                             T.C. Memo. 2019-100



                        UNITED STATES TAX COURT



                TODD MYRON MOORE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 29854-15.                        Filed August 15, 2019.



      Todd Myron Moore, pro se.

      Jason P. Oppenheim, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      MARVEL, Judge: Respondent determined an income tax deficiency of

$453,564, an addition to tax under section 6651(a)(1) of $23,354.25, and an
                                         -2-

[*2] accuracy-related penalty under section 6662(a) of $90,712.80 with respect to

petitioner’s Federal income tax for tax year 2013.1

      After concessions, the remaining issues are: (1) whether petitioner is

entitled to deduct interest on purported loans paid to alleged creditors; (2) whether

petitioner is entitled to deduct commission expenses reported on his return for his

tax return preparation business; and (3) whether petitioner is liable for the

accuracy-related penalty under section 6662(a). Petitioner resided in Georgia at

the time he filed his petition.

                                  FINDINGS OF FACT

      Petitioner, Todd Myron Moore, is a serial entrepreneur.2 After studying

architecture, business, and civil engineering in college, petitioner worked for three

years as a civil engineer designing bridges. Petitioner eventually found this work

unsatisfying, and in late 2008 he decided to change careers. He always enjoyed

numbers and finance so he chose to enter the income tax return preparation



      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect for the year at issue, and Rule references are to the
Tax Court Rules of Practice and Procedure. Monetary amounts are rounded to the
nearest dollar.
      2
       In addition to petitioner’s tax return preparation business, he testified that
he also engaged in real estate, insurance, mortgage services, and car sales
businesses.
                                        -3-

[*3] business even though he had no formal training in tax law or accounting

principles before he made his decision. Petitioner, however, took online training

courses and also attended a 12-week program provided by Jackson Hewitt before

he embarked on his new career.

      In October 2008 petitioner formed a single-member limited liability

company, Moore Investment Group LLC, with offices in Georgia and Ohio.

Moore Investment Group LLC is a disregarded entity for Federal income tax

purposes and was the business entity that petitioner used to conduct his tax return

preparation business.

Petitioner’s Purported Loan Transactions

      In late 2012 petitioner sought to expand his tax return preparation business,

and to do so he needed additional capital. Petitioner approached five individuals

with whom he had had prior business relationships and asked them for money to

expand his tax return preparation business. Petitioner referred to these advances at

varying times both as investments and as loans. Petitioner prepared nine

purported promissory notes, which list a “loan period” and also a “return on

investment” percentage. Each purported note specifies a return on investment of

100% or more. Only one of the purported promissory notes is signed. A summary

of the information on the purported promissory notes is set out below:
                                         -4-

 [*4]                Date of                    “Return on       Listed
    Alleged         document       Amount      investment”     “payment
      lender       preparation    advanced         rate        schedule”     Signed

 C. Akoma           9/19/2012     $10,000         100%         2/8/2013        No
 J. Burton        10/26/2012         5,000        100%        2/22/2013        No
 J. Burton        11/16/2012       10,000         100%         3/1/2013        No
 W. McKinney        9/10/2012        5,000        100%        1/31/2013        No
 W. McKinney        12/2/2013        8,000        200%         4/1/2014        No
 A. Price           10/1/2012        6,000        100%         2/8/2013        Yes
 A. Price           11/2/2013      25,000         200%         3/3/2014        No
 J. Warren        11/21/2012         3,000        100%         3/1/2013        No
 J. Warren          12/2/2013      10,000         200%         4/1/2014        No

Petitioner’s Commission Arrangements

      In his tax return preparation business petitioner hired return preparers

throughout the country as independent contractors. Petitioner’s company served

as a clearinghouse for processing returns and also provided training and support to

his contractors. Each contractor developed and maintained his or her own client

base and prepared returns for these clients.

