paid and respondent concedes the deductibility of process service fees and other transportation_expenses totaling dollar_figure ex 40-r lines d during petitioner paid and respondent concedes the deductibility of process server fees of dollar_figure and messenger service fees of dollar_figure the total of which is dollar_figure ex 41-r lines petitioner is entitled to deduct process service and transportation_expenses in each of the years at issue in the 17although the amounts shown on mr aunan’s workpapers total dollar_figure the amount claimed on the tax_return was dollar_figure amounts summarized above and set forth in the chart at page of this opinion f court fees for the years at issue petitioner claimed deductions for court fees paid in connection with her law practice as follows year amount dollar_figure big_number big_number big_number mr aunan’s workpapers reveal that the following entries comprised the deducted amounts a for amounts of dollar_figure dollar_figure and dollar_figure for a total amount deducted of dollar_figure it appears that a computational mistake was made here as the total of the listed amounts is dollar_figure b for amounts of dollar_figure and dollar_figure for a total amount deducted of dollar_figure c for amounts of dollar_figure dollar_figure and dollar_figure for a total amount deducted of dollar_figure d for amounts of dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for a total amount deducted of dollar_figure our review of the record reveals the following a during petitioner paid and respondent concedes the deductibility of court fees of dollar_figure ex 38-r lines and dollar_figure ex 38-r lines for a total amount documented of dollar_figure b during petitioner paid and respondent concedes the deductibility of court fees of dollar_figure ex 39-r lines dollar_figure ex 39-r lines and dollar_figure ex 39-r lines for a total amount documented of dollar_figure c during petitioner paid and respondent concedes the deductibility of court fees of dollar_figure ex 40-r line dollar_figure ex 40-r line sec_270 and dollar_figure ex 40-r lines for a total amount documented of dollar_figure d during petitioner paid and respondent concedes the deductibility of court fees of dollar_figure ex 41-r lines and expert fees of dollar_figure ex 41-r lines for a total amount documented of dollar_figure petitioner is entitled to deduct court and expert fees in each of the years at issue in the amounts summarized above and as set forth in the chart at page of this opinion g contract services for the years at issue petitioner claimed deductions for contract services obtained as part of her law practice as follows year amount dollar_figure big_number big_number big_number mr aunan’s workpapers reveal that the following entries comprised the deducted amounts a for amounts of dollar_figure and dollar_figure for a total amount deducted of dollar_figure b for a cumulative amount of dollar_figure c for amounts of dollar_figure and dollar_figure for a total amount deducted of dollar_figure d for a cumulative amount of dollar_figure our review of the record reveals the following a during petitioner paid and respondent concedes the deductibility of contract services of dollar_figure ex 38-r lines and dollar_figure ex 38-r lines for a total amount documented of dollar_figure b during petitioner paid and respondent concedes the deductibility of contract services of dollar_figure ex 39-r lines c during petitioner paid and respondent concedes the deductibility of contract services of dollar_figure ex 40-r lines excluding items conceded by petitioner d during petitioner paid and respondent concedes the deductibility of contract services of dollar_figure ex 41-r lines petitioner is entitled to deduct amounts paid for contract services in each of the years at issue in the amounts summarized above and set forth in the chart at page of this opinion h moving_expenses for petitioner claimed a deduction for moving_expenses in the amount of dollar_figure mr aunan’s workpapers reveal that the amount deducted consisted of expenses of dollar_figure and dollar_figure our review of the record reveals that petitioner paid and respondent concedes the deductibility of office moving_expenses of dollar_figure ex 38-r lines and dollar_figure ex 38-r lines for a total amount documented of dollar_figure petitioner is entitled to deduct moving_expenses of dollar_figure for as conceded by respondent and as shown on the chart at page of this opinion i insurance for the years at issue petitioner claimed deductions for insurance paid in connection with her law practice as follows year amount dollar_figure big_number big_number big_number mr aunan’s workpapers reveal that the following entries comprised the deducted amounts a for a cumulative amount of dollar_figure b for a cumulative amount of dollar_figure c for amounts of dollar_figure and dollar_figure for a total amount deducted of dollar_figure d for amounts of dollar_figure dollar_figure and dollar_figure for a total amount deducted of dollar_figure our review of the record reveals the following a in july november and date petitioner paid amounts to state farm insurance totaling dollar_figure all of which respondent concedes are deductible ex 38-r lines b at various times during petitioner also paid for employee health insurance from blue cross blue shield and travel insurance from sid murray co and mutual of omaha in amounts totaling dollar_figure all of which respondent concedes are deductible ex 38-r lines some monthly payments to blue cross blue shield are not listed and appear to be missing c at various times during petitioner also paid additional_amounts to state farm insurance dollar_figure ex 38-r lines and the administrator msba plan dollar_figure ex 38-r line that respondent does not concede but we conclude are deductible d during petitioner made payments to blue cross blue shield for employee health insurance dollar_figure ex 39-r lines dca for unspecified insurance dollar_figure ex 39-r lines and minnesota department of jobs training for unemployment_compensation insurance dollar_figure ex 39-r lines all of which respondent concedes are deductible e during petitioner also made payments of dollar_figure to state farm insurance co for office and equipment insurance and for car insurance ex 39-r lines dollar_figure to confederation life_insurance co for office insurance ex 39-r lines and dollar_figure to mutual of omaha and sid murray co for travel insurance ex 39-r line sec_115 although respondent does not concede that these amounts are deductible we hold that the above-listed items are deductible and we note that respondent has conceded similar items for f during petitioner made payments to state farm insurance for office insurance to sid murray co and mutual of omaha for travel insurance to blue cross blue shield for employee health insurance to confederation life_insurance