                              T.C. Memo. 2018-120



                        UNITED STATES TAX COURT



     DAMON R. BECNEL, Petitioner v. COMMISSIONER OF INTERNAL
                      REVENUE, Respondent



      Docket No. 14707-14.                         Filed August 2, 2018.



      James E. Long, Jr., and Robert C. Walthall, for petitioner.

      Horace Crump and Thomas Alan Friday, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      HOLMES, Judge: Damon Becnel is a property developer in Florida’s

Panhandle who bought a yacht--a yacht he claims to use to market his properties to

wealthy anglers. But he didn’t buy or operate his yacht in his own name; instead,

he claimed deductions under misleading categories--for example, “dues and
                                         -2-

[*2] subscriptions”--on the Schedule C, Profit or Loss From Business, for one of

his companies that rented beach chairs, towels, water toys, and the like. The

Commissioner says these yacht expenses were not ordinary and necessary and,

even if they were, Becnel can’t overcome the Code’s strict limitation on certain

kinds of business deductions.

                                FINDINGS OF FACT

I.    Becnel’s Background

      Becnel is a serial entrepreneur originally from Louisiana who moved east to

Destin, Florida, dubbed by its boosters the “World’s Luckiest Fishing Village.” It

is in that village that Becnel and his father launched a real-estate empire, and it is

where he has spent most of his career.

      It started with the Silver Shells Beach Resort, a 30-acre site on the Gulf of

Mexico that had 439 condominium units at the time of trial. To help make the

resort more profitable, Becnel formed a property-management company that’s now

named Visionary Destin, Inc., and a beach-amenities company named Sunrise

Beach Service, LLC (Sunrise). The building continued: Near the Silver Shells

Beach Resort, Becnel and his father built developments called the Silver Beach

Towers and the Palms of Destin; and they also built projects named Pine Ridge

Villas and One Beach Club Drive within a larger resort complex called the
                                                 -3-

[*3] Sandestin Golf & Beach Resort--a 2,400-acre resort that Becnel and his

family bought in 2010. By the time we tried the case, Becnel’s portfolio of

companies had grown still more:

                              Interest
          Name               (percent)                               Purpose

 Ramrod of NW Florida           100       Owns 11.79% of Sandestin Investments LLC¹ and 22.50% of
  LLC                                      Sandestin Holdings LLC²
 Sable LLC                         8.33   Owns 23.58% of Sandestin Investments LLC and 23.58% of
                                           Sandestin Holdings LLC
 Sandestin Real Estate           16       Onsite sales office for Sandestin Golf & Beach Resort
  of NW Florida LLC
 Becnel Family LLC               14       Owns 10.71% of Sandestin Investments LLC and 90% of
                                           DRB Development LLC
 DRB Development                 10       Owns around 100 rental units at the Palms of Destin
  LLC
 Abec Resorts II, LLC           100       Owns and operates bait shop at Sandestin Marina
 Silver Shells, LLC              11       Owns undeveloped land at Silver Beach Towers and Silver
                                           Shells Beach Resort
 The Becnel Company              25       Development company for three towers at Silver Shells
  LC                                       Beach Resort and Silver Beach Towers West
 Visionary Destin, Inc.          63.7     Property-management company for Silver Beach Towers,
                                           Silver Shells Beach Resort, and Palms of Destin
 Communications                  95.1     Provides telecommunication services to Silver Beach
  Processing Systems,                      Towers, Silver Shells Beach Resort, and Palms of Destin
  Inc.
 Sunrise Beach                  100       Beach-amenities company for Silver Beach Towers and
  Service, LLC                             Silver Shells Beach Resort

        ¹ Sandestin Investments LLC purchased the Sandestin Golf & Beach Resort. Becnel doesn’t own
any direct interest in Sandestin Investments LLC, but he holds an indirect interest through Ramrod of
NW Florida LLC, Sable LLC, and Becnel Family LLC.
        ² Sandestin Holdings LLC owns the undeveloped land at Sandestin Golf & Beach Resort. Becnel
also doesn’t own any direct interest in Sandestin Holdings LLC, but he holds an indirect interest through
Ramrod of NW Florida LLC and Sable LLC.
                                        -4-

[*4] Becnel credibly testified that “this is big stuff,” and we have no trouble

finding that he has an extensive portfolio of property-development and property-

management businesses which should in the normal course generate lots of

deductible expenses. But the Commissioner says there has to be a line drawn

somewhere, and he determined to draw one--if not in the sand, then just slightly

off the beach where Becnel kept a yacht.

