United States Tax Court

United States Tax Court

T.C. Memo. 2024-95

PATRICIA MARCELLO ANDERSON,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

ANTHONY MARCUS ANDERSON,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

__________

Docket Nos. 20178-18, 20179-18.

Filed October 17, 2024.

__________

During the years at issue Ps were engaged in

numerous business activities. Because R has no record of

returns for those years, he prepared substitutes for returns

for Ps. The parties have stipulated items of gross income

for the years at issue. Ps principally rely on accounting

documents (cash disbursements journals and account

registers) to substantiate reported business expenses. For

a few of those expenses, the record contains bank

statements evidencing checks cashed or electronic funds

transfers confirming payment. Ps explain the absence of

additional evidence of actual payments on the grounds that

the boxes containing that evidence were too voluminous to

produce or the evidence is tied up in other litigation.

Held: Because Ps have not convinced us that

evidence of payment that exists is unavailable to them due

to circumstances beyond their control, we will not accept

Served 10/17/24

2

[*2]

Ps’ journals and registers as evidence of actual payment.

See, e.g., Barrios v. Commissioner, T.C. Memo. 2023-32,

at *5 (treating profit and loss statements without source

documents as argument—not evidence).

Held, further, because proper record keeping was

feasible and, apparently, proper records were maintained,

we decline to exercise our authority under the so-called

Cohan doctrine, see Vanicek v. Commissioner, 85 T.C. 731,

742–43 (1985) (citing Cohan v. Commissioner, 39 F.2d 540

(2d Cir. 1930)), to estimate Ps’ expenditures.

Held, further, for similar reasons, deductions for net

operating losses are not allowed.

Held, further, I.R.C. §§ 6651(a)(1) and (2) and 6654

additions to tax are sustained for Ps’ failure to challenge.

__________

Patricia Marcello Anderson, pro se in Docket No. 20178-18.

Anthony Marcus Anderson, pro se in Docket No. 20179-18.

Zachary B. Friedman and Ashleigh R. Wise Friedman, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HALPERN, Judge: These cases have been consolidated for trial,

briefing, and opinion. By separate Notices of Deficiency, each dated July

13, 2018 (Notices), respondent determined deficiencies in, and additions

to, federal income tax as follows: 1

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

Code (Code), Title 26 U.S.C., in effect for the years in issue, regulation references are

to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect for the years in

issue, and Rule references are to the Tax Court Rules of Practice and Procedure. Dollar

amounts have been rounded to the nearest dollar.

3

[*3] Patricia M. Anderson

Additions to Tax

Taxable Year

Deficiency

§ 6651(a)(1)

§ 6651(a)(2)

§ 6654

2010

$289,737

$65,191

$72,434

$6,214

2011

106,847

24,041

26,712

2,115

2012

13,025

2,931

3,256

234

2013

22,656

5,098

5,664

407

2015

8,700

1,958

To be

computed

157

Anthony M. Anderson

Additions to Tax

Taxable Year

Deficiency

§ 6651(a)(1)

§ 6651(a)(2)

§ 6654

2010

$335,139

$75,406

$83,785

$7,187

2011

129,622

29,165

32,406

2,566

2012

15,992

3,598

3,998

287

2013

26,237

5,903

6,559

471

2015

15,388

3,462

To be

computed

126

The parties have reached agreements and made concessions on

several issues. Among respondent’s concessions are that petitioners

(1) are entitled for all years at issue to the filing status of married filing

jointly and (2) are not liable for section 6654 additions to tax for 2010

and 2015.

The issues for decision are whether petitioners (1) have

substantiated deductions claimed on various Schedules C, Profit or Loss

From Business, and Schedules E, Supplemental Income and Loss,

4

[*4] (2) have substantiated net operating loss (NOL) carryovers, (3) are

liable for additions to tax under section 6651(a)(1) for failure timely to

file tax returns, (4) are liable for additions to tax under section

6651(a)(2) for failure to pay the tax shown on a return, and (5) are liable

for additions to tax under section 6654 for failure to pay estimated tax.