co for office insurance to lutheran brotherhood for office insurance and miscellaneous other companies totaling dollar_figure all of which respondent concedes are deductible g during petitioner paid additional office insurance that respondent does not concede is deductible but that we hold is deductible the additional documented amounts total dollar_figure ex 40-r lines h during petitioner paid employee life_insurance employee health insurance and workers’ compensation and unemployment insurance totaling dollar_figure all of which respondent concedes are deductible ex 41-r lines ssr dated i during petitioner also made payments to blue cross blue shield sid murray co and mutual of omaha for office and travel insurance dollar_figure that petitioner documented and respondent concedes are deductible ex 41-r lines j during petitioner made other insurance payments the amount and business_purpose of which she documented at trial although respondent does not concede that these payments are deductible we hold that they are deductible because petitioner has credibly testified with regard to their business_purpose the payments total dollar_figure ex 41-r line petitioner is entitled to deduct business insurance that she paid in each of the years at issue in the amounts summarized above and shown on the chart at page of this opinion j utilities for the years at issue petitioner claimed deductions for utilities as follows year amount dollar_figure big_number big_number big_number mr aunan’s workpapers reveal that the following entries comprised the deducted amounts a for a cumulative amount of dollar_figure b for amounts of dollar_figure dollar_figure dollar_figure and dollar_figure for a total amount deducted of dollar_figure c for amounts of dollar_figure dollar_figure dollar_figure and dollar_figure for a total amount deducted of dollar_figure d for amounts of dollar_figure dollar_figure and dollar_figure for a total amount deducted of dollar_figure our review of the record reveals the following a for petitioner documented and respondent conceded the deductibility of dollar_figure and dollar_figure of payments to northwestern bell ex 41-r lines and ssr dated line and utility payments to nsp in october and december of dollar_figure ex 38-r lines for a total amount documented of dollar_figure b for petitioner documented and respondent conceded the deductibility of telephone expenses paid to american paging us west and northwestern bell of dollar_figure ex 39-r lines petitioner also documented but respondent does not concede the deductibility of utility expenses paid to nsp totaling dollar_figure ex 39-r lines because petitioner has substantiated the payments to nsp which are consistent with utility payments in other years that respondent did concede we conclude that the payments to nsp during are deductible utility expenses c for petitioner documented and respondent concedes the deductibility of payments to nsp of dollar_figure ex 40-r lines and ssr dated and telephone and metagram expenses totaling dollar_figure ex 40-r lines d for petitioner documented payments of dollar_figure the amount of which equals the sum of two of the three entries on mr aunan’s workpapers ex 41-r lines of the payments documented respondent concedes the deductibility of certain payments made to us west cellular nsp american paging at t and us west communications totaling dollar_figure ex 41-r lines and ssr dated petitioner testified at trial that she was entitled to additional_amounts for cellular phone service and for certain at t expenses for the office phones we accept petitioner’s testimony as credible and we allow her additional phone expense of dollar_figure ex 41-r lines petitioner is entitled to deduct utility expenses in each of the years at issue in the amounts summarized above and shown on the chart at page of this opinion k supplies for the years at issue petitioner claimed deductions for supplies purchased for her law practice as follows year amount dollar_figure big_number big_number big_number mr aunan’s workpapers which describe this category of expenses as office supplies postage reveal that the following entries comprised the deducted amounts a for amounts of dollar_figure dollar_figure and dollar_figure for a total amount deducted of dollar_figure b for amounts of dollar_figure dollar_figure dollar_figure and dollar_figure for a total amount deducted of dollar_figure c for amounts of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure for a total amount deducted of dollar_figure d for amounts of dollar_figure dollar_figure dollar_figure and dollar_figure for a total amount deducted of dollar_figure our review of the record reveals the following 18petitioner disputes respondent’s failure to allow additional expenditures that she made and deducted as office supplies in many but not all instances petitioner credibly continued a during petitioner paid for and documented for purposes of this case office supplies and postage summarized below the deductibility of which respondent has conceded office postage office supplies sec b postage sec b supplies dollar_figure ex 38-r lines dollar_figure ex 38-r lines excl dollar_figure ex 38-r lines dollar_figure ex 38-r lines excl total dollar_figure b during petitioner paid for and documented for purposes of this case office supplies and postage summarized below the deductibility of which respondent has conceded office supplies office supplies postage etc sec b off supplies dollar_figure ex 39-r lines dollar_figure ex 39-r lines in amount allowed column dollar_figure ex 39-r lines dollar_figure ex 39-r lines sec b postage in amount allowed column dollar_figure ex 39-r lines total dollar_figure c during petitioner paid for and documented for purposes of this case office supplies and postage summarized below the deductibility of which respondent has conceded continued testified regarding the business_purpose of the expenditure at trial and or the documentation presented at trial contains a contemporaneous notation of the business_purpose of the item in addition respondent has conceded the deductibility of other expenses that could be categorized as supplies we shall account for these additional expenses as miscellaneous expenses later in this analysis office supplies office postage office furniture postage dollar_figure ex 40-r lines amount allowed column plus line dollar_figure ex 40-r lines dollar_figure ex 40-r line dollar_figure ex 40-r lines amount allowed column sec b off supplies dollar_figure ex 40-r line sec b postage sec b additional supplies dollar_figure ex 40-r lines dollar_figure ex 40-r lines _________ amount allowed column total dollar_figure d during petitioner paid for and documented for purposes of this case office supplies and postage summarized below the deductibility of which respondent has conceded office supplies office expense dollar_figure ex 41-r lines dollar_figure ex 