T.C. Memo. 2018-120
UNITED STATES TAX COURT
DAMON R. BECNEL, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14707-14. Filed August 2, 2018.
James E. Long, Jr., and Robert C. Walthall, for petitioner.
Horace Crump and Thomas Alan Friday, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HOLMES, Judge: Damon Becnel is a property developer in Florida’s
Panhandle who bought a yacht--a yacht he claims to use to market his properties to
wealthy anglers. But he didn’t buy or operate his yacht in his own name; instead,
he claimed deductions under misleading categories--for example, “dues and -2-
[*2] subscriptions”--on the Schedule C, Profit or Loss From Business, for one of
his companies that rented beach chairs, towels, water toys, and the like. The
Commissioner says these yacht expenses were not ordinary and necessary and,
even if they were, Becnel can’t overcome the Code’s strict limitation on certain
kinds of business deductions.
FINDINGS OF FACT
I. Becnel’s Background
Becnel is a serial entrepreneur originally from Louisiana who moved east to
Destin, Florida, dubbed by its boosters the “World’s Luckiest Fishing Village.” It
is in that village that Becnel and his father launched a real-estate empire, and it is
where he has spent most of his career.
It started with the Silver Shells Beach Resort, a 30-acre site on the Gulf of
Mexico that had 439 condominium units at the time of trial. To help make the
resort more profitable, Becnel formed a property-management company that’s now
named Visionary Destin, Inc., and a beach-amenities company named Sunrise
Beach Service, LLC (Sunrise). The building continued: Near the Silver Shells
Beach Resort, Becnel and his father built developments called the Silver Beach
Towers and the Palms of Destin; and they also built projects named Pine Ridge
Villas and One Beach Club Drive within a larger resort complex called the -3-
[*3] Sandestin Golf & Beach Resort--a 2,400-acre resort that Becnel and his
family bought in 2010. By the time we tried the case, Becnel’s portfolio of
companies had grown still more:
Interest Name (percent) Purpose
Ramrod of NW Florida 100 Owns 11.79% of Sandestin Investments LLC¹ and 22.50% of LLC Sandestin Holdings LLC² Sable LLC 8.33 Owns 23.58% of Sandestin Investments LLC and 23.58% of Sandestin Holdings LLC Sandestin Real Estate 16 Onsite sales office for Sandestin Golf & Beach Resort of NW Florida LLC Becnel Family LLC 14 Owns 10.71% of Sandestin Investments LLC and 90% of DRB Development LLC DRB Development 10 Owns around 100 rental units at the Palms of Destin LLC Abec Resorts II, LLC 100 Owns and operates bait shop at Sandestin Marina Silver Shells, LLC 11 Owns undeveloped land at Silver Beach Towers and Silver Shells Beach Resort The Becnel Company 25 Development company for three towers at Silver Shells LC Beach Resort and Silver Beach Towers West Visionary Destin, Inc. 63.7 Property-management company for Silver Beach Towers, Silver Shells Beach Resort, and Palms of Destin Communications 95.1 Provides telecommunication services to Silver Beach Processing Systems, Towers, Silver Shells Beach Resort, and Palms of Destin Inc. Sunrise Beach 100 Beach-amenities company for Silver Beach Towers and Service, LLC Silver Shells Beach Resort
¹ Sandestin Investments LLC purchased the Sandestin Golf & Beach Resort. Becnel doesn’t own any direct interest in Sandestin Investments LLC, but he holds an indirect interest through Ramrod of NW Florida LLC, Sable LLC, and Becnel Family LLC. ² Sandestin Holdings LLC owns the undeveloped land at Sandestin Golf & Beach Resort. Becnel also doesn’t own any direct interest in Sandestin Holdings LLC, but he holds an indirect interest through Ramrod of NW Florida LLC and Sable LLC. -4-
[*4] Becnel credibly testified that “this is big stuff,” and we have no trouble
finding that he has an extensive portfolio of property-development and property-
management businesses which should in the normal course generate lots of
deductible expenses. But the Commissioner says there has to be a line drawn
somewhere, and he determined to draw one--if not in the sand, then just slightly
off the beach where Becnel kept a yacht.