Other issues are computational and need no further discussion.

Petitioners bear the burden of proof. See Rule 142(a). 2

FINDINGS OF FACT

Stipulation

The parties have entered a First Stipulation of Facts, a First

Supplemental Stipulation of Facts, and a Second Supplemental

Stipulation of Facts. The facts stipulated are found, and the documents

stipulated are accepted as authentic. 3

2 Section 7491(a)(1) provides that, if a taxpayer offers credible evidence with

respect to any factual issue relevant to determining his tax liability, the burden of

proof with respect to the issue is on the Commissioner. See also Rule 142(a)(2). Section

7491(a)(1) applies only if the taxpayer complies with the relevant substantiation

requirements in the Code, maintains all required records, and cooperates with the

Commissioner with respect to witnesses, information, documents, meetings, and

interviews. See § 7491(a)(2)(A) and (B). The taxpayer bears the burden of proving

compliance with the conditions of section 7491(a)(2)(A) and (B). See, e.g., Mileham v.

Commissioner, T.C. Memo. 2017-168, at *30. Petitioners neither propose facts to

support their compliance with the conditions of section 7491(a)(2)(A) and (B) nor

persuasively argue that respondent bears the burden of proof on any issues because of

section 7491(a)(1). We therefore conclude that section 7491(a)(1) does not apply in

these cases.

3 At trial, respondent objected to three exhibits: Exhibit 47-P, “‘Flash Report’

for the entities Health II of California dba Unified Healthcare and UHCP Incorporated

dba MAXCARE;” Exhibit 48-P, “‘UHCP Incorporated Cash Receipt journal for the Tax

Years 2010 through 2013,’ dated June 1, 2016;” and Exhibit 49-P, “correspondence

between Sharon E. Witherspoon and Petitioners dated January 20, 2010, March 30,

2010, May 12, 2011, and May 17, 2011.” Respondent objected to Exhibits 47-P and

48-P on the grounds of inadmissible hearsay and as summary documents where the

originals had not been made available to him. See Fed. R. Evid. 802, 1006. Respondent

objects to Exhibit 49-P on the grounds of lack of relevance and because it is

inadmissible hearsay. See Fed. R. Evid. 402, 802. The Court reserved ruling on

respondent’s objections, requiring him to argue his objection only if, on brief,

petitioners referred to the exhibit. Petitioners do not refer to Exhibits 48-P and 49-P,

so we need not rule on those exhibits. They did refer to Exhibit 47-P in their Opening

Seriatim Brief but make no argument for admission of the exhibit. We sustain

respondent’s objections to Exhibit 47-P and admit into evidence neither it nor Exhibits

48-P and 49-P.

5

[*5] Marital Status, Residence

Petitioners, a married couple, resided in Arizona when each filed

her or his Petition.

Business Activities

During the years at issue, petitioners were self-employed,

engaged in company management, commercial real estate, and the

medical industry.

They carried on business through a tiered

arrangement of six single-member limited liability companies (LLCs),

on top of which was a limited partnership, Vaughn-Leavitt, LP (VaughnLeavitt), whose principal member (98% interest) was a revocable trust,

AMA Trust I, created by petitioners for their benefit and for the benefit

of other family members. The six LLCs are:

•

Health II of California, LLC (Health II)

•

Health II Equipment and Financing, LLC (Health II

Equip.)

•

Health II Holdings, LLC (Health II Holdings)

•

8727 E. Via De Commercio, LLC (8727 VDC)

•

Claims

Management

Management)

•

8723 E. Via De Commercio, LLC (8723 VDC)

Solutions,

LLC

(Claims

The LLCs are, for federal income tax purposes, disregarded entities. 4

4 See Treas. Reg. § 301.7701-2(c)(2).

Also, Vaughn-Leavitt is for tax purposes

a partnership. See Treas. Reg. § 301.7701-2(c)(1).

