                          T.C. Summary Opinion 2016-7



                         UNITED STATES TAX COURT



                    JOSE G. HENAO, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 23394-12S.                         Filed February 8, 2016.



      Andrew R. Roberson and Kristina M. Gordon, for petitioner.

      D. Anthony Abernathy, for respondent.



                              SUMMARY OPINION


      GALE, Judge: This case was heard pursuant to the provisions of section

7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant

to section 7463(b), the decision to be entered is not reviewable by any other court,

and this opinion shall not be treated as precedent for any other case. Unless
                                         -2-

otherwise indicated, all section references are to the Internal Revenue Code of

1986, as in effect for the years in issue, and all Rule references are to the Tax

Court Rules of Practice and Procedure.

      Respondent determined deficiencies in petitioner’s 2009 and 2010 Federal

income tax of $3,758 and $5,443, respectively, and an accuracy-related penalty

under section 6662(a) of $1,088 for 2010. Petitioner filed a timely petition

seeking redetermination of the deficiencies. After concessions,1 the issues for

decision are: (1) whether petitioner is entitled to deductions for unreimbursed

employee business expenses for 2009 and 2010 in amounts greater than those

allowed by respondent; (2) whether petitioner is entitled to charitable contribution

deductions for 2009 and 2010 in amounts greater than those allowed by

respondent; (3) whether petitioner is entitled to a credit under section 25A for

2009; and (4) whether petitioner is liable for an accuracy-related penalty under

section 6662(a) for 2010.




      1
        Petitioner concedes additions to adjusted gross income of $507 for
additional wages, salaries, tips, etc. for 2009 and of $4,390 and $1,848 for 2009
and 2010, respectively, for taxable Social Security benefits. Respondent concedes
that petitioner is entitled to an additional charitable contribution deduction of
$2,000 for 2010.
                                         -3-

                                    Background

      Some of the facts have been stipulated and are so found. The stipulation of

facts and the accompanying exhibits are incorporated herein by this reference. At

the time the petition was filed, petitioner resided in Hawaii.

      On his 2009 Federal income tax return, petitioner reported $59,772 of

adjusted gross income and claimed itemized deductions of $28,491, including

employee business expenses and charitable contributions. On his 2010 Federal

income tax return, petitioner reported $189,262 of adjusted gross income and

claimed itemized deductions of $63,150, including employee business expenses

and charitable contributions.

Employee business expenses

      During the years in issue, petitioner was employed as a sales associate at

Wyndham Vacation Resorts, Inc. (Wyndham), in Honolulu, Hawaii, where he

marketed timeshares and was compensated on a commission basis. Petitioner

employed a variety of methods to attract prospective buyers and complete sales,

including holding open houses, cold calling, working with local travel agencies for

referrals of Honolulu visitors, and providing prospective buyers with various

incentives to attend timeshare presentations.
                                         -4-

       Wyndham provided office space for temporary use by its sales associates to

meet with potential buyers but did not provide petitioner office space to make

telephone calls to potential customers. Petitioner did some of his work at his

residence, including paperwork, telephone followups with potential customers,

and cold calling.

       Petitioner claimed unreimbursed employee expense deductions in

connection with his employment with Wyndham of $17,138 and $35,484 for 2009

and 2010, respectively.2 The notice of deficiency disallowed all but $1,560 for

each year, citing a failure by petitioner to establish the payment or business

purpose of these amounts. Petitioner contends that the disallowed amounts

included deductible amounts he has adequately substantiated, specifically:

(1) office rent; (2) customer referral payments to travel agents for initial referrals

of timeshare customers and for referrals that resulted in sales; (3) customer

incentives to attract prospective customers and to discourage cancellation of

timeshare purchases; (4) shipping; (5) continuing education; (6) telephone; and

(7) air travel.




       2
       The Forms 2106, Employee Business Expenses, that were attached to the
returns are not included in the record.
                                           -5-

      Office rent

      Petitioner wrote five checks for $800 each to “Seven Island Corp.” at one-

month intervals from January to May 2009. Written on the memo line of several

of the checks was a street address in Honolulu and “#303” or “Apt. 303.”

      Customer referral expenditures

      Petitioner’s credit card statements for 2009 list 12 charges totaling $741

denoted as “Food/Beverage” purchases at “Oceanarium Restaurant Honolulu”

(Oceanarium Restaurant).3 These expenditures were for Oceanarium Restaurant

gift certificates that petitioner gave to travel agents who referred potential

timeshare customers to him. Petitioner was not present when the food and

beverages purchased with these gift certificates were consumed.

      Petitioner’s credit card statements for 2009 also list six entries totaling

$379.03 denoted as “Personal Services” purchases at Outrigger Catamaran

Honolulu (Outrigger Catamaran).4


      3
       On brief petitioner lists only 11 Oceanarium Restaurant charges totaling
$631.72 for 2009. However, a review of petitioner’s 2009 credit card statements
reveals that petitioner’s brief contains the following two errors: (1) an
Oceanarium Restaurant charge of $82.34 is listed in the brief as $82.84, and (2) an
Oceanarium Restaurant charge of $109.78 is incorrectly listed as an “Outrigger
Catamaran” charge.
      4
          On brief, petitioner contends that there are seven rather than six Outrigger
                                                                           (continued...)
                                        -6-

      In 2010, petitioner gave cashier’s checks totaling $2,400 to travel agents

and other individuals when their referrals of potential timeshare buyers resulted in

completed sales. Petitioner stapled a copy of each such cashier’s check to a

completed Wyndham “Sales Professional Follow-Up Form” (followup form) as a

means of keeping track of his expenses associated with each completed sale on

which he earned a commission. Each followup form included the name or names

of the timeshare purchaser, a sale price, and a sale date and named petitioner as the

sale representative.

      Customer incentive expenditures

      The record includes a handwritten statement prepared by petitioner reciting

that he made cash payments to Hawaii Tour and Travel totaling $900 “for year

2010” for cruise tickets. The statement bears the stamp of Hawaii Tour and Travel

with a handwritten signature and is dated August 19, 2011.

      Also in 2010, petitioner took certain of his timeshare purchasers to dinner or

gave them gift certificates redeemable at a Honolulu resort to foster “goodwill”


      4
         (...continued)
Catamaran charges totaling $487.93. However, a review of petitioner’s 2009
credit card statements reveals that petitioner’s brief contains two errors: (1) the
incorrect listing of a $109.78 Oceanarium Restaurant charge as an Outrigger
Catamaran charge, noted above; and (2) an Outrigger Catamaran charge of $41.88
is listed in petitioner’s brief as $41.
                                         -7-

intended to discourage them from canceling their purchase contracts (retention

meals and retention gift certificates, respectively). Petitioner kept a record of

these expenditures by stapling to the followup form associated with the purchaser

the credit card receipt for the retention meal or the resort’s invoice reflecting the

purchase of the retention gift certificate. Eight followup forms had retention meal

credit card receipts from 2010 totaling $665.02,5 and seven had retention gift

certificate invoices from 2010 from the Marriott Waikiki Resort & Spa totaling

$450. An additional six followup forms had credit card receipts attached, totaling

$275, that did not indicate the nature of the credit card expenditure.

      Shipping costs

      One of petitioner’s credit card statements in 2009 had an entry for “Mail

Boxes, Etc.” in the amount of $72.25.

      Continuing education expenses

      The stipulated exhibits include petitioner’s check made out in 2009 to

“Management Specialists” for $99.48 and a credit card statement of petitioner’s

for 2009 with an entry for $20.66 for the vendor listed as “Get Motivated Semina

Tampa” and the description “Business Services”.

      5
        On brief petitioner lists all eight charges, but his total for them--$625.02--
omits one such charge, a $40 charge at Saba Dee Thai restaurant. The correct
figure, as respondent notes in his brief, is $665.02.
                                        -8-

      Telephone

      The stipulated exhibits include copies of 17 checks petitioner made out to

“Sprint” during 2009 and 2010. None of the Sprint checks bears an entry in the

memo line, and no Sprint monthly statements are in the record.

