David E. Benson, Petitioner

T .C . Memo . 2007-113

UNITED STATES TAX COUR T

DAVID E . BENSON , Petitioner v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docked No . 22965-05 .

Filed May 2, 2007 .

David E . Benson, pro se .

Ann M¹ Welhaf and Michael A . Raiken , for respondent .

MEMORANDUM FINDINGS OF FACT AND OPINIO N

CHIEC I, Judge : Respondent determined a deficiency of $2,316 in, and an accuracy-related penalty under section 6662(a)' of $463 .20 on, petitioner's Federal income tax (tax) for 1999 .

'All s ction references are to the Internal Revenue Code (Code) in ffect for the year at issue . All Rule references are to the Tax Court Rules of Practice and Procedure .

SERVED MAY 2 2007

The issues remaining for decision are :

(1) Is petitioner entitled to deduct certain legal fees in determining his Schedule C net loss? We hold that he is not .

(2) Is petitioner entitled to deduct certain claimed gift s to customers and prospective customers? We hold that he is not .

(3) Is petitioner liable for the accuracy-related penalty under section 6662(a)? We hold that he is .

FINDINGS OF FAC T

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

Petitioner resided in Falls Church, Virginia, at the time he filed the petition in this case .

During 1999, McKendree Co ., Inc . (McKendree), employed petitioner as a salesperson . At all relevant times, McKendree had in effect an employee reimbursement policy (McKendree's reimbursement policy) that allowed its employees to request reimbursement on a prescribed reimbursement form (reimbursement form) for any employee business expenses that they incurred .

That policy provided in pertinent part :

Any purchase regardless of how small must have a Purchase Order number (P .O . #) obtained from the Nor- folk Parts Department and be accompanied by a Pay- ment/Reimbursement form * * * in order to be reim- bursed .

Payments to employees for the reimbursement of expenses, travel, etc ., will be made on the 1st and 15th of each month . All employees must complete an Authorization Payment/Reimbursement form in order to receive reimbursement * * * Only those vehicles owned by McKendree are eligi- ble or gas, tire, oil, repairs, etc . to be paid by or charged to the Company . Employees must sign any tick- ets and include the license plate number for any vehi- cle expenses charged . In addition, gasoline expenses will be paid or reimbursed only in areas wher e McKendree does business . 1st of each month and is two weeks in arrears . All mileage must be entered into the computer by the 25th of each month prior to the 1st of the following month .

Mileage is paid only on the hose employees who are paid driving allowances or driving reimbursements must pay their own expenses out of th se disbursements . Any personal charges whic h appear on an invoice presented to McKendree for payment will e deducted from an employee's next pay chec k * * * authorized charges in the future will be grounds for i mediate dismissal .

During 1999, pursuant to McKendree's reimbursement policy, petitioner received $1,600 from McKendree as an advance on his vehicle expenses for that year ($1,600 McKendree driving allow- ance) .

At no relevant time did McKendree require petitioner to provide gifts to its customers or its potential customers .

On February 24, 1999, petitioner was arrested for an d charged wi h stealing merchandise belonging to COMPUSA, Inc ., valued at 200 or more . On June 2, 1999, a grand jury in the Commonwealth of Virginia Circuit Court for the City of Norfolk indicted p titioner for grand larceny (criminal charges) .

Petitioner hired Christopher Christie (Mr . Christie), an attor- ney, to re resent him in defending against those criminal charges, for which he paid Mr . Christie $5,500 . On July 23, 1999, petitioner entered into a plea agreement in which he pleaded guilty to the criminal charges .

Petitioner timely filed Form 1040, U .S . Individual Income Tax Return, for his taxable year 1999 (petitioner's 1999 return) .

Petitioner did not include the $1,600 McKendree driving allowance in total income in his 1999 return .

