                        T.C. Memo. 2006-87



                      UNITED STATES TAX COURT



                  JOEL RAPPAPORT, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10777-04.            Filed April 25, 2006.



     Martin A. Stoll, for petitioner.

     Willie Fortenberry, Jr., for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined a deficiency of

$47,650 in petitioner’s Federal income tax for 2001 and additions

to tax (1) for failure to file under section 6651(a)(1)1 in the



     1
        Section references are to the Internal Revenue Code as
amended. Rule references are to the Tax Court Rules of Practice
and Procedure.
                               - 2 -

amount of $5,096.25; (2) for failure to pay tax under section

6651(a)(2) in the amount of $1,812; and (3) for failure to pay

estimated tax under section 6654(a) in the amount of $786.40.

     Less than a month before trial, petitioner submitted an

income tax return for 2001 to respondent in which he reported

more income than respondent had determined and deducted expenses

that flowed through to his return from two S corporations.

Respondent asserted in an amendment to answer filed 5 days before

trial that petitioner’s deficiency for 2001 is $168,424 and that

he is liable for additions to tax of $42,106 under section

6651(a)(1) and $2,317 under section 6654(a).

     After concessions,2 the issues for decision are:

     1.   Whether petitioner may deduct a greater amount of

expenses flowing through to him from his S corporations than

respondent allowed.   We hold that he may not.

     2.   Whether petitioner is liable for the addition to tax

for failure to timely file his 2001 return under section

6651(a)(1).   We hold that he is.

                         FINDINGS OF FACT

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




     2
        Among other concessions, petitioner concedes he is liable
for the addition to tax for failure to pay estimated tax under
sec. 6654(a), and respondent concedes that petitioner is not
liable for the addition to tax under sec. 6651(a)(2).
                                 - 3 -

A.   Petitioner

     Petitioner lived in Florida when he filed the petition.

Petitioner graduated from New York University and received a

master’s degree from a second institution.     He is a certified

public accountant (C.P.A.), and practices in Florida and New

York.     He had specialized in taxation for about 40 years.      He

represented taxpayers before the Internal Revenue Service (IRS)

during 2001-04.

B.   Petitioner’s Businesses

     1.      Joel Rappaport & Co. and Rappaport, Steele & Co.

     Petitioner is the sole owner and president of Joel Rappaport

& Co., P.A. (JRC), a Florida corporation, and Rappaport, Steele &

Co., P.C. (RSC), a New York corporation.     JRC and RSC performed

tax, accounting, and return preparation services.

     Petitioner performed services for JRC in 2001-04.       He

received $160,000 per year in wages from JRC.     In April of each

year from 1996 to 2004, petitioner signed annual reports for JRC

and filed them with the secretary of state of Florida.       JRC

timely filed employment tax returns for 2002-04.     Petitioner

signed those returns.

     RSC provided tax and accounting services.     RSC was

profitable in 2001.     In 2001-04, John Glasner and Bob Steele

(Steele) were RSC employees who provided accounting services and

prepared tax returns for RSC clients.     Steele represented clients
                                 - 4 -

before the IRS during those years.       RSC timely filed employment

tax returns for 2001-04.     Petitioner signed all of those

employment tax returns.     RSC paid JRC $192,500 for services that

petitioner performed in 2001.

     2.      Consulting for Business, Inc.

     Petitioner’s wife and two children owned a business called

Consulting for Business, Inc. (CFB).3      CFB provides marketing

activities (e.g., direct mail services) to JRC and RSC.

Petitioner has been president of CFB since its inception around

1995.

C.   Petitioner’s Illness

     In June 2002, petitioner sought treatment at the Mayo Clinic

for pain in his left leg and his back.       The pain worsened in July

2002.     He had difficulty walking in August 2002.   Petitioner was

soon diagnosed with multiple myeloma, which he was told is an

incurable blood disorder.     He received radiation therapy 22 times

over a 45-day period beginning in September 2002.      Petitioner

changed medications several times because he had adverse

reactions.     From August 2002 to April 2004, the medication

affected petitioner’s personality and caused petitioner to have

difficulty sleeping, bending, walking, and traveling.




     3
        Apparently petitioner was not a shareholder of CFB. Exh.
18-P, General Ledger for Consultants for Business, Inc., refers
to petitioner’s wife, but not petitioner, as a CFB shareholder.
                                - 5 -

     From July through December 2002, petitioner reduced the

amount of his business travel and primarily worked from home.

