Riley v. Comm'r

T.C. Summary Opinion 2007-26

UNITED STATES TAX COURT

JAMES M. AND RUTH J. RILEY, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 23681-05S. Filed February 26, 2007.

James M. and Ruth J. Riley, pro sese.

Marion K. Mortensen, for respondent.

DAWSON, Judge: This case was heard pursuant to section 7463

of the Internal Revenue Code in effect when the petition was

filed.1 The decision to be entered is not reviewable by any

other court, and this opinion should not be cited as authority.

1

Unless otherwise indicated, subsequent section references

are to the Internal Revenue Code in effect for the years at

issue, and Rule references are to the Tax Court Rules of Practice

and Procedure.

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Respondent determined the following deficiencies in

petitioners’ Federal income taxes and accuracy-related penalties

under section 6662(a):

Penalty

Year Deficiency Sec. 6662(a)

2001 $5,674 $1,134.80

2002 18,003 3,600.60

2003 11,840 2,368.00

Petitioners have not contested some of the adjustments

respondent made that give rise to the deficiencies in question.2

Other adjustments are computational,3 and the resolution of those

adjustments depends on our resolution of the substantive issues

for decision.

2

In the notice of deficiency, respondent (1) disallowed a

deduction of $1,600 for self-employed health insurance for 2001,

(2) increased petitioners’ 2001 dividend income from $1,692 to

$1,881, (3) increased petitioners’ self-employment taxes for 2002

and 2003 from $879 reported on the 2002 return to $7,002 and from

$14,979 reported on the 2003 return to $15,397, and (4)

disallowed the $427 alternative minimum tax (AMT) foreign tax

credit carried forward from 2002 to 2003 resulting in AMT of

$1,459 for 2003. In the petition, petitioners did not assign

error to those adjustments.

3

Respondent made the following computational adjustments

resulting from the adjustments to income: (1) Increased the

taxable amount of Social Security benefits for 2001 from $278

reported on the return to $6,574, (2) increased the deductions

for self-employment tax for 2002 and 2003 from $440 reported on

the 2002 return to $3,501 and from $7,490 reported on the 2003

return to $7,699, and (3) reduced the deduction for exemptions

for 2003 from $5,978 reported on the 2003 return to $5,124.

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The issues for decision are:

(1) Whether petitioners are entitled to the deductions for

depreciation of farm buildings and drainage tile that they

claimed on Schedules F, Profit or Loss From Farming, for 2001,

2002, and 2003;

(2) whether petitioners are entitled to elect under section

179 to expense in 2002 a portion of the cost of a truck placed in

service in 2001;

(3) whether petitioners are entitled to deductions for

travel expenses they claimed on Schedules F and Schedules E,

Supplemental Income and Loss, for 2001, 2002, and 2003; and

(4) whether petitioners are liable for the accuracy-related

penalty under section 6662(a) for each of the years at issue.

Background

Some of the facts have been stipulated and are so found.

At the time the petition was filed petitioners resided in

Salt Lake City, Utah.

James M. Riley (petitioner) worked as an extracting

metallurgist for the Department of the Interior from 1953 to

1983. Petitioner’s father and grandfathers were cattle feeders.

Petitioner began his cattle feeding activity while he was

employed with the Department of the Interior. He was familiar

with real estate transactions and bought and sold feeder cattle

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and managed his farming operations. His primary business is

cattle feeding, and his tax home during the years at issue was in

Utah.

After petitioner retired from the Department of the

Interior, he bought three farms in Jackson County, Minnesota,

from the Federal Farm Credit Association; namely, the DeMoore

farm purchased in 1986, the Sioux Valley farm purchased in 1990,

and the Ross farm purchased in 1997. He raised corn and soybeans

on the farms. He used part of the corn crop to feed cattle.

Petitioner bought the DeMoore farm in 1986 for $129,000.

The buildings on the farm included a house, four barns (the hog

raising barn, the granary, the storage building, and a fourth

barn), a pole shed, and two silos. Petitioner used the house as

an office and for his lodging when he was at the farm. He stored

old scrap items in the storage building, allowed others to store

firewood in the pole shed, and parked a “farm car” in the

granary.4 He did not use the pole shed, the silos, or the barns

in his farming operations.

Petitioner purchased the 160-acre Sioux Valley farm in 1990

for $1,375 per acre. The improvements on the Sioux Valley farm

consisted of a house and a well. He did not use the house or the

well in his farming operations.

4

Aside from petitioner’s description of the vehicle as a

“farm car”, there is no evidence in the record as to the car’s

use.

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Petitioner purchased the Ross farm in 1997 for $154,000.

The improvements on the Ross farm consisted of two buildings (a

barn and a storage building) and installed drainage tile. He did

not use the barn in his farming operations but occasionally used

the storage building to store soybeans.

Petitioner purchased a 2001 Dodge Truck for $35,000 for use

in his farming activity. He used it to transport grain in

Minnesota and when traveling to Montana, Wyoming, and South

Dakota to find feeder cattle for purchase. During 2001, 2002,

and 2003, petitioner drove the truck approximately 7,000 miles

each year in his farming operations. He also has three other

vehicles that he used while conducting his farming and rental

activities.

Petitioner prepared and timely filed petitioners’ Forms

1040, U.S. Individual Income Tax Return, for 2001, 2002, and

2003, using the cash basis method of accounting.

On Schedules E, petitioners reported rental income and loss

from the rental of four houses. One house was reported as being

in South Dakota, one in Minnesota, one in Iowa, and one in Utah.