Petitioner included . Schedule A-Itemized Deductions (1999 Schedule A) as part of his 1999 return . In that schedule, petitioner claimed, inter alia, $12,617 of "Job Expenses and Most Other Miscellaneous Deductions" (job expenses) prior to the application of the two-percent floor imposed by section 67(a) .

Of that total, petitioner claimed $12,157 as "Unreimbursed employee expenses" . With respect to those claimed unreimbursed employee expenses, petitioner, as required, completed Form 2106, Employee Business Expenses (1999 Form 2106), and included that form as part of his 1999 return . In the 1999 Form 2106, peti- tioner claimed the following unreimbursed employee expenses :

Expense Amount Vehicle '$10,780 Transportation² 254 Travel³ 685 Meals 943 8 1Peti ioner calculated the $10,780 of claimed vehicle ex- penses by multiplying his claimed actual vehicle expenses (i .e ., $12,015) b the percentage of claimed business use for his vehicle (i .e ., 89 .72 percent) . Petitioner's claimed actual vehicle expenses consisted of $5,835 for "Gasoline, oil, repairs, vehicle in urance, etc ." and $6,180 for "Vehicle rentals" . Petitioner calculated the percentage of claimed business use for his vehicle by dividing his "Business miles" (i .e ., 28,810 miles) by "Total tiles the vehicle was driven during 1999" (i .e ., 32,110 miles) .

2In t e 1999 Form 2106, the expense category "Transporta- tion" cove ed "Parking fees, tolls, and transportation, including train, bus etc ., that did not involve overnight travel or commuting to and from work ." Petitioner did not specify in the 1999 Form 106 the type(s) of transportation expenses that he was claiming .

3In t e 1999 Form 2106, the expense category "Travel" cov- ered "Tray 1 expense while away from home overnight, including lodging, airplane, car rental, etc .", but not expenses for meals or entertainment . Petitioner did not specify in the 1999 Form 2106 the t pe(s) of travel expenses that he was claiming .

'In calculating the $438 of claimed meal expenses, peti- tioner claimed in the 1999 Form 2106 total meal expenses of $875 and reduce that total by 50 percent, as required by sec . 274(n) .

Petitioner did not reduce the vehicle expenses claimed in th e 1999 Form 106 and as part of unreimbursed employee expenses in the 1999 S hedule A by the $1,600 McKendree driving allowance .

As required by section 67(a), petitioner reduced the $12,617 of job exp nses claimed in the 1999 Schedule A by two percent of his adjust d gross income (i .e ., by $916) . In determining the taxable income reported in petitioner's 1999 return, petitione r deducted tie balance (i .e ., $11,701), as well as the other itemized deductions claimed in the 1999 Schedule A that were not subject to the two-percent floor imposed by section 67(a) .

Petitioner included Schedule C, Profit or Loss From Busines s (1999 Schedule C), as part of his 1999 return . In that schedule, petitioner showed his "Principal business or profession, includ- ing product or service" as "COMPUTER CONSULTING" and his "Busi- ness name" as "POWERPOINT CONSULTING" . In the 1999 Schedule C, petitioner showed gross income of $2,000 and claimed tota l expenses of $13,563 and a net loss of $11,563 . The claimed total expenses in the 1999 Schedule C included as an expense for "Legal and professional services" $5,000 ($5,000 claimed legal expense) of the $5,500 that petitioner paid to Mr . Christie to represent him in defending against the criminal charges . In determining the taxable income reported in petitioner's 1999 return, peti- tioner deducted the total (i .e ., $11,563) net loss that peti- tioner claimed in the 1999 Schedule C .

On August 4, 2005,2 respondent issued to petitioner a notice of deficiency (notice) for his taxable year 1999 . In that notice, respondent disallowed, inter alia, the $5,000 claimed legal expense in the 1999 Schedule C . In the notice, responden t 'The parties stipulated that respondent issued the notice to petitioner on May 31, 2005 . That stipulation is clearly contrary to the facts that we have found are established by the record, and we shall disregard it . See Cal-Maine Foods, Inc . v . Commis- sioner , 93 T .C . 181, 195 (1989) . The record establishes, and we have found, that respondent issued the notice to petitioner on Aug . 4, 2005 .

also determined that petitioner is liable for his taxable year 1999 for the accuracy-related penalty under section 6662(a) .

