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T.C. Memo. 2021-100 UNITED STATES TAX COURT ALEXANDER

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T.C. Memo. 2021-100 UNITED STATES TAX COURT ALEXANDER T.C. Memo. 2021-100 UNITED STATES TAX COURT ALEXANDER BERNARD WATHEN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 4310-18. Filed August 11, 2021. Alexander Bernard Wathen, pro se. Courtney M. Hill and Gabriel Okoye (student), for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION PUGH, Judge: In a notice of deficiency dated February 4, 2015, respondent determined the following deficiencies, additions to tax, and penalties:1 1 Unless otherwise indicated, 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. All monetary amounts are rounded to the nearest dollar. Served 08/11/21 - 2 - [*2] Addition to tax Penalty Year Deficiency sec. 6651(a)(1) sec. 6662(a) 2010 $40,091 $10,023 $8,018 2011 29,615 7,404 5,923 The issues for decision are: (1) whether petitioner’s prior bankruptcy proceeding precludes respondent from pursuing the above deficiencies, additions to tax, and penalties;2 (2) whether petitioner failed to report gross receipts of $59,726 and $15,833 for 2010 and 2011, respectively, on Schedules C, Profit or Loss From Business; (3) whether petitioner failed to report partnership income of $1,951 for 2010 on Schedule E, Supplemental Income and Loss;3 (4) whether petitioner is entitled to deduct travel expenses of $8,732 and $21,980 for 2010 and 2011, respectively, on Schedules C; (5) whether petitioner is entitled to deduct office expenses of $46,717 and $53,420 for 2010 and 2011, respectively, on Schedules C; (6) whether petitioner is liable for additions to tax under section 2 At trial petitioner moved for summary judgment that res judicata, collateral estoppel, and judicial estoppel bar respondent from asserting these deficiencies, additions to tax, and penalties. His motion was not timely under Rule 121 or our standing pretrial order, and we advised the parties to address petitioner’s legal arguments in their posttrial briefs. We will deny petitioner’s motion as moot but address his legal arguments below. 3 Respondent conceded half of the $3,902 adjustment for failure to report partnership income because the notice of deficiency contained a duplicate entry. - 3 - [*3] 6651(a)(1) for failure to timely file tax returns for both years in issue; and (7) whether petitioner is liable for penalties under section 6662(a) and (b)(2) for substantial understatements of income tax for both years in issue. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulated facts are incorporated in our findings by this reference. Petitioner resided in Texas when he timely filed his petition. I. Background A. Petitioner’s Bankruptcy Practice During the years in issue petitioner was a bankruptcy lawyer; he listed legal services as his principal business or profession on his Schedules C. And during those years he lived and worked in Houston, Texas; he listed Houston as his home- address city on his Forms 1040, U.S. Individual Income Tax Return, and as his business-address city on his bank accounts. In 2009 petitioner’s bankruptcy practice expanded to Austin and San Antonio, Texas, and throughout the years in issue he would travel to both cities to attend court hearings or meet with clients. The U.S. Bankruptcy Court for the Western District of Texas has locations in both cities. Petitioner’s engagement as counsel in bankruptcy proceedings is documented by automated notices of electronic filing (NEF) sent to his personal - 4 - [*4] email address from the U.S. Bankruptcy Court for the Western District of Texas and the U.S. Bankruptcy Court for the Southern District of Texas. The record includes 52 such notices related to proceedings that took place in 2010 and 59 for 2011. They list petitioner as counsel on behalf of various debtors; some reference upcoming hearings or meetings in San Antonio or Austin although they do not show who was present and do not indicate whether a meeting or hearing was later rescheduled, which sometimes occurred. Petitioner’s bank statements for the years in issue show filing fees paid to U.S. bankruptcy courts in Texas (noted generally as “COURTS/USBC-TX”) but do not indicate any client. These filing fees totaled $15,070 for 2010 and $9,695 for 2011. The bank statements also show charges for PACER and LexisNexis-- research services that petitioner used in connection with his bankruptcy practice. PACER expenses totaled $233 for 2010 and $246 for 2011. LexisNexis expenses totaled $1,055 for 2010 and $1,459 for 2011. When petitioner traveled for his bankruptcy practice, he typically would stay at a motel or hotel booked by phone, email, or through Priceline. He received flight, hotel, and rental car confirmations sent to one of his personal email addresses from companies such as