The opinion
T.C. Memo. 1997-105
UNITED STATES TAX COURT
RAYMOND STRONG, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 27340-90. Filed March 3, 1997.
During 1987, petitioner (P) was a business manager at
two automobile dealerships. P claimed various employee
business expense deductions, primarily for business meals.
1. Held: P is not entitled to deductions for business
meals expenses because he has not satisfied the requirements
of sec. 274, I.R.C. 1986.
2. Held, further, deductions are not allowable for P’s
otherwise deductible other employee business expenses
because they do not in the aggregate exceed the 2-percent
floor on miscellaneous itemized deductions. Sec. 67, I.R.C.
1986.
3. Held, further, P is liable for additions to tax
under secs. 6653(a)(1) and 6661(a), I.R.C. 1986.
Stuart E. Abrams, for petitioner.
Mark A. Ericson, Nancy Chassman Rothbaum, and Rosemarie D.
Camacho, for respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION
CHABOT, Judge: Respondent determined deficiencies in
Federal individual income tax and additions to tax under sections
6653(a)1 (negligence, etc.) and 6661 (substantial understatement
of liability) against petitioner as follows:
Additions to Tax
Year Deficiency Sec. 6653(a)(1)(A) Sec. 6653(a)(1)(B) Sec. 6661
1
1987 $20,272 $1,014 $5,068
1
An amount equal to 50 percent of the interest due on $20,272.
After a deemed concession by petitioner,2 the issues for
decision are as follows:
(1) Whether petitioner is entitled to various itemized
employee business expense deductions;
(2) Whether petitioner is liable for additions to tax
under section 6653(a); and
(3) Whether petitioner is liable for additions to tax
under section 6661(a).
1
Unless indicated otherwise, all section references are to
sections of the Internal Revenue Code of 1986 as in effect for
the year in issue.
2
In the notice of deficiency, respondent disallowed
petitioner’s claimed $250 tax preparation fee deduction. At the
opening statement, this matter remained in dispute. On the third
day of the trial, a witness was questioned about this matter.
However, petitioner, who has the burden of proof, did not argue
this matter on brief. We treat petitioner’s failure to argue as,
in effect, a concession by petitioner of this matter. See
subpars. (4) and (5) of Rule 151(e); Sundstrand Corp. v.
Commissioner, 96 T.C. 226, 344 (1991); Money v. Commissioner, 89
T.C. 46, 48 (1987).
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FINDINGS OF FACT
Some of the facts have been stipulated; the stipulations and
the stipulated exhibits are incorporated herein by this
reference.
When the petition was filed in the instant case, petitioner
resided in Syosset, New York.
Background
Petitioner has a degree from Baruch College (CUNY) and a
Masters in Business Administration degree from Adelphi
University. During 1987, petitioner was employed by Crabtree
Toyota, Inc., and Crabtree Hyundai, Inc. (hereinafter sometimes
collectively referred to as the Crabtree Dealerships). The
Crabtree Dealerships were located in New Rochelle, Westchester
County, New York, and were in the business of selling
automobiles. In 1987, Crabtree also had Mazda, Cadillac,
Mitsubishi, Suzuki, and Nissan dealerships in New Rochelle, and a
Ford dealership in Larchmont, also in Westchester County.
Petitioner was employed at the Crabtree Dealerships as a
business manager, which position was sometimes referred to as a
finance and insurance manager.3 The Crabtree Dealerships
required business managers to be in the showrooms from 50 to 70
hours a week. Petitioner's duties at the Crabtree Dealerships
3
The parties stipulated that petitioner was employed by the
Crabtree Dealerships as a “salesperson” in 1987. Our finding,
contrary to the stipulation, is in accord with petitioner's trial
testimony and with both parties’ proposed findings of fact.
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were to (1) arrange financing, (2) sell insurance and warranties,
(3) assist customers with their automobile registration, and (4)
make leasing arrangements. Petitioner's duties as a business
manager generally took place after a deal was agreed to for the
sale of an automobile. However, at times, petitioner arranged
the automobile sale.
Petitioner received $163,289 commission income from the
Crabtree Dealerships in 1987. Petitioner's business manager
commissions were directly tied to the amount of financing and
other arrangements he successfully concluded and were not based
on a pool of all business managers at the Crabtree Dealerships.
In those instances when petitioner arranged for sales of
automobiles, not merely financing, etc., petitioner’s commissions
were based on the entire sales price. Petitioner sold about 50
automobiles in 1987.
When petitioner referred customers to other Crabtree
Dealerships, he earned commissions from the resulting sales.
Petitioner’s Forms W-2 for 1987, report income only from Crabtree
Hyundai, Inc., and Crabtree Toyota, Inc.4
4
The record in the instant case does not indicate how the
amount of referral commission was determined, or what the
mechanics were for petitioner to receive such a commission
without a Form W-2’s being issued by the dealership at which the
referred sale occurred. Respondent appears to agree that the two
Forms W-2 include all of petitioner’s commission income from the
Crabtree Dealerships and the related companies.
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The Crabtree Dealerships had a busy year in 1987. Banks
competed to obtain the Crabtree Dealerships' financing business
in 1987. Petitioner maintained close relationships with
representatives of banks and other financial institutions, such
as insurance companies and leasing companies, in order to be sure
that, once a deal was made between the customer and the
dealership, the financing would be approved by a bank or other
financial institution.
