¶2MEMORANDUM FINDINGS OF FACT AND OPINION
¶3WHALEN, JUDGE: Respondent determined the following deficiencies in, additions to, and penalties with respect to petitioner's Federal income tax for 1989 and 1990:
¶4 Additions to Tax Penalties
¶5Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)
¶6____ __________ ________________ ____________
¶71989 $ 33,472 $ 4,065 $ 6,694
¶81990 47,206 10,252 9,585
¶9Unless stated otherwise, all section references are to the Internal Revenue Code as in effect during the years in issue.
¶10After concessions, the issues for decision are: (1) Whether the period of limitations on assessment and collection set forth in section 6501(a) expired as to both of the years in issue, 1989 and 1990, before respondent issued the subject notice of deficiency to petitioner; and (2) whether petitioner is entitled to offset gross income by, or to deduct*241 as business expenses under section 162, certain expenditures in the aggregate amount of $ 50,141 in 1989 and $ 97,854 in 1990 that respondent disallowed.
¶11FINDINGS OF FACT
¶12Some of the facts have been stipulated by the parties. The Stipulation of Facts filed by the parties and the exhibits attached thereto are incorporated herein by this reference. Petitioner resided in Moorestown, New Jersey, at the time he filed his petition in this case.
¶13Petitioner graduated from Northeastern University in 1979 with a degree in business administration. He passed the examination to become a certified public accountant (C.P.A.) and was licensed as a C.P.A. by the State of New York in 1980. He then worked for Arthur Anderson & Co. as an auditor for 1 year, before matriculating at Georgetown University Law Center to study law. He graduated from Georgetown in 1984 and was awarded a J.D. degree. Petitioner then enrolled in Georgetown University's graduate program in taxation, but he completed only one semester of the two-semester program leading to an LL.M. degree in taxation.
¶14Petitioner is currently licensed as an attorney in both the State of New Jersey and the Commonwealth of Pennsylvania. He also*242 holds an inactive license as a C.P.A. from the State of New York.
¶15Petitioner has been self-employed since graduating from law school. His business involves providing various financial and tax services to clients including: Preparing personal, business, and employment tax returns, providing personal and business tax planning advice, providing investment advice, and reviewing and supervising the office staffs of small businesses. Additionally, petitioner is a member of the Bar of this Court, and he has represented taxpayers as an attorney before the Court. Petitioner has filed approximately 10 petitions on behalf of clients, and he has tried at least one case. See Epstein v. Commissioner, T.C. Memo 1994-34.
¶16Petitioner has also promoted various partnerships, including Friedmann Financial Number 2, Friedmann Investors Number 1, and Friedmann Investors Number 2. It appears that the business of these partnerships involved investments in real estate. A number of clients of petitioner's Schedule C business, including some clients on behalf of whom the expenditures at issue in this case were allegedly made, were investors in one or more of these partnerships. Petitioner was*243 also the sole owner and employee of Friedmann Management Corp., which allegedly provided management services to the partnerships.
¶17In addition to the instant case, petitioner prosecuted a suit in District Court for refund of taxes paid with respect to his joint return for 1987. Friedmann v. United States, 107 F. Supp. 2d 502 (D.N.J. 2000). In that case, the court granted the Government's motion to dismiss one count of the complaint on the ground that it raised issues that had not been set forth in the claim for refund, and the court granted summary judgment as to the other count of the complaint, involving certain consulting fees that petitioner claimed as an expense deduction on his Schedule C, Profit or Loss From Business. According to the court, the consulting fees were not deductible because petitioner had admitted in his complaint that the consulting fees were not income to, nor a business expense incurred by, petitioner but should have been reported by Friedmann Management Corp.Id. at 511.
¶18Petitioner also prosecuted a case in this Court involving adjustments to his joint return for 1988 that was settled before trial pursuant to an agreement of the*244 parties. Lastly, in 1996, he sued the United States to quash two Internal Revenue Service summonses, one of which demanded all documents and records regarding petitioner's assets, liabilities, and accounts for purposes of preparing a "collection information statement", and the other of which sought all books, records, documents, and receipts for income from all sources for purposes of preparing Federal income tax returns for 1991 through and including 1995 that had not been filed by petitioner. Friedmann v. United States, 1997 U.S. Dist. LEXIS 1546, 79 A.F.T.R.2d (RIA) 895 (D.N.J. 1997). In that case, the court granted the Government's motion to dismiss petitioner's complaint. Id.
¶19Petitioner failed to timely file his individual Federal income tax returns for tax years 1989 through 1995. He filed delinquent returns for 1989 and 1990, the years at issue, as discussed below, but he had not yet filed his returns for tax years 1991 through 1995 at the time this case was tried.
¶20In 1992, during the audit of petitioner's 1988 income tax return, respondent's revenue agent requested copies of petitioner's 1989 and 1990 returns. In April 1992, petitioner gave photocopies of those returns to the agent. At that time, *245 the agent believed that petitioner had previously filed the returns with the Internal Revenue Service. Petitioner gave the agent no indication otherwise. Both returns had been signed before they were photocopied, and neither return bore petitioner's original signature. In September or October 1992, the agent began an examination of petitioner's 1989 and 1990 returns.
¶21In due course, the revenue agent found that the Internal Revenue Service had no record of having received either the 1989 or 1990 return. The agent notified petitioner, by letter dated November 6, 1992, that the photocopied returns would be processed as delinquent returns once the agent received a copy of each return that bore petitioner's original signature. The agent's letter states as follows:
¶22 As per our telephone conversation yesterday, I will process
¶23 the previously submitted copies of your 1989 & 1990 1040 income
¶24 tax returns as delinquent returns since our records do not
¶25 indicate receipt of the aforementioned at the service centers.
¶26 However, before I can process the copies I need them to have
¶27 original signatures. Please provide same above the copied
¶28*246 signature (also date) and return them to me so that I can
¶29 process them. Please return as soon as possible.
¶30On March 4, 1993, before the Internal Revenue Service had received petitioner's signed 1989 and 1990 tax returns, respondent prepared a substitute return for petitioner's taxable year 1990, as authorized by section 6020(b). On the basis of this substitute return, respondent issued a notice of deficiency to petitioner for taxable year 1990. Respondent mailed the notice of deficiency by certified mail to petitioner's last known address. Petitioner did not claim the notice from the U.S. Postal Service and it was returned unopened to respondent by the Postal Service on June 25, 1993.
¶31On October 4, 1993, after attempting to reach petitioner by telephone on two occasions and after writing to petitioner about the unfiled returns, a second revenue agent received copies of petitioner's 1989 and 1990 tax returns. The copy of each return received by the agent is identical to the photocopy that petitioner previously had provided to the former revenue agent, except that it also bears petitioner's original signature and the date, October 1, 1993.
¶32Respondent's transcript of petitioner's*247 account for 1989 states that petitioner's 1989 return was filed on October 4, 1993. Respondent's transcript of petitioner's account for 1990 does not reflect that petitioner filed a return. This is due to the fact that respondent had filed a substitute return for petitioner under section 6020(b) on March 4, 1993.
¶33During the course of the audit of petitioner's individual income tax returns for 1989 and 1990, respondent's revenue agent discovered that the Internal Revenue Service had no record of having received returns from Friedmann Financial Number 2, Friedmann Investors Number 1, or Friedmann Investors Number 2 for taxable year 1989. During a meeting with respondent's agent, petitioner signed copies of the 1989 Forms 1065, U.S. Partnership Return of Income, for Friedmann Financial Number 2 and Friedmann Investors Number 2.
¶34Petitioner's individual return for 1989 reports wages, salaries, tips, etc. of $ 72,252. Attached to the return is a Form W- 2, Wage and Tax Statement, that reports wages of $ 24,252 from an employer, Dr. Carey Strom, who is also a client of petitioner's Schedule C business, as discussed further below. Petitioner's 1989 return also reports wages of $ 48,000 from*248Friedmann Management Corp.
