                         T.C. Memo. 2009-204



                       UNITED STATES TAX COURT



                 WILLIAM G. HALBY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14785-07.                  Filed September 14, 2009.



     William G. Halby, pro se.

     Donald A. Glasel and James P. A. Caligure, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:    Respondent determined the following income

tax deficiencies and penalties:

                                                 Penalty
               Year              Deficiency    Sec. 6662(a)

               2004              $12,656         $2,531
               2005                8,835          1,767
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     The issues for decision are:    (1) Whether petitioner is

entitled to claimed medical expense deductions in 2004 and 2005

in amounts greater than those allowed by respondent; and (2)

whether petitioner is liable for the section 66621 accuracy-

related penalty for 2004 and 2005.     For the reasons stated

herein, we find that petitioner is not entitled to deductions in

amounts greater than that allowed by respondent and is liable for

the accuracy-related penalties.

                         FINDINGS OF FACT

     Petitioner is a lawyer admitted to practice in New York

State.   Petitioner resided in New York at the time he filed his

petition.

     During 2004 and 2005 petitioner frequented prostitutes in

New York.   Petitioner did not visit these prostitutes as part of

a course of therapy prescribed by his doctor, nor did petitioner

ask his doctor to prescribe any sort of sex therapy.     Petitioner

kept track of these visits in a journal.     The journal included

the date, the name of the “service provider”, and the amount.

Petitioner did not discuss these visits with his doctors

afterwards to determine their impact on his health.




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

     During 2004 and 2005 petitioner purchased pornography and

books and magazines on sex therapy.     Petitioner also recorded the

dates and amounts of the purchases in his journal.

     Petitioner timely filed his Forms 1040, U.S. Individual

Income Tax Return, for 2004 and 2005.    For 2004 petitioner

claimed medical expense deductions of $76,314 on his Schedule A,

Itemized Deductions.   For 2005 petitioner claimed medical expense

deductions on his Schedule A of $49,203.    Both the 2004 and 2005

returns included attachments to the respective Schedules A.    The

attachments provided further detail on the costs that went into

petitioner’s claimed medical expense deductions.    However, the

descriptions were not specific but provided only vague

descriptions of the types of costs petitioner was claiming as

deductions.

     Respondent issued a notice of deficiency to petitioner on

June 21, 2007.   The notice disallowed $73,934 of petitioner’s

$76,314 claimed medical expense deductions for 2004 and $47,024

of petitioner’s $49,203 claimed medical expense deductions for

2005.

     The $73,934 disallowed by respondent for 2004 included:     (1)

$2,368 for medical books, magazines, videos, and pornographic

material; (2) $65,934 for prostitutes; and (3) $5,632 in bank and

finance charges incurred in connection with loans used to pay for

the claimed medical expenses.   Petitioner and respondent
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stipulated that petitioner provided receipts totaling $1,455.20

of the $2,368 for books, magazines, videos, and pornographic

materials; however, the actual receipts were not entered into

evidence.    Petitioner concedes that he is not entitled to deduct

the $5,632 in bank and finance charges.

      The $47,024 disallowed for 2005 included:    (1) $5,005 for

books, magazines, videos, and pornographic materials; and (2)

$42,152 for prostitutes.   Petitioner and respondent stipulated

that petitioner provided receipts for $2,325.58 of the claimed

$5,005 for medical books, magazines, videos, and pornographic

materials; however, the actual receipts were not entered into

evidence.

      On June 28, 2007, petitioner filed a petition with this

Court challenging respondent’s determinations.     A trial was held

on October 27, 2008.

                                OPINION

I.   Medical Expense Deductions

      The Commissioner’s determinations in a notice of deficiency

are presumed correct, and the taxpayer bears the burden of

proving, by a preponderance of the evidence that these

determinations are incorrect.     Rule 142(a)(1); Welch v.

Helvering, 290 U.S. 111, 115 (1933).      Tax deductions are a matter

of legislative grace, and a taxpayer has the burden of proving

that he is entitled to the deductions claimed.     Rule 142(a)(1);
                                - 5 -

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

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

burden of proof on factual issues that affect a taxpayer’s

liability for tax may be shifted to the Commissioner where the

“taxpayer introduces credible evidence with respect to * * * such

issue.”   Sec. 7491(a)(1).   Petitioner does not claim that the

burden shifts to respondent under section 7491(a).    In any event,

petitioner has failed to establish that he has satisfied the

requirements of section 7491(a)(2).     On the record before us, we

find that the burden of proof does not shift to respondent under

section 7491(a).

     Section 213(a) permits a deduction for a taxpayer’s medical

and dental expenses that were paid and not compensated for by

insurance, to the extent the expenses exceed 7.5 percent of the

taxpayer’s adjusted gross income.    Section 213(d)(1) provides in

pertinent part that the term “medical care” means amounts paid

“for the diagnosis, cure, mitigation, treatment, or prevention of

disease, or for the purpose of affecting any structure or

function of the body”.   Section 1.213-1(e)(1)(ii), Income Tax

Regs., provides that amounts expended for illegal operations or

treatments are not deductible and that deductions allowed under

section 213 will be confined strictly to expenses incurred

primarily for the prevention or alleviation of a physical or

mental defect or illness.
                               - 6 -

     To substantiate these expenses, the taxpayer must furnish

the name and address of each payee and the date and amount of

each payment.   Sec. 1.213-1(h), Income Tax Regs.   If requested by

the Commissioner, the taxpayer must also furnish a statement or

itemized invoice identifying the patient, the type of service

rendered, and the specific purpose of the expense.    Id.