41-r line sec_264 big_number ssr dated dollar_figure ex 41-r lines dollar_figure ex 41-r lines dollar_figure ex 41-r lines copier printing expenses postage sec b off supplies dollar_figure ex 41-r lines sec b off misc amount allowed column dollar_figure ex 41-r lines amount allowed column sec b postage cash dollar_figure ex 41-r lines sec b credit card dollar_figure ex 41-r lines amount allowed column dollar_figure ex 41-r line dollar_figure ex 41-r lines sec b printing sec c credit card total dollar_figure petitioner is entitled to deduct payments made for supplies in each of the years at issue in the amounts summarized above and shown on the chart at page of this opinion l wages and employee_benefits for the years at issue petitioner claimed deductions for wages and employee_benefits paid in connection with her law practice as follows year wages employee_benefits dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number mr aunan’s workpapers reveal that the following entries comprised the deducted amounts a for the wage deduction was derived by adding expenditures of dollar_figure and dollar_figure and the employee benefit deduction was an aggregate amount of dollar_figure b for the wage deduction was derived by adding expenditures of dollar_figure and dollar_figure and the employee benefit deduction was derived by adding expenditures of dollar_figure dollar_figure and dollar_figure c for the wage deduction was derived by adding expenditures of dollar_figure and dollar_figure and the employee benefit deduction was derived by adding expenditures of dollar_figure dollar_figure dollar_figure and dollar_figure d for the wage deduction was an aggregate amount of dollar_figure and the employee benefit deduction was derived by adding expenditures of dollar_figure dollar_figure dollar_figure and dollar_figure our review of the record reveals the following a during the years at issue petitioner employed one or more employees in her law office and maintained a payroll account through which she paid her employees’ salaries and related withholdings b petitioner did not introduce into evidence at trial all of her payroll records or her forms w-2 wage and tax statement for the years at issue nevertheless petitioner’s testimony and other documents establish that petitioner paid salaries employment_taxes and employee_benefits during each of the years at issue c for petitioner documented expenses characterized as employee benefit expenses of dollar_figure ex 38-r lines six deposits into the payroll account on various dates in may november and date totaling dollar_figure ex 38-r lines and additional salary and daycare payments of dollar_figure in date ex 38-r lines the deductibility of which respondent has conceded d for petitioner documented salary payments of dollar_figure ex 39-r lines additional salary payments of dollar_figure to cynthia o ransom during date ex 39-r lines and daycare expenses in april and date of dollar_figure ex 39-r lines the deductibility of which respondent has conceded e for petitioner documented salary payments of dollar_figure ex 40-r lines and daycare expenses of dollar_figure paid for one of her employees ex 40-r lines the deductibility of which respondent has conceded f for petitioner documented salary payments of dollar_figure ex 41-r lines and dollar_figure ex 41-r lines the deductibility of which respondent has conceded although petitioner did not introduce all of her payroll records into evidence we are convinced that her failure to do so was more_likely_than_not the result of the sheer volume of documentation with which she was dealing at trial and the lack of attention paid_by both petitioner and respondent to the actual schedule c categories petitioner however credibly testified at trial that she paid salaries a telephone allowance life_insurance health insurance school and summer childcare expenses and automobile expenses including car insurance a gas allowance and car payments to or for the benefit of her employees during and part of we also note that the documented amounts if annualized would generate an annual figure consistent with or larger than the amounts claimed on petitioner’s schedules c for the years at issue we shall apply the cohan_rule to uphold petitioner’s wage and employee_benefits deductions for each of the years at issue petitioner paid wages and provided employee_benefits in the amounts deducted in each of the years at issue as shown on the chart at page of this opinion m car and truck for the years at issue petitioner claimed deductions for car and truck expenses paid in connection with her law practice as follows year amount dollar_figure big_number big_number big_number 1this amount includes car lease payments of dollar_figure claimed as rent mr aunan’s workpapers reveal that the following items of car and truck expenses were taken into account in calculating the deductions for the years at issue car lease repairs year dollar_figure big_number big_number big_number big_number dollar_figure big_number gas dollar_figure big_number total dollar_figure big_number big_number big_number our review of the record reveals the following a during and petitioner leased two cars for business purposes--a toyota camry from wilkens toyota for general office use driven by the process server law clerk courier and petitioner and a toyota tercel from ge credit auto leasing for her secretary’s use petitioner had another car for her personal_use b during petitioner leased three cars for business purposes--a toyota tercel a toyota camry and a hyundai that was leased in date c for petitioner documented and respondent concedes the deductibility of car expenses of dollar_figure ex 38-r lines dollar_figure ex 38-r lines and dollar_figure ex 38-r lines ssr dated for a total amount documented of dollar_figure d for petitioner documented and respondent concedes the deductibility of car expenses of dollar_figure ex 39-r lines ssr dated dollar_figure ex 39-r lines and dollar_figure ex 39-r lines ssr dated for a total amount documented of dollar_figure e for petitioner documented and respondent concedes the deductibility of car expenses of dollar_figure ex 40-r lines ssr dated dollar_figure ex 40-r lines dollar_figure ex 40-r lines ssr and dollar_figure ex 40-r lines for a total amount documented of dollar_figure f for petitioner documented and respondent concedes the deductibility of car expenses of dollar_figure ex 41-r lines ssr dated and dollar_figure ex 41-r lines for a total amount documented of dollar_figure petitioner paid car and truck expenses in connection with her law practice in each of the years at issue in the amounts summarized above and shown on the chart at page of this opinion n rent for the years at issue petitioner claimed deductions for rent in connection with her law practice as follows year amount dollar_figure big_number big_number big_number 1total rent expense claimed