                        T.C. Memo. 2002-57



                      UNITED STATES TAX COURT



                  INTEREX, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17030-99.                Filed February 27, 2002.



     Paul J. Dee, Jr., for petitioner.

     Carina J. Campobasso, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION

     COHEN, Judge:   Respondent determined a deficiency of $67,473

in petitioner’s Federal income taxes for 1994 and a penalty of

$5,070 under section 6662.   After concessions, the issues for

decision are whether petitioner is entitled to a deduction for

professional fees in the amount of $65,000 for 1994 and whether

petitioner is liable for the penalty.    Unless otherwise
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indicated, all section references are to the Internal Revenue

Code in effect for the year in issue.

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioner is a corporation located in Amesbury, Massachusetts,

at the time that its petition was filed.

     Petitioner was in the business of designing, storing, and

refurbishing trade show exhibits.   Petitioner began its business

in mid-September 1993.   Tamara C. Olbres (Olbres) was the

100-percent shareholder and president of petitioner.

     In 1994, petitioner was a C corporation.    Petitioner used

the accrual method of accounting.   On its Form 1120, U.S.

Corporation Income Tax Return, for 1994, petitioner claimed a

deduction for professional fees in the amount of $66,865.    The

amount deducted was based in part on an adjusting entry to accrue

a professional fee in the amount of $65,000.    The Form 1120

reported compensation paid to Olbres in the amount of $42,000,

salary and wages expense of $6,723, and taxable income of

$75,689.   Petitioner’s Form 1120 was prepared and signed by

George Coupounas (Coupounas), who represented himself to be a

knowledgeable certified public accountant and attorney.

     An audit of petitioner’s Federal income tax return for 1994

was commenced in early 1997, and an inquiry was made into the
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accrual of the $65,000 professional fee.     During the audit,

petitioner was represented by Coupounas.     Coupounas stated that

the $65,000 was for his services and that he had never billed

petitioner and had not been paid for the services.     He declined

to provide time sheets reflecting services performed for

petitioner.   In August 1998, Olbres signed a check payable to

Coupounas for $65,000.   At the direction of Coupounas, Olbres

dated the check December 31, 1998.     The check was delivered to

Coupounas in August 1998 and was negotiated by him and cleared

petitioner’s bank account in August 1998.     Before delivering the

check to Coupounas, Olbres did not receive from Coupounas any

invoice or other itemization of the services for which payment

was allegedly made.

                              OPINION

     Petitioner argues that the professional fees were incurred

during the year in issue.

     Under the accrual method of accounting, a liability is

incurred, and generally is taken into account for Federal income

tax purposes, in the taxable year in which all the events have

occurred that establish the fact of the liability, the amount of

the liability can be determined with reasonable accuracy, and

economic performance has occurred with respect to the liability.

Sec. 1.461-1(a)(2), Income Tax Regs.
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       The only evidence offered at trial by petitioner was the

canceled check and the testimony of Olbres.    Olbres testified

that she never had any discussions with Coupounas as to how he

would charge petitioner for accounting and legal services.      She

acknowledged that it was not petitioner’s standard business

practice to retain service providers or suppliers without knowing

what they were going to charge.    She attempted to explain her

reliance on Coupounas by reference to his history of preparation

of tax returns for her parents and for her.    Coupounas declined

to cooperate with petitioner’s counsel, and there are no

documents in the record reflecting services allegedly performed

by Coupounas for petitioner other than the tax return prepared by

him.

       We are not persuaded that economic performance with respect

to the professional fees claimed had occurred during the year in

issue.    Coupounas never submitted an invoice to petitioner,

unlike other suppliers with whom petitioner did business.     Based

on the testimony and lack of contemporaneous documentation, we

conclude that the amount of the professional fees for services

allegedly rendered by Coupounas could not have been determined

with reasonable accuracy by the end of 1994.    Olbres also

testified that, at the time she signed the return, she was not

aware that more than $65,000 in professional fees expense was
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claimed as a deduction.    She testified that she looked only at

the bottom line.

     With respect to the check written to Coupounas in August

1998, Olbres testified as follows:

          Q      When did you first become aware that the
     corporation owed Mr. Coupounas $65,000 for professional
     fees from the calendar year 1994?

          A        It was some time in August 1998.

          Q        And how did you become aware of that?

          A      Mr. Coupounas arrived at my office one day
     and told me that the corporation owed him $65,000 for
     services rendered that was claimed on the 1994 tax
     return, and he asked me to write him a check.

          Q      Now, at the time Mr. Coupounas came to you
     in August of 1998, and said “You owe me $65,000 for
     legal and accounting services,” were you aware that
     Mr. Coupounas had rendered services to Interex, Inc.
     for which he had not been paid?

          A        Yes, I was.

          Q      When he told you you owed him $65,000 or
     the corporation owed him $65,000, did you ask him what
     services is this for, or what did you do for this
     money?

          A        No, I didn’t.

          Q      Did you ask him whether he had kept any
     time records or any other types of records which would
     support that amount of $65,000?

          A        No, I didn’t.

                   *   *     *      *      *   *   *

          Q      Is it your testimony that you paid
     Mr. Coupounas on December 31, 1998?
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        A    No.   I wrote the check sometime in August
1998.

     Q       Who printed that date, December 31, 1998 on
the check?

        A    I did.

     Q      Now, why would you give Mr. Coupounas a
check in August of 1998 and date that check
December 31, 1998?

     A      That’s the date that Mr. Coupounas asked me
to reflect on the check.

     Q       Mr. Coupounas asked you to put that date on
the check?

        A    Yes, he did.

     Q      Did he tell you why he wanted you to put
that date on the check?

        A    No, he didn’t.

        Q    Did you ask him?

        A    No, I didn’t.

     Q      Didn’t that seem unusual to you writing a
check in August and putting a December 31, 1998 date on
it?

        A    Yes, it seemed unusual.

     Q      But even though it was unusual, you still
didn’t ask him?

        A    That’s correct.

        Q    Why not?

     A      It seemed unusual but I didn’t think it was
illegal, especially where the same year is reflected on
the check, the year I wrote it.
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Although Olbres identified a few services performed for

petitioner by Coupounas, none of these services were specialized,

unique, or otherwise reasonably valued at $65,000 during 1994.

Her testimony does not support a finding that an expense in any

amount was incurred during petitioner’s 1994 tax year that would

support a deduction by an accrual basis taxpayer.        See sec.

461(a); sec. 1.461-1(a)(2)(i), Income Tax Regs.

     Olbres’ testimony concerning her unquestioning reliance on

Coupounas is either improbable or indicative of unreasonable

conduct.   Her testimony that she did not look at anything other

than the bottom line on the tax return that she signed is also

improbable or indicative of negligence.     According to the return,

the professional fees claimed during the year in issue exceeded

150 percent of the compensation that she received as the

executive and operating employee of the corporation.        Although

Coupounas was an accountant and an attorney, under the facts of

this case we do not believe that Olbres reasonably relied on him

with respect to the propriety of deducting $65,000 in accrued

professional fees that were allegedly payable to Coupounas.

Under these circumstances, a penalty for negligence under section

6662(a) is appropriate.

                                            Decision will be entered

                                       for respondent.
