                       T.C. Memo. 2009-218



                      UNITED STATES TAX COURT



                   VON H. ARGYLE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6820-08.              Filed September 17, 2009.



     Von H. Argyle, pro se.

     Edward J. Laubach, Jr., for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   Respondent determined deficiencies and

penalties with respect to petitioner’s Federal income taxes as

follows:
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                                                Penalty
      Year           Deficiency           I.R.C. Sec. 6662(a)

      2004             $7,478                  $1,495.60
      2005              3,606                     721.20
      2006             10,607                   2,121.40

Except as otherwise stated, 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 for decision are:

      (1) Whether petitioner’s filing status was single during the

years in issue, when he was separated from but still married to

his spouse;

      (2) whether petitioner is entitled to deduct attorney’s fees

and related expenses incurred in defending a criminal proceeding;

      (3) whether petitioner is entitled to deduct expenses on

Schedule C, Profit or Loss From Business, beyond those conceded

by respondent;

      (4) whether petitioner is entitled to deduct a net operating

loss carryforward from 2005 to 2006;

      (5) whether petitioner is liable for the additional tax

under section 72(t) for early withdrawals from a retirement plan;

and

      (6) whether petitioner is liable for the section 6662

accuracy-related penalty for each of the years in issue.
                                - 3 -

                          FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioner resided in Pennsylvania at the time that he filed his

petition.    Petitioner has a master’s degree in accounting with a

major in tax and has been a certified public accountant (C.P.A.)

since 1983.    During 2004, 2005, and 2006, petitioner was a

practicing C.P.A. licensed in the State of Ohio.

     From January through August 2004, petitioner used

residential property on Washington Boulevard in Grove City,

Pennsylvania, as his office.   From September 1, 2004, through at

least December 31, 2006, petitioner used the same property as his

residence.

     At all material times petitioner has been married.   Although

petitioner’s wife filed for divorce in August 2004 and petitioner

and his wife lived separate and apart during the years in issue,

they were neither divorced nor parties to a decree of separate

maintenance.

     During 2004, petitioner performed accounting and tax

preparation services for a medical services client in Newcastle,

Pennsylvania, approximately 40 miles from petitioner’s home in

Grove City.    Among the client’s employees was a 20-year-old woman

whose job included transcribing doctors’ notes, maintaining

patient charts, and observing examinations of female patients by
                                 - 4 -

doctors.    Before May 28, 2004, petitioner and the client’s

employee had meals together on two occasions. Petitioner gave the

employee $1,000 so that she could buy a car.

     On May 28, 2004, petitioner allowed the employee to drive

him to his home in his BMW automobile.     They arrived at his home

about 5 p.m., and she stayed until 10 p.m. or 11 p.m., leaving in

his automobile.    While she was at petitioner’s home, petitioner

kissed the employee.    Thereafter, the employee instituted

criminal charges against petitioner.     Petitioner pleaded “no

contest” and was convicted of simple assault relative to the

events of May 28, 2004.    More serious charges that had been filed

against him were dismissed and expunged from his record.

     During the criminal proceedings against him, petitioner was

represented by Paul Gettleman.    Petitioner paid Gettleman $12,500

during 2004, $25,000 in 2005, and $25,000 in 2006.     In 2004,

petitioner also paid $645 to an investigator hired by Gettleman.

On Schedules C attached to his Federal income tax returns for the

years in issue, petitioner deducted the fees paid to Gettleman

and to the investigator as “legal and professional services”

without any further disclosure of the context in which they were

incurred.   Petitioner also deducted an additional $10,000 in

legal fees that he claims was paid in 2005, but he has no

evidence substantiating that payment.
                                - 5 -

     During 2004, 2005, and 2006, petitioner withdrew $10,000,

$25,000, and $20,000, respectively, from his individual

retirement accounts.    Petitioner was under 59-1/2 years old

during those years.    Petitioner paid qualified higher education

costs for his son totaling $6,001 in 2004, $8,693 in 2005, and

$4,526 in 2006.

