                  T.C. Memo. 2004-41



                UNITED STATES TAX COURT



          ALEC JEFFREY MEGIBOW, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 8369-02.                Filed February 19, 2004.


     Respondent determined deficiencies for
petitioner’s 1997, 1998, and 1999 taxable years based
primarily on the disallowance of amounts claimed as
business expense deductions.

     Held: Because petitioner failed to substantiate
claimed deductions, he is liable for income tax
deficiencies for 1997, 1998, and 1999.

     Held, further, petitioner is liable for sec.
6662(a), I.R.C., accuracy-related penalties with
respect to the years in issue.


Anthony M. Bentley, for petitioner.

D. Sean McMahon, for respondent.
                                 - 2 -

                MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:     Respondent determined the following

deficiencies and penalties with respect to petitioner’s Federal

income taxes:

                                                     Penalty
          Year              Deficiency          Sec. 6662, I.R.C.

          1997                $28,565                $5,713.00
          1998                 43,789                 8,757.80
          1999                 15,216                 3,043.20

The principal issues for decision are:

     (1) Whether petitioner is entitled to business expense

deductions claimed on Schedules C, Profit or Loss From Business,

for the taxable years 1997, 1998, and 1999; and

     (2) whether petitioner is liable for the section 6662

accuracy-related penalty for the subject years.1

     In the notice of deficiency, respondent also disallowed in

full unreimbursed employee business expenses claimed by

petitioner on Schedule A, Itemized Deductions, for 1999.      Neither

party specifically addressed this matter at trial or on brief.

Such items are typically deemed conceded.    See Rules 149(b),

151(e)(4) and (5); Levin v. Commissioner, 87 T.C. 698, 722-723

(1986), affd. 832 F.2d 403 (7th Cir. 1987).    To the extent that

anything in petitioner’s brief could be interpreted to pertain to


     1
       Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years in issue, and Rule
references are to the Tax Court Rules of Practice and Procedure.
                               - 3 -

this adjustment, suffice it to say that our holding infra with

respect to the Schedule C expenses, and the rationale therefor,

apply equally to these Schedule A expenses.   Certain additional

adjustments made by respondent to petitioner’s itemized

deductions, exemptions, and self-employment tax are correlative

in nature and will be resolved by our holdings on the foregoing

issues.

                         FINDINGS OF FACT

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

The stipulations of the parties, with accompanying exhibits, are

incorporated herein by this reference.   At the time the petition

was filed in this case, petitioner resided in New York, New York.

     Petitioner, a physician, timely filed Forms 1040, U.S.

Individual Income Tax Return, for 1997, 1998, and 1999.    On each

of these returns, petitioner reported wage income from New York

University (NYU) Medical Center and attached corresponding Forms

W-2, Wage and Tax Statement.   The amounts so reflected totaled

$231,959.95, $248,625.68, and $305,592.93, for 1997, 1998, and

1999, respectively.   Petitioner also included with each return a

Schedule C for a “MEDICAL PRACTICE” with the stated name of “ALEC

MEGIBOW”.   The Schedules C reported the income, expense

deductions, and net losses set forth below:
                                - 4 -

                                  1997         1998       1999

     Gross Income               $506,503     $43,598    $18,150

     Expenses:
          Car and truck            6,838       7,228      1,041
          Depreciation            12,523      10,392      8,387
          Travel                  15,562       9,728      1,357
          Meals and
            entertainment          2,298       2,319        --
          Other                  545,288     133,105     35,807

     Loss                        (76,006)   (119,174)   (28,442)

For each year, the “Other expenses” shown on the Schedule C

incorporated an item labeled “FEES REMITTED TO NYU MEDICAL CENTER

PER LETTER” in an amount equal to most or all of the Schedule C

gross income reported for that year.     The remaining “Other

expenses” included figures for expenditures such as accounting,

professional dues, telephone and communications, legal, postage,

garage and parking, gifts, Amex dues, publications, computer and

office, music, internet, local travel, CPE, and research.

     By a letter dated March 24, 1999, Revenue Agent Melinda

O’Connell (Ms. O’Connell) of the Internal Revenue Service

informed petitioner that his 1997 tax return had been selected

for examination.    A similar letter dated February 23, 2001, under

the signature of Area 2 Manager Michael Donovan, was subsequently

issued informing petitioner that his 1998 and 1999 income tax

returns had been selected for examination.     Although a detailed

chronology of these examinations is unnecessary for resolving the

issues in dispute, some general observations are warranted.       The
                                 - 5 -

record contains evidence of repeated instances where petitioner

or his representatives delayed or postponed appointments, failed

to provide timely substantive responses to requests for

information, or otherwise declined to act with any alacrity upon

attempted communications from respondent.

     Additionally, the processing of petitioner’s 1997 through

1999 tax years was likely impacted by certain other

administrative and judicial actions instituted by petitioner.

Petitioner is no stranger to the Federal forum when it comes to

his tax matters.   Documents submitted in this case and public

records reflect that petitioner has apparently been involved in

at least three actions against the Internal Revenue Service based

on the Freedom of Information Act (FOIA), 5 U.S.C. sec. 552

(2000).   Megibow v. Commissioner, No. 03 CV 6020 (S.D.N.Y. Dec.

