T .C . Memo . 2009-13 3

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UNITED STATES TAX COURT

PAUL RUDNICK, Petit' .oner v .

COMMISSIONER OF INTERNAL REV,NUE, Responden t

Docket No . 17500-06 .

(Filed

June

2009 .

Paul Rudnick, pro se .

Margaret Burow , for respondent .

MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL,

Judge : Respondent determined a deficiency of t

$103,194 and a section 6662(a)' accuracy- related penalty o f

$20,634 with respect to petitioner's 2 04 Federal income ta x

'Unless otherwise indicated, all s~ction references alt o

the Internal Revenue Code, and all Rule references are to the Tax

Court Rules of Practice and Procedure .

9 2009

After concession's,2 the issues for decision are :

(1) Whether, andlito what extent,iipetitioner is entitled t o

certain deductions claimed on his Schedule A, Itemize d

Deductions ;

(2) whether, andl!to what extent,petitioner is entitled to

business expense deductions claimed with respect to a busines s

.activity known as Eglobal Call Solutions ;

ft,(3) whether petitione r is liable'ifor the 10-percen t

!additional tax under section 72(t) on early distributions fro m

qualified retirement .plans ; and

4 whether petitioner is liable :; for the section 6662(a )

accuracy-related penalty .

FINDINGS OF FAC T

facts have been stipulated .

We incorporate th e

stipulation of facts and supplemental ; stipulation of facts into

lour findings by this reference . -,Petitioner resided in Californi a

when he petitioned this Court .

Before 2004 petitioner was employed as presiden t

software development company, Five-by-Five Networks, Inc . (Five-

concedes the $lbl dividend income adjustment .

Respondent also concedes that petitioner is entitled to :a home

mortgage interest deduction of $32,905, and petitioner 'concedes

that he is not entitled to the remaining home mortgage :interest

deduction of $3,423 . Respondent concedes that petitioner is

entitled to $10,998 of deductions claimed on Schedule C, Profit

or Loss,, From Businessll ; for a business' ; activity known as 4-Play,

,and petitioner concedes that he .is not entitled to the remainde r

of those deductions claimed .

- 3 by-Five Networks) . Before and during 004 petitioner wa s

involved in various business ventures elated to software ,

development and telephone call centerslin Vietnam and the Unite d

States .

Petitioner's Testimony at Tria l

Petitioner testified regarding hi

business entities during 2003 and 2004

involvement with s'ev eral

Although we find ih at

petitioner was engaged in a business a~tivity during 2004'un de r

the name Eglobal Call Solutions, petitioner did not introdu' c e

documents

to establish the relationship, if any,

between Egil bbal

Call-Solutions and other business acti ities mentioned durlin!g his

testimony . We are not willing to make findings of fact regardin g

those business activities based solely on petitioner' s

uncorroborated testimony . However, we summarize petitioner s

testimony to provide a framework for oir holdings . That 'summar y

is set forth below .

Five-by-Five Networks3 started a software developmenticenter

in Vietnam . Sometime around December 003 or January 2004 ; Iwhen

Five-by-Five Networks ran out of money,

petitioner acquired as

severance from his employment with Five-by-Five Networks4 th e

3The record does not show what kin of entity Five-by- :Five

Networks was, nor does the record show who owned it .

4The record does not show in which year (2003 or 2004)1this

occurred or whether petitioner include the value of the s'o'ftwar e

program in his income .

rights5 to a software development program that the Vietnam cente r

was . developing .

. Specifically, petitioner acquired the rights to

two assets--I-Contact'i integrated software that assisted with

Internet sales, and Hey-Voice, call center software that provided

an automated list of options over the telephone . However, when

petitioner acquired the rights to the software, it was not ready

for immediate use .

After receiving the rights to the software from Five-by-Five

Networks, petitioner arranged for employees at a Vietnam cal l

center to integrate the software petitioner had acquired from

;IFive-by-Five Networkslfinto a software :program called Integrate d

,Agent Desktop . Integrated Agent Desktop was necessary for

petitioner's business, to operate . Development and testing of

Integrated Agent Desktop occurred from early 2004 through August

2004 . In March 2004 ntegrated Agent,Desktop was brought onlin e

in beta version, and in June 2004 it was formally launched .

Around August or September 2004 Integrated Agent Desktop

underwent a major revision .I n In approximately' December 2003 or January 2004 petitioner

also obtained6 for $250,000 the rights to several assets from

Eglobal Call Networks, Inc .

.(Eglobal Call Networks),

5The record does N, not disclose how or in what name petitioner

acquired the rights .

6The record does not disclose how or in what name petitioner

acquired the assets .

