                        T.C. Memo. 2011-289



                      UNITED STATES TAX COURT



               PETER A. MCLAUCHLAN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14996-09.             Filed December 19, 2011.



     Kathlyn C. Curtis, for petitioner.

     Adam P. Sweet, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     KROUPA, Judge:   Respondent determined deficiencies in

petitioner’s Federal income taxes and accuracy-related penalties

under section 6662(a)1 for 2005, 2006 and 2007 (years at issue).


     1
      All section references are to the Internal Revenue Code as
amended and in effect for the years at issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure,
unless otherwise indicated.
                                - 2 -

After concessions,2 there are two issues for decision.     The first

issue is whether certain expenses that petitioner claimed on

Schedule C, Profit or Loss From Business (Schedule C), for 2005

and 2006 are deductible.    We hold they are not.3   We also must

decide whether petitioner is liable for an accuracy-related

penalty for each year at issue.    We hold he is liable.

                           FINDINGS OF FACT

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

The stipulation of facts and the accompanying exhibits are

incorporated by this reference.    Petitioner resided in Houston,

Texas at the time he filed the petition.




     2
      Petitioner conceded or settled all of the adjustments in
the deficiency notice concerning the disallowed itemized
deductions and unreported income. Petitioner also conceded that
he is not entitled to a deduction for the legal and professional
services expense that he claimed on Schedule C for each of the
years at issue. Finally, petitioner conceded that he is liable
for additional tax for an early distribution from a retirement
account for 2007. Respondent conceded that petitioner is allowed
deductions for claimed contributions to pension and profit
sharing plans for 2005 and 2006. Other remaining adjustments are
computational and need not be discussed.
     3
      Notwithstanding, we hold that the depreciation expense
claimed on line 13 of Schedule C for 2006 and the charitable
contribution expense claimed on line 27 of Schedules C for 2005
and 2006 are allowed because they are flow-through partnership
items under sec. 702.
                               - 3 -

Background

     Petitioner is married with two children.    He has practiced

law since 1985.   Petitioner was practicing law as a partner at

AR, a law partnership, during the years at issue.4

     Petitioner’s share of AR income for 2005 and 2006 was

$339,260 and $329,016, respectively.   Petitioner paid various

expenses (e.g., advertising, home office, automobile, travel,

meals, entertainment, cell phone, professional organizations,

continuing legal education, State bar membership, supplies,

interest, banking fees and legal support services) in connection

with practicing law at AR.   AR reimbursed petitioner for over

$60,000 of expenses for each of 2005 and 2006.   Petitioner

contends, however, that he paid over $100,000 of AR expenses in

both 2005 and 2006 for which he was not reimbursed.   He

categorized and claimed these expenses on Schedules C.

     Petitioner left AR in 2007.

Reimbursement of AR Expenses

     AR partners were required under AR’s partnership agreement

to pay expenses for business meals, automobiles, travel,

entertainment, conventions, continuing legal education and

professional organizations (collectively, indirect AR expenses).

Indirect AR expenses were reimbursable under AR’s partnership



     4
      The Court granted petitioner’s motion to seal the part of
the record that identifies the name of the law firm.
                                 - 4 -

agreement if approved by a managing partner or a designee of the

managing partner.

     AR had a written reimbursement policy that specifically

provided for reimbursement of certain indirect AR expenses.

Reasonable travel expenses were reimbursable, including expenses

related to client maintenance and development.     Interoffice

travel expenses involving an automobile were reimbursable.       Lease

and rental automobile expenses incurred for client travel were

reimbursable.   Business meals and entertainment were reimbursable

if authorized and approved.   Continuing legal education expenses

were reimbursable if approved.

     The written reimbursement policy, however, also provided

that in-town transportation (i.e., transportation within a 20-

mile radius of an attorney’s home office) expenses and spousal

travel expenses were not reimbursable.

     As a matter of routine practice, AR would reimburse other

indirect AR expenses that were not provided for in the written

reimbursement policy, including State bar membership expenses and

professional organization expenses.      AR did not have a limit on

the amount for which a partner could be reimbursed.