22, 2003); Megibow v. Commissioner, No. 01 CV 2979 (S.D.N.Y. Jan.

14, 2002); Megibow v. Commissioner, No. 97 CV 9500 (S.D.N.Y. Nov.

30, 1998).   At least two FOIA requests, one of which seems to

have precipitated the second of the just-listed suits, were made

during the examinations of petitioner’s 1997 through 1999 returns

and pertained to those audits.    A third FOIA request related to

matters is this case was submitted after the issuance of the

notice of deficiency and appears to have led to the most recent

of the FOIA suits enumerated above.
                                - 6 -

     Petitioner has also litigated a previous tax year, 1993,

before this Court, with respect to which a ruling in favor of

respondent was issued in Megibow v. Commissioner, T.C. Memo.

1998-455.    That decision was appealed to the Court of Appeals for

the Second Circuit, and the appeal was ultimately dismissed on

May 25, 2000.    Megibow v. Commissioner, No. 99-4099 (2d Cir. May

25, 2000).

     Consistent with the foregoing general observations about

petitioner’s administrative and judicial history, the discussion

below highlights aspects of the 1997 through 1999 examinations

concerning substantiation of the Schedule C expenses at issue

here.   At an initial appointment on October 5, 1999, with Joel

Gendler (Mr. Gendler), petitioner’s certified public accountant,

Ms. O’Connell reviewed certain of petitioner’s bank statements

for 1997 and prepared a Form 4564, Information Document Request,

for 1997 asking that specified records be provided.   Among other

things, the Form 4564 requested a “letter from NYU showing income

agreement and employee status (any reimbursement of expenses)”

and “details of trips” in 1997 to the United Kingdom, Brazil,

Amsterdam, and Argentina.

     On or about October 28, 1999, Ms. O’Connell received from

Mr. Gendler copies of brochures from medical conferences in which

petitioner participated at the above-listed foreign locations.

Additionally, at a time not clear from the record, petitioner
                               - 7 -

submitted to respondent a letter from the vice president for

finance at NYU Medical Center dated March 9, 1998, and reading as

follows:

     To:   Internal Revenue Service

     Alec Megibow, MD, Social Security No. * * * , is a full
     time faculty member and employee of the New York
     University School of Medicine. Dr. Megibow serves as a
     participating physician in a unit of physicians which
     provides professional radiologic services for patients.

     Billings to patients for services rendered by
     Dr. Megibow are made to his name. Under the terms of
     an agreement entered into between this institution and
     the participating physicians in the unit, all income
     derived from these professional services is remitted to
     New York University Medical Center and is credited to a
     special fund.

     Funds disbursed to the participating physician are
     reflected in their respective W-2 forms issued by New
     York University Medical Center.

     During the calendar year 1997, $506,503.15 was
     collected for billings rendered in Dr. Megibow’s name.
     Such amount was duly remitted to the Medical Center and
     credited to the aforementioned special fund. No part
     of such receipts was retained by Dr. Megibow.

     On March 17, 2000, Ms. O’Connell mailed to Mr. Gendler a

second Form 4564 with respect to 1997.   This Form 4564 asked for

certain items outstanding from the October 5, 1999 request,2 for

example:   “Another letter from NYU is needed outlining the

reimbursment [sic] policy of expenses incurred by the doctor and


     2
       This Form 4564, Information Document Request, identified
in the top right-hand corner as “Request Number 2”, by apparent
typographical error referred to the earlier Form 4564 as “IDR #2
issued on 10/05/99”. The Form 4564 issued on Oct. 5, 1999, is in
fact designated on its face as “Request Number 1” for 1997.
                              - 8 -

and [sic] any included on the W-2.”   Additional information was

also requested as set forth below:

     Please provide documentation to support the following
     Schedule C expenses:

     - Depreciation- Verification of purchase of depreciable
     items during 1997.

     - Travel- Please provide Airline tickets, hotel bills,
     charge statements and cancelled checks to verify
     expenses.

     - Legal fees- Documentation is needed to support the
     amount deducted.

     Please provede [sic] an explaination [sic] of why the
     expenses were deducted on Schedule C when Dr. Megibow
     is a W-2 employee?

     In August of 2000 Mr. Gendler sent to Ms. O’Connell a one-

page letter making the following statement:

          Please note that Dr. Megibow acts in an
     independent contractor capacity at N. Y. U. Medical
     Center. In addition to practicing medicine for these
     people, he lectures and promotes himself, which enables
     him to obtain patient referrals. He writes and
     publishes articles and lectures, in addition to
     practicing medicine. The expenses incurred on his
     Schedule C are not reimbursed by anyone and are
     expenses of his doing business that are necessary in
     the normal course of doing business. I hope this
     explains the presentation of Dr. Megibow’s tax
     information.

     On August 23, 2001, a third Form 4564, “Request Number 3”,

was issued with respect to 1997.   This Form 4564 repeated

verbatim the previous Request Number 2 for 1997 as regards

documentation supporting the claimed depreciation, travel

expenses, and legal fees, and added requests for documentation
                               - 9 -

supporting Schedule C items for car and truck expenses,

professional dues, telephone and communications, local travel,

and CPE.