Petitioners reported a rental loss of $178 for 2001 and rental

income of $5,032 for 2002 and $5,133 for 2003.

Petitioners reported income from farming on Schedules F.

They reported a net farm loss of $29,350 for 2001 and net farm

profits of $6,219 for 2002 and $156,492 for 2003.

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On Schedules F, petitioners claimed depreciation deductions

for the truck, the farm buildings on the DeMoore, Sioux Valley,

and Ross farms, and the installed tile on the Ross farm using the

straight-line method for the years at issue.

The truck was placed in service on January 1, 2001. On the

2001 return, petitioners claimed a $7,000 depreciation deduction

for the truck, depreciating the $35,000 cost of the truck over 5

years using the straight-line method. On the 2002 return,

petitioners attempted to elect to expense $24,000 of the cost of

the truck under section 179. On the 2002 return, they deducted

the $24,000 expensed amount plus $1,000 of depreciation for the

truck. On the 2003 return, petitioners deducted $1,000 of

depreciation for the truck.

Petitioner did not allocate the purchase prices of the

DeMoore, Sioux Valley, and Ross farms between the land and the

improvements on the farms. Rather, he estimated the fair market

values of the improvements and used those amounts as his bases in

the improvements. He estimated that the fair market value of the

DeMoore farm buildings was $75,000, that the fair market value of

the house on the Sioux Valley farm was $25,000, that the fair

market value of the Ross farm buildings was $50,000, and that the

fair market value of the tile installed on the Ross farm was

$10,000.

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Petitioners did not claim depreciation deductions for 1998

and 1999. They thought they could extend the depreciation

periods for the assets for 2 years.

On the Schedules F for 2001, 2002, and 2003, petitioners

reported depreciation and section 179 expensed amounts as

follows:

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Date Cost or Basis Elected

Placed Other Recovery for Depreciation Sec. 179

Item in Service Basis Period Depreciation Deduction Cost

2001 Return:

Truck 1/2001 $35,000 5 years -- $7,000 --

Farm buildings 3/1986 75,000 15 years -- 5,000 --

Farm buildings 3/1990 25,000 10 years -- 2,500 --

Farm buildings 9/1997 50,000 10 years -- 5,000 --

Drainage tile 9/1997 10,000 5 years -- 2,000 --

Total 21,500

2002 Return:

Truck 1/2001 $35,000 5 years $4,000 $1,000 $24,000

Farm buildings 3/1986 75,000 15 years -- 5,000 --

Farm buildings 3/1997 50,000 10 years -- 5,000 --

Drainage tile 9/1997 10,000 5 years -- 2,000 --

Total 13,000 24,000

2003 Return:

Truck 1/2001 $35,000 5 years 11,000 $1,000 --

Farm buildings 9/1997 50,000 10 years -- 5,000 --

Drainage tile 9/1997 10,000 5 years -- 2,000 --

Total 8,000

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For each year at issue, petitioner deducted his travel

expenses, including transportation, meals, and lodging, on

Schedules F and E. He did not keep logs to substantiate dates he

was away from home on business or the business purpose of the

travel. He kept some, but not all, of his receipts for his

gasoline, meals, and lodging expenses. He did not use the

receipts to calculate his travel expenses. Instead, he used a

formula to compute the travel expenses deducted on Schedules E

and F each year.

Petitioner estimated that he traveled 15,000 miles each year

for his rental and farming activities.5 For each year,

petitioner calculated his transportation expense by multiplying

15,000 miles by the standard mileage rate for the year ($.345 for

2001; $.365 for 2002; and $.36 for 2003).

Petitioner estimated that he was away from home 40 days each

year for rental and farming business. He calculated his total

meals and lodging expenses of $3,600 by multiplying the 40 days

by $90, which he believed was the low-cost per diem lodging

expense rate for the years at issue listed in Rev. Proc. 2000-39,

2000-2 C.B. 340.

5

In addition to the 2001 truck, petitioner has three other

vehicles that he uses (not exclusively) in his business

activities. He estimated that he used all four to travel a total

of 15,000 miles related to his business activity.

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Petitioner allocated $1,400 of the total travel expenses to

Schedule E and the remainder to Schedule F. He allocated and

deducted travel expenses on Schedule E for his rental and

Schedule F for his farming activity as follows:

Item 2001 2002 2003

Travel:

Transportation $5,175 $5,475 $5,400

Meals & lodging 3,600 3,600 3,600

Total travel 8,775 9,075 9,000

Schedule E rental allocation 1,400 1,400 1,400

Schedule F farming allocation 7,375 7,675 7,600

Discussion

Respondent disallowed all travel expenses petitioners

deducted on Schedules E and F and most of the depreciation

petitioners deducted on Schedules F for 2001, 2002, and 2003.

Petitioners bear the burden of proving that respondent’s

determinations in the notice of deficiency are erroneous.6 See

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

Deductions are a matter of legislative grace, and petitioners

bear the burden of proving they are entitled to the deductions

they claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992).

6

Petitioners do not claim that the burden of proof shifts to

respondent under sec. 7491(a). In any event, petitioners have

failed to establish that they satisfy the requirements of sec.

7491(a)(2). On the record before us, we find that the burden of

proof does not shift to respondent under sec. 7491(a).

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A. Deductions Generally

A taxpayer may not deduct personal, living, and family

expenses unless the Internal Revenue Code expressly provides

otherwise; e.g., State and local real property taxes are

deductible pursuant to section 164(a)(1). Sec. 262(a). Nor may

a taxpayer deduct capital expenditures; i.e., amounts paid for

new property or for permanent improvements or betterments made to

increase the value of any property or estate. Sec. 263(a)(1).

