Rick Fishman v. Commissioner, TC Memo 2011-102 , Code Sec(s) 6501; 6663.
RICK FISHMAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent .
Case Information:
| Code Sec(s): |
6501; 6663 |
<>
| Docket: |
Docket No. 14514-06. |
| Date Issued: |
05/18/2011 |
| Judge: |
Opinion by PARIS |
HEADNOTE
XX.
Reference(s): Code Sec. 6501 ;
Code Sec. 6663
Syllabus
Official Tax Court Syllabus
Counsel
J. Timothy Bender and J. Scott Broome, for petitioner.
Cathy J. Horner, for respondent.
Opinion by PARIS
MEMORANDUM FINDINGS OF FACT AND OPINION
Petitioner and his wife, Mary Ann Fishman
(the Fishmans, and petitioner's wife alone, Mrs. Fishman), timely filed joint
Federal income tax returns for tax years 1994, 1995, 1996, and 1997 (the tax
years at issue). Respondent issued a statutory notice of deficiency covering the
tax years at issue to the Fishmans on May 9, 2006. The notice stated that
respondent had determined the following deficiencies and penalties with respect
to their Federal income taxes:
Penalty
Year Deficiency Sec. 6663(a)
1994 $13,878 $10,409.50
1995 14,415 10,811.25
1996 14,692 11,019.00
1997 15,304 11,478.00
Petitioner timely filed a petition with this Court challenging the
deficiencies and penalties.
1
Petitioner resided in Indiana when he filed his petition.
This case presents one issue for decision: whether underpayments due to fraud
exist for the tax years at issue such that, because of the fraud: (1) Petitioner
is liable for civil fraud penalties under
section 6663(a)
2 and (2) the period of limitations on assessment does
not bar assessment of the proposed deficiencies and penalties. The Court holds
that no underpayments due to fraud exist. Therefore, petitioner is not liable
for civil fraud penalties, and the period of limitations bars assessment of the
proposed deficiencies. As a result, the Court need not otherwise address the
correctness of the proposed deficiencies, including the computational
adjustments.
3
FINDINGS OF FACT
I. Petitioner's Career With United Group Association Some of the facts have
been stipulated and are found accordingly. The stipulations of fact and the
attached exhibits are incorporated herein by this reference. In 1988 when the
Fishmans lived in Cleveland, Ohio, petitioner became a sales representative for
United Group Association (UGA). As a sales representative, petitioner was a
self-employed independent contractor of UGA. His responsibilities included
marketing and selling to other self-employed individuals insurance policies for
life, health, dental, vision, and prescription drug coverage, as well as
memberships in the National Association for the Self- Employed (NASE).
In a little over a year UGA promoted petitioner to district sales leader
(district leader); he remained a self-employed independent contractor. As a
district leader, petitioner continued his previous duties of marketing and
selling insurance and NASE memberships. He also took on new responsibilities
such as recruiting, hiring, training, managing, and motivating a team of sales
representatives. The sales representatives in petitioner's district were also
self-employed independent contractors.
When petitioner became a district leader, he began doing business as PACE
Associates (PACE). Petitioner formed and operated PACE as a sole proprietorship
and reported income (or loss) from PACE on Schedules C, Profit or Loss From
Business, of the Fishmans' joint returns. Petitioner also opened and maintained
a bank account for PACE, from which he paid all expenses relating to his
business.
In 1991 UGA promoted petitioner again, this time to division sales leader
(division leader). Petitioner remained a self- employed independent contractor
and continued to do business as PACE. His new division covered the entire State
of Indiana, so the Fishmans moved to Indianapolis, where they remained
throughout the tax years at issue. Petitioner held the position of division
leader throughout the tax years at issue.
As a division leader, petitioner retained the same general
responsibilities—sell insurance and NASE memberships and recruit, hire, train,
manage, and motivate a sales team. His new sales team, however, consisted not
only of sales representatives but also of district leaders. Specifically, during
the tax years at issue petitioner had between 3 and 5 district leaders and
between 40 and 60 sales representatives in his division. The district leaders
and sales representatives in petitioner's division were all self-employed
independent contractors. Petitioner continued to work for UGA until 2008, when
he left the insurance industry.