Crabtree sold the Crabtree Dealerships around mid-1989, and
Crabtree no longer had access to the Crabtree Dealerships’ books
and records.
During 1987, petitioner resided in Syosset, New York, which
is located in northeastern Nassau County, on Long Island. The
Crabtree Dealerships are about 34 miles from petitioner’s
residence. Driving between Syosset and New Rochelle ordinarily
requires one to pass through Queens and Bronx Counties, and to
cross the East River by one of three toll bridges.
Employee Business Expenses
Business Meals
Petitioner recorded in a diary the amounts he claims he
spent each day for business meals. Each entry in petitioner’s
diary for meals lists the name of the restaurant, the names of
the people present, the type of meal (breakfast, lunch, or
dinner), and the cost of the meal. Petitioner’s diary does not
show the business purpose of any of these meals and does not show
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what was the business relationship to petitioner of any of the
people present. The business meals shown in the diary include
274 dinners, 104 lunches, and 10 breakfasts. For 1987,
petitioner made 388 such entries, showing a total cost of
$65,777.39 over 304 days. Petitioner’s diary shows entries for
every day of 1987 except Sundays, six holidays, and one 3-day
vacation.
Petitioner paid for many of his business meals in currency
and others of his business meals by credit card. Petitioner's
entries in his diary for business meals average about $5,481 a
month.
Many of the restaurants listed in the diary, including those
shown as lunch sites, are located within a few miles of
petitioner’s home on Long Island. Some of the listed restaurants
are in The Bronx, some in Manhattan, some in Westchester, and
some in Connecticut.
Thomas Mercer (hereinafter sometimes referred to as Mercer)
hired petitioner to work for the Crabtree Dealerships about 1985
or late 1984. In 1986, Mercer was the general manager of
Crabtree Toyota, Inc., Crabtree Mazda, Inc., and Crabtree
Hyundai, Inc. In 1986 or 1987, Mercer left those dealerships to
become president of an unrelated auto leasing company. According
to petitioner's diary, petitioner entertained Mercer once in
1987. In fact, Mercer had dinner with petitioner once or twice
during 1987, but he (Mercer) paid for the meals.
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Paula Wright (hereinafter sometimes referred to as Wright)
was a senior credit analyst at Chemical Bank who dealt with the
Crabtree Dealerships, among about 35 auto dealerships, during
1987. At that time, Wright worked in Jericho, which is about 3
miles southwest of Syosset. According to petitioner's diary,
petitioner entertained Wright only once during 1987. In fact,
Wright had business dinners with petitioner many times during
1987. These dinners, which sometimes involved others from the
Crabtree Dealerships and sometimes involved others from Chemical
Bank, generally took place at restaurants in or near Syosset or
Glen Cove. Glen Cove is about 7 miles northwest of Syosset and
Jericho. Petitioner paid for these dinners with Wright.
John Sullivan (hereinafter sometimes referred to as
Sullivan) was a retail sales representative with Chemical Bank
until around the end of May or beginning of June 1987, at which
time he became a credit specialist with Citibank. As a retail
sales representative with Chemical Bank, Sullivan had a business
relationship with petitioner. As a credit specialist with
Citibank, Sullivan did not have a business relationship with
petitioner. According to petitioner's diary, petitioner
entertained Sullivan seven times in 1987--three times at lunch
and four times at dinner. According to petitioner’s diary, one
lunch and one dinner took place while Sullivan was with Chemical
Bank, and two lunches and three dinners took place while Sullivan
was with Citibank. In fact, while working for Chemical Bank,
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Sullivan went out to lunch weekly or biweekly with petitioner;
most of the time Chemical Bank paid for the lunches, sometimes
petitioner paid. After Sullivan left Chemical Bank, the few
times he had lunch with petitioner, petitioner paid for the
lunch. Sullivan never had dinner with petitioner. Sullivan does
not know many of the restaurants at which petitioner’s diary
shows that he ate with petitioner. Sullivan does not know some
of the people petitioner’s diary shows as having shared a meal
with him and petitioner.
In addition to his diary, petitioner presented the bottom
perforated portion of restaurant checks (hereinafter sometimes
collectively referred to as the stubs) as substantiation for his
meals expenses. Less than half the stubs have the name of the
restaurant imprinted on them. On most of the stubs there is a
name of a restaurant, a month and day but not a year, and an
amount, handwritten in pencil. Petitioner wrote the handwritten
information on most, if not all, of the stubs that have
handwritten information.
Table 1 shows the information recorded in petitioner’s diary
about meals at Frank’s Steaks in 1987. All of these meals are
shown in the diary as dinners.
Table 1
Date Amount Diners (in addition to petitioner)
Jan 05 $132.80 B. Newman, A. McDermott
Feb. 21 203.75 A. Loomis, C. Walsh, N. Hawkins
Mar. 14 235.50 C. Shiflet, W. Keller, J. Orr
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May 08 193.50 L. Lewis, M. Lewis, N. Hannon
Jun. 01 196.85 G. Becker, J. Ferraro, D. Voelker
Aug. 04 212.45 T. Schwitz, N. Annarella, C. Bouse
Aug. 19 206.35 G. Levy, N. Pierce, F. Loria
Sep. 30 196.00 J. Gold, M. Hong, J. Niceberg
Oct. 09 265.00 B. Ragan, R. Grossman, D. Dearney
Oct. 22 223.35 J. Paevor, N. Cohen, J. Cowen
Dec. 30 246.60 M. Smith, J. Fox, M. Hannon
Total 2,312.15
Nine of these 11 dinners at Frank’s Steaks in 1987 were
“substantiated” by stubs which do not have the name of the
restaurant imprinted on them; there are not any stubs for the
remaining two dinners.