Instead, if the capital expenditure is for property used in a

trade or business or held for the production of income, the

taxpayer may be allowed a deduction for depreciation under

section 167. See, e.g., INDOPCO, Inc. v. Commissioner, supra at

83-84.

Taxpayers generally may deduct expenses that are ordinary

and necessary in carrying on a trade or business under section

162(a), for the production or collection of income under section

212(1), or for the management, conservation, or maintenance of

property held for the production of income under section 212(2).

The statutory prohibitions of sections 262 and 263 regarding

deductibility of personal and capital expenses take precedence

over the allowance provisions of sections 162 and 212.

Commissioner v. Idaho Power Co., 418 U.S. 1, 17 (1974); Sharon v.

Commissioner, 66 T.C. 515, 523 (1976), affd. 591 F.2d 1273 (9th

Cir. 1978).

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B. Depreciation

On Schedules F, petitioners claimed depreciation deductions

for the truck, the farm buildings on the DeMoore, Sioux Valley,

and Ross farms, and the installed tile on the Ross farm using the

straight-line method for the years at issue. Respondent

disallowed $19,500 of the $21,500 depreciation claimed for 2001,

$35,667 of the $37,000 claimed for 2002, and all of the $8,000

claimed for 2003. Respondent allowed all of the $2,000

depreciation of the tile installed on the Ross farm deducted for

2001 and $1,333 of the $2,000 deducted for 2002. Respondent

disallowed all depreciation claimed for the farm buildings

because petitioners had not established their bases in the

property or shown that the assets met the requirements of section

167. Respondent also disallowed depreciation and expensed

deductions petitioners claimed for the truck.

1. Depreciation of Farm Buildings and Tile

Section 167(a) allows as a depreciation deduction a

reasonable allowance for the exhaustion, wear, and tear of

property used in a trade or business. The purpose of the

deduction for depreciation is to allow the taxpayer to recover

over the useful life of the property its cost or other basis.

United States v. Ludey, 274 U.S. 295, 300-301 (1927).

Pursuant to section 168(a), the depreciation deduction for

any tangible property generally is to be determined by using the

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applicable depreciation method, the applicable convention, and

the applicable recovery period. The period for depreciation of

an asset begins when the asset is first placed into service.

Sec. 1.167(a)-10(b), Income Tax Regs. Deductions for

depreciation must be taken in the year in which depreciation

occurs and cannot be taken in subsequent years by reason of a

taxpayer’s failure to deduct the depreciation allowance in prior

years. Sec. 1.167(a)-10(a), Income Tax Regs.

Generally, depreciation is computed by using the cost of the

property as its basis. Secs. 167(c), 1011, 1012; sec.

1.167(g)-1, Income Tax Regs. If depreciable property and

nondepreciable property such as real property with improvements

are bought for a lump sum, the cost must be apportioned between

the land and the improvements. United States v. Hill, 506 U.S.

546, 559 (1993); sec. 1.167(a)-5, Income Tax Regs. In making

this allocation, section 1.167(a)-5, Income Tax Regs., provides:

In the case of the acquisition on or after March 1,

1913, of a combination of depreciable and

nondepreciable property for a lump sum, as for example,

buildings and land, the basis for depreciation cannot

exceed an amount which bears the same proportion to the

lump sum as the value of the depreciable property at

the time of acquisition bears to the value of the

entire property at that time. * * *

Thus, the relevant inquiry is the respective fair market values

of the depreciable and nondepreciable property at the time of

acquisition. Weis v. Commissioner, 94 T.C. 473, 482-483 (1990);

Randolph Bldg. Corp. v. Commissioner, 67 T.C. 804, 807 (1977).

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Petitioners claimed depreciation deductions for the

buildings on the DeMoore farm, the Sioux Valley farm, and the

Ross farm. Respondent argues alternatively that petitioners are

not entitled to the depreciation deductions because they did not

use the buildings in their farming activities, the depreciation

periods had expired, and/or they have not established their cost

bases in the buildings. We agree with respondent on all three

points.

Petitioner bought the 160-acre DeMoore farm from the Federal

Farm Credit Association in 1986 for $129,000. The buildings on

the farm included a house, four barns (the hog raising barn, the

granary, the storage building, and a fourth barn), a pole shed,

and two silos. Petitioner did not allocate the cost of the farm

between the land and the buildings. He estimated that the fair

market value of the DeMoore farm buildings was $75,000 and

allocated that amount to the buildings on the farm. He used the

house as an office and for lodging. He did not use the pole

shed, the silos, or the barns in his farming operations. On

their returns, petitioners reported that the buildings were

placed in service in March 1986, had a recovery period of 15

years, and had a cost basis of $75,000. They deducted $5,000

depreciation for 2001 and 2002.

Petitioners are not entitled to deductions for depreciation

of the pole shed, the silos, or the barns for any of the years at

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issue because petitioner did not use those structures in his

farming or rental activities. Although petitioner used the house

as an office and for his lodging when he was at the farm,

petitioners are not entitled to deductions for depreciation of

the house for the years at issue. They are not entitled to

deductions for depreciation in 2002 because the 15-year

depreciation period expired in March 2001. Petitioners did not

claim depreciation deductions for 1998 and 1999. They thought

that they could extend the depreciation periods for the assets

for 2 years. The failure to claim the depreciation deductions in

1989 and 1999 does not extend the depreciation period into 2002

and later years. See sec. 1.167(a)-10(a), Income Tax Regs.

