Timothy P. Foster, Petitioner

T .C . Memo . 2009-27 4

UNITED STATES TAX COUR T

TIMOTHY P . FOSTER, Petitioner v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 24411-07 . Filed November 25, 2009 .

Timothy P . Foster , pro se .

John W . Strate , for respondent .

MEMORANDUM FINDINGS OF FACT AND OPINIO N

HAINES, Judge : Respondent determined a deficiency . of $265,665 and a section 6662(a) penalty of $53, .133 with respect to petitioner's Federal income tax for 2005 .1 The issues fo r 'Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure . Amounts are rounded to the nearest dollar .

SERVED NOV 2 5 2009

decision are : (1) Whether petitioner is entitled to business, expense deductions for labor costs and,rental payments-for 2005 ; and (2) whether petitioner is . liable for the negligence penalty under section 6662 .

FINDINGS `OF FACT Some of-the facts have been stipulated and are so found .

The stipulation of facts, together with attached exhibits, i s incorporated herein"by-this reference .-,At the time petitioner ...

filed his petition, he resided in California .

Petitioner is in the commercial relocation business . Sinc e 2004 he has . been the sole proprietor of C&C Services, ,a busines s relocation company . Before striking-out on his own he was a .salesperson at several other business relocation companies , including Golden State Services .

Commercial relocation is a labor- and cash-intensive = business . It involves the moving of heavy equipment an d machinery . from one site to another and requires large amounts of storage space . In 2005'petitioner hired two unrelated companies, Piece of-Mind and California- State Interiors, y,to provide'contract, laborers for C&C Services .to(cid:127)staffspecific relocation . . projects .

Petitioner did not pay„these contract laborers__directlybut rather paid Piece of Mind and California State Interiors wit h checks and in ;cash for meeting C&C Services' staffing requirements . Petitioner sent invoices to clients for services 4t C&C Services performed, and in return would receive checks tha t he placed in his bank account .

Petitioner hired two project managers, Telemu Jennings an d Navassa Brown, to supervise and coordinate the contract laborers .

Petitioner paid Mr . Jennings and Mr . Brown in cash at least 70 percent of the time .

Petitioner rented part of :a large warehouse in San Jose from California State Interiors in order to store clients' materials while their businesses . were being relocated by .C&C Services .

Petitioner often combined''rental and staffing payments in the checks he made to California State Interiors .

Petitioner did not keep a general ledger, cash expenditure journal, or computer program to keep track of his, income and expenses . Petitioner had studied business .' finance at~San Jose State University for 3 years, in the 1970s and taken a basic accounting course .

Petitioner hired an old acquaintance, Bill Miller, to, prepare his 2005 return . Mr . Miller had helped employees of Golden State Services . prepare their taxes while petitioner was a member of that firm . Petitioner never attempted to ascertain Mr .

Miller's qualifications to prepare tax returns, . and it is unclear whether Mr . Miller was a licensed accountant . Mr . Miller passe d away in February 2007 .

_ 4 - On,April .17, 2006, petitioner filed Form 1040, U .S .

Individual Income Tax Return, for,2005 . -Onhis . .Schedule C , Profit or Loss From . Business,,petitioner claimed deductions for business expenses consisting of,wages,ofo$603,662,_contract labor of $8,160, and rental costs of, .(cid:127)$120,,000 . Petitioner alsofiled, multiple Forms 1099-MISC, Miscellaneous Income,-reporting=that h e paid various independent contractors,1$645,524, in 2005 . 2 July 23, 2007, respondent'sent .;a notice .of deficiency t o petitioner disallowing,his business : expense, :deductions 'for wages, contract labor, and-rental costs .,, ,Petitioner filed a timel y petition with this-Court, :and trial was,held on November 6, 2008 , .in,San Francisco, . California .

OPINIO N

L .

Burden of Proo f Generally,,, the Commissioner's determinations in a; 'notice . of deficiency are presumed correct, and the taxpayer has the burde n of proving that those determinations are erroneo -us .` See Rul e 142. (a ) ;. Welch v . Helvering ,,; 2 90 . ; U . S-. 11'1, 115 ( 1933 ) In-,certain circumstances , however , . section 7491(a ) ,,(1) places theburden"of proof on the Commissioner Petitioner has not alleged that(cid:127) section7491 . is applicable , norhas .. he established compliance ' 2Petitioner lost access to the original copies of these Forms 1099-MISC when Mr . Miller passed away .

I with the requirements of section 7491(a)(2)(A) .' Therefore, the - 5 burden of proof does not shift to respondent .

II .

Claimed Business Expense Deduction s Deductions are strictly a matter of legislative- grace, an d taxpayers must satisfy the specific requirements for any .deduction claimed . See INDOPCO, Inc . v . . Commissioner , 503 U .S .

79, 84 (1992) ; New Colonial Ice Co . v . Helvering, 292 U .S . 435, 440 (1934) . 'Taxpayers bear the burden of substantiating the amount and purpose of any claimed deduction . See Hradesky v .