     Meanwhile, Schedule C deductions had likewise become a focus

of the audit for 1998 and 1999, as evidenced by a Form 4564 dated

May 14, 2001, identified as “Request Number 2” for 1998 and 1999,

requesting documentation with respect to, inter alia, “All

Business expenses listed on Schedule C for both years” and “All

travel and entertainment expenses for both years listed on

Schedule C including a diary showing your travel itinerary”.

     On January 22, 2002, a final examination meeting was held

with Mr. Gendler.   The record indicates that as of that date,

petitioner had not provided further materials responsive to the

above-described requests for substantiation.   At the meeting, Mr.

Gendler, acting under direction from petitioner’s counsel,

Anthony Bentley (Mr. Bentley), declined to consent to an

extension of the time for assessment.   As a result, a decision

was made to close the case based on the impending statute of

limitations.   Shortly after the meeting, Mr. Gendler apparently

provided copies of Amex statements for 1997 and certain bank

statements, but these items were not analyzed or incorporated in

the adjustments on account of the decision to close the case.

     The notice of deficiency underlying this proceeding was

issued on February 25, 2002.   Among other things, the notice
                              - 10 -

disallowed the business expenses claimed by petitioner on

Schedules C, with the exception of the amounts shown as fees

remitted to NYU.   Additional correspondence sent by Mr. Bentley

after that date was reviewed by Ms. O’Connell but was determined

not to be pertinent to the adjustments in the statutory notice.

     The petition in this case was filed on May 9, 2002, and

trial was held on May 8, 2003.   Mr. Bentley represented

petitioner.   The stipulated joint exhibits consist of copies of

petitioner’s 1997, 1998, and 1999 tax returns; the notice of

deficiency; and the March 9, 1998, letter from NYU Medical

Center.   Mr. Bentley introduced into evidence two additional

exhibits.

     The first is a group of documents purporting to represent

production from respondent’s disclosure officer received by

Mr. Bentley in response to one of petitioner’s FOIA requests.

The second is a similar group of documents purporting to

represent production from the U.S. Attorney for the Southern

District of New York received by Mr. Bentley in response to one

of petitioner’s FOIA requests.   As such, the exhibits were

proffered as representing the contents of respondent’s

administrative files with respect to the examination of

petitioner’s 1997 through 1999 returns.   No further explanation

was offered by Mr. Bentley.
                              - 11 -

     After introducing the two exhibits into evidence,

Mr. Bentley directed the Court’s attention to petitioner’s

signature on his three tax returns and, pointing out that perjury

is a felony in New York, stated as follows:

          The reason that I bring this to your Honor’s
     attention is to invoke a presumption under the criminal
     law of innocence for someone who is accused or
     suggested of having committed a crime, certainly a
     felony. The reason that I raise that presumption is so
     that I can introduce the tax returns as being the
     initial showing of credible evidence in petitioner’s
     case to the effect that he is entitled to the
     deductions that he has taken, because what he is
     presenting under penalty of perjury is a statement to
     the effect that he’s entitled to take those deductions,
     has paid what he has said that he has paid, and that
     such deductions are appropriate and not--the tax code.
          Having said all of those things, petitioner rests.

Petitioner did not testify, nor were any witnesses called on his

behalf.   Respondent called Ms. O’Connell, who testified regarding

the examination of petitioner’s returns.   Respondent also

introduced four additional exhibits pertaining to the

examination.   At the conclusion of trial, a briefing schedule was

set with simultaneous opening briefs due July 28, 2003, and reply

briefs due September 11, 2003.

     On July 24, 2003, the Court received from petitioner a

document entitled “Petitioner’s Motion To Extend Time To File

Brief, For Partial Summary Judgment, and To Reopen the Record”,

with accompanying exhibits.   This document was returned to

petitioner unfiled, with the explanation that it represented an

improper joinder of motions under Rule 54 and an inappropriate
                              - 12 -

attempt to submit documents in the nature of evidence outside the

trial setting and without stipulation.

     On July 31, 2003, a document titled as a motion to extend

time to file briefs was filed by petitioner.     The preamble asked

that the time to file opening briefs be extended in order to

allow for resubmission of the previous motion for summary

judgment and to reopen the record.     By order dated August 4,

2003, the Court granted petitioner’s motion in that the time to

file petitioner’s opening brief was extended to August 18, 2003,

denied the motion in all other respects, and directed that the

time for answering briefs be extended to October 2, 2003.

     Petitioner’s opening brief was filed on August 20, 2003

(having been postmarked timely).   On October 2, 2003, respondent

filed respondent’s reply brief, and petitioner filed a motion to

extend time to file briefs.   Pursuant to Court order, respondent

filed a response to petitioner’s motion on October 27, 2003.

Additional correspondence received from petitioner on October 28,

2003, was filed as a supplement to petitioner’s motion, and by

order dated November 5, 2003, petitioner’s motion, as

supplemented, was denied.
                                - 13 -

                                OPINION

I.   Preliminary Matters

      A.   Petitioner’s Motions for Partial Summary Judgment and To

Reopen the Record

      On brief, petitioner states that he reasserts and resubmits

his previous motions for partial summary judgment and to reopen

the record.   These requests were denied by means of the Court’s

August 4, 2003, order, and we decline to modify that disposition

for the reasons described briefly below.

