                            T.C. Summary Opinion 2020-17



                            UNITED STATES TAX COURT



   JAMES ANTHONY BOWERS AND ALESANDRA LANTO, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 18779-17S.                            Filed June 16, 2020.



      James Anthony Bowers and Alesandra Lanto, pro sese.

      Jerry M. Innocent and Gennady Zilberman, for respondent.



                                 SUMMARY OPINION


      GUY, Special Trial Judge: This case was heard pursuant to the provisions

of section 7463 of the Internal Revenue Code in effect when the petition was

filed.1 Pursuant to section 7463(b), the decision to be entered is not reviewable by


      1
          Unless otherwise indicated, all section references are to the Internal
                                                                           (continued...)
                                         -2-

any other court, and this opinion shall not be treated as precedent for any other

case.

        Respondent determined that petitioners are liable for a Federal income tax

deficiency of $9,203 for the taxable year 2014 (year in issue) and an accuracy-

related penalty under section 6662(a) of $1,841. Petitioners, husband and wife,

filed a timely petition for redetermination with the Court pursuant to section

6213(a). Petitioners resided in New York when the petition was filed.

        After concessions,2 the issues remaining for decision are whether petitioners

are entitled to deduct on Schedule C, Profit or Loss From Business, travel

expenses and certain “Other” expenses not otherwise conceded by respondent.




        1
       (...continued)
Revenue Code, as amended and in effect for 2014, and Rule references are to the
Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to
the nearest dollar.
        2
       Petitioners concede that they are not entitled to deductions for meals and
entertainment expenses and legal and professional expenses of $600 and $1,975,
respectively. Respondent concedes that petitioners are (1) entitled to deductions
for “Other” conference expenses limited to hotel expenses and transportation
expenses of $376 and $120, respectively, and (2) not liable for an accuracy-related
penalty under sec. 6662. Other adjustments are computational and will flow from
our disposition of the issues remaining in dispute.
                                        -3-

                                   Background3

I. Groupe Sanglier

      Mr. Bowers is employed as a financial manager at a nonprofit organization.

Dr. Lanto is a doctor of clinical psychology. In the late 1990s they started a

management consulting business, Groupe Sanglier, with the aim of providing

services primarily to nonprofit organizations. During the year in issue petitioners

engaged in the Groupe Sanglier activity part time.

II. Petitioners’ Tax Return

      Petitioners filed a joint Form 1040, U.S. Individual Income Tax Return, for

the year in issue. They attached to the return a Schedule C for Groupe Sanglier

reporting no receipts and expenses totaling $31,210, which they in turn claimed as

a business loss deduction on line 12 of the return. Respondent disallowed a

substantial portion (but not all) of the Schedule C expenses for lack of

substantiation and on the theory that the expenses are not ordinary and necessary

business expenses.




      3
      Some of the facts have been stipulated. Dr. Lanto did not appear when this
case was called for trial. Mr. Bowers appeared and informed the Court that Dr.
Lanto was aware of the proceeding but was unable to attend the trial because of
work obligations.
                                        -4-

      A. Travel Expenses

      Petitioners claimed a deduction for travel expenses of $9,500 which they

attribute to (1) a seminar that they attended at the University of Southern

California and (2) cab fares and car service fees that they paid in connection with

meetings with prospective clients.

      B. “Other” Expenses

      Petitioners claimed a deduction for “Other” expenses comprising storage

fees of $1,500, publication expenses of $2,950, telecommunication expenses of

$4,975, marketing expenses of $475, conference expenses of $1,900, and

consulting fees of $1,975.

             1. Storage

      Petitioners stored paper records and other materials at a commercial storage

facility. Mr. Bowers produced four invoices issued to Groupe Sanglier by the

storage facility acknowledging cash payments of storage fees totaling $2,000.

             2. Publications

      Petitioners paid $127, $30, and $20 for The Economist, Time, and Forbes

magazines, respectively. Mr. Bowers occasionally paid cash at newsstands for

copies of Investor’s Business Daily and similar financial publications.
                                          -5-

             3. Telecommunications

      Petitioners paid $314 and $497 for phone and internet services, respectively.

Although petitioners also paid for cellular phone services, there is no evidence in

the record of the amounts they paid.