Petitioners are not entitled to a deduction for depreciation of

the house for 2001 both because they have not established their

original cost basis in the house (i.e., they have not established

the portion of the purchase price of the farm that is properly

allocated to the house) and because they have not shown that the

total depreciation allowed or allowable in earlier years had not

reduced their basis in the house to zero.7

Petitioner purchased the 160-acre Sioux Valley farm from the

Federal Farm Credit Association in 1990. He paid approximately

$1,375 per acre or approximately $220,000 for the Sioux Valley

7

Had petitioners established that their cost basis in the

house was $75,000, they would have been entitled to depreciation

of only $833.33 ($5,000 x 2/12) for 2 months in 2001, not the

$5,000 claimed on the 2001 return.

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farm. There were improvements on the Sioux Valley farm

consisting of a house and a well. Petitioner did not use the

house or the well in his farming operations. He estimated that

the fair market value of the house on the Sioux Valley farm was

$25,000 and depreciated it using the straight-line method over 10

years. Petitioners are not entitled to deduct the $2,500 they

claimed for 2001 for depreciation of the house and the well

because petitioner did not use the house or the well in his

farming or rental activity and the 10-year depreciation period

expired in 2000. Their failure to claim the depreciation

deductions for 1998 and 1999 does not extend the depreciation

period into later years. See sec. 1.167(a)-10(a), Income Tax

Regs.

Petitioner purchased the Ross farm from the Federal Farm

Credit Association in 1997 for $154,000. Improvements on the

Ross farm buildings consisted of two buildings (a barn and a

storage building) and installed drainage tile. Petitioner

estimated that the value of the Ross farm buildings was $50,000.

He did not use the barn in his farming operations but

occasionally used the storage building to store soybeans.

Petitioners are not entitled to depreciation deductions for the

barn because petitioner did not use it in his farming or rental

activity. Although he occasionally used the storage building

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to store soybeans, petitioners are not entitled to depreciation

deductions because they have not established the cost basis in

the storage building.

With respect to depreciation deductions related to the tile

installed on the Ross farm, petitioners claimed $2,000 for each

of the years at issue. Respondent allowed all of the $2,000

depreciation of the tile deducted for 2001 and $1,333 of the

$2,000 deducted for 2002. Respondent disallowed the $667 of the

depreciation of the tile claimed for 2002 and all of the $2,000

deducted for 2003 because the 5-year useful life had expired in

September 2002. Petitioners are not entitled to the claimed

depreciation deductions beyond the useful life of the tile.

Petitioner testified that he paid approximately $129,000 for

the DeMoore farm, approximately $1,375 per acre ($220,000 for 160

acres) for the Sioux Valley farm, and $154,000 for the Ross farm.

He testified that all three properties were 160-acre farms that

he purchased at distress prices from the Federal Farm Credit

Association. Petitioner did not submit copies of the purchase

agreements, deeds, mortgages, canceled checks, or any other

documents to establish the purchase prices of the farms.

Petitioner submitted an undated letter from Dan Pike &

Associates Auction Co. listing farmland and building lots sold by

the company. Petitioner has written “2005” on the letter. The

letter provides no evidence of the value of petitioner’s farmland

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or the buildings thereon at the time he purchased the farms.

Petitioner also submitted real property tax assessments for the

farms for 1997 and/or 1998. The assessments do not separately

appraise the land and the improvements on the land. Therefore,

the assessments provide no evidence of the comparative values of

the land and the improvements.

If a claimed deduction is not adequately substantiated, we

are permitted to estimate expenses when we are convinced from the

record that the taxpayer has incurred such expenses. Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). However, we

require a basis upon which an estimate may be made. Vanicek v.

Commissioner, 85 T.C. 731, 743 (1985). Here we have no such

basis. The taxpayer must present credible evidence that provides

a rational basis for our estimate. Id. Cohan is inapplicable

“where the claimed but unsubstantiated deductions are of a sort

for which the taxpayer could have and should have maintained the

necessary records.” Lerch v. Commissioner, 877 F.2d 624, 628

(7th Cir. 1989), affg. T.C. Memo. 1987-295. Under such

circumstances the Tax Court is under no obligation to guess as to

the amounts of the expenses. Lutheran Mut. Life Ins. Co. v.

United States, 816 F.2d 376, 379 (8th Cir. 1987) (observing that

“given the lack of evidentiary support for taxpayer’s claimed

deductions, we cannot say that the trial court erred in declining

to uphold at least some deduction under Cohan”).

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Petitioners ask us to agree with their estimate of the

values of the improvements and land at the time of purchase.

However, they offered only the vaguest estimates of the values of

the improvements on the farms. It is not appropriate under Cohan

for us to guess the allowable amounts of depreciation. See,

e.g., Shaw v. Commissioner, T.C. Memo. 2003-111. We decline to

do so. Consequently, we hold that petitioners have failed to

substantiate their bases in the buildings.

2. Depreciation of Truck

On the 2001 return, petitioners claimed a $7,000

depreciation deduction for the truck, depreciating the $35,000

cost of the truck over 5 years using the straight-line method.

On the 2002 return, petitioners attempted to elect to expense

$24,000 of the cost of the truck under section 179. On the 2002

return, they deducted the $24,000 expensed amount plus $1,000 of

depreciation for the truck. On the 2003 return, petitioners

deducted $1,000 of depreciation for the truck. Respondent

disallowed all of those deductions.

Respondent concedes that the truck was placed in service on

January 1, 2001, and was used solely for business purposes.