During our consideration of these cases, we asked respondent to answer

whether petitioners’ tiered business structure terminating in a partnership whose

principal member was a trust deprives us of jurisdiction to redetermine deficiencies in

petitioners’ tax with respect to what might be partnership items or items of a trust

(i.e., items of taxpayers other than petitioners). Respondent answered that, although

the unified audit and litigation rules enacted by the Tax Equity and Fiscal

Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, 96 Stat. 324, and in effect

before 2018 generally require tax items of partnerships to be determined in entity-level

proceedings, see § 6221, those rules do not apply in these cases. Assuming VaughnLeavitt to be a valid partnership with an independent filing obligation, respondent

6

[*6] Accounting Method

For the years at issue, petitioners’ method of accounting was the

cash receipts and disbursements method of accounting.

Income Tax Returns

Neither petitioner filed an income tax return for any of the years

at issue.

Because respondent had no record of returns for those years, he

prepared substitutes for returns for each petitioner. The additional

income in the Notices is based on a bank deposits analysis. The

substitutes for returns include, for each petitioner, computations of his

or her tax liability for the years at issue. Except with respect to some

differences in the amounts of the section 6651(a)(2) additions to tax

calculated for each petitioner (due to the time-sensitive nature of that

addition), the deficiencies in tax and additions to tax computed in the

substitutes for returns agree with the deficiencies in tax and additions

to tax in the Notices.

After they filed the Petitions and in preparation for trial,

petitioners submitted to respondent income tax returns, Forms 1040,

U.S. Individual Income Tax Return (Returns), for the years at issue,

each dated February 11, 2019. Respondent has not processed the

Returns.

On all the Returns, petitioners elected the filing status of married

filing jointly. On all, they reported “Business income or (loss)” and, for

each year, included between two and four Schedules C pertaining to the

various LLCs listed above. On the 2010, 2011, and 2012 Returns, they

also reported income from “Rental real estate,” including, for each year,

a Schedule E pertaining to 8723 VDC. They reported no other items of

income on any of the Returns.

argues, the TEFRA rules do not apply because, as found in the next section of this

report, respondent used an indirect method of proof—a bank deposits analysis—to

determine petitioners’ income. And Treasury Regulation § 301.6231(c)-6(a) provides

that partnership items of a partner whose income is determined by an indirect method

of proof be treated as nonpartnership items. Moreover, respondent continued, because

AMA Trust I is a revocable trust with respect to whose corpus and income petitioners

control beneficial enjoyment without the consent of an adverse party, they are treated

as owners of the whole of the trust. See §§ 671, 674, 676. Respondent’s claims with

respect to the trust are supported by the record and are not contested by petitioners.

7

[*7] Reflecting entries on the Returns, the parties have stipulated the

following items of gross income for the years at issue.

Year

Schedule C Gross

Receipts

Schedule E Rents

Received

Schedule E

Merchant Card

and Third-Party

Payments

2010

$1,926,164

$206,020

2011

815,118

—

2012

176,074

—

—

2013

284,988

—

—

2015

113,203

—

—

—

$139,878

Petitioners variously claimed deductions on the Schedules C

and E for expenses incurred for items such as insurance, mortgage

interest, legal and professional fees, rent, taxes and licenses, utilities,

wages, telephone, computer support services, postage and mail, gasoline

and oil, and management fees.

Because petitioners could not satisfactorily substantiate to

respondent any of the reported Schedule C and E expenses, all of those

expenses are at issue here.

Petitioners carried over from 2005 to 2006 an NOL in the amount

of $306,554. On each Return, petitioners claimed an NOL deduction. 5

Because petitioners were unable to satisfactorily substantiate those

deductions, respondent disallowed them in total.

