                             T.C. Memo. 2019-149



                        UNITED STATES TAX COURT



      KEVIN M. TABE AND THERESIA Z. TABE, ET AL.,1 Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 26975-17, 7579-18,              Filed November 5, 2019.
                  14514-18.



      Kevin M. Tabe and Theresia Z. Tabe, pro sese.

      Hannah K. Wilkins and Airelle L. Mills-Johnson, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      KERRIGAN, Judge: In these consolidated cases respondent issued Kevin

Tabe (petitioner husband) notices of deficiency for 2013, 2015, and 2016. For



      1
       Cases of the following petitioners are consolidated herewith: Kevin Mbeh
Tabe, docket No. 7579-18; and Kevin M. Tabe, docket No. 14514-18.
                                           -2-

[*2] these years, respondent determined the following deficiencies, penalties, and

additions to tax with respect to petitioner husband’s Federal income tax:

                                          Penalty       Addition to tax
                   Year Deficiency      sec. 6662(a)    sec. 6651(a)(1)
                   2013     $48,472        $9,694           $7,271
                   2015      26,312         5,262             1,238
                   2016      23,189         4,638             -0-

      Respondent issued petitioner husband and Theresia Z. Tabe (petitioner

wife) (collectively, petitioners) a notice of deficiency for 2014.2 Respondent

determined an $86,482 deficiency and a $17,296 section 6662(a) penalty with

respect to petitioners’ 2014 Federal income tax.

      Unless otherwise indicated, all section references are to the Internal

Revenue Code (Code) in effect at all relevant times, and all Rule references are to

the Tax Court Rules of Practice and Procedure. We round all monetary amounts

to the nearest dollar.

      After concessions the issues for consideration are: (1) whether petitioner

husband may deduct various expenses reported on Schedule C, Profit or Loss

From Business, for 2013; (2) whether petitioner husband may deduct charitable

contributions and unreimbursed employee business expenses reported on Schedule

      2
          For 2013-16 (years at issue) petitioners filed a joint return for only 2014.
                                        -3-

[*3] A, Itemized Deductions, for 2013; (3) whether petitioner husband may claim

head of household filing status for 2013; (4) whether petitioner husband’s

S corporation may deduct its reported business expenses; (5) whether petitioner

husband had unreported flowthrough income from the S corporation for 2015 and

2016; (6) whether petitioner husband is liable for additions to tax under section

6651(a)(1) for 2013 and 2015; (7) whether petitioners may deduct various

expenses reported on Schedule C for 2014; and (8) whether petitioners may deduct

tuition and fees pursuant to section 222 for 2014.3 Other adjustments are

computational and will flow from the Court’s resolution of the issues remaining in

dispute.

                               FINDINGS OF FACT

      Some of the facts are stipulated and are so found. Petitioners resided in

Texas when they timely filed their petitions.

      Petitioner husband is a licensed attorney specializing in construction,

business, real estate, and immigration law. Petitioner husband holds a bachelor’s

degree in law, a master’s degree in law, and a master of laws degree in litigation

and dispute resolution. During 2013 and 2014 petitioner husband was

      3
       In respondent’s posttrial brief respondent conceded penalties pursuant to
sec. 6662(a) and corrected math errors made in the stipulation of settled issues,
filed May 20, 2019. Petitioners did not file a posttrial brief.
                                       -4-

[*4] self-employed and the principal attorney at his firm, the Law Offices of Kevin

M. Tabe, P.C. For 2015 petitioner husband incorporated his law firm under the

name Tabe & Associates, P.C., and had the law firm elect to be treated as an

S corporation. During 2015 and 2016 petitioner husband provided his legal

services through his S corporation.

       Petitioner wife was a nurse. Petitioners were married and lived together

throughout the years at issue.

2013

       On January 7, 2015, petitioner husband filed his Federal income tax return

for 2013, claiming head of household status. Petitioner husband’s only source of

income for 2013 was his law firm, and he reported $231,648 in gross receipts on

his Schedule C less the following business expenses:
                                         -5-

[*5]                              Expense        Amount
                         Advertising               $3,000
                         Car and truck             28,100
                         Contract labor            50,060
                         Depreciation               7,734
                         Office                    15,610
                         Supplies                   4,201
                         Travel                     8,000
                         Utilities                  7,100
                         Other (dry cleaning)       7,146
                         Business use of home       5,078
                          Total                  136,029