Respondent also concedes that petitioners are entitled to a

$7,000 deduction for depreciation of the truck for 2001, 2002,

and 2003 but asserts that petitioners may not elect to expense

$24,000 of the cost of the truck for 2002.

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Section 179(a) generally allows a taxpayer to elect to treat

the cost of section 179 property as a current expense in the year

the property is placed in service, within certain dollar

limitations. Sec. 179(b). The election must be made on the

taxpayer’s first income tax return (whether or not the return is

timely) or on an amended return filed within the time prescribed

by law (including extensions) for filing the original return for

such year. Sec. 179(c)(1)(B); Genck v. Commissioner, T.C. Memo.

1998-105; sec 1.179-5(a), Income Tax Regs. A taxpayer may not

elect to expense the cost of section 179 property in a year other

than the year in which the property is placed in service. Kay v.

Commissioner, T.C. Memo. 2002-197, affd. 85 Fed. Appx. 362 (5th

Cir. 2003).

Petitioners’ truck was placed in service in 2001, and

petitioners were required to make the election under section 179

on their 2001 return. Petitioners did not elect to expense the

cost of the truck on their 2001 return. Instead, they claimed a

$7,000 depreciation deduction for the truck, depreciating the

$35,000 cost of the truck over 5 years using the straight-line

method. Their attempt to make the section 179 election on their

2002 return was ineffective. See Kay v. Commissioner, supra.

We hold that petitioners are entitled to deduct $7,000 for

depreciation of the truck for each year in issue.

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C. Travel Expenses

In general, expenses incurred for a taxpayer’s daily meals

and lodging and for commuting between the taxpayer’s residence

and the taxpayer’s place of business are nondeductible personal

expenses. Sec. 262(a); see, e.g., United States v. Correll, 389

U.S. 299 (1967); Commissioner v. Flowers, 326 U.S. 465, 472-473

(1946); Barry v. Commissioner, 54 T.C. 1210, 1214 (1970), affd.

per curiam 435 F.2d 1290 (1st Cir. 1970); see also secs.

1.162-2(e), 1.262-1(b)(5), Income Tax Regs. By contrast,

traveling expenses, including amounts expended for meals and

lodging, may be deducted if they are incurred while away from

home in the pursuit of a trade or business or related to

income-producing property.8 Secs. 162(a)(2), 212, 262.

1. Record Keeping

A taxpayer is required to maintain records sufficient to

establish the amount of his deductions. See sec. 6001; sec.

1.6001-1(a), Income Tax Regs. When a taxpayer establishes that

he paid or incurred a deductible expense but does not establish

the amount of the deduction, we may estimate the amount allowable

in some circumstances. Cohan v. Commissioner, 39 F.2d at 543-

544. There must be sufficient evidence in the record, however,

8

For a taxpayer to be considered “away from home” within the

meaning of sec. 162(a)(2), the taxpayer must be on a trip that

requires the taxpayer to stop for sleep or a substantial period

of rest. United States v. Correll, 389 U.S. 299 (1967);

Strohmaier v. Commissioner, 113 T.C. 106, 115 (1999).

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to permit us to conclude that a deductible expense was paid or

incurred in at least the amount allowed. Williams v. United

States, 245 F.2d 559, 560 (5th Cir. 1957).

For certain kinds of expenses otherwise deductible under

section 162(a) or 212, such as travel, meal, and entertainment

expenses, and those expenses attributable to “listed property”,

section 274(d) overrides the Cohan rule. Sanford v.

Commissioner, 50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d

201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary Income Tax Regs.,

50 Fed. Reg. 46014 (Nov. 6, 1985). Listed property includes any

passenger automobile9 and any other property used as a means of

transportation, under section 280F(d)(4)(A)(i) and (ii), unless

excepted by section 280F(d)(4)(C) or (5)(B).10 Under section

274(d), a taxpayer must satisfy strict substantiation

requirements before a deduction is allowable. Secs. 274(d),

6001; sec. 1.6001-1(a), (e), Income Tax Regs.

9

The term “passenger automobile” does not include trucks and

vans excluded by regulation. Sec. 280F(d)(5)(B)(iii). Pursuant

to sec. 1.280F-6(c)(3)(iii), Income Tax Regs., a passenger

automobile does not include a truck or van that is a qualified

non-personal-use vehicle defined under sec. 1.274-5T(k),

Temporary Income Tax Regs., 50 Fed. Reg. 46033 (Nov. 6, 1985).

Petitioner’s truck is not excluded from the definition of

passenger automobile. See sec. 1.274-5T(k), Temporary Income Tax

Regs., supra.

10

Petitioner used his truck and three other vehicles for his

rental and farming activities. On the record before us, we find

that petitioners’ vehicles, which are not subject to any of the

exceptions in sec. 280F(d)(4)(C) or (5)(B), are listed property

within the meaning of sec. 280F(d)(4).

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The elements that a taxpayer must prove with respect to an

expenditure for traveling away from home on business, including

meals, are: (1) The amount of each such expenditure for

traveling away from home, except that the daily cost of the

traveler’s own breakfast, lunch, and dinner may be aggregated;

(2) the time of each such expenditure; i.e., the dates of

departure and return for each trip away from home and the number

of days away from home spent on business; (3) the place of each

such expenditure; i.e., the destinations or locality of travel,

described by name of city or town or other similar designation;

and (4) the business purpose of each such expenditure; i.e., the

business reason for the travel or the nature of the business

benefit derived or expected to be derived as a result of travel.

Sec. 1.274-5T(b)(2), Temporary Income Tax Regs., 50 Fed. Reg.