II. The Britney Jean
In December 2005 Becnel paid just over $2 million for a Bertram fishing
yacht.1 We find the boat a beautiful specimen of its species: It’s 67 feet long with
four staterooms; a well-appointed salon, galley, and bar; a tuna tower; and a slew
of electronic gadgets and built-in fishing equipment. Becnel christened her the
Britney Jean and promptly put her to work.
The Britney Jean is a fishing boat, and Becnel used her from day one almost
exclusively for that purpose. In 2006 she took part in ESPN 2’s Billfish Xtreme
1 The parties stipulated that Sunrise bought the yacht in its name, but we’ll refer to it as Becnel’s boat because Sunrise is disregarded for federal income-tax purposes. See secs. 301.7701-2(a), 301.7701-3(b)(1)(ii), Proced. & Admin. Regs. This means that Becnel is taxed as a sole proprietor under the Code on any income or loss of the entity reported on his return. See sec. 301.7701-2(a), Proced. & Admin. Regs. (All section references are to the Internal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless we say otherwise.) -5-
[*5] Release League (BXRL)--a televised release-only fishing league at
destination resorts from Marathon, Florida, through the Caribbean. Becnel signed
an agreement with the BXRL that guaranteed a certain amount of air time, and the
first year was a success. But the BXRL went broke the next year, and Becnel
sought out local tournaments in the Gulf of Mexico.
That’s where the Britney Jean got the most use in 2009-11, the years at
issue. Becnel used the Britney Jean in about four regional fishing tournaments a
year between 2009 and 2011, including the Bay Point Billfish Invitational, the
Sandestin/Emerald Coast Billfish Classic, and the Sandestin Celebration Fishing
Tournament. These tournaments draw many serious sport fishermen--there were
68 boats and 353 anglers at the 2009 Sandestin/Emerald Coast Billfish Classic, 20
boats and 109 anglers at the 2010 Sandestin Celebration Fishing Tournament, and
71 boats and 352 anglers at the 2011 Sandestin/Emerald Coast Billfish Classic.
But the Britney Jean got little use other than in fishing tournaments. She’s
sometimes anchored in front of the Sandestin Resort and sometimes putters along
in the Destin boat parade, but one can usually find the Britney Jean behind
Becnel’s house.
The first problem here is that Becnel does not argue that he’s in the trade or
business of professional sport fishing. He argues instead that the Britney Jean is a -6-
[*6] marketing tool for his real-property businesses. As he testified, “the goal was
to meet and greet, to get to know people and do what’s called relationship
marketing * * * because the boat provides an in into a community of very wealthy
travelers who like fishing, who like the Gulf Coast, who are already there, to make
business decisions.” At these tournaments, he would get wealthy anglers on board
and schmooze with them. He also brought the concierge from his resorts on board
for the same reason,2 and always had sales packets touting his condominiums on
board to hand out. But the Britney Jean didn’t have any signs advertising these
resorts, and Becnel didn’t keep a log of its use or the visitors on board. Though he
admits it’s difficult to quantify, Becnel claims that his “relationship marketing”
strategy led to some sales and rentals.
But what’s the cost of this strategy?
III. Tax Reporting and Audit
It’s no secret that boats are expensive, and the Britney Jean is no exception.