¶35There is attached to petitioner's return for both 1989 and 1990 a Schedule C, Profit or Loss From Business, for a business or profession listed as "CPA", operating under the name of "Gary Friedmann CPA". Petitioner reported the following income and expenses for that business on the Schedules C:
¶36 1989
¶37 ____
¶38Gross receipts or sales $ 177,072
¶39Returns and allowances 103,784
¶40 _______
¶41Gross income $ 73,288
¶42Car and truck expenses 7,946
¶43Depreciation 5,096
¶44Interest
¶45 Mortgage -0-
¶46 Other 187
¶47Legal and professional servs. *249 2,000
¶48Office expenses 21,935
¶49Rent
¶50Machinery & equipment -0-
¶51Other business property 4,600
¶52Repairs 403
¶53Travel, meals & entertainment
¶54 Travel 6,089
¶55 Meals and entertainment $ 25,051
¶56 20% of meals 5,010
¶57 _______
¶58 20,041
¶59Utilities
¶60Other expenses
¶61 Telephone 6,025
¶62 Legal 1,600
¶63 Dues 132
¶64 Assoc. 3,600
¶65 Gifts 719
¶66 Publications 600
¶67 _______
¶68 12,676
¶70 80,973
¶71 ______
¶72Net profit or (loss) -7,685
¶73 [Table continued]
¶74 1990
¶75 ____
¶76Gross receipts or sales $ 175,790
¶77Returns and allowances 97,854
¶78 ________
¶79Gross income $ 77,936
¶80Car and truck expenses 8,584
¶81Depreciation 5,096
¶82Interest
¶83 Mortgage -0-
¶85Legal and professional servs. -0-
¶86Office expenses 21,041
¶87Rent
¶88Machinery & equipment -0-
¶89Other business property 6,308
¶90Repairs 632
¶91Travel, meals & entertainment
¶92 Travel 17,940
¶93 Meals and entertainment $ 27,359
¶94 20% of meals 5,472
¶95 21,887
¶96Utilities 920
¶97Other expenses
¶98 Telephone 3,100
¶99 Legal 5,000
¶100 Dues 600
¶101 Assoc.
¶102 Gifts 1,109
¶103 Publications 700
¶104 _____
¶105 10,509
¶107 92,917
¶108 _______
¶109Net profit or (loss) -14,981
¶110On May 15, 1996, respondent issued a notice of deficiency to petitioner for taxable years 1989 and 1990. This is the second notice of deficiency respondent issued with respect to petitioner's 1990 return. Among other adjustments made in this notice, respondent disallowed $ 50,141 of the $ 103,784 claimed as returns and allowances on petitioner's 1989 return, and respondent disallowed the entire $ 97,854 claimed as returns and allowances on petitioner's 1990 return. The notice of deficiency describes this adjustment as follows:
¶111 The deductions of $ 103,784.00 and $ 97,854.00 shown on your 1989
¶112 and 1990 returns as returns and allowances are reduced by
¶113 $ 50,141.00 and $ 97,854.00 because it has not been established
¶114 that any amount more than $ 53,643.00 for 1989 and -0- for 1990
¶115*253 was for an ordinary and necessary business expense, or was
¶116 expended for the purpose designated. Therefore, your taxable
¶117 income is increased $ 50,141.00 for 1989 and $ 97,854.00 for 1990.
¶118OPINION
I. PERIOD OF LIMITATIONS ON ASSESSMENT AND COLLECTION¶119The first issue for decision is whether respondent issued the subject notice of deficiency after the period of limitations on assessment and collection under section 6501(a) had expired for both of the taxable years in issue, 1989 and 1990. Petitioner's principal position is that the period of limitations on assessment began to run in April 1992 when he submitted photocopies of his 1989 and 1990 returns to respondent's revenue agent and that the period expired before the subject notice of deficiency was issued. According to petitioner, respondent "treated these tax returns 'as filed'", notwithstanding the fact that the returns did not bear petitioner's original signature and the fact that they were not filed at a location specified by section 6091(b)(1). Alternatively, petitioner argues that he filed each of the returns at issue by mail more than 3 years before the date of the second notice of deficiency with the*254 result that the period of limitations on assessment and collection under section 6501(a) bars assessment of the deficiencies determined in that notice by respondent for each of the years at issue.
¶120Section 6501 provides rules limiting the time during which the amount of any tax can be assessed. As a general rule, section 6501(a) provides that the amount of any tax shall be assessed "within 3 years after the return was filed". Sec. 6501(a). In the case of a deficiency in tax, the Internal Revenue Code further prohibits the assessment of the deficiency until a notice of deficiency has been mailed to the taxpayer and, if a petition is filed in this Court, until the decision of the Court has become final. Sec. 6213(a). Thus, generally, a notice of deficiency must be mailed to the taxpayer before the expiration of the period of limitations on assessment and collection set out in section 6501(a).
¶121The bar of this statute of limitations on assessment and collection is an affirmative defense, and the party raising it must plead it and carry the burden of proving its applicability. Rules 39, 142(a), Tax Court Rules of Practice and Procedure; Amesbury Apts., Ltd. v. Commissioner, 95 T.C. 227, 240 (1990);*255Adler v. Commissioner, 85 T.C. 535, 540 (1985); Schalekamp v. Commissioner, T.C. Memo 1998-277. In this opinion, all Rule references are to the Tax Court Rules of Practice and Procedure. In this case, petitioner must prove that the date on which each of the subject returns was filed was more than 3 years before respondent issued the subject notice of deficiency. See United States v. Gurley, 415 F.2d 144, 147 (5th Cir. 1969); Young v. Commissioner, 208 F.2d 795 (4th Cir. 1953), affg. a Memorandum Opinion of this Court dated Apr. 10, 1953; BJR Corp. v. Commissioner, 67 T.C. 111, 121 (1976).
¶122We note that the substitute return respondent prepared for petitioner's taxable year 1990 pursuant to section 6020(b) did not start the running of the period of limitations on assessment and collection. Section 6501(b)(3) provides: "Notwithstanding the provisions of paragraph (2) of section 6020(b), the execution of a return by the Secretary pursuant to the authority conferred by such section shall not start the running of the period of limitations on assessment and collection."
¶123We begin with petitioner's alternative argument that*256 he filed his 1989 and 1990 returns by mail with the Internal Revenue Service Centers more than 3 years before respondent issued the subject notice of deficiency. The evidence on which petitioner relies in support of this factual assertion is his own testimony at trial. Petitioner's testimony is vague, is not supported by any documentary evidence, such as certified mail receipts, is contradicted by respondent's records, which do not record such filings, and is unbelievable.
¶124In the case of his 1989 return, petitioner testified: "I BELIEVE it's signed April 12th or 11th [of 1992] and that's when I APPARENTLY mailed it." (Emphasis supplied.) He further testified: "I BELIEVE I mailed it to Fresno, California" (emphasis supplied), notwithstanding the fact that he resided in New Jersey at the time. Petitioner's 1989 return states that his address is 1034 17th Street, No. 102, Santa Monica, California 90828. Petitioner states that he used a California address on his 1989 return because he "was spending a lot of time in California" and "was intending to move there".
¶125In the case of his 1990 return, petitioner testified that he prepared this return approximately 10 days after he prepared*257 his 1989 return. The address listed on petitioner's 1990 return is 7 Baldwin Hill Place, Morristown, New Jersey 08057.
¶126Petitioner testified that he gave his 1990 return to the revenue agent who was auditing his 1988 return "and mailed a copy". Petitioner's testimony regarding the filing of his 1990 return also includes the following:
¶127 Q And for the 1990 return, you prepared that in New Jersey, as
¶128 well, correct?