46014-46015 (Nov. 6, 1985). A taxpayer is required to

substantiate each element of an expenditure or use

* * * by adequate records or by sufficient evidence

corroborating his own statement. Section 274(d)

contemplates that a taxpayer will maintain and produce

such substantiation as will constitute proof of each

expenditure or use referred to in section 274. Written

evidence has considerably more probative value than

oral evidence alone. In addition, the probative value

of written evidence is greater the closer in time it

relates to the expenditure or use. A contemporaneous

log is not required, but a record of the elements of an

expenditure or of a business use of listed property

made at or near the time of the expenditure or use,

supported by sufficient documentary evidence, has a

high degree of credibility not present with respect to

a statement prepared subsequent thereto when generally

there is a lack of accurate recall. Thus, the

corroborative evidence required to support a statement

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not made at or near the time of the expenditure or use

must have a high degree of probative value to elevate

such statement and evidence to the level of credibility

reflected by a record made at or near the time of the

expenditure or use supported by sufficient documentary

evidence. The substantiation requirements of section

274(d) are designed to encourage taxpayers to maintain

the records, together with documentary evidence, as

provided in paragraph (c)(2) of this section [1.274-5T,

Temporary Income Tax Regs.].

Sec. 1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg.

46016-46017 (Nov. 6, 1985).

Respondent concedes that petitioners have substantiated the

following travel expenses for fuel, food, and lodging:

Item 2001 2002 2003

Fuel $303.75 $168.22 $264.84

Food 87.39 82.73 120.17

Motel -0- 689.05 -0-

Total travel 391.14 940.00 385.01

2. Alternative Substantiation Methods

Petitioners assert that they are entitled to use the per

diem rates to substantiate their travel expenses. Section 274(d)

permits the Secretary to provide by regulations that some or all

of the substantiation requirements do not apply in the case of an

expense that does not exceed an amount prescribed by the

regulations. Pursuant to section 1.274-5(g), Income Tax Regs.,

the Commissioner is authorized to prescribe rules in

pronouncements of general applicability under which allowances

for certain types of ordinary and necessary expenses for

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traveling away from home will be regarded as satisfying the

substantiation requirements of section 274(d). Beech Trucking

Co. v. Commissioner, 118 T.C. 428, 434 (2002).

3. Meals and Lodging

Pursuant to the regulations, the Commissioner issued Rev.

Proc. 2000-39, 2000-2 C.B. 340, Rev. Proc. 2001-47, 2001-2 C.B.

332, and Rev. Proc. 2002-63, 2002-2 C.B. 691, in effect for the

years 2001, 2002, and 2003, respectively (collectively the

revenue procedures). Section 4.01 of the revenue procedures

provides an optional method for employers to substantiate the

amounts of ordinary and necessary business expenses of an

employee for lodging, meals, and/or incidental expenses incurred

while traveling away from home. Section 4.03 of the revenue

procedures also provides an optional method for employees and

self-employed individuals to substantiate the amounts of business

meals and incidental expenses incurred while traveling away from

home. Petitioner relies on these revenue procedures to support

the per diem expense deductions claimed for meals and lodging for

the days he was away from home on business during the years at

issue.

While section 4.01 of the revenue procedures authorizes the

per diem method to substantiate lodging, meal, and incidental

costs, that per diem method is available only to employers who

pay a per diem allowance in lieu of reimbursing the actual

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expenses an employee incurs while traveling away from home.

Petitioner’s claimed lodging expenses do not come under this

provision because he was self-employed in connection with his

farming and rental activities.

Accordingly, petitioner’s claimed lodging expenses for each

of the years at issue are not deemed substantiated under the

revenue procedures. Respondent concedes that petitioner has

substantiated lodging expenses of $689.05 for 2002, and the Court

finds that petitioners may deduct $689.05 for 2002. Petitioner

has not substantiated and is not entitled to deduct any amount

for lodging expenses for 2001 or 2003.

Petitioner, as a self-employed individual, however, is

entitled to rely on the per diem method allowed under section

4.03 of the revenue procedures for meals and incidental expenses.

Section 4.03 of the revenue procedures allows a self-employed

taxpayer to use the per diem method for meals and incidental

expenses, provided the taxpayer “substantiates the elements of

time, place, and business purpose of the travel” expenses.

Respondent argues that petitioner failed to substantiate these

elements and, therefore, is not entitled to use the per diem

method for meals and incidental expenses for the years at issue.

We disagree.

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As previously stated, respondent has conceded that

petitioners have substantiated and may deduct travel expenses for

fuel, food, and lodging totaling $391.14 for 2001, $940 for 2002,

and $385.01 for 2003.

Respondent’s concession that petitioners have substantiated

these expenses is a concession that petitioner incurred the

expenses while he was away from home on business. Petitioners

substantiated those expenses with receipts and bank statements

provided to respondent and entered into the record of this case.

