Holmes v. Comm'r , 93 T.C.M. 1137 ( 2007 )

T.C. Memo. 2007-97
UNITED STATES TAX COURT
SANDRA HOLMES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5699-05. Filed April 24, 2007.
James H. Callwood, for petitioner.
Matthew J. Avon and Paul Schneiderman, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined a deficiency in and
additions to petitioner’s 2001 Federal income tax as follows:
Additions to Tax
Sec. Sec. Sec.
Deficiency 6651(a)(1) 6651(a)(2) 6654(a)
$35,380 $2,037 $1,358 $242
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Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 2001, and Rule references
are to the Tax Court Rules of Practice and Procedure.
After settlement of some issues by the parties, the issue
for decision is whether petitioner for 2001 is entitled to deduct
legal fees.
FINDINGS OF FACT
At the time the petition was filed, petitioner resided in
New York, New York.
In 1994, using an attorney, petitioner filed in Federal
District Court a lawsuit against petitioner’s employer alleging
sexual harassment and discrimination. In 1996, the District
Court dismissed petitioner’s lawsuit. In 1997 the United States
Court of Appeals for the Second Circuit affirmed the dismissal.
Holmes v. NBC, GE, 946 F. Supp. 2 (S.D.N.Y. 1996), affd. without
published opinion Holmes v. NBC/GE, 133 F.3d 907 (2d Cir. 1997).
The specific terms of the fee agreement between petitioner
and her attorney are not established in the record.
In 2001, even though petitioner’s Federal sexual harassment
and discrimination lawsuit had been dismissed against petitioner
several years earlier, petitioner’s attorney continued attempts
to recover for petitioner damages relating to alleged sexual
harassment and discrimination. The record does not indicate that
petitioner ever recovered any amount of damages relating to
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sexual harassment or discrimination.
On September 13, 2004, because petitioner had not filed her
2001 individual Federal income tax return, respondent prepared
for petitioner a substitute tax return using third-party return
information and determined against petitioner a tax deficiency of
$35,380, plus the additions to tax listed above.
On or about September 5, 2006, 2 weeks prior to trial,
petitioner signed and submitted to respondent her 2001 individual
Federal income tax return and claimed thereon a $47,600
miscellaneous legal expense deduction under section 212, subject
to the 2-percent adjusted-gross-income floor of section 67(a).
At trial, after settling all other issues and without objection
from respondent, petitioner was allowed to raise the issue as to
the claimed $47,600 legal expense deduction.
Of the $47,600 in legal expenses petitioner seeks to deduct,
petitioner acknowledges that in 2001 she paid her attorney no
more than approximately $7,000, representing out-of-pocket legal
expenses.
Petitioner has not submitted bills, receipts, canceled
checks, or other records that would establish that petitioner
paid any of the legal expenses that petitioner seeks to deduct.
Petitioner admits that she is a cash method taxpayer.
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OPINION
A taxpayer is required to keep records to enable a
determination of the taxpayer’s correct Federal income tax
liability to be made. Sec. 6001; sec. 1.6001-1(a), Income Tax
Regs.
A taxpayer may deduct from income ordinary and necessary
expenses paid or incurred during a year in connection with the
production of income. Sec. 212.
Under section 1.446-1(c)(1)(i), Income Tax Regs., a taxpayer
who uses the cash method of accounting to compute taxable income
may only deduct expenses in the year the expenses are paid. See
Estate of Gordon v. Commissioner, 47 T.C. 462, 466 (1967);
Dehoney v. Commissioner, T.C. Memo. 2006-108; Sandoval v.
Commissioner, T.C. Memo. 1979-430.
Petitioner’s argument that the statutory language of section
212 allows her a deduction for legal expenses “incurred” but not
paid in 2001 is without merit.
Because petitioner has not substantiated that she paid any
legal fees in 2001, petitioner is not entitled to a deduction in
2001 for legal fees in any amount.
To reflect the foregoing,
Decision will be entered
under Rule 155.
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