Petitioner used video conferencing to reduce stress and the need

to travel.    He worked an average of about 15 hours per week from

September to November 2002, about 20 hours per week from November

2002 to August 2003, about 10 to 15 hours per week from August

2003 to March 2004, about 30 hours per week from March to

November 2004, and about 40 hours per week after November 2004.

Petitioner’s income was fairly stable throughout 2002-04.   As of

the date of trial, no one associated with JRC or RSC knew about

petitioner’s illness.

D.   Income Tax Returns

     1.   Petitioner’s Tax Return for 2000

     Stan Hester (Hester), a JRC employee, prepared petitioner’s

Form 1040, U.S. Individual Income Tax Return, for 2000.   JRC

employed Hester in 2001, 2002, and until October 2003.

     Petitioner signed his Federal income tax return for 2000 on

February 12, 2002, and untimely filed it on a date not stated in

the record.   Petitioner reported in that return that he had

received wages of $160,000 from JRC.

     2.   JRC’s and RSC’s Forms 1120S for 2001

     On January 3, 2003, petitioner filed Forms 1120S, U.S.

Income Tax Return for an S Corporation, for 2001 for JRC and RSC.
                                 - 6 -

     3.    Petitioner’s Tax Returns for 2001-04

     On a date not stated in the record, petitioner received an

extension to file his 2001 return on or before October 15, 2002.

Petitioner did not file income tax returns for tax years 2002-04.

E.   Notice of Deficiency for Petitioner’s Tax Year 2001 and the
     Pleadings in This Case

     Respondent determined a deficiency in petitioner’s income

tax for 2001 on the basis of information reported by third

parties.   Respondent mailed the notice of deficiency to

petitioner on March 22, 2004.    Petitioner had not filed an

individual income tax return for 2001 at that time.

     Petitioner filed a petition in which he contends that he is

entitled to deduct certain expenses.     Petitioner faxed a Form

1040 for 2001 to respondent’s Appeals Office less than a month

before the trial of this case.    He reported income of $317,525,

which included amounts not previously reported to respondent by

third-party payers.   The $317,525 consisted of:    $160,000 of

wages paid by JRC; $4,033 of interest; $4 of dividends; $25,613

of capital gains; and $127,875 from rent.

     On his Form 1040 for 2001, petitioner deducted the following

expenses that flowed through to him from JRC and RSC:
                                - 7 -

     JRC
            Rent                          $45,441
            Marketing                      41,335
            Professional fees              16,008
            Auto rental and expenses       20,893
               Total                      123,677

     RSC
            Rent                          $82,252
            New York apartment tax          3,121
            Lodging                         8,419
            Professional fees              18,037
            Transportation                 24,905
            Travel                         20,929
            Marketing                     141,707
            Management, staff, and        192,500
              administration
            Interest                       36,392
               Total                      528,262

     Respondent asked petitioner to substantiate the deductions

that flowed through from JRC and RSC to his delinquent Form 1040

for 2001.    Petitioner did not do so.

     Respondent filed an amendment to answer.   In it, respondent

asserts that petitioner’s 2001 deficiency and additions to tax

were larger than respondent had determined in the notice of

deficiency on the basis of the amount of income first reported to

respondent in the Form 1040 petitioner had faxed to respondent.

Respondent also asserted in the answer that, although requested

to do so by respondent, petitioner did not provide documents

substantiating any deductions for 2001.
                                 - 8 -

                                OPINION

A.     Whether Petitioner May Deduct Various Expenses That CFB Paid
       for Him in 2001

       Petitioner contends that he may deduct mortgage interest

under section 163(h)(3), real estate tax under section 164(a)(1),

and condominium fees under section 162(a) paid for him by CFB in

2001.    We disagree.   Petitioner may not deduct these items

because they were paid by CFB, not petitioner.     See Doggett v.

Commissioner, 275 F.2d 823, 827 (4th Cir. 1960), affg. T.C. Memo.

1958-176; Citizens Nat. Trust & Sav. Bank v. Welch, 119 F.2d 717,

719 (9th Cir. 1941); Kniffen v. Commissioner, 39 T.C. 553, 567

(1962); Budner v. Commissioner, T.C. Memo. 1984-542.       Petitioner

disagrees and contends he can deduct CFB’s payments because they

were loans to him, which, because of the obligation to repay the

loans, were constructively paid by him.     We disagree.