OPINIO N

Petitioner bears the burden of proving that the determina- tions in the notice are erroneous .3 Rule 142(a) ; Welch v .

Helverina , 290 U .S . 111, 115 (1933) . Moreover, deductions are a matter of legislative grace, and petitioner bears the burden of proving entitlement to any deduction claimed .

INDOPCO, Inc . v .

Commission r, 503 U .S . 79, 84 (1992) . Petitioner was required to maintain r cords sufficient to establish the amount of any deduction claimed . Sec . 6001 ; sec . 1 .6001-1(a), Income Tax Regs .

$5,000 Claimed Legal Expens e It is petitioner's position⁴ that he is entitled to deduct in the 199 Schedule C the $5,000 claimed legal expense .

A tax ayer is entitled to deduct under section 162(a) expenses for legal fees "if the suit against the taxpayer `arises in connect on with' or `proximately results from' the taxpayer's business o profit-seeking activity .

United States v . Gilmore , 372 U .S . 3 , 48 (1963) ; Kornhauser v . United States , 276 U .S .

3Petit'oner does not claim that the burden of proof shifts to respond Ent under sec . 7491(a) . In any event, petitioner has failed to stablish that he satisfies the requirements of sec . 7491(a)(2) . On the record before us, we find that the burden of proof does not shift to respondent under sec . 7491(a) .

'Although the Court ordered petitioner to file a posttrial brief , he ailed to do so .

145, 153 (1928) ."

O'Malley v . Commissioner , 91 T .C . 352, 361-362 (1988) . In determining whether such expenses are deductible, we must focus on "the origin and character of the claim with respect to which [the] expense was incurred" .

United States v . Gilmore , supra at 49 .

In support of his position that he is entitled to deduct in the 1999 Schedule C the $5,000 claimed legal expense, petitioner testified :

It was in the process of building up my business . I was in computer consulting, computer software, and it was computer equipment that I had tried to purchase at a slight discount .

Petitioner did not present any other evidence in support of his position with respect to the $5,000 claimed legal expense .

On the instant record, we find that petitioner has failed to carry his burden of establishing that the criminal proceeding in which Mr . Christie represented petitioner arose in connection with or proximately resulted from a business or profit-seeking activity of petitioner . On that record, we further find that petitioner has failed to carry his burden of establishing that the origin and the character of the claim with respect to which the $5,000 claimed legal expense was incurred was a business or profit-seeking activity of petitioner .

On the record before us, we find that petitioner has failed to carry his burden of establishing that he is entitled to deduct in the 1999 Schedule C the $5,000 claimed legal expense .

Certain Claimed Gift s Petitioner did not claim any gifts as unreimbursed employee expenses in the 1999 Schedule A included as part of his 1999 return . t trial, however, petitioner maintained that he is entitled to deduct as unreimbursed employee expenses for his taxable year 1999 gifts totaling $1,600 that he claims he gave t o customers nd prospective customers of McKendree (claimed gifts) .

Secti n 162(a) generally allows a deduction for ordinary and necessary xpenses paid or incurred during the taxable year in carrying o any trade or business . A taxpayer is entitled to deduct and r section 162(a) unreimbursed employee business expenses .o ly to the extent that the taxpayer demonstrates that such taxpayer could not have been reimbursed for such expenses by such taxpa er's employer .

