Court Opinion

ID: 4336458
Source: CourtListenerOpinion
Date Created: 2018-11-14 02:51:58.600616+00
Date Added: 2024-06-11T14:47:32.157796
License: Public Domain

T.C. Memo. 2007-113

                       UNITED STATES TAX COURT

                 DAVID E. BENSON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

     Docket No. 22965-05.               Filed May 2, 2007.

     David E. Benson, pro se.

     Ann M. Welhaf and Michael A. Raiken, for respondent.

             MEMORANDUM FINDINGS OF FACT AND OPINION

     CHIECHI, Judge:    Respondent determined a deficiency of

$2,316 in, and an accuracy-related penalty under section 6662(a)1

of $463.20 on, petitioner’s Federal income tax (tax) for 1999.

     1
      All section references are to the Internal Revenue Code
(Code) in effect for the year at issue. All Rule references are
to the Tax Court Rules of Practice and Procedure.
                               - 2 -

     The issues remaining for decision are:

     (1) Is petitioner entitled to deduct certain legal fees in

determining his Schedule C net loss?   We hold that he is not.

     (2) Is petitioner entitled to deduct certain claimed gifts

to customers and prospective customers?     We hold that he is not.

     (3) Is petitioner liable for the accuracy-related penalty

under section 6662(a)?   We hold that he is.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

     Petitioner resided in Falls Church, Virginia, at the time he

filed the petition in this case.

     During 1999, McKendree Co., Inc. (McKendree), employed

petitioner as a salesperson.   At all relevant times, McKendree

had in effect an employee reimbursement policy (McKendree’s

reimbursement policy) that allowed its employees to request

reimbursement on a prescribed reimbursement form (reimbursement

form) for any employee business expenses that they incurred.

That policy provided in pertinent part:

          Any purchase regardless of how small must have a
     Purchase Order number (P.O. #) obtained from the Nor-
     folk Parts Department and be accompanied by a Pay-
     ment/Reimbursement form * * * in order to be reim-
     bursed.

          Payments to employees for the reimbursement of
     expenses, travel, etc., will be made on the 1st and
     15th of each month. All employees must complete an
     Authorization Payment/Reimbursement form in order to
     receive reimbursement * * *
                               - 3 -

           Only those vehicles owned by McKendree are eligi-
     ble for gas, tire, oil, repairs, etc. to be paid by or
     charged to the Company. Employees must sign any tick-
     ets and include the license plate number for any vehi-
     cle expenses charged. In addition, gasoline expenses
     will be paid or reimbursed only in areas where
     McKendree does business. Mileage is paid only on the
     1st of each month and is two weeks in arrears. All
     mileage must be entered into the computer by the 25th
     of each month prior to the 1st of the following month.
     * * *

           Those employees who are paid driving allowances or
     driving reimbursements must pay their own expenses out
     of those disbursements. Any personal charges which
     appear on an invoice presented to McKendree for payment
     will be deducted from an employee’s next pay check
     * * *

          Unauthorized charges in the future will be grounds
     for immediate dismissal.

     During 1999, pursuant to McKendree’s reimbursement policy,

petitioner received $1,600 from McKendree as an advance on his

vehicle expenses for that year ($1,600 McKendree driving allow-

ance).

     At no relevant time did McKendree require petitioner to

provide gifts to its customers or its potential customers.

     On February 24, 1999, petitioner was arrested for and

charged with stealing merchandise belonging to COMPUSA, Inc.,

valued at $200 or more.   On June 2, 1999, a grand jury in the

Commonwealth of Virginia Circuit Court for the City of Norfolk

indicted petitioner for grand larceny (criminal charges).

Petitioner hired Christopher Christie (Mr. Christie), an attor-

ney, to represent him in defending against those criminal
                               - 4 -

charges, for which he paid Mr. Christie $5,500.   On July 23,

1999, petitioner entered into a plea agreement in which he

pleaded guilty to the criminal charges.

     Petitioner timely filed Form 1040, U.S. Individual Income

Tax Return, for his taxable year 1999 (petitioner’s 1999 return).

