                       T.C. Memo. 2009-133



                      UNITED STATES TAX COURT



                   PAUL RUDNICK, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17500-06.              Filed June 9, 2009.



     Paul Rudnick, pro se.

     Margaret Burow, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     MARVEL, Judge:   Respondent determined a deficiency of

$103,194 and a section 6662(a)1 accuracy-related penalty of

$20,634 with respect to petitioner’s 2004 Federal income tax.



     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                 - 2 -

     After concessions,2 the issues for decision are:

     (1) Whether, and to what extent, petitioner is entitled to

certain deductions claimed on his Schedule A, Itemized

Deductions;

     (2) whether, and to what extent, petitioner is entitled to

business expense deductions claimed with respect to a business

activity known as Eglobal Call Solutions;

     (3) whether petitioner is liable for the 10-percent

additional tax under section 72(t) on early distributions from

qualified retirement plans; and

     (4) whether petitioner is liable for the section 6662(a)

accuracy-related penalty.

                        FINDINGS OF FACT

     Some of the facts have been stipulated.   We incorporate the

stipulation of facts and supplemental stipulation of facts into

our findings by this reference.    Petitioner resided in California

when he petitioned this Court.

     Before 2004 petitioner was employed as president of a

software development company, Five-by-Five Networks, Inc. (Five-


     2
      Respondent concedes the $101 dividend income adjustment.
Respondent also concedes that petitioner is entitled to a home
mortgage interest deduction of $32,905, and petitioner concedes
that he is not entitled to the remaining home mortgage interest
deduction of $3,423. Respondent concedes that petitioner is
entitled to $10,998 of deductions claimed on Schedule C, Profit
or Loss From Business, for a business activity known as 4-Play,
and petitioner concedes that he is not entitled to the remainder
of those deductions claimed.
                                - 3 -

by-Five Networks).    Before and during 2004 petitioner was

involved in various business ventures related to software

development and telephone call centers in Vietnam and the United

States.

Petitioner’s Testimony at Trial

     Petitioner testified regarding his involvement with several

business entities during 2003 and 2004.    Although we find that

petitioner was engaged in a business activity during 2004 under

the name Eglobal Call Solutions, petitioner did not introduce

documents to establish the relationship, if any, between Eglobal

Call Solutions and other business activities mentioned during his

testimony.    We are not willing to make findings of fact regarding

those business activities based solely on petitioner’s

uncorroborated testimony.    However, we summarize petitioner’s

testimony to provide a framework for our holdings.    That summary

is set forth below.

     Five-by-Five Networks3 started a software development center

in Vietnam.   Sometime around December 2003 or January 2004, when

Five-by-Five Networks ran out of money, petitioner acquired as

severance from his employment with Five-by-Five Networks4 the




     3
      The record does not show what kind of entity Five-by-Five
Networks was, nor does the record show who owned it.
     4
      The record does not show in which year (2003 or 2004) this
occurred or whether petitioner included the value of the software
program in his income.
                                - 4 -

rights5 to a software development program that the Vietnam center

was developing.    Specifically, petitioner acquired the rights to

two assets--I-Contact, integrated software that assisted with

Internet sales, and Hey-Voice, call center software that provided

an automated list of options over the telephone.    However, when

petitioner acquired the rights to the software, it was not ready

for immediate use.

     After receiving the rights to the software from Five-by-Five

Networks, petitioner arranged for employees at a Vietnam call

center to integrate the software petitioner had acquired from

Five-by-Five Networks into a software program called Integrated

Agent Desktop.    Integrated Agent Desktop was necessary for

petitioner’s business to operate.    Development and testing of

Integrated Agent Desktop occurred from early 2004 through August

2004.    In March 2004 Integrated Agent Desktop was brought online

in beta version, and in June 2004 it was formally launched.

Around August or September 2004 Integrated Agent Desktop

underwent a major revision.

     In approximately December 2003 or January 2004 petitioner

also obtained6 for $250,000 the rights to several assets from

Eglobal Call Networks, Inc. (Eglobal Call Networks), a


     5
      The record does not disclose how or in what name petitioner
acquired the rights.
     6
      The record does not disclose how or in what name petitioner
acquired the assets.
                               - 5 -

corporation that was in the business of selling calling cards.

Those assets included a Voice Over IP network router in Vietnam,

fiber optic links from San Francisco to Hong Kong and from Hong

Kong to Vietnam, and billing equipment in San Francisco.

Petitioner made a downpayment of $125,000 to Eglobal Call

Networks and paid the balance of the purchase price by giving

Eglobal Call Networks cash to keep its business afloat.7

Petitioner and Eglobal Call Networks did not execute any

agreement or bill of sale formalizing the purchase.   After the

purchase, petitioner began operating the assets jointly with

Eglobal Call Networks.

     During 2004 petitioner effected several transactions using

the name Eglobal Call Networks.    For example, on February 19 and

March 20, 2004, petitioner transacted with Business Wire using

Eglobal Call Networks’s account.   Petitioner also placed an order

with Source Voice Data Systems Solutions under the name Eglobal

Call Networks and signed loan documents as president of Eglobal

Call Networks.   In addition, petitioner had some control of

Eglobal Call Networks’s checking account and used Eglobal Call

Networks to transfer money to Vietnam.




