                                T.C. Memo. 2018-27

                         UNITED STATES TAX COURT



               RJ CHANNELS, INC., ET AL.,1 Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 25151-15, 11955-16,                Filed March 14, 2018.
                  11957-16.


      Walter D. Channels, for petitioners.

      Mindy S. Meigs, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      CHIECHI, Judge: Respondent determined a deficiency in, and an accuracy-

related penalty under section 6662(a)2 on, the Federal income tax (tax) of each

petitioner for the taxable year indicated, as follows:

      1
      Cases of the following petitioners are consolidated herewith: Channels &
Channels, Inc., docket No. 11955-16; and RJ Channels, Inc., docket No.
11957-16.
      2
       All section references are to the Internal Revenue Code in effect for the
taxable years at issue. All Rule references are to the Tax Court Rules of Practice
and Procedure.
                                         -2-

[*2]                       Taxable                     Accuracy-Related Penalty
         Petitioner       Year Ended     Deficiency      Under Sec. 6662(a)
    RJ Channels, Inc.      5/31/2012       $234,940             $46,988.00
    Channels &
     Channels, Inc.       12/31/2012        215,081              43,015.60
    RJ Channels, Inc.      5/31/2013        136,151              27,230.20

       The issues remaining for decision are:

       (1) Are certain amounts of client fees that RJ Channels, Inc., received

during each of its taxable years that ended on May 31, 2012 and 2013, includible

in its gross income for the taxable year in which it received those fees? We hold

that they are.

       (2) Is RJ Channels, Inc., entitled to deduct for its taxable year that ended on

May 31, 2012, certain expenses paid on behalf of certain of its clients? We hold

that it is not.

       (3) Is RJ Channels, Inc., entitled to deduct for its taxable year that ended on

May 31, 2013, a certain amount with respect to a claimed contingent liability? We

hold that it is not.

       (4) Is RJ Channels, Inc., entitled for each of its taxable years that ended on

May 31, 2012 and 2013, to certain claimed miscellaneous deductions in excess of

those that respondent allowed? We hold that it is not.
                                              -3-

[*3] (5) Is RJ Channels, Inc., liable for each of its taxable years that ended on

May 31, 2012 and 2013, for the accuracy-related penalty under section 6662(a)?

Pursuant to the stipulations of the parties, it is liable for those penalties.

       (6) Is Channels & Channels, Inc., entitled to deduct for its taxable year 2012

certain expenses paid on behalf of certain of its clients? We hold that it is not.

       (7) Is Channels & Channels, Inc., entitled for its taxable year 2012 to certain

claimed miscellaneous deductions in excess of those that respondent allowed? We

hold that it is not.

       (8) Is Channels & Channels, Inc., liable for its taxable year 2012 for the

accuracy-related penalty under section 6662(a)? Pursuant to the stipulations of

the parties, it is liable for that penalty.

                                 FINDINGS OF FACT3

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

       The principal office of petitioner, RJ Channels, Inc. (RJC), was in Califor-

nia at the time it filed the respective petitions in the cases at docket Nos. 25151-15

       3
       Unless otherwise indicated, our findings of fact as they relate to petitioner,
RJ Channels, Inc., pertain to its taxable years ended on May 31, 2012 and 2013
(TYE 5/31/12 and TYE 5/31/13, respectively), the taxable years at issue in the
cases at docket Nos. 25151-15 and 11957-16 (sometimes, RJC’s cases), and our
findings of fact as they relate to petitioner, Channels & Channels, Inc., pertain to
the taxable year 2012, the taxable year at issue in the case at docket No. 11955-16
(sometimes, C&C’s case).
                                        -4-

[*4] and 11957-16. The principal office of petitioner, Channels & Channels, Inc.

(C&C), was in California at the time it filed the petition in the case at docket No.

11955-16.

RJC

      Background

      RJC, which was taxed as a subchapter C corporation, maintained its books

and records and filed its tax returns using the accrual method of accounting and

used a fiscal year and a taxable year ending on May 31. Ronald J. Channels (Mr.

Channels), an enrolled agent and return preparer, owned 100 percent of RJC and

was an officer of that company. RJC was engaged in the business of providing tax

services, primarily return preparation services. It maintained certain accounts at

various banks, including a checking account at Wells Fargo Bank (RJC’s Wells

Fargo account).

      Certain Client Fees Received by RJC

      Eric Betzler (Mr. Betzler) retained RJC in February 2012 to provide certain

Federal tax services to his wife, Cynthia Betzler (Ms. Betzler), and him (RJC’s

Betzler tax services).4 On February 29, 2012, Mr. Betzler gave Mr. Channels a


      4
       We shall sometimes refer collectively to Mr. Betzler and Ms. Betzler as the
Betzlers.
                                         -5-

[*5] check for $150,000 (TYE 5/31/12 Betzler fees) as payment for RJC’s Betzler

tax services, which was promptly deposited into RJC’s Wells Fargo account. Mr.

Channels, on behalf of RJC, informed Mr. Betzler that if RJC were unable to

obtain a favorable result for them as a result of RJC’s Betzler tax services, RJC

would repay to the Betzlers the TYE 5/31/12 Betzler fees that it had received from

them. RJC’s return of the TYE 5/31/12 Betzler fees that it had received was thus

subject to a condition subsequent.

      At no time did the Betzlers place any restrictions on RJC’s use of the TYE

5/31/12 Betzler fees that they had paid to it. RJC issued checks and/or withdrew

moneys from RJC’s Wells Fargo account whenever it deemed it appropriate to do

so. RJC did not return to the Betzlers the TYE 5/31/12 Betzler fees.

