DocketNumber: Docket No. 9539-06
Citation Numbers: 2016 T.C. Memo. 135, 112 T.C.M. 65, 2016 Tax Ct. Memo LEXIS 134
Judges: GALE
Filed Date: 7/21/2016
Status: Non-Precedential
Modified Date: 4/18/2021
Decision will be entered under
GALE,
2001 | $525,164 | $131,291 | $105,033 |
2002 | 230,125 | 57,460 | 46,025 |
Following concessions by the parties,1*135 the issues for decision are:
(1) whether petitioner received unreported income in 2001 and 2002 from A&G Precision Parts, LLC (A&G), a partnership in which he was a partner;
(2) whether petitioner is entitled to deduct expenses reported on Schedules C, Profit or Loss From Business, for 2001 and 2002;
(3) whether petitioner is liable for an addition to tax under
*137 (4) whether petitioner is liable for accuracy-related penalties under
Some of the facts have been stipulated and are so found. We incorporate by this reference the stipulation of facts and the accompanying exhibits. Petitioner resided in Washington State at the time he filed his petition.
Petitioner received a degree*136 in business administration in the mid-1970s. He worked initially for an accounting firm and then for a public company auditing financial statements. For approximately 10 years during the 1980s petitioner worked for a securities brokerage firm. In the first half of the 1990s petitioner worked at two money management firms managing investments for clients. In approximately 1995 or 1996 petitioner began investing in small startup companies for his own account. Around 1998 petitioner discovered one such company. He became interested in acquiring A&G Precision Parts (the predecessor of A&G), a company headquartered near Portland, Oregon, because it had good cashflow and offered him an opportunity to earn a salary.
Before and during the years at issue, A&G developed parts and other prototype components for semiconductor manufacturers. Sometime in 1998 petitioner and four other individuals acquired A&G. Petitioner and the other four individuals were designated 20% partners of A&G; petitioner became managing and tax matters partner while the remaining partners functioned as passive investors. During the years at issue A&G had five partners, all of whom were individuals. Petitioner made*137 all financial and sales decisions for A&G and frequently traveled to meet potential A&G clients in an effort to develop A&G's business relationships.
Sometime after petitioner and his partners acquired A&G, two individuals were hired to manage A&G's day-to-day operations. One of them, Mark Herz, was initially hired as A&G's vice president and operations manager of its production facility. He became president sometime around 2001 while still overseeing operations.
A&G maintained approximately $30,000 in an account for use in purchasing equipment at auction. In 2001 these funds were transferred to petitioner to purchase equipment on behalf of A&G. Petitioner did not purchase any equipment at auction in 2001 or thereafter.
During 2001 and 2002 petitioner explored business opportunities in China and traveled there extensively. His goal was to acquire exclusive rights to distribute certain Chinese manufactured products in the United States. To that end, petitioner often spent a great deal of time developing business relationships with the executives of target companies over meals. He conducted these activities for himself and not as part of A&G's semiconductor parts*138 manufacturing and sales.
Petitioner maintained two accounts at Bank of America during 2001 and 2002. The first was a joint checking account that he held with his then spouse; the second was a business checking account in the name of Probandt Associates that he maintained to support his business endeavors in China. In addition to the business checking account at Bank of America, petitioner maintained a credit card account at Capital One that he used to pay for his travels to, and expenses incurred in, China.3
*140 Petitioner kept handwritten records of the travel and meals and entertainment expenses*139 he paid in 2001 and 2002. Petitioner recorded the date, amount, and business purpose of each of his travel, printing, and consulting expenditures in a spiral notebook. Petitioner similarly noted the date, amount, and business purpose of each of his meals and entertainment expenses in a day timer.
