T .C . Summary Opinion 2009-11 . 9

T .C . Summary Opinion 2009-11 . 9

UNITED STATES

TAX COURT

REYNARD AND JOYCE M . CAMPBELL, Petitioners v .

COMMISSIONER OF INTERNAL REVEUE, Responden t

Docket No . 3530-07S .

Filed July 30, 2009 .

Reynard and Joyce M . Campbell, pro $ese .

Shannon Edelstone , for respondent .

WHERRY,

Judge : This case was heard pursuant to section 746 3

of the Internal Revenue Code in effect when the petition wa s

filed .' Pursuant to section 7463(b), the decision to be entere d

'All subsequent section references are to the Internal

Revenue Code of 1986, as amended and in effect for the tax year

at issue . Rule references are to the Tax Court . Rules of Practice

and Procedure .

SERVED JUL 3 0 2009

2 -

is not reviewable by any other court, and this opinion shall no t

be treated as precedent for any other case .

Petitioners are husband and wife . Respondent determined a

$31,153 deficiency in petitioners' Federal income tax and a

j ""-x$6 ;2330`:-60°,accuracy-related penalty under section 6662 (a) fo r

k. . . . pet-it,-Toner s

i

'qwr

2005 tax year . After concessions by the parties ,

th e:issues remaining before the Court are : (1) Whethe r

f

} ._ ., petitioners

are entitled to additional deductions claimed o n

Schedul`e';C, Profit or Loss From Business, for insurance expenses ,

car KKancl truck expenses, and expenses

homem;,2

for business use of thei r

k

(2) whether petitioners are entitled to additiona l

deductions claimed on Schedule E, Supplemental Income and Loss,

for repairs to two multiunit dwellings used as rental propertie s

and as petitioners' home (4319 and 4329 Rilea) ;3 (3) whethe r

petitioners were required to capitalize certain expenditure s

2Respondent has conceded that petitioners are entitled to a

$1,444 Schedule C deduction for expenses for business use of

their home . The amounts remaining in dispute relating to

petitioners' claimed Schedule C deductions for business use of

their home are $1,718 in depreciation and a $5,154 carryover loss

from 2004 . Those amounts are computational and will .be resolved

in the Rule 155 computation in accordance with our decision in

Campbell v . Commissioner , T .C . Summ . Op . 2008-154, which

concerned Mr . Campbell's 2004 tax year .

3The two rental properties are located at 4319 and 4329

Rilea Way in Oakland, California .

3 relating to 4319 and 4329 Rilea ; and (4) whether petitioners are

liable for an accuracy-related penalty under section 6662(a) .4

Backgroun d

Some of the facts have been stipul ted, and the stipulated

facts and accompanying exhibits are here y incorporated b y

reference into our findings .

petition, petitioners resided in Calif or

i

Reynard Campbell is a certified pu lic accountant (C .P .A-.) ,

and Joyce Campbell is aPBX operator .

2005 Mr . Campbell was

employed by Bay Area Rapid Transit (BART

In addition, Mr .

Campbell maintained his own auditing an d accounting business,

with respect to which petitioners repor t d Schedule C gros s

income of $22,161 and a net profit of

$

,062 on`their 2005 joint

Form 1040, U .S . Individual Income Tax Re

urn .6 Petitioners

reported a Schedule E loss of $14,219 re

ating to 4319 and 432 9

Rilea Way . '

'In addition, respondent made a $1 , 66 . computationa l

to petitioners' net

adjustment that resulted from adjustment

income from self-employment . That compu ational adjustment will

be resolved in the Rule 155 computation

hat the Court wil l

direct in accordance with this opinion .

5PBX stands for "private branch ex c

privately owned telephone switching syst

6Petitioners calculated that profit1by subtracting $11,09 9

in reported business expenses from $22,1

income .

- 4 On January .18, .2007, respondent issued a notice of

;1

deficiency disallowing many of petitioners' claimed Schedule C

and E deductions . Petitioners filed a timely petition with this

Court on February 12, 2007 . A trial was held on March 21, 2008,

in San Francisco, California .

Discussio n

I.

Burden of Proo f

The Commissioner's determination of a taxpayer's liability

is generally presumed correct, and the taxpayer bears the'burden

of proving that the determination is improper . See Rule 142(a) ;

Welch v . Helvering ,

.290 U .S . 111, 115 (1933) . However, pursuant

to section 7491(a), the burden of proof on factual issues that

affect the taxpayer's tax liability may be shifted to the

Commissioner where the "taxpayer introduces credible evidence

with respect to * * * such issue ." Petitioners have not

established that they meet the requirements under sectio n

. 7( . .