Her expenses, however, washed up on Sunrise’s Schedules C. Both we and the
Commissioner were curious about why a beach-amenities business--out of all of
Becnel’s businesses--might need a yacht. Becnel’s CPA didn’t quite answer the
2 Becnel’s concierge is a gifted angler who caught the winning fish at the Sandestin/Emerald Coast Billfish Classic in 2009. -7-
[*7] question, and said only that “that was the actual entity that paid for these
expenses.” (We continue to find it curious, but this detail doesn’t actually affect
our findings.) These are the yacht-related deductions that Becnel claimed and the
Commissioner disallowed:
Type of deduction 2009 2010 2011
Insurance $10,156 $22,936 $16,789 Other expenses 110,814 29,733 30,350 Depreciation and section 179 expense 28,272 24,199 18,094 Repairs and maintenance 245,239 7,766 47,926 Supplies --- 42,277 --- Total 394,481 126,911 113,159
Most of these deductions were components of larger totals on Sunrise’s
Schedules C, and not all of them are necessarily expenses directly attributable to
the yacht. The “other expenses” Becnel claimed on his 2009 return included a
“charter boat expense” on a summary attached to Sunrise’s Schedule C.3 The
Commissioner disallowed this “other expense.” The Commissioner peeped in at
the same category on Becnel’s 2010 and 2011 returns and disallowed such
3 Note that Becnel stipulated that he didn’t use the Britney Jean as a charter fishing boat. -8-
[*8] expenses again when he discovered that Becnel had tucked “other expenses”
in large part attributable to fishing-tournament fees into a larger category of “dues
& subscriptions.” The depreciation amounts that the Commissioner disallowed
were similarly buried among amounts for beach chairs, boxes, and umbrellas. The
point is that the roots of these deductions were not easy to find, and the
Commissioner had to dig them out during his audit.
That audit was detailed. The revenue agent who conducted it learned there
were yacht-related deductions on the returns; these are often questionable, and she
pressed on. She issued information document requests (IDRs) to Becnel, and
these IDRs requested both big-picture items like books and records and also any
backup documents. Becnel’s CPA turned over the general ledgers, which is how
the agent was able to decipher which expenses on the returns were related to the
yacht. But the CPA didn’t provide any of the other substantiation that she
requested,4 and he failed to prove to the agent’s satisfaction even the adjusted
basis of the yacht. This made the agent think there was a problem under sections
4 We asked the agent if she “asked for the back-up to the general ledger expenses as they relate to the yacht,” to which she replied: “Yes. And whenever we come to an audit, the invoices and the general ledger are supposed to be available for the auditor to review on site.” Becnel’s CPA testified that he didn’t see any requests for receipts in the IDRs, but when asked on cross-examination if the agent raised substantiation at in-person meetings, he replied: “I don’t recall that.” We find the agent’s testimony the more credible of the two. -9-
[*9] 162 and 274, so the Commissioner drafted the notice of deficiency that
launched this case. It says more or less the same thing for each disallowed
expense:
[Y]ou have not established that these amounts were incurred or, if incurred, paid by you during the taxable years for ordinary and necessary business purposes and that these amounts qualify as allowable deductions under the provisions of the Internal Revenue Code. Further, the expenses associated with Britney Jean Yacht reported on Schedule C1 - Sunrise Beach Services have been disallowed because you have not established that these amounts were incurred or, if incurred, paid by you during the taxable year for IRC section 212 expenses, or that these expenses were deductible under the provisions of the Internal Revenue Code.
Becnel disagreed with the Commissioner’s adjustments and timely filed a
petition.5
IV. The Trial and Excluded Evidence
The trial was short, but there was an evidentiary ruling that’s worth
discussing here because this case is, at least in part, about substantiation: The
notice of deficiency says that Becnel failed to establish that he “incurred” the
expenses. That presented a problem for Becnel at trial.
We know Becnel didn’t provide substantiation during the audit, see supra
p. 8, and that failure continued as trial approached. We issued our standing
5 Becnel was a Florida resident when he filed his petition, which makes any appeal bound for the Eleventh Circuit. See sec. 7482(b)(1)(A). - 10 -
[*10] pretrial order five months before trial--an order that told the parties they had
to exchange exhibits 14 days before trial or we might refuse (absent a showing of
good cause) to receive the documents into evidence (14-day rule). See Rule
131(b) (“Unexcused failure to comply with any * * * [standing pretrial] order may
subject a party or a party’s counsel to sanctions”). After having failed during audit
and pretrial preparation to provide backup documentation, Becnel tried for the first
time on the day of trial to introduce a stack of receipts to substantiate his yacht-
related expenses. This was substantiation that he had never shared with the
Commissioner; the Commissioner objected. He argued that Becnel had violated
the 14-day rule, and the receipts should be excluded from evidence.