     7
      Petitioner did not introduce any bank records to document
his investment, nor did he explain the relationship between
Eglobal Call Solutions (the business he operated) and Eglobal
Call Networks.
                                    - 6 -

       Petitioner also formed a company called Eglobal Vietnam,

Ltd.       (Eglobal Vietnam).   Petitioner needed Eglobal Vietnam in

order to conduct business in Vietnam.        Eglobal Vietnam operated

the call center in Vietnam.        Although petitioner provided funding

to Eglobal Vietnam, he held no ownership interest.8

       In 2004 Eglobal Vietnam entered into a lease agreement with

Quang Trung Software City Development Co. for a facility in

Vietnam.       Eglobal Vietnam also contracted with Quang Trung

Software City Development Co. to construct a call center facility

in Vietnam.       In July 2004 Eglobal Vietnam moved into the newly

constructed call center facility, and in September 2004 the call

center started generating customer traffic.

       In October 2004 Eglobal Call Solutions began to generate

revenue.       During 2004 Eglobal Call Solutions’s revenue came from

two customers, Tata Consulting and H & R Block.        Eglobal Call

Solutions earned income when employees of the two customers

contacted the call center in Vietnam for technical support

involving software operation.9

       Petitioner employed a bookkeeper in Vietnam to help keep his

business records.       The bookkeeper used Quickbooks to keep

       8
      Petitioner did not introduce any documentation regarding
the formation and ownership of Eglobal Vietnam.
       9
      Petitioner did not explain the relationship between Eglobal
Call Solutions, Eglobal Call Networks, and Eglobal Vietnam, but
his testimony implied that Eglobal Call Solutions income was
generated by the business activity in Vietnam.
                               - 7 -

records, and petitioner reviewed the records when he visited

Vietnam.   The bookkeeper provided petitioner information from the

Quickbooks records to complete his tax returns.

     In 2005 Vietnamese authorities raided the Vietnam facility

because, unbeknownst to petitioner, a manager of Eglobal Vietnam

was operating without a required license.   During the raid the

authorities seized various business records.

Petitioner’s 2004 Return

     Petitioner, a cash basis taxpayer, prepared his 2004 Form

1040, U.S. Individual Income Tax Return (2004 return).

Petitioner’s Schedule A attached to his 2004 return showed the

following:

             Schedule A Expenses               Amount

         Medical and dental expenses1         $41,000
         Taxes
           State and local income taxes         2,621
           Real estate taxes                   10,144
           Personal property taxes              3,450
         Home mortgage interest and points     36,328
         Gifts to charity
           Gifts by cash or check               1,360
           Other than cash or check               112
         Job expenses and most other
           miscellaneous deductions2
             Unreimbursed employee expenses   118,052
             Attorney’s and accountant’s fees 26,575
     1
       After the application of the 7.5-percent floor under sec.
213(a).
     2
       Amounts reflect deductions as reported before application
of the 2-percent limitation under sec. 67(a).
                                 - 8 -

     On the Schedule C, Profit or Loss From Business, for Eglobal

Call Solutions attached to his 2004 return, petitioner reported

gross receipts of $45,060 and the following Schedule C expenses:

                  Schedule C Expenses            Amount

             Advertising                        $34,090
             Commissions and fees                 1,222
             Contract labor                       4,534
             Employee benefit programs            4,532
             Insurance                           12,389
             Legal and professional services      1,459
             Office expenses                      8,123
             Rent or lease
               Other business property           88,045
             Supplies                              2,333
             Taxes and licenses                    3,123
             Travel                                6,123
                                                  1
             Meals and entertainment                6,745
             Utilities                           13,455
             Wages                               96,050
     1
      Amount reflects the deductions for meals and entertainment
expenses as reported before application of the 50-percent
limitation under sec. 274(n).

     Petitioner, who was not yet 59-1/2, reported $208,226 of

taxable pension and annuity income on his 2004 return.

Petitioner attached to his 2004 return Form 5329, Additional

Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored

Accounts.     On Form 5329 petitioner reported early distributions

of $2,895 that were subject to the section 72(t) additional tax

and early distributions of $28,900 that were not subject to

section 72(t) additional tax.10

     10
          It appears that there is a mistake on petitioner’s Form
5329.      He was supposed to report on line 1 all early
                                                       (continued...)
                                    - 9 -

        In a notice of deficiency dated June 1, 2006, respondent

disallowed the medical and dental expenses, unreimbursed employee

expenses, attorney’s and accountant’s fees, and part of the home

mortgage interest and points reported on petitioner’s Schedule A.

Respondent also disallowed all deductions relating to Eglobal

Call Solutions claimed on petitioner’s Schedule C.11       Respondent

also determined that petitioner was liable for section 72(t)

additional tax of $20,823 and a section 6662(a) accuracy-related

penalty of $20,634.