Commissioner , 65 T .C . `87 (1975), affd .' per curiam 540 F .2d 821 (5th Cit . 1976 ) .

Section 162(a') allows a'deduction for all ordinary and necessary expenses paid or incurred by a taxpayer in carrying on any trade or business . An expense is considered ordinary if commonly or frequently incurred in the trade or business of the taxpayer .

Deputy v . du Pont , 308 U .S . 488, 495-496 (1940) . An expense is necessary if it is appropriate or helpful in carrying on a taxpayer's trade or business .

Commissioner v . Heininger , 320 U .S . 467, 471 (1943) ; Welch v . Helverina , supra at 113 .

A taxpayer must maintain records sufficient to substantiat e the amounts of the deductions claimed . Sec . 1 .6001-1(a), Incom e Tax Regs . If a taxpayer establishes that an expense is deductible but is unable to substantiate the precise amount, we may estimate the amount, bearing heavily against the taxpayer whose inexactitude is of his own making .

. Cohan v . . Commissioner ,

,, ;withoutsuch .a basis, any allowance would amount to unguide d largesse . -Williams v . United States , -245,F.- 2d 559, 560-561 (5th Cir . 1957) ; Vanicek . v . Commissioner ,, 85 -T .C . 731, 742-743 .,(1985) A . . , Wages and Contract Labor Expenses_ .

, Petitioner claims that he is entitled to labor cost deductions of $617, 708afor .2005 . Taxpayer's operating ,,a trade or business are entitled to deduct "salaries or other compensation for personal services " which they can substantiate . Sec .

162 (a)'( 1) ; sec . 1 .162-7(a), ,Income Tax Regs ., o Petitioner submitted . four Forms 1099-MISC for,2005 listing payments he made to his project managers and labor providers in the following amounts :

Labor. Contractor Telemu Jennings Navassa Brown Piece of Mind Jesse Mausa / California State ; Interiors' Amount $38,70 0 52,00 0 275,0,0 0 252,00 8 'Petitioner's Form 10994MISCfor'California State Interiors also listed Jesse Mausa as a recipient,of',, petitioner's payments . Petitioner did not provide a taxpayer identification :„number for Mr . Mausa, . .who presumablyVis an officer/owner of California' State' Interiors .

As petitioner lost his original Forms 1099 - MISC when Mr . Miller passed away , : these reconstituted forms represent petitioner's best recollection of his labor, costs . for 2005 . 3 Petitioner also submitted a California State Interiors "aging" worksheet that states C&C Services ' invoices and payments for 2005 .

The document lists accrued charges for California State Interiors ' labor procurement services as $252 , 008 and C&C Services ' payments for both labor procurement and rent as $161,920 .

Petitioner ' s testimony and submitted . documentation are inadequate to meet his burden . to substantiate any of his claimed labor expenses .

A schedule of expenses is not sufficient to substantiate claimed deductions .

Lofstrom v . Co mmissioner , 125 T .C . 271 , 278 (2005 ) ; Cluck v . Co mmissioner , 105 T .C . 324, 338 (1995 ) ; see also Paal v . Co mmissioner., T .C . Memo . 1969-284 (holding that salary expense for secretary to type manuscript could be substantiated with introduction of manuscript int o r evidence), affd . 450 F .2d 1108 (9th Cir . 1971) .

However, petitioner's testimony, coupled,with the labor- intensive nature of his business, indicates that petitioner incurred substantial labor costs for 2005 . Although petitioner' s 3Although neither party submitted petitioner's original Forms 1099-MISC, respondent's electronic records indicate that petitioner reported labor costs of $645,524 for 2005 . Petitioner's reconstructed Forms1099-MISC list costs of $617,708 for 2005 . Petitioner could not account for this discrepancy .

testimony was too, vague to allow,,us, to estimate :'' hi .s pa;ymen .ts It o .P~Iece„rof' Mind 'and California State .-Interior s contract laborers ; ." see Vanicek .

.v . =Commissioner ,-. 4supra' Lat petitionericredibly paid:. 'each ;°o f and . -Navassa ;Brown, a,regula-r Accordingly we', .find that Mr .

.Jennings,;-and` Mr .. Brown= were employees--of 'Petit ione`r . :for 2005 an d that petitioner paid,- them ,, wages . of °$38 ,700 and .$ 52`,-000, ;respectively . See Cohan v . Commissioner , supra , .,at 544 7 .

Rental, -Cost s Petitioner., claims that he ; paid ,California~.: .Stat e $10, 000, per' month in ., 200 .5 .in, order ,tor rent a" .portion :-o f kwarehouse 5 Taxpayers, .are-entitled, .a~,Schedule⁴ C .expenses for rental . property w used in ea . trade ' can subs tantiate, .them ..°, Sec . 162-(a) (3) ; sec . 1 .162-1 ( a - Tax Reg s "aging"; .:worksheet submitted . by petitioner show ,tha t petitioner paid, California, State :Interiors `more ::-'than'. $1:2 :0 , 4Petitioner -credibly testified that,he : paid .Mr . ., Jennings, $15 , 'per hour and ' Mr : Brown $25 per hour .

