T.C. Memo. 2013-65
UNITED STATES TAX COURT
VLADIMIR GOROKHOVSKY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24015-10. Filed February 28, 2013.
Vladimir Gorokhovsky, pro se.
Frederic J. Fernandez and Mark J. Miller, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: Respondent determined deficiencies and accuracy-related
penalties under section 6662(a)1 for petitioner’s taxable years 2006, 2007, and 2008
as follows:
1 Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) in effect for the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure. -2-
[*2] Accuracy-related penalty Year Deficiency sec. 6662(a) 2006 $55,153 $11,030.60 2007 89,567 17,913.40 2008 55,938 11,187.60
The deficiencies stem from respondent’s disallowance of various expenses and costs
of goods sold petitioner reported on his Schedule C, Profit or Loss From Business,
for each of the years at issue. Respondent also adjusted petitioner’s income to
account for certain alleged unreported items of income for each of the years at issue.
We must determine:2
(1) whether petitioner may deduct Schedule C expenses, related to his law
practice, of $132,162, $145,536, and $112,164 for taxable years 2006, 2007, and
2008, respectively.3 We hold that petitioner may deduct some of those expenses;
2 Our determinations result in corresponding computational adjustments to petitioner’s self-employment tax liability. 3 Following trial, respondent conceded $400 in supply expenses for petitioner’s taxable year 2006 and $257 in office expenses for taxable year 2007. Respondent also conceded $844 in either supply expenses or office expenses for taxable year 2008; the exact item is unclear from respondent’s posttrial brief. -3-
[*3] (2) whether petitioner may deduct Schedule C expenses related to his then
wife’s sale of skin care products4 of $4,477 and $4,018 for taxable years 2006 and
2007, respectively. We hold that he may not;
(3) whether petitioner may deduct Schedule C depreciation related to his
import-export business, Gorokhovsky Imports, of $7,807 and $7,863 for taxable
years 2006 and 2007, respectively. We hold that he may not;
(4) whether petitioner failed to report gross receipts from his law practice of
$40,894, $122,425, and $88,779 for taxable years 2006, 2007, and 2008,
respectively.5 We hold that petitioner failed to report some of those receipts;
(5) whether petitioner failed to report interest income of $5, $4, and $49 for
taxable years 2006, 2007, and 2008, respectively. We find that respondent
conceded this issue on brief; and,
(6) whether petitioner is liable for accuracy-related penalties under section
6662(a) for taxable years 2006, 2007, and 2008. We hold that petitioner is so
liable.
4 Petitioner jointly filed his tax returns for the taxable years at issue. 5 Following trial, respondent conceded that petitioner accurately reported deposits of $7,034.29 and $16,279.47 for taxable years 2007 and 2008, respectively. -4-
[*4] FINDINGS OF FACT
At the time petition was filed, petitioner resided in Wisconsin.
Petitioner, an attorney since 2002, has maintained a solo practice in
Wisconsin and the Northern District of Illinois. Specializing in criminal defense and
aviation law, petitioner practices out of an office subleased from a law firm in
Milwaukee, Wisconsin, and, purportedly, in a home office in Mequon, Wisconsin.
He also maintains a condominium in Chicago which he uses primarily to facilitate
his Federal law practice in a nearby Federal court. In addition to his law degree,
petitioner has undergraduate degrees in accounting and business administration.
During the years at issue petitioner was married to Larissa Ocheretner. Ms.
Ocheretner allegedly operated a skin care product business in 2006 and 2007.
Petitioner managed his import-export business, Gorokhovsky Imports, during those
two years as well.
Petitioner filed his taxable year 2006 and 2007 returns with three separate
Schedules C: the first (Schedule C1) related to Gorokhovsky Imports; the second
(Schedule C2) related to his law practice; and the third (Schedule C3) related to Ms.
Ocheretner’s skin care product business. Petitioner filed his taxable year 2008
return with only a Schedule C2. -5-
[*5] I. Schedule C1--Gorokhovsky Imports
On petitioner’s 2006 and 2007 Schedules C1, he claimed depreciation and
cost of goods sold deductions for his import business in the following amounts:
Item 2006 2007 Depreciation and sec. 179 expense deduction $807 $527 Cost of goods sold 7,000 7,336
Respondent disallowed all petitioner’s claimed deductions.