      Air travel

      During 2009 petitioner took seven same-day roundtrip flights from Oahu to

the island of Hawaii to fill in as a sales associate at another Wyndham timeshare

sales office that was understaffed. Petitioner’s credit card statements for 2009 list

seven entries for $39.95 for the vendor “Mokulele Flight SE 5 Kailua Kona” and

the description “Airport Terminal F”.

      Wyndham’s reimbursement policy

      Wyndham had a written reimbursement policy that set forth certain terms

and conditions for reimbursement of expenses incurred by employees. The

reimbursement policy stated that Wyndham employees had to use a corporate

charge card for all travel and entertainment expenses. The policy was silent with

respect to mailing and shipping costs incurred by employees.

      Petitioner requested a corporate charge card from Wyndham, but it was

refused to him with the explanation that charge cards were available only to

company presidents and vice presidents.
                                       -9-

      Petitioner brought an employment discrimination lawsuit against Wyndham

on December 28, 2010. In his complaint, as amended, he alleged that in January

2009 his Wyndham supervisors accused him of offering unauthorized incentives to

prospective clients.

Charitable contributions

      2009

      In 2009, petitioner wrote checks totaling $1,640 to “Victory Outreach” and

a check for $60 to “Trinity Broadcasting Network” (Trinity).

      The founder of the “Waikiki Beach Outreach Ministry” (Waikiki Outreach)

wrote letters in April and May of 2013 stating that petitioner made contributions to

the organization in 2009 by cash and check that totaled $8,340.

      2010

       The founder of Waikiki Outreach wrote letters in April and May of 2013

stating that petitioner made contributions to the organization in 2010 by cash and

check that totaled $14,450.

American Opportunity Tax Credit

      Petitioner’s daughter Vanessa Henao was enrolled full time at the

University of Hawaii during 2009. She was allowed as petitioner’s dependent for

that year. The University of Hawaii issued Forms 1098-T, Tuition Statement, for
                                        - 10 -

2009 and 2010 to Vanessa, reporting amounts billed during those years for tuition

and related expenses of $1,861 and $2,858, respectively. Petitioner wrote four

checks to Vanessa between January and April 2009 for $330, $320, $150, and

$320. Written in the memo line of all but the $150 check is “school tuition”.

Accuracy-related penalty

      Petitioner’s 2010 return names H&R Block as the paid preparer.

                                     Discussion

      Generally, the Commissioner’s determinations in a notice of deficiency are

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

determinations are erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111,

115 (1933). Deductions are a matter of legislative grace, and the burden of

showing entitlement to a claimed deduction is on the taxpayer. Rule 142(a);

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); see also sec. 6001;

Hradesky v. Commissioner, 65 T.C. 87, 89 (1975), aff’d per curiam, 540 F.2d 821

(5th Cir. 1976). However, the burden of proof shifts to the Commissioner as to

any factual issue relevant to a taxpayer’s liability for income tax where the

taxpayer introduces credible evidence with respect to the issue and certain other

criteria are met, including substantiation of items on the return. Sec. 7491(a).

Credible evidence for this purpose “is the quality of evidence which, after critical
                                        - 11 -

analysis, the court would find sufficient upon which to base a decision on the issue

if no contrary evidence were submitted”. Higbee v. Commissioner, 116 T.C. 438,

442 (2001) (quoting H.R. Conf. Rept. No. 105-599, at 240-241 (1998), 1998-3

C.B. 747, 994-995).

      While conceding that he has the burden to substantiate the deductions and

the credit at issue, petitioner argues that the burden has shifted to respondent with

respect to other issues, such as whether reported business expenses were ordinary

and necessary. We disagree. As discussed more fully infra, we conclude that the

burden of proof has not shifted to respondent under section 7491(a) with respect to

any factual issues, either because petitioner has failed to substantiate an item or, in

the case of certain alleged business purposes for expenditures, because petitioner

has not introduced credible evidence of business purpose.

      Where a taxpayer establishes that he paid or incurred a deductible expense

but does not establish the amount of the deduction to which he may be entitled, we

may in certain circumstances estimate the amount allowable. See Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner,

85 T.C. 731, 742-743 (1985). For expenses subject to the more stringent

substantiation requirements of section 274(d), however, the Cohan rule may not be

used. See Sanford v. Commissioner, 50 T.C. 823, 827 (1968), aff’d per curiam,
                                       - 12 -

412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a)(4), Temporary Income Tax Regs.,

50 Fed. Reg. 46014 (Nov. 6, 1985). In addition, the Cohan rule does not relieve

taxpayers of substantiation requirements that Congress has specifically laid out

under section 170 with respect to charitable contributions. Van Dusen v.

Commissioner, 136 T.C. 515, 537 n. 39 (2011). And section 170(f)(17) provides

that no charitable contribution deduction is allowed “for any contribution of a

cash, check, or other monetary gift unless the donor maintains as a record of such

contribution a bank record or written communication from the donee showing the

name of the donee organization, the date of the contribution, and the amount of the

contribution.”

Employee Business Expenses

      Overview

      Section 162 allows a taxpayer to deduct all “ordinary and necessary”

expenses paid or incurred by the taxpayer in carrying on a trade or business,

including expenses paid or incurred as an employee. Lucas v. Commissioner, 79

T.C. 1, 6 (1982). A deductible business expense under section 162 must be

“directly connected with or pertaining to the taxpayer’s trade or business”. See

Briggs v. Commissioner, 75 T.C. 465, 468-469 (1980), aff'd, 694 F.2d 614 (9th

Cir. 1982); sec. 1.162-1(a), Income Tax Regs. A proximate relation between the
                                       - 13 -

expense and the business is required. Walliser v. Commissioner, 72 T.C. 433,

437-438 (1979); Lohrke v. Commissioner, 48 T.C. 679, 689 (1967); see also

Noland v. Commissioner, 269 F.2d 108, 113 (4th Cir. 1959) (requiring “proof of

some certainty and directness”), aff’g T.C. Memo. 1958-60. The determination is

essentially one of fact. Commissioner v. Heininger, 320 U.S. 467, 475 (1943);

Walliser v. Commissioner, 72 T.C. at 437. In general, no deduction is allowed for

personal, living, or family expenses. Sec. 262(a).

      A deduction under section 162 generally is not allowable to an employee to

the extent that the employee is entitled to (but does not claim) reimbursement of

the expense. Lucas v. Commissioner, 79 T.C. at 7; Podems v. Commissioner, 24

T.C. 21 (1955). Such an expense generally is not considered “necessary”. See

Orvis v. Commissioner, 788 F.2d 1406, 1408 (9th Cir. 1986), aff’g T.C. Memo.

1984-533; Podems v. Commissioner, 24 T.C. at 22-23. Expenditures that are not

reimbursable by the employer but that enable an employee to better perform his

duties to the employer and that have a direct bearing on the amount of his

compensation or chances for advancement may be deductible under section 162.

See Walliser v. Commissioner, 72 T.C. at 437; see also Heineman v.

Commissioner, 82 T.C. 538, 545 (1984). The absence of a requirement or

expectation on the part of the employer that the employee make the expenditure
                                         - 14 -

and bear the cost does not itself bar the deduction of an employee business

expense. See, e.g., O’Malley v. Commissioner, 91 T.C. 352, 363-364 (1988);

Heineman v. Commissioner, 82 T.C. at 545; Christensen v. Commissioner, 17 T.C.

1456, 1456-57 (1952); Jetty v. Commissioner, T.C. Memo. 1982-378; Reynolds v.

Commissioner, T.C. Memo. 1980-422.

      Respondent contends that all of petitioner’s reported employee business

expenses, except office rent, were reimbursable under Wyndham’s reimbursement

policy. The taxpayer bears the burden of proving that he is not entitled to

reimbursement from the employer for any reported employee business expenses.

See Fountain v. Commissioner, 59 T.C. 696, 708 (1973). We address the issue of

reimbursability in the analysis that follows where its resolution is necessary to

decide petitioner’s entitlement to a specific expense item.

