Lawrence Leroy Henry

United States Tax Court

T.C. Memo. 2024-79

LAWRENCE LEROY HENRY,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 24155-18. Filed August 22, 2024.

—————

During 2011 through 2014, the years at issue, P and

W owned and operated several businesses that provided

tax and financial services to clients. P’s primary source of

income was P’s business SBP, a bill pay service that

allowed clients of P to use credit cards to pay expenses that

otherwise required cash or check payments. P and W did

not keep records, and they intermingled their personal and

business expenditures. P failed to file tax returns for tax

years 2011 through 2014. For those years, R conducted a

bank deposit analysis and determined deficiencies in tax

totaling over $1.7 million as well as additions to tax for

failure to file, fraudulent failure to file, and failure to pay

estimated income tax. R issued Notices of Deficiency

(“NODs”) to P and W. In 2018 P filed a timely petition

disputing the NODs, but W failed to timely file a petition.

In 2019 P and W submitted late returns for 2011 through

2014. In this case R accepted the income as reported on the

late returns; R denied many of the deductions claimed on

the returns but allowed some; and R newly asserted income

from cancellation of indebtedness.

Held: P is not liable for cancellation of indebtedness

income, because that issue was “new matter” as to which

R bore the burden of proof under Rule 142(a)(1), but R

Served 08/22/24

2

[*2] failed to prove that P was not insolvent at the time the debt

was canceled.

Held, further, P substantiated and is entitled to

deduct business expenses in amounts slightly larger than

those conceded by R; but P failed to substantiate most of

the expenses in dispute.

Held, further, R did not prove by clear and

convincing evidence that P’s failure to file returns was

fraudulent for purposes of the I.R.C. § 6651(f) addition to

tax for fraudulent failure to file, so P is not liable for that

addition to tax.

Held, further, P is liable for additions to tax under

I.R.C. §§ 6651(a)(1) (for non-fraudulent failure to timely

file), 6651(a)(2) (for failure to pay tax), and 6654 (for failure

to pay estimated tax).

—————

Lawrence Leroy Henry, for himself.

Mary Ellen Goode, Rachel L. Gregory, Ryan A. Ault, and William J.

Gregg, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GUSTAFSON, Judge: Pursuant to section 6212, 1 the Internal

Revenue Service (“IRS”) issued a statutory notice of deficiency (“NOD”)

to petitioner Lawrence L. Henry on September 6, 2018, determining the

following deficiencies in federal income tax and additions to tax for the

four years 2011 through 2014:

1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code (“the Code”; Title 26 of the United States Code) as in effect at the relevant times;

references to regulations are to Title 26 of the Code of Federal Regulations (“Treas.

Reg.”) as in effect at the relevant times; and references to Rules are to the Tax Court

Rules of Practice and Procedure. Some dollar amounts are rounded.

3

[*3] Additions to Tax

Tax year Deficiency

§ 6651(f) § 6651(a)(2) § 6654

2011 $340,808 $247,085.80 $85,202.00 $6,747.25

2012 398,802 289,131.45 99,700.50 7,149.85

2013 571,561 414,381.73 – 10,263.47

2014 413,694 299,928.15 – 7,428.66

Total $1,724,865 $1,250,527.13 $184,902.50 $31,589.23

In addition to determining a fraudulent-failure-to-file addition to tax

under section 6651(f) for each of the years (as stated in the table above),

the NOD determined in the alternative for each year an addition for non-

fraudulent failure to timely file under section 6651(a)(1).

Mr. Henry filed a timely petition under section 6213(a) for

redetermination of the deficiencies and additions to tax. After the

parties’ concessions, 2 there are four remaining issues for decision:

(1) whether Mr. Henry must recognize cancellation of indebtedness

income; (2) the amount of deductions to which Mr. Henry is entitled;

(3) the proper allocation of Mr. Henry’s income and deductions to

Schedule C, “Profit or Loss From Business”, or Schedule E,

“Supplemental Income and Loss”; and (4) whether Mr. Henry’s failure

to file his returns was fraudulent for purposes of section 6651(f). 3

2 See “Stipulation of Settled Issues” (Doc. 612), resolving filing status, personal

and dependent exemptions, child tax credit, the amount of cancellation of indebtedness

income (but not the related insolvency question), net operating loss (“NOL”)

carryforward from 2010, and portions of the “Savvy Bill Pay” expenses.

3 As to the additions to tax under sections 6651(a)(2) and 6654 and the

alternative addition under section 6651(a)(1), Mr. Henry’s opening brief filed in August

2023 (Doc. 624 at 35–37, 57–58) argues “reasonable cause” for his failures to file

returns, timely pay, and timely pay estimated tax. However, there is no “reasonable

cause” exception for the section 6654 addition for failure to pay estimated tax; and in

May 2023 Mr. Henry expressly stipulated (see Doc. 612 paras. 9–10) that he does not

have “reasonable cause” for these failures. He has not requested nor been granted

leave under Rule 91(e) “to qualify, change, or contradict” that stipulation, so we need

not address the issue of reasonable cause, and we treat it as conceded by stipulation.

4

[*4] FINDINGS OF FACT

At the time he filed his petition, Mr. Henry resided in Maryland.

The facts below are based on the parties’ stipulations (including the

exhibits attached thereto) and the testimony and additional exhibits

admitted at trial. 4

Mr. Henry and his businesses

In the years at issue, Mr. Henry and his wife, Sherrie Hunter-

Henry, 5 owned and operated four nominally distinct but operationally

intertwined businesses: L&S Marketing Concepts (“L&S Marketing”)

was, during all the years at issue, an S corporation of which Mr. Henry

was the sole shareholder and which served as a sort of holding company

for the other three businesses. L&S Business Solutions, LLC, was a

general partnership that consisted only of Mr. Henry, who had a 1%

interest, and Ms. Hunter-Henry, who had a 99% interest, and L&S

Business Solutions had common accounts with L&S Marketing. 6 Savvy

King and Savvy Bill Pay were services that Mr. Henry offered under

L&S Marketing. That is, Mr. Henry understood that each of “L&S,

Savvy Bill Pay, and Savvy Consulting is an entity under L&S Marketing

Concepts.” The Henrys used the same bank account for all of their

businesses and commingled their business and personal assets.

4 The parties submitted 11 stipulations with exhibits, and Mr. Henry

complicated the record by making voluminous submissions and resubmissions of

exhibits. The exhibits admitted into evidence are listed in the appendices attached to

our order of May 3, 2023 (Doc. 611).

5 The IRS issued similar NODs to Mr. Henry (on September 6, 2018) and to

Ms. Hunter-Henry (on August 28, 2018). The petition, which was mailed to the Court

on December 4, 2018, named both of them as petitioners, but it was timely only as to

Mr. Henry and was untimely as to Ms. Hunter-Henry. We therefore dismissed

Ms. Hunter-Henry for lack of jurisdiction by our order (Doc. 08) of May 16, 2019. The

following findings of fact include reference to Ms. Hunter-Henry because both

members of the couple were involved in the activities that gave rise to the income at

issue here. We sometimes refer to the couple collectively as “the Henrys”.

6 We do not need to attempt to allocate income and deductions between

Mr. Henry and Ms. Hunter-Henry. During the pendency of this case the Henrys signed

and submitted to the IRS joint returns that reported income and deductions of all four

businesses, and Mr. Henry’s position in his post-trial briefs is consistent with those

joint returns.

5

[*5] The Henrys’ children as contractors

Ms. Hunter-Henry has five adult children—Burnice Cain,

Burnell Cain, Verdell Smalls, Velma Blackstone, and Lawrence M.

Henry—and Mr. Henry is the father of some of them. The Henrys

provided money to the children. To an extent we cannot determine,

some of this money may have been in return for work that the children

performed for Mr. Henry’s various businesses—characterized as “casual

labor” on one of Mr. Henry’s lead sheets. While they sometimes

compensated the children with cash, the Henrys also sometimes

provided “payment[s] in lieu of cash”. As Ms. Hunter-Henry explained:

I had the five children and if I paid for their—if I

paid them in cash, they may not pay their bills . . . . I make

each kid work off any bills that I paid for them. So they

say [“]Mom, my cell phone about to be cut off[”], I’m not

giving you no free money. I got plenty of work for you and

you’re qualified to do it, knock it out. So I won’t issue them

payroll, I will pay that bill for them.

Mr. Henry did not show that Form W–2, “Wage and Tax

Statement”, or any version of Form 1099 was prepared or filed for the

years at issue for any cash payments or payments in lieu of cash. For

2012 Mr. Henry submitted a payroll log for January through March that

details work performed by Velma Blackstone and Lawrence M. Henry

in the total amount of $500. For reasons stated in Part II.D.7.b, we find

that Mr. Henry made only $500 of deductible payments for “casual

labor” to his children.

Casual labor by non-family

In addition to payments made to his and his wife’s children,

Mr. Henry claims deductions for payments to several individuals, to

whom he referred as “contractors”, for “casual labor” allegedly

performed for the Henrys’ businesses. Mr. Henry alleges that he paid

his contractors through PayPal after receiving invoices from them for

work performed for his businesses. At trial he offered bank statements

that do list payments made through PayPal, and he claims that these

payments were made to those contractors. However, at trial Mr. Henry

was unable to distinguish PayPal payments made to contractors from

other payments he made through PayPal. Mr. Henry could not say

whether he had ever prepared Forms W–2 or Forms 1099 for his

contractors, and he offered no such forms into evidence. We are

6

[*6] generally unable to conclude whether these payments were in fact

for services and, if they were, whether they were services performed for

the businesses. Moreover, at least two of the children used credit cards

tied to the Henrys’ businesses and issued in the children’s names.

The only exception to this failed proof concerns payments made

to Robert Half International, an apparent “temp agency”, for work

performed by Nancy Villalobos in 2012. Mr. Henry submitted invoices

from Robert Half International as well as bank statements showing

payments to Robert Half International. While it appears that Mr. Henry

was behind on his payments to Robert Half International, his bank

statement shows a total of $781 paid to the temp agency. Therefore, for

the reasons stated in Part II.D.7.a, we find that Mr. Henry may deduct

only $781 for “casual labor” performed by his “contractors”.

Referral fees

Mr. Henry claims that he made payments of $300 each for three

referrals in 2011 ($900 total) to individuals who referred new clients to

his business. For reasons stated in Part II.D.8, we cannot tell the actual

nature and purpose of these expenditures, and we disallow this claimed

deduction.

Savvy King and Savvy Bill Pay

The Henrys recruited clients for Savvy King and L&S Business

Solutions through weekly seminars in California and Maryland. Savvy

King was a consulting service through which clients could learn to “pay

the IRS without using their own money.” Clients paid a monthly fee for

this consulting service. One element of Savvy King’s purported “tax

strategy” is to use bank float to allow clients to pay regular expenses

with a credit card without incurring a fee or paying interest on a cash

advance. (We do not discern a tax-related strategy in this procedure.)

Mr. Henry created Savvy Bill Pay to create this “bank float”.

Through Savvy Bill Pay, the client designated the payee and amount

owed for each bill to be paid and paid Mr. Henry using a credit card, and

Mr. Henry then paid the payee using a check or a debit card. Clients

paid a merchant fee for each transaction through Savvy Bill Pay as well

as a $3.50 administrative fee.