II.   The Britney Jean

      In December 2005 Becnel paid just over $2 million for a Bertram fishing

yacht.1 We find the boat a beautiful specimen of its species: It’s 67 feet long with

four staterooms; a well-appointed salon, galley, and bar; a tuna tower; and a slew

of electronic gadgets and built-in fishing equipment. Becnel christened her the

Britney Jean and promptly put her to work.

      The Britney Jean is a fishing boat, and Becnel used her from day one almost

exclusively for that purpose. In 2006 she took part in ESPN 2’s Billfish Xtreme


      1
         The parties stipulated that Sunrise bought the yacht in its name, but we’ll
refer to it as Becnel’s boat because Sunrise is disregarded for federal income-tax
purposes. See secs. 301.7701-2(a), 301.7701-3(b)(1)(ii), Proced. & Admin. Regs.
This means that Becnel is taxed as a sole proprietor under the Code on any income
or loss of the entity reported on his return. See sec. 301.7701-2(a), Proced. &
Admin. Regs. (All section references are to the Internal Revenue Code in effect
for the years at issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure, unless we say otherwise.)
                                        -5-

[*5] Release League (BXRL)--a televised release-only fishing league at

destination resorts from Marathon, Florida, through the Caribbean. Becnel signed

an agreement with the BXRL that guaranteed a certain amount of air time, and the

first year was a success. But the BXRL went broke the next year, and Becnel

sought out local tournaments in the Gulf of Mexico.

      That’s where the Britney Jean got the most use in 2009-11, the years at

issue. Becnel used the Britney Jean in about four regional fishing tournaments a

year between 2009 and 2011, including the Bay Point Billfish Invitational, the

Sandestin/Emerald Coast Billfish Classic, and the Sandestin Celebration Fishing

Tournament. These tournaments draw many serious sport fishermen--there were

68 boats and 353 anglers at the 2009 Sandestin/Emerald Coast Billfish Classic, 20

boats and 109 anglers at the 2010 Sandestin Celebration Fishing Tournament, and

71 boats and 352 anglers at the 2011 Sandestin/Emerald Coast Billfish Classic.

But the Britney Jean got little use other than in fishing tournaments. She’s

sometimes anchored in front of the Sandestin Resort and sometimes putters along

in the Destin boat parade, but one can usually find the Britney Jean behind

Becnel’s house.

      The first problem here is that Becnel does not argue that he’s in the trade or

business of professional sport fishing. He argues instead that the Britney Jean is a
                                          -6-

[*6] marketing tool for his real-property businesses. As he testified, “the goal was

to meet and greet, to get to know people and do what’s called relationship

marketing * * * because the boat provides an in into a community of very wealthy

travelers who like fishing, who like the Gulf Coast, who are already there, to make

business decisions.” At these tournaments, he would get wealthy anglers on board

and schmooze with them. He also brought the concierge from his resorts on board

for the same reason,2 and always had sales packets touting his condominiums on

board to hand out. But the Britney Jean didn’t have any signs advertising these

resorts, and Becnel didn’t keep a log of its use or the visitors on board. Though he

admits it’s difficult to quantify, Becnel claims that his “relationship marketing”

strategy led to some sales and rentals.

       But what’s the cost of this strategy?

III.   Tax Reporting and Audit

       It’s no secret that boats are expensive, and the Britney Jean is no exception.