We enforce the 14-day rule unless a party can show good cause. See, e.g.,
Rodriguez v. Commissioner, T.C. Memo. 2017-173, at *6 (“absent good cause, we
do not hesitate to enforce the 14-day rule” (citing Kaplan v. Commissioner, T.C.
Memo. 2016-149, at *9-*10)). We cannot find good cause here. Becnel’s
counsel’s explanation was that it was difficult to get his hands on the records
earlier, and that before trial accountants had to go to a warehouse for the receipts.
He also argued that he was surprised that substantiation was at issue because
Becnel was never asked to provide backup documentation during the audit. But
we’ve already found that we believe the revenue agent asked for substantiation - 11 -
[*11] during the audit, see supra note 4, and the Commissioner fairly put
substantiation at issue in the notice of deficiency, see supra p. 9.6 Becnel
nevertheless waited until just before trial to look for substantiation, and that is not
good cause for violating the 14-day rule. We therefore excluded the evidence,7
and are left to decide the case with what is in the trial record.
6 Becnel argues on brief that substantiation can’t be at issue in this case because the Commissioner stipulated before trial that it wasn’t. Here’s the stipulation that Becnel is relying on: “A schedule of income and operating expenses for the Britney Jean is attached as Exhibit 11-P.” This stipulation doesn’t do what Becnel thinks it does. The Commissioner is stipulating only that a schedule Becnel prepared is attached to the stipulation of facts, and that it may be admitted into evidence. It is a summary of Becnel’s claimed deductions, not substantiation. Stipulating this summary is not a concession that the schedule satisfies Becnel’s substantiation obligations under the Code or that figures on the schedule must be accepted as fact. 7 See, e.g., Kornhauser v. Commissioner, 632 F. App’x 421, 422 (9th Cir. 2016) (“Tax Court did not abuse its discretion in declining to admit into evidence documents that * * * [petitioner] provided to the Commissioner on the day of trial, in violation of * * * standing pretrial order”), aff’g T.C. Memo. 2013-230; Kanofsky v. Commissioner, 271 F. App’x 146, 149 (3d Cir. 2008) (“Tax Court acted within its discretion in excluding * * * untimely filed documents because they were not produced in accordance with the court’s own procedural rule”), aff’g T.C. Memo. 2006-79; Moretti v. Commissioner, 77 F.3d 637, 644 (2d Cir. 1996) (“Tax Court acted within its discretion in excluding documents” under 14-day rule); cf. Walker v. Anderson Elec. Connectors, 944 F.2d 841, 844 (11th Cir. 1991) (trial court’s “decision to follow * * * pre-trial order can be reversed on appeal only where the * * * court has abused its discretion”). - 12 -
[*12] OPINION
The parties note and argue about the similarities between this case and
Henry v. Commissioner, 36 T.C. 879 (1961), a classic opinion that has sailed into
a lot of Tax I casebooks. Henry was a tax lawyer who flew a flag emblazoned
with “1040” on his yacht and claimed to use the vessel to meet well-to-do clients.
Id. at 880, 883. We held in Henry that the yacht expenses were not deductible
business expenses because they were not “ordinary and necessary.” Id. at 884-86.
The Commissioner says this case is just like Henry, and Becnel says it isn’t. Note,
though, that Henry is over a half-century old, and Congress has since enacted
section 274 to restrict the deductibility of such sometimes extravagant expenses.8
Our first question then is whether section 274’s limits apply here.