5 Petitioners reported NOL carryovers to each of the years at issue as follows.

2010

2011

2012

2013

2015

$1,655,978

$1,672,839

$1,781,159

$1,778,396

$1,652,391

8

[*8] Substantiation—Exhibit 18-J

To substantiate their reported expenses, petitioners rely

principally on Exhibit 18-J, entitled “Anthony and Patricia Anderson

Financial Information for the Tax Years 2006 through 2015.” As with

the Returns, Exhibit 18-J was presented to respondent during trial

preparation. The exhibit is 218 pages long and is dated June 1, 2016,

and the pages are labeled: “For Tax Purposes Only.” Petitioners claim

on brief: “This binder of accounting ledgers . . . is the road maps [sic] for

this Court to rely on concerning” substantiation of the reported

expenses. The exhibit is divided into seven sections, one for each of

seven entities. Those entities are:

•

AMA Trust I

•

8723 VDC

•

Health II

•

Health II Holdings

•

UHCP Inc. (UHCP)

•

Knights III, Inc.

•

Vaughn-Leavitt

Each section contains some or all the following self-described

documents:

•

Summary Statement

•

Income Statement

•

Operating Expense Supporting Details

•

Cash Receipts Journal

•

Cash Disbursements Journal

•

Account Register

•

Analysis of Partners’ Capital Account

•

Estimated Basis Calculation

9

[*9] Petitioners do not purport that those documents are copies of

original accounting records but, rather, “likely the mix up of more than

a dozen unsuccessful attempts [to reconstruct each described document]

from multiple electronic files emailed to respondent.”

The two documents providing the particulars of each entity’s

alleged expenditures are the Cash Disbursements Journal and the

Account Register.

The Cash Disbursements Journal lists expenditures day by day,

referencing a date, a check number or account number, payee (e.g.,

TelePacific Communications), a description (“phone and internet”), and

an amount.

The Account Register shows cash disbursements by payee,

grouping the year’s disbursements to the payee. For example, for

UHCP, the following entries describe payments to TelePacific

Communications for phone and internet during 2011.

Date

Reference

Transaction

Description

3/11/2011

acct

7451/eft

TelePacific

Comms.

phone &

internet

$1,468

3/21/2011

acct

7451/eft

TelePacific

Comms.

phone &

internet

1,452

5/6/2011

acct

7451/eft

TelePacific

Comms.

phone &

internet

1,401

5/13/2011

acct

7451/eft

TelePacific

Comms.

phone &

internet

1,500

8/16/2011

acct

7451/eft

TelePacific

Comms.

phone &

internet

1,496

10/14/2011

ck

82682/eft

TelePacific

Comms.

phone &

internet

1,440

Total

Amount

$8,757

10

[*10] Additional Substantiation

The record contains the following Bank of America (BoA) and

Arizona Business Bank (ABB) statements.

Account No. (last 4 digits)

Name on Account

Period of Statements

BoA Acct. No. 9906

AMA Trust I

12/25/09 – 1/25/16

BoA Acct. No. 7448

8723 VDC

4/1/11 – 12/31/15

BoA Acct. No. 7354

Vaughn-Leavitt

4/1/11 – 9/30/11

BoA Acct. No. 7451

Health II dba UHCP

4/1/11 – 8/31/14

ABB Acct. No. 6768

AMA Trust I

5/4/12 – 12/31/15

ABB Acct. No. 6741

UHCP

5/4/12 – 12/31/15

Other than what indicia of payment by bank check or electronic

funds transfer (EFT) can be found in the BoA or the ABB bank

statements, the record contains no documentary evidence of payment of

any of the reported Schedule C and E expenses, nor does it contain any

loan document, contract, or other evidence of an obligation to pay any

expense. At trial, in response to the Court’s observation that it could

not in the record identify such documentary evidence, Mr. Anderson

explained that the relevant documents were in “so many boxes” that he

“wouldn’t be able to bring [them] into th[e] courtroom.” Later in the trial

he claimed that petitioners’ bank statements and records that would

substantiate the expenditures recorded in the Cash Disbursements

Journal were in storage, and he added: “I have no access to them . . . .

[I]t’s the subject of another pending legal matter.” In the Petitions,

petitioners claimed that “at trial” they will offer “sufficient accounting

records [to] support the[ir] actual income . . . for the audited years.”

