UNITED STATES TAX COURT

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T.C. Memo.

2011-164

UNITED STATES TAX COURT

]

GLENN PATRICK BOGUE, Petitioner v.

COMMISE IONER OF INTERNAL REVENUE, Respondent

Docket No.

12291-09.

•

Filed July 11, 2011.

Glenn Patrici Bogue, pro se.

Carrie L. Kleinian, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WELLS, Judge

Respondent determined income tax deficiencies

of $5, 900 . 85 and $6, 738 . 11, and accuracy-related penalties

pursuant to section 6662(a)1 of $1,180.17 and $1,347.62 for

IUnless otherwise indicated, section references are to the

Internal Revenue Code of 1986, as amended, and Rules references

are to the Tax Court Rules of Practice and Procedure .

( SERVED JUL 1 1 2011

- 2 petitioner's 2005 and 2006 tax years (the years in issue),

respectively.

After concessions, the issues we must decide are:

(1) Whether petitioner is entitled to deduct certain

transportation expenses for travel between his residence and

worksites during the years in issue;

(2) whether petitioner is

entitled to certain depreciation deductions;

(3) whether

petitioner is entitled to certain deductions on his Schedule C;

and (4) whether petitioner is liable for the accuracy-related

penalties for the years in issue.

FINDINGS OF FACT

Some of the facts and certain exhibits have been stipulated.

The parties' stipulations of fact are incorporated in this

opinion by reference and are found accordingly.

At the time he

filed his petition, petitioner was a resident of New Jersey.

Petitioner is an independent contractor based in Cherry

Hill, New Jersey.

During the years in issue, petitioner lived in

a house owned by his fiance, Janis Pannepacker (Ms. Pannepacker)

(we sometimes also refer to Ms . Pannepacker' s house as

petitioner's residence).

During the years in issue, petitioner

was building an addition to Ms . Pannepacker' s house in his spare

time.

During the years in issue, petitioner worked with Raymond J.

Mancino (Mr. Mancino) to renovate residential properties.

his 2005 tax year, petitioner worked on properties at gthe

During

3 -

following locations:

East Upsal Street, Philadelphia,

Pennsylvania; Wissahickon Avenue, Philadelphia, Pennsylvania; and

Seminole Avenue, Melrose Par , Pennsyivania.

During his 2006 tax

year, petitioner worked on properties at the following locations:

Seminole-Avenue, Melrose Park, Pennsylvaniä; Albright3 Aven'ue,

Elkins Parks, Peansylvania; and Coles Mills Road, Haddonfield,

New Jersey.

Those five work locations (hereinafter sometimes

referred to as wbrksites) were 20.1; 15.7, 15.0; 14.7, and 4.0

miles, respectively, from petitioner's residence.

He worked at

each of the work ites for a n mber of months and then, when the

project at that

worksite.

orksite was afinished, he moved to another

Petit oner also reeeïved~ some income from his work as

a track team coach:

Petitioner declared bankiruptcy during 1999, following a

divorce

it.

During 2003, the bank "foreclosed'on his house and sold

The individual who purchased it razed the h'ouse before

petitioner had removed all of his possessions, includiñg some of

his important records.

Among the records he lost were the

purchase records for his 1991 Ford Explorer and for his tools.

Pètitioner's credit was affected by his bankruptcy, and

consequently, he was unable.to get a'credit card'or open a bank

accounty

To provide a bank aâcount for petitioner's'use, Ms.

Pannepacker opened an account in her name5that was used only for

- 4 pe t itioner ' s expenses .

Although Ms . Pannepacker wrote checks

from the account at the direction. of petitioner, both- she and

petitioner treated all of the funds in the account as

petitioner's.

On his returns for the years in issue, petitioner claimed deductions for a variety of expenses related to his.

transportation between his residence and the worksites.

claimed deductions for car and truck expenses of $9, 232 and$9,657.50 on Schedules C, Profit or Loss from Business, .attached

to his tax returns for 2005 and 2006, respectively.

In addition

to car and truck expenses, petitioner deducted as part of -his

"Other Expenses" on his Schedules C amounts for tolls that he

paid on the way to worksites.

He claimed deductions of $660 and

$400 for those tolls during 2005 and 2006, a respectively. - As part

of the insurance expenses he reported on his Schedules C,

petitioner deducted auto insurance expenses of $2; 028 and $1, 866

for . 2005 and 2006, respectively.

Petitioner also deducted $650

in car rental expenses for the period- during 2005 when.he was

renting a car after the 1991 Ford Explorer became inoperable.

Additionally, petitioner claimed a deduction of $4; 600 for

the depreciation of his 1991 Ford Explorer, which became

inoperable during 2005.

The $4, 600 he claimed as a depreciation

deduction reflects petitioner' s estimate of its "Kelley, Blue

Book" value when it became inoperable .

- 5 -

On his 2006 tax return, petitioner claimed depreciation of

$400 for tools he purchased in a prior year.

His tool purchase

records were los: when his house was destroyed during 2003, and

he subsequently estimated the values of those tools for the

purpose of depreciating them.

During the years in issue, petitioner had a storage shed at

Ms. Pannepacker's house-where he kept all of his tools when he

was not using them.

However, he did not deduct, any expense for

depreciation of the storage s ed on his tax return for either

year.

During 2005

petitioner had a dispute withrone of his

clients over the payment of a bill and was arrested in

Pennsylvania when the client~ reported to the police: that

petitioner had stolen a deposit.

In connection with that

dispute, Ms. Pan epacker paid $398 to, the clerk of court. TOn his

Schedule C for 2005, petitioner claïmed a deduction for legal

expenses of $1,250.

That amount'also included $800 petitioner

had paid a lawyer to represent him during 2003 but never claimed

as a deduction.

He therefore deducted both of those expenses on

his 2005 return.2

On the-Schedule C attached to his 2006 return, petitioner

claimed a deduction for $1,970 in legal expenses related to a

2The sum of >etitioner's legal expenses from 2003 and 2005

is $1,198.

It ir not clear f om the record how he arrived at a

deductible expence of $1,250.

lawsuit stemming from a contract dispute.

To ,substantiate those

expenses, he of fered canceled checks totaling $1, 423 from Ms .

Pannepacker to the law firm he retained to represent him.

also provided part of the complaint filed in that lawsuit and the

retainer agreement he signed with the law f irm that represented

him. I Petitioner- was unable to find any other records to

substantiate the full amount of his - claimed legal expenses for

2006.

Petitioner used one of the rooms in Ms . Pannepacker' s house as his office (office) during the years in issue, but he did not

claim a deduction-for the business use of his office.

Petitioner used the computer in the office to research parts for

building houses and to keep track of his billing.

He also used

the landline telephone in the office to contact building asupply

stores.

Petitioner claimed $1,200 for office expenses on his tax

returns for .both of the years in -issue, but respondent allowed

only $600 for each year.

Petitioner now contends -that he should

be entitled to deduct office expenses of $2,184 for each of the,

years in issue.

To substantiate his claimed expenses, petitioner

submitted a receipt from Ms. Pannepacker stating that petitioner

pays her the following amounts each month:

$50 for Internet

service; $30 for a landline telephone; $20 for computer and

printer use; and $82 for petitioner's share of a joint cellular

- 7 -

phone plan.

Petitioner submitted several invoices in Ms.