Petitioner did not include the $1,600 McKendree driving allowance

in total income in his 1999 return.

     Petitioner included Schedule A-Itemized Deductions (1999

Schedule A) as part of his 1999 return.   In that schedule,

petitioner claimed, inter alia, $12,617 of “Job Expenses and Most

Other Miscellaneous Deductions” (job expenses) prior to the

application of the two-percent floor imposed by section 67(a).

Of that total, petitioner claimed $12,157 as “Unreimbursed

employee expenses”.   With respect to those claimed unreimbursed

employee expenses, petitioner, as required, completed Form 2106,

Employee Business Expenses (1999 Form 2106), and included that

form as part of his 1999 return.   In the 1999 Form 2106, peti-

tioner claimed the following unreimbursed employee expenses:
                              - 5 -

                        Expense       Amount
                                      1
                    Vehicle           $10,780
                    Transportation2        254
                    Travel3                685
                                         4
                    Meals                  438

     1
       Petitioner calculated the $10,780 of claimed vehicle ex-
penses by multiplying his claimed actual vehicle expenses (i.e.,
$12,015) by the percentage of claimed business use for his
vehicle (i.e., 89.72 percent). Petitioner’s claimed actual
vehicle expenses consisted of $5,835 for “Gasoline, oil, repairs,
vehicle insurance, etc.” and $6,180 for “Vehicle rentals”.
Petitioner calculated the percentage of claimed business use for
his vehicle by dividing his “Business miles” (i.e., 28,810 miles)
by “Total miles the vehicle was driven during 1999” (i.e., 32,110
miles).
     2
       In the 1999 Form 2106, the expense category “Transporta-
tion” covered “Parking fees, tolls, and transportation, including
train, bus, etc., that did not involve overnight travel or
commuting to and from work.” Petitioner did not specify in the
1999 Form 2106 the type(s) of transportation expenses that he was
claiming.
     3
       In the 1999 Form 2106, the expense category “Travel” cov-
ered “Travel expense while away from home overnight, including
lodging, airplane, car rental, etc.”, but not expenses for meals
or entertainment. Petitioner did not specify in the 1999 Form
2106 the type(s) of travel expenses that he was claiming.
     4
       In calculating the $438 of claimed meal expenses, peti-
tioner claimed in the 1999 Form 2106 total meal expenses of $875
and reduced that total by 50 percent, as required by sec. 274(n).

Petitioner did not reduce the vehicle expenses claimed in the

1999 Form 2106 and as part of unreimbursed employee expenses in

the 1999 Schedule A by the $1,600 McKendree driving allowance.

     As required by section 67(a), petitioner reduced the $12,617

of job expenses claimed in the 1999 Schedule A by two percent of

his adjusted gross income (i.e., by $916).   In determining the

taxable income reported in petitioner’s 1999 return, petitioner

deducted the balance (i.e., $11,701), as well as the other
                              - 6 -

itemized deductions claimed in the 1999 Schedule A that were not

subject to the two-percent floor imposed by section 67(a).

     Petitioner included Schedule C, Profit or Loss From Business

(1999 Schedule C), as part of his 1999 return.   In that schedule,

petitioner showed his “Principal business or profession, includ-

ing product or service” as “COMPUTER CONSULTING” and his “Busi-

ness name” as “POWERPOINT CONSULTING”.   In the 1999 Schedule C,

petitioner showed gross income of $2,000 and claimed total

expenses of $13,563 and a net loss of $11,563.   The claimed total

expenses in the 1999 Schedule C included as an expense for “Legal

and professional services” $5,000 ($5,000 claimed legal expense)

of the $5,500 that petitioner paid to Mr. Christie to represent

him in defending against the criminal charges.   In determining

the taxable income reported in petitioner’s 1999 return, peti-

tioner deducted the total (i.e., $11,563) net loss that peti-

tioner claimed in the 1999 Schedule C.

