The opinion
United States Tax Court
T.C. Memo. 2026-18
JACK GOODWILL-OIKERHE,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
__________
Docket No. 20144-19. Filed February 11, 2026.
__________
Jack Goodwill-Oikerhe, pro se.
Victoria E. Cvek, David A. Indek, Archana Ravindranath, Amanda K.
Bartmann, and Nancy M. Gilmore, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARSHALL, Judge: Petitioner is a highly educated individual
who wholly owns an S corporation, Golden Express International, Inc.
(GEI), through which he engages in tax return preparation and other
services. Respondent issued petitioner a Notice of Deficiency (NOD) in
which he determined that petitioner is liable for federal income tax
deficiencies of $6,704, $24,067, and $11,223 and section 6663 1 fraud
penalties of $5,028, $18,050, and $8,417 for taxable years 2015, 2016,
and 2017 (years in issue), respectively. Petitioner timely filed the
Petition in this case. The issues for decision are whether petitioner is
(1) entitled to dependency exemption deductions for each of the years in
issue; (2) entitled to a property tax deduction for 2016; (3) entitled to
1 Unless otherwise indicated, statutory references are to the Internal Revenue
Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the
Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and
Rule references are to the Tax Court Rules of Practice and Procedure. Monetary
amounts are rounded to the nearest dollar.
Served 02/11/26
2
[*2] unreimbursed employee expense deductions for vehicle and cell
phone expenses for 2015 and 2016; (4) entitled to various deductions
with respect to GEI for each of the years in issue; and (5) liable for the
fraud penalty for each of the years in issue. For the reasons set forth
below, we sustain respondent’s determinations in full. 2
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The
Stipulation of Facts and the accompanying Exhibits are incorporated
herein by this reference. Petitioner resided in Maryland when he filed
the Petition.
I. Petitioner’s Background
A. Residence
During the years in issue petitioner resided on Antanna Avenue
in Baltimore, Maryland. The Antanna Avenue residence consisted of
three stories. During the years in issue petitioner used the top two
stories as living quarters and used the basement exclusively as GEI’s
office. The Antanna Avenue residence was owned by petitioner’s
brother, Austin Oparanma, who resided in Nigeria. Petitioner had a
verbal agreement with his brother to use the residence.
B. Family
Petitioner has two nephews, Chisa and Chinda Oparanma,
through his brother Mr. Oparanma. The nephews were born in 1997 and
1998. During the years in issue Chisa and Chinda attended school in
Ukraine, with Mr. Oparanma paying at least some of their school fees.
C. Education
In 1985, petitioner earned a bachelor’s degree in business
administration from Central State University. In 2006, petitioner
earned a master’s degree in accounting and finance from Morgan State
University. At the time of trial petitioner was a Ph.D. candidate in
public policy and administration at Walden University, a program which
2 In the alternative to the section 6663 fraud penalties, respondent determined
that petitioner is liable for section 6662(a) accuracy-related penalties attributable to
negligence, or a substantial understatement of income tax, for each of the years in
issue. Because we sustain the fraud penalties, we do not address these penalties. Other
adjustments made in the NOD are computational and also will not be discussed.
3
[*3] he began in 2016. As part of his course loads for both his bachelor’s
and master’s degrees, petitioner took courses in accounting and
taxation. Petitioner’s accounting courses covered basic accounting
principles including cash basis versus accrual method accounting.
D. Work Experience
1. Tax Return Preparation
In 1984, petitioner began preparing U.S. income tax returns for
himself, his family, and friends for no compensation. In 2006, after
completing his master’s degree, petitioner began preparing tax returns
commercially through GEI, which we discuss in more detail infra
Findings of Fact Part II. In 2010, petitioner was issued a preparer tax
identification number. As of the time of trial, petitioner still had a
number and continued to prepare tax returns for others.
2. Other Work
During the years in issue petitioner was employed by a car
dealership, Bob Davidson Ford (BDF), as a lot attendant in its service
department. As a lot attendant, petitioner was required to take
customer cars to and from a service lot and occasionally to shuttle
customers to or from their homes. Petitioner would also assist with the
general maintenance of the service department, such as by cleaning
floors. Petitioner would work intermittently for BDF throughout each
year, taking time off to do other things such as his tax preparation work.
When petitioner did work for BDF, he worked approximately 40 hours
per week.
BDF discouraged employees from incurring personal expenses to
complete work-related tasks, including advising against the use of
personal vehicles. BDF provided an employee handbook, or blue book,
that reflected this policy to every employee when they first started with
BDF. If a vehicle was needed to complete a work-related task, BDF
would provide a shuttle vehicle. Or, if a shuttle vehicle was not
available, BDF would put a dealer tag on another car if it was for a short
distance. The general radius allowed by BDF for shuttle pickup and
dropoff of a customer was seven to ten miles.
If a BDF employee was required to pick up a part or other item
for BDF, a shuttle vehicle would also be provided or the BDF parts
department would provide a truck. There was never a time when a BDF
employee would need to use a personal vehicle for a work-related task,
4
[*4] nor did BDF employees need personal cell phones to do work-
related tasks.
One of the managers petitioner reported to at BDF was Anthony
Moskunas. Another of petitioner’s supervisors was John Marshall. Mr.
Moskunas had no knowledge of petitioner’s ever requesting to use a
personal vehicle to complete a work task. And it was Mr. Marshall’s
understanding that BDF would never allow petitioner to drive his
personal vehicle for company business.
For taxable years 2015, 2016, and 2017, petitioner received
income reported on Forms W–2, Wage and Tax Statement, from BDF of
$4,260, $9,230, and $7,054, respectively. 3 For taxable year 2015,
petitioner also received income reported on Form W–2 from Anytime
Labor Baltimore, LLC (Anytime Labor), of $83.
II. GEI
A. In General
During the years in issue petitioner was the sole shareholder of
GEI, a subchapter S corporation that he organized in 2006. In addition
to his other work, petitioner engaged in two separate business activities
through GEI. One, as stated, was tax return preparation. The other was
consolidation and shipping.
GEI obtained customers through referrals. GEI received
payments for services primarily in cash although it also accepted checks.
GEI also paid its expenses primarily in cash, and the parties stipulated
that it used the cash basis method of accounting. GEI used the same
bank accounts for both the tax return preparation and the consolidation
and shipping activities. GEI did not deposit all its gross receipts into its
bank accounts and paid few expenses from its bank accounts. GEI did
not issue any Forms W–2 to petitioner for the years in issue. Nor did it
issue any Forms 1099–MISC, Miscellaneous Income, for the years in
issue.
3 The parties stipulated that petitioner received income reported on Forms
W–2 from BDF of $4,529 for 2015 and $7,053 for 2017. The Forms W–2 included in the
record, however, report these amounts as $4,260 and $7,054, respectively, and these
are the amounts petitioner included in his federal income tax returns. See infra
Findings of Fact Part III.B. Neither party has sought any adjustment with respect to
petitioner’s BDF wages, and they are not in dispute.
5
[*5] GEI had two computers that it used for its business. Petitioner’s
cousin, Sanni Momoh, assisted petitioner with the maintenance of GEI’s
books and records for the years in issue. Mr. Momoh maintained GEI’s
books and records in Excel-type spreadsheets.
B. Tax Return Preparation
Petitioner, through GEI, prepared over 100 returns for taxable
year 2015 and over 300 returns for each of taxable years 2016 and 2017.
Petitioner used tax preparation software to prepare the returns and filed
them electronically. Petitioner generally charged customers $200 for
preparing and filing their federal and state tax returns and $50 for any
additional state tax returns. Petitioner also provided certain discounts,
however, such as for family, friends, and seniors.
C. Consolidation and Shipping
GEI’s consolidation and shipping activity consisted both of
consolidating various size items into freight containers and shipping
them via cargo ships and of transporting vehicles in freight containers
also via cargo ships. GEI charged customers for its consolidation and
shipping expenses, any other corresponding business expenses, the price
of the item if GEI purchased it (e.g., if it purchased a vehicle), and a
profit margin. For the shipment of a vehicle, GEI generally charged
approximately $1,200.
GEI used ports in New Jersey, Boston, Baltimore, and Miami, and
shipped items primarily to Africa and the Caribbean. GEI would
contract with shipping partners who it would have ship the consolidated
freight containers and vehicles from the U.S. ports to their destinations.
GEI sometimes paid day laborers in the United States to help load
containers before shipment. GEI also sometimes paid day laborers at the
shipment’s destination to get the items to their recipients. GEI never
directly purchased fuel for shipping.
GEI also sometimes worked with George Apusa, who was in
Boston. Mr. Apusa had a business separate from but similar to GEI’s
consolidation and shipping activity. Mr. Apusa informed petitioner
about expenses that he ostensibly incurred for GEI, such as payments
to dockworkers and fuel expenses. Mr. Apusa did not break such
expenses down by line item, however. For example, he would not tell
petitioner how much he ostensibly paid each dockworker, but only the
total amount it allegedly cost to do a job.
6
[*6] GEI did not pay Mr. Apusa directly for any such expenses. Nor
did it pay Mr. Apusa any wages or other direct compensation. Instead,
petitioner and Mr. Apusa had an arrangement whereby they would do
work for each other and then give the other credit for the same amount.
