Alec Jeffrey Megibow, Petitioner

S T!f2 CAL. STAT.

S.T. JLC£E T.C. Memo. 2004-41 UNITED STATES TAX COURT ALEC JEFFREY MEGIBOW, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 8369-02.

Filed February 19, 2004.

Respondent.determined deficiencies for petitioner's 1997, 1998, and 1999 taxable years based primarily on the disallowance of amounts claimed as business expense deductions.

Held:

Because petitioner failed to substantiate claimed deductions, he is liable for income tax deficiencies for 1997, 1998, and 1999.

Held, further, petitioner is liable for sec. I.R.C., accuracy-related penalties with 6662(a), respect to the yéars in issue.

Anthony M. Bentley, for petitioner.

D. Sean McMahon, for respondent.

SERVED FEB 1 9 2004

MEMORANDUM FINDINGS OF FACT AND OPINION

WHERRY, Judge: Respondent determined the following dpficiencies and penalties with respect to petitioner's Federal ihcome taxes:

Year 1997 1998 1999 Deficiency Sec. 6662,

I.R.C.

Penalty $28,565 43,789 15,216 $5,713.00 8,757.80 3,043.20 The principal issues for decision are:

(1) Whether petitioner is entitled to business expense deductions.claimed on Schedules C, Profit or Loss From Business, for the taxable years 1997, 1998, and 1999; and (2) whether petitioner is liable for the section 6662 äccuracy-related penalty for the subject years.

In the notice of deficiency, respondent alpo disallowed in full unreimbursed employee business expenses claimed by petitioner on Schedule A, Itemized Deductions, for 1999. Neither party specifically addressed this matter at trial or on brief.

Such items are typically deemed conceded.

See Rules 149(b), 151(e)(4) and (5); Levin v. Commissioner, 87 T.C. 698, 722-723 (1986), affd. 832 F.2d 403 (7th Cir. 1987).

T the extent that anything in petitioner's brief could be interp eted to pertain to ¹ Unless otherwise indicated, section refekences are to the Internal Revenue Code n issue, and Rule n effect for the years keferences are to the Tax Court Rules of Practice and Procedure.

this adjustment, suffice it to say that our holding infra with respect to the Schedule C expenses, and the rationale therefor, apply equally to these Schedule A expenses. Certain additional adjustments made by respondent to petitioner's itemized deductions, exemptions, and self-employment tax are correlative in nature and will be resolved by our holdings on the foregoing issues.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulations of the parties, with accompanying exhibits, are incorporated herein by this reference. At the time the petition was filed in this case, petitioner resided in New York, New York.

Petitioner, a physician, timely filed Forms 1040, U.S.

Individual Income Tax Return, for 1997, 1998, and 1999.

On each of these returns, petitioner reported wage income from New York University (NYU) Medical Center and attached corresponding Forms W-2, Wage and Tax Statement.

The amounts so reflected totaled $231,959.95, $248,625.68, and $305,592.93, for 1997, 1998, and 1999, respectively. Petitioner also included with each return a Schedule C for a "MEDICAL PRACTICE" with the stated name of "ALEC

MEGIBOW".

The Schedules C reported the income, expense deductions, and net losses set forth below:

1997 1998; 1999 Gross Income $506,503 $43,59 $18,150 Expenses:

Car and truck Depreciation Travel Meals and entertainment Other 6,838 12,523 15,562 7,228 10,392 9,728 2,298 545,288 2,3119 133,1 5 1,041 8,387 1,357 35,807 Loss (76,006) (119,1 ) (28,442) For each year, the "Other expenses" shown on th Schedule C iÂcorporated an item labeled "FEES REMITTED TO NYU MEDICAL CENTER PÉR LETTER" in an amount equal to most or all of the Schedule C ghoss income reported for that year.

The remaining "Other expenses" included figures for expenditures such as accounting, p ofessional dues, telephone and communications, legal, postage, g rage and parking, gifts, Amex dues, publications, computer and o fice, music, internet, local travel, CPE, and research.

By a letter dated March 24, 1999, Revenue gent Melinda O'Connell (Ms. O'Connell) of the Internal Revenge Service informed petitioner that his 1997 tax return had been selected fþr examination.

A similar letter dated Februa y 23, 2001, under t e signature of Area 2 Manager Michael Donovan, was subsequently issued informing petitioner that his 1998 and 1999 income tax r turns had been selected for examination. Although a detailed chronology of these examinations is unnecessary for resolving the ilssues in dispute, some general observations arç warranted.

The record contains evidence of repeated instances where petitioner or his representatives delayed or postponed appointments, failed to provide timely substantive responses to requests for information, or otherwise declined to act with any alacrity upon attempted communications from respondent.

Additionally, the processing of petitioner's 1997 through 1999 tax years was likely impacted by certain other administrative and judicial actions instituted by petitioner.

