                               T.C. Memo. 2018-203



                         UNITED STATES TAX COURT



                 MARY LOUISE SHOLES, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 7917-15L.                          Filed December 17, 2018.



      Mary Louise Sholes, pro se.

      Zachary B. Friedman, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      COHEN, Judge: This case was commenced under section 6330(d) in

response to a notice of determination sustaining a notice of Federal tax lien filing

with respect to petitioner’s Federal income tax liabilities for 2007, 2008, 2009, and

2010. The notice acknowledged that petitioner’s liabilities were in currently-not-

collectible status. Respondent agreed to de novo review of petitioner’s tax
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[*2] liabilities for 2007, 2008, and 2009 because, although notices of deficiency

for those years were sent to her last known address, petitioner did not receive them

in time to file petitions with the Court. See sec. 6330(c)(2)(B). All section

references are to the Internal Revenue Code in effect at all relevant times, and all

Rule references are to the Tax Court Rules of Practice and Procedure.

      Respondent has conceded that petitioner is not liable for the section 6662

penalties that were assessed for 2007, 2008, and 2009, and petitioner has conceded

excess withholding credits claimed on her return for 2010. The primary issue

remaining is the deductibility of legal and professional fees paid by petitioner and

her deceased husband Russell Sholes (R. Sholes) on behalf of themselves and their

son, Bruce A. Sholes (B. Sholes).

                                 FINDINGS OF FACT

      Some of the facts have been stipulated, and the stipulated facts are

incorporated in our findings by this reference. Petitioner resided in Arizona when

she timely filed her petition.

      For some time before and during the years in issue, petitioner and R. Sholes

maintained a residence in Michigan and frequently traveled to Arizona. During

the years in issue, petitioner owned residential property in Tucson, Arizona. The

persons residing at that property during those years were petitioner and R. Sholes,
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[*3] and their son B. Sholes. B. Sholes did not pay rent with respect to the Tucson

property during the time that he resided there.

      Petitioner also owned residential property in Phoenix, Arizona (collectively

with the Tucson residential property, Arizona residences) during 2007, 2008, and

2009. The persons residing at that property during those years were petitioner,

R. Sholes, and B. Sholes. B. Sholes did not pay rent with respect to the Phoenix

property during the time he resided there. During part of the time he resided in the

Arizona residences, B. Sholes was practicing law.

      The Arizona residences became the subject of litigation between petitioner,

R. Sholes and B. Sholes, and B. Sholes’ former wife, Judy Fernando. One subject

of the litigation was the divorce of B. Sholes and Fernando. Other litigation

involved an entity known as Oasis at Wild Horse Ranch (Oasis). In the divorce

action, Fernando filed a motion leading to the addition of petitioner and R. Sholes

as defendants to claims by Fernando of community property interests in the

Arizona residences and in Oasis. Fernando alleged, among other things, that

B. Sholes had caused title to those properties to be in the names of his parents to

defraud Fernando of her community interest in the properties. In 2010, 50% of

Oasis was awarded to Fernando and 50% was awarded to B. Sholes’ parents, as a

result of moneys his parents had invested in Oasis at his suggestion or on his
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[*4] behalf. In 2011 or 2012, the Tucson property was awarded to Fernando in the

divorce case.

      Petitioner and R. Sholes filed joint Federal income tax returns for 2007,

2008, and 2009. On Schedule E, Supplemental Income and Loss, of each return

they claimed rental expense deductions that were disallowed in the notices of

deficiency as follows:

            Item             2007              2008                2009

   Legal and other
     professional fees $390,939               $580,267          $301,408

   Mortgage interest        90,629              96,957             50,732

   Travel                    ---                 ---                3,209

   Office                    ---                 ---                6,074

   Taxes                     ---                 ---               12,430

   Depreciation              ---                 ---               10,908

They did not report any rental income from the Tucson or Phoenix properties

during those years.

      The legal and professional fees deducted on petitioner’s Schedules E

included fees paid in the course of criminal investigations involving petitioner and

B. Sholes, B. Sholes’ divorce proceedings, and litigation over Oasis. When asked
                                        -5-

[*5] to substantiate the legal expenses paid, petitioner prepared and submitted to

respondent a summary of checks payable to law firms; numerous checks to

caregivers for B. Sholes’ children; a check dated July 14, 2007, for $10,000

payable to Bruce Sholes; a check dated November 30, 2007, for $53,000 payable

to petitioner; and a check dated December 13, 2007, for $40,000 payable to cash.

Despite repeated requests and Court orders during discovery and in preparation for

trial, petitioner did not produce any invoices from lawyers or other documents that

explained the nature of the services performed. No invoices produced contained a

description of the services that would allow allocation between personal items of

B. Sholes and deductible expenses of petitioner. (After trial, petitioner and

B. Sholes sent some invoices for legal services to respondent’s counsel, none of

which were provided to the Court. They acknowledged that some of the invoices

were addressed to B. Sholes and related to his divorce proceedings.)