     On August 4, 2005,2 respondent issued to petitioner a notice

of deficiency (notice) for his taxable year 1999.   In that

notice, respondent disallowed, inter alia, the $5,000 claimed

legal expense in the 1999 Schedule C.    In the notice, respondent

     2
      The parties stipulated that respondent issued the notice to
petitioner on May 31, 2005. That stipulation is clearly contrary
to the facts that we have found are established by the record,
and we shall disregard it. See Cal-Maine Foods, Inc. v. Commis-
sioner, 93 T.C. 181, 195 (1989). The record establishes, and we
have found, that respondent issued the notice to petitioner on
Aug. 4, 2005.
                                - 7 -

also determined that petitioner is liable for his taxable year

1999 for the accuracy-related penalty under section 6662(a).

                               OPINION

     Petitioner bears the burden of proving that the determina-

tions in the notice are erroneous.3      Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).      Moreover, deductions are a

matter of legislative grace, and petitioner bears the burden of

proving entitlement to any deduction claimed.      INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992).      Petitioner was required to

maintain records sufficient to establish the amount of any

deduction claimed.   Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.

$5,000 Claimed Legal Expense

     It is petitioner’s position4 that he is entitled to deduct

in the 1999 Schedule C the $5,000 claimed legal expense.

     A taxpayer is entitled to deduct under section 162(a)

expenses for legal fees “if the suit against the taxpayer ‘arises

in connection with’ or ‘proximately results from’ the taxpayer’s

business or profit-seeking activity.      United States v. Gilmore,

372 U.S. 39, 48 (1963); Kornhauser v. United States, 276 U.S.
3
      Petitioner does not claim that the burden of proof shifts
to respondent under sec. 7491(a). In any event, petitioner has
failed to establish that he satisfies the requirements of sec.
7491(a)(2). On the record before us, we find that the burden of
proof does not shift to respondent under sec. 7491(a).
     4
      Although the Court ordered petitioner to file a posttrial
brief, he failed to do so.
                               - 8 -

145, 153 (1928).”   O’Malley v. Commissioner, 91 T.C. 352, 361-362

(1988).   In determining whether such expenses are deductible, we

must focus on “the origin and character of the claim with respect

to which [the] expense was incurred”.    United States v. Gilmore,

supra at 49.

     In support of his position that he is entitled to deduct in

the 1999 Schedule C the $5,000 claimed legal expense, petitioner

testified:

     It was in the process of building up my business. I
     was in computer consulting, computer software, and it
     was computer equipment that I had tried to purchase at
     a slight discount.

Petitioner did not present any other evidence in support of his

position with respect to the $5,000 claimed legal expense.

     On the instant record, we find that petitioner has failed to

carry his burden of establishing that the criminal proceeding in

which Mr. Christie represented petitioner arose in connection

with or proximately resulted from a business or profit-seeking

activity of petitioner.   On that record, we further find that

petitioner has failed to carry his burden of establishing that

the origin and the character of the claim with respect to which

the $5,000 claimed legal expense was incurred was a business or

profit-seeking activity of petitioner.

     On the record before us, we find that petitioner has failed

to carry his burden of establishing that he is entitled to deduct

in the 1999 Schedule C the $5,000 claimed legal expense.
                                      - 9 -

Certain Claimed Gifts

     Petitioner did not claim any gifts as unreimbursed employee

expenses in the 1999 Schedule A included as part of his 1999

return.    At trial, however, petitioner maintained that he is

entitled to deduct as unreimbursed employee expenses for his

taxable year 1999 gifts totaling $1,600 that he claims he gave to

customers and prospective customers of McKendree (claimed gifts).

     Section 162(a) generally allows a deduction for ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business.            A taxpayer is entitled to

deduct under section 162(a) unreimbursed employee business

expenses only to the extent that the taxpayer demonstrates that

such taxpayer could not have been reimbursed for such expenses by

such taxpayer’s employer.          Podems v. Commissioner, 24 T.C. 21, 23

(1955).5

     Section 274(b) provides:

     SEC. 274.       DISALLOWANCE OF CERTAIN ENTERTAINMENT, ETC.,
     EXPENSES.