dollar_figure reduced by car lease payments dollar_figure that were included as part of rent expense on petitioner’s return mr aunan’s workpapers show totals only and do not contain any information identifying the rental expenses claimed our review of the record reveals the following during each of the years at issue petitioner leased office space that she used for her law practice during petitioner entered into a predevelopment purchase agreement for office space described as suite energy park drive that required her to pay dollar_figure for the office once the development work was completed for approximately months before petitioner actually moved into suite she rented suite and used it as her temporary law office petitioner paid dollar_figure per month to the trah partnership for months ex 38-r lines and respondent has conceded that these amounts are deductible in date petitioner moved into suite but did not close on the purchase agreement because she could not get the developer to schedule the closing petitioner maintained her law office in suite until when the developer’s interest in the property energy park drive was foreclosed when petitioner first moved into suite in date she agreed to pay rent at the rate of dollar_figure per month until the closing under the purchase agreement was held petitioner expected this arrangement to be of short duration no closing however was ever scheduled sometime after she moved into suite petitioner ceased paying rent to the developer in an effort to force a closing under the purchase agreement petitioner was sued for unpaid rent and resolved the litigation by escrowing approximately dollar_figure in to settle the claim however the escrowed funds were not released if at all until sometime after petitioner paid architect and designer fees with respect to suite petitioner also paid for the improvements made to suite in date petitioner’s law office was burglarized the burglary caused damage to the doorway but the developer refused to repair the damage petitioner made the necessary repairs by the time petitioner’s tax returns for the years at issue were prepared the developer’s interest in energy drive had been foreclosed it is reasonable to assume therefore that all amounts paid with respect to suite during the years at issue except for the development costs that were depreciated ex 38-r lines and the interest on the business loan were deducted by mr aunan as rent however the record does not give us sufficient information to estimate the amount of rent or rent equivalent that petitioner paid during we conclude that petitioner paid rent for her law office during in the amount of dollar_figure as shown on the chart at page of this opinion we lack sufficient information to estimate petitioner’s rent expense for o taxes for the years at issue petitioner claimed deductions for taxes as follows year amount dollar_figure big_number big_number big_number mr aunan’s workpapers which describe the tax expense category as p r taxes reveal that the following entries comprised the deducted amounts a for amounts of dollar_figure and dollar_figure for a total amount deducted of dollar_figure b for amounts of dollar_figure and dollar_figure for a total amount deducted of dollar_figure c for a single amount of dollar_figure is listed but the final expense figure shown on mr aunan’s workpapers is dollar_figure the total amount deducted on petitioner’s return d for a total amount of dollar_figure our review of the record reveals the following a for petitioner documented two payments to the irs in september and date and one payment to the commission of revenue in date totaling dollar_figure ex 38-r lines respondent concedes the deductibility of these payments b for petitioner documented dollar_figure of payments to the irs dollar_figure and the minnesota department of revenue dollar_figure and deposits into petitioner’s payroll account dollar_figure covering the months of february may july august and date ex 39-r lines of the amounts documented petitioner concedes that dollar_figure was deposited into the payroll account and presumably was claimed as a wage deduction and respondent concedes the deductibility of the payments to the minnesota department of revenue c for petitioner documented dollar_figure of payments to the irs dollar_figure and to the minnesota department of revenue the minnesota department of jobs the minnesota uc fund the commissioner of revenue and the employee benefit administration dollar_figure ex 40-r lines respondent conceded the deductibility of all of these payments d for petitioner documented dollar_figure of payments to the irs dollar_figure the department of revenue dollar_figure and the minnesota department of jobs dollar_figure ex 41-r lines but provided no information regarding the nature or purpose of the payments respondent has not conceded that any of these payments is deductible e during each of the years at issue petitioner paid wages to employees and had an obligation to pay the employer’s share of federal_insurance_contributions_act fica and federal_unemployment_tax_act futa taxes see sec_3111 and b as well as the employer’s share of state employment and unemployment taxes such taxes are deductible when paid in carrying on the employer’s trade_or_business sec_162 although we cannot precisely ascertain from the record the exact amount of fica and futa taxes paid_by petitioner we shall apply the cohan_rule and allow deductions for the employer’s share of fica and futa taxes calculated on the wages that we have held are deductible in each of the years at issue the following rates were in effect with respect to fica old-age survivors and disability insurance sec_3111 and hospital insurance sec_3111 and futa sec_3301 for each of the years at issue year old age fica hospital futa percent dollar_figure percent dollar_figure percent dollar_figure percent dollar_figure percent dollar_figure percent percent dollar_figure percent percent percent percent percent applying these rates to the wages allowed as deductions in each of the years at issue results in deductions for the employer’s share of fica and futa_tax of dollar_figure for dollar_figure for dollar_figure for and dollar_figure for 19respondent already has conceded that dollar_figure of this amount is deductible we have calculated the amount allowed as a deduction for to eliminate any duplication petitioner is entitled to deduct tax_payments in each of the years at issue in the amounts conceded by respondent and allowed under the cohan_rule the amounts are shown on the chart at page of this opinion p interest for the years at issue petitioner claimed deductions for interest_paid in connection with her law practice as follows year amount dollar_figure big_number big_number big_number mr aunan’s workpapers include a workpaper labeled business_interest which contains the following entries citibank mastercard amex gold