      Summary judgment is intended to expedite litigation and to

avoid unnecessary and expensive trials.     FPL Group, Inc. v.

Commissioner, 116 T.C. 73, 74 (2001); Fla. Peach Corp. v.

Commissioner, 90 T.C. 678, 681 (1988).     Rule 121(a) allows a

party to move “for a summary adjudication in the moving party’s

favor upon all or any part of the legal issues in controversy.”

Rule 121(b) directs that a decision on such a motion shall be

rendered “if the pleadings, answers to interrogatories,

depositions, admissions, and any other acceptable materials,

together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that a decision may be

rendered as a matter of law.”

      Petitioner’s motion for summary judgment asked for “an order

adjudicating that a taxpayer’s receipt of a W-2 form does not,

without more, preclude deductibility of legitimate business
                              - 14 -

expenses presented on a Schedule C form.”     Petitioner asserted

that respondent’s disallowance of his claimed expenditures was

premised on this concept.

     As an initial observation, we note that presenting the issue

in this abstract manner amounts to little more than a request for

an advisory opinion as to Federal tax law.     This Court does not

issue advisory opinions in a hypothetical context.     The Court’s

rulings are restricted to actual cases and controversies.

     Moreover, petitioner’s motion was and is properly rejected

because, regardless of the accuracy of the principle he seeks to

establish, the purposes of summary judgment would not be served

by a ruling thereon.   Trial, having already occurred, would not

be avoided.   More importantly, even an order in petitioner’s

favor would in no way expedite resolution of this case.

Substantiation would still be required for any allowable

expenses.

     The notice of deficiency expressly provides that the

Schedule C deductions for 1997, 1998, and 1999 were disallowed

“since you failed to establish that the disallowed portion of the

claimed deductions were paid, and if paid, qualified as ordinary

and necessary business expenses, or that the expenditures were

made for the purposes designated.”     Because the substantiation

issue under the actual facts of this case would remain before us,
                               - 15 -

nothing could be gained toward disposition by granting

petitioner’s motion.    We affirm our earlier denial.

     Reopening the record for the submission of additional

evidence is a matter within the discretion of the trial court.

Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 331

(1971); Butler v. Commissioner, 114 T.C. 276, 286-287 (2000).

The standard for doing so may be summarized as follows:      “A court

will not grant a motion to reopen the record unless, among other

requirements, the evidence relied on is not merely cumulative or

impeaching, the evidence is material to the issues involved, and

the evidence probably would change the outcome of the case.”

Butler v. Commissioner, supra at 287.3

     Petitioner’s motion to reopen the record seeks to have the

Court admit his bank and credit card statements for 1997 through

1999.    These proffered items fall short of the foregoing

standard.    Even if admitted, the documents would not alter the

outcome in this case.    The 3 years of financial statements in



     3
       The Court notes that prior to the trial of this case, we
contacted counsel for petitioner and respondent by conference
calls and implored the parties to acknowledge and obey the
Court’s standing pretrial order and the Tax Court Rules of
Practice and Procedure. These items require the parties to
stipulate facts and documents not reasonably in dispute and to
exchange before trial documents to be introduced as evidence. In
addition, the trial of this case was delayed for an hour to
afford petitioner an eleventh hour opportunity to provide
documents to respondent; this effort resulted in petitioner’s two
exhibits’, described supra in text, being admitted at trial
despite respondent’s objections.
                               - 16 -

petitioner’s name reflect hundreds of transactions, a large

percentage of which appear personal in nature, and petitioner has

not suggested any way of identifying those which allegedly

represent business expenses.   The admission of these materials

would therefore do little, if anything, to provide the requisite

substantiation for petitioner’s expenditures.

     Furthermore, even if the statements offered support for the

disputed deductions, we would deny their admission on grounds of

prejudice to respondent.   By submitting the documents after

trial, petitioner deprived respondent of any opportunity to

examine or question them during the proceeding.   Given the

background in this case, we cannot countenance such tardiness.

We again affirm our previous denial.

     B.   Petitioner’s Argument That the Notice of Deficiency is

Time Barred

     In his opening brief, petitioner puts forward the argument

that the notice of deficiency is time barred because his

representative lacked authority to extend the statute of

limitations for assessment.    This issue was not mentioned in the

petition, in petitioner’s trial memorandum, or at trial.

     It is well settled that a matter raised for the first time

on brief will not be considered when to do so would prejudice the

opposing party.   DiLeo v. Commissioner, 96 T.C. 858, 891-892

(1991), affd. 959 F.2d 16 (2d Cir. 1992); Markwardt v.
                                - 17 -

Commissioner, 64 T.C. 989, 997 (1975).   Such prejudice arises

when the opposing party would be prevented from presenting

evidence that might have been offered if the issue had been

timely raised, or the opposing party would otherwise be surprised

and placed at a disadvantage.    DiLeo v. Commissioner, supra at

891-892; Markwardt v. Commissioner, supra at 997.   It is also the

rule of this Court that claims related to the statute of

limitations are affirmative defenses that must be pleaded or

proved at trial and upon which the taxpayer bears the burden of

proof.    Rules 39, 142(a); Woods v. Commissioner, 92 T.C. 776, 779

(1989).