      Petitioner maintained several business bank accounts. When one of

petitioner’s return preparers would file a return for a client that generated a tax

refund, the refund was deposited into one of petitioner’s bank accounts, which
                                        -5-

[*5] petitioner referred to as a third-party bank account and appears to have treated

as an escrow account. Petitioner would then take from the client’s refund the

agreed-upon preparation fee, which would be deposited into another of

petitioner’s business accounts, and the remainder would be paid to the client.

From the preparation fee petitioner would then pay a commission to the individual

return preparer, ranging from 60% to 90% of the preparation fee depending on the

return preparer’s expertise and client base. Petitioner would retain the rest of the

preparation fee.

      From January to July 2013 petitioner engaged a payroll company to handle

the commission payments. The payroll company paid the contractors either by

direct deposit or by check. In July 2013 petitioner ended his relationship with the

payroll company because he felt it had made errors in processing checks and was

too expensive. After July 2013 petitioner began to handwrite checks to his return

preparers for their commissions. To keep track of the payments petitioner had his

assistant update a spreadsheet each week as new checks were processed by the

payroll company (before July) or by petitioner (after July).

      At the end of 2013 petitioner informed his former payroll company of all

checks he had handwritten. The payroll company then prepared and submitted to

the Internal Revenue Service (IRS) Forms 1099-MISC, Miscellaneous Income, for
                                         -6-

[*6] the contractors listing all payments made to them throughout the year. These

Forms 1099-MISC contained errors, however; for example, several of the Forms

1099-MISC did not include Social Security or taxpayer identification numbers for

the recipients. Petitioner informed the payroll company of these errors. The

payroll company then issued revised Forms 1099-MISC to the contractors and

submitted them to the IRS.

        On Schedule C, Profit or Loss From Business, of his original 2013 income

tax return petitioner deducted commission expenses of $754,999. Petitioner also

deducted investment expenses of $161,750, which included the $39,500 that he

purportedly paid to the individuals who had advanced him funds. On August 26,

2015, respondent issued to petitioner a notice of deficiency, determining to

disallow both deductions. On November 30, 2015, petitioner timely filed a

petition with this Court to redetermine the deficiency. On October 12, 2016,

petitioner submitted an amended 2013 income tax return, claiming deductions for

commission expenses of $667,745 and investment expenses of $115,500.

Trial

        We issued a standing pretrial order (SPTO) on May 31, 2018, in which we

ordered the parties to exchange all documents they might seek to introduce into

evidence at least 14 days before the first day of the trial session.
                                        -7-

[*7] On October 31, 2018, we held a trial in Atlanta, Georgia. At trial petitioner

conceded that the amounts of commissions reported on his original and amended

returns were too high and instead contended that the correct amount of

commissions paid was $651,986. In support of this new number petitioner sought

to introduce two exhibits: (1) a large set of canceled checks that he argues

substantiates the commissions paid to his contractors and (2) a payroll register

prepared by his former payroll company, which purports to list all payments issued

to his contractors from January 1 to December 31, 2013. Respondent objected to

these exhibits because petitioner did not produce the exhibits to respondent’s

counsel (or otherwise advise him of the exhibits) before trial, as required by the

SPTO. Petitioner stated that he received the canceled checks from his former bank

at the close of business the day before trial, and the payroll company summary

four days before trial. We reserved ruling on respondent’s objections as to these

two exhibits.

                                     OPINION

      Petitioner bears the burden of proving that the determinations in the notice

of deficiency are incorrect. See Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933). Moreover, deductions are a matter of legislative grace, and petitioner

bears the burden of proving that he is entitled to deductions claimed on his return.
                                          -8-

[*8] See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Before we

can address the merits of petitioner’s claimed deductions, however, we must

resolve the pending evidentiary issues.

I.    Evidentiary Issues

      This Court applies the Federal Rules of Evidence when deciding evidentiary

issues. See sec. 7453. Under the Federal Rules of Evidence, relevant evidence is

generally admissible, Fed. R. Evid. 402, but a Court has discretion to exclude

relevant evidence if its “probative value is substantially outweighed by a danger of

* * * unfair prejudice, * * * undue delay, [or] wasting time”, Fed. R. Evid. 403.