Petitioner is no stranger to the Federal forum when it comes to his tax matters. Documents submitted in this case and public records reflect that petitioner has apparently been involved in at least three actions against the Internal Revenue Service based on the Freedom of Information Act (FOIA),

22, 2003); Megibow v. Commissioner, No. 01 CV 2979 (S.D.N.Y. Jan.

14, 2002); Megibow v. Commissioner, No. 97 CV 9500 (S.D.N.Y. Nov.

30, 1998). At least two FOIA requests, one of which seems to have precipitated the second of the just-listed suits, were made during the examinations of petitioner's 1997 through 1999 returns and pertained to those audits.

A third FOIA request related to matters is this case was submitted after the issuance of the notice of deficiency and appears to have led to the most recent of the FOIA suits enumerated above.

Petitioner has also litigated a previous tak year, 1993, before this Court, with respect to which a rulink in favor of respondent was issued in Megibow v. Commissioner, T.C. Memo.

1998-455.

That decision was appealed to the Court of Appeals for the Second Circuit, and the appeal was ultimately dismissed on M4y 25, 2000. Megibow v. Commissioner, No. 99-4099 (2d Cir. May 25, 2000).

Consistent with the foregoing general obseryations about p4titioner's administrative and judicial history¡, the discussion below highlights aspects of the 1997 through 1999 examinations cóncerning substantiation of the Schedule C expenses at issue here. At an initial appointment on October 5, 1599, with Joel Gendler (Mr. Gendler), petitioner's certified public accountant, Ms. O'Connell reviewed certain of petitioner's bänk statements for 1997 and prepared a Form 4564, Information Dbcument Request, f r 1997 asking that specified records be providsd.

Among other things, the Form 4564 requested a "letter from NTU showing income agreement and employee status (any reimbursement of expenses)" I a d "details of trips" in 1997 to the United Kingdom, Brazil, Amsterdam, and Argentina.

On or about October 28, 1999, Ms. O'Connell received from Mr. Gendler copies of brochures from medical conferences in which petitioner participated at the above-listed forekgn locations.

Additionally, at a time not clear from the record, petitioner submitted to respondent a letter from the vice president for finance at NYU Medical Center dated March 9, 1998, and reading as follows:

To:

Internal Revenue Service Alec Megibow, MD, Social Security No. time faculty member and employee of University School of Medicine. Dr. Megibow serves as a participating physician in a unit of physicians which provides professional radiologic services for patients.

the New York is a full * * * , Billings to patients for services rendered by Dr. Megibow are made to his name. Under the terms of an agreement entered into between this institution and the participating physicians in the unit, all derived from these professional services is remitted to New York University Medical Center and is credited to a special income fund.

Funds disbursed to the participating physician are reflected in their respective W-2 forms issued by New York University Medical Center.

During the calendar year 1997, $506,503.15 was collected for billings rendered in Dr. Megibow's name. Such amount was duly remitted to the Medical Center and credited to the aforementioned special of such receipts was retained by Dr. Megibow.

No part fund.

On March 17, 2000, Ms. O'Connell mailed to Mr. Gendler a second Form 4564 with respect to 1997.

This Form 4564 asked for certain items outstanding from the October 5, 1999 request,2 for example:

"Another letter from NYU is needed outlining the reimbursment [sic] policy of expenses incurred by the doctor and

Information Document Request, is in ard (sic] any included on the W-2." Additional information was also requested as set forth below:

Please provide documentation to support Schedule C expenses:

the following - Depreciation- Verification of purchase of depreciable items during 1997.

- Travel- Please provide Airline tickets, hotel bills, charge statements and cancelled checks to verify expenses.

- Legal amount deducted.

fees- Documentation is needed to support the Please provede [sic] an explaination [sic] of why the expenses were deducted on Schedule C when Dr. Megibow is a W-2 employee?

In August of 2000 Mr. Gendler sent to Ms. O''Connell a one- page letter making the following statement:

Please note that Dr. Megibow acts in an In addition to practicing medicine for these independent contractor capacity at N. Y. U. Medical Center. people, he lectures and promotes himself, which enables him to obtain patient referrals. publishes articles and lectures, practicing medicine. Schedule C are not reimbursed by anyone and are expenses of his doing business that are necessary in the normal course of doing business. explains the presentation of Dr. Megibow's tax information.

He writes and in addition to The expenses incurred on his I hope this On August 23, 2001, a third Form 4564, "Regtlest Number 3", wàs issued with respect to 1997. This Form 4564 repeated v rbatim the previous Request Number 2 for 1997 s regards d cumentation supporting the claimed depreciation, travel expenses, and legal fees|, and added requests for documentation supporting Schedule C items for car and truck expenses, professional dues, telephone and communications, local travel, and CPE.

