                         T.C. Memo. 2007-188



                       UNITED STATES TAX COURT



        TYSON FOODS, INC. AND SUBSIDIARIES, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21590-03.               Filed July 16, 2007.



     Jay H. Zimbler, W. Thomas Baxter, Kevin R. Pryor, and

Hille R. Sheppard, for petitioner.

     Bonnie L. Cameron, James F. Kearney, and Catherine T. Gugar,

for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:    Respondent determined deficiencies of

$7,352,495, $2,802,710, and $1,793,801 in petitioner’s Federal

income taxes for its years ended September 30, 1995, 1996, and

1997, respectively.   Ten separate adjustments were set forth in
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the statutory notice, and petitioner raised a new issue in its

petition.   Seven issues were settled by the parties before trial,

and one (the research credit issue) has been deferred for later

trial or other disposition.   Two issues were settled after trial.

The issue addressed in this opinion is whether petitioner may

depreciate, upon application of the rule of Cohan v.

Commissioner, 39 F.2d 540 (2d Cir. 1930), approximately

$2 million in expenditures for which complete and correct records

were not maintained.   Unless otherwise indicated, all section

references are to the Internal Revenue Code in effect for the

years in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

                         FINDINGS OF FACT

     Petitioner is a Delaware corporation with its principal

offices located in Springdale, Arkansas.    During the years in

issue, petitioner was the world’s largest fully integrated

producer, processor, and marketer of poultry-based food products.

     By the end of 1991, Culinary Foods, Inc. (Culinary), based

in Chicago, Illinois, was a well-established manufacturer of

frozen food products for institutional buyers, as well as other

food products for the airline industry.     At that time, Culinary

operated through two integrated manufacturing facilities located

on the north side of Chicago.
                               - 3 -

     In 1992, a fire destroyed one of Culinary’s two

manufacturing facilities.   As a temporary measure, Culinary

leased two facilities and fitted them out with new machinery.

     In 1993, Culinary broke ground for the construction of a

125,000-square-foot, $18 million office and manufacturing

facility on the south side of Chicago in a neighborhood that the

City of Chicago was attempting to redevelop.   That neighborhood

is generally known as the “Back-of-the-[stock]Yards”.   In June

1994, the City of Chicago granted Culinary a $5 million tax

increment financing (TIF) subsidy in connection with the

construction of Culinary’s new facility and, more specifically,

with the jobs that it would bring to the Back-of-the-Yards.    The

subsidy was to be paid over time.

     In August 1994, petitioner purchased the stock of Culinary

in a transaction that was treated as an asset purchase for

Federal income tax purposes.   At that time, petitioner allocated

its purchase price to the various assets acquired from Culinary

and claimed depreciation and amortization deductions with respect

thereto.   No allocation was made to the TIF subsidy.

     Beginning in mid-1995, Culinary moved its operations from

its north side-owned and leased facilities into its new Back-of-

the-Yards facility.

     On July 12, 1999, during the audit of petitioner’s Federal

income tax returns for its September 30, 1995 through 1999, tax
                                      - 4 -

years, respondent proposed to reallocate, and petitioner agreed

to the reallocation of, petitioner’s purchase price among the

various assets held by Culinary.             As part of this adjustment, the

parties agreed to allocate $5 million of the purchase price to

the receivable from the City of Chicago for the TIF subsidy.

Based on the allocation of the $5 million of the purchase price

to the receivable from the City of Chicago for the TIF subsidy,

payments on the receivable should have been debited to cash and

credited to the receivable with no impact on petitioner’s taxable

income.

        In fact, however, in accounting for payments that the City

of Chicago made in connection with the subsidy, petitioner did

not credit a receivable.         Rather, the payments were received and

credited as shown in the following chart:

                                               Account       Account
Ref.    Check No.     Date          Amount        No.        Description

 A    96737341       1-27-95     $875,453.00    101565   Land-Contra
($625,000)
                                                101900   Goodwill ($250,453)
 B      96767315     3-10-95    1,955,451.00    101226   TIF moving expenses
 C      96878721      7-5-95       52,189.43    101226   TIF moving expenses
 D      96960850    11-24-95      422,704.97    101226   TIF moving expenses
 E      97039857     4-15-96      330,780.50    780946   Misc. other income
 F      97039858     4-15-96    1,363,421.10    780946   Misc. other income
Total                          $5,000,000.00

Various entries in the accounts shown above erroneously increased

or decreased petitioner’s taxable income for the years in issue.

        The parties have agreed to the proper treatment of all of

the above accounts except with respect to entries into account

No. 101226, TIF moving expenses.             That account had a zero balance
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at the end of the fiscal years 1995 and 1996.    The only records

explaining the amounts that were debited to the moving expense

account are lists showing a breakdown by vendor or other brief

description, but not identifying the nature of the item or the

dates that the credited amounts were expended.

     Respondent has conceded that petitioner’s income should be

reduced by $1,800,354 of the misapplied $5 million subsidy.

Petitioner contends that it is entitled to deduct an additional

$2,007,640.   Petitioner concedes that it is not entitled to

reduce its income by the balance of $1,192,006.

                               OPINION

     In its opening brief on this issue, petitioner’s position is

concisely stated as follows:

          Petitioner’s records are insufficient to determine
     the extent to which these expenses should have resulted
     in a reduction of otherwise allowable ordinary and
     necessary business expenses as contrasted with the
     reduction of otherwise allowable depreciation.
     However, at a minimum, under the well-established Cohan
     rule (Cohan v. Commissioner, 39 F.2d 540 (2d Cir.
     1930)), petitioner is entitled to treat the entire
     $2,007,640 as a capital expenditure depreciable over a
     five-year time period and to reduce its taxable income
     accordingly for the resulting additional depreciation
     deductions.