7

[*7] The amounts of deductions 7 for Savvy Bill Pay payments made on

behalf of clients as claimed by Mr. Henry, as conceded by the

Commissioner, and as still in dispute are as follows:

Tax year Petitioner’s claimed The Commissioner’s Difference

deduction concession

2011 $669,133 $531,317 $137,816

2012 874,523 496,480 378,043

2013 1,158,015 707,849 450,166

2014 768,802 581,941 186,861

Total $3,470,473 $2,317,587 $1,152,886

L&S Business Solutions

L&S Business Solutions is a limited liability company established

in 1999 by the Henrys. L&S Business Solutions provided general

accounting and tax services for either a flat fee or a bundled monthly

fee, depending on the services selected by the client. Advertised services

include bookkeeping for businesses and consultations with a “tax

specialist” on everything from IRS audit representation to liens and

levies.

Mr. Henry helped Ms. Hunter-Henry to set up a website for L&S

Business Solutions, and he attended her sessions with clients and

prospective clients. He was aware that her presentations included

“recommended Tax Saving Strategies” such as: “[s]plitting income

among several family members or legal entities in order to get more of

the income taxed in [a] lower bracket” and “[f]inding tax deductions by

structuring your money to pay for things you enjoy, such as a vacation

home.” He helped Ms. Hunter-Henry prepare video presentations in

which she explained:

[W]e teach you what is tax deductible, and help you convert

your personal life into your business life and write it all off.

Okay. We call it anyway expenses. You gonna eat anyway,

ya might as well write it off, talk business.

7 Both parties treat clients’ payments to Savvy Bill Pay as gross income of the

business and treat Savvy Bill Pay’s payments on behalf of clients as deductions of the

business. In view of this consensus, we do not address the theoretical propriety of this

method of accounting but assume that it is proper.

8

[*8] She explained that “gifts” are a big category for business tax write-

offs and stated: “[I]f I do not have a corporation, I can do gift cards,

twenty-five bucks a gift card, right, now we are under the limit, how

many do [you] give [your relative]? It is up to you.” She bragged: “I’ve

been losing money how long, how many, 15 to 20 years on paper.”

(Emphasis added.) The advice of L&S Business Solutions—with which

Mr. Henry was familiar—included instruction about a taxpayer’s

return-filing and record-keeping obligations.

Bookkeeping and record-keeping

Mr. Henry did not maintain any books or records, general ledgers,

or profit and loss statements, or use any accounting software for his

various businesses at any time during the years at issue. Instead, the

Henrys relied on bank and credit card statements (including statements

for cards issued to and used by at least two of his children) and online

statements from Savvy Bill Pay to differentiate personal and business

expenses, and they then aggregated totals to report on their (late) tax

returns. This disarray is reflected in Mr. Henry’s submitted evidence,

which amounted to hundreds of filings consisting of thousands of pages

of bank statements and faded receipts bearing handwritten notes and

highlights. And, even with these thousands of pages, Mr. Henry is often

able to provide only an “example” of an expense he claims (e.g., receipts

for food allegedly provided to clients at one seminar, which he used as

an example in order to attempt to substantiate a year’s worth of

“refreshment” expenses).

Gross income

The amounts of Mr. Henry’s gross income from these businesses

are no longer in dispute. His late returns reported income amounts

totaling as follows:

Tax year Amount

2011 $913,815

2012 1,061,925

2013 1,326,475

2014 907,474

Total $4,209,689

Before Mr. Henry filed those returns, the IRS had conducted a bank

deposit analysis that yielded higher totals, and those higher totals were

9

[*9] used in the NODs. However, in his opening brief the Commissioner

“stipulates to the total taxable income in the amounts admitted to by

petitioner.” (Doc. 623 at 42 n.4.)

Cancellation of indebtedness and insolvency

In two of the years at issue, debts against Mr. Henry were

canceled in the following amounts:

Tax year Amount

2011 $281,398

2012 41,061

Total $322,459

This issue was not raised in the IRS’s NODs (nor in the Commissioner’s

Answer in this litigation). Mr. Henry does not dispute that debts were

canceled in these amounts, but he maintains that he was insolvent at

the time the debts were canceled. For the reasons explained below in

Part II.A, we find that he was insolvent.

Ayer’s Place rental unit

Mr. Henry and Ms. Hunter-Henry received payments of $15,000

per year in connection with a rental unit (Ayer’s Place property) during

all four years at issue (totaling $60,000). The rent amounts they

received were reported to the IRS on a Form 1099 as rental income, and

Mr. Henry reported the $15,000 as rental income on his tax returns.

Mr. Henry now claims that the amount reported as rental income is not

rental income at all but is instead a repayment of a loan that the Henrys

supposedly made to a group of eight to ten “investors” in order to help

an individual “manage” their Ayer’s Place property. The Henrys

allegedly contributed $100,000 to this investment pool and (they say)

subsequently collected rent as repayment of the $100,000. Mr. Henry

also paid for alleged repairs to the unit in order to maintain its

habitability. Mr. Henry contends that the $60,000 of rental income

should be recharacterized as a nontaxable loan repayment and that he

should be allowed deductions for the cost of repairs to the unit. For the

reasons stated in Part II.B, we find that Mr. Henry received $60,000 of

taxable rental income, and for reasons stated in Part II.E, we find he did

not substantiate his claimed deductions for repairs.

10

[*10] Expense for office space and home office

The Henrys operated their businesses first out of their residence

and out of a professional office in California and later out of their

residence and out of a professional office in Maryland. In Maryland

Mr. Henry paid for a professional office space managed by Brightleaf

Properties (which had previously been named Treetops Atrium). In

California Mr. Henry paid for a professional office space managed by

Essex Realty. For the reasons set out below in Part II.D.6, we find that

Mr. Henry incurred the following amounts for office rent:

Tax year Amount

2011 $29,423

2012 8,842

2013 4,710

2014 13,405

Total $56,380

However, we are unable to find as a fact that any portion of either of

Mr. Henry’s residences was used exclusively for business.

Merchant banking fees

A business incurs “merchant banking fees” when a bank processes

electronic payments made to the business. The Commissioner conceded

the existence and deductibility of such fees incurred by Mr. Henry’s

businesses to the extent of the amounts in Mr. Henry’s bank statements

that contain the words “BankCard”, “Mtot Disc”, “Discount”, and “Indn”,

because these abbreviations, according to the Commissioner, indicate a

merchant banking fee. The amounts claimed by Mr. Henry and the

somewhat smaller amounts conceded by the Commissioner are as

follows:

Tax year Amount claimed Amount conceded by Difference

by Mr. Henry the Commissioner

2011 $23,270 $22,579 $691

2012 27,727 27,564 163

2013 34,730 27,742 6,988

2014 21,593 20,257 1,336

Total $107,320 $98,142 $9,178

11

[*11] Mr. Henry claims, in addition to the amounts reported on his

returns, an additional $817 for 2011 and $2,523 for 2013 for alleged

merchant banking fees associated with American Express and

Authorize.net. For reasons stated in Part II.D.1, we find that Mr. Henry

incurred only those merchant banking fees conceded by the

Commissioner.

Bank service fees

Mr. Henry incurred (and claimed the following deductions for)

bank service fees, which included the monthly fee for his bank account,

overdraft fees, chargeback fees, and transfer fees (of which the

Commissioner conceded $359 in each year):

Tax year Amount claimed Amount conceded by Difference

by Mr. Henry the Commissioner

2011 $2,209 $359 $1,850

2012 1,647 359 1,288

2013 3,468 359 3,109

2014 22,896 359 22,537

Total $30,220 $1,436 $28,784

For the reasons stated below in Part II.D.2, we find that Mr. Henry

incurred $359 of bank service fees for each year at issue.

Taxes, licensing, and business insurance

Mr. Henry had business insurance during all the years at issue.

After he moved his business to Maryland, he filed articles of

incorporation with the state and registered a trademark. Mr. Henry

claims a deduction for the business insurance premiums and “Taxes and

Licensing”. For reasons stated in Part II.D.10, we allow a deduction for

business insurance as well as the fees to file articles of incorporation and

to register a trademark.

12

[*12]

Tax year Taxes and license fees Business insurance

Claimed Amount for licenses

2011 $500 0 $492

2012 0 0 445

2013 328 $328 445

2014 63 0 445

Total $891 $328 $1,827

Advertising and web hosting

Mr. Henry claims deductions for advertising and web hosting for

all years at issue. Without any testimony to support most of the

advertising expenses, we are able to allow only those expenses for which

we find support through testimony and briefs. Thus, we find deductible

advertising expenses only for payments made to entities whose names

seem to be clearly related to the one form of advertisement discussed

through testimony: signs. Thus, we find that Mr. Henry made

deductible payments to entities such as “Fast Signs” and “OnlineSign.”

Mr. Henry’s “marketing” expenses, insofar as we are able to

discern from testimony and briefs, are actually web hosting expenses

related to maintaining the website for Mr. Henry’s businesses. After

reviewing Mr. Henry’s evidence to support his web hosting expenses, we

find that amounts paid to “GoDaddy”, “Domain Hosting”,

“OneWebHosting.com”, and “DiscountASP.Net” were for business

expenses. The first three entities listed are those whose names seem to

relate to domain hosting, and those deductions are supported by the

testimony of Mr. Henry and Ms. Hunter-Henry. For DiscountASP.Net

Mr. Henry submitted invoices as well as a statement that listed the

yearly expenses he incurred for the domain name “savvybillpay.com”.

13

[*13]

Tax year Advertising Web hosting

Claimed Amount related Claimed Amount related

to signs to web hosting

2011 $6,390 $1,131 $2,134 $681

2012 6,199 3,745 937 436

2013 2,216 127 1,871 992

2014 3,076 0 3,974 729

Total $17,881 $5,003 $8,916 $2,838

Travel, meals and entertainment, business gifts, and listed property

Mr. Henry claims that for the purposes of his business he incurred

(and he therefore claims deductions for) travel, hotel accommodations,

metro fare, bus fare, meals, car payments (including insurance, gas, and

tolls), and multiple gifts to clients. We find that Mr. Henry incurred

expenses for hotel rooms that he used for meetings to recruit clients.

However, for the reason set out below in Part II.D.4, we are unable, on

the evidence presented, to find that he incurred the remaining expenses

in the conduct of his businesses.

Cell phones and landlines

Mr. Henry, during any given year at issue, had at least one

landline and three cell phones which he allegedly used for business. 8 He

reports for each year the amounts of these expenses indicated below (and

we allow the lesser amounts indicated): 9

8 Mr. Henry also mentions for the first time in his opening brief (Doc. 624) a

claimed deduction for an “inbound call center”. However, we have before us no

testimony, discussion, or even an allusion on his lead sheet to any expense relating to

an inbound call center. Therefore, we do not allow any deduction for it.

9 The amounts in this table are aggregated totals for each year, as Mr. Henry

separately listed “Business Cellular” and “Business Cellular 2”, in his lead sheets, for

example. Some amounts in Mr. Henry’s “Landline” column are described as including

internet. But, because of a lack of monthly statements for these amounts, we are

unable to discern what, if any, of the amounts were paid for internet.

