BLODGETT v. COMMISSIONER

MEMORANDUM FINDINGS OF FACT AND OPINION

FOLEY, JUDGE: By notice dated November 19, 1999, respondent determined deficiencies, additions, and penalties relating to petitioner's Federal income taxes as follows:

               Sec. 6651(a)(1)    Sec. 6662(a)

   Year    Deficiency     Addition       Penalty

   ____    __________     ________       _______

   1994     $ 10,291      $ 2,573       $ 2,058

   1995     131,218       4,371        26,244

   1996      94,529        --        18,906

Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. After concessions, the issues are whether petitioner is: (1) Entitled to certain sole proprietorship expense deductions; (2) entitled to employee business expense deductions; *175 (3) liable for section 6651(a)(1) addition to tax; and (4) liable for section 6662(a) accuracy-related penalties.

FINDINGS OF FACT

When the petition was filed, petitioner resided in Orlando, Florida. During the years in issue, he was an investment broker and was married to Norma Blodgett.

In December 1991, petitioner agreed to operate a branch office of Quantum Financial Services, Inc. (Quantum). In the middle of 1992, Quantum terminated the agreement. In 1994, petitioner made a claim against Quantum in an arbitration hearing before the National Futures Association. In the arbitration, petitioner's counsel was Thomas Kolter.

After the termination by Quantum, petitioner operated a sole proprietorship called Equator Capital Management (Equator). From mid-1994 through 1996, he was an employee of Daiwa Securities, Inc. (Daiwa). During the years in issue, petitioner paid and documented business expenses.

Petitioner hired certified public accountants and provided them with the information to prepare his returns. On October 15, 1995, petitioner's 1994 return was due (i.e., after extensions). On November 22, 1997, petitioner signed his 1994 return. In a letter*176 dated July 15, 1998, respondent stated that he was beginning to examine the 1994 return.

On October 15, 1996, petitioner's 1995 return was due (i.e., after extensions). On November 22, 1996, respondent received the 1995 return. Petitioner filed his 1996 return in a timely manner. In a letter dated February 11, 1999, respondent stated that he was beginning to examine petitioner's 1995 and 1996 returns.

OPINION

Petitioner contends that he is entitled to all of the deductions shown on his returns. Respondent contends that petitioner is entitled only to the deductions conceded by respondent.

Section 7491(a)(1), relating to examinations commenced after July 22, 1998, provides that if, "in any court proceeding, a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax * * * the Secretary shall have the burden of proof with respect to such issue." The burden, however, shall not be on the Secretary unless, among certain other conditions, "the taxpayer has complied with the requirements under this title to substantiate any item". Sec. 7491(a)(2)(A). Petitioner, however, *177 did not comply, as set forth below, with the substantiation requirements relating to certain items. See secs. 6001, 274(d); Higbee v. Commissioner, 116 T.C. 438, 2001 U.S. Tax Ct. LEXIS 29, 116 T.C. No. 28 (2001); H. Conf. Rept. 105-599, at 241 (1998), 1998-3 C.B. 747, 995 (stating that "taxpayers must meet applicable substantiation requirements, whether generally imposed or imposed with respect to specific items, such as * * * meals, entertainment, travel, and certain other expenses" (fn. refs. omitted)).

Accordingly, respondent, pursuant to section 7491(a), does not have the burden of proof as set forth below. Respondent does, however, have the burden of production, pursuant to section 7491(c), relating to any 1995 or 1996 penalty or addition to tax.

On his 1992, 1993, and 1994 returns (i.e., Schedule C, Profit or Loss From Business), petitioner claimed expenses of $ 164,666, $ 355,971, and $ 185,731, of which $ 32,123, $ 16,467, and $ 13,070 were travel, meal, or entertainment expenses, relating to Quantum and Equator. Respondent contends that the record substantiates $ 31,318, $ 211,184, and $ 97,321 of 1992, 1993, and 1994 expenses, respectively, but no travel, meal,*178 or entertainment expenses as required by section 274(d). Petitioner contends that documents substantiating the rest of his expenses are in the possession of Mr. Kolter, who will not return them. Petitioner further contends that he testified against Mr. Kolter and that Mr. Kolter has been incarcerated for fraud.

