Romer v. Commissioner
| Decision Date | 06 July 2001 |
| Docket Number | Docket No. 11646-97. |
| Parties | Nicholas M. Romer v. Commissioner. |
| Court | U.S. Tax Court |
Nicholas M. Romer, pro se.1 Elizabeth Downs, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined the following deficiencies, additions to tax, and penalties with respect to petitioner's Federal income taxes:2
Addition to Tax
Year Deficiency Sec. 6654(a)
1989 ......................................... $4,472 $ 5,708
1990 ......................................... 95,905 6,343
1991 ......................................... 153,032 8,702
After concessions by both parties,3 the issues for decision are: (1) Whether petitioner is entitled to deductions for aviation-related expenses, not previously claimed on his Federal income tax returns, in excess of amounts agreed to by respondent; (2) whether petitioner is liable for civil fraud penalties under section 6663; and (3) whether the period of assessment for taxable year 1989 has expired.4
The parties have stipulated some of the facts, which we incorporate in our findings by this reference. When he filed his petition, petitioner resided in Franklin, Tennessee.
During the years in issue, petitioner was a certified public accountant (C.P.A.) practicing with Romer & Co., a Minneapolis, Minnesota accounting business that he founded in 1974. As part of his accounting practice, petitioner prepared individual State and Federal income tax returns for aircraft pilots.
During the years in issue, petitioner also engaged in various aviation activities as a licensed commercial pilot, a certified flight instructor, a licensed aircraft dealer, an airline transport pilot, and a charter pilot (the aviation activities). During the years in issue, petitioner owned, at different times, four aircraft: A Piper Navajo N1430S, a Piper Navajo N55CT, an Aero Commander N163D, and a King Air N623R (collectively, the aircraft). Petitioner used the aircraft in his aviation activities.
During the subject years, petitioner had no charter certificate. In order to fly his aircraft on charter flights, petitioner associated himself with Great Lakes Air d/b/a Cirrus Air Charter (Great Lakes) and Cirrus Flight Operations (Cirrus). Great Lakes possessed a charter certificate and operated an air charter business. Cirrus sold fuel and provided maintenance to small aircraft. During the years in issue, Great Lakes and Cirrus were owned, in part, by Richard Cross (Cross), who was a pilot for Sun Country Airlines, and in part by an unrelated business entity known as General Housewares.
Pursuant to an agreement with Cross, petitioner flew his aircraft on charter flights under Great Lakes' charter certificate. Sometimes, Cirrus would arrange for other pilots to fly petitioner's aircraft on charter trips.5
Apparently, petitioner was entitled to receive all the income generated from flights using his aircraft and was credited with all the income and charged with associated expenses incurred by Great Lakes or Cirrus in an account that he maintained with Great Lakes (Great Lakes account). Romer & Co. provided accounting services for Great Lakes and Cirrus and prepared their Federal income tax returns.
During each of the years in issue, petitioner received gross receipts and incurred expenses with respect to his aviation activities.
For the years in issue, petitioner personally prepared his Federal income tax returns. He reported no gross income or expenses from his aviation activities. On Schedule C, Profit or Loss From Business, he reported gross receipts and net profit from "Bookkeeping and Accounting" as follows:
Year Gross Receipts Net Profit
1989 .................................................. $116,869 $23,177
1990 .................................................. 165,116 25,122
1991 .................................................. 13,200 13,200
The Criminal Investigation
In the early 1990's, petitioner became the subject of an investigation by the Internal Revenue Service Criminal Investigation Division (CID). On several occasions in 1992, as part of that investigation, undercover CID agents posing as new clients of Romer & Co. met with petitioner and surreptitiously recorded their conversations. The criminal investigation culminated in the April 15, 1996, indictment of petitioner on three counts of violating section 7206(1) with respect to his individual Federal income tax returns for taxable years 1989, 1990, and 1991, for willfully making and subscribing false tax returns, under penalties of perjury, knowing that he had underreported gross receipts from his accounting firm and had failed to report any gross receipts from his aviation activities.