SPetitioner's petition does not disputerespondent'` s disallowance of netitioner .'s rental cost<deductvions ; Petitione r 'has-not moved-to amend, his petition, to„'assert this . issue ., : Nonetheless,, ;since the,_issue :was,;raisedat .trial and respondent addressed , . it ,on-briefweaassume .,that,the :. rental' aost,'deduction issue was . ,tried by consent - 0 f the . parties See Rule 41"("b) (1) ` e , 9 - per year to California State Interiors as part of a,joint lease on the warehouse-but often paid late and thus sometimes paid California State Interiors more or less than $10,000 per month .6 On the basis-of the record, we are able to approximate petitioner's rental costs considering the aging worksheet and petitioner's testimony regarding his warehouse . 'We find that petitioner-is entitled to deduct $120,000-in rental costs for 2005 as a business expense . See Cohan v . Commissioner , supra at 544 .

III . Accuracy-Related Penalty ' ' Respondent determined that petitioner` is` liable for the accuracy-related penalty under'section'6662(a) for 2005 . The accuracy-related penalty .applies,to any underpayment of ta x required to be .shown(cid:127)on aireturn that -is attributable t negligence or disregard of rules or regulations under section 66,62 (b) (1) .

Negligence is defined as any failure to make a reasonable attempt to comply with the provisions of the Internal . Revenue Code . Sec . 6662 .(c) . However, section 6664(c)'(1) provides that a penalty under section 6662 will not~be imposed on any .portion of an underpayment if the taxpayer shows reasonable cause for such portion of the underpayment and that the taxpayer acted in goo d 6The aging worksheet indicates that petitioner did not make any payments to California State Interiors in .2005 until August of that year .

10 - faith r with rcrespect to .such portion ., .z Reliance on `the advice : of profess onal,t _ such as a -certified , .public accountant`, Xmay .

constitute a showing of reasonable, . cause under,-all .:~the =facts and circumstances . such ,r ;elian .ce is .reasonabl e ' and . the .taxpayer , acted good faith ., -Henry v . Commissioner , 1-.70 F .3d "' 1217. ; ;:121 9 1223; (9th Cir . ,199 :9), , ,- revg ,. T . C .' Memo .. 1997 - 29' Bet'son . v .

Commissioner , 802 2d 365, . 372 - (9,th Cir ., ;1986) , =affg : in part and r.evg . in part T .C . . Memo . . 1984-264 ; sec . 1 .-6664-4 (b),(1) (c) , Income".' Tax Regs .

. To prove reasonable cause based on the receipt of professional advice,, a taxpayer',,must show that,,he :,reasonabl y relied in , good ,,~fai;t h upon a . ,.qualified . advi- ser, after(cid:127)_full .; disclosure' of all necessary: .and -relevant :facts . . Collins . v .

': .; , Commissioner , ,85,7 . Fr .2d 1383, 1386,.(cid:127) (9th, Cir .17_198 .8) .°, affg .: -D.iste r v . Commissioner , T .C . Memo . 1987=2,17 ; : sec . 1 .-6664-4'(b)`(1), ,,Incom e Tax Reg s Under section 7491(c) the Commissioner has the burden of A production . :with.- respect to , the taxpayer's :-liability for . th e penalty ., provided ; by section .66,62 and , must come .,, forwa:rd with , "sufficient evidence to impose the penalty ., Higbee v⁴ -' .

Commissioner ,-\116 T .:C .,, 438, 446-447 `(2001) : . But once the .'

., Commissioner= meets that burden,, the taxpayer' has° the . burden o f proof concerning, ;whether the. Commissioner's,determination .to , impose the penalty-is correct .

Allen v . Commissioner ,, .

.T .C . ..Memo .

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We conclude that respondent has met his burden of production under section 6662 . Respondent has demonstrated that petitioner incorrectly claimed(cid:127)Schedule C deductions for 2005 and failed'to maintain records to substantiate his claimed deductions : These facts indicate that petitioner in general failed to make a reasonable attempt to .comply with the provisions of the Internal Revenue Code .

Petitioners is otherwise unable to show why respondent's determination to impose the penalty is incorrect . Petitioner demonstrated that he relied on the advice of Mr . Miller to prepare his 2005 return but failed show that Mr . Miller was a qualified adviser . Nor has petitioner offered any reasonable cause for his inability to substantiate his claimed deductions, particularly given his level of education and experience in the business relocation industry . Accordingly, with the exception of the portion of the penalty attributable to adjustments to petitioner's business expense deductions for payments to Telemu Jennings and Navassa Brown and for rental costs, petitioner is liable for the accuracy-related penalty under section 6662(a) .

- .12 - reaching, o.ur holdings,:herein,, . we have ,considered' all .

made, and,, to the extent not mentioned . above , them, ;to rbe moot, irrelevant, or 'without, merit ; .

--reflecti'the ;foregoing,

39. F .2d 540, '543-544,(2d Cir .1930) The taxpayer must present sufficient evidence for the Court=to,-form-an estimate because :