II. Schedule C2--Petitioner’s Law Practice
In connection with his law practice, petitioner claimed a $139,199 business
expense deduction on his 2006 Schedule C2. Respondent disallowed $132,162 of
this amount. Respondent also disallowed all of petitioner’s claimed business
expense deductions totaling $146,536 and $112,164 reported on his 2007 and 2008
Schedules C2, respectively. The following table demonstrates the composition of
respondent’s negative adjustments:
Expense 2006 2007 2008 Travel $6,664 $9,493 $2,270 Taxes and licenses 6,384 -0- -0- Repairs and maintenance 7,168 8,123 2,276
Interest--other 340 2,129 139 -6-
[*6] Insurance (other than health) 4,359 4,752 10,050 Advertising 1,303 700 9,932 Business use of home 10,445 7,615 11,954 Office 21,583 22,996 20,099 Depreciation and sec. 179 17,445 8,392 4,557 Car and truck 2,990 18,534 6,975 Other--tools 1,105 -0- -0- Other--telephone 3,138 3,124 5,396 Other--storage 1,086 1,099 -0- Other--printing 1,456 1,587 -0- Other--postage 469 1,970 1,154 Other--parking 5,211 4,328 2,918 Other--outside services 18,018 5,369 -0- Other-misc. 1,562 -0- -0- Other--license 400 50 50 Other--laundry 774 1,316 -0- Other--filing fees 369 1,448 3,902 Other--education 10,126 1,405 2,016 Other--client 3,675 8,783 1,356 Other--books 935 -0- -0- Other--bank charges 820 674 1,207 Accounting 265 300 350 Meals and entertainment 4,372 1,817 2,511 Utilities -0- 1,880 -0- -7-
[*7] Supplies -0- 10,715 2,078 Legal and professional services -0- 2,737 4,388 Other--dues -0- 2,853 3,497 Rent/lease--other business property -0- 11,090 8,484 Other--janitorial -0- -0- 1,164 Other--client settlements -0- -0- 2,597
At trial petitioner produced Excel spreadsheets listing the monthly sums for
each category of expense reported on his Schedules C2. Petitioner meticulously and
contemporaneously maintained these documents so that he could monitor the
financial health of his law practice. The spreadsheets, however, neither itemize
expenses nor provide details as to the nature of any expenditure. Petitioner also
offered at trial monthly bank statements, credit card statements, and copies of
canceled checks and check registers.
Regarding his car and truck expenses, petitioner produced coded mileage logs
which list the starting point and destination of each of his business trips and the
distance traveled between such points.
Respondent also determined that petitioner had unreported income from
his law practice for each of the years at issue and correspondingly adjusted
result of several unidentified deposits in petitioner’s bank accounts during those
years. -8-
[*8] III. Schedule C3--Ms. Ocheretner’s Skin care Product Business
On his taxable year 2006 and 2007 Schedules C3, petitioner claimed business
expense deductions of $4,477 and $4,018, respectively, for his then wife’s skin care
product business. Respondent disallowed those claimed deductions. The following
table demonstrates the composition of respondent’s negative adjustments:
Expense 2006 2007 Other expenses $118 -0- Taxes and licenses 149 -0- Supplies 387 -0- Rent/lease--other business property 1,381 -0- Car and truck 1,363 -0- Cost of goods sold 699 $3,638 Depreciation and sec. 179 380 380
As with his attempt to substantiate his law practice expenses, petitioner
produced Excel spreadsheets listing the monthly sum of each category of expense
reported on his Schedules C3 at trial. The spreadsheets again neither itemized
expenses nor provided details as to the nature of any of petitioner’s expenditures. -9-
[*9] IV. Interest Income
Respondent adjusted petitioner’s interest income to purportedly reflect
amounts shown on Forms 1099-INT, Interest Income. These adjustments resulted
in increases in interest income of $5, $4, and $49 for taxable years 2006, 2007, and
2008, respectively.
