                        T.C. Memo. 2008-120



                      UNITED STATES TAX COURT



                  RONALD A. TASH, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15662-06.               Filed April 29, 2008.



     Karrick Lee Major, for petitioner.

     Julie Jebe and John Comeau, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   Respondent determined a deficiency of

$13,912 and a section 6662(a) penalty of $2,782 in petitioner’s

Federal income tax for 2003.1   The issues for decision after


     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure. Amounts
                                                   (continued...)
                                - 2 -

concessions2 are:   (1) Whether petitioner is entitled to trade or

business expense deductions totaling $11,575 for wages, (2)

whether petitioner is entitled to trade or business expense

deductions totaling $6,604 for legal and professional service

expenses, and (3) whether petitioner is liable for a section

6662(a) penalty.

                          FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and supplemental stipulation of facts,

together with attached exhibits, are incorporated herein by this

reference.   At the time petitioner filed his petition, he resided

in Illinois.

     Petitioner has been a lawyer since 1970.   During 2003

petitioner’s legal practice focused on residential real estate

transactions.    He employed Gloria Mason (Ms. Mason) as his

secretary.

     The only books petitioner kept with respect to his practice

during 2003 were a general ledger for his bank account with

Northern Trust Bank and a general ledger for his bank account

with Bank One.   The ledgers did not list any payments for Federal

employment taxes.   The ledger for petitioner’s account with Bank


     1
      (...continued)
are rounded to the nearest dollar.
     2
        Respondent concedes that petitioner is entitled to deduct
$20,488 of legal and professional service expenses for 2003.
                                 - 3 -

One lists payroll tax payments made to the State of Illinois for

1998, 1999, 2000, and 2001, but not for 2003.

     During 2003, petitioner wrote 27 checks totaling $11,575 to

Ms. Mason (Mason checks) which were listed on petitioner’s

Northern Trust Bank ledger under the heading “Payroll Expense.”3

Petitioner also wrote 63 checks to various entities and

individuals totaling $26,467 (miscellaneous checks).

         Petitioner provided his checks and receipts to Karrick L.

Major (Ms. Major) to prepare his Federal income tax return for

2003.     The information petitioner provided to Ms. Major was not

complete.     After Ms. Major prepared the return, petitioner

reviewed it and signed it.

     Petitioner filed his 2003 Federal income tax return on

September 24, 2004.4    On his Schedule C, Profit or Loss from

Business, petitioner claimed deductions for $10,789 of employee

benefit plan expenses, $27,093 of legal and professional service

expenses, and $19,572 of wages.




     3
        Petitioner wrote an additional 26 checks to either Ms.
Mason or IL Collection totaling $19,562. This figure
approximates the $19,572 petitioner ultimately claimed as a wage
expense deduction on his Schedule C, Profit or Loss from
Business.
     4
        Petitioner submitted an Application for Additional
Extension of Time to File U.S. Individual Income Tax Return on
Aug. 13, 2004. It appears that respondent granted this
extension.
                               - 4 -

     Respondent issued a notice of deficiency on August 7, 2006,

disallowing petitioner’s deductions for employee benefit plan

expenses and legal and professional service expenses because of

lack of substantiation.   Petitioner filed a timely petition with

this Court, and a trial was held on May 22, 2007, in Chicago,

Illinois.   At trial respondent conceded that petitioner had

presented sufficient documentation to substantiate $20,488 of

legal and professional service expenses.   Petitioner testified

that he had never established an employee benefit plan.

     On August 27, 2007, we granted petitioner’s motion to

conform pleading under Rule 41(b) and filed his amended petition.

In the amended petition petitioner alleges that the $10,789

employee benefit plan expense deduction on his return evidenced

by the 27 Mason checks should have been described as “Employee

Salary Expense in the correct amount of $11,575”.

                              OPINION

I.   Burden of Proof

     Deductions are a matter of legislative grace, and the

taxpayer must prove he is entitled to the deductions.     New

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

142(a).   The burden of proof may shift to the Commissioner under

section 7491(a) if the taxpayer establishes compliance with the

requirements of section 7491(a)(2)(A) and (B) by substantiating

items, maintaining required records, and fully cooperating with
                               - 5 -

the Secretary’s reasonable requests.    As discussed below, we find

that petitioner has failed to substantiate his claimed expenses

and to maintain adequate records.   The burden of proof,

therefore, does not shift to respondent under section 7491(a).

II.   Business Expense Deductions

      Section 162(a) provides that “There shall be allowed as a

deduction all the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or

business”.   The regulations specify that ordinary and

necessary business expenses include “the ordinary and necessary

expenditures directly connected with or pertaining to the

taxpayer’s trade or business”, sec. 1.162-1(a), Income Tax Regs.,

such as “a reasonable allowance for salaries or other

compensation for personal services actually rendered”, sec.

1.162-7(a), Income Tax Regs.