Respondent replies:

          * * * [Petitioner’s] assertion that * * * [it] is
     at least entitled to capitalize the remaining amounts
     in dispute without any documentation, is to simply
     ignore the well known legal principle that deductions
     are a matter of legislative grace, and the taxpayer
     must clearly demonstrate entitlement to any deductions
                               - 6 -

     claimed, even capital deductions. INDOPCO, Inc. v.
     Commissioner, 503 U.S. 79, 84 (1992).

          Petitioner cavalierly relies on Cohan v.
     Commissioner, 39 F.2d 540 (2d Cir. 1930) to assert that
     the remaining expenses are deductible and thus this
     Court should allow a greater deduction than the
     $1,800,354 already permitted by respondent. Petitioner
     bases this belief on the fact that because account
     101226, of which petitioner alleges the remaining
     $2,324,193 was credited, is labeled “TIF Moving
     Expenses,” and because the TIF Subsidy was given in
     connection with Culinary, then all of the $2,324,193
     [now reduced to $2,007,640] in dispute must represent
     moving expenses of food processing equipment for which
     petitioner is entitled to capitalize [the cost] over a
     five year time period. Petitioner has no evidence to
     substantiate this allegation.

Respondent’s primary criticism of petitioner’s evidence is that

the list of expenditures on which petitioner relies is for the

entire calendar year 1995 and cannot be allocated to the fiscal

years before the Court.   Respondent points out that the list of

vendors contains no information regarding the nature of the

expense or when within the calendar year 1995 the expense was

incurred.   Respondent concludes that “petitioner wants this Court

to make a leap of faith without any corroborating evidence that

the remaining amounts in issue were for the purchase, the

installation, or the moving of equipment for use in Culinary’s

processing facility.”   Respondent emphasizes petitioner’s status

in the industry and its employment of in-house and outside

accountants and tax preparers “who were well aware of the record

keeping requirements of the Internal Revenue Code.”
                               - 7 -

     Section 6001 requires taxpayers to “keep such records,

render such statements, make such returns, and comply with such

rules and regulations as the Secretary may from time to time

prescribe.”   Section 1.6001-1(a), Income Tax Regs., requires the

taxpayer to “keep such permanent books of account or records,

including inventories, as are sufficient to establish the amount

of gross income, deductions, credits, or other matters required

to be shown by such person in any return of such tax or

information.”

     If a claimed deduction is disallowed by respondent,

petitioner must prove entitlement to that deduction, whether

ordinary and necessary business expenses or depreciation expense.

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

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934) (“a

taxpayer seeking a deduction must be able to point to an

applicable statute and show that he comes within its terms”);

Rule 142(a); Cluck v. Commissioner, 105 T.C. 324, 337 (1995).

(While the burden of proof may be shifted in some cases involving

taxpayers, including corporations, unlike petitioner, with a

limited net worth, under section 7491, the burden shift occurs

only where “the taxpayer has maintained all records required”.

Sec. 7491(a)(2)(B).)

     The doctrine of Cohan v. Commissioner, supra, permits the

Court to estimate allowable deductions when it is clear that
                                - 8 -

deductible expenses have been incurred.    However, there must be

sufficient evidence in the record to provide a basis for making

an estimate.   Mendes v. Commissioner, 121 T.C. 308 (2003);

Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).    This is

not a case where no allowance has been made for the costs of

relocating the Culinary facility, and a substantial amount has

been conceded by respondent.    Approximations under the Cohan rule

necessarily bear heavily upon taxpayers whose inexactitude in

failing to keep records created the problem.    See Cohan v.

Commissioner, 39 F.2d at 544.    Here there is evidence that

certain payments were made and recorded.   From that, petitioner

asks us to conclude that the payments must have been either for

deductible expenses or depreciable assets and that the

expenditures that were made are attributable to a tax year before

the Court.

     The only evidence that petitioner produced in this regard

was the list of vendors and amounts that were recorded in the

moving expenses account and the testimony of David L. Van Bebber

(Van Bebber), a lawyer involved in the Culinary acquisition who

had reviewed the document and concluded that “This lists out

certain third party vendors that I believe Culinary was utilizing

or making payments to for goods or services.”   Van Bebber was

familiar with some, but not all, of the vendors on the list.     As

to one, for example, he testified that “It could be line
                                - 9 -

equipment.    It could be freezing equipment.   It could be any

number of the different types of equipment that we utilize in the

food processing business.”    Although he identified the nature of

the business of certain of the vendors, the most he could say

was:

            Q [Petitioner’s counsel] Do you have any views
       as to the nature of the invoices?

            A Yes. I believe these invoices were for either
       the purchase, the installation, the moving of equipment
       for the processing facility, the new processing
       facility on Ashland Avenue.

No invoices were in the record or ever produced.     On cross-

examination, Van Bebber admitted that he was not involved in the

accounting with respect to the TIF subsidy or the disputed

expenditures.

       Petitioner repeatedly refers to the list of vendors as a

“contemporaneous record”.    But the list is, in effect,

contemporaneous only with respect to the recording of amounts

that went into account No. 101226.      It is not contemporaneous in

the sense that invoices, purchase orders, or journal entry

explanations reflect the nature of the items purchased.     The

witness’s speculation, based on familiarity with certain of the

vendors, is not reliable evidence that the items paid for are

deductible currently or over time through depreciation.     On a

record in which it is established that erroneous accounting

entries were made, we have no confidence that the expenditures
                             - 10 -

were for the purpose claimed by petitioner.   Thus, we conclude

that petitioner has failed to satisfy its burden of proving that

it is entitled to the disputed deductions.

     Because of the yet unresolved research credit issue,


                                        An appropriate order

                                   will be issued.