Pannepacker' s name, including an invoice for Internet and cable

television that shows that Ms. Pannepacker paid only $33 -per

month for Internet service.

iMs. Pannepacker also accesses the

Internet through her laptop at. her home.

On. the Schedule C' attached to his 2005 tax return,

petitioner claimed "Other EXÓenses" of $1", 000 for the settlement

of a purchase 'ciispute with Builder' s Prime Window.

On his 2006

tax return, petitioner claimed Schedule C "Other Expenses" of

$2,200; for books that he purchased during the-preceding 5 years.

He eventually used those books as part of his research for a book

series that he recently published through a self-publishing

house". - Petition3redid not ddduct those expenses as he paid them;

instead, he dedu ted all of them on his 2006 tax return because

it was not until 2006 that he "firmly decided that he would write

the books . 3

Petitioner

imely filed his Federal income tax returns for

the years in iss e.

On April 23, 2009, respondent issued and

mailed to petitioner a notice of deficiency.

Petitioner timely

filed his petition with this Court.

3Petitioner stated with regard to his work on the books that

during 2006, "I know I'm going forward."

- 8 OPINION

Whether the Burden of Proof Has Shifted Under Sectïon 7491

We consider tas a preliminary matter petitioner' s contention

that the burden of proof has shifted to respondent pursùànt to

section 7491(a) .

Generally, the Commissioner's determination of

a deficiency is presumed correct," ands the taxpayer has the burden

of proving it incorrect.

U.S.* 111, 115

(1933),.

Rule 142(a); Welch v. Helvering, 290

Section 7491(a) (1) provides an exception

that shifts the burden of proof td the Commissioner as to sany

factual issue :relevant to a taxpayer's liability, for tax if:

(i)

The taxpayer introduces credible evidence with respect to that

issue; and (2), the .taxpayer satisfiesa certain other conditions

éincluding substantiation of any item and cooperation with the

Government's requests for witnesses, documents, other

information, and meetings.

142 (a) (2) .

Sec . 7491(a) (2) ;. see also |Rule

The taxpayer bears the burden of proving that, the

taxpayer has met the requirements of section 7491(a) .

Commissioner,

135 T.C. 471, 483

Rolfs v.

(2010) .

» As we explain below, petitioner has failed to present

credible evidence sufficient to substantiate most-items.

those issues, the burden of proof remains with petitioner.

With

respect to a few factual issues, petitioner presented credible

evidence sufficient to substantiate his expenses.

However,

because we decide those issues in petitioner's favor on the

preponderance of the evidence, the allocation of the burden of

proof is immateri.al.

189 (2008) .

See Knudsen. v. Conimissioner, 131 T.C.. 185,

We :herefore need not decide whether petitioner has

also mets the conditions of section 7491(a) (2)i required to shift

the burden of proof to respondent with respect- to those issues.

II.

Whether Petitioner Is Entitled to the Claimed Deductions

Deductions are a matter of legislative grace, and taxpayers

generally bear the burden of proving their entitlement to the

deductions claimed.

503 U.S. 79,

Sec. 6001;a INDOPCO, Inc. v. Commissi'oner,

'1992) .

Section 162 (a) permits "as a deduction

all the ordinary and necessary expenses paid or incurred during

the taxable year in carrying on any trade or business" .

To be

deductible, ordinary and nece sary expenses must be' "directly

connected with or pertaining to the taxpayer' s trade or

business".

Sec. 1.162-1(a), Income Tax Regs

section 212 generally allows

. Additionally,

he -deduction of ordinary and

necessary expens s paid or inburred during the tax year for the

production or collection of income.

Regs .

Sec. 1.212-1(d); Income Tax

Such expenses must be reasonable in amount and bear' a

reasonable and p oximate relationship to the production or

collection of taxable incotne . 1

deduct personal expenses .

Id.

However, a taxpayer may not

Sec . 262 (a) .

-^10

Generally, "a taxpayer must keep records sufficient to

establish the amounts of the items reported on his federal income

tax return.

Sec..6001; sec. 1.6001-1(a),

(e), Income Tax Regs.

In the event that a taxpayer establishes that a deductible

expense has been paid but is unable to substantiate the sprecisè

amount, we generally may estimate the amount of the deductible

expense, bearing heavily against the taxpayer whose inexactitude

in substantiating the amount of the expense is of his own making.

Cohan v. Commissioner,

39 F.2d 540,

543-544

(2d Cir.

1930).-

We -

generally will not estimate a deductible expense, however, únless

ther taxpayer-presents sufficient evidence to provide some basis

uponawhich an-estimate may be-made.

T.C.

731,

743

(1985).

Vanicek v. Commissioner,- 85

Section ,274(d) supersedes the Cohan doctrine for certain

categories of expenses.

827-828

Sanford v. Commissioner, 50 T.C. 823,s.

(1968), affd. per curiam 412 F.2d 201 (2d Cir. -1969).

Generally, a deduction is disallowed for an expense for travel,

meals and entertainment, or listed property unless the taxpayer

properly substantiates:

-(1) The amount of such expense; '(2) the

time and place of the expense; -(3) the business purpose; and (4)

in the case of meals and entertainment, the business relationship

between the taxpayer and the persons being entertained., Sec.

274(d).

Listed property includes passenger automobiles, any type

of property generally used for entertainment or recreation, any

- 11 -

computer or peripheral equipdent, and any cellular:phone or other

similar telecommanications equipment.4

Sec. 280F-(d) (4).

Generally, deductions for expenses subject to the strict

substantiation requirements df.section 274(d) mustube disallowed

in full unless tae taxpayer satisfies every element of those

requirements.

Sanford -v. Commissioner, "supra at 827-828; Larson

v. Commissioner, T.C. Memo. 2008-187; sec. 1.274-5T(a), Temporary

Income Tax Regs.,

50 Fed. Red. 46014

(Nov.

1985).

Deductions

. for listed property 'that is used both personally and in the

taxpayer's business are disallowed unless a taxpayer establishes

ther amount of business use of the property.

Kinney v.

Commissioner, T.C. Memo. 20084287; Olsen v. Commissioner, T.C.

Memo.

2002-42, a fd.

54 Fed. Appx. 479'(9th Cir.

2003); sec.

1.274-5T(b) (6) (i -(B),. Temporary Income Tax Regs., 50 Fed. Reg.

46016

(Nov. 6, 1985).

Taxpayersamay substantiate their deductions by either

adequate-records or sufficient evidence that corroborates the

taxpayer's owns statement.

Seg. 274(d).

To'satisfy- the adequate

records requirement~, a taxpayer must maintain records and

documentary evidence that in combination are sufficient- to

*Sec. 280F(d) (4) has sinée been amended by the Creating

Small Business Jobs Act of 2010, Pub. L. 111-240, sec. 2043(a),

124 Stat. 2560, Ehich removed cellular phones and other similar

telecommunicatio1s equipment from "listed property." However,

that amendment is effective only for tax years beginning after

Dec.

31,

2009.

-. 12. -

establish each element of an expenditure or use .

Larson y

Commissioner, supra; sec. 1.274--5T(c) (2) (i), Temporary Income Tax

Regs.-, 50 Fed. Reg. 46017 (Nov. 6, 1985) .s

As we haŸe stated,t á

contemporaneous log is not required, but corroborative evidence

used».to support a taxpayer' s reconstruction of the expenditure

"'must have a high degree. of probative value to elevate such..

statement'" to the level of credibility of a contemporaneous

record.