Meanwhile, Schedule C deductions had likewise become a focus of the audit for 1998 and 1999, as evidenced by a Form 4564 dated May 14, 2001, identified as "Request Number 2" for 1998 and 1999, requesting documentation with respect to, inter alia, "All Business expenses listed on Schedule C for both years" and "All travel and entertainment expenses for both years listed on Schedule C including a diary showing your travel itinerary".

On January 22, 2002, a final examination meeting was held with Mr. Gendler.

The record indicates that as of that date, petitioner had not provided further materials responsive to the above-described requests for substantiation. At the meeting, Mr.

Gendler, acting under direction from petitioner's counsel, Anthony Bentley (Mr. Bentley), declined to consent to an extension of the time for assessment.

As a result, a decision was made to close the case based on the impending statute of limitations. Shortly after the meeting, Mr. Gendler apparently provided copies of Amex statements for 1997 and certain bank statements, but these items were not analyzed or incorporated in the adjustments on account of the decision to close the case.

The notice of deficiency underlying this proceeding was issued on February 25, 2002.

Among other things, the notice disallowed the business expenses claimed by petitioner on Schedules C, with the exception of the amounts shown as fees r mitted to NYU. Additional correspondence sent by Mr. Bentley after that date was reviewed by Ms. O'Connell but was determined n t to be pertinent to the adjustments in the statutory notice.

The petition in this case was filed on May 9, 2002, and trial was held on May 8, 2003. Mr. Bentley represented pbtitioner.

The stipulated joint exhibits consist of copies of p titioner's 1997, 1998, and 1999 tax returns; the notice of deficiency; and the March 9, 1998, letter from NYU Medical Center. Mr. Bentley introduced into evidence t o additional e hibits.

The first is a group of documents purporting to represent production from respondent's disclosure officer received by Mr. Bentley in response to one of petitioner's NOIA requests.

The second is a similar group of documents purpcrting to rbpresent production from the U.S. Attorney for the Southern District of New York received by Mr. Bentley in response to one of petitioner's FOIA requests.

As such, the ex ibits were phoffered as representing the contents of respo dent's a ministrative files with respect to the examination of phtitioner's 1997 through 1999 returns.

No fur her explanation was offered by Mr. Bentley.

After introducing the two exhibits into evidence, Mr. Bentley directed the Court's attention to petitioner's signature on his three tax returns and, pointing out that perjury is a felony in New York, stated as follows:

innocence for someone who is accused or The reason that I raise that presumption is so The reason that I bring this to your Honor's attention is to invoke a presumption under the criminal law of suggested of having committed a crime, certainly a felony. that I can introduce the tax returns as being the initial showing of credible evidence in petitioner's case to the effect that he is entitled to the deductions that he has taken, because what he is presenting under penalty of perjury is a statement the effect that he's entitled to take those deductions, has paid what he has said that he has paid, and that such deductions are appropriate and not--the tax code.

to Having said all of those things, petitioner rests.

Petitioner did not testify, nor were any witnesses called on his behalf. Respondent called Ms. O'Connell, who testified regarding the examination of petitioner's returns. Respondent also introduced four additional exhibits pertaining to the examination. At the conclusion of trial, a briefing schedule was set with simultaneous opening briefs due July 28, 2003, and reply briefs due September 11, 2003.

On July 24, 2003, the Court received from petitioner a document entitled "Petitioner's Motion To Extend Time To File Brief, For Partial Summary Judgment, and To Reopen the Record", with accompanying exhibits. This document was returned to petitioner unfiled, with the explanation that it represented an improper joinder of motions under Rule 54 and an inappropriate attempt to submit documents in the nature of evidence outside the trial setting and without stipulation.

On July 31, 2003, a document titled as a mdtion to extend tame to file briefs was filed by petitioner.

The preamble asked t at the time to file opening briefs be extende in order to allow for resubmission of the previous motion f¢r summary judgment and to reopen the record.

By order dated August 4, 2003, the Court granted petitioner's motion in that the time to file petitioner's opening brief was extended to August 18, 2003, denied the motion in all other respects, and dit:ected that the time for answering briefs be extended to October 2, 2003.

Petitioner's opening brief was filed on August 20, 2003 (having been postmarked timely).

On October 2,! 2003, respondent filed respondent's reply brief, and petitioner filed a motion to extend time to file briefs. Pursuant to Court þrder, respondent filed a response to petitioner's motion on October 27, 2003.

dditional correspondence received from petitioner on October 28, 2003, was filed as a supplement to petitioner's motion, and by order dated November 5, 2003, petitioner's motion, as supplemented, was denied.

OPINION

I. Preliminary Matters A. Petitioner's

Motions for Partial Summary Judgment and To Reopen the Record On brief, petitioner states that he reasserts and resubmits his previous motions for partial summary judgment and to reopen the record.

These requests were denied by means of the Court's (cid:16)042August 4, 2003, order, and we decline to modify that disposition for the reasons described briefly below.