      The checks and payroll register petitioner seeks to introduce are relevant to

whether, and in what amount, he may be entitled to a deduction for commissions

paid. Moreover, they may corroborate whether, to whom, and why payments were

made. Petitioner, however, did not comply with the SPTO because he did not

exchange the exhibits with respondent’s counsel by the deadline set forth in the

SPTO. Petitioner argues that he could not have exchanged the exhibits by the

deadline in the SPTO because he did not receive the documents from his bank and

the payroll company until the week of trial. Petitioner states that he provided the

exhibits to respondent expeditiously once he had them. Moreover, at trial

petitioner provided copies to respondent’s counsel, and respondent has had the
                                         -9-

[*9] opportunity to review these documents during the pendency of this case. We

find, therefore, that there is little risk of undue prejudice or delay by allowing

these exhibits into evidence. Consequently, we overrule respondent’s objection to

their introduction and admit them.

II.   Investment Expenses

      On his original 2013 tax return petitioner deducted $161,750 as investment

expenses. Petitioner later submitted an amended return, which deducted $115,500

as investment expenses. At trial petitioner conceded that both of these numbers

are too high but argued that he is nonetheless entitled to deduct $39,500, the

amount paid on the alleged loans to the purported creditors. Each of the nine

purported promissory notes sets forth a “Return on Investment” rate of 100% or

more, which petitioner contends is actually an interest rate. Petitioner argues that

he is entitled to deduct the full amount of the payments he made related to these

alleged loans. Respondent counters that petitioner is not entitled to any deduction

because he has not established that (1) these arrangements were true loans, (2) the

amounts deposited in his bank accounts actually came from the creditors, and

(3) the payments are ordinary or necessary business expenses.

      Section 163(a) provides that “[t]here shall be allowed as a deduction all

interest paid or accrued within the taxable year on indebtedness.” Interest is a
                                        - 10 -

[*10] payment for the use or forbearance of money, and any payment for this

purpose may be deductible regardless of its label. See, e.g., John Hancock Life

Ins. Co. (U.S.A.) v. Commissioner, 141 T.C. 1, 145-146 (2013). For payments to

be deductible as interest within the meaning of section 163(a), however, they must

be made in connection with a bona fide loan transaction where both parties have

an actual, good-faith intent to establish a debtor-creditor relationship at the time

the funds are advanced. Id. This relationship exists if the debtor intends to repay

the loan and the creditor intends to enforce repayment. Fisher v. Commissioner,

54 T.C. 905, 909-910 (1970). We look at various factors in determining whether

this relationship in fact exists, including the presence of: (1) a debt instrument,

(2) a statement that interest will be charged, (3) a fixed schedule for repayment,

(4) collateral to secure payment, (5) actual repayment, (6) reasonable prospects of

advancement and repayment of the funds, and (7) the parties’ conducting

themselves as if the transaction were a loan. See Calloway v. Commissioner, 135

T.C. 26, 37 (2010), aff’d, 691 F.3d 1315 (11th Cir. 2012); see also Fisher v.

Commissioner, 54 T.C. at 909-910; Kaider v. Commissioner, T.C. Memo. 2011-

174, slip op. at 15-16 (citing Welch v. Commissioner, 204 F.3d 1228, 1230-1231

(9th Cir. 2000), aff’g T.C. Memo. 1998-121).
                                         - 11 -

[*11] We find that petitioner has not met his burden of proving that these

transactions represented bona fide loans and that the payments he made with

respect to them qualify as deductible interest. The purported notes, save one, are

unsigned and bear no indication of a good-faith agreement between the parties.