Larson v. Commissioner, supra (quoting section i.274-

5T (c ) (1) , Temporary Income Tax Regs . , 50 Fed . - Reg . 46016 (Nov . 6,

.1985) ) .

In the absence of adequate grecords,- a .taxpayer alternatively

may establish an element of an expenditure by "his own statement,

whether written or oral,s containing specific information .in

detail as to such element"o and by "other corroborative evidences

sufficient to establish such element."

Larson v. Commissioner,-

suora; sec. 1.274-5T(c) (3), Temporary Income Tax Regs,, 50:Fed.

Reg. 46020 (Nov. 6, 1985) .

Even if an expense woulds otherwise be

deductible, . the deduction may still be denied if there is

insuf f ic ient substantiation to support mit .

See se c . 1 . 274 5T (a) ,

Temporary Income Tax Regs; , 50 Fed. Reg. 46014 (Nov. 6, 1985) .

We do not estimate under the Cohan doctrine expenses that are

subject to the requirements of section 274 (d) .

Sanford v.

Commissioner, supra at 827; Larson v. Commi~ssioner, suprat

- 13 -

A.-

Commuting Expenses

Respondent contends that many of petitioner's expenses,

including the amounts petitioner claimed for car and truck

expen'ses, -tolls, sauto insura ce, and car rental expenses

deductible because they are commuting expenses.

are not

As a general

-rule, expenses for traveling between one's home and one's place

of business or enployment constitute commuting expenses and,

consequently, are nondeductible personal expenses.

262 (a) ; »Fausner

. Commissioner, 413 U. S. 838

See sec.

(1973) ;

Commissioner v. Flowers, 326 U.S. 465 (1946); Feistman v.

Commissioner, 63 T.C. 129, 134

(1974) .

As the Supreme Court explained in Commissioner v. Flowers,

såpra at 473, Éh

core reason commuting expenses are not -

deductible is that the taxpayer makes a personal choice about

where to live.

In Flowers, the taxpayer was a longtime resident

of Jackson, Mississippi, who accepted a job that required him to

spend most of his time in Mobile, Alabama.

For personal reasons,

the taxpayer decided to contihue to maintain a home in Jackson

and made repeated trips between Jackson and Mobile.

The Supreme

Court held that the taxpayer was not entitled to deduct the costs

of traveling from Jackson to

obile, despite the substantial

distance, because those costs were incurred for personal reasons

and not in the pursuit of the business of his employer.

Supreme Court explained:

The

- 14 -

The facts demonstrate clearly that the expenses were

not incurred in the pursuit of the business of the

taxpayer' s employer, the railroad. Jackson was his regular

home. Had his post of duty been in that city the cost of

maintaining his home there and of commuting or driving to

work concededly would be non-deductible living and personal

expenses lacking ;the necessary direct relation to the

prosecution of the business . The character of such expenses

is unaltered by the circumstance that the taxpayer' s post of" ,

duty was in Mobile, thereby increasing the costs of

transportation, food and lodging. Whether he maintained öne

abode or two, whether he traveled three blocks or three

hundred miles to work, the nature of these expenditures

remained the same .

The added costs in issue, moreover, were as unnecessary

and inappropriate to the-development of the railroad's

business as were his personal and living costs in Jackson.

They were incurred solely as the result of the taxpayer' s

desire to maintain a home in Jackson while working in

Mobile, a factor irrelevant to the maintehance and

prosecution of the railroad's legal business. * * * The fact

that he traveled frequently between the two citiek and

incurred extra living expenses in Mobile, while doing much

of his work in Jackson, was occasioned solely by his

personal propensities. * * *

Id. at 473-474.

By holding that commuting expenses are ,personal,

the Supreme Court placed those expenses in the category of

nondeductible expenses now governed by section 262 (a) .

Such

personal "expenses contrast with trade or business expenses, which

are deductible provided they satisfy the requirements of section

162.

Section 162 (a) provides that a deduction is allowed for

"all the ordinary and necessary expenses paid or incurred during

the taxable year in carrying on a trade or business".

Three exceptions to the general rule that commuting expenses

are nondeductible have evolved since the Supreme Court decided

Flowers.

The first exception is that expenses incurred traveling

- 15. between a.taxpayer's residence and a place of business are

deductible if the residence is the taxpayer's principal place of

business -(home office exceptÎon).

The second exception is that

trave,l expenses between a taxpayer's residence and temporary work

locations outsid

of the metropolitan area where the taxpayer

lives and normal y works are deductible (temporary distant

worksite exception).

The third exception is that travel expenses

betwÊen a taxpayer's residence and temporary work locations,

regardless of th

distance,

re deductible if the taxpayer also

has one or more regular work locationssaway from the taxpayer's

residence- (regular work location exception).

Petitioner contends

that his transportation expenses driving between his residence

and worksites qualify under all three exceptions; we will

consider each exception in turn.

The Home Office Exception

The first exception, that expenses incurred traveling

between a taxpayer's residencò and a place of business are

deductible if the residence is the taxpayer's principal place of

business because a home office is located at the residence, is a

judicially created exception.i

113 T.C.

106,

113-114

See Strohmaier v.. Commissioner,

(1999);,Wis.

Psychiatric Servs. v.

sThe first exception is Olso recognized under Rev. Rul. 997, 1999-1 C.B. 361, 362, which states:

"If a taxpayer's

residence is the takpayer's piincipal place of business * * *,

the taxpayer may deduct daily transportation expenses incurred in

going between the residence and another work location".

- 16 Commissioner, 76 T.C. 839, 849 (1981) ; Curphey v. Commissioner,

73 T.C. 766, 777-778 (1980) .

In the-seminal case on the home

office exception, Curphev :v. Commissioner, supra, the taxpayer

maintained a home office in his residence that qualified as his

"principal place of business" under section 280A(c) (1) (A) .

stated

Petitioner made his trips from his home office (which"

we have held to be the principal place of business with

respect to his rental activities) to his rentalsproperties

for a business purpose, i.e., to carry out management duties

at , those properties . We see no reason why the rule that

local transportation expenses incurred in travel between one

business location and another are deductible should not be

equally applicable where the taxpayer' s principal place of

business with respect to the ,activities involved is his

residence. * * *

Id. at 777-778 (citations omitted) .

According to the terms of

this judicially created home office exception, the taxpayer's

residence must qualify as the taxpayer's "principal place of

business", and we have consistently equated the "principal place

of blisiness" requirement for the home office exception with the

"principal place of business" requirement under section 280A.

See Walker v. Commissioner, 101 T.C. 537, 546 (1993); Curphey v.

Commissioner, supra at 777.

Consequently, although petitioner

did not claim a deduction for the business use of his residence

pursuant to section 280A(c) (1), we nonetheless must consider

whether petitioner's office in his residence qualifies as his

prïncipal place of business under that statute.

- 17 Section3280A(a) provides that, as a general rule, no

deduction is allowed with respect to the taxpayer's residence.