II. UGA's Commission Advance System UGA paid its agents
4 solely on commission. Commissions were
earned as monthly insurance premiums were paid. Specifically, when an agent sold
an insurance policy, for the first 12 months the policy was in effect he would
earn a sales commission equal to 20 percent of the policy's monthly premiums.
For each subsequent month the policy remained in effect, he would earn a sales
commission equal to 4 percent of the monthly premium. Thus, agents earned larger
commissions from selling new policies than from maintaining existing policies.
Sales leaders earned two types of commission. First, they earned sales
commissions on policies they personally sold. Second, they earned commissions on
their subordinate
5 agents'
sales. UGA called this second type of commission an override. “sales leaders” to
refer to division leaders and district leaders combined.
UGA recognized that earning commissions only as monthly premiums were paid
might prevent agents from initially earning adequate commissions to cover their
living expenses.
6 To address
these concerns, UGA used a commission advance system. Under this system, when an
agent sold a policy, UGA would advance (i.e., lend) the agent approximately 6
months' anticipated but unearned commissions. As the monthly premiums on that
policy were paid, UGA would apply the earned commissions against the advance
(i.e., as repayment of the loan). Thus, after approximately 6 months, earned
commissions would fully offset the advance. As a result, agents who consistently
sold new policies would have as cash on hand approximately 5 to 6 months'
anticipated but unearned If premium payments discontinued within the first 6
commissions. months, however, UGA would collect from the agent any portion of
the advance not offset by earned commissions. An advance not offset by earned
commissions carried simple interest at rates ranging from 1 to 1.5 percent, and
the agent had a contractual duty to repay whether or not he continued to earn
commissions.
Because the advances were loans bearing a stated rate of interest, UGA did
not report them as compensation to its agents on Forms 1099-MISC, Miscellaneous
Income. Rather, UGA reported only earned commissions as compensation.
Specifically, for tax year 1996, when UGA issued Forms 1099-MISC to its agents,
UGA included a document that explained the commission advance system. The
document explained the income-reporting implications of the system, provided an
illustration of how the system worked, and alerted its agents to “start planning
today for 1997's tax liability!”
7
The commission advance system applied to petitioner's division during all tax
years at issue. Each week UGA would approve new policies sold by agents in
petitioner's division. Upon approving the policies, UGA would wire-transfer the
entire division's weekly advances to the PACE account and would send to
petitioner a summary document specifying the advance amounts for each agent,
including petitioner. Petitioner was responsible for writing checks to the other
agents in his division as per the UGA summary document, which he did. Of course,
petitioner retained in the PACE account his own advances on personal sales and
overrides.
III. Expenses Petitioner Paid on Behalf of the District Leaders Petitioner
paid various expenses on behalf of the district leaders in his division.
8 For example, if a district leader
shipped something using petitioner's Federal Express (FedEx) or United Parcel
Service (UPS) account number, petitioner paid the entire FedEx or UPS bill.
Petitioner also paid the costs of running advertisements for the district
leaders. In addition, if a district leader made a long-distance phone call,
petitioner paid the entire phone bill. Lastly, one district leader needed a fax
machine, so petitioner bought the fax machine for the district leader.
9
While petitioner initially paid these expenses, the district leaders
eventually reimbursed him.
10
Rather than sending bills to the district leaders showing their expenses—which
would have required the district leaders to write reimbursement checks to
petitioner each week—petitioner obtained reimbursement directly by deducting the
expenses from the district leaders' commission advance checks. Specifically,
petitioner would review any invoices, bills, and receipts containing such
expenses and would note on a sheet of paper the expense types and amounts, as
well as the names of the district leaders on whose behalf petitioner had
initially paid the expenses. Each week petitioner would transfer the information
on the sheet of paper to balance sheets he prepared for the district leaders. On
a given balance sheet petitioner noted, among other things: (1) The district
leader's weekly advance amount as per the UGA summary document and (2) the
expenses he had paid on behalf of that district leader. Petitioner subtracted
these expenses from the UGA-prescribed advance amounts and wrote checks to the
district leaders for the net amounts.