Briefing

Following the initial round of seriatim briefing in these cases

(petitioners went first), it was apparent that, while entries in

petitioners’ Cash Disbursements Journal and Account Register

referencing a specific bank check or EFT might lead to probative

evidence that disbursements were made, petitioners had failed to

include in those entries the page of a bank statement in evidence

11

[*11] detailing the disbursement. Nor on brief did they propose findings

directing us to the specific pages of the record. 6

On our own, we discovered some bank statement entries

supporting entries in the Register. It is not our duty, however, to

undertake the laborious task of combing the various bank statements

for information to support entries in the Journals and Registers. To give

petitioners a chance to cure their failure to direct us to page references

in the bank statements to support Register or Journal entries, we

ordered them to file a supplemental brief proposing findings of fact in

tabular form identifying those expenses reported on any of the

Schedules C or E that are traceable to bank statements in the record

and to identify the page in the record of the bank statement entry. We

ordered respondent to file a supplemental answering brief addressing

petitioners’ proposed findings of fact. The parties complied.

Schedule C and E Expenses

On the basis of supplemental briefing, we list in the following

tables expenses to the deduction of which respondent has no objection

(together, Table Expenses).

6 At the conclusion of trial, we directed petitioners to Rule 151, which deals

with briefing. We discussed Rule 151(e)(3), which addresses the form and content of

briefs and requires that an opening brief contain proposed findings of fact in the form

of numbered concise statements of essential fact, each statement supported by

reference to the pages of the transcript or the exhibits or to other sources relied on in

support of the proposed finding. Petitioners have failed to comply with Rule 151(e)(3).

In their Opening Brief, as proposed findings of fact, petitioners include only 25

unnumbered statements, nearly all of which consist of what appear to be testimonial

statements without any reference to the pages of the transcript or the exhibits or other

sources supporting the statements.

Petitioners also ignored the instruction in Rule 151(e)(3) that, in an answering

or reply brief, a party “set forth any objections, together with the reasons therefor, to

any proposed findings of any other party.” Respondent filed his Seriatim Answering

Brief, making 76 proposed findings of fact, and petitioners asked for, and were granted,

leave to file their Seriatim Reply Brief. However, in that discursive brief, they failed

to follow the instruction in Rule 151(e)(3) to set forth objections, together with reasons

therefor, to respondent’s proposed findings of fact.

Because petitioners have failed to provide us with usable findings of fact or to

object to respondent’s proposed findings, we must conclude that they have conceded

respondent’s proposed findings of fact as correct except to the extent unsupported by,

or inconsistent with, evidence in the record. See, e.g., Jonson v. Commissioner, 118

T.C. 106, 108 n.4 (2002), aff’d, 353 F.3d 1181 (10th Cir. 2003).

12

[*12]

Table 1—2011 Schedule C—Health II Equip.

Line No.

Description

Amount

15

Insurance (other than health)

$4,466

16b

Interest: Other

3,000

20a

Rent or lease: Vehicles, machinery, and equipment

30,502

20b

Rent or lease: Other business property

20,002

25

Utilities

3,621

26

Wages (less employment credits)

27

Other expenses: Telephone

Other expenses: Mail and parcel express

400

16,730

828

Table 2—2011 Schedule C—Health II Holdings

Line No.

Description

Amount

15

Insurance (other than health)

$14,157

17

Legal and professional services

12,230

Table 3—2011 Schedule C—8727 VDC

Line No.

17

Description

Legal and professional services

Amount

$2,500

13

[*13]

Table 4—2011 Schedule E—8723 VDC

Line No.

Description

Amount

7

Cleaning and maintenance

$4,725

9

Insurance

3,257

14

Repairs

1,225

17

Utilities

19,995

18

Other expenses: Furniture, equipment, office

4,004

Table 5—2012 Schedule C—Claims Management

Line No.