     Petitioner attached Forms 5329, Additional Taxes on

Qualified Plans (Including IRAs) and Other Tax-Favored Accounts,

to his Federal income tax returns for the years in issue.   As

directed on those Forms 5329, petitioner reported the “Early

distributions included in income” on line 1.   On line 2 of the

Forms 5329, he claimed “Early distributions included on line 1

that are not subject to the additional tax” in amounts equal to

the amounts reported on line 1, thus reporting that he owed no

additional tax under section 72(t).

                               OPINION

     In the stipulation, respondent has conceded various

deductions disallowed in the statutory notice of deficiency.

Respondent has also stipulated payments substantiated by

petitioner but disputed as to deductibility.   Certain of the

issues, as discussed below, are legal issues not dependent on

burden of proof.
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     As applicable to the factual issues, section 7491(a)

provides in relevant part that the burden of proof shifts from

the taxpayer to the Commissioner if the “taxpayer introduces

credible evidence”, has complied with the requirements to

substantiate items, and has maintained required records.    Section

7491(c) imposes on the Commissioner the burden of production with

respect to any penalty, but the taxpayer must then establish that

the penalty does not apply.   See generally Higbee v.

Commissioner, 116 T.C. 438 (2001).

     Unless the burden of proof has shifted under section 7491(a)

or some exception not present in this case exists, the taxpayer

has the burden of proving that the claimed expenses were ordinary

and necessary business expenses rather than nondeductible

personal expenses.   New Colonial Ice Co. v. Helvering, 292 U.S.

435, 440 (1934); Welch v. Helvering, 290 U.S. 111, 113-114

(1933); see Rule 142(a).

     We are not required to accept testimony that is improbable

or implausible.   See Geiger v. Commissioner, 440 F.2d 688, 689-

690 (9th Cir. 1971), affg. T.C. Memo. 1969-159; Shea v.

Commissioner, 112 T.C. 183, 189 (1999).   In this case,

particularly in view of his training and experience as a C.P.A.,

the absence of corroboration of his testimony by witnesses or

reliable records leads us to conclude that petitioner has not
                                 - 7 -

carried his burden of proof as to the factual issues.    See Shea

v. Commissioner, supra at 188.

Filing Status

     Petitioner stipulated that he was married during the years

in issue, but he contends that he was entitled to file his

Federal income tax returns for 2005 and 2006 using rates

applicable to single taxpayers.    Respondent contends that

petitioner’s filing status is married filing separately.      This

issue is thus one of law.

     Petitioner relies on Pennsylvania law and cases in other

contexts to argue that his “separate and apart” status determines

his rights and those of his wife and “confers single filing

status.”   It appears, however, that the authorities on which

petitioner relies recognize “separate and apart” as a factor only

in determining property rights of the spouses.

     Section 7703(a) states the general rule for determination of

marital status as of the close of a taxable year and provides

that “an individual legally separated from his spouse under a

decree of divorce or of separate maintenance shall not be

considered as married.”   Sec. 7703(a)(2).   Section 7703(b) sets

out the conditions under which married individuals living apart

shall not be considered married for purposes of section 151,

personal exemptions and head of household filing status.      Neither

subsection allows petitioner to be treated as not married.
                                - 8 -

     In Keibler v. Commissioner, T.C. Memo. 1980-75, we concluded

that only an absolute divorce effects a legal separation in

Pennsylvania as relevant to a taxpayer’s filing status on his

Federal income tax return.    Although we there applied former

section 153, as applicable to 1974, the decisive language now

appears in section 7703(a).    We rejected the taxpayer’s argument

that living separate and apart was the equivalent of an absolute

divorce under Pennsylvania law.    Petitioner has not cited any

authority that would lead to a different result in this case, and

he acknowledges that “Pennsylvania cases suggest that there is no

such thing as a decree of ‘legal separation’ which a court can

order for married parties who live apart”.    Because petitioner is

neither divorced nor a party to a decree of separate maintenance,

he is not entitled to single filing status.