Petitioner leased a storage unit in which he placed his handwritten financial records and other personal effects for safekeeping during his travels; he prepaid two years' rent on the unit before he left on a trip to China sometime in 2005. Petitioner received notice in early December 2005 while in China that the Portland Development Commission had acquired the site of the storage facility by eminent domain and that he had to arrange to move the contents of his storage unit to another storage unit by December 31, 2005, or risk their destruction. The Portland Development Commission offered petitioner (and other unit lessees) assistance including free moving services and the identification of a mover and a new storage facility that would arrange for the moving and re-storage of his contents, respectively, without petitioner's needing to appear before either in person, so *141 long as he provided a*140 power of attorney to another individual to act on his behalf and provided the authorized person with his unit key and access code. Petitioner was unable to make the arrangements in time, and as a consequence the contents of his storage unit were destroyed.4
A&G filed Forms 1065, U.S. Return of Partnership Income, for 2001 and 2002, which petitioner signed as tax matters partner. These*141 returns were prepared by a certified public accountant. For 2001 A&G claimed total deductions of $2,061,195, including travel expense deductions of $39,946 and meals and entertainment expense deductions of $5,335. For 2002 A&G claimed total deductions of $2,470,500, including travel expense deductions of $65,899 and meals and entertainment expense deductions of $10,275.
*142 A&G's 2001 and 2002 returns included Schedules K-1, Partner's Share of Income, Credits, Deductions, etc., for each of the partners. Petitioner's Schedule K-1 for 2001 reported $81,322 as his distributive share of ordinary income, $135,000 in guaranteed payments, $125,000 in cash distributions, and nondeductible expenses of $1,067.5 Petitioner's Schedule K-1 for 2002 reported $234,067 as his distributive share of ordinary income, $145,000 in guaranteed payments, $25,000 in cash distributions, and nondeductible expenses of $2,055.6*142 Petitioner received his Schedules K-1 before filing his individual Federal income tax returns for 2001 and 2002.
Petitioner filed delinquent Federal income tax returns for 2001 and 2002 on April 10, 2004. The returns were prepared by a certified public accountant. Petitioner did not provide the accountant with copies of his 2001 and 2002 Schedules K-1. However, petitioner provided the accountant with summary sheets of his travel, meals and entertainment, printing, and consulting expenses derived from his handwritten records.
*143 A Schedule C was attached to petitioner's 2001 return. The Schedule C reported that the principal business of the proprietorship was "Investments". The entry for the business' name was left blank, and the address reported for the business was the same address that was reported for one of A&G's other partners (Walter Glass) on his Schedules K-1 for 2001 and 2002. The 2001 Schedule C reported gross receipts of $231,000 and total expenses of $201,400 for a net profit of $29,600. A similar Schedule C (with an identical principal business and address and with no entry for the business name) was attached to petitioner's 2002*143 return. The 2002 Schedule C reported gross receipts of $201,900 and total expenses of $194,000 for a net profit of $7,900. The 2001 and 2002 Schedules C reported the following expenses:
Rent | $12,500 | |
Travel | 87,900 | $103,000 |
Meals & entertainment | 16,500 | |
Other--consulting | 65,000 | 50,000 |
Other--printing | 1 | |
Total | 201,400 | 194,000 |
1 The figures for meals and entertainment expenses have been subjected to the 50% limitation of
*144 Petitioner did not attach a Schedule E, Supplemental Income and Loss, to his 2001 or 2002 return, nor did he report any partnership income on those returns.
Respondent issued a notice of deficiency to petitioner with the following adjustments to petitioner's 2001 and 2002 returns:
(a) respondent determined that petitioner had failed to report his distributive shares and guaranteed payments from A&G7 for 2001 of $216,322 (a $81,322 distributive share and $135,000 in guaranteed payments) and for 2002 of $379,067 (a $234,067 distributive share and $145,000 in guaranteed payments8);
(b) respondent disallowed, with the exception of the rent expense reported on petitioner's 2001 Schedule C, the deductions claimed for all expenses reported*144 on petitioner's Schedules C for 2001 and 2002; and
*145 (c) respondent determined that petitioner was liable for
Petitioner filed a timely petition for redetermination.
The parties are far apart in their dispute over unreported income for 2001 and 2002. Petitioner filed a Schedule C for each year for an unnamed sole proprietorship. The proprietorship's principal business was reported as "Investments". The 2001 and 2002 Schedules C reported gross income of $231,000 and $201,900, respectively. Respondent's position, reflected in the notice of deficiency, is that the foregoing gross income is from a Schedule C business that petitioner conducted separate and apart from his activities*145 as the managing partner of A&G and that petitioner failed to report his distributive share of the partnership income and guaranteed payments from A&G as reflected on the Schedules K-1--$216,322 for 2001 and $379,067 for 2002.