¶129 A The actual return, yes.
¶130 Q And you mailed that in New Jersey, correct?
¶131 A My recollection is I gave this directly to Mr. Brokowski
¶132 [i.e., the revenue agent] in New Jersey.
¶133 Q So you're saying, then, for 1990, that you never filed a
¶134 return without giving one to Brokowski first. You never filed
¶135 one independently for 1990.
¶136 A I THINK I mailed it in, as well, but I gave him a copy. I gave
¶137 two -- I THINK I gave him the original and mailed a copy, it
¶138 is my recollection.
¶139 Q Would you mail a copy of a 1040 to a Service Center? Why?
¶140 A I didn't mail it initially. Subsequently, I mailed it. I
¶141 ACTUALLY THINK I sent it*258 by certified mail, as I've indicated,
¶142 and I cannot locate those records.
¶143 Q Let's go back to 1990 again. What was -- when was the first
¶144 time that you filed your 1990 tax return?
¶145 A I BELIEVE I gave it directly to Mr. Brokowski.
¶146[Emphasis supplied.]
¶147On the basis of the above discussion, we find that petitioner has failed to establish that he filed his 1989 and 1990 returns by mail with the Internal Revenue Service Centers more than 3 years before respondent issued the subject notice of deficiency.
¶148Petitioner's principal argument is that he filed his 1989 and 1990 returns, and the period of limitations on assessment and collection under section 6501(a) began to run as to each tax year, in April 1992, when petitioner submitted photocopies of the returns to respondent's revenue agent. If measured from April 1992, the period of limitations on assessment and collection expired before the subject notice of deficiency was issued.
¶149Petitioner argues that, if respondent treats a return "as filed", then the period of limitations on assessment and collection under section 6501(a) begins to run, irrespective of whether the return was filed in a location*259 specified by section 6091 and the regulations promulgated thereunder, or whether it contains the taxpayer's original signature. Petitioner contends that respondent used the photocopies of petitioner's 1989 and 1990 returns in formulating the audit of petitioner's returns and, thus, treated the returns "as filed".
¶150It has long been held that in order for the period of limitations on assessment and collection prescribed by section 6501 and its predecessors to run against the United States, a taxpayer must meticulously comply with all conditions for application of the statute. See Lucas v. Pilliod Lumber Co., 281 U.S. 245, 249, 74 L. Ed. 829, 50 S. Ct. 297 (1930); Florsheim Bros. Drygoods Co. v. United States, 280 U.S. 453, 74 L. Ed. 542, 50 S. Ct. 215 (1930); Bachner v. Commissioner, 81 F.3d 1274, 1280 (3d Cir. 1996).
¶151As mentioned above, section 6501(a) prescribes that the tax "shall be assessed within 3 years after the return is filed". As the Supreme Court has noted, "The word 'return' is not a technical word of art." Florsheim Bros. Drygoods Co. v. United States, supra at 462. There are four elements in determining whether a document is sufficient for statute of limitations purposes: First, *260 the document must contain sufficient data to calculate the taxpayer's tax liability; second, it must purport to be a return; third, there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and fourth, the taxpayer must execute the document under penalties of perjury. Beard v. Commissioner, 82 T.C. 766, 777 (1984), affd. 793 F.2d 139 (6th Cir. 1986). In order to have the effect of a return for statute of limitations purposes, a key element is that the document "must honestly and reasonably be intended as such" by the taxpayer. Florsheim Bros. Drygoods Co. v. United States, supra at 462.
¶152Among other filing requirements, the Internal Revenue Code specifies that a return "shall be signed in accordance with forms or regulations prescribed by the Secretary", sec. 6061(a), it "shall contain or be verified by a written declaration that it is made under the penalties of perjury", sec. 6065, and it shall be filed at the place specified by the Internal Revenue Code and the regulations promulgated thereunder, sec. 6091. In the case of the return of an individual, the general rule is that the return shall be made to the Secretary*261 in the internal revenue district in which is located the taxpayer's legal residence or principal place of business, or it shall be made at the service center serving one of those districts. Sec. 6091(b)(1).
¶153A return form that is not signed or sworn to, as required by the statute, does not meet the plain requirements for the filing of a return and does not start the period of limitations on assessment and collection. See Lucas v. Pilliod Lumber Co., supra; Doll v. Commissioner, 358 F.2d 713 (3d Cir. 1966), affg. T.C. Memo 1965-191; Richardson v. Commissioner, 72 T.C. 818, 823-824 (1979). Similarly, a return that is delivered to an office other than the one specified by the Code and the regulations for filing of that return is not considered filed and does not commence the period of limitations. See O'Bryan Bros., Inc. v. Commissioner, 127 F.2d 645 (6th Cir. 1942) (gift tax return given to revenue agent), affg. 42 B.T.A. 18 (1940); W.H. Hill Co. v. Commissioner, 64 F.2d 506 (6th Cir. 1933) (return given to examining agent), affg. 23 B.T.A. 605 (1931); Winnett v. Commissioner, 96 T.C. 802 (1991)*262 (return mailed to wrong service center); Espinoza v. Commissioner 78 T.C. 412 (1982) (taxpayer failed to prove that amended returns were filed when they were handed to a revenue agent); Green v. Commissioner, T.C. Memo 1993-152 ("giving a delinquent return to an IRS agent does not constitute filing"); Metals Refining Ltd. v. Commissioner, T.C. Memo 1993-115 ("Even if the IRS agents received properly executed [partnership] returns, delivery to such agents does not necessarily constitute proper filing"); see also Kotovic v. Commissioner, T.C. Memo 1959-177.
¶154In this case, we find that there was no filing of the subject returns in April 1992 when petitioner gave photocopies of his 1989 and 1990 returns to respondent's revenue agent. Clearly, the revenue agent was not the prescribed place for filing those returns pursuant to section 6091(b)(1). O'Bryan Bros., Inc. v. Commissioner, supra; W.H. Hill Co. v. Commissioner, supra; Winnett v. Commissioner, supra; Espinoza v. Commissioner, supra; Green v. Commissioner, supra; Metals Refining Ltd. v. Commissioner, supra.*263
¶155Moreover, there is nothing in the record to show that petitioner intended his delivery of those documents to the agent in April 1992 to constitute the filing of his returns. See Berenbeim v. Commissioner, T.C. Memo 1992-272. Petitioner gave them to the revenue agent who had requested copies of the returns, and petitioner did not tell the agent that petitioner had not previously filed the returns with the Internal Revenue Service. Respondent's agent received the returns thinking that they were the copies that he had requested. The revenue agent reviewed the copies of petitioner's 1989 and 1990 returns and may have used information from the returns in formulating his request for information from petitioner, but there is no evidence that respondent ever treated the copies "as filed". To the contrary, for example, respondent took the step of filing a substitute return for 1990, pursuant to section 6020(b).
¶156We find that petitioner has failed to establish that he filed his 1989 and 1990 tax returns more than 3 years before the date the subject notice of deficiency was issued. Thus, petitioner has failed to prove that respondent's notice of deficiency for 1989 and 1990 is*264 untimely under section 6501(a).
II. RETURNS AND ALLOWANCES¶157The second issue in this case, the only substantive issue presented, involves certain payments that are reported as "returns and allowances" on the Schedules C filed as part of petitioner's 1989 and 1990 tax returns. As mentioned above, petitioner's Schedules C for 1989 and 1990 report "returns and allowances" of $ 103,784 and $ 97,854, respectively. Respondent allowed $ 53,643 of the amount reported for 1989, consisting of a check drawn by petitioner on January 18, 1989, to Hackett & Co., but disallowed the rest, i.e., $ 50,141 in 1989 and $ 97,854 in 1990, on the ground that petitioner had not "established that any amount more than 53,643.00 for 1989 and -0- for 1990 was for an ordinary and necessary business expense, or was expended for the purpose designated."