The expense numbers Mr. Apusa provided to petitioner with respect to
issues he handled for GEI were the numbers petitioner had entered into
GEI’s books and records. Petitioner also used these numbers in
preparing GEI’s tax returns for the years in issue, which we discuss in
more detail infra Findings of Fact Part III.A. Petitioner never requested
any underlying documents, such as receipts or invoices, to support the
numbers Mr. Apusa provided.
III. Tax Returns
Petitioner prepared and timely filed Forms 1120S, U.S. Income
Tax Return for an S Corporation, for GEI for each of the taxable years
2015, 2016, and 2017. Petitioner also prepared and timely filed Forms
1040, U.S. Individual Income Tax Return, for himself for each of the
taxable years in issue.
A. GEI’s Returns
On GEI’s returns for each of the years in issue, petitioner reported
that GEI used the cash method of accounting. In preparing GEI’s
returns, petitioner looked at income and expense numbers given to him
by Mr. Momoh, but he did not review any underlying records or
spreadsheets maintained by Mr. Momoh. As stated, neither did
petitioner request any supporting documents from Mr. Apusa. GEI,
through petitioner, reported its income and expenses, in pertinent part,
as follows.
1. Gross Receipts
GEI reported its gross receipts as $115,875, $124,692, and
$82,746 for 2015, 2016, and 2017, respectively.
2. Fuel Tax Credits
GEI claimed fuel tax credits of $15,480, $17,268, and $12,582 for
2015, 2016, and 2017, respectively. With respect to the credits, each
return also reported the prior year’s claimed fuel tax credit as other
income. These amounts were $14,176, $15,480, and $17,268 for 2015,
2016, and 2017, respectively.
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[*7] 3. Expenses
On its returns for the years in issue, GEI also claimed deductions
for various reported expenses including the following.
2015 2016 2017
Bad Debts $2,482 $3,863 $5,172
Rents 9,000 9,000 9,000
Freights & 79,856 82,176 48,931
Purchases
Travel & — 6,734 7,426
Entertainment
Nonemployee 14,250 — —
Compensation
Commissions — — 7,520
4. Ordinary Business Income
Subtracting its deductions from its total reported income (i.e.,
gross receipts plus other income), GEI reported its ordinary business
income as $11,312, $20,338, and $4,841 for 2015, 2016, and 2017,
respectively. GEI issued to petitioner Schedules K–1, Shareholder’s
Share of Income, Deductions, Credits, etc., for each of the years in issue
on which it reported these amounts as petitioner’s 100% share of income
from GEI.
B. Petitioner’s Returns
As with GEI, petitioner used the cash basis method of accounting
on his individual returns. On his returns for 2015 and 2016, petitioner
reported zero taxable income and claimed refunds of $5,292 and $5,882,
respectively. And on his 2017 return petitioner reported $3,073 of
taxable income and claimed a $4,514 refund. Petitioner further reported
his income and expenses, in pertinent part, as follows.
1. Wage, Schedule C, and Other Income
Petitioner reported his GEI Schedule K–1 income as gross
receipts on Schedule C, Profit or Loss From Business, for taxable year
8
[*8] 2015 and as other income for taxable years 2016 and 2017. 4
Petitioner did not report any income on Schedule E, Supplemental
Income and Loss, for the years in issue.
2. Dependency Exemption Deductions
Petitioner claimed dependency exemption deductions with
respect to his two nephews for each of the years in issue.
3. Property Tax Deduction
For taxable year 2016, petitioner claimed an itemized deduction
for personal property taxes of $4,630.
4. Unreimbursed Employee Expense Deductions
For taxable years 2015 and 2016, petitioner claimed itemized
deductions with respect to unreimbursed employee expenses of $9,505
and $8,188, respectively. On his corresponding Form 2106, Employee
Business Expenses, for 2015, petitioner included in his unreimbursed
employee expense amount $8,221 of vehicle expenses and $1,284 of cell
phone expenses. With respect to the vehicle expenses, petitioner
reported that he drove 14,298 business miles, that his vehicle was used
98.39% for business, and that he had no other vehicle available for
personal use. On his 2016 Form 2106, petitioner included in his
unreimbursed expense amount $5,068 of vehicle expenses and $3,120 of
cell phone expenses. As to these vehicle expenses, petitioner reported
that he drove 9,386 business miles, that his vehicle was used 98.159%
for business, and that he again had no other vehicle available for
personal use.
IV. Examination
Internal Revenue Service (IRS) Revenue Agent Kevin Cascante
(RA Cascante) examined petitioner’s 2015, 2016, and 2017 tax returns.
In conjunction with this examination RA Cascante also examined GEI’s
2015, 2016, and 2017 tax returns. RA Cascante was assigned to
petitioner’s case in early 2018 by his then manager, Ashley Gunn. When
RA Cascante became a revenue agent, he received training on how to
4 For 2017, petitioner reported total other income of $17,423. The parties
stipulated that this amount included the $4,841 of income reported on petitioner’s 2017
Schedule K–1. We note that the remaining amount, $12,582, is the same amount as
the fuel tax credit GEI claimed for 2017.
9
[*9] perform examinations. As of the time of trial, RA Cascante had been
a revenue agent for 13 years and performed at least 100 income tax
examinations, including examinations for both individuals and
businesses.
A. Meetings and Documents, in General
RA Cascante met with petitioner four times during the
examination, twice in February 2018, once in June 2018, and once in
July 2018. Each of these meetings took place at the Antanna Avenue
residence. During these meetings RA Cascante asked petitioner to
provide documents in support of his return positions. Petitioner
provided RA Cascante only a few documents in response to this request.
RA Cascante had certain procedures he would follow depending
on whether the document petitioner provided was an original or a copy.
For original documents RA Cascante would memorialize the contents of
the document in the case file and hand the document back to petitioner.
Every receipt petitioner handed to RA Cascante, RA Cascante handed
back to petitioner on the same day. For copies RA Cascante might take
the document back to his office and make it a part of the case file.
Specifically, RA Cascante took some copies of petitioner’s invoices for
GEI’s tax preparation clients back to his office, “scheduled them out,”
and then mailed them back to petitioner. These copies were the only
records that RA Cascante took with him from petitioner’s residence. RA
Cascante never kept any original documents that petitioner gave him.
RA Cascante followed these same procedures in every other case to
which he was assigned and in which a taxpayer gave him documents.
Petitioner told RA Cascante that he had documents to support his
case in addition to the few that he had given him, but he did not provide
RA Cascante with these additional documents. Neither did he provide
RA Cascante with bank records, and RA Cascante had to summon the
records. RA Cascante asked petitioner to reconstruct his records from
the bank statements, but petitioner was unable to do so.
Petitioner did show RA Cascante a drawer or two that contained
documents but told RA Cascante that he was unprepared to go through
those documents and never provided them to RA Cascante. Petitioner
also told RA Cascante that he would bring Mr. Momoh to a meeting with
him to discuss GEI’s records but he never did, nor did he provide RA
Cascante with any spreadsheets prepared by Mr. Momoh. Petitioner
further explained to RA Cascante that he could not provide more
10
[*10] documents during the examination because there had been a flood
at the Antanna Avenue property in early 2017 that destroyed his
records.
To support his explanation of a flood, petitioner showed RA
Cascante work proposals from a plumber for drain cleaning and
replacement of a sewer line. The proposals were not signed by either
petitioner or the plumber, and petitioner acknowledged to RA Cascante
that the work was never completed. Petitioner did not provide RA
Cascante with any other evidence that there was a flood or that a flood
was the reason he was unable to provide more documents. Petitioner did
not take any photographs of the alleged flood damage or file an
insurance claim for flood damage. During RA Cascante’s meetings with
petitioner at his residence, RA Cascante did not see any evidence of a
flood, even when he walked through the property’s basement with
petitioner during his first visit. Petitioner did not collect any
information from Mr. Apusa to help reconstruct his records. Similarly,
petitioner did not contact the shipping companies.
B. Specific Deductions
During the examination, RA Cascante discussed with petitioner
the deductions petitioner claimed on his individual returns. RA
Cascante also discussed with petitioner the deductions he claimed on
GEI’s returns, which flowed through to petitioner’s individual returns.
See § 1366(a).
1. Petitioner’s Deductions
a. Dependency Exemption Deductions
As to the dependency exemption deductions petitioner claimed
with respect to his two nephews, petitioner told RA Cascante that Chisa
and Chinda stayed with him for visits. But petitioner was unable to tell
RA Cascante when their visits were or how long the visits lasted. Nor
did petitioner show RA Cascante any evidence of the nephews’ living
with him at the Antanna Avenue residence when RA Cascante met with
him there. Petitioner likewise did not tell RA Cascante what expenses
he paid with respect to his nephews. The only evidence petitioner did
provide to RA Cascante ostensibly with respect to providing their
support was two or three Western Union-type receipts totaling
approximately $1,100.
11
[*11] b. Property Tax Deduction
Petitioner informed RA Cascante that he claimed the $4,630
personal property tax deduction on his 2016 return because he paid
property taxes on the Antanna Avenue residence. In support of the
deduction, petitioner showed RA Cascante a water bill, a property tax
bill, and a $3,468 receipt dated in 2017 from the City of Baltimore.