Petitioner has provided no testimony or other evidence from any of the alleged

creditors to prove their intent to act as creditors and to enforce repayment, or how

the alleged creditors characterized the transactions. The purported notes did not

state interest rates or provide for any type of security interests. Petitioner also has

not proven that the eight unsigned purported notes were contemporaneous debt

instruments, as they have no execution dates. Finally, as to the one signed

purported note, petitioner has failed to prove that the funds allegedly deposited in

his account actually came from the alleged creditor; he has introduced no canceled

check or other evidence tying the funds directly to the alleged creditor. On this

record petitioner has failed to prove that these transactions represented bona fide

indebtedness, and consequently, we conclude that petitioner is not entitled to a

deduction under section 163(a).

III.   Commission Payments

       On his original 2013 Schedule C petitioner deducted commissions of

$754,999. On Schedule C of his amended return he deducted commissions of
                                       - 12 -

[*12] $667,745. At trial he conceded that both of these commission deductions

were too high and instead asserted that the correct amount was $651,986.

Respondent disputes petitioner’s claim and argues that, because petitioner cannot

show that the commission payments were made for a business purpose, he is

entitled to no deduction.

      Section 162(a) permits a deduction for “all the ordinary and necessary

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

business”. If a taxpayer proves that he paid business commissions to independent

contractors, he is entitled to a deduction. See, e.g., Lewis v. Commissioner, T.C.

Memo. 1983-741, 47 T.C.M. (CCH) 605 (1983); see also Fresoli v. Commissioner,

T.C. Memo. 1988-384, 55 T.C.M. (CCH) 1624 (1988). To prove that he paid

deductible commissions, the taxpayer generally must introduce documentary

evidence, such as canceled checks, a check register, or payroll records in addition

to credible testimony. See Niv v. Commissioner, T.C. Memo. 2013-82, at

*21-*23; Fresoli v. Commissioner, 55 T.C.M. (CCH) at 1626-1627; Lewis v.

Commissioner, 47 T.C.M. (CCH) at 608.

      If a taxpayer establishes that he is entitled to some deduction but cannot

establish the full amount claimed, the Court may estimate the amount of the

allowable expense deduction to the best of its ability, “retaining always the power
                                        - 13 -

[*13] to ‘bear * * * heavily * * * upon the taxpayer whose inexactitude is of his

own making’”. Ellis Banking Corp. v. Commissioner, 688 F.2d 1376, 1383 (11th

Cir. 1982) (quoting Cohan v. Commissioner, 39 F.2d 540, 544 (2d Cir. 1930)),

aff’g in part, remanding in part T.C. Memo. 1981-123. For the Court to estimate

the amount of an expense, however, there must be a reasonable basis in the record

to support that estimate. Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

      Petitioner has demonstrated that he is entitled to a deduction for

commissions paid to his contractors in 2013. At trial he testified credibly that he

ran a tax return preparation business. He also testified credibly that he retained

independent contractors as return preparers throughout the country to whom he

paid commissions based on their experience level and clientele. Moreover, he has

introduced numerous canceled checks that he or his payroll company wrote to

various individual contractors. Petitioner has also introduced payroll reports

generated by his former payroll company that identify contractors petitioner paid

and list the amounts he allegedly paid each during 2013. Both the checks and the

payroll summary identify many of the same contractors, with the handwritten

checks listing “commissions” or similar text in the memorandum line.

Additionally, respondent’s list of Forms 1099-MISC filed by petitioner

corroborates the identities of numerous contractors and provides payment amounts
                                       - 14 -

[*14] that broadly align with the sums in the exhibits petitioner provided. We

therefore find that petitioner paid the named independent contractors in

furtherance of his business and is entitled to a deduction for commission

payments.

      We also find that petitioner has provided a reasonable basis from which we

can make an estimate of his actual commission expenses. As noted above, the

amounts of the canceled checks and the amounts reflected in the payroll company

reports petitioner provided broadly align with the amounts shown on the Forms

1099-MISC list respondent provided. Taken together, these exhibits provide

upper and lower limits for a range of potential payment amounts, bracketing our

estimate and ensuring that it does not amount to “unguided largesse”. Williams v.