Southwest, Priceline, and Hertz. - 5 - [*5] Petitioner did not keep any records--such as records of travel expenses or office expenses--of how much he spent on any given bankruptcy case as counsel for the debtor. When he submitted his fees for bankruptcy court approval, he included filing fees and other charges and was reimbursed for those fees. During the years in issue petitioner was a partner in the Vuong & Wathen Partnership (Vuong & Wathen). Vuong & Wathen reported $1,951 as petitioner’s share of income on his Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., for 2010.4 B. Petitioner’s Personal Bankruptcy On August 6, 2012, petitioner, as an individual debtor, filed for chapter 13 bankruptcy in the U.S. Bankruptcy Court for the Southern District of Texas. That same month, the Internal Revenue Service (IRS) filed a proof of claim for tax years 2010 and 2011. It later amended its proof of claim on February 27, 2013, two days after petitioner untimely filed his 2010 and 2011 Forms 1040. In June 2014 petitioner proposed a chapter 13 plan, which listed the IRS’ priority claim. The bankruptcy court entered an order confirming the plan in August 2014. The order confirming the plan did not cite 11 U.S.C. sec. 505(a)(1) 4 The parties stipulated the amount reported on petitioner’s 2010 Schedule K-1 for Vuong & Wathen, but the Schedule K-1 itself is not in the record. - 6 - [*6] or otherwise state that it was issued pursuant to the bankruptcy court’s authority to determine taxes under that section. Nor did it include any factual recitations of petitioner’s income, deductions, and credits or otherwise state his total Federal tax liability for any year. In December 2017 petitioner was granted a discharge of debts under 11 U.S.C. sec. 1328(a). The order of discharge noted that “[s]ome debts are not discharged” and listed as “[e]xamples of debts that are not discharged” debts for taxes specified in 11 U.S.C. sec. 523(a)(1)(B). There is no indication that the IRS agreed to waive any of its rights with respect to tax debts excepted from discharge under title 11 of the United States Code (Bankruptcy Code). While the bankruptcy case was pending, respondent issued the notice of deficiency before us; petitioner filed his petition in March 2018, soon after the chapter 13 trustee submitted the final report and account of the bankruptcy estate. II. Petitioner’s Tax Returns Petitioner failed to timely file his Forms 1040 for 2010 and 2011. He was required to file his 2010 return by October 15, 2011, and his 2011 return by April 15, 2012; he did not file either until February 25, 2013. - 7 - [*7] Included with each Form 1040 was Schedule C, on which petitioner reported total gross receipts of $103,124 for 2010 and $148,295 for 2011. He also reported various business expenses, including: Expense 2010 2011 Car and truck $12,809 $9,558 Office 46,717 53,420 Travel 8,732 21,980 Meals and entertainment 2,560 2,181 Not included with either Form 1040 was Schedule E, on which income or loss from partnerships is reported. Petitioner did not keep a set of books and records computing his gross receipts or classifying his expenses into the four categories above. The record includes bank statements for business accounts petitioner owned during the years in issue. In his posttrial brief petitioner reconstructed his travel and office expenses using these bank statements. He grouped the office expenses into categories, including: telecommunications, bar dues and professional organization memberships, equipment, advertising and marketing, printing, shipping and mailing, office supplies, bankruptcy court filing fees (those noted generally as “COURTS/USBC-TX”), outside services (including PACER), and legal research and legal and professional services (including LexisNexis). - 8 - [*8] III. Respondent’s Determinations In the notice of deficiency respondent increased petitioner’s reported Schedule C gross receipts by $59,726 for 2010 and $15,833 for 2011, stating that “[i]n the absence of adequate records, your taxable income for the taxable years shown above [2010 and 2011] has been computed by reference to bank deposits and cash payments, plus personal and other nondeductible expenditures if any.” These adjustments were based on the examining agent’s analysis of petitioner’s bank statements, which calculated the difference between petitioner’s bank deposits (less payroll, transfer from other bank accounts, refunds, or other nontaxable deposits) and petitioner’s reported gross receipts. Respondent disallowed petitioner’s claimed deductions for Schedule C travel and office expenses for both years in issue because the expenses “ha[d] not been adequately substantiated (as to amount or deductibility).” Respondent allowed petitioner’s claimed Schedule C deductions for car and truck and meals and entertainment expenses.
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