     We conclude that the foregoing principles render

consideration of petitioner’s argument inappropriate here.    At

minimum, the posture in which this issue has arisen deprived

respondent of the opportunity to introduce evidence concerning

petitioner’s agreement to extend the statute and the authority of

his representative.   Additionally, petitioner has submitted no

materials to support his allegations; he has merely indicated

that he is attempting to obtain such proof through an FOIA suit

against respondent.

     We surmise from the grounds recited in his motion to extend

the time for filing answering briefs that he would seek to

proffer evidence and argument on this matter using his reply

brief as the vehicle, which would again raise complications
                              - 18 -

related to reopening the record.   In these circumstances, our

rules do not support addressing the merits of petitioner’s

statute of limitations claim.4

     C.   Petitioner’s Estoppel Argument

     In both his trial memorandum and his brief, petitioner

frames one of the issues as follows:   “Whether respondent is

estopped from asserting that petitioner has failed adequately to

support the disallowed deductions.”    His argument on brief under

the heading “Estoppel” then reads in its entirety:

          5. Federal Courts, including administrative
     courts of limited jurisdiction, are courts of equity.

          6. Respondent’s audit changes taken as a whole
     essentially shift petitioner’s deductions from Schedule
     C to Schedule A, based on a premise contrary to the
     course of dealing of the parties over a period
     approaching ten years: one which has previously been
     litigated and established; i.e., that respondent
     acknowledges that petitioner is entitled to Schedule C
     deductions as an aspect of his professional activities.

          7. Respondent’s position initially appeared
     grounded in the untenable premise that “if you get a W-
     2, you can’t use a Schedule C.” That position morphed,
     at trial, into “this is just a substantiation case.”

     It is less than clear from the foregoing statements whether

petitioner’s argument rests on equitable estoppel, collateral



     4
       We note that respondent disputes the merits of
petitioner’s argument in respondent’s opposition to petitioner’s
motion to extend the time to file briefs. Respondent also
attaches to the opposition copies of three Forms 2848, Power of
Attorney and Declaration of Representative, and a copy of the
disputed Form 872, Consent to Extend the Time to Assess Tax,
which together reflect a proper extension of the statute.
                              - 19 -

estoppel, or some combination of the two.   For completeness, we

shall summarize why neither doctrine is applicable here.

     Equitable estoppel is a judicial doctrine that operates to

preclude a party from denying its own acts or representations

that induced another to act to his or her detriment.    Wilkins v.

Commissioner, 120 T.C. 109, 112 (2003); Hofstetter v.

Commissioner, 98 T.C. 695, 700 (1992).   In tax contexts,

equitable estoppel will be applied against the Government only

with the utmost caution and restraint and upon the establishment

of prerequisite elements:   (1) A false representation or

wrongful, misleading silence by the party against whom the

estoppel is claimed; (2) an error in a statement of fact and not

in an opinion or statement of law; (3) ignorance of the true

facts by the taxpayer; (4) reasonable reliance by the taxpayer on

the acts or statements of the one against whom estoppel is

claimed; and (5) adverse effects suffered by the taxpayer from

the acts or statements of the one against whom estoppel is

claimed.   Wilkins v. Commissioner, supra at 112; Norfolk S. Corp.

v. Commissioner, 104 T.C. 13, 60 (1995), affd. 140 F.3d 240 (4th

Cir. 1998); see also Lignos v. United States, 439 F.2d 1365, 1368

(2d Cir. 1971).

     Here, the record fails to show the existence of any of the

required elements for equitable estoppel.   Petitioner does not

identify, nor do we perceive, any particular statements or
                              - 20 -

conduct by respondent that could reasonably be interpreted as

false statements or misleading silence with respect to

petitioner’s entitlement to his claimed deductions.   On the

contrary, the course of events beginning in the audit and

ultimately reflected in the reasons for disallowance expressed in

the notice of deficiency emphasized the need for substantiation.

     Collateral estoppel exists for “the dual purpose of

protecting litigants from the burden of relitigating an identical

issue and of promoting judicial economy by preventing unnecessary

or redundant litigation.”   Meier v. Commissioner, 91 T.C. 273,

282 (1988); see also Montana v. United States, 440 U.S. 147, 153-

154 (1979); Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326

(1979).   In general, the doctrine of collateral estoppel, also

referred to as issue preclusion, forecloses relitigation of

issues actually litigated and necessarily decided in a prior

suit.   Parklane Hosiery Co. v. Shore, supra at 326 n.5; Meier v.

Commissioner, supra at 282; Peck v. Commissioner, 90 T.C. 162,

166 (1988), affd. 904 F.2d 525 (9th Cir. 1990).

     This Court, expanding upon three factors identified by the

Supreme Court in Montana v. United States, supra at 155, has set

forth five prerequisites necessary for the application in factual

contexts of collateral estoppel:

     (1) The issue in the second suit must be identical in
     all respects with the one decided in the first suit.
     (2) There must be a final judgment rendered by a court
     of competent jurisdiction.
                               - 21 -

       (3) Collateral estoppel may be invoked against parties
       and their privies to the prior judgment.
       (4) The parties must actually have litigated the issues
       and the resolution of these issues must have been
       essential to the prior decision.
       (5) The controlling facts and applicable legal rules
       must remain unchanged from those in the prior
       litigation. [Peck v. Commissioner, supra at 166-167;
       citations omitted.]