Section 280A (c) (1) provides several exceptions to that general

rule:

Subsection (a) shall not apély to any' item to the extent

such item is allocable to a portion of the dwelling unit

which is ex lusively used on a regularabasis-trade

( ) as the principal place of business for any

r business of the taxpayer,

( ) as a place of business which is used by

patients, clients, or customers in· meeting -or dealing

with the taxpayer in the normal course of his trade or

businebs, or

( ) in the case of a separate structure which is

not attached to the dwelling unit, in connection with

the taxpayer' s trade or business .

* * * For purposes of subparagraph (A) , the term "principal

place of business" includes a place of business which is

used by the taxpayer for the administrative or management

activities of any trade or business of the taxpayer if there

s no other fixed location of such trade or business where

the taxpayer conducts substantial administrative or

management activities of such trade or business.

Where a taxpayer s. business is conducted in part at the

taxpayer' s residence and in part at another location, the Supreme

Court has held that there are two primary considerations in

deciding whether the home office qualifies as the taxpayer's

principal place of business:

(1) The relative importance of the

functions or act:.vities perfo -med at each location; and (2) the

time spent at each location.

Commissioner v. Soliman, 506 U.S.

- 18 -

168, 175-177 (1993) ; Strohmaier v. Commissioner

supra at

111-112 .

Since the Supreme Court's decision in Soliman, Congress has

added the flush language following section 280A(c) (1) (C) to expand the scope of the home office deduction.

That flush÷

language was intended to permit taxpayers who manage business activities from their homes to claim a home office deduction even

if they would not qualify under the Soliman standard.'

However,

The House report accompanying the amendment explained its

purpose as follows:

The Committee believes that the Supreme Court's

decision in Soliman unfairly denies a home office deduction

to a growing number of taxpayers who manage their business

activities from their homes

Thus, the statutory

modifiàation adopted by the Committee will reduce the

present-law bias in favor'of taxpayers who manage their a

business activities from outside their home, thereby

enabling more taxpayers to work efficiently at.home, save

commuting time and expenses, and spend additional time with

their families. Moreover, the statutory modification is an

appropriate response to the computer and information

revolution, which has made it more practical, for t'axpayers

to manage trade or business activities from a home office.

Section 280A is amended to specifically piovide that a

home office qualifies as the "principal place of business"

if (1) the office is used by the taxpayer to conduct.

administrative or management activities of a trade or

business and (2) there is no other fixed location of the

trade or business where the taxpayer conducts substantial

administrative or management actinities of the trade or

business. As under present law, deductions will be allowed

for a home office meeting the above two-part test only if*

the office is exclusively used on a regular basis as a place

of business by the taxpayer * * *

(continued. . . )

- 19 -

Congress did not change the requirement that, in order to qualify

as the principa3 place of business, the home office must be

regularly and exclusively used for business purposes.

The

exclusive-use requirement in section 280A(c) (1) is an'"all-ornothing" standard.

Hamacher v. Commissioner, 94 T.C. 348; 357

(1990).

Our first consideration is whether petitioner's residence is

his principal place of business, a-prerequisite for qualification

under the home office exception.

Petitioner stored tools in a

shed at his residence, used the telephone in his office in¡his ,

residence to contact;building -supply, stores, and used his desktop

computer in his office to research parts for building houses and

to keep track of his billing.

Petitioner, however, offered no

testimony or other evidence 'that he used the office in his

residence exclus vely for his business..

Although Ms.- Pannepacker

testified that she did not.use the office at all during regular

business hours, she did not include in her testimony anything

regarding her us

of it during evenings or weekends.

Petitioner

did testify that he -used a se arate storage 'shed exclusively for

his business, and Ms. Pannepacker confirmed petitioner's

testimony on tha

point.

It is clear from petitioner's arguments

'(...continued)

H. Rept. 105-148

See also Leach v.

The IRS acquiesced to our

decision in Schurer and laten issued Rev. Rula 190, 1953-2 C.B.

303, which state

that when an employee "is employed for a

strictly temporary (as distinguished from an indefinite) period

on a construction project situated at a distance from the

metropolitan area in which he is regularly employed, he may

deduct * * * his actual expenses incurred for daily transportation between his principal or regular place of

employment and such job" .

Originally, when courts decided whether transportation

expenses were nondeductible commuting expenses, they focused only

on the nature of the job:

indefinite duration.

whether it was of temporary or

In Peurifoy v. Commissioner, 358 U.S. 59,

60 (1958), the Supreme Court summarized the law as follows:

Generally, a taxpayer is entitled to deduct unreimbursed

travel expedses under this subsection only -when they are

required by "the exigencies of business." * * *

To this rule, however, the Tax Court has engrafted an

exception which allows a deduction for expenditures of the

type made il this case when the taxpayer's employment is

"temporary" as contrasted with "indefinite" or

"indeterminate." * * *

However, over the

ears, a number of courts added an additional

requirement that the temporary worksite had to be distant from

the area where the taxpayer lives and normally works.

See Dahood

- 24 v. United States,

United States,

747 F.2d 46; 48

671 F.2d 1059,

1061

Commissioner, T.C. Memo. 1985-382.

(1st Cir.

1984) ; Kasun v.

(7th 'Cir.

1982) ; Epýerson

The Court of Appeals for othe

First Circuit explained the reasoningiunderlying the temporary

distant worksite exception. as follows:

A judicial- exception'has been carved out of this

general rule [that commuting expenses are nondeductible] to

cover instances when people commute -long distances to their

workplaces for business, rather than personal, re'asons.

This exception permits taxpayers to deduct commuting

expenses to a job that is temporary, as opposed to

indefinite, in duration. The exception has been deemed

necessary because "it is not reasonable to expect þeople to

move to a distant location when a ,job is foreseeablyt of

limited duration." Implicit in this exception is the

requirement that the taxpayer commute to a worksite distant

from his or her residence. Without such a requirement, the

absurd result would obtain of permitting a taxpayer who e

commuted to a succession of temporary jobs, to deduct

commuting expenses, no matter how close these jobs were to.

his residence.

Dahood v. United States, supra at 48 (citations omitted) .

Consistent with the holdings of similar cases, the IRS has

memorialized the temporary distant worksite exception in Rev.

Rul. 99-7, 1999-19 C.B. at 361, which states:

"A taxpayer e* * *

may deduct daily transportation expenses incurred in going

between the taxpayer' s residence and a temporary work location

outside the metropolitan area where, the taxpayer lives and

normally works."

The revenue ruling defines a temporary work

location as one that "is realistically expected to last (and does

in fact last) for 1 year or less" .

Id.

Neither Rev. Rul. 99-7,

- 25 -

supra, nor any cf its predecessors? defines the term

"metropolitan area".

The revenue:ruling does not explain the

rationale for the temporary distant worksite exception.

However,

as we read the revenue ruling, on.the basis of the caselaw cited

above, the revenue ruling redognizes that taxpayers whose work

consists of many temporary worksites might not always,have a

choice about the location of those worksites.

Although the

taxpayer's.choices about whe e to live and where to "normally

work" are person 1 and it is assumed the taxpayer will live near

the place of employment, it is unreasonable to expect' that a

taxpayer will mo e to a distant location for a temporary job.

See Kasun v. Uniaed States, supra at 1061. I The taxpayer's choice

to take a temporary job at a remote location is therefore

dictated-by business needs more thans ersonal preference.

Petitioner contends that because he lived in Cherry Hill,

New Jersey, and nost of his worksites were across the State line

in Pennsylvania, those worksites were temporary work locations

not within his "netropolitan.area".