The receipts and bank statements show purchases that petitioner

made in States other than Utah dated as follows:

Date Source State

4/22/2001 Statement Wyoming

4/24/2001 Statement Wyoming

4/25/2001 Receipt/Statement Wyoming

4/26/2001 Receipt/Statement South Dakota

4/28/2001 Receipt/Statement Minnesota

5/3/2001 Receipt Iowa

5/10/2001 Receipt Minnesota

5/16/2001 Receipt Minnesota

5/23/2001 Receipt Iowa

5/30/2001 Receipt Minnesota

6/3/2001 Receipt Minnesota

6/5/2001 Receipt Minnesota

6/7/2001 Receipt/Statement Minnesota

6/14/2001 Receipt South Dakota

6/15/2001 Receipt Nebraska

6/16/2001 Receipt/Statement Minnesota

6/17/2001 Receipt Wyoming

9/5/2001 Receipt/Statement Wyoming

9/6/2001 Receipt/Statement Wyoming

9/6/2001 Statement South Dakota

9/7/2001 Receipt Minnesota

9/10/2001 Statement Minnesota

9/15/2001 Receipt/Statement Minnesota

- 28 -

9/22/2001 Receipt Minnesota

9/27/2001 Receipt Minnesota

9/30/2001 Receipt/Statement Minnesota

10/2/2001 Receipt Minnesota

10/5/2001 Receipt/Statement Minnesota

10/9/2001 Receipt Minnesota

10/12/2001 Receipt Minnesota

10/25/2001 Receipt South Dakota

10/27/2001 Receipt Nebraska

10/28/2001 Receipt/Statement Colorado

10/29/2001 Receipt/Statement Wyoming

4/23/2002 Statement Wyoming

4/24/2002 Receipt Wyoming

5/3/2002 Receipt Wyoming

5/21/2002 Receipt Minnesota

5/29/2002 Receipt Minnesota

6/11/2002 Receipt Nebraska

8/14/2002 Receipt Wyoming

8/15/2002 Receipt/Statement Wyoming

8/15/2002 Receipt/Statement South Dakota

8/19/2002 Statement Iowa

8/22/2002 Statement Iowa

8/22/2002 Receipt Nebraska

8/23/2002 Receipt/Statement Nebraska

8/23/2002 Receipt Minnesota

9/10/2002 Receipt Minnesota

9/19/2002 Receipt Iowa

10/07/2002 Receipt Nebraska

10/16/2002 Receipt Nebraska

10/18/2002 Receipt/Statement Wyoming

4/30/2003 Receipt Wyoming

5/1/2003 Receipt Nebraska

6/12/2003 Statement Nebraska

6/14/2003 Statement Wyoming

9/3/2003 Receipt/Statement Montana

9/4/2003 Receipt/Statement Wyoming

9/5/2003 Receipt/Statement South Dakota

9/26/2003 Receipt Minnesota

10/16/2003 Receipt/Statement South Dakota

10/17/2003 Statement South Dakota

10/19/2003 Receipt/Statement Colorado

10/20/2003 Receipt/Statement Wyoming

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The receipts and statements establish the dates and places

of the travel, and respondent’s concession that petitioner has

substantiated the expenses evidenced by the receipts is a

concession that he was away from home conducting business on

those dates. Consequently, petitioners have satisfied the

requirements of section 4.03 of the revenue procedures and are

entitled to use the per diem method for the 33 days established

for 2001, the 16 days established for 2002, and the 12 days

established for 2003. Publication 1542, Per Diem Rates (For

Travel Within the Continental United States) (Rev. Mar. 2001,

Feb. 2002, and Feb. 2003), reports that the standard rate for

meals and incidental expenses is $30 for all years at issue.

Section 274(n)(1)(A) provides that the amount allowable as a

deduction for “any expense for food or beverages” is generally

limited to 50 percent of the amount of the expense that would

otherwise be allowable. The revenue procedures provide rules for

applying the section 274(n)(1) 50-percent limitation to per diem

allowances. Under section 6.05(1) of the revenue procedures, a

taxpayer who computes the amount of his or her meals and

incidental expenses under section 4.03 of the revenue procedures

is required to treat that amount as an expense for food and

beverages. The expenses are thus subject to the limitation of

section 274(n)(1).

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Under section 4.03 of the revenue procedures, petitioners

substantiated meals and incidental expenses of $990 ($30 x 33

days) for 2001, $480 ($30 x 16 days) for 2002, and $360 ($30 x 12

days) for 2003. Those expenses are subject to the section

274(n)(1) 50-percent limitation. Therefore, we hold that

petitioners may deduct meal and incidental expenses of $445 in

2001, $240 in 2002, and $180 in 2003.

Petitioner’s ineligibility to claim greater amounts for

meals and lodging is a result of his failure to maintain proper

records of his expenses, including logs showing the dates,

places, and business activity conducted while he was away from

home.

4. Automobile/Truck Expenses

Automobile expenses if paid or incurred for business reasons

or related to income-producing property are not personal and may

be deductible under section 162(a) or section 212, even if not

paid or incurred for travel away from home. In lieu of

substantiating the actual amount of the ordinary and necessary

expenses of using a vehicle for “local transportation [excluding

commuting expenses] and transportation to, from and at the

destination while traveling away from home”, a taxpayer may use a

standard mileage rate established by the Internal Revenue Service

(standard mileage rate). Sec. 1.274-5(j)(2), Income Tax Regs. A

deduction using the standard mileage rate is computed on a yearly

basis and is in lieu of all operating and fixed costs of the

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vehicle, including depreciation, maintenance and repairs, tires,

gasoline, oil, insurance, and license and registration fees.

Rev. Proc. 2002-61, sec. 5.03, 2002-2 C.B. at 616; Rev. Proc.

2001-54, sec. 5.03, 2001-2 C.B. at 530; Rev. Proc. 2000-48, sec.

5.03, 2000-2 C.B. at 570. The standard mileage rate is to be

multiplied by the number of business miles traveled. Rev. Proc.

2002-61, sec. 5.02, 2002-2 C.B. at 618; Rev. Proc. 2001-54, sec.

