                               T.C. Memo. 2017-79



                         UNITED STATES TAX COURT



              BARRY LEONARD BULAKITES, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 16878-14.                          Filed May 11, 2017.



      Barry Leonard Bulakites, pro se.

      Monica D. Polo and Erin Kathleen Salel, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      HOLMES, Judge: Barry Bulakites is an insurance consultant whose clients

are accountants, but who relied only on TurboTax when he prepared his own

returns. The Commissioner thinks he claimed a few too many deductions, but

Bulakites argues that he has enough evidence to prove some of them and blames

the software for luring him into claiming others.
                                          -2-

[*2]                            FINDINGS OF FACT

       Bulakites is a specialist in life insurance and annuities, and is frequently an

expert witness on the subject. He trains others in his field, and works for a firm

whose clients are mostly accountants in need of advice on anything from how to

sell their services to how to decide if a client is due a refund for a particular

service sold.

       The big issue in this case, however, arose from a dispute that happened

years ago while Bulakites was at a different job. He became ensnared in a lawsuit

brought against a company called Wasley Products. Though the details in the

record are thin, we know the suit arose when 401(k) plan participants at Wasley

sued the company where Bulakites worked. He credibly testified that he was

named as a defendant for his work on the plan, and in 2007 a global settlement left

him on the hook for $500,000. Bulakites says that he paid the settlement by taking

out a $500,000 loan in 2007 secured by his home. The promissory note was due in

less than a year, but Bulakites planned to sell his home and use the proceeds to pay

the note when it came due in October 2008. The start of the Great Recession
                                        -3-

[*3] turned out to be exactly the wrong time to need to sell a house, and he

managed to pay only a fraction of what he owed.1

      His troubles got even worse in 2009 when he and his ex-wife legally

separated, and, a year later, divorced. Their separation agreement directed

Bulakites to pay his ex-wife $2,000 per month for spousal support until the sale of

the marital residence, at which point his payments would increase to $8,000. The

real-estate market had not noticeably improved for him by 2009, and Bulakites

credibly claimed during trial that the house was “under water” with “no hope” of a

sale. He and his ex-wife never entered into any subsequent maintenance

agreements, but in an effort to do “the right thing,” Bulakites orally agreed with

his ex-wife to increase his payments to $5,000 per month. He didn’t quite keep

up, but the documents in the record do show (and we find) that he paid her about

$50,000 in both 2011 and 2012.

      Bulakites used TurboTax to prepare his returns for the years at issue, and he

now admits that he made a lot of mistakes in the process. These may have been

what caught the Commissioner’s attention, and in 2014 out went a notice of

deficiency for the 2011 and 2012 tax years. Bulakites timely filed a petition with


      1
       The promissory note does not reflect what the money was to be used for,
and Bulakites introduced no additional records to explain this.
                                         -4-

[*4] the Court, but in the months leading up to trial he was largely unresponsive to

the Commissioner’s attempts at informal discovery. There were some problems

once he arrived for trial as well. It turned out that Bulakites did not turn over

some evidence to the Commissioner until the eve of trial. This he blamed on a

flood at his home when it turned out the flood was three years before trial--though

he explained that he was still receiving vital documentation back from a restora-

tion company that very week. This narrative affected our view of his credibility.

      Bulakites was a California resident when he began the case, which we tried

in San Diego.

                                      OPINION

      The only issues left for us to decide are:

      •      Whether Bulakites is entitled to deduct the payments that he
             sent his wife in the 2011 and 2012 tax years;

      •      Whether he is entitled to deduct business-interest expenses for
             the 2011 and 2012 tax years;

      •      Whether he is entitled to deduct other business expenses for the
             2011 tax year; and

      •      Whether he is liable for the accuracy-related penalty under
             section 6662(a)2 for the years at issue.

      2
       Unless stated otherwise, all section references are to the Internal Revenue
Code in effect for the years at issue. All Rule references are to the Tax Court
                                                                        (continued...)
                                          -5-

[*5] I.         Alimony Paid Deduction

              Year                  Claimed amount              Allowed amount
              2011                      $70,580                      $24,000
              2012                       66,710                       24,000

          Section 215(a) allows as a deduction an amount equal to alimony paid.

Section 71(b) defines alimony, and part of the definition requires that the payment

be required by a divorce or separation instrument. Secs. 71(b)(1)(A), 215(b); see

also Ellis v. Commissioner, T.C. Memo. 1990-456. A divorce or separation

instrument is:

          •     a decree of divorce or separate maintenance or a written
                instrument incident to such a decree;

          •     a written separation agreement; or

          •     a decree requiring a spouse to make such payments.

Sec. 71(b)(2). Bulakites’ oral modification of his written separation agreement

doesn’t work--it’s well settled that an oral modification of a written instrument

does not meet section 71’s requirements. Sec. 71(b)(2); Gordon v. Commissioner,

70 T.C. 525, 529-30 (1978); Larievy v. Commissioner, T.C. Memo. 2012-247;

Ellis v. Commissioner, T.C. Memo. 1990-456; sec. 1.71-1(c), Income Tax Regs.