     Petitioner timely petitioned this Court, and a trial was

held.        After trial we kept the record open to allow petitioner to

introduce additional evidence to substantiate his Schedule A and

Schedule C deductions.       Specifically, we instructed petitioner

(1) to arrange for respondent to conduct a telephone interview of

the bookkeeper in Vietnam, (2) to obtain health insurance records

to substantiate his medical expenses, and (3) to provide 2004 and

2005 bank statements with respect to the Eglobal Call Solutions

account and his personal account.       Petitioner did not provide any




        10
      (...continued)
distributions included in income and then, of those distributions
reported on line 1, report on line 2 the distributions that are
not subject to the additional tax.
        11
      Respondent also disallowed all expenses claimed on a
separate Schedule C relating to a business called 4-Play.
However, the parties have resolved this issue by agreement.
                              - 10 -

additional evidence, nor did he file a posttrial brief with the

Court.

                              OPINION

I.   Exhibits 6-P, 7-P, and 8-P

     At trial we reserved ruling on petitioner’s Exhibits 6-P,

7-P, and 8-P.   Exhibit 6-P is a computer spreadsheet showing

various expenses for a 12-month period.    Respondent objected to

Exhibit 6-P on grounds of authenticity, best evidence, and

hearsay and because it was prepared in anticipation of

litigation.   In his brief respondent contends that Exhibit 6-P is

an improper summary, chart, or calculation under rule 1006 of the

Federal Rules of Evidence because the underlying documents used

to prepare the spreadsheet were not made available to respondent

and petitioner provided no testimony regarding the preparation of

the spreadsheet.

     Rule 1006 of the Federal Rules of Evidence provides that the

contents of voluminous writings that cannot conveniently be

examined in court may be presented in the form of a chart,

summary, or calculation.   It also provides that the originals or

duplicates of the summarized writings must be made available for

examination or copying, or both, by other parties at a reasonable

time and place.

     Exhibit 6-P does not show the year to which the spreadsheet

relates or who prepared the spreadsheet.   Petitioner did not
                                - 11 -

present any credible testimony about the source of the amounts

shown in the spreadsheet or what the expenses represented.    In

addition, even though we gave petitioner a posttrial opportunity

to provide to respondent and to the Court documentation

substantiating the expenses he claimed, petitioner did not take

advantage of the opportunity.    Because petitioner did not produce

the underlying documentation that Exhibit 6-P purportedly

summarized as required by rule 1006 of the Federal Rules of

Evidence, we conclude that Exhibit 6-P is inadmissible.

     At trial respondent also objected to Exhibits 7-P and 8-P on

the basis of relevancy because they related to 2003 and not 2004.

Exhibit 7-P is a credit card statement showing charges for

December 2003.   Petitioner argued at trial that Exhibit 7-P is

relevant because he paid the credit card statement in 2004.

However, petitioner did not prove that he paid the credit card

statement in 2004.   We conclude that Exhibit 7-P is not relevant

and therefore is inadmissible.    Exhibit 8-P consists of copies of

the following receipts:   (1) Radioshack receipt dated January 9,

2004, paid in cash, (2) San Francisco International Airport

Parking Receipt dated December 20, 2003, paid in cash, and (3)

Dougherty Shell receipt dated January 29, 2004, paid by credit

card.   We conclude that the San Francisco International Airport

Parking Receipt is not relevant because it was paid in 2003.
                               - 12 -

However, because the other receipts reflect payments in 2004, we

shall admit Exhibit 8-P.

II.   Burden of Proof

      In general, the Commissioner’s determination of a deficiency

is presumed correct, and the taxpayer bears the burden of proving

otherwise.    Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).    Petitioner does not contend that section 7491(a), which

shifts the burden of proof to respondent if its requirements are

met, applies, and petitioner has not produced evidence to show he

meets the requirements of section 7491(a).   The burden of proof

with respect to the deficiency in his tax, therefore, remains on

petitioner.

III. Schedule A Deductions

      A.   Medical Expenses

      Expenses paid during the taxable year, not compensated for

by insurance or otherwise, for medical care of the taxpayer shall

be allowed as a deduction to the extent that such expenses exceed

7.5 percent of adjusted gross income.   Sec. 213(a).   A deduction

is allowed only with respect to medical expenses actually paid

during the taxable year, regardless of when the incident or event

which occasioned the expenses occurred.   Sec. 1.213-1(a)(1),

Income Tax Regs.

      Petitioner deducted $41,000 of medical expenses on his

Schedule A.   In support of this deduction, petitioner introduced
                              - 13 -

into evidence several documents evidencing that he underwent

outpatient surgery in December 2004.    Those documents included

documents titled “Outpatient Surgery Postoperative

Orders/Discharge Instructions”, “Anesthesia Risk Information”,

and “Consent to Surgery/Special Procedures/Anesthesia”, three

Explanation of Benefit forms from petitioner’s health insurer,12

and a medical invoice for $10.49.   Petitioner, however,

introduced no credible evidence to prove that he paid any medical

expenses in 2004.   Although we allowed petitioner an opportunity

after trial to offer substantiation of the medical expenses he

allegedly paid in 2004, petitioner failed to do so.

     Because petitioner did not prove he paid any medical

expenses in 2004, we sustain respondent’s determination

disallowing petitioner’s medical expense deduction.