V. Procedural Matters
Petitioner produced several documents at trial in an attempt to substantiate his
claimed deductions and evidence that certain items of income were not earned
during the years at issue. We repeatedly apprised petitioner of the importance of
correlating the expenses listed on such documents with the deductions claimed on
his tax returns and fully articulating on brief his position regarding the alleged
unreported items of income. At trial petitioner requested and was granted additional
time to prepare his posttrial briefs. We also advised petitioner that absent unforseen
circumstances we would not further extend the filing deadline. Following trial,
petitioner filed a posttrial motion to extend time to file a trial brief citing his health
as interfering with his ability to meet set deadlines. We granted petitioner’s motion;
however, he failed to file a posttrial brief on the ensuing extended filing date or at
any point thereafter. - 10 -
[*10] OPINION
The Commissioner’s determinations in a notice of deficiency are presumed
correct, and taxpayers bear the burden of proving that the Commissioner’s
determinations are incorrect. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111,
115 (1933).6 Under section 7491(a), if the taxpayer produces credible evidence
with respect to any factual issue relevant to ascertaining the taxpayer’s liability for
tax and meets other requirements, the burden of proof shifts from the taxpayer to the
Commissioner as to that factual issue. Petitioner has neither alleged that
6 On rare occasions this Court has recognized an exception to these rules in cases involving unreported income where the Commissioner introduces no substantive evidence but relies solely on the presumption of correctness. Jackson v. Commissioner, 73 T.C. 394, 401 (1979). In such cases, if the taxpayers challenge the notice of deficiency on the ground that it is arbitrary, then the determination is treated as a “naked” assessment and the presumption of correctness does not attach. Id. However, this is a limited exception, and it does not apply when the Commissioner has provided a minimal evidentiary foundation. Petzoldt v. Commissioner, 92 T.C. 661, 687-688 (1989); Fankhanel v. Commissioner, T.C. Memo. 1998-403, 1998 Tax Ct. Memo LEXIS 424, aff’d without published opinion, 205 F.3d 1333 (4th Cir. 2000).
Presently, respondent relies on bank deposits to determine petitioner’s unreported income for the years in issue. “A bank deposit is prima facie evidence of income and respondent need not prove a likely source of that income.” Tokarski v. Commissioner, 87 T.C. 74, 77 (1986) (citing Estate of Mason v. Commissioner, 64 T.C. 651, 656-657 (1975), aff’d, 566 F.2d 2 (6th Cir. 1977)). Accordingly, the limited exception does not apply in this case. - 11 -
[*11] section 7491(a) applies nor established his compliance with its requirements.
Therefore, the burden of proof remains on petitioner.7
I. Deductions
Section 162(a) provides a deduction for certain business-related expenses. In
order to qualify for the deduction under section 162(a), “an item must (1) be ‘paid
or incurred during the taxable year’, (2) be for ‘carrying on any trade or business’,
(3) be an ‘expense’, (4) be a ‘necessary’ expense, and (5) be an ‘ordinary’
expense.” Commissioner v. Lincoln Sav. & Loan Ass’n, 403 U.S. 345, 352 (1971);
Deputy v. du Pont, 308 U.S. 488, 495 (1940) (to qualify as “ordinary”, the expense
must relate to a transaction “of common or frequent occurrence in the type of
business involved”). Whether an expense is ordinary is determined by time, place,
and circumstance. Welch v. Helvering, 290 U.S. at 113-114. Taxpayers also must
maintain sufficient records to substantiate their deductions. See sec. 6001; Petzoldt
v. Commissioner, 92 T.C. 661, 686 (1989); see also Hradesky v. Commissioner, 65
T.C. 87 (1975), aff’d, 540 F.2d 821 (5th Cir. 1976).
7 As noted supra, petitioner failed to file a posttrial brief. Accordingly, it is within our discretion to dismiss this case entirely. See Rules 123, 151(a); Stringer v. Commissioner, 84 T.C. 693, 704-708 (1985), aff’d without published opinion, 789 F.2d 917 (4th Cir. 1986). However, we will decide the case on the merits. See, e.g., D’Errico v. Commissioner, T.C. Memo. 2012-149, 2012 Tax Ct. Memo LEXIS 149, at *17-*18. - 12 -
[*12] Certain expenses described in section 274 are subject to strict substantiation
rules. No deductions are allowed for, among other things, traveling expenses
(including meals and lodging away from home), entertainment expenses, gifts, and
expenses with respect to “listed property” defined in section 280F(d)(4) “unless the
taxpayer substantiates by adequate records or by sufficient evidence corroborating
the taxpayer’s own statement”: (1) the amount of the expense or other item; (2) the
time and place of the travel, entertainment or use, or date and description of the gift;
(3) the business purpose of the expense or other item; and (4) in the case of
entertainment or gifts, the business relationship to the taxpayer of the recipients or
persons entertained. Sec. 274(d). If a taxpayer cannot satisfy the substantiation
burden imposed by section 274(d) with respect to an expense to which it applies, he
fails to carry his burden of establishing that he is entitled to deduct that expense,
regardless of any equities involved. Id.; Nicely v. Commissioner, T.C. Memo.
2006-172, 2006 Tax Ct. Memo LEXIS 174, at *7-*8; sec. 1.274-5T(a), Temporary
Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
Nonetheless, with respect to expenses not covered by section 274(d), this
Court may estimate the amount of allowable deductions where there is evidence - 13 -
[*13] that deductible expenses were incurred. Cohan v. Commissioner, 39 F.2d
540, 543-544 (2d Cir. 1930). In order to do so, however, we must have some
rational basis upon which to make such an estimate. Vanicek v. Commissioner, 85
T.C. 731, 742-743 (1985). In estimating the amount allowable, we bear heavily
against the taxpayer where the inexactitude of the record is of his or her own
making. See Cohan v. Commissioner, 39 F.2d at 544.