5 corporation that was in the business o

selling calling card s .

Those assets included a Voice Over IP

etwork router in Vietnam,

fiber optic links from San Francisco t

Hong Kong and from HI n g

Kong to Vietnam, and billing equipment in San Francisco .

Petitioner made a downpayment of $125, 00 to Eglobal Call 'I .

Networks and paid the balance of the purchase price by giving

Eglobal Call Networks cash to keep its business afloat ."

Petitioner and Eglobal Call Networks

did not execute any

agreement or bill of sale formalizing the purchase . Af,ter~ t e

purchase, petitioner began operating t e assets jointly with

Eglobal Call Networks .

During 2004 petitioner effected several transactions' usin g

the name Eglobal Call Networks . For e~ample ,

March 20, 2004, petitioner transacted

on February 19 and

ith Business Wire usin g

Eglobal Call Networks's account . Petitioner also placed an

rde r

with Source Voice Data Systems Solutionls under the name Eglobal

Call Networks and signed loan documents as president of Eglobal

Call Networks . In addition, petitions had some control b f,,~, ~

Eglobal Call Networks ' s checking account and used EglobalCa1 1

Networks to transfer money to Vietnam .

'Petitioner did not introduce any l Sank records to . documen t

his investment, nor did he explain the relationship between

Eglobal Call Solutions (the business he operated) and Eglobal

Call Networks .

Petitioner also formed a ,company called Eglobal Vietnam ,

Ltd . (Eglobal Vietnam) . Petitioner needed Eglobal Vietnam i n

order to conduct business in Vietnam .' Eglobal Vietnam operated

the call center in Vietnam . Although petitioner provided funding

to Eglobal Vietnam, he held no ownership interest . 8

In 2004 Eglobal Vietnam entered into a lease agreement with

,Quang Trung Software City Development Co . for a facility in

Vietnam . Eglobal Vietnam also contracted with Quang Trun g

'Software City Development Co . to construct a call center facilit y

in Vietnam . In July ,2004 Eglobal Vietnam moved into the newly

constructed call center facility, and in September 2004„the call

,center started generating customer traffic .

In October 2004 Eglobal Call Solutions began to generate

revenue . During .20041~Eglobal Call,Solutions's revenue came from

two customers, Tata Consulting and H & R Block . Eglobal Cal l

tSolutions earned income when employees of the two customer s

contacted the call center in Vietnam for technical support

involving software operation . 9

Petitioner employed a bookkeeper in Vietnam to help keep hi s

business records . The bookkeeper used Quickbooks to kee p

'Petitioner did not introduce any documentation regarding

the formation and ownership of Eglobal Vietnam .

'Petitioner-did not explain the relationship between Eglobal

Call Solutions, Eglobal Call Networks, and Eglobal Vietnam, but

his testimony implied'!that Eglobal Call Solutions income was

generated by the business activity in Vietnam .

records, and petitioner reviewed the r cords when he visite d

Vietnam . The bookkeeper provided peti loner information from th e

Quickbooks records to complete his tax returns .

In 2005 Vietnamese authorities raided the Vietnam facility

because, unbeknownst to petitioner, a anager of Eglobal Vie nam

was operating without a required license . During the raid' the

authorities seized various business records .

Petitioner's 2004 Return

Petitioner, a cash basis taxpayer, prepared his 2004 FoJm

1040, U .S . Individual Income Tax Retur (2004 return) .

Petitioner's Schedule A attached to h i

2004 return showedithe

il l

following :

Schedule A Expenses

Amoun t

Medical and dental expenses' $41,000

Taxe s

State and local income taxes 2,621

Real estate taxes 10,144

Personal property taxes 3,45 0

Home mortgage interest and points 36,32 8

Gifts to charit y

Gifts by cash or check 1,360

Other than cash or check 11 2

Job expenses and most other

miscellaneous deductions 2

Unreimbursed employee expenses 118,052

Attorney's and accountant', fees 26,575

'After the application of the 7 .5- ercent floor under s ec .

213(a) .

2Amounts reflect deductions as rep rted before application

of the 2-percent limitation under sec . 67(a) .

On the Schedule C, Profit or Loss From Business , for Egloba l

Ca11j~Solutions attached to his 2004 return, petitioner reporte d

gross receipts of .$45 , 060 and the following Schedule C expenses :

Schedule C Expenses

Advertising?

Commissions'and fees

Contract labor

Employee benefit programs

Insurance

Legal and professional services

Office expenses

Rent or leas e

Other business property

Amoun t

$34,09 0

1,22 2

4,53 4

4,53 2

12,38 9

1,45 9

8,12 3

88,04 5

Supplies

2,33 3

Taxes and licenses

3,12 3

Travel

Meals and entertainment

Utilities

6,12 3

16,74 5

13,45 5

Wages

96,05 0

'Amount reflects'the deductions for meals and entertainment

expenses as reported before application of the 50-percent

,limitation under sec .274(n) .