                 *       *     *       *        *     *     *

            (b) Gifts.--

                 (1) Limitation.--No deduction shall be al-
            lowed under section 162 or section 212 for any
            expense for gifts made directly or indirectly to
            any individual to the extent that such expense,
            when added to prior expenses of the taxpayer for

     5
      See also Putnam v. Commissioner, T.C. Memo. 1998-285;
Marshall v. Commissioner, T.C. Memo. 1992-65.
                             - 10 -

          gifts made to such individual during the same
          taxable year, exceeds $25. For purposes of this
          section, the term “gift” means any item excludable
          from gross income of the recipient under section
          102 which is not excludable from his gross income
          under any other provision of this chapter, but
          such term does not include–-

                    (A) an item having a cost to the tax-
               payer not in excess of $4.00 on which the
               name of the taxpayer is clearly and perma-
               nently imprinted and which is one of a number
               of identical items distributed generally by
               the taxpayer, or

                    (B) a sign, display rack, or other pro-
               motional material to be used on the business
               premises of the recipient.

     For certain kinds of expenses otherwise deductible under

section 162(a), such as expenses for gifts, a taxpayer must

satisfy certain substantiation requirements set forth in section

274(d) before such expenses will be allowed as deductions.

     In order for petitioner’s claimed gifts to be deductible,

such gifts must satisfy the requirements of not only section

162(a) but also section 274(d).    To the extent that petitioner

carries his burden of showing that the claimed gifts satisfy the

requirements of section 162(a) but fails to satisfy his burden of

showing that such gifts satisfy the recordkeeping requirements of

section 274(d), petitioner will have failed to carry his burden

of establishing that he is entitled to deduct such gifts, regard-

less of any equities involved.    See sec. 274(d); sec. 1.274-

5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6,

1985).
                               - 11 -

     The recordkeeping requirements of section 274(d) will

preclude petitioner from deducting any expenditure otherwise

allowable under section 162(a) for a gift unless he substantiates

the requisite elements of each such expenditure.    See sec.

274(d); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed.

Reg. 46014 (Nov. 6, 1985).    A taxpayer is required to

     substantiate each element of an expenditure or use
     * * * by adequate records or by sufficient evidence
     corroborating his own statement. Section 274(d) con-
     templates that a taxpayer will maintain and produce
     such substantiation as will constitute proof of each
     expenditure or use referred to in section 274. Written
     evidence has considerably more probative value than
     oral evidence alone. In addition, the probative value
     of written evidence is greater the closer in time it
     relates to the expenditure or use. A contemporaneous
     log is not required, but a record of the elements of an
     expenditure or of a business use of listed property
     made at or near the time of the expenditure or use,
     supported by sufficient documentary evidence, has a
     high degree of credibility not present with respect to
     a statement prepared subsequent thereto when generally
     there is a lack of accurate recall. Thus, the corrobo-
     rative evidence required to support a statement not
     made at or near the time of the expenditure or use must
     have a high degree of probative value to elevate such
     statement and evidence to the level of credibility
     reflected by a record made at or near the time of the
     expenditure or use supported by sufficient documentary
     evidence. The substantiation requirements of section
     274(d) are designed to encourage taxpayers to maintain
     the records, together with documentary evidence, as
     provided in paragraph (c)(2) of this section [1.274-5T,
     Temporary Income Tax Regs.].

Sec. 1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg.

46016-46017 (Nov. 6, 1985).

     The elements that a taxpayer must prove with respect to an

expenditure for a gift are:    (1) The amount of each expenditure
                               - 12 -

for a gift, i.e., the cost of the gift to the taxpayer; (2) the

time of each such expenditure, i.e., the date of the gift;

(3) the description of each such expenditure, i.e., a description

of the gift; (4) the business purpose of each such expenditure,

i.e., the business reason for the gift or nature of the business

benefit derived or expected to be derived as a result of the

gift; and (5) the business relationship of each such expenditure,

i.e., the occupation or other information relating to the recipi-

ent of the gift, including name, title, or other designation,

sufficient to establish business relationship to the taxpayer.

