                         T.C. Memo. 2010-272



                       UNITED STATES TAX COURT



  DEAN F. AND JOCELYNE S. PACE, Petitioners v. COMMISSIONER OF
                  INTERNAL REVENUE, Respondent



     Docket No. 13446-07.               Filed December 13, 2010.



     Dean F. Pace, pro se.

     Carolyn Schenck and Alan Cooper, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION



     HOLMES, Judge:    Dean Pace is a successful plaintiff’s

attorney who in 2001 recovered over $1 million in legal

settlements.   But he didn’t file his 2001 return until 2003.   The

IRS audited him, Pace submitted an amended return, and then the

Commissioner issued a notice of deficiency based on the original
                                  -2-

2001 return.1    The case is almost entirely about whether Pace

substantiated a very large number of personal and business

expenses.     The parties argue about many of those deductions, the

use of Pace’s amended return, and the additions to tax and

penalty that the Commissioner has determined.

                              Background

         The Sovereign Military Hospitaller Order of St. John of

Jerusalem, of Rhodes, and of Malta was established in the mid-

eleventh century, when merchants from Amalfi founded the

Benedictine Abbey of St. Mary of the Latins in Jerusalem.     By

1080 the abbey built St. John’s hospital--located on the

traditional site of the angel’s announcement of John the

Baptist’s conception–-which provided a place of refuge for poor

and sick pilgrims visiting the Holy Land.     Under the leadership

of Brother Gerard, the Hospital of St. John grew to include

several ancillary hospices in Palestine along the pilgrimage

route.     Pope Paschal II officially recognized the hospital in

1113, establishing the Order of St. John.

         As the twelfth century wore on, the Hospitallers of St.

John expanded their medical mission to preventive care by

providing armed escort to pilgrims traveling the hostile route to

Jerusalem.     Crusading knights who stayed in Jerusalem began to



     1
       Jocelyne Pace is a party only because she and her husband
filed a joint return. All references to Pace refer to Dean Pace.
                                 -3-

join the Order, and by 1148–-the time of the Second Crusade--the

Hospitallers of St. John were recognized as an essential part of

the Holy Land’s defense.   Specialization crept in and the Order

became divided into knights and nurses, but the Order stayed true

to its original calling by rebuilding the original hospital.

John of Würzburg, a German pilgrim, described the place in 1160:

     Over against the Church of the Holy Sepulchre * * * on
     the opposite side (of the way), towards the south, is a
     beautiful church built in honour of John the Baptist,
     annexed to which is a hospital, wherein in various
     rooms is collected together an enormous multitude of
     sick people, both men and women, who are tended and
     restored to health daily at a very great expense. When
     I was there I learned that the whole number of these
     sick people amounted to two thousand, of whom sometimes
     in the course of one day and night more than fifty are
     carried out dead, while many other fresh ones keep
     continually arriving.

John of Würzburg, Description of the Holy Land, in 5 Palestine

Pilgrims’ Text Society:    Publications 44 (Aubrey Stewart trans.,

London 1896).

     The next several centuries did not go as well.   The Order

was forced out of Palestine by 1291, when Muslim forces took its

last stronghold in Acre.   The knights took refuge in Cyprus, and

then established a sovereign territory in Rhodes in 1309.   They

were under constant pressure, and were besieged by the Ottoman

Navy in 1480.   About 600 knights and 1,500 to 2,000 soldiers

repelled it, but the Turks returned with a large army in July

1522.   By December the knights’ position had become desperate;

supplies were running low and there was little hope of
                                  -4-

reinforcements.    L’Isle Adam–-the Grand Master of the Knights of

Rhodes–-surrendered and withdrew with his brethren on January 1,

1523.

     By 1530 the Order had settled in Malta.    Charles V of Spain

gave the island to the knights in perpetual fiefdom in exchange

for an annual tribute of one Maltese falcon.    The original goal

was to retake Rhodes, but when this didn’t work out the Order

stayed in Malta for 268 years and became known as the Knights of

Malta.   They continued their naval mission of patrolling the

Mediterranean to check Ottoman power.    And perhaps the most

famous moment in the Order’s history happened in 1565 when an

Ottoman force again laid siege against them.    Their successful

resistance was of enormous moral importance to Europe and was

celebrated throughout the West.    Even more than two hundred years

later Voltaire would state:    “Rien n’est plus connu que le siege

de Malte” (nothing is better known than the siege of Malta).

European monarchs showed their support for the Order by sending

funds to rebuild.    The knights built another great hospital,

churches, and even a university on their island.

     The Order, however, could not withstand Napoleon, who took

Malta in 1798.    Disarmed, disisled, and dispersed, the knights

entered what looked to be a long decline.    They needed a new

mission and, in 1834, they took their current name of the

Sovereign Military Hospitaller Order of Saint John of Jerusalem,
                                -5-

of Rhodes, and of Malta which is, however, in neither Jerusalem,

nor Rhodes, nor Malta, but in Rome.   They returned to hospital

service and greatly expanded their humanitarian work during the

first and second World Wars.   As the end of the second millennium

neared the Order had become a major global organization with a

medical-aid, emergency-relief, and humanitarian mission.    One

commentator described their modern rise:

     The age of software, economists and pocket calculators
     has been caught napping; that of chivalry has crept up
     behind it and taken it unawares. A hundred years ago
     the Order of Malta appeared a mere honorific memory of
     the crusades * * * Today the Order exchanges
     ambassadors with nearly sixty governments; it has more
     than ten thousand knights in thirty-nine national
     associations throughout the world; its decorations have
     been proudly accepted by republican heads of state from
     Africa to the United States; and above all it conducts
     an international Hospitaller activity with few equals
     in size, modernity and efficiency.

Sire, The Knights of Malta, at xi (Yale University Press 1994).

                         FINDINGS OF FACT

     Pace is an heir to this ancient legacy.   He is also one man

in three parts.   As Dean Pace, Esq., he has practiced law for

over 50 years and become an unusually successful attorney

specializing in qui tam litigation2–-as he himself testified:     “I

don’t think anyone is equal to me in qui tam actions.”



     2
       Qui tam actions are brought under the False Claims Act, 31
U.S.C. secs. 3729-3733 (2006), which entitles individuals with
knowledge of fraud against the U.S. Government to sue on its
behalf. Whistleblowers are rewarded with 15 to 30 percent of the
recovery; the lawyers take home generous contingency fees.
                                  -6-

Whistleblowers are rewarded handsomely in qui tam litigation, and

Pace takes home about half of the reward via contingency fees.