Her expenses, however, washed up on Sunrise’s Schedules C. Both we and the

Commissioner were curious about why a beach-amenities business--out of all of

Becnel’s businesses--might need a yacht. Becnel’s CPA didn’t quite answer the


       2
       Becnel’s concierge is a gifted angler who caught the winning fish at the
Sandestin/Emerald Coast Billfish Classic in 2009.
                                          -7-

[*7] question, and said only that “that was the actual entity that paid for these

expenses.” (We continue to find it curious, but this detail doesn’t actually affect

our findings.) These are the yacht-related deductions that Becnel claimed and the

Commissioner disallowed:

     Type of deduction            2009              2010                 2011

 Insurance                       $10,156          $22,936              $16,789
 Other expenses                  110,814            29,733               30,350
 Depreciation and
  section 179 expense             28,272            24,199               18,094
 Repairs and maintenance         245,239             7,766               47,926
 Supplies                           ---             42,277                ---
  Total                          394,481          126,911              113,159

      Most of these deductions were components of larger totals on Sunrise’s

Schedules C, and not all of them are necessarily expenses directly attributable to

the yacht. The “other expenses” Becnel claimed on his 2009 return included a

“charter boat expense” on a summary attached to Sunrise’s Schedule C.3 The

Commissioner disallowed this “other expense.” The Commissioner peeped in at

the same category on Becnel’s 2010 and 2011 returns and disallowed such



      3
        Note that Becnel stipulated that he didn’t use the Britney Jean as a charter
fishing boat.
                                        -8-

[*8] expenses again when he discovered that Becnel had tucked “other expenses”

in large part attributable to fishing-tournament fees into a larger category of “dues

& subscriptions.” The depreciation amounts that the Commissioner disallowed

were similarly buried among amounts for beach chairs, boxes, and umbrellas. The

point is that the roots of these deductions were not easy to find, and the

Commissioner had to dig them out during his audit.

      That audit was detailed. The revenue agent who conducted it learned there

were yacht-related deductions on the returns; these are often questionable, and she

pressed on. She issued information document requests (IDRs) to Becnel, and

these IDRs requested both big-picture items like books and records and also any

backup documents. Becnel’s CPA turned over the general ledgers, which is how

the agent was able to decipher which expenses on the returns were related to the

yacht. But the CPA didn’t provide any of the other substantiation that she

requested,4 and he failed to prove to the agent’s satisfaction even the adjusted

basis of the yacht. This made the agent think there was a problem under sections

      4
        We asked the agent if she “asked for the back-up to the general ledger
expenses as they relate to the yacht,” to which she replied: “Yes. And whenever
we come to an audit, the invoices and the general ledger are supposed to be
available for the auditor to review on site.” Becnel’s CPA testified that he didn’t
see any requests for receipts in the IDRs, but when asked on cross-examination if
the agent raised substantiation at in-person meetings, he replied: “I don’t recall
that.” We find the agent’s testimony the more credible of the two.
                                        -9-

[*9] 162 and 274, so the Commissioner drafted the notice of deficiency that

launched this case. It says more or less the same thing for each disallowed

expense:

       [Y]ou have not established that these amounts were incurred or, if
       incurred, paid by you during the taxable years for ordinary and
       necessary business purposes and that these amounts qualify as
       allowable deductions under the provisions of the Internal Revenue
       Code. Further, the expenses associated with Britney Jean Yacht
       reported on Schedule C1 - Sunrise Beach Services have been
       disallowed because you have not established that these amounts were
       incurred or, if incurred, paid by you during the taxable year for IRC
       section 212 expenses, or that these expenses were deductible under
       the provisions of the Internal Revenue Code.

Becnel disagreed with the Commissioner’s adjustments and timely filed a

petition.5

IV.    The Trial and Excluded Evidence

       The trial was short, but there was an evidentiary ruling that’s worth

discussing here because this case is, at least in part, about substantiation: The

notice of deficiency says that Becnel failed to establish that he “incurred” the

expenses. That presented a problem for Becnel at trial.