      Office rent

      Petitioner contends that $4,000 of the claimed employee business expense

deduction for 2009 that respondent disallowed constitutes rent he paid for office

space. Petitioner testified that the rent was paid for a “small room” he shared with

another Wyndham sales associate that was used for making cold calls to

prospective timeshare purchasers, away from the distractions of home. Petitioner

testified that this rent was paid to a “friend”.
                                         - 15 -

      As substantiation petitioner proffered five checks he wrote in 2009, all of

which were for $800, made out to “Seven Island Corp.”, dated at one-month

intervals, and--in the case of several--containing in the memo line a street address

in Honolulu and “#303” or “Apt. 303”.

      Respondent, noting the absence of any lease in the record, contends that

petitioner’s self-serving testimony and the foregoing checks are insufficient to

substantiate the claimed rent expense.

      We agree with respondent. The checks do not corroborate petitioner’s

testimony in important respects. If petitioner paid the rent to a “friend”, why are

the checks made out to a corporate entity? Petitioner has not explained. And if

the lessor was a corporation, we find the absence of a copy of any lease

implausible. Petitioner claims that he rented a small room, but the memo entries

on several of the checks indicate they were for an apartment. If, as petitioner

claims, he shared this rental property with another Wyndham sales associate, what

portion of the rent was paid by the associate? Petitioner has not said. In sum,

while the checks might establish that petitioner paid $4,000 to rent an apartment

during 2009, they do not establish that the apartment was used for business as

opposed to personal purposes. Because petitioner’s testimony and his proffered

documentation do not correspond, we conclude that petitioner has failed to offer
                                          - 16 -

credible evidence within the meaning of section 7491(a)(1) concerning the

business purpose of the rent he paid. He therefore retains the burden of proof on

that issue and has failed to meet it. Petitioner has accordingly not shown

entitlement to any deduction for office rent for 2009.

      Customer referral expenditures

      Petitioner contends that $1,120.03 of his claimed employee business

expense deduction for 2009 that respondent disallowed was for the purchase of

gift certificates that he gave to travel agents for their referrals of potential

timeshare buyers. As substantiation petitioner proffers his credit card statements

for 2009 that list 12 charges for “Food/Beverage” at Oceanarium Restaurant

totaling $741 and six charges for “Personal Services” at Outrigger Catamaran

totaling $379.03. Petitioner made the handwritten notation “gift cert.” next to

each of these entries at a time not disclosed in the record. Respondent argues that

petitioner’s uncorroborated, self-serving testimony does not establish that he paid

referral fees to travel agents.

      As for the Outrigger Catamaran entries, the obvious inference to be drawn is

that petitioner purchased catamaran rides. Even if we give petitioner the benefit of

the doubt--not drawing the conclusion that he himself took six catamaran rides

during 2009 but instead purchased gift certificates for rides to be given to others--
                                         - 17 -

we encounter tough sailing with the rest of the story. Why were Honolulu-based

travel agents providing referrals to petitioner compensated with catamaran rides

rather than cash? To get over that hump of implausibility, one has to speculate

that perhaps the travel agents found the gift certificates useful because they could

“re-gift” them to clients. But this is too much speculation. We conclude that

petitioner has failed to introduce credible evidence within the meaning of section

7491(a)(1) concerning the business purpose for the Outrigger Catamaran

expenditures. He therefore retains the burden of proof on that issue and has failed

to meet it. Accordingly, petitioner has not shown entitlement to an employee

business expense deduction for the Outrigger Catamaran expenditures.

      As for the Oceanarium Restaurant entries, they are listed on the credit card

statements as for food and beverage. Accepting petitioner’s testimony that the

entries represent the purchase of restaurant gift certificates that he gave to travel

agents as referral fees,6 we find that the gift certificates were redeemable for food

and beverages.7 For that reason, petitioner’s attempt to deduct the expenditure


      6
      We find it considerably more plausible that a travel agent in the
circumstances described by petitioner would be compensated with a
complimentary restaurant meal rather than a catamaran ride.
      7
        Cf. Concord Instruments Corp. v. Commissioner, T.C. Memo. 1994-248
(treating season ticket expenditures as entertainment expenditures for purposes of
                                                                      (continued...)
                                        - 18 -

founders on section 274(k). Section 274(k)(1) provides that “no deduction shall

be allowed under this chapter for the expense of any food or beverages unless

* * * the taxpayer (or an employee of the taxpayer) is present at the furnishing of

such food or beverages.” “This chapter” is chapter 1 of subtitle A of the Internal

Revenue Code, which encompasses both section 274 and the allowance of trade or

business deductions under section 162. Since, according to petitioner, he treated

helpful travel agents to restaurant meals by giving them gift certificates from a

restaurant, the evidence all points to the conclusion that petitioner was not present

for the meal. We find that he was not.8 We accordingly conclude that section

274(k)(1) precludes petitioner’s deduction of the Oceanarium Restaurant

expenditures as employee business expenses.9




      7
       (...continued)
section 274).
      8
       Had petitioner been present for the meal, it is implausible that he would
have used a gift certificate as opposed to merely picking up the check. Petitioner
has made no contention to the contrary.
      9
        While there are various exceptions to the sec. 274(k)(1) disallowance rule
in sec. 274(k)(2), none is pertinent. We note in this regard that there is no
evidence that petitioner treated the gift certificates as includible in the gross
income of the recipients and filed information returns reporting the same. See sec.
274(e)(9); see also Boris I. Bittker & Lawrence Lokken, Federal Taxation of
Income, Estates and Gifts, par. 21.2.4, at s21-9-21-10 (Supp. 2015).
                                         - 19 -

      Petitioner also contends that $2,400 of his claimed employee business

expense deduction for 2010 that respondent disallowed is deductible by him

because he made payments in that aggregate amount to travel agents and other

individuals when their referrals of potential timeshare buyers resulted in

completed sales. He testified to this effect and the stipulated exhibits include five

completed followup forms for 2010 containing the name of a timeshare purchaser,

a sale price, and sale date and listing petitioner as the sales representative.

Attached to each is a copy of a cashier’s check with a date in 2010, an individual

named as payee, and a value ranging from $300 to $800. The checks total $2,400.

Respondent argues that petitioner’s self-serving testimony does not establish that

the cashier’s checks were provided to travel agents as referral fees, or that such

fees, if so paid, were ordinary and necessary business expenses.

      We are satisfied that the documentary evidence sufficiently corroborates

petitioner’s testimony. The cashier’s check copies are each stapled to a particular

followup form that has been filled out in a manner indicating a completed

timeshare sale. We are persuaded by the circumstantial evidence that petitioner

affixed the cashier’s check copies to the followup forms as a means of keeping

track of the expenditures he made to facilitate a given timeshare sale. The

business purpose of providing a cash “referral fee” to a travel agent who referred a
                                        - 20 -

prospective customer to petitioner that culminated in a completed timeshare sale is

obvious.

        The question remains, however, whether petitioner was eligible to be

reimbursed by Wyndham for these referral fees, as respondent also contends.

Petitioner testified that Wyndham was unwilling to reimburse him for these

referral fees. On December 28, 2010, petitioner brought an employment

discrimination lawsuit against Wyndham. In his complaint, as amended, he

alleged that in January 2009 his Wyndham supervisors accused him of offering

unauthorized incentives to prospective clients. On this record and in view of the

relaxed standards for evidence in a small tax case, see sec. 7463(a); Rule 174(b),

we are satisfied from the lawsuit allegation that in 2010 Wyndham had become

distrustful of petitioner’s use of incentives to facilitate timeshare sales. We are

satisfied on this record that petitioner was not, and could not have been,

reimbursed for these referral fees. Accordingly, we hold that petitioner is entitled

to deduct $2,400 as an ordinary and necessary employee business expense for

2010.

