                        T.C. Memo. 2000-291



                      UNITED STATES TAX COURT



          HOWARD HOWE AND JANICE HOWE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17137-98.               Filed September 18, 2000.



     Howard Howe, pro se.

     Brian M. Harrington, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined a deficiency in

petitioners’ income tax of $10,722 for 1992 and an addition to

tax under section 6651(a)(1) of $2,658.25.

     In 1992, petitioner Howard Howe (hereinafter “petitioner”)

paid $54,716 rent for 1992, 1993, and 1994.     Following

concessions, the issues for decision are:
                                 - 2 -



     1.      Whether petitioners may deduct in 1992 $33,192.20 in

rent that petitioner prepaid in 1992 for 1993 and 1994.       We hold

that they may not.

     2.      Whether, under the mitigation rules, sections 1311-

1314, petitioners may deduct in 1993 and 1994 rent that

petitioner prepaid in 1992.     We hold that we lack jurisdiction to

decide this question because the only notice of deficiency

petitioned in this case is for 1992.

     3.      Whether petitioners are liable for the addition to tax

under section 6651(a)(1) for 1992.       We hold that they are.

     Section references are to the Internal Revenue Code in

effect for the years in issue.     Rule references are to the Tax

Court Rules of Practice and Procedure.

                           FINDINGS OF FACT

     Petitioners lived in Indianapolis, Indiana, when the

petition was filed.     They used the cash method of accounting in

1992.     Petitioner is an attorney and certified public accountant.

He was a sole practitioner in 1992.

     On June 27, 1989, petitioner and 50 South Meridian

Associates, Ltd. (the landlord) signed a 5-year lease for about

1,200 square feet of business space.       The lease provided that

petitioner would pay rent of $564.75 per month for the first 12

months (August 1, 1990, to July 31, 1991); $1,637.67 per month

for the next 36 months (August 1, 1991, to July 31, 1994); and
                                 - 3 -

$1,750.58 per month for the remainder of the lease (August 1,

1994, to July 31, 1995) and about $156 per month for common area

maintenance.   In 1992, petitioner paid rent of $54,716.24 for

1992, 1993, and 1994.   Petitioner and his landlord began to

negotiate a new lease in 1994 and signed it in 1995.

     Petitioners reported on their Schedule C, Profit or Loss

from Business, attached to their 1992 return that petitioner had

received $149,358 in gross receipts and paid expenses of

$156,203, which included $54,716 as rental expense and $262 for

rental expense of vehicles, machinery, and equipment.

Petitioners reported that they owed no income tax for 1992.

     On April 15, 1996, petitioners mailed their 1992 income tax

return to the Internal Revenue Service Center in Covington,

Kentucky, which received it on April 18, 1996.

     On July 23, 1998, respondent issued a notice of deficiency

which states that, of the $54,978 petitioners deducted for rental

expenses for 1992, petitioners may deduct $16,860 and may not

deduct $38,118.   Respondent also determined that petitioners are

liable for the addition to tax for failure to timely file their

return under section 6651(a)(1).

     On September 17, 1999, petitioner sent a one paragraph

letter to respondent’s counsel and attached the following chart

which petitioner had prepared:
                                - 4 -

                                                  Tax over-
                           Tax payments         payment to be
                              except            applied to the
Tax            Tax         prior year’s          next year’s
year        liability      overpayment            liability
1987           -0-           4,184.40             4,184.40
1988         5,820.83        5,820.83             4,184.40 not
                                                            applied
1989        13,798.70       16,960.62             3,161.92
1990        12,393.65       21,661.24            12,429.51
1991         9,226.00       15,601.00            18,805.00
1992           -0-           2,089.00            20,894.00
1993         6,402.00        8,100.00            22,592.00
1994        28,660.00       15,000.00             8,932.00
1995        21,384.00       22,419.00             9,967.00
1996        16,091.00       19,576.00            13,452.00

                                OPINION

A.     Whether Petitioners May Deduct Rent for 1993 and 1994 That
       Petitioner Prepaid in 1992

       1.   Petitioners’ Contentions and Background

       Petitioners contend that petitioner prepaid $33,192.20 in rent

for 1993 and 1994 in 19921 to induce the landlord to give him a

below-market lease rate and to require no personal guaranty in the

next lease.