Legal Fees

     The parties agree that the test for deductibility of the

legal expenses petitioner claimed in relation to the criminal

proceedings brought against him is the origin and character of

the claim involved, under United States v. Gilmore, 372 U.S. 39

(1963).   Petitioner asserts that the proceedings against him were

instituted as retaliation by the client’s employee because he

reprimanded her for misconduct in the client’s business.    Thus,

he argues, the origin of the claim is his business activity,

rendering the legal fees that he incurred deductible.
                               - 9 -

      Petitioner’s posttrial brief asserts many facts that are

not in the record and cannot be considered.    See Rules 143(b),

151(e)(3).   Petitioner’s factual assertions, however, suggest

that corroborating witnesses should have been available if his

claims are accurate.   He did not call Gettleman as a witness,

even though an unsubstantiated amount of $10,000 allegedly paid

to Gettleman in 2005 is in dispute.    He did not call any other

witness who might have been available to corroborate his claim

that the employee was dishonest in her services to the client.

     Respondent contends that the fees relating to the criminal

proceedings were nondeductible personal expenses comparable to

those in cases involving criminal assault charges, such as Nadiak

v. Commissioner, 356 F.2d 911 (2d Cir. 1966), affg. T.C. Memo.

1964-291; Kelly v. Commissioner, T.C. Memo. 1999-69; Siket v.

Commissioner, T.C. Memo. 1978-124; and Michaelis v. Commissioner,

T.C. Memo. 1971-199.   As demonstrated in the cases cited by

respondent, successful defense of criminal charges is not

determinative under the origin of the claim test.

     Respondent relies on petitioner’s testimony regarding the

events of May 28, 2004, as establishing the personal nature of

the relationship between petitioner and his client’s employee.

As petitioner testified:   The alleged assault occurred at

petitioner’s residence 40 miles from the client’s place of

business, after the employee drove petitioner to his residence in
                                - 10 -

petitioner’s car and spent 5 or more hours at his house between 5

p.m. and 11 p.m.    Petitioner had gone to dinner with the employee

on at least two prior occasions, kissed her on May 28, 2004, and

did not deny kissing her on other occasions.    Petitioner had

given the employee $1,000 so that she could buy a car.

     We agree with respondent.    The preponderance of the evidence

is that the legal fees for defending the criminal proceedings

arose out of a personal relationship and are not deductible

business expenses.

Other Schedule C Expenses

     At trial petitioner presented a spreadsheet representing

various items claimed as business expense deductions.    He did

not, however, establish by his testimony any items that

respondent had not previously conceded in the stipulation.    He

asserts that all of the claimed deductions were ordinary,

necessary, and substantiated and that his returns were correct

when filed.     He admitted during his testimony, however, that a

portion of his deductions for mortgage interest on the property

that he occupied as his office and his residence had been

duplicated as itemized deductions on Schedule A, Itemized

Deductions, and as business expenses on Schedule C.    He deducted

vehicle expenses using a combination of actual expenses and

business mileage, rather than an acceptable alternative of either

but not both.    See sec. 1.274-5(j)(2), Income Tax Regs.; Rev.
                               - 11 -

Proc. 2004-64, sec. 5.03, 2004-2 C.B. 898, 900; Rev. Proc. 2005-

78, sec. 5.03, 2005-2 C.B. 1177, 1179; see also, e.g., Nash v.

Commissioner, 60 T.C. 503, 520 (1973); Clark v. Commissioner,

T.C. Memo. 2002-32.   He claims that he is entitled to use section

280A(d)(4)(A) to deduct all of the expenses concerning the home

used as an office before September 1, 2004, but that section

relates only to rental property.   The property petitioner

occupied was not rental property during any of the years in

issue.

     Petitioner did not establish during trial the portion of the

residential property that was used exclusively for business, as

required by section 280A(c), and he apparently deducted as

business expenses unallocated items, such as utilities and

repairs, that related to the residence.   Respondent nonetheless

conceded a portion of the claimed home office expense, and

petitioner has not shown that he is entitled to a greater amount.

     Petitioner did not substantiate travel and meals expenses by

time, place, and business purpose as required by section 274(d),

and he testified that he did not know whether he reduced the cost

of business meals by 50 percent as required by section 274(n).