Petitioner now concedes that these distributive share and guaranteed payment figures for his A&G partnership interest are--with one exception--correct but contends that the income he reported on the Schedule C for each year was his *146 partnership income from A&G. Specifically, petitioner contends he mistakenly believed that he was required to report only the
A comparison of petitioner's Schedules C and Schedules K-1 for the years at issue substantially corroborates his contentions. The total of petitioner's guaranteed payments and cash distributions from A&G in 2001 was $260,000. Petitioner reported Schedule C gross receipts for that year of $231,000. Petitioner *147 explains the $29,000 discrepancy as follows. He received a $30,000 disbursement from A&G in 2001 to buy used equipment for the partnership at auction. His search for appropriate equipment proved unsuccessful, and in 2002, after a discussion with one of his partners, it was agreed that he could keep the disbursement because cash distributions had been*147 low that year. According to petitioner, the partnership's accountant who prepared the 2001 A&G return treated the disbursement as part of petitioner's guaranteed payments for 2001, but he had considered it to be income for 2002 when it was agreed he could keep it. Petitioner maintains that he reported the disbursement in his Schedule C gross receipts for that year. Petitioner describes the remaining $1,000 discrepancy for 2001 as most likely small sums that he had received from A&G for miscellaneous items. We note in this regard that petitioner's 2001 Schedule K-1 from A&G lists as an income item, immediately above his cash distributions, $1,067 in "nondeductible expenses".10*148 If the amounts petitioner recalls and the "nondeductible expenses" item from the Schedule K-1 are treated as the same thing, the remaining discrepancy between petitioner's cash distributions from *148 A&G as reported on his 2001 Schedule K-1 and the gross receipts he reported on the Schedule C is only $67.11
A&G's president and operations manager, Mark Herz, corroborated petitioner's testimony concerning the $30,000. Mr. Herz confirmed in his testimony that an account for the purchase of used equipment at auction had been set up at A&G, that the account's $30,000 balance had been transferred to petitioner, and that he (Mr. Herz) did not know what happened to the funds. According to petitioner's 2002 Schedule K-1 from A&G, the total of his guaranteed payments and cash distributions from the partnership for that year was $170,000. Petitioner reported Schedule C gross receipts for that year of $201,900. When the $30,000 disbursement that petitioner claims he received from A&G in 2001 but did not treat as income until 2002 is accounted for, the discrepancy remaining between petitioner's cash distributions from A&G and the gross receipts he reported on his Schedule C is $1,900. Petitioner describes this remaining $1,900*149 as "little checks" he received from A&G for miscellaneous items, and we note that petitioner's 2002 Schedule K-1 from A&G lists as an income item, immediately above his cash distributions, $2,055 in "nondeductible *149 expenses".12 If the "little checks" petitioner recalls and the "nondeductible expenses" item from the Schedule K-1 are treated as the same thing, the remaining discrepancy between petitioner's cash distributions from A&G as reported on his Schedule K-1 and the gross receipts he reported on the Schedule C is only $155.
We are persuaded that the near match of the Schedule K-1 items that represent A&G's cash disbursements to petitioner and the gross receipts he reported on Schedules C for 2001 and 2002 is too close to be mere coincidence. While incorrect as a matter of partnership taxation, petitioner's belief that he needed to report only cash distributions he received from the partnership and not undistributed partnership income was plausible. Aside from the inference that might be drawn from petitioner's having*150 reported gross receipts on Schedules C for each year, there is no evidence that the Chinese venture generated any income. There is also no evidence, such as a bank deposits analysis or spending well in excess of reported income, that would suggest petitioner underreported his income to the extent that respondent's position in the notice of deficiency necessarily implies. On balance, considering all of the foregoing factors, we are persuaded on the preponderance of the evidence that the income petitioner reported on the *150 Schedule C for each year represented cash distributions, guaranteed payments, and nondeductible expenses from A&G and was not gross proceeds generated by the Chinese distributorship venture petitioner conducted in his individual capacity. As a consequence, petitioner has demonstrated that the notice of deficiency is erroneous with respect to the issue of unreported income.