¶158At trial, petitioner was not able to identify the amounts reported as returns and allowances on his 1989 and 1990 returns. Although petitioner's Schedules C for 1989 and 1990 report returns and allowances of $ 103,784 and $ 97,854, respectively, he introduced documents that show aggregate expenditures of $ 118,817.83 in 1989 (including the payment of $ 53,643 to*265 Hackett & Co. that respondent allowed) and $ 103,349.71 in 1990. Petitioner failed to offer an acceptable explanation for these discrepancies.
¶159According to petitioner, the subject payments can be grouped into three categories: (1) Direct refunds to clients and unreimbursed payments on behalf of clients to the Internal Revenue Service and to State tax authorities; (2) payments on behalf of one client for which petitioner was reimbursed; and (3) payments to clients for the purchase of supplies and services. Petitioner refers to the payments in the first category as "direct payments" and for convenience, we will do the same. The following is a list of the payments that petitioner claims as "returns and allowances" for each of the years at issue. The list shows the check number, date, payee, and amount of each payment, and groups each payment into one of petitioner's three categories:
¶1601989 Check Date Payee Amount
¶161__________ ____ _____ ______
¶162 1931 1/7 Mass. Div. of
¶163 Employ. Security *266 $ 221.00
¶164 2200 11/19 Jepsco 4,500.00
¶165 1938 1/28 IRS 54.00
¶166 2083 5/12 IRS 3,585.99
¶167 2085 5/12 State of R. I. 75.01
¶168 2101 11/10 IRS 10,831.60
¶169 2102 11/10 IRS 3,930.09
¶170 Wire 12/12 Hospital Trust RI 5,010.00
¶171 Wire 12/14 Hospital Trust
¶172 Providence, RI 12,010.00
¶173 2082 5/12 IRS 35.66
¶174 2476 8/9 N.Y. State 576.16
¶175 2174 7/14 IRS 2,382.18
¶176 2201 12/1 N.Y. State 388.29
¶177 2135 6/3 Steven Dana 500.00
¶178 1957 *267 6/17 IRS 7,687.75
¶179 1958 6/17 IRS 278.92
¶180 2203 12/1 Franchise Tax Board 371.55
¶181 1974 6/30 Jeff Kolton 500.00
¶182 2403 7/14 Sec. of State 5.00
¶183 2122 12/5 Employment Dev. Dept. 28.16
¶184 2405 7/14 Franchise Tax Board 122.71
¶185 2175 7/14 Franchase Tax Board 250.00
¶186 2404 7/14 Sec. of State 5.00
¶187 2436 10/17 Gary Chang 3,500.00
¶188 1959 6/17 Employment Dev. Dept. 458.82
¶189 2401 7/15 Franchise Tax Board 1,472.94
¶190 2402 7/15 IRS 198.09
¶191 2442 10/1 IRS 4,639.91
¶192 2443 10/1 Mass*268 DOR 1,156.00
¶193 2202 12/1 Habhac 400.00
¶194 1536 1/18 Hackett & Co. 53,643.00
¶195 __________
¶196 Total 118,817.83
¶197 Amount reported 103,784.00
¶198 on return __________
¶199 Difference 15,033.83
¶200 [Table continued]
¶201 Reimbursed Supplies
¶2021989 Check Direct Payments Payments and Services
¶203__________ _______________ __________ ____________
¶204 1931 $ 221.00 -0- -0-
¶205 2200 -0- -0- $ 4,500
¶207 2083 3,585.99 -0- -0-
¶208 2085 75.01 -0- -0-
¶209 2101 10,831.60 -0- -0-
¶210 2102 3,930.09 -0- -0-
¶211 Wire 5,010.00 -0- -0-
¶212 Wire 12,010.00 -0- -0-
¶213 2082 35.66 -0- -0-
¶214 2476 576.16 -0- -0-
¶215 2174 2,382.18 -0- -0-
¶216 2201 388.29 -0- -0-
¶217 2135 -0- -0- 500
¶218 1957 7,687.75 -0- -0-
¶220 2203 371.55 -0- -0-
¶221 1974 -0- -0- 500
¶222 2403 5.00 -0- -0-
¶223 2122 28.16 -0- -0-
¶224 2405 122.71 -0- -0-
¶225 2175 250.00 -0- -0-
¶226 2404 5.00 -0- -0-
¶227 2436 3,500.00 -0- -0-
¶228 1959 458.82 -0- -0-
¶229 2401 1,472.94 -0- -0-
¶230 2402 198.09 -0- -0-
¶231 2442 4,639.91 -0- -0-
¶232 2443 1,156.00 -0- *271 -0-
¶233 2202 400.00 -0- -0-
¶234 1536 53,643.00 -0- -0-
¶235 __________ ___ ______
¶236 Total 113,317.83 -0- 5,500
¶2371990 Check Date Payee Amount
¶238__________ ____ _____ ______
¶239 1758 2/20 State of Cal. $ 5.00
¶240 1730 2/28 N.Y. State 470.29
¶241 1731 2/28 N.Y. State 114.70
¶242 1732 2/28 N.Y. State 2,850.38
¶243 1738 3/7 IRS 791.12
¶244 1737 3/7 Mass. 2,350.00
¶245 2269 3/9 Jeffrey Kolton 12,500.00
¶246 124 7/10 N.Y. State*272 5,337.57
¶247 125 7/15 N.Y. State 1,128.13
¶248 189 11/20 Said Dermarkar 2,000.00
¶249 209 12/10 IRS 235.08
¶250 217 12/21 N.Y. State 150.00
¶251 215 12/12 IRS 228.64
¶252 1878 1990 Carey Storm 930.00
¶253 242 12/31 Employment Dev. Dept. 7,000.00
¶254 164 10/1 US Dept. of Treasury 12,000.00
¶255 163 9/26 City of Beverly Hills 2,679.75
¶256 1799 5/12 Employment Dev. Dept. 59.02
¶257 Wire 2/16 Shawmut Bros. 30,010.00
¶258 2292 2/20 Stewart Gleischman 18,500.00
¶259 Wire 11/28 Security -- Los Angeles 4,010.00
¶261 Total 103,349.68
¶262 Amount reported 97,854.00
¶263 on return __________
¶264 Difference 5,495.68
¶265 [Table continued]
¶266 Reimbursed Supplies
¶2671990 Check Direct Payments Payments and Services
¶268__________ _______________ __________ ____________
¶269 1758 $ 5.00 -0- -0-
¶270 1730 470.29 -0- -0-
¶271 1731 114.70 -0- -0-
¶272 1732 2,850.38 -0- -0-
¶273 1738 791.12 -0- -0-
¶274 1737 2,350.00 -0- *274 -0-
¶275 2269 12,500.00 -0- -0-
¶276 124 5,337.57 -0- -0-
¶277 125 1,128.13 -0- -0-
¶278 189 2,000.00 -0- -0-
¶279 209 235.08 -0- -0-
¶280 217 150.00 -0- -0-
¶281 215 228.64 -0- -0-
¶282 1878 930.00 -0- -0-
¶283 242 -0- $ 7,000.00 -0-
¶284 164 -0- 12,000.00 -0-
¶285 163 -0- 2,679.75 -0-
¶286 1799 59.02 -0- -0-
¶287 Wire 30,010.00 -0- -0-
¶288 2292 18,500.00 *275 -0- -0-
¶289 Wire 4,010.00 -0- -0-
¶290 _________ _________ _______
¶291 Total 81,669.93 21,679.75 -0-
¶292At the outset, we note that there is a fundamental difference between expenditures that constitute "returns and allowances" and expenditures that are treated as business deductions under section 162. See Beatty v. Commissioner, 106 T.C. 268, 273 (1996); Max Sobel Wholesale Liquors v. Commissioner, 69 T.C. 477 (1977), affd. 630 F.2d 670 (9th Cir. 1980); B.C. Cook & Sons, Inc. v. Commissioner, 65 T.C. 422, 428 (1975), affd. per curiam 584 F.2d 53 (5th Cir. 1978); see also sec. 1.61-3(a), Income Tax Regs. The former expenditures are taken into account in computing the gross income from a business activity. See B.C. Cook & Sons, Inc. v. Commissioner, supra at 428. Strictly speaking, they are not deductions and are not subject to the various limitations on deductions claimed under section 162. See*276Metra Chem Corp. v. Commissioner, 88 T.C. 654, 661 (1987); B.C. Cook & Sons, Inc. v. Commissioner, supra.