He also testified that some of the other amounts claimed on his

returns were only estimates.   Petitioner’s general assertions as

to deductibility are thus unreliable, and no deductions beyond

those respondent conceded are allowed.
                                - 12 -

Net Operating Losses

     Petitioner claimed a $25,744 net operating loss carryover

from 2005 to 2006.     The loss claimed for 2005 included $35,000

of erroneously deducted legal fees, $10,000 of which was

unsubstantiated.   The claimed loss also included lesser items now

disallowed.   Therefore petitioner did not establish that he was

entitled to any net operating loss carryover.

Section 72(t)

     Section 72(t) imposes a 10-percent additional tax on early

distributions from retirement plans, subject to certain

exceptions.   The exceptions petitioner asserts are for

distributions used to pay qualified higher education expenses

under section 72(t)(2)(E) and medical insurance costs for

unemployed individuals under section 72(t)(2)(D).

      Respondent has conceded the amounts petitioner paid for his

son’s tuition, fees, books, supplies, and equipment and an

allowance for room and board, less scholarships received.     The

parties dispute whether transportation expenses incurred in

relation to petitioner’s son’s attendance at college are

qualified higher education expenses.

     Section 72(t)(2)(E) provides the exception to the 10-percent

additional tax on early distributions from retirement plans for

higher education expenses defined under section 72(t)(7), which
                              - 13 -

in turn incorporates section 529(e).   Respondent argues that

transportation costs are not included in the definitions of

qualified expenses in section 72(t)(7) or 529(e)(3) and, in any

event, petitioner has not proven the amount of transportation

expenses he actually incurred.   Petitioner wishes to incorporate

transportation expenses into the definition of qualified expenses

on the basis of section 472 of the Higher Education Act of 1965,

20 U.S.C. section 1087ll, and claims deductions based on

estimates in the catalog of the college attended by his son.

     Section 529(e)(3) does not include transportation expenses

as qualified higher education expenses and incorporates section

472 of the Higher Education Act of 1965 only as a limitation on

an allowance for room and board.   There is neither logic nor

authority supporting petitioner’s attempt to add transportation

expenses as a qualified higher education expense for purposes of

section 72(t)(2)(E), and he is not entitled to use third-party

estimates rather than evidence to prove that he actually incurred

expenses.

     Section 72(t)(2)(D) provides that the 10-percent additional

tax on early distributions does not apply to distributions for

health insurance premiums.   Under section 72(t)(2)(D)(iii) a

self-employed individual may qualify for this exception if he

would have received unemployment compensation but for the fact

that he was self-employed.   Petitioner has not established that
                                - 14 -

he would be eligible for unemployment compensation if he had not

been self-employed or that he used any part of the distributions

from his retirement plan to purchase health insurance.

Petitioner claims that he receives health insurance through his

spouse’s employer and seeks to deduct amounts that he paid to his

spouse for homeowner’s and automobile insurance as the equivalent

of health insurance premiums.    Again petitioner’s uncorroborated

testimony and generalized assertions do not satisfy his burden of

proving the amount of the expenditures or that they qualify for

the exemption from the section 72(t) additional tax.

     Finally, petitioner argues that respondent incorrectly

calculated the section 72(t) additional tax on the early

distribution after allowing for conceded qualified higher

education expenses.   Section 72(t) imposes a tax on early

withdrawals because they “frustrate the intention of saving for

retirement, and section 72(t) discourages this from happening.”

Dwyer v. Commissioner, 106 T.C. 337, 340 (1996) (citing S. Rept.

93-383, at 134 (1973), 1974-3 C.B. (Supp.) 80, 213).   The tax is

imposed on “the portion of such amount [received from a qualified

plan] which is includible in gross income.”   Sec. 72(t)(1).

Respondent does not contest the portion includible in gross

income as reported by petitioner on his returns.
                                - 15 -

     Petitioner argues that the amounts excepted under section

72(t)(2) should be deducted solely from the distribution

includible in gross income.   For example, the portion of the

withdrawal of $10,000 for 2004 that was includible in gross

income was $6,400.   The conceded amount of qualified higher

education expenses is $6,001.    Petitioner argues that the tax is

10 percent of $399 ($6,400 - $6,001).