But the flow of income is uneven--sowing seeds in years of famine

for reaping in years of plenty.    Pace feasted in 2001--he

recovered over $2 million in legal settlements and took home over

$1 million in contingency fees.

     As Mr. Dean Pace, Pace is also a bon vivant.    He frequents

the Bel Air Country Club, drives a Jaguar, visits France

regularly, and enjoys $10,000 bottles of wine and bespoke shirts.

He has numerous friendships, here and in Europe, that he has

sustained over the decades--people with whom he shares an

interest in fine wine and dining, plus many professional contacts

and former clients.

     And, finally, there is Sir Dean Pace, a man of faith and a

Knight in Obedience in the Sovereign Military Hospitaller Order

of St. John of Jerusalem, of Rhodes, and of Malta.    As a Knight

in Obedience, Pace is required to participate in an annual

pilgrimage to Lourdes3 and contribute time, talent, and treasure

to the Order.   He contributes to the Order’s U.S. affiliate,

which the IRS recognizes as a charitable organization.    Pace’s

confusion of business, personal, and charitable expenses is what

prompted the IRS to issue a notice of deficiency.    The Court


     3
       Lourdes is a small town in southwestern France that hosts
a major pilgrimage with 5 million annual visitors. Volunteers
from the Order tend to the pilgrims who are poor and sick.
                                    -7-

conducted an audit by trial in Los Angeles, where the Paces

resided when they filed their petition.


                                  OPINION

I.     Preliminaries

       We begin by reviewing some of the basics of substantiation.

The most important rule is that taxpayers have to keep records.

Section 60014 and its accompanying regulations tell taxpayers to

hold onto records that would enable the IRS to verify their

income and expenses.       See sec. 1.6001-1(a), Income Tax Regs.

Unsophisticated taxpayers unfamiliar with the substantiation

requirements often get extra leeway in their good-faith attempts

to comply.       See, e.g., Larson v. Commissioner, T.C. Memo. 2008-

187.       But sophisticated attorneys like Pace should know better.

       As a general rule, we presume the Commissioner’s

determination in the notice of deficiency is correct.       See also

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

Because the taxpayer is usually in a better position to show what

he earned and what he spent, it is he who generally has the

burden of proof.       At least for tax years after 1998, the burden

can shift to the Commissioner, but only if a taxpayer produces

credible evidence meeting the requirements of section 7491(a).


       4
       Unless otherwise noted, all section references are to the
Internal Revenue Code as amended and in effect for 2001, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
                                  -8-

But with few exceptions, it does him no good to argue that the

Commissioner wasn’t working with good information--the

notice of deficiency puts issues in play for trial; we generally

do not look behind it.     Dellacroce v. Commissioner, 83

T.C. 269, 280 (1984).

     Pace objects to the Commissioner’s decision to base the

notice of deficiency upon his original, rather than his amended,

return.   He is simply wrong--the Commissioner is not required to

treat an amended return as superseding an original return.

Fayeghi v. Commissioner, 211 F.3d 504, 507 (9th Cir. 2000), affg.

T.C. Memo. 1998-297.     And it is within the Commissioner’s

discretion to determine the deficiency using the original return.

Colvin v. Commissioner, T.C. Memo. 2004-67 (citing Koch v.

Alexander, 561 F.2d 1115, 1117 (4th Cir. 1977)), affd. 122 Fed.

Appx. 788 (5th Cir. 2005).

     Pace also attempts to prove his deductions with his

appointment book and with various schedules of expenses that he

prepared specially for trial.    We treat these as argument--not

evidence--and use them only to guide us to the appropriate

canceled check or credit-card statement.    We rely on those checks

and statements, as well as Pace’s testimony (to the extent we

find it credible), to decide what deductions he has adequately

substantiated.
                                     -9-

II.   Schedule C Deductions

      Pace deducted a wide range of business and nonbusiness

expenses on his Schedule C.        We divide them into categories and

look at each in turn.

      A.    Section 274 Expenses

      Certain deductions have enhanced substantiation requirements

under sections 274 and 280F.       These categories include travel,

meals and entertainment, and certain forms of “listed property.”

The term “listed property” in section 274 includes any passenger

automobile.      Sec. 280F(d)(4)(A).   To deduct any expenses related

to such property, a taxpayer must “[substantiate] by adequate

records or by sufficient evidence” the amount, time and place,

and business purpose of the expenditure.            Sec. 274(d).

            1.     Car Expenses5

 Claimed          RA’s       NOD       P claimed      P claimed    R argued
on return        report    adjust.      at trial       in brief    at trial
  $8,639         $1,725    ($6,914)        $8,270      $4,992      $1,725



      5
       One of the more bedeviling aspects of this case was the
parties’ constant bombardment of the Court with concessions,
partial stipulations both oral and written, and testimony that
seemed to contradict the concessions and stipulations. (In
fairness to the Commissioner, we do note that most of this
rhetorical shelling came from Pace’s camp.) The Commissioner’s
counsel helpfully summarized the various amounts still seemingly
at issue in posttrial briefing, and we summarize at the beginning
of each section the conflicting numbers from Pace’s original
return, the revenue agent’s report, the notice of deficiency,
what Pace claimed before (and sometimes during) trial, what he
claimed in his posttrial brief, and what the Commissioner allowed
at trial.
                               -10-

     Pace offered his appointment book, spreadsheets, and credit-

card statements in an attempt to substantiate his car expenses.

While Pace showed that he spent freely on his Jaguar, he failed

to demonstrate his business use of the vehicle.    His appointment

book does not record the number of miles driven and rarely, if

ever, describes the business purpose for a particular entry.

Many entries--illegible or containing a single word--fail to

describe the purpose of the expense.   The credit-card statements

prove that Pace spent money on gasoline and car washes, but there

is nothing to indicate that these expenses had a business

purpose.   The car-insurance expense was not allocated between

Pace’s Jaguar and his wife’s personal-use Honda.   He depreciated

his car using a novel method,6 but the Code does not allow such

creativity.

