                  T.C. Memo. 2011-239



                UNITED STATES TAX COURT



            LOUIS GREENWALD, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 1577-09.                Filed October 3, 2011.



     R’s disallowance of a short-term capital loss and
the capitalization of certain improvements made to P’s
home before its sale caused deficiencies in Federal
income tax for P’s 2005 tax year. R also determined
that P was liable for an addition to tax pursuant to
sec. 6651(a)(1), I.R.C., and an accuracy-related
penalty pursuant to sec. 6662(a), I.R.C., for his 2005
tax year.

     Held: P is liable for a portion of the deficiency
consistent with the findings herein.

     Held, further: P is liable for the sec. 6651(a)(1),
I.R.C., addition to tax but is not liable for the sec.
6662(a), I.R.C., penalty.



B. Paul Husband, for petitioner.

Linette B. Angelastro, for respondent.
                                    - 2 -

                   MEMORANDUM FINDINGS OF FACT AND OPINION


        WHERRY, Judge:     This case is before the Court on a petition

for redetermination of petitioner’s liability for income tax, a

failure to file addition to tax, and an accuracy-related penalty

for the 2005 tax year.        After concessions the issues for decision

are:1

        (1) Whether petitioner is entitled to a short-term capital

loss of $68,000;

        (2) whether petitioner had $356,515 of additional capital

gain;

        (3) whether petitioner is liable for the section 6651(a)

failure to file addition to tax;2 and

        (4) whether petitioner is liable for the section 6662(a)

accuracy-related penalty.

                              FINDINGS OF FACT

            Some of the facts have been stipulated.   The stipulated

facts and the accompanying exhibits are incorporated by this




        1
      Respondent concedes that petitioner is entitled to exclude
$250,000 of residential capital gain, and petitioner concedes
that he is not entitled to a net operating loss deduction of
$65,993.
        2
      Unless otherwise indicated, section references are to the
Internal Revenue Code of 1986, as amended and in effect for the
tax year at issue. All Rule references are to the Tax Court
Rules of Practice and Procedure.
                                - 3 -

reference.   Petitioner resided in California at the time he filed

his petition.

     On June 29, 2001, petitioner, along with Daniel Lewis Kupper

and George H. Manuras, entered into a “Fixed Rate Installment

Note” (installment agreement) in the amount of $90,000, with JAV,

Inc. (JAV), to purchase a skateboarding accessories business

known as Skaters Paradise.   Under the installment agreement,

petitioner and the two other individuals were jointly and

severally liable and were required to make installment payments

(with interest) to JAV.

     On or about April 11, 2002, petitioner purchased a residence

at 610 Olive Road in Santa Barbara, California (Olive Road

property), for $1,155,000.   Petitioner also owned a second Santa

Barbara residence at 590 Santa Rosa Lane (Santa Rosa property)

which he leased out.   Petitioner refinanced the Olive Road

property on October 31, 2002.   Petitioner again refinanced the

Olive Road property in July of 2003, and in March or early April

of 2004 petitioner used the Olive Road property as collateral for

a loan with a private lender.

     On December 20, 2002, JAV sued petitioner, Daniel Lewis

Kupper, and George H. Manuras for nonpayment of the installment

agreement.   JAV obtained a judgment for $64,491.71 against

petitioner on December 23, 2003, which was recorded on December
                               - 4 -

24, 2003.   Petitioner satisfied the judgment by again refinancing

the Olive Road property on April 26, 2004.

     After petitioner paid the judgment, he tried to keep the

business going and sought repayment from Daniel Lewis Kupper and

George H. Manuras.   He abandoned the venture in 2005.

     Beginning in 2002 petitioner began making improvements on

the Olive Road property.   His bookkeeper, Neala Robbins, recorded

each expense.   Petitioner typically used his wholly owned

corporation, BLSH, Inc., to pay the expenses for the

improvements.   However, the contractors and other persons

petitioner hired understood that they were doing business with

petitioner personally and not his corporation.

     By 2003 petitioner’s wholly owned corporation was no longer

actively in business.   Petitioner explained that he used the

corporation’s credit card and accounts “because it was

convenient” and because “There was a credit card attached to it,

and I had no income or no job, so I couldn’t get a credit card,

you know, and this one had [a] Louis Greenwald credit card * * *

and I just assumed that it was okay to use it, and I did.”

Petitioner claimed that the money in the corporation’s account

represented proceeds from refinancing the Olive Road property and

the rental income from the Santa Rosa property.

