The old saying “the lawyer who represents himself has a fool for a client” is proven once more in Peter A. McLauchlan, 2011 T.C. Mem. 289, filed 12/19/11. Pete was a partner in a Texas law firm during the years at issue (identity of law firm sealed by Court at Pete’s request; pseudonymously AR), but tax wasn’t his area of expertise.

Of course, he prepared his own returns. And of course his firm affiliation can be found by doing a simple Google search. Sealing a person’s professional affiliation in the Internet Age is like trying to hide a Great White Shark in your bathtub, but we’ll keep it anonymous here.

At least he didn’t represent himself before Tax Court.

Pete claimed some Schedule C expenses that were reimbursable by his firm’s policy, with no countervailing custom or practice, and for some of which he was reimbursed. He had some pass-through charitables and depreciation, and those gimmes Judge Kroupa let him have.

As for the reimbursables, AR had a policy: “AR had a written reimbursement policy that specifically provided for reimbursement of certain indirect AR expenses. Reasonable travel expenses were reimbursable, including expenses related to client maintenance and development. Interoffice travel expenses involving an automobile were reimbursable. Lease and rental automobile expenses incurred for client travel were reimbursable. Business meals and entertainment were reimbursable if authorized and approved. Continuing legal education expenses were reimbursable if approved.

“The written reimbursement policy, however, also provided that in-town transportation (i.e., transportation within a 20- mile radius of an attorney’s home office) expenses and spousal travel expenses were not reimbursable.

“As a matter of routine practice, AR would reimburse other indirect AR expenses that were not provided for in the written reimbursement policy, including State bar membership expenses and professional organization expenses. AR did not have a limit on the amount for which a partner could be reimbursed. Reasonableness, rather, was the overarching standard for approving reimbursement of indirect AR expenses. AR would deem an expense unreasonable if it was personal, excessive or not in AR’s best interests.” 2011 T.C. Mem. 289, at p. 4.

Pete’s Schedule C expenses were, he claimed, unreimbursed expenses. IRS said if they were proper expenses properly paid (which they didn’t concede), they were partnership expenses paid by a partner, and therefore not deductible by the partner. Judge Kroupa: “Generally, a partner may not directly deduct the expenses of the partnership on his or her individual returns, even if the expenses were incurred by the partner in furtherance of partnership business. Cropland Chem. Corp. v. Commissioner, 75 T.C. 288, 295 (1980), affd. without published opinion 665 F.2d 1050 (7th Cir. 1981). An exception applies, however, when there is an agreement among partners, or a routine practice equal to an agreement, that requires a partner to use his or her own funds to pay a partnership expense. Id.; Klein v. Commissioner, 25 T.C. 1045, 1052 (1956).

“The AR partnership agreement required petitioner to pay indirect AR expenses that were unreimbursable. There was no routine practice at AR that required petitioner to pay any other AR expenses. Accordingly, the expenses at issue are deductible if they were (1) indirect AR expenses, (2) unreimbursable and (3) actually incurred.” 2011 T. C. Mem. 289, at pp. 6-7.

Examining the expenses, the AR partnership agreement, and Pete’s own “general and vague” and “self-serving, unverified and undocumented” testimony (2011 T.C. Mem. 289, at p. 9), Judge Kroupa finds Pete never was denied reimbursement for anything he claimed, and his in-town, nonreimbursable automobile deductions hit the Section 274(d) roadblock. Strict substantiation: nothing else will serve, but again Pete offers only “general, vague, self-serving and uncorroborated testimony”, 2011 T. C. Mem. 289, at p. 11.

Game over for Pete’s Schedule C.

Now for the Section 6662(a) accuracy penalty. After the ritual incantation, Judge Kroupa nails Pete: “A taxpayer is not liable for an accuracy-related penalty, however, if the taxpayer acted with reasonable cause and in good faith with respect to any portion of the underpayment. Sec. 6664(c)(1); sec. 1.6664-4(a), Income Tax Regs. The determination of whether a taxpayer acted with reasonable cause and in good faith depends on the pertinent facts and circumstances, including the taxpayer’s efforts to assess his or her proper tax liability, the knowledge, experience and education of the taxpayer, and the reliance on the advice of a professional. Sec. 1.6664-4(b)(1), Income Tax Regs.

“Petitioner is well educated and has been an attorney for over 20 years. He prepared his own Federal income tax returns for the years at issue. Petitioner admitted that he had difficulty preparing his tax returns, yet he failed to seek the assistance of a tax professional.

“Moreover, the full amount of each underpayment resulted from petitioner repeatedly disregarding the rules and regulations on reporting income and claiming deductions against income. Petitioner failed to offer any persuasive evidence that he acted with reasonable cause and in good faith in disregarding the relevant rules and regulations.” 2011 T. C. Mem. 289, at pp. 12-13.

So Pete loses–all the way.

Takeaway–Hire your tax professional before you get to trial. Hire them even before you do your own return.