11 He also provided copies of the balance sheets to the
district leaders. During the tax years at issue petitioner prepared between
three and five balance sheets per week and obtained repayment for expenses he
had paid on the district leaders' behalf of $54,549, $51,996, $63,159, and
$59,241, respectively.
IV. The Fishmans' Joint Tax Returns For each tax year at issue petitioner
prepared a summary list of what he believed to be his Schedule C business
expenses. He sent the lists, his Forms 1099-MISC, and Mrs. Fishman's Forms W-2,
Wage and Tax Statement, to his C.P.A. Petitioner occasionally provided his
C.P.A. with other information relevant to his tax return preparation.
Specifically, for tax year 1996, petitioner provided to his C.P.A.: (1) The
document from UGA outlining the income-reporting implications of the commission
advance system and (2) information regarding petitioner's stock purchase plan
with UGA.
Petitioner prepared the summary lists using a rather Petitioner took what he
called a “vacation” rudimentary method. from his normal UGA duties for
approximately 1 week each year. During these weeks, which he spent in his home,
petitioner compiled all of the division's expense receipts and the district
leaders' balance sheets for the respective tax year. Petitioner would then take
the balance sheets for a district leader and determine the total amount of
expenses he initially paid on that district leader's behalf (for which he had
been reimbursed).
12 He would
then begin adding up the expense receipts for his division. When the dollar
amount of the receipts reached the amount of expenses petitioner had paid on
that district leader's behalf, he would set those receipts and that district
leader's balance sheets aside. Petitioner would repeat this process for each
district leader in his division.
After completing this process, petitioner added up and categorized the
remaining expense receipts and reported the amounts as Schedule C business
expenses on the summary lists he sent to his C.P.A. See supra note 7. Because
petitioner set aside receipts up to the amount of the reimbursed expenses, the
summary lists neither included those expenses as Schedule C business deductions
nor reported the reimbursements as Schedule C gross receipts. Consequently, the
C.P.A. did not include the expenses as business deductions or the reimbursements
as gross receipts on the Fishmans' joint returns.
V. The IRS Criminal Investigation of Petitioner In 1998 special agents from
respondent's Criminal Investigation Division (CID) contacted petitioner
concerning an investigation into PACE's finances and the Fishmans' joint
returns. CID terminated the investigation sometime in 2003 without initiating
criminal prosecution against petitioner. The record contains no evidence
concerning: (1) The details of the investigation; (2) what prompted CID to open
the investigation;
(3) why criminal prosecution was not initiated; or (4) whether CID ever
notified petitioner that it had terminated the investigation.
VI. Subsequent Civil Audit and Notice of Deficiency In December 2003
respondent assigned the audit of the Fishmans' tax years 1994, 1995, 1996, and
1997 to Revenue Agent Kay Shoaf (revenue agent). CID delivered to the revenue
agent 10 boxes of materials it had collected during its investigation. In April
2004 petitioner provided the revenue agent with six additional boxes of
documents. These boxes contained bank statements, checks, receipts mostly
organized in monthly packets, charge card statements, and telephone, shipping,
and advertising bills. Despite having six boxes of documents containing expense
receipts, the revenue agent analyzed only the telephone, shipping (FedEx and
UPS), and advertising expenses. She observed that, while the amounts of these
expenses did not exceed the amounts reported on the Fishmans' joint returns,
they did exceed the amounts for which petitioner was reimbursed by the district
leaders. The revenue agent could not, however, determine whether the expenses
she reviewed were reported as Schedule C deductions on the Fishmans' joint
returns. The revenue agent did not review receipts corresponding to any other
expense items on the joint returns.
The revenue agent did create spreadsheets based on information contained in
the joint returns, IRS computer databases, the weekly balance sheets, and
letters petitioner wrote to his C.P.A. One spreadsheet the revenue agent created
reflects the stipulated amounts of expenses petitioner paid on behalf of the
district leaders for which he was reimbursed. Aside from the spreadsheets,
however, the record contains nothing prepared by the revenue agent during her
audit. The revenue agent never spoke with the Fishmans or the C.P.A. during the
course of her audit. She completed her audit in August 2004.
On May 9, 2006, almost 2 years after the revenue agent completed her audit,
respondent determined deficiencies in the Fishmans' Federal income taxes for the
tax years at issue. The deficiency determinations resulted primarily from
respondent's adjustment to petitioner's gross income.