Podems v . Commissioner , 24 T .C . 21, 23 (1955) . 5 Section 274(b) provides :

SEC . 74 . DISALLOWANCE OF CERTAIN ENTERTAINMENT, ETC ., EXPENSES .

db) Gifts .-- (1) Limitation .--No deduction shall be al- owed under section 162 or section 212 for any xpense for gifts made directly or indirectly t o any individual to the extent that such expense, hen added to prior expenses of the taxpayer fo r 'See a so Putnam v . Commissioner , T .C . Memo . 1998-285 ; Marshall v . Commissioner , T .C . Memo . 1992-65 .

gifts made to such individual during the same taxable year, exceeds $25 . For purposes of this section, the term "gift" means any item excludable from gross income of the recipient under section 102 which is not excludable from his gross income under any other provision of this chapter, but such term does not include-- (A) an item having a cost to the tax- payer not in excess of $4 .00 on which the name of the taxpayer is clearly and perma- nently imprinted and which is one of a numbe r of identical items distributed generally by the taxpayer, o r (B) a sign, display rack, or other pro- motional material to be used on the business premises of the recipient .

For certain kinds of expenses otherwise deductible under section 162(a), such as expenses for gifts, a taxpayer must satisfy certain substantiation requirements set forth in section 274(d) before such expenses will be allowed as deductions .

In order for petitioner's claimed gifts to be deductible, such gifts must satisfy the requirements of not only section 162(a) but also section 274(d) . To the extent that petitioner carries his burden of showing that the claimed gifts satisfy the requirements of section 162(a) but fails to satisfy his burden of showing that such gifts satisfy the recordkeeping requirements of section 274(d), petitioner will have failed to carry his burden of establishing that he is entitled to deduct such gifts, regard- less of any equities involved . See . sec . 274(d) ; sec . 1 .274- 5T(a), Temporary Income Tax Regs ., 50 Fed . Reg . 46014 (Nov . 6, 1985) .

The ecordkeeping requirements of section 274(d) will preclude petitioner from deducting any expenditure otherwise allowable under section 162(a ) for a gift unless he substantiates the requi ite elements of each such expenditure .

See sec .

274(d ) ; s c . 1 .274-5T ( a), Temporary Income Tax Regs ., 50 Fed .

Reg . 4601 ( Nov . 6 , 1985 ) .

A taxpayer is required t o substantiate each element of an expenditure or use * * by adequate records or by sufficient evidence corr borating his own statement . Section 274(d) con- templates that a taxpayer will maintain and produce such substantiation as will constitute proof of each expe diture or use referred to in section 274 . Written evidence has considerably more probative value than oral evidence alone . In addition, the probative value of written evidence is greater the closer in time it relates to the expenditure or use . A contemporaneous log is not required, but a record of the elements of an expe diture or of a business use of listed property made at or near the time of the expenditure or use, supp rted by sufficient documentary evidence, has a high degree of credibility not present with respect to a statement prepared subsequent thereto when generally then is a lack of accurate recall . Thus, the corrobo- rative evidence required to support a statement not made at or near the time of the expenditure or use must have a high degree of probative value to elevate such stat ment and evidence to the level of credibilit y refl cted by a record made at or near the time of the expe diture or use supported by sufficient documentary evid nce . The substantiation requirements of section 274(c) are designed to encourage taxpayers to maintain the ecords, together with documentary evidence, as provided in paragraph (c)(2) of this section [1 .274-5T, Temp rary Income Tax Regs .] .

Sec . 1 .27 -5T(c)(1), Temporary Income Tax Regs ., 50 Fed . Reg .

46016-46017 (Nov . 6, 1985) .

The Elements that a taxpayer must prove with respect to an expenditu e for a gift are : (1) The amount of each expenditure for a gift, i .e ., the cost of the gift to the taxpayer ; (2) the time of each such expenditure, i .e ., the date of the gift ; (3) the description of each such expenditure, i .e ., a description of the gift ; (4) the business purpose of each such expenditure, i .e ., the business reason for the gift or nature of the business benefit derived or expected to be derived as a result of the gift ; and (5) the business relationship of each such expenditure, i .e ., the occupation or other information relating to the recipi- ent of the gift, including name, title, or-other designation, sufficient to establish business relationship to the taxpayer .