Given that there is no dispute that petitioner was engaged in an in-comeproducing activity in connection with A&G during the years at issue, respondent has provided the necessary evidentiary foundation for his determination that petitioner failed to report income from that activity. Thus, the notice*151 of deficiency was presumptively correct.
Instead, petitioner having now conceded that he failed to correctly report his partnership taxable income from A&G for 2001 and 2002, we must redetermine the unreported income amounts by comparing what petitioner reported on his Schedules C with what his partnership taxable income from A&G was for those years.
*152 For 2001 petitioner reported gross income of $231,000 on his Schedule C. The Schedule K-1 that A&G issued to petitioner for 2001 reported his total taxable partnership income as $216,322, consisting of guaranteed payments of $135,000 and his distributive share of ordinary income of $81,322.14 We therefore hold that petitioner did not have any unreported partnership income for 2001; instead he overstated his taxable income from A&G by $14,678. For 2002 petitioner reported gross income of $201,900 on his Schedule C. The Schedule K-1 that A&G issued to petitioner for 2002 reported his total taxable partnership income as $379,067, consisting of guaranteed payments of $145,000 and his distributive share of*153 ordinary income of $234,067. We therefore hold that petitioner had $177,167 of unreported income from A&G for 2002.15
The notice of deficiency disallowed for lack of substantiation the travel, meals and entertainment, consulting, and printing expenses that petitioner reported *153 on his 2001 and 2002 Schedules C.16*154 While the notice of deficiency did not disallow a rent expense deduction claimed for 2001, the parties tried that issue by consent.
Deductions are a matter of legislative grace, and a taxpayer generally bears the burden of proving that he is entitled to the deduction claimed.17
Petitioner testified that he documented the date, amount, and business purpose of each of his consulting, printing, and travel expenditures by making entries in a spiral notebook at or near the time of the expenditure*156 and that he similarly documented his meals and entertainment expenses in a day timer. These documents were destroyed, however, when he failed to retrieve them within a short deadline from a storage facility which the city of Portland acquired by eminent domain.
Petitioner contends that he is entitled to deduct the travel and meals and entertainment expenses he reported for 2001 and 2002 on two grounds. Petitioner claims that he can substantiate a portion of the expenditures with bank statements and that he is entitled to substantiate the remaining expenses through a reasonable reconstruction pursuant to
The bank statements in evidence are from a Bank of America joint checking account in the individual names of petitioner and his then spouse. It is apparent that the account could be accessed by means of a debit card, as most of the statement entries are for "merchant purchases" with the merchant listed (such as an airline, hotel, or restaurant), a transaction date, and an amount. Petitioner testified and contends*157 on brief that the expenditures recorded in the Bank of America joint checking account statements for airlines, hotels, and restaurants were paid in connection with his work on behalf of A&G during 2001 and 2002. By petitioner's reckoning, the entries substantiate $22,257 and $449 of travel expenditures for 2001 and 2002, respectively, and $6,144 and $319 of meals and entertainment expenditures for 2001 and 2002, respectively. (He reaches those figures by treating essentially every expenditure of that nature as business related.)
However, because these expenditures were made in conducting A&G's business, they are partnership expenses. It is well established that a partner cannot himself deduct the expenses of a partnership, even if he incurred the expenses in furtherance of partnership business.
In addition, A&G itself deducted substantial travel and meals and entertainment expenses for 2001 and 2002 on its returns; namely, travel expenses of $39,946 and $65,899 for 2001 and 2002, respectively, and meals and *158 entertainment expenses of $5,335 and $10,275 for 2001 and 2002, respectively. These A&G deductions exceed the amounts that petitioner contends he has substantiated with the bank statements, with one exception.18 As petitioner was, according to his testimony,*159 the only active partner and the one who traveled for the purpose of developing new customer relationships, there is a reasonable inference to be drawn that the travel and meals and entertainment expenses deducted by A&G reflected reimbursements it made to petitioner for such expenses. Petitioner testified that he was not reimbursed, and on brief his counsel argues that it was "more likely" that the expenses A&G deducted were for employees rather than for partners.
Petitioner has the burden of proof, and there is no evidence in the record concerning the nature*160 of the travel and meals and entertainment expense deductions that A&G claimed. Petitioner testified that he was not reimbursed, but he had difficulty recalling details with respect to many other matters. We are not *159 bound to accept his testimony on this point.