Frank’s Steaks, a restaurant on the border of Westbury and
Jericho, opened under that name in July 1988. From January 1987
to July 1988 there was no Frank’s Steaks, and there were not any
restaurant operations at the Frank’s Steaks location. For about
a year before that hiatus, the restaurant at this location was
named “The Peculiar Penguin”. Before that, the restaurant at
this location was named “The Great American Cafe”. There are no
other restaurants in the Westbury or Jericho area named “Frank’s”
or “Frank’s Steaks”. There were only two restaurants in the New
York City metropolitan area in 1987 with “Frank’s” in the name;
one was “Frank’s” in Manhattan at 14th St. and 9th Ave., and the
other was “Frank’s Pizzeria” in Huntington, in the northwest
corner of Suffolk County, about 6 miles west of Syosset. The
stubs that petitioner presented as substantiation of his dinners
at Frank’s Steaks were not the sort of stubs that had ever been
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used at Frank’s Steaks or at its predecessor, The Peculiar
Penguin.
Petitioner presented two stubs to substantiate two meals at
Montauk Yacht Club. Montauk is at the easternmost end of Long
Island, more than 80 miles east of Syosset. One stub shows
$219.35 for dinner on July 29; the other shows $211 for dinner on
September 1. Both stubs are imprinted with the name of the
restaurant. Both stubs have the serial no. 05284 imprinted on
them. One stub is light paper, with the serial number in red;
the other is heavy paper, with the serial number in dark gray.
It is evident that the two stubs were parts of separate copies of
a single bill, and not stubs for two separate bills almost 5
weeks apart (July 29 and Sept. 1).
Petitioner’s diary shows that on Friday, June 26, 1987, he
took three people to dinner at Smith & Wollensky, at a cost of
$212.75. Petitioner’s diary does not show any other meals for
that day. Petitioner presented two stubs to substantiate meals
on June 26, each in the amount of $212.75. One stub is imprinted
with the name of the restaurant, Smith & Wollensky. The other
stub does not have any name imprinted on it. The date and amount
were hand-written on both stubs. That June 26 dinner is the only
meal shown in the entire diary as costing $212.75.
Petitioner’s diary shows that on Tuesday, July 7, 1987, he
took three people to dinner at Gian-Lorenzo Ristorante, at a cost
of $193.50. Petitioner’s diary does not show any other meals for
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that day. Petitioner presented two stubs to substantiate meals
on July 7, each in the amount of $193.50. Neither stub has the
name of the restaurant imprinted on it. The stubs are of the
same style, but with different serial numbers. Petitioner’s
diary shows a $193.50 dinner for January 31 and another one for
May 8; there are different stubs to “substantiate” each of these
meals. The diary does not show any other meals costing $193.50.
Petitioner’s diary shows that petitioner took people to
meals at North Shore Steak House on four occasions in 1987--all
were dinners during the 16-week period from September 4 through
December 23. Petitioner presented stubs to substantiate each of
these four dinners. None of these four stubs has a restaurant’s
name imprinted on it. Each of these four stubs is in a style
different from the other three.
There are numerous instances in which a single restaurant is
represented by stubs of different styles. There are numerous
instances in which stubs of a single style with close receipt
numbers are represented as coming from different restaurants.
The Crabtree Dealerships did not have a formal reimbursement
policy for meals and entertainment expenses incurred by an
employee. The Crabtree Dealerships’ informal policy was to
reimburse an employee for meals and entertainment expenses if the
employee was asked to incur the expense, but not otherwise.
Auto Expenses
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In petitioner’s diary he noted mileage amounts for each of
the days on which he also noted business meals, intending to show
how many business miles he had driven that day. The mileage
amounts that petitioner so noted in his diary total 28,867. In
petitioner’s diary he noted parking and toll amounts for some of
the days on which he also noted business meals, intending to show
business parking and tolls. The parking toll amounts that
petitioner so noted in his diary total $1,101.75.
The Crabtree Dealerships provided various demonstration
vehicles to petitioner for his use during 1987. Petitioner had
exclusive use of these vehicles while the vehicles were in his
possession. Petitioner used these vehicles to commute to and
from work and for other personal purposes. Petitioner did not
incur any repair expenses relating to these vehicles. Petitioner
paid for gasoline, for oil and other maintenance, and $35 per
month rental fee.
Petitioner’s Tax Return
Petitioner’s 1987 tax return was prepared by Morris A.
Levine (hereinafter sometimes referred to as Levine), a C.P.A.,
who signed the tax return as preparer on April 10, 1988. This
tax return was filed timely.
Petitioner’s 1987 tax return was the first tax return Levine
prepared for petitioner. Levine prepared this tax return
primarily from statements made by petitioner and not from
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underlying books or records. In particular, petitioner did not
give petitioner’s diary to Levine.
On his 1987 tax return, petitioner claimed the deductions
shown in table 2.