13 Specifically, the notice of deficiency stated:
It is determined that you received reimbursement for business expenses
claimed on your returns *** which were not reflected on your return. These
reimbursements are taxable income to you under the provisions of
Section 61 of the Internal Revenue Code. Alternatively,
your other business expenses are decreased by the amount of reimbursements you
received. [Emphasis added.
14 ]
Notably, the notice of deficiency did not reflect a determination that
petitioner had overstated any specific deductions he claimed on his Schedules C.
In addition, the notice of deficiency reflected no adjustment to gross income
related to the commission advances petitioner received from UGA. In fact, the
revenue agent never saw or considered the UGA document explaining the commission
advance system during her audit, even though she admitted that the 16 boxes of
information she had may have contained that document.
15
OPINION
I. Underpayments Due to Fraud Do Not Exist.
A taxpayer is liable for a civil fraud penalty if, acting with fraudulent
intent, he underpays the Federal income tax required to be shown on his return.
Sec. 6663(a). In other words, fraud consists of two
elements: (1) Underpayment of tax and (2) fraudulent intent. To establish fraud,
the Commissioner must prove both elements with clear and convincing evidence.
16 Secs. 7454(a),
7491(c); Rule 142(a)(2), (b); DiLeo v.
15
See supra note 7 and accompanying text. Commissioner,
96 T.C. 858, 873 (1991), affd.
959 F.2d 16 [69 AFTR 2d 92-998] (2d Cir. 1992).
Respondent has not proven the first element—that petitioner underpaid his
Federal income tax. The Commissioner may initially establish that a taxpayer
underpaid his Federal income tax by producing clear and convincing evidence that
the taxpayer failed to report specific transactions that gave rise to gross
income. See, e.g., United States v. Shavin,
320 F.2d 308, 311 [12 AFTR 2d 5112] (7th Cir. 1963);
Peyton v. Commissioner,
T.C.
Memo. 2003-146 [TC Memo 2003-146] (citing Siravo v. United States, 37 F.2d 469,
473-474 (1st Cir. 1967), Elwert v. United States,
231
F.2d 928, 933 [49 AFTR 546] (9th Cir. 1956), United States v. Bender,
218
F.2d 869, 871-872 [46 AFTR 1614] (7th Cir. 1955), and United States v. Stayback,
212
F.2d 313, 317 [45 AFTR 1412] (3d Cir. 1954)). This method of establishing an
underpayment is called the specific items method of proof.
17 See Price v. Commissioner,
T.C.
Memo. 2004-103 [TC Memo 2004-103]. If, using this method, the Commissioner
produces clear evidence of unreported gross income, the taxpayer must then prove
by a preponderance of the evidence that he incurred, but did not report, enough
deductible costs or expenses to offset the unreported income. See United States
v. Bender, supra at 871- 872; Peyton v. Commissioner, supra. If, however, the
Commissioner improperly characterizes a nonincome item as gross income, he fails
to meet his initial burden and, as a result, the taxpayer need not produce
evidence of offsetting expenses. Cf. United States v. Bender, supra at 871-872
(stating that the burden of production shifts to the taxpayer “when the
Government has shown unreported income”).
Respondent determined deficiencies based solely on the following two-pronged
argument: (1) Petitioner paid expenses on behalf of the district leaders and
deducted the expenses on his Schedules C;
18 (2) the district leaders eventually reimbursed
petitioner for these expenses, and the reimbursements constituted gross income
to petitioner, which he omitted from his return. To establish an underpayment
based on this position, respondent must produce clear and convincing evidence
that the reimbursements were properly characterized as gross income. See United
States v. Bender, supra at 871; Peyton v. Commissioner, supra.
Respondent claims that petitioner conceded that he underreported gross
income. If a taxpayer concedes that he failed to report gross income, his
concession may serve as the evidence the Commissioner needs to satisfy his
initial burden. Karcho v. Commissioner,
T.C.
Memo. 2000-213 [TC Memo 2000-213]. Absent such a concession, however, the
Commissioner must produce actual evidence of unreported gross income. See United
States v. Bender,
218
F.2d 869, 871 [46 AFTR 1614] (7th Cir. 1955); Peyton v. Commissioner, supra.