10

Description

Billing services

Amount

$8,810

Table 6—2012 Schedule C—Health II Holdings

Line No.

17

Description

Amount

Legal and professional services

$5,500

Table 7—2012 Schedule C—8727 VDC

Line No.

17

Description

Amount

Legal and professional services

$5,000

14

[*14]

Table 8—2012 Schedule C—8723 VDC

Line No.

Description

Amount

20a

Rent or lease: Vehicles, machinery, and equipment

$5,400

21

Repairs and maintenance

4,600

25

Utilities

16,754

27a

Other expenses: Cleaning and maintenance

services

750

Other expenses: Security monitoring

50

Other expenses: Telephone

661

Table 9—2013 Schedule C—Claims Management

Line No.

10

Description

Billing services

Amount

$27,068

Table 10—2013 Schedule C—Health II Holdings

Line No.

17

Description

Amount

Legal and professional services

$7,400

15

[*15]

Table 11—2013 Schedule C—8723 VDC

Line No.

Description

Amount

17

Legal and professional services

$7,977

21

Repairs and maintenance

8,735

25

Utilities

20,361

27a

Other expenses: Telephone

1,430

Other expenses: Cleaning and maintenance

services

3,090

Table 12—2015 Schedule C—Health II Holdings

Line No.

17

Description

Amount

Legal and professional services

$800

Table 13—2015 Schedule C—8723 VDC

Line No.

Description

Amount

20a

Rent or lease: Vehicles, machinery, and equipment

$4,200

21

Repairs and maintenance

8,044

25

Utilities

19,024

27a

Other expenses: Cleaning and maintenance

services

1,200

Tax Payments

Neither petitioner has made estimated tax payments for any of

the years at issue, nor has either made any tax payment for those years.

16

OPINION

[*16]

I.

Introduction

During the years at issue, petitioners were engaged in various

Schedule C and E business activities. The parties have stipulated

petitioners’ gross receipts or gross income from those activities. After

concessions, that leaves at issue whether (1) petitioners are entitled to

deduct expenses shown on those schedules, (2) they may deduct NOL

carryovers to 2010 through 2013 and to 2015, and (3) they are liable for

the additions to tax.

II.

Schedule C and E Deductions

A.

Introduction

In general, a taxpayer may deduct the expenses of carrying on a

trade or business. See, e.g., § 162(a) (providing a deduction for “all the

ordinary and necessary expenses paid or incurred during the taxable

year in carrying on any trade or business”).

The taxpayer is required to maintain records that are sufficient

to enable the Commissioner to determine his correct tax liability. See

§ 6001; Treas. Reg. § 1.6001-1(a). The taxpayer bears the burden of

substantiating the amount and purpose of a claimed deduction. Higbee

v. Commissioner, 116 T.C. 438, 440 (2001). Part of that burden involves

proving “the fact” of any expenditure. Anderson v. Commissioner, T.C.

Memo. 2023-42, at *8–9, aff’d, No. 23-9002, 2024 WL 2239160 (10th Cir.

May 17, 2024); see also Barrios v. Commissioner, T.C. Memo. 2023-32,

at *4. Treasury Regulation § 1.461-1(a)(1) provides that, under the cash

method of accounting, expenses are generally deductible for the year

paid. A taxpayer can carry his burden of proving the fact (payment) of

an expenditure by producing canceled checks, invoices, receipts, or

credit card statements. See, e.g., Odujinrin v. Commissioner, T.C.

Memo. 2014-213, at *9–10. 7 A tax return is not evidence of the truth of

7 The Commissioner has provided guidance with respect to account statements

that he will accept as proof of payment by a taxpayer for purposes of substantiating

federal income tax deductions. See Rev. Proc. 92-71, 1992-2 C.B. 437. If an amount is

paid by check but the bank does not return canceled checks to customers, the

expenditure may be proved by a bank statement showing the check number, the

amount of the check, the date the bank posted the check, and the name of the payee.