             4. Marketing

      Petitioners paid $138 for Wordtracker services, an internet search engine

optimization tool. Although petitioners also purchased a half-page advertisement

for Groupe Sanglier in a marketing brochure, Mr. Bowers was unable to produce a

receipt or similar record showing the amount of the expenditure.

      Dr. Lanto’s records indicate that she paid membership dues to various

business organizations, maintained an account subscription with LinkedIn, and

paid for online writing skills courses.

             5. Conferences

      In February and November 2014 Dr. Lanto attended conferences in Florida.

Petitioners paid $206 to Maverick Vision International Advisors in connection

with the February 2014 conference.
                                        -6-

             6. Consulting Fees

      Petitioners hired a consultant to design a website for Groupe Sanglier. Mr.

Bowers could not recall the amount that petitioners paid the consultant but

recalled that he and Dr. Lanto were not satisfied with the website.

                                     Discussion

      The Commissioner’s determination of a taxpayer’s liability in a notice of

deficiency normally is presumed correct, and the taxpayer bears the burden of

proving that the determination is incorrect.4 Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933). Deductions are a matter of legislative grace, and the

taxpayer generally bears the burden of proving entitlement to any deduction

claimed. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);

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

      A taxpayer must substantiate deductions claimed by keeping and producing

adequate records that enable the Commissioner to determine the taxpayer’s correct

tax liability. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975),

aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); Meneguzzo v. Commissioner, 43

      4
        Under sec. 7491(a)(1) the burden of proof may shift from the taxpayer to
the Commissioner if the taxpayer produces credible evidence with respect to any
factual issue relevant to ascertaining the taxpayer’s liability. Petitioners did not
allege that sec. 7491(a)(1) applies, nor did they introduce the requisite evidence to
invoke that section; therefore, the burden of proof remains on petitioners.
                                        -7-

T.C. 824, 831-832 (1965). 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 expense to which the deduction

relates has been paid or incurred. Sec. 6001; Hradesky v. Commissioner, 65 T.C.

at 89-90.

      Under section 162(a) a deduction is allowed for ordinary and necessary

expenses paid or incurred during the taxable year in carrying on any trade or

business. A deduction normally is not allowed, however, for personal, living, or

family expenses. Sec. 262(a).

      Whether an expenditure satisfies the requirements for deductibility under

section 162 generally is a question of fact. See Commissioner v. Heininger, 320

U.S. 467, 475 (1943). 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. at 471; sec. 1.162-1(a),

Income Tax Regs.

      When a taxpayer establishes that he or she paid or incurred a deductible

expense but fails to establish the amount of the deduction, the Court normally may

estimate the amount allowable as a deduction. Cohan v. Commissioner, 39 F.2d
                                        -8-

540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743

(1985). There must be sufficient evidence in the record, however, to permit the

Court to conclude that a deductible expense was paid or incurred in at least the

amount allowed. Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957).

      Section 274(d) prescribes more stringent substantiation requirements to be

met before a taxpayer may deduct certain categories of expenses, including

expenses for travel. See Sanford v. Commissioner, 50 T.C. 823, 827 (1968), aff’d

per curiam, 412 F.2d 201 (2d Cir. 1969). To satisfy the requirements of section

274(d), a taxpayer generally must maintain adequate records or produce sufficient

evidence corroborating his or her own statement, which, in combination, are

sufficient to establish the amount, date and time, and business purpose for each

expenditure. Sec. 1.274-5T(b), (c)(1), Temporary Income Tax Regs., 50 Fed. Reg.

46014-46017 (Nov. 6, 1985).

      Section 1.274-5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg.

46017-46018 (Nov. 6, 1985), provides in relevant part that “adequate records”

generally consist of an account book, a diary, a log, a statement of expense, trip

sheets, or a similar record made at or near the time of the expenditure, along with

supporting documentary evidence. The Court may not use the rule established in

Cohan v. Commissioner, 39 F.2d at 543-544, to estimate expenses covered by
                                         -9-

section 274(d). Sanford v. Commissioner, 50 T.C. at 827; sec. 1.274-5T(a),

Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). Taxpayers

lacking a contemporaneous log are expected to maintain a record created as near

in time as possible to the particular expenditure (including the elements outlined

above), supported by corroborative documentary evidence that carries with it a

high degree of probative value. Sec. 1.274-5T(c)(1), Temporary Income Tax

Regs., supra.