Petitioner asserted to RA Cascante that the City of Baltimore receipt
covered property taxes with respect to at least part of 2016 such that the
date on which he paid the taxes did not matter.
c. Unreimbursed Employee Expense Deductions
With respect to the vehicle and cell phone expenses for which he
claimed unreimbursed employee expense deductions for 2015 and 2016,
petitioner told RA Cascante that the expenses were incurred primarily
for his work at BDF and that he would use his personal vehicle to pick
up parts and vehicles and to shuttle customers. RA Cascante asked
petitioner for documentation to support these expenses, but petitioner
did not provide any, nor was he able to explain to RA Cascante how he
calculated his expenses.
RA Cascante attempted to verify petitioner’s statements
regarding the use of his personal vehicle at BDF. During one of his
meetings with petitioner, RA Cascante and petitioner had a phone call
with petitioner’s supervisor Mr. Marshall. Mr. Marshall stated his
understanding that BDF would never allow petitioner to drive his
personal vehicle for company business. After the call, petitioner told RA
Cascante that Mr. Marshall was not aware of an agreement petitioner
had with a higher level of management at BDF authorizing him to use
his personal vehicle. But when RA Cascante asked petitioner if he would
be willing to drive to BDF to clear up the issue, petitioner declined. Nor
did petitioner explain the business necessity of the cell phone use to RA
Cascante or provide him with any supporting documentation with
respect to the phone.
2. GEI’s Flowthrough Deductions
a. Bad Debts
Petitioner did not provide RA Cascante with any documents to
support GEI’s bad debt deductions for the years in issue. Petitioner told
RA Cascante that there were generally two scenarios in which he would
claim bad debt deductions: (1) if someone wrote petitioner a bad check,
12
[*12] he would deduct it as bad debt expense when it happened; and
(2) if he purchased a vehicle for transport overseas and upon receipt and
inspection of the vehicle the customer negotiated a lower payment
amount than that originally agreed upon. RA Cascante explained to
petitioner that because GEI used the cash basis method of accounting,
GEI would not be entitled to a bad debt deduction in petitioner’s sample
situations because the initial amount of income would not have been
reported in gross receipts. In response to RA Cascante’s explanation,
petitioner declared he did not know what RA Cascante was talking
about.
b. Rents
As to GEI’s rent deductions for the years in issue, petitioner
informed RA Cascante that the deductions reflected rent he paid to his
brother Mr. Oparanma for GEI’s use of the Antanna Avenue residence’s
basement. Petitioner further informed RA Cascante that his rental
agreement with his brother was a verbal one and that he was paying
$750 per month. But petitioner provided RA Cascante with no evidence
of the agreement or any rent payments to Mr. Oparanma. RA Cascante
did, however, view the 2017 City of Baltimore receipt as proof that
petitioner had made a payment in lieu of rent for that year.
Consequently, RA Cascante allowed one-third of the amount of the
receipt, or $1,156, as a rent expense for 2017. RA Cascante arrived at
the one-third amount by counting the basement as constituting one-
third of the residence.
c. Freights and Purchases
In discussing GEI’s freight and purchase expenses, petitioner
provided RA Cascante with a buyer’s order for a Jaguar that was
purchased for $78,037 in 2015 as well as documents showing that a
Mack truck and a car were shipped from Boston to Nigeria for $2,930 in
2017. RA Cascante allowed the documented expenses. Petitioner did not
provide any additional substantiation or explanation for the reported
freight and purchase expenses above the amounts allowed by RA
Cascante.
d. Travel and Entertainment
Petitioner did not provide RA Cascante with any information
regarding GEI’s reported travel and entertainment expenses for 2016
and 2017.
13
[*13] e. Nonemployee Compensation
Petitioner had no records to support the nonemployee
compensation expense GEI deducted for 2015, and he could not provide
any to RA Cascante during the examination. Petitioner was also unable
to reconstruct the amount reported as nonemployee compensation.
Petitioner explained to Mr. Cascante that GEI was not required to issue
Forms 1099 with respect to the nonemployee compensation because no
individual worker was paid over $600. Petitioner could not name any of
the workers paid, however, and he did not know whether the same
person had worked for him multiple times.
f. Commissions
Petitioner provided RA Cascante with no records to support the
commission expense GEI deducted for 2017. Petitioner told RA Cascante
that the purpose of the commission expense was to pay a transfer agent
in Nigeria.
C. Examination Results
RA Cascante’s examination resulted in adjustments with respect
to both petitioner’s and GEI’s returns for each of the years in issue. RA
Cascante also determined that section 6663 fraud penalties should be
imposed with respect to petitioner.
V. Notices of Deficiency
On August 14, 2019, respondent issued petitioner the NOD for
taxable years 2015, 2016, and 2017 in which he determined that
petitioner is liable for the deficiencies and section 6663 fraud penalties
at issue. On December 3, 2019, respondent issued GEI an NOD in which
he determined GEI was also liable for deficiencies for taxable years
2015, 2016, and 2017.
A. GEI’s NOD
In GEI’s NOD, the only adjustment respondent made was to
disallow the fuel tax credits that GEI claimed for the years in issue.
Respondent issued a separate NOD to GEI for the fuel tax credit
adjustments because they were entity-level adjustments that did not
flow through to petitioner’s individual income tax returns. See § 1366(a),
(f)(1). Respondent reflected the remaining adjustments that resulted
from the examination of GEI’s returns on petitioner’s NOD as
14
[*14] flowthrough adjustments. No petition was filed with respect to
GEI’s NOD.
B. Petitioner’s NOD
1. The Deficiencies
Respondent determined the deficiencies in petitioner’s NOD on
the basis of multiple adjustments. Respondent disallowed the
dependency exemption deductions that petitioner claimed with respect
to his two nephews for each of the years in issue. Respondent also
disallowed the itemized deductions that petitioner claimed with respect
to unreimbursed employee expenses for 2015 and 2016 and with respect
to personal property tax for 2016. In addition, respondent determined
that petitioner had Schedule E income of $38,863, $106,631, $61,536 for
2015, 2016, and 2017, respectively.
The Schedule E income amounts were based on respondent’s
recharacterization of the GEI Schedule K–1 income that petitioner had
reported as Schedule C gross receipts for 2015 and as other income for
2016 and 2017. 5 They were also based on the aforementioned
flowthrough adjustments with respect to GEI. More specifically, the
Schedule E income amounts reflected the following modifications with
respect to GEI’s claimed deductions.
2015 2016 2017
Claimed Allowed Claimed Allowed Claimed Allowed
Bad Debts $2,482 –0– $3,863 –0– $5,172 –0–
Rents 9,000 –0– 9,000 –0– 9,000 $1,156
Freights & 79,856 $78,037 82,176 –0– 48,931 2,930
Purchases
Travel & — — 6,734 –0– 7,426 –0–
Entertainment
Nonemployee 14,250 –0– — — — —
Compensation
Commissions — — — — 7,520 –0–
5 For 2017, respondent recharacterized only the $4,841 amount reflected on the
2017 Schedule K–1. Respondent removed the remaining $12,582 petitioner reported
as other income.
15
[*15] They also reflected respondent’s removal of the other income that
GEI reported with respect to the disallowed fuel tax credits.
2. The Section 6663 Fraud Penalties and Their
Approval
Respondent also determined in petitioner’s NOD that section
6663 fraud penalties should apply because all or part of the
underpayment for each taxable year in issue was due to fraud.
Respondent first notified petitioner of the determination to impose the
fraud penalties in a Letter 950, or 30-day letter, that respondent issued
to petitioner on April 26, 2019. The 30-day letter included a copy of RA
Cascante’s examination report and a summary of the adjustments made
to petitioner’s returns for 2015, 2016, and 2017. The 30-day letter was
signed by Ms. Gunn as “Group Manager.”
When Ms. Gunn signed the 30-day letter, RA Cascante had
accepted a new position within the IRS with a new supervisor, Joanna
Caree. Ms. Caree was not assigned to petitioner’s case, however, and Ms.
Gunn remained the supervisor responsible for the case. For the duration
of RA Cascante’s work on the examination, which continued after he
accepted his new position, RA Cascante reported to Ms. Gunn with
respect to petitioner’s case and he discussed the imposition of the section
6663 fraud penalty with her. Neither Ms. Caree nor any other manager
supervised RA Cascante’s work on the case.
On the same date that Ms. Gunn signed the 30-day letter, she also
signed a Civil Penalty Approval Form. RA Cascante prepared the form
as part of his examination of petitioner’s returns. The form identifies its
“primary” position as “IRC 6663 Fraudulent Failure to File, Civil,” and
an attachment to the form bears checks in a “yes” box next to “6651(f)
Fraudulent Failure to File” and in a “no” box next to “6663 Civil fraud.”
It was RA Cascante’s intention in preparing the form to assert section
6663 fraud penalties and the references to the section 6651(f) fraudulent
failure to file penalty were made by mistake. The parties have stipulated
that the Civil Penalty Approval Form approved the assertion of section
6663 penalties for taxable years 2015, 2016, and 2017.
OPINION
Petitioner contends that he is entitled to the disputed deductions.
He also contends that no penalties should apply. In support of these
contentions, petitioner generally asserts that he supplied
documentation to support his expenses to the best of his ability and that
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[*16] he was unable to produce more documents both because his
records were destroyed in a flood and because RA Cascante took his
records and did not return them. 6
I. The Disputed Deductions
A. Burden of Proof
The Commissioner’s determinations in an NOD to disallow
deductions are generally presumed correct, and the taxpayer bears the
burden of proving those determinations are erroneous. Welch v.