citibank visa citibank preferred first card amex green tcf visa dollar_figure dollar_figure dollar_figure dollar_figure -- -- dollar_figure dollar_figure -- dollar_figure dollar_figure -- -- dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -- dollar_figure the total amount of credit card interest in each year was then rounded and added to amounts characterized as capital loan to arrive at the total business_interest deducted in each of the years at issue year credit card capital loan total dollar_figure big_number big_number big_number dollar_figure big_number dollar_figure big_number big_number big_number our review of the record reveals the following a petitioner maintained various credit card accounts that she used for business purposes during the years at issue b during each of the years at issue petitioner paid interest_expense attributable to her business use of her credit card accounts c petitioner documented interest_expense paid on her citibank visa account for of dollar_figure d petitioner documented and respondent concedes the deductibility of interest_expense paid on petitioner’s citibank mastercard account for of dollar_figure ex 40-r lines e petitioner documented the existence of a business loan with anb the purpose of which was to finance leasehold improvements the face_amount of the loan was dollar_figure and it carried an annual interest rate of dollar_figure percent f petitioner documented that she paid interest on the business loan in the following amounts 1988--dollar_figure dollar_figure 1990--dollar_figure although petitioner did not introduce all of her credit card records for each of the years at issue into evidence we are satisfied from the documentation that was introduced that petitioner maintained the credit card accounts in question and that she used them for her law practice we are also satisfied that at the time mr aunan prepared petitioner’s returns for the years at issue he had documentation of the credit card interest_paid by petitioner during the years at issue with respect to the capital loan interest deducted petitioner produced copies of information returns that confirmed the interest_expense paid with respect to petitioner’s business loans for and the amounts documented corresponded exactly with the amounts shown on mr aunan’s workpapers although petitioner did not introduce into evidence copies of her interest statements for we believe that there is a sufficient factual predicate in the record to support a finding that petitioner incurred interest_expense attributable to her business loans and credit card accounts as claimed on her schedule c petitioner paid interest_expenses as claimed on her schedules c for the years at issue and reflected on the chart at page of this opinion q travel for the years at issue petitioner claimed deductions for business travel as follows year amount dollar_figure -- big_number big_number mr aunan’s workpapers reveal that the following entries comprised the deducted amounts a for a cumulative amount of dollar_figure b for a cumulative amount of dollar_figure c for amounts of dollar_figure and dollar_figure for a total amount deducted of dollar_figure mr aunan’s workpapers also show a dollar_figure entry for travel for but that amount was not deducted as travel on petitioner’s schedule c instead it appears mr aunan added the dollar_figure item to miscellaneous expense and deducted it as such on petitioner’s schedule c our review of the record reveals the following a for petitioner documented and respondent concedes the deductibility of business travel_expenses of dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure and dollar_figure totaling dollar_figure ex 38-r lines b for petitioner documented and respondent concedes the deductibility of business travel_expenses including baggage and flight insurance totaling dollar_figure ex 39-r lines c for petitioner documented and respondent concedes the deductibility of business travel_expenses totaling dollar_figure ex 40-r lines d for petitioner documented and respondent concedes the deductibility of business travel_expenses of dollar_figure ex 41-r lines and dollar_figure ex 41-r lines for a total of dollar_figure petitioner paid business travel_expenses during each of the years at issue in the amounts summarized above and reflected in the chart at page of this opinion r advertising and meals entertainment for the years at issue petitioner claimed deductions for advertising and for meals and entertainment in connection with her law practice as follows year advertising meals ent total dollar_figure big_number dollar_figure big_number big_number dollar_figure big_number big_number big_number mr aunan’s workpapers reveal that the following entries comprised the deducted amounts a for promotion advertising cumulative amounts of dollar_figure dollar_figure and dollar_figure for and respectively and amounts of dollar_figure and dollar_figure for a total amount deducted of dollar_figure for b for entertainment amounts of dollar_figure and dollar_figure totaling dollar_figure for amounts of dollar_figure dollar_figure and dollar_figure totaling dollar_figure for amounts of dollar_figure and totaling dollar_figure for and amounts of dollar_figure dollar_figure dollar_figure and dollar_figure totaling dollar_figure for before application of the sec_274 limitation our review of the record reveals the following a petitioner maintained voluminous records to document her practice of entertaining and purchasing gifts for clients employees referral sources judges and other members of the legal community throughout the years at issue b in his notices of deficiency respondent did not assert sec_274 as a ground for disallowing any of petitioner’s deductions for business promotion advertising or for meals and entertainment respondent only asserted a sec_162 standard as the basis for his proposed disallowance of petitioner’s deductions c petitioner testified extensively at trial regarding the identity of the person who was entertained or to whom a gift was given as well as the business_purpose of many of the individual items comprising her business promotion and meals and entertainment_expenses the date and amount of the expenditures were documented by invoices canceled checks credit card and other receipts and other records in some cases receipts retained by petitioner as part of her business records were no longer legible d for petitioner presented documentation of the following expenditures that were listed on exhibit 38-r in the following categories category line nos amount bachman’s bus gifts client entertainment credit cards dollar_figure dollar_figure dollar_figure e for petitioner presented documentation of the following expenditures that were listed on exhibit 39-r in the following categories category line nos amount client employee gifts entertainment client gifts employee_benefits office party client