Sec . 1 .274-5T(b)(5), Temporary Income Tax Regs ., 50 Fed . Reg .

46016 (Nov . 6, 1985) .

Petitioner testified that he did not use the $1,600 McKendree driving allowance to pay for vehicle expenses, as required by McKendree's reimbursement policy . Instead, according to petitioner's testimony, he used that driving allowance to pay for the claimed gifts totaling $1,600 to customers and prospec- tive customers of McKendree . Petitioner testified :

I would basically purchase very inexpensive gifts generally under $20, give it either to potential cli- ents or give it to present clients just as a way of greasing the skids . So all the gifts I gave I kept track of . I know what days I gave it on .

Sometimes I don't have exactly who I gave it to, but other times I did . I wasn't exact about writing down the name of the person . All that was done in that year . It was fully expensed, and I basically kept track of that .

* * * * I gave the gifts out on a regular basis, and that was basically it . They were small gifts, no receipts needed because they were all under $20 .

Petitioner's testimony fails to establish, inter alia , (1) the re ipient of any claimed gift, (2) the business relation- ship to Mc endree or to petitioner of the recipient of any claimed gift, (3) the amount of any claimed gift, (4) the date of any claime 1 gift, (5) a description of any claimed gift, o r (6) the bu iness purpose of any claimed gift . We shall not rely on petitioner's testimony to establish his position with respect to the cla med gifts . Except for that testimony, petitioner presented o evidence with respect to the claimed gifts .

The r cord establishes that McKendree did not require petitioner to provide gifts to its customers or its potential customers . The record does not establish that gifts to customers .

and prospective customers of McKendree were employee business expenses urder McKendree's reimbursement policy .

Assuming arguendo that petitioner had established that he made the claimed gifts to customers and prospective customers of McKendree a d that such claimed gifts were employee business expenses un er McKendree's reimbursement policy, petitioner admitted at trial that he did not submit any reimbursement forms for any suc gifts, as required by McKendree's reimbursement policy . On the instant record, we find that petitioner has failed to carry his burden of establishing that he could not have been reimbursed by McKendree for the claimed gifts .

On the record before us, we find that petitioner has failed to carry his burden of establishing that he is entitled for his taxable year 1999 to the deduction under section 162(a) that he claims as unreimbursed employee business expenses for the claimed gifts . 6 Accuracy-Related Penalt y It is respondent's position that petitioner is liable for his taxable year 1999 for the accuracy-related penalty under section 6662(a) because of negligence or disregard of rules or regulations under section 6662(b)(1) .

The term "negligence" in section 6662(b)(1) includes any failure to make a reasonable attempt to comply with the Code .

Sec . 6662(c) . Negligence has also been defined as a failure to do what a reasonable person would do under the circumstances .

See Leuhsler v . Commissioner , 963 F .2d 907, 910 (6th Cir . 1992), affg . T .C . Memo . 1991-179 ; Antonides v . Commissioner , 91 T .C .

686, 699 (1988), affd . 893 F .2d 656 (4th Cir . 1990) . The ter m 'Assuming arguendo that petitioner had established the deductibility under sec . 162(a) of the claimed gifts, he would still have to satisfy the requirements of sec . 274(b) and (d) and the regulations thereunder . On the record before us, we find that petitioner has failed to satisfy those requirements . See sec . 274(b) and (d) ; sec . 1 .274-3, Income Tax Regs . ; sec . 1 .274- 5T(b)(5), Temporary Income Tax Regs ., 50 Fed . Reg . 46016 (Nov . 6, 1985) .

"disregar " includes any careless, reckless, or intentional disregard Sec . 6662(c) .

Fail re to keep adequate records is evidence not only of negligent , but also of intentional disregard of regulations .

See sec .