      Mr. Betzler died on July 24, 2012. Around September 7, 2012, Ms. Betzler,

who wanted RJC to continue to provide to her RJC’s Betzler tax services, gave

Mr. Channels a check for $153,600 (TYE 5/31/13 Betzler fees) as an additional

payment for those services, which was promptly deposited into RJC’s Wells Fargo

account. Mr. Channels, on behalf of RJC, informed Ms. Betzler that if RJC were

unable to obtain a favorable result for her as a result of the RJC Betzler tax

services, RJC would repay to her not only the TYE 5/31/12 Betzler fees but also

the TYE 5/31/13 Betzler fees (sometimes collectively, RJC’s total Betzler fees)
                                          -6-

[*6] that it had received from them. RJC’s return of the TYE 5/31/13 Betzler fees

that it had received was thus subject to a condition subsequent.

      At no time did Ms. Betzler place any restrictions on RJC’s use of the TYE

5/31/13 Betzler fees that she had paid to it. RJC did not return to Ms. Betzler the

TYE 5/31/13 Betzler fees.

      Caren Wyatt (Ms. Wyatt) retained RJC around April 2012 to provide certain

Federal tax services to her (RJC’s Wyatt tax services). On April 12, 2012, Ms.

Wyatt gave Mr. Channels a check for $65,000 (TYE 5/31/12 Wyatt fees) as pay-

ment for RJC’s Wyatt tax services, which was promptly deposited into RJC’s

Wells Fargo account. Mr. Channels, on behalf of RJC, informed Ms. Wyatt that if

RJC were unable to obtain a favorable result for her as a result of RJC’s Wyatt tax

services, RJC would repay to her the TYE 5/31/12 Wyatt fees that it had received

from her. RJC’s return of the TYE 5/31/12 Wyatt fees that it had received was

thus subject to a condition subsequent.

      At no time did Ms. Wyatt place any restrictions on RJC’s use of the TYE

5/31/12 Wyatt fees that she had paid to it. RJC did not return to Ms. Wyatt the

TYE 5/31/12 Wyatt fees.

      As of the close of RJC’s TYE 5/31/13, RJC’s Wells Fargo account showed

a negative balance.
                                        -7-

[*7] Payment of Certain Client Expenses

      During its TYE 5/31/12, RJC paid on behalf of certain of its clients certain

obligations of those clients (1) for “Legal and Professional Fees” totaling $775

and (2) for “Taxes” totaling $1,750.46 (collectively, TYE 5/31/12 client expenses

paid by RJC). At times not established by the record after RJC paid those client

expenses, RJC’s clients whose respective expenses it had paid on their behalf

reimbursed RJC for those expenses.

      During RJC’s TYE 5/31/12, Mr. Channels paid on behalf of certain of

RJC’s clients certain obligations of those clients for “Legal and Professional Fees”

totaling $2,900.11 (TYE 5/31/12 client expenses paid by Mr. Channels). At times

not established by the record after Mr. Channels paid those client expenses, RJC’s

clients whose respective expenses Mr. Channels had paid on their behalf reim-

bursed those expenses.5

      RJC’s Claimed Contingent Liability

      On December 31, 2012, Denise Bogard (Ms. Bogard) commenced a lawsuit

(Bogard lawsuit) against various defendants, including an organization known as

Channels & Barth, LLP (C&B), and Mr. Channels, both in his individual capacity

      5
       The record does not establish whether RJC’s clients reimbursed RJC or Mr.
Channels for certain expenses of certain of RJC’s clients that Mr. Channels paid
during RJC’s TYE 5/31/12.
                                       -8-

[*8] and as an executive of C&B. RJC was not named as a defendant in the

Bogard lawsuit.

RJC’s Tax Returns

      In Form 1120, U.S. Corporation Income Tax Return (Form 1120), that RJC

filed for its TYE 5/31/12 (TYE 5/31/12 return), RJC reported $447,570 in “Gross

receipts”. In that return, RJC claimed the following “Other deductions”, which

included deductions totaling $5,425.116 for “Taxes for clients” and “Legal and

professional” claimed for the TYE 5/31/12 client expenses paid by RJC and the

TYE 5/31/12 client expenses paid by Mr. Channels:7




      6
       In its TYE 5/31/12 return, RJC rounded to the nearest dollar each of the
“Other deductions” that it claimed.
      7
        We shall refer collectively to the deductions that RJC claimed in its TYE
5/31/12 return for the TYE 5/31/12 client expenses paid by RJC and the TYE
5/31/12 client expenses paid by Mr. Channels as the total TYE 5/31/12 claimed
client expense deductions.
                                -9-

[*9]      Claimed “Other deductions”    Amount

       Utilities                         $500
       Travel                           13,340
       Telephone                         4,554
       Taxes for clients                 1,750
       Software                          3,160
       Professional development           200
       Printing                           258
       Postage                           2,481
       Parking and tolls                  163
       Outside services                  5,133
       Other expenses                    3,687
       Office expense                    8,027
       Medical expense                   8,800
       Meals and entertainment           5,557
       Legal and professional            3,675
       Internet connections              1,741
       Insurance                        10,457
       Gifts                             1,064
       Dues and subscriptions            2,435
       Contract labor                  208,116
       Continuing education              4,797
       Computer services                28,710
       Bank charges                      4,848
       Auto and truck                   22,469
        Total                          345,922
                                          - 10 -