     B.    Unreimbursed Employee Expenses

     A taxpayer may deduct unreimbursed employee expenses as an

ordinary and necessary business expense under section 162.      Lucas

v. Commissioner, 79 T.C. 1, 6 (1982).    However, an employee

cannot deduct such expenses to the extent that the employee is

entitled to reimbursement from his or her employer for

expenditures related to his or her status as an employee.       Id. at

7.   Along with other miscellaneous itemized deductions,

     12
      Although petitioner provided several forms from his health
insurer, petitioner testified that the cost of his procedure was
disallowed by his insurer because he had not paid the premiums.
                               - 14 -

unreimbursed employee expenses are subject to the 2-percent of

adjusted gross income limitation under section 67(a).

     Petitioner claimed a $118,052 deduction for unreimbursed

employee expenses.   Petitioner testified that some of the

unreimbursed employee expenses related to his employment with

Five-by-Five Networks and were expenses not paid by Five-by-Five

Networks.   Petitioner, however, did not introduce any credible

evidence that he actually paid any employee expenses or that he

was not entitled to reimbursement from Five-by-Five Networks for

those expenses.   In addition, petitioner did not introduce any

credible evidence regarding that part of his unreimbursed

employee expense deduction that did not relate to his employment

with Five-by-Five Networks.

     Because petitioner failed to prove he is entitled to a

deduction for unreimbursed employee expenses, we sustain

respondent’s determination disallowing the deduction.

     C.     Attorney’s and Accountant’s Fees

     Petitioner claimed a $26,575 deduction for attorney’s and

accountant’s fees as other miscellaneous itemized deductions.

Petitioner testified that at least some of those fees related to

two lawsuits involving his neighbor, one dealing with a sprinkler

system and the other involving a dispute over petitioner’s tree.

Petitioner did not introduce documentation of his legal expenses

from the attorney representing him in those matters, nor did he
                              - 15 -

introduce any credible evidence establishing that he actually

paid any fees to a professional or that the fees, if paid, were

deductible.13

      Because petitioner failed to introduce credible evidence to

prove that he paid attorney’s and accountant’s fees during 2004

and that the fees, if paid, were deductible, we sustain

respondent’s determination disallowing the deduction.

IV.   Schedule C Deductions for Eglobal Call Solutions

      Section 162(a) permits a taxpayer to deduct the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.   See Commissioner v. Lincoln

Sav. & Loan Association, 403 U.S. 345, 352 (1971).     In order for

a taxpayer “to be engaged in a trade or business, the taxpayer

must be involved in the activity with continuity and regularity

and * * * the taxpayer’s primary purpose for engaging in the

activity must be for income or profit.”     Commissioner v.

Groetzinger, 480 U.S. 23, 35 (1987).    An expense is ordinary if

it is normal, usual, or customary within a particular trade,

business, or industry or arises from a transaction “of common or

frequent occurrence in the type of business involved.”        Deputy v.

du Pont, 308 U.S. 488, 495 (1940).     An expense is necessary if it

is appropriate and helpful for the development of the business.


      13
      Legal expenses that are personal are not deductible.        Sec.
262(a).
                               - 16 -

See Commissioner v. Lincoln Sav. & Loan Association, supra at

353; Commissioner v. Heininger, 320 U.S. 467, 471 (1943).

Section 262(a) disallows deductions for personal, living, or

family expenses.   See also sec. 1.162-17(a), Income Tax Regs.

     When a taxpayer establishes that he paid or incurred a

deductible expense but does not establish the amount of the

expense, we may estimate the amount allowable in some

circumstances (the Cohan rule).     See Cohan v. Commissioner, 39

F.2d 540, 543-544 (2d Cir. 1930).    There must be sufficient

evidence in the record, however, to permit us to conclude that

the taxpayer paid or incurred a deductible expense in at least

the amount allowed.    See Williams v. United States, 245 F.2d 559,

560 (5th Cir. 1957).   In estimating the amount allowable, we bear

heavily upon the taxpayer who failed to maintain required records

and to substantiate deductions as the Code requires.    See Cohan

v. Commissioner, supra at 544.

     For certain kinds of business expenses, such as travel,

meals, and entertainment expenses, section 274(d) overrides the

Cohan rule.   See Sanford v. Commissioner, 50 T.C. 823, 827

(1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969); sec. 1.274-

5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6,

1985).   Under section 274(d), a taxpayer must satisfy strict

substantiation requirements before a deduction is allowable.     See

also sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs.
                              - 17 -

     Respondent does not dispute that petitioner had a business

or that he was involved in that business with continuity and

regularity and for profit.   Respondent contends, however, that

petitioner has not substantiated the expenses he claimed on his

Schedule C relating to Eglobal Call Solutions and that petitioner

has provided only self-serving testimony that he is entitled to

the deductions.   In addition respondent contends that the limited

documentation introduced into evidence appears to reflect the

payment of startup expenditures that are not deductible under

section 195.

     Section 195(a) provides that, except as otherwise provided

therein, no deduction is allowed for startup expenditures.    See

also Hardy v. Commissioner, 93 T.C. 684, 687-693 (1989), affd. in

part and remanded in part per order (10th Cir., Oct. 29, 1990).