Contrary to respondent's claim, petitioner did not concede Respondent relies
on two that he underreported gross income. stipulated facts to support his
claim: (1) Petitioner received reimbursements for expenses PACE paid on behalf
of the district leaders; and (2) petitioner did not report the reimbursements as
gross income. These two stipulations, however, do not constitute a concession
that the reimbursements constitute gross income pursuant to
section 61.
19 [the] reimbursements or if the reimbursements were
offset by other business expenses incurred and paid by the Petitioner”.
(continued...)
Generally, gross income does not include reimbursements for expenses a
taxpayer pays on behalf of another. Price v. Commissioner,
T.C.
Memo. 1999-142 [1999 RIA TC Memo ¶99,142] (citing Gray v. Commissioner, Morever,
a taxpayer generally
10 T.C. 590, 596-597 (1948)). cannot deduct such
expenses because, when the taxpayer obtains reimbursement, the expenses have
been paid not by the taxpayer but by the person who reimbursed the taxpayer.
20 Universal Oil Prods. Co. v.
Campbell,
181
F.2d 451, 475 [39 AFTR 377] (7th Cir. 1950) (citing Glendinning, McLeish &
Co. v. Commissioner,
61 F.2d
950, 952 [11 AFTR 1025] (2d Cir. 1932), affg.
24 B.T.A. 518
(1931)). In other words, the taxpayer merely advances (i.e., lends) the payment
to the other person or business, and the other person or business returns (i.e.,
repays) the advanced amount at a later time. Flower v. Commissioner,
61 T.C. 140, 152 (1973), affd. without published opinion
505 F.2d 1302 (5th Cir. 1974); see Commissioner v. Tufts,
461
U.S. 300, 307 [51 AFTR 2d 83-1132] (1983).
The two stipulated facts respondent relies upon establish only that
petitioner initially paid the expenses and that the district leaders eventually
reimbursed him. They do not establish that petitioner could have properly
deducted the expenses as his own business expenses. In fact, respondent ignores
the most important stipulation—the district leaders were self-employed
independent contractors. They had no employment or contractual relationship with
PACE or petitioner. As independent contractors, they carried on their own
businesses separate from PACE. See World Wide Agency, Inc. v. Commissioner,
T.C.
Memo. 1981-419 [¶81,419 PH Memo TC]. Thus, any expenses the district leaders
paid or incurred that were ordinary and necessary to their businesses would not
be directly attributable to PACE and therefore would not be deductible by
petitioner. See
secs. 62(a)(1),
162(a); Glendinning, McLeish & Co. v. Commissioner,
supra at 952; Phila.- Balt. Stock Exch. v. Commissioner,
19 T.C. 355, 359 (1952);
sec. 1.162-1(a), Income Tax Regs.;
sec. 1.62-1T(c)(1), Temporary Income Tax Regs., 53 Fed.
Reg. 9873 (Mar. 28, 1988). Because the stipulated facts do not represent a
concession that petitioner could have deducted the reimbursed expenses as his
own business expenses, they cannot represent a concession that the
reimbursements were properly characterized as gross income. Therefore,
respondent must produce actual evidence that the reimbursements constitute gross
income.
Respondent has not produced sufficient evidence to characterize the
reimbursements as gross income. Respondent acknowledges that petitioner used the
reimbursement system merely as a substitute for billing the district leaders
weekly and having them write checks to reimburse petitioner for the outlays.
Inherent in this acknowledgment is that, by the end of each year, the district
leaders ultimately paid the expenses.
Petitioner's testimony, which the Court finds credible, further supports this
view of the reimbursements. Petitioner viewed the expenses as the district
leaders' "[expenses] to help the division grow”. Despite using a rudimentary
method, petitioner segregated the expenses ultimately paid by the district
leaders from those ultimately paid by PACE. Petitioner listed only the expenses
ultimately paid by PACE on the documents he sent to his C.P.A., who prepared
petitioner's tax returns.