       A cash method taxpayer generally may not deduct prepaid rent

in the year paid because it is not an ordinary and necessary

business expense for that year; instead, the taxpayer must deduct

prepaid rent ratably over the years in which the taxpayer uses the


       1
        Respondent contends that petitioner prepaid $38,118.
Petitioner’s monthly rent and maintenance for common areas was
$21,524.04 in 1992. Subtracting $21,524.04 from petitioner’s
total payment of $54,716.24 in 1992 yields $33,192.20.
Respondent has not explained how respondent determined that
petitioner prepaid rent of $38,118. We conclude that petitioner
prepaid $33,192.20 in rent in 1992.
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property.   See Southwestern Hotel Co. v. United States, 115 F.2d

686, 688 (5th Cir. 1940); Main & McKinney Bldg. Co. v.

Commissioner, 113 F.2d 81, 81-82 (5th Cir. 1940), affirming a

Memorandum Opinion of this Court; Baton Coal Co. v. Commissioner,

51 F.2d 469, 470 (3d Cir. 1931), affg. 19 B.T.A. 169 (1930);

Grynberg v. Commissioner, 83 T.C. 255, 268-269 (1984); University

Properties Inc. v. Commissioner, 45 T.C. 416, 421 (1966), affd. 378

F.2d 83 (9th Cir. 1967); sec. 1.162-11(a), Income Tax Regs.

However, we have held that a cash-basis taxpayer may deduct prepaid

items when paid, including rent, if the taxpayer paid the rent

(i.e., did not make a mere deposit), had a “substantial business

reason for making the prepayment in the year” it was made, and the

prepayment did not “cause a material distortion in the taxpayer’s

taxable income in the year of prepayment.”   See Grynberg v.

Commissioner, supra at 265-266.2   Petitioners contend that

petitioner had a substantial business reason for prepaying the rent

in 1992.

     2.     Whether Petitioner Had a Substantial Business Reason To
            Prepay Rent in 1992

     Petitioner testified and contends that he prepaid rent in 1992

to induce the landlord to agree to a below-market lease rate and to


     2
        We have also held that an accrual basis taxpayer may
deduct prepaid items that do not create a future benefit that is
more than incidental. See USFreightways Corp. v. Commissioner,
113 T.C. 329, 333 (1999). Petitioners do not contend that the
prepayment of rent did not create a future benefit that is more
than incidental.
                                  - 6 -

require no personal guaranty in their next lease.    We decide

whether a witness is credible based on objective facts, the

reasonableness and consistency of the testimony, and the demeanor

of the witness.   See Quock Ting v. United States, 140 U.S. 417,

420-421 (1891); Wood v. Commissioner, 338 F.2d 602, 605 (9th Cir.

1964), affg. 41 T.C. 593 (1964); Pinder v. United States, 330 F.2d

119, 124-125 (5th Cir. 1964).     We may discount testimony which we

find to be unworthy of belief, see Tokarski v. Commissioner, 87

T.C. 74, 77 (1986), but we may not arbitrarily disregard testimony

that is competent, relevant, and uncontradicted, see Conti v.

Commissioner, 39 F.3d 658, 664 (6th Cir. 1994), affg. 99 T.C. 370

(1992) and T.C. Memo. 1992-616.    Petitioner's testimony was

implausible.   We do not believe that petitioner prepaid rent in

1992 to induce action relating to a lease he began to negotiate in

1994 and that he signed in 1995.    The landlord did not testify.   We

conclude that petitioners had no substantial business purpose for

prepaying rent in 1992.3

     Petitioners contend that under Rev. Rul. 69-511, 1969-2 C.B.