Summary judgment is intended to expedite litigation and to avoid unnecessary and expensive trials.

FPL Group, Inc. v.

Commissioner, 116 T.C. 73, 74 (2001); Fla. Peach Corp. v.

Commissioner, 90 T.C. 678, 681 (1988.). Rule 121(a) allows a party to move "for a summary adjudication in the moving party's favor upon all or any part of the legal issues in controversy."

Rule 121(b) directs that a decision on such a motion shall be rendered "if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law."

Petitioner's motion for summary judgment asked for "an order adjudicating that a taxpayer's receipt of a W-2 form does not, without more, preclude deductibility of legitimate business expenses presented on a Schedule C form." Petit|ioner asserted that respondent's disallowance of his claimed e penditures was premised on this concept.

As an initial observation, we note that presenting the issue ih this abstract manner amounts to little more than a request for ah advisory opinion as to Federal tax law. This Court does not ibsue advisory opinions in a hypothetical context.

The Court's rulings are restricted to actual cases and contdoversies.

Moreover, petitioner's motion was and is pdoperly rejected because, regardless of the accuracy of the prindiple he seeks to establish, the purposes of summary judgment would not be served by a ruling thereon. Trial, having already occurred, would not be avoided. More importantly, even an order in petitioner's favor would in no way expedite resolution of this case.

Substantiation would still be required for any llowable expenses.

The notice of deficiency expressly provides that the S hedule C deductions for 1997, 1998, and 1999 Were disallowed "bince you failed to establish that the disallowed portion of the claimed deductions were paid, and if paid, qualified as ordinary and necessary business expenses, or that the expenditures were made for the purposes designated." Because the substantiation issue under the actual facts of this case would remain before us, nothing could be gained toward disposition by granting petitioner's motion.

. We affirm our earlier denial.

Reopening the record for the submission of additional evidence is a matter within the discretion of the trial court.

Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 331 (1971); Butler v. Commissioner, 114 T.C. 276, 286-287 (2000).

The standard for doing so may be summarized as follows:

"A court (cid:16)042will not grant a motion to reopen the record unless, among other requirements, the evidence relied on is not merely cumulative or impeaching, the evidence is material to the issues involved, and the evidence probably would change the outcome of the case."

Butler v. Commissioner, supra at 287.3 Petitioner's motion to reopen the record seeks to have the Court admit his bank and credit card statements for 1997 through 1999.

These proffered items fall short of the foregoing standard.

Even if admitted, the documents would not alter the outcome in this case.

The 3 years of financial statements in

the trial of this case was delayed for an hour to These items require the parties to this effort resulted in petitioner's two In petitioner's name reflect hundreds of transactiols, a large percentage of which appear personal in nature, aad petitioner has n t suggested any way of identifying those which allegedly represent business expenses.

The admission of these materials wóuld therefore do little, if anything, to provide the requisite s bstantiation for petitioner's expenditures.

Furthermore, even if the statements offered support for the disputed deductions, we would deny their admissibn on grounds of p ejudice to respondent.

By submitting the docu)nents after trial, petitioner deprived respondent of any oppbrtunity to examine or question them during the proceeding. Given the b ckground in this case, we cannot countenance spch tardiness.

We again affirm our previous denial.

B. Petitioner's Argument That the Notice of Deficiency is Time Barred In his opening brief, petitioner puts forwa d the argument t at the notice of deficiency is time barred because his representative lacked authority to extend the statute of 1 mitations for assessment. This issue was not entioned in the I p¢tition, in petitioner's trial memorandum, or at trial.

It is well settled that a matter raised for the first time on brief will not be co sidered when to do so wo ld prejudice the opposing party. DiLeo V. Commissioner, 96 T.C. 358, 891-892 (i991), affd. 959 F.2d 16 (2d Cir. 1992); Markwakdt v.

Commissioner, 64 T.C. 989, 997 (1975).

Such prejudice arises when the opposing party would be prevented from presenting evidence that might have been offered if the issue had been timely raised, or the opposing party would otherwise be surprised and placed at a disadvantage. DiLeo v. Commissioner, supra at 891-892; Markwardt v. Commissioner, supra at 997.

It is also the rule of this Court that claims related to the statute of limitations are affirmative defenses that must be pleaded or proved at trial and upon which the taxpayer bears the burden of proof. Rules 39, 142(a); Woods v. Commissioner, 92 T.C. 776, 779 (1989).

We conclude that the foregoing principles render consideration of petitioner's argument inappropriate here. At minimum, the posture in which this issue has arisen deprived respondent of the opportunity to introduce evidence concerning petitioner's agreement to extend the statute and the authority of his representative. Additionally, petitioner has submitted no materials to support his allegations; he has merely indicated that he is attempting to obtain such proof through an FOIA suit against respondent.

We surmise from the grounds recited in his motion to extend the time for filing answering briefs that he would seek to proffer evidence and argument on this matter using his reply brief as the vehicle, which would again raise complications related to reopening the record.