       Petitioner introduced in evidence some pages from CFB’s

general ledger for 2001 that show that CFB routinely paid

petitioner’s personal expenses.     The balance sheet on CFB’s Form

1120S for 2001 states that these payments were loans to

petitioner.    However, neither those pages nor any other evidence

show that petitioner is obligated to repay CFB.     Thus, petitioner

has not shown that CFB’s payments on his behalf were loans to

him.

       Petitioner contends that Budner v. Commissioner, supra, on

which respondent relies, is distinguishable on two grounds.
                               - 9 -

First, in Budner, we held that a taxpayer (partner) may not

deduct payments by a third party (a partnership) unless there is

an arrangement for charging the partner.      We found that there was

no such arrangement in Budner.    Petitioner contends that CFB’s

payment of his expenses was a loan to him, unlike the

circumstances in Budner.   We disagree because petitioner has not

shown that he was obligated to repay CFB.

     Second, in Budner, we found no evidence that the expenses

the partnership paid for the taxpayer had not been deducted at

the partnership level, and thus the expenses at issue could have

been improperly deducted twice.      Id.   Petitioner testified and

contends that CFB did not deduct the expenses it paid that are at

issue in this case.   We disagree.    Petitioner is an experienced

C.P.A. who should have known that he is required to keep and

produce records to substantiate his claims.      See sec. 6001.   He

did not offer CFB returns in evidence.      He did not corroborate

his testimony or explain how he knew that CFB did not deduct

those items.   Petitioner’s attempt to distinguish Budner is

without merit.

     We conclude that petitioner may not deduct mortgage

interest, real estate tax, and condominium fees that CFB paid in

2001.
                              - 10 -

B.   Whether Items Deducted on the Forms 1120S for 2001 for JRC
     and RSC Flow Through to Petitioner’s Individual Tax Return

     1.    Background

     JRC and RSC delinquently filed their Forms 1120S for 2001,

and petitioner delinquently submitted his Form 1040 for 2001.     In

his Form 1040, petitioner reported flow-through expenses from JRC

and RSC.   Respondent disregarded those expenses in the amended

answer because petitioner did not respond to respondent’s request

to substantiate them.   After trial, this Court gave petitioner 4

months to provide respondent with substantiation of the flow-

through items.   Petitioner failed to do so.

     2.    Burden of Proof

     Petitioner filed a motion to shift the burden of proof to

respondent 2 months after the deadline for providing the

additional substantiation.   Petitioner contends that respondent

bears the burden of proving the increased deficiency respondent

asserted in the amendment to answer.   Petitioner contends that

respondent bears the burden of proof under Rule 142(a)(1) because

the denial of deductions is a new matter which, if sustained,

would increase the deficiency.   We disagree.4

     Respondent did not allow petitioner any deductions for 2001

in the notice of deficiency, the answer, or the amendment to



     4
        Petitioner concedes he is taxable on the increased income
reported on his Form 1040 for 2001. Thus, the burden of proof
does not affect whether he is taxable on those amounts.
                               - 11 -

answer.   Petitioner claimed deductions in his Form 1040 for 2001,

which he submitted after respondent filed the amendment to

answer.   Thus, petitioner, not respondent, changed positions

belatedly.   Petitioner’s assertion that respondent bears the

burden of disproving his belatedly claimed deductions is

untenable; those deductions are not new matter under Rule 142(a).

See Comtek Expositions, Inc. v. Commissioner, 99 Fed. Appx. 343,

345-346 (2d Cir. 2004), affg. T.C. Memo. 2003-135; Widemon v.

Commissioner, T.C. Memo. 2004-162.

     Petitioner points out that the Commissioner asserted new

matter in Hurst v. Commissioner, 124 T.C. 16 (2005), and Shea v.

Commissioner, 112 T.C. 183 (1999).      Those cases are

distinguishable because the taxpayers in those cases did not file

returns after the notices of deficiency were issued.