5.02, 2001-2 C.B. at 532; Rev. Proc. 2000-48, sec. 5.02, 2000-2

C.B. at 571. The standard mileage rate is 34.5 cents per mile

for 2001, Rev. Proc. 2000-48, secs. 5.01, 11, 2000-2 C.B. at 571,

577; 36.5 cents per mile for 2002, Rev. Proc. 2001-54, secs.

5.01, 11, 2001-2 C.B. at 531, 537; and 36 cents per mile for

2003, Rev. Proc. 2002-61, secs. 5.01, 11, 2002-2 C.B. at 618,

623. The use of the standard mileage rate establishes only the

amount deemed expended with respect to the business use of a

vehicle. Sec. 1.274-5(j)(2), Income Tax Regs. The taxpayer must

still establish the amount (i.e., the business mileage), the

time, and the business purpose of each such use. Id.

Petitioner testified that he used his truck and his other

vehicles for business purposes each year and estimated that he

drove 15,000 miles each year for his farming and rental

activities. He used the standard mileage rate and deducted

$5,175 (34.5 cents per mile) for 2001, $5,475 (36.5 cents per

mile) for 2002, and $5,400 (36 cents per mile) for 2003.

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Respondent concedes that petitioners drove the truck 7,000

miles each year and that the truck is used solely for business

purposes. Although petitioners probably used their other

vehicles for business purposes and drove more business miles than

respondent conceded, their failure to substantiate the mileage on

their other vehicles forecloses any use of the standard mileage

rate for establishing the ordinary and necessary expenses of

using those vehicles. Petitioner did not maintain a

contemporaneous diary, calendar, or mileage log of his business

travel, and he failed to prove that he otherwise made a record of

the alleged business use of his other vehicles at or near the

time of the use. He did not retain receipts for most of the

expenses paid and did not establish the total business miles

driven during any of the years at issue.

If petitioner uses the standard mileage rate for the 7,000

miles of business use of the truck, petitioners will be entitled

to total deductions of $2,415 (34.5 cents per mile) for 2001,

$2,555 (36.5 cents per mile) for 2002, and $2,520 (36 cents per

mile) for 2003 for all operating and fixed costs of the vehicle,

including depreciation, maintenance and repairs, tires, gasoline,

oil, insurance, and license and registration fees. Respondent

concedes that petitioners are entitled to depreciation deductions

of $7,000 for the truck each year and have substantiated fuel

expenses of $303.75 for 2001, $168.22 for 2002, and $264.84 for

- 33 -

2003. The depreciation deductions alone exceed the amounts

petitioners could deduct using the standard mileage rate.

The deductions computed under the standard mileage rate are

in lieu of separate deductions for depreciation and actual

operating costs. Since petitioners are allowed a greater

deduction for actual costs, they are not allowed a deduction for

transportation costs using the standard mileage rate. See, e.g.,

Tesar v. Commissioner, T.C. Memo. 1997-207; Velinsky v.

Commissioner, T.C. Memo. 1996-180.

In addition to the allowable deduction of $7,000 for

depreciation of the truck for each year in issue, petitioners are

entitled to deduct fuel expenses of $303.75 for 2001, $168.22 for

2002, and $264.84 for 2003.

D. Accuracy-Related Penalties

Respondent determined accuracy-related penalties against

petitioners under section 6662(a) for the years in issue.

Section 7491(c) places on the Commissioner the “burden of

production” with respect to a taxpayer’s liability for any

penalty, addition to tax, or additional amount (collectively,

penalty). In order to satisfy the burden of production under

section 7491(c), the Commissioner must produce evidence that it

is appropriate to impose the relevant penalty. Higbee v.

Commissioner, 116 T.C. 438, 446 (2001). Once the Commissioner

has met this burden, the taxpayer must come forward with

- 34 -

persuasive evidence that the penalty does not apply. Id. at 447.

The taxpayer may establish, for example, that an accuracy-related

penalty is inapplicable because it is attributable to an

understatement with respect to which the taxpayer acted with

reasonable cause and in good faith. Sec. 6664(c)(1). Whether a

taxpayer acted as such is a factual determination, in regard to

which the taxpayer’s effort to assess the proper tax liability is

an important consideration. Sec. 1.6664-4(b)(1), Income Tax

Regs.

Section 6662(a)(1) imposes a penalty in an amount equal to

20 percent of the portion of the underpayment attributable to

negligence or disregard of rules or regulations. Negligence

includes any failure by the taxpayer to keep adequate books and

records or to substantiate items properly. Sec. 1.6662-3(b)(1),

Income Tax Regs. The term “disregard” includes any careless,

reckless, or intentional disregard. Sec. 6662(c). Disregard of

rules or regulations is careless if the taxpayer does not

exercise reasonable diligence to determine the correctness of a

return position that is contrary to the rule or regulation. Sec.

1.6662-3(b)(2), Income Tax Regs. A taxpayer is not liable for

the penalty if he shows that he had reasonable cause for the

underpayment and that he acted in good faith. Sec. 6664(c).

Petitioners did not maintain adequate records to

substantiate the deductions they claimed on their 2001, 2002, and

- 35 -

2003 returns. They claimed deductions for travel expenses that

were improperly calculated using per diem rates without

maintaining records of the dates, places, and business activity

of the travel. They did not produce records of the purchase

prices of the farms or valid appraisals of the land and buildings

at the time of the purchases. They did not seek professional

advice. Petitioners have not shown that their underpayments

were due to reasonable cause. Accordingly, we hold that

petitioners are liable for accuracy-related penalties under

section 6662(a) for 2001, 2002, and 2003.

To reflect the foregoing,

Decision will be entered

under Rule 155.