        Customer incentive expenditures

        Petitioner contends that $900 of his claimed employee business expense

deduction for 2010 that respondent disallowed constitutes his payment for dinner
                                        - 21 -

cruise tickets to entice prospective timeshare buyers to attend Wyndham sales

presentations and is therefore deductible. Petitioner testified that he purchased the

tickets with cash. To substantiate the cash payment, petitioner proffered a

handwritten statement he prepared, dated August 19, 2011, reciting that he paid

cash to “Hawaii Tour and Travel” totaling $900 “for year 2010” for cruise tickets.

The statement bears the stamp of “Hawaii Tour and Travel” and the signature of

an individual petitioner testified represented the foregoing firm.

      The dinner cruise tickets constitute entertainment expenses for purposes of

section 274. See sec. 1.274-2(b)(1), Income Tax Regs. A deduction for the

expenditure is therefore subject to the strict substantiation requirements of section

274(d). See sec. 274(d)(2). One element of an entertainment expenditure that

must be substantiated under section 274 is the date. See sec. 1.274-5T(b)(3)(ii),

Temporary Income Tax Regs., 50 Fed. Reg. 46015 (Nov. 6, 1985). The

substantiation petitioner has offered at most establishes that he purchased several

dinner cruise tickets in 2010. It does not establish either the dates the tickets were

purchased or the dates the cruises were taken. See Smith v. Commissioner, 80

T.C. 1165, 1171-1172 (1983) (applying section 274(d)(1)) (“Each of the * * *

elements must be proved for each separate expenditure.”); Wakefield v.

Commissioner, T.C. Memo. 2015-4 (stating that section 1.274-5T(b)(3),
                                         - 22 -

Temporary Income Tax Regs., supra, requires, for each expense, the date of the

entertainment or meal, its location, its specific business purpose, the attendees, and

the attendees’ business relationship to the taxpayer).10

      Petitioner also contends that $1,390.02 of his claimed employee business

expense deduction for 2010 that respondent disallowed constitutes expenditures

for meals (retention meals) and gift certificates (retention gift certificates) that he

provided to timeshare purchasers as a “goodwill” gesture to encourage them not to

exercise their cancellation rights. As substantiation petitioner offered additional

completed followup forms for 2010, each including the name of a timeshare

purchaser, a sale price, and a sale date and naming petitioner as sales

representative. Attached to the forms were credit card receipts or invoices, as

described infra.

      With respect to the retention meals, eight of the followup forms have

stapled to them a credit card receipt of petitioner’s for a restaurant meal that

together total $665.02. Providing food and beverages to customers is

“entertainment” for purposes of section 274 and therefore is subject to that


      10
        There is no evidence that petitioner made the cruise tickets available to the
general public or a cross-section thereof, as opposed to persons he selected. See
274(e)(7); Churchill Downs, Inc. v. Commissioner, 115 T.C. 279 (2000), aff’d,
307 F.3d 423 (6th Cir. 2002); sec. 1.274-2(f)(2)(viii), Income Tax Regs.
                                        - 23 -

section’s more stringent substantiation requirements. See Sanford v.

Commissioner, 50 T.C. at 827; Jones v. Commissioner, T.C. Memo. 2013-132;

sec. 1.274-2(b)(1)(i), Income Tax Regs. In general, a taxpayer must show that

such an entertainment expenditure is either “directly related to” or “associated

with” the active conduct of the taxpayer’s trade or business, sec. 274(a)(1); he

must substantiate the amount, time and place, business purpose, and his business

relationship to the persons entertained, sec. 274(d); and, in the case of a meal, he

must have been present for its consumption, sec. 274(k).

      Petitioner testified that he bought dinner for certain of his timeshare

purchasers so that they would not change their minds and cancel their purchases.

We are satisfied that the credit card receipts, stapled as each was to a specific

followup form, corroborate petitioner’s testimony as to the business purpose for

and relationship to specific timeshare purchasers entertained at meals and

substantiate the amount, time, and place of the meals. A taxpayer may satisfy the

“associated with” requirement of section 274(a)(1) by showing that an

entertainment expenditure was incurred “to encourage the continuation of an

existing business relationship.” Sec. 1.274-2(d)(2), Income Tax Regs. We are

satisfied that is what occurred here. Generally, the entertainment must directly

precede or follow a bona fide business transaction. Where the entertainment does
                                        - 24 -

not occur on the same day as the transaction, the regulations further provide that

satisfaction of this temporal aspect requires a consideration of all the facts and

circumstances. Id. subpara. (3)(ii). Under that standard, we are satisfied that

petitioner’s providing his customers with meals so that they would not exercise

their cancellation rights is close enough in time to the purchase of the timeshare as

to constitute “associated with” entertainment under the regulations. That

petitioner’s credit cards were used for the meal purchases establishes to our

satisfaction that he was present at the meals. Thus, we conclude that petitioner has

shown that the meals were “associated with” the active conduct of his business in

that they facilitated the consummation of a timeshare sale, thereby securing

petitioner’s commission. We also find that petitioner was not and could not have

been reimbursed by Wyndham for these meal expenditures, for the same reasons

we reached that conclusion with respect to the referral fees. Consequently, we

hold that petitioner has shown entitlement to deduct $665.02 in employee business

expenses for 2010 disallowed by respondent, subject to the 50% limitation of

section 274(n), which petitioner acknowledges.

      With respect to the retention gift certificates, attached to seven of the

followup forms are invoices from the Marriott Waikiki Resort & Spa for purchases

of gift certificates totaling $450. (Five of the invoices indicate purchases by credit
                                        - 25 -

cards corresponding to the credit cards petitioner used for the meals discussed

above, and two are for cash.) Given that the gift certificates were redeemable at a

resort property, presumably for resort activities or lodging, we find that providing

them constituted providing “entertainment” within the meaning of section 274.

See sec. 274(a)(1); sec 1.274-2(b)(1)(i), Income Tax Regs. Consequently,

petitioner must establish that the expenditures were either “directly related to” or

“associated with” the active conduct of his business, sec. 274(a)(1), and he must

substantiate the amount, time, place, and business purpose of the entertainment

and his business relationship to the persons entertained, sec. 274(d).

      Petitioner argues that the gift certificates served the same purpose as the

meals: to encourage timeshare purchasers not to exercise their cancellation rights.

As with the credit card receipts for meals, we are satisfied that the stapling of a

gift certificate invoice to a specific followup form corroborates petitioner’s

testimony as to the business purpose for and relationship to specific timeshare

purchasers whom petitioner entertained by means of gift certificates at the resort.

The gift certificate invoices substantiate the dollar amount and place of the

entertainment and, given that the timeshare purchasers were vacationing in

Hawaii, we are satisfied that the gift certificates were redeemed within a short time

after their purchase, which would adequately substantiate the date and time of the
                                        - 26 -

entertainment. For essentially the same reasons as for the meals, we are persuaded

that the entertainment petitioner provided by means of the resort gift certificates

was “associated with” the active conduct of his trade or business. We also find

that petitioner was not and could not have been reimbursed by Wyndham for these

gift certificate expenditures, for the same reasons we reached that conclusion with

respect to the referral fees. Consequently, we hold that petitioner has shown

entitlement to deduct $450 in employee business expenses for 2010 disallowed by

respondent, subject to the 50% limitation of section 274(n).

      We find the substantiation inadequate for the remaining $275 petitioner

deducted for retention gift certificates. Although there are another six followup

forms in the stipulated exhibits with credit card receipts stapled to them that

together total $275, nothing anywhere on any document or attachment indicates

that the expenditure was for the purchase of a gift certificate.

      Shipping costs

      Petitioner contends that $72.25 of his claimed employee business expense

deduction for 2009 that respondent disallowed constitutes shipping costs that he is

entitled to deduct. Petitioner testified that he often mailed 8- to 10-pound

paperwork kits to timeshare purchasers after they returned home from Hawaii, as

the purchasers were reluctant to carry the materials in their luggage. Petitioner’s
                                        - 27 -

credit card statements for 2009 include a July 10, 2009, entry for the amount noted

above at “Mail Boxes, Etc.” Petitioner made the handwritten notation “mail

shipments” next to the entry at a time not established in the record.