Because "metropolitan area"

is not defined in any revenue ruling, petitioner argues that we

should refer to the Office of Management and Budget (OMB) for a

definition of "metropolitan", which petitioner contends is an

urban area with more than 50,000 people.

However, petitioner is

7Rev. Rul. 91-47, 1994-2 C.B. 18; Rev. Rul.

C.B. 28; Rev. Ru]. 190, 1953-2 C.B. 303.

90-23,

1990-1

- 26 mistaken about how the OMB defines "metropolitan area."

The OMB

defines a "metropolitan statistical area" or a "microÿolitan

statistical area" as "an area contäining a recognized population

nucleus and adjacent communities that have a high degree of

integration with that nucleus."

Standards for Defining

Metropolitan and Micropolitan Statistical Areas, 65 Fed.- Reg.

82,228 a(Dec. 27, 2000).

A metropolitan statistical area is

distinguished from a micropolitan statistical area by having a

population core of at least :50,000.

However, petitioner's

reference to the definitions used by the OMB does -not support his

contention because, as defined by the OMB, petitioner's residence

in therry.Hill,;New Jersey, and all of his temporary worksites

are part of the Philadelphia-Camden-Wilmington Metropolitan ,

Statistical Area.

See Office of Mgmt.' & Budget, Exec

Office df

therPresident, OMB Bull. No. 06-01, Update of Statistical*Area

Definitions and Guidance on Their Uses (2005).

Nonetheless,.we decline to adopt any such rigid "definition

for deciding when«a taxpayer's temporary worksites take him

"outside the metropolitan area where the taxpayer lives and

normally works."

Adopting such a rigid definition would

inevitably lead to some absurd results.

In some situations, à

rigid definition would disallow the deduction of travel expenses

that should be permitted.

The metropolitan statistical areas

(MSAs) defined by the OMB are often quite large, such as. the

27 -

Philadelphia-Camden-Wilmington MSA. - A taxpayer who lives and

normally works near the outskirts of one- MSA may normally drive

only 5 miles to and from worksites. * However, if that taxpayer

accepts work at a temporary- worksite on the opposite end of the

MSA, but still within the MSA, the- taxpayer could end up driving

as much as 100 mLles each way yet not be able to deduct such

transportation e:<penses becauise the worksite is still within the

MSA.

In other situations, such a rigid definition would allow

commuting:expense deductions that should tot'be permitted..

instance, a taxpayer may-live on the border of two MSAs.

For

If that

taxpayer normally has worksites in one MSA and only occasionally

has wðrksites in the other MSA, the taxpayer would be permitted

to deduct othe expenses incurred in traveling to the worksites in

the second MSA even if the.distance traveled were no greater than

that normally traveled when working at worksites in the first"

MSA.

(Accordingly,.employing rigid definitions would frustrate

the intent of the primary principle that commuting expenses are

nondeductible.

Indeed, we conclude that respondent's use of the "term

"metropolitan arca" is not helpful for answering the question of

whether petitioncr's travel expenses are deductible under the

- 28 -

temporary distant worksite exception?

»Instead, we will evaluate

the facts and circumstances to decide whether the travel" expenses

in question were.incurred in traveling to a worksite unusually

distant from the area where petitioner lives and normally works.

Such an approach is consistent with the approach historically

takens by a number of other courts;.

See Ellwein v. »United States,

778 F.2d 506, 511 (8th Cir. 1985), (holding that it was necessary

to consider whether the taxpayer's temporary worksites were

within the "work area" of the city -that «was'the taxpayer's tax

home) ; Dahood v. United States, 747 F. 2d at a 48 (fot commuting

expenses to a temporary worksite-to be.deductible, that temporary

worksite must be "distant from * *-* [the taxpayer's]

residence")s;- Frederick v. United States,

Cir. 1979)

603 F.2d.1292,r1295

(8th

(commuting expenses to a.temporary worksite "a

considerable distance" from-the taxpayer's.residence were

deductible)

As the maps introduced by respondent at trial show,

petitioner's residence in Cherry Hill, New Jersey, is

approximately 10 miles east of Philadelphia.

Most off

?We are not bound by revenue rulings, and we evaluate them

based on the "power to persuade" standard articulated by the

Supreme Court in Skidmore v. Swift & Co., 323 U.S. 134 (1944)~.

See'Taproot Admin. Servs., Inc. v. Commissioner, 133 T.C. 202,

208-209 (2009); PSB Holdings, Inc. v. Commissioner, 129 T.C. 131,

142 (2007).

Under that standard, the weight we give revenue

rulings "depends upon their persuasiveness and the consistency óf

the Commissioner's position over time."' Taproot Admin. Servs.

Inc. v. Commissioner, supra at 209.

- 29 --

petitioner's worksites during the years in issue were.in

Philadelphia or its suburbs to the north.

Petitioner had five,

worksites that were 20.1, 15.7, 15.0, 14.7, and 4.0 miles from

his residence.

Consequently, it was petitioner's normal practice

during the years in issue to travel about 15 miles from his

residence to a worksite. , There was nothing unusual about those.

trips..a

Even the worksite that was farthest from.petitioner's

residence was stLll within the city limits of Philadelphia.

Given that- four out of five of petitioner's worksites.during the

years in issue were in either Philadelphia or its suburbs to the

north, we conclu e that those areas, are the areas where

petitioner normally worked.

Accordingly, we hold that he was not

entitled to deduct travel expânses incurred in driving between

his residence:-an

those worksites.

See Aldea v.,Commissioner,

T.C. Memor 2000- 36 (holding phat, because it was the taxpayer's

personal choice to live outside the area where most of her

temporary worksites were located, she was not entitled to deduct

her commuting expenses).

Con equently, we conclude that

petitioner is not eligible to deduct his commuting expenses under

the temporary distant worksite exception.

The Regular Work Location Exception

Unlike the first two exceptions, the regular work location

exception is not rooted in cabelaw.

Rather, the.regular work

location exceptic.n was originally articulated by the Commissioner

- 30 -

in Rev.. Rul. 90-23, supra.

The current versioniof the "regular

work location exception is found in Rev. Rul. 99-7, 1999-1 C.B.

at 362, which states:

"If a taxpayer has one or more regulara

work-locations away-from the taxpayer's residence, the taxpayer may deduct daily transportation~expenses incurred in going

between the taxpayer's residence and a temporary work location

the same- trade or business, regardless of the distance."

Rev

Rul. 99-7, supra, does not define "regular work -location."

However, Rev-. Rul. 90-23, 1990-1 C.B. at 28, defines" "regular

place of business" as "any location at which the taxpayer works

or peiforms services on a regular basis."

We infer that the same

definition should apply to "règular work location" under Rev.

Rul. -99-7, supra, except that a "regular work location" may not

include the taxpayer's residence.

We'also infer that,e because

"regular work location" is'contrasted with "temporary work

location," the two are mutually exclusive.

Rev."Rul. 90-23, 1990-1 C.B. at 29, explains the rationale

for the regular work location exception by analogy to Rev.. Rul

190,

supra:--

A taxpayer who pays or incurs daily transportation

expenses on trips between the taxpayer's residence and one

or more regular places of business is like the taxpayer

described in Rev. Rul. 190 who pays or incurs daily

transportation expenses on trips-between the taxpayer's

residence and temporary work sites within the metropolitan

area that is considered the taxpayer's regular place of"

business.