     The Commissioner could have disallowed the car expenses in

their entirety--the strict substantiation requirements of section

274(d) do not allow this Court to approximate expenses.     Sanford

v. Commissioner, 50 T.C. 823, 827-28 (1968), affd. 412 F.2d 201

(2d Cir. 1969); see also sec. 1.274-5T(a), Temporary Income Tax

Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).   But in a spasm of

bureaucratic generosity, the Commissioner allowed $1,725 in


     6
       Pace multiplied the cost of the car by the number of
months he owned the car in 2001 over its useful life, multiplied
by the percentage of business use of the car. He didn’t
calculate the “correct” amount of depreciation even using his own
method.
                                   -11-

expenses based on mileage.       This mileage allowance encompasses

all of the “actual” car expenses claimed, including insurance,

gasoline, depreciation, etc., and we limit Pace’s allowable car-

expense deduction to this amount.

            2.    Meals and Entertainment

 Claimed          RA’s        NOD      P claimed   P claimed    R argued
on return        report     adjust.     at trial    in brief    at trial
  $9,227           0        ($9,227)    $17,057     $18,854            0

      Pace often dined at fine restaurants and his country club in

2001.   But he did not meet section 274’s substantiation

requirements for meals and entertainment expenses.           He also

failed even to identify in his posttrial brief which expenses

comprise the amount listed for meals and entertainment expenses.

And he showed no business purpose.         As with car expenses, section

274 does not allow us to approximate.         Sanford, 50 T.C. at 827-

28.   And, unlike with the car expenses, the Commissioner didn’t

give anything away.       We agree with the Commissioner.

            3.    Travel

 Claimed          RA’s        NOD      P claimed   P claimed    R argued
on return        report     adjust.     at trial    in brief    at trial
  $6,418           0        ($6,418)      $8,959    $5,494             0

      Pace traveled extensively in 2001, spending thousands of

dollars on airfare, hotels, and incidentals.        But he has failed

to adequately substantiate such expenses under section 274.                He

provided credit-card statements and his appointment book as
                                  -12-

evidence, but the appointment book didn’t include the purpose of

the travel.    A substantial portion of the travel expenses also

appears to be related to nonbusiness travel--including a

pilgrimage to Lourdes that he undertook as a Knight of Malta and

wine-tasting events in Paris.      We therefore uphold the

Commissioner’s denial of all travel expenses.

     B.     Employee-Benefit Expenses

 Claimed        RA’s       NOD       P claimed    P claimed    R allowed
on return      report    adjust.      at trial     in brief     at trial
 $46,723       $1,347   ($45,376)     $29,174      $29,174      $29,174

     Pace conceded the disallowance of $45,376 in employee-

benefit expenses, but argued at trial that $27,827 in federal and

state employment-tax expenses--which the revenue agent allowed in

his report--should be recategorized as employee-benefit expenses.

Because it does not affect the amount of the deficiency, the

Commissioner went along with the recategorization.          The $29,174

employee-benefit deduction allowed by the Commissioner at trial

consists of the $1,347 in employee benefits allowed at audit,

plus the $27,827 transferred from employment taxes.          Pace

conceded this calculation in his reply brief.

     C.     Office Expenses

 Claimed        RA’s       NOD       P claimed    P claimed    R argued
on return      report    adjust.      at trial     in brief    at trial
  $2,763       $2,763         0          $9,687    $7,815       $2,763
                                -13-

     The Commissioner allowed Pace’s $2,763 office-expense

deduction in full.    But Pace wants more, claiming at trial that

he should be entitled to $9,687 in office expenses.    On brief,

however, he claims only $7,815.7   We therefore conclude that Pace

abandoned his $9,687 office expense argument.   See Nicklaus v.

Commissioner, 117 T.C. 117, 120 n.4 (2001); Rybak v.

Commissioner, 91 T.C. 524, 566 n.19 (1988); Cerone v.

Commissioner, 87 T.C. 1, 2 n.1 (1986); Rockwell Intl. Corp. v.

Commissioner, 77 T.C. 780, 837 (1981), affd. 694 F.2d 60 (3d Cir.

1982).   Even if he had not abandoned his arguments for a $9,687

deduction, we would reject it on the record before us.

     Pace attempts to substantiate $1,711 in office expenses with

a list of expenses containing check numbers, dates, and

descriptions.   He did not, however, introduce into evidence the

underlying canceled checks, and the only testimony supporting the

deduction was conclusory statements by Pace and his secretary

that the office expenses were “incurred in the ordinary course of

business.”    Therefore, we disallow in full these office expenses.

     Evaluating the remaining $6,698 in contested office expenses

led to some engaging reading--nearly 150 pages of credit-card

statements.   Pace provided annotated statements to back up these



     7
       In his brief, Pace broke down his office expenses by
payment method: credit card, $6,698; check, $1,117. The $1,117
varies from the $1,711 claimed at trial because of a
transposition error in the brief.
                                   -14-

deductions.8      But the majority of these expenses aren’t business

related.    Here are the “office expenses” lacking a valid business

purpose:

                  Expense                         Amount
Prescription drugs                                $4,769
Clothing                                             896
Annual credit-card fees                              600
Religious books                                      508
BCH Catholic U                                        40
  TOTAL                                            6,813

             1.     Prescription Drugs

     Pace explained why he deducted his prescription drugs as an

office expense--“if Dean Francis Pace is not healthy to conduct a

practice, [the firm] doesn’t exist.”      But personal expenses

aren’t deductible as business expenses.      Trebilcock v.

Commissioner, 64 T.C. 852 (1975), affd. 557 F.2d 1226 (6th Cir.

1977).     Section 1.262-1, Income Tax Regs., states that “no

deduction shall be allowed, except as otherwise expressly

provided * * *, for personal, living, and family expenses.”       The

regulation goes on to list examples of personal expenses.

Medical expenses–-under which prescription drugs clearly fall--

are included as a personal expense, with a cross-reference to the



     8
       Pace’s substantiation for the $6,698 in office expenses
actually shows a total of $7,643. The source of this disparity
is unclear from the record.
                                 -15-

express provision of their deductibility under section 213

(medical expenses) alone.     Sec. 1.262-1(c)(6), Income Tax Regs.

Therefore, Pace can’t deduct his prescription drugs as a section

162 business expense.

            2.    Clothing

     Pace deducted custom-made shirts and a tie as office

expenses.    He explained that he found it difficult to buy some of

his clothes off the rack because of his unusual physique.    Our

own observation makes us suspect that Pace was being modest, but

no inspection could affect our necessary conclusion:    expenses in

this category are not deductible because Pace failed to establish

that the clothing was not suitable for everyday wear.    See, e.g.,

Hamilton v. Commissioner, T.C. Memo. 1979-186; Rev. Rul. 70-474,

1970-2 C.B. 35.    And he wore one of his bespoke shirts to trial–-

showing without any doubt its suitability for everyday use.