       We know Becnel didn’t provide substantiation during the audit, see supra

p. 8, and that failure continued as trial approached. We issued our standing

       5
       Becnel was a Florida resident when he filed his petition, which makes any
appeal bound for the Eleventh Circuit. See sec. 7482(b)(1)(A).
                                         - 10 -

[*10] pretrial order five months before trial--an order that told the parties they had

to exchange exhibits 14 days before trial or we might refuse (absent a showing of

good cause) to receive the documents into evidence (14-day rule). See Rule

131(b) (“Unexcused failure to comply with any * * * [standing pretrial] order may

subject a party or a party’s counsel to sanctions”). After having failed during audit

and pretrial preparation to provide backup documentation, Becnel tried for the first

time on the day of trial to introduce a stack of receipts to substantiate his yacht-

related expenses. This was substantiation that he had never shared with the

Commissioner; the Commissioner objected. He argued that Becnel had violated

the 14-day rule, and the receipts should be excluded from evidence.

      We enforce the 14-day rule unless a party can show good cause. See, e.g.,

Rodriguez v. Commissioner, T.C. Memo. 2017-173, at *6 (“absent good cause, we

do not hesitate to enforce the 14-day rule” (citing Kaplan v. Commissioner, T.C.

Memo. 2016-149, at *9-*10)). We cannot find good cause here. Becnel’s

counsel’s explanation was that it was difficult to get his hands on the records

earlier, and that before trial accountants had to go to a warehouse for the receipts.

He also argued that he was surprised that substantiation was at issue because

Becnel was never asked to provide backup documentation during the audit. But

we’ve already found that we believe the revenue agent asked for substantiation
                                         - 11 -

[*11] during the audit, see supra note 4, and the Commissioner fairly put

substantiation at issue in the notice of deficiency, see supra p. 9.6 Becnel

nevertheless waited until just before trial to look for substantiation, and that is not

good cause for violating the 14-day rule. We therefore excluded the evidence,7

and are left to decide the case with what is in the trial record.




      6
         Becnel argues on brief that substantiation can’t be at issue in this case
because the Commissioner stipulated before trial that it wasn’t. Here’s the
stipulation that Becnel is relying on: “A schedule of income and operating
expenses for the Britney Jean is attached as Exhibit 11-P.” This stipulation
doesn’t do what Becnel thinks it does. The Commissioner is stipulating only that
a schedule Becnel prepared is attached to the stipulation of facts, and that it may
be admitted into evidence. It is a summary of Becnel’s claimed deductions, not
substantiation. Stipulating this summary is not a concession that the schedule
satisfies Becnel’s substantiation obligations under the Code or that figures on the
schedule must be accepted as fact.
      7
         See, e.g., Kornhauser v. Commissioner, 632 F. App’x 421, 422 (9th Cir.
2016) (“Tax Court did not abuse its discretion in declining to admit into evidence
documents that * * * [petitioner] provided to the Commissioner on the day of trial,
in violation of * * * standing pretrial order”), aff’g T.C. Memo. 2013-230;
Kanofsky v. Commissioner, 271 F. App’x 146, 149 (3d Cir. 2008) (“Tax Court
acted within its discretion in excluding * * * untimely filed documents because
they were not produced in accordance with the court’s own procedural rule”), aff’g
T.C. Memo. 2006-79; Moretti v. Commissioner, 77 F.3d 637, 644 (2d Cir. 1996)
(“Tax Court acted within its discretion in excluding documents” under 14-day
rule); cf. Walker v. Anderson Elec. Connectors, 944 F.2d 841, 844 (11th Cir.
1991) (trial court’s “decision to follow * * * pre-trial order can be reversed on
appeal only where the * * * court has abused its discretion”).
                                        - 12 -

[*12]                                 OPINION

        The parties note and argue about the similarities between this case and

Henry v. Commissioner, 36 T.C. 879 (1961), a classic opinion that has sailed into

a lot of Tax I casebooks. Henry was a tax lawyer who flew a flag emblazoned

with “1040” on his yacht and claimed to use the vessel to meet well-to-do clients.

Id. at 880, 883. We held in Henry that the yacht expenses were not deductible

business expenses because they were not “ordinary and necessary.” Id. at 884-86.

The Commissioner says this case is just like Henry, and Becnel says it isn’t. Note,

though, that Henry is over a half-century old, and Congress has since enacted

section 274 to restrict the deductibility of such sometimes extravagant expenses.8

Our first question then is whether section 274’s limits apply here.