Section 195(c)(1) defines startup expenditures to mean any amount

paid or incurred in connection with (i) investigating the

creation or acquisition of an active trade or business, or (ii)

creating an active trade or business, or (iii) any activity

engaged in for profit and for the production of income before the

day on which the active trade or business begins, in anticipation

of becoming an active trade or business, which if paid or

incurred in connection with the operation of an existing active

trade or business would be allowed as a deduction for the taxable
                              - 18 -

year in which paid or incurred.14   Under section 195(c)(2)(B), an

acquired trade or business is treated as beginning when the

taxpayer acquires it.15

     Although petitioner testified he acquired various assets

during 2004, he also testified that the software assets he

acquired were still under development until approximately

September 2004 when a revision of the integrated software was

completed.   According to petitioner, the Vietnam call center did

not begin to service customers until September 2004 and did not

generate any revenue until October 2004.   Even if we accept

petitioner’s general and very vague testimony as credible and

assume that the Vietnam call center’s business activity was a

part of petitioner’s Schedule C business, Eglobal Call Solutions,

the testimony reveals that call center did not begin to function

until September 2004 at the earliest and did not generate revenue

until October 2004.   Consequently, we conclude on the record

     14
      Sec. 195(b)(1) was amended by the American Jobs Creation
Act of 2004, Pub. L. 108-357, sec. 902(a)(1), 118 Stat. 1651,
effective for amounts paid or incurred after Oct. 22, 2004.
Under sec. 195(b)(1), as in effect both before and after the 2004
amendment, a taxpayer may elect to treat startup expenditures as
deferred expenses that may be amortized as provided therein, and
the amortization period cannot begin any earlier than the month
in which the active trade or business begins. It does not appear
that petitioner elected to amortize any startup expenditures with
respect to Eglobal Call Solutions, and petitioner does not argue
that he made the election.
     15
      Petitioner testified that he acquired various assets. We
infer from this testimony that he did not acquire an active trade
or business during or before 2004.
                              - 19 -

before us that any expenses paid before September 2004 were

nondeductible startup expenditures under section 195(a).

     We turn now to specific expenses petitioner deducted on the

Schedule C for Eglobal Call Solutions.

     A.   Advertising

     Petitioner claimed a $34,090 deduction for advertising

expenses on his Schedule C.   To substantiate the advertising

expenses, petitioner introduced into evidence several documents

including:   (1) An invoice dated February 19, 2004, from Business

Wire addressed to Eglobal Call Networks showing a paid membership

fee of $120, (2) a confirmation dated March 25, 2004, of a $74.93

payment with petitioner’s credit card for promoting an Internet

Web site address described as “www.eglobalcallsolutions.com”

showing the company name as “eglobalcall networks, inc”, (3) an

invoice dated March 31, 2004, from Business Wire for $440, (4) a

confirmation dated April 28, 2004, of a $49.95 payment with

petitioner’s credit card for promoting the Internet Web site

“www.eglobalcallsolutions.com”, and (5) an invoice for $1,081.42

dated April 30, 2004, from Focus Print n Copy primarily for “700

Brochures ‘eGlobalCall Solutions’” that was stamped paid.

     Because the Business Wire invoices show that the amounts

were paid on behalf of Eglobal Call Networks and not Eglobal Call

Solutions or petitioner himself, we cannot determine whether they

were paid by petitioner or whether they related to Eglobal Call
                              - 20 -

Solutions.   And although the payment for promoting Eglobal Call

Solutions’s Internet Web site and the payment for the Focus Print

n Copy invoice appear to relate to Eglobal Call Solutions, all of

the expenses were paid before September 2004.

     In addition to the expenses discussed above, petitioner

testified that most of the advertising expenses related to the

purchase of four customer lists at $5,000 each.   Petitioner

testified that he paid for the customer lists by wire transfers

from his personal checking account;16 but even after we gave

petitioner a second opportunity to substantiate the payments

after trial, petitioner never introduced evidence of the wire

transfers that he claims he made, nor did he submit any other

documentation to establish he paid for the customer lists.17

     All of the documentation of advertising expenses in the

record relates to expenses paid before petitioner’s business

became operational.   See, e.g., Feerick v. Commissioner, T.C.

Memo. 1991-330.   We conclude, therefore, that petitioner has

failed to prove he paid deductible advertising expenses during


     16
      Petitioner testified that in the beginning he used his
personal checking account to pay expenses, but then he started
using one of Eglobal Call Networks’s checking accounts.
     17
      Even if petitioner were able to substantiate that he paid
for four customer lists, it appears that petitioner would not be
entitled a full deduction in 2004 for those payments. Customer
lists are generally considered sec. 197 intangibles that must be
amortized over a 15-year period. Sec. 197(a), (d)(1)(C)(ii);
sec. 1.197-2(b)(4), Income Tax Regs.
                                  - 21 -

2004, and we sustain respondent’s determination disallowing the

deduction.

     B.     Commissions and Fees

     Petitioner claimed a $1,222 deduction for commissions and

fees on his Schedule C.       Petitioner testified that this deduction

represented payments made by check to two people who helped him

generate deals.     Petitioner, however, testified that he did not

have copies of the checks or any other evidence to show whether

or when he paid any commissions or fees.      Petitioner’s testimony

about the commissions and fees he supposedly paid is insufficient

for the Court to make an estimate of this expense under the Cohan

rule.     See Norgaard v. Commissioner, 939 F.2d 874, 879 (9th Cir.