[*10] In the return that RJC filed for its TYE 5/31/13 (TYE 5/31/13 return), RJC

reported $146,412 in “Gross receipts”. In that return, RJC claimed the following

“Other deductions”, which included a deduction for $325,000 that RJC claimed as

a contingent liability with respect to the Bogard lawsuit (claimed $325,000 Bogard

lawsuit deduction):

                        Claimed “Other deductions”       Amount

               Utilities                                 $3,680
               Telephone                                    454
               Security                                    6,289
               Parking and tolls                             30
               Outside services                            4,665
               Other expenses                                87
               Office expense                               469

               Medical expense                            7,011
               Meals and entertainment                    1,512
               Internet connections                        1,194
               Insurance                                   4,893
               Dues and subscriptions                      2,486
               Contract labor                              9,226
               Continuing education                         576
               Contingent liability--Bogard lawsuit     325,000
               Bank charges                                  41
               Auto and truck                              8,164
                Total                                   375,777
                                       - 11 -

[*11] RJC Notices of Deficiency

      Respondent issued a notice of deficiency (notice) to RJC for its TYE

5/31/12 (TYE 5/31/12 notice). In that notice, respondent determined, inter alia, to

include in RJC’s gross income the TYE 5/31/12 Betzler fees and the TYE 5/31/12

Wyatt fees. In the TYE 5/31/12 notice, respondent also determined to disallow the

entire amount (i.e., $345,922) of the claimed “Other deductions”.8 Respondent

      8
       As a result of certain concessions, only the following deductions included
in “Other deductions” that respondent disallowed remain at issue for RJC’s TYE
5/31/12 which include the total TYE 5/31/12 claimed client expense deductions
for “Taxes for clients” and “Legal and professional”:

                   Claimed “Other deductions”          Amount
                  Telephone                           $1,291.40
                  Taxes for clients                    1,750.00
                  Software                             3,160.00
                  Legal and professional               3,675.00
                  Insurance                            3,477.00
                  Dues and subscriptions               2,181.17
                  Contract labor                       3,562.05
                  Computer services                   28,710.00
                  Bank charges                           894.40
                   Total                              48,701.02

There appear to be discrepancies between certain amounts of certain “Other
                                                                     (continued...)
                                       - 12 -

[*12] further determined in the TYE 5/31/12 notice that RJC is liable for the

accuracy-related penalty under section 6662(a).9

      Respondent issued a notice to RJC for its TYE 5/31/13 (TYE 5/31/13

notice). In that notice, respondent determined, inter alia, to include in RJC’s gross

income the TYE 5/31/13 Betzler fees. In the TYE 5/31/13 notice, respondent also

determined to disallow the entire amount (i.e., $375,777) of the claimed “Other




      8
        (...continued)
deductions” that remain at issue for RJC’s TYE 5/31/12 and the respective
amounts of such “Other deductions” that respondent asserts on brief remain at
issue for that year. We expect the parties to reconcile any such discrepancies as
part of the respective computations under Rule 155 that will be required in these
cases (Rule 155 computations). (We shall refer to the deductions that RJC
included in “Other deductions” for its TYE 5/31/12 that respondent disallowed,
and that remain at issue for its TYE 5/31/12 except for the total TYE 5/31/12
claimed client expense deductions, as the TYE 5/31/12 claimed miscellaneous
deductions at issue or the TYE 5/31/12 deductions at issue claimed for certain
miscellaneous expenses.)
      9
       The parties agree that RJC would be liable for its TYE 5/31/12 for the
accuracy-related penalty under sec. 6662(a) in the event there is a deficiency for
that year.
                                        - 13 -

[*13] deductions”.10 Respondent further determined in the TYE 5/31/13 notice

that RJC is liable for the accuracy-related penalty under section 6662(a).11

C&C

      Background

      C&C, which was taxed as a subchapter C corporation, maintained its books

and records and filed its tax returns using the accrual method of accounting and

used a calendar fiscal year and a calendar taxable year. Mr. Channels and his



      10
       As a result of certain concessions, only the following deductions included
in “Other deductions” that respondent disallowed remain at issue for RJC’s TYE
5/31/13 which include the claimed $325,000 Bogard lawsuit deduction:

                    Claimed “Other deductions”             Amount
               Insurance                                   $3,477

               Dues and subscriptions                          836
               Contingent liability--Bogard lawsuit       325,000
                 Total                                    329,313

(We shall refer to the deductions that RJC included in “Other deductions” for its
TYE 5/31/13 that respondent disallowed, and that remain at issue for its TYE
5/31/13 except for the claimed $325,000 Bogard lawsuit deduction, as the TYE
5/31/13 claimed miscellaneous deductions at issue or the TYE 5/31/13 deductions
at issue claimed for certain miscellaneous expenses.)
      11
        The parties agree that RJC would be liable for its TYE 5/31/13 for the
accuracy-related penalty under sec. 6662(a) in the event there is a deficiency for
that year.
                                       - 14 -

[*14] daughter, Susan Gyor, a.k.a. Susan Channels (Ms. Gyor), who is a certified

public accountant, each owned 50 percent of C&C. Ms. Gyor was secretary of

C&C, and Mr. Channels held the remaining offices of that company. C&C was

engaged in the business of providing tax services, primarily return preparation

services.

      Payment of Certain Client Expenses

      During 2012, C&C paid on behalf of certain of its clients certain obligations

of those clients for “Clients’ Obligations” totaling $3,138.64 (2012 client expenses

paid by C&C). At times not established by the record after C&C paid those client

expenses, C&C’s clients whose respective expenses it had paid on their behalf

reimbursed C&C for those expenses.