14

[*14]

Tax year Cell phones Landline

Claimed Allowed Claimed Allowed

2011 $9,832 $5,406 $2,624 0

2012 2,234 1,656 2,214 0

2013 2,638 1,656 3,641 $3,641

2014 890 0 4,086 0

Total $15,594 $8,718 $12,565 $3,641

Mr. Henry offered into evidence monthly invoices for only one of the cell

phone plans under the name of Mr. Henry’s business: a Sprint plan from

2011–2013 for which Mr. Henry paid $5,406 in 2011 and $138 per month

in 2012 and 2013. He offered no statements for cell phone expenses in

2014. Regarding landline expenses, he offered monthly invoices for a

Verizon landline plan under Ms. Hunter-Henry’s name for service at her

and Mr. Henry’s professional address in California in 2013 for which

they paid $3,641. He offered no invoices for landline expenses at a

professional address for 2011, 2012, or 2014. For the reasons stated in

Part II.D.5, we find that Mr. Henry incurred business cell phone

expenses of $5,406 for 2011 and $3,312 per year for 2012 and 2013, and

$3,641 in landline expenses for his business for 2013.

Clothing

Mr. Henry claims a deduction for the purchase and dry cleaning

of clothing, which he labels as a cost for “uniforms”. As evidence,

Mr. Henry submitted faded receipts from Dress Barn and a dry cleaning

business. For the reasons stated in Part II.D.9, we disallow any

deduction related to “uniforms”.

Charitable contributions

Mr. Henry claims deductions for alleged contributions to the

Nation of Islam, to Louis Farrakhan individually, and to “Scarlet

Saints”, an entity about which we do not have information, in the

amounts listed here, but he offered into evidence receipts only for Nation

of Islam contributions and only in the amounts stated here:

15

[*15]

Tax year Nation of Islam Louis Scarlet Saints

Farrakhan

Claimed Amount

supported by

receipts 10

2011 $1,625 $800 $871 $100

2012 245 20 0 0

2013 992 340 0 0

2014 1,605 0 0 0

Total $4,467 $1,160 $871 $100

On the Forms 1040, “U.S. Individual Income Tax Return”, that

Mr. Henry submitted to this Court, Mr. Henry took the standard

deduction for 2011 through 2013; we do not have a Form 1040 for 2014.

We find that Mr. Henry made charitable contributions in amounts

totaling $1,160 (but for the reasons stated in Part II.F, he is not entitled

to deduct them).

Mr. Henry’s late filing of tax returns

In the Henrys’ household, Ms. Hunter-Henry is the spouse

principally responsible for preparing and filing tax returns. She has

been to law school, and she has been in the business of preparing tax

returns and giving tax advice. Mr. Henry, by contrast, has only a high

school diploma, and he deferred to Ms. Hunter-Henry. She told him

(incorrectly) that they were experiencing net losses from year to year,

that the losses would result in their not having tax liabilities for the

years at issue, and that therefore it would ultimately not be a problem

that their returns were overdue.

With Ms. Hunter-Henry in charge of tax compliance, the Henrys

did not file timely returns for the three pre-suit years 2008, 2009, and

2010 (each of which was, under an extension, due in October of the

following year). Instead, they filed those returns years late in October

10 On several of the receipts, which appear to be carbon copies, there are some

notes written in ink pen that purport to indicate an additional amount paid in cash by

Mr. Henry. We do not consider these notes to qualify as contemporaneous written

acknowledgments (“CWA”) by the donee, because they were added after the execution

of the receipt, and we cannot know when or by whom the notes were added to the

receipts. Consequently, we disregard them for purposes of determining Mr. Henry’s

allowed charitable contribution deductions.

16

[*16] and November 2017 (which was after the commencement of the

audit described below). On the 2010 return they claimed an NOL of

$945,801. After examination the IRS duly mailed to the Henrys an NOD

that made various adjustments (including disallowance of the NOL) and

determined for each year a tax deficiency and an addition to tax under

section 6651(f) for fraudulent failure to timely file. Mr. Henry did not

receive the NOD, and he did not file in the Tax Court a petition to

challenge the deficiency determinations for those pre-suit years.

Similarly, under the leadership of Ms. Hunter-Henry, the Henrys

did not file timely returns for any of the four years at issue (2011–2014).

In fact, the Henrys did not file returns for those years until April 2019—

i.e., after the IRS completed its audit and issued its NOD, and after

Mr. Henry commenced this case.

IRS audit

Although the IRS received no timely returns from the Henrys for

2011–2014, it did receive information about them. Each year the credit

card companies with which the Henrys maintained their merchant

accounts issued to the Henrys Forms 1099 reporting the companies’

payments to the Henrys, and the IRS also received such third-party

reporting. Consequently, in 2016 the IRS commenced an examination

of the Henrys, for which Ms. Hunter-Henry did most of the

communicating with the IRS.

The IRS’s audit included a bank deposit analysis. As a result of

that analysis, the IRS determined that the Henrys had gross receipts of

roughly $1 million or more for each of the years 2011 through 2014.

After minimal deductions (only the standard deduction, the self-

employed adjustment, and personal exemptions were included because

of the Henrys’ failure to file returns), the IRS determined total increases

in adjusted gross income of $912,983, $1,066,783, $1,353,889, and

$988,150 for those years. Pursuant to section 6020(b), the IRS prepared

for each of the years 2011–2014 a substitute for return (“SFR”) dated

May 10, 2018, that reflected these amounts.

Notice of deficiency and petition

The Commissioner issued an NOD to Ms. Hunter-Henry on

August 28, 2018, and to Mr. Henry on September 6, 2018, determining

the deficiencies and additions to tax and penalties set out above in the

table at page 3.

17

[*17] The NODs made no adjustments increasing income in the

amounts of the debts canceled in 2011 and 2012.

The parties’ pleadings in Tax Court

Ms. Hunter-Henry prepared a petition which they mailed to the

Tax Court on December 4, 2018—untimely as to her NOD but timely as

to Mr. Henry’s. At that time Mr. Henry resided in Maryland. As we

understand the petition, it puts at issue all the adjustments in the NOD.

It makes no mention of cancellation of indebtedness. (Several months

later, in April 2019, the Henrys filed their income tax returns for the

years at issue, 2011–2014. Forms 982, “Reduction of Tax Attributes Due

to Discharge of Indebtedness (and Section 1082 Basis Adjustment)”,

filed with the returns for 2011 and 2012 claimed exclusion of the

canceled indebtedness as “insolvent”.)

The Commissioner filed his answer, which defended the

adjustments in the NOD and made affirmative allegations in support of

the determination that Mr. Henry’s failure to file timely was

attributable to fraud. The answer makes no mention of cancellation of

indebtedness income.

Pretrial activity and three continuances 11

This case was first set for trial in January 2020—more than a

year after the petition had been filed—but Mr. Henry filed a motion for

a continuance, explaining: “In the process of copying all of the

supporting tax documentation for trial, we found to[o] many missing tax

deductions that need to be included with this case. We still need to

reconcile 2 large bank statements that were prepared by the same

bookkeeper, to make sure we’re not missing more deductions, then we

need to update each of the categories, and rerun adding machine tape to

get to the new totals for the tax returns.” (It is not clear how this

explanation can be reconciled with the fact that the tax returns for the

years at issue had been filed in April 2019.) The Commissioner did not

object, and we granted the continuance.

11 We decide several issues on the basis that Mr. Henry had the burden of proof

and failed to substantiate his position with evidence. Because Mr. Henry suggests that

he should be permitted to rely on evidence that we excluded and should be permitted

to provide additional evidence that he did not have a chance to offer at trial, we set out

in detail the course of the activity leading up to the trial of this case.

18

[*18] The trial was then set for a year later, in January 2021, but the

Commissioner filed a motion for another continuance, explaining that

the parties were making progress in stipulating the facts of the case but

that Mr. Henry “has submitted a large volume of documents to the

Commissioner which have not yet been included in a proposed

stipulation” and “has further informed respondent that additional

documents will be provided with respect to the issue of a loss

carryforward which petitioner intends to raise as an issue in the case”.

We granted the second continuance.

The case was set for trial 11 months later at a session in

December 2021. The parties continued working on stipulations of fact

(see Docs. 38, 39, 41); but in November 2021 Mr. Henry filed a motion

(Doc. 43) for another continuance, explaining his continuing efforts to

obtain information and provide it to the Commissioner. He also stated

that he “wishes to hire an attorney and the attorney needs more time

than 30 days, and Petitioner wishes to give notice to potential witnesses

to validate their Savvy Bill Pay transactions, claimed as an expense of

the Petitioner.” (No attorney ever entered an appearance for Mr. Henry,

and at the eventual trial in August 2022 Mr. Henry called no witnesses.)

The Commissioner objected to the continuance, and we initially denied

it, observing that “[t]his case has previously been set for trial and then

continued on two occasions (see Docs. 17, 29), and it seems unlikely that

the postponement of this current (third) setting and the setting of a

fourth would have any significant effect.”

We served an order (Doc. 192) requiring that the parties appear

remotely (via Zoomgov) for the calendar call set for December 13, 2021,

and that they appear in person for trial on December 14, 2021. Before

that date Mr. Henry electronically submitted scores of proposed

exhibits, but in doing so he failed to comply with our instructions.

Among other things, he submitted exhibits without exhibit numbers and

without sequential page numbering, and sometimes misfiled documents

as if they had been submitted by both parties (rather than by Mr. Henry

alone). We explained the Court’s instructions and ordered Mr. Henry to

comply with them. (Doc. 401.) The parties successfully filed additional

stipulations with exhibits. (See Docs. 401–414.) Mr. Henry also filed or

refiled additional proposed exhibits. (Docs. 428–431, 441–446.)

Three days before the trial session set for December 13, 2021,

Mr. Henry filed another motion (Doc. 436) for a continuance, stating that

he “wishes to have more time to respond to Respondents request to

include Tax years 2004, 05 and 10 based on Respondent’s Pre-Trial

19

[*19] Memorandum. Petitioner will have to scan and upload 30 more

3[-inch] Tax binders that also have to be redacted.” He also filed a

motion (Doc. 439) to strike “thousands” of his previously filed exhibits

so that he could “have more time to redact[] thousands of account

numbers displayed on thousands of documents uploaded.” (That is, in

disregard of Rule 27(a), he had previously failed to redact from his

exhibits bank and credit card account numbers and social security

numbers.) During the December 13 calendar call, we ordered that the

trial would be continued for a third time and that the December 14

session would be a pretrial hearing. (See Doc. 449.)

At the remote hearing on December 13 and the in-person hearing

on December 14, the Court spent about four hours with the parties, time

that was largely spent on attempting to assist Mr. Henry in preparing

and filing his documents for eventual admission into evidence and to

assist him in doing so in a manner that would make it possible to

demonstrate that those documents support his contentions about the

amounts in dispute in the case. (Much of the complication seemed to

involve pre-suit years, for which Mr. Henry intended to submit

thousands of documents to prove NOLs that would carry forward into

the years at issue. He later gave up on that project, and we struck from

the record the documents related to the NOLs.) For example, we

explained:

I know, Mr. Henry, that you don’t have the

misunderstanding I’m about to describe, but I’m going to

give an extreme example just to make a point. A Petitioner

couldn’t prove his case by filling up a truck with relevant

documents and driving over here and dumping them into

the courtroom and saying to the judge, [“]it’s all in there,

decide the case in my favor[”]. It turns out that the burden

of proof means more than the physical burden of getting

the papers into the courtroom, it’s the burden of

demonstrating from the evidence that you’re entitled to

prevail.