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

      In estimating the commission expenses deduction we are mindful of the

gaps in the record and the quality of the evidence introduced, and we will not

reward petitioner for “inexactitude[s] * * * of his own making.” Cohan v.

Commissioner, 39 F.2d at 544. To start, we note that petitioner’s business records

for tax year 2013 are so woefully disorganized and incomplete that petitioner has

not been able to provide a credible and reliable statement of his total commission

expenses. Instead, he has asserted three different numbers at varying stages of this
                                       - 15 -

[*15] case. The exhibits in the record provide no less than nine potential sums,

ranging from just over $400,000 to $750,000. We are convinced that petitioner

paid commissions to independent contractors, but we also are concerned about the

fluid state of the evidence he introduced. Consequently, we will sustain

deductions only for amounts clearly established by the record, and we will resolve

ambiguities against petitioner.

      With that in mind, we find that petitioner’s check registry, Exhibit 11-P, and

gross pay report, Exhibit 16-R, and the list respondent provided of Forms 1099-

MISC filed by petitioner, Exhibit 17-R, to be the most credible evidence in the

record.3 While the record provides a wide range of potential sums, we can limit

this range by relying on these exhibits. Cf. Neonatology Assocs., P.A. v.

Commissioner, 115 T.C. 43, 84-87 (2000), aff’d, 229 F.3d 221 (3d Cir. 2002).

      On the basis of the records described above and summarized in the

appendix, we find that petitioner is entitled to a deduction of $414,157. As shown

in the appendix, we limit our dataset to include only those individuals identified in

all three exhibits, excluding petitioner. We then look at the totals generated by the

exhibits: $536,398, $414,157, and $536,414. Our analysis begins by recognizing


      3
        Ordinarily we would not reference specific exhibits in an opinion, but in
this case doing so helps illuminate our reasoning.
                                       - 16 -

[*16] that the totals generated by Exhibits 17-R and 11-P are quite close, but we

cannot discard the total provided by Exhibit 16-R. To account for the variance,

where Exhibit 16-R provides a lesser payment amount for a given contractor, we

will consider only that lesser amount. Cf. Green v. Commissioner, 66 T.C. 538,

544-549 (1976). Doing so, we conclude that $414,157 is the appropriate amount

of the allowable commission expenses deduction because it reflects the substantial

amount of commission payments we believe petitioner made, but does not reward

petitioner for “inexactitude[s] * * * of his own making.” Cohan v. Commissioner,

39 F.2d at 544.

IV.   Accuracy-Related Penalty Under Section 6662(a)

      Respondent determined that petitioner is liable for the accuracy-related

penalty under section 6662(a) for 2013. Section 6662(a) authorizes the

Commissioner to impose a 20% penalty on an underpayment of tax attributable to,

among other things, any substantial understatement of income tax within the

meaning of section 6662(b)(2). A substantial understatement means an

understatement that exceeds the greater of $5,000 or 10% of the income tax

required to be shown on the return for the taxable year. Sec. 6662(d)(1)(A). A

taxpayer may be excused from this penalty if the taxpayer can show that there was

reasonable cause for and that the taxpayer acted in good faith with regard to the
                                        - 17 -

[*17] underpayment. Sec. 6664(c)(1). Whether a taxpayer acted in good faith and

with reasonable cause is determined on the basis of the totality of the facts and

circumstances, including “the experience, knowledge, and education of the

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

      The Commissioner bears the burden of production as to accuracy-related

penalties, which he may satisfy by providing sufficient evidence to indicate that it

is appropriate to impose the relevant penalty. Sec. 7491(c); Higbee v.

Commissioner, 116 T.C. 438, 446 (2001). As part of his burden of production, the

Commissioner must also prove that he complied with the supervisory approval

requirement of section 6751(b)(1). Graev v. Commissioner, 149 T.C. 485 (2017),

supplementing and overruling in part 147 T.C. 460 (2016).