Such daily transportation expenses-are

nondeductible commuting expenses. On the other hand, a

taxpayer who has one or more regular places of business and

- 31 -

who-pays'or incurs daily transportation-expenses for trips

between the taxpayer's residence and temporary work

locations ils like the taxpayer described in Rev. Rul. 190

who pays o incurs deductible daily transportation expenses

for trips etween the taxpayer' s residence and temporary

work sites outside the metropolitan area that is considered

the.taxpayer's regular flace of büsinesse Thus, för a

taxpayer whb has one or more regular places of business,

daily transportation expenses paid or incurred 'in going

between the taxpayer's residence and temporary work

locations are deductible business expenses under section

162(a) of the Code rega dless of the distance.

We do not follow the Commissioner's reasoning.

It is unclear why

the Commissioner considers analogous the situation where a

taxpayer travels between the taxpayer's residence and a distant

temporary work l>cation and the situation where the taxpayer has

one or more regular work locations,and travels between the

taxpayer's residence and a nearby temporary work location.

The

exception would be logical if it were limited to distant

temporary work locations.

Ho ever, as it stands, the regular

work location exception reaches a result similar to what the

Court of Appeals for the First Circuit labeled "absurd" when it

held that there was an implic t requirement that, in order for

trave], expenses between a taxpayer's residence and a temporary

work location to be deductible, the temporary work location must

be distant from tie taxpayer's residence." See Dahood.v. United

States, supra at 48.

Nonetheless, we will treat the regular work

location exception as a conceþsion by the Commissioner.'

9Similarly, in Walker v. Commissioner, 101 T.C. 53T, 550

(continued...)

- 32 -

rIn the instant case, petitioner' s only work locatioris during

the years in issues were worksites where he performed

renovations.

All of those worksites were temporary as defined in

Rev. Rul. 99-7, supra, and petitioner has not shown that he had

other,' regular work locations.1°

Accordingly, petitioner has not

established facts that would qualify him for respondent's

concession.

Consequently, we conclude that petitioner is not

entitled to deduct his commuting expenses under the regular work

location exception.

Because petitioner has failed to qualify under any of the

three exceptions, we hold that his expenses in traveling between

his worksites and his residence were nondeductible commutinc)

expenses .

Other Travel Expense Deductions

Petitioner contends that his travel between his residence

and his worksites should not be considered commuting because he

was carrying his tools in his pickup truck.

However, the Supreme

Court rejected a similar argument made by the taxpayer in Fausner

* (. . . continued)

(1993) , we treated as a concession another portion of Rev. RuL.

90-23, 1990-1 C.B. 28, that was inconsistent with our prècedent

but that was a concession in favor of the taxpayer.

1°We reject petitioner's, contention that his storage shed,

his car, the bank, and various building supply stores should be

considered regular work locations.

Petitioner has not

established that he " [worked] or [performed] services on a

regu]:ar basis", at any of those locations. See Rev. Rul. 90-23,

1990.-1 C.B. 28.

- 33 -

v. Commissioner, 413 U.S. at 839.

In that case, the taxpayer was

an airline pilot who argued that his commuting expenses were

deductible because he used h s automobile to transport the bags

he needed for his job.

Id. at 838.

The Supreme Court rejected

the taxpayer's argument but left open the possibility that a

taxpayer could allocate expenses between the necessary costs for

commuting,and.ad itional costs that might be incurred to

transport job-related tools and materials.

Id. at 839.

After Fausner, the IRS published Rev. Rul. 75-380, 1975-2

C.B..59, stating that a taxpayer was entitled to deduct the cost

of "transporting the work implements by the mode of -

transportation used in excess of the cost of commuting by the

same mode of- transportation without the twork implements."

However, petitioner- did not p ovide any evidence that would allow

us to decide what excess commuting expenses, if any, might be

attributable to transporting his tools to and from his worksites.

Because "any tra eling expense" under section 162 is subject to

the strict substantiation requirements of section 274(d), the

Cohan doctrine does not apply, and we therefore will not estimate

the amount of a y additional feductible commuting expenses

petitioner may have incurred by transporting his tools."

We reject petitioner's argument that the strict ·

substantiation rcquirements of sec. 274(d) do not apply-because

petitioner's care were trucks, not passenger automobiles, and

therefore were not listed property under sec. 280F(d) (4): Sec.

(continued...)

- 34 Accordingly, we will not allow petitioner any deduction.for the

transportation of his tools to his worksites.

Petitioner contends that, even if he is not entitled to deduct his commuting expenses, he should still be entitled to

deduct his expenses for short errands to pick up materials at

building supply stores.

Respondent acknowledges that -such travel

expenses would be deductible but contends that -petitioner failed

to supply evidence documenting his alleged trips.

In his brief,

petitioner contends that we may ascertain how many trips he made

to building supply stores by examining his debit cakd 'purchases

and calculating the distances.from his worksites to those

building supply stores.

However, petitioner did not provide-

sufficient evidence for us to link those trips to particular

worksi:tes.

Because expenses for listed property and 4"any

"(...continued)

280F(d) (5) defines a "passenger automobile" as "any 4-wheeled

vehicle * * * manufactured primarily for use on public streets *

roads and highways, and * * * rated at 6,000 pounds unloaded

gross vehicle weight or less." In the case of a truck or van,

the vehicle will be considered a passenger automobile if the

gross vehicle weight is 6,000 pounds or less.

The record does

not contain any evidence regarding the gross vehicle weight of

his Ford Explorer and Toyota Tundra, but we note that such

vehicles,are commonly used passenger automobiles. Moreover, the

regulations specifically state that the substantiation

requirements of sec. 274(d) "apply generally to any pickup truck

or van, unless the truck or van has been specially modified with

the result that it is not likely to be used more than a de

minimis amount for personal purposes." Sec. 1.274-5T(k) (7),

Temporary Income Tax Regs., 50 Fed. Reg. 46035 (Nov. 6, 1985).

Petitioner has not contended, and the record does not support a

finding, that his pickup truck was so modified.

- 35 -

traveling expense" under section 162 are subject to the'strict

substantiation requirements of section 274(d), the Cohan doctrine

does not apply, and we therefore cannot estimate the amounts of

such expenses.

Moreover, petitioner was also performing

renovation and constructing an addition on his own residence during the years in issue, and it is impossible for us to

determine from his debit card transactions whether purchases at

building supply stores were for his own residence o

for his

business.- Accordingly,9 we conclude that petitioner'has failed to

prove that he is entitled to deduct expenses related to trips

from his work'sites, to building supply stores.

inally, respondent also acknowledges:that petitioner would

be entitled to deduct travel

xpenses between different temporary

worksites, but petitioner testified that he typically worked at

one worksite for several months at a time before'moving on to

another worksite

Accordingl , petitioner has failed to show

that he made any such trips.

In sum, we hold that petitioner is n'ot entitled to deduct

any transportation expenses during the years-in -issue.

Deprec:.ation Experises

In order to be entitled to a deduction for depreciation with

respect to an automobile, a taxpayer must establish.that the

automobilé~was used at least

artiall

deduction will

to the extent of business use.

e allowed on1

for business,, Ánd the

- 36 Sec. 167(a); Henry Schwartz Corp. v. Commissioner, 60 T.C.s 728,

744 (1973) .