I. Travel Expenses

      Petitioners claimed a deduction for travel expenses of $9,500. Although

the expenses were attributable in part to a conference that petitioners attended at

the University of Southern California, Mr. Bowers failed to produce any records,

such as airline receipts or hotel invoices, necessary to substantiate any travel

expenditures related to the conference. Mr. Bowers did produce records showing

that petitioners paid local transportation expenses (i.e., cab fares and car service

fees), but petitioners did not maintain a travel log or similar record presenting

details about their purported business meetings. In sum, petitioners failed to meet

the strict substantiation requirements of section 274(d) applicable to travel

expenses. Consequently, respondent’s determination disallowing the deduction

that petitioners claimed for travel expenses is sustained.
                                        - 10 -

II. “Other” Expenses

      Petitioners failed to produce the business records needed to fully

substantiate many of the “other” expenses that they attributed to Groupe Sanglier.

It is worth noting here that while the expenses in dispute would normally qualify

as ordinary and necessary business expenses within the meaning of section 162(a),

a number of the disputed expenses also have a distinctly personal element.

Considering all the facts and circumstances, and applying the Cohan rule, we have

estimated the amount of allowable deductions for some expenses, in relatively

modest amounts, as set forth below.

      A. Storage Fees

      Petitioners claimed a deduction for storage expenses of $1,500. Mr. Bowers

produced four invoices indicating that Groupe Sanglier paid a total of $2,000 to

store records and other materials. Mr. Bowers’ testimony regarding the invoices

suggests, however, that petitioners stored both personal records and business

records at the storage facility. We conclude that petitioners are entitled to a

deduction of $1,000 for storage expenses.

      B. Publications

      Petitioners claimed a deduction for publication expenses of $2,950. Mr.

Bowers produced records showing that petitioners paid a total of $177 for various
                                        - 11 -

magazines. Although Mr. Bowers occasionally paid cash for Investor’s Business

Daily and similar financial publications, there are no records to substantiate the

amount of his cash expenditures. We conclude that petitioners are entitled to a

deduction of $100 for publication expenses.

      C. Telecommunications

      Petitioners claimed a deduction for telecommunications expenses of $4,975.

Mr. Bowers produced records showing that petitioners paid a total of $811 for

phone and internet services. Although Mr. Bowers testified that petitioners

purchased additional telecommunication services, including cellular phone

services, there are no records to substantiate those additional expenditures. We

conclude that petitioners are entitled to a deduction of $600 for

telecommunications expenses.

      D. Marketing

      Petitioners claimed a deduction for marketing expenses of $475. Mr.

Bowers produced records showing that petitioners paid $138 for Wordtracker

services. He also testified that petitioners purchased an advertisement for Groupe

Sanglier in a marketing brochure, but he failed to produce any records to

substantiate the expenditure. Dr. Lanto’s records indicate that she paid

membership dues to various business organizations, maintained a subscription
                                       - 12 -

with LinkedIn, and paid for online courses to improve her writing skills. We

conclude that petitioners are entitled to a deduction of $300 for marketing

expenses.

      E. Conferences

      Petitioners claimed a deduction for conference expenses of $1,900. As

noted above respondent conceded that petitioners are entitled to deduct conference

expenses comprising hotel expenses and transportation expenses of $376 and

$120, respectively. Mr. Bowers produced a receipt showing that petitioners paid

$206 in connection with a conference. He failed to produce any other

documentation, however, substantiating the balance of the disputed conference

expenses. We conclude that petitioners are entitled to a deduction of $206 for

conference expenses, in addition to the amounts respondent conceded.

      F. Consulting Fees

      Petitioners claimed a deduction for consulting fees of $1,975. Although Mr.

Bowers testified that these expenses related to payments to a website developer, he

was unable to produce any records to substantiate this expenditure. Respondent’s

determination disallowing the deduction that petitioners claimed for consulting

fees is sustained.
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III. Conclusion

      In sum, petitioners failed to maintain or produce the business records

needed to substantiate many of the expenses in dispute.

      To reflect the foregoing,


                                               Decision will be entered under

                                      Rule 155.