      We conclude that petitioner has shown entitlement to a $72.25 deduction for

shipping costs as an employee business expense for 2009. We are persuaded that

petitioner made the expenditure for the convenience of his timeshare purchasers

and thereby secured his commissions. Given the silence of the Wyndham

reimbursement policy regarding shipping costs incurred by employees, we are

satisfied that petitioner was not eligible for reimbursement.

      Continuing education expenses

      Petitioner contends that $120.14 of his claimed employee business expense

deduction for 2009 that respondent disallowed is “continuing education” expenses

that he is entitled to deduct. On brief petitioner points to a copy of a check he

made out to “Management Specialists” and a 2009 credit card statement entry for

“Get Motivated” that, when totaled, equal the previous figure. Petitioner made

handwritten notations next to the check copy and the credit card statement, at a

time not disclosed in the record, indicating that the foregoing were for education.

Petitioner argues on brief that these expenditures were for education necessary for

the renewal of his real estate and business licenses, but there is no competent
                                        - 28 -

testimony to that effect. Because petitioner has not introduced credible evidence

within the meaning of section 7491(a)(1) sufficient to support a finding in his

favor, he retains the burden of proof regarding the business purpose of these

expenditures and has failed to meet it. He has therefore failed to show entitlement

to deduct any continuing education expenses for 2009.

      Telephone

      Petitioner claims that $121 of his claimed employee business expense

deduction for 2009 that respondent disallowed constitutes his expenditures for

cellular telephone use in connection with his employment with Wyndham.

Petitioner testified that he kept two cell phones with Sprint service, one for

personal matters and one for business. The stipulated exhibits include copies of

17 checks petitioner made out to Sprint during 2009 and 2010. Petitioner testified

that checks attributable to the business phone could be distinguished from checks

attributable to the personal phone because the monthly charges were

approximately $50-$60 for the former and $100 for the latter. Petitioner testified

that two of the Sprint checks written in 2009, for $56 and $65, were for the

business phone. (The remaining checks generally ranged from $107.58 to

$232.82.) None of the Sprint checks bears an entry in the memo line. No Sprint

monthly statements are in the record.
                                        - 29 -

      For 2009 cellular phones were “listed property” subject to the strict

substantiation requirements of section 274(d). Secs. 274(d)(4), 280F(d)(4); sec.

1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 1985).

By those standards, petitioner’s substantiation of business cell phone use is

inadequate. We therefore hold that petitioner has not shown entitlement to any

employee business expense deduction for 2009 for a cellular phone.

      Air travel

      Petitioner contends that $279.65 of his claimed employee business expense

deduction for 2009 that respondent disallowed constitutes airfare that he is entitled

to deduct. Petitioner testified that he paid for flights from Oahu to the Big Island

to cover for employees at one of Wyndham’s timeshare sales offices there.

Respondent argues that petitioner has not satisfied the substantiation requirements

applicable to travel expenses under section 274(d).

      Petitioner concedes these are traveling expenses required to be substantiated

under section 274(d) but argues that he has adequately done so.11 In the case of a

traveling expense, the taxpayer must substantiate the amount of each separate


      11
        Because we conclude on the basis of a preponderance of the evidence that
petitioner’s trips to the Big Island did not involve staying overnight, there is some
doubt whether the expenditures are properly characterized as a “traveling expense”
within the meaning of sec. 274(d)(1) as opposed to a transportation expense.
                                        - 30 -

expenditure, departure and return dates, destination, and business purpose. Sec.

1.274-5T(b)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).

The stipulated exhibits include petitioner’s credit card statements for 2009, and

those statements contain seven entries for $39.95 with the vendor listed as

“Mokulele Flight SE 5 Kailua Kona” and the description “Airport Terminal F”.

      For the reasons discussed below, we are satisfied that petitioner has

adequately substantiated his reported traveling expense under section 274(d). We

take judicial notice of the fact that Kailua Kona is on the Big Island (the island of

Hawaii). The credit card entries persuade us that each represents petitioner’s

purchase of roundtrip airfare between Oahu and the Big Island on the dates

specified (on a walkup, at-the-terminal basis, given the description line), thus

satisfying all elements of the regulation except business purpose. Petitioner’s

testimony persuades us of the business purpose: to fill in as a sales associate at

another Wyndham timeshare sales office that was understaffed. Because

petitioner was compensated on a commission basis, we find it plausible that he

would take advantage of the opportunity to mine other prospects at a different

Wyndham location when presented, even to the point of getting himself there at

his own expense, given the modest cost per trip.
                                        - 31 -

      We find that petitioner was not, and could not have been, reimbursed by

Wyndham for the cost of these flights. The Wyndham reimbursement policy

required that Wyndham employees use a corporate charge card for all travel

expenses. Petitioner’s request for such a card was denied.

      We therefore hold that petitioner has shown entitlement to an employee

business expense deduction of $279.65 for air travel for 2009.

      Conclusion

      In the notice of deficiency, respondent allowed deductions of $1,560 for

2009 and 2010 for unreimbursed employee business expenses. To demonstrate

error in these determinations, petitioner must demonstrate that he is entitled to

deductions in excess of the amount allowed. See Schafler v. Commissioner, T.C.

Memo. 1998-86. For 2009 we have found herein that petitioner has demonstrated

entitlement to a deduction of $351.90 for unreimbursed employee business

expenses--far less than the $1,560 respondent allowed. For 2010 we have found

herein that petitioner has demonstrated entitlement to deductions totaling

$2,957.51 for unreimbursed employee business expenses, consisting of $2,400 in

referral payments, plus meals and entertainment expenses of $665.02 and $450 the

deductibility of which is limited to 50% of the expenditure. Consequently, we

hold that petitioner is not entitled to any additional employee business expense
                                       - 32 -

deduction for 2009 beyond those allowed by respondent, and that he is entitled to

an additional deduction of such expenses for 2010 of $1,397.51.

Charitable contributions

      Petitioner claimed charitable contribution deductions of $8,747 and $18,000

on his 2009 and 2010 returns, respectively. In the notice of deficiency, respondent

determined that petitioner had substantiated only $3,100 of such deductions for

each year, and disallowed the remaining $5,647 and $14,900 reported

contributions for the 2009 and 2010 years, respectively. Respondent has since

conceded that petitioner is entitled to additional charitable contribution deductions

for 2010 of $2,000, for a total of $5,100 in charitable contribution deductions

allowed for that year.

      Section 170(a) allows a deduction for a charitable contribution made within

the taxable year, but only if “verified under regulations prescribed by the

Secretary.” With respect to monetary gifts, section 170(f)(17) further provides

that “[n]o deduction shall be allowed under * * * [section 170(a)] for any

contribution of a cash, check, or other monetary gift unless the donor maintains as

a record of such contribution a bank record or a written communication from the

donee showing the name of the donee organization, the date of the contribution,

and the amount of the contribution.” Section 170(f)(17) was added to the Code by
                                        - 33 -

the Pension Protection Act of 2006, Pub. L. No. 109-280, sec. 1217(a), 120 Stat. at

1080. It is effective for taxable years beginning after August 17, 2006. See id.

subsec. (b) (date of enactment is effective date). Before the enactment of section

170(f)(17), the applicable recordkeeping requirements for substantiating a

monetary charitable contribution were set out in section 1.170A-13(a), Income

Tax Regs.

      2009

      Petitioner contends he is entitled to deduct $13,140 in charitable

contributions for 2009 consisting of: (1) $8,340 in contributions by cash or check

to Waikiki Outreach; (2) $1,640 in contributions by check to Victory Outreach;

(3) a $60 contribution by check to Trinity; and (4) the $3,100 allowed in the notice

of deficiency. Respondent contends that the Waikiki Outreach contributions have

not been substantiated and that while there are checks to substantiate the Victory

Outreach and Trinity contributions, the total of those is less than the $3,100

allowed for charitable contribution deductions in the notice of deficiency. Thus,

respondent contends, petitioner has not shown entitlement to any deduction

greater than what has been allowed.