A. Schedule C2: Petitioner’s Law Practice
1. General Business Deductions
Petitioner produced numerous bank statements, canceled checks, check
registers, contemporaneous personal records, credit card statements, and Excel
spreadsheets in an attempt to substantiate his reported business expenses. We
indicated the probative limitations of petitioner’s isolated, nonitemized Excel
spreadsheets in a previous, similar matter before the Court. See Gorokhovsky v.
Commissioner, T.C. Memo. 2012-206, 2012 Tax Ct. Memo 208, at *11-*13. In the
present case, however, petitioner supplemented his Excel spreadsheets with
further supportive documentation. Nonetheless, petitioner made no attempt to use
the evidence in the record to brief his legal position following trial. While we need
not undertake the work of sorting through every piece of evidence petitioner
provided in an attempt to find support for his ultimate legal positions, see, e.g., - 14 -
[*14] Hale v. Commissioner, T.C. Memo. 2010-229, 2010 WL 4120880, at *2
(refusing to sort through 317 pages of disorganized evidence in an attempt to
determine whether a taxpayer provided adequate substantiation when that taxpayer
failed to file a brief), petitioner’s canceled checks and/or check registers clearly
substantiate certain business expenses he incurred for his law practice in the taxable
years at issue. In particular, petitioner’s Continental Bank account records evidence
substantiated expenses of $12,066.18 for taxable year 2006, see infra app. A,
$7,405 for taxable year 2007, see infra app. B), and $5,544.97 for taxable year
2008, see infra app. C. Petitioner’s Wells Fargo account records also evidence
additional substantiated expenses of $4,269.38 for taxable year 2006.
See infra app. D.8 Petitioner may correspondingly deduct these amounts pursuant to
section 162.
8 Petitioner submitted a Wells Fargo account check register for his taxable year 2007 which superficially demonstrates that he made certain expenditures during that year; however, the corresponding canceled checks were not offered into evidence. While we find elsewhere that various other check registers showing expenditures in other years supported deductions even though certain canceled checks were not before the Court, those other registers on a whole were congruous with the catalog of canceled checks from the corresponding accounts. We cannot ascribe the same credibility to the 2007 Wells Fargo account check register without any correlative documentation. - 15 -
[*15] Notwithstanding this finding, most of petitioner’s general business deductions
remain unsubstantiated. Though we may estimate additional expenses if we have a
rational basis to do so, see Vanicek v. Commissioner, 85 T.C. at 742-743, the
record before us does not permit us to formulate reasoned conclusions as to
petitioner’s incurred expenses.
2. Home Office Deduction
Section 280A generally provides that no deduction otherwise allowable shall
be allowed with respect to the business use of a taxpayer’s residence. Sec.
280A(a). However, as relevant to this case, a deduction may be allowed to the
extent it is allocable to a portion of a dwelling unit which is exclusively used on a
regular basis as: (1) the principal place of business for any trade or business of the
taxpayer; or (2) a place of business which is used by patients, clients, or customers
in meeting or dealing with the taxpayer in the normal course of his trade or business.
Sec. 280A(c)(1)(A) and (B).
Petitioner maintains that he used an office located in the basement of his
home as his principal place of business.9 The evidence concerning this point is
9 Petitioner did not assert at trial that expenses related to his condominium in Chicago qualified as a deduction pursuant to sec. 280A(c)(1). Furthermore, it is unclear from the record whether petitioner ever claimed an expense deduction related to the Chicago condominium. - 16 -
[*16] limited to petitioner’s testimony that the office has a law library and “four
computers”. No evidence was submitted demonstrating the nature or extent of the
work performed in the basement, whether petitioner met clients there, or any other
facts which might shed light on the purported business use of the area. Furthermore,
petitioner admitted that he subleased a separate office in Milwaukee for his law
practice and offered no evidence to negate the inference that office functioned as his
principal place of business. According to the limited record in this case, we cannot
find that petitioner is entitled to home office deductions pursuant to section
280A(c)(1) for the years at issue.10
3. Meal and Travel Expenses
Petitioner’s reported meal and travel expenses are subject to heightened
substantiation requirements, noted supra. See sec. 274(d)(1). Petitioner failed to
adduce any evidence purporting to substantiate his meal expenses for the years at
issue. Without any corroborative documentation, we find that petitioner has failed
to substantiate these expenses.
