                    T.C. Summary Opinion 2009-112



                       UNITED STATES TAX COURT



         RICARDO GARCIA PACHECO AND ANA MILIAN, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent.



     Docket No. 16574-08S.            Filed July 20, 2009.



     Ricardo Garcia Pacheco and Anna Milian, pro sese.

     Leslie A. Hale, for respondent.



     GERBER, Judge:    This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

when the petition was filed.1    Pursuant to section 7463(b), the




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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decision to be entered is not reviewable by any other court, and

this opinion shall not be treated as precedent for any other

case.

     Respondent determined a $6,132 income tax deficiency and a

$1,226 section 6662(a) accuracy-related penalty for petitioners’

2006 tax year.   The deficiency is attributable to the

disallowance of certain business expense deductions.     After

concessions by the parties, three issues remain for our

consideration:   (1) Whether Ricardo Garcia Pacheco (petitioner)

is entitled to deductions for finder’s fees/gifts paid to

individuals who provided leads for future real estate

transactions; (2) whether petitioner is entitled to deductions

for advertising expenses in his real estate business; and (3)

whether petitioners are liable for an accuracy-related penalty

under section 6662(a).

                            Background

     Petitioners resided in California at the time their petition

was filed.   Petitioner is a real estate broker and operated a

real estate sales business during 2006.   During 2006 he earned

commissions from the sales of approximately 30 residences.       He

reported gross income in excess of $60,000 for 2006.     Petitioner

specialized in houses that had been the subject of foreclosure by

the U.S. Department of Veterans Affairs and sold the homes to
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buyers in the Spanish-speaking community.    In petitioner’s

community it was customary to conduct business by means of a

handshake, and payments were usually made in cash.

     Each time he concluded a sale, petitioner would ask buyers

to let others in the community know about his business.     Many of

petitioner’s real estate transactions emanated from referrals by

past customers.    Each time such a real estate transaction closed,

petitioner would give the referring former customer a referral

fee, which he called a “gift”, in an amount ranging from $100 to

$200.   Petitioner did not keep specific records of these

payments.

     Petitioner used two forms of advertising to promote his real

estate business.   On occasion, he and his wife would distribute

pamphlets door-to-door advertising his business activity.      During

2006 petitioner paid $500 on two separate occasions to have 1,000

pamphlets printed and prepared for distribution.

     Another method of advertising was for petitioner to appear

on Spanish-speaking radio programs.     Petitioner would pay $1,200

in cash to someone at the radio station and, in turn, he was made

the subject of a 30-minute, on-the-air interview about his real

estate sales activity.   Petitioner was interviewed on the radio

three times during 2006.
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                           Discussion2

     Respondent disallowed $43,397 of petitioner’s claimed

business expense deductions, including gifts--$10,650;

commissions--$20,200; and advertising--$12,547.     At trial

respondent conceded the $20,200 commissions deduction on the

basis of petitioner’s documentation.     Petitioner, however, did

not provide documentary evidence concerning the other two items.

Petitioner explained that the custom of doing business in cash in

his community limited his ability to provide documentation.

     A taxpayer is entitled to deduct the ordinary and necessary

expenses incurred in carrying on a trade or business.     Sec.

162(a).   Taxpayers are generally required to maintain records of

their business activity, but this Court may (if not statutorily

prohibited from so doing) approximate or estimate the amounts of

deductions or expenses even though adequate records may not have

been maintained.   Secs. 274(d), 6001; Vanicek v. Commissioner, 85

T.C. 731, 742-743 (1985); Cohan v. Commissioner, 39 F.2d 540,

543-544 (2d Cir. 1930).

     Although petitioner deducted $10,650 as “Gifts” to former

customers for bringing in new customers, it is well established

that these amounts are referral fees and not “gifts”.     Petitioner


     2
      Neither party raised any question regarding the burden of
proof under sec. 7491(a). Petitioner has the burden of proof as
to his entitlement to the claimed deductions, and respondent has
the burden of production regarding the sec. 6662(a) penalty. See
sec. 7491(a), (c).
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did not pay the referral fee until after a referred transaction

closed.   It was apparently well known that petitioner made such

payments, and the referrals provided a reliable source of

business.   Neither the referrals nor the corresponding payments

were made out of disinterested generosity.   Accordingly, the

recordkeeping requirement of section 274(d)(3) applicable to

“gifts” does not apply to these payments.

     The problem is petitioner’s lack of adequate recordkeeping

to support the amounts claimed.   In the light of petitioner’s

testimony, which we found credible, we hold that petitioner is

entitled to deduct $3,000 for referral fee expenses for 2006 and

that respondent’s disallowance of the remaining referral fee

expenses is sustained.

     With respect to petitioner’s claimed $12,547 advertising

expense deduction, we have likewise encountered a lack of

adequate recordkeeping.   The expenditures for advertising would

obviously be an ordinary and necessary business expense.

However, on this record we find that $1,000 was expended for

pamphlets and $3,600 for radio broadcast advertising.

Accordingly, we hold that petitioner is entitled to deduct $4,600

for advertising expenses for 2006 and that respondent’s

disallowance of the remaining advertising expenses is sustained.

     Finally, respondent determined an accuracy-related penalty

with respect to the income tax deficiency.   Section 6662(a) and
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(b)(1) and (2) provides for a 20-percent penalty on any part of

an underpayment attributable to negligence or a substantial

understatement of income tax.   Here, the question centers on

whether petitioners were negligent with respect to the

adjustments respondent determined.      Negligence includes a failure

to make a reasonable attempt to comply with, among other

provisions, the requirement to keep adequate books and records.

There is no doubt that petitioners are liable for the section

6662(a) penalty with respect to the entire underpayment for the

failure to keep any records or to properly report all income.

     Although petitioners have pointed out that business is

conducted informally and in cash in their community, there is no

reason or explanation for the failure to obtain receipts and/or

to maintain records of the business activity.      Petitioner is

successful in his real estate business, and the types of

expenditures he deducted are to be expected.      However, there must

be some manner for the Government to verify this business

activity.   Petitioner is admonished to keep adequate records to

avoid future controversy.

     To reflect the foregoing and concessions of the parties,


                                             Decision will be entered

                                        under Rule 155.