      Petitioner offers as substantiation for the 2009 Waikiki Outreach

contributions letters written more than three years later, in April and May of 2013,
                                         - 34 -

by Waikiki Outreach’s founder, who also testified at trial. The April letter states

that petitioner made “contributions totaling $8,340 (over $600 to $700 cash per

month in cash and checks) in 2009” while the May letter states: “Our records and

information reflect monthly contributions [by petitioner] of $400 per month in

checks and an average of about $600 per month in cash from early 2009 to 2011.

Your contributions totaled $8,340 in 2009”.

      These letters do not satisfy the substantiation requirements of section

170(f)(17). They do not establish the amounts of the contributions. Even putting

aside the obvious problem that the letters contradict each other as to the monthly

amounts given ($600 to $700 per month according to one; $1,000 per month

according to the other), it is clear from the face of the letters that they are mere

estimates. One says “$600 to $700” per month; the other says, with respect to

cash, “an average of about $600 per month” but only from “early” 2009. The

letters also do not establish the date of any contribution.12

      Petitioner argues, albeit in reference to the requirements of section 1.170A-

13(a)(1), Income Tax Regs., that he has substantially complied with the

      12
         Petitioner suggests on brief that Waikiki Outreach maintained records of
the contributions that are more detailed than the letters. In our view, the testimony
of the letters’ author casts some doubt on that proposition, but in any event sec.
170(f)(17) provides that the required information must be in the written
communication from the donee that is maintained by the taxpayer in his records.
                                        - 35 -

substantiation requirements, citing Van Dusen v. Commissioner, 136 T.C. 515,

and Bond v. Commissioner, 100 T.C. 32 (1993), cases where this Court held that

taxpayers were entitled to charitable contribution deductions notwithstanding their

failure to comply strictly with certain regulatory requirements set forth in section

1.170A-13, Income Tax Regs. This Court’s application of the substantial

compliance doctrine has been summarized as turning upon whether the

requirements “relate to the substance or essence of the statute”--in which case

strict adherence is required--or whether instead the requirements “are procedural

or directory in that they are not of the essence of the thing to be done but are given

with a view to the orderly conduct of business”--in which case they may be

fulfilled by substantial, if not strict, compliance. Taylor v. Commissioner, 67 T.C.

1071, 1077-1078 (1977).

      The requirements at issue here--namely, that the written communication

from the donee show the date and amount of a contribution--have been put into the

statute by Congress in enacting section 170(f)(17). The legislative history of

section 170(f)(17) states:

             The provision * * * provid[es] that in the case of a charitable
      contribution of money * * * applicable record keeping requirements
      are satisfied only if the donor maintains as a record of the
      contribution a bank record or a written communication from the
      donee showing the name of the donee organization, the date of the
                                        - 36 -

      contribution, and the amount of the contribution. The recordkeeping
      requirements may not be satisfied by maintaining other written
      records. * * * The provision is intended to provide greater certainty,
      both to taxpayers and to the Secretary, in determining what may be
      deducted as a charitable contribution.

Staff of J. Comm. on Taxation, Technical Explanation of H.R. 4, the “Pension

Protection Act of 2006,” as Passed by the House on July 28, 2006, and as

Considered by the Senate on August 3, 2006, at 305-306 (J. Comm. Print 2006)

(emphasis added). We conclude that the recordkeeping requirements of section

170(f)(17) are its essence. Consequently, they may not be satisfied by substantial

compliance. We reached a similar conclusion with respect to the statutory

requirements for charitable contributions of $250 or more set forth in section

170(f)(8). See Durden v. Commissioner, T.C. Memo. 2012-140. Because the

letters do not strictly comply with section 170(f)(17), petitioner has failed to

substantiate any charitable contribution to Waikiki Outreach for 2009.

      Even if a deduction for the claimed contributions to Waikiki Outreach were

not precluded by section 170(f)(17), we would still conclude that petitioner had

failed to substantiate the contributions because the letters are unreliable. The

letters were written more than three years after petitioner purportedly made the
                                         - 37 -

2009 contributions.13 Waikiki Outreach’s founder, who wrote the letters, also

testified; his testimony made clear that he was estimating from memory in writing

the letters. We have noted that the letters contradict each other as to the monthly

amounts given. Both letters also state that petitioner made contributions by check

most months during 2009. Although the stipulated exhibits contain an extensive

number of petitioner’s canceled checks for 2009, none are written to Waikiki

Outreach. In short, the letters are simply not reliable evidence of the amount of

petitioner’s contributions to Waikiki Outreach in 2009.

      There remains petitioner’s claim of deductions for charitable contributions

of $1,640 to Victory Outreach and $60 to Trinity, for a total of $1,700.

Respondent contends that even if these contributions were treated as




      13
        Because the letters do not establish the dates or amounts of the
contributions as required by sec. 170(f)(17), we find it unnecessary to decide
whether petitioner’s procurement of the letters in 2013 would satisfy the sec.
170(f)(17) requirement that the donor “maintain[] as a record of such
contribution” a bank record or written communication from the donee showing the
required information. We note in this regard that proposed regulations
implementing sec. 170(f)(17) set as a deadline for the donor’s receipt of the
records the earlier of: (1) the date the donor files the original return for the taxable
year in which the contribution was made; or (2) the due date (including
extensions) for filing the donor’s original return for that year. See sec. 1.170A-
15(c), Proposed Income Tax Regs., 73 Fed. Reg. 45914 (Aug. 7, 2008).
                                        - 38 -

substantiated,14 they total less than the $3,100 charitable contribution deduction

allowed in the notice of deficiency for 2009 and are therefore encompassed in that

allowance.

      Petitioner argues that these deductions should not be treated as included in

the allowed amount because, in the case of the charitable contribution deduction

allowed for 2010, the examining agent made an “X” on the canceled checks that

were included in reaching the $3,100 figure allowed for that year, while there is no

“X” on the checks substantiating the Victory Outreach and Trinity contributions

for 2009. Petitioner testified that it was his understanding that the absence of the

“X” on the Victory Outreach and Trinity checks indicates that they were not

included in the $3,100 allowance for 2009 and contends that we should draw that

inference.

      We decline to do so. Respondent offers the more plausible explanation for

the absence of “Xs” on the Victory Outreach and Trinity checks--indeed for the

absence of an “X” on any of petitioner’s 2009 checks in the record. Respondent

would have us draw the inference that, because the amount allowed for 2009 is

identical to that for 2010, and the 2010 figure can be matched with 2010 checks

      14
        Respondent concedes that there are checks petitioner wrote to these
organizations in these total amounts in the stipulated exhibits but contends that
petitioner has not shown that either donee is a charitable organization.
                                       - 39 -

marked with an “X”,15 the examining agent: (1) analyzed the 2010 substantiation

check by check; (2) found checks payable to charitable organizations totaling

$3,100 for 2010 on that basis; and (3) simply allowed the same amount to

petitioner for 2009. We accept respondent’s theory because it better accounts for

the evidence in the record. It accounts for the identical allowance in both years--

an otherwise very unlikely coincidence had both years’ figures been based on an

actual tally of petitioner’s checks. It also would explain why no 2009 check in the

record has an “X” on it--a circumstance that petitioner’s requested inference leaves

unexplained.

      More fundamentally, petitioner has the burden of showing error in the

determination in the notice of deficiency that the charitable contribution deduction

to which he is entitled for 2009 is $3,100. See Rule 142(a)(1); Welch v.

Helvering, 290 U.S. at 115. To do so, he must provide evidence substantiating

charitable contributions in excess of that amount. See Schafler v. Commissioner,

T.C. Memo. 1998-86. He has not done so. We accordingly hold that petitioner




      15
        In fact, there are two 2010 checks made payable to apparent charitable
organizations that do not have an “X” yet must be counted to reach the $3,100
figure for 2010. Neither party has addressed this point, but on balance we find the
evidence supports respondent’s theory as described above.
                                        - 40 -

has not shown entitlement to any charitable contribution deduction for 2009 in

excess of that allowed in the notice of deficiency.