Petitioner, who was not yet 59-1/2, reported $208,226 o f

taxable pension and annuity income on his 2004 return .

Petitioner attached to his 2004 return Form 5329, Additiona l

Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored

:Accounts . On Form 5329 petitioner reported early distribution s

$2,895 that were subject to the section 72(t) additional ta x

,and early distributions of $28,900 that were not subject to

section 72(t) additional tax .1 0

'°It appears that~there is a mistake on petitioner's Form

;[5329 . He was supposed to report on line 1 all early

(continued . . . )

9 In a notice of deficiency dated J

disallowed the medical and dental expe

ses, unreimbursed employe e

expenses, attorney's and accountant's

ees, and part of th e hom e

mortgage interest and points reported

petitioner's Schedule A .

Respondent also disallowed all deducti ns relating to Eglobal

Call Solutions claimed on petitioner' s Schedule C .11 Responden t

also determined that petitioner was li ble for section `72 (t)

additional tax of $20,823 and a sectio

6662 ( a) accuracy - relate d

penalty of $20,634 .

Petitioner timely petitioned thi s Court,

and a trial wa s

held . After trial we kept the record pen t o allow petitioner t o

introduce additional . evidence to subst ntiate his Schedule A an d

Schedule C deductions . Specifically,

e instructed petitione r

(1) to arrange for respondent to conduct a telephone in'terv w of

the bookkeeper in Vietnam, (2) to obtain health insurance records

to substantiate his medical . expenses, and (3) to provide 2004 and

2005 bank statements with respect to the Eglobal Call Soluti~ns

account and his personal account . Petitioner did not provide an y

1O(

. .continued )

distributions included in income and t en, of those distributions

reported on line 1, report on line 2 th e distributions that :ar e

not subject to the additional tax .

"Respondent also disallowed all e penses claimed on ai

separate Schedule C relating to a busin ss called 4-Play .

However, the parties have resolved this issue by agreement .

- 10 additional evidence, nor did he file a posttrial brief with th e

. Court .

OPINION

'I .

Exhibits 6-P, 7-P, and 8- P

At trial we reserved ruling on petitioner's Exhibits 6-P,

7-P, and 8-P . Exhibit 6-P is a computer spreadsheet showing

,various expenses for A 12-month period . Respondent objected t o

Exhibit 6-P on grounds of authenticity, best evidence, an d

hearsay and because it was prepared in anticipation o f

,litigation .

In his brief respondent contends that Exhibit 6-P i s

an improper summary, ,chart, or calculation under rule 1006 of the

Federal Rules of Evidence because the underlying documents use d

to prepare the spreadsheet were not made available to respondent

and petitioner provided no testimony regarding the preparation o f

the spreadsheet .

.Rule 1006 of the, Federal Rules of Evidence provides that th e

contents of voluminous writings that cannot conveniently be

examined in court may be presented in ; the form of a chart ,

summary, or calculation . It also provides that the originals or

duplicates of the summarized writings must be made available fo r

examination or copying, or both, by other parties at a reasonable

time![°and place .

Exhibit 6-P doesunot show the year to which the spreadshee t

relates or who prepared the spreadsheet . Petitioner did not

11 present any credible testimony about tie source of the amount s

shown in the spreadsheet or what the e :pensesrepresented . jtn

addition, even though we gave petitioner a posttrial opportunit y

to provide to respondent and to the Co rt documentation

substantiating the expenses he claimed, petitioner did not take

advantage of the opportunity . Because petitioner did not ploduc e

the underlying documentation that Exhi it 6-P purportedlyf~ .

summarized as required by rule 1006 of the Federal Rules of'Evidence, we conclude that Exhibit 6-P is inadmissible . '

At trial respondent also-objected to Exhibits 7-P and 8IP o n

the basis of relevancy because they related to 2003 and notl2004 .

Exhibit 7-P is a credit card statement showing charges forij

December 2003 . Petitioner argued at trial that Exhibit'7-P's

relevant because he paid the credit caiqd statement in 200 W

However, petitioner did not prove that he paid the credit bir d

statement in 2004 . We conclude that Exhibit 7-P is not' relevan t

and therefore is inadmissible . Exhibit 8-P consists of cop

s of

the following receipts : (1) Radioshack ~ receipt dated January 9,

2004, paid in cash, (2) San Francisco

I nternational Airport (

Parking Receipt dated December 20, 2003

paid in cash, and i(, )

Dougherty Shell receipt dated January 2 9, 2004, paid by credit

card . We conclude that the San Francis co International ; Airpor t

Parking Receipt is not relevant because

it was paid in 20031

12 However, because the other receipts reflect payments in1 ;2004, we

shall admit Exhibit 8Lp .

