The opinion
T.C. Summary Opinion 2007-96
UNITED STATES TAX COURT
JIN XIONG, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2795-06S. Filed June 14, 2007.
Jin Xiong, pro se.
W. Lance Stodghill, for respondent.
JACOBS, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect
at the time the petition was filed. Pursuant to section 7463(b),
the decision to be entered is not reviewable by any other court,
and this opinion shall not be treated as precedent for any other
case. Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year in issue,
- 2 -
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
Respondent determined a $5,850 deficiency in petitioner’s
2003 Federal income tax and a $1,170 penalty under section
6662(a). The issues for decision are: (1) Whether petitioner is
entitled to a deduction for claimed home office expenses; (2) the
amount, if any, of the excess unreimbursed employee and other
miscellaneous expenses deduction to which petitioner is
entitled;1 (3) whether petitioner is entitled to a deduction
under section 179 with respect to a motor vehicle; (4) the amount
of the deduction for charitable contributions to which petitioner
is entitled; and (5) whether petitioner is liable for a penalty
under section 6662(a).
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. Petitioner resided in
College Station, Texas, at the time he filed the petition.
1
The excess unreimbursed employee and other miscellaneous
expenses deduction is claimed on Schedule A, Itemized Deductions.
The amount of the deduction equals the sum of: (1) Unreimbursed
employee expenses--job travel, union dues, job education, etc.;
(2) tax preparation fees; and (3) other expenses--investment,
safe deposit box, etc., less an amount equal to 2 percent (the 2-
percent floor) of the taxpayer’s adjusted gross income. See sec.
67(a).
- 3 -
Petitioner timely filed a Form 1040, U.S. Individual Income
Tax Return, for 2003 in which he claimed: (1) A deduction of
$12,509 for excess unreimbursed employee and other miscellaneous
expenses; and (2) a deduction of $7,250 for charitable
contributions. On or about August 22, 2005, petitioner filed a
Form 1040X, Amended U.S. Individual Income Tax Return, for 2003,
in which he claimed a deduction under section 179 with respect to
a motor vehicle. In his amended return, petitioner
recharacterized a portion ($8,585 of “vehicle used in business
travel” and $5,094 of “home office deduction”) of the excess
unreimbursed employee and other miscellaneous expenses that he
had previously reported on Schedule A, Itemized Deductions, as
“business profit/loss”.2 As a result of these amendments,
petitioner claimed a $2,482 refund.
With respect to Form 1040, respondent disallowed: (1) The
entire deduction for excess unreimbursed employee and other
miscellaneous expenses; and (2) all but $500 of the deduction for
charitable contributions. Based on these disallowances,
respondent issued a notice of deficiency reflecting a $5,850
deficiency in tax and a $1,170 penalty under section 6662(a).
2
Petitioner’s 2003 tax return was not introduced into
evidence. However, the amended return was produced and shows
petitioner’s recharacterization of the amounts as indicated.
- 4 -
The notice of deficiency did not address petitioner’s claimed
deduction under section 179 or any other aspect of Form 1040X.3
Petitioner was an assistant professor of biology at Texas
A&M University (the university) at all relevant times.
Petitioner’s duties consisted of teaching and scholarly research,
for which petitioner was provided an office at the university.
In 2003, petitioner entered into a contract with Cambridge
University Press to write a book on bioinformatics--the analysis
of information relating to biological structures with the aid of
computers. The contract identified the parties thereto as the
Syndicate of the Press of the University of Cambridge and Dr. Jin
Xiong, Department of Biology, Texas A&M University.
In the preface to the book, petitioner described the book as
based on a compilation of notes he developed over several years
of teaching bioinformatics in addition to supplemental research.
The book was published in 2006, and petitioner used it in courses
he taught at the university.
Petitioner maintains that for tax purposes his book writing
project was a separate business activity. Petitioner asserts,
without explaining or introducing corroborating evidence, that he
3
At trial, the parties addressed all items in Form 1040X;
counsel for respondent indicated that the notice of deficiency
did not take into account Form 1040X because the notice of
deficiency was probably in the process of being prepared when
petitioner filed that return. Nonetheless, the Court has
jurisdiction to determine the correct treatment of all items
affecting the tax year(s) before it (here, 2003). Sec. 6214(a).
- 5 -
was not permitted to write the book at his university office, but
rather, he was constrained to write the book at his home.