1991), affg. in part and revg. in part T.C. Memo. 1989-390.      We

conclude, therefore, that petitioner failed to substantiate the

deduction he claimed for commissions and fees, and we sustain

respondent’s determination disallowing the deduction.

     C.      Contract Labor

     Petitioner claimed a $4,534 deduction for contract labor on

his Schedule C.     Petitioner testified that this deduction

probably represented payments to people he paid by the hour.      He

testified that he would have paid those people from the Eglobal

Call Solutions account that he had set up with U.S. Bank.

Petitioner did not have those bank statements because he claimed

that the bank statements were seized by Vietnamese authorities in
                                - 22 -

the 2005 raid on his office.     Even if we accept as credible

petitioner’s testimony regarding the raid in Vietnam, we are not

convinced that all relevant business records were in Vietnam or

were seized in the raid.     Moreover, we gave petitioner an

opportunity after trial to obtain duplicate bank records from

U.S. Bank, but he did not do so.     We conclude therefore that

petitioner failed to substantiate that he paid any contract labor

expenses during 2004, and we sustain respondent’s determination

disallowing the deduction.

     D.    Employee Benefit Programs

     Petitioner claimed a $4,532 deduction for employee benefits

on his Schedule C.     Petitioner testified that this expense

included cash payments to the Vietnamese Government for health

insurance.    However, petitioner did not present any credible

evidence to prove the nature, amount, and purpose of the health

insurance he allegedly paid in 2004.     Consequently, we conclude

that petitioner failed to substantiate the deduction he claimed

for employee benefits, and we sustain respondent’s determination.

     E.    Insurance

     Petitioner claimed a $12,389 deduction for insurance on his

Schedule C.    Petitioner testified that the insurance expense

mostly represented insurance that he paid on his automobile in

Vietnam.   However, petitioner did not introduce any documentation

or other credible evidence to prove that he paid insurance or
                                - 23 -

that he even had an insurable interest in a vehicle in Vietnam.

Consequently, we conclude that petitioner has failed to

substantiate the deduction he claimed for an insurance expense,

and we sustain respondent’s determination.

     F.     Legal and Professional Services

     Petitioner claimed a $1,459 deduction for legal and

professional services on his Schedule C.      In support of this

deduction, petitioner introduced into evidence an invoice dated

February 26, 2004, from Sedgwick Detert, Moran & Arnold LLP and

Affiliated Entities for professional services through January 31,

2004.     Petitioner testified the invoice related to expenses

incurred in establishing the organization and dissolving his

relationship with Five-by-Five Networks.      However, petitioner did

not introduce any evidence substantiating that he paid the

invoice in 2004 or showing that the professional services related

to Eglobal Call Solutions.     Consequently, we conclude that

petitioner has failed to substantiate the deduction he claimed

for legal and professional services, and we sustain respondent’s

determination.

     G.      Office Expenses

     Petitioner claimed an $8,123 deduction for office expenses

on his Schedule C.     Petitioner testified that the office expenses

included payments for utilities in both his Vietnam and U.S.

offices.     Petitioner also testified that he made the payments
                               - 24 -

from either his personal checking account or the account

established under the name Eglobal Call Solutions, but petitioner

could not produce any canceled checks, bank statements, or other

payment records.   As we have already stated several times,

petitioner was given an opportunity to obtain his bank statements

after trial and present them to respondent and the Court, but

petitioner did not do so.

     Petitioner also introduced into evidence various receipts,

such as receipts from Staples, Radioshack, CompUSA, Fry’s

Electronics, and the U.S. Postal Service, that may have been

included in office expenses.   However, because we have no way of

determining whether those receipts represented business or

personal expenses, we cannot conclude that those receipts

substantiate petitioner’s office expense deduction.18

     We conclude that petitioner has failed to substantiate his

deduction for office expenses, and we sustain respondent’s

determination.

     H.   Rent or Lease for Other Business Property

     Petitioner claimed an $88,045 deduction for rent or lease

for other business property.   Petitioner testified that the

property in question included land in Vietnam on which petitioner

     18
      Several of the receipts showed purchases of items that
were personal and not related to Eglobal Call Solutions. For
example, one receipt from Fry’s Electronics included a purchase
of a Euro Pro Shark Professional Iron, and another included a
purchase of a DVD entitled “Matrix Revolutions”.
                              - 25 -

constructed a building.   Petitioner testified that in 2004 he

paid about $90,000 to Quang Trung Software City Development Co.

for the lease.   In support of his testimony, petitioner

introduced into evidence an unsigned copy of a lease that showed

Eglobal Vietnam as the lessor.    Petitioner testified that

although the lease showed Eglobal Vietnam as the lessor,

petitioner paid the rent.   Petitioner claimed that he had bank

statements that would prove those payments, but he did not

introduce any documentation at trial to substantiate the lease

payments he allegedly made.   Although we gave petitioner a

posttrial opportunity to produce the documentation he claimed he

had, petitioner did not do so.