That leaves in dispute reported travel expenses of $65,643 and $102,551 and reported meals and entertainment expenses of $11,856 and $16,181 for 2001 and 2002, respectively. Petitioner testified that these expenses were paid in pursuit of his Schedule C business seeking exclusive distributorship rights for Chinese products.20 Petitioner offered no written substantiation to document these expenses. He relies on his testimony alone, citing
Respondent, pointing to the options available to petitioner for preserving the storage unit's contents--he could have used a free moving service or entered into contracts with a mover and a new storage facility without personally appearing-- argues that the loss of records was not beyond petitioner's control, disqualifying *161 him from using a reasonable reconstruction as provided for in
As a consequence,*164 petitioner "ha[s] a right" under the regulations to substantiate his claimed deductions by means of a "reasonable reconstruction". The
The evidence establishes that there were two accounts through which petitioner paid the expenses of his Schedule C business. Petitioner testified that he paid expenses of his Schedule C business through a business checking account at Bank of America held in the name of Probandt Associates. Petitioner also *163 maintained a Capital One credit card account through which he paid expenses of his Schedule C business.
We are satisfied that there was a reasonable effort to reconstruct, through third-party sources, any expenses that were paid through the Capital One account (though that reconstruction effort was unsuccessful). The same cannot be said for the Bank of America business checking account established in the name of Probandt Associates. There is no evidence of any efforts made to reconstruct*165 expenditures through the records of that account.21
We find guidance for the unusual circumstances surrounding the Capital One account, where a reasonable reconstruction has been thwarted by a third party's failure, in (4) *164 (i) He was unable to obtain evidence with respect to an element of the expenditure or use which conforms fully to the "adequate records" requirements of paragraph (c)(2) of this section,22 (ii) He is unable to obtain evidence with respect to such element which conforms fully to the "other sufficient evidence" requirements of paragraph (c)(3) of this section,23 and (iii) He has presented other evidence, with respect*166 to such element, which possesses the highest degree of probative value possible under the circumstances, such other evidence shall be considered to satisfy the substantiation requirements of section 274(d) and this paragraph.
We believe petitioner has satisfied the regulation with respect to any expenses paid through the Capital One account. He is unable to satisfy the "adequate records" records requirements because his day timers and spiral notebook wherein he contemporaneously documented expenditures and their purpose were lost when his storage unit contents were destroyed. He is unable to satisfy the "other sufficient evidence" requirements because the Capital One credit *165 card account statements--which might corroborate his own statement--are unavailable despite his reasonable*167 efforts to obtain them.
That leaves the question of whether the third requirement for "exceptional circumstances" substantiation has been satisfied; namely, whether petitioner presented evidence to substantiate the deduction "which possesses the highest degree of probative value possible under the circumstances". We conclude that he has. Petitioner was a credible witness in this regard. We are persuaded that he traveled extensively to China during 2001 and 2002. The evidence he has proffered is his own statement concerning the trips to China and their purpose, as well as testimony to the effect that he consulted his now destroyed records to provide information to his return preparer for the preparation of his 2001 and 2002 returns in 2004. The amounts reported as travel and meals and entertainment expenses on the Schedule C for each year thus reflect those now destroyed records. The impracticality of petitioner's obtaining written statements or testimony from the myriad vendors involved in typical travel and meals and entertainment expenditures persuades us that the return figures, coupled with petitioner's testimony concerning their source, constitute evidence "which possesses the*168 highest degree of probative value possible under the circumstances".