In these circumstances, our r les do not support addressing the merits of petitioner's statute of limitations claim.⁴ C. Petitioner's Estoppel Argument In both his trial memorandum and his brief, petitioner frames one of the issues as follows:

"Whether espondent is estopped from asserting that petitioner has failed adequately to s pport the disallowed deductions." His argume t on brief under the heading "Estoppel" then reads in its entirett:

5.

Federal Courts, including administrative courts of limited jurisdiction, are courts iof equity.

6. Respondent's audit changes taken as a whole essentially shift petitioner's deductions from Schedule C to Schedule A, based on a premise contrary to the course of dealing of approaching ten years: one which has previously been litigated and established; acknowledges that petitioner is entitled to Schedule C deductions as an aspect of his professional activities.

the parties over a period that respondent i.e., 7. Respondent's position initially ap eared grounded in the untenable premise that "if you get a W- 2, you can't use a Schedule C." That position morphed, at trial, into "this is just a substantiation case."

It is less than clear from the foregoing statements whether petitioner's argument rests on equitable estoppel, collateral

the estoppel, or some combination of the two.

For completeness, we shall summarize why neither doctrine is applicable here.

Equitable estoppel is a judicial doctrine that operates to preclude a party from denying its own acts or representations that induced another to act to his or her detriment. Wilkins v.

Commissioner, 120 T.C. 109, 112 (2003); Hofstetter v.

Commissioner, 98 T.C. 695, 700 (1992).

In tax contexts, equitable estoppel will be applied against the Government only with the utmost caution and restraint and upon the establishment of prerequisite elements:

(1) A false representation or wrongful, misleading silence by the party against whom the estoppel is claimed; (2) an error in a statement of fact and not in an opinion or statement of law; (3) ignorance of the true facts by the taxpayer; (4) reasonable reliance by the taxpayer on the acts or statements of the one against whom estoppel is claimed; and (5) adverse effects suffered by the taxpayer from the acts or statements of the one against whom estoppel is claimed. Wilkins v. Commissioner, supra at 112; Norfolk S. Corp.

v. Commissioner, 104 T.C. 13, 60 (1995), affd. 140 F.3d 240 (4th Cir. 1998); see also Lignos v. United States, 439 F.2d 1365, 1368 (2d Cir. 1971).

Here, the record fails to show the existence of any of the required elements for equitable estoppel. Petitioner does not identify, nor do we perceive, any particular statements or conduct by respondent that could reasonably be interpreted as false statements or misleading silence with respect to petitioner's entitlement to his claimed deducticns.

On the contrary, the course of events beginning in the audit and ultimately reflected in the reasons for disallowance expressed in the notice deficiency emphasized the need for substantiation.

Collateral estoppel exists for "the dual pyrpose of protecting litigants from the burden of relitigàting an identical issue and of promoting judicial economy by prevënting unnecessary or redundant litigation." Meier v. Commissione , 91 T.C. 273, 282 (1988); see also Montana v. United States, 440 U.S. 147, 153- (1979); Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 (1979).

In general, the doctrine of collateral¡estoppel, also referred to as issue preclusion, forecloses rel$tigation of issues actually litigated and necessarily decid d in a prior uit. Parklane Hosiery Co. v. Shore, supra at 26 n.⁵; Meier v.

ommissioner, supra at 282; Peck v. Commissione , 90 T.C. 162, 166 (1988), affd. 904 F.2d 525 (9th Cir. 1990).

This Court, expanding upon three factors i entified by the Supreme Court in Montana v. United States, suprá at 155, has set forth five prerequisites necessary for the application in factual contexts of collateral estoppel:

(1) The issue in the second suit must be identical all respects with the one decided in the first suit. (2) There must be a final jurisdiction. of competent judgment rendered by a court in (3) Collateral estoppel may be invoked against parties and their privies to the prior judgment. (4) The parties must actually have litigated the issues and the resolution of these issues must have been essential to the prior decision. (5) The controlling facts and applicable legal rules must remain unchanged from those in the prior litigation. citations omitted.]

[Peck v. Commissioner, supra at 166-167; These prerequisites are not met in the instant case.

No legal proceeding has ever addressed, much less established, that petitioner is entitled to the Schedule C deductions claimed for 1997, 1998, and 1999. While petitioner has litigated a previous tax year, resulting in Megibow v. Commissioner, T.C. Memo. 1998- 455, with respect to 1993, that proceeding provides neither a legal nor a factual basis for applying collateral estoppel here.

From a legal standpoint, income taxes are levied on an annual basis, such that each year represents a new liability and a separate cause of action. Commissioner v. Sunnen, 333 U.S.

591, 598-600 (1948); Fla. Peach Corp. v. Commissioner, 90 T.C. at 682. Given this principle, collateral estoppel would not operate to establish entitlement to deductions in one year based merely on an allowance of similar deductions in a different year or years.

