11-3760-ag
Fein v. Comm’r

                           UNITED STATES COURT OF APPEALS
                               FOR THE SECOND CIRCUIT

                                     SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED
BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1.
WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY
MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE
NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY
OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.


        At a stated Term of the United States Court of Appeals for the Second Circuit, held at the
Daniel Patrick Moynihan United States Courthouse, 500 Pearl Street, in the City of New York,
on the 6th day of December, two thousand twelve.

Present:    AMALYA L. KEARSE,
            CHESTER J. STRAUB,
            ROSEMARY S. POOLER,
                        Circuit Judges.
_____________________________________________________

LEONARD FEIN AND PEARL FEIN,

                              Petitioners-Appellants,

                        -v-                                                11-3760-ag


COMMISSIONER OF INTERNAL REVENUE,

                        Respondent-Appellee.
_____________________________________________________

Appearing for Appellant:      SAMUEL A. EHRENFELD, New York, NY.

Appearing for Appellee:       TERESA T. MILTON (Bruce R. Ellisen, on the brief), for Kathryn

                              Keneally, Assistant Attorney General, Tax Division, Department
                              of Justice, Washington, DC.

        Appeal from the United States Tax Court (Swift, J.).

     ON CONSIDERATION WHEREOF, IT IS HEREBY ORDERED, ADJUDGED,
AND DECREED that the judgment of the tax court be and it hereby is AFFIRMED.
       Petitioners-Appellants Leonard and Pearl Fein (“Petitioners”) appeal from a June 24,
2011 decision of the tax court (Swift, J.), sustaining the Commissioner of Internal Revenue’s
(“Commissioner’s”) disallowance of deductions under 26 U.S.C. § 162 and 26 U.S.C. § 274(d)
and imposition of penalties under 26 U.S.C. § 6651 and 26 U.S.C. § 6662(a) for Petitioners’
2002, 2003, and 2004 returns. We assume the parties’ familiarity with the underlying facts,
procedural history, and specification of issues for review.

        We review the tax court’s conclusions of law de novo and its findings of fact for clear
error. Robinson Knife Mfg. Co. v. Comm’r, 600 F.3d 121, 124 (2d Cir. 2010). The tax court’s
finding that a taxpayer has not shown reasonable cause sufficient to avoid the imposition of
penalties under 26 U.S.C. §§ 66651 or 6662 is reviewed for clear error. Fran Corp. v. United
States, 164 F.3d 814, 816 (2d Cir. 1999) (§ 6651). Thompson v. Comm’r, 499 F.3d 129, 134 (2d
Cir. 2007) (§ 6662).

         The tax court requires parties to “stipulate, to the fullest extent to which complete or
qualified agreement can or fairly should be reached, all matters not privileged which are relevant
to the pending case.” T.C. R. 91(a)(1). Petitioners’ main argument on appeal is that, in a pre-
trial stipulation of facts adopted by the tax court, both parties agreed to the accuracy of most of
Petitioners’ returns, and this prevents disallowance by the Commissioner and tax court of the
deductions claimed on those returns. A reading of the stipulation, however, makes clear that the
parties agreed that certain attached exhibits were accurate copies, but did not agree that the
returns themselves had accurate information. Furthermore, the fact that Petitioners offered
evidence at trial in order to substantiate their expenses belies the argument that the parties
stipulated that the claimed expense deductions were correct. See Mildred Cotler Trust v. United
States, 184 F.3d 168, 172-75 (2d Cir. 1999) (rejecting argument that taxpayer stipulated to fraud
penalties when government failed to raise issue before the tax court and taxpayer repeatedly
denied fraud before the tax court).

        Petitioners also argue that the tax court erred in finding that they failed to substantiate
their business expense deductions under Section 162 and Section 274(d). Taxpayers must keep
records to substantiate deductions for as long as the records are material to the administration of
the tax laws. See 26 U.S.C. § 6001; Treas. Reg. § 1.6001-1(a), (e). Business expenses claimed
under Section 274(d) are subject to stricter substantiation requirements as to the nature of
records to be maintained. Here, the tax court found that Petitioners failed to meet their
substantiation requirements under either Section. Much of Petitioners’ documentation was
illegible or blank, and such documentation as was legible did not clearly show a business
purpose for the claimed expenses. On appeal, Petitioners point to nothing that contradicts the tax
court’s findings. Accordingly, we find that the tax court did not err.

        Finally, Petitioners argue that the tax court erred in its imposition of penalties. Section
6651 requires the imposition of a penalty “[i]n case of failure to file any return . . . on the date
prescribed therefor (determined with regard to any extension of time for filing), unless it is
shown that such failure is due to reasonable cause and not due to willful neglect.” 26 U.S.C. §
6651(a)(1). Section 6662 requires the imposition of a penalty on the portion of an underpayment
in tax attributable to the taxpayer’s “[n]egligence or disregard of rules or regulations.” Id. §
6662(b). Negligence is defined as “any failure to make a reasonable attempt to comply with the


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provisions of [the Internal Revenue Code].” Id. § 6662(c); see also Treas. Reg. § 1.6662-3(b)(1)
(providing that it is negligent for a taxpayer to fail “to keep adequate books and records or to
substantiate items properly”). Section 6662 also has an exception for “reasonable cause.” 26
U.S.C. § 6664(c). In this case, Petitioners failed to keep adequate records and failed to file
timely returns, and are therefore liable for penalties under Sections 6651 and 6662. The tax
court found that they did not establish reasonable cause for their failures. Petitioners argue they
meet the reasonable cause exception, but they have pointed out no error in the tax court’s
determination.

      We have considered all of Petitioners’ other arguments and find them without merit.
Accordingly, the judgment of the district court is AFFIRMED.


                                                     FOR THE COURT:
                                                     Catherine O=Hagan Wolfe, Clerk




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