*166 That does not end the matter, however. Some of the Schedule C travel and meals and entertainment expenses for the years at issue were paid, according to petitioner's testimony, by means of the Bank of America business checking account in the name of Probandt Associates. Since the other Bank of America checking account petitioner maintained had a debit card he used, we infer that he employed the same feature to pay travel and meals and entertainment expenses through the business checking account. Neither petitioner nor his counsel offered any evidence of the efforts undertaken to obtain the records of that account from third-party sources or to reconstruct expenditures from any such records. For that reason, with respect to any expenditures made through the Bank of America business checking account, petitioner has failed to satisfy the prerequisites for the less stringent "other sufficient evidence" substantiation alternatives available under
Thus, we are left with a situation where the travel and meals and entertainment expenditures made through the Capital One account are eligible for the "exceptional*169 circumstances" substantiation provided for in
Travel | $26,257 | $41,020 |
Meals & entertainment | 14,742 | 6,472 |
1The amounts for meals and entertainment expenses*170 have been subjected to the 50% limitation of
On his Schedules C for 2001 and 2002 petitioner reported expenses for consulting fees of $65,000 and $50,000, respectively, the deductions for which respondent disallowed in full. Petitioner testified that these amounts were paid to three individuals, either by check or by wire transfer, but he was unable to recall the bank account through which the payments were made. Petitioner attributes the lack of documentation to substantiate these expenditures to the loss of the spiral notebook when the contents of his storage unit were destroyed. Given this loss of records, petitioner contends, the Court should estimate the deduction amounts under the
We disagree. Even for expenses that do not have to be substantiated pursuant to
Petitioner reported printing expenses of $18,000 and $24,500 on his Schedules C for 2001 and 2002, respectively, the deductions for which respondent disallowed in full. Petitioner testified that the printed materials were used in his Schedule C business in connection with efforts to secure exclusive U.S. distributorship rights from Chinese manufacturers and that almost all of the expenditures were made at a particular Kinko's location in Portland. The record does not establish whether the expenditures were paid through the Capital One account, the Bank of America business account, or some other means. Petitioner again invokes the
The same*172 principles apply here as with the consulting fees. Given the magnitude of these expenditures at a single vendor, we believe petitioner was obligated to undertake reasonable efforts to obtain secondary evidence to *170 substantiate these expenses, such as some effort to elicit information or documentation from the vendor or to establish the account through which the expenditures were paid. Petitioner has not shown that such secondary evidence was unavailable so that he should be permitted to substantiate the printing expenses solely by his testimony. We accordingly sustain the disallowance of deductions for these expenses.
Petitioner reported a $12,500 rent expense on his 2001 Schedule C, which the notice of deficiency did not disallow. Although respondent did not raise the issue in his answer, we conclude, on the basis of the parties' stipulations and arguments on brief, that this issue was tried by consent and is properly before the Court.
There is no documentary substantiation of the reported rent expense. Petitioner*173 testified that the expense reflects rent he paid of approximately $1,000 per month during 2001 for an office in Chicago leased from one of A&G's other passive investor partners. Petitioner testified that he paid rent because that partner *171 had lent him money and wanted to "keep track"of him. Respondent argues, and we agree, that petitioner's testimony demonstrates that the rent expense lacked a business purpose. As the rent was also almost certainly paid by check, and there are no canceled checks in evidence, respondent has also shown that the rent expense has not been substantiated. Accordingly, respondent has met his burden, and we conclude that petitioner is not entitled to deduct the rent expense reported for 2001.
Respondent determined additions to tax under
The parties stipulated that petitioner's 2001 return was due October 15, 2002, and that his 2002 return was due April 15, 2003. Respondent received and filed both returns on April 10, 2004.
Petitioner claims that he is not liable for the
Taxpayers who deliberately omit to file returns must use reasonable care to ascertain that no returns are necessary.
Considering all the facts and circumstances, petitioner has not shown reasonable cause with respect to his failure to timely file returns for 2001 and 2002. Respondent's determinations of the additions to tax under
No penalty is imposed with respect to any portion of an underpayment if the taxpayer acted with reasonable cause and in good faith with regard to that portion.
Respondent has met his burden of production with respect to petitioner's negligence and disregard of rules and regulations as to the underpayment attributable to the unreported partnership income. Petitioner failed to report*178 *176 $177,167 of his distributive share of A&G's ordinary income for 2002. Petitioner has not demonstrated that this failure was due to reasonable cause, as there is no evidence that he undertook any investigation to determine the correct method of reporting his partnership income. This portion of the underpayment is therefore attributable to negligence.
Additionally, petitioner has conceded that he failed to report dividend and interest income totaling $7,133 and $1,828 for 2001 and 2002, respectively. The notice of deficiency noted that all of the foregoing amounts were reported to respondent by third parties on information returns, which creates an inference in the absence of any contrary evidence that petitioner also received copies of these information returns. Moreover, the bulk of this unreported income was interest from A&G, for which petitioner served as managing partner. Negligence is strongly indicated where a taxpayer fails to report income reflected on information returns.
