                     T.C. Summary Opinion 2010-133



                        UNITED STATES TAX COURT



                   VLADIMIR SHPILRAIN, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 10883-09S.             Filed September 9, 2010.



        Vladimir Shpilrain, pro se.

        Eliezer Klein, for respondent.



     DEAN, 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.      Pursuant to section 7463(b),

the decision to be entered is not reviewable by any other court,

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

case.     Unless otherwise indicated, subsequent section references

are to the Internal Revenue Code in effect for the year at
                                - 2 -

issue, and Rule references are to the Tax Court Rules of Practice

and Procedure.

     Respondent determined for 2006 a deficiency of $3,521 in

petitioner’s Federal income tax.

     The issue for decision is whether petitioner is entitled to

deduct expenses for travel, meals, and entertainment in excess of

those respondent allowed.

                              Background

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

The stipulation of facts and the exhibits received in evidence

are incorporated herein by reference.      Petitioner resided in New

York when the petition was filed.

     Petitioner became in 2004 a tenured professor of mathematics

at the City College of New York, part of the City University of

New York (CUNY).   In that same year petitioner started doing

research in cryptography.   His research in cryptography was

related to his earlier work in a field of mathematics called

group theory.    Petitioner’s research led to the idea of producing

unique algorithms1 on software for cryptographic purposes to be

sold to chip manufacturers.    Petitioner found that in 2004 and

2005 there existed a substantial market for products like RFID


     1
      An algorithm is a step-by-step procedure for solving a
problem or accomplishing some end. Webster’s Ninth New
Collegiate Dictionary 70 (1990). According to petitioner,
cryptographic algorithms are very fast and use very little
computer memory, making them ideal for tiny computer chips.
                               - 3 -

(radio frequency identification) tags, “keyless” entry devices,

and other small electronic devices that require code encryption.

For a conference in 2005, “Crypto 2005”, petitioner was listed on

the program, along with Alexei Myasnikov and Alexander Ushakov,

as being responsible for the topic “A Practical Attack on a Braid

Group Based Cryptographic Protocol” from 2:25 to 2:50 p.m.

     In 2006 petitioner traveled to Nashville, Tennessee, on two

occasions.   He also made trips in 2006 to Ithaca, New York,

Beijing, China, his former home in Moscow, Russia,2 Cologne and

Bonn, Germany, and an international conference on information

security and cryptography in Busan, Korea.     The purpose of the

trip to Ithaca was to discuss group-based cryptography with a

Professor Reilly.   Professor Reilly was not a potential customer.

Petitioner incurred no hotel expenses on his two trips to Moscow

because he stayed with his family.     On the application for the

conference in Korea petitioner listed his affiliation as City

College of New York.

     Petitioner purchased during 2006 over 70 books related to

the study of abstract algebra including three directly related to

cryptography.

     Petitioner and his associates, Professors Myasnikov and

Ushakov, could have used the commercialization office at CUNY to



     2
      Petitioner made two trips to Moscow lasting from June 17 to
30, 2006, and from July 7 to 15, 2006.
                                - 4 -

promote their cryptographic algorithms.    They did in fact

investigate using the office in 2007.    They did not make earlier

inquiries because petitioner did not know the office existed as

he was not previously involved in business operations.

     Petitioner timely filed his Federal income tax return for

2006 and attached to it a Schedule C, Profit or Loss From

Business.   The Schedule C listed the principal business or

profession as “Research and Writing” and the business name as

“Vladimir Shpilrain”.    Petitioner listed his home address as the

business address.    Petitioner reported gross receipts and gross

income of $476.    He reported expenses on the Schedule C of

$15,397, including expenses for:    (a) Supplies of $4,230,

including books and computer equipment; (b) travel of $7,920; and

(c) meals and entertainment of $2,140.

     None of petitioner’s products have a commercial name.

Petitioner has no patent or copyright on his algorithms.

