                        T.C. Memo. 2001-147



                      UNITED STATES TAX COURT



                  DANIEL R. BLODGETT, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1859-00.                        Filed June 21, 2001.


     Daniel R. Blodgett, pro se.

     Michael D. Zima, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:   By notice dated November 19, 1999, respondent

determined deficiencies, additions, and penalties relating to

petitioner’s Federal income taxes as follows:

                               Sec. 6651(a)(1)       Sec. 6662(a)
     Year       Deficiency        Addition             Penalty

     1994         $10,291          $2,573               $2,058
     1995         131,218           4,371               26,244
     1996          94,529             --                18,906
                                  - 2 -


Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for the years in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.    After concessions, the issues are whether petitioner

is:    (1) Entitled to certain sole proprietorship expense

deductions; (2) entitled to employee business expense deductions;

(3) liable for section 6651(a)(1) addition to tax; and (4) liable

for section 6662(a) accuracy-related penalties.

                            FINDINGS OF FACT

       When the petition was filed, petitioner resided in Orlando,

Florida.    During the years in issue, he was an investment broker

and was married to Norma Blodgett.

I.    Background

       In December 1991, petitioner agreed to operate a branch

office of Quantum Financial Services, Inc. (Quantum).       In the

middle of 1992, Quantum terminated the agreement.       In 1994,

petitioner made a claim against Quantum in an arbitration hearing

before the National Futures Association.       In the arbitration,

petitioner’s counsel was Thomas Kolter.

       After the termination by Quantum, petitioner operated a sole

proprietorship called Equator Capital Management (Equator).        From

mid-1994 through 1996, he was an employee of Daiwa Securities,

Inc. (Daiwa).      During the years in issue, petitioner paid and

documented business expenses.
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II.    Returns

       Petitioner hired certified public accountants and provided

them with the information to prepare his returns.     On October 15,

1995, petitioner’s 1994 return was due (i.e., after extensions).

On November 22, 1997, petitioner signed his 1994 return.     In a

letter dated July 15, 1998, respondent stated that he was

beginning to examine the 1994 return.

       On October 15, 1996, petitioner’s 1995 return was due (i.e.,

after extensions).     On November 22, 1996, respondent received the

1995 return.     Petitioner filed his 1996 return in a timely

manner.    In a letter dated February 11, 1999, respondent stated

that he was beginning to examine petitioner’s 1995 and 1996

returns.

                                OPINION

       Petitioner contends that he is entitled to all of the

deductions shown on his returns.     Respondent contends that

petitioner is entitled only to the deductions conceded by

respondent.

I.    Burden of Proof and Production

       Section 7491(a)(1), relating to examinations commenced after

July 22, 1998, provides that if, “in any court proceeding, a

taxpayer introduces credible evidence with respect to any factual

issue relevant to ascertaining the liability of the taxpayer for

any tax * * * the Secretary shall have the burden of proof with
                               - 4 -

respect to such issue.”   The burden, however, shall not be on the

Secretary unless, among certain other conditions, “the taxpayer

has complied with the requirements under this title to

substantiate any item”.   Sec. 7491(a)(2)(A).   Petitioner,

however, did not comply, as set forth below, with the

substantiation requirements relating to certain items.    See secs.

6001, 274(d); Higbee v. Commissioner, 116 T.C. ___ (2001); H.

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

that “taxpayers must meet applicable substantiation requirements,

whether generally imposed or imposed with respect to specific

items, such as * * * meals, entertainment, travel, and certain

other expenses” (fn. refs. omitted)).

      Accordingly, respondent, pursuant to section 7491(a), does

not have the burden of proof as set forth below.    Respondent

does, however, have the burden of production, pursuant to section

7491(c), relating to any 1995 or 1996 penalty or addition to tax.

II.   Sole Proprietorship Expense Deductions

      On his 1992, 1993, and 1994 returns (i.e., Schedule C,

Profit or Loss From Business), petitioner claimed expenses of

$164,666, $355,971, and $185,731, of which $32,123, $16,467, and

$13,070 were travel, meal, or entertainment expenses, relating to

Quantum and Equator.   Respondent contends that the record

substantiates $31,318, $211,184, and $97,321 of 1992, 1993, and

1994 expenses, respectively, but no travel, meal, or
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entertainment expenses as required by section 274(d).   Petitioner

contends that documents substantiating the rest of his expenses

are in the possession of Mr. Kolter, who will not return them.

Petitioner further contends that he testified against Mr. Kolter

and that Mr. Kolter has been incarcerated for fraud.