Id. § 3.01, 1992-2 C.B. at 438. Payment by electronic funds transfer may be

substantiated by an account statement that shows the amount of the transfer, the date

the transfer was posted to the account, and the name of the payee. Id. § 3.02.

17

[*17] the statements in it. E.g., Fabian v. Commissioner, T.C. Memo.

2022-94, at *42. Nor do statements in briefs constitute evidence, Rule

143(c), and they cannot supplement the record, Rogers v. Commissioner,

T.C. Memo. 2014-141, at *15, amended on reconsideration in part, 2014

WL 6805465 (Nov. 26, 2014); see also Patitz v. Commissioner, T.C.

Memo. 2022-99, at *11.

“When a taxpayer’s records have been destroyed or lost due to

circumstances beyond his control, he is generally allowed to

substantiate his deductions through secondary evidence.” Boyd v.

Commissioner, 122 T.C. 305, 320 (2004); accord Barrios, T.C. Memo.

2023-32, at *5.

And even where the taxpayer has failed to keep records of his

deductible expenditures, we have discretion in appropriate

circumstances to estimate those expenditures where there is evidence

that deductible expenses were incurred. Cohan v. Commissioner, 39

F.2d 540, 543–44 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731,

742–43 (1985). 8

Where the evidence presented at trial is insufficient to support

the deductibility of a particular expense, we must sustain the

Commissioner’s determinations and disallow the deduction. Rogers,

T.C. Memo. 2014-141, at *16.

B.

Discussion

To substantiate their reported Schedule C and E expenses,

petitioners primarily rely on the Cash Disbursements Journals and the

Account Registers found in Exhibit 18-J for each entity. Those

documents detail outlays by date, check number, account number,

payee, and the like, but, except with respect to the Table Expenses,

petitioners have not directed us to anything in the record evidencing

actual payment. Mr. Anderson testified that petitioners have “many

boxes” containing substantiating documents. Nevertheless, he was

either unwilling (“so many boxes”) or unable (“no access . . . . [I]t’s the

subject of another pending legal matter”) to produce the substantiation

8 A court may not invoke the Cohan doctrine to estimate the amount of a

deductible expense subject to the heightened substantiation requirements in section

274(d). Among the items to which section 274(d) applies are traveling expenses,

expenses related to a passenger automobile, and gifts. §§ 274(d)(1), (3), (4),

280F(d)(4)(A).

18

[*18] to the Court. Mr. Anderson’s first excuse describes petitioners’

choice on how to present their case, not a circumstance beyond their

control. His second excuse lacks particulars that might convince us that

the stored records are unavailable because of circumstances beyond

petitioners’ control. Moreover, petitioners’ failure to direct us to

evidence supporting claimed expenditures contradicts their

representation in the Petitions that, “at trial,” they will offer “sufficient

. . . records [to] support the[ir] actual income . . . for the audited years.”

In other cases where a taxpayer has presented us with accounting

documents merely containing lists of categories and amounts of

expenses without the introduction of any source documents underlying

the figures, we have treated the documents “as argument—not

evidence.” Barrios, T.C. Memo. 2023-32, at *5 (quoting Rodriguez v.

Commissioner, T.C. Memo. 2009-22, 2009 WL 211430, at *2). We will

do the same here.

We are thus faced with a situation where, other than the Table

Expenses, the record lacks evidence of the outlays underlying

petitioners’ Schedule C and E expenses. As noted above, the Cohan

doctrine allows us to estimate acknowledged expenses that a taxpayer

cannot fully substantiate. Petitioners invoke our discretion to make an

estimate. Respondent argues we lack discretion because there exists no

evidentiary basis upon which to make an estimate. See Vanicek, 85 T.C.

at 743. Petitioners’ specific circumstances, however, give us grounds to

decline to rely on Cohan to estimate the amounts of their deductible

expenses that they failed to substantiate. As the U.S. Court of Appeals

for the Second Circuit observed in Cohan v. Commissioner, 39 F.2d

at 543, not only did the taxpayer in that case fail to keep account of his

travel expenses; he “probably could not have done so.”