      Respondent determined that petitioner understated his income tax by

$453,564, which is greater than 10% of the income tax that should have been

reported. Respondent also introduced a signed Civil Penalty Approval Form

approving the assertion of the substantial understatement penalty against petitioner

before the first formal assertion of the penalty. We have determined that petitioner

is entitled to deduct $414,157 as commission expenses. To the extent that the

Rule 155 computations taking our determination into account show that petitioner
                                        - 18 -

[*18] substantially understated his 2013 income tax liability within the meaning of

section 6662(d)(1)(A), we find that respondent has met his burden of production.

      Assuming that the Rule 155 calculations show that petitioner substantially

understated his income tax on his return, petitioner is therefore liable for the

accuracy-related penalty unless he can show reasonable cause and good faith with

respect to his underpayment. See sec. 6664(c)(1). Although petitioner is not an

accountant or an attorney, he organized and ran a multistate tax return preparation

business. He held himself out as a tax professional, advising others on preparing

returns and otherwise applying the requirements of the Code to individual

taxpayers, but he failed to keep accurate documentation about his largest reported

expenses: the commissions he paid to his independent contractors and the

purported interest payments he made to alleged creditors. Given petitioner’s

background and business in tax return preparation, this is unreasonable. We find,

therefore, that he did not have reasonable cause for his underpayment and that he

is liable for the accuracy-related penalty under section 6662 to the extent that the

Rule 155 calculations show that he substantially understated his 2013 income tax.
                                  - 19 -

[*19] To reflect the foregoing,


                                           Decision will be entered under

                                  Rule 155.
                                       - 20 -

[*20]                              APPENDIX

        Summary of the most credible exhibits regarding commission payments

        Payee          Exhibit 17-R         Exhibit 16-R        Exhibit 11-P
        name         Forms 1099-MISC       gross pay report    check register
  J. Abdul                $4,341                 $4,341             $4,341
  A. Battle                5,315                  3,490              5,315
  A. Bryant                5,986                  5,986              5,986
  J. Cohen                45,598                 36,580            45,599
  M. Dothard              47,951                 11,212            47,952
  T. Dulaney               4,384                  3,984              4,384
  K. Felton                4,471                  4,171              4,471
  T. Francis                 850                   850                850
  S. Harrell              35,639                 30,724            35,640
  S. Harrod                1,412                  1225               1,413
  K. Hubbard              10,149                  1,252            10,150
  K. Husain                9,668                  9,669              9,669
  R. Jackson               1,475                  1,475              1,475
  I. Jihad                 4,051                  4,052             4,051
  N. Jihad               106,712                102,979           106,712
  B. Jones                51,778                 51,779            51,779
  E. Jones                 1,500                  1,500              1,500
  E. Jones                 6,521                  4,742              6,521
  M. Jones                 2,553                  2,553             2,553
  M. Long                  2,318                  1,741              2,319
                           - 21 -

[*21]
  K. McMillian       735               735       735
 K. Morns          2,050              1,930     2,050
 C. Morton         4,719              3,166     4,719
 E. Mulenoh        1,635              1,635     1,635
 J. Ndong          1,020              1,020     1,020
 R. Perryman      50,153             20,913    50,154
 A. Powe           2,165              1,485     2,165
 T. Robertson     11,654             11,654    11,654
 A. Robinson       2,160              2,130     2,160
 R. Rogers        16,170              9,459    16,170
 L. Shelley        9,460              9,461     9,461
 J. Smith         39,212             26,736    39,213
 J. Spears           791               792       792
 B. Stewart        1,387              1,388     1,388
 D. Stewart          770               770       770
 N. Trice          3,533              2,573     3,533
 P. Tucker           700               700       700
 T. White          3,391              3,392     3,392
 A. Williams       1,410              1,410     1,410
 R. Young         25,926             23,817    25,927
 S. Young          4,685              4,686     4,686
  Total          536,398            414,157   536,414