!III .

Burden of Proo f

In general, the Commissioner's determination of a deficiency

is presumed correct, and the taxpayer bears the burden of proving

otherwise . Rule 142( .) ;

Welch v . Helvering , 290 U .S . 111, 115

(1933) . Petitioner does not contend that section 7491(a), which

shifts the burden of proof to respondent if its requirements are

met, applies, and petitioner has not produced evidence to show h e

meets the requirements of section 7491(a) . The burden of proo f

with, respect to the deficiency in his tax, therefore, remains on

petitioner .

III .,, Schedule A Deductions

Medical Expense s

Expenses paid during the taxable year ,

,,by insurance or otherwise,

not compensated for

for medical care of the taxpayer shal l

be allowed as a deduction to the extent that such expenses exceed

7 .5 percent of adjusted gross income . ; . Sec . 213(a) . A deduction

is allowed only with respect to medical expenses actually pai d

during the taxable year, regardless of when the incident or event

which occasioned the expenses occurred . Sec . 1 .213-1(a)(1),

Income Tax Regs .

Petitioner deducted $41,000 of medical expenses on-hi s

'I Schedule A . In support of this deduction, petitioner introduced

- 13

into evidence several documents evidenc e ing that he underwent

outpatient surgery in December 2004 .

T hose documents incl ulde d

documents titled "Outpatient Surgery Pd stoperative

Orders/Discharge Instructions", "Anes t

esia Risk Information

and "Consent to Surgery/Special Proced

res/Anesthesia",

thre e

Explanation of Benefit forms .from petit ioner's health insure ,l z

and a medical invoice for $10 .49 . Pet' tioner, however ,

introduced no credible evidence to pro e that he paid any medical

expenses in 2004 . Although we allowed petitioner an opportunit y

after trial to offer substantiation of

the medical expense

allegedly paid in 2004, petitioner fail ed to do so .

Because petitioner did not prove

e paid any medical

expenses in 2004, we sustain respondent 's determinatio n

disallowing petitioner's medical expen s e deduction .

Unreimbursed Employee Expenses

A taxpayer may deduct unreimburse

employee expenses a

ordinary and necessary business . expense under section 162 .

v . Commissioner , 79 T .C . 1, 6 (1982) .

uca s

However, an employee

cannot deduct such expenses to the exte nt that the empl'oyee' is

entitled to reimbursement from his or h er employer fo r

expenditures related to his or her status as an employee .

Id .

7 . Along with other miscellaneous itemized deductions,

12Although petitioner provided several forms from his health

insurer, petitioner testified that the cost of his procedure was

disallowed by his insurer because he had not paid the premiums .

- 14 -

unreimbursed employee expenses are . subject to the 2-percent o f

adjusted gross income? limitation under section 67_(a) .

Petitioner claimed a $118,052 deduction for unreimburse d

employee expenses . Petitioner testified that some of th e

unreimbursed employees ;expenses related to his employment wit h

Five-by-Five Networks! and were expenses not paid by Five-by-Fiv e

.Networks . Petitioner1 however, did not introduce any credibl e

evidence that he actually paid any employee expenses or that h e

was not entitled to reimbursement from Five-by-Five Networks fo r

those expenses . In addition, petitioner did not introduce an y

,credible evidence regarding that part of his unreimbursed

lemployee expense deduction

that did not relate to his employmen t

with Five-by-Five Networks .

Because petitioner failed to prove he is entitled to

deduction for unreimbursed employee expenses, we sustai n

;;respondent's determination disallowing the deduction .

C .

Attorney's and Accountant's Fee s

Petitioner claimed a $26,575 deduction for attorney's and

accountant's fees as other miscellaneous itemized deductions .

Petitioner testified that at least some of those fees related t o

two lawsuits involving his neighbor, one dealing with a sprinkler

system and the other involving a dispute over petitioner's tree .

Petitioner did not introduce documentation of his legal expenses

from the attorney representing him in those matters, nor did he

- 15 introduce any credible evidence establishing that he actually

paid any fees to a professional or that the fees, if paid, were

deductible . . 1 3

Because petitioner failed to intr duce credible evidence to

prove that he paid attorney's and accountant's fees during pP0 4

and that the fees,

if paid, werel deductible, we sustain

respondent's determination disallowing the deduction .