      During 2012, Ms. Gyor paid on behalf of certain of C&C’s clients certain

obligations of those clients for “Clients’ Obligations” totaling $737 (2012 client

expenses paid by Ms. Gyor). At times not established by the record after Ms.

Gyor paid those client expenses, C&C’s clients whose respective expenses Ms.

Gyor had paid on their behalf reimbursed those expenses.12




      12
       The record does not establish whether C&C’s clients reimbursed C&C or
Ms. Gyor for certain expenses of certain of C&C’s clients that Ms. Gyor paid
during C&C’s taxable year 2012.
                                      - 15 -

[*15] C&C’s Tax Return

      In Form 1120 that C&C filed for its taxable year 2012 (2012 return), C&C

claimed the following “Other deductions”, which included deductions totaling

$3,89813 comprising (1) “Client obligations paid” claimed for the 2012 client

expenses paid by C&C and the 2012 client expenses paid by Ms. Gyor, which

totaled $3,875.64, and (2) $22 paid by C&C to Ms. Gyor:14




      13
       In C&C’s 2012 return, C&C rounded to the nearest dollar each of the
“Other deductions” that it claimed.
      14
       We shall refer collectively to the deductions that C&C claimed in C&C’s
2012 return for (1) the 2012 client expenses paid by C&C and the 2012 client
expenses paid by Ms. Gyor, which totaled $3,875.64, and (2) the $22 paid by C&C
to Ms. Gyor as the 2012 claimed client expense deductions.
                                  - 16 -

[*16]      Claimed “Other deductions”       Amount

        Utilities                             328
        Travel                               4,843
        Telephone                            4,107
        Security                              780
        Printing                             1,023
        Postage                              2,609
        Parking and tolls                     104
        Office expense                       3,514
        Miscellaneous                        1,793
        Medical expenses                     1,092
        Meals and entertainment             3,921
        Legal and professional                785
        Insurance                           4,576
        Gifts                                 414
        Dues and subscriptions              2,067
        Contract labor                     225,931
        Continuing education                5,009
        Computer & internet expenses        11,101
        Client obligations paid             3,898
        Bonuses                             3,887
        Bank charges                        2,705
        Auto and truck                      3,415
        Amortization                           67
        Accrued payroll                     72,000
         Total                             359,969
                                          - 17 -

[*17] C&C Notice of Deficiency

      Respondent issued a notice to C&C for its taxable year 2012 (2012 notice).

In that notice, respondent determined, inter alia, to disallow the entire amount (i.e.,

$359,969) of the claimed “Other deductions”.15 In the 2012 notice, respondent

also determined that C&C is liable for the accuracy-related penalty under section

6662(a).16


      15
        As a result of certain concessions, only the following deductions included
in “Other deductions” that respondent disallowed remain at issue for C&C’s
taxable year 2012, which include the 2012 claimed client expense deductions for
“Client obligations paid”:

                      Claimed “Other deductions”          Amount
                     Insurance                           $2,105.58
                     Dues and subscriptions                2,022.02
                     Continuing education                  2,956.52

                     Client obligations paid               3,897.64
                     Bank charges                          1,510.74
                      Total                              12,492.50

(We shall refer to the deductions that C&C included in “Other deductions” for its
taxable year 2012, that respondent disallowed, and that remain at issue for its
taxable year 2012, except for the 2012 claimed client expense deductions, as 2012
claimed miscellaneous deductions at issue or 2012 deductions at issue claimed for
certain miscellaneous expenses.)
      16
           The parties agree that C&C would be liable for its taxable year 2012 for
                                                                         (continued...)
                                        - 18 -

[*18]                                 OPINION

        RJC has the burden of establishing that respondent’s respective determina-

tions in the TYE 5/31/12 notice and the TYE 5/31/13 notice that remain at issue in

the respective cases at docket Nos. 25151-15 and 11957-16 are in error. C&C has

the burden of establishing that respondent’s determinations in the 2012 notice that

remain at issue in the case at docket No. 11955-16 are in error.17 See Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).

        Before addressing the issues presented, we shall evaluate the testimony of

Mr. Channels, the only witness at the trial in these cases. We found Mr. Channels’

testimony to be at times evasive and in certain material respects general, conclu-

sory, and/or vague. We are not required to, and we shall not, rely on any such

testimony of Mr. Channels to establish the respective positions of RJC and C&C

with respect to the issues remaining in their respective cases. See, e.g., Tokarski

v. Commissioner, 87 T.C. 74, 77 (1986). We also found Mr. Channels’ testimony



        16
         (...continued)
the accuracy-related penalty under sec. 6662(a) in the event there is a deficiency
for that year.
        17
        RJC and C&C, as petitioners in these consolidated cases, properly filed
one simultaneous opening brief and one simultaneous reply brief. Nonetheless,
we shall refer to RJC when we are addressing the issues presented in RJC’s cases
and to C&C when we are addressing the issues in C&C’s case.
                                        - 19 -

[*19] to be in certain material respects not helpful to the respective positions of

RJC and C&C with respect to certain issues. In fact, certain of Mr. Channels’

testimony supports respondent’s position with respect to certain issues.