            3.    Annual Credit-Card Fees

     Pace maintained ten credit cards during 2001.    None of the

cards were issued in the name of the law firm, and Pace used all

the cards for both personal and business expenses.    The

percentage of business use as compared to personal use is

unclear.    He can’t deduct the annual fees because he failed to

establish the business use of the credit cards.
                                    -16-

            4.    Religious Books

     As a Knight in Obedience, Pace is required to read certain

books chosen by the Order.    He improperly deducted the cost of

these books as a business expense–-such spiritual reading is

personal.

            5.    BCH Catholic U

     Pace included a $40 payment to “BCH Catholic U” as an office

expense.    We’re not sure what BCH Catholic U is--it shows up on

one of his credit-card statements and Pace didn’t explain it.

Thus, Pace didn’t establish the deductibility of this payment.

            6.   Other Deductions

     Unlike the bulk of the office expense deductions, the

following deductions seem to have a valid business purpose:

            Vendor                         Amount
Sports Illustrated                          $30
Daily Journal                                75
Best Buy                                     86
Circuit City                                497
Amex appointment book                        56
  Total                                     744

     Pace credibly testified that Sports Illustrated and the

Daily Journal--a legal newspaper--were used in his office.       He

also testified that the Best Buy and Circuit City expenses were

for office computer equipment.       And the Amex appointment book

seems reasonable as well.     But he failed to establish that these
                                        -17-

expenses were not already included in the $2,763 he deducted on

his 2001 return.      He didn’t produce the documents used to prepare

his 2001 return, so there is no way to verify what items were

previously allowed.         We therefore disallow these deductions.

       D.   Charitable Contributions

       The key issue regarding Pace’s charitable contributions is

whether they should be transferred from Schedule C (where he

claimed them) to Schedule A.9           An individual’s Schedule C

deductions–-unlike Schedule A deductions–-have the advantage of

being neither limited to a percentage of a taxpayer’s

contribution base nor phased out at a high income.           During the

return-to-audit-to-trial-to-briefing voyage, Pace’s claims of the

amount and characterization of his charitable contributions

bobbed up and down.         We divide them into two categories:

contributions that are related to the Order and those that are

not.

            1.    Non-Order Contributions

  Claimed          RA’s         NOD       P claimed   P claimed   R argued
 on return        report      adjust.      at trial    in brief   at trial
 $133,196           0        -$133,196     $67,700     $67,700    $69,650
  Sch. C          Sch. C       Sch. C       Sch. C      Sch. A    Sch. A
                 $132,154    +$131,754
                  Sch. A       Sch. A




       9
       Pace originally included all but $400 of the claimed
charitable contributions on Schedule C.
                                    -18-

     On his Schedule C, Pace deducted $133,196 as “charitable

contributions.”        The Commissioner disallowed the entire amount on

audit, but found that $69,650 of the contributions were legit and

moved them to Schedule A as charitable contributions.             In

preparation for trial, Pace created a detailed schedule showing

$67,700 in non-Order contributions, but kept insisting that they

should be included as a business expense.            Then, in postrial

briefing, Pace conceded that these non-Order contributions should

also be moved to Schedule A.

     We find Pace’s documentation and testimony regarding the

$67,700 in non-Order charitable deductions credible, albeit

properly reported only on his Schedule A.            But Pace claimed

$1,950 less than the IRS allowed, and we treat that reduction as

a concession.

            2.    Order-Related Contributions

 Claimed          RA’s         NOD       P claimed    P claimed   R argued
on return        report      adjust.      at trial     in brief   at trial
 $12,369           0        ($12,369)     $64,359      $64,359     $62,504
 Sch. C                       Sch. C       Sch. C       Sch. C      Sch. A

     Pace started out with a $12,369 Schedule C deduction for

“bar and business development.”          The vast majority of expenses in

this category, however, turned out to be contributions to the

Knights or related activities.          During audit, Pace provided

additional documentation of these contributions, and the

Commissioner eventually allowed $62,504 on Schedule A.             Pace
                               -19-

changed his mind again preparing for trial, claiming $64,359 in

Order-related contributions, but continued to defend against the

Commissioner’s siege on his Order-contributions-should-remain-on-

Schedule-C argument.

     We find Pace’s evidence--both records and testimony--of the

amounts of these contributions credible, and his grand tour

through the Order’s medieval and early modern history engaging.

But his argument for treating them as business expenses, rather

than charitable contributions, is another matter.    Payments that

qualify as charitable contributions are not deductible as

ordinary and necessary business expenses under section 162 if

they fail to qualify as legitimate business expenses.    Hartless

Linen Serv. Co. v. Commissioner, 32 T.C. 1026, 1030-31 (1959);

Gage v. Commissioner, T.C. Memo. 2002-72; sec. 1.162-15(a),

Income Tax Regs.   Charitable contributions must be made for

detached and disinterested motives.    Commissioner v. Duberstein,

363 U.S. 278, 285 (1960); Sklar v. Commissioner, 549 F.3d 1252,

1259 (9th Cir. 2008), affg. 125 T.C. 281 (2005).    A payment is

generally not deductible when a taxpayer receives a benefit in

exchange.   Sklar, 549 F.3d at 1259.

     Pace explained why he contributes to the Knights:    “we even

take an oath that we will devote our time, talent, and treasure

to [the Order], and that’s a religious order promise or oath.”

As honorable as Pace’s intentions are, the time, talent, and
                                     -20-

treasure he devoted to the Knights were given with a religious,

rather than business, purpose in mind.        Since these expenses

qualify as charitable-contribution deductions, they are not

deductible as ordinary and necessary business expenses.

     Pace doesn’t get the tax benefit of moving his contributions

to Schedule C, but does get to deduct $132,059 in total

charitable contributions--Order and non-Order donations--on his

Schedule A ($95 less than the amount the IRS allowed on audit).

     E.     Litigation Expenses

     Pace’s law practice focuses on contingency-fee litigation,

but also takes some cases on a noncontingency basis.           He claims

deductions for litigation expenses10 from both types of cases.