See Barmes v. Commissioner, T.C. Memo. 2001-155 (rejecting attempts to apply collateral estoppel to depreciation deductions based on a prior litigated tax year), affd. 89 AFTR 2d 2002-2249, 2002-1 USTC par. 50,312 (7th Cir. 2002); see also Adolph Coors Co. v. Commissioner, 519 F.2d 1280, 1283 (10th Cir.

lb⁷⁵) (rejecting an attempt to apply collateral estoppel even though the exact issue was raised in a prior Tad Court proceeding blit, because the Commissioner abandoned the iss e during the 1 tigation, no judicial determination or findincs were made), affg. 60 T.C. 368 (1973).

From a factual standpoint, petitioner's entitlement to S hedule C expenses comparable to those claimed here was, with o e exception, not litigated in Megibow v. Comm ssioner, T. C.

Mpmo. 1998-455.

As to the one exception, this ourt sustained respondent's denial of deductions claimed by pet itioner for bpsiness-related legal fees.

Id. Accordingly, the case at bar presents no grounds for applying either equitable or collateral ehtoppel.

I . Deficiencies and Penalties A.

Burden of Proof As a general rule, determinations by the C mmissioner are presumed correct, and the taxpayer bears the bu den of proving otherwise. Rule 142 (a) . Section 7491 may oper te, however, in specified circumstances to place the burden on he Commissioner.

Séction 7491 is applicable to court proceedings that arise in connection with examinations commencing after Jtly 22, 1998, and reads in pertinent part:

SEC. 7491.

BURDEN OF PROOF.

(a) Burden Shifts Where Taxpayer Prodt ces Credible Evidence . - - (1) General rule.--If, in any court proceeding, a taxpayer introduces credible issue evidence with respect relevant taxpayer for any tax imposed by subtitle A or B, the Secretary shall have the burden of proof with respect to such issue.

to ascertaining the liability of to any factual the (2) Limitations.--Paragraph (1) shall apply with respect to an issue only if-- (A) the taxpayer has complied with the requirements under this title to substantiate any item; (IB) the taxpayer has maintained all records required under this title and has cooperated with reasonable requests by the Secretary for witnesses, documents, meetings, and interviews; information, * * * * * * * * * * (c) Penalties.--Notwithstanding any other provision of this title, the Secretary shall have the burden of production in any court proceeding with respect penalty, addition to tax, or additional amount by this title. Restructuring & Reform Act of 1998, Pub. L. 105-206, sec. 3001(c), 112 Stat. 727, to the liability of any individual for any [See also Internal Revenue Service regarding effective date.]

imposed Section 7491 is applicable here in that the examinations in this case began after the statute's effective date.

With respect to the income adjustments at issue, petitioner has not met the prerequisites of section 7491(a)(2) for placing the burden on respondent.

The record reflects a failure on petitioner's part to substantiate items, to show that he maintained adequate books and records, and to cooperate with respondent. With respect to the accuracy-related penalty, the , Commissioner satisfies the section 7491(c) burden of production by "[coming] forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty" tut "need not introduce evidence regarding reasonable cause, ubstantial a thority, or similar provisions." Higbee v. C mmissioner, 116 T.C. 438, 446 (2001).

ather, "it is the taxpaper's r sponsibility to raise those issues."

Id. Because, as will be mhre fully detailed infra, respondent here has introduced sufficient evidence to render the section 6662(E) penalty at least facially applicable, the burden rests on detitioner to show why it should not be applied.

B. Business Expense Deductions Deductions are a matter of "legislative grace", and "a taxpayer seeking a deduction must be able to point to an applicable statute and show that he comes within its terms."

New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); see also RÜle 142(a).

As a general rule, section 162(a) authorizes a deduction for "all the ordinary and necessary e penses paid or i curred during the taxable year in carrying on any trade or business".

An expense is ordinary for purposes of this section if it is normal or customary within a particular trade, business, or industry. Deputy v. chi Pont, 308 U.S. 488, 4!95 (1940).

An ekpense is necessary if it is appropriate and helpful for the development of the business. Commissioner v. Heininger, 320 U.S.

467, 471 (1943).

The breadth of section 162(a) is tempered by the requirement that any amount claimed as a business expense must be substantiated, and taxpayers are required to maintain records sufficient therefor.

Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), affd. 540 F.2d 821 (5th Cir. 1976); sec.

1.6001-1(a), Income Tax Regs. When a taxpayer adequately establishes that he or she paid or incurred a deductible expense but does not establish the precise amount, we may in some circumstances estimate the allowable deduction, bearing heavily against the taxpayer whose inexactitude is of his or her own making.

Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.

1930).