      The Supreme Court has explained that a cash method taxpayer

such as petitioner may deduct an expenditure under section 162(a)

if the expenditure is:   (1) An expense, (2) an ordinary expense,

(3) a necessary expense, (4) paid during the taxable year, and

(5) made to carry on a trade or business.   See INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 85 (1992).    The Supreme Court has

stated that a necessary expense is an expense that is appropriate

or helpful to the development of the taxpayer’s business, see

Commissioner v. Tellier, 383 U.S. 687, 689 (1966); Welch v.
                                - 6 -

Helvering, 290 U.S. 111, 113 (1933), and that an ordinary expense

is an expense that is “normal, usual, or customary” in the type

of business involved, Deputy v. du Pont, 308 U.S. 488, 495-496

(1940); see also Welch v. Helvering, supra at 113-114.

     A.   Wages

     Petitioner argues in his amended petition that he is

entitled to a business expense deduction of $11,575 for wage

expenses as evidenced by the 27 Mason checks.    Respondent

contends that petitioner originally characterized these checks as

payments for employee benefit plan expenses in order to avoid

paying payroll taxes and has failed to prove that the checks were

wage payments.    Although, as discussed below, petitioner is

unable to satisfy his burden of proving that the 27 Mason checks

were payments for wages, the record indicates that these checks

were payments for expenses related to petitioner’s business.

     Petitioner has not demonstrated that the Mason checks

constituted ordinary and necessary payments for wages.    At trial

both petitioner and Ms. Mason testified that the Mason checks

were for wages, rather than employee benefit plan expenses, and

should have been added to the amount claimed as a wage expense on

petitioner’s 2003 return.    However, petitioner provides no

documentation to demonstrate that the Mason checks were for

ordinary and necessary wage payments.    Ms. Mason was unable to

precisely state the amount of her wages in 2003 or for previous
                               - 7 -

years.   The intervals at which petitioner issued checks to Ms.

Mason and the amounts of those checks do not conform to any

particular pattern.   For example, five checks totaling $3,300

were issued to Ms. Mason in August 2003, but only one check for

$300 was issued in September 2003.     As Ms. Mason testified, the

checks “were for things related to the job that I have, picking

up different items that * * * we need to use in the office”, in

addition to her wages.

     The testimony and records are inadequate to meet

petitioner’s burden to prove that the Mason checks were used to

pay wages.   However, the record indicates that petitioner used

the Mason checks to pay for services and items related to his

legal practice.

     As a general rule, if the trial record provides sufficient

evidence that the taxpayer has incurred a deductible expense, but

the taxpayer is unable to substantiate adequately the precise

amount of the deduction to which he or she is otherwise entitled,

the Court may estimate the amount of the deductible expense and

allow the deduction to that extent.     Cohan v. Commissioner, 39

F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85

T.C. 731, 742-743 (1985); Sanford v. Commissioner, 50 T.C. 823,

827-828 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969);

sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014

(Nov. 6, 1985).   In these instances, the Court is permitted to
                                  - 8 -

make as close an approximation of the allowable expense as it

can, bearing heavily against the taxpayer whose inexactitude is

of his or her own making.      Cohan v. Commissioner, supra at 544.

However, in order for the Court to estimate the amount of an

expense, the Court must have some basis upon which an estimate

may be made.      Vanicek v. Commissioner, supra.   Without such a

basis, any allowance would amount to unguided largesse.          Williams

v. United States, 245 F.2d 559, 560-561 (5th Cir. 1957).

     Petitioner’s ledger states that the Mason checks constituted

a “Payroll Expense”, and both petitioner and Ms. Mason testified

that the checks were either related to Ms. Mason’s employment or

for items necessary for petitioner’s legal practice.       The sum of

the Mason checks, $11,575, is not in dispute.       Therefore, we find

that petitioner is entitled to a deduction for business expenses

of $11,575.

         B.   Legal and Professional Services

     Petitioner claims he is entitled to a deduction for legal

and professional service expenses of $27,093.       Respondent

contends that petitioner has failed to substantiate $6,604 of

this deduction.5     We agree with respondent.


     5
        Petitioner’s 63 miscellaneous checks total $26,466, $626
less than the $27,093 claimed on his return. Of the 63 checks,
respondent contends that petitioner failed to substantiate 21 of
them: check Nos. 2965, 2715, 2729, 2311, 2327, 2328, 2569, 2667,
2668, 2434, 2449, 2504, 2489, 2531, 2854, 2860, 2892, 2895, 2948,
2746, and the counter check. These 21 contested checks total
                                                   (continued...)
                                - 9 -

     Petitioner has presented no documentary evidence

establishing an ordinary and necessary business purpose for the

miscellaneous checks.    Although petitioner testified as to the

purpose behind the checks, the testimony was vague and left

unclear whether the payments were expenses of petitioner’s legal

practice.   For example, petitioner testified that check No. 2892

was a payment for his cellular telephone bill.    The record did

not indicate whether petitioner used his cellular telephone for

business and/or personal calls.    Petitioner has not demonstrated

that his checks paid expenses that were “normal, usual, or

customary” for a real estate attorney.    See Deputy v. du Pont,

supra at 495-496.