On August 13, 1996, petitioner entered into a plea agreement, pleading guilty to one count of willfully failing to supply information on his 1991 Federal income tax return pursuant to section 7203. The plea agreement states that petitioner "admits that the civil fraud penalty and interest applies to whatever additional tax he is deemed to owe after pursuing remaining civil remedies for tax years 1989-1991." Petitioner was ultimately sentenced to 6 months' imprisonment.
In the notice of deficiency, dated April 10, 1997, respondent determined that petitioner had failed to report gross receipts from his accounting and aviation activities and other sources in the following amounts:
Respondent also determined that petitioner is subject to the section 6663 civil fraud penalty and the section 6654(a) addition to tax for failing to pay estimated taxes for each of the subject years.
OPINIONPetitioner concedes that he failed to report gross receipts in the amounts determined in respondent's notice of deficiency. He contends, however, that he is entitled to deduct associated business expenses not claimed on his returns for the subject years. He claims that these newly asserted deductions more than offset the gross proceeds that he omitted from his returns and that consequently he has no deficiency for any year in issue.
The parties have stipulated that petitioner is entitled to certain deductions not claimed on his return with respect to both his aviation activities and the Romer & Co. accounting business.6 Giving effect to the parties' concessions and stipulations results in net losses from petitioner's aviation activities for each of the years in issue but indicates positive net income from petitioner's other activities. Seeking to eliminate any remaining net income (and indeed to produce significant net losses) from his accounting business and other sources, petitioner seeks to deduct the following additional expenses relating to his aviation activities, not previously claimed on his return and not agreed to by respondent (the unagreed expenses):
Year Amount
1989 .............................. $40,074
1990 .............................. 53,372
1991 .............................. 147,504
1 This amount includes additional depreciation of $20,847
that petitioner is claiming on one of his aircraft. The
$47,504 amount is also based, in part, on petitioner's alleged
duplicate living expenses assuming that Nashville, Tenn., is
petitioner's tax home. If Minneapolis, Minn., is assumed to
be petitioner's tax home, the amount claimed is $43,476
Section 162 generally allows a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. An expense is ordinary if it is customary or usual within a particular trade, business, or industry or relates to a transaction "of common or frequent occurrence in the type of business involved." Deputy v. du Pont [40-1 USTC ¶ 9161], 308 U.S. 488, 495 (1940). An expense is necessary if it is appropriate and helpful for the development of the business. Commissioner v. Heininger [44-1 USTC ¶ 9109], 320 U.S. 467, 471 (1943). Expenses that are personal in nature are generally not allowed as deductions. Sec. 262(a).
When a taxpayer establishes that he has incurred deductible expenses but is unable to substantiate the exact amounts, we can estimate the deductible amount, but only if the taxpayer presents sufficient evidence to establish a rational basis for making the estimate. See Cohan v. Commissioner [2 USTC ¶ 489], 39 F.2d 540, 543-544 (2d Cir. 1930); see also Vanicek v. Commissioner [Dec. 42,468], 85 T.C. 731, 742-743 (1985).
Section 274(d) supersedes the general rule of Cohan v. Commissioner, supra, and precludes us from estimating the taxpayer's expenses with regard to certain items. See Sanford v. Commissioner [Dec. 29,122], 50 T.C. 823, 827 (1968), affd. per curiam [69-2 USTC ¶ 9491] 412 F.2d 201 (2d Cir. 1969). Section 274(d) imposes strict substantiation requirements for expenses relating to, among other things, travel, entertainment, and "listed property", including automobiles and other property used as a means of transportation. Sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). To obtain a deduction for such items, the taxpayer must substantiate "by [either] adequate records or sufficient evidence corroborating * * * [his] own statement" the amount of the expense, the time and place of travel or entertainment, the business purpose of the expense, and...
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