I.      Section 274 and Entertainment Expenses

        Section 274(a) says:

              (1) In general.--No deduction otherwise allowable under this
        chapter shall be allowed for any item--

                    (A) Activity.--With respect to an activity which is of a
              type generally considered to constitute entertainment,
              amusement, or recreation, unless the taxpayer establishes that

        8
        Section 274 underwent a substantial overhaul as part of the Tax Cuts and
Jobs Act, Pub. L. No. 115-97, sec. 13304, 131 Stat. at 2124-26 (2017)--for
example, all business entertainment expenses are now generally nondeductible
under the section. We apply section 274 as in effect for the years at issue.
                                         - 13 -

[*13]         the item was directly related to * * * the active conduct of the
              taxpayer’s trade or business, or

                   (B) Facility.--With respect to a facility used in
              connection with an activity referred to in subparagraph (A).

        Note the distinction between entertainment activities and entertainment

facilities. Expenses for entertainment activities might be deductible if they are

directly related to the active conduct of a taxpayer’s business, sec. 274(a)(1)(A),

but there’s no hope for the expenses “with respect to” entertainment facilities, sec.

274(a)(1)(B). Instead, there’s “a flat prohibition on deductions for * * *

[entertainment] facilities--that is, deductions for entertainment facilities are

prohibited without regard to whether the taxpayer can establish that the

expenditure was directly related to * * * the active conduct of his * * * business.”

Catalano v. Commissioner, T.C. Memo. 1998-447, 1998 WL 892263, at *2, aff’d,

240 F.3d 842 (9th Cir. 2001). What’s an entertainment activity and what’s an

entertainment facility are separate questions, and we can pilot our way through

them with the regulations.

        A.    Entertainment Activity

        Not far into the regulations, a key definition emerges: An entertainment

activity is “any activity which is of a type generally considered to constitute
                                       - 14 -

[*14] entertainment, amusement, or recreation, such as entertaining * * * on * * *

fishing * * * trips.” Sec. 1.274-2(b)(1)(I), Income Tax Regs. (emphasis added).

The expenses here relate to fishing tournaments; that’s basically all the Britney

Jean was used for. And those are quite clearly activities that are generally

considered entertainment. Becnel does argue that he wasn’t entertaining anybody

at these tournaments, and that the Britney Jean was just a marketing tool. Does

that nuance matter?

      It doesn’t seem to. Indeed, that argument appears to bottom out on the

regulation’s test:

      An objective test shall be used to determine whether an activity is of a
      type generally considered to constitute entertainment. Thus, if an
      activity is generally considered to be entertainment, it will constitute
      entertainment for purposes of * * * section 274(a) regardless of
      whether the expenditure can also be described otherwise * * * . This
      objective test precludes arguments such as that * * * an expenditure
      for entertainment should be characterized as an expenditure for
      advertising or public relations.

Sec. 1.274-2(b)(1)(ii), Income Tax Regs. This means that if an activity is

generally considered entertainment, it remains so under section 274(a) even if one

could find another way (e.g., marketing) to describe it. Fishing is generally

considered entertainment--the regulation says so.
                                       - 15 -

[*15] But Becnel insists that there’s more here. He points out that the regulation

also says we are supposed to take into consideration the petitioner’s business when

we apply the objective test. See sec. 1.274-2(b)(1)(ii), Income Tax Regs. For

example, “if a manufacturer of dresses conducts a fashion show to introduce his

products to a group of store buyers, the show would not be generally considered to

constitute entertainment.” Id. On the other hand, “if an appliance distributor

conducts a fashion show for the wives of his retailers, the fashion show would be

generally considered to constitute entertainment.” Id. Becnel argues that he’s

more like the dressmaker and cites in support Churchill Downs, Inc. v.

Commissioner, 307 F.3d 423 (6th Cir. 2002), aff’g 115 T.C. 279 (2000).