¶293As to returns and allowances, a taxpayer is required to maintain records that are sufficient to substantiate the amount claimed on his or her return. Sec. 6001. A taxpayer must establish a direct connection between an expenditure claimed as an offset of gross receipts and the activity giving rise to the gross receipt. See Max Sobel Wholesale Liquors v. Commissioner, supra at 483 (rebate treated as a reduction of gross income "where the rebate was a part of the transaction of sale"); see also Shriver v. Commissioner, 85 T.C. 1, 8 (1985).
¶294As to deductions under section 162(a), a taxpayer is required to maintain records that are sufficient to substantiate the deductions claimed on his or her return. Sec. 6001. Section 162 generally allows a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Such expenses must be directly connected with or pertain to the taxpayer's trade or business. Sec. 1.162-1(a), Income Tax Regs. Petitioner*277 bears the burden of proving his eligibility for offsets to gross income or deductions under section 162(a).
¶295Petitioner reported the subject expenditures as returns and allowances for both 1989 and 1990 and reduced the gross income reported on his Schedule C for each year by the total expenditures for the year. In his posttrial briefs, petitioner's principal position is that the subject expenditures are "ordinary and necessary and deductible under section 162." It is not clear whether petitioner also takes the position that the subject expenditures are "returns and allowances" that offset the gross receipts realized from the business reported on petitioner's Schedules C. However, it is not necessary to sort out petitioner's legal position because we find that petitioner has failed to adequately substantiate any of the subject expenditures either as an offset of the gross receipts of his Schedule C business or as an ordinary and necessary business deduction.
¶296During his testimony at trial, petitioner sometimes compared the fees that he claims to have received during 1989 and 1990 from the clients of his Schedule C business with the payments treated as returns and allowances that he*278 claims to have made to, or on behalf of, some of those clients. As was true in the case of the returns and allowances, at trial petitioner was unable to itemize the fees composing the gross receipts reported on his Schedules C for 1989 and 1990. The totals from the two lists of fees that petitioner introduced at trial do not match the gross receipts reported on the Schedules C filed with his returns.
¶297In any event, for both of the years in issue, the following schedule repeats the lists of fees that petitioner introduced at trial, it shows the payments allegedly made by petitioner to, or on behalf of, each of his clients, and it shows the net amounts for each client:
¶298 Fees Payments
¶299 ____ ________
¶300 Client 1989 1990 1989 1990
¶301 ______ ____ ____ ____ ____
¶302Jeff Abrams $ 12,213 -0- $ 650.47 $ 228.67
¶303Automatic systems 24,375 -0- -0- *279 -0-
¶304David Baumberg 500 $ 1,500 -0- -0-
¶305Faith Burns 2,815 -0- 5,795.91 -0-
¶306Gary Chang -0- 25,830 3,872.71 -0-
¶307Norman Dana 4,122 2,442 -0- -0-
¶308Eric Friedmann 7,374 -0- 3,585.99 8,772.94
¶309Mark Grayson -0- 4,703 -0- -0-
¶310Bill Habelow 2,000 -0- 7,687.75 2,350.00
¶311Hackett & Co. 61,643 -0- 400.00 -0-
¶312Habsco -0- -0- 53,643.00 -0-
¶313Emily Harris -0- 2,880 -0- -0-
¶314Thomas Hickey 14,000 -0- -0- -0-
¶315Robert Hastings -0- 7,955 3,382.29 941.12
¶316High Comps-Callan 16,000 31,278 54.00 -0-
¶317Art Jacob 4,500 -0- -0- *280 -0-
¶318Jeff Kolton 4,272 -0- 500.00 12,500.00
¶319Margaret Lynch 5,159 -0- 31,856.70 -0-
¶320Jeanne Lynch 400 16,961 -0- -0-
¶321Scott Mitchell -0- 1,000 -0- -0-
¶322Albert Pachew -0- 4,980 -0- -0-
¶323Victoria Shulman -0- 6,627 -0- -0-
¶324Carey Strom -0- 28,560 38.16 22,668.77
¶325Corey Tynam -0- 51,250 -0- -0-
¶326Brain Wayset 6,374 -0- -0- -0-
¶327Steven Dana -0- -0- 500.00 -0-
¶328Said Dermarkar -0- -0- -0- 2,000.00
¶329Carissa Drucker -0- -0- 1,671.03 4,010.00
¶330Stewart Gleischman -0- -0- 458.82 18,740.08
¶331Jepsco/Epstein -0- -0- 4,721.00*281 30,010.00
¶332Joblon -0- -0- -0- 1,128.13
¶333 _______ _______ __________ __________
¶334 Total 165,747 185,966 118,817.83 103,349.71
¶335Amount reported 177,076 175,790 103,784.00 97,857.00
¶336Difference -11,329 10,176 15,034.00 5,493.00
¶337 [Table continued]
¶338 Net
¶339 ___
¶340 Client 1989 1990
¶341 ______ ____ ____
¶342Jeff Abrams $ 11,562.53 $ -228.67
¶343Automatic systems 24,375.00 -0-
¶344David Baumberg 500.00 1,500.00
¶345Faith Burns -2,980.91 -0-
¶346Gary Chang -3,872.71 25,830.00
¶347Norman Dana *282 4,122.00 2,442.00
¶348Eric Friedmann 3,788.01 -8,772.94
¶349Mark Grayson -0- 4,703.00
¶350Bill Habelow -5,687.75 -2,350.00
¶351Hackett & Co. 61,243.00 -0-
¶352Habsco -53,643.00 -0-
¶353Emily Harris -0- 2,880.00
¶354Thomas Hickey 14,000.00 -0-
¶355Robert Hastings -3,382.29 7,013.88
¶356High Comps-Callan 15,946.00 31,278.00
¶357Art Jacob 4,500.00 -0-
¶358Jeff Kolton 3,772.00 -12,500.00
¶359Margaret Lynch -26,697.70 -0-
¶360Jeanne Lynch 400.00 16,961.00
¶361Scott Mitchell -0- 1,000.00
¶362Albert Pachew -0- 4,980.00
¶363Victoria Shulman -0- 6,627.00
¶364Carey Strom *283 -38.16 5,891.23
¶365Corey Tynam -0- 51,250.00
¶366Brain Wayset 6,374.00 -0-
¶367Steven Dana -500.00 -0-
¶368Said Dermarkar -0- -2,000.00
¶369Carissa Drucker -1,671.03 -4,010.00
¶370Stewart Gleischman -458.82 -18,740.08
¶371Jepsco/Epstein -4,721.00 -30,010.00
¶372Joblon -0- -1,128.13
¶373 _________ _________
¶374 Total 46,929.17 82,616.29
¶375As shown above, petitioner claims to have made payments in 1989 of $ 118,817.83 or 71.68 percent of the fees received in that year and payments in 1990 of $ 103,349.71 or 55.57 percent of the fees received in that year. The above schedule shows that petitioner allegedly made substantial payments to persons from whom no fees are listed for 1989 or 1990. The net payments to clients in this category are as follows:
¶377 ____ ____
¶378 Steven Dana $ -500.00 -0-
¶379 Said Dermarkar -0- $ -2,000.00
¶380 Carissa Drucker -1,671.03 -4,010.00
¶381 Stewart Gleischman -458.82 -18,740.08
¶382 Jepsco/Epstein -4,721.00 -30,010.00
¶383 Joblon -0- -1,128.13
¶384 _________ __________
¶385 -7,350.85 -55,888.21
¶386The above schedule also shows that petitioner allegedly made payments to a number of clients, including his parents, that substantially exceeded the amount of fees petitioner received from those clients. The net payments to clients in this category are as follows:
¶387 1989 1990
¶388 ____ ____
¶389 Faith Burns -$ 2,980.91 -0-
¶390 Eric Friedmann 3,788.01 -$ 8,722.94
¶391 Bill*285 Habelow -5,687.75 -2,350.00
¶392 Jeff Kolton 3,772.00 -12,500.00
¶393 Margaret Lynch -26,697.70 -0-
¶394Another preliminary point should be noted. In his reply brief, petitioner implies that he was unable to produce some records necessary to substantiate the "returns and allowances" reported on his returns because certain of his records had been lost. In discussing the evidence that he adduced to substantiate the direct payments, petitioner states that his "business records were lost when he shipped the records from California to New Jersey with the United Parcel Service." In discussing the evidence adduced to substantiate the payments to clients for professional services and supplies, he also states that "his original books and records were lost by United Parcel Service when the records were shipped from California to New Jersey."