      The 2009 joint return of petitioner and R. Sholes was due April 15, 2010,

but was filed on October 15, 2010, without an extension of time for filing.

Because of the late filing, the IRS assessed an addition to tax under section

6651(a)(1). Failure to pay additions to tax under section 6651(a)(2) and (3) were

also assessed for 2007, 2008, and 2009.
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[*6]                                   OPINION

       Petitioner bears the burden of proof of the deductions in dispute in this case.

See Rule 142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934);

Rockwell v. Commissioner, 512 F.2d 882, 886 (9th Cir. 1975), aff’g T.C. Memo.

1972-133. Petitioner has not satisfied the conditions under which the burden of

proof would shift to respondent. See generally sec. 7491(a).

       Respondent has the burden of production under section 7491(c) for the

additions to tax. Respondent presented evidence, justifying the additions to tax

assessed under section 6651(a). Petitioner has presented neither evidence nor

argument that her late filing and late payments were due to reasonable cause and

not due to willful neglect. The additions to tax will be sustained.

       By agreement with respondent’s counsel and permission of the Court

because of petitioner’s infirmities, petitioner’s case was presented primarily

through the testimony and arguments of her son, B. Sholes, a former lawyer. They

did not present testimony concerning expenses other than legal expenses. They

specifically failed to substantiate expenses subject to the heightened requirements

of section 274(d), and they failed to show that disallowed mortgage interest

deductions satisfied the requirements and limitations of section 163(a) and (h).

Petitioner’s posttrial brief refers to lost records as the reason for failure to
                                         -7-

[*7] substantiate other items and states that “[t]here is really only one issue of

significance here, whether professional fees are deductible.” All other issues,

therefore, are either deemed abandoned or decided against petitioner because of

failure of proof. See Rule 149(b). In any event, the posttrial arguments are not

evidence and cannot be considered. See Rule 143(c).

      During rambling trial testimony, B. Sholes described financial difficulties

he encountered in investments in Oasis with Fernando and her parents; how his

parents helped him financially by purchasing his residences and allowing him to

live there; how his parents incurred costs of litigation in which he was involved;

and how adverse results of the litigation precluded his repaying his parents. He

testified that the rental arrangement with his parents started in approximately May

2004, that he was winding down his law practice and, with Fernando, was trying

to make money out of investments in Oasis. In 2010, 50% of Oasis was awarded

to Fernando and 50% was awarded to his parents, as a result of moneys his parents

had invested in Oasis at his suggestion or on his behalf.

      Petitioner and B. Sholes have claimed from time to time that Fernando and

her friends and family used political connections to cause a criminal investigation

for money laundering to be commenced against them. Some of the legal expenses

were incurred in relation to that investigation, in which the same lawyers
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[*8] represented all three Sholeses. Other fees were incurred in B. Sholes’ divorce

proceeding, and some were incurred in separate litigation over rights in Oasis. So

far as the record reveals, all of the litigation arose from B. Sholes’ disputes with

Fernando.

      Notwithstanding multiple opportunities to provide specific descriptions of

the services rendered by various lawyers and firms involved in the various legal

battles, petitioner and B. Sholes failed to do so. Instead, to support their

contentions that all of the amounts were properly deducted, they have relied on

canceled checks, summaries of those checks, and vague explanations of what

particular lawyers did. The inclusion of payments to caregivers for B. Sholes’

children, by checks clearly marked as for child care, undermines the reliability of

their generalizations. Petitioner belatedly offered to concede those clearly

personal amounts, but that concession does not cure the misrepresentation of the

nature of the payments in the summary of legal and professional fees petitioner

prepared to support the deductions claimed on her tax returns.

      Petitioner originally reported the legal and professional fees in question as

rental expenses on Schedules E of the returns she filed with R. Sholes. The fiction

that the Arizona residences were rental properties was belied by the evidence that

they were occupied by B. Sholes, and occasionally by petitioner and R. Sholes,
                                          -9-

[*9] and not rented during the years in issue. Although B. Sholes testified that he

executed a promissory note to pay the rent when he was able to do so, there is no

evidence of the agreed amount of rent or other terms. There is no evidence of the

actual amount of time spent at the Arizona residences by petitioner and R. Sholes.

Deductions related to occupancy of the Arizona residences by petitioner and her

family members are disallowed by section 280A(a). See sec. 280A(a), (d).