Petitioner posits that because he used a portion of his home
exclusively in connection with his book writing project, he is
entitled to deduct under section 280A expenses of $5,094 relating
to that portion of his home used as an office. Further,
petitioner claims his book writing project required travel to
various libraries in the State for research purposes which
generated deductible business travel expenses. Finally,
petitioner claims, driving from his home office to his university
office constituted a deductible business expense. Petitioner
calculated that the expenses attributable to his book writing
project (which petitioner first deducted as itemized deductions
on his 2003 return and subsequently recharacterized as “business
profit/loss”) totaled $13,679.16.4
Discussion
As a general rule, the Commissioner’s determinations in the
notice of deficiency are presumed correct, and the burden of
proving an error is on the taxpayer. Rule 142(a); Welch v.
4
On his return, petitioner claimed, and respondent
disallowed, $13,916 of Schedule A unreimbursed employee and other
miscellaneous expenses deductions; petitioner recharacterized
$13,679.16 of this amount on Form 1040X as trade or business
expenses, leaving $137.16 still claimed as an unreimbursed
employee and other miscellaneous expenses deduction. As
discussed infra, at trial petitioner claimed that he was entitled
to the Schedule A deduction for more than this amount.
- 6 -
Helvering, 290 U.S. 111, 115 (1933). However, pursuant to
section 7491(a), the burden of proof with respect to any factual
issue relating to ascertaining the liability for tax shifts to
the Commissioner if the taxpayer: (1) Maintained adequate
records; (2) satisfied the substantiation requirements; (3)
cooperated with the Commissioner’s agents; and (4) during the
Court proceeding introduced credible evidence with respect to the
factual issue involved. As discussed infra, we find that
petitioner failed to satisfy these requirements. Therefore, the
burden of proof does not shift to respondent.
Expenses for business use of a taxpayer’s home are
deductible under limited circumstances. For the expense to be
deductible, the taxpayer must show that the portion of the home
purported to be used for business is: (1) The taxpayer’s
principal place of business; (2) a place where the taxpayer meets
or deals with customers, clients, or patients; or (3) a separate
structure used in connection with the business. It must be used
exclusively on a regular basis for these things. Sec.
280A(c)(1)(A)-(C). Finally, in the case of an employee, the home
office must be for the convenience of the employer. Sec.
280A(c)(1) (flush language).
Petitioner seeks to satisfy the requirements of section 280A
by claiming that a portion of his home was his “principal place
of business” for purposes of the book writing project and that he
- 7 -
did not have an “employer” with respect to his book writing
project. It is for this reason that petitioner amended his 2003
return to recharacterize these expenses as “profit/loss from a
separate business activity.”
Petitioner has not convinced us that his book writing
project is a separate activity rather than an outgrowth of his
university teaching and research. While it may be true, as
petitioner suggests, that university professors generally are not
required to write books, it does not follow that a university
professor who writes a book is engaged in a separate business
activity. Petitioner’s book is in the same academic discipline
as the one petitioner teaches at the university. Petitioner’s
contract with Cambridge University Press clearly identifies
petitioner as a university professor. Petitioner based his book,
at least in part, on teaching notes he had developed over the
years, and he used the book in teaching courses at the
university. We find that petitioner’s book writing project is so
interconnected with his university teaching and research as to
not constitute an activity separate from that of his occupation
as a university professor. See Topping v. Commissioner, T.C.
Memo. 2007-92.
A taxpayer may have only one principal place of business for
each business activity in which he is engaged. Curphey v.
Commissioner, 73 T.C. 766, 775-776 (1980). Where a taxpayer’s
- 8 -
business is conducted in part in the taxpayer’s residence and in
part at another location, the following two primary factors are
considered in determining whether the home office qualifies under
section 280A(c)(1)(A) as the taxpayer’s principal place of
business: (1) The relative importance of the functions or
activities performed at each business location, and (2) the
amount of time spent at each location. See Commissioner v.
Soliman, 506 U.S. 168, 175-177 (1993).
Because he was a university professor, petitioner’s teaching
and research functions at the university were of primary
importance. Petitioner’s book writing project (which was
performed at his home) was of secondary importance. Petitioner
did not show that as a university professor he spent more time
working at home than at the university. Accordingly,
petitioner’s principal place of business as a university
professor was the university. Moreover, we believe petitioner
maintained an office in his home not for the convenience of the
university, his employer, but rather for his own convenience.