       On Schedule A for 2013 petitioner husband reported $9,132 in cash

charitable contributions, $318 in noncash charitable contributions, and $58,815 in

unreimbursed employee business expenses. Petitioner husband reported the

unreimbursed employee business expenses on Form 2106, Employee Business

Expenses, as follows:
                                         -6-

[*6]                             Expense           Amount
                          Vehicle expense          $36,963
                          Parking fees, tolls,
                           and transportation         4,036
                          Business                  12,642
                          Meals and
                           entertainment            10,347

       The notice of deficiency for 2013 disallowed Schedule A deductions for all

of petitioner husband’s reported unreimbursed employee business expenses,

charitable contributions, a portion of Schedule C office expenses, and all of the

advertising, car and truck, contract labor, travel, and “other” expenses.

2014

       On July 13, 2015, petitioners filed their joint Federal income tax return for

2014. Petitioners claimed a $4,000 deduction for tuition and fees pursuant to

section 222(a). On petitioner husband’s Schedule C, he reported $323,107 in

gross receipts and the following business expenses for his law firm:
                                        -7-

[*7]                              Expense               Amount
                  Advertising                             $3,250
                  Car and truck                            6,748
                  Commissions and fees                  183,842
                  Depreciation                             2,651
                  Insurance                                6,000
                  Office                                   1,500
                  Repairs and maintenance                    400
                  Supplies                                 8,200
                  Taxes and licenses                         900
                  Travel                                     510
                  Other:
                   Office rents                           16,431
                   Telephone/internet services             4,800
                   Bad debts                               2,350
                   Bank charges/credit card fees           2,388
                   Postage                                 1,305
                   Dues and subscriptions                  1,000
                   Dry cleaning                            4,259
                   Professional fees                       7,000
                   Total                                253,534

The notice of deficiency for 2014 disallowed the deduction for tuition and fees and

the following expenses reported on Schedule C: advertising, supplies,
                                        -8-

[*8] commissions and fees, bad debts, credit card fees, postage, dues and

subscriptions, dry cleaning, and a portion of the professional fees. Respondent

concedes that petitioners may deduct $2,461 for supplies and $20,158 for other

expenses.

2015

       On November 7, 2016, petitioner husband filed his Federal income tax

return for 2015 and reported $83,846 in wages. Petitioner husband did not report

his law firm’s business operations on Schedule C for 2015. Instead, he reported a

$14,918 nonpassive loss on Schedule E, Supplemental Income and Loss.

       For 2015 petitioner husband incorporated his law firm under the name Tabe

& Associates, P.C., and had it elect to be treated as an S corporation. Petitioner

husband was the S corporation’s sole shareholder and director. On Form 1120S,

U.S. Income Tax Return for an S Corporation, petitioner husband’s law firm

reported $158,537 in gross receipts and the following expenses:
                                         -9-

[*9]                               Expense       Amount
                          Salaries and wages     $83,846
                          Rents                    35,948
                          Advertising               8,365
                          Other:
                           Miscellaneous              249
                           Printing                 1,322
                           Tools                    1,600
                           Job materials            1,222
                           Salaries                40,903
                           Total                 173,455

2016

       On April 16, 2017, petitioner husband filed his Federal income tax return

for 2016 and reported $7,385 of wages from his law firm. Petitioner husband did

not file a Schedule C or E with his 2016 Federal income tax return.

       Petitioner husband’s law firm operated in 2016 as an S corporation. It did

not file a Federal income tax return for 2016. During 2016 petitioner’s law firm

received the following payments:
                                           - 10 -

[*10]                              Payor            Amount
                          Western World
                           Insurance Co.            $55,000
                          Twin City Fire
                           Insurance Co.             12,861
                          Nationwide
                           Insurance Co.              9,000
                          State Farm Fire and
                           Casualty Co.               9,100
                          Geico Casualty Co.          6,885
                          Geico General
                           Insurance Co.             16,000
                           Total                    108,846

The payors listed above classified the payments as “attorney’s fees” on the Forms

1099-MISC, Miscellaneous Income, that they filed with respondent to report the

payments to petitioner husband’s law firm. Respondent prepared a substitute for

return for the law firm that characterized these payments as taxable income.

                                      OPINION

I.      Burden of Proof

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

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

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 taxpayer
                                        - 11 -

[*11] likewise bears the burden of proving his or her entitlement to deductions

allowed by the Code and substantiating the amounts of claimed deductions.

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co.

v. Helvering, 292 U.S. 435, 440 (1934); sec. 1.6001-1(a), Income Tax Regs.

