                   T.C. Summary Opinion 2008-8



                     UNITED STATES TAX COURT



                  PETER SHOWLER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19480-04S.            Filed January 29, 2008.



     Peter Showler, pro se.

     Kris H. An, for respondent.



     CARLUZZO, Special Trial Judge:   This case was heard

pursuant to the provisions of section 7463.1   Pursuant to section

7463(b), the decision to be entered is not reviewable by any


     1
        Unless otherwise indicated, section references are to the
Internal Revenue Code of 1986, as amended, in effect for the
relevant period. Rule references are to the Tax Court Rules of
Practice and Procedure.
                               - 2 -

other court, and this opinion shall not be cited as precedent for

any other case.

     Respondent determined a $15,841 deficiency in petitioner’s

2002 Federal income tax.   The issue for decision is whether

petitioner is entitled to certain deductions claimed on a

Schedule C, Profit or Loss From Business, included with his 2002

Federal income tax return.

                             Background

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

At the time the petition was filed, petitioner resided in

California.

     During the year in issue petitioner sold securities and/or

financial products as an independent contractor for National

Planning Corp. (NPC).   His compensation for doing so was paid in

the form of commissions that were directly deposited into one or

another of two “regular personal” checking accounts maintained at

China Trust, U.S.A. (Trust).   One of those accounts was

petitioner’s individual account; the other was a joint account

that petitioner maintained with three business associates.

     Petitioner and those three business associates each owned

25 percent of the stock of Wise Steward Corp. (Wise), a

California corporation that offered financial planning services
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to its customers.   Wise conducted business through its employees,

one of whom was petitioner, and independent contractors.    Wise

maintained a “business checking” account at Trust.

     During 2002, NPC paid commissions totaling $75,929 to

petitioner and issued a Form 1099-MISC, Miscellaneous Income, to

petitioner evidencing those payments.   As an NPC sales

representative, petitioner had two “rep codes”, one that tracked

the payment of “regular” commissions and the other that tracked

“override” commissions.   The difference, if any, between the two

types of commission payments has not been made entirely clear.

Of the total commissions paid to petitioner by NPC during 2002,

regular commissions totaling $45,862 were directly deposited into

petitioner’s individual checking account at Trust, and override

commissions totaling $30,067 were directly deposited in the

joint checking account that petitioner maintained at Trust with

the other shareholders of Wise.   Except for five direct deposits

that total $1,714, the funds directly deposited as override

commissions into the joint checking account were, within days of

each direct deposit, electronically transferred to Wise’s

business checking account at Trust.

     The services that petitioner performed for Wise as one of

its employees are not entirely clear, but the services appear to

overlap to some extent with the services he performed for NPC.
                               - 4 -

In any event, Wise paid petitioner a salary or wages totaling

$24,916 during 2002.

     From time to time throughout the year petitioner entertained

and/or provided gifts to his clients, clients and independent

contractors of Wise, and other independent contractors of NPC.

     As relevant here, the income reported on petitioner’s timely

filed 2002 Federal income tax return includes the wages he

received from Wise and $14,515 of “business income”, the

computation of which is detailed on a Schedule C included with

that return.

     The Schedule C identifies petitioner’s principal business as

“investment manager & sale” and shows the accounting method for

the business as “cash”.   The $75,929 in commissions received from

NPC is reported as gross income, and as relevant here, the

following deductions are claimed:   (1) “Commissions and fees”--

$30,067; (2) “travel, meals, and entertainment”--$7,217;

(3) “donations to non-profit”--$2,750; (4) “bonuses”--$1,500; (5)

“gifts”--$3,690; and (6) “memberships”--$410.

     The amount of the deduction for commissions and fees equals

the amount of “override” commissions that petitioner received

from NPC that were first directly deposited into petitioner’s

joint checking account but then, and with the exceptions noted
                               - 5 -

above, were electronically transferred to Wise’s business

checking account.

     All of the above-referenced deductions were disallowed in

the notice of deficiency.   According to an explanation included

in the notice of deficiency, the deduction for commissions and

fees was disallowed because “no deduction is allowed for any

compensation that is unreasonable or excessive”.     The explanation

for the disallowance of that deduction went on to note that

petitioner had failed to “establish that the amount shown was (a)

compensation, and (b) paid”.   Various reasons are   given in the

notice of deficiency for the disallowances of the other

deductions listed above, including petitioner’s failure to

substantiate the payments of the underlying expenses.

                            Discussion

     In general, a taxpayer is entitled to a deduction for all

ordinary and necessary expenses paid or incurred in carrying on

any trade or business.   Sec. 162(a).    Depending upon the nature

of the business, the disallowed deductions here in dispute fall

into categories of expenses generally recognized as deductible

under section 162(a).

     The nature of and the manner in which petitioner conducted

his business, as either an employee of Wise or an independent

contractor of NPC, have been described only in general terms, and

many details are unknown.   At trial petitioner attempted to
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distinguish among his clients, NPC’s clients, and Wise’s clients,

but his attempts, for the most part, were lost on the Court.

This lack of detail, exacerbated by a lack of precision, does

little to demonstrate how many of the disallowed deductions

relate to petitioner’s trade or business.    Furthermore,

complications between the parties that arose in the pretrial

stipulation process, see Rule 91, resulted in a hodgepodge of

exhibits, some of which duplicate others in content if not

format, many of which are illegible or incomplete, and many of

which, although it might come as a surprise to the parties, are

hardly self-explanatory.