Sec. 1.274-5T(b)(5), Temporary Income Tax Regs., 50 Fed. Reg.

46016 (Nov. 6, 1985).

     Petitioner testified that he did not use the $1,600

McKendree driving allowance to pay for vehicle expenses, as

required by McKendree’s reimbursement policy.   Instead, according

to petitioner’s testimony, he used that driving allowance to pay

for the claimed gifts totaling $1,600 to customers and prospec-

tive customers of McKendree.   Petitioner testified:

     I would basically purchase very inexpensive gifts
     generally under $20, give it either to potential cli-
     ents or give it to present clients just as a way of
     greasing the skids. So all the gifts I gave I kept
     track of. I know what days I gave it on.

          Sometimes I don’t have exactly who I gave it to,
     but other times I did. I wasn’t exact about writing
     down the name of the person. All that was done in that
     year. It was fully expensed, and I basically kept
     track of that.
                                - 13 -

               *     *      *     *      *    *      *

          * * * I gave the gifts out on a regular basis, and
     that was basically it. They were small gifts, no
     receipts needed because they were all under $20.

     Petitioner’s testimony fails to establish, inter alia,

(1) the recipient of any claimed gift, (2) the business relation-

ship to McKendree or to petitioner of the recipient of any

claimed gift, (3) the amount of any claimed gift, (4) the date of

any claimed gift, (5) a description of any claimed gift, or

(6) the business purpose of any claimed gift.     We shall not rely

on petitioner’s testimony to establish his position with respect

to the claimed gifts.    Except for that testimony, petitioner

presented no evidence with respect to the claimed gifts.

     The record establishes that McKendree did not require

petitioner to provide gifts to its customers or its potential

customers.   The record does not establish that gifts to customers

and prospective customers of McKendree were employee business

expenses under McKendree’s reimbursement policy.

     Assuming arguendo that petitioner had established that he

made the claimed gifts to customers and prospective customers of

McKendree and that such claimed gifts were employee business

expenses under McKendree’s reimbursement policy, petitioner

admitted at trial that he did not submit any reimbursement forms

for any such gifts, as required by McKendree’s reimbursement

policy.   On the instant record, we find that petitioner has
                              - 14 -

failed to carry his burden of establishing that he could not have

been reimbursed by McKendree for the claimed gifts.

     On the record before us, we find that petitioner has failed

to carry his burden of establishing that he is entitled for his

taxable year 1999 to the deduction under section 162(a) that he

claims as unreimbursed employee business expenses for the claimed

gifts.6

Accuracy-Related Penalty

     It is respondent’s position that petitioner is liable for

his taxable year 1999 for the accuracy-related penalty under

section 6662(a) because of negligence or disregard of rules or

regulations under section 6662(b)(1).

     The term “negligence” in section 6662(b)(1) includes any

failure to make a reasonable attempt to comply with the Code.

Sec. 6662(c).   Negligence has also been defined as a failure to

do what a reasonable person would do under the circumstances.

See Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th Cir. 1992),

affg. T.C. Memo. 1991-179; Antonides v. Commissioner, 91 T.C.
686, 699 (1988), affd. 893 F.2d 656 (4th Cir. 1990).   The term

     6
      Assuming arguendo that petitioner had established the
deductibility under sec. 162(a) of the claimed gifts, he would
still have to satisfy the requirements of sec. 274(b) and (d) and
the regulations thereunder. On the record before us, we find
that petitioner has failed to satisfy those requirements. See
sec. 274(b) and (d); sec. 1.274-3, Income Tax Regs.; sec. 1.274-
5T(b)(5), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6,
1985).
                              - 15 -

“disregard” includes any careless, reckless, or intentional

disregard.   Sec. 6662(c).

     Failure to keep adequate records is evidence not only of

negligence, but also of intentional disregard of regulations.