So getting the documents before the Court either

physically in paper or electronically is an important step,

but I can’t figure out how these documents relate to what

the parties are disputing unless the parties show me.

In doing that, making that kind of showing in a case

with thousands of pages of documents is a challenge.

20

[*20] (Tr. at 6:10–7:1.) In particular, we urged Mr. Henry to consider

preparing spreadsheets that would show, for each type of deductible

expense in each year, the amount of each expenditure and the source

document that substantiated the nature and amount of that

expenditure. (See, e.g., Doc. 454 at 17–18; Doc. 455 at 21–29, 32–36,

63–66.) We referred to possibility of a true “summary” exhibit under

Rule 1006 of the Federal Rules of Evidence, and we acknowledged that

such a spreadsheet that is not a Rule 1006 summary might nonetheless

be admitted as demonstrative evidence. (Doc. 454 at 28–29.) Mr. Henry

had many documents that he called “lead sheets”, which tallied various

expenses, but we explained—and Mr. Henry professed to understand—

that the numbers on the lead sheets “have to be backed up”. (Doc. 455

at 63.) It was clear even then (see Doc. 455 at 36, 40–41, 68) that the

most difficult subject for presenting verifiable proof was the Savvy Bill

Pay expenditures.

During the hearing on December 14, 2021—the date that had

previously been set for the (now continued) trial of the case—Mr. Henry

stated that he had additional documents that he would need to submit

as evidence. (Doc. 455 at 16–17.) When the trial had been set for

December 13, 2021, Mr. Henry had a deadline for exchanging exhibits

with an opponent by November 29, 2021 (see Doc. 36), and if the trial

had gone forward on December 14, he would have been precluded from

using any documents not exchanged by that date. But our continuing

the case for the third time mooted that deadline, and we set a series of

deadlines for Mr. Henry’s further production of documents. (See

Doc. 450.)

Three months later the Commissioner filed a status report

(Doc. 479) complaining that he was unable to make additional

concessions, prepare a stipulation of settled issues, or prepare additional

stipulations of fact because the documents that Mr. Henry was

producing were not organized and appeared to be duplicative. We held

a telephone conference with the parties in April 2022, and confirmed the

general accuracy of the Commissioner’s complaints. We observed that,

whatever Mr. Henry’s good-faith intentions were about preparation for

trial, his documents constituted a moving target to which his opponent

could not respond. By our order of May 3, 2022 (Doc. 481), we set the

case for trial beginning August 29, 2022, and we set deadline of August

1, 2022, for Mr. Henry to exchange additional documents with his

opponent. Our orders of July 6 and 12, 2022 (Docs. 483, 486), reminded

him of that August 1 deadline.

21

[*21] Notwithstanding the August 1 deadline, Mr. Henry made

16 filings of proposed exhibits (that he had not previously exchanged

with the Commissioner) on August 2 and 3. (See Docs. 509–514,

516–525.) The Commissioner filed a motion for an order to show cause

(Doc. 15), which we granted on August 3, 2022 (see Doc. 526), directing

Mr. Henry to show by August 12, 2022, why we should not preclude his

admission of those late exhibits into evidence at trial. Mr. Henry did

not make any such filing in response to our order to show cause. Rather,

on August 4–15, 2022, he filed 20 more untimely sets of “Proposed Trial

Exhibits”. (Docs. 527 and 528, 530–539, 541–548.) We therefore made

absolute our order to show cause (see Doc. 552) and directed that

Mr. Henry was precluded from relying on late evidence. We later made

a minor modification to that preclusion. (See Doc. 558.) On August 23,

2022, Mr. Henry filed a motion for a fourth continuance (Doc. 559),

saying that he needed more time to complete tasks that had in fact been

ordered to be completed by August 1, 2022. We denied the motion (see

Doc. 560), stating: “Mr. Henry has already been allowed, on multiple

occasions, a remarkably generous amount of time to prepare for trial,

and we will not delay the trial further.”

Trial and subsequent proceedings

The case proceeded to trial on August 29 and 30, 2022. Mr. Henry

called himself and Ms. Hunter-Henry as witnesses, and the

Commissioner also called the IRS agent who had conducted the audit.

Even though she was not a petitioner in this case, Ms. Hunter-Henry

helped Mr. Henry in the preparation and presentation of his case.

At the conclusion of trial we did not immediately set a briefing

schedule but instructed the parties to attempt to settle the case in whole

or in part. (Doc. 619 at 434–41.) That attempt bore some fruit in May

2023 when the parties filed a stipulation (Doc. 612) that settled some

issues. See supra note 2. The same month we ordered the parties to

brief the case (and we extended the deadlines at Mr. Henry’s request,

see Doc. 620). Briefing was completed in November 2023.

In his opening brief, the Commissioner conceded the income that

the IRS had determined above Mr. Henry’s reporting on his returns

(Doc. 623 at 42 n.4); and in his answering brief the Commissioner made

partial concessions of some amounts (i.e., less than Mr. Henry contends)

for three categories of deductions claimed by Mr. Henry: merchant

banking fees, see supra p. 10, bank service fees, see supra p. 11, and

22

[*22] payments remitted on behalf of clients as part of Savvy Bill Pay,

see supra p. 7, for 2011 through 2014.

OPINION

I. Basic legal principles

A. Burden of proof

As a general rule, the Commissioner’s determinations in a notice

of deficiency are presumed correct, and the taxpayer bears the burden

of proving them erroneous. Rule 142(a); see Welch v. Helvering, 290 U.S.

111, 115 (1933). In certain circumstances section 7491(a) may shift to

the Commissioner the burden of proof on factual issues, but Mr. Henry

does not argue that the burden of proof has shifted under that section.

There are, however, two other exceptions to the general rule that are

pertinent here:

First, as to fraud (asserted by the Commissioner in connection

with the fraudulent failure-to-file addition to tax under section 6651(f)),

the Commissioner has both the burden of production, see § 7491(c), and

the burden of proof by clear and convincing evidence, see § 7454(a); Rule

142(b); Clayton v. Commissioner, 102 T.C. 632, 646 (1994). The

Commissioner acknowledges he bears that burden, and we discuss the

issue below in Part II.G.2.b.

Second, Rule 142(a)(1) provides that, “in respect of any new

matter, . . . [the burden of proof] shall be upon the respondent.” For the

reasons we explain below in Part II.A, we conclude that the cancellation

of indebtedness issue is new matter and that the Commissioner

therefore bears the burden of proof on that issue.

B. Ordinary and necessary business expenses

Taxpayers generally bear the burden of proving that claimed

business expenses were actually incurred and were “ordinary and

necessary.” § 162(a); Rule 142(a); see INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435,

440 (1934). Taxpayers are not allowed a deduction for personal, living,

or family expenses except where specifically allowed in the Code.

§ 262(a). Taxpayers bear the burden of substantiating the amounts of

their deductions by keeping and producing records sufficient to enable

the IRS to determine the correct tax liability. See § 6001; Treas. Reg.

§ 1.6001-1(a).

23

[*23] II. Analysis

A. Income from cancellation of indebtedness

The business income at issue is not in dispute, so we do not

discuss it further. The only disputed income is from cancellation of

indebtedness, totaling $322,459 in 2011 and 2012. Gross income

generally includes income from the discharge of indebtedness.

§ 61(a)(12). The rationale of this principle is that the cancellation of

indebtedness provides the debtor with an economic benefit that is

equivalent to income. See Friedman v. Commissioner, 216 F.3d 537, 545

(6th Cir. 2000), aff’g T.C. Memo. 1998-196. However, a cancellation of

indebtedness may be excluded from income if, and to the extent to which,

a taxpayer is insolvent. § 108(a)(1). A taxpayer is insolvent if he has an

“excess of liabilities over the fair market value of assets.” § 108(d)(3).

After trial, Mr. Henry stipulated that he “received taxable income

from cancellation of debt” (emphasis added), and his post-trial brief

admits that at trial he “provided no information concerning his claim of

insolvency”. He asks to be permitted to offer additional evidence that

will show his insolvency, but we need not address that request because

Mr. Henry does not need more evidence.

Rather, we have found that income from the cancellation of

indebtedness in 2011 and 2012 was not included in the NOD. 12 Thus,

we can say here, as we said in Tabrezi v. Commissioner, T.C. Memo.

2006-61, 91 T.C.M. (CCH) 953, 955:

Respondent went beyond the scope of the original

deficiency determination by arguing . . . that the discharge

of the [indebtedness] gave rise to COD income. . . .

Therefore, respondent bears the burden of proof and must

show, by a preponderance of the evidence, that petitioners

were solvent under section 108(a)(1)(B) as of the calculation

date.

12 Nor was the cancellation of indebtedness issue pleaded in the

Commissioner’s answer but was raised for the first time in a pretrial memorandum.

However, Mr. Henry stipulated the fact of his receipt of the income and in his briefs he

did not object to the Commissioner’s raising the issue. We therefore treat the issue as

having been “tried by express or implied consent of the parties”, within the meaning of

Rule 41(b)(1).

24

[*24] (Emphasis added.) The Commissioner did not undertake at trial

to show Mr. Henry’s solvency. Since the Commissioner had the burden

on that point, his failure to prove it requires that we not sustain the

determination as to cancellation of indebtedness income.

B. Ayer’s Place rental income

Mr. Henry claims that the rental income reported from the Ayer’s

Place property should be recharacterized as repayment for a loan. We

decline Mr. Henry’s claim.

During trial Ms. Hunter-Henry testified that she contributed

$100,000, along with money borrowed from eight to ten individuals, to

“tak[e] over the management” from the owners of the Ayer’s Place

property. She alleges that this was done as some sort of investment to

help people keep their homes when they were behind on payments. The

ultimate goal of this transaction was allegedly for Mr. Henry and the

other investors to receive their money back plus some return once the

owner of the house was able to refinance it and repay the loans.

Meanwhile, Ms. Hunter-Henry collected rental income from the

property and allegedly paid for repairs to the unit. Ms. Hunter-Henry

claimed in her testimony that the rental income was considered

repayment on the money lent to purchase the property but that it was

wrongly reported as rental income on the Form 1099 received by the

Commissioner.

Aside from testimony stating that the Henrys lent money for the

Ayer’s Place property, Mr. Henry has not provided any evidence to

support his request for recharacterization of the rental income. On their

Schedule E for all years at issue, the Henrys reported as rental income

the rent money they received. We do not have a deed, loan documents,

or any other documentary evidence to corroborate Mr. Henry’s position

that he and Ms. Hunter-Henry ever lent any money, let alone $100,000,

for the purchase of the Ayer’s Place property. We are therefore unable

to eliminate the possibility that this is yet another attempt by the

Henrys to avoid their tax liability by turning their income into a

“repayment” of a debt. They did not prove that the rent payments were

loan repayments.

C. Allocation of business income and deductions among

entities

Allocation of gross income and of deductions among Mr. Henry’s

various entities might in some circumstances affect the amount of the

25

[*25] income tax deficiency and of self-employment tax to be

determined. We discussed this issue during a pretrial hearing (see Doc.