          2
       (...continued)
Rules of Practice and Procedure.
                                        -6-

[*6] We do find his motivation sincere, and he did prove that he paid his ex well

over the $2,000 a month required by his separation agreement, but we have to hold

that the law does not allow him to deduct those excess amounts as alimony. We

therefore find for the Commissioner on this issue.

II.   Interest Deductions

           Year                   Claimed amount              Allowed amount
           2011                       $31,000                        -0-
           2012                        48,000                        -0-

      A taxpayer may deduct interest paid or incurred during the tax year if the

interest is an ordinary and necessary expense of carrying on his trade or business.

Sec. 162(a); Robinson v. Commissioner, 119 T.C. 44, 48 (2002); see sec. 163(a).

A taxpayer must be able to substantiate that interest. Porter v. Commissioner, T.C.

Memo. 2015-122; Thompson v. Commissioner, T.C. Memo. 2011-291. And this

means that he must show that he made a payment and show what portion was

interest and what portion was repayment of principal.

      The evidence does show Bulakites made payments to his lender, but the

amounts do not match those that he claimed on his tax returns, and he did not

explain this discrepancy at trial. Bulakites also did not provide us with any

business records regarding the loan, any loan statements, or any loan-repayment
                                        -7-

[*7] schedules. Without this type of documentation we are unable to tell whether

these payments were made on the original 2007 loan. Remember that the note for

that loan says it should have been paid in full by October 2008. We understand

that it might have been his plan to pay the note with proceeds from the sale of his

home, and that that sale didn’t happen. The problem is that we can’t figure out

what happened to the note--was it refinanced? Was it extended? Without any

paperwork (in a situation where there should have been lots of paperwork) we are

left only with his testimony about the total amounts of the payments and the

allocation of those payments between principal and interest. We do not find his

testimony credible on this issue, and so sustain the Commissioner’s determination.

III.   Other Expenses

           Year                   Claimed amount              Allowed amount
           2011                      $185,673                       $142

       Bulakites claimed a “deduction for other expenses” on his 2011 return. He

claimed during trial that this was a carryforward of a net operating loss from a

previous year that he mistakenly put on the wrong line of his return. He failed to

contest this issue on brief, which we would normally deem a concession, see Rule

151(e)(4) and (5); Petzoldt v. Commissioner, 92 T.C. 661, 683 (1989); Tufft v.

Commissioner, T.C. Memo. 2009-59, but we will discuss it anyway.
                                         -8-

[*8] Section 172 allows a deduction for net operating loss carryovers from

earlier years, and net operating loss carrybacks from later years as long as the

taxable income for the current year is greater than zero. Sec. 172(a), (b)(2). A

taxpayer substantiates his claim to such a deduction by filing with his return “a

concise statement setting forth the amount of the net operating loss deduction

claimed and all material and pertinent facts relative thereto, including a detailed

schedule showing the computation of the net operating loss deduction.” Sec.

1.172-1(c), Income Tax Regs. Bulakites filed no such documentation. During

trial he did turn in a tax return for a previous year (though not the one that

generated the net operating loss), but even with his testimony, that is not enough

to substantiate his entitlement to a loss carryforward. See Gould v. Commissioner,

139 T.C. 418, 443 (2012), aff’d, 552 F. App’x 250 (4th Cir. 2014); Obedin v.

Commissioner, T.C. Memo. 2013-223, aff’d, 655 F. App’x 583 (9th Cir. 2016).3

IV.   Penalty

      The Commissioner asserts a section 6662(a) accuracy-related penalty for

each year at issue. Section 6662 imposes the penalty when there is “any

substantial understatement of income tax.” Sec. 6662(b)(2). Here the


      3
       The Commissioner has his own theory on how Bulakites calculated his
carryover and where it really came from, but we need not analyze it.
                                         -9-

[*9] Commissioner met his burden of production with math. An understatement

of tax is “substantial” if it exceeds the greater of $5,000 or “10 percent of the tax

required to be shown on the return.” Sec. 6662(d)(1)(A). Bulakites’

understatements for the 2011 and 2012 tax years well surpass both $5,000 and

10% of the tax required.

      The burden then swings to Bulakites to show that his mistakes were

reasonable and in good faith. See sec. 6664(c)(1). He cannot. He admitted during

trial that he deducted items he shouldn’t have, and that he overstated certain

losses. He tried to blame TurboTax for his mistakes, but “[t]ax preparation

software is only as good as the information one inputs into it.” Bunney v.

Commissioner, 114 T.C. 259, 267 (2000). We therefore find for the

Commissioner on this issue.


                                               Decision will be entered under

                                        Rule 155.