     Section 162(a) allows as a deduction all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business.    Section 274(d), relating to

travel, meal, entertainment, and gift expenses, requires a

taxpayer to substantiate

     by adequate records or by sufficient evidence
     corroborating the taxpayer’s own statement[,] (A) the
     amount of such expense or other item, (B) the time and
     place of the travel, entertainment, amusement,
     recreation, or use of the facility or property, or the
     date and description of the gift, (C) the business
     purpose of the expense or other item, and (D) the
     business relationship to the taxpayer of persons
     entertained, using the facility or property, or
     receiving the gift. * * *

Section 1.274-5(c)(5), Income Tax Regs., states:

     Where the taxpayer establishes that the failure to
     produce adequate records is due to the loss of such
     records through circumstances beyond the taxpayer’s
     control, such as destruction by fire, flood,
     earthquake, or other casualty, the taxpayer shall have
     the right to substantiate a deduction by reasonable
     reconstruction of his expenditures.

Mr. Kolter’s representation of petitioner related to Quantum

(i.e., 1992) but not Equator (i.e., 1993 and 1994).    Petitioner’s

failure to produce adequate records relating to 1992 is due to
                                - 6 -

the loss of such records, but he has not offered any

reconstruction of his expenditures.

       There is no evidence in the record to substantiate

adequately the section 162(a) expenses in excess of those

conceded by respondent.    In addition, we believe that petitioner

did make some business trips during the years in issue, but there

is insufficient evidence to determine the facts required by

section 274(d).    Thus, petitioner is not entitled to deduct such

expenses, and, pursuant to Lone Manor Farms, Inc. v.

Commissioner, 61 T.C. 436, 440 (1974) (stating that the Court may

compute “the correct tax liability for a year not in issue when

such a computation is necessary to a determination of the correct

tax liability for a year that has been placed in issue”), the

carryovers from 1992 and 1993 shall be computed accordingly.

III.    Employee Business Expense Deductions

       On Forms 2106, Employee Business Expenses, of his 1994,

1995, and 1996 returns, petitioner claimed employee business

expenses of $20,103, $56,137, and $24,903. We conclude that the

record contains evidence sufficient to substantiate section

162(a) deductions of $3,804, $33,419, and $6,056, relating to the

respective years in issue, but not the deductions governed by

section 274(d) (i.e., travel, meal, entertainment, and gift

expenses).
                                   - 7 -

IV.    Addition to Tax

       Section 6651(a)(1) imposes an addition to tax for failure to

file a required return on the date prescribed, unless it is shown

that such failure is due to reasonable cause and not willful

neglect.    To meet his burden of production pursuant to section

7491(c), respondent “must come forward with sufficient evidence

indicating that it is appropriate to impose the relevant penalty”

but “need not introduce evidence regarding reasonable cause,

substantial authority, or similar provisions.”      Higbee v.

Commissioner, supra at ___ (slip op. at 15).

       Respondent concedes that petitioner is not liable for the

1994 addition to tax.    Petitioner’s 1995 return was due on

October 15, 1996.    Respondent has shown that he received the 1995

return on November 22, 1996.    Petitioner has not shown that such

failure to file by the prescribed date was due to reasonable

cause and not willful neglect.      See sec. 6651(a)(1).

Accordingly, we conclude that respondent has produced sufficient

evidence indicating that the section 6651(a)(1) addition is

appropriate, and petitioner is liable for the 1995 addition to

tax.

V.    Accuracy-Related Penalties

       Section 6662(a) imposes a penalty on an underpayment of tax

required to be shown on a return.      Section 6664(c)(1) provides

that no penalty shall be imposed if it is shown that there was
                                 - 8 -

reasonable cause for the underpayment and that the taxpayer acted

in good faith.   The determination of whether a taxpayer acted

with reasonable cause and in good faith depends upon the facts

and circumstances.   See sec. 1.6664-4(b)(1), Income Tax Regs.

Reliance on the advice of an accountant may demonstrate

reasonable cause and good faith.    See id.

     Respondent concedes that petitioner is not liable for the

1994 accuracy-related penalty, but contends that “petitioner has

failed to substantiate even a third of the expenditures at issue

in this case.”   We conclude that petitioner reasonably and in

good faith relied on his accountants.       Accordingly, he is not

liable for the 1995 and 1996 accuracy-related penalties.

     Contentions we have not addressed are moot, irrelevant, or

meritless.

     To reflect the foregoing,



                                              Decision will be entered

                                         under Rule 155.