      In Churchill Downs, 307 F.3d at 424-25, the company behind the Kentucky

Derby deducted 100% of its expenses for promotional parties, brunches, and

dinners; the Commissioner disallowed 50% of the deductions as entertainment

expenses limited under section 274(n). Churchill Downs argued that the events

were not entertainment because they “generated publicity and media attention

which introduced its races to the public in the same manner that a dress designer’s

fashion show introduces its product to clothing buyers.” Id. at 426. The Sixth

Circuit held otherwise. It said the “regulation draws the line between pure

publicity and entertainment events integral to the conduct of the taxpayer’s
                                        - 16 -

[*16] business by providing” the contrasting fashion-show examples. Id. at 426-

27. The dressmaker’s fashion show “is attended by the taxpayer’s primary

customers, and the taxpayer’s product is present at the event and is the focus of it.”

Id. at 427. The fashion shows for the wives of appliance retailers were “social

event[s] focused on something unrelated to the taxpayer’s product, held to

generate good will among selected third parties with the expectation that they will

influence * * * primary customers into buying its product.” Id. The Sixth Circuit

held that Churchill Downs’ events were more like the latter--the events were held

away from the track and not open to the public, and they featured no horse racing

and no information about horse racing. Id. These events were “best characterized

not as a product introduction event used to conduct the taxpayer’s business, but as

pure advertising or public relations expenses.” Id.

      Becnel points out differences between his case and Churchill Downs: He

says that some of the fishing tournaments were hosted by one of Becnel’s resorts;

that Becnel did provide product information at the tournaments; and that the

tournaments were open to wealthy fishermen--Becnel’s target market. With all

these differences, Becnel argues, he’s more like the dressmaker in the regulation

and his yacht-related expenses are therefore not entertainment expenses.
                                       - 17 -

[*17] We agree that there are some differences between this case and Churchill

Downs, but we don’t think those differences are that important. Becnel might

have gained access to potential condominium buyers at the fishing tournaments,

and he did credibly testify about anglers he met who later bought units. But just

because an activity generates some business doesn’t mean it can’t be entertainment

under section 274(a). See, e.g., Harrigan Lumber Co. v. Commissioner, 88 T.C.

1562, 1563-64 (1987) (hunting with clients is entertainment even if those clients

generated over $5 million worth of business in two-year period), aff’d without

published opinion, 851 F.2d 362 (11th Cir. 1988). Becnel emphasized the third-

party referrals he received from people he met at the tournaments, but this is

analogous to the influence that wives of appliance retailers might exercise over

their husbands. See Churchill Downs, 307 F.3d at 427. And Becnel may have

kept sales packets for his condos on board the Britney Jean at tournaments, but

that doesn’t make condominium sales the focus of those events. See id. Becnel is

not a professional fisherman--he isn’t even in the boat business--so we find that

the fishing tournaments were merely entertainment activities for him and his

company. See, e.g., Buddy Schoellkopf Prods., Inc. v. Commissioner, 65 T.C.

640, 642, 659-60 (1975) (hunting and fishing was entertainment even for an
                                        - 18 -

[*18] outdoor-equipment manufacturer--he “was not a professional hunter or

fisherman”).

      B.       Entertainment Facility

      Becnel has another problem--the yacht itself is an “entertainment facility.”

The regulation defines an entertainment facility as “[a]ny item of personal or real

property owned, rented, or used by a taxpayer * * * during the taxable year for, or

in connection with, entertainment.” Sec. 1.274-2(e)(2)(I), Income Tax Regs.; see

also Ireland v. Commissioner, 89 T.C. 978, 981-82 (1987) (citing H.R. Conf. Rept.

No. 95-1800, at 249-50 (1978), 1978-3 C.B. (Vol. 1) 521, 583-84; S. Rept. No. 95-

1263, at 174-75 (1978), 1978-3 C.B. (Vol. 1) 315, 472-73). That definition

includes yachts that are used for entertainment. See Mediaworks, Inc. v.

Commissioner, T.C. Memo. 2004-177, 2004 WL 1682832, at *5 (citing cases, a

regulation, and legislative history). We’ve already found that the Britney Jean

was used for entertainment--the fishing tournaments--and we therefore find that

she was an entertainment facility.