            1.    Contingency-Fee Litigation Expenses

 Claimed          RA’s       NOD       P claimed   P claimed    R argued
on return        report    adjust.      at trial    in brief    at trial
 $131,986          0      ($131,986)    $146,077   $146,077      $2,028

     Pace wants to deduct $146,077 in litigation expenses for

2001.     But he paid most of the expenses from 1997-2000, which

usually would mean--since he is a cash-basis taxpayer--that he


     10
       Litigation expenses are out-of-pocket expenses that are
necessary to bring a case to its conclusion. Attorney’s fees–-
what a lawyer is paid for his time–-are distinct from litigation
expenses. Common litigation expenses include copying costs,
expert witness consultations, costs of hiring investigators,
deposition costs, long-distance phone charges, travel to
depositions out of state, and shipping fees. Advancing
litigation expenses in qui tam and other contingency-fee
litigation is common. See 1 Attorneys’ Fees, sec. 2:13 (3d ed.
2010).
                               -21-

can’t win on this point.   But there’s an exception in some cases

to the deduct-in-the-year-paid rule for contingency-fee-

litigation expenses.   And at least some of Pace’s litigation

expenses were incurred in contingency cases--a qui tam case

against Fluor Corporation that settled in 2001 and three Fluor

Corporation retaliation cases that settled in 2000.11   We

consider the following:

     •    Are the Fluor litigation expenses deductible in the
          year of settlement?

     •    What expenses did Pace actually pay?

     •    How should the expenses be allocated between the qui
          tam and retaliation cases?

               a.   Deductibility of Litigation Expenses in the
                    Year of Settlement

     Pace relies primarily on Canelo v. Commissioner, 53 T.C. 217

(1969), affd. 447 F.2d 484 (9th Cir. 1971), as authority for his

deducting contingency-litigation expenses in the year of

settlement.   See also Boccardo v. Commissioner, 56 F.3d 1016 (9th

Cir. 1995), revg. T.C. Memo. 1993-224; Hearn v. Commissioner, 309

F.2d 431 (9th Cir. 1962) (holding that taxpayer could not take

uncollected litigation expenses in year at issue), affg. 36 T.C.

672 (1961); Burnett v. Commissioner, 42 T.C. 9 (1964), affd. in



     11
       Pace’s records collectively refer to these four cases as
the Hoefer case. Patrick Hoefer was the relator–-the individual
suing on behalf of the government–-in the Fluor Corporation qui
tam litigation, and Hoefer also brought the retaliation cases
against Fluor Corporation.
                                    -22-

part and remanded on other issue, 356 F.2d 755 (5th Cir. 1966).

But it isn’t quite that simple.       In Canelo, the taxpayers were

personal-injury attorneys who customarily advanced litigation

expenses to clients under contingency-fee contracts, recovering

the expenses from clients only upon successful resolution of a

case.     Id. at 218.   They deducted the advanced expenses in the

years they were paid as section 162 business expenses, and

reported them as income if they were reimbursed when a case paid

off.     Id. at 219.    We held that the advances were analogous to a

loan, because the lawyers made them with the reasonable

expectation of reimbursement.        Id. at 224.   This prompted us to

hold that the advances were not deductible as business expenses

in the year paid–-the lawyers had to wait until resolution of the

case because the “unconditional obligation to pay a fixed sum

does not arise until the case is closed” in contingency

litigation.     Id. at 225-26.     If a contingency case closed without

any recovery, then the advanced expenses would be deductible in

that year as a bad-debt deduction.         Id. at 226.   And if there was

a successful recovery, the resulting offset of the advanced

expenses would not be income, but would be treated as repayment

of the loan principal.       Id.

        Pace deducted the litigation expenses at issue here on his

2001 return–-the year of settlement for the substantive qui tam

case.     This is certainly wrong--even if Pace is right in his
                                 -23-

argument that Canelo controls, he should have excluded the

reimbursed advanced expenses from income, rather than deducted

them.    But we can easily recharacterize the deduction as an

exclusion because both yield the same tax result.      The deeper

problem is that Pace may have been reimbursed differently from

the taxpayers in Canelo.     In Canelo, we characterized the

expenses advanced as a loan to the client for costs that he would

otherwise have had to pay himself.      The False Claims Act, in

contrast, requires a losing qui tam defendant to pay his

adversary’s litigation expenses.     See 31 U.S.C. sec. 3730(h)

(2006).     But we think this amounts to little more than saying

that the potential recovery in a false-claim case might include a

different category of damages from a personal-injury case.

        The real distinction in the caselaw isn’t between different

types of cases, but between different terms in the lawyers’ con-

tracts with their clients.     In Canelo, the contract provided for

the lawyer to collect a percentage of the recovery won by the

client net of expenses.    If the client collected on a judgment or

settled, the advanced costs were to be repaid out of the

proceeds. That created a conditional obligation of the client to

pay for the expenses.    In contrast, when a personal-injury

lawyer’s contract provides for him to collect a percentage of the

gross recovery but he has to pay the expenses himself, he gets to

deduct those expenses as he incurs them, see, e.g., Boccardo v.
                               -24-

Commissioner, 56 F.3d at 1019, but has to include the full amount

of the fee in the year he receives it.

     Pace’s situation is much more like Canelo’s.   His contract

with Hoefer stated that

     Pace will advance expenses and costs, which will be
     deducted from any gross recovery before calculation of
     the fifty percent (50%) contingent fee. In the event
     there is no recovery, Client will have no obligation to
     Pace for any expenses or costs expended by Pace.

     Whatever the default rule on who bears expenses in false-

claims cases might be, this contract makes them just like the

expenses of the personal-injury litigation analyzed in Canelo.

And so we’ll treat them the same--Pace can treat them as an

exclusion from his income in the year of settlement.

     To exclude the entire reimbursement from income, however,

Pace must prove that he actually advanced the expenses and that

he actually incurred them in prosecuting the case that settled in

2001.   If the expenses are allocated to cases that settled in

other years–-such as the retaliation claims–-he can’t exclude

them from his 2001 income.   The exclusion for such fees would

benefit him in a tax year not at issue.

                b.   Amount of Expenses

     The parties disagree about the total expenses that Pace

actually advanced.   Pace argued for $146,077 at trial, but the

Commissioner found support for only $127,842.
                                -25-

     Why the $18,235 difference?   The Commissioner is of the

opinion that Pace is double-dipping--counting many of his

expenses twice.   He claims that Pace provided duplicates of

several cancelled checks to substantiate the advanced expenses.