See Cadwallader v. Commissioner, T.C. Memo. 1989-356, affd. 919
F.2d 1273 (7th Cir. 1990); Mathes v. Commissioner, T.C. Memo.
- 9 -
1990-483. Therefore, we hold that petitioner’s use of his home
for his book writing project does not qualify it as a home
office.5
Consistent with his treatment of a portion of his home as a
home office, petitioner claimed an $8,585 deduction for the use
of his passenger vehicle for business travel and transportation.
The claimed “travel expense” consisted of expenses petitioner
incurred in driving from his home to various libraries in the
State in order to gather material for his book, as well as the
expenses he incurred in driving from his home to his office at
the university. Even were we to hold that petitioner’s book
writing project was a separate business activity and that
petitioner maintained a home office, the deduction for these
claimed driving expenses would not be allowable because those
claimed deductions have not been adequately substantiated.
In general, all ordinary and necessary expenses paid or
incurred in carrying on a trade or business during the taxable
year are deductible. Sec. 162(a). An expense is considered
ordinary for these purposes if it is normal or customary within a
5
Even were we to hold that petitioner’s book writing project
was separate from his employment as a university professor,
petitioner would still not be entitled to the claimed home office
deduction because sec. 280A(c)(5) would limit the amount of the
home office deduction to the amount of income produced from the
book. The parties do not dispute that in 2003, the tax year in
issue, petitioner had not yet written the book and therefore did
not have any income from the book writing project.
- 10 -
particular trade, business, or industry. Deputy v. du Pont, 308
U.S. 488, 495 (1940). An expense is considered necessary if it
is appropriate or helpful for the development of the business.
Commissioner v. Heininger, 320 U.S. 467, 471 (1943). Personal,
living, or family expenses, on the other hand, are generally not
deductible. Sec. 262. If a taxpayer establishes that he or she
paid or incurred a deductible business expense but does not
establish the amount of the deduction, we may approximate the
amount of the allowable deduction, but we bear heavily against
the taxpayer whose inexactitude is of his or her own making.
Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). For
the Cohan rule to apply, however, a basis must exist on which
this Court can make an approximation. Vanicek v. Commissioner,
85 T.C. 731, 742-743 (1985). Without such a basis, any allowance
would amount to unguided largesse. Williams v. United States,
245 F.2d 559, 560 (5th Cir. 1957).
In the case of expenses paid or incurred with respect to
travel and certain listed property, section 274 overrides the
Cohan rule, and those expenses are deductible only if the
taxpayer meets the stringent substantiation requirements of
section 274(d). See sec. 280F(d)(4)(A); Sanford v. Commissioner,
50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d 201 (2d Cir.
1969). For these expenses, only certain types of documentary
evidence will suffice. Passenger automobiles are listed property
- 11 -
under section 280F, and strict substantiation is therefore
required. Sec. 274(d). No deduction is allowed for any travel
or transportation expense unless the taxpayer substantiates by
adequate records or by sufficient evidence corroborating the
taxpayer’s own statement the amount of the expense, the mileage
for each business use of the automobile and the total mileage for
all use of the automobile during the taxable period, the date of
the business use, and the business purpose for the use. Sec.
1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016
(Nov. 6, 1985). Adequate records include the maintenance of an
account book, diary, log, statement of expense, trip sheets,
and/or other documentary evidence, which, in combination, are
sufficient to establish each element of expenditure or use. Sec.
1.274-5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46017
(Nov. 6, 1985).
Taxpayers may use a standard mileage rate established by the
Internal Revenue Service in lieu of substantiating the actual
amount of the expenditure. See sec. 1.274-5(j)(2), Income Tax
Regs. The standard mileage rate is generally multiplied by the
number of business miles traveled. See Rev. Proc. 2002-61, 2002-
2 C.B. 616 (in effect for transportation expenses incurred during
2003). The use of the standard mileage rate establishes only the
amount deemed expended with respect to the business use of a
passenger automobile. Sec. 1.274-5(j)(2), Income Tax Regs. The
- 12 -
taxpayer must still establish the actual mileage, the time, and
the business purpose of each use. Nicely v. Commissioner, T.C.
Memo. 2006-172; sec. 1.274-5(j)(2), Income Tax Regs.