     The issue for decision is whether petitioner is entitled to

deduct amounts paid to prostitutes and for medical texts and

pornographic materials.   Respondent argues that petitioner is not

entitled to deduct amounts paid to prostitutes because such

payments were illegal and petitioner has not provided

substantiation as required by section 1.213-1(h), Income Tax

Regs.   Respondent argues that petitioner is not entitled to a

deduction for amounts paid for books on sex therapy and

pornographic material because those amounts were incurred for

petitioner’s general welfare, not pursuant to a doctor’s

prescription or for a specific medical condition.

     Petitioner does not argue that section 213 and the

regulations thereunder allow a deduction for these costs.

Rather, petitioner points to book and magazine articles about the

positive health effects of sex therapy and argues that we should

allow him a deduction despite the illegality of his conduct or

the fact that petitioner’s doctor did not prescribe this

treatment.
                                 - 7 -

      We agree with respondent that petitioner is not entitled to

deduct the amounts at issue.     Patronizing a prostitute is illegal

in the State of New York.   See N.Y. Penal Law sec. 230.04

(McKinney 2008).   N.Y. Penal Law sec. 230.02 (McKinney 2008)

provides that a person is patronizing a prostitute when he:     (1)

Pursuant to a prior agreement pays a fee for another person’s

having engaged in sexual conduct with him; (2) agrees to pay a

fee pursuant to an understanding that in return such person or a

third person will engage in sexual conduct with him; or (3)

solicits or requests another person to engage in sexual conduct

in return for a fee.   Section 1.213-1(e)(1)(ii), Income Tax

Regs., provides that a taxpayer is not entitled to a deduction

for any illegal operation or treatment.     Petitioner’s payments

to various prostitutes were personal expenses not prescribed by a

doctor and not intended to treat a medical condition.    Petitioner

is not entitled to deductions for these amounts.

      Petitioner is likewise not entitled to deductions for

amounts paid for books and magazines on sex therapy and

pornography.   The purchases were not for the treatment of a

medical condition but were instead personal items.    Sec. 1.213-

1(e)(1)(ii), Income Tax Regs.

II.   Accuracy-Related Penalty

      We next determine whether petitioner is liable for an

accuracy-related penalty.   Section 6662(a) and (b)(2) provides
                                - 8 -

that taxpayers will be liable for a penalty equal to 20 percent

of the portion of the underpayment of tax attributable to a

substantial understatement of income tax.    Section 6662(d)(1)(A)

provides that a substantial understatement of income tax exists

if the amount of the understatement exceeds the greater of (1) 10

percent of the tax required to be shown on the return, or (2)

$5,000.    Section 7491(c) provides that the Commissioner bears the

burden of production respecting an individual’s liability for the

penalty.    As discussed above, we have upheld respondent’s

determinations of deficiencies in petitioner’s income tax;

respondent has thus met his burden of showing a substantial

understatement.

     Section 6662(d)(2)(B)(ii) provides that the amount of the

understatement is to be reduced by that portion of the

understatement which is attributable to any item if the relevant

facts affecting the item’s tax treatment are adequately disclosed

on the return or in a statement attached to the return and there

is a reasonable basis for the tax treatment of such item by the

taxpayer.    If an item is adequately disclosed and there is a

reasonable basis for its tax treatment, that item is treated as

having been reported properly on the return, and the

understatement of tax is computed without regard to that item.

See sec. 1.6662-4(e)(1), Income Tax Regs.    Section 1.6662-

4(e)(2), Income Tax Regs., provides that an item will not be
                                  - 9 -

treated as adequately disclosed if a taxpayer does not have a

reasonable basis for the position as defined in section 1.6662-

3(b)(3), Income Tax Regs.      Section 1.6662-3(b)(3), Income Tax

Regs., provides that reasonable basis is a relatively high

standard that is significantly higher than not frivolous.      A

return position that is merely arguable does not satisfy the

reasonable basis standard.      Id.   A taxpayer can have a reasonable

basis if the position is reasonably based on one or more

authorities listed in section 1.6662-4(d)(3)(iii), Income Tax

Regs., which includes the Internal Revenue Code, temporary and

final regulations, revenue procedures and revenue rulings, and

court decisions.

     The section 6662 penalty is inapplicable to the extent the

taxpayer had reasonable cause for the understatement and acted in

good faith.   Sec. 6664(c)(1).     The determination of whether the

taxpayer acted with reasonable cause and in good faith is made on

a case-by-case basis, taking into account the relevant facts and

circumstances.      Sec. 1.6664-4(b)(1), Income Tax Regs.

“Circumstances that may indicate reasonable cause and good faith

include an honest misunderstanding of fact or law that is

reasonable in light of all of the facts and circumstances,

including the experience, knowledge, and education of the

taxpayer.”    Id.    Generally, the most important factor is the

extent of the taxpayer’s efforts to assess the proper tax
                               - 10 -

liability.   Id.   An honest misunderstanding of fact or law that

is reasonable in the light of the experience, knowledge, and

education of the taxpayer may indicate reasonable cause and good

faith.   Remy v. Commissioner, T.C. Memo. 1997-72.

     Petitioner did not have reasonable cause or a reasonable

basis for claiming the deductions at issue.     Petitioner has been

an attorney for 40 years and specialized in tax law.      Petitioner

should have known that his visits to prostitutes in New York were

illegal and that section 213, the regulations thereunder, and

caselaw do not support his claimed deductions.     Accordingly,

petitioner is liable for the section 6662 penalty.

     To reflect the foregoing,


                                            Decision will be entered

                                        for respondent.