Under section 7491(a), in certain circumstances the burden of proof may shift

from the taxpayer to the Commissioner. Petitioners have not claimed or shown

that they have met the specifications of section 7491(a) to shift the burden of proof

to respondent as to any relevant factual issue.

II.   Expense Deductions

      Generally, an S corporation shareholder determines his or her tax liability

by taking into account a pro rata share of the S corporation’s income, losses,

deductions, and credits. Sec. 1366(a)(1). Where, as here, a notice of deficiency

includes adjustments for S corporation items with other items unrelated to the

S corporation, we have jurisdiction to determine the correctness of all adjustments.

See Winter v. Commissioner, 135 T.C. 238 (2010).

      Section 162(a) allows a taxpayer to deduct all ordinary and necessary

expenses paid or incurred in carrying on a trade or business. A taxpayer claiming

a deduction on a Federal income tax return must demonstrate that the deduction is

allowable pursuant to a statutory provision and must further substantiate that the
                                        - 12 -

[*12] expense to which the deduction relates has been paid or incurred. Sec.

6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff’d per curiam, 540

F.2d 821 (5th Cir. 1976). A taxpayer may not deduct a personal, living, or family

expense unless the Code expressly provides otherwise. Sec. 262(a).

      An ordinary expense is one that commonly or frequently occurs in the

taxpayer’s business, Deputy v. du Pont, 308 U.S. 488, 495 (1940), and a necessary

expense is one that is appropriate and helpful in carrying on the taxpayer’s

business, Commissioner v. Heininger, 320 U.S. 467, 471 (1943); sec. 1.162-1(a),

Income Tax Regs. Normally, the Court may estimate the amount of a deductible

expense if a taxpayer establishes that an expense is deductible but is unable to

substantiate the precise amount. See Cohan v. Commissioner, 39 F.2d 540,

543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

This principle is often referred to as the Cohan rule. See, e.g., Estate of Reinke v.

Commissioner, 46 F.3d 760, 764 (8th Cir. 1995), aff’g T.C. Memo. 1993-197.

      Certain expenses specified in section 274 are subject to strict substantiation

rules. No deductions under section 162 shall be allowed for “listed property”, as

defined in section 280F(d)(4), “unless the taxpayer substantiates [them] by

adequate records or by sufficient evidence corroborating the taxpayer’s own
                                        - 13 -

[*13] statement”. Sec. 274(d). Listed property includes passenger automobiles

and other property used for transportation. Sec. 280F(d)(4)(A)(i) and (ii).

      To meet these strict substantiation rules, a taxpayer must substantiate by

adequate records or by sufficient evidence corroborating the taxpayer’s own

statement: (1) the amount of the expense, (2) the time and place the expense was

incurred, and (3) the business purpose of the expense. Sec. 274(d). To

substantiate by adequate records, the taxpayer must provide (1) an account book, a

log, or similar record and (2) documentary evidence, which together are sufficient

to establish each element of an expenditure. Sec. 1.274-5T(c)(2)(i), Temporary

Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). Documentary evidence

includes receipts, paid bills, or similar evidence. Sec. 1.274-5(c)(2)(iii), Income

Tax Regs. To substantiate by sufficient evidence corroborating the taxpayer’s

own statement, the taxpayer must establish each element by his or her own

statement and by documentary evidence or other direct evidence. Sec.

1.274-5T(c)(3)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6,

1985).

      Petitioner husband contends that he is entitled to deductions for a portion of

the office expenses and for all of the advertising, car and truck, contract labor,

travel, and “other” expenses reported on his Schedule C for 2013. Petitioners
                                        - 14 -

[*14] contend that they are entitled to deduct the following expenses reported on

their 2014 Schedule C: advertising, supplies, commissions and fees, bad debts,

credit card fees, postage, dues and subscriptions, dry cleaning, and a portion of the

professional fees. Travel expenses and car and truck expenses are subject to the

strict substantiation rules of section 274(d). Secs. 274(d)(1), (4), 280F(d)(4)(A)(i)

and (ii).

       The documents petitioner husband produced do not provide enough

information for us to determine what expenses he actually incurred and to what

extent these expenses had a business purpose. Petitioner husband has provided no

receipts linking his car and truck expenses and travel expenses to his business.

The strict substantiation requirements of section 274(d) with respect to travel

expenses and car and truck expenses were not met for 2013.