An automobile is listed property under section

280F (d) (4) and is therefore subject to the strict substantiatión

requirements of section-274(d) and the regulations thereunder.

Those, regulations also require strict substantiation with respect

to depreciation expenses on listed property;

Temporary, Income Tax Regs.,

50 Fed. Reg. 46014

Sec. 1.274x5T(a),

(Nov.

1985)

In order ,to deduct depreciation on listed property, the taxpayer

must strictly substantiate the percentage of business use, and we

will not estimate the appropriate allocation using the; Cohan

rule.

See Sowards v. Commissioner, T.C. Memo. 2003-180; Vaksman

v. Commissioner, T.C. Memo. .2001-165, affd. 254 Fed.. Appx. 592

(5th Cir. 2002); Bishop v. Commissioner, T.C. Memo.,2001-82;

Yecheskel v. Commissioner, T.C. Memo." 1997-89, affd. without

published opinion 173 F.3d 427 (4th Cir. 1999) ; Whalley v.

Commissioner, T.C. Memo. 1996-533.

As we concluded above, most of petitioner' s claimed business

use -of his automobile was actually for commuting, ,a nondeductible

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

46014

(Nov.

1985), provides:

For* taxable years beginning on or after January 1, 1986, no

deduction or credit shall be allowed with respect to * * *

listed property * * * unless the taxpayer substantiates each

element of the expenditure * * *. This limitation

supersedes the doctrine found in Cohan v.' Commissioner

* * *. For purposes of this section * * * the term

"expenditure" means expenses and items (including items* such

as loss and depreciation) .

- 37 personal expense.

Petitioner provided no evidence ,regarding any

other use of hid vehicle that would satisfy the substantiation

requirements of section 274(d).

Accordingly, we hold that he is

not entitled to deduct any depreciation on his automobile."

On his 2006 tax return, petitioner claimed a $400 deduction

for d'epreciation of his toolá.

However, her did not explain how

he determined that he was entitled to such a-deduction.

brief, he contends that $3,200 is a reasonable value for his

tools and that h

should be

ntitled to deduct them using

straight-line depreciation over 4 years.

Petitioner contends

that we should employ the Cohan rule- and estimate the amount of

depreciation to which he is entitled.

The cost of tools with useful lives greater than a year is

recoverable by depreciation.

Secs. 167(a), 168(b); Seawright v.

9At trial, petitioner á tempted to introduce an incomplete,

unsigned portion.of his 2004 tax return for the purpose of

showing 'that he put his Ford Explorer into service duking 2003.

We suátained res ondent's objection to that exhibit and did not

admit it into evidence. Petitioner argues, in a separate motion,

that we erred in refusing to admit that exhibit. Even if that

exhibit were admitted, petitioner would not be allowed to

depreciate his F rd Explorer. Accordingly, we will deem

petitioner's motion moot. Similarly, we will deem moot 3

petitioner's motion to admit a portion of his 2007 tax return',

which:he contends should be admitted to show that the IRS did not

object to deductions he claimed for commuting expenses during

2007. Whether the IRS examined petitioner's return for his 2007

tax year is irrelevant to our decision in the instant case.

Respondent is not estopped from asserting a different position in

the years in issue even if he accepted petitioner's treatment of

certain items du(ing other ye rs. See Rose v. Commissioner, 55

T.C.. 28, 32

(1970).

- 38 Commissioner, 117 T.C. 294, 305 (2001) .

Petitioner offered no

testimony gor other evidence regarding the date on, which he

purchased the tools.

Since he testified that the records

e a

regarding their purchase were destroyed in 2003, we irifer that

they were purchased some time before then.

Petitioner failed to

offer any evidence that the cost of, his tools were not already

fully depreciat-ed by 2005 and 2006.

Without more evidence, we

are unable to estimate the amount of depreciation -to which

petitioner is entitled."

See Vanicek v. Commissioner, 85 T.C.

at 743.

Although he did not claim it on his return, petitioner

contends that he should also be allowed to depreciate the cost of

the toolshed that he used exclusively to store his toolst for

work.

However, petitioner produced no evidence to substantiate

the amount he spent on the toolshed, nor did he indicate when he

purchased it.

He merely guessed what it was worth.

Accordingly, we conclude that petitioner has failed to produce

"At trial, in order to provide- a basis for estimating the

value of his tools, petitioner attempted to introduce a price

squote on similar tools. He obtained the price quote from Home

Depot during April 2008. We sustained respondent's objection and

did not admit the price quote into evidence.

Petitioner now

moves that we reconsider that ru-ling. However, even if we- were

to adniit petitioner's price quote, we would still disallow

petitioner's claim for depreciation of his tools because he

introduced no evidence regarding when he purchased thóse tools.

Accordingly, we will deem petitioner's motion moot.

4 - "39 evidence that would allow him to claim depreciation on the

toolshed.

See id_

Legal Expenses

A taxpayer is entitled to deduct expenses for legal fees

pursuant to section 162(a) in a suit that "arises in connection

with" the taxpay r's business.

U.S. 39, 48

153

United States v. Gilmore, 372

(196 ); Kornhauser v. United States, 276 U.S. 145,

(1928); O'Malley v. Commissioner,

(1988).

A taxpayer is even

from a criminal

91 T.C. 352, 361-362

ermitted to deduct legal expenses

atter, as long as the criminal matter is

sufficiently connected to thel taxpayer's business.

Commissioner v. Tellier, '383'U.S. 687 (1966).

of le#al expense

See

The deductibility

is determine'd by looking at" the "origin and

character of the claim with respect to-which an expense was

incurred".

United Stätes v. Gilmore, supra at 49.

Petitioner'

testimony established that his legal expenses

were incurred during several þontract disputes, including one

that led to his arrest.

Those disputes arose in connection with

his business as an.independent building contractor.

We are

satisfied by petitioner's and Ms. Pannepacker's testimony

regarding the origin and charäcter.of those expenses.

We are

also. satisfied that, although the canceled checks provided by

petitione

to substanŠiute the majority of those expenses were

written by Ms. Pannepacker, t ey were written on a bank account

- 40 -

containing petitioner's funds.-

However, petitioner's claimed

deduction of $800 in legal fees paid during 2003 cannot be

deducted on his 2005 return.

775, 782 (1959)

See Burke v. Commissioner, 32 T.C.

(a cash basis taxpayer's legal'fees could be

deducted only in the years during which they weresactually paid,

not in subsequent years), affd. 283 F.2d 487 (9th Cir. 1960); see

also Dehoney v. Commissioner, T.C. Memo. 2006-108.

Accordingly,

we conålude that petitioner is entitled to deduct only the legal

fees he has substantiated, i.e., $398 for 2005 and $1,:423 for

2006.

Office Expenses

Section 262(a) generally disallows deductions for,personal

expenses,, and section 262(b)a provides that the "first tel'ephone

line of a taxpayer's residence will bes treated as a personal

expense.

Accordingly, we conclude that petitioner is not

entitled to deduct the cost of his landline telephone.

Cellular phones" and computers are listed items under

section 280F(d) (4) and are therefore subject to the heighténed

substantiation requirements of section 274(d)."

Petitioner dida

"As noted above, for tax years beginning after Dec.-31,

2009, cellular phones are no longer "listed property" under sec.

280F(d) (4).