24, they may deduct the rent they prepaid in 1992.    The

Commissioner ruled in Rev. Rul. 69-511, supra, that a taxpayer may

deduct damages that the taxpayer paid to a lessor to cancel a lease

for a term of years when paid or accrued, depending on the


     3
        In light of our conclusion, we need not decide whether
petitioner’s prepayment of rent materially distorted petitioners’
taxable income.
                                - 7 -

taxpayer’s method of accounting.   Petitioners contend that “It

logically follows that a lump-sum payment to procure a lease in a

time-sensitive context should be deductible as well.”   We need not

decide this point because we are not convinced that petitioner

prepaid rent in 1992 to obtain a lease in 1994 and 1995.

     We conclude that petitioners may not deduct the rent

petitioner prepaid in 1992.

B.   Whether, Under the Mitigation Rules, Petitioners May Deduct
     Rental Expense for 1993 and 1994 Which Petitioner Prepaid in
     1992

     Petitioners contend that, if they may not deduct rent they

prepaid in 1992, then they may deduct it in 1993 and 1994 under

sections 1.1314(a)-1 through 1.1314(c)-1, Income Tax Regs. (which

relate to the mitigation provisions, sections 1311 through 1314).

     We disagree.   We lack jurisdiction to redetermine a taxpayer’s

tax liability in years for which the Commissioner has not issued a

notice of deficiency.   See secs. 6213(a) and 6214(a) and (b).    The

only notice of deficiency petitioned in this case is for 1992.

Thus, we lack jurisdiction to decide petitioners’ tax liability for

1993 and 1994.

C.   Whether Petitioners Are Liable for the Addition to Tax Under
     Section 6651(a) for Failure To Timely File a Return

     Respondent determined and contends that petitioners are liable

for the addition to tax under section 6651(a) for failure to timely

file their income tax return for 1992.   A taxpayer may be liable

for an addition to tax of up to 25 percent for failure to timely
                                    - 8 -

file a Federal income tax return unless the failure was due to

reasonable cause and not willful neglect.      See sec. 6651(a).   The

taxpayer bears the burden of proving that the failure is due to

reasonable cause and not willful neglect.      See United States v.

Boyle, 469 U.S. 241, 245 (1985).4

       Petitioners contend that they filed their 1992 return late

because petitioner worked 18 hours a day including Saturdays and

had about four vacations in 10 years.       Working long hours does not

relieve a taxpayer of the duty to timely file a tax return.        See

Logan Lumber Co. v. Commissioner, 365 F.2d 846, 854 (5th Cir. 1966)

(“If every taxpayer who * * * was too busy to file a return escaped

the penalty for failure to file, our tax system would soon

collapse.”), affg. and remanding on another issue T.C. Memo. 1964-

126.       Petitioners have not shown that they had reasonable cause for

filing their 1992 return 3 years late.

       Petitioners contend that they are not liable for the addition

to tax for failure to timely file under section 6651(a) even if

they do not prevail on the prepaid rent issue because they overpaid

their taxes for 1992.      Petitioners rely on the chart attached to

petitioner’s September 17, 1999, letter to respondent’s counsel.

Petitioner testified that the chart is based on his records and his



       4
        The burden of proof provisions of sec. 7491 do not apply
here because the examination in this case began before July 22,
1998. See Internal Revenue Service Restructuring & Reform Act of
1998, Pub. L. 105-206, sec. 3001(c), 112 Stat. 685, 727.
                                - 9 -

personal knowledge of his tax liabilities.    We give the chart no

weight because it is completely uncorroborated.    Petitioners did

not offer into evidence the underlying information that petitioner

claims to have summarized on the chart, such as canceled checks

showing tax payments, or returns from other years showing treatment

of alleged overpayments.

     Petitioners contend that they reasonably believed that they

owed no tax for 1992.   Petitioner did not explain what led him to

that belief.   We are not convinced that petitioners had reasonable

cause for filing their 1992 return late.    Thus, petitioners are

liable for the addition to tax under section 6651(a)(1) for 1992.

     To reflect concessions and the foregoing,


                                           Decision will be entered

                                    under Rule 155.