10 The flush language of sec. 280A indicates that the term “principal place of business” includes “a place of business which is used by the taxpayer for the administrative or management activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative or management activities of such trade or business.” There is no evidence in the record indicating that petitioner performed any administrative or management activities in his home basement. - 17 -
[*17] However, petitioner meticulously maintained coded travel logs which
superficially support his travel expense deductions.11 Following trial, petitioner
submitted additional documentation which supplements his logs and expressly
articulates the business purpose of each of his business trips. Each entry in
petitioner’s submitted records is categorized into one of three codes. At trial
petitioner explained that “code 1” represented travel from his home to his subleased
office in Milwaukee or the Milwaukee county courthouse; “code 2” represented
travel from his condo in Chicago to the Daley Center or to a Federal courthouse;
and, “code 3” represented all other business travel neither originating nor
concluding at his home. We find that petitioner’s entries labeled “code 2”12 and
“code 3” in Exhibits 58-J, 60-J, and 66-J specify the time, place, and business
11 When respondent questioned petitioner about two random items on the 2006 mileage spreadsheet, petitioner, unable to quickly cross-reference other documentation immediately available, admitted that those specific mileage log entries were in error; however, we do not believe such minor errors infect the entirety of the logs. 12 A taxpayer may deduct travel expenses that are reasonable, necessary, and directly attributable to the taxpayer’s business. Sec. 162(a)(2); sec. 1.162-2(a), Income Tax Regs. If a trip is undertaken for both business and personal reasons, travel expenses are deductible only if the primary purpose of the trip is business. See sec. 1.162-2(b)(1), Income Tax Regs. Petitioner convincingly testified that he used his Chicago condominium “primarily” for his practice in Federal court. The credibility of this testimony is amplified by petitioner’s meticulous records evidencing the business purpose of his “code 2” travel in Chicago. - 18 -
[*18] purpose of petitioner’s business travels and, accordingly, satisfy the
heightened substantiation requirements of section 274(d)(1).
Code 1, however, represents travel to or from petitioner’s home. As a
general rule, expenses for traveling between one’s home and one’s place of business
or employment constitute commuting expenses and are, consequently, nondeductible
personal expenses. See sec. 262(a); Fausner v. Commissioner, 413 U.S. 838
(1973); Commissioner v. Flowers, 326 U.S. 465 (1946); Feistman v. Commissioner,
63 T.C. 129, 134 (1974). Three jurisprudential or administrative exceptions to this
rule have developed over time: (1) the home office exception; (2) the temporary
distant worksite exception; and (3) the regular work location exception. See Bogue
v. Commissioner, T.C. Memo. 2011-164, 2011 Tax Ct. Memo LEXIS 164, at *16-
*17. We address the applicability of each to petitioner’s “code 1” travel.
a. The Home Office Exception
The first judicially created exception permits taxpayers to deduct expenses
incurred traveling between their residence and a place of business if the residence
has a home office which serves as the taxpayer’s principal place of business. See
Strohmaier v. Commissioner, 113 T.C. 106, 113-114 (1999); Wis. Psychiatric
Servs., Ltd. v. Commissioner, 76 T.C. 839, 849 (1981); Curphey v. Commissioner, - 19 -
[*19] 73 T.C. 766, 777-778 (1980). We have consistently equated the “principal
place of business” requirement for the home office exception with the “principal
place of business” requirement under section 280A. See Walker v. Commissioner,
101 T.C. 537, 546 (1993); Curphey v. Commissioner, 73 T.C. at 777.
As noted supra, we found that petitioner’s purported basement office in
Mequon, Wisconsin, did not qualify as a “principal place of business” pursuant to
section 280A. Accordingly, the home office exception is not applicable regarding
petitioner’s expenses incurred during his “code 1” travel.
b. The Temporary Distant Worksite Exception
Taxpayers are entitled to deduct travel and lodging expenses stemming from
work at a series of temporary worksites during the year, all of which were distant
from the taxpayer’s residence. Schurer v. Commissioner, 3 T.C. 544 (1944).13 The
IRS has memorialized the temporary distant worksite exception in Rev. Rul. 99-7,
1999-1 C.B. 361, stating: “A taxpayer * * * may deduct daily transportation
expenses incurred in going between the taxpayer’s residence and a temporary work
location outside the metropolitan area where the taxpayer lives and normally
works.” The revenue ruling thereafter defines a temporary work location as one
13 Our decision in Schurer v. Commissioner, 3 T.C. 544, 547 (1944), was based in part on the fact that the taxpayer had no “principal place of business” during the taxable year at issue. - 20 -
[*20] that “is realistically expected to last (and does in fact last) for 1 year or
less”. Id.