Reasonableness, rather, was the overarching standard for

approving reimbursement of indirect AR expenses.     AR would deem

an expense unreasonable if it was personal, excessive or not in

AR’s best interests.
                                    - 5 -

The Deficiency Case

      Petitioner filed Federal income tax returns for the years at

issue.   After examination, respondent issued petitioner the

deficiency notice.      Petitioner timely filed the petition for

redetermination with this Court.         Respondent filed an answer and

an amended answer.      Respondent asserted in the amended answer

that petitioner was not entitled to any of the claimed Schedule C

expenses for 2005 and 2006, resulting in increased income tax

deficiencies.     The following expenses are at issue.


                          Expenses                                 2005     2006
Advertising                                                       $1,648   $1,785
Car and truck                                                     18,503    3,224
Commissions and fees (professional organizations and
  continuing legal education)1                                       922      874
Contract labor                                                     1,687    1,644
Depreciation and section 179                                          54    1,693
Insurance (automobile insurance and home insurance)                3,865    3,944
Interest                                                          18,985   18,466
Office                                                            18,626   19,486
Rent or lease (vehicle lease and vehicle rental)                   8,456    8,692
Repairs and maintenance (automobile repairs and maintenance
  and other repairs and maintenance)                                 946    6,872
Supplies                                                             655      623
Taxes and licenses (automobile taxes and licenses and State
  bar membership)                                                  1,963     1,984
Travel, meals and entertainment                                   32,395    23,816
Utilities                                                          3,522     3,846
Wages                                                              8,465     7,244
Other (charitable contributions)                                   1,892     1,349
                                                                 122,584   105,542

      1
        For simplicity’s sake, we have delineated in parentheses certain
subcategories of expenses that petitioner deducted.

                                   OPINION

      We are asked to decide whether petitioner, an attorney in a

law partnership, can deduct the expenses at issue as unreimbursed

partnership expenses, and if so, whether any of the expenses at
                                 - 6 -

issue are nonetheless disallowable for lack of proper

substantiation.    We are also asked to decide whether petitioner

is liable for an accuracy-related penalty under section 6662(a)

for each year at issue.    We begin with the burden of proof.

I.    Burden of Proof

      Taxpayers generally bear the burden of proving that the

Commissioner’s determinations are erroneous.   Rule 142(a).     The

Commissioner bears the burden of proof on any new matter,

increases in deficiencies and affirmative defenses pleaded in his

answer.   See id.; Welch v. Helvering, 290 U.S. 111 (1933).     Our

resolution of whether the expenses are deductible is based on a

preponderance of evidence standard, not upon an allocation of the

burden of proof.   Therefore, we need not consider who bears the

burden of proof on this issue.    See Estate of Bongard v.

Commissioner, 124 T.C. 95, 111 (2005).    We now turn to the

expenses at issue.

II.   Unreimbursed Partnership Expenses

      The parties dispute whether the expenses at issue are

deductible as unreimbursed partnership expenses.   Generally, a

partner may not directly deduct the expenses of the partnership

on his or her individual returns, even if the expenses were

incurred by the partner in furtherance of partnership business.

Cropland Chem. Corp. v. Commissioner, 75 T.C. 288, 295 (1980),

affd. without published opinion 665 F.2d 1050 (7th Cir. 1981).
                               - 7 -

An exception applies, however, when there is an agreement among

partners, or a routine practice equal to an agreement, that

requires a partner to use his or her own funds to pay a

partnership expense.   Id.; Klein v. Commissioner, 25 T.C. 1045,

1052 (1956).

     The AR partnership agreement required petitioner to pay

indirect AR expenses that were unreimbursable.   There was no

routine practice at AR that required petitioner to pay any other

AR expenses.   Accordingly, the expenses at issue are deductible

if they were (1) indirect AR expenses, (2) unreimbursable and (3)

actually incurred.   We now turn to each of these requirements.

     A. Expenses That Were Not Indirect AR Expenses

     The only indirect AR expenses petitioner claimed for 2005

and 2006 are the travel, meals, entertainment, automobile

expenses,5 vehicle rental, professional organizations, continuing

legal education and State bar membership expenses.    All other

expenses at issue are not indirect AR expenses and thus are not

deductible as unreimbursed partnership expenses.