     Petitioner contends that respondent knew or should have

known about the expenses of JRC and RSC which flowed through to

petitioner because respondent had the Forms 1120S and Schedules

K-1, Shareholder’s Share of Income, Credits, Deductions, Etc.,

for JRC and RSC more than 14 months before respondent issued the

notice of deficiency.    We disagree; respondent could not have

disallowed petitioner’s deduction of the flow-through items when

respondent issued the notice of deficiency because petitioner had

not yet deducted them.
                              - 12 -

     Petitioner also contends that the fact that respondent had

JRC and RSC Forms 1120S and Schedules K-1 for 2001 when

respondent issued the notice of deficiency causes the notice of

deficiency to be inadequate under section 7522(a).   Petitioner

gives no reason to support that contention.   We conclude that

petitioner’s reliance on section 7522(a) is misplaced.

     3.   Conclusion

     We conclude that petitioner bears the burden of proving he

is entitled to deductions he claimed on his late return, and that

he has not carried that burden.   Thus, he may not deduct expenses

that flowed through from JRC and RSC in 2001.

C.   Whether Petitioner Is Liable for the Addition to Tax for
     Failure To Timely File His 2001 Return

     1.   Burden of Production

     Section 7491(c) places on the Commissioner the burden of

producing evidence that a taxpayer is liable for an addition to

tax or penalty.   Respondent has met the burden of production

under section 7491(c) with respect to the addition to tax for

failure to timely file a return under section 6651(a)(1) by

showing that petitioner filed his 2001 return on March 2, 2005.

     2.   Whether Petitioner Had Reasonable Cause for Failure To
          Timely File His 2001 Return

     Once the Commissioner meets the burden of production, the

taxpayer must, in order to not be found liable for the addition

to tax, produce evidence that the Commissioner’s determination is
                                - 13 -

incorrect; e.g., that the failure was due to reasonable cause and

not willful neglect.     United States v. Boyle, 469 U.S. 241, 245

(1985); Higbee v. Commissioner, 116 T.C. 438, 446 (2001); H.

Conf. Rept. 105-599, at 241 (1998), 1998-3 C.B. 747, 995.

Reasonable cause may exist if the taxpayer exercised ordinary

business care and prudence but nevertheless could not file the

return when due.     United States v. Boyle, supra at 246; Bank of

the West v. Commissioner, 93 T.C. 462, 471 (1989).

     Petitioner contends that his illness was reasonable cause

for failure to timely file his 2001 return.    We disagree.   A

taxpayer’s disability may constitute reasonable cause for failure

to file returns.     United States v. Boyle, supra at 248 n.6.

However, a taxpayer does not have reasonable cause for failing to

file tax returns if he or she was performing normal business

operations.    See Paradiso v. Commissioner, T.C. Memo. 2005-187;

Kemmerer v. Commissioner, T.C. Memo. 1993-394; Bear v.

Commissioner, T.C. Memo. 1992-690, affd. 19 F.3d 26 (9th Cir.

1994); Bloch v. Commissioner, T.C. Memo. 1992-1.

     Petitioner operated JRC and RSC in 2002 and through the date

of trial.     He continued to work on a reduced schedule after his

illness was diagnosed.    He operated successful tax and accounting

practices in New York and Florida from 2002 through 2004.     He

also (1) represented clients before the IRS; (2) traveled between

his offices in Florida and New York; (3) signed all of JRC’s
                               - 14 -

timely filed employment tax returns for 2002-04; (4) signed and

filed annual reports with the State of Florida for his Florida

corporation; and (5) received wages from JRC of $160,000 per year

for his work in 2002, 2003, and 2004.

     Petitioner testified that he had not prepared his or any

taxpayers’ returns in more than 30 years and that he had others

at JRC and RSC prepare them.   Petitioner does not explain why

someone at JRC or RSC did not prepare his 2001 return.   Hester

prepared petitioner’s 2000 return and apparently was available to

prepare and timely file petitioner’s 2001 return.

     Petitioner contends that United States v. Isaac, 68 AFTR 2d

91-5094, 91-2 USTC par. 50,314 (E.D. Ky. 1991), affd. without

published opinion 968 F.2d 1216 (6th Cir. 1992), “is virtually on

‘all fours’ with Petitioner’s situation” and thus controls here.

We disagree.   In Issac, the District Court found that the

taxpayer could not function during the 3 years for which the

Commissioner contended he should have filed his income tax

returns.   Petitioner continued to function during the time at

issue here.    We conclude that petitioner lacked reasonable cause

for his failure to file a return for 2001.
                        - 15 -

To reflect concessions and the foregoing,


                                        An appropriate order

                                   will be issued, and

                                   decision will be entered

                                   under Rule 155.