21
Furthermore, petitioner provided the weekly balance sheets showing the nature
and amount of the reimbursable expenses to the district leaders. These balance
sheets served as summary tax documentation that enabled: (1) Petitioner to
determine the total expenses paid by the district leaders during the tax years
at issue and (2) the district leaders to substantiate their business expenses on
their tax returns.
Simply put, respondent has not produced clear and convincing evidence that
the reimbursements constitute gross income.
22 Rather, petitioner's receipt of the reimbursements
gave rise to nothing more than a loan repayment. Because receiving repayment of
a loan does not give rise to gross income, respondent has not met his initial
burden. Thus, petitioner need not produce evidence of offsetting expenses.
Therefore, the Court holds that respondent has not proven that petitioner
underpaid the Federal income tax required to be shown on his returns for the tax
years at issue. Because respondent did not prove that petitioner underpaid his
Federal income tax during the tax years at issue, the Court need not discuss
whether petitioner acted with See Jenkins v. United States,
313 F.2d 624 [11 AFTR 2d 868], fraudulent intent. 627
(5th Cir. 1963); Elfmon v. United States,
209
F.2d 642, 643 [45 AFTR 191] (4th Cir. 1954). Accordingly, petitioner is not
liable for civil fraud penalties pursuant to
section 6663(a).
II. The Period of Limitations Bars Assessment of the Proposed Deficiencies.
Respondent conceded that, if he could not prove fraud, the period of
limitations would bar assessment of the proposed deficiencies. Respondent has
not proven fraud. Thus, the period of limitations bars assessment of the
proposed deficiencies.
23
To reflect the foregoing and the concessions of the parties,
Decision will be entered for petitioner.
1
Petitioner and Mrs. Fishman originally filed separate petitions. The
Court consolidated their cases on Oct. 21, 2009. Respondent and Mrs. Fishman
later agreed to settle her case at docket No. 14515-06, and on Mar. 12, 2010,
after the date of trial in the instant case, the Court severed the previously
consolidated cases. The Court then entered a stipulated decision in Mrs.
Fishman's case on Apr. 5, 2010.
2
Unless otherwise indicated, all section references are to the Internal
Revenue Code of 1986, as amended and in effect for the tax years at issue. All
Rule references are to the Tax Court Rules of Practice and Procedure.
3
Specifically, respondent adjusted petitioner's self- employment tax
deductions and liability, his medical expense deductions, and his earned income
tax credits.
4
For convenience, the Court will use the term “agents” to refer to
division leaders, district leaders, and sales representatives combined. The
Court will also use the term
5
The Court uses the term “subordinate” loosely. Recall that all UGA
agents were self-employed independent contractors.
6
An agent would have to sell a substantial number of policies and keep
them on the books to live solely on earned commissions.
7
Petitioner provided this document to his certified public accountant
(C.P.A.) along with other documents pertaining to tax year 1996. The document
was also in the possession of the Internal Revenue Service (IRS). See infra note
15 and accompanying text.
8
Petitioner also incurred and paid expenses to run his division that
were not on the district leaders' behalf. Such expenses included those for
office rent, utilities, equipment, advertising, travel, and meals and
entertainment. Petitioner deducted these expenses on Schedules C of the
Fishmans' joint returns.
9
Petitioner also paid a “Management Package Fee” on behalf of each
district leader. No evidence exists regarding this fee other than its amount,
which was approximately $150 to $200 per week per district leader.
10
Petitioner was not reimbursed for the other expenses he paid to run his
division. See supra note 8.
11
Petitioner was not always reimbursed in full every week. For example,
the district leader for whom petitioner initially purchased the fax machine
reimbursed him over multiple weeks, as if making installment payments on the
purchase.
12
Petitioner viewed these expenses as the district leaders' "[expenses]
to help the division grow.” In other words, petitioner viewed the expenses to be
the district leaders' business expenses rather than his own.
13
All other adjustments reflected in the notice of deficiency were
computational. See supra note 3.
14
While respondent in the notice of deficiency uses the term “taxable
income” to articulate his determination, the reference to
sec. 61 and the statements surrounding the term clearly
indicate that respondent's determination focused on petitioner's gross income
(as opposed to taxable income or adjusted gross income as defined in
secs. 63 and
62, respectively).