After examining the evidence, we find that both the Commissioner

and Pace were partly right.   Some of the checks were included

more than once, but Pace didn’t ever refer to the same check more

than once for his claimed expenses.    Instead, Pace claimed some

expenses without any substantiation.   Here’s what he failed to

substantiate:

   Date                  Description                 Amount
6/5/98      Complaint Hoefer Hanford action         $256.20
12/28/98    Racklin depo Arlin R. Tueller &          117.50
              order
7/30/99     Janney & Janney certified copy            45.00
11/9/99     Racklin depo of Sarah M. Bruck           740.50
              on 2/1/99
9/15/99     Janney Filing OCSC state                 112.50
              complaint
9/16/99     Service summons & complaint on            78.00
              Fluor Daniel Inc.
11/10/99    Notice of appeal Hoefer                  105.00
11/12/99    Sally Marshall CSR Hoefer                 75.00
              transcript of hearing on 11/8/99
8/11/00     Sanctions by USDC                     16,031.86
11/14/01    Trial Rider Investigations Ltd.,       1,995.00
              former DCIS Special Agent
              Armstrong
9/29/01     Catholic University School of Law      1,000.00
              Board of Visitors
                                -26-

8/28/01     Ryan Brown                             500.00
6/8/98      Messenger service USDC                  35.75
6/8/98      Messenger service MTO                   19.80
6/17/98     Messenger service MTO                   19.80
12/15/98    Messenger service to Janney for         13.20
              service of process
1/25/00     ADS final bill re Hoefer                32.13
6/22/00     Messenger service USDC                  41.60
7/14/00     Messenger service Munger Tolls           1.75
1/4/01      Messenger service Ausa Plessman         22.00
9/27/00     FedEx Bart Williams at Munger on        16.06
              6/28/08
9/27/00     FedEx Knox Atty Svs                     39.26
9/27/00     FedEx Louis Goldsman CPA                10.61
11/1/00     USDC SA                                 10.61
4/1/99      Summitt Reproduction                    32.73
10/23/00    Summitt Reproduction                    55.01
No date     In-house reproduction of Hoefer      3,580.26
provided      Qui Tam
No date     Facsimiles Hoefer Qui Tam            1,243.00
provided
  TOTAL                                         26,230.13


Therefore, Pace has established that he incurred $119,847

($146,077 - $26,230) in litigation expenses for the Hoefer qui

tam and retaliation cases.

               c.     Allocation of Expenses

     Our next step is to figure out how to allocate the $119,847

in litigation expenses between the qui tam and the retaliation
                                 -27-

cases.   Pace would prefer to allocate the entire amount to the

qui tam case, because “if there is no violation of the False

Claims Act, then there cannot be any retaliation.”    He

essentially argues that the retaliation and qui tam claims are a

single cause of action, because the two cannot be meaningfully

separated and are dependent on each other.    We decide whether the

retaliation claim is a separate cause of action by considering:

     •     The language of the False Claims Act,

     •     interpretative caselaw, and

     •     Pace’s settlement and retainer agreements.

Then we’ll address the proper allocation of expenses.

                      i.    Language of the False Claims Act

     The False Claims Act, 31 U.S.C. secs. 3729-3733 (2006),

authorizes both substantive qui tam and retaliation claims.     This

seems to suggest that retaliation and qui tam claims are part of

the same cause of action.    But a closer look at the statute

suggests otherwise.   Authority for qui tam actions is outlined in

31 U.S.C. section 3730(b)(1), while the requirements to bring a

retaliation claim are laid out in 31 U.S.C. section 3730(h):

     Any employee who is discharged, demoted, suspended,
     threatened, harassed, or in any other manner
     discriminated against * * * because of lawful acts
     * * * in furtherance of an action under this section,
     including investigation for, initiation of, testimony
     for, or assistance in an action filed or to be filed
     under this section, shall be entitled to [relief].
     * * *

31 U.S.C. sec. 3730(h) (2006).    On its face, the statute does not

require violation of the False Claims Act for a valid retaliation
                                 -28-

claim.    The employee need only take steps “in furtherance of an

action.”   The plain language suggests that a retaliation claim

may be pursued even before an underlying qui tam claim is filed–-

“an action filed or to be filed.”       (Emphasis added.)   If one can

pursue a retaliation claim for investigating a possible violation

of the False Claims act that hasn’t even been filed yet, surely

it isn’t necessary to prove a qui tam action to prove, or even

commence, a retaliation claim.

     Paragraph (h) also states that “an employee may bring an

action” in retaliation cases, while paragraph (b)(1) requires

that “the action shall be brought in the name of the Government”

for qui tam claims.   Paragraph (b)(2) also requires that

complaints for such claims be served on the Government.       The fact

that the Government is not named as a plaintiff in the

retaliation case suggests that it is a separate cause of action

from the brought-on-behalf-of-the-Government qui tam case.

                      ii.   Interpretive Caselaw

     A leading treatise on the False Claims Act cites a

substantial body of caselaw12 for the proposition that, to


     12
       See Wilkins v. St. Louis Hous. Auth., 314 F.3d 927, 931-
32 (8th Cir. 2002) (distinguishing requirements of retaliation
claims from those of qui tam claims); Abner v. Jewish Hosp.
Health Care Servs., Inc., 2008 WL 3853361, at *8 (S.D. Ind. Aug.
13, 2008) (entry on defendant’s motions for judgment on the
pleadings) (noting that 31 U.S.C. section 3730(h) does not
require plaintiff to prove fraud on the merits); U.S. ex rel.
Barrett v. Columbia/HCA Healthcare Corp., 251 F. Supp. 2d 28
                                                   (continued...)
                                -29-

prevail in a retaliation claim, “a plaintiff is not required to

show that the defendant actually committed a False Claims Act

violation.”13   Sylvia, The False Claims Act: Fraud Against the

Government, pt. II, sec. 5.15 (West 2010).     This, too, supports

treating retaliation and qui tam claims separately.