      2010

      Petitioner contends he is entitled to an additional $11,850 in charitable

contribution deductions for 2010 beyond the $5,100 respondent has allowed,16

attributable to contributions made to Waikiki Outreach. Petitioner contends that

he made contributions by cash or check to Waikiki Outreach during 2010 totaling

$14,450 and that respondent allowed only $2,600 of this amount. (The parties

have stipulated that the $5,100 in charitable contribution deductions respondent

allowed for 2010 includes $2,600 in Waikiki Outreach contributions petitioner

made by check.)

      To substantiate the additional $11,850 in Waikiki Outreach contributions

for 2010, petitioner again offers letters written in 2013 by the organization’s

founder: one letter from May 2013 (previously discussed) and a letter from April

of that year. The April 2013 letter states in pertinent part: “Your contributions

totaling $14,450 (over $1000 [sic] cash per month in cash and checks) in 2010,


      16
       We note that in contending for an additional $11,850 beyond the $5,100
allowed, petitioner has conceded that the $18,000 charitable contribution
deduction claimed on his 2010 return was overstated by $1,050, as $11,850 plus
$5,100 equals only $16,950.
                                        - 41 -

have helped many people you have not known. Thank you for your regular cash

contributions”. The May 2013 letter states in pertinent part: “Our records and

information reflect monthly contributions [by petitioner] of $400 per month in

checks and an average of about $600 per month in cash from early 2009 to 2011.

Your contributions totaled * * * $14,450 in 2010”.

      As with the 2009 contributions, these letters do not satisfy the substantiation

requirements of section 170(f)(17). They do not establish the amounts of the

contributions. The April 2013 letter states that petitioner contributed over $1,000

per month, for a total of $14,450--without explaining by how much petitioner’s

contributions exceeded $1,000 in each month so as to reach an annual total of

$14,450. The May 2013 letter states the check amounts precisely (“$400 per

month”) and the cash amounts less precisely as “an average of about $600 per

month”. Our review of the letters persuades us that they provide, at best, estimates

of the amounts. The letters also do not establish the date of any contribution.

Section 170(f)(17) requires more, and for the reasons previously discussed, we

conclude that strict, not substantial, compliance with the statute is required.

      We also conclude, without regard to the strict requirements of section

170(f)(17), that the letters are unreliable evidence of contributions in the amounts

reported by petitioner. The letters were written more than two years after
                                         - 42 -

petitioner purportedly made the 2010 contributions and reflected, at best,

estimates. The stipulated exhibits contain numerous checks petitioner made out to

Waikiki Outreach during 2010, but their amounts fall considerably short of $400

per month.

American Opportunity Tax Credit

      Although he did not raise it as an issue in the petition, at trial petitioner

claimed entitlement to an American Opportunity Tax Credit (AO credit) for 2009.

Respondent consented to having the issue tried. Petitioner contends that he is

entitled to an AO credit for expenditures of $1,861 for tuition and $500 for books

that he made in connection with his daughter Vanesssa’s attendance at the

University of Hawaii during 2009.

      In general, section 25A(a) and (i) allows a tax credit equal to 100% of the

first $2,000, and 25% of the next $2,000, of qualified tuition and related expenses

paid during the taxable year for education furnished to a student, enrolled at least

half time at an eligible educational institution, who is the taxpayer or the

taxpayer’s spouse or dependent.17 The education must be furnished during an

academic period beginning in the taxable year. See sec. 25A(i)(1). Vanessa was

      17
       The credit is phased out when the taxpayer’s adjusted gross income
exceeds $80,000. Sec. 25A(i)(4). For 2009 petitioner reported adjusted gross
income of $59,772 and concedes that he failed to report an additional $4,897.
                                        - 43 -

allowed as petitioner’s dependent for 2009. When a person who is allowed as a

dependent for another taxpayer pays qualified tuition and related expenses, that

person is not allowed the credit and instead the payment is treated as having been

made by the taxpayer. Sec. 25A(g)(3).

      Respondent does not dispute that Vanessa was enrolled at least half time at

an eligible institution during 2009. Instead, respondent disputes that either

petitioner or Vanessa made tuition payments to the University of Hawaii of $1,861

or that petitioner paid $800 for books for Vanessa’s use in her course of study.

      The stipulated exhibits include four checks petitioner wrote to Vanessa

between January and April 2009 for $330, $320, $150, and $320. Written in the

memo line of all but the $150 check is “school tuition”. Petitioner testified that

Vanessa used the funds to pay her University of Hawaii tuition. The stipulated

exhibits also include Forms 1098-T issued by the University of Hawaii to Vanessa

for 2009 and 2010 reporting amounts billed to her for qualified tuition and related

expenses of $1,861 and $2,858, respectively.

      The Forms 1098-T corroborate petitioner’s claim that Vanessa used the four

checks noted above (totaling $1,120) to fund payments of her tuition at the

University of Hawaii. Although the Forms 1098-T in the record report amounts

billed rather than paid, we infer from the fact that Vanessa was also billed
                                        - 44 -

substantial amounts for University of Hawaii tuition during 2010 (according to the

2010 Form 1098-T in the record) that she must have remained reasonably current

with respect to the tuition reported as billed to her on the 2009 Form 1098-T.

Nonetheless, because petitioner has produced checks reflecting tuition payments

in 2009 of only $1,210, we find that he has proved the payment of qualified tuition

in that year only to the extent of $1,210.18 As for petitioner’s claim that he spent

an additional $800 on books used by Vanessa to pursue her course of study, we

find, given the absence of any documentary evidence of that expenditure, that

petitioner has not established that he or Vanessa paid any qualified related

expenses for 2009. Consequently, we hold that petitioner is entitled to an AO

credit of $1,210 for 2009.

Accuracy-related penalty

      Respondent determined an accuracy-related penalty under section 6662(a)

for 2010. Respondent argues that petitioner is liable for the penalty because his




      18
         We note that the 2010 Form 1098-T reports that a $231 adjustment was
made for a prior year. In the absence of any other evidence, we find that the
$1,861 reported as billed on the 2009 Form 1098-T must be adjusted downward by
$231 to $1,630. Since, as discussed supra, petitioner has substantiated tuition
payments totaling only $1,210, we conclude that this adjustment does not affect
his entitlement to an AO credit equal to the substantiated tuition payments.
                                        - 45 -

underpayment is attributable to negligence or, in the alternative, a substantial

understatement of income tax. Petitioner disputes his liability for the penalty.

      Section 6662(a) and (b)(1) and (2) imposes a penalty equal to 20% of an

underpayment of tax that is attributable to negligence or disregard of rules or

regulations, or to a substantial understatement of income tax. An “underpayment

of tax” for this purpose is defined as the excess of the amount of income tax

imposed over the sum of the amount of tax shown as the tax by the taxpayer on his

return and any tax previously assessed (or collected without assessment), less any

rebate. Sec. 6664(a). An “understatement” is the excess of the amount of tax

required to be shown on a return over the amount of tax shown on the return less

any rebate. Sec. 6662(d)(2)(A). An understatement is “substantial” when it

exceeds the greater of 10% of the tax required to be shown on the return or

$5,000. Sec. 6662(d)(1)(A).

      For purposes of the accuracy-related penalty, “negligence” is defined as any

failure to make a reasonable attempt to comply with the provisions of the Internal

Revenue Code. Sec. 6662(c). Negligence includes any failure to exercise

ordinary and reasonable care in the preparation of a tax return or any failure to

keep adequate books and records or to substantiate items properly. Sec.

1.6662-3(b)(1), Income Tax Regs.
                                        - 46 -

      No penalty is imposed under section 6662 with respect to any portion of an

underpayment if there was reasonable cause for, and the taxpayer acted in good

faith with respect to, such portion. Sec. 6664(c)(1); sec. 1.6664-4(a), Income Tax

Regs. The determination of whether a taxpayer acted with reasonable cause and in

good faith is made on a case-by-case basis, taking into account all pertinent facts

and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the most

important factor is the extent of the taxpayer’s effort to assess the taxpayer’s

proper tax liability. Id. An honest misunderstanding of fact or law that is

reasonable in the light of all of the facts and circumstances, including the

experience, knowledge, and education of the taxpayer, may indicate reasonable

cause and good faith. Id. Finally, reliance on professional advice may, but does

not necessarily, constitute reasonable cause if, under the circumstances, such

reliance was reasonable and the taxpayer acted in good faith. Id.