*177 Respondent has also met his burden of production with respect to petitioner's negligence for the portion of the underpayment attributable to the disallowed travel and meals and entertainment expenses petitioner claimed in connection with A&G's business for 2001 and 2002. Although as managing partner petitioner had access to A&G's records, he failed to produce any documentary evidence to support his claim that he was not reimbursed for these expenses by A&G or that the expenses were not deducted by A&G. Petitioner's failure to maintain this substantiation for these expenses constitutes negligence.
Finally, respondent has met his burden of production with respect to the portion of the underpayment attributable to deductions for those Schedule C expenses for printing, consulting, travel, and meals and entertainment that petitioner claimed for 2001 and 2002 in connection with his business endeavors in China and which we have disallowed.24*181 Negligence includes a failure to keep adequate books and records or to substantiate expenses as required by
In the event the
To reflect the foregoing,
1. The parties have stipulated that petitioner received unreported dividend and interest income of $58 and $7,075, respectively, for 2001, and $16 and $1,812, respectively, for 2002, as reflected on Forms 1099-DIV, Dividends and Distributions, and Forms 1099-INT, Interest Income, as determined in the notice of deficiency. Of these amounts, $6,858 and $1,812 were interest from A&G Precision Parts, LLC, for 2001 and 2002, respectively. Respondent concedes that petitioner did not realize capital gains in 2001 and 2002 of $970,183 and $41,986, respectively, as determined in the notice of deficiency but instead realized shortterm capital losses in 2001 and 2002 of $63,338 and $5,777, respectively, entitling petitioner to capital loss deductions of $3,000 for both years and capital loss carryovers of $60,338 to 2002 and $63,115 to 2003.
2. All section references are to the Internal Revenue Code of 1986, as amended and in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. All dollar amounts have been rounded to the nearest dollar.↩
3. Petitioner's counsel represented at trial that both she and respondent had issued subpoenas to Capital One for petitioner's credit card account statements, but were unsuccessful in obtaining any such records because Capital One, though apparently acknowledging that petitioner had been a customer there, could not find them. Given respondent's counsel's acquiescence in these representations, we take it as established that petitioner had a Capital One credit card account through which he paid expenses of his Schedule C business.↩
4. Petitioner's testimony concerning the matters outlined in this paragraph was corroborated by contemporaneous emails between him and a representative of a firm hired by the Portland Development Commission to assist storage unit lessees in moving their stored materials. Respondent raised a hearsay objection to the emails, and they were admitted for limited nonhearsay purposes. However, on brief respondent makes extensive use of the emails for the truth of the matters asserted therein. He has therefore waived the hearsay objection. Moreover, petitioner's statements in the emails are not hearsay because they support his explanation of the reason he lacked substantiation,
5. A statement attached to the return explained that this entry represented the partner's share of the nondeductible portion of meals and entertainment expenses.↩
6. A statement attached to the return explained that this entry represented the partner's share of the nondeductible portion of meals and entertainment expenses.
7. Because A&G had fewer than 10 partners, each of whom was an individual, and there is no indication that it otherwise elected under
8. In the notice of deficiency, the 2002 figures for distributive share and guaranteed payments were reversed, but the parties have treated this reversal as a scrivener's error at trial and on brief.↩
9. Respondent does not contend that the cash distributions petitioner received from A&G in 2001 and 2002 exceeded his adjusted basis in his partnership interest and were therefore taxable.