       These prerequisites are not met in the instant case.   No

legal proceeding has ever addressed, much less established, that

petitioner is entitled to the Schedule C deductions claimed for

1997, 1998, and 1999.    While petitioner has litigated a previous

tax year, resulting in Megibow v. Commissioner, T.C. Memo. 1998-

455, with respect to 1993, that proceeding provides neither a

legal nor a factual basis for applying collateral estoppel here.

       From a legal standpoint, income taxes are levied on an

annual basis, such that each year represents a new liability and

a separate cause of action.    Commissioner v. Sunnen, 333 U.S.

591, 598-600 (1948); Fla. Peach Corp. v. Commissioner, 90 T.C. at

682.    Given this principle, collateral estoppel would not operate

to establish entitlement to deductions in one year based merely

on an allowance of similar deductions in a different year or

years.    See Barmes v. Commissioner, T.C. Memo. 2001-155

(rejecting attempts to apply collateral estoppel to depreciation

deductions based on a prior litigated tax year), affd. 89 AFTR 2d

2002-2249, 2002-1 USTC par. 50,312 (7th Cir. 2002); see also

Adolph Coors Co. v. Commissioner, 519 F.2d 1280, 1283 (10th Cir.
                                - 22 -

1975) (rejecting an attempt to apply collateral estoppel even

though the exact issue was raised in a prior Tax Court proceeding

but, because the Commissioner abandoned the issue during the

litigation, no judicial determination or findings were made),

affg. 60 T.C. 368 (1973).

      From a factual standpoint, petitioner’s entitlement to

Schedule C expenses comparable to those claimed here was, with

one exception, not litigated in Megibow v. Commissioner, T.C.

Memo. 1998-455.    As to the one exception, this Court sustained

respondent’s denial of deductions claimed by petitioner for

business-related legal fees.     Id.   Accordingly, the case at bar

presents no grounds for applying either equitable or collateral

estoppel.

II.   Deficiencies and Penalties

      A.   Burden of Proof

      As a general rule, determinations by the Commissioner are

presumed correct, and the taxpayer bears the burden of proving

otherwise.    Rule 142(a).   Section 7491 may operate, however, in

specified circumstances to place the burden on the Commissioner.

Section 7491 is applicable to court proceedings that arise in

connection with examinations commencing after July 22, 1998, and

reads in pertinent part:

      SEC. 7491.   BURDEN OF PROOF.

           (a) Burden Shifts Where Taxpayer Produces Credible
      Evidence.--
                                  - 23 -

               (1) General rule.--If, in any court
          proceeding, a taxpayer introduces credible
          evidence with respect to any factual issue
          relevant to ascertaining the liability of the
          taxpayer for any tax imposed by subtitle A or B,
          the Secretary shall have the burden of proof with
          respect to such issue.

               (2) Limitations.--Paragraph (1) shall apply
          with respect to an issue only if--

                     (A) the taxpayer has complied with the
                requirements under this title to substantiate
                any item;

                     (B) the taxpayer has maintained all
                records required under this title and has
                cooperated with reasonable requests by the
                Secretary for witnesses, information,
                documents, meetings, and interviews; * * *

                     *      *      *    *    *    *    *

          (c) Penalties.--Notwithstanding any other
     provision of this title, the Secretary shall have the
     burden of production in any court proceeding with
     respect to the liability of any individual for any
     penalty, addition to tax, or additional amount imposed
     by this title. [See also Internal Revenue Service
     Restructuring & Reform Act of 1998, Pub. L. 105-206,
     sec. 3001(c), 112 Stat. 727, regarding effective date.]

Section 7491 is applicable here in that the examinations in this

case began after the statute’s effective date.

     With respect to the income adjustments at issue, petitioner

has not met the prerequisites of section 7491(a)(2) for placing

the burden on respondent.       The record reflects a failure on

petitioner’s part to substantiate items, to show that he

maintained adequate books and records, and to cooperate with

respondent.   With respect to the accuracy-related penalty, the
                                - 24 -

Commissioner satisfies the section 7491(c) burden of production

by “[coming] forward with sufficient evidence indicating that it

is appropriate to impose the relevant penalty” but “need not

introduce evidence regarding reasonable cause, substantial

authority, or similar provisions.”       Higbee v. Commissioner, 116

T.C. 438, 446 (2001).   Rather, “it is the taxpayer’s

responsibility to raise those issues.”       Id.   Because, as will be

more fully detailed infra, respondent here has introduced

sufficient evidence to render the section 6662(a) penalty at

least facially applicable, the burden rests on petitioner to show

why it should not be applied.

     B.   Business Expense Deductions

     Deductions are a matter of “legislative grace”, and “a

taxpayer seeking a deduction must be able to point to an

applicable statute and show that he comes within its terms.”          New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); see also

Rule 142(a).   As a general rule, section 162(a) authorizes a

deduction for “all the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or

business”.   An expense is ordinary for purposes of this section

if it is normal or customary within a particular trade, business,

or industry.   Deputy v. du Pont, 308 U.S. 488, 495 (1940).      An

expense is necessary if it is appropriate and helpful for the
                                - 25 -

development of the business.    Commissioner v. Heininger, 320 U.S.