IV . Schedule C Deductions for E global Call Solution s

Section 162(a) permits a taxpayer to deduct the ordin r and

necessary expenses paid or incurred during the taxable yearlin

carrying on a trade or business . See commissioner v . Lincol n

Sav . & Loan Association , 403 U .S . 345,

352 (1971) . In ordler fo r

a taxpayer "to be engaged in a trade o business, the taxpayer .

must be involved in the activity with continuity and regularity

and * * * the taxpayer's primary purpose for engaging in th e

activity must be for income or profit ."

Commissioner v' .

Groetzinger , 480 U .S . 23, 35 (1987) . expense is ordinary

i s

it is normal, usual, or . customary within a particular tirade ;

business , or industry or arises from a transaction " of '.common or

frequent occurrence in the type

of busi ess involved ."

du Pont , 308 U .S . 488, 495 (1940) . A n

Deputy v .

expense is necessarylif i t

is appropriate and helpful for the dev e lopment of the business i

"Legal expenses

262(a) .

that are personal are not deductible .', 'lec .

- 16 ,See

Commissioner v . Lincoln Sav . & Loan Association ,

supra a t

353 ;

Commissioner v . Heininger , 320 U .S . 467, 471 (1943) .

.Section 262(a) disallows deductions for personal, living, or

family expenses . Seedalso sec . 1 .162 ;-17(a), Income Tax Regs .

When a taxpayer establishes that-he paid or incurred a

°deductible expense but does not establish the amount of th e

expense, we may estimate the amount allowable in som e

.circumstances (the

Cohan rule) . See

Cohan v . Commissioner , 39

F .2dij-540, 543-544 (2diCir . 1930) . There must be sufficient

evidence in.,the record, however, to permit us to conclude that

the taxpayer paid or incurred a deductible expense in at leas t

.the amount allowed . See Williams v . United States , 245 F .2d 559,

560 (5th Cir . 1957) . In estimating the amount allowable, we bear

heavily upon the taxpayer who failed to maintain required records

.and to substantiate deductions as the`, Code requires . See Cohan

v . Commissioner ,

supra

at 544 .

For certain kinds of business expenses, such as travel ,

meals, and entertainment expenses, section 274(d) overrides the

( Cohan rule . See

Sanford v . Commissioner , 50 T .C . 823, 82 7

(1968), affd . per curiam 412 F .2d 201 (2d Cir . 1969) ; sec . 1 .274-

5T(a), Temporary Income Tax Regs ., 5&Fed . Reg . 46014 (Nov . 6,

1985) . Under section 274(d),

a taxpayer must satisfy strict

substantiation requirements before a deduction is allowable . Se e

also sec . 6001 ; sec . 1 .6001-1(a), (e), Income Tax Regs .

-17

Respondent does not dispute that etitioner had a business

or that he was involved in that business with continuity and

regularity and for profit . Respondent contends, however, th t

petitioner has not substantiated the e penses he claimed on1 is

Schedule .C relating to Eglobal Call So utions and that pet itione

has provided only self-serving testimo y that he is entitled to

the deductions . In addition responder contends that the i ite d

documentation introduced into evidence appears to reflect the

payment of startup expenditures that axe not deductibld, under

section 195 .

Section 195(a) provides that, exc pt as otherwise provided

therein, no deduction is allowed for startup expenditures . See

also Hardy v . Commissioner , 93 T .C . 684, 687-693 (1989), affd . in

part and remanded in part per order (10th Cir ., Oct . 29, 1990 .

Section 195(c)(1) defines startup expe ditures to mean any a oun t

paid or incurred in connection with (i)

investigating the

ii )

creation or acquisition of an active .tiade or business, o r

creating an active trade or business, or (iii) any activity

engaged in for profit and for the production of income before the

day on which the active trade or business begins, in anticipatio n

of becoming an active trade or business ,

which if paid or

incurred in connection with the operation of an existing active

trade or business would be allowed as deduction for the taxable

- 18 'year in which paid or!incurred .14 Under section 195(c)(2)(B), a n

,,acquired trade or business is treated as beginning when th e

taxpayer acquires it .l s

Although petitioner testified he acquired

various asset s

during 2004, he also testified that the software assets he

acquired were still under development until approximately

September 2004 when aj,revision of the integrated software wa s

completed . According, to petitioner, the Vietnam call center did

not begin to service customers until September .2004 and'did not

generate any revenue until October 2004 . Even if we accep t

petitioner's general and very vague testimony as credible and

.assume that the Vietnam call center's business activity was a

,'part . of petitioner's Schedule C business, Eglobal Call Solutions ,

the testimony reveals,, that call center did not begin to function

until,September 2004 at the earliest and did not generate revenue

until October 2004 . Consequently, we conclude on the recor d

14Sec . 195(b)(1) was amended by the American Jobs Creatio n

Act of 2004, Pub . L . 08-357, sec . 902(a)(1), 118 Stat . 1651,

,ii effective for amounts'~'paid or incurred after Oct . 22, 2004 .