I. Section 274 and Entertainment Expenses
Section 274(a) says:
(1) In general.--No deduction otherwise allowable under this chapter shall be allowed for any item--
(A) Activity.--With respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, unless the taxpayer establishes that
8 Section 274 underwent a substantial overhaul as part of the Tax Cuts and Jobs Act, Pub. L. No. 115-97, sec. 13304, 131 Stat. at 2124-26 (2017)--for example, all business entertainment expenses are now generally nondeductible under the section. We apply section 274 as in effect for the years at issue. - 13 -
[*13] the item was directly related to * * * the active conduct of the taxpayer’s trade or business, or
(B) Facility.--With respect to a facility used in connection with an activity referred to in subparagraph (A).
Note the distinction between entertainment activities and entertainment
facilities. Expenses for entertainment activities might be deductible if they are
directly related to the active conduct of a taxpayer’s business, sec. 274(a)(1)(A),
but there’s no hope for the expenses “with respect to” entertainment facilities, sec.
274(a)(1)(B). Instead, there’s “a flat prohibition on deductions for * * *
[entertainment] facilities--that is, deductions for entertainment facilities are
prohibited without regard to whether the taxpayer can establish that the
expenditure was directly related to * * * the active conduct of his * * * business.”
Catalano v. Commissioner, T.C. Memo. 1998-447, 1998 WL 892263, at *2, aff’d,
240 F.3d 842 (9th Cir. 2001). What’s an entertainment activity and what’s an
entertainment facility are separate questions, and we can pilot our way through
them with the regulations.
A. Entertainment Activity
Not far into the regulations, a key definition emerges: An entertainment
activity is “any activity which is of a type generally considered to constitute - 14 -
[*14] entertainment, amusement, or recreation, such as entertaining * * * on * * *
fishing * * * trips.” Sec. 1.274-2(b)(1)(I), Income Tax Regs. (emphasis added).
The expenses here relate to fishing tournaments; that’s basically all the Britney
Jean was used for. And those are quite clearly activities that are generally
considered entertainment. Becnel does argue that he wasn’t entertaining anybody
at these tournaments, and that the Britney Jean was just a marketing tool. Does
that nuance matter?
It doesn’t seem to. Indeed, that argument appears to bottom out on the
regulation’s test:
An objective test shall be used to determine whether an activity is of a type generally considered to constitute entertainment. Thus, if an activity is generally considered to be entertainment, it will constitute entertainment for purposes of * * * section 274(a) regardless of whether the expenditure can also be described otherwise * * * . This objective test precludes arguments such as that * * * an expenditure for entertainment should be characterized as an expenditure for advertising or public relations.
Sec. 1.274-2(b)(1)(ii), Income Tax Regs. This means that if an activity is
generally considered entertainment, it remains so under section 274(a) even if one
could find another way (e.g., marketing) to describe it. Fishing is generally
considered entertainment--the regulation says so. - 15 -
[*15] But Becnel insists that there’s more here. He points out that the regulation
also says we are supposed to take into consideration the petitioner’s business when
we apply the objective test. See sec. 1.274-2(b)(1)(ii), Income Tax Regs. For
example, “if a manufacturer of dresses conducts a fashion show to introduce his
products to a group of store buyers, the show would not be generally considered to
constitute entertainment.” Id. On the other hand, “if an appliance distributor
conducts a fashion show for the wives of his retailers, the fashion show would be
generally considered to constitute entertainment.” Id. Becnel argues that he’s
more like the dressmaker and cites in support Churchill Downs, Inc. v.
Commissioner, 307 F.3d 423 (6th Cir. 2002), aff’g 115 T.C. 279 (2000).
In Churchill Downs, 307 F.3d at 424-25, the company behind the Kentucky
Derby deducted 100% of its expenses for promotional parties, brunches, and
dinners; the Commissioner disallowed 50% of the deductions as entertainment
expenses limited under section 274(n). Churchill Downs argued that the events
were not entertainment because they “generated publicity and media attention
which introduced its races to the public in the same manner that a dress designer’s
fashion show introduces its product to clothing buyers.” Id. at 426. The Sixth
Circuit held otherwise. It said the “regulation draws the line between pure
publicity and entertainment events integral to the conduct of the taxpayer’s - 16 -
[*16] business by providing” the contrasting fashion-show examples. Id. at 426-
27. The dressmaker’s fashion show “is attended by the taxpayer’s primary
customers, and the taxpayer’s product is present at the event and is the focus of it.”