     We conclude that petitioner has failed to substantiate the

deduction for rent or lease expenses for other business property,

and we sustain respondent’s determination.

     I.   Supplies

     Petitioner claimed a $2,333 deduction for supplies.

Petitioner testified that he deducted amounts spent for generic

office supplies used in his Vietnam and U.S. offices.    Although

petitioner introduced into evidence various receipts, we cannot

determine from a review of those receipts whether they reflect

business or personal purchases.    Because petitioner did not

introduce any evidence that would allow us to estimate the

supplies petitioner purchased for Eglobal Call Solutions, we will
                                - 26 -

not apply the Cohan rule.     See Norgaard v. Commissioner, 939 F.2d

at 879.

     We conclude that petitioner has failed to substantiate the

deduction for supplies, and we sustain respondent’s

determination.

     J.   Taxes and Licenses

     Petitioner claimed a $3,123 deduction for taxes and licenses

on his Schedule C.   Petitioner testified that the taxes and

licenses expense included a license fee that he paid to the

Vietnamese Government.   However, because petitioner introduced no

evidence that he actually paid any license fee in 2004 or that a

license fee was required, the Cohan rule is not applicable here.

Consequently, we conclude that petitioner has failed to

substantiate his deduction for taxes and licenses, and we sustain

respondent’s determination.

     K.   Travel

     Petitioner claimed a $6,123 deduction for travel.

Petitioner testified that the travel expense related primarily to

his Vietnam trips and that he also attended a call center

conference in Orlando, Florida.

     Petitioner introduced into evidence two credit card

statements showing purchases from China Air that he credibly

testified were for airplane tickets to Vietnam.    However, the

first credit card statement shows a China Air purchase on
                               - 27 -

December 13, 2003, and the second shows two China Air purchases

on February 2 and February 6, 2004, of $876.50 each.    The China

Air purchases occurred before the Vietnam call center became

operational in approximately September 2004.    At best, these

travel expenses are nondeductible startup expenditures under

section 195.   See supra pp. 17-19.

     Petitioner also introduced in evidence a rental car receipt

from Orlando, Florida, where he supposedly attended a call center

conference.    Petitioner did not present corroborating evidence

regarding the conference, nor did he show that the car rental was

for business purposes.    Consequently, we conclude that petitioner

failed to prove that he is entitled to deduct the rental car

expense.   See sec. 274(d).

     Petitioner also introduced into evidence numerous receipts

for gasoline purchases.    Because petitioner did not produce any

mileage or travel logs to substantiate that the gasoline

purchases related to his activities in Eglobal Call Solutions, we

conclude that he has failed to prove that the gasoline purchases

reflected on the receipts are deductible.    See id.   We sustain

respondent’s determination.

     L.    Meals and Entertainment

     Petitioner claimed a $6,745 deduction for meals and

entertainment expenses.    Petitioner introduced into evidence

restaurant receipts that he claims were for various meetings.
                              - 28 -

Although petitioner provided some testimony regarding the meal

receipts, petitioner introduced no documentation to show with

whom he met during these so-called meetings or whether the

meetings were related to his business activities.   Petitioner has

not substantiated by adequate records or by sufficient evidence

corroborating his own statement the business purpose of the

expenses as required under section 274(d).   Consequently, we

conclude that petitioner has failed to substantiate the deduction

for meals and entertainment expenses, and we sustain respondent’s

determination.

     M.   Utilities

     Petitioner claimed a $13,455 deduction for utilities.

Petitioner testified that the utilities expenses primarily

represented the electricity cost in Vietnam.19   Because

petitioner did not provide any credible evidence that he paid

electricity bills in Vietnam, we conclude that petitioner has

failed to substantiate the deduction for utilities.   We sustain

respondent’s determination.

     N.   Wages

     Petitioner claimed a $96,050 deduction for wages.

Petitioner testified that all wages were paid in cash to

employees in Vietnam.   Petitioner also testified that the records

     19
      Petitioner testified that the utility costs for his U.S.
activities were de minimis in comparison to his utility costs in
Vietnam.
                              - 29 -

of the wages paid to employees were included in the Quickbooks

accounting records seized by Vietnamese authorities.   Petitioner

did not introduce any other evidence to prove that he paid wages

to employees in Vietnam.   Petitioner did not testify as to how

many employees he had or the amounts of their wages, and he made

no effort to document this deduction by obtaining duplicate bank

records.   We conclude therefore that petitioner has failed to

substantiate the deduction for wages, and we sustain respondent’s

determination.20

     O.    Other Documents and Receipts

     Petitioner introduced in evidence additional documents and

receipts to substantiate his expenses claimed on the Schedule C.

To the extent we did not specifically address the documents or

receipts in this opinion, we conclude that the documents or

receipts do not substantiate that petitioner was entitled to a

business expense deduction for Eglobal Call Solutions.