Under sec . 195(b)(l),,as in effect both before and after the 2004

amendment, a taxpayer may elect to treat startup expenditures as

deferred expenses that may be amortized as provided therein, and

,the amortization period cannot begin any earlier than the month

n which the active trade or business' begins . It does not appear

,iin

elected to amortize any startup expenditures with

respect to Eglobal Call Solutions, and petitioner does not argue

that he made the election .

15Petitioner testified that he acquired various assets . We

;,infer from this testimony that he did not acquire an active trade

for business during or''before 2004 .

nondeductible startup expenditures and r section 195(a) ; . .

We turn now to specific expenses etitioner deducted

Schedule C for Eglobal Call Solutions .

Advertisin g

Petitioner claimed a $34,090 deduction for advertising

including : ( 1) An invoice dated February 19, 2004 ,

from Bu l

Wire addressed to Eglobal` Call Network

fee of $120, (2) a confirmation dated

arch 25, 2004, of

payment with petitioner's credit card

or promoting an

Web site address described as "www .egl balcallsolutions .corn "

showing the company name as "eglobalca

invoice dated March 31, 2004, from Bu s ness Wire for $4"40, I(4)

confirmation dated April 28, 2004 ,

petitioner's credit card for promoting

"www .eglobalcallsolutions .com", and (5)

$49 .95 payment with )

the Internet Web s i

an invoice for $11,081 .42-

dated April 30, 2004, from Focus Prin t n Copy primarily foi "70 0

Brochures `eGlobalCall Solutions'" that was stamped paid .

Because the Business Wire invoic e

show that the amount s

were paid on behalf of Eglobal Call Ne t works and not Eglobal

Cal l

Solutions or petitioner himself, we cannot determine whether) the y

were paid by petitioner or whether they related to EglobalCall

20 -

Solutions . And although the payment for promoting Eglobal Call

j~Solutions's Internet Web site and the payment for the Focus Print

n Copy invoice appear to relate to Eglobal Call Solutions, all of

the expenses were paid before September 2004 .

In addition to the expenses discussed above, petitione r

testified that most of the advertising expenses related to the

!a purchase of four customer lists at $5,000 each . Petitione r

testified that he paid for the customer lists by wire transfer s

from,,,his personal checking account ;16 but even after we gav e

petitioner a second opportunity to substantiate the payment s

,after trial, petitioner never introduced evidence of the wir e

transfers that he claims he made, nor did he submit any othe r

.documentation to establish he paid for the customer lists .17

All of the documentation of advertising expenses in the

record relates to expenses paid before petitioner's busines s

,became operational . 'See, e .g .,

,Memo .

Feerick v . Commissioner , T .C .

1991-330 . We conclude, therefore, that petitioner ha s

failed .to prove he paid deductible advertising expenses durin g

16Petitioner testified that in the beginning he used his

,personal checking account to pay expenses, but then he started

;using one of Eglobal Call Networks's checking accounts .

1 .7 Even if petitioner were able to substantiate that he paid

for four customer lists, it appears that petitioner would not be

entitled a full deduction in 2004 for those payments . Customer

lists are generally considered sec . 197 intangibles that must be

amortized over a 15-year' period . Sec" . 197(a), (d) (1) (C) (ii) ;

sec . 1 .197-2(b)(4), income Tax Regs .

21 2004, and we sustain respondent's dete mination disallowinglth e

deduction .

B .

Commissions and Fees

Petitioner claimed a $1,222 dedu c

ion for commissions an d

fees on his Schedule C . Petitioner to tified that this deduction

h l

represented payments made by check to

wo people who helpedl h m

generate deals . Petitioner, however,

estified that he did not

have copies of the checks or any other evidence to show whetie r

i I

or when he paid any commissions or fee

Petitioner's testimony

about the commissions and fees he suppgsedly paid is insuffi

ien t

for the Court to make an estimate of tis expense under thei toha n

rule . See Norgaard v . Commissioner , 939 F .2d 874, 879 ;(9thj

ir .

1991), affg . in part and revg . in part T .C . Memo . 1989-3901 . 1

conclude, therefore, that petitioner fa iled to substantiate! the

deduction he claimed for commissions a d fees, and we sustain

respondent's determination disallowing

the deduction .