Id. at 427. The fashion shows for the wives of appliance retailers were “social
event[s] focused on something unrelated to the taxpayer’s product, held to
generate good will among selected third parties with the expectation that they will
influence * * * primary customers into buying its product.” Id. The Sixth Circuit
held that Churchill Downs’ events were more like the latter--the events were held
away from the track and not open to the public, and they featured no horse racing
and no information about horse racing. Id. These events were “best characterized
not as a product introduction event used to conduct the taxpayer’s business, but as
pure advertising or public relations expenses.” Id.
Becnel points out differences between his case and Churchill Downs: He
says that some of the fishing tournaments were hosted by one of Becnel’s resorts;
that Becnel did provide product information at the tournaments; and that the
tournaments were open to wealthy fishermen--Becnel’s target market. With all
these differences, Becnel argues, he’s more like the dressmaker in the regulation
and his yacht-related expenses are therefore not entertainment expenses. - 17 -
[*17] We agree that there are some differences between this case and Churchill
Downs, but we don’t think those differences are that important. Becnel might
have gained access to potential condominium buyers at the fishing tournaments,
and he did credibly testify about anglers he met who later bought units. But just
because an activity generates some business doesn’t mean it can’t be entertainment
under section 274(a). See, e.g., Harrigan Lumber Co. v. Commissioner, 88 T.C.
1562, 1563-64 (1987) (hunting with clients is entertainment even if those clients
generated over $5 million worth of business in two-year period), aff’d without
published opinion, 851 F.2d 362 (11th Cir. 1988). Becnel emphasized the third-
party referrals he received from people he met at the tournaments, but this is
analogous to the influence that wives of appliance retailers might exercise over
their husbands. See Churchill Downs, 307 F.3d at 427. And Becnel may have
kept sales packets for his condos on board the Britney Jean at tournaments, but
that doesn’t make condominium sales the focus of those events. See id. Becnel is
not a professional fisherman--he isn’t even in the boat business--so we find that
the fishing tournaments were merely entertainment activities for him and his
company. See, e.g., Buddy Schoellkopf Prods., Inc. v. Commissioner, 65 T.C.
640, 642, 659-60 (1975) (hunting and fishing was entertainment even for an - 18 -
[*18] outdoor-equipment manufacturer--he “was not a professional hunter or
fisherman”).
B. Entertainment Facility
Becnel has another problem--the yacht itself is an “entertainment facility.”
The regulation defines an entertainment facility as “[a]ny item of personal or real
property owned, rented, or used by a taxpayer * * * during the taxable year for, or
in connection with, entertainment.” Sec. 1.274-2(e)(2)(I), Income Tax Regs.; see
also Ireland v. Commissioner, 89 T.C. 978, 981-82 (1987) (citing H.R. Conf. Rept.
No. 95-1800, at 249-50 (1978), 1978-3 C.B. (Vol. 1) 521, 583-84; S. Rept. No. 95-
1263, at 174-75 (1978), 1978-3 C.B. (Vol. 1) 315, 472-73). That definition
includes yachts that are used for entertainment. See Mediaworks, Inc. v.
Commissioner, T.C. Memo. 2004-177, 2004 WL 1682832, at *5 (citing cases, a
regulation, and legislative history). We’ve already found that the Britney Jean
was used for entertainment--the fishing tournaments--and we therefore find that
she was an entertainment facility.