RJC

      Certain Client Fees Received by RJC

      We begin by setting forth our understanding of what we are not being asked

to decide. We are not being asked to decide whether (1) the TYE 5/31/12 Betzler

fees and the TYE 5/31/12 Wyatt fees that RJC received during its TYE 5/31/12

and (2) the TYE 5/31/13 Betzler fees that it received during its TYE 5/31/1318

constitute income.19 We are being asked to decide when those fees are includible



      18
        We shall sometimes refer collectively to the TYE 5/31/12 Betzler fees and
the TYE 5/31/12 Wyatt fees that RJC received during its TYE 5/31/12 and
(2) the TYE 5/31/13 fees that it received during its TYE 5/31/13 as the client fees
in question.
      19
        Counsel of record for petitioners indicated at trial that the issue involving
the TYE 5/31/12 Betzler fees, the TYE 5/31/12 Wyatt fees, and the TYE 5/31/13
Betzler fees was a “prepaid income” issue. On brief, RJC seems to suggest that
the issue involving those fees is not a “prepaid income” issue but is whether they
constitute income. On the record before us, we reject any such contention. The
record establishes, and we have found, that RJC received (1) the TYE 5/31/12
Betzler fees and the TYE 5/31/13 Betzler fees as payment for RJC’s Betzler tax
services and (2) the TYE 5/31/12 Wyatt fees as payment for RJC’s Wyatt tax
services. On that record, we find that those fees constitute income. See sec.
61(a)(1). We proceed now to consider the issue of when those fees are includible
in RJC’s gross income.
                                        - 20 -

[*20] in RJC’s gross income. That is to say, we must decide whether the client

fees in question are includible in RJC’s gross income for some taxable year after

the taxable year of receipt by RJC, as RJC maintains, or for the taxable year of

receipt, as respondent maintains.

      We start our consideration of when the client fees in question are includible

in RJC’s gross income by summarizing certain apposite authorities. Pursuant to

section 1.446-1(c)(1)(ii), Income Tax Regs., a taxpayer on the accrual method of

accounting20 is required to include income for the taxable year when (1) all the

events have occurred that fix the right to the income and (2) the amount of income

can be determined with reasonable certainty.

      Under the all events test, it is the fixed right of a taxpayer on the accrual

method of accounting to receive the income that is controlling, not whether there

has been actual receipt thereof. Spring City Foundry Co. v. Commissioner, 292

U.S. 182, 184-185 (1934). In Charles Schwab Corp. & Subs. v. Commissioner,

107 T.C. 282, 293 (1996), aff’d, 161 F.3d 1231 (9th Cir. 1998), we observed that

“[i]n applying the all events test, this and other courts have distinguished between

conditions precedent, which must occur before the right to income arises, and


      20
        RJC maintained its books and records and filed its tax returns using the
accrual method of accounting.
                                         - 21 -

[*21] conditions subsequent, the occurrence of which will terminate an existing

right to income, but the presence of which does not preclude accrual of income.”

      The right of a taxpayer on the accrual method of accounting to receive

income is fixed upon the earliest of (1) the taxpayer’s receipt of payment, (2) the

contractual due date of the payment, or (3) the taxpayer’s performance. See

Schlude v. Commissioner, 372 U.S. 128, 133, 137 (1963); Charles Schwab Corp.

& Subs. v. Commissioner, 107 T.C. at 292; Cox v. Commissioner, 43 T.C. 448,

455-456 (1965).

      Where a taxpayer receives money under a claim of right and without

restriction or limitation as to the disposition of the money, the taxpayer must

include the money in gross income for the year in which the taxpayer receives it,

even though the taxpayer may not be entitled to retain the money and even though

the taxpayer may be liable to return its equivalent. See N. Am. Oil Consol. v.

Burnet, 286 U.S. 417, 424 (1932).

      In advancing its position on brief, RJC fails to discuss some of the apposite

authorities discussed above and/or misconstrues and/or misapplies some of those

authorities or other authorities that it cites. Equally troublesome is that, in

advancing its position that the client fees in question are not includible in income
                                       - 22 -

[*22] upon receipt, RJC relies principally on Commissioner v. Indianapolis Power

& Light Co., 493 U.S. 203 (1990), and certain other cases that, as we explain

below, we find to be inapposite to resolving when the client fees in question are

includible in RJC’s gross income.21

      The Supreme Court of the United States (Supreme Court) began its opinion

in Indianapolis Power by pointing out that the taxpayer involved there had

acknowledged that the customer deposits in question in that case would be taxable

upon receipt if that Court were to hold that they constituted advance payments for

electricity. See id. at 207. The Supreme Court also pointed out in Indianapolis

Power that it had previously “held that an accrual-basis taxpayer is required to

treat advance payments as income in the year of receipt. See Schlude v. Commis-

sioner, 372 U. S. 128 (1963); American Automobile Assn. v. United States, 367 U.

S. 687 (1961); Automobile Club of Michigan v. Commissioner, 353 U. S. 180


      21
         For example, RJC relies on Milenbach v. Commissioner, 106 T.C. 184
(1996), aff’d in part, rev’d in part on other grounds, 318 F.3d 924 (9th Cir. 2003),
which held, inter alia, that a certain amount received by the Los Angeles Raiders
in 1984 constituted income, not a loan. See id. at 197. As discussed below, we
find in our Opinion Milenbach and in the opinions in certain other cases on which
RJC relies to be inapposite. Moreover, RJC fails to point out that the U.S. Court
of Appeals for the Ninth Circuit, the court to which an appeal in these cases would
normally lie, reversed this Court on the issue of whether a certain amount received
by the Los Angeles Raiders in 1984 constituted income, not a loan. See
Milenbach v. Commissioner, 318 F.3d at 930-931.
                                        - 23 -

[*23] (1957).” Id. n.3. It then observed: “These cases concerned payments--

nonrefundable fees for services--that indisputably constituted income; the issue

was when that income was taxable. Here, in contrast, the issue is whether these

deposits, as such, are income at all.” Id.