10. Respondent does not contend that petitioner was required to include in income the nondeductible expenses reflected on his Schedule K-1 for 2001. The $1,067 in nondeductible expenses was presumably reported on petitioner's Schedule K-1 for purposes of adjustments to petitioner's basis in his partnership interest pursuant to
11. In the case of the small checks, we are persuaded that petitioner's recall is faulty but that he was attempting to report his cash receipts to the best of his recollection.↩
12. As was the case for 2001, respondent does not contend that petitioner was required to include in income the nondeductible expenses reported on his Schedule K-1 for 2002.↩
13. Respondent treats petitioner's contention concerning a shift in the burden of proof to respondent as an invocation of
14. Petitioner contends that his 2001 Schedule K-1 from A&G overstates his total taxable income by $30,000, the amount of the disbursement from the auction account made to him in 2001 that he believes did not become taxable income until 2002. We disagree. The record does not demonstrate that this $30,000 made up any part of his guaranteed payments, and it would not enter into the calculation of his distributive share of the partnership's ordinary income.↩
15. Petitioner concedes on brief that he understated his partnership income from A&G for 2002 in this amount.↩
16. Respondent argues for the first time on brief that certain of these expenses constitute nondeductible startup expenditures under
17. As noted, petitioner has not claimed, or shown entitlement to, any shift in the burden of proof to respondent under
18. The exception concerns the meals and entertainment expense deduction for 2001. A&G claimed a deduction (before the 50% reduction required by
19. Petitioner did not make any specific claim that the partnership's records were lost when the contents of his storage unit were destroyed. Even if the partnership records had been lost in that manner, it would have been incumbent upon petitioner, as part of demonstrating a reasonable reconstruction effort, to provide evidence that the accountant who prepared A&G's returns was consulted regarding any records he retained. Petitioner did not do so.↩
20. To the extent petitioner claims any of these expenses were paid in connection with his activities as managing partner of A&G, we conclude that he has not shown entitlement to any deduction for the reasons previously outlined.↩
21. There are statements in evidence from a different Bank of America checking account; namely, the joint checking account held in the name of petitioner and his then spouse. As discussed previously, petitioner testified that the debit card expenditures from this account were for travel and meals and entertainment expenses he paid in connection with his activities on behalf of A&G.↩
22. "Adequate records" for this purpose generally means a contemporaneously prepared account book, diary, log, statement of expense, trip sheets, or other record, coupled with documentary evidence such as receipts or paid bills.
23. "Other sufficient evidence" for this purpose in general means the taxpayer's own statement and corroborative evidence such as receipts or paid bills.
24. Although the parties tried petitioner's entitlement to a Schedule C rent expense deduction for 2001 by consent, respondent has not clarified whether he is asserting an accuracy-related penalty relating to the portion of the underpayment attributable to the rent expense deduction disallowed for 2001. Consequently, we treat respondent as having conceded that the underpayment attributable to petitioner's unsubstantiated rent expense deduction for 2001 is not subject to a penalty.
Jack E. Golsen and Sylvia H. Golsen v. Commissioner of ... , 445 F.2d 985 ( 1971 )
William F. Sanford v. Commissioner of Internal Revenue , 412 F.2d 201 ( 1969 )
Robert A. Henningsen, and Cross and R.A. And Margaret ... , 243 F.2d 954 ( 1957 )
Carlos and Jacqueline Marcello v. Commissioner of Internal ... , 380 F.2d 499 ( 1967 )
Gary M. Emmons and Martha C. Emmons v. Commissioner of ... , 898 F.2d 50 ( 1990 )
Cohan v. Commissioner of Internal Revenue , 39 F.2d 540 ( 1930 )
Johnny Weimerskirch v. Commissioner of Internal Revenue , 596 F.2d 358 ( 1979 )
New Colonial Ice Co. v. Helvering , 54 S. Ct. 788 ( 1934 )
Howard F. And Mildred E. Keogh v. Commissioner of Internal ... , 713 F.2d 496 ( 1983 )
United States v. Boyle , 105 S. Ct. 687 ( 1985 )
Lesly Cohen v. Commissioner of Internal Revenue , 266 F.2d 5 ( 1959 )
thomas-l-freytag-and-sharon-n-freytag-v-commissioner-of-internal , 904 F.2d 1011 ( 1990 )
Preben Norgaard Sandra C. Norgaard v. Commissioner Internal ... , 939 F.2d 874 ( 1991 )
Freytag v. Commissioner , 111 S. Ct. 2631 ( 1991 )
Indopco, Inc. v. Commissioner , 112 S. Ct. 1039 ( 1992 )
Estate of Belcher v. Commissioner , 83 T.C. 227 ( 1984 )
Klein v. Commissioner , 25 T.C. 1045 ( 1956 )
Wallendal v. Commissioner , 31 T.C. 1249 ( 1959 )
Sanford v. Commissioner , 50 T.C. 823 ( 1968 )