Petitioner, however, citing the complexity of the mathematics of

his algorithms, minimized the necessity for intellectual property

protection.   Petitioner, as of trial, had never sold a software

program.    Petitioner’s business has no Web site, and petitioner

has no Web site.    Petitioner produced no physical evidence of his

product at trial.    Petitioner had at trial no records to document

his meetings with potential buyers.
                               - 5 -

                             Discussion

     Generally, the Commissioner’s determinations in a notice of

deficiency are presumed correct, and the taxpayer has the burden

of proving that those determinations are erroneous.    See Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).     In some

cases the burden of proof with respect to relevant factual issues

may shift to the Commissioner under section 7491(a).    Petitioner

did not argue or present evidence that he satisfied the

requirements of section 7491(a).   Therefore, the burden of proof

with respect to the issues in the notice of deficiency does not

shift to respondent.

     Petitioner argues that he is entitled to deduct the ordinary

and necessary business expenses of his “research and writing”

activity.   Respondent in the notice of deficiency determined that

petitioner did not establish that the claimed Schedule C expenses

were paid or were ordinary and necessary to the extent they

exceeded $5,337.   In his pretrial memorandum respondent’s counsel

argued, in addition to the issues in the statutory notice, that

petitioner was not in a trade or business either because he had

no profit objective, or alternatively, because he was just

starting up but had not yet commenced his business.

Trade or Business Expenses

     Section 162 generally allows a deduction for ordinary and

necessary expenses paid or incurred during the taxable year in
                               - 6 -

carrying on a trade or business.   Generally, no deduction is

allowed for personal, living, or family expenses.   See sec. 262.

The taxpayer must show that any claimed business expenses were

incurred primarily for business rather than personal reasons.

See Rule 142(a); Walliser v. Commissioner, 72 T.C. 433, 437

(1979).   To show that the expense was not for personal reasons,

the taxpayer must show that the expense was incurred primarily to

benefit his business, and there must have been a proximate

relationship between the claimed expense and the business.    See

Walliser v. Commissioner, supra at 437.

     Petitioner has, potentially, two trades or businesses.     He

is employed as a professor of mathematics,3 and he is engaged in

research and writing on mathematical issues.   He “wears two hats”

but the “hats” are so similar in appearance that it is difficult

to tell the difference between them.   Because of this

circumstance, it is particularly important that petitioner

distinguish his research and writing activity from his activity

as college professor as well as from his personal activities.

     If a particular expense is related to his employment, it

might be deductible as an employee business expense on Schedule

A, Itemized Deductions.   Petitioner would have to show, however,

that the expense was not subject to reimbursement from his


     3
      An employee’s performance of services is a trade or
business. E.g., Primuth v. Commissioner, 54 T.C. 374, 377
(1970).
                                 - 7 -

employer, CUNY.    An expense is not deductible as ordinary and

necessary to the extent that it was subject to reimbursement by

the employer.     Podems v. Commissioner, 24 T.C. 21, 22-23 (1955).

     For an expense to be deductible as a trade or business

expense on Schedule C petitioner must show that the expense is

not a personal expense and that the expense is that of a trade or

business other than that of his services as an employee.

     Petitioner spent a substantial sum for the purchase of books

related primarily to abstract algebra.    He included $1,859 as the

cost of the books on Schedule C in “supplies”, but he offered no

evidence at trial, other than his own testimony, that the book

purchases were related to a trade or business other than his

employment.

Expenses Under Section 274

     Certain business expense deductions described in section 274

are subject to strict rules of substantiation.     See sec. 1.274-

5T(c), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6,

1985).   Section 274(d) provides that no deduction shall be

allowed with respect to:    (a) Any traveling expense, including

meals and lodging away from home; (b) any item related to an

activity of a type considered to be entertainment, amusement, or

recreation; or (c) the use of any “listed property”, as defined
                               - 8 -

in section 280F(d)(4),4 unless the taxpayer substantiates certain

elements.