     5
      The “car and truck,” “vehicle lease,” “automobile repairs
maintenance,” “automobile insurance” and “automobile taxes and
licenses” expenses claimed on Schedules C for 2005 and 2006 all
arise from petitioner’s alleged use of two passenger automobiles,
a BMW and an unidentified vehicle for AR business. For
simplicity’s sake, we refer to these expense categories
collectively as “automobile expenses.”
                                 - 8 -

     B. Expenses That Were Reimbursable

     We now focus on whether the indirect AR expenses petitioner

claimed were reimbursable.6   AR’s written reimbursement policy

shows that they were.   AR’s reimbursement policy reflects that AR

reimbursed reasonable travel expenses.    In that regard, AR

reimbursed authorized and approved business meals and

entertainment expenses.   AR also reimbursed approved continuing

legal education expenses and vehicle rental expenses for client-

related travel.

     Moreover, AR’s routine reimbursement practices show that the

indirect AR expenses petitioner claimed were reimbursable.

Specifically, the record indicates that AR routinely reimbursed

reasonable expenses for professional organizations and State bar

memberships.   More generally, the record reflects that AR had no

set limit on the amount of expenses for which it would reimburse

a partner.   Instead, reasonableness was the determinative

criterion for approving or authorizing an indirect AR expense.

AR would deem an expense unreasonable if it was personal,

excessive or not in AR’s best interest.    We find petitioner was

not required under the AR partnership agreement or by routine

practice to pay such expenses.



     6
      Because we hold that petitioner did not meet the strict
substantiation requirements of sec. 274(d) for claiming the
automobile expenses for 2005 and 2006, it is unnecessary to
consider whether the automobile expenses were reimbursable.
                               - 9 -

     In addition, petitioner fails to point to any specific

expense for which AR denied him reimbursement.   Petitioner merely

offers his own general and vague testimony that AR denied him

reimbursement for some of his travel, meal and entertainment

expenses.   This Court is not required to accept petitioner’s

self-serving, unverified and undocumented testimony.    See Shea v.

Commissioner, 112 T.C. 183, 189 (1999); Tokarski v. Commissioner,

87 T.C. 74, 77 (1986).

     We find that petitioner was not required to pay without

reimbursement any expenses for travel, meals, entertainment,

vehicle rental, continuing legal education, professional

organizations or State bar memberships.   We therefore sustain

respondent’s disallowance of these expenses.7

     C. Expenses That Were Not Properly Substantiated

     We now focus on the automobile expenses.    Respondent argues

that petitioner is not entitled to deduct any portion of the

automobile expenses that he claimed because they were not

properly substantiated.   We agree.

     No deduction may be allowed for expenditures or use with

respect to listed property unless the taxpayer substantiates

certain elements.   Sec. 274(d).   Passenger automobiles are listed



     7
      We note that even if we found that the travel, meals and
entertainment expenses were deductible as unreimbursed
partnership expenses, they would still be disallowed under the
strict substantiation rules of sec. 274(d).
                               - 10 -

property.   Sec. 280F(d)(4)(A)(i).   The automobile expenses stem

from petitioner’s use of two passenger automobiles and are

therefore subject to the strict substantiation requirements of

section 274(d).

     A taxpayer shall substantiate certain elements of

expenditure and use by adequate records or sufficient evidence to

corroborate his or her own statement before a deduction with

respect to an alleged business use of an automobile will be

allowed.8   Sec. 1.274-5T(b)(6), Temporary Income Tax Regs., 50

Fed. Reg. 46016 (Nov. 6, 1985).   The elements petitioner must

substantiate are (1) the amount of each separate expenditure, (2)

the mileage for each business use of the relevant automobiles and

the total mileage for all use of the automobiles during the

taxable period, (3) the date of the expenditure or use and (4)

the business purpose for the expenditure or use.   See id.

     Moreover, expenses subject to the strict substantiation

rules, such as passenger automobile expenses, may not be

estimated; i.e., section 274(d) overrides the so-called Cohan

rule.    Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.