¶395At trial, petitioner made no suggestion that any records necessary to substantiate the returns and allowances claimed on his return had been lost. To the contrary, during his opening statement, petitioner mentioned certain business records that allegedly had been lost, but he*286 limited that discussion to the substantiation of certain business deductions that are no longer at issue in this case. When it came to the returns and allowances at issue here, petitioner made it clear that he never had records of any of these expenditures. Petitioner stated as follows:
¶396 In other areas, for example, we'll get to the area of
¶397 returns and allowances. In this area, often the client had a
¶398 problem with the IRS or a government agency and I advanced taxes
¶399 on their behalf, without any expectation of getting the money
¶400 back from them, it -- from them. And unfortunately, at that
¶401 time, I was perhaps lax that I didn't have business contracts or
¶402 even key business records. There were just oral agreements with
¶403 respect to the treatment of these items. Obviously, it's a
¶404 practice of -- it's not an ideal practice and IT'S NOT THAT
¶405 THESE RECORDS WERE LOST. It's just that I didn't keep them at
¶406 the time. They were oral agreements. [Emphasis supplied.]
¶407Furthermore, after petitioner completed his direct testimony regarding returns and allowances, and before discussing the records that he allegedly*287 lost in shipping, he stated: "As mentioned earlier, I shipped some information -- I'm done with the returns and allowances at this point." Thus, petitioner again made it clear that the records allegedly lost in shipping did not involve "returns and allowances." Finally, at trial, petitioner stated: "As such, my business logs were in there detailing in the instance of travel and entertainment, who I entertained and what -- and all the other requirements of Section 274(d)." Petitioner did not testify at trial that any of the documents that were allegedly lost involved amounts reported on his returns as "returns and allowances".
¶408Moreover, on the basis of the record of this case, we would have difficulty finding that petitioner lost any business records as a result of a shipment from California to petitioner's home in Moorestown, New Jersey. None of the documents introduced by petitioner substantiate a lost shipment of records from California to Moorestown. The documents on which petitioner relies, consisting of two receipts for the shipment that were filled out by petitioner on United Parcel Service forms and a Damage Tracer Copy that was issued by UPS, fail to show that any part of*288 the shipment was lost. To the contrary, according to a handwritten phone message, a representative of UPS telephoned petitioner and stated that all seven boxes of the shipment had been delivered. The only formal communication from UPS concerning this shipment is the Damage Tracer Copy which states that petitioner had reported damage to a "Panasonic EASA Phone". There is no document from UPS to substantiate petitioner's assertion that "two bags" were lost and never recovered.
¶409A. REFUNDS TO CLIENTS AND UNREIMBURSED PAYMENTS TO THE INTERNAL
¶410 REVENUE SERVICE AND TO STATE TAX AUTHORITIES
¶411As shown in the above schedules, petitioner claims offsets to gross receipts or deductions under section 162 for the aggregate amounts of direct payments in 1989 and 1990. For 1989, petitioner claims offsets or deductions in the form of direct payments totaling $ 113,317.83, including the $ 53,643 payment to Hackett and Co., sometimes referred to as Habsco, that was allowed by respondent, and for 1990 he claims offsets or deductions in the form of direct payments in the aggregate amount of $ 81,669.93. In his posttrial briefs, petitioner asserts that he made the subject payments to clients, to*289 the Internal Revenue Service, or to State tax authorities in order to resolve "tax problems that was [sic] due to an error or omission made by the Petitioner." According to petitioner: "These [payments] were for tax services that I performed that there was some kind of problem with." According to petitioner, in each case after "negotiations with client(s) and once the Petitioner and the client came to an oral agreement that the Petitioner would pay the tax bill", "the direct payment was made to fully settle the legal dispute between the Petitioner and his client." Petitioner asserts that "he did not carry professional malpractice insurance", and he orally agreed with his clients to make each of the payments "to avoid litigation and to retain customers." Furthermore, according to petitioner, each of the direct payments was made "to resolve a tax problems [sic] that was due to an error or omission made by the petitioner." Petitioner states: "There was no connection between the 'direct payment' and billing", except in the case of the reimbursed payments, discussed below.
¶412To prove the nature of the subject direct payments, petitioner relies on his own testimony, copies of canceled*290 checks or other evidence of payment, such as wire transfers, and in several instances, copies of the bills or statements issued by the taxing authority. The documentary evidence petitioner introduced supports a finding that petitioner made payments to his clients, to the Internal Revenue Service, and to various State tax administrators. However, the documentary evidence does not explain why the payments were made, what connection any of the payments had to petitioner's Schedule C business, or why these payments are ordinary and necessary business expenses. For this, petitioner relies upon his own uncorroborated testimony at trial. As we have often stated, we are not required to accept a taxpayer's self-serving testimony. See, e.g., Niedringhaus v. Commissioner, 99 T.C. 202, 219-220 (1992); Tokarski v. Commissioner, 87 T.C. 74, 77 (1986); Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).
¶413We have difficulty accepting petitioner's testimony that he made 27 payments totaling $ 59,674.83 (i.e., total direct payments of $ 113,317.83 less the amount allowed by respondent, $ 53,643) in 1989 and*291 18 payments totaling $ 81,669.93 in 1990 to settle malpractice claims with 17 clients. Petitioner claims to have made these payments, but he failed to produce documents of any kind, such as agreements, correspondence, or memoranda, to substantiate the nature of any of the payments. We also find it significant that petitioner introduced no testimony or corroboration from any of his clients concerning the nature of these payments. We agree with respondent that this raises an inference that such testimony would not support petitioner's case. See McKay v. Commissioner, 89 T.C. 1063, 1069 (1987), affd. 886 F.2d 1237 (9th Cir. 1989); Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158 (1946), affd. 162 F.2d 513 (10th Cir. 1947); Metals Refining Ltd. v. Commissioner, T.C. Memo 1993-115.
¶414As mentioned above, petitioner relies entirely on his own testimony at trial to substantiate the subject payments. However, petitioner's testimony is extremely vague. He does not describe the services that he provided to the subject clients or the nature of the problem with those services that prompted him to make the payment or payments*292 with respect to that client. The following example illustrates petitioner's vague testimony. Petitioner's testimony regarding two payments made on behalf of Faith and Joseph Burns is as follows:
¶415 The next items is items 22-19, which has to do with Faith and
¶416 Joseph Burns. I paid the Internal Service directly $ 4,640 and
¶417 the State of Massachusetts, which is item 20-22-20 -- $ 1,156.
