BAILEY v. COMMISSIONER OF INTERNAL REVENUE
T.C. Memo. 2012-96
United States Tax Court.
Filed April 2, 2012.
The IRS allowed Mr. Bailey a deduction of $931,698 for 1994 and $302,454 for 1995 for Duboc expenses that he paid from the Credit Suisse account in those amounts. Mr. Bailey should certainly get the benefit of (and not owe tax on) the funds he expended for that purpose. However, these allowances were premised on the prior upward adjustment to Mr. Bailey's income for the Biochem Pharma stock from the proceeds of which the expenditures were made, which adjustment we did not sustain. Since we have held that Mr. Bailey realized income not from the Credit Suisse account, but only when funds were transferred to his other accounts, such a deduction is no longer appropriate and is not sustained.
For 1996 the IRS determined that Mr. Bailey's documentation substantiated only a portion of his claimed mortgage interest and real estate tax deductions, and it disallowed the remainder—i.e., $14,244 of the mortgage interest and $2,362 of the real estate taxes. He offered no evidence on the subject, and the adjustment is sustained.
For 1997 the IRS disallowed deductions for mortgage interest ($14,986) and real estate taxes ($11,327) that, as for 1996, Mr. Bailey did not substantiate. The adjustments are sustained.
h. Travel expense
The IRS determined that Mr. Bailey's claimed deduction of 1993 travel expenses included $12,976 that was not substantiated. The trial record includes the IRS agent's worknotes analyzing the subsidiary amounts that made up the total and reporting the supposed comments of Mr. Bailey's daughter-in-law and representative, Lainey Bailey. In his post-trial brief, Mr. Bailey argues: "The documents cited by Respondent (l) do not establish the claim, and (2) are incomplete and inaccurate." However, this argument reflects a misunderstanding of the burden of proof. In view of the IRS's determination, however fallible, Mr. Bailey was obliged to substantiate his claimed deductions for travel expenses, but he did not do so. The IRS's adjustment is therefore sustained.
The IRS made adjustments to travel and entertainment expense deductions for 1995 and subsequent years on the basis of an agent's detailed analysis of the travel and entertainment expense that Mr. Bailey claimed for 1996. She determined the portion of the total claimed (in 1996, $65,272) that was either unsubstantiated or else was for personal travel or other personal expense (in 1996, $22,080). She then applied that ratio to disallow a portion of the travel and entertainment expense that Mr. Bailey reported for other years—i.e., to disallow $48,199 for 1995, $20,480 for 1997, $45,201 for 1998, and $25,229 for 1999. (For year 2000 travel expense, see "Office expense" below.) Of course, the IRS's distinctions between personal and business could be in error; and its use of a ratio from another year, though potentially reasonable, is obviously rough at best and is certainly subject to improvement. Mr. Bailey therefore had the opportunity to provide that correction and to substantiate all of his claimed deductions, and it was incumbent on him to do so. He did not. As to 1996, he summarily asserts, "The `disallowed' travel and entertainment expenses were properly documented and should be allowed." As to 1997, he complains that this was "arbitrarily determined". But Mr. Bailey did not substantiate any of these expenses, and the adjustments are sustained.