Table 2
Form 2106
Meals and entertainment $62,500
1
Less: 20 percent 12,500 $50,000
Vehicle expenses 4,016
Parking fees, tolls, and local trans. 900
Other business expenses 840
Total Form 2106 $55,756
Schedule A
Form 2106 $55,756
Tax preparation fees 250
56,006
2
Less: 2 percent A.G.I. 3,350
Net miscellaneous deductions 52,656
1
Petitioner acknowledges the limitation, and showed it on his
tax return. Sec. 274(n).
2
Petitioner acknowledges the limitation, and showed it on his
tax return. Sec. 67. Both sides agree that $3,350 is the
correct amount.
On the Form 2106 of his 1987 tax return, petitioner arrived
at the $4,016 vehicle expenses amount shown in table 2, by the
route described in table 3.
Table 3
Total mileage vehicle used 35,000 mi.
Business use 27,500 mi.
Percent of business use 78.571
“Average daily round trip commuting distance” 10 mi.1
Total commuting 2,500 mi.2
Other personal mileage 5,000 mi.
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Gasoline, oil, repairs, vehicle ins. $3,361
Vehicle rentals 1,750
Total 5,111
Total times percent business use (78.571) 4,016
1
The parties have stipulated that the distance between
petitioner’s home and his workplace is about 34 miles; the
roundtrip is about 68 miles.
2
Although the implication of the commuting items is that
petitioner worked 250 days in 1987 (2,500 mi. divided by 10 mi.
per day = 250 days) petitioner’s diary, discussed supra, shows
business meals on 304 days in 1987.
In the notice of deficiency, respondent disallowed all the
deductions described supra in tables 2 and 3.
_________________________
The information in petitioner’s diary and the stubs was not
recorded at or near the times of the events described therein.
Petitioner’s diary and the stubs are not “adequate records” for
purposes of section 274(d) and section 1.274-5T(c)(2), Temporary
Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6,1985). The record
in the instant case does not include “sufficient evidence” for
purposes of section 274(d) and section 1.274-5T(c)(3), Temporary
Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985).
Petitioner paid for some meals that were expenses of his
trade or business as an employee.
Petitioner’s business use of his vehicles was well under
1,000 miles.
The entire underpayment is due to petitioner’s negligence.
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OPINION
I. Deductions
Respondent contends that, under section 162(a), petitioner
is not entitled to the claimed employee business expense
deductions because petitioner has failed to substantiate that the
expenses (1) were incurred and (2) were ordinary and necessary
expenses of petitioner’s trade or business as a Crabtree
Dealerships business manager. See supra note 3. In addition,
respondent contends that petitioner is not entitled to these
deductions because of petitioner’s failure to meet the strict
record-keeping requirements of section 274(d).
Petitioner maintains that (1) he has satisfied the
requirements of section 162(a) as to all his claimed employee
business expense deductions, (2) he has satisfied the
requirements of section 274(d) as to his claimed meals expenses
deductions, and (3) section 274(d) does not apply to his claimed
automobile and other nonmeal business expense deductions.
Respondent apparently does not dispute petitioner’s contention
that section 274(d) does not apply to the claimed automobile and
other nonmeal business expense deductions. But see secs.
274(d)(1), and (4), and 280F(d)(4)(A)(i), and the regulations
thereunder.
We agree with respondent that petitioner has failed to
establish that he is entitled to any of these deductions.
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Deductions are a matter of legislative grace, and a taxpayer
seeking a deduction has the burden of overcoming the presumption
of correctness that attaches to respondent's factual
determinations in the notice of deficiency. Rule 142(a); New
Colonial Co. v. Helvering, 292 U.S. 435, 440 (1934); Welch v.
Helvering, 290 U.S. 111, 115 (1933).
Section 162(a)5 allows a deduction for "all the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on any trade or business," including a trade or business
as an employee. See, e.g., Lucas v. Commissioner, 79 T.C. 1, 6-7
(1982). Under section 6001 and section 1.6001-1(a) and (e),
Income Tax Regs., a taxpayer must keep such permanent books of
account or records as are sufficient to establish the amount of
gross income, deductions, credits, or other matters required to
be shown on the tax return. If the books and records are not
adequate to establish the amounts of deductions or credits, but
there is evidence that something more should be allowed than
respondent allowed, then we are required to make some estimate of
5
Sec. 162 provides, in relevant part, as follows:
SEC. 162. TRADE OR BUSINESS EXPENSES.
(a) In General.--There shall be allowed as a deduction
all the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or
business, * * *
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how much more should be allowed. Cohan v. Commissioner, 39 F.2d
540, 543-544 (2d Cir. 1930).
However, section 274(d)6 provides that a deduction is not
allowable under section 162 for meals and entertainment expenses,
as well as certain other types of expenses, unless the taxpayer
substantiates certain matters by “adequate records” or by
“sufficient evidence” corroborating the taxpayer's own statement.
Where section 274(d) applies, it overrules the “Cohan rule”.
6
Sec. 274(d) provides, in relevant part, as follows:
SEC. 274. DISALLOWANCE OF CERTAIN ENTERTAINMENT, ETC.,
EXPENSES.
* * * * * * *
(d) Substantiation Required.--No deduction or credit
shall be allowed--
* * * * * * *
(2) for any item with respect to an activity
which is of a type generally considered to constitute
entertainment, amusement, or recreation, or with
respect to a facility used in connection with such an
activity,
* * * * * * *
unless the taxpayer substantiates by adequate records or by
sufficient evidence corroborating the taxpayer's own
statement (A) the amount of such expense or other item, (B)
the time and place of the travel, entertainment, amusement,
recreation, or use of the facility or property, or the date
and description of the gift, (C) the business purpose of the
expense or other item, and (D) the business relationship to
the taxpayer of persons entertained, * * *
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Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968), affd. 412
F.2d 201 (2d Cir. 1969).