¶418 They paid me fees in 1989 of $ 2,815.
¶419In response to questions from the Court about the fact that petitioner's payments exceeded the fees received, petitioner gave the following explanation:
¶420 They were paid out more in aggregate than I received in fees,
¶421 yes, and these had to do with old matters existing prior to 1989
¶422 that were ultimately paid or resolved in 1989. It's not that I
¶423 intended to lose money on this proposition. It's just that old
¶424 matters were resolved.
¶425 Now, people say, Gary, you could have not paid these
¶426 matters, had the clients either pay them or whatever, and let
¶427 them sue you, and then these would have been deductible at some
¶428 time down the road, you would have incurred legal*293 fees and the
¶429 amounts may have been larger due to interest and penalties and
¶430 you would have been caught up in court. But I decided to resolve
¶431 older matters probably pertaining to years '82 to '84,
¶432 particularly in the -- well, these matters were resolved --
¶433 well, problems arising from earlier years were resolved and
¶434 negotiated with the clients in '89 and these were paid.
¶435 There is no real relationship to the $ 2,815 in fees
¶436 received in 1989 and the amounts paid. Obviously, in the case of
¶437 Dr. Chang, which is items 13, 14, and 15, which aggregate $ 400,
¶438 and item 21, which is a refund of $ 3,500 -- well, those three
¶439 amounts are minuscule in comparison to the 1990 collections of
¶440 $ 25,830.
¶441 So there is no correlation between the two. The reason I
¶442 mentioned the fees is to show that they were, one, current
¶443 clients, that I retained them, not obviously to show that this
¶444 agreement had been reached and to show some perspective that, by
¶445 and large, for most of the clients, the fees taken in and the
¶446 retention of the relationship exceeded*294 the amounts that were
¶447 paid out in what would have been a divisive matter.
¶448 Well, if these things were not resolved amicably, it could
¶449 have been a divisive matter, which would have -- could have led
¶450 to litigation, as I said, I didn't have malpractice insurance,
¶451 and also, a loss of clients and client good will. That's my
¶452 rationale for paying them.
¶453In effect, petitioner states that the subject payments were made "to resolve older matters probably pertaining to years '82 to '84". Petitioner gives no explanation of the matters that were resolved.
¶454Petitioner's testimony concerning the payments made on behalf of his parents similarly fails to describe the nature of those payments. Petitioner's testimony is as follows:
¶455 The next check is 50 -- is 22-3, which was paid directly to
¶456 the Internal Revenue Service on behalf of my father, Eric
¶457 Friedmann. It's actually my parents, Eric and Phyllis Friedmann,
¶458 for a tax problem. I would just note that my parents were
¶459 clients and in the year 1989, they paid me taxable fees of
¶460 $ 7,374. When I say they paid me fees, these are all reflected*295 in
¶461 my income schedules that were reconstructed, that are found in
¶462 files 20-J for 1989 and 21-J for 1990. And these have been
¶463 accepted by the Internal Revenue Service for purpose -- as noted
¶464 in the audit work papers, although they don't tie in precisely
¶465 to the income per the tax return.
¶466 The next item has to do with Eric Friedmann, who is, again,
¶467 my father. These had to do with items 15-A2, A3, A4, and A10.
¶468 The first one being payment directly to New York State on behalf
¶469 of him of $ 470.29. The next one is 15-A3, had to do with
¶470 payments directly to New York State in the amount of $ 114.70.
¶471 The next one is 15-A4, which is payment directly to New York
¶472 State of $ 2,880.38, and the last one is 15-A10, which has to do
¶473 with payments directly to New York State of $ 5,337.57. The
¶474 checks are in this file, Your Honor.
¶475Petitioner claims an offset to income or a deduction for payments made in 1989 in the amount of $ 31,856.70 allegedly on behalf of Ms. Margaret Lynch. His testimony regarding those payments is as follows:
¶476 The next item is number 22-4. Again, *296 these are all within
¶477 file 16-J, having to do with the taxpayer Margaret Lynch, and I
¶478 paid $ 75 -- $ 75.01 to the State of Rhode Island on her behalf,
¶479 for a tax problem.
¶480 In items 23, I paid the IRS, Internal Revenue Service,
¶481 directly, $ 10,831.50 on her behalf. Item 24, I paid the Internal
¶482 Revenue Service $ 3,930.09 on her behalf. Items 4-23 and 24 are
¶483 direct checks to either Rhode Island or the Internal Revenue
¶484 Service.
¶485 In addition, items 30(a) and 30(b) are direct wires or
¶486 returns of funds to Margaret Lynch, as agreed upon, in the
¶487 amounts of $ 5,010, in the instance of 30(a), and in the instance
¶488 of 30(b), $ 12,010. Margaret Lynch, in 1989, paid me fees -- and
¶489 these were all, as I say, agreed upon and accepted. Margaret
¶490 Lynch paid me fees of $ 5,159 and also in that period, her
¶491 sister, Jeanne Lynch, who is a client and had an influence over
¶492 her or their opinion of me counted, they spoke quite frequently,
¶493 paid me fees of $ 400 in 1989 and in 1990, paid me fees of
¶494 $ 16,961.
¶495 Again, I believe these offsets*297 -- there's two components of
¶496 the offsets here. One is money given directly back to the
¶497 client, which I consider to be return of fees, and the other is
¶498 expenses that I paid directly for the client, that would be
¶499 items 24, 23 and 24, and the two wires, items 30 and 30(a) and
¶500 30(b) were funds paid directly -- wired directly to the client's
¶501 personal account.
¶502As true throughout petitioner's testimony at trial, petitioner offers no explanation for the nature of the services he provided to Ms. Lynch, the problems that arose with respect to those services, or the reason for his payment of those funds.
¶503Finally, in one instance, petitioner claims to have made a direct refund of fees to Dr. Strom in the amount of $ 930. When asked about this payment at trial, petitioner stated as follows:
¶504 Well, basically, it had to do with -- I looked after his
¶505 investments and as well as doing his personal -- doing his taxes
¶506 and corporate work, and he didn't feel the investments performed
¶507 as well as expected. Some of this had to do with indemnities and
¶508 the value of some of his investments.
¶509For the above reasons, we*298 find that petitioner has failed to meet his burden of proving that any of the direct payments offset his gross receipts or can be deducted under section 162. Accordingly, we hereby sustain respondent's determination as to these payments.
B. SUPPLIES AND SERVICES¶510Included among the returns and allowances reported on his 1989 return are payments that petitioner claims to have made to clients to purchase "supplies and services". Petitioner relies upon his own testimony and copies of canceled checks to substantiate this claim. Petitioner testified that the payments in this category, totaling $ 5,500, consist of payments to three clients, Mr. Dana, Mr. Kolton, and Jepsco, in the amounts of $ 500, $ 500, and $ 4,500, respectively. At trial, petitioner testified that the $ 500 payment to Mr. Dana was a fee "for supplies that he provided for me in my business", the $ 4,500 payment to Jepsco was "for consulting fees", and the $ 500 payment to Mr. Kolton was "for legal services … in a probate matter" rendered by Mr. Kolton. Petitioner testified further that Mr. Kolton assisted petitioner with a probate matter and "looked up some stuff and filed a paper". Petitioner introduced copies of*299 three canceled checks payable to Mr. Dana, Mr. Kolton, and Jepsco containing the notations "fee", "serv.", and "consulting", respectively, in the memo section of the checks.