       Substantiation requirements with respect to the advertising, office,

commissions and fees, supplies, contract labor, and “other” (telephone/internet

services, bad debts, bank charges/credit card fees, postage, dues and subscriptions,

dry cleaning, or professional fees) expenses have not been met. No documents

were provided that would allow these expenses to be estimated and that show

these expenses have business purposes. For 2013 petitioner husband may not
                                        - 15 -

[*15] deduct any additional expenses. For 2014 petitioners may not deduct any

additional expenses.

III.   Schedule A Expenses

       On his 2013 Federal income tax return, petitioner husband claimed a

$67,829 deduction for Schedule A expenses, including unreimbursed employee

business expenses and charitable contributions. In the notice of deficiency for

2013 respondent disallowed petitioner husband’s Schedule A deductions for

charitable contributions and unreimbursed employee business expenses.

       A.    Charitable Contributions

       Section 170(a)(1) allows a deduction for contributions made to charitable

organizations defined in section 170(c). Section 170(f)(8) provides substantiation

requirements for certain charitable contributions. Specifically, section

170(f)(8)(A) provides: “No deduction shall be allowed under subsection (a) for

any contribution of $250 or more unless the taxpayer substantiates the

contribution by a contemporaneous written acknowledgment of the contribution

by the donee organization that meets the requirements of subparagraph (B).”

       For donations of cash the donee’s written acknowledgment must state the

amounts contributed, indicate whether the donee organization provided any goods

or services in consideration for the contribution, and provide a description and a
                                       - 16 -

[*16] good-faith estimate of the value of any goods or services provided by the

donee organization. See sec. 170(f)(8)(B); sec. 1.170A-13(f), Income Tax Regs.

Section 170(f)(17) provides: “No deduction shall be allowed under

subsection (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.” For noncash

contributions a taxpayer must maintain for each contribution a receipt from the

donee showing the name of the donee, the date and location of the contribution,

and a description of the donated property in detail reasonably sufficient under the

circumstances. See sec. 1.170A-13(b)(1), Income Tax Regs.

      Petitioner husband’s charitable contribution deduction for 2013 consists of

$9,132 for cash and check contributions and $318 for noncash charitable

contributions. Petitioner husband testified that these contributions were donations

to his church. Respondent argues that petitioner husband is not entitled to any

deduction because he did not substantiate any of the contributions. Petitioner

husband did not provide receipts, bank records, or documentation for the cash or

check contributions. Petitioner husband likewise did not produce the required
                                       - 17 -

[*17] documents to substantiate the noncash contributions claimed as a deduction.

Respondent’s disallowance of these deductions is sustained.

        B.    Unreimbursed Employee Business Expenses

        A taxpayer may deduct unreimbursed employee business expenses as

ordinary and necessary business expenses under section 162. Lucas v.

Commissioner, 79 T.C. 1, 7 (1982). Miscellaneous itemized deductions, such as

the deduction for unreimbursed employee business expenses, are allowed only to

the extent that the total of such deductions exceeds 2% of adjusted gross income.

Sec. 67(a). Unreimbursed employee business expenses are similar to Schedule C

business expenses in that taxpayers are required to substantiate the expense

underlying the claimed deduction by maintaining records sufficient to establish the

amount and to enable the Commissioner to determine the correct tax liability. Sec.

6001; Higbee v. Commissioner, 116 T.C. 438, 440 (2001).

        On Form 2106 petitioner husband reported a $36,963 vehicle expense; a

$4,036 parking fees, tolls, and transportation expense; a $12,642 business

expense; and a $10,347 meals and entertainment expense as the underlying

expenses for his claimed unreimbursed employee business expense deduction for

2013.
                                        - 18 -

[*18] At trial petitioner husband testified inconsistently that the underlying

expense for his claimed unreimbursed employee business expense deduction was

actually bad debts. He contended that some of the expenses were related to his

law practice, and he could not explain how these expenses differed from expenses

reported on his Schedule C or why these expenses were not reported on his

Schedule C.

      Petitioner husband’s vehicle and meals and entertainment expenses are

subject to the strict substantiation rules of section 274. He failed to provide an

account book, a log, a similar record, or other sufficient evidence to substantiate

these reported expenses. Since petitioner husband failed to meet the strict

substantiation requirements of section 274(d), respondent’s disallowance of

deductions for these expenses is sustained.

      Petitioner husband did not provide any receipts, invoices, or other

documents to substantiate the remaining expenses. He likewise did not provide

sufficient evidence to permit us to estimate the amounts of the expenses.