Helvering, 290 U.S. 111, 115 (1933). Deductions are matters of
legislative grace, and the taxpayer must show his entitlement to any
deductions claimed and substantiate their amounts. 7 § 6001; Rule
142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);
Hradesky v. Commissioner, 65 T.C. 87, 89–90 (1975), aff’d per curiam,
540 F.2d 821 (5th Cir. 1976). There must be enough evidence in the
record to permit the Court to conclude that a deductible expense was
paid in at least the amount allowed. See Williams v. United States, 245
F.2d 559, 560 (5th Cir. 1957). A taxpayer’s “self-serving declaration is
generally not a sufficient substitute for records.” Fine v. Commissioner,
T.C. Memo. 2013-248, at *4. And in evaluating a taxpayer’s evidence, we
are not bound to accept unverified and undocumented testimony. Shea
v. Commissioner, 112 T.C. 183, 189 (1999); Tokarski v. Commissioner,
87 T.C. 74, 77 (1986).
When a taxpayer claims a deduction but cannot fully substantiate
the underlying expense, the Court in certain circumstances may
approximate the allowable amount, “bearing heavily . . . upon the
taxpayer whose inexactitude is of his own making.” Cohan v.
Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930). But the Court is not
required to guess at a number; rather “we must have some basis on
which an estimate may be made.” Vanicek v. Commissioner, 85 T.C. 731,
6 As we understand it, petitioner further asserts that respondent miscalculated
GEI’s gross receipts attributable to tax return preparation by insufficiently accounting
for fee discounts. We note, however, that respondent did not reflect any adjustments
to GEI’s gross receipts in petitioner’s NOD.
7 Section 7491(a) provides that the burden of proof may shift to the
Commissioner on a factual issue if, among other requirements, the taxpayer
“introduces credible evidence with respect to [that] issue” and “has maintained all
records required under this title and has cooperated with reasonable requests by the
[Commissioner] for witnesses, information, documents, meetings, and interviews.” See
§ 7491(a)(1), (2)(B). Petitioner does not contend, and the record does not demonstrate,
that he meets these requirements.
17
[*17] 743 (1985). In addition, under section 274(d), certain categories of
deductions, including deductions with respect to certain vehicle, travel,
and entertainment expenses, are subject to strict substantiation
requirements. See §§ 274(d), 280F(d)(4). Section 274(d) provides that no
deduction shall be allowed for these expenses unless the taxpayer
substantiates the amount, time and place, business purpose, and
business relationship to the taxpayer of the person receiving the benefit
for each expenditure by adequate records or sufficient evidence
corroborating his own statements. The Court may not apply the Cohan
rule to approximate expenses covered by section 274(d). See Sanford v.
Commissioner, 50 T.C. 823, 827–28 (1968), aff’d per curiam, 412 F.2d
201 (2d Cir. 1969).
B. Petitioner’s Records
Before we consider the specific deductions at issue, we first
address petitioner’s general assertions that he had records supporting
the disputed deductions that were destroyed in a flood and that were
taken by RA Cascante and not returned.
As to the alleged flood, petitioner explained to RA Cascante
during his examination that there had been a flood at the Antanna
Avenue residence in early 2017 that destroyed his records. To support
this explanation, petitioner showed RA Cascante work proposals from a
plumber for drain cleaning and replacing a sewer line. But the proposals
were not signed by either petitioner or the plumber, and petitioner
acknowledged to RA Cascante that the work was never completed.
Petitioner did not provide RA Cascante with any other evidence
that there was a flood or that a flood was the reason he was unable to
provide more documents during the examination. Petitioner did not take
any photographs of the alleged flood damage or file an insurance claim
for flood damage. And during RA Cascante’s meetings with petitioner at
his residence, RA Cascante did not see any evidence of a flood, even
when he walked through the property’s basement with petitioner. In
addition, petitioner provided RA Cascante with only very few documents
for the years in issue, i.e., although the flood allegedly occurred in early
2017, petitioner did not provide RA Cascante with notably more
documents for the remainder of taxable year 2017 than he did for
taxable years 2015 and 2016.
At trial, petitioner further asserted that his records had been the
casualty of a basement flood. And here he provided no supporting
18
[*18] evidence at all. Petitioner testified that the flood caused
significant damage to the basement, including to GEI’s computers, but
he offered no documents to support such damage or asserted repairs. He
testified he did not know whether he or Mr. Momoh had backed up the
computer files. And he did not make any effort to reconstruct his records,
admittedly not collecting any supporting information from Mr. Apusa or
the shipping companies after the alleged flood occurred. As we have
stated, we are not bound to accept a taxpayer’s self-serving, unverified,
and undocumented testimony, and we see petitioner’s assertion that he
had records destroyed in a flood as nothing more.
Petitioner’s assertion that RA Cascante took his documents and
failed to return them is similarly unavailing. We have found RA
Cascante had certain procedures he would follow depending on whether
the document petitioner provided was an original or a copy. For original
documents, RA Cascante would memorialize the contents of the
document in the case file and hand the document back to petitioner.
Every receipt petitioner handed to RA Cascante, he handed back to
petitioner on the same day. For copies, RA Cascante might take the
document back to his office and make it a part of the case file.
Specifically, RA Cascante took some copies of petitioner’s invoices for
GEI’s tax preparation clients back to his office, “scheduled them out,”
and then mailed them back to petitioner. But these copies were the only
records that RA Cascante took with him from petitioner’s residence, and
he never kept any original documents that petitioner gave him.
As of the time of trial, RA Cascante had been a revenue agent for
13 years and performed at least 100 income tax examinations. He
followed these same procedures in every case to which he was assigned
and in which a taxpayer gave him documents. And as with the alleged
flood, we likewise do not accept petitioner’s baseless assertion that, in
his case, RA Cascante kept his records and that this is the reason
petitioner cannot provide more support for the disputed deductions.
C. Petitioner’s Deductions
1. Dependency Exemption Deductions
Petitioner claimed dependency exemption deductions with
respect to his nephews Chisa and Chinda for each of the years in issue.
Section 151(c) permits a taxpayer to claim as a deduction an exemption
for each dependent as that term is defined under section 152.
19
[*19] Section 152(a) provides that a dependent must be either a
qualifying child or a qualifying relative.
Section 152(c)(1) defines a qualifying child as a child who bears a
specified relationship to the taxpayer, who lived with the taxpayer for
more than one-half of the taxable year at issue, who meets certain age
requirements, who did not provide more than one-half of his or her own
support during the taxable year, and who did not file a joint return with
a spouse for the taxable year. As relevant here, a child satisfies the
specified relationship requirement if the child is a descendant of the
taxpayer’s sibling. § 152(c)(2)(B). A child satisfies the age requirement
if the child is less than 19 years old, a student less than 24 years old, or
permanently and totally disabled. § 152(c)(3).
Section 152(d) defines a qualifying relative as an individual who
bears a specified relationship to the taxpayer, who earned gross income
of less than the exemption amount defined in section 151(d) during the
taxable year, who had more than one-half of his or her support provided
for by the taxpayer during the taxable year, and who is not the
qualifying child of any other taxpayer. As relevant here, an individual
satisfies the specified relationship requirement if the individual is a son
or daughter of the taxpayer’s sibling. § 152(d)(2)(E).
Respondent concedes that Chisa and Chinda each satisfied the
relationship, age, support, and non-filing requirements for a qualifying
child. Respondent also concedes that they each satisfied the
relationship, gross income, and nonqualifying child requirements for a
qualifying relative. He contends, however, that petitioner has failed to
show that his nephews lived with him for more than one-half of each of
the years in issue or that he provided over one-half of his nephews’
support for each of the years in issue, as is required for qualifying
children and qualifying dependents, respectively. We agree with
respondent on both counts.
During the examination petitioner told RA Cascante that his
nephews stayed with him for visits but was unable to say when his
nephews’ visits were or how long the visits lasted. Nor did petitioner
show RA Cascante any evidence of the nephews’ living with him at the
Antanna Avenue property when RA Cascante met with him there. At
trial, however, petitioner testified that his nephews lived with him “for
a very long time,” staying with him during winter breaks from
approximately December to February and summer breaks from
approximately May to August during the years in issue. But as with RA
20
[*20] Cascante, petitioner offered the Court no documentary or other
evidence, such as testimony from Chisa or Chinda, in support of his
testimony.
Nor did petitioner tell RA Cascante what expenses he paid with
respect to his nephews. The only evidence petitioner offered to RA
Cascante with respect to providing their support was two or three
Western Union-type receipts totaling approximately $1,100. Petitioner
testified these receipts were for school fees, but he did not know the
name of the school. Petitioner also testified that he paid for his nephews’
flights to and from Ukraine, but he failed to offer documentary evidence
in support of these, or any other, payments with respect to his nephews.
In addition, petitioner did not know specifically how much he paid with
respect to his nephews during the years in issue, and he admitted that
his brother provided at least some of their support.