entertainment dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure of the expense items listed on lines respondent conceded that dollar_figure was deductible and the nature of the expenses indicates that they were not entertainment_expenses during trial petitioner conceded that some of the items were not 20petitioner conceded several of the smaller expense items ie she did not offer any additional evidence regarding them because she was interested in getting to the large items she did not concede that the items were not deductible however and she did document the date and amount of the expense and the identity of the payee as reflected on exhibits 38-r through 41-r deductible and testified that other items were misclassified but nevertheless were deductible business_expenses f for petitioner presented documentation of the following expenditures that were listed on exhibit 40-r in the following categories category line nos client gifts employee client gifts entertainment client gifts client entertainment american express amount dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure 1some of these items which do not appear to be meal or entertainment_expenses have been conceded by respondent the amount shown has been reduced by the conceded amounts g for petitioner presented documentation of the following expenditures that were listed on exhibit 41-r in the following categories category business promotion client gifts employee gifts client entertainment business promotion client entertainment client gifts line nos amount dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure after reviewing petitioner’s documentation and testimony we have no doubt that a properly conducted audit of petitioner’s meals and entertainment and business promotion records could have resulted in a reasonable dispute regarding whether the requirements of sec_162 have been satisfied with respect to each expense item and if so whether sec_274 should operate to preclude deductions for some of the items we also have no doubt however that petitioner had deductible meals and entertainment_expenses and purchased deductible business_gifts for clients referral sources and other professional people in each of the years at issue we also note that the documentation presented by petitioner that was reviewed and summarized by respondent in exhibits 38-r through 41-r substantially exceeds the deductions claimed by petitioner for advertising business promotion and meals and entertainment in each of the years at issue year total on return total on exhibits dollar_figure big_number big_number big_number dollar_figure dollar_figure dollar_figure dollar_figure recognizing the flaws in each party’s position we conclude only that petitioner paid advertising business promotion and meals and entertainment_expenses in sufficient amounts to support the deductions claimed in each of the years at issue s miscellaneous for the years at issue petitioner claimed deductions for miscellaneous business_expenses as follows year amount dollar_figure big_number big_number big_number mr aunan’s workpapers reveal that the following entries comprised the deducted amounts a for parking expenses of dollar_figure and miscellaneous expenses of dollar_figure for a total deducted of dollar_figure b for travel_expenses of dollar_figure and miscellaneous expenses of dollar_figure for a total deducted of dollar_figure c for miscellaneous expenses of dollar_figure and dollar_figure for a total deducted of dollar_figure d for miscellaneous expenses of dollar_figure and parking expenses of dollar_figure for a total deducted of dollar_figure our review of the record reveals the following a during petitioner paid the following schedule c expenses that have not been previously allocated in this analysis to any other schedule c category category ex line nos amount various parking various various various various various various various various various various various various various various various various various various various 38-r 38-r 38-r 38-r 38-r 38-r 38-r 38-r 38-r 38-r 38-r 38-r 38-r 38-r 38-r 38-r 38-r 38-r 38-r 38-r 38-r conceded by respondent yes yes yes yes yes yes yes yes yes yes yes dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure yes yes dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure yes yes yes yes yes yes yes yes b during petitioner paid the following schedule c expenses that have not been previously allocated in this analysis to any other schedule c category category various luth broth cle book various various misc supp misc supp various various client exp various various various various various ex line nos amount conceded by respondent 39-r 39-r 39-r 39-r 39-r including 39-r big_number 39-r 39-r 39-r 39-r 39-r 39-r dollar_figure yes dollar_figure dollar_figure dollar_figure dollar_figure no no yes yes no dollar_figure no dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure no no yes no yes 39-r 39-r 39-r dollar_figure yes dollar_figure yes dollar_figure yes dollar_figure dollar_figure ye sec_1the amount allowed with regard to these items is based on petitioner’s testimony at trial which we find credible c during petitioner paid the following schedule c expenses that have not been previously allocated in this analysis to any other schedule c category category ex line nos conceded by amount respondent off supp off supp off supp off supp off supp off supp off supp off supp client exp client exp client exp client exp client exp auto parking off supp off supp off supp auto various off subs various 40-r dollar_figure 40-r dollar_figure 40-r dollar_figure 40-r dollar_figure 40-r dollar_figure 40-r dollar_figure 40-r dollar_figure 40-r dollar_figure 40-r dollar_figure 40-r dollar_figure 40-r dollar_figure 40-r dollar_figure 40-r dollar_figure dollar_figure 40-r dollar_figure 40-r 40-r dollar_figure dollar_figure 40-r dollar_figure 40-r dollar_figure 40-r 40-r dollar_figure 40-r dollar_figure 40-r dollar_figure dollar_figure no no no no no no no no yes no yes no no yes yes no no yes yes yes no yes d during petitioner paid the following schedule c expenses that have not been previously allocated in this analysis to any other schedule c category category ex line nos amount conceded by respondent miscell off furn 41-r 41-r 41-r 41-r 41-r parking admin fees court rpt fees to attys 41-r dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure out of dollar_figure client fees client fees emp benef rental exp bus prom prof fee client fee parking auto 41-r 41-r 41-r 41-r 41-r 41-r 41-r 41-r 41-r t reconciliation dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure no no yes yes yes no yes no no yes yes yes yes yes yes a comparison of the schedule c expenses allowed pursuant to the foregoing analysis with the schedule c expenses claimed on petitioner’s federal_income_tax returns for the years at issue reveals the following per return per opinion per return