We consider first petitioner’s claimed business meals
expenses, then his other claimed business expenses.
A. Business Meals Expenses
The parties agree that petitioner’s claimed business meals
expenses are not deductible if they fail to meet the requirements
of section 274(d).
Petitioner’s right to deduct his claimed meals and
entertainment expenses turns on (1) whether the diary and the
stubs constitute adequate records for purposes of section 1.274-
5T(c)(2), Temporary Income Tax Regs., and if not, then (2)
whether sufficient evidence to corroborate petitioner’s own
statements has been presented. Sec. 1.274-5T(c)(3), Temporary
Income Tax Regs.
(1) Adequate Records
Under section 1.274-5T(c)(2)(i), Temporary Income Tax Regs.,
in order to meet the "adequate records" requirement, a taxpayer
is to maintain an account book, diary, statement of expenses, or
similar record and documentary evidence (such as receipts, paid
bills, or similar evidence) which, when combined, establish each
element of the expense that section 274(d) requires to be
established. The account book, diary, statement of expense, or
similar record must be prepared or maintained in such a manner
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that each recording of an element of expenditure is made at or
near the time of the expenditure. Sec. 1.274-5T(c)(2)(ii),
Temporary Income Tax Regs. If the taxpayer lacks "adequate
records", then the taxpayer is to provide a written or oral
statement by the taxpayer containing sufficient information in
detail as to each element set forth in section 274(d), as well as
sufficient other corroborative evidence. Sec. 1.274-5T(c)(3)(i),
Temporary Income Tax Regs.
Petitioner’s diary paints a picture of an indefatigable
worker (the diary shows that he had business meals on 304 days,
even though his tax return showed that he worked only 250 days
during 1987) who was, if anything, overly cautious on his tax
return (his diary showed the meals cost him $65,777.39, but he
deducted only $62,500). Supra tables 3 and 2. The bill stubs
present an ostensibly plausible backup, in a bewildering variety
of styles, sizes, and colors.
However, neither the diary nor the stubs show (1) the
business purpose of any of the claimed business meals or (2) the
business relationship to petitioner of any of the people with
whom he dined. In addition, substantially all the other
information in the record about business meals contradicts the
information that is presented in the diary and stubs. Mercer
testified that he, not petitioner, paid for their dinners.
Wright testified that she had many dinners with petitioner during
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1987, and that petitioner paid for them, but petitioner’s diary
shows Wright as a guest only once. Sullivan went to lunch with
petitioner many times, but not to dinner, during 1987;
petitioner’s diary shows Sullivan as petitioner’s guest for four
dinners and only three lunches. Petitioner’s diary shows 11
dinners at Frank’s Steak in 1987; 9 were purportedly
substantiated by stubs. However Frank’s Steaks did not open
until July 1988, and the predecessor restaurant, The Peculiar
Penguin, closed in January 1987. Also, the stubs petitioner
presented to substantiate the Frank’s Steaks business meals were
of a style that had never been used by either Frank’s Steaks or
The Peculiar Penguin. In addition, our findings set forth
numerous inconsistencies among the stubs.
Petitioner’s cause is not helped by his testimony that he
relied on stubs that he filled in, even where he had paid the
bill by credit cards and thus had credit card receipts. He
testified that the stubs that he filled in were just as
trustworthy as credit card receipts.
The record does not include meaningful evidence to
corroborate the reliability of petitioner’s diary or stubs. Nor
has petitioner offered as adequate explanation for the
inaccuracies and inconsistencies which are identified with
respect to the diary and stubs. Based on the record, we
conclude, and we have found, that petitioner’s diary and the
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stubs are not adequate records for purposes of section 274(d).
Sec. 1.274-5T(c)(2), Temporary Income Tax Regs.
On brief, petitioner attempts to counter the Frank’s Steaks
evidence as follows:
The one restaurant representative called by respondent,
Brent Gindel, the owner of a restaurant known as Frank’s
Steaks, was unable to identify the receipts provided by the
petitioner. Since the evidence showed there were other
restaurants known as “Frank’s” in the New York metropolitan
area that were open during 1987, Mr. Gindel’s testimony is
incompetent to establish anything concerning the restaurant
receipts proffered by Strong.
The record indicates that there were only two other restaurants
in the New York City metropolitan area in 1987 with “Frank’s” in
the name. One of them, Frank’s Pizzeria, was in Huntington,
about 8-10 miles from the Westbury-Jericho location of Frank’s
Steaks. The other, Frank’s, was in lower Manhattan, on the west
side.
Before Brent Gindel testified, petitioner testified that the
“Frank’s” in question was “on the Westbury Jericho border on Long
Island”. About half an hour later, petitioner testified that the
“Frank’s” in question was “I believe in Westbury.” Although
petitioner’s responses between these two occasions were somewhat
evasive, he did not suggest, in his pre-Gindel testimony, that
the “Frank’s” or “Frank’s Steak” referred to in his diary and the
stubs was in any other location than the Westbury-Jericho border.