Petitioner contends that he has “done things in the family ways
for my nephews who are my dependents and not counting monetary
contributions to their livelihoods but purely on the family bonds that
existed in us” and that “[w]hen there is call for needs or actions for
incidental expenses, I do not count the pennies and dimes for doing the
things for my nephews.” Even if we assume, however, that petitioner’s
nephews stayed with him during at least some portion of their school
breaks and that petitioner paid at least some of their expenses, we find
it implausible based on petitioner’s inconsistent and unsubstantiated
explanations that they lived with him for more than one-half of any of
the years in issue 8 or that he provided more than half of their support
for any of those years. Consequently, petitioner is not entitled to the
dependency exemptions he claimed with respect to his nephews for the
years in issue. 9
8 We acknowledge that a taxpayer and child may be considered to occupy the
same household for an entire taxable year notwithstanding temporary absences by the
child due to special circumstances, such as education. See Treas. Reg. § 1.152-1(b).
Considering petitioner’s failure to provide any credible evidence showing where the
nephews actually lived during the taxable years in issue, particularly when they were
not at school, however, we cannot and will not find that they lived with petitioner for
more than one-half of any of those years.
9 In addition to deciding whether petitioner is entitled to certain deductions,
we must also decide whether he is liable for section 6663 fraud penalties. And as we
discuss further infra Opinion Part II.C.2, a relevant factor in determining whether
petitioner is liable for the penalties is whether he has provided implausible or
inconsistent explanations of behavior. In consideration of this factor, in our analysis of
21
[*21] 2. Property Tax Deduction
Petitioner claimed a $4,630 personal property tax deduction on
his 2016 tax return. Section 164 allows itemized deductions for state and
local personal property taxes and for state and local real property taxes
paid during the taxable year. For this purpose, the term “personal
property tax” means an ad valorem tax imposed on an annual basis in
respect of personal property, and the term “real property tax” means tax
imposed on interests in real property and levied for the general public
welfare. § 164(b)(1); Treas. Reg. § 1.164-3(b).
Respondent contends that petitioner is not entitled to a deduction
for personal property taxes because petitioner has not provided any
substantiation for any such expenses. Respondent further contends that
to the extent petitioner intended to claim a deduction for real property
taxes paid with respect to the Antanna Avenue residence, rather than
for personal property taxes, such a deduction should also be disallowed.
In this regard respondent asserts that the deduction should be
disallowed because the only receipt petitioner provided in support of the
payment of real property taxes was dated 2017, and thus it did not
establish that petitioner paid any such taxes during the year for which
the deduction was claimed. In addition, respondent asserts that even if
petitioner did pay real property taxes with respect to the Antanna
Avenue residence in 2016, he still could not deduct them because he did
not own the residence. Here again, we agree with respondent on all
counts.
Petitioner has not provided any credible evidence, or even alleged,
to the Court that he paid any personal property taxes during 2016. The
record is similarly lacking in evidence that petitioner paid any real
property taxes with respect to the Antanna Avenue residence during
2016. Petitioner, as a cash basis taxpayer, must recognize income for the
year in which he “actually or constructively” receives it and take an
allowable deduction into account for the taxable year in which the
underlying expense was paid. §§ 451, 461; Treas. Reg. §§ 1.451-1(a),
1.461-1(a)(1). As respondent indicates, the only documentary evidence
the disputed deductions, including the dependency exemption deductions here, we
have thus highlighted where petitioner has given implausible explanations to either
RA Cascante or the Court as well as where the explanations he gave to RA Cascante
were inconsistent with those he gave to the Court. We note, however, that our
redetermination of petitioner’s tax liabilities is based on the merits of the case he
presented to the Court and not on any previous record developed at the administrative
level. See Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 324, 328 (1974).
22
[*22] petitioner has provided at any point in support of a real property
tax deduction is the receipt from the City of Baltimore dated 2017, which
he provided to RA Cascante. But this receipt, which petitioner did not
introduce into evidence, and petitioner’s otherwise unsupported
testimony are simply not enough to persuade us petitioner paid any real
property taxes during 2016 with respect to the Antanna Avenue
residence.
Furthermore, even if we were to assume petitioner did pay real
property taxes with respect to the Antanna Avenue residence in 2016,
we must also agree with respondent that petitioner still would not be
entitled to a deduction under section 164 because it was not petitioner,
but his brother, who owned the property. Generally, taxes are deductible
only by the person upon whom they are imposed. Treas. Reg. § 1.164-
1(a). We have held that taxpayers who do not hold legal title to property
but establish they are equitable owners of the property are entitled to
deduct property tax they paid for the property. See Aulisio v.
Commissioner, T.C. Memo. 2024-29, at *38 (citing Steinert v.
Commissioner, 33 T.C. 447, 449 (1959)). But petitioner has also failed to
allege or produce any credible evidence that any real property taxes he
did ostensibly pay were paid as the equitable owner of the Antanna
Avenue residence. We therefore also disallow petitioner’s claimed
property tax deduction.
3. Unreimbursed Employee Expense Deductions
For taxable years 2015 and 2016, petitioner claimed itemized
deductions with respect to unreimbursed employee expenses of $9,505
and $8,188, respectively. On his corresponding Form 2106 for 2015,
petitioner included in his unreimbursed employee expense amount
$8,221 of vehicle expenses and $1,284 of cell phone expenses. With
respect to the vehicle expenses, petitioner reported that he drove 14,298
business miles, that his vehicle was used 98.39% for business, and that
he had no other vehicle available for personal use. On his 2016 Form
2106, petitioner included in his unreimbursed expense amount $5,068
of vehicle expenses and $3,120 of cell phone expenses. As to these vehicle
expenses, petitioner reported that he drove 9,386 business miles, that
his vehicle was used 98.159% for business, and that he again had no
other vehicle available for personal use.
Pursuant to section 162(a), a taxpayer may deduct all the
ordinary and necessary expenses paid during the taxable year in
carrying on any trade or business. For the years in issue, a taxpayer may
23
[*23] claim an unreimbursed employee business expense as a
miscellaneous itemized deduction, subject to the 2% floor of section
67(a), under section 162(a). See § 67(b); Lucas v. Commissioner, 79 T.C.
1, 6–7 (1982). An employee is considered to be in the business of being
an employee and may deduct expenses that are (1) nonreimbursable,
(2) related to the employee’s trade or business of rendering services to
the employer, and (3) ordinary and necessary expenses of such a trade
or business. See Lucas, 79 T.C. at 6–7; Treas. Reg. § 1.162-1(a).
An expense is ordinary if it is normal, usual, or customary within
a particular trade, business, or industry or arises from a transaction of
common or frequent occurrence in the type of business involved. Deputy
v. du Pont, 308 U.S. 488, 495 (1940). An expense is necessary if it is
appropriate and helpful for the development of the business. Welch v.
Helvering, 290 U.S. at 113. Ordinary and necessary business expenses
do not include nondeductible personal, living, or family expenses. Treas.
Reg. § 1.162-17(a); see § 262(a). Whether an expenditure satisfies the
requirements of section 162 is a question of fact. Commissioner v.
Heininger, 320 U.S. 467, 475 (1943).
Respondent contends that petitioner is not entitled to deduct the
disputed vehicle and cell phone expenses both because they are not
ordinary and necessary and because petitioner failed to substantiate
them. Respondent further asserts that the expenses are unreasonable
and implausible on their face. We agree with respondent here as well.
During the examination petitioner told RA Cascante that the
disputed expenses were primarily related to his work at BDF and that
he would use his personal vehicle to pick up parts and vehicles and to
shuttle customers when the shuttle was not available. RA Cascante
asked petitioner for documentation to support these expenses, but he
did not provide any. Petitioner was also unable to explain to RA
Cascante how he calculated his expenses.
RA Cascante attempted to verify petitioner’s statements
regarding the use of his personal vehicle at BDF. During one of his
meetings with petitioner, RA Cascante asked petitioner to call his
supervisor. The supervisor to which they spoke, Mr. Marshall, said BDF
would never allow petitioner to drive his personal vehicle for company
business. After the call, petitioner told RA Cascante that Mr. Marshall
was not aware of an agreement petitioner had with a higher level of
management at BDF authorizing him to use his personal vehicle. But
when RA Cascante asked petitioner if he would be willing to drive to
24
[*24] BDF to clear up the issue, petitioner declined. And petitioner’s
other BDF manager, Mr. Moskunas, had no knowledge of petitioner’s
ever asking to use his personal vehicle for a work task. Nor did petitioner
explain the business necessity of the cell phone use to RA Cascante or
provide him with any supporting documentation with respect to the
phone.
At trial petitioner testified that all of the unreimbursed employee
business expenses that he claimed were related to his work at BDF.
Petitioner also testified, however, that, in addition to BDF, the expenses
were related to another “agency” at which he had worked. He then
further testified that they were “mostly” related to using his personal
vehicle to shuttle customers for BDF, but that he never picked up parts
for BDF, and that some portion of the expenses was indirectly connected
with GEI’s shipping activity as well.
As to BDF, petitioner additionally testified both that he never
received BDF’s employee handbook, which set forth its policy
discouraging employees from incurring personal expenses to complete
work-related tasks, and that there “were times” when he did not have
it. He also testified that Mr. Marshall gave him the authority to use his
personal vehicle but admitted that Mr. Marshall did not give him
specific permission to do so.
On this record we cannot allow petitioner the claimed deductions
with respect to the reported vehicle and cell phone expenses. We agree
with respondent that these expenses were neither ordinary nor
necessary with respect to petitioner’s employment with BDF. Rather
than give petitioner permission to incur such expenses, we instead find
BDF discouraged him, along with its other employees, from doing so.