Section 162(a) allows as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 274(d), relating to travel, meal, entertainment, and gift expenses, requires a taxpayer to substantiate

   by adequate records or by sufficient evidence corroborating the

   taxpayer's own statement[,] (A) the amount of such expense or

   other item, (B) the time and place of the travel, entertainment,

   amusement, recreation, or use of the facility or property, or

   the date and description of the gift, (C) the business purpose

   of the expense or other item, and (D) the business relationship

   to the taxpayer of persons entertained, using the facility or

   property, or receiving the gift. * * *

Section 1.274-5(c)(5), Income Tax Regs.*179 , states:

   Where the taxpayer establishes that the failure to produce

   adequate records is due to the loss of such records through

   circumstances beyond the taxpayer's control, such as destruction

   by fire, flood, earthquake, or other casualty, the taxpayer

   shall have the right to substantiate a deduction by reasonable

   reconstruction of his expenditures.

Mr. Kolter's representation of petitioner related to Quantum (i.e., 1992) but not Equator (i.e., 1993 and 1994). Petitioner's failure to produce adequate records relating to 1992 is due to the loss of such records, but he has not offered any reconstruction of his expenditures.

There is no evidence in the record to substantiate adequately the section 162(a) expenses in excess of those conceded by respondent. In addition, we believe that petitioner did make some business trips during the years in issue, but there is insufficient evidence to determine the facts required by section 274(d). Thus, petitioner is not entitled to deduct such expenses, and, pursuant to Lone Manor Farms, Inc. v. Commissioner, 61 T.C. 436, 440 (1974) (stating that the Court may compute "the correct*180 tax liability for a year not in issue when such a computation is necessary to a determination of the correct tax liability for a year that has been placed in issue"), the carryovers from 1992 and 1993 shall be computed accordingly.

On Forms 2106, Employee Business Expenses, of his 1994, 1995, and 1996 returns, petitioner claimed employee business expenses of $ 20,103, $ 56,137, and $ 24,903. We conclude that the record contains evidence sufficient to substantiate section 162(a) deductions of $ 3,804, $ 33,419, and $ 6,056, relating to the respective years in issue, but not the deductions governed by section 274(d) (i.e., travel, meal, entertainment, and gift expenses).

Section 6651(a)(1) imposes an addition to tax for failure to file a required return on the date prescribed, unless it is shown that such failure is due to reasonable cause and not willful neglect. To meet his burden of production pursuant to section 7491(c), respondent "must come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty" but "need not introduce evidence regarding reasonable cause, substantial authority, *181 or similar provisions." Higbee v. Commissioner, supra, 2001 U.S. Tax Ct. LEXIS 29, *18 (slip op. at 15).

Respondent concedes that petitioner is not liable for the 1994 addition to tax. Petitioner's 1995 return was due on October 15, 1996. Respondent has shown that he received the 1995 return on November 22, 1996. Petitioner has not shown that such failure to file by the prescribed date was due to reasonable cause and not willful neglect. See sec. 6651(a)(1). Accordingly, we conclude that respondent has produced sufficient evidence indicating that the section 6651(a)(1) addition is appropriate, and petitioner is liable for the 1995 addition to tax.

Section 6662(a) imposes a penalty on an underpayment of tax required to be shown on a return. Section 6664(c)(1) provides that no penalty shall be imposed if it is shown that there was reasonable cause for the underpayment and that the taxpayer acted in good faith. The determination of whether a taxpayer acted with reasonable cause and in good faith depends upon the facts and circumstances. See sec. 1.6664-4(b)(1), Income Tax Regs. Reliance on the advice of an accountant may demonstrate reasonable cause and*182 good faith. See id.

Respondent concedes that petitioner is not liable for the 1994 accuracy-related penalty, but contends that "petitioner has failed to substantiate even a third of the expenditures at issue in this case." We conclude that petitioner reasonably and in good faith relied on his accountants. Accordingly, he is not liable for the 1995 and 1996 accuracy-related penalties.

Contentions we have not addressed are moot, irrelevant, or meritless.

To reflect the foregoing,

Decision will be entered under Rule 155.