V.   Section 72(t) Additional Tax

     Section 72(t)(1) imposes an additional tax of 10 percent on

the portion of a distribution from a qualified retirement plan

that is includable in gross income, unless the distribution falls

under one of the exceptions in section 72(t)(2).   Under certain

     20
      In his testimony petitioner made several references to a
minimum monthly payment of $15,000 to Eglobal Vietnam for various
expenses including wages associated with the Vietnam call center.
Petitioner has failed to substantiate he made monthly payments as
alleged.
                              - 30 -

circumstances, the section 72(t) additional tax does not apply to

distributions made to cover the costs of medical care or of

higher education expenses.   Sec. 72(t)(2)(B), (E).

     Section 72(t)(2)(B) provides an exception to the section

72(t) additional tax for distributions made to the employee to

the extent such distributions do not exceed the amount allowable

as a deduction under section 213 to the employee for amounts paid

during the taxable year for medical care.   We have already found

that petitioner is not entitled to a deduction for medical

expenses claimed on his Schedule A under section 213 because

petitioner could not substantiate that he paid any medical

expenses in 2004.   Thus, petitioner is not eligible for the

section 72(t)(2)(B) exception to the additional tax because his

distribution exceeds the amount allowable as a deduction under

section 213.

     Section 72(t)(2)(E) provides an exception to the section

72(t) additional tax for distributions from individual retirement

plans used for qualified higher education expenses of the

taxpayer for the taxable year.   This exception applies to

qualified higher education expenses the taxpayer paid for the

taxpayer’s children.   Sec. 72(t)(7)(A)(iii).   Qualified higher

education expenses generally include expenses for tuition, fees,

books, supplies, and equipment required for the enrollment or
                              - 31 -

attendance at an eligible educational institution.   Secs.

72(t)(7)(A), 529(e)(3).

     Petitioner contends that he paid expenses related to his

children’s college education and therefore he is entitled to the

section 72(t) exception for at least part of his distributions.

However, petitioner did not introduce any evidence other than his

uncorroborated testimony regarding any higher education payments

he allegedly made on behalf of his two children.   Without some

documentation to support petitioner’s general testimony, we

cannot conclude that petitioner used the distribution to pay

college education expenses or that the expenses, even if paid,

are qualified higher education expenses within the meaning of

section 529(e)(3).   See sec. 72(t)(7)(A).21

     Because petitioner failed to prove that he qualifies for any

exception under section 72(t)(2), we sustain respondent’s

     21
      Even if petitioner were able to substantiate that he used
the distribution from his qualified retirement plan to pay his
children’s qualified higher education expenses, he would likely
not qualify for the sec. 72(t)(2)(E) exception because his
distribution apparently was not a distribution from an individual
retirement plan. See, e.g., Uscinski v. Commissioner, T.C. Memo.
2005-124; see also H. Rept. 105-148, at 288-289 (1997), 1997-4
C.B. (Vol. 1) 319, 610-611. The Internal Revenue Code defines
“individual retirement plan” as an individual retirement account
or annuity described in sec. 408(a) and (b). Sec. 7701(a)(37).
Petitioner attached to his 2004 return two Forms 1099-R,
Distributions From Pensions, Annuities, Retirement or Profit-
Sharing Plans, IRAs, Insurance Contracts, etc., which show that
petitioner’s distribution was not a distribution from an
individual retirement account or annuity. Moreover, on his 2004
return petitioner did not report receiving any distribution from
an individual retirement account or annuity.
                                 - 32 -

determination that petitioner is liable for the section 72(t)

additional tax on the distribution from his qualified retirement

plan.

VI.   Section 6662(a) Accuracy-Related Penalty

        Respondent contends that petitioner is liable for the

accuracy-related penalty under section 6662 on the ground that

there was a substantial understatement of income tax in 2004.

Section 6662(a) and (b)(2) authorizes the Commissioner to impose

a 20-percent penalty if there is a substantial understatement of

income tax.     A substantial understatement of income tax with

respect to an individual taxpayer exists if, for any taxable

year, the amount of the understatement for the taxable year

exceeds 10 percent of the tax required to be shown on the return

for the taxable year or $5,000, whichever is greater.     Sec.

6662(d)(1)(A).

        Respondent bears the initial burden of production with

respect to petitioner’s liability for the section 6662 penalty,

in that respondent must first produce sufficient evidence to

establish that the imposition of the section 6662 penalty is

appropriate.     Sec. 7491(c).   If respondent satisfies his initial

burden of production, the burden of producing evidence to refute

respondent’s evidence and to establish that petitioner is not

liable for the section 6662 penalty shifts to petitioner.       See

Higbee v. Commissioner, 116 T.C. 438, 447 (2001).
                               - 33 -

       Respondent has carried his burden of production by showing

that petitioner substantially understated his 2004 Federal income

tax.    Because respondent has met his burden of production,

petitioner must come forth with sufficient evidence to persuade

the Court that respondent’s determination is incorrect.      See id.

at 446-447.    Petitioner also bears the burden of producing

evidence to demonstrate reasonable cause under section

6664(c)(1).    See id.

       Petitioner has not introduced any credible evidence that

respondent’s accuracy-related penalty determination is incorrect

or that petitioner had reasonable cause for the substantial

understatement of his 2004 income tax.      Therefore, we sustain

respondent’s determination that petitioner is liable for the

section 6662(a) accuracy-related penalty.

       To reflect the foregoing,


                                        Decision will be entered

                                   under Rule 155.