There is also no credible evidence that any of these expenses related to
petitioner’s employment with respect to another “agency” or GEI. For
2015, petitioner does seem to have also been employed by Anytime
Labor, from which he received a Form W–2. But petitioner offered no
explanation or documentation as to how any of the reported expenses
would have related to that employer at all let alone as to how they would
have been ordinary and necessary as to that employer. We are also
unpersuaded by petitioner’s unsupported assertion that some
unidentified portion of the reported vehicle and cell phone expenses
qualified as deductible employee expenses because they were indirectly
connected with GEI’s shipping activity.
25
[*25] We further conclude that petitioner failed to sufficiently
substantiate any of the reported expenses. As to the vehicle expenses,
they are subject to the strict substantiation requirements of section
274(d). Thus petitioner must show the amount, time and place, business
purpose, and business relationship to him of the person receiving the
benefit for each expenditure by either adequate records or sufficient
evidence corroborating his own statements. §§ 274(d)(4), 280F(d)(4).
Petitioner testified that he kept a book of his mileage expenses but that
it was destroyed in the alleged flood, and he failed to provide any other
supporting evidence. This is clearly insufficient. And as to the cell phone
expenses, although they do not require strict substantiation for the
years in issue, petitioner’s inconsistent and unsupported explanations
for these expenses are insufficient as well. 10 (We are hardly surprised
by the lack of evidence in support of the reported unreimbursed
employee expenses, however. As respondent has observed, petitioner’s
contention that he paid $9,505 in such expenses for 2015 and $8,188 for
2016 is simply implausible given that his total reported Form W–2
wages for 2015 and 2016 were only $4,343 and $9,230, respectively.) We
therefore conclude that petitioner is also not entitled to the claimed
deductions for unreimbursed employee expenses.
D. GEI’s Flowthrough Deductions
Pursuant to section 1366(a), a shareholder of an S corporation
generally must take into account his pro rata share of the S corporation’s
income, losses, deductions, and credits. The examination of GEI for
taxable years 2015, 2016, and 2017 resulted in the disallowance of
several of GEI’s deductions, specifically, those claimed with respect to
bad debts, rents, freights and purchases, travel and entertainment,
nonemployee compensation, and commissions. These adjustments
flowed through to petitioner’s individual returns, resulting in increased
income from GEI for each of the taxable years in issue. Where, as here,
an NOD includes adjustments for S corporation items with other items
unrelated to the S corporation, we have jurisdiction to determine the
10 See Small Business Jobs Act of 2010, Pub. L. No. 111-240, § 2043, 124 Stat.
2504, 2560 (removing cell phones from the definition of section 280F(d)(4) listed
property, and thus from the scope of section 274(d), for taxable years beginning after
December 31, 2009). Even though petitioner is not required to meet the strict
substantiation requirements of section 274(d), we note that he must still show that the
cell phone was used for business rather than personal purposes and provide some
credible evidence as to the extent of the business use, which he did not do. See, e.g.,
Parker v. Commissioner, T.C. Memo. 2016-194, at *15 n.5.
26
[*26] correctness of all the adjustments. 11 See Johnson v. Commissioner,
160 T.C. 18, 28 (2023); Winter v. Commissioner, 135 T.C. 238, 245–46
(2010).
As with the other deductions at issue, petitioner bears the burden
of proving his entitlement to the flowthrough deductions claimed and of
substantiating their amounts. See § 6001; Rule 142(a); INDOPCO, Inc.
v. Commissioner, 503 U.S. at 84; Hradesky, 65 T.C. at 89–90; see also,
e.g., Isaacs v. Commissioner, T.C. Memo. 2015-121, at *25–57 (applying
burden of proof to taxpayer in regard to whether the Commissioner
properly disallowed flowthrough deductions for certain business
expenses of taxpayer’s wholly owned S corporation). As set forth supra
Opinion Part I.C.3, a taxpayer may deduct business expenses paid
during the taxable year pursuant to section 162(a). Deductible business
expenses include the ordinary and necessary expenditures directly
connected with or pertaining to the taxpayer’s business, except items
which are used as the basis for a deduction or a credit under provisions
of law other than section 162. Treas. Reg. § 1.162-1(a).
1. Bad Debts
GEI claimed bad debt deductions of $2,482, $3,863, and $5,172 for
taxable years 2015, 2016, and 2017, respectively. Section 166(a)
generally allows a taxpayer a deduction for “any debt which becomes
worthless within the taxable year.” To be entitled to a business bad debt
deduction, taxpayers must prove (1) that a bona fide debt was created,
(2) that the debt was created or acquired in proximate relation to a trade
or business, and (3) that the debt became worthless in the year claimed.
§ 166(a)(1); United States v. Generes, 405 U.S. 93, 96 (1972); Calumet
Indus., Inc. v. Commissioner, 95 T.C. 257, 284 (1990). A debt is bona fide
if it arose “from a debtor-creditor relationship based upon a valid and
enforceable obligation to pay a fixed or determinable sum of money.”
Treas. Reg. § 1.166-1(c).
Worthless debts arising from unpaid fees, wages, salaries, rents,
and similar items of income, however, are not deductible as a bad debt
unless the taxpayer has included the amount in income for the year for
which the bad debt is deducted or for a prior taxable year. See Gertz v.
Commissioner, 64 T.C. 598, 600 (1975); Treas. Reg. § 1.166-1(e). “It is
11 As discussed supra Findings of Fact Part V.A, respondent also disallowed
GEI’s claimed fuel tax credits, but these were entity-level adjustments that did not
flow through to petitioner’s individual returns and for which GEI received a separate
NOD. See § 1366(a), (f)(1). As such, they are not at issue in this case.
27
[*27] well settled that a taxpayer is not allowed to reduce ordinary
income actually received by the amount of income he failed to receive.”
Ratcliff v. Commissioner, T.C. Memo. 1983-636, 47 T.C.M. (CCH) 86, 87
(quoting Hendricks v. Commissioner, 406 F.2d 269, 272 (5th Cir. 1969),
aff’g per curiam T.C. Memo. 1967-140)).
During the examination, petitioner told RA Cascante that there
were generally two scenarios in which he would claim bad debt
deductions: (1) if someone wrote petitioner a bad check, he would deduct
it as bad debt expense when it happened; and (2) if he purchased a
vehicle for transport overseas and upon receipt and inspection of the
vehicle the customer negotiated a lower payment amount than that
originally agreed upon. Although he has generally asserted that he is
entitled to all the deductions in issue, petitioner has not made any
additional arguments regarding the bad debt deductions to the Court.
And as with RA Cascante, petitioner has failed to provide the Court with
any records to support the bad debt deductions claimed.
Respondent contends that petitioner is not entitled to the bad
debt deductions because of his failure to establish that any debts were
created obligating a debtor to pay a fixed or determinable sum of money
or that any such debts became worthless during the years in issue, as
well as because of general lack of substantiation. To the extent any
alleged bad debts relate to unpaid fees, he further contends that
petitioner failed to establish that GEI included any corresponding
amounts in income.
In the first instance, we agree with respondent that petitioner has
provided no credible evidence demonstrating that any debts were
created obligating debtors to pay fixed or determinable sums of money
to GEI or that any such debts became worthless during the years in
issue. In addition, even if we assume GEI did have worthless debts, we
also agree that petitioner has failed to provide any credible evidence of
the amounts of any such debts.
Moreover, as respondent aptly observes, it is “conspicuous” that
GEI is a cash basis taxpayer and the bad debt examples given by
petitioner to RA Cascante relate to unpaid fees. As we have explained,
the unpaid fees would need to have been previously reported in income
for the debt to be deductible. See Treas. Reg. § 1.166-1(e). As a cash basis
taxpayer, however, GEI would not have included the fees in income
before they were actually or constructively received. See §§ 451, 461;
Treas. Reg. §§ 1.451-1(a), 1.461-1(a)(1); see also Crosson v.
28
[*28] Commissioner, T.C. Memo. 2003-170, 85 T.C.M. (CCH) 1475, 1477
(“[The taxpayers] used the cash method for reporting income and
deductions; therefore, fees for services that remain unpaid have not been
included in income. Such debts do not constitute ‘bad debts’ within the
meaning of section 166 for which a deduction for worthlessness may be
claimed.”).
Petitioner testified at trial that he did sometimes report GEI’s
income on its books before it was received. But he provided no evidence
in support of this testimony, which runs counter to both his stipulation
that GEI used the cash basis method of accounting for the taxable years
in issue and to his reporting on GEI’s returns that GEI used the cash
method. The Court treats a stipulation as a binding admission, and it
will not permit a party to a stipulation to qualify, change, or contradict
the stipulation in whole or in part, “except that it may do so if justice
requires.” Rule 91(e). Similarly, “[s]tatements made on a tax return
signed by the taxpayer are considered binding admissions unless there
is ‘cogent evidence’ that indicates such statements are wrong.”
Kornhauser v. Commissioner, T.C. Memo. 2013-230, at *5, aff’d, 632
F. App’x 421 (9th Cir. 2016). We do not consider petitioner’s self-serving
and unsupported testimony sufficient to require the Court to treat GEI’s
alleged unpaid fees as having been previously included in GEI’s income,
and we hold that the worthless debt deductions GEI claimed for the
years in issue are disallowed.
2. Rents
GEI claimed a $9,000 rent deduction for each of the years in issue.