“That

observation,” we have said, “suggests a limit on Cohan’s scope, under

which estimating unsubstantiated expenses would be inappropriate

when proper recordkeeping is feasible and can reasonably be expected.”

Joseph v. Commissioner, T.C. Memo. 2020-65, at *40–41. “In fact,” we

added, “the Court of Appeals for the Seventh Circuit has recognized just

such a limitation, identifying a trend under which Cohan, ‘while not

* * * repudiate[d] * * * entirely, is * * * not invoke[d] * * * where the

claimed but unsubstantiated deductions are of a sort for which the

taxpayer could have and should have maintained the necessary

records.’” Id. (quoting Lerch v. Commissioner, 877 F.2d 624, 628 (7th

Cir. 1989), aff’g T.C. Memo. 1987-295).

19

[*19] We take petitioners at their word in the Petitions that they

possessed, and would offer at trial, sufficient evidence of their income.

Moreover, we are not persuaded by Mr. Anderson’s testimony at trial as

to why they did not do so. Because petitioners could have and, we now

find, did maintain records that would substantiate expenses other than

the Table Expenses, we will not estimate any of those other expenses.

We allow Schedule C and E expenses only to the Table Expenses.

III.

NOLs

A taxpayer may generally deduct, as an NOL for a taxable year,

an amount equal to the sum of the NOL carryovers and carrybacks to

that year. § 172(a). A taxpayer claiming an NOL deduction must file

with his return “a concise statement setting forth the amount of the

[NOL] deduction claimed and all material and pertinent facts relative

thereto, including a detailed schedule showing the computation of the

[NOL] deduction.” Treas. Reg. § 1.172-1(c). Petitioners bear the burden

of establishing both the existence of NOLs for prior years and the NOL

amount that may properly be carried forward to the year at issue. See

Rule 142(a); Keith v. Commissioner, 115 T.C. 605, 621 (2000).

Petitioners had an NOL carryover from 2005 of $306,554. On the

2010 return, they claimed an NOL carryover of $1,655,978, which is

$1,349,424 more than the $306,554 carryover from 2005. That excess is

allegedly composed of NOLs from 2006 through 2009. Those NOLs are,

in turn, based on expenses allegedly incurred in petitioners’ Schedule C

and E activities for 2006 through 2009. Petitioners’ alleged NOL

carryover to 2015 includes the NOL they claimed in an amended 2014

income tax return.

Other than the Table Expenses reported for 2010 through 2013

and for 2015, petitioners have not provided any of the underlying

documents, such as receipts or invoices, showing that the expenses were

in fact incurred for 2006 through 2009 and for 2014. Petitioners have

not shown that the NOL carryover from 2005 was not used for 2006

through 2009. They have not shown that they had an NOL in 2014.

Although petitioners may have incurred business expenses

during 2006 through 2009 and for 2014, there is no evidence supporting

the carryovers they claimed from those years, nor do we have any basis

to estimate those amounts.

We do not allow any NOL deductions.

20

[*20] IV.

Additions to Tax

Section 6651(a)(1) and (2) provides for separate additions to tax

in the event a taxpayer (1) fails to timely file a return and (2) fails to pay

tax shown on the return. Section 6654 provides for an addition to tax in

the event a taxpayer underpays a required installment of individual

estimated tax.

The Petitions contain no specific assignments of error or

supporting facts regarding the additions to tax.

Furthermore,

petitioners did not address the additions on brief. We deem petitioners

to have conceded the section 6651(a)(1) and (2) and 6654 additions to tax

and hold that respondent has no burden of production under section

7491(c) with respect to them. See Funk v. Commissioner, 123 T.C. 213,

217–18 (2004); Swain v. Commissioner, 118 T.C. 358, 363–65 (2002);

Carlson v. Commissioner, T.C. Memo. 2012-76, aff’d, 604 F. App’x 628

(9th Cir. 2015).

Decisions will be entered under Rule 155.