                     iii. Retainer and Settlement Agreements

     Pace entered into a single retainer agreement with his

client for the Fluor litigation that included both the

retaliation and qui tam claims.   It provided that Pace will

represent the client for “Qui Tam action(s) against Fluor

Corporation * * * pursuant to the False Claims Act * * * and

related constructive termination action(s).”    At least in terms

of internal recordkeeping at his firm, Pace doesn’t seem to have

distinguished the two types of claims.   On the other hand, Pace


     12
      (...continued)
(D.D.C. 2003) (allowing a retaliation claim to proceed even
though initial False Claims Act allegations were not viable);
Elliott v. Lake Cnty. Cmty. Action Project, 2000 WL 949476 (N.D.
Ill. July 6, 2000) (observing that few would report fraud if they
could be fired if their suspicions failed to pan out); United
States ex rel. Yesudian v. Howard Univ. 153 F.3d 731, 739-40
(D.C. Cir. 1998) (“the protected conduct element * * * does not
require the plaintiff to have developed a winning qui tam action
before he is retaliated against”); Luckey v. Baxter Healthcare
Corp., 2 F. Supp. 2d 1034, 1050 (N.D. Ill. 1998) (stating that a
31 U.S.C. sec. 3730(h) claim may “proceed even if neither
governmental action is taken nor any qui tam action is
contemplated, threatened, filed, or ultimately successful” (fn.
ref. omitted)), affd. 183 F.3d 730 (7th Cir. 1999).
     13
       Thus even if an employee reports an action that does not
violate the False Claims Act, the employee may still seek
protection from resulting retaliatory acts.
                                -30-

did in fact settle the retaliation claims separately from the qui

tam claim--the retaliation claims in August 2000, and the qui tam

claim in May 2001.   It’s hard to see how the retaliation could be

dependent upon the qui tam claim when it settled nine months

before.   Despite the fact that the retainer agreement groups the

retaliation and qui tam claims together, their separate

settlement strongly suggests that they are separate causes of

action.

                     iv.   Allocation of Expenses

     The plain language of the False Claims Act, interpretive

caselaw, and terms of the settlement agreements convince us that

the retaliation claims are separate from the qui tam claim.     This

means that we have to allocate the expenses between them, because

the retaliation case was settled in 2000 and expenses allocated

to that case cannot be excluded from Pace’s 2001 income.

     Pace points to the retaliation claims’ settlement agreement

as an allocation-of-expenses guide.    The agreement provides for a

$440,000 settlement of the three retaliation claims and expenses

of $60,869.   After deducting expenses, Hoefer would get half of

the remaining $379,131.    The other half of the net recovery would

be split between Pace and Phillip Benson, another attorney who

worked on the matter.   That Benson was involved in the

retaliation case, but not the qui tam case, makes using the

settlement agreement as a guide to allocate expenses more
                                -31-

reasonable, because Benson would have an incentive to allocate to

the retaliation case as much of the recovery and as few of the

expenses as possible–-since that is where he would get his

share--while Pace’s incentive would be to allocate as few of the

expenses as possible to the qui tam case.

     The Commissioner urges us instead to look at the carbon-copy

portion of Pace’s cancelled checks.    Most of these note the

docket numbers of the retaliation cases, instead of the qui tam

docket number.   By matching up the checks with their respective

carbon-copy-docket numbers, the Commissioner concludes that

$122,592 in expenses should be allocated to the retaliation

cases.    Pace counters that the retaliation docket numbers were an

internal accounting quirk.   He claims to have used the

retaliation docket numbers because the qui tam case had not

settled yet and there weren’t any proceeds to tie to the

expenses.   We find the retaliation-settlement agreement to be a

more reliable guide to allocating expenses than Pace’s haphazard

internal accounting.

     We therefore find that $60,869 in expenses is allocable to

the retaliation cases while the remaining $58,978 of the

substantiated expenses goes to the qui tam case.    Of the

$150,00014 Pace indirectly received for expenses, $58,978 is


     14
       As part of the 2001 settlement, Fluor agreed to reimburse
$300,000 of Hoefer’s attorney’s fees. Pace then waived the
                                                   (continued...)
                                 -32-

offset from income as reimbursed expenses.      The remaining $91,022

is taxable.

            2.   Noncontingency Fee Litigation Expenses

 Claimed          RA’s      NOD     P claimed   P claimed     R argued
on return        report   adjust.    at trial    in brief     at trial
     0             0         0      $115,190     $25,443            0

     Pace concedes $89,190 of noncontingency litigation expenses

on brief.    But there appears to be a math error--his brief

contains an itemized list of each conceded expense that actually

adds up to $95,042 in concessions.15    Therefore, it seems that

all but $20,148 in noncontingency expenses has been conceded

($115,190 - $95,042).     But it isn’t entirely clear how some of

the conceded expenses correspond to the original list of $115,190

in expenses–-most match up, but some do not.      Below are the

expenses that were not clearly conceded:


   Date                   Description                       Amount
2/13/01     Chaine Baillage Du Golden West dues        $475.00
2/27/01     Stephanie Reavesdail reimbursement              12.95
              IPPO/SG
3/5/01      Louise Sanford CSR transcript IPPO/SG           11.80




     14
      (...continued)
original term for expense recovery--100 percent to Pace--and
instead received 50 percent, or $150,000.
     15
       Another math error occurred when Pace claimed $25,443 on
brief--$89,190 subtracted from $115,190 equals $26,000, not
$25,443. This difference does not affect our analysis.
                                 -33-

           ABTL annual dues to Assoc. of                75.00
5/16/01      Business Trial Lawyers
7/12/01    Moller International                     10,000.00
7/13/01    Experian--Credit Reports                     21.00
7/17/01    Bernhard Kreten, Esq.                    10,000.00
8/2/01     Secretary of state counter fee               15.00
9/10/01    Trans Union credit report                     8.50
11/9/01    L.A. County Bar Assoc.                      170.00
12/10/01   Merrill Corp. re Shroff, QT3                110.99
  TOTAL                                             20,900.24

We’ll give Pace the benefit of the doubt and find that $20,900.24

is being claimed, instead of the $20,148 in his brief.

     But claiming an expense is quite different from proving it.

Pace didn’t provide any backup documentation for these expenses

beyond a self-prepared log.   Without any cancelled checks, bank

statements, or other substantiating evidence there is no way to

verify whether Pace actually paid these expenses.    And it isn’t

clear whether all the expenses are business-related.    For

example, he claims $475 in dues for Chaine Baillage Du Golden

West–-a food-and-wine society.     There is insufficient information

in the record to verify that this was a legitimate business

expense.   And then there’s $10,000 to Moller International.    The

record contains no information about Moller International or how

it could be an expense of litigation.     In sum, we deny the entire

deduction for failure to substantiate.
                                   -34-

III. Schedule A Deductions

     Pace does not live by Schedule C deductions alone, so we

next turn to Schedule A.