      We find RJC’s reliance on Indianapolis Power, Milenbach v. Commission-

er, 106 T.C. 184, and any other case where the issue was whether certain payments

are “income at all” to be misplaced because those authorities are inapposite to the

issue here involving the client fees in question. See Alexander Shokai, Inc. v.

Commissioner, T.C. Memo. 1992-41, 63 T.C.M. (CCH) 1870, 1881 (1992), aff’d,

34 F.3d 1480 (9th Cir. 1994).

      Under the authorities that we conclude are apposite to resolving the issue

involving the client fees in question and that we summarized at the beginning of

our discussion of this issue, we find on the record before us that RJC is required to

include those fees in its gross income for the taxable year of receipt. The record

establishes, and we have found, the following facts that require our so finding

under those authorities. During RJC’s TYE 5/31/12, Mr. Betzler retained RJC to

provide RJC’s Betzler tax services for him and Ms. Betzler. During that taxable

year, Mr. Betzler gave Mr. Channels a check for $150,000 (i.e., the TYE 5/31/12
                                         - 24 -

[*24] Betzler fees) as payment for RJC’s Betzler tax services, which was promptly

deposited into RJC’s Wells Fargo account. Mr. Channels, on behalf of RJC,

informed Mr. Betzler that if RJC were unable to obtain a favorable result for them

as a result of RJC’s Betzler tax services, RJC would repay to the Betzlers the TYE

5/31/12 Betzler fees that it had received from them. RJC’s return of the TYE

5/31/12 Betzler fees that it had received was thus subject to a condition subse-

quent.

         At no time did the Betzlers place any restrictions on RJC’s use of the TYE

5/31/12 Betzler fees that they had paid to it. RJC issued checks and/or withdrew

moneys from RJC’s Wells Fargo account whenever it deemed it appropriate to do

so. RJC did not return to the Betzlers the TYE 5/31/12 Betzler fees.

         During RJC’s TYE 5/31/12, Ms. Wyatt retained RJC to provide RJC’s

Wyatt tax services. During that taxable year, Ms. Wyatt gave Mr. Channels a

check for $65,000 (i.e., the TYE 5/31/12 Wyatt fees) as payment for RJC’s Wyatt

tax services, which was promptly deposited into RJC’s Wells Fargo account. Mr.

Channels, on behalf of RJC, informed Ms. Wyatt that if RJC were unable to obtain

a favorable result for her as a result of RJC’s Wyatt tax services, RJC would repay

to her the TYE 5/31/12 Wyatt fees that it had received from her. RJC’s return of
                                        - 25 -

[*25] the TYE 5/31/12 Wyatt fees that it had received was thus subject to a

condition subsequent.

         At no time did Ms. Wyatt place any restrictions on RJC’s use of the TYE

5/31/12 Wyatt fees that she had paid to it. RJC did not return to Ms. Wyatt the

TYE 5/31/12 Wyatt fees.

         Mr. Betzler died on July 24, 2012. Around September 7, 2012, Ms. Betzler,

who wanted RJC to continue to provide to her RJC’s Betzler tax services, gave

Mr. Channels a check for $153,600 (i.e., the TYE 5/31/13 Betzler fees) as an

additional payment for those services, which was promptly deposited into RJC’s

Wells Fargo account. Mr. Channels, on behalf of RJC, informed Ms. Betzler that

if RJC were unable to obtain a favorable result for her as a result of the RJC

Betzler tax services, RJC would repay to her RJC’s total Betzler fees (i.e., the TYE

5/31/12 Betzler fees and the TYE 5/31/13 Betzler fees) that it received from them

in its TYE 5/31/12 and its TYE 5/31/13, respectively. RJC’s return of the TYE

5/31/13 Betzler fees that it had received was thus subject to a condition subse-

quent.

         At no time did Ms. Betzler place any restrictions on RJC’s use of the TYE

5/31/13 Betzler fees that she had paid to it. RJC did not return to Ms. Betzler the

TYE 5/31/13 Betzler fees.
                                         - 26 -

[*26] As of the close of RJC’s TYE 5/31/13, RJC’s Wells Fargo account showed

a negative balance.

        On the record before us, we find that RJC is required to include in its gross

income (1) for its TYE 5/31/12 the TYE 5/31/12 Betzler fees of $150,000 and the

TYE 5/31/12 Wyatt fees of $65,000, or a total of $215,000, that it received during

that taxable year and (2) for its TYE 5/31/13 the TYE 5/31/13 Betzler fees of

$153,600 that it received during that taxable year.

        Claimed Deductions That Remain at Issue

        Before turning to the deductions that RJC claimed for each of its TYE

5/31/12 and its TYE 5/31/13, that respondent disallowed, and that remain at issue,

we shall briefly summarize certain applicable authorities. Deductions are a matter

of legislative grace, and a taxpayer bears the burden of proving entitlement to any

deduction claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

Moreover, a taxpayer is required to maintain records sufficient to establish the

amount of any deduction claimed. See sec. 6001; sec. 1.6001-1(a), Income Tax

Regs.

        Section 162(a) generally allows a deduction for ordinary and necessary

expenses paid or incurred during the taxable year in carrying on any trade or

business. In addition, for certain kinds of expenses that are otherwise deductible
                                        - 27 -

[*27] under section 162(a), such as those for “listed property”, as defined in

section 280F(d)(4), a taxpayer must satisfy certain additional substantiation

requirements set forth in section 274(d) before such expenses will be allowed as

deductions.

      Section 170(a) allows a deduction for any charitable contribution, as defined

in section 170(c), payment of which is made within the taxable year in question.