Petitioner lives in Wisconsin and has maintained his law practice there for
almost a decade. Consequently, petitioner’s code 1 travel does not fit within this
exception.
c. The Regular Work Location Exception
The regular work location exception was originally articulated by the
Commissioner in Rev. Rul. 90-23, 1990-1 C.B. 28. The current iteration is found in
Rev. Rul. 99-7, 1999-1 C.B. at 362, which states: “If a taxpayer has one or more
regular work locations away from the taxpayer’s residence, the taxpayer may deduct
daily transportation expenses incurred in going between the taxpayer’s residence
and a temporary work location in the same trade or business, regardless of the
distance.”14
As noted supra, petitioner has not suggested that any of his travel was to a
temporary work location. Therefore, petitioner’s code 1 travel does not fit within
this exception.
14 We have previously questioned the rationale of this exception and have simply treated it as a concession by the Commissioner. See Bogue v. Commissioner, T.C. Memo. 2011-164, 2011 Tax Ct. Memo LEXIS 164, at *16- *17. - 21 -
[*21] d. Conclusion
In sum, we conclude that petitioner has failed to establish that his “code 1”
travel meets any exception to the general rule treating commuting expenses as
nondeductible personal expenses.
B. Petitioner’s Schedules C1 and C3
Petitioner provided no documentation regarding expenses reported on his
Schedules C1 and C3 for the years at issue. Accordingly, we find that petitioner
failed to substantiate those expenses.
II. Unreported Income
Section 61(a)(1) defines gross income as all income from whatever source
derived, including compensation for services, such as wages, salaries, and bonuses.
See also sec. 1.61-2(a)(1), Income Tax Regs. Bank deposits serve as prima facie
evidence of income. Tokarski v. Commissioner, 87 T.C. 74, 77 (1986) (citing
Estate of Mason v. Commissioner, 64 T.C. 651, 656-657 (1975), aff’d, 566 F.2d 2
(6th Cir. 1977)); see also Clayton v. Commissioner, 102 T.C. 632, 645 (1994).
In a posttrial brief respondent itemized unidentified deposits to petitioner’s
various bank accounts for the taxable years at issue and determined that those
deposits totaled $40,894.17, $90,295.89, and $72,500 for taxable years 2006, - 22 -
[*22] 2007, and 2008, respectively. Respondent’s totals on brief for taxable years
2006 and 2008 are consistent with his assertions following posttrial concessions;
however, the itemized totals on brief for taxable year 2007 differ from those
following concessions by approximately $25,095 ($115,391 following concessions
and $90,295.89 on brief). We construe respondent’s position on brief as an
additional concession in this case.
At trial petitioner identified various deposits at issue as nontaxable balance
transfers or payments relating to his wife’s business. Nonetheless, petitioner never
submitted any credible evidence establishing that such transfers were legitimately
effected nor explained how his wife’s alleged payments were reported on the
relevant tax returns.
Petitioner also indicated that separate deposits of $5,000 and $11,000 from
taxable year 2007 represent payments from a debtor on a loan he had previously
advanced. Petitioner supplemented the record following trial with an undated,
unsigned “commercial promissory note” purporting to memorialize his $15,000
advance. Nonetheless, petitioner failed to submit any financial documents evincing
either the actual transfer of $15,000 or payments of interest on the alleged loan. We
find that the record is insufficient to support petitioner’s position. - 23 -
[*23] Petitioner further referenced a deposit of $55,000 in taxable year 2008,
testifying that the deposit represented a retainer from a Chinese company that had
hired him to perform a “due diligence and feasibility study” regarding the potential
importation of their products. However, petitioner did not submit a copy of the
alleged retainer agreement to the Court nor provide any probative evidence
pertaining to his alleged work on the project.15 We decline to accept petitioner’s
self-serving, unverified, and undocumented testimony. See Tokarski v.
Commissioner, 87 T.C. at 77.
In sum, we find that petitioner failed to report income in the itemized amounts
represented by respondent in his posttrial brief.
III. Interest Income
In the introductory statement of issues in respondent’s posttrial brief, he
indicated that the question of whether petitioner failed to report interest income of
$5, $4, and $49 for taxable years 2006, 2007, and 2008, respectively, remained
unresolved. However, at no point in the remainder of his brief did he address this
issue. Indeed, the Forms 1099 upon which respondent purportedly made his
15 The only evidence in the record regarding this study is petitioner’s vague self-created timesheet labeled “Shanghai”. - 24 -
[*24] determinations were never offered into evidence. Accordingly, we find that
respondent has conceded the issue.