per opinion per return per opinion per return per opinion advertising bank charges dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure big_number dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure car truck big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure depreciation big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure dues pubs big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure employee ben big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure insurance dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure interest big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure legal prof big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure rent big_number dollar_figure big_number --- big_number --- big_number --- supplies taxes travel meals ent utilities big_number big_number big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure dollar_figure --- dollar_figure big_number dollar_figure big_number dollar_figure dollar_figure big_number dollar_figure dollar_figure big_number dollar_figure dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure wages big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure moving exps big_number dollar_figure --- --- process serv big_number dollar_figure big_number dollar_figure --- --- --- --- dollar_figure big_number dollar_figure contract serv big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure court fees big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure collect fees --- --- --- --- --- --- --- miscellaneous dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure big_number dollar_figure the chart summarizes the schedule c expenses that we have concluded based on a preponderance_of_the_evidence petitioner is entitled to deduct in each of the years at issue as reflected in the chart petitioner has substantiated schedule c expenses for each of the years and in excess of those claimed on her tax returns for those years the chart also reveals that for and petitioner has substantiated schedule c expenses in amounts that are less than the amounts claimed on her tax_return for each year the chart also illustrates what should be obvious by now-- respondent’s determination disallowing her schedule c expenses for the years at issue was arbitrary and unreasonable we cannot explain how the audit process malfunctioned so badly but it is readily apparent that the malfunction occurred the disallowance of petitioner’s business_expenses after petitioner had produced auditable business records for considered review by the revenue_agent and others has resulted in significant expenditures of time on the part of petitioner respondent’s counsel and this court to conduct what was in effect an audit this case has amply demonstrated that the litigation process is not well suited for the exchange of information that should occur in a properly conducted audit d net operating losses unlike the record made by petitioner with respect to her schedule c income and deductions the record made by petitioner with respect to her nol carryforward deductions does not establish that respondent’s determinations disallowing petitioner’s nol carryforward deductions were erroneous although petitioner alluded to the fact that respondent did not examine the nols during his examination of the years at issue petitioner did not clearly testify that she produced to the revenue_agent the records necessary to support the nol_carryover deductions claimed for the return years at issue more importantly although petitioner introduced some documentation at trial with respect to her claimed nol deductions the documentation was insufficient to support a finding that she is entitled to all or any portion of such carryforwards the principal problem with the trial record is that the documentation although substantial is incomplete in many respects for example petitioner introduced no records for or and insufficient records for and the years in which petitioner claimed net operating losses to enable us to verify the losses or to show how the losses were absorbed in other years under the foregoing circumstances we hold that petitioner has failed to prove she is entitled to any portion of the reported nol carryforward ii additions to tax and penalties a sec_6651 addition_to_tax sec_6651 imposes a penalty equal to percent of the tax due for each month of delayed filing beyond the due_date including extensions up to a maximum of percent unless it is shown that such failure_to_file is due to reasonable_cause and not due to willful neglect petitioner was well aware that her return and the joint returns with her husband were not filed timely all four returns were filed between august and date well after the due dates including the extended due_date for for petitioner did not furnish the accountant with information he needed to prepare the returns until after the return due dates although petitioner testified that the late filings were largely attributable to her husband’s failure to gather his tax information and pay his self-employment_tax and or to the accountant’s delay in completing the returns she failed to pursue available alternatives such as insisting on the timely filing of her return timely filing a married filing separate_return for or demanding that her husband and his accountant complete and file the joint returns for by their due dates using the best information available and if necessary filing amended returns when the rest of the information became available petitioner’s failure to ensure that her returns were filed timely under these circumstances supports the imposition of the delinquency addition_to_tax see estate of thomas v commissioner tcmemo_2001_225 consequently we sustain respondent’s imposition of the sec_6651 delinquency addition_to_tax for each of the years at issue recomputed in accordance with this opinion b negligence addition_to_tax under sec_6653 sec_6653 applicable to petitioner’s and taxable years authorizes the imposition of an addition_to_tax for negligence it provides that if any part of any underpayment is due to negligence or disregard of rules or regulations an addition equal to the sum of percent of the underpayment and for an amount equal to percent of the interest payable under sec_6601 with respect to the portion of such underpayment attributable to negligence for the period from the underpayment due_date to the assessment_date or if earlier the tax payment_date shall be added to the tax for purposes of sec_6653 negligence is defined to include any failure to make a reasonable attempt to comply with the provisions of this title and disregard is defined to include any careless reckless or intentional disregard sec_6653 respondent contends that petitioner is liable for the sec_6653 addition_to_tax for negligence because she failed to use reasonable care in ascertaining and reporting her tax_liabilities for and specifically