I h

Contract Labo r

Petitioner claimed a $4,534 deduct ion for contract lab o

his Schedule C . Petitioner testified t hat this deductio n

probably represented payments to people

he paid by the hour!

testified that he would have paid those

people from the . Egloba l

Call Solutions account that he had set up with U . S . Bank .

Petitioner did not have those bank .sta t ements because he claimed

that the bank statements were seized by Vietnamese authoriti s in

- 22 -

the 20,05 raid . on his office . Even if we accept as credibl e

petitioner's testimony regarding the raid in Vietnam, we are no t

convinced that all relevant business records were in Vietnam or

were seized in the raid . Moreover, we gave petitioner a n

,opportunity after trial to obtain duplicate bank records from

U .S . Bank, but he did not do so . . We conclude therefore that

;petitioner failed to substantiate that he paid any contract labo r

expenses during 2004,!and we sustain respondent's determinatio n

disallowing the deduction .

1,D . .

Employee Benefit Program s

Petitioner claimed a $4,532 deduction for employee benefits

on his Schedule C . Petitioner testified that this expense

included cash payments to the Vietnamese Government for-health

insurance . However, petitioner did not present any credibl e

evidence to prove thell:nature, amount,

and purpose of the healt h

insurance he . allegedly paid in 2004 . ,!Consequently, we conclude

that petitioner failed to substantiate the deduction he claimed

for employee benefits, and we sustain respondent's determination .

E .

Insuranc e

Petitioner claimed a $12,389 deduction for insurance on his

Schedule C . Petitioner testified that the insurance expense

mostly represented insurance that he paid on his automobile i n

Vietnam . However, petitioner did not introduce any documentation

or other credible evidence to prove that he paid insurance o r

- 23 that he even had an insurable interest

Consequently, we conclude that petitio

substantiate the deduction he claimed

or an insurance expense ,

and we sustain respondent's determina t on

Legal and Professional Serv i e s

Petitioner claimed a $1,459 deduc

ion for legal an d

professional services on his Schedule

In support of thi s

deduction, petitioner introduced into

vidence an invoice 'd'ated

1 1

February 26, 2004, from Sedgwick Deter , Moran & .Arnold LLP and

Affiliated Entities for professional s rvices through January 31 ,

2004 . Petitioner testified the invoic€ related to

expenses ,

incurred in establishing the organization and dissolving h'i s

I ;, i

relationship with Five-by-Five Networks . However, peti'tione~r di d

not introduce any evidence substantiat : ng that he paid the'!

invoice in 2004 or showing that the pr

fessional services related

to Eglobal Call Solutions . Consequent y, we conclude tha t

petitioner has failed to substantiat e

he deduction he 'claime d

for legal and professional services, ai d

determination .

Office Expenses

Petitioner claimed an $8,123 deduction for office expense s

on his Schedule C . Petitioner testified that the office expense s

included payments for utilities in bot his Vietnam and U .S .

offices . Petitioner also testified th t he made the payment

I i

- 24 from either his personal checking account or the account

established under the name Eglobal Call Solutions, but petitioner

could not produce any canceled checks, bank statements,,ior .other

payment records . As we have already stated several times ,

petitioner was given an opportunity to obtain his bank statements

,after trial and present them to respondent and the Court, bu t

,;petitioner did not do so . Petitioner also introduced into evidence various receipts,

such,, as receipts from,, Staples, Radioshack, CompUSA, Fry's

Electronics, and the U .S . Postal Service, that may,have,been

included in office expenses . However, because we have no way of

determining whether those receipts represented business o r

,personal expenses, we cannot conclude that those receipt s

substantiate petitioner's office expense deduction . "

We conclude that ;; petitioner has failed to substantiate hi s

.deduction for office expenses ,

and we sustain respondent' s

determination .

H .

Rent or Lease for Other Business Property

Petitioner claimed an $88,045 deduction for rent or leas e

for other business property . Petitioner testified that th e

.property in question included land in Vietnam on which petitione r

18Several of the -receipts showed purchases of, items, that

were personal and not'related .to Eglobal Call Solutions . For

example, one receipt from Fry's Electronics included a purchase

of a Euro Pro Shark Professional Iron, and another . included a

!purchase of a DVD entitled "Matrix Revolutions" .

constructed a building .

Petitioner . te tified that in 2004':h

paid about

$ 90,000 to Quang Trung Soft are City Development C 0 .

for the lease . In support of his testimony, petitioner

I I

introduced into evidence an unsigned c py of a lease that sh wed

Eglobal Vietnam as the lessor . Petitioner testified that :

although the lease showed Eglobal Viet n am as the lessor ,

petitioner paid the rent . Petitioner Maimed that he had bank

statements that would prove those payments, but he did no t

introduce any documentation at trial t substantiate the leas e

payments he allegedly made . Although ye gave petitioner a~!~

posttrial opportunity to produce the documentation he claimed h e

had, petitioner did not do so .