Two days after Gindel’s testimony, petitioner was on the witness
stand again. On this occasion, counsel for both sides “danced
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around” the question of what petitioner had stated about Frank’s
in a response to an interrogatory. Because of the form of
respondent’s counsel’s questions, and respondent’s counsel’s
tactical decision to not offer into evidence the interrogatory
and petitioner’s written response thereto, the evidence of record
is not clear as to petitioner’s statements in discovery.
However, it is clear that, up to that point in the trial,
petitioner had identified the Frank’s Steaks mentioned in his
diary and on some of the stubs as the restaurant on the border of
Westbury and Jericho. Also, Brent Gindel’s testimony clearly
contradicted petitioner’s testimony. This point was important--
petitioner claimed in his diary to have taken 32 different people
to Frank’s in 1987, and to have spent more than $50 per person
per meal there that year. Supra table 1. Respondent had
informed petitioner some 9 months before the trial that Frank’s
Steaks did not open until 1988, and so was not open on the
relevant 1987 dates shown in petitioner’s diary and on the stubs.
In addition, petitioner had 2 days after the Gindel testimony to
check records or call any of his 32 claimed dinner guests. Yet
petitioner did not take this or any other opportunity to identify
the correct location of the Frank’s Steaks where he took his
claimed dinner guests and incurred his claimed expenses. We
conclude that petitioner did not explain or rebut because there
was no plausible explanation or rebuttal. See Wichita Terminal
Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162
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F.2d 513 (10th Cir. 1947). This strongly suggests that
petitioner’s diary and stubs (1) are materially false, and (2)
were not substantially contemporaneous in 1987, but were
constructed well after August 1988 when the restaurant first
opened as Frank’s Steaks.
We conclude, and we have found, that petitioner’s diary and
the stubs are not “adequate records” for purposes of section
274(d) and section 1.274-5T(c)(2), Temporary Income Tax Regs.
(2) Corroboration
Substantiation by “sufficient evidence corroborating the
taxpayer’s own statement” requires the cost, time, place, and
date of the expenditure to be corroborated by “direct evidence,”
while business purpose or business relationship may be shown by
“circumstantial evidence.” Sec. 1.274-5T(c)(3)(i), Temporary
Income Tax Regs.
The witnesses who testified about sharing meals with
petitioner were unable to support the specifics of petitioner’s
testimony or diary. None of the witnesses could identify (1) any
particular date on which they had dined with petitioner, (2)
where they had eaten, (3) who else was present during the meal,
or (4) the amount of any bill. Some of the witnesses could not
even recollect ever being at some of the restaurants that,
according to the diary, they had dined at, nor could they
recollect ever having met the people who, according to the diary,
shared a meal with them. Indeed, with the exception of general
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assertions by some of the witnesses that they attended meals with
petitioner, the testimony did not provide an adequate description
of the circumstances surrounding any of the meals. Not only was
there a total failure of direct evidence to corroborate
petitioner’s statement as to cost, time, place, and date, but
some of the witnesses’ testimony directly contradicted at least
some of petitioner’s statements. See supra the discussion of
Mercer’s, Wright’s, and Sullivan’s testimony.
Thus, we conclude, and we have found, that the record does
not include “sufficient evidence” of corroboration for purposes
of section 274(d) and section 1.274-5T(c)(3), Temporary Income
Tax Regs.
Petitioner argues that he should not be held to strict
compliance with section 274(d), because important records have
become unavailable. The records that petitioner claims are
unavailable are the Crabtree Dealerships’ records of who bought
automobiles from the Crabtree Dealerships during 1987.
Petitioner contends that he is unable to obtain those records
because the Crabtree Dealerships were sold sometimes after 1987.
Section 1.274-5T(c)(5), Temporary Income Tax Regs., provides
that if records have become unavailable through no fault of the
taxpayer, then the taxpayer is permitted “to substantiate a
deduction by reasonable reconstruction of his expenditures”. In
order to qualify for relief under this provision, petitioner must
establish that (1) at one time he possessed adequate records and
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(2) his present lack of records is due to fire, flood, or other
casualty beyond his control. Gizzi v. Commissioner, 65 T.C. 342,
345 (1975).7 There is not any evidence that (1) petitioner ever
possessed the records in question or (2) if the records were
available, then the records would contain sufficient evidence to
satisfy the requirements of section 274(d). Even if the records
of who bought automobiles from the Crabtree Dealerships in 1987
were available, then petitioner’s records would still have all
the problems discussed supra, that caused us to conclude that
petitioner’s diary and the stubs are materially false and were
not substantially contemporaneous. Thus, petitioner is not
entitled to relief under section 1.274-5T(c)(5), Temporary Income
Tax Regs.
(3) Conclusions
We believe that it is more likely than not that petitioner’s
diary and the stubs were created by petitioner well after the
events they purport to describe. We are satisfied that
petitioner did, indeed, have some business meals in 1987 for
which deductions would have been allowable if contemporaneous
records had been kept. However, petitioner failed to keep
contemporaneous records, and his efforts to create
7
Sec. 1.274-5T(c)(5), Temporary Income Tax Regs., which
applies to 1986 and later years (see sec. 1.274-5T(a), Temporary
Income Tax Regs.), is identical in all material respects with
sec. 1.274-5(c)(5), Income Tax Regs., the provision interpreted
in Gizzi v. Commissioner, 65 T.C. 342, 345 (1975).
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contemporaneous-appearing records have succeeded only in
destroying what modicum of credibility his testimony might
otherwise have had.8
Petitioner has wholly failed to meet the requirements of
section 274(d) with respect to the business meal expenses. As a
result, he is not permitted to deduct any of his claimed business
meal expenses.