     For an expense described in one of the above categories, the

taxpayer must substantiate by adequate records or sufficient

evidence to corroborate the taxpayer’s own testimony:   (1) The

amount of the expenditure or use; (2) the time and place of the

expenditure or use; (3) the business purpose of the expenditure

or use; and in the case of entertainment, (4) the business

relationship to the taxpayer of each expenditure or use.    See

sec. 274(d).

     To meet the adequate records requirements of section 274(d)

a taxpayer must maintain some form of records and documentary

evidence that in combination are sufficient to establish each

element of an expenditure or use.   See sec. 1.274-5T(c)(2),

Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).    A

contemporaneous log is not required, but corroborative evidence

to support a taxpayer’s reconstruction of the elements of

expenditure or use must have “a high degree of probative value to

elevate such statement” to the level of credibility of a

contemporaneous record.   Sec. 1.274-5T(c)(1), Temporary Income

Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).




     4
      “Listed property” includes any computer or peripheral
equipment. Sec. 280F(d)(4)(A)(iv).
                                 - 9 -

     Included in petitioner’s deduction for supplies was $2,108

for a Sony Vaio notebook computer.       Petitioner offered no

substantiation for the purchase of the computer, and the expense

fails to meet the requirements of section 274(d).       See sec.

1.274-5T(d)(3), Temporary Income Tax Regs., 50 Fed. Reg. 46026

(Nov. 6, 1985).

     Petitioner’s traveling expense deductions, including meals

and lodging away from home, are subject to section 274(d) and the

regulations thereunder.     Petitioner presented receipts and travel

documents that meet the adequate records requirements to

substantiate the amount of his claimed travel expenditures and

the time and place of the expenditures.       Where he has failed is

at providing adequate records of the business purpose of the

expenditures.   Petitioner testified that he did not keep formal

records because he did not think he would “need them” (for IRS).

     Petitioner testified that his business was a joint venture

with Professors Ushakov and Myasnikov and that there was a simple

partnership agreement to share profits.       Petitioner explained

that his business operations include promotion and advertising

and that the expenses at issue are related to promoting and

advertising his product.5    Petitioner stated that he was promoting



     5
      This testimony seems to conflict with his previous
testimony that he did not contact the commercialization office at
CUNY before 2007 because he was not previously involved in
“business operations”.
                               - 10 -

and advertising his products at various meetings.    Petitioner

testified that his associates, who helped him create the software

programs, also traveled abroad to conferences.    According to

petitioner, some of these meetings were conferences in

cryptography that were attended not only by academic researchers

but also by potential buyers “from the industry”.

     Petitioner explained that during presentations at the

conferences, he described the benefits and features of his

product and invited contacts from interested parties.

     According to petitioner, there was feedback from his

meetings:   potential buyers made comments, asked questions and

suggested improvements.    He had to think about the feedback and

contact his partners to come up with improvements.    The meetings

were “quite useful” because they gave him a feeling of what a

particular industry wanted from a product like his.

     Petitioner’s testimony is reasonable; however, he has failed

to provide the Court with any adequate records or sufficient

evidence to corroborate his own testimony.    There is documentary

evidence of only one trip to a “conference” on cryptography in

2006, in Busan, Korea.    At that conference petitioner listed

himself as an affiliate of CUNY.    Petitioner testified that he

met with “potential customers” in China, Russia, and Germany.      He

failed, however, to provide any documentary evidence to

substantiate his own testimony on the business purpose of any of
                              - 11 -

the trips to Nashville, Tennessee, Ithaca, New York, Beijing,

China, Moscow, Russia,6 and Cologne and Bonn, Germany.

     Petitioner has failed to show that he is entitled to

Schedule C deductions in excess of those respondent allowed.

Because petitioner has failed to adequately substantiate his

deductions, the Court need not address the profit objective,

trade or business, and startup issues respondent raised in his

pretrial memorandum.

     To reflect the foregoing,


                                        Decision will be entered

                                   for respondent.




     6
      Were petitioner to have met the requirements of sec.
274(d), with respect to the trips to Moscow, he would be required
to show that portion of each trip that was spent on business as
opposed to personal activities. See sec. 274(c).