We conclude that petitioner has failed to substantiate s

deduction for rent or lease expenses fo r other business property,

and we sustain respondent's determination .

I .

Supplie s

Petitioner claimed a $2,333 .deduction for supplies .

Petitioner testified that he deducted mounts spent for generic

office supplies used in his Vietnam an U .S . offices . Although

petitioner introduced into evidence various receipts, we cannot

determine from a review of those receipts whether they reflect

business or personal purchases .' . Because petitioner did not ;

introduce any evidence that would allow us to estimate the

supplies .peti .tioner purchased for Eglo al Call Solutions, we will

26 .not apply the Cohan rule . See Norgaard v . Commissioner ,

939 F .2 d

at 879 . •

We conclude that.ipetitioner has failed to substantiate th e

deduction for supplies, and we sustain respondent' s

determination .

Taxes and License s

Petitioner claimed a $3,123 deduction for taxes and licenses

on his Schedule C . Petitioner testified that the taxes and

licenses expense included a license fee that he paid to„th e

Vietnamese Government . However, because petitioner introduced n o

evidence that he actually paid any license fee in 2004 or that

license fee was required, the

Cohan rule is not applicable here .

Consequently, we conclude that petitioner has failed t o

substantiate his deduction for taxes and licenses, and we sustain

respondent's determination .

Trave l

Petitioner claimed a $6,123 deduction . for travel .

Petitioner testified that the travel expense related primarily t o

this Vietnam trips and that he also attended a call cente r

conference in Orlando, Florida .

Petitioner introduced into evidence two credit car d

statements showing purchases from China Air that he credibly

testified were for airplane tickets to Vietnam . However, th e

first credit card statement shows a China Air purchase on

- 27 December 13, 20 .03, and the second show

hin a

on February 2 and . February 6, 2004, of

Air purchases occurred before the Viet

am call center became

operational in approximately September

2004 . At best, these

travel expenses are nondeductible star up expenditures unde r

section 195 . See

supra pp . 17-19 .

Petitioner also introduced in evi

ence a rental car receipt

from Orlando, Florida, where he suppos

dly attended a call iHcente r

conference . Petitioner did not prese n

corroborating evidenc e

regarding the conference, nor did he s

ow that the car rental wa s

for business purposes . Consequently ,

e conclude that peti t i oner

failed to prove that he is . entitled to deduct the rental ca r

expense . See sec . 274(d) .

Petitioner also introduced into e

idence numerous receipts

for gasoline purchases . Because petit oner did not produce any

mileage or travel logs to substantiate that the gasolin e

purchases related to his activities in Eglobal Call Solutions, w e

conclude that he has failed to prove that the gasoline purchases

reflected on the receipts are deductib e . See id .

respondent's determination .

We susIt a

Meals and Entertainmen t

Petitioner claimed a $6,745 deduction for meals and

entertainment expenses . Petitioner in roduced into evidence

restaurant receipts that he claims were for various meetings

- 28 Although petitioner provided some testimony regarding the meal

receipts, petitioner introduced no documentation to show with

whom he met during these so-called meetings or whether th e

meetings were related to his business activities . Petitioner has

!I not substantiated by adequate records or by sufficient evidenc e

corroborating his own~statement'the business purpose of th e

expenses as required under section 274(d) . Consequently, we

!conclude that petitioner has failed to substantiate the deduction

,for meals and entertainment expenses, and we sustain respondent's

determination .

Utilitie s

Petitioner claimed a $13,455 deduction for utilities .

Petitioner testified that the utilities expenses primarily

represented the electricity cost in V etnam .19 Becaus e

petitioner did not provide any credible evidence that he paid

electricity bills in Vietnam, we conclude that petitioner has

failed to substantiate- the deduction for utilities . We sustai n

respondent 's determination .

Wage s

Petitioner claimed , a $96,050 deduction for wages .

!'Petitioner testified that all wages were paid . in cash to

1, employees in Vietnam . :', Petitioner also testified that the record s

19Petitioner testified that the utility costs for his U .S .

,activities were de minimis in comparison to his utility costs in

Vietnam .

accounting records-seized by Vietnamese authorities . Petitione r

did not introduce any other evidence t~ prove that he paid wage s

to employees in Vietnam .

Petitioner did not testify as to ' ;:hb w

many employees he had or . the amounts o

no effort to document this deduction b

records . We conclude therefore-that p

substantiate the deduction for wages,

determination . 2 0