Under these circumstances, it is not necessary to examine
the details of section 162(a) with respect to these expenses.
We hold for respondent on this issue.
B. Other Business Expenses
See supra tables 2 and 3 for petitioner’s other claimed
business expenses. The “Other business expenses” category on
table 2 evidently consists of telephone expenses.
Expenses incurred in going from home to work, and from work
to home, are generally treated as nondeductible personal
expenses. Sec. 262; Commissioner v. Flowers, 326 U.S. 465
(1946); Green v. Commissioner, 59 T.C. 456, 458 (1972), secs.
1.262-1(b)(5), 1.162-2(e), Income Tax Regs. However, expenses
8
Our qualms about the credibility of petitioner’s testimony
may be illustrated by his statements about the number of days he
worked. When confronted with his diary, he testified that he
worked “well over 300 days.” When confronted with his tax
return, he testified that “that was a guess when I said 300”, and
that he probably went to work about 250 days in 1987. When asked
how to reconcile his diary and his tax return, he responded--
I don’t know, Your Honor, probably between 250 and 300.
I can’t be certain.
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incurred in going from one workplace to another are generally
treated as trade or business expenses deductible under sec.
162(a). E.g., Steinhort v. Commissioner, 335 F.2d 496, 504-505
(5th Cir. 1964), affg. and remanding T.C. Memo 1962-233; Dancer
v. Commissioner, 73 T.C. 1103 (1980).
The claimed business use of the vehicles that the Crabtree
Dealerships leased to petitioner is for business meetings (such
as with bank employees) and for demonstrations to customers and
potential customers. Although we are satisfied that petitioner
did have business meals in 1987, our efforts to determine the
amount of business usage of petitioner’s vehicles and the amount
of petitioner’s vehicle-related expenses have largely foundered
on the inadequate record herein and on the contradictions in
petitioner’s contentions.
For reasons explained supra, we have concluded that
petitioner’s diary and stubs are unreliable. In addition, there
is no evidence in the record as to the locations of many of the
restaurants named in the diary and on the stubs, and no evidence
as to locations of any nonmeal business meetings, so we could not
check on the mileage figures petitioner wrote in his diary.
Although we are satisfied that petitioner incurred some vehicle-
related expenses, we do not have any reliable evidence as to the
$5,111 he claims to have spent on the vehicles. Supra table 3.
Also, we have no satisfactory explanation of why petitioner
claims that his “Average daily round trip commuting distance” is
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only 10 miles, in light of the parties’ stipulation that the one-
way distance between his home and his workplace is about 34
miles. Supra table 3. Finally, we do not have any explanation
of why on his tax return petitioner claims to have used his auto
to go to work on 250 days of the year (average daily round trip
commute of 10 mi., divided into total 1987 commuting distance of
2,500 mi.), while in his diary, petitioner claims to have had
business meals on 304 days.
Even if we were to find that petitioner substantiated some
vehicle-related expenses, any such allowance would be well under
$1,000. We note that both sides agree that the 2-percent floor
on miscellaneous itemized deductions is $3,350. Supra table 2,
note 2. Table 2 shows that, even if we were to allow $1,000
vehicle expenses, when added to petitioner’s remaining claimed
miscellaneous deductions it would not be enough to enable
petitioner to pass the $3,350 threshold; thus petitioner is not
entitled to any net miscellaneous deductions. Under these
circumstances, it is not necessary for us to set a more precise
number on petitioner’s vehicle expenses, nor on his parking fees,
etc., nor on his other business expenses. We have already deemed
petitioner to have conceded the claimed tax preparation fees.
Supra note 2.
We hold for respondent on this issue.
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II. Additions to Tax
A. Section 6653(a)
Section 6653(a)(1)(A)9 imposes an addition to tax of 5
percent of the underpayment if any part of the underpayment is
due to negligence or disregard of rules or regulations. Section
6653(a)(1)(B) imposes an additional addition to tax equal to 50
percent of the interest payable under 6601 with respect to the
portion of the underpayment attributable to negligence, etc.
Petitioner has the burden of proving error in respondent's
determination that these additions to tax should be imposed
against him. Goldman v. Commissioner, 39 F.3d 402, 407 (2d Cir.
9
Sec. 6653 provides, in relevant part, as follows:
SEC. 6653. ADDITIONS TO TAX FOR NEGLIGENCE AND FRAUD.
(a) Negligence.--
(1) In general.--If any part of any underpayment
* * * is due to negligence or disregard of rules or
regulations, there shall be added to the tax an amount
equal to the sum of--
(A) 5 percent of the underpayment, and
(B) an amount equal to 50 percent of the
interest payable under section 6601 with respect
to the portion of such underpayment which is
attributable to negligence for the period
beginning on the last date prescribed by law for
payment of such underpayment * * * and ending on
the date of the assessment of the tax * * *.
The later amendments of this provision by sec. 1015(b)(2)(A)
of the Technical and Miscellaneous Revenue Act of 1988 (Pub. L.
100-647, 102 Stat. 3342, 3569), and by sec. 7721(a) of the
Omnibus Budget Reconciliation Act of 1989 (OBRA 89--Pub. L. 101-
239, 103 Stat. 2106, 2395) do not affect the instant case.