Section 170(a) further provides that a deduction will be allowed for a charitable

contribution “only if verified under regulations prescribed by the Secretary.”

              Total TYE 5/31/12 Claimed Client Expense Deductions

      We consider now whether RJC is entitled to deduct under section 162(a) for

its TYE 5/31/12 the total TYE 5/31/12 claimed client expense deductions. RJC

advances no argument on brief in support of its position that it is entitled for that

taxable year to those claimed client expense deductions, choosing instead to “rely

[only] on the evidence admitted”.

      We have found on the record before us the following facts relating to RJC’s

total TYE 5/31/12 claimed client expense deductions. During its TYE 5/31/12,

RJC paid on behalf of certain of its clients certain obligations of those clients

(1) for “Legal and Professional Fees” totaling $775 and (2) for “Taxes” totaling

$1,750.46. At times not established by the record after RJC paid those client
                                        - 28 -

[*28] expenses, RJC’s clients whose respective expenses it had paid on their

behalf reimbursed RJC for those expenses.

      During RJC’s TYE 5/31/12, Mr. Channels paid on behalf of certain of

RJC’s clients certain obligations of those clients for “Legal and Professional Fees”

totaling $2,900.11. At times not established by the record after Mr. Channels paid

those client expenses, RJC’s clients whose respective expenses Mr. Channels had

paid on their behalf reimbursed those expenses.22

      Generally, where a taxpayer pays the obligations of another taxpayer, the

payments of those obligations are not ordinary and necessary expenses incurred in

carrying on the taxpayer’s business under section 162(a). See, e.g., Interstate

Transit Lines v. Commissioner, 319 U.S. 590, 593 (1943); Deputy v. DuPont, 308

U.S. 488 (1940); Columbian Rope Co. v. Commissioner, 42 T.C. 800, 815 (1964).

      On the record before us, we find that RJC has failed to carry its burden of

establishing for its TYE 5/31/12 that it paid or incurred the total TYE 5/31/12

claimed client expense deductions in carrying on its trade or business. On that

record, we further find that RJC has failed to carry its burden of establishing that it

is entitled under section 162(a) for its TYE 5/31/12 to deduct those claimed client

expenses.

      22
           See supra note 5.
                                         - 29 -

[*29]         RJC’s Claimed $325,000 Bogard Lawsuit Deduction

        We address next whether RJC is entitled to deduct under section 162(a) for

its TYE 5/31/13 $325,000 that it claimed as a contingent liability with respect to

the Bogard lawsuit.

        In support of its position that it is entitled to the claimed $325,000 Bogard

lawsuit deduction, RJC relies on brief on certain alleged facts that we have not

found because those alleged facts are not established by the record. We have

found on the record before us the following facts relating to RJC’s claimed

$325,000 Bogard lawsuit deduction. On December 31, 2012, Ms. Bogard com-

menced the Bogard lawsuit against various defendants, including C&B and Mr.

Channels, both in his individual capacity and as an executive of C&B. RJC was

not named as a defendant in the Bogard lawsuit.

        RJC compounds its failure to rely on facts established by the record by

relying on brief on “the U.S. Securities and Exchange Commission Rules”, instead

of applicable tax law, to support its position that it is entitled to the claimed

$325,000 Bogard lawsuit deduction. We find RJC’s position that it is entitled to

the claimed $325,000 Bogard lawsuit deduction and the contentions on brief in

support of that position to be groundless, if not frivolous.
                                         - 30 -

[*30] On the record before us, we find that RJC has failed to carry its burden of

establishing that it would have any liability with respect to the Bogard lawsuit. On

that record, we further find that RJC, which was on the accrual method of account-

ing, has failed to carry its burden of establishing for its TYE 5/31/13 (1) that all

the events occurred that establish the fact of its liability with respect to the Bogard

lawsuit, (2) that the amount of any such liability could have been determined with

reasonable accuracy, and (3) that economic performance occurred with respect to

the liability. See sec. 1.461-1(a)(2), Income Tax Regs. On the record before us,

we find that RJC has failed to carry its burden of establishing that it is entitled to

deduct under section 162(a) for its TYE 5/31/13 $325,000 with respect to the

Bogard lawsuit.

             RJC’s TYE 5/31/12 Claimed Miscellaneous Deductions at Issue
             and TYE 5/31/13 Claimed Miscellaneous Deductions at Issue

      We turn now to whether RJC is entitled under section 162(a) or any other

section for its TYE 5/31/12 and its TYE 5/31/13 to the respective TYE 5/31/12

claimed miscellaneous deductions at issue and TYE 5/31/13 claimed miscella-

neous deductions at issue.23 As was true with respect to its total TYE 5/31/12

      23
        There appear to be certain discrepancies between the respective amounts
of certain of RJC’s TYE 5/31/12 claimed miscellaneous deductions at issue and its
TYE 5/31/13 claimed miscellaneous deductions at issue that respondent claims on
                                                                     (continued...)
                                        - 31 -

[*31] claimed client expense deductions, RJC advances no argument on brief in

support of its position that it is entitled for its TYE 5/31/12 and its TYE 5/31/13 to

the respective TYE 5/31/12 claimed miscellaneous deductions at issue and the

TYE 5/31/13 claimed miscellaneous deductions at issue, choosing instead to “rely

[only] on the evidence admitted”.