455 at 47–55). The Commissioner noted this issue in both of the pretrial

memoranda he filed in this case. (See Doc. 48 at 13–14; Doc. 540 at 13.)

In his opening post-trial brief, the Commissioner noted (Doc. 623 at 5

n.1) that Mr. Henry bears the burden to show the allocation among those

entities, that he therefore should address that allocation in his own

opening brief, and that the Commissioner would respond in his

answering brief. Mr. Henry did not address the issue, and the

Commissioner’s answering brief therefore observed (Doc. 626 at 2 n.1)

that “petitioner has conceded the character of his taxable income falls

under Schedule C for purposes of this litigation”. We agree.

D. Substantiation of business deductions

Mr. Henry’s post-trial brief (Doc. 624 at 50) explains its

presentation on business expenses as follows:

The Petitioner lists each of the business expenses that may

not be common and describe the ordinary and necessary

business expenses and give the reasons why and how

Petitioner used the item or service in our businesses. The

Petitioner is not going to list the common deductions that

all businesses have, such as telephone expenses, and

equipment.

That is, Mr. Henry expressly disclaimed any undertaking to discuss in

his brief the justification for what he calls “common deductions”. This

approach interfered with his showing that he carried his burden of

production, proof, and persuasion, which he does bear even as to those

“common deductions”.

1. Merchant banking fees

A “merchant banking fee” is imposed on a business by a payment

processing company when it processes an electronic payment. The

Commissioner has conceded the existence and business character of

those fees for which one of the statements produced by Mr. Henry

contains abbreviations such as “BankCard”, “Mtot Disc”, “Discount”,

and “Indn”, in amounts that total $98,142 for the four years at issue.

See supra p. 10. The Commissioner reasons that Mr. Henry used

payment processing companies to conduct his bill pay service and that

no personal expense would incur a merchant bank fee.

26

[*26] However, Mr. Henry claims deductions in excess of those

conceded by the Commissioner, see supra pp. 10–11, including amounts

attributable to American Express and Authorize.net. But the additional

amounts he claimed do not contain the same abbreviations that the

Commissioner admitted are an indication of merchant banking fees, and

Mr. Henry did not provide any explanation to show the character of

these additional charges nor to warrant their deductibility. Therefore,

we sustain the Commissioner’s disallowance of the additional alleged

merchant banking fees.

2. Bank service fees

A “bank service fee” is a monthly maintenance fee to maintain a

bank account. The Commissioner has conceded the existence and

business character of each of the monthly fees ($29.95 per month) on

Mr. Henry’s bank statements that are stated to be a “Monthly

Maintenance Fee” because (he acknowledges) it is reasonable to expect

that a business needs at least one bank account. (Mr. Henry’s account

commingled his personal and business income and expenses, but the

Commissioner did not dispute the business need for and character of the

account.) The amount conceded is $359 for each year at issue, or $1,436

total. However, Mr. Henry also claims a deduction for any amounts

stemming from overdraft fees, chargebacks, and transfer fees. As is

shown above on page 11, amounts totaling $28,784 that are not conceded

by the Commissioner are still in dispute.

Mr. Henry has not provided sufficient evidence to demonstrate

that the additional fees he claims were incurred as a result of his

business activities and not in conjunction with his personal activities

and expenses, nor has he demonstrated how those expenses would be

ordinary and necessary business expenses. Therefore, we sustain the

Commissioner’s disallowance of the additional, unsubstantiated portion

of the alleged merchant bank service fees.

3. Advertising and web hosting

Advertising and marketing expenses are those which are incurred

to attract customers or clients to a business. Mr. Henry claims

deductions for signs made for the purpose of advertising his businesses

as well as “marketing” expenses, which are actually expenses for web

hosting. As to the advertising expenses, Mr. Henry testified that he and

Ms. Hunter-Henry posted signs to attract clientele to seminars where

they would teach them about their business. Mr. Henry submitted lead

27

[*27] sheets and bank statements listing payments to various

businesses that his testimony obviously supports, such as “Fast Signs”

and “Online Signs”, and we allow deductions for those payments. Other

payments, however, were made to entities such as Facebook, and

without more information we are unable to determine what those

payments were for. Therefore, we allow a deduction for advertising

expenses only to those businesses whose purpose is readily identifiable

by name. See supra pp. 12–13.

As to web hosting expenses, Mr. Henry testified and stated in his

brief that he was in charge of designing and maintaining the websites

for his and Ms. Hunter-Henry’s businesses. The expenses for web

hosting seem to be the cost for having a domain name and other domain-

related expenses. Mr. Henry’s evidence and testimony support that he

made these payments in order to carry out his business, and we allow

these deductions for web hosting. See supra pp. 12–13.

4. Travel, meals and entertainment, business gifts, and

listed property

Certain expenses are subject to strict substantiation under

section 274(d). Such expenses include those relating to travel, meals

and entertainment, gifts, and “listed property” under section 280F(d)(4).

§ 274(d). For the years in issue, listed property included passenger

automobiles and any other property used as a means of transportation.

§ 280F(d)(4). To comply with the strict substantiation rules, the

taxpayer must have adequate records or sufficient evidence

corroborating the amount of the expense, the time and the place the

expense was incurred, the business purpose of the expense, and the

business relationship of the taxpayer to any others benefited by the

expense. § 274(d). To substantiate by adequate records, the taxpayer

must maintain an account book, a log, a diary, or a similar record and

documentary evidence to establish each element of an expenditure.

Treas. Reg. § 1.274-5T(c)(2)(i).

Mr. Henry believes he is entitled to deductions for air and bus

travel, hotels, gas, rental cars, car payments, car insurance and repairs,

car wash, AAA, toll roads and parking, metro and bus fare, personal

meals, meals for “private market receptions”, and business gifts. The

Commissioner disallowed all amounts claimed.

Mr. Henry’s evidence to support his claimed deductions for these

strict substantiation expenses is overall not helpful to his cause, and his

28

[*28] intermingling of business and personal accounts and finances

dooms his contention that all of his claimed deductions in these

categories are allowable. Mr. Henry collaborated with Ms. Hunter-

Henry in teaching others to “convert your personal life into your

business life and write it all off”; and this greatly undermines the

credibility of both their record-keeping (such as it was) and their

testimony at trial. Mr. Henry offered into evidence travel itineraries to

destinations such as Sacramento (where Mr. Henry lived for a time) and

Las Vegas, but he provided no explanation of a business purpose for any

of his travel. Mr. Henry also submitted bank statements highlighting

payments for bus and metro travel but again provided no explanation as

to the business purpose for these expenses. That Mr. Henry evidently

did to some extent conduct business in California and Maryland is not

sufficient for our analysis because we simply do not know the actual

purpose for which Mr. Henry flew or took a bus on any given occasion.

Without a demonstrated business purpose, a taxpayer may not deduct

expenses for travel. § 274(d). Therefore, we sustain the Commissioner’s

disallowance of Mr. Henry’s travel expenses.

Mr. Henry also claims local transportation costs for all years at

issue, citing supposed substantiation of expenses paid for metro travel,

car insurance, car rentals in Maryland, and car payments and repairs.

Commuter fare is not deductible as a business expense, Treas. Reg.

§ 1.162-2, and costs related to passenger automobiles must be

substantiated with carefully kept logs or records, § 274(d). Mr. Henry

did not submit any such logs or records. Therefore, we also sustain the

Commissioner’s disallowance of Mr. Henry’s deductions for

transportation expenses.

As to his claimed deductions for hotels, Mr. Henry explained that

when he and his wife were in California, where the record shows they

had a residence that they rented, they also rented rooms at a hotel in

which to conduct their weekly seminars. According to Mr. Henry, the

need for the hotel ceased once he and his wife secured a more

appropriate office space. This explanation aligns with the fact that

Mr. Henry did not report hotel expenses for 2013 or 2014. While this

expense is labeled “hotels” (because the payments were in fact for hotel

rooms), the purpose of the payments was to host business seminars (in

hotel rooms), not to provide travel accommodations for the Henrys.

Those seminars were an element in the Henrys’ recruitment of clients.

Therefore, we allow Mr. Henry’s claimed deductions for the hotel

expenses for years 2011 and 2012.

29

[*29] Mr. Henry claims deductions for meals, both personal and those

allegedly provided at the “private marketing receptions”, which were

apparently the presentations that Mr. Henry and Ms. Hunter-Henry

hosted to recruit clients to their businesses. Mr. Henry provided no

testimony regarding the business purpose of the meals, neither the

personal nor the private marketing reception meals. Instead, he

submitted to the Court receipts from the meals, often without any

information regarding even who paid for the meal, much less the

attendees and the business purpose for the meal. Given the Henrys’

strategy regarding “anyway expenses”, we are unconvinced by the

evidence and lack of testimony before us that the personal meals claimed

by Mr. Henry were anything beyond family dinners. While meals

provided at the private marketing receptions might more plausibly

support deductions, we are unable to determine whether there were

even any attendees at presentations for which Mr. Henry submitted

receipts for meals and, further, whether the meals purchased were,

again, merely Mr. Henry’s buying lunch for his family.

Finally, Mr. Henry claims the following deductions for

“Marketing Gift Cards”—i.e., business gifts in the form of $25 gift cards

that he allegedly gave to clients when they attended a seminar and

brought with them a new, potential client:

Year Amount

2011 $4,603

2012 2,639

2013 2,166

2014 1,412

Total $10,820

Mr. Henry’s sole evidence to support these deductions is receipts

showing the purchases of the gift cards. Section 274(b)(1) limits the

deduction of the cost of any business gift to $25 per recipient per year.

A taxpayer claiming a business gift deduction must substantiate the cost

and description of the gift, the date the gift was made, the business

reason for the gift, and the business relationship to the taxpayer. Temp.

Treas. Reg. § 1.274-5T(b)(5). While Mr. Henry provided receipts

evidencing the purchase of the gift cards he later gave to clients, he does

not meet his burden regarding the other substantiation requirements

under the regulation. We do not know, because we have before us no

evidence showing, whether the gift cards he purchased were ever in fact

30

[*30] given to clients or, if they were, whether more than one gift card

was given to the same client in any given year, which would affect the

deductibility of the claimed business gifts. We think it is likely that

Mr. Henry may have used the cards for his personal expenses or for

nondeductible gifts. Ms. Hunter-Henry’s cynical presentation to her

customers, videotaped by Mr. Henry, asked “how many do [you] give

[your relative]? It is up to you.” The lack of credible evidence prompts

us to sustain the Commissioner’s determination entirely disallowing the

business gift deductions for all the years at issue.

5. Cell phones, landlines, and inbound call center

“Any charge . . . for basic local telephone service with respect to

the [first] telephone line provided to any residence of the taxpayer shall

be treated as a personal expense” and is not deductible. § 262(b).

Mr. Henry reports expenses for multiple cell phone plans (MetroPCS,

Verizon, T-Mobile, and Virgin) and landlines. We have before us bank

statements, invoices, and call logs with unidentified phone numbers.