There must, however, be sufficient evidence in the record to provide a basis upon which an estimate may be made and to permit us to conclude that a deductible expense, rather than a nondeductible personal expense, was incurred in at least the - amount allowed. Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

Furthermore, business expenses described in section 274.are subject to rules of substantiation that supersede the doctrine of Cohan v. Commissioner, supra. Sanford v. Commissioner, 50 T.C.

823, 827-828 (1968), affd. 412 F.2d 201 (2d Cir. 1969); sec.

1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov.

6, 1985). Section 274 provides that no deduction shall be allowed for, among other things, traveling expe ses, e tertainment expenses, meal expenses, gifts, a d expenses with respect to listed property (as defined in sectidn 280F(d) (4) and including passenger automobiles, computer equipt ent, and cellular t lephones) "unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer's own statement" :

(1) The amount of the expenditt re or use; (2) the time and place of the expenditure or use, od date and d scription of the gift; (3) the business purpo e of the expenditure or use; and (4) in the case of entertainment or gifts, the business relationship to the taxpaye of the recipients or persons entertained.

Sec. 274 (d) .

In seeking to establish petitioner' s entitlement to deduct t e business expenses disallowed by respondent, petitioner' s c linsel at trial introduced two exhibits and then pointed out tilat petitioner' s returns were signed under pendlty of perjury.

As to the exhibits, they merely represent the cQntents of administrative files received by Mr. Bentley in response to FOIA requests and are bereft of any materials that wduld adequately s 1bstantiate the claimec deductions. Although the exhibits do show that certain information with respect to tbe expenses was given to respondent, this information falls far short of meeting the heightened substantiation requirements of section 274, where applicable, or of enabling us to make any reasonable estimate under Cohan v. Commissioner, supra. Accordingly, we reject petitioner's claim on brief that evidence of substantiation was provided to respondent prior to January of 2002.

We likewise give little weight to petitioner's statement on brief that evidence of substantiation tendered after January of 2002 would not have been considered by respondent. Petitioner has at no time shown either an ability or a willingness to provide additional relevant material.

He neither testified at trial nor offered any pertinent substantiating exhibits.

Moreover, the only other information tendered to the Court, through petitioner's tardy motion to reopen the record, would, even if accepted and as previously explained, have failed to demonstrate entitlement to any further deductions.

The materials do not tie any specific expense to a particular for-profit business or investment endeavor.

With respect to petitioner's reliance at trial on having filed returns signed under penalty of perjury, petitioner apparently reiterates this position on brief, as follows:

Petitioner duly filed his 1998 and 1999 income tax timely filed pursuant returns which were signed under penalty of perjury by petitioner, to 26 United States Code § 7502 through the United States mails, and received in evidence; for substantiation of that any request thereupon taken was made of petitioner. were therein not properly disallowed as respondent failed to demonstrate the deductions The deductions unsubstantiated, and the additions to tax éssessed for the said years accordingly improper.

As a threshold matter, we dispute any suggestion by p titioner that substantiation was not sought by respondent for t e expenses claimed on the 1998 and 1999 retur s.

As revealed in the exhibits introduced by petitioner and det1ailed more fully i our above factual discussion of the administrative process, sàbstantiation was a focus of respondent's examibation for all t tree of the years in issue.

More importantly, and contrary to petitionepr' s assertion, it is axiomatic that neither tax returns themselves, nor the execution of such forms under penalty of perjuryi, establishes the t uth of items recited therein.

Lawinger v. Comtnissioner, 103 T.C. 428, 438 (1994); Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979) ; Roberts v. Commissioner, 62 T. C. 834, 837 (1974) .

Pétitioner' s reliance on his tax returns is enti ely misplaced.

Thus, in absence of any evidence reflecting the propriety of the bt siness expense deductions claimed by petitioneh, we sustain their disallowance for lack of substantiation.

C. Section 6662 Penalty subsection (a) of section 6662 imposes an a curacy-related penalty in the amount of 20 percent of any under ayment that is attributable to causes shecified in subsection ( ) . Subsection justifying imposition of the penalty is negligence or disregard of rules or regulations.

"Negligence" is defined in section 6662(c) as "any failure to make a reasonable attempt to comply with the provisions of this title", and "disregard" as "any careless, reckless, or intentional disregard." Caselaw similarly states that "'Negligence is a lack of due care or the failure to do what a reasonable and ordinarily prudent person would do under the circumstances.'" Freytag v. Commissioner, 89 T.C. 849, 887 (1987) (quoting Marcello v. Commissioner, 380 F.2d 499, 506 (5th Cir. 1967), affg. on this issue 43 T.C. 168 (1964) and T.C. Memo.

1964-299), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S.

868 (1991). Pursuant to regulations, "'Negligence' also includes any failure by the taxpayer to keep adequate books and records or to substantiate items properly."

Sec. 1.6662-3(b)(1), Income Tax Regs.

An exception to the section 6662(a) penalty is set forth in section 6664(c)(1) and reads:

"No penalty shall be imposed under this part with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion."