1930); Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd.


     8
      Adequate records generally must be written and must be
prepared or maintained such that a record of each element of an
expenditure or use that must be substantiated is made at or near
the time of the expenditure or use when the taxpayer has full
present knowledge of each element. See sec.
1.274-5T(c)(2)(ii)(C), Temporary Income Tax Regs., 50 Fed. Reg.
46018 (Nov. 6, 1985).
                               - 11 -

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);

sec. 1.280F-6(b)(1), Income Tax Regs.    For these expenses, only

strict substantiation will suffice.

     Against this background, we analyze whether petitioner

satisfied the strict substantiation requirements of section

274(d) to allow any automobile expenses for 2005 and 2006.

Petitioner has shown that he paid some expenses regarding certain

automobiles he contends were used for AR business.    Petitioner

failed, however, to maintain records that indicate the amount of

business use and total use, the dates of any business use and the

purposes of any business use for the automobiles.    Instead,

petitioner offers his general, vague, self-serving and

uncorroborated testimony that he used the automobiles to conduct

AR business.   Petitioner is therefore not entitled to deduct the

automobile expenses.   Consequently, we sustain respondent’s

disallowance of the automobile expenses.

III. Accuracy-Related Penalties

     We now turn to respondent’s determination that petitioner is

liable for an accuracy-related penalty under section 6662(a) for

each year at issue.    The Commissioner has the burden of

production and must come forward with sufficient evidence that it

is appropriate to impose a penalty.     Sec. 7491(c); see Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001).    The taxpayer bears
                              - 12 -

the burden of proof as to any defense to the accuracy-related

penalty.   Sec. 7491(c); Rule 142(a); Higbee v. Commissioner,

supra at 446.

     A taxpayer is liable for an accuracy-related penalty on any

part of an underpayment attributable to, among other things, a

substantial understatement of income tax.   Sec. 6662(b)(2).

There is a substantial understatement of income tax if the amount

of the understatement exceeds the greater of either 10 percent of

the tax required to be shown on the return, or $5,000.   Sec.

6662(a), (b)(2), (d)(1)(A); sec. 1.6662-4(a), Income Tax Regs.

Respondent has met his burden of production because the Court’s

decision results in a substantial understatement of income tax

for each of the years at issue.   See Higbee v. Commissioner,

supra at 446; Jarman v. Commissioner, T.C. Memo. 2010-285.

     A taxpayer is not liable for an accuracy-related penalty,

however, if the taxpayer acted with reasonable cause and in good

faith with respect to any portion of the underpayment.   Sec.

6664(c)(1); sec. 1.6664-4(a), Income Tax Regs.   The determination

of whether a taxpayer acted with reasonable cause and in good

faith depends on the pertinent facts and circumstances, including

the taxpayer’s efforts to assess his or her proper tax liability,

the knowledge, experience and education of the taxpayer, and the

reliance on the advice of a professional.   Sec. 1.6664-4(b)(1),

Income Tax Regs.
                              - 13 -

     Petitioner is well educated and has been an attorney for

over 20 years.   He prepared his own Federal income tax returns

for the years at issue.   Petitioner admitted that he had

difficulty preparing his tax returns, yet he failed to seek the

assistance of a tax professional.

     Moreover, the full amount of each underpayment resulted from

petitioner repeatedly disregarding the rules and regulations on

reporting income and claiming deductions against income.

Petitioner failed to offer any persuasive evidence that he acted

with reasonable cause and in good faith in disregarding the

relevant rules and regulations.

     We find under the relevant facts and circumstances that

petitioner did not act with reasonable cause and in good faith

with respect to the underpayments for the years at issue.     We

therefore hold petitioner liable for the accuracy-related

penalty, under section 6662(b), on the underpayments of tax for

the years at issue.

     We have considered all arguments made in reaching our

decision and, to the extent not mentioned, we conclude that they

are moot, irrelevant, or without merit.

     To reflect the foregoing and the parties’ concessions,


                                          Decision will be entered

                                    under Rule 155.