IV. Section 6662(a) Penalty
Section 6662(a) and (b)(1) and (2) provides for an accuracy-related penalty
of 20% of the portion of any underpayment attributable to, among other things,
negligence or intentional disregard of rules or regulations or any substantial
understatement of income tax. Negligence includes any failure to make a reasonable
attempt to comply with the provisions of the Code, including any failure to maintain
adequate books and records or to substantiate items properly. Sec. 6662(c); sec.
1.6662-3(b)(1), Income Tax Regs. A substantial understatement of income tax
exists for an individual if the amount of the understatement exceeds the greater of
10% of the tax required to be shown on the return or $5,000. See sec.
6662(d)(1)(A). We will focus our inquiry on whether petitioner exhibited
negligence or intentional disregard of rules or regulations for the years at issue.16
Section 6664(c)(1) provides that the penalty shall not be imposed with
respect to any portion of an underpayment if the taxpayer shows that there
16 Only one accuracy-related penalty may be applied with respect to any given portion of an underpayment, even if that portion is subject to the penalty on more than one of the grounds set forth in sec. 6662(b). Sec. 1.6662-2(c), Income Tax Regs. - 25 -
[*25] was reasonable cause for, and that he acted in good faith with respect to, that
portion.
The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all pertinent facts and circumstances. * * * Circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of * * * law that is reasonable in light of all the facts and circumstances, including the experience, knowledge, and education of the taxpayer. * * *
Sec. 1.6664-4(b)(1), Income Tax Regs.
Respondent bears the burden of production with respect to the penalty. Sec.
7491(c). The burden imposed by section 7491(c) is “only to come forward
with evidence regarding the appropriateness of applying a particular addition to tax
or penalty to the taxpayer.” Good v. Commissioner, T.C. Memo. 2008-
245, 2008 WL 4756483, at *9. Once that burden is met, petitioner bears the burden
of proving that he is entitled to relief under section 6664(c)(1). Higbee v.
Commissioner, 116 T.C. 438, 446 (2001).
Respondent submits that petitioner’s background as an attorney with
undergraduate accounting degrees and a degree in business administration
demonstrates that he should have recognized the importance of maintaining
adequate records and substantiating all items reported on his return. While petitioner
did meticulously maintain records evidencing certain expenses, he failed - 26 -
[*26] to offer records supporting many claimed expenses as well as credible
documentation which might shed light on the unidentified deposits at issue. As a
result, we find that respondent met his burden of production on this issue.
Petitioner did not address the section 6662 penalties at trial and failed to file
a posttrial brief. However, petitioner’s tax returns for the taxable years at issue
were prepared by an accountant.17 Good-faith reliance on the advice of an
independent professional, such as an accountant, may demonstrate reasonable
cause. United States v. Boyle, 469 U.S. 241, 251 (1985); Canal Corp. & Subs. v.
Commissioner, 135 T.C. 199, 218 (2010); sec. 1.6664-4(b), Income Tax Regs. To
prevail in this effort, however, the taxpayer must show that he: (1) selected a
competent adviser with sufficient expertise to justify reliance; (2) supplied the
adviser with necessary and accurate information; and (3) actually relied in good
faith on the adviser’s judgment. Neonatology Assocs., P.A. v. Commissioner, 115
T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002); see Sanford v.
Commissioner, T.C. Memo. 2008-158, 2008 Tax Ct. Memo LEXIS 159, at *17.
Petitioner offered no testimony or other evidence concerning the expertise of his
17 At trial petitioner indicated that the expense of having his Wisconsin-based accountant travel to the place of trial in Chicago was prohibitive. Nonetheless, petitioner requested that the trial take place in Chicago and should have anticipated the expense at that time. - 27 -
[*27] accountant, the information he allegedly provided to his accountant, or his
actual good-faith reliance on his accountant’s advice. Accordingly, we find that
petitioner has failed to satisfy his burden.
V. Conclusion
In reaching our holdings herein, we have considered all arguments made, and,
to the extent not mentioned above, we conclude they are moot, irrelevant, or without
merit.