Petitioner used the basement of the three-story Antanna Avenue
residence exclusively as GEI’s office. The Antanna Avenue residence
was owned by petitioner’s brother, Mr. Oparanma. Petitioner had a
verbal agreement with his brother to use the residence. During the
examination, petitioner informed RA Cascante that the deductions
reflected $750 per month in rent that he paid to Mr. Oparanma for GEI’s
use of the basement. But petitioner provided RA Cascante with no
evidence that he was making rental payments to Mr. Oparanma.
RA Cascante did, however, view the 2017 City of Baltimore
receipt as proof that petitioner had made a payment in lieu of rent for
that year. RA Cascante therefore allowed one-third of the amount of the
receipt, or $1,156, as a rent expense for 2017, as is reflected in
29
[*29] petitioner’s NOD. 12 Respondent contends that other than this
receipt, petitioner provided no substantiation that GEI paid rent in
taxable years 2015, 2016, and 2017, and, therefore, GEI is not entitled
to deduct any additional rent expense for these years. Again, we must
agree.
At trial, petitioner testified that his verbal agreement with Mr.
Oparanma required the reported $9,000 in yearly rental payments for
GEI’s use of the basement. He also testified that he would pay expenses
and deposit money into “funds” for his brother in lieu of paying rent. But
petitioner did not provide the Court with any support for this testimony.
And just as his unsupported and self-serving testimony has been
insufficient to persuade us as to the disputed deductions thus far, it is
insufficient here.
3. Freights and Purchases
GEI claimed deductions for freight and purchase expenses of
$79,856, $82,176, and $48,931 for taxable years 2015, 2016, and 2017,
respectively. In discussing the freight and purchase expenses during the
examination, petitioner provided RA Cascante with a buyer’s order for
a Jaguar that was purchased for $78,037 in 2015 as well as documents
showing a Mack truck and a car were shipped from Boston to Nigeria
for $2,930 in 2017. RA Cascante allowed the documented expenses, as is
reflected in petitioner’s NOD.
Respondent contends that petitioner is not entitled to deduct any
additional amounts because he did not provide any additional credible
evidence as to the reported freight and purchase expenses either during
his examination or at trial. We agree here too and hold that GEI is not
entitled to deductions for freight and purchase expenses beyond those
already allowed.
4. Travel and Entertainment
GEI claimed deductions for reported travel and entertainment
expenses of $6,734 and $7,426 for taxable years 2016 and 2017,
respectively. Petitioner did not provide RA Cascante with any
information regarding these expenses during the examination. At trial,
petitioner testified he went to Nigeria on several occasions and other
locations such as Houston, Boston, Miami, New York, and Pennsylvania
12 As previously explained, RA Cascante arrived at the one-third amount by
counting the basement as one-third of the residence.
30
[*30] to check out shipments for GEI. But petitioner did not identify any
specific details regarding the travel or provide any documents in support
of his testimony.
Travel and entertainment expenses for the years in issue are
subject to the strict substantiation requirements of section 274(d). See
§ 274(d)(1) and (2). Respondent contends that petitioner has failed to
meet these requirements, and we agree here as well. Petitioner’s vague
and unsupported testimony regarding his alleged trips do not
sufficiently substantiate their amount, time and place, business
purpose, and business relationship to petitioner of the person receiving
the benefit for each expenditure by adequate records or sufficient
evidence corroborating his own statements. The deductions for these
expenses are therefore also disallowed.
5. Nonemployee Compensation
GEI claimed a deduction for a $14,250 nonemployee
compensation expense on its return for taxable year 2015. During the
examination, petitioner had no records to support the expense, and he
was unable to reconstruct the amount reported, which he asserted had
been paid in cash. Petitioner explained to Mr. Cascante that GEI was
not required to issue Forms 1099 with respect to the nonemployee
compensation because no individual worker was paid over $600. See
§ 6041(a). But petitioner could not name any of the workers paid, nor
did he know whether the same person worked for him multiple times.
At trial petitioner testified that the amount of nonemployee
compensation he reported on GEI’s return was based on amounts given
to him by Mr. Apusa with respect to shipment issues he handled in
Boston. He also testified that Mr. Apusa did not tell petitioner how much
each person got paid but provided only a total amount it would allegedly
cost to do a job and that it was Mr. Apusa who directly paid the workers
rather than himself. Petitioner could not estimate the number of people
paid nonemployee compensation or the amount each person was paid.
As with the other GEI expenses in dispute, respondent contends
that petitioner has failed to provide substantiation sufficient to show
GEI is entitled to the claimed deduction, with petitioner appearing to
know very little about the amount or purpose of the alleged nonemployee
compensation expenses or about whether nonemployee compensation
payments were even made at all. We again agree and conclude that
petitioner has failed to sufficiently substantiate a nonemployee
31
[*31] compensation deduction for the amount claimed. Although we
have found GEI did sometimes pay day laborers to help load containers
in the United States and to help unload containers abroad, we similarly
conclude that petitioner has failed to provide enough evidence for us to
estimate an amount and that to do so would amount to unguided
largesse. See Williams, 245 F.2d at 560.
6. Commissions
GEI claimed a deduction for a $7,520 commission expense on its
return for taxable year 2017. Petitioner told RA Cascante during his
examination that the purpose of the commission expense was to pay a
transfer agent in Nigeria. Petitioner did not provide RA Cascante with
any records to support the expense.
At trial petitioner testified that the commission expense was for
payments made to workers in Nigeria to move goods from the dock to
the client and that he paid such workers by sending money to his cousin
Santi Oksuha, who then paid the workers. Petitioner also testified that
he paid commissions to day workers in Boston to load trucks.
Respondent contends that petitioner has failed to sufficiently
substantiate this deduction as well, emphasizing that petitioner
provided no documentation to support that any commission payments
were made to Mr. Oksuha, that Mr. Oksuha made any commission
payments to Nigerian agents, or that GEI incurred the commission
expenses at all. And as with the nonemployee compensation expense, he
further emphasizes that petitioner provided no credible evidence
regarding the amounts of any commission payments, the frequency of
the payments, or the number of people paid. We here again agree that
petitioner has failed to sufficiently substantiate a deduction in the
amount claimed or in any other amount and disallow this deduction as
well. 13
13 Respondent also points out that there appears to have been some overlap in
petitioner’s testimony regarding what he characterized as nonemployee compensation
expenses and what he categorized as commission expenses. We agree, particularly with
respect to the Boston workers, who petitioner’s testimony suggested were paid
nonemployee compensation by Mr. Apusa but commissions by himself. We note that
petitioner’s conflation of these asserted expenses further bolsters our reluctance to
estimate either.
32
[*32] E. Conclusion
Having held that petitioner is not entitled to any of the disputed
deductions, we sustain respondent’s determinations disallowing the
deductions.
II. Fraud Penalties
We next consider respondent’s section 6663 fraud penalty
determinations.
A. Burdens of Production and Proof
Section 6663(a) provides that “[i]f any part of any underpayment
of tax required to be shown on a return is due to fraud, there shall be
added to the tax an amount equal to 75 percent of the portion of the
underpayment which is attributable to fraud.” Where the Commissioner
seeks to apply this penalty to an individual, as a threshold matter he
must produce evidence that he complied with section 6751(b)(1). See
§ 7491(c); Graev v. Commissioner, 149 T.C. 485, 492–93 (2017),
supplementing and overruling in part 147 T.C. 460 (2016). Section
6751(b)(1) requires that the “initial determination” of assessment of
certain penalties, including the section 6663 fraud penalty, be
“personally approved (in writing) by the immediate supervisor of the
individual making such determination.”
The Commissioner must also prove by clear and convincing
evidence that “an underpayment exists for the years in issue and that
some portion of the underpayment is due to fraud.” Petzoldt v.
Commissioner, 92 T.C. 661, 699 (1989); see § 7454(a); Rule 142(b). The
Commissioner need not prove the precise amount of the underpayment
resulting from fraud, however, only that some part of the underpayment
of tax for each year in issue is attributable to fraud. Petzoldt, 92 T.C.
at 699. If the Commissioner establishes that any portion of an
underpayment is attributable to fraud, then the entire underpayment is
treated as attributable to fraud, except with respect to any portion of the
underpayment which the taxpayer establishes by a preponderance of the
evidence is not attributable to fraud. § 6663(b).
B. Penalty Approval
As stated, section 6751(b)(1) requires that the “initial
determination” of assessment of a section 6663 fraud penalty be
“personally approved (in writing) by the immediate supervisor of the
33
[*33] individual making such determination.” In Belair Woods, LLC v.
Commissioner, 154 T.C. 1, 14–15 (2020), we explained that the “initial
determination” of a penalty assessment is typically embodied in a
document “by which the IRS formally notifie[s] [the taxpayer] that the
Examination Division ha[s] completed its work and . . . ha[s] made a
definite decision to assert penalties.” Once the Commissioner introduces
evidence sufficient to show written supervisory approval of that
determination, the burden shifts to the taxpayer to show that the
approval was untimely, i.e., “that there was a formal communication of
the penalty [to the taxpayer] before the proffered approval” was secured.
Frost v. Commissioner, 154 T.C. 23, 35 (2020). 14
Respondent contends that he obtained proper, written
supervisory approval of the section 6663 fraud penalties for the years in
issue. In support of this contention, he asserts that RA Cascante
obtained timely approval of the penalty when Ms. Gunn, as RA
Cascante’s only supervisor involved in petitioner’s case, signed both the
30-day letter and the Civil Penalty Approval Form on April 26, 2019,
which was the first time the penalties were communicated to petitioner.