C. Disallowed Deductions
Because facility expenses aren’t deductible and activity expenses might be,
we would normally next ask which of the disputed deductions are expenses of an
entertainment activity and which are expenses of an entertainment facility. See, - 19 -
[*19] e.g., Dodd v. Commissioner, T.C. Memo. 1992-341, 63 T.C.M. (CCH) 3141,
3141-3 (1992) (noting that section 1.274-2(e)(3)(I) and (iii), Income Tax Regs.,
gives guidance on that); see also Harrigan Lumber Co., 88 T.C. at 1566-68. Even
if we made that determination here, however, it wouldn’t make any difference
because Becnel can’t motor his way through the other obstacles for entertainment
activities in section 274. Section 274(a)(1)(A) requires Becnel to prove that items
for entertainment activities were directly related to the active conduct of his
business, and section 274(d) imposes stricter-than-normal substantiation
requirements. Becnel runs aground on both: Other than his testimony, which is
not credible on this point, there’s no evidence of a proximate relationship between
the yacht-related expenses and the active conduct of any of his businesses--
especially the beach-amenities business. Cf., e.g., Harris v. Commissioner, T.C.
Memo. 1975-276, 34 T.C.M. (CCH) 1192, 1192-94 (1975) (relationship found
where the taxpayer kept a boat log of guests that could be tied to business referral
cards). He also introduced no substantiation for the expenses at issue other than
an expense summary.9 Cf., e.g., Rutz v. Commissioner, 66 T.C. 879, 880-81, 883
9 Even if we looked at the excluded evidence, most, if not all, of the disallowed deductions were for items attributable to the yacht itself under section 1.274-2(e)(3)(i), Income Tax Regs.--including depreciation, operating costs, and maintenance and preservation costs. Section 274(a)(1)(B) would disallow these as (continued...) - 20 -
[*20] (1976) (taxpayer didn’t satisfy section 274(d) even where he submitted into
evidence contemporaneous boat log, expense summary, and receipts). We
therefore sustain the Commissioner’s determination with respect to the yacht-
related deductions.
II. Accuracy-Related Penalty
The only remaining question is whether Becnel owes a 20% accuracy-
related penalty. The Commissioner argues that he does, because any tax
underpayment was caused by negligence or disregard of rules and regulations;
alternatively, the Commissioner argues Becnel substantially understated his
income tax due. The Commissioner correctly points out that Becnel failed to
substantiate the yacht-related deductions, and that negligence under section 6662
includes a failure to keep adequate records or to substantiate items that give rise to
an underpayment. See sec. 1.6662-3(b)(1), Income Tax Regs. And Becnel
himself didn’t cite any authorities as the basis for his reporting position other than
Churchill Downs, a case where deductions were disallowed. We would therefore
sustain the penalty.
9 (...continued) expenses of an entertainment “facility”. - 21 -
[*21] But the Commissioner has a problem. The Code places the burden of
production for penalties on the Commissioner, sec. 7491(c), which also requires
the Commissioner to produce evidence that the “initial determination” of the
penalties was approved in writing by the examiner’s supervisor no later than the
date the notice of deficiency was issued in this case, see sec. 6751(b)(1); Graev v.
Commissioner, 149 T.C. , (slip op. at 14 n.14) (Dec. 20, 2017) (citing Chai
v. Commissioner, 851 F.3d 190, 221 (2d Cir. 2017), aff’g in part, rev’g in part
T.C. Memo. 2015-42), supplementing and overruling in part 147 T.C. 460 (2016).
Becnel put the accuracy-related penalties at issue in his pleadings and contested
them on their merits in his briefs, but the Commissioner never once mentioned
section 6751 or any supervisory penalty approval before or at trial. See Wheeler
v. Commissioner, 127 T.C. 200, 208, 210, 212 (2006), aff’d, 521 F.3d 1289 (10th
Cir. 2008). The Commissioner thus did not meet his burden of production, and
Becnel is for this reason alone not liable for the accuracy-related penalty
determined against him for 2009, 2010, or 2011. See Ford v. Commissioner, T.C.
Memo. 2018-8, at *6. - 22 -
[*22] With no outright victor,
Decision will be entered under
Rule 155.