      C.       Disallowed Deductions

      Because facility expenses aren’t deductible and activity expenses might be,

we would normally next ask which of the disputed deductions are expenses of an

entertainment activity and which are expenses of an entertainment facility. See,
                                        - 19 -

[*19] e.g., Dodd v. Commissioner, T.C. Memo. 1992-341, 63 T.C.M. (CCH) 3141,

3141-3 (1992) (noting that section 1.274-2(e)(3)(I) and (iii), Income Tax Regs.,

gives guidance on that); see also Harrigan Lumber Co., 88 T.C. at 1566-68. Even

if we made that determination here, however, it wouldn’t make any difference

because Becnel can’t motor his way through the other obstacles for entertainment

activities in section 274. Section 274(a)(1)(A) requires Becnel to prove that items

for entertainment activities were directly related to the active conduct of his

business, and section 274(d) imposes stricter-than-normal substantiation

requirements. Becnel runs aground on both: Other than his testimony, which is

not credible on this point, there’s no evidence of a proximate relationship between

the yacht-related expenses and the active conduct of any of his businesses--

especially the beach-amenities business. Cf., e.g., Harris v. Commissioner, T.C.

Memo. 1975-276, 34 T.C.M. (CCH) 1192, 1192-94 (1975) (relationship found

where the taxpayer kept a boat log of guests that could be tied to business referral

cards). He also introduced no substantiation for the expenses at issue other than

an expense summary.9 Cf., e.g., Rutz v. Commissioner, 66 T.C. 879, 880-81, 883

      9
        Even if we looked at the excluded evidence, most, if not all, of the
disallowed deductions were for items attributable to the yacht itself under section
1.274-2(e)(3)(i), Income Tax Regs.--including depreciation, operating costs, and
maintenance and preservation costs. Section 274(a)(1)(B) would disallow these as
                                                                       (continued...)
                                        - 20 -

[*20] (1976) (taxpayer didn’t satisfy section 274(d) even where he submitted into

evidence contemporaneous boat log, expense summary, and receipts). We

therefore sustain the Commissioner’s determination with respect to the yacht-

related deductions.

II.   Accuracy-Related Penalty

      The only remaining question is whether Becnel owes a 20% accuracy-

related penalty. The Commissioner argues that he does, because any tax

underpayment was caused by negligence or disregard of rules and regulations;

alternatively, the Commissioner argues Becnel substantially understated his

income tax due. The Commissioner correctly points out that Becnel failed to

substantiate the yacht-related deductions, and that negligence under section 6662

includes a failure to keep adequate records or to substantiate items that give rise to

an underpayment. See sec. 1.6662-3(b)(1), Income Tax Regs. And Becnel

himself didn’t cite any authorities as the basis for his reporting position other than

Churchill Downs, a case where deductions were disallowed. We would therefore

sustain the penalty.




      9
      (...continued)
expenses of an entertainment “facility”.
                                        - 21 -

[*21] But the Commissioner has a problem. The Code places the burden of

production for penalties on the Commissioner, sec. 7491(c), which also requires

the Commissioner to produce evidence that the “initial determination” of the

penalties was approved in writing by the examiner’s supervisor no later than the

date the notice of deficiency was issued in this case, see sec. 6751(b)(1); Graev v.

Commissioner, 149 T.C.       ,    (slip op. at 14 n.14) (Dec. 20, 2017) (citing Chai

v. Commissioner, 851 F.3d 190, 221 (2d Cir. 2017), aff’g in part, rev’g in part

T.C. Memo. 2015-42), supplementing and overruling in part 147 T.C. 460 (2016).

Becnel put the accuracy-related penalties at issue in his pleadings and contested

them on their merits in his briefs, but the Commissioner never once mentioned

section 6751 or any supervisory penalty approval before or at trial. See Wheeler

v. Commissioner, 127 T.C. 200, 208, 210, 212 (2006), aff’d, 521 F.3d 1289 (10th

Cir. 2008). The Commissioner thus did not meet his burden of production, and

Becnel is for this reason alone not liable for the accuracy-related penalty

determined against him for 2009, 2010, or 2011. See Ford v. Commissioner, T.C.

Memo. 2018-8, at *6.
                                 - 22 -

[*22] With no outright victor,


                                          Decision will be entered under

                                 Rule 155.