      Pursuant to section 7491(c), the Commissioner has the burden of production

with respect to penalties and must offer sufficient evidence to indicate that

imposing a penalty is appropriate. Higbee v. Commissioner, 116 T.C. at 446. If

the Commissioner meets this burden of production, the burden shifts to the

taxpayer to show that the penalty is incorrect, including establishing any

exculpatory factors, such as reasonable cause. Id. at 446-447.
                                        - 47 -

      Negligence

      Petitioner conceded on brief that he failed to report $1,848 in taxable Social

Security benefits for 2010. He has not otherwise addressed this item. On this

record, we find that the failure to report this income satisfies respondent’s burden

of production and constitutes a failure to exercise ordinary and reasonable care in

the preparation of a tax return, unless petitioner establishes reasonable cause.

      Petitioner claimed a deduction of $35,484 in 2010 for unreimbursed

employee business expenses. After examining petitioner’s return and

substantiation, respondent determined that only $1,560 was allowable. At trial,

petitioner sought to establish his entitlement to only $4,690.02 of the disallowed

amount. For the remaining $30,793.98, he did not offer any substantiation,

testimony, or argument.19 The underpayment attributable to this portion of the

disallowed employee business expenses is therefore attributable to negligence, see




      19
        In this regard, given the absence of any documentation or any sworn
testimony directed at this portion of the deduction, we accord no weight to
petitioner’s argument in his brief to the effect that all claimed expenses were in
fact paid, were appropriate, and were supported by contemporaneous
documentation at the time the return was filed.
                                          - 48 -

sec. 1.6662-3(b)(1), Income Tax Regs., unless petitioner demonstrates that he had

reasonable cause for it.20

       With respect to the $4,690.02 for which petitioner attempted to show

entitlement to an employee business expense deduction, we have found that he

demonstrated entitlement to deduct $2,957.51.21 The $1,732.51 for which

petitioner unsuccessfully contended included $900 in customer incentive

expenditures for dinner cruise tickets and, with respect to the retention gift

certificates, a $275 portion that we rejected outright (because the credit card

documentation did not establish gift certificate purchases) plus a 50% reduction,

due to the expenditure’s character as entertainment, in the $450 portion we

accepted as substantiated. We find that petitioner acted with reasonable cause and

in good faith with respect to these claimed deductions. The dinner cruise tickets

and retention gift certificates were supported by documentation that, although

insufficient as substantiation under section 274(d), had been obtained before

petitioner filed his return. Petitioner’s failure to treat the retention gift certificates

as “entertainment” subject to the 50% limitation in section 274(n) was reasonable


      20
       Given the magnitude of this portion of the deduction and the absence of
substantiation, respondent has satisfied his burden of production.
      21
       Because respondent allowed $1,560 of employee business expense
deductions, petitioner is entitled to an additional deduction of $1,397.51.
                                        - 49 -

in view of petitioner’s experience, knowledge, and education See sec. 1.6664-

4(b)(1), Income Tax Regs. Accordingly, we hold that petitioner had reasonable

cause with respect to the underpayment attributable to the foregoing items, which

total $1,400.

      Petitioner claimed a charitable contribution deduction of $18,000 for 2010.

After examining petitioner’s substantiation, respondent determined that the

allowable deduction was $3,100. Subsequently, respondent conceded that

petitioner was entitled to an additional $2,000 deduction, for a total of $5,100.

      The remaining $12,900 consists of claimed charitable contributions of

$1,050 for which petitioner offered no substantiation, testimony, or argument22

and $11,850 that petitioner contends he made to Waikiki Outreach in cash or by

checks for which he did not produce copies.23

      The underpayment attributable to the $1,050 portion of the charitable

contribution deduction for which petitioner offered no substantiation, testimony,

or argument is attributable to negligence, see sec. 1.6662-3(b)(1), Income Tax




      22
           See supra note 16.
      23
        Petitioner concedes on brief that all checks made out to Waikiki Outreach
that he produced were included in the $5,100 that respondent allowed as a
charitable contribution deduction for 2010.
                                            - 50 -

Regs., unless petitioner demonstrates that he had reasonable cause with respect to

it.24

        As for the remaining $11,850 that petitioner contends represents cash or

check contributions to Waikiki Outreach, the only written substantiation petitioner

offered with respect to this portion was letters written by an official with the donee

organization approximately 18 months after petitioner filed his 2010 return.25

Thus, on this record we find that petitioner claimed $11,850 in charitable

contribution deductions without any written substantiation when he filed his

return. This position violated section 170(f)(17) as well as the published

instructions for claiming such deductions.26 The failure to maintain the necessary

records constitutes negligence,27 see sec. 1.6662-3(b)(1), Income Tax Regs., unless

        24
       Given that this portion of the deduction was claimed on the return without
substantiation, it follows that respondent has satisfied his burden of production.
        25
          The copy of petitioner’s 2010 return in the record is unsigned and undated.
However, since the paid preparer information is dated September 29, 2011, and no
late filing penalty was determined, we find that petitioner’s return was filed under
an extension in the first half of October 2011.
        26
        “Recordkeeping. For any contribution made in cash, regardless of the
amount, you must maintain as a record of the contribution a bank record (such as a
canceled check or credit card statement) or a written record from the charity.”
Dept. of the Treasury, Internal Revenue Service, “2010 Instructions for Schedule
A (Form 1040)”, at A-9 (emphasis added).
        27
             This failure to maintain records also satisfies respondent’s burden of
                                                                            (continued...)
                                        - 51 -

petitioner establishes that he had reasonable cause with respect to this portion of

the underpayment.

      Reliance on professional advice

      Petitioner contends that he had reasonable cause because he reasonably

relied on the advice of H&R Block, a professional tax preparation company, in

connection with his 2010 reporting position. The 2010 return lists H&R Block as

the paid preparer. Petitioner testified that he provided “canceled checks” and

“receipts” to H&R Block and relied on that firm for the return positions.

      A taxpayer seeking to establish reasonable cause for purposes of relief from

a section 6662 penalty on the basis of reliance on professional advice must show

that “(1) The adviser was a competent professional who had sufficient expertise to

justify reliance, (2) the taxpayer provided necessary and accurate information to

the adviser, and (3) the taxpayer actually relied in good faith on the adviser's

judgment.” Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000),

aff’d, 299 F.3d 221 (3d Cir. 2002). In this regard, the mere fact that a professional

prepared a return, without more, does not establish reliance on professional

advice. See id. at 100 (“The mere fact that a certified public accountant has


      27
       (...continued)
production.
                                       - 52 -

prepared a tax return does not mean that he or she has opined on any or all of the

items reported therein.”). Petitioner has adduced no evidence concerning what

advice he received from H&R Block; he instead would have us infer that he relied

on professional advice for purposes of reasonable cause by virtue of the fact that

H&R Block prepared the return. We rejected such a claim in Neonatology

Assocs., and we reject it here. We therefore conclude, with the exception of the

specific findings of reasonable cause we made above, that petitioner has not

established that he had reasonable cause with respect to any portions of the

underpayment. Consequently, with respect to those portions, petitioner is liable

for the accuracy-related penalty under section 6662(a) on the basis of negligence

for 2010.28

      To reflect the foregoing,


                                                Decision will be entered under

                                       Rule 155.

      28
        As previously noted, respondent determined in the alternative that
petitioner was liable for the sec. 6662(a) penalty for 2010 on the basis of a
substantial understatement of income tax. To the extent that the Rule 155
computations demonstrate that there is an understatement of income tax that
exceeds the greater of 10% of the tax required to be shown on the return or
$5,000, we hold that, except with respect to those items for which we have held
petitioner had reasonable cause, he is liable for the accuracy-related penalty on
that basis as well.