Petitioner husband did not prove that these expenses were connected with his

business. Respondent’s disallowance of the deductions for these expenses is

sustained.
                                        - 19 -

[*19] IV.    Tuition and Fees Deduction

      In 2014 petitioners claimed a $4,000 tuition and fees deduction on their

joint Federal income tax return. In the notice of deficiency for 2014 respondent

disallowed this deduction.

      For qualifying individuals, section 222(a) allows a taxpayer to deduct an

amount equal to qualified tuition and related expenses paid by the taxpayer during

the taxable year. See sec. 25A(f)(1). Petitioners failed to substantiate a qualified

tuition and related expense. Petitioners produced a document which notified

petitioner husband that his payment to the University of Tulsa had been returned

because of insufficient funds. Respondent’s disallowance of this deduction is

sustained.

V.    Head of Household

      Section 1(b) provides a special tax rate for an individual who qualifies as

head of household. Section 2(b)(1) defines a head of household as an individual

taxpayer who, among other things, is “not married at the close of his taxable year

* * * [and] is not a surviving spouse”. Petitioner husband testified that he was

married to and living with petitioner wife throughout 2013. His correct filing

status for 2013 is married filing separately. See sec. 1(d).
                                       - 20 -

[*20] VI.    Unreported Income

      Section 61(a) provides that gross income includes “all income from

whatever source derived”. See also Commissioner v. Glenshaw Glass Co., 348

U.S. 426, 430 (1955). Section 1366(a) provides that income, losses, deductions,

and credits of an S corporation are passed through pro rata to its shareholders on

their individual income tax returns. The character of each item of income is

determined as if it were realized directly from the source from which the

corporation realized it or incurred in the same manner as it was by the corporation.

Sec. 1366(b). A shareholder’s gross income includes his or her pro rata share of

the S corporation’s gross income. Sec. 1366(c).

      Petitioner husband had his law firm opt to be treated as an S corporation as

of 2015. The law firm did not file a Form 1120S tax return for 2016. As a result

respondent created for the S corporation a substitute for return pursuant to section

6020. Respondent determined that petitioner’s law firm had $108,846 of income

for 2016 on the basis of information reported to respondent on Forms 1099-MISC.

      Petitioner husband acknowledges that he received the payments made to his

law firm but claims that he distributed the funds to his clients. He produced no

evidence at trial to support his claim. We conclude that the $108,846 paid to
                                        - 21 -

[*21] petitioner husband’s law firm is taxable income to him as the sole

shareholder of the S corporation.

VII. S Corporation Business Expenses

      The substantiation requirements for section 162 also apply to business

expense deductions for S corporations. Sec. 1363(b). Petitioner husband was the

sole shareholder and director of his law firm. On his law firm’s 2015 Form 1120S

it reported $158,537 in gross receipts and reported various expenses totaling

$173,455. Petitioner husband contended that his law firm had expenses for 2016.

      He did not offer any receipts or other evidence to substantiate these claimed

expenses. His law firm may not deduct any business expenses for 2015 and 2016.

Therefore, with the exception of an expense for the wages of $7,385 that the S

corporation paid to petitioner husband and that he reported on his personal returns,

no deductions reduce the flowthrough income to him.

VIII. Section 6651(a)(1) Additions to Tax

      Respondent determined that petitioner husband is liable for additions to tax

because he did not timely file his 2013 and 2015 Federal income tax returns.

Section 6651(a)(1) provides for an addition to tax for failure to timely file a

Federal income tax return unless it is shown that such failure was due to

reasonable cause and not willful neglect. See also United States v. Boyle, 469
                                         - 22 -

[*22] U.S. 241, 245 (1985). A failure to file a timely Federal income tax return is

due to reasonable cause if the taxpayer exercised ordinary business care and

prudence but nevertheless was unable to file the return within the prescribed time.

See sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

      Petitioner husband filed his 2013 Federal income tax return on January 7,

2015. He filed his 2015 Federal income tax return on November 7, 2016.

Respondent has shown that petitioner husband failed to timely file his Federal

income tax returns for 2013 and 2015. Consequently, we conclude that

respondent has satisfied the burden of production under section 7491(c).

      Petitioner husband failed to introduce any evidence that he is not liable for

the additions to tax or that his failure to timely file was due to reasonable cause

and not willful neglect. Accordingly, petitioner husband is liable for the additions

to tax pursuant to section 6651(a)(1).

      Any contentions we have not addressed are irrelevant, moot, or meritless.

      To reflect the foregoing,


                                                  Decision will be entered under

                                         Rule 155.