      On the record before us, we find that RJC has failed to carry its burden of

establishing for its TYE 5/31/12 and its TYE 5/31/13 that it paid or incurred the

respective TYE 5/31/12 deductions at issue claimed for certain miscellaneous

expenses and TYE 5/31/13 deductions at issue claimed for certain miscellaneous

expenses in carrying on its trade or business. On that record, we further find that

RJC has failed to carry its burden of establishing that it is entitled under section

162(a) or any other section for its TYE 5/31/12 and its TYE 5/31/13 to deduct

those respective claimed expenses.

             Section 6662(a)

      The parties agree that RJC would be liable for each of its TYE 5/31/12 and

its TYE 5/31/13 for the accuracy-related penalty under section 6662(a) in the

      23
         (...continued)
brief and the respective amounts of those certain deductions that RJC claimed in
its TYE 5/31/12 return and its TYE 5/31/13 return, respectively. We expect the
parties to reconcile any such discrepancies as part of the respective computations
under Rule 155.
                                         - 32 -

[*32] event there is a deficiency for either of those years. In the light of RJC’s

concessions and our holdings herein with respect to the issues presented with

respect to RJC, we conclude that there will be a deficiency for each of its TYE

5/31/12 and its TYE 5/31/13. Consequently, pursuant to the stipulations of the

parties, RJC will be liable for each of those taxable years for the accuracy-related

penalty determined under section 6662(a).24

C&C

      C&C’s 2012 Claimed Client Expense Deductions

      We consider now whether C&C is entitled to deduct under section 162(a)

for its taxable year 2012 C&C’s claimed client expense deductions. As was true

of RJC, C&C advances no argument on brief in support of its position that it is

entitled for its taxable year 2012 to deduct those client expenses, choosing instead

to “rely [only] on the evidence admitted”.

      We have found on the record before us the following facts relating to

C&C’s 2012 claimed client expense deductions. During 2012, C&C paid on

behalf of certain of its clients certain obligations of those clients for “Clients’

Obligations” totaling $3,138.64. At times not established by the record after C&C

      24
         The respective amounts of the penalties under sec. 6662(a) for which RJC
will be liable for its TYE 5/31/12 and its TYE 5/31/13 will be determined as part
of the Rule 155 computations.
                                       - 33 -

[*33] paid those client expenses, C&C’s clients whose respective expenses it had

paid on their behalf reimbursed C&C for those expenses.

      During 2012, Ms. Gyor paid on behalf of certain of C&C’s clients certain

obligations of those clients for “Clients’ Obligations” totaling $737. At times not

established by the record after Ms. Gyor paid those client expenses, C&C’s clients

whose respective expenses Ms. Gyor had paid on their behalf reimbursed those

expenses.25

      As discussed above as part of our consideration of RJC’s total TYE 5/31/12

claimed client expense deductions, where a taxpayer pays the obligations of

another taxpayer the payments of those obligations generally are not ordinary and

necessary expenses incurred in carrying on the taxpayer’s business under section

162(a). See, e.g., Interstate Transit Lines v. Commissioner, 319 U.S. at 593;

Deputy v. DuPont, 308 U.S. 488; Columbian Rope Co. v. Commissioner, 42 T.C.

at 815.




      25
        See supra note 12.
       C&C claimed in its 2012 return deductions for not only the 2012 client
expenses paid by C&C and the 2012 client expenses paid by Ms. Gyor, which
totaled $3,875.64, but also the $22 paid by C&C to Ms. Gyor, or the 2012 claimed
client expense deductions of $3,898, rounded to the nearest dollar. See supra note
13.
                                        - 34 -

[*34] On the record before us, we find that C&C has failed to carry its burden of

establishing for its taxable year 2012 that it paid or incurred C&C’s 2012 claimed

client expense deductions in carrying on its trade or business. On that record, we

further find that C&C has failed to carry its burden of establishing that it is

entitled under section 162(a) for its taxable year 2012 to deduct those claimed

client expenses.

        C&C’s 2012 Claimed Miscellaneous Deductions at Issue

        We turn next to whether C&C is entitled under section 162(a) or any other

section for its taxable year 2012 to the 2012 claimed miscellaneous deductions at

issue. As was true with respect to certain other deduction issues presented with

respect to RJC and C&C, C&C advances no argument on brief in support of its

position that it is entitled for its taxable year 2012 to the 2012 claimed miscella-

neous deductions at issue, choosing instead to “rely [only] on the evidence admit-

ted”.

        On the record before us, we find that C&C has failed to carry its burden of

establishing for its taxable year 2012 that it paid or incurred the 2012 deductions

at issue claimed for certain miscellaneous expenses in carrying on its trade or

business. On that record, we further find that C&C has failed to carry its burden
                                         - 35 -

[*35] of establishing it is entitled under section 162(a) or any other section for its

taxable year 2012 to deduct those claimed expenses.

        Section 6662(a)

        The parties agree that C&C would be liable for its taxable year 2012 for the

accuracy-related penalty under section 6662(a) in the event there is a deficiency

for that year. In the light of C&C’s concessions and our holdings herein with

respect to the issues presented with respect to C&C, we conclude that there will be

a deficiency for C&C’s taxable year 2012. Consequently, pursuant to the stipula-

tions of the parties, C&C will be liable for that taxable year for the accuracy-

related penalty determined under section 6662(a).26

        We have considered all of the contentions and arguments of the parties that

are not discussed herein, and we find them to be without merit, irrelevant, and/or

moot.

        To reflect the foregoing and the concessions of the parties,


                                                       Decisions will be entered

                                                  under Rule 155.


        26
         The amount of the penalty under sec. 6662(a) for which C&C will be
liable for its taxable year 2012 will be determined as part of the Rule 155
computations.