respondent argues that petitioner is liable for the addition_to_tax because she failed to keep adequate_accounting records and claimed a large nol deduction with little or no support respondent does not argue however that petitioner’s failure_to_file timely returns is a basis for imposing the addition_to_tax under sec_6653 it is well established that a taxpayer’s failure to keep records is a basis for imposing the addition_to_tax under sec_6653 see eg taylor v commissioner tcmemo_1988_389 affd without published opinion 887_f2d_259 lst cir as numerous cases have illustrated however the irs and taxpayers can often differ regarding what constitutes a failure to keep records sufficient to support liability under sec_6653 sec_1_6001-1 income_tax regs provides any person subject_to tax under subtitle a of the code including a qualified_state individual income_tax which is treated pursuant to sec_6361 as if it were imposed by chapter of subtitle a or any person required to file a return of information with respect to income shall keep such permanent books of account or records including inventories as are sufficient to establish the amount of gross_income deductions credits or other matters required to be shown by such person in any return of such tax or information respondent contends that the cited regulation required petitioner to maintain adequate_accounting records he supports his argument by focusing primarily on one exhibit introduced into evidence by petitioner and generally disparaging petitioner’s records although petitioner chose not to file a posttrial brief she adamantly asserted at trial that she maintained voluminous records and that while the records were not formal or perfect they were routinely maintained in an organized form were produced to the accountant who prepared her returns for the years at issue and adequately documented the income and expenses from her law practice our review of the evidentiary record when filtered through the parties’ arguments convinces us that petitioner should not be held liable for the addition_to_tax under sec_6653 based on respondent’s contention that she failed to keep adequate_records as we have stated previously we found petitioner’s testimony including her testimony regarding her record keeping and her production of records during the audit to be credible in addition the documents petitioner produced at trial amply demonstrated that she maintained records and that the records were auditable moreover we accept petitioner’s testimony that she produced those records for examination by respondent’s revenue_agent and appeals officer on several different occasions over a period of several years we are left with the impression that any gaps in petitioner’s records at trial were more_likely_than_not the result of the passage of time the multiple and delayed reviews of petitioner’s records by respondent and others and petitioner’s difficult personal circumstances before and during trial respondent contends that petitioner’s record keeping was inadequate and therefore negligent because she failed to maintain formal books of account as required by sec_1_6001-1 income_tax regs she failed to employ competent help to prepare her tax returns and she failed to furnish that help with the necessary information to file proper and timely returns respondent in his brief states it is evident petitioner failed to do so because she was unable to adequately reconstruct her expenses we disagree it simply does not follow from petitioner’s failure to reconstruct completely her schedule c expenses at trial that she failed to maintain adequate_records or that she failed to hire competent help as respondent suggests petitioner conceded at trial that she did not maintain formal books of account such as a general ledger or a cash receipts and disbursements journal however petitioner maintained voluminous records of her income and expenses as she amply demonstrated at trial we are convinced that the evidentiary gaps in the record including the lack of documentation regarding petitioner’s nol carryforwards are not the result of negligent record keeping as respondent alleges but are due to petitioner’s financial and personal difficulties that arose following the years at issue for example petitioner testified that she had other records such as client and bank records which would have enabled her to fill the evidentiary gaps but she simply did not have the financial and personal resources to retrieve the records from storage and analyze those records under the circumstances we have no doubt however that such records exist we hold that petitioner is not liable for the addition_to_tax under sec_6653 for any of the years at issue c accuracy-related_penalty under sec_6662 sec_6662 applicable to petitioner’s and years authorizes the imposition of a 20-percent penalty for specified types of misconduct including negligence or disregard of rules or regulations sec_6662 and b sec_6662 adopts the same definitions of negligence and disregard as those utilized in sec_6653 before its repeal respondent contends that petitioner is liable for the accuracy-related_penalty for and due to her alleged negligent record keeping and makes the same arguments with respect to sec_6662 that he made with respect to sec_6653 consequently we incorporate by reference our discussion of respondent’s arguments under sec_6653 and we hold that petitioner did not negligently fail to maintain required records as respondent contends 21neither party raised or addressed the issue of whether both the addition_to_tax under sec_6651 and the accuracy-related_penalty may be applied to the underpayment for a taxable_year in which the taxpayer failed to file a timely return consequently we do not discuss the issue even though it may provide an alternative ground for decision iii conclusion we have analyzed all of the testimony exhibits and stipulations in this unwieldy record in an effort to fairly and justly decide the issues presented by this case the task has not been easy due largely to respondent’s failure to examine petitioner’s documentation before issuing the notices of deficiency in this case and respondent’s blanket disallowance of all of petitioner’s schedule c expenses for of the years at issue as petitioner conceded more than once at trial however petitioner must also take some responsibility for the gaps in the record presented to this court by failing to maintain formal books of account to summarize and organize her voluminous documentation petitioner left herself exposed to the problems presented by this case and must accept a less than perfect result we have considered all of the arguments expressly or inferentially raised in this case by either party and to the extent not discussed we find them to be irrelevant or without merit in light of the foregoing and to reflect concessions made by the parties decisions will be entered under rule