See sec. 1.6662-3(b)(1) and (2), Income Tax Regs.; see also

Magnon v. Commissioner, 73 T.C. 980, 1008 (1980).

     The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment if it is shown that there

was reasonable cause for, and that the taxpayer acted in good

faith with respect to, such portion.   Sec. 6664(c)(1).   The

determination of whether the taxpayer acted with reasonable cause

and in good faith depends on the pertinent facts and circum-

stances, including the taxpayer’s efforts to assess such tax-

payer’s proper tax liability, the knowledge and experience of the

taxpayer, and the reliance on the advice of a professional, such

as an accountant.   Sec. 1.6664-4(b)(1), Income Tax Regs.

     Respondent has the burden of production under section

7491(c) with respect to the accuracy-related penalty under

section 6662.   To meet that burden, respondent must come forward

with sufficient evidence indicating that it is appropriate to

impose that penalty.   Higbee v. Commissioner, 116 T.C. 438, 446

(2001).   Although respondent bears the burden of production with

respect to the accuracy-related penalty that respondent deter-

mined for petitioner’s taxable year 1999, respondent “need not
                                 - 16 -

introduce evidence regarding reasonable cause * * * or similar

provisions. * * * the taxpayer bears the burden of proof with

regard to those issues.” Id.

     Petitioner conceded certain determinations that respondent

made in the notice.   As a result, petitioner has acknowledged

that an underpayment exists for his taxable year 1999.

     With respect to the accuracy-related penalty under section

6662(a) that respondent determined for petitioner’s taxable year

1999, petitioner testified:

     I keep as accurate records as I always have. I use a
     computer program to do my taxes. I’m pretty precise
     about what I put in there and back it up to the best of
     my ability. I’ve done this for 30 years. Well, not
     computerized, but I’ve used a computer since 1988 doing
     my taxes.

              *       *    *       *      *     *     *

          * * * I always go through it, the computer program
     will check it for any discrepancies, and even then I
     will go back through it and check it again. So all the
     calculations are done by the computer, but I do double-
     check, and the computer will flag anything that is a
     discrepancy.

     The record in this case does not contain any of the records

that petitioner testified he maintained.      We are not required to,

and we shall not, accept petitioner’s uncorroborated, self-

serving, and conclusory testimony about maintaining records.     See

Lerch v. Commissioner, 877 F.2d 624, 631-632 (7th Cir. 1989),

affg. T.C. Memo. 1987-295; Geiger v. Commissioner, 440 F.2d 688,

689-690 (9th Cir. 1971), affg. per curiam T.C. Memo. 1969-159;
                              - 17 -

Shea v. Commissioner, 112 T.C. 183, 189 (1999).    On the instant

record, we find that petitioner did not maintain the records

required by section 6001 and section 1.6001-1(a), Income Tax

Regs.   On that record, we further find that any unidentified

records that petitioner may have maintained were not adequate

under those provisions.   On the instant record, we find that the

burden of production that respondent has under section 7491(c) is

satisfied.   See sec. 1.6662-3(b)(1) and (2), Income Tax Regs.

     Except for the testimony quoted above, petitioner presented

no evidence, and made no argument, with respect to the accuracy-

related penalty under section 6662(a) that respondent determined

for petitioner’s taxable year 1999.    On the instant record, we

find that petitioner has failed to carry his burden of showing

that he was not negligent and did not disregard rules or regula-

tions, or otherwise did what a reasonable person would do, with

respect to the underpayment for that year.

     On the instant record, we further find that petitioner has

failed to carry his burden of showing that there was reasonable

cause for, and that he acted in good faith with respect to, the

underpayment for the year at issue.    See sec. 6664(c)(1).

     On the record before us, we find that petitioner has failed

to carry his burden of establishing that he is not liable for

1999 for the accuracy-related penalty under section 6662(a).

     We have considered all of the parties’ contentions and
                             - 18 -

arguments that are not discussed herein, and we find them to be

without merit, irrelevant, and/or moot.

     To reflect the foregoing and the concessions of the parties,

                                   Decision will be entered under

                              Rule 155.