     Petitioner sold the Olive Road property on or about January

7, 2005, for $2,650,000.   On his 2005 tax return petitioner
                                - 5 -

reported the adjusted basis of the residence as $1,761,198

(including selling expenses).    He then subtracted this amount

from the sale price to compute his taxable gain of $888,802.

From the $888,802 he took the maximum principal residence

exclusion of $250,000 and reported a capital gain from the sale

of $638,802.

     The accounting firm Fineman West & Co., LLP (Fineman West),

prepared petitioner’s 2005 tax return.    Fineman West had prepared

petitioner’s personal returns in the past; and when he was in

business, they had prepared his business returns as well.

Petitioner believed that Fineman West was a well-respected

certified public accounting firm and “Trusted them implicitly”.

Petitioner believed that he provided all of the required

information to Fineman West and that his return was prepared

correctly.    Petitioner also explained that he was under the

impression Fineman West automatically requested extensions of

time to file for all of the returns they processed.

     Jeffery Dunn, C.P.A., a senior tax manager at Fineman West,

explained that it was the custom and practice of the firm for an

accountant to prepare the return, a senior manager to review it,

and then a tax partner to do a second and final review and sign

off on it.    He also explained that it was Fineman West’s practice

to request extensions for its clients even if not requested by

the client.
                                - 6 -

     The filing date for petitioner’s 2005 tax return was not

extended.    Petitioner did not know why the firm did not

automatically request an extension of time to file his return.

Petitioner claims that as soon as he found out, he “got it fixed

right away” and immediately had the firm file the return.

Petitioner’s 2005 and 2004 tax returns were filed on January 12,

2007.    Petitioner did not file a tax return for 2002 or 2003.

     Respondent issued petitioner a notice of deficiency on

October 27, 2008, determining a deficiency in income tax of

$151,007, a section 6651(a) addition to tax of $45,112, and a

section 6662(a) accuracy-related penalty of $30,201 for the 2005

tax year.    For that tax year respondent disallowed a claimed net

operating loss (NOL) carryforward of $65,993, increased capital

gains by $674,515, disallowed itemized deductions of $22,215, and

determined alternative minimum tax of $29,906.3   Petitioner filed

a timely petition with this Court on January 21, 2009, denying

that he owed the deficiency, addition to tax, and penalty.    A

trial was held on June 25, 2010, in Los Angeles, California.



     3
      Although petitioner contested the disallowed itemized
deductions and the alternative minimum tax in his petition, they
were not mentioned at trial or on brief. Therefore, to the
extent these adjustments are not a mathematical correlative
adjustment, we deem them conceded. See Levin v. Commissioner, 87
T.C. 698, 722-723 (1986) (citing Rule 142(a) for the proposition
that because “petitioners have made no argument with respect to
* * * deductions claimed * * * [, they] are deemed to have
conceded their nondeductibility”), affd. 832 F.2d 403 (7th Cir.
1987).
                                - 7 -

                               OPINION

I.   Short-Term Capital Loss of $68,000

     Petitioner claimed a $68,000 short-term capital loss on

Schedule D, Capital Gains and Losses, for “Investment JAV-KGM” on

his 2005 tax return.4   Section 165(a) generally allows a

deduction for losses sustained within the taxable year.     Section

165(c) limits losses that can be deducted by individual

taxpayers, permitting a deduction only for losses incurred in a

trade or business, in a profit-making activity (though not

connected with a trade or business), or from a casualty or theft.

     A loss is deductible only for the taxable year in which it

is sustained.   Sec. 1.165-1(d)(1), Income Tax Regs.   In order to

be “sustained”, the loss must be “evidenced by closed and

completed transactions and as fixed by identifiable events

occurring in such taxable year.”    Id.   At trial petitioner

explained that a judgment was obtained against him because of a

business installment agreement for which he was personally

liable.   Petitioner explained that he claimed the capital loss

after he was unable to collect from his business partners their

shares of the judgment.

     The record contains both the installment agreement and the

judgment against petitioner.   It also contains the paperwork for


     4
      We note that the judgment entered against petitioner in
relation to JAV was in the amount of $64,491.71. The disparity
is not explained by the record.
                                 - 8 -

the refinancing petitioner used to pay off the judgment in 2004.

We find credible petitioner’s testimony that he continued to seek

repayment from his partners during 2004 and part of 2005, after

paying the judgment, and then abandoned the venture in 2005.