15
16
The taxpayer's mere failure to prove error in the Commissioner's
deficiency determination does not, without more, satisfy the Commissioner's
burden for either element. Gromacki v. Commissioner,
361 F.2d 727, 730 [17 AFTR 2d 1005] (7th Cir. 1966),
affg.
T.C. Memo. 1964-292 [¶64,292 PH Memo TC]; Petzoldt v.
Commissioner,
92 T.C. 661, 700 (1989).
15
17
The Commissioner can also employ the specific items method by producing
clear and convincing evidence of specific items of overstated deductions. See
Beauchamp v. Commissioner,
T.C.
Memo. 1997-393 [1997 RIA TC Memo ¶97,393] (sustaining fraud penalty for portion
of underpayment related to overstated alimony deductions). However, respondent
did not produce any evidence—much less clear and convincing evidence—that
petitioner overstated any specific deductions. Rather, respondent focuses solely
on whether the reimbursements petitioner received constituted gross income that
petitioner failed to report.
18
The Court recognizes that, as part of his determination, respondent
asserted that petitioner had deducted the reimbursed expenses on his Schedules
C. See supra p. 12. That assertion does not, however, equate to a determination
that petitioner overstated specific items of deduction. See supra note 17.
Rather, the essence of respondent's determination is that, while petitioner
correctly reported his Schedule C deductions, he underreported his gross
receipts.
In any event, petitioner employed a system—albeit rudimentary—to deduct
only those business expenses for which he had not been reimbursed. See supra pp.
10-11. Thus, the Court finds that petitioner did not report the reimbursed
expenses on his Schedules C.
19
Petitioner argues that, while he “has never denied that he received
expense reimbursements *** for expenses that PACE paid or incurred on behalf of
the District Sales Leaders”, he never conceded that he had unreported gross
income. Specifically, petitioner's brief states: “The only dispute is over
whether Petitioner realized additional taxable income as a result of
20
Only under limited circumstances may a taxpayer deduct expenses for
which he obtains reimbursement. See, e.g.,
secs. 62(a)(2)(A),
,
274(a), (e)(3);
secs. 1.62-1(c)(2),
1.62-2,
1.162- 17,
1.274-2(f)(2)(iv), Income Tax Regs.;
sec. 1.62-1T(e), Temporary Income Tax Regs., 53 Fed.
Reg. 9874 (Mar. 28, 1988). Accordingly, only under limited circumstances does
mere receipt of reimbursements give rise to gross income. See, e.g.,
sec. 62(a)(2)(A);
sec. 1.162-17(b), Income Tax Regs. (regulating how
employee taxpayers must report certain expenses and any reimbursements received
therefor). None of those circumstances apply in this case.
21
Petitioner's method only matched the amounts of the receipts to the
amounts on the balance sheets. Thus, while the character of the expenses on the
receipts may not have matched the character of the expenses on the balance
sheets, respondent made no determination that the character of any of
petitioner's expenses should be adjusted. See supra note 17.
22
Respondent also argues in his posttrial briefs that “the commission
advances he received from UGA are income to petitioner upon his exercise of
dominion and control over the funds in the bank account”. Respondent makes this
argument despite the facts that the revenue agent never saw or considered UGA's
policy document regarding the commission advance system during her audit and
that respondent did not determine that the commission advances constituted gross
income to petitioner. The Court need not consider this argument raised for the
first time after trial. Centel Commcns. Co. v. Commissioner,
920 F.2d 1335, 1340 [67 AFTR 2d 91-373] (7th Cir. 1990)
(citing Knowlton v. Commissioner,
791
F.2d 1506, 1511 [58 AFTR 2d 86-5294] (11th Cir. 1986), affg.
84 T.C. 160 (1985)), affg.
92 T.C. 612 (1989). In any event, UGA required
petitioner to distribute the advances to the agents in his division. The system
imposed a contractual obligation upon the agents to repay UGA for any unearned
advances, which bore a stated rate of interest. Thus, the advances did not
constitute gross income to petitioner when UGA wire-transferred the amounts to
the PACE account.
23
Because respondent cannot assess the proposed deficiencies (including
the computational adjustments), the Court need not otherwise determine their
correctness. See supra note 3 and accompanying text.
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