"Because we have found that no portion of petitiôner's

residence qualified as his principal place' of business~under sec.

280A(c) (1), we reject petitioner's argument that his computer

qualifies for the exception under 280F(d) (4) (B), which providès

(continued...)

, 41 -

not provide- any testimony or ¡other evidence regarding the extent

of his business use of his cellular phone or computer.

Accordingly, he has not satisfied the strict-substantiatión

requirements und r section 274(d), and respondent's disallowance

of those expense

will be sustained.

The Court h s characterized Internet service provider

expenses as util ty expenses.

2001-132.

Verma v. Commissioner, TsC. Memo.

(Strict substantiation therefore does not apply, and

the Court may estimate a taxpayer's deductible expenses, provided

that the Court has a reasonable basis for making an estimate.

Vanicek v. Commissioner, supra at 743.

Petitioner provided

documentation th t Ms. Pannepacker spends $33 per month on

Internet service, and he testified that he uses the Internet to

resea ch parts and tools. . Ho ever, Ms. Pannepacker'also áses the

Internet at home

presumably for recreation.

Ýhe record before us would establish petitioner's office

expende deduction of, at most, $16.50 per month. "However,

respondent conceded to petitioner in the notice of defioiency a

deduction of $$0 per month for office expenses.

'Accordingly, we

sustain respondent's determination that petitioner is entitled to

"(...contin ed)

that computers uded at a regular,business establishment are not

iisted property. Sec. 280F(d) (4) (B) providès that any portion of

a dwelling unit will qualify as a "regular business

establishment" odly if that portion of the dwelling satisfies the

requi ements of sec. 280A(c)(1).

- 42 -

deduct only $600 per year for office expenses, not the $1,4200 per

year he claimed on his returns .

Other Expenses

As part of petitioner's claimed "Other Expenses" on his 2005

Schedule C, he included a $1,000 expense related to assettlement

with Builder's Prime Window (Builder's Prime).

At some point,

Builder's-Prime billed Ms. Pannepacker approximately $2,~500 for

windows that petitioner and Ms. Pannepacker'testified she never

purchased.

Petitioner testified that the bill was related to

some work he was doing as general contractor-, but that the

accounting department at Builder's Prime had made an error andbilled him for windows he did not order.. Because petitioner used

a bank account in Ms. Pannepacker's name to conduct his business,

the bi'll from Builder's Prime was actually addressed to Ms.

Pannepacker, who has never bought anything from ·Builder's<Prime.

In addition to petitioner's- testimony and that of.Ms;

Pannepacker, petitioner also provided copies of correspondence

with Builder's- Prime regarding the dispute, a canceled check

payable to Builder's Prime.with a note about settlement on the

memo line, and a settlement agreement signed by petitioner,« Ms.

Pannepacker, and the president of Builder's Prime.

The

settlement agreement also refers to the bills from another

project that þetitioner explained were the source of the Éispu e.

Petitioner testified that he never received reimbursement for"

- 43 -

that settlement expense fromîMr. Mancino,' and he also submitted a

statement from Mr. Mancino, included among the stipulated

exhibits, in which.Mr. Manci o stated that he did not.reimburse

petitioner for that amount.

We are persuaded by -petitioner's evidence that the $1,000paid to Builder's Prime was a settlement payment that arose from

petitioner's con racting business and that he was never

reimbårsed for that payment.

Accordingly, we conclude that it is

a dedùctible bus ness expense for.2005.

* Petitioner

ontends that he is entitled to deduct $2,200 on

his 2006 tax return for books he purchased between 2001 and 2005.

He contends that he did not deduct those expenses during prior

years because he did not begin writing seriously until. 2006.

The

books purchased by petitioner consist almost entirely of popular

books that most· urchasers wo ld read for pleasure.

The recôrd

is unclear as to whether, at the time petiti'oner maderthe

purchases, he int-ended to use the books as research'material for

books she intended to write in the future.

from the record

iIndeed, it is unclear

hether petit oner had even conceived of the idea

of writing a book series when he began to purchase the books

during 2001.

In any case, because petitioner.paid for the books

in priior years, he is not entitled to deduct them on his 2006return.

973,

See A. Finkenberg's Sons, Inc. v. Commissioner, 17 T.C.

9;82-983

(1951)

("Expenses incurred and paid in prior years

- 44 -

are not - deductible in later years though incidental to earnings

in later years") .

III. Whether Petitioner Is Liable for Accuracy-Related Pènalties

Section 6662(a) imposes an accuracy-related penalty of 320 percent of any underpayment that, is attributable to causes

specified in subsection (b) .

Subsection (b) applies "the penalty

to any underpayment attributable to, inter alia», a "substantial

understatement" of income tax, meaning that the- amount of the

understatement exceeds the greater of 10 percent of the tax

required to be shown on the return for the tax year or $5, 000 .

Sec . 6662 (d) (1) (A) .

Generally, the Commissioner bears the burden of production

with respect to any penalty, including the accuracy-related

penalty.

Sec. 7491(c) ; Higbee v. Commissioner, 116 T.C. 438, 446

(,2001) .

To meet that burden, the Commissioner must. come forward

with sufficient evidence indicating that it is appropriate to

impose the relevant penalty.

446 .

Higbee v. Commissioner, supra at

However, once the. Commissioner has met the burden of

production, the burden of proof remains with the taxpayer

including the burden of proving that the penalties " are

inappropriate because of substantial authority or reasonable

cause under section 6664.

See Rule 142(a); Higbee v

Commissioner, supra at 446-447.

45 -

1 espondenta determined ethat petitioner swas eliable ifor' the

penaltjy under section 6662 (a) because he substantiallyunderåtate.d his ancome tax for both of the years in issue.

Section 6662 (a) c and (b) (2) - imposes a 20 -percent accuracy-related

penaltjy onaany portion of a taxy underpayment that4iss attributable

to- ant substantial understatement sof income tax, defined 'in

sec tien 6662 (d);(:.). (A) as an understatemente that exceeds, the

greater of 210. percent of the

return or $5,000

ax required to be shown- on the

The exact amount of petitioner's

underåtatement w:.ll depend-upon the Rule 155 computations, which

we order below.

To the extent that those computations establish

that petitioner has a substantial understatement of income tax,

respondent has met his burden of production.

See Prince v.

Commiásioner, T.C. Memo. 2003 247.

The amount of an understatement on which the penalty is

impos d will be reduced by the portion of the understatement that

is atýributable to the tax treatment of an item (1) that was

suppoited by "substantial authority" or (Ž) for which the

relevant facts were "adequately disclosed in the return or in a

statedent attached to the return".

Sec. 6662(d) (2) (B).

Additfonally, no penalty will be imposed with respect to any

portion of an undetpayment if it is shown that there was

reasonable cause for such portion and the taxpayer acted in good

faith with respect to such portion.

See sec. 6664(c) (1).

- 46 -

Petitioner has failed to show that he had substantial authority

or acted with reasonable cause and in good faith with respect to

any portion of his underpayment .

Accordingly, we hold that he is

liable for the section 6662 (a) penalty insofar as the Rule 155

computations show a substantial understatement .of income tax.

In reaching the foregoing holdings, we have considered all

the parties' arguments, and, to the extent not addressed herein,

we conclude that they are moot, irrelevant, or without merit'.

To reflect the foregoing,

Decision will be entered

under Rule 155.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.