Petitioner submitted a travel log, consisting of a
collection of preprinted forms which he had filled in, showing
the details of travel on particular dates. The travel log was
not prepared contemporaneously with the claimed business travel
but rather was a reconstruction based on petitioner’s
recollection of travel during 2003. The travel log was prepared
after petitioner had been contacted by respondent’s agents in
connection with an audit of petitioner’s 2003 tax return. The
travel log was unsupported by any other documentation, such as a
calendar or receipts, and petitioner admitted that the log
contained several errors. Even if petitioner maintained an
office in his home for the convenience of the university (which
we find he did not), the travel log does not meet the
substantiation requirements of section 274, and petitioner’s use
of his automobile for his trips to libraries around the State did
not generate any business deduction.6
Petitioner’s claimed transportation expenses reflecting the
use of his vehicle to drive from his home to the university were
6
At trial, respondent conceded that other expenses for trips
out of State and abroad for the purpose of attending conferences
and the like are adequately substantiated and are therefore
deductible.
- 13 -
supported only by petitioner’s testimony that his office at the
university was 5 to 10 miles from his home. We would not allow
any deduction for transportation expenses due to this lack of
substantiation. Petitioner’s use of his vehicle to drive from
his home to the university was simply a cost of commuting, a
nondeductible expense. See sec. 1.262-1(b)(5), Income Tax Regs.
Most of the excess unreimbursed employee and other
miscellaneous expenses deduction petitioner claimed pertains to
his home office. The remainder of the deduction consists of
expenses incurred for subscriptions to scholarly journals, which
respondent conceded at trial are deductible, the cost of meals
petitioner shared with colleagues while discussing work-related
matters, and the cost of trading stocks petitioner held in his
Roth IRA account.7
All of the claimed expenses for meals were for meals
consumed in College Station, where petitioner worked and resided.
Therefore, they were not traveling expenses potentially allowable
under section 162(a)(2) as expenses incurred while away from home
in pursuit of a trade or business. Furthermore, a deduction for
meals and entertainment expenses, like the deduction for travel
7
In his notice of deficiency, respondent disallowed
petitioner’s claimed $1,550 other miscellaneous expenses
deduction (apparently relating to gambling losses) and a $1,950
deduction for a capital loss. Petitioner did not dispute these
items in his pleadings or at trial, and we therefore treat these
items as conceded by petitioner. See Rule 34(b).
- 14 -
expenses, is subject to the strict substantiation requirements of
section 274. Sec. 274(d)(2). Petitioner submitted receipts for
restaurant meals which show the dates and amounts of the meals
but not the business purpose of the meals or the business
relationship to petitioner of persons with whom he shared the
meals. See sec. 274(d) (flush language); sec. 1.274-5T(b),
Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
Petitioner’s testimony in this regard was vague and unconvincing,
and the record does not meet the statutory requirements for
substantiation, even if the claimed expense might be allowable if
incurred while away from home in pursuit of a trade or business.
The claimed deduction for meals represents a personal expense and
is not allowable. See sec. 1.262-1(b)(5), Income Tax Regs.
Petitioner deducted the trading costs he incurred in
purchasing and selling securities held in his Roth IRA.
Petitioner does not claim to be a dealer in securities, nor does
he point to any statutory provision that might justify treating
his trading costs other than in the usual manner, as additions
to, or subtractions from, his basis for purposes of computing
gain or loss on sale. See sec. 1221; Woodward v. Commissioner,
397 U.S. 572, 575 (1970); sec. 1.263(a)-2(e), Income Tax Regs.
These trading costs are not deductible.
In his amended return, petitioner sought to deduct $16,561
under section 179 with respect to the business use of a motor
- 15 -
vehicle. The vehicle is the same one petitioner used for travel
and transportation, and the business use claimed is the book
writing project.
Amounts paid to acquire machinery, equipment, and similar
property having a useful life substantially beyond the taxable
year are capital expenditures and generally are not deductible.
Sec. 263(a)(1); sec. 1.263(a)-2, Income Tax Regs. 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, 503 U.S. 79, 83-84 (1992).
Alternatively, the cost may be expensed pursuant to section 179
if the requirements of that section are satisfied. The cost may
not be expensed, however, in the absence of an election. Sec.
179(c); Visin v. Commissioner, T.C. Memo. 2003-246; sec. 1.179-5,
Income Tax Regs. Furthermore, section 179 limits the amount of
the deduction to the amount of taxable income derived from the
trade or business, although a disallowed deduction may be carried
over to later tax years. Sec. 179(b)(3)(A) and (B).