To reflect the foregoing,
Decision will be entered
under Rule 155. - 28 -
[*28] APPENDIX A--2006 Continental Bank
Check No. Transaction description Amount 1252 Business Cards $211.00 1257 Sarah Decorah1 146.91 1258 Fred Tabak2 400.00 1274 Sarah Decorah 113.00 1275 Fred Tabak 400.00 1276 Clerk of Court 259.00 1279 Citi Business Card 701.31 1284 Clerk of Federal Court 250.00 1288 Office Depot 36.09 1298 Fred Tabak 400.00 1305 Cook County Sheriff 33.40 1310 Clerk of U.S. Dist. Court 250.00 1312 Office Depot 126.67 1321 Fred Tabak 400.00 1323 Sarah Decorah 1,020.63 1330 Clerk of Circuit Court 175.00 1333 Sarah Decorah 444.59 1334 Sarah Decorah 115.08 1335 Sarah Decorah 106.56 1346 Home Depot 166.40 1347 Clerk of City Court 250.00 - 29 -
[*29] 1349 Fred Tabak 400.00 1359 Home Depot 201.50 1361 Wis. Legal Forms 5.25 1379 Fred Tabak 400.00 1380 State Bar of Wis. 25.00 1383 Sarah Decorah 237.89 1384 Sarah Decorah 179.56 1390 Clerk of Circuit Court 259.50 1396 Sarah Decorah 245.92 1397 Sarah Decorah 128.20 1398 State Bar 199.00 1399 Sarah Decorah 217.36 1400 Clerk of Court 122.00 1402 Fred Tabak 400.00 1407 Clerk of Court 5.00 1408 Attorney Assist 39.80 1409 Attorney Assist 82.74 1410 Attorney Assist 334.34 1411 Attorney Assist 1225.96 1415 Attorney Assist 216.09 1418 Dr. S. Lisowski3 300.00 1426 Office Depot 65.43 - 30 -
[*30] 1432 Attorney Assist 427.86 1433 Attorney Assist 129.12 1434 Attorney Assist 206.48 1437 Office Depot 6.54 Total 12,066.18
1 Ms. Decorah worked for Attorney Assist. 2 Petitioner subleased his Milwaukee office from Mr. Tabak. 3 Petitioner consulted Dr. Lisowski regarding various cases. - 31 -
[*31] APPENDIX B--2007 Continental Bank
Check No. Transcript description Amount 1431 Suzanne Lisowski $81.25 1432 Attorney Assist 527.86 1433 Attorney Assist 206.48 1436 Clerk of Traffic Court 236.40 1437 Office Depot 6.54 1440 Fred Tabak 450.00 1441 Supreme Court of Wis. 6.00 1442 V. Publishing 350.00 1447 Fred Tabak 450.00 1452 Clerk of Court 158.50 1468 Clerk of Federal Court 250.00 1469 Fred Tabak 450.00 1482 Attorney Assist 1,254.53 1484 Clerk of Court of Appeal 150.00 1520 Fred Tabak 450.00 1541 State Bar of Wis. 25.00 1546 Office Depot 201.56 1555 Francine L. O’Claire1 18.50 1556 Fred Tabak 450.00 1558 Clerk of Court 524.00 - 32 -
[*32] 1563 Lake County Sheriff 44.10 1608 Fred Tabak 500.00 1610 Clerk of Court 5.00 1611 Clerk of Court 5.00 1629 Ref. and Info. Service 79.00 1631 Fred Tabak 500.00 1660 Lowe’s 25.28 Total 7,405.00
1 This payment was for a copy of a transcript. - 33 -
[*33] APPENDIX C--2008 Continental Bank
Check No. Transaction description Amount 1690 Clerk of Court 189.50 1691 Fred Tabak 500.00 1714 Fred Tabak 500.00 1721 Office Depot 43.22 1745 Luxury Furnishings 950.00 1746 Clerk of Milwaukee Cty. 158.50 1748 Office Dept Credit Plan 50.68 1760 Office Depot 15.84 1823 V. Publishing 450.00 1829 Fred Tabak 500.00 1830 Clerk of Cook County 319.00 1831 Clerk of Cook County 319.00 1843 Office Dept. Credit Plan 458.77 1869 Clerk of Circuit Court 123.50 1870 Fred Tabak 500.00 1906 Sarah Decorah 73.89 1912 Office Depot 269.57 1933 Clerk of Circuit Court 123.50 Total 5,544.97 - 34 -
[*34] APPENDIX D--2006 Wells Fargo
Check No. Transaction description Amount 1001 State Bar of Wis. $441.00 1018 Fred Tabak 400.00 1039 Wash. County Sheriff 22.57 1047 Office Depot 69.66 1055 Fred Tabak 400.00 1071 Office Depot 47.27 1078 Fred Tabak 750.00 1090 Office Depot 9.70 1103 Fred Tabak 450.00 1108 Home Depot 1,229.18 1109 Fred Tabak 450.00 Total 4,269.38