His lists of expenses (Doc. 608 at 5–13) include entries for “Toll Free

Line”, “Business Cellular”, “Land Line”, “Fax Line”, and “Long

Distance”. Mr. Henry did not provide further explanation, on brief or at

trial, regarding the connection of these expenses to his businesses. We

are not skeptical of the proposition that a business may have a need for

multiple phone lines, but so may a family household. Mr. Henry reports

expenses for “business cellular” and “business landline” plans across five

different companies. Of these five different companies, Mr. Henry

submitted account invoices for only two: a Verizon plan under the name

of Ms. Hunter-Henry, and a Sprint plan under “L N S Marketing

Concepts”. No invoices for other plans are submitted.

Mr. Henry encouraged his clients to falsely characterize their

personal expenses as business expenses, and we cannot rule out the

likelihood that the Henrys themselves did just that in this instance for

at least some of the reported phone expenses. As seen on page 11,

Ms. Hunter-Henry would often pay her children’s phone bills. Given the

fact that most of the evidence Mr. Henry submitted to support these

reported expenses is nothing more than bank statements showing

payment to a phone company, we cannot be sure that most of the

payments were for Mr. Henry’s businesses but were instead for his

children. On the other hand, a business does need to have telephone

service, and we think that a cell phone plan issued under the name of a

business was likely used for business purposes. Likewise, landline

service at a professional address was likely for a business purpose.

31

[*31] Therefore, we allow for cell phone expenses a deduction of $5,406

for 2011 and $1,656 for each of 2012 and 2013, and we allow $3,641 for

the Verizon landline expense in 2013.

Mr. Henry also raised for the first time in his brief the issue of a

deduction for an “inbound call center”. We have no testimony from

Mr. Henry regarding this expense, no amount reported by Mr. Henry,

and no discernible evidence cited from among his thousands of

submitted documents. Therefore, we disallow whatever amount is

reported by Mr. Henry regarding an inbound call center expense.

6. Office rent and home office

a. Office rent

Mr. Henry claims deductions for rent paid for professional office

space as well as for amounts paid for, and relating to, his residences.

While Mr. Henry has not met any of the requirements to qualify for a

deduction for home office expenses, we believe that he has met his

burden as it relates to payments (in the amounts listed above at page

10) made to Brightleaf Properties and Essex Realty for the Henrys’

rental of his professional offices. The properties rented in California and

then in Maryland were professional office suites, and it is reasonable to

conclude that that the Henrys’ businesses would need office space out of

which to work. We hold that he is entitled to deduct the four-year total

of $56,380 that is set out above.

b. Home office deduction

A different analysis is required for the amounts allegedly paid for

Mr. Henry’s “home office”.

Section 280A(a) disallows any deduction, even if otherwise

allowable under the Code, with respect to the business use of a

taxpayer’s personal residence, except as otherwise provided in section

280A(c)(1). Section 280A(c)(1) provides, in relevant part, that

subsection (a) shall not apply to disallow any item to the extent the item

is allocable to a portion of the dwelling unit which is exclusively used on

a regular basis “(A) as the principal place of business for any trade or

business of the taxpayer”, or “(B) as 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”. § 280A(c)(1)(A) and (B);

Robinson v. Commissioner, 487 F. App’x 751, 754 (3d Cir. 2012), aff’g

T.C. Memo. 2011-99.

32

[*32] For deductions allowed under section 280A(c)(1), the taxpayer

must establish that a portion of his personal residence was

(1) exclusively used, (2) on a regular basis, (3) for one of the purposes

enumerated in section 280A(c). Hamacher v. Commissioner, 94 T.C.

348, 353 (1990). The flush text of section 280A(c)(1) provides:

[T]he 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.

Several of these requirements defeat Mr. Henry’s claim of a home office

deduction.

First, as we have noted, Mr. Henry and his wife operated their

businesses not only out of their residences in California and Maryland

but also out of professional offices (i.e., “fixed locations”) that they rented

in California and in Maryland. Their use of these professional office

suites during all years at issue makes it very unlikely that any home

office that they used was ever their “principal place of business”. It

seems much more likely that Mr. Henry’s deduction of household

expenses is another instance of “convert[ing] your personal life into your

business life and writ[ing] it all off”.

Second, as far we can tell, Mr. Henry is claiming, as home office

deductions, 100% of his household expenses. For example, for three of

the years at issue, 13 Mr. Henry’s post-trial brief seems to claim

deductions for the entire “home office rent” of $22,380 for 2012, $36,000

for 2013, and $21,000 for 2014 (totaling $79,380). In addition, Mr. Henry

seems to attempt to deduct the gross amounts of various other costs

associated with the residential properties, from homeowners association

fees to utility bills to landscaping. Under section 280A(c)(1), however,

he could deduct at most the household expenses that correspond to the

“portion” of the house that is used for business.

Third, Mr. Henry put on no evidence as to what that “portion”

might be. While he offered copious amounts of documentation

13 As far as we can tell, the record does not show why Mr. Henry’s claim for

2011 omits “home office rent”.

33

[*33] attempting to show the expenses of his California and Maryland

residences, he did not submit evidence or make argument that any part

of either of his homes was used exclusively, on a regular basis, as his

principal place of business. Therefore, we sustain the Commissioner’s

disallowance of all home office expense deductions.

7. Casual labor by children and non-family

a. Payments to non-family “contractors”

Mr. Henry testified that he paid his contractors through PayPal,

but the Commissioner demonstrated at trial that at least some

payments claimed by Mr. Henry do not actually correspond to payments

supposedly made to contractors. We do not have any Form W–2 or Form

1099 before us to support any claimed “casual labor” payments made.

As we noted above, the only exception to this evidence is that

which relates to payments made to Robert Half International in 2012

for services performed by Nancy Villalobos. Mr. Henry submitted both

invoices from Robert Half International and a bank statement showing

two payments totaling $781 to Robert Half International. An absence

of a Form W–2 or a Form 1099 is not detrimental to Mr. Henry’s claim

on this amount because Robert Half International was the employer of

Ms. Villalobos when she worked as a contractor for the Henrys, and it

thus would have been the entity to issue either form. Therefore, we find

that Mr. Henry did make deductible payments of $781 in 2012 for

services rendered by Nancy Villalobos.

However, regarding the other claimed “casual labor” payments,

we remain unconvinced. Forms 1099 or Forms W–2, where they are

issued, show that the recipients are expected to report the income and

give the IRS information by which it can confirm that the income was

reported; and the issuance of the forms helps to assure that the payor

really did pay the amounts as alleged. On the other hand, the absence

of the forms increases the likelihood that the payments may not ever

really have been made or that they may not have been made for the

business purpose alleged. The PayPal payments to the supposed

contractors on Mr. Henry’s bank statements do not provide names that

correspond to Mr. Henry’s “lead sheets”, and the Commissioner

demonstrated at trial that at least some of the payments claimed by

Mr. Henry may not have been made to contractors at all. Therefore, we

are unable to find that Mr. Henry made deductible payments for “casual

34

[*34] labor” to the non-family contractors, other than the $781 paid to

Robert Half International.

b. Payments to the Henrys’ children

Mr. Henry claims deductions for payments made to his children

and several other “contractors” for “casual labor”. We are largely unable

to determine what, if any, payments were made for services rendered or

were made in pursuit of the Henrys’ “anyway expense” tax evasion

strategy that they marketed to their customers. Ms. Hunter-Henry

testified that she paid her children in cash or “payments in lieu of cash”

for services they allegedly rendered for her business. Among the

evidence submitted, there is no Form W–2 or Form 1099 that would

support a finding that any of the Henrys’ children performed work for

their businesses. Instead, we have testimony provided by Ms. Hunter-

Henry, payments made to PayPal, checks made out to the Henrys’

children, or checks for the children’s personal expenses, such as rent.

The payments most nearly plausibly made for business work

performed by any of Mr. Henry’s children is a total of about $500

recorded on the 2012 payroll log for January through March. The log

lists work performed by Lawrence M. Henry and Velma Blackstone and

the corresponding amount they earn for that task. However, we do not

have any Form W–2 or Form 1099, and we cannot say that Mr. Henry

proved it is more likely than not that even just the claimed payments

made to Velma and Lawrence in 2012 were for services rendered for the

businesses.

The Henrys also issued credit cards to two of their children that

were apparently tied to an account that the Henrys used for their

businesses. Allegedly, some of the children would “do errands” on behalf

of Mr. Henry and Ms. Hunter-Henry using these cards. On that basis,

Mr. Henry claims a deduction for some payments made under the cards,

although from the testimony, briefs, and submitted evidence we are

unable to determine what the amount of that deduction would be.

However, the amount is unnecessary as we disallow any amount claimed

by Mr. Henry for expenses incurred by any of the children on such credit

cards for the simple reason that we cannot determine whether any

amounts paid were for deductible business expenses or were instead for

the personal expenses of the children.

35

[*35] 8. Referral fees

Mr. Henry claims a deduction for “referral fees” of $900 to three

people ($300 each) as supposed “commissions” for referring new clients

to Mr. Henry’s business. He raised this deduction for the first time,

without elaboration, in his opening brief. By way of evidence, he offered

three canceled checks for $300 made out to three individuals whose

names we do not recognize, all with “memo” lines specifying that the

payments are for “commission”. However, because we have no

testimony relating to these payments (and have only three checks before

us), we are unable to determine whether the payments were made for

their purported reasons, or whether instead this was yet another way

for Mr. Henry to turn his “anyway expense” into deductible payments.

Therefore, we do not allow a deduction for the alleged “referral fees”.

9. Clothing

The cost of clothing may be deductible as a business expense only

if the clothing is “of a type specifically required as a condition of

employment,” if it is “not adaptable to general usage as ordinary

clothing,” and if “it is not so worn.” Pevsner v. Commissioner, 628 F.2d

467, 469 (5th Cir. 1980), rev’g T.C. Memo. 1979-311; accord Yeomans v.

Commissioner, 30 T.C. 757, 767 (1958). Mr. Henry did not provide

through testimony, discussion on brief, or evidence any information

about the nature of the clothing he purchased and had dry cleaned. It

seems likely to us, therefore, that this is an example of another “anyway

expense” reported by Mr. Henry. Thus, we disallow any deduction for

clothing or dry cleaning expenses.

10. Taxes, licenses, and business insurance

Mr. Henry claims deductions for amounts paid for taxes,

“licenses” (filing of articles of incorporation and filing a trademark), and

business insurance. Regarding amounts paid for taxes, Mr. Henry has

submitted no evidence to support the purpose of the “taxes”. They were

payments made to a municipality with no testimony or explanation on

brief as to what the payments were for. We do not allow the deduction.

However, Mr. Henry did make payments to the State of Maryland

to file articles of incorporation and to register a trademark, evidenced

by a receipt and letter to that effect for both filings. He also provided

statements supporting his claimed deduction for his business insurance.

36

[*36] We therefore allow a deduction of $328 for “licenses” and $1,827

for business insurance. 14

11. Deductions for Savvy Bill Pay remittance

The Commissioner conceded two-thirds of the deductions

Mr. Henry claims for payments remitted on behalf of clients of Savvy

Bill Pay, 15 but the other one-third of the alleged payments remains in

dispute. That is, for the four years at issue, Mr. Henry claims “Savvy

Bill Pay” remittances—which he paid either by check or by debit card—

totaling approximately $3.5 million; the Commissioner concedes about

$2.3 million; and about $1.2 million remains in dispute. See supra p. 7.