We have already found that petitioner’s book writing project
was not a separate trade or business. The vehicle was not a
capital asset in petitioner’s hands, and therefore he is not
entitled to depreciate it or to expense any part of its cost
under section 179. Even if petitioner’s book writing project had
- 16 -
constituted a separate trade or business, the section 179
deduction would not be allowable because petitioner did not have
any income from the sale of the book in 2003.8 Respondent
properly disallowed the claimed deduction under section 179.
Petitioner claimed a deduction of $7,250 for charitable
contributions--$7,050 of which was for contributions of property
and $200 was for cash contributions. Respondent disallowed all
of the deduction for cash contributions and all but $500 of the
deduction for contributions of property.
Section 170 allows a deduction for charitable contributions
during the taxable year if they are verified as provided in the
regulations. Sec. 170(a)(1). No deduction is allowed for any
contribution of $250 or more unless the taxpayer substantiates
the contribution by a contemporaneous written acknowledgment of
the contribution by the qualified donee organization. Sec.
170(f)(8)(A). This written acknowledgment must state the amount
of cash and a description (but not necessarily the value) of any
property other than cash the taxpayer donated and whether any
consideration was given to the taxpayer. Sec. 1.170A-13(f)(2),
Income Tax Regs.
8
Furthermore, petitioner failed to substantiate the portion
of the use of the vehicle that could be attributed to business
rather than personal use.
- 17 -
Although petitioner did not present any documentary
substantiation of his cash charitable contributions, he testified
that he had made such contributions to his local church. We find
this part of petitioner’s testimony credible. Therefore, the
claimed cash contributions totaling $200 are deductible. The
claimed deduction for charitable contributions of property was
substantiated by receipts from a charitable organization and by
receipts showing the acquisition cost to petitioner of some
donated property, such as a bicycle and artwork. But petitioner
did not substantiate the date-of-donation value of the property
donated to charity. We therefore sustain respondent’s
determination that the date-of-donation value of the donated
property did not exceed $500. Petitioner is therefore entitled
to a deduction for contributions of property only in the amount
of $500.
As noted supra, respondent determined a section 6662(a)
penalty for 2003. Pursuant to section 6662(a) and (b)(1) and
(2), a taxpayer is liable for a penalty of 20 percent of the
portion of an underpayment of tax attributable to (1) negligence
or disregard of rules or regulations, or (2) any substantial
understatement of tax. In addition, a taxpayer is liable for the
section 6662(a) penalty with respect to the portion of the
underpayment of tax attributable to any substantial valuation
misstatement under chapter 1. Sec. 6662(b)(3).
- 18 -
Petitioner’s claimed $5,094 deduction for home office
expenses was based on his belief that his book writing project
was a separate activity from his occupation as a university
professor. We are unable to find that petitioner was negligent
or disregarded rules or regulations in claiming this deduction.
Therefore, while that part of the underpayment of tax
attributable to the $5,094 claimed deduction for home office
expenses is not subject to the section 6662(a) penalty under
section 6662(b)(1), it is part of the substantial understatement
of income tax subject to the section 6662(a) penalty under
section 6662(b)(2). The applicability of section 6662(b)(2) to
the underpayment attributable to the home office expenses
deduction will depend on the magnitude of the understatement of
tax as calculated under Rule 155.
Petitioner claimed deductions for business travel and
transportation, and for meals and entertainment expense for which
he apparently maintained no contemporaneous records. At trial,
petitioner submitted records in support of these deductions that
were patently unreliable. Petitioner further claimed deductions
for the trading cost of securities in the absence of any
statutory authority for such treatment. He also claimed a
deduction for a vehicle under section 179 even though he had no
income from the claimed business activity in which the vehicle
allegedly was used. These deductions were claimed in the absence
- 19 -
of a reasonable attempt to comply with the rules and/or
regulations. Therefore, under section 6662(b)(1), that part of
the underpayment attributable to these disallowed deductions is
subject to the section 6662(a) penalty even if the parties’ Rule
155 computation establishes that there was not a substantial
understatement of income tax.
Petitioner claimed a deduction for charitable contributions
of property in excess of the $500 we found to be the value of the
contributed property. Again, independently of the outcome of the
parties’ Rule 155 computation, that part of the underpayment
attributable to this substantial valuation misstatement is
subject to the section 6662(a) penalty under section 6662(b)(3).
To reflect the foregoing and concessions by the parties,
Decision will be entered
under Rule 155.