Regulations interpreting section 6664(c) state:

The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case- by-case basis, and circumstances.

taking into account all pertinent * * * Generally, facts important the most factor is the extent of the taxpayer's proper tax liability. * * * 1.6664-4(b)(1), Income Tax. Regs.]

the taxpayer's effort to assess [Sec.

Reliance upon the advice of an expert tax preparer may, but does not necessarily, demonstrate reasonable caQse and good faith i the context of the section 6662(a) penalty.

Id ; see also United States v. Boyle, 469 U.S. 241, 251 (1985); Freytag v.

Commissioner, supra at 888.

Such reliance is not an absolute d fense, but it is a factor to be considered.

Fireytag v.

C6mmissioner, supra at 888.

In order for this factor to be given dispositive weight, the t xpayer claiming reliance on a professional must show, at minimum, that (1) the preparer was supplied with correct information and (2) the incorrect return was a result of the preparer's error.

See, e.g., Westbrook v. Commissioner, 68 F.3d 868, 881 (5th Cir. 1995), affg. T.C. Memo. 1993-634; Cramer v.

C mmissioner, 101 T.C. 225, 251 (1993), affd. 64 F.3d 1406 (9th Cir. 1995); Ma-Tran Corp. v. Commissioner, 70 T.

. 158, 173 (1978); Pessin v. Commissioner, 59 T.C. 473, 489 (1972).

As previously indicated, section 7491(c) places the burden of production on the Commissioner.

The notice of deficiency i sued to petitioner generally asserted applicability of the section 6662(a) penalty on account of negligence or disregard, substantial understatement, and/or substantial valuation m sstatement.

See sec. 6662(b). Respondent at :rial and on I brief has addressed only negligence or disregard of rules or regulations as the basis for the penalty, and we shall do likewise.

We conclude that respondent has met the section 7491(c) burden of production with respect to the negligence penalty.

The evidence adduced in this case reveals that petitioner has failed to keep adequate books and records and properly to substantiate reported items. Petitioner, 9 with reasonable cause and in good faith as to the claimed items.

in turn, has not shown that he acted His argument on brief with regard to the penalties reads as follows:

Petitioner has done everything he reasonably could be expected to do to pay his taxes when due, security for over 100% of the claimed "additions" to taxes dreamed up by respondent under any theory, and petitioner's efforts at cooperation, offers of settlement, coupled with tendered funds, have been refracted or ignored at every turn, within the context of history can be viewed ultimately as a denial of petitioner's procedural due process rights.

these proceedings, such that including those tender the Petitioner is entitled to minimize his income taxes under the Internal Revenue Code.

This picture is belied by the record in this case. Contrary to petitioner's suggestions of cooperation and forthcoming behavior, his history before the Internal Revenue Service and this Court is replete with instances where petitioner, or the representative acting on his behalf, has delayed, ignored, or otherwise hindered repeatedly offered opportunities for c mmunication and exchange of pertinent information. Conversely, the record is devoid of any evidence reflecting offers of s ttlement or payment, nor would such offers be r in any event on whether petitioner was negligent at the point in time when he f iled hia Federal income tax return and underpa d his taxes .

On these facts, petitioner' s intimations of a deni 1 of due process are not well taken.

Finally, petitioner is entitled to minimize income taxes only to the extent consistent with law.

See United States v.

dumberland Pub. Serv. Co., 338 U.S. 451, 454-45 (1950).

He clearly overstepped that boundary here and has $tot shown a reasonable basis for doing so.

The Court sustains respondent's imposition of the section 6662 penalty.

To reflect the. foregoing, Decisio will be entered for responde t.

2. This Form 4564, identified in the top right-hand corner as "Request Number 2", by apparent typographical error referred to the earlier Form 4564 as "IDR #2 issued on 10/05/99". fact designated on its face as "Request Number 1" The Form 4564 issued on Oct. 5, 1999, for 1997.
3. The Court notes that prior to the trial of this case, we contacted counsel for petitioner and respondent by conference calls and implored the parties to acknowledge and obey the Court's standing pretrial order and the Tax Court Rules of Practice and Procedure. stipulate facts and documents not reasonably in dispute and to exchange before trial documents to be introduced as evidence. addition, afford petitioner an eleventh hour opportunity to provide documents to respondent; exhibits', described supra in text, being admitted at trial despite respondent's.objections.
4. We note that respondent disputes the merits of petitioner's argument mótion to extend the time to file briefs. Respondent also in respondent's oppositioni to petitioner's . attaches to the opposition copies of three Forms 2848, Power of Attorney and Declaration of Representative, and a copy of disputed Form 872, Consent which together reflect a proper extension of to Extend the Time to Assess Tax, the statute.
5. U.S.C. sec. 552 (2000). Megibow v. Commissioner, No. 03 CV 6020 (S.D.N.Y. Dec.