     A.     Bad Debt

 Claimed        RA’s         NOD      P claimed   P claimed    R argued
on return      report      adjust.     at trial    in brief    at trial
   N/A          N/A          N/A       $50,000     $50,000         0

     Pace didn’t claim a bad-debt deduction on his return.          At

trial he changed his mind and claimed a $50,000 loss for unpaid

attorney’s fees.      As evidence of the bad debt, he provided a

$50,000 check from a former client that had never cleared (the

former client had fired Pace and stopped payment on the check).

But Pace never reported the $50,000 check as income.          He can’t

claim a loss for unpaid fees if they were never included in gross

income.    See sec. 1.166-1(e), Income Tax Regs.     The litigation

expenses and fees Pace incurred for the former client were also

reimbursed by the replacement counsel, which means he didn’t have

any bad debt to deduct.

     B.     State and Local Taxes

 Claimed        RA’s         NOD      P claimed   P claimed    R argued
on return      report      adjust.     at trial    in brief    at trial
 $34,989         0        ($34,989)    $34,989     $34,989         0

     Section 164(a)(3) provides for the deduction of state and

local income taxes paid during the taxable year.       Pace is a cash-
                                 -35-

basis taxpayer.16    Therefore, he may deduct only state and local

income taxes actually paid in 2001.     He has failed to establish

that the California state taxes he deducted on his 2001 return

were paid in 2001.    His 2001 California return shows a $34,989

tax liability--precisely the amount of state and local taxes

deducted on his 2001 federal return.    But Pace couldn’t possibly

have paid his 2001 California state taxes during 2001, because

the California return wasn’t executed until 2003 (and he showed

us no evidence of withholding, estimated payments, or designated

use of the prior year’s refund to the California Franchise Tax

Board).    He hasn’t offered any other evidence to establish that

state and local taxes were paid in 2001.    We therefore uphold the

disallowance of this deduction in full.

IV.   Penalty and Addition to Tax

      A.    Section 6651(a)(1) Failure to File

      The Code imposes an addition to tax if a taxpayer fails to

file on time, unless he can show that his failure was due to

reasonable cause and not willful neglect.    Sec. 6651(a)(1).   Pace

concedes he filed late and offers no evidence that the failure to

file was due to reasonable cause and not willful neglect.    We

therefore find that the failure-to-file addition applies.



      16
       There was a minor dispute between the parties over Pace’s
method of accounting and whether he made an unauthorized change
of method. We find that he was and still is a cash-basis
taxpayer.
                                -36-

     B.   Section 6662 Accuracy-Related Penalty

     Section 6662 imposes an “accuracy-related penalty” of 20

percent of the portion of the underpayment of tax attributable to

any substantial understatement of income tax.    By definition, an

understatement of income tax is substantial if it exceeds the

greater of $5,000 or “10 percent of the tax required to be shown

on the return.”   Sec. 6662(d)(1)(A).   Pace’s return reported a

total tax due of $152,755; the notice of deficiency determined a

liability of $305,730.

     We agreed with the Commissioner on most–-but not all–-of the

disallowed deductions,17 so the “tax required to be shown on the

return” is somewhat less than $305,730.    Since we won’t know the

precise amount of tax required to be shown on the return until

completion of Rule 155 computations, we’ll give Pace the benefit

of the doubt and set the required-understatement-threshold amount

at $30,573.18   Even without plugging the changes into the black


     17
       The notice of deficiency included a $361,000 adjustment
to income. After concessions and trial, there’s still a $302,022
adjustment–-Pace proved only that he’s entitled to an extra
$58,978 deduction for contingency-litigation expenses while the
remainder of the Commissioner’s determination was substantially
correct.
     18
       This is equal to 10 percent of the notice of deficiency’s
determination of tax due. In reality, the penalty-triggering
amount for the understatement is lower, because we allowed some
deductions that the Commissioner did not–-resulting in a lower
tax due. (Though the movement of some deductions from Pace’s
Schedule C to Schedule A figures to lead to a bit of an increase
in tax due.) The actual 10-percent-penalty trigger would
                                                   (continued...)
                                -37-

box of Rule 155 computations, it’s clear there was an

understatement in excess of ten percent of the tax required to be

shown--we are upholding 84 percent of the Commissioner’s

adjustments to Pace’s income.     We therefore find that there was a

substantial understatement.19

     Pace offers a novel defense to the accuracy-related penalty

in his opening brief–-that it’s the IRS’s fault because it didn’t

settle.   Review of the caselaw fails to find any support for this

penalties-don’t-apply-when-the-IRS-won’t-settle argument.    And

Pace never argued any of the valid defenses to the penalty.    See

secs. 6662(d)(2)(B), 6664(c)(1).    We therefore find that he is

subject to this penalty.

     C.   Section 6673 Delay Penalty

     The Commissioner has moved to impose a penalty under section

6673(a)(1), which authorizes us to impose a penalty not in excess

of $25,000 whenever it appears that proceedings have been

instituted or maintained by the taxpayer primarily for delay or

that the taxpayer’s position in such proceedings is frivolous or

groundless.   Pace vigorously contested the Commissioner’s

determination, resulting in a weeklong trial, 760 pages of trial


     18
      (...continued)
therefore be less than $30,573.
     19
       The Commissioner also argued that Pace is subject to the
section 6662 penalty based on negligence. Our finding of a
substantial understatement means that we don’t need to address
this argument.
                              -38-

transcript, and thousands of pages of credit-card statements,

canceled checks, and other documents.   But Pace’s aggressive

advocacy doesn’t rise to the level of sanctionable behavior.     He

may be long winded–-as many lawyers and even some judges are–-but

delay and frivolous positions were not the crux of his case.20

     In the best of all possible worlds, perhaps, Pace’s pursuit

of the unified life would be recognized and rewarded.   See, e.g.,

Pope Paul VI, Pastoral Constitution on the Church in the Modern

World--Gaudium et Spes sec. 43 (December 7, 1965).   But the Code

imposes a more exact and less merciful accounting:   business

expenses, charitable contributions, and the costs of everyday

life must be identified, segregated, and substantiated by

reliable documents and credible testimony.


                                     Decision will be entered

                              under Rule 155.




     20
       Pace nevertheless remains on the list of those previously
cautioned against frivolity. See Pace v. Commissioner, T.C.
Memo. 2000-300.