     Respondent contends that section 72(t)(2)(E) refers to gross

or total distributions, not just distributions includible in

gross income.   Respondent’s position is that the additional tax

imposed by section 72(t)(1) is on the lesser of the distribution

includible in gross income or the gross distribution remaining

after reduction for qualified higher education expenses.    As a

result, the amounts excepted from the 10-percent additional tax

are deducted first from the portion of the distribution not

includible in gross income.   Respondent does not cite, and we

have not found, any authority supporting respondent’s

calculation.

     The amount subject to additional tax under section 72(t)(1),

i.e., the amount includible in gross income, is reduced for

distributions used for certain specified purposes listed in

section 72(t)(2), including qualified higher education expenses

specified in section 72(t)(2)(E).    Respondent has given us no

reason why, in the context of section 72(t), exceptions to the
                              - 16 -

10-percent additional tax should be used first to offset

nontaxable distributions.   Petitioner’s methodology is consistent

with the Forms 5329 prescribed by the Internal Revenue Service

and submitted with petitioner’s returns for the years in issue.

On this point, we agree with petitioner.

Section 6662 Accuracy-Related Penalty

     Section 6662(a) and (b)(1) and (2) imposes a 20-percent

accuracy-related penalty on any underpayment of Federal income

tax attributable to a taxpayer’s negligence or disregard of rules

or regulations, or a substantial understatement of income tax.

Section 6662(d)(1)(A) defines “substantial understatement of

income tax” as an amount exceeding the greater of 10 percent of

the tax required to be shown on the return or $5,000.    In this

case, a Rule 155 computation will be required because of

respondent’s concessions and our determination with respect to

the section 72(t) additional tax computation.    Respondent asserts

that a substantial understatement of income tax will exist for

2006 but that the penalty should be based on negligence for 2004

and 2005.

     Respondent argues that petitioner was a well-educated

C.P.A., with a master’s degree in accounting and a major in

taxation, who has practiced since 1983.    Respondent points out

that petitioner deducted travel expenses without maintaining the

substantiating records required under section 274(d) or reducing
                              - 17 -

the amounts claimed by 50 percent of the meals as required under

section 274(n); he duplicated mortgage expense deductions; he

deducted utilities and repairs on his office in the home without

regard to the income limitations of section 280A(c)(5); he used

an improper method for vehicle expenses; and he claimed legal

fees as a business deduction when he should have known that those

expenses were personal.

     The accuracy-related penalty under section 6662(a) will not

be imposed with respect to any portion of the underpayment as to

which the taxpayer acted with reasonable cause and in good faith.

Sec. 6664(c)(1).   The decision as to whether a taxpayer acted

with reasonable cause and in good faith is made by taking into

account all of the pertinent facts and circumstances.   Sec.

1.6664-4(b)(1), Income Tax Regs.

     Petitioner asserts that “All accounting measures are

estimates subject to multiple interpretations.”   He claims to

have researched all of the contested deductions, but he has

provided no substantial authority for those that have been

disallowed as being personal legal expenses or deductions claimed

contrary to the express provisions of section 274(d) or 280A. See

sec. 6662(d)(2)(B)(i); sec. 1.6662-4(d)(3), Income Tax Regs.     He

claims that “disclosure was complete” for the deduction of legal

fees paid to Gettleman, but there is no disclosure on his returns

of “the relevant facts affecting the item’s tax treatment”.    See
                              - 18 -

sec. 6662(d)(2)(B)(ii).   He claims that “all contested deductions

were supported by documentation”, but that claim is contradicted

by the record.   Petitioner’s training and experience are relevant

factors in considering whether he is liable for the penalty.       See

sec. 1.6664-4(b)(1), Income Tax Regs.; see also Reynolds v.

Commissioner, 296 F.3d 607, 618 (7th Cir. 2002), affg. T.C. Memo.

2000-20.   His training and experience support the conclusion that

he was negligent in claiming the disallowed deductions.    The

penalty under section 6662(a) will be sustained for each year.

     In reaching our decision, we have considered all arguments

made by the parties.   To the extent not mentioned or addressed,

they are irrelevant or without merit.

     To reflect the foregoing,


                                        Decision will be entered

                                 under Rule 155.