     As we have noted in countless cases, deductions must be

substantiated by adequate records.     Sec. 6001; Hradesky v.

Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d

821 (5th Cir. 1976).   Not only does the taxpayer bear the burden

to substantiate any deduction claimed, but in proceedings such

as this one, the taxpayer has the burden to present the

substantiating records in an organized manner that clearly

demonstrates the relationship of the record to the disputed

deduction.

1. Deductions for Expenses Other Than for Commissions and Fees

     The documents that petitioner produced to substantiate the

deductions claimed for expenses other than for commissions and

fees consist of:   (1) Copies of receipts from various restaurants
                               - 7 -

for meals paid for by credit card or cash; (2) copies of receipts

from various retail stores or supermarkets for food, beverages,

and other household items; (3) copies of receipts from golf

courses; (4) copies of receipts from cigar stores and other gift

shops; (5) copies of checking account statements showing payment

for items by debit card; (6) copies of canceled checks; and (7)

spreadsheets which appear to list some of the items reflected in

the first six categories of documents.

     We begin by noting that the totals shown on the spreadsheets

for various categories of expenses do not match the deductions

claimed for those expenses on petitioner’s return.     Furthermore,

nothing has been submitted that ties the disallowed deductions

to specific copies of receipts, checks, or other documents that

have been admitted into evidence.

     Careful review of the restaurant receipts demonstrates many

duplications.   The following two examples of such duplications

are representative of many others:     (1) The February 15, 2002,

dinner at Saddle Peak Lodge in Calabasas, California, shown on

one receipt for $159.13 that details the items consumed is

duplicated by a receipt for $183.13 that summarizes the amount of

the dinner check, plus tip; and (2) a dinner receipt dated

February 22, 2002, from Café Bellissimo, in Woodland Hills,

California, showing items totaling $49.20 consumed by two

individuals, marked “client meeting--Faupel”, is duplicated on a
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receipt that shows the cost of the dinner, plus tip (total

$59.20), marked “client meeting--Brennan”.2

     There are other unexplained irregularities in the documents

that petitioner produced to support the disallowed deductions.

One receipt for a purchase of an item from Liberty Leather in

Torrence, California, is dated in 2001 and signed by someone

other than petitioner.    Supermarket receipts marked as “training”

expenses for Wise employees include expenditures for items the

deduction of which would, without explanation, seem to be

prohibited by section 262(a).3    We could go on and on but see

little point in doing so.    The many duplications and other

irregularities in the records that petitioner produced to support

the deductions claimed for expenses other than for commissions

and fees lead us to conclude that the records are unreliable.

Because petitioner has otherwise failed to substantiate the

deductions for those expenses, respondent’s disallowances of

those deductions are sustained.

2. Deduction for Commission and Fees Expenses

     Trust checking account statements demonstrate that $28,353

($30,067 minus $1,714) of the $30,067 “override” commissions was

transferred from petitioner’s joint checking account to Wise’s


     2
         This pattern is repeated numerous times in the exhibits.
     3
       Sec. 262(a) provides in part that “no deduction shall be
allowed for personal, living, or family expenses.”
                               - 9 -

business account.   Consequently, petitioner has substantiated the

payment of that expense to that extent.   Although the record is

not as complete as we would like concerning exactly to what

the expense relates, it is clear that it is some form of

compensation; and contrary to the explanation given in the notice

of deficiency for the disallowance of the deduction, nothing in

the record suggests that the compensation was not reasonable.

See sec. 162(a)(1).   It follows that the reasons given in the

notice of deficiency (unreasonable compensation and lack of

substantiation) for the disallowance of the deduction have been

overcome by the evidence, or lack thereof, presented.

     Although it is not a ground listed in the notice of

deficiency, respondent also argues that petitioner is not

entitled to the deduction because the payments of the underlying

expenses in some manner or another violated various provisions of

the Securities Exchange Act of 1934 (the 1934 Act), ch. 404, 48

Stat. 881 (current version at 15 U.S.C. secs. 78a-78lll (2000)).

According to respondent, the expense to which the deduction

relates is a nondeductible “illegal” payment within the meaning

of section 162(c)(2).   Respondent bears the burden of

establishing by clear and convincing evidence that the expenses

to which the commission deduction relates constitute illegal

payments.   Secs. 162(c)(2), 7454(a); Rule 142(b).
                              - 10 -

     In support of his burden, respondent relies upon an opinion

letter from the Securities and Exchange Commission (SEC) issued

in response to a “No-Action Request” made on behalf of an

individual and an organization involved in the sale of

securities.   According to the opinion letter, the “facts and

circumstances” presented, which might or might not be similar

to petitioner’s, could result in an SEC enforcement action for

violation of the 1934 Act.   We cannot help but wonder whether the

circumstances described in the opinion letter are, in fact, so

similar to petitioner’s that the conclusion reached in the letter

has application to petitioner’s situation.    Even if applicable,

the conclusion is hardly determinative of whether payment of the

commission expense should be treated as an illegal payment within

the meaning of section 162(c), and the opinion letter, in and of

itself, hardly satisfies respondent’s burden on the point.

     Respondent’s disallowance of the commissions expense

deduction claimed on the Schedule C is rejected.    Petitioner is

entitled to a deduction for commission expenses to the extent the

payment of those commissions has been substantiated.

     To reflect the foregoing,


                                      Decision will be entered

                                 under Rule 155.