.6662-3(b)(1) and (2), Income Tax Regs . ; see also Ma non v . Co mm issioner, 73 T .C . 980, 1008 (1980) .

The accuracy-related penalty under section 6662(a) does not apply to any portion of an underpayment if it is shown that there was reasonable cause for, and that the taxpayer acted in good faith with respect to, such portion . Sec . 6664(c)(1) . The determination of whether the taxpayer acted with reasonable cause and in goo faith depends on the pertinent facts and circum- stances, including the taxpayer's efforts to assess such tax- payer's pr per tax liability, the knowledge and experience of the taxpayer, and the reliance on the advice of a professional, such as an acco ntant . Sec . 1 .6664-4(b)(1), Income Tax Regs .

Respondent has the burden of production under section 7491(c) wi h respect to the accuracy-related penalty under section 66 2 . To meet that burden, respondent must come forward with suffi ient evidence indicating that it is appropriate t o impose than penalty .

Higbee v . Commissioner , 116 T .C . 438, 44 6 (2001) . Although respondent bears the burden of production with respect to the accuracy-related penalty that respondent deter- mined for petitioner's taxable year 1999, respondent "need not introduce evidence regarding reasonable cause * * * or simila r provisions . * * * the taxpayer bears the burden of proof with regard to those issues ."

Id .

Petitioner conceded certain determinations that respondent made in the notice . As a result, petitioner has acknowledged that an underpayment exists for his taxable year 1999 .

With respect to the accuracy-related penalty under section 6662(a) that respondent determined for petitioner's taxable year 1999, petitioner testified :

I keep as accurate records as I always have . I use a computer program to do my taxes . I'm pretty precise about what I put in there and back it up to the best of my ability . I've done this for 30 years . Well, not computerized, but I've used a computer since 1988 doing my taxes .

* * * * I always go through it, the computer program will check it for any discrepancies, and even then I will go back through it and check it again . So all the calculations are done by the computer, but I do double- check, and the computer will flag anything that is a discrepancy .

The record in this case does not contain any of the records that petitioner testified he maintained . We are not required to, and we shall not, accept petitioner's uncorroborated, self- serving, and conclusory testimony about maintaining records . See Lerch v . Commissioner , 877 F .2d 624, 631-632 (7th Cir . 1989), affg . T .C . Memo . 1987-295 ; Geiger v . Commissioner , 440 F .2d 688, 689-690 (9th Cir . 1971), affg . per curiam T .C . Memo . 1969-159 ; Shea v record, dmmissioner , 112 T .C . 183, 189 (1999) . On the instan t find that petitioner did not maintain the records require d section 6001 and section 1 .6001-1(a), Income Ta x Regs . On that record, we further find that any unidentified records t at petitioner may have maintained were not adequat e under tho e provisions . On the instant record, we find that the burden of production that respondent has under section 7491(c) i s satisfied .

See sec . 1 .6662-3(b)(1) and (2), Income Tax Regs .

Exce t for the testimony quoted above, petitioner presented no eviden e, and made no argument, with respect to the accuracy- related p nalty under section 6662(a) that respondent determine d for petitiloner's taxable year 1999 . On the instant record, w e etitioner has failed to carry his burden of showin g that he was not negligent and did not disregard rules or regula- tions, or therwise did what a reasonable person would do, with respect t o the underpayment for that year .

On t h instant record, we further find that petitioner has failed to arry his burden of showing that there was reasonable cause fo r and that he acted in good faith with respect to, the underpayme t for the year at issue . See sec . 6664(c)(1) .

On t h record before us, we find that petitioner has failed to carry h burden of establishing that he is not liable fo r 1999 for t e accuracy-related penalty under section 6662(a) .

We ha e considered all of the parties' contentions and arguments that are not discussed herein, and we find them to be without merit, irrelevant, and/or moot .

To reflect the foregoing and the concessions of the parties , Decision will be entered unde r Rule 155 .

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