We agree that Ms. Gunn was the appropriate supervisor to
provide approval. Although RA Cascante was transferred to a new
position with a new supervisor during his work on petitioner’s case, Ms.
Gunn remained the supervisor responsible for petitioner’s case and the
only supervisor to whom RA Cascante reported with respect to it. See
Sand Inv. Co. v. Commissioner, 157 T.C. 136, 142–43 (2021). We also
agree that Ms. Gunn’s approval was timely. Both the 30-day letter and
the Civil Penalty Approval Form appear in the record. Respondent first
notified petitioner of the determination to impose the section 6663 fraud
penalties in the 30-day letter, which was issued on April 26, 2019. And
on that date, Ms. Gunn signed both the 30-day letter itself, which clearly
14 Absent stipulation to the contrary, this case is appealable to the U.S. Court
of Appeals for the Fourth Circuit. See § 7482(b)(1)(A). Unlike certain other appellate
courts, that court has not squarely addressed the question of when supervisory
approval must be secured for purposes of section 6751(b)(1). Cf. Swift v. Commissioner,
144 F.4th 756, 770 (5th Cir. 2025), aff’g T.C. Memo. 2024-13; Minemyer v.
Commissioner, No. 21-9006, et al., 2023 WL 314832, at *5 (10th Cir. Jan. 19, 2023),
aff’g in part, rev’g in part and remanding T.C. Memo. 2020-99; Kroner v. Commissioner,
48 F.4th 1272, 1276, 1279 n.1 (11th Cir. 2022), rev’g in part T.C. Memo. 2020-73;
Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066, 1074 (9th Cir.
2022), rev’g and remanding 154 T.C. 68 (2020). We therefore apply our own precedent
on the issue. See Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d 985
(10th Cir. 1971); Lawrence v. Commissioner, 27 T.C. 713, 716–17 (1957), rev’d per
curiam on other grounds, 258 F.2d 562 (9th Cir. 1958).
34
[*34] asserted the section 6663 fraud penalties, and the Civil Penalty
Approval Form, which, although imperfect, the parties stipulated
approved the assertion of the section 6663 penalties for the years in
issue. See, e.g., Frost, 154 T.C. at 35; Soleimani v. Commissioner, T.C.
Memo. 2023-60, at *9–11; Cuthbertson v. Commissioner, T.C. Memo.
2020-9, at *70.
Petitioner has neither made any argument nor provided any
evidence that the penalties were not approved by RA Cascante’s
immediate supervisor or that the approval was untimely. He argues
instead that “I do not think it was fair for [Ms.] Gunn to have formed
[her] opinion of me based on the frivolous characterization of me by [RA]
Cascante without speaking with me or appearing during the trial to
allow me the opportunity for questioning the charges that she signed on
to.” But the written supervisory approval requirement of section
6751(b)(1) “requires just that: written supervisory approval.” Belair
Woods, LLC, 154 T.C. at 17 (quoting Raifman v. Commissioner, T.C.
Memo. 2018-101, at *61). And “‘[w]e decline to read into section
6751(b)(1) the subtextual requirement’ that respondent demonstrate the
depth or comprehensiveness of the supervisor’s review.” Id. (quoting
Raifman, T.C. Memo. 2018-101, at *61). In this case the 30-day letter
and the Civil Penalty Approval Form were signed in timely fashion by
Ms. Gunn, RA Cascante’s immediate supervisor with respect to
petitioner’s case, and we conclude that respondent has complied with
section 6751(b)(1).
C. Underpayments Due to Fraud
To satisfy his burden of proof regarding the 6663 fraud penalties,
respondent must show two things for each of the years in issue. First,
respondent must prove that an underpayment exists. See Parks v.
Commissioner, 94 T.C. 654, 660 (1990). And second, he must show that
petitioner intended to evade taxes known to be owing by conduct
intended to conceal, mislead, or otherwise prevent the collection of taxes.
See id. at 661.
1. Underpayment of Tax
The first prong of the fraud test requires that respondent
affirmatively prove that petitioner underpaid his tax for each of the
years in issue. See id. at 660. Where the Commissioner has prevailed on
the issue of the existence of a deficiency by virtue of a taxpayer’s failure
to carry his burden of proof, he cannot rely on that failure to sustain his
35
[*35] burden. Id. at 660–61. In this case petitioner failed to meet his
burden of proof as to the deficiency determinations. As demonstrated by
our analysis of the disputed deductions supra Opinion Part I.C. and D,
however, wholly independent of petitioner’s failure to meet his burden
of proof, there is also clear and convincing evidence in the record that
petitioner claimed deductions to which he was not entitled and which
resulted in an underpayment of tax for each year. Therefore, respondent
has satisfied his burden of proof on this issue. See Jordan v.
Commissioner, T.C. Memo. 1986-389, 52 T.C.M. (CCH) 234, 237.
2. Fraudulent Intent
Fraud is defined as an intentional wrongdoing designed to evade
tax believed to be owing. DiLeo v. Commissioner, 96 T.C. 858, 889 (1991),
aff’d, 959 F.2d 16 (2d Cir. 1992). The existence of fraud is a question of
fact to be resolved upon consideration of the entire record. Petzoldt, 92
T.C. at 699. Because direct evidence of fraud is rarely available, fraud
may be proved by circumstantial evidence and reasonable inferences
from the facts. Id.
Courts have developed a nonexclusive list of factors, or “badges of
fraud,” that demonstrate fraudulent intent. Niedringhaus v.
Commissioner, 99 T.C. 202, 211 (1992). These badges of fraud include:
(1) understating income (including by overstating deductions);
(2) keeping inadequate records; (3) giving implausible or inconsistent
explanations of behavior; (4) failing to cooperate with tax authorities;
(5) filing false documents (including false tax returns); (6) dealing in
cash; (7) engaging in a pattern of behavior that indicates an intent to
mislead; and (8) providing testimony that lacks credibility. See Spies v.
United States, 317 U.S. 492, 499 (1943); Bradford v. Commissioner, 796
F.2d 303, 307–08 (9th Cir. 1986), aff’g T.C. Memo. 1984-601; Gould v.
Commissioner, 139 T.C. 418, 446 (2012), aff’d, 552 F. App’x 250 (4th Cir.
2014); Niedringhaus, 99 T.C. at 211; Drobny v. Commissioner, 86 T.C.
1326, 1349 (1986). Although no single factor is necessarily sufficient to
establish fraud, the existence of several indicia is persuasive
circumstantial evidence of fraud. Petzoldt, 92 T.C. at 700. The taxpayer’s
intelligence, education, and tax expertise are also relevant in
determining fraudulent intent. Gould, 139 T.C. at 446.
In support of his contention that the section 6663 fraud penalties
should apply, respondent asserts that petitioner’s sophistication, in
conjunction with his substantial understatements of income tax due to
overstated expenses, lack of records, failure to cooperate with RA
36
[*36] Cascante, dealings in cash, and continuous inconsistent
statements, demonstrate petitioner’s fraudulent intent. 15 We agree that
there is considerable evidence to show that petitioner intended to evade
taxes known to be owing by conduct intended to conceal, mislead, or
otherwise prevent the collection of taxes. See Parks, 94 T.C. at 661.
Petitioner is a well-educated businessman and an experienced tax
return preparer, and yet he significantly overstated the deductions to
which he was entitled on his and GEI’s returns for each of the years in
issue. During the examination, he required RA Cascante to summon his
bank records, failed to provide promised documents and meetings, and
ultimately provided RA Cascante with only minimal documentation to
support the claimed deductions. And during trial petitioner provided the
Court with no documentation or other corroborating evidence at all with
respect to his testimony.
Petitioner also made implausible and inconsistent statements
throughout the course of the examination and trial, as repeatedly
demonstrated throughout our analysis of the disputed deductions supra
Opinion Part I.C. and D, including statements surrounding his
employee business expenses that were refuted. And we have found
incredible his assertions that whatever books and records he did
maintain were destroyed in a flood or absconded with by RA Cascante.
We also note that petitioner caused GEI to operate primarily in cash and
that GEI did not deposit all its gross receipts into, and paid few expenses
from, its bank accounts.
In light of the foregoing, respondent has clearly and convincingly
established that at least some portion of the underpayment for each year
in issue is attributable to fraud. Petitioner asserts that he did not
“knowingly or intentionally . . . defraud anyone or the government.”
Particularly given petitioner’s education and experience, however, this
assertion also seems to us incredible. We conclude therefore that the
entire underpayment for each year must be treated as attributable to
fraud. See § 6663(b). Consequently, we hold that petitioner is liable for
the section 6663 fraud penalties determined by respondent.
15 Respondent asserts that petitioner’s claiming of GEI’s disallowed fuel tax
credits is also indicative of fraud. As we have noted, however, the fuel tax credits are
not at issue in this case. And regardless of whether they were properly claimed, we
find more than sufficient evidence in the record to clearly and convincingly support the
existence of fraud. We thus consider the fuel tax credits no further.
37
[*37] III. Conclusion
We have held that petitioner is liable for the deficiency and
section 6663 fraud penalty determined by respondent for each of the
years in issue. We have considered all arguments made and facts
presented in reaching our holdings, and to the extent not discussed
above, we conclude that they are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered for respondent.