Mr. Henry provided multiple “lead sheets” (produced either by

Savvy Bill Pay or by himself) accompanied by pages of bank statements

that purport to demonstrate the amounts that Savvy Bill Pay paid on

behalf of its clients. Amounts shown on Mr. Henry’s lead sheets

supposedly correspond with amounts on the submitted bank statements

to prove that the expenses were not Mr. Henry’s personal expenses and

that he actually paid the amount he received from a client to a creditor

of that client. However, keeping in mind the Henrys’ notion of

“convert[ing] your personal life into your business life and writ[ing] it

all off,” we find Mr. Henry’s evidence of his Savvy Bill Pay expenses

unconvincing. Even where an alleged Savvy Bill Pay payment is duly

listed on his lead sheets and is linked to a payment entry on a bank

statement, we have no way to eliminate the possibility that it was in fact

a payment that Mr. Henry made on his own behalf, disguised as a client

payment, as a means of “writing off” his personal expenses as if they

were business expenses. We conclude that some unknowable portion of

14 Mr. Henry also claims a deduction for payments made for life insurance

supposedly by his businesses for Key Man Life. However, we have no testimony,

discussion on brief, or evidence to support that payments for an ostensible key man

life insurance for the business were not in fact merely personal payments made for life

insurance for which Mr. Henry’s relatives were beneficiaries. Mr. Henry did not offer

the insurance policy into evidence. We disallow those claimed “Key Man Life”

deductions and do not address the issue further.

15 The Commissioner is not obliged to justify the amount of his concession, and

he does not do so. That is, he does not provide details as to whether he determined

any particular alleged Savvy Bill Pay payments to be legitimate nor how he otherwise

decided what amount to concede for each year or why. We therefore simply look to

Mr. Henry to sustain his burden of proving for each year a larger total than the

Commissioner conceded. We conclude he did not do so.

37

[*37] the alleged Savvy Bill Pay client expenditures were in fact

expenditures for the benefit of the Henrys.

Upon reviewing Mr. Henry’s documents, we see that amounts

claimed as client “payments” made by debit card do seem to correspond

to payments appearing on Mr. Henry’s bank statements, that the bank

statements list payees (but not Savvy Bill Pay clients), and that the

payees on the bank statements match the payees listed by Mr. Henry.

However, as to client payments allegedly made by check, there are check

entries that Mr. Henry characterizes as Savvy Bill Pay payments that

provide no information beyond the check number, the date, and the

amount of the check itself. 16 And to complicate the analysis further,

Mr. Henry’s commingling of his finances with the finances of his

businesses makes impossible a siloed analysis of transactions only from

Savvy Bill Pay. Instead, we are presented with a veritable haystack and

are asked to find the hundreds of needles within. We decline the

assignment, see Venuto v. Commissioner, T.C. Memo. 2017-123, at *9

(“The Court will not sort through the voluminous evidence to decide

whether petitioner substantiated each and every expense he claimed”);

Akey v. Commissioner, T.C. Memo. 2015-227, at *21, and instead we hold

Mr. Henry to his obligation to demonstrate his entitlement to

deductions. He did not do so.

In response to the Commissioner’s criticisms about defects in his

proof of the particulars of his expenditures, Mr. Henry argues broadly

that the revenue from Savvy Bill Pay was necessarily and directly offset

by the payments remitted on behalf of his clients, so that (he says) one

can safely assume that the actual total of client payments would

approximate the Savvy Bill Pay income. But it is not so, and he does not

literally contend that it is so: Rather, in his post-trial brief (Doc. 624

at 29–30) he asserts that his Savvy Bill Pay expenses constituted not

100% of his Savvy Bill Pay income but instead only 85% for 2011, 87%

for 2012, 93% for 2013, and 91% for 2014. He also acknowledges that he

16 Mr. Henry’s supporting evidence for the check expenses of Savvy Bill Pay

varies widely from month to month. For some months there are scanned copies of

checks with named payees (although there is no “memo” description indicating a

client’s name nor even that the check is remitting payment on behalf of any client)

while for other months, there are no scanned copies of the claimed checks. Even for

months with scanned copies of checks, there are not copies of all checks reported as

Savvy Bill Pay expenses. For example, Mr. Henry listed 48 checks on a lead sheet for

the month of January 2012 paid by Savvy Bill Pay, but he offered only 21 images of

checks for that month, not all of which even correspond to the checks listed on the lead

sheet.

38

[*38] charged each client a total that consisted not only of the payments

he was to make on its behalf but also of a processing fee and some flat

amount per transaction. Of necessity, therefore, to the extent of those

other amounts, the Savvy Bill Pay income would not have been offset by

client payments; rather, it would seem that some portion of the Savvy

Bill Pay revenue either would have consisted of the merchant banking

fees (for which we have already allowed deductions, so that one cannot

assume a duplicative deduction for payment of a client expense) or

would have been a profit source of the Savvy Bill Pay business. The

record before us does not show what those amounts are and what portion

of the Savvy Bill Pay income they may have constituted.

Mr. Henry has not provided any reason, through testimony or in

his briefs, why this deduction should be any higher than the

Commissioner has conceded, and we are not obligated to “undertake the

work of sorting through every piece of evidence that [Mr. Henry] has

provided in an attempt to find support for his reported expenses”. See

Amundsen v. Commissioner, T.C. Memo. 2023-26, at *6. Consequently,

we sustain the Commissioner’s disallowance of deductions attributable

to payment remittance for Savvy Bill Pay clients in excess of what the

Commissioner has conceded.

12. Other Deductions

We briefly address other deductions not previously discussed in

this opinion. Mr. Henry’s brief discusses some of his claimed deductions

and presents charts that list both those claimed deductions and other

deductions that are not discussed in the narrative of the brief. 17 For

Mr. Henry to carry his burden to prove his entitlement to a deduction

for a business expense, it was generally incumbent on him (1) to assert

a claim for the deduction, (2) to produce credible documentation to

substantiate both the expenditure and its business purpose, and (3) to

provide credible testimony of that business purpose where it was not

either stipulated or evident from the documentation. In general we

disallow deductions where he has failed to do so.

There are some reported expenses that Mr. Henry did list and

discuss in his briefs, but as to which he had given no testimony during

trial. That is, he gave supposed information about these items as

17 We consider issues not raised in Mr. Henry’s opening brief to have been

abandoned. See Clay v. Commissioner, 152 T.C. 223, 235–36 (2019), aff’d, 990 F.3d

1296 (11th Cir. 2021); Hockaden & Assocs. v. Commissioner, 84 T.C. 13, 16 n.3 (1985),

aff’d, 800 F.2d 70 (6th Cir. 1986).

39

[*39] unsworn narrative in his briefs but had given no sworn testimony

at trial. These expenses include those for office moving, a “business”

storage unit, seminars and training, and online marketing ads. His

documentary evidence for these expenses resembles much of the

evidence that he submitted for his other expenses that we have

disallowed: receipts without context and highlighted and notated bank

statements. We disallow these expenses because, as with many of the

other expenses he reports, we lack credible testimony and are unable to

determine whether these are legitimate business expenses or are

another implementation of the Henrys’ “anyway expense” strategy.

There are other claimed deductions that are listed but not

discussed in Mr. Henry’s briefs. These include some for office

equipment, software, video conferencing, legal fees, prepaid legal fees,

finance charges, additional cash advances, books and subscriptions, and

postage. At trial he did not offer testimony on these items. For some of

these items he offered documentation that does show the fact of an

expenditure but does not show its business purpose. Mr. Henry is quite

right that, for example, postage is a deductible “common” expense

incurred by many businesses; but it is also a non-deductible expense

commonly incurred by many households. Someone with an announced

strategy of characterizing personal expenses as business expenses faces

a difficult burden to persuade us that a given expense was in fact a

business expense. Lacking supporting testimony and an express

explanation in his briefs, we deny deductions for those items.

However, we cannot say it is impossible that there might be an

expense for which we have not allowed any deduction but for which a

sufficiently meticulous review of the record would show that Mr. Henry

did submit documentary evidence for it and did give testimony about it

at trial and did report and discuss the expense in his briefs. But

Mr. Henry’s disorganized presentation made such a meticulous review

impractical. As we explained to Mr. Henry eight months before trial: “I

can’t figure out how these documents relate to what the parties are

disputing unless the parties show me.” As we read his post-trial briefs—

which ought to have linked the exhibits and the testimony to his

contentions—they instead include tangential, unsupported, and

generally unhelpful arguments. Even if we make allowances for his

being self-represented, Mr. Henry’s performance at trial requires the

conclusion that some of his claims were abandoned at trial. We

therefore did not consider such claims made by Mr. Henry in his post-

trial briefs without visible evidentiary support.

40

[*40] E. Ayer’s Place repairs

Section 212(2) allows for a deduction of all the ordinary and

necessary expenses paid or incurred during the taxable year for the

management, conservation, or maintenance of property held for the

production of income. A taxpayer may deduct under section 212

properly substantiated repair expenses for properties held out for rent.

A taxpayer claiming a deduction on a federal income tax return

must demonstrate that the deduction is allowable pursuant to a

statutory provision and must further substantiate that the expense to

which the deduction relates has been paid or incurred. § 6001; Hradesky

v. Commissioner, 65 T.C. 87, 89–90 (1975), aff’d per curiam, 540 F.2d

821 (5th Cir. 1976).

Mr. Henry claims deductions for payments allegedly made to

repair the Ayer’s Place property to maintain its habitability. As

discussed above, see supra p. 24, we do not know the extent to which Mr.

Henry owned the Ayer’s Place property, if at all. The only evidence

submitted to support Mr. Henry’s claimed deductions is faded receipts

and a handful of checks with the “memo” line reading “Ayer’s Place” or

“Section 8 Repairs”. For these reasons, we find a lack of credible

evidence to allow a deduction for repairs made to the Ayer’s Place

property.

F. Charitable contributions

Section 170(a) allows as a deduction any charitable contribution

made within the taxable year. During all years at issue, a taxpayer

could only claim a deduction for charitable contributions only if he

itemized his deductions. To qualify as a deduction, the contribution

must be made to a donee organization described in section 170(c),

including, inter alia, “[a] corporation, trust, or community chest, fund,

or foundation . . . organized and operated exclusively for religious,

charitable, scientific, literary, or educational purposes”. Deductions for

charitable contributions are allowable only if verified under the

regulations prescribed by the Secretary. § 170(a)(1). Charitable

contributions of cash or property of $250 or more must be substantiated

by a contemporaneous written acknowledgment from the donee. See

§ 170(f)(8); Treas. Reg. § 1.170A-13(f)(1). A CWA is “contemporaneous”

if it is obtained by the taxpayer on or before the earlier of the date the

taxpayer files the original return for the taxable year of the contribution

or the due date (including extensions) for filing the original return for

41

[*41] the year. § 170(f)(8)(C); Treas. Reg. § 1.170A-13(f)(3). That

acknowledgment, which must be furnished by the donee, must (1) state

the amount of cash and describe other property contributed, (2) indicate

whether the donee organization provided any goods or services in

consideration for the contribution, and (3) provide a description and good

faith estimate of the value of any goods or services provided by the

donee. § 170(f)(8)(B); Treas. Reg. § 1.170A-13(f)(2).