Respondent has not satisfactorily rebutted this evidence;

therefore petitioner is entitled to deduct the $68,000 capital

loss.

II.   Capital Gain of $356,515

      Respondent increased capital gain on the sale of the Olive

Road property by $606,515.   After respondent’s concession that

petitioner was entitled to the section 121 exclusion of $250,000,

capital gain of $356,515 remains at issue.   Petitioner claimed

that he made total capital improvements of $387,734.60 to the

Olive Road property.   Most of the expenditures were paid through

petitioner’s defunct wholly owned corporation, and petitioner

submitted receipts for improvements totaling only $171,301.79.

      A. Petitioner’s Corporation

      Respondent asserts that because petitioner’s personal

service corporation made the payments, petitioner is not entitled

to add the amounts to the basis of the Olive Road property.    We

find this argument without merit.    Petitioner credibly testified

that because of credit card problems he merely used the

corporation’s accounts as his personal piggy bank clearing house

agent, depositing his income from the rental and refinancing and
                               - 9 -

then using the accounts to pay for the capital improvements. In

reality and in substance petitioner paid for the capital

improvements to the Olive Road property, not his corporation.

     B. Substantiation

     Petitioner included receipts for only $171,301.79 of the

$387,734.60 of claimed expenses.   Petitioner claims that he

included only invoices that exceeded $2,000 because of an

agreement with the examining agent.5

     Petitioner urges the Court to apply the Cohan doctrine,

under which the Court may allow a claimed expense even where the

taxpayer is unable to fully substantiate it, provided the Court

has an evidentiary basis for doing so.   Williams v. United

States, 245 F.2d 559, 560 (5th Cir. 1957); Cohan v. Commissioner,

39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85

T.C. 731, 742-743 (1985).   But see sec. 1.274-5T(a), Temporary



     5
      We note that petitioner (or his counsel) should have been
aware that this Court is not constrained by an alleged but
unproven agreement made between a taxpayer and the examining
agent. Further, the Commissioner as sovereign is generally not
bound by unauthorized acts of his revenue agents “even where a
taxpayer may have relied to his detriment on that mistake.”
Norfolk S. Corp. v. Commissioner, 104 T.C. 13, 60 (1995), affd.
140 F.3d 240 (4th Cir. 1998); see also Auto. Club of Mich. v.
Commissioner, 353 U.S. 180, 183 (1957); Hendrick v. Commissioner,
63 T.C. 395, 403 (1974). Nor has petitioner established that
respondent should be estopped here. See Wilkins v. Commissioner,
120 T.C. 109, 112 (2003); Lignos v. United States, 439 F.2d 1365,
1368 (2d Cir. 1971). The consideration of only items larger than
$2,000 is also not a statistically valid sample of all expenses
since items of less than $2,000 had no chance of being included.
See generally Rev. Proc. 2011-42, 2011-37 I.R.B. 318.
                               - 10 -

Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).    In these

instances, the Court is permitted to approximate the allowable

expense, bearing heavily against the taxpayer whose inexactitude

is of his or her own making.    Cohan v. Commissioner, supra at

544.    However, the record must contain sufficient evidence to

provide a basis upon which the estimate may be made and to permit

us to conclude that those expenses were allowable, rather than

personal expenses.    Williams v. United States, supra at 560;

Vanicek v. Commissioner, supra at 472-473.

       Generally, we agree with petitioner that the application of

the Cohan doctrine is appropriate in this instance.    Although

petitioner did not submit receipts for any expense of less than

$2,000, he did submit a complete list of the expenses, including

the date incurred, the payee, and the number of the check used to

pay each expense.    This factual background allows the Court to

estimate the expenses; before the amounts disallowed by this

opinion below, the Court estimates that petitioner had expenses

of $387,734.60.

       However, certain of the items on the list were checks

written to “Cash” with a description of the purpose for which the

cash was supposedly used.    Petitioner did not discuss why he used

checks written to cash without receipts to substantiate the

expenses.    We are unconvinced that petitioner used the entire

amount of cash extracted from the account for those expenses.
                               - 11 -

Therefore, he is not entitled to add to basis unsubstantiated

expenses paid with checks made out to cash totaling $7,661.15.6

     C. Expenses Eligible To Increase Basis

     Respondent argues that not all of the expenses listed in

petitioner’s exhibit are eligible to be added to the basis of the

property as capital improvements and that certain expenses are

noncapitalizable personal expenses.     Capital expenditures include

“Any amount paid out * * * for permanent improvements or

betterments made to increase the value of any property or

estate.”   Sec. 263(a)(1).   In contrast personal expenses include

those expenses which are “personal, living, or family expenses”.