      Petitioner claims that, according to her accountant:

      Michigan had an unusual law that only allowed a ceiling of
      $100,000.00 per year in legal fees unless they related to rental or
      business property. Thus, Petitioner was forced to treat the two
      Arizona residences as rental properties, according to the CPA. Since
      they were in fact bought to be rented out, petitioner gave her
      approval. Since that time two Federal Courts ruled petitioner to be an
      Arizona resident, so the maintaining of the rental property category
      on the tax returns was no longer necessary.

That claim is neither corroborated nor relevant but indicates petitioner’s lack of

veracity in the entries on her returns.

      Petitioner’s latest claim, in her posttrial brief, is that the legal expenses are

deductible as “paid or incurred for the production of income or the management,

conservation, or maintenance of income-producing property” under section 212.

She asserts:

      Petitioner had to invest the legal fees to conserve Oasis as she knew
      it. Otherwise her investment and that of her son, which together
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[*10] constituted 100% of the money which bought the Wildhorse Ranch,
      renovated it, bought all the appliances, kitchen equipment, dishes and
      all other equipment would have been lost. The payment of the legal
      and professional fees and costs was necessary to conserve both the
      Oasis, LLC and her investment and ownership of it.

Petitioner’s posttrial brief also asserts many facts that are not in the evidentiary

record and cannot be considered. See Rules 143(b) and (c), 151(e)(3).

Petitioner’s factual assertions, however, suggest that corroborating witnesses and

documents should have been available if her claims were accurate. Petitioner

contends that all of the fees deducted related to protecting her interest in Oasis,

even those paid in relation to her son’s divorce and in defending a criminal

investigation that involved her for a short time and B. Sholes for years. This

contention is simply unsupported, implausible, and not credible.

      Taxpayers are required to maintain sufficient records to establish the

amount and purpose of any deduction. Sec. 6001; Higbee v. Commissioner, 116

T.C. 438, 440 (2001); Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), aff’d per

curiam, 540 F.2d 821 (5th Cir. 1976); sec. 1.6001-1(a), (e), Income Tax Regs. We

are not required to accept B. Sholes’ testimony in the absence of corroborating

evidence that should have been available. See Geiger v. Commissioner, 440 F.2d

688, 689-690 (9th Cir. 1971), aff’g T.C. Memo. 1969-159; Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986). After multiple unsuccessful attempts to
                                        - 11 -

[*11] secure the actual invoices before and even after trial, we may infer that they

would not support petitioner’s claims. See Wichita Terminal Elevator Co. v.

Commissioner, 6 T.C. 1158, 1165 (1946), aff’d, 162 F.2d 513 (10th Cir. 1947). It

is worth repeating that the canceled checks and summaries petitioner relied on

included numerous checks for child care services as well as unexplained checks

totaling over $100,000 written in 2007 and payable to B. Sholes ($10,000),

petitioner ($53,000), and cash ($40,000). Petitioner’s evidence is simply

unreliable and does not support any deductions.

      Without evidence of the specific services performed for petitioner by

lawyers and law firms, it is not possible to separate out fees that are paid for

petitioner’s son or otherwise for personal, living, or family expenses not

deductible because of section 262. Deductibility of legal fees depends on the

origin and character of the claim and not on its potential consequences to the

taxpayer. United States v. Gilmore, 372 U.S. 39, 49-52 (1963). If the origin of the

claim is a marital relationship, the legal expenses are nondeductible even if the

outcome affects income-producing property of the taxpayer. Fleischman v.

Commissioner, 45 T.C. 439, 446 (1966); Lucas v. Commissioner, T.C. Memo.

2018-80; Barry v. Commissioner, T.C. Memo. 2017-237.
                                        - 12 -

[*12] Petitioner and R. Sholes became parties to the divorce proceeding between

B. Sholes and Fernando. The pleadings in evidence relating to that case suggest

that the origin of the claim was Fernando’s assertion that the Arizona residences

and Oasis had been placed in the name of B. Sholes’ parents in an effort to deprive

Fernando of her community interest in the properties. Even if we concluded that

some of the fees petitioner paid might be deductible under section 212, we would

be unable to estimate the deductible amount under the principles of Cohan v.

Commissioner, 39 F.2d 540 (2d Cir. 1930), because we have no reliable evidence

on which we could base an estimate. See Norgaard v. Commissioner, 939 F.2d

874, 879 (9th Cir. 1991), aff’g in part, rev’g in part T.C. Memo. 1989-390;

Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

      Petitioner’s evidence is simply too unreliable and her arguments are too

unpersuasive for any disputed deductions to be allowed. Petitioner has presented

no reason why the notice of determination upholding the lien filing while

petitioner’s liabilities remain in currently-not-collectible status should not be
                                       - 13 -

[*13] sustained. We have considered the other arguments of the parties, but they

are unsupported or contradicted by the record or are irrelevant to the issues before

us.


                                                 Decision will be entered for

                                          respondent.