467, 471 (1943).

     The breadth of section 162(a) is tempered by the requirement

that any amount claimed as a business expense must be

substantiated, and taxpayers are required to maintain records

sufficient therefor.   Sec. 6001; Hradesky v. Commissioner, 65

T.C. 87, 89-90 (1975), affd. 540 F.2d 821 (5th Cir. 1976); sec.

1.6001-1(a), Income Tax Regs.    When a taxpayer adequately

establishes that he or she paid or incurred a deductible expense

but does not establish the precise amount, we may in some

circumstances estimate the allowable deduction, bearing heavily

against the taxpayer whose inexactitude is of his or her own

making.   Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.

1930).    There must, however, be sufficient evidence in the record

to provide a basis upon which an estimate may be made and to

permit us to conclude that a deductible expense, rather than a

nondeductible personal expense, was incurred in at least the

amount allowed.    Williams v. United States, 245 F.2d 559, 560

(5th Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731, 742-743

(1985).

     Furthermore, business expenses described in section 274 are

subject to rules of substantiation that supersede the doctrine of

Cohan v. Commissioner, supra.    Sanford v. Commissioner, 50 T.C.

823, 827-828 (1968), affd. 412 F.2d 201 (2d Cir. 1969); sec.
                              - 26 -

1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov.

6, 1985).   Section 274 provides that no deduction shall be

allowed for, among other things, traveling expenses,

entertainment expenses, meal expenses, gifts, and expenses with

respect to listed property (as defined in section 280F(d)(4) and

including passenger automobiles, computer equipment, and cellular

telephones) “unless the taxpayer substantiates by adequate

records or by sufficient evidence corroborating the taxpayer’s

own statement”:   (1) The amount of the expenditure or use; (2)

the time and place of the expenditure or use, or date and

description of the gift; (3) the business purpose of the

expenditure or use; and (4) in the case of entertainment or

gifts, the business relationship to the taxpayer of the

recipients or persons entertained.     Sec. 274(d).

     In seeking to establish petitioner’s entitlement to deduct

the business expenses disallowed by respondent, petitioner’s

counsel at trial introduced two exhibits and then pointed out

that petitioner’s returns were signed under penalty of perjury.

As to the exhibits, they merely represent the contents of

administrative files received by Mr. Bentley in response to FOIA

requests and are bereft of any materials that would adequately

substantiate the claimed deductions.     Although the exhibits do

show that certain information with respect to the expenses was

given to respondent, this information falls far short of meeting
                             - 27 -

the heightened substantiation requirements of section 274, where

applicable, or of enabling us to make any reasonable estimate

under Cohan v. Commissioner, supra.     Accordingly, we reject

petitioner’s claim on brief that evidence of substantiation was

provided to respondent prior to January of 2002.

     We likewise give little weight to petitioner’s statement on

brief that evidence of substantiation tendered after January of

2002 would not have been considered by respondent.    Petitioner

has at no time shown either an ability or a willingness to

provide additional relevant material.    He neither testified at

trial nor offered any pertinent substantiating exhibits.

Moreover, the only other information tendered to the Court,

through petitioner’s tardy motion to reopen the record, would,

even if accepted and as previously explained, have failed to

demonstrate entitlement to any further deductions.    The materials

do not tie any specific expense to a particular for-profit

business or investment endeavor.

     With respect to petitioner’s reliance at trial on having

filed returns signed under penalty of perjury, petitioner

apparently reiterates this position on brief, as follows:

          Petitioner duly filed his 1998 and 1999 income tax
     returns which were signed under penalty of perjury by
     petitioner, timely filed pursuant to 26 United States
     Code § 7502 through the United States mails, and
     received in evidence; respondent failed to demonstrate
     that any request for substantiation of the deductions
     thereupon taken was made of petitioner. The deductions
     were therein not properly disallowed as
                                 - 28 -

     unsubstantiated, and the additions to tax assessed for
     the said years accordingly improper.

     As a threshold matter, we dispute any suggestion by

petitioner that substantiation was not sought by respondent for

the expenses claimed on the 1998 and 1999 returns.    As revealed

in the exhibits introduced by petitioner and detailed more fully

in our above factual discussion of the administrative process,

substantiation was a focus of respondent’s examination for all

three of the years in issue.

     More importantly, and contrary to petitioner’s assertion, it

is axiomatic that neither tax returns themselves, nor the

execution of such forms under penalty of perjury, establishes the

truth of items recited therein.     Lawinger v. Commissioner, 103

T.C. 428, 438 (1994); Wilkinson v. Commissioner, 71 T.C. 633, 639

(1979); Roberts v. Commissioner, 62 T.C. 834, 837 (1974).

Petitioner’s reliance on his tax returns is entirely misplaced.

Thus, in absence of any evidence reflecting the propriety of the

business expense deductions claimed by petitioner, we sustain

their disallowance for lack of substantiation.