Sec. 262(a).

     While we agree that most of the expenses that petitioner

included in the amount he capitalized for the house were properly

capitalizable, certain expenses cannot be included.    These are on

petitioner’s list of expenses under “Miscellaneous” beginning on

February 10, 2002, and continuing to September 11, 2004, with the

exception of two charges for storage and one for a pest report.

Petitioner did not attempt to explain these expenses at trial;




     6
      However, only $356,515 is at issue, and petitioner’s list
includes capital improvements which total $387,734.60. Therefore
this finding may not have a practical effect on this case.
                              - 12 -

therefore he is not entitled to include expenses totaling

$950.33.7

III. Section 6651(a) Failure to File Addition to Tax

     Respondent bears the burden of production with regard to

the section 6651(a)(1) addition to tax.    See sec. 7491(c); Higbee

v. Commissioner, 116 T.C. 438, 446-447 (2001).      To meet his

burden, respondent must produce sufficient evidence that it is

appropriate to impose the determined addition to tax.     See Higbee

v. Commissioner, supra at 446.    However, respondent does not have

to produce evidence of lack of reasonable cause, substantial

authority, or lack of willful neglect.    See id.

     Section 6651(a)(1), in the case of a failure to file on time

any return required under section 6011(a), imposes an addition to

tax of 5 percent of the tax required to be shown on the return

for each month or fraction thereof for which there is a failure

to file, not to exceed 25 percent in the aggregate.     Generally,

“any person made liable for any tax * * * shall make a return or

statement according to the forms and regulations prescribed by

the Secretary.”   Sec. 6011(a).   The addition to tax will not




     7
      Again, only $356,515 is at issue. Therefore this finding
may not affect the outcome of this case. Respondent also argued
that petitioner was not entitled to add to his basis the
$7,879.35 of expenses related to staging the house for resale.
Even if we disallow those expenses the amount of capital
improvements allowed still exceeds the amount at issue.
                               - 13 -

apply if it is shown that such failure is due to reasonable cause

and not due to willful neglect.

       Petitioner’s 2005 return was filed on January 12, 2007.

Petitioner argues that “October 16 is an appropriate date from

which to calculate the late filing penalty”, because he believed

that the accounting firm automatically requested an extension for

him.    Petitioner’s argument is essentially that he had reasonable

cause for filing his return late until October 15, 2006, but not

anytime thereafter.

       The failure to timely file a tax return is considered due to

reasonable cause where a taxpayer is unable to file the return

within the prescribed time despite exercising “‘ordinary business

care and prudence.’”    Jackson v. Commissioner, 86 T.C. 492, 538

(1986) (quoting section 301.6651-1(c)(1), Proced. & Admin.

Regs.), affd. 864 F.2d 1521 (10th Cir. 1989).

       Generally, circumstances considered to constitute reasonable

cause arise as a result of factors beyond a taxpayer’s control

and include situations such as unavoidable postal delays, timely

filing of a return with the wrong office, death or serious

illness of the taxpayer or a member of his immediate family, the

taxpayer’s unavoidable absence from the United States,

destruction by casualty of the taxpayer’s records or place of

business, and reliance on the erroneous advice of an IRS office

or employee.    McMahan v. Commissioner, 114 F.3d 366, 369 (2d Cir.
                               - 14 -

1997), affg. T.C. Memo. 1995-547; see also Gagliardi v.

Commissioner, T.C. Memo. 2008-10.

     Good faith reliance on professional advice may also provide

a basis for reasonable cause; however, it is not absolute.8

Freytag v. Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d

1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991); LaPlante v.

Commissioner, T.C. Memo. 2009-226.