¶511The evidence offered by petitioner is insufficient to substantiate that petitioner is entitled to offset gross income by, or to deduct, these amounts. Petitioner's testimony regarding the payments fails to provide sufficient information regarding the "supplies" purchased or the "consulting and legal work" actually performed. As stated earlier, we are not required to accept a taxpayer's self-serving testimony. See, e.g., Niedringhaus v. Commissioner, 99 T.C. at 219-220; Tokarski v. Commissioner, 87 T.C. at 77; Hradesky v. Commissioner, 65 T.C. at 90. For the above reasons, we hold that petitioner has failed to establish that he is entitled to a deduction for these payments, and we sustain respondent on this issue.
C. REIMBURSED PAYMENTS ALLEGEDLY MADE ON BEHALF OF ONE CLIENT¶512Included among the subject returns and allowances for 1990 are payments totaling $ 21,679.75, that petitioner allegedly made on behalf of a client, Dr. Strom, for licensing fees and tax liabilities. *300 Petitioner asserts that Dr. Strom reimbursed petitioner for these payments, as discussed below, and that they should be treated as offsets to gross income or as ordinary and necessary business expenses under section 162. In passing, we note that petitioner allegedly made two other payments on behalf of or to Dr. Strom in 1990, $ 59.02, and $ 930, that petitioner also treated as "direct payments".
¶513The evidence presented by petitioner regarding the payments totaling $ 21,679.75 consists of petitioner's testimony, copies of canceled checks, and a copy of a check stub. Petitioner testified that he made three separate payments on behalf of Dr. Strom in order to avoid penalty and interest charges that Dr. Strom had incurred in prior years for late fee payments and tax deposits. According to petitioner's testimony and the copies of the canceled checks petitioner offered as evidence, petitioner paid $ 2,679.75, on September 26, 1990, to the City of Beverly Hills for Dr. Strom's personal medical licensing fee, he paid $ 12,000 to the U.S. Department of the Treasury on October 1, 1990, for Dr. Strom's 1990 third quarter Federal payroll tax deposit, and he paid $ 7,000 on December 31, 1990, to*301 the Employment Development Department for Dr. Strom's California employment tax liability.
¶514Petitioner claims to have reported receipts in 1990 from Dr. Strom in the aggregate amount of $ 28,560. Petitioner testified that "Dr. Strom paid me in two checks that year". According to petitioner, the second check in the amount of $ 26,700 or $ 26,200 was paid on December 19, 1990. Petitioner testified:
¶515 I actually wrote out the name to Gary Friedmann, wrote the word
¶516 fee, wrote the amount and wrote out the check. Dr. Strom signed
¶517 the check and gave it to me and it's his handwriting in there on
¶518 check 3009 where he writes in the date of 12/19/90, and writes
¶519 out reimbursement, and then $ 6,500 annual.
¶520 * * * * * * *
¶521 It's the check stub that I'm referring to. The check -- the
¶522 original check was returned to Dr. Carey Strom. There is my
¶523 writing on this register and in addition to that, Dr. Strom, in
¶524 aggregate, paid me, in 1990, $ 28,560 for -- that is -- there are
¶525 two payments to me at least equal that amount. This amount
¶526 represents $ 26,200. There*302 was also other checks representing
¶527 $ 2,300 that reflected in income.
¶528Petitioner summarized his testimony regarding this matter as follows:
¶529 Getting back to returns and allowances for 1990, I just have one
¶530 point. On December 19th, 1990, Dr. Strom paid me the $ 26,700, of
¶531 which 6,500 was fees and the rest was reimbursement.
¶532 That was attributable, and this was our agreement, this is
¶533 my testimony, the reimbursement component was attributable to
¶534 taxes paid to Beverly Hills, the City of Beverly Hills in
¶535 September of that year of $ 2,679. Withholding taxes or payroll
¶536 taxes the entity owed that I paid on October 1st of that year,
¶537 1990, of $ 12,000 and it contemplated me paying state
¶538 unemployment tax -- state employment taxes of $ 7,000 on December
¶539 31st, 1990, which was subsequent to the payment that was made on
¶540 December 19th, 1990.
¶541 You have checks that I paid all those three amounts. That's
¶542 all I wish to say about that.
¶543 And I believe that the total amount was an advance, aside
¶544 from the $ 6,500 fee, and that these other*303 amounts were just paid
¶545 as a flow-through.
¶546As we understand it, petitioner claims that the second payment that he received from Dr. Strom in the amount of $ 26,700 consisted of an annual fee of $ 6,500 and the reimbursement of three payments that petitioner allegedly made on behalf of Dr. Strom in the aggregate amount of $ 21,679.75 (viz, $ 2,679.75, $ 12,000, and $ 7,000). One problem we have with petitioners's testimony is that the total of the fees and reimbursements is $ 28,179.75, or $ 1,479.75 more than Dr. Strom's check of $ 26,700. Another problem we have with petitioner's testimony is that he does not explain why, in preparing the check for Dr. Strom's signature, to reimburse himself for payments made on Dr. Strom's behalf, petitioner included the $ 7,000 payment to the Employment Development Department that would be due on December 31, 1990, several days later. We do not understand why petitioner did not simply prepare a check for this upcoming payment directly from Dr. Strom to the Employment Development Department.
¶547Petitioner contends that the payments made on Dr. Strom's behalf in 1990 are deductible because petitioner received reimbursement for those payments*304 from Dr. Strom, and petitioner included the reimbursements in computing gross income for that year. Petitioner states in his posttrial brief that he included fees of $ 28,560, from Dr. Strom as gross receipts on Schedule C of his 1990 return. As mentioned above, petitioner produced a handwritten list of the names of his clients and the amounts that petitioner allegedly received from these clients in 1990. According to the handwritten list, petitioner included $ 28,560 from Dr. Strom in the calculation of his gross receipts for that year.
¶548We find that the evidence petitioner adduced is insufficient to establish that amounts reimbursed by Dr. Strom were included in the computation of petitioner's gross receipts for 1990. According to the handwritten list, petitioner's gross receipts for 1990, $ 185,966, does not equal the gross receipts reported on Schedule C of petitioner's 1990 return, $ 175,790. Petitioner has failed to adequately explain this inconsistency. Furthermore, the handwritten list of fees introduced at trial is not supported by any other evidence, such as books, receipts, or other documentation.
¶549In addition, petitioner's testimony regarding the fees of $ 28,560 received*305 from Dr. Strom in 1990 and allegedly included in his gross receipts for that year is confusing. At trial, petitioner testified that Dr. Strom's fees of $ 28,560 consisted of a $ 26,200 payment and "other checks representing $ 2,300". In his opening brief, however, petitioner contends that the $ 28,560 payment comprised a $ 960 payment and a $ 27,600 payment. Subsequently, in his answering brief, petitioner contends that the $ 28,560 payment comprised a $ 26,700 payment, consistent with the amount listed on the copy of the check stub introduced at trial, and a $ 1,860 payment.
¶550Furthermore, petitioner maintained a multifaceted business relationship with Dr. Strom. Petitioner's returns report wages from Dr. Strom's professional corporation totaling $ 24,252 in 1989 and $ 18,409 in 1990. Dr. Strom was also a client of petitioner's Schedule C business and, in that connection, petitioner claims to have made a direct payment to Dr. Strom of $ 930 because Dr. Strom "didn't feel the investments performed as well as expected". Dr. Strom was also an investor in one or more of the partnerships petitioner promoted. In view of these relationships, petitioners's testimony is too vague to substantiate*306 the offset or deductions he claimed for 1990 in the aggregate amount of $ 21,679.75. In this connection, we also note the fact that petitioner did not produce to respondent the retainer agreement between himself and Dr. Strom or seek to introduce the agreement at trial.
¶551As a result of the inconsistent and insufficient evidence he presented, petitioner has failed to establish that he is entitled to a deduction for the payments, totaling $ 21,679.75, that he made on behalf of Dr. Strom. We hereby sustain respondent on this issue.
¶552On the basis of the foregoing, and concessions,
¶553Decision will be entered under Rule 155.