     The record provides no satisfactory basis for estimating

petitioner’s legal and professional service expenses.    Petitioner

has failed to adequately substantiate the business purpose behind

the 21 miscellaneous checks.    Although the checks provide a guide

as to the amount of petitioner’s expenditures in 2003, the Court

cannot guess as to the character of those expenditures when

confronted with an inadequate record.6   Vanicek v. Commissioner,

supra.   Consequently, we will not apply the Cohan rule to


     5
      (...continued)
$5,978.
     6
        Expenses   of a cellular telephone must be substantiated
pursuant to sec.   274(d). The Court cannot estimate those
expenses. Secs.    274(d)(4), 280F(d)(4)(v); sec. 1.274-5T(a),
Temporary Income   Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
                               - 10 -

estimate the amount of petitioner’s legal and professional

service expenses.

III. Section 6662

     Section 6662 imposes an accuracy-related penalty upon any

underpayment of tax resulting from a substantial understatement

of income tax.    The penalty is equal to 20 percent of any

underpayment that constitutes a substantial understatement of

income tax.   Sec. 6662(a).   The term “substantial understatement”

is defined as the greater of: (1) 10 percent of the tax required

to be shown on the return for the taxable year, or (2) $5,000.

Sec. 6662(d).    Petitioner reported tax of $2,115 on his 2003

income tax return, and respondent determined a $13,912

understatement based on a corrected tax of $16,027.    The amount

of the understatement for 2003 is more than 10 percent of

the tax required to be shown and greater than $5,000.    According

to the Court’s calculations, this would still be true even after

reducing the corrected tax by the $20,488 deduction for business

expenses conceded by respondent and the $11,575 deduction for

business expenses allowed by the Court under the Cohan rule.7

Thus, petitioner substantially understated his income tax for




     7
        Assuming petitioner is taxed at a 25 percent bracket, the
understatement and corrected tax would be reduced by roughly
$7,500 (.25 x 30,000), leaving an understatement of roughly
$6,500 on a corrected tax of $8,500.
                              - 11 -

2003, and respondent has met his burden of production under

section 7491(c).

     An accuracy-related penalty is not imposed on any portion of

the understatement as to which the taxpayer acted with

reasonable cause and in good faith.    Sec. 6664(c)(1).   The

taxpayer bears the burden of proof with regard to those issues.

Higbee v. Commissioner, 116 T.C. 438, 446 (2001).    Although

petitioner has not alleged any specific basis for us to reduce

the accuracy-related penalty, the record indicates that

petitioner relied on a lawyer, Ms. Major, to prepare his 2003 tax

return.   Reliance on the advice of a tax professional may

constitute reasonable cause and good faith if under all the facts

and circumstances the reliance is reasonable and in good faith.

Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 98

(2000), affd. 299 F.3d 221 (3d Cir. 2002); sec. 1.6664-4(c)(1),

Income Tax Regs.   To qualify for this exception, a taxpayer must

prove by a preponderance of the evidence that:    (1) The adviser

was a competent professional who had sufficient expertise to

justify reliance; (2) the taxpayer provided necessary and

accurate information to the adviser; and (3) the taxpayer

actually relied in good faith on the adviser’s judgment.

Neonatology Associates, P.A. v. Commissioner, supra at 98-99.

     Petitioner has provided no evidence to establish that Ms.

Major is a competent tax professional.    Although Ms. Major is
                              - 12 -

licensed to practice before this Court, the record gives no

indication of her expertise in preparing tax returns.

      Nor has petitioner demonstrated that he provided Ms. Major

with necessary and accurate information.    Ms. Major was not

called as a witness.8   Although petitioner testified that he

provided Ms. Major with all of his checks and receipts,

petitioner’s position on his 2003 Federal income tax return is at

odds with his ultimate position in his amended petition and

indicates that Ms. Major may not have had access to all the

information necessary to prepare his return properly.9

      Petitioner, having failed to show reasonable cause,

substantial authority, or other basis for reducing the

understatement, is liable for the section 6662 penalty for 2003

as commensurate with respondent’s concessions and our holding.

See Higbee v. Commissioner, supra at 446.

IV.   Conclusion

      We find that petitioner has failed to meet his burden of

substantiating his legal and professional service expense



      8
        At trial, Ms. Major presented a document to the Court
titled “Consent to Representation” in which petitioner waived any
concerns over the conflict of interest that might arise from Ms.
Major’s being a potential witness. However, she was never called
to testify.
      9
        For example, petitioner’s 2003 Federal income tax return
reports $10,789 of employee benefit plan expenses. Petitioner’s
amended petition changes this figure to $11,575 of “salary
expenses”.
                             - 13 -

deductions beyond those respondent already conceded.   Petitioner

has also failed to show reasonable cause for his understatement

of tax and is thus subject to the section 6662 penalty.   However,

under the Cohan rule we find that petitioner is entitled to trade

or business expense deductions of $11,575.

     In reaching these holdings, the Court has considered all

arguments made and, to the extent not mentioned, concludes that

they are moot, irrelevant, or without merit.

     To reflect the foregoing,

                                        Decision will be entered

                                   under Rule 155.