Mr. Henry claims Schedule A deductions for charitable

contributions totaling $5,438 for the years at issue. Mr. Henry alleges

he paid $4,467 to the Nation of Islam, $871 to the Rev. Farrakhan

individually, and $100 to the Scarlet Saints. Mr. Henry submitted

receipts produced by the donee for only a handful of contributions

(totaling $1,160) that he made to the Nation of Islam during 2011

through 2013; he did not submit any receipts for 2014.

All remaining evidence consists of bank statements and several

checks. We do not have enough evidence before us to enable us to

determine whether the payments made to the individual or the Scarlet

Saints qualify as charitable contributions under section 170, and we

therefore disallow those deductions. Regarding the payments made to

the Nation of Islam, we conclude that receipts executed at the time of

the donations qualified as a CWA. For that reason, we find that

Mr. Henry has offered sufficient evidence to support a deduction for

charitable contributions of $1,160. However, because Mr. Henry

claimed (and we will allow) the standard deduction on his late returns

for years 2011 through 2014, he is unable to also claim a deduction for

charitable contributions, which could be deducted only if one itemized

his deductions for those years. 18 Consequently, we find that Mr. Henry

is entitled to no deduction for charitable contributions for any year at

issue.

G. Additions to tax

The Commissioner determined in the NOD additions to tax under

section 6651(a)(2) for failure to pay, under section 6651(f) for fraudulent

failure to file (or, in the alternative, under section 6651(a)(1) for non-

fraudulent failure to timely file), and under section 6654 for failure to

18 Congress allowed a temporary exception to this limitation on charitable

contribution deductions when it amended section 170(p) in 2020. For any taxable year

beginning in 2021, section 170(p) allows a taxpayer to claim some charitable

contributions even when claiming the standard deduction. For the years at issue,

however, there was no such exception.

42

[*42] pay estimated income tax for all relevant years. For the following

reasons, we find that Mr. Henry is liable for section 6651(a)(2) and 6654

additions to tax, and that he is liable not for the section 6651(f)

fraudulent failure-to-file addition to tax but instead for the alternative

section 6651(a)(1) addition for a non-fraudulent failure to file.

1. Section 6651(a)(2) failure to timely pay

Under section 6651(a)(2), an addition to tax is imposed for failure

to timely pay the amount shown as tax on a return. (The addition is not

imposed where there is “reasonable cause”, but Mr. Henry has

stipulated the absence of reasonable cause. See supra note 3.) The

amount of the addition to tax is 0.5% of the amount of tax shown on the

return, with an additional 0.5% for each month the return is delinquent,

not to exceed 25% in the aggregate. § 6651(a)(2).

Mr. Henry did not submit returns prior to receiving the NOD. For

that reason, the Commissioner created SFRs pursuant to section 6020(b)

for 2011–2014 which each showed amounts owed for each year. For

purposes of section 6651(a)(2), SFRs are treated as returns that trigger

the accrual of the addition to tax for failure to pay tax shown on a return.

§ 6651(g)(2). The Commissioner bears the burden of producing evidence

that the addition to tax under section 6651(a)(2) is appropriate. See

§ 7491(c). The Commissioner has submitted signed 6020(b)

certifications for 2011–2014, and Mr. Henry does not challenge their

validity. Likewise, Mr. Henry does not challenge that he has paid the

amount shown on the SFRs. Therefore, because an amount of tax will

be due for each year at issue (in an amount to be recalculated under Rule

155), Mr. Henry will be liable for additions to tax under section

6651(a)(2).

2. Section 6651(a)(1) and (f) failure to file

Section 6651 imposes two alternative additions to tax that

penalize a failure to file a return—i.e., under section 6651(a)(1) a

maximum addition of 25% for failure to file, and under section 6651(f) a

maximum addition of 75% if the failure to file is fraudulent. Liability

under either subsection arises from the late filing of a return (which here

is an undisputed fact) and the absence of “reasonable cause” (which

absence is stipulated here).

43

[*43] a. Section 6651(a)(1)

Section 6651(a)(1) authorizes the imposition of an addition to tax

for failure to file a timely return (unless the taxpayer proves that such

failure is due to reasonable cause and is not due to willful neglect). The

amount of the addition is a percentage of the amount of tax required to

be shown on the return—5% per month up to five months, for a

maximum of 25% (but after reducing the amount by the withholding

credits). An addition to tax under section 6651(a)(1) is an alternative to

the greater addition to tax imposed under section 6651(f). Because, as

we discuss in the next section, Mr. Henry is not liable for the greater

addition to tax under section 6651(f), we hold that he is liable instead

for the lesser addition to tax under section 6651(a)(1).

b. Section 6651(f)

Under section 6651(f), the addition to tax imposed under section

6651(a)(1) is increased to 15% (rather than 5%) for each month the

return is delinquent, up to a total of 75% (rather than 25%), if “the

failure to file any return is fraudulent”. The Commissioner argues for

that addition enhanced for fraud. In applying section 6651(f), we

consider essentially the same elements as when considering the

imposition of the fraud penalty under section 6663. See Clayton, 102

T.C. at 653. Fraud under section 6663 “may be proved by circumstantial

evidence and from reasonable inferences drawn from the facts because

direct proof of the taxpayer’s intent is rarely available. . . . The intent to

conceal or mislead may be inferred from a pattern of conduct.”

Niedringhaus v. Commissioner, 99 T.C. 202, 210–11 (1992). Facts that

show this “intent to conceal or mislead” are called “badges of fraud”, and

the often-quoted non-exclusive list of such badges tallies them as

follows:

(1) Understatement of income; (2) inadequate records;

(3) failure to file tax returns; (4) implausible or inconsistent

explanations of behavior; (5) concealment of assets;

(6) failure to cooperate with tax authorities; (7) filing false

Forms W–4; (8) failure to make estimated payments;

(9) dealing in cash; (10) engaging in illegal activity; and

(11) attempting to conceal illegal activity.

Id. at 211.

However, whereas section 6663 imposes a penalty for a knowing

misrepresentation of the truth in a filed return in order to evade tax,

44

[*44] section 6651(f) imposes a penalty only when there is a knowing

concealment of a material fact by the non-filing of a return in order to

evade tax. Mohamed v. Commissioner, T.C. Memo. 2013-255, at *20–21.

That is to say, for purposes of the section 6651(f) addition to tax, the

taxpayer must be shown to have deliberately failed to file his return

timely, knowing that, by doing so, he was concealing the fact that he had

received income subject to tax. See Bennett v. Commissioner, 30 T.C.

114, 120, 122 (1958). Consequently, while “we examine the same badges

of fraud we used when considering the imposition of the fraud penalty

. . . under section 6663(a), . . . we necessarily focus on [the taxpayer’s]

decision not to file [his] return when due. If that decision was made with

the intent to evade tax, then the addition to tax under section 6651(f)

may properly be imposed”. Enayat v. Commissioner, T.C. Memo. 2009-

257, 2009 WL 3763085, at *24 (emphasis added).

On brief and during trial, the Commissioner provided evidence

and argument that might support a finding that the Henrys’ businesses

were counseling their clients to file fraudulent returns; Ms. Hunter-

Henry provided tax advice to clients with the aim to avoid tax liability

and “pay the IRS without using your money” and encouraged clients to

falsely characterize their personal expenses as deductible business

expenses. But we do not address here any fraud that might have been

committed by their clients, nor any criminal liability that might arise

from conspiring with them to do so. See 18 U.S.C. § 371. We do not

consider here Ms. Hunter-Henry’s failure to timely file a return, but only

Mr. Henry’s failure. We do not consider false deductions claimed on or

omissions of income from the returns that the Henrys eventually,

belatedly, filed in April 2019, but only Mr. Henry’s failure to file returns

for 2011–2014 when they were due in the succeeding years (the latest

being the 2014 return due on extension in October 2015).

To prevail under section 6651(f), the Commissioner is obliged to

prove by clear and convincing evidence that Mr. Henry failed to file his

returns with the intent to conceal his tax liabilities. But the Henrys

conducted all of their business through payment processing entities that

issued Forms 1099 to them for each year at issue. Mr. Henry knew that

the issuers were reporting his income to the IRS. We cannot rule out

the substantial possibility that Mr. Henry, aware that his income was

being reported to the IRS, did not think that he was able to conceal much

of anything from the IRS.

Moreover, Mr. Henry was a man with a high school diploma who

relied on his wife—the “tax pro” with a juris doctorate who actually

45

[*45] performed the tax services of the businesses—to file their tax

returns each year. He accepted her assurances that they had loss

carryforwards that would reduce their income tax liabilities to zero and

that this zero liability trumped their obligation to file a return. It is easy

to argue that this was negligent on Mr. Henry’s part; but the

Commissioner has not shown us “clear and convincing evidence” that it

was fraudulent.

The Commissioner has not met his burden to prove that

Mr. Henry actively intended to evade his tax liability by failing to file

his return, and we therefore do not find Mr. Henry liable for any

additions to tax under section 6651(f).

3. Section 6654 failure by individual to pay estimated

income tax

Section 6654(a) provides for an addition to tax for an individual’s

underpayment of estimated tax. In advance of the due date of the

income tax return, estimated income tax must be paid quarterly in an

amount equal to 25% of the lesser of (1) 90% of the tax shown on the

current year’s tax return (or 90% of the tax if no return is filed) or (2) if

the taxpayer filed for the previous year, 100% of the tax shown on the

prior year’s tax return. See § 6654(c) and (d)(1). To meet his burden of

production, the Commissioner must show that Mr. Henry had an

obligation to make estimated tax payments. See Wheeler v.

Commissioner, 127 T.C. 200, 211–12 (2006), aff’d, 521 F.3d 1289 (10th

Cir. 2008). That is, the Commissioner must introduce evidence of

whether Mr. Henry filed a tax return for the prior year (he did not do so

as to any of the years at issue) and whether he had a tax liability for

each of the years at issue (he did have a liability). See id. The due dates

of the required estimated payments for a calendar year taxpayer are

April 15, June 15, and September 15 of the calendar year in question

and January 15 of the following year, § 6654(c)(2), but Mr. Henry admits

that he did not pay estimated quarterly taxes for 2011–2014.

Mr. Henry’s assertions regarding payments he made years later, after

2019, on the basis of his suppositions about the amounts of his tax

liabilities, do not alter our determination here because these payments

were made delinquently. Therefore, we sustain the additions to tax

under section 6654 for failure to pay estimated income tax.

46

[*46] Conclusion

For the tax years 2011 through 2014, we hold that Mr. Henry is

not liable for tax on cancellation of indebtedness income but is liable for

tax on the Ayer’s Place rental income. As to deductions, we hold that he

is entitled only to relatively small amounts, set out above, beyond those

the Commissioner already conceded.

As to additions to tax, we hold that Mr. Henry is not liable for

additions to tax under section 6651(f) for fraudulent failure to file his

returns, but we do hold him liable for additions to tax under section

6651(a)(1) for (non-fraudulent) failure to timely file, under section

6651(a)(2) for failure to pay, and under section 6654 for failure to pay

estimated tax.

To reflect the foregoing,

Decision will be entered under Rule 155.