     C.   Section 6662 Penalty

     Subsection (a) of section 6662 imposes an accuracy-related

penalty in the amount of 20 percent of any underpayment that is

attributable to causes specified in subsection (b).    Subsection

(b)(1) of section 6662 then provides that among the causes
                                - 29 -

justifying imposition of the penalty is negligence or disregard

of rules or regulations.

     “Negligence” is defined in section 6662(c) as “any failure

to make a reasonable attempt to comply with the provisions of

this title”, and “disregard” as “any careless, reckless, or

intentional disregard.”    Caselaw similarly states that

“‘Negligence is a lack of due care or the failure to do what a

reasonable and ordinarily prudent person would do under the

circumstances.’”   Freytag v. Commissioner, 89 T.C. 849, 887

(1987) (quoting Marcello v. Commissioner, 380 F.2d 499, 506 (5th

Cir. 1967), affg. on this issue 43 T.C. 168 (1964) and T.C. Memo.

1964-299), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S.

868 (1991).   Pursuant to regulations, “‘Negligence’ also includes

any failure by the taxpayer to keep adequate books and records or

to substantiate items properly.”    Sec. 1.6662-3(b)(1), Income Tax

Regs.

     An exception to the section 6662(a) penalty is set forth in

section 6664(c)(1) and reads:    “No penalty shall be imposed under

this part with respect to any portion of an underpayment if it is

shown that there was a reasonable cause for such portion and that

the taxpayer acted in good faith with respect to such portion.”

     Regulations interpreting section 6664(c) state:

          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. * * * Generally, the most important
                              - 30 -

     factor is the extent of the taxpayer’s effort to assess
     the taxpayer’s proper tax liability. * * * [Sec.
     1.6664-4(b)(1), Income Tax. Regs.]

     Reliance upon the advice of an expert tax preparer may, but

does not necessarily, demonstrate reasonable cause and good faith

in the context of the section 6662(a) penalty.     Id.; see also

United States v. Boyle, 469 U.S. 241, 251 (1985); Freytag v.

Commissioner, supra at 888.   Such reliance is not an absolute

defense, but it is a factor to be considered.     Freytag v.

Commissioner, supra at 888.

     In order for this factor to be given dispositive weight, the

taxpayer claiming reliance on a professional must show, at

minimum, that (1) the preparer was supplied with correct

information and (2) the incorrect return was a result of the

preparer’s error.   See, e.g., Westbrook v. Commissioner, 68 F.3d

868, 881 (5th Cir. 1995), affg. T.C. Memo. 1993-634; Cramer v.

Commissioner, 101 T.C. 225, 251 (1993), affd. 64 F.3d 1406 (9th

Cir. 1995); Ma-Tran Corp. v. Commissioner, 70 T.C. 158, 173

(1978); Pessin v. Commissioner, 59 T.C. 473, 489 (1972).

     As previously indicated, section 7491(c) places the burden

of production on the Commissioner.     The notice of deficiency

issued to petitioner generally asserted applicability of the

section 6662(a) penalty on account of negligence or disregard,

substantial understatement, and/or substantial valuation

misstatement.   See sec. 6662(b).   Respondent at trial and on
                              - 31 -

brief has addressed only negligence or disregard of rules or

regulations as the basis for the penalty, and we shall do

likewise.

     We conclude that respondent has met the section 7491(c)

burden of production with respect to the negligence penalty.    The

evidence adduced in this case reveals that petitioner has failed

to keep adequate books and records and properly to substantiate

reported items.   Petitioner, in turn, has not shown that he acted

with reasonable cause and in good faith as to the claimed items.

His argument on brief with regard to the penalties reads as

follows:

     Petitioner has done everything he reasonably could be
     expected to do to pay his taxes when due, tender
     security for over 100% of the claimed “additions” to
     taxes dreamed up by respondent under any theory, and
     petitioner’s efforts at cooperation, offers of
     settlement, coupled with tendered funds, have been
     refracted or ignored at every turn, including those
     within the context of these proceedings, such that the
     history can be viewed ultimately as a denial of
     petitioner’s procedural due process rights.

     Petitioner is entitled to minimize his income taxes
     under the Internal Revenue Code.

     This picture is belied by the record in this case.    Contrary

to petitioner’s suggestions of cooperation and forthcoming

behavior, his history before the Internal Revenue Service and

this Court is replete with instances where petitioner, or the

representative acting on his behalf, has delayed, ignored, or

otherwise hindered repeatedly offered opportunities for
                             - 32 -

communication and exchange of pertinent information.   Conversely,

the record is devoid of any evidence reflecting offers of

settlement or payment, nor would such offers bear in any event on

whether petitioner was negligent at the point in time when he

filed his Federal income tax return and underpaid his taxes.      On

these facts, petitioner’s intimations of a denial of due process

are not well taken.

     Finally, petitioner is entitled to minimize income taxes

only to the extent consistent with law.   See United States v.

Cumberland Pub. Serv. Co., 338 U.S. 451, 454-456 (1950).     He

clearly overstepped that boundary here and has not shown a

reasonable basis for doing so.   The Court sustains respondent’s

imposition of the section 6662 penalty.

     To reflect the foregoing,


                                          Decision will be entered

                                    for respondent.