     There is insufficient evidence in the record for the Court

to determine that petitioner had reasonable cause for filing his

return late.    His supposed reliance on the accounting firm to

request an extension for him does not constitute reasonable cause

since he knew that if he needed extra time, an extension request

was due.   That duty to file may not be delegated to an attorney

or accountant.    United States v. Boyle, 469 U.S. 241, 249-250

(1985).    Petitioner did not testify as to when he gave his

information to the accounting firm to prepare his return, and the

witness from the accounting firm could not recall what was in

petitioner’s file.    Further, petitioner’s 2004 return was filed

within a matter of days of his 2005 return.    It does not appear


     8
      We have held that for a taxpayer to rely reasonably upon
advice, “the taxpayer must prove * * * that the taxpayer meets
each requirement of the following three-prong test: (1) The
adviser was a competent professional who had sufficient expertise
to justify reliance, (2) the taxpayer provided necessary and
accurate information to the adviser, and (3) the taxpayer
actually relied in good faith on the adviser’s judgment.”
Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 99
(2000), affd. 299 F.3d 221 (3d Cir. 2002).
                               - 15 -

that petitioner had reasonable cause for late filing, and thus he

is liable for the section 6651(a) addition to tax.

IV.    Section 6662(a) Accuracy-Related Penalty

       Respondent also determined that petitioner is liable for a

section 6662(a) accuracy-related penalty for his 2005 tax year.

Pursuant to section 7491(c), the Commissioner also has the burden

of production with respect to this penalty.       Subsection (a) of

section 6662 imposes an accuracy-related penalty of 20 percent of

any underpayment attributable to causes specified in subsection

(b).    Respondent asserts two causes justifying the penalty:     A

substantial understatement of income tax, subsec. (b)(2), and

negligence, subsec. (b)(1).

       There is a “substantial understatement” of income tax for an

individual in any tax year where the amount of the understatement

exceeds the greater of (1) 10 percent of the tax required to be

shown on the return for the tax year or (2) $5,000.

Sec. 6662(d)(1)(A). “[N]egligence” is “any failure to make a

reasonable attempt to comply with the provisions of this title”

(i.e., the Internal Revenue Code).      Sec. 6662(c).   Under caselaw,

“‘Negligence is a lack of due care or the failure to do what a

reasonable and ordinarily prudent person would do under the

circumstances.’”    Freytag v. Commissioner, supra at 887 (quoting

Marcello v. Commissioner, 380 F.2d 499, 506 (5th Cir. 1967),

affg. on this issue 43 T.C. 168 (1964) and T.C. Memo. 1964-299).
                               - 16 -

     There is an exception to the section 6662(a) penalty when a

taxpayer can demonstrate:   (1) Reasonable cause for the

underpayment and (2) that the taxpayer acted in good faith with

respect to the underpayment.   Sec. 6664(c)(1).   Regulations

promulgated under section 6664(c) provide that the determination

of reasonable cause and good faith “is made on a case-by-case

basis, taking into account all pertinent facts and

circumstances”.   Sec. 1.6664-4(b)(1), Income Tax Regs.

     Reliance on the advice of a tax professional may, but does

not necessarily, establish reasonable cause and good faith for

the purpose of avoiding a section 6662(a) penalty.    See United

States v. Boyle, supra at 251.   Such reliance does not serve as

an “absolute defense”; it is merely a “factor to be considered.”

Freytag v. Commissioner, supra at 888.

     The caselaw sets forth three requirements for a taxpayer

seeking to use reliance on a tax professional to avoid liability

for a section 6662(a) penalty.   See Neonatology Associates, P.A.

v. Commissioner, 115 T.C. 43, 99 (2000), affd. 299 F.3d 221 (3d

Cir. 2002);9 see also, e.g., Charlotte’s Office Boutique, Inc. v.

Commissioner, 425 F.3d 1203, 1212 & n.8 (9th Cir. 2005) (quoting

with approval the above three-prong test), affg. 121 T.C. 89

(2003).




     9
      See supra note 8.
                                - 17 -

     We find that with respect to this penalty petitioner has met

the three requirements for a finding of reasonable cause under

Neonatology Associates.   Therefore petitioner is not liable for

the section 6662(a) accuracy-related penalty.

V.   Conclusion

     Petitioner is entitled to deduct the $68,000 capital loss.

Petitioner is entitled to increase his basis with respect to the

capital expenditures on the Olive Road property consistent with

the findings of this opinion.    Finally, petitioner is liable for

the section 6651(a) addition to tax, but on account of reasonable

cause he is not liable for the section 6662(a) accuracy-related

penalty.

     The Court has considered all of petitioner’s and

respondent’s contentions, arguments, requests, and statements.

To the extent not discussed herein, we conclude that they are

meritless, moot, or irrelevant.

     To reflect the foregoing,

                                      Decision will be entered

                                 under Rule 155.