As a result of OBRA 89, the substance of former sec. 6653(a)
now appears in subsecs. (b)(1) and (c) of sec. 6662.
- 30 -
1994), affg. T.C. Memo. 1993-480; Bixby v. Commissioner, 58 T.C.
757, 791-792 (1972).
Broadly speaking, for purposes of this provision, negligence
is lack of due care or failure to do what a reasonable and
ordinarily prudent person would do under the circumstances.
Neely v. Commissioner, 85 T.C. 934, 947-948 (1985). Petitioner
contends that he relied on his tax return preparer, Levine, to
prepare the 1987 tax return, and, thus, he neither was negligent,
nor acted in intentional disregard of the rules or regulations.
Respondent contends that petitioner was negligent as to the
entire underpayment and thus, the additions to tax under section
6653(a)(1) should be imposed.
We agree with respondent.
Petitioner was obligated to keep and present adequate and
accurate records of his trade or business expenses. Sec. 6001;
Stovall v. Commissioner, 762 F.2d 891, 895 (11th Cir. 1985),
affg. T.C. Memo. 1983-450; Crocker v. Commissioner, 92 T.C. 899,
917 (1989). An ordinarily prudent taxpayer who contends that he
spent more than $60,000, supra table 2, on employee trade or
business expenses (about 40 percent of his $163,289 gross
receipts from that trade or business) would keep such records and
present them to his or her tax return preparer. Petitioner’s
diary and stubs are inadequate, and they conflict with the facts
in material respects. In addition, petitioner testified that he
did not give his diary to Levine, his tax return preparer.
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Petitioner’s failure to do what an ordinarily prudent taxpayer
would do is negligence. This negligence led to the entire
deficiency in the instant case. Thus, the entire deficiency (in
the instant case, the entire underpayment) is attributable to
petitioner’s negligence.
Levine testified that petitioner presented “papers” to
Levine and gave certain information orally to Levine, but Levine
could not recall the specifics. Petitioner’s testimony on this
matter is consistent with, and no more detailed than, Levine’s
testimony. The following colloquy is illustrative:
THE COURT: Mr. Strong, it appears that Mr. Levine
prepared your 1987 tax return, is that correct?
THE WITNESS: That’s correct.
THE COURT: When he prepared your tax return, did you
simply give him the numbers or did you give him the
documents and he figured out the numbers from the documents?
THE WITNESS: No, I gave him the numbers. I provided
the information to him.
THE COURT: Did you give him the diary?
THE WITNESS: No, sir.
THE COURT: So, did you then total the information on
the diary? You add up the mileage, the dollar amounts and
so on?
THE WITNESS: Yes, Your Honor.
As a general rule, the duty of filing accurate tax returns
cannot be avoided by placing responsibility on an agent. Metra
Chem Corp. v. Commissioner, 88 T.C. 654, 662 (1987); Pritchett v.
Commissioner, 63 T.C. 149, 174 (1974). Because the record does
- 32 -
not include evidence that petitioner provided complete and
accurate information to Levine, it is not necessary for us to
explore in the instant case whether he could have avoided the
negligence addition to tax by providing this information to
Levine. See discussions in Metra Chem Corp. v. Commissioner, 88
T.C. at 662; Pritchett v. Commissioner, 63 T.C. at 174.
We hold for respondent on this issue.
B. Section 6661
Section 6661(a)10 imposes an addition to tax of 25 percent
of the amount of any underpayment attributable to a substantial
understatement of tax. Pallottini v. Commissioner, 90 T.C. 498
(1988). An understatement is substantial if it exceeds the
greater of 10 percent of the correct tax or $5,000. Sec.
6661(b)(1)(A). (Our holdings make it clear that petitioner has a
substantial understatement for 1987.)
If an item is not attributable to a tax shelter, then the
understatement shall be reduced on account of the item, and the
addition to tax accordingly reduced, if (1) the taxpayer's
10
Sec. 6661 provides, in relevant part, as follows:
SEC. 6661. SUBSTANTIAL UNDERSTATEMENT OF LIABILITY.
(a) Addition to Tax.--If there is a substantial
understatement of income tax for any taxable year, there
shall be added to the tax an amount equal to 25 percent of
the amount of any underpayment attributable to such
understatement.
Sec. 6661 was repealed by sec. 7721(c)(2) of OBRA 89, Pub.
L. 101-239, 103 Stat. 2106, 2399. The substance of former sec.
6661 now appears as secs. 6662(b)(2), 6662(d), and 6664(c)(1).
- 33 -
treatment of the item was based on substantial authority, or (2)
the taxpayer adequately disclosed on the tax return or in a
statement attached to the tax return the relevant facts affecting
the item's tax treatment. Sec. 6661(b)(2)(B).
Respondent has authority to waive this addition to tax, if
the taxpayer shows there was reasonable cause for the
understatement and the taxpayer acted in good faith. Sec.
6661(c).
Petitioner has the burden of proving error in respondent's
determination that such an addition to tax should be imposed
against him. Rule 142(a); Welch v. Helvering, 290 U.S. at 115.
Petitioner has not shown (1) that he had substantial authority
for the position taken on his tax return, (2) that he adequately
disclosed his position in a statement attached to the tax return
or on the tax return, (3) that he had reasonable cause for the
understatement, or (4) that he acted in good faith. Thus,
petitioner has failed to carry his burden of proof.
We hold for respondent on this issue.
To reflect the foregoing,
Decision will be entered
for respondent.