.

continued )

subtracting $85,895 in expenses and depreciation from $60,179 in

rents received . But because of passive activity loss

limitations, they were not allowed to deduct that entire loss in

2005 . Although sec . 469(i) provides an exemption to the passive

activity loss rules for taxpayers who "actively participated" in

a rental real estate activity that allows such taxpayers to

deduct a maximum loss of $25,000 per year related to the rental

real estate activity, that exemption begins to phase out for

taxpayers with modified adjusted gross income (AGI) in excess of

$100,000 . Sec . 469(i)(3)(A) . Petitioners' modified AGI in 2005

was $121,562 .

5 7491(a)(1) and (2) for such a shift . Co sequently, . the burden of

proof remains on them .

II .

General Deduction Rule s

Deductions are a :matter of legislati ve grace,' and the

taxpayer must maintain adequate records to substantiate the

amounts of any deductions or credits claimed . Sec . 6001 ;

INDOPCO, Inc . v . Commissioner , 503` U .S . 9, 84 (1992) ; sec .

1 .6001-1(a), Income Tax Regs .

Generally, the Court may allow'for t he deduction of a

claimed expense even where the taxpayer

s unable to full y

substantiate it, provided the Court has

n evidentiary basis for

doing so .

1930) ;

Cohan v . Commissioner , 39 F .2

540, 543-544 (2d Cir .

Vanicek v . Commissioner , 85 T .C . 7 31, 742-743 (1985) . But

see sec . 1 .274-5T(a), Temporary Income T x Regs ., 50 Fed . Reg .

46014 (Nov . 6, 1985) . In these instances

the Court is permitted

to approximate the allowable expense, b e

ring heavily against the

taxpayer whose inexactitude is of his o r her own making .

v . Commissioner ,

III .

Coha n

supra at 544 .

Deductibility of Repair Expenses Rel ating to Petitioners '

Schedule E Business

Section 162(a) authorizes a deduction for "all the ordinary

and necessary expenses paid or incurred during the taxable year

in carrying on any trade or business" . trade or busines s

expense is ordinary for purposes of section 162 if it . .is normal

or customary within a particular trade, b siness, or industry and

6 -

is necessary if it is appropriate and helpful for the development

of the business .

(1943) ;

Commissioner v . Heininger , 320 U .S . 467, 47 1

Deputy v . du Pont , 308 U .S . 488,

495 (1940) .

contrast, "personal, living, or family expenses" are generally

nondeductible . Sec . 262(a) . 8

Respondent concedes that petitioners have substantiated

$26,857 of the $37,076 in claimed Schedule E deductions for

repair expenses .9 Respondent argues that petitioners have faile d

to substantiate the remaining $10,219 . The-precise source of the

$10,219 remaining in dispute is not entirely clear . That amount

appears to comprise in part $1,767 .60 that Mr . Campbell paid on

April 24, 2005, for=wood flooring, $20 .65 paid on August 12,

2005, for a related flooring installation kit, and $450 that Mr .

Campbell paid Mrs . Campbell for contract labor . The .remainde r

'Appendix A contains a summary of our conclusions as to each

of the adjustments contained in the notice of deficiency .

Appendix B contains a breakdown of the additional repair expenses

that we are allowing petitioners to deduct . .

'More specifically, respondent concedes that petitioners

have substantiated $14,494 of repair expenses but contends that

$1,789 of this amount is neither deductible nor depreciable . The

$1,789 comprises a wood floor and related installation k'it

costing $1,767 .60 and $20 .65, respectively . Respondent would

have petitioners capitalize those items and would allow

depreciation, but not until 2006 or 2007--when they were placed

in service . This, in respondent's view, leaves .$12,705 in

deductible 2005 repair expenses . Respondent also concedes that

petitioners have substantiated another $12 .,363 in repair expenses

but argues that those expenses must be capitalized . Petitioners

agree that $6,016 .32 of the $12,363 must be capitalized ., The

parties dispute whether the remaining $6,346 .68 of the $12,363

must be capitalized or is fully deductible . We will address

these issues in the next section of our opinion .

- 7 -

apparently relates to a multitude of purchase s by Mr .

Home Depot and various hardware , flooring,

stores .

Campbell at

paint, and other

Petitioners have provided receipts and bank records

reflecting most of those purchases .

Regarding the $450 deduction petitioners

claimed for

"contract labor", Mr . Campbell _ testified that hepaid ,l,his wife

$450 to help him clean petitioners '

rent 1 units .

check reflects that such a payment was made

trial the Court apprised petitioners

that

A canceled

on - May 23 2005 . At

it would allow the

deduction if they could show that they r ported the $450 as

income on their joint return . In response,

asserted : " Okay, well ,

that degree ."

Mr .

Campbell

I don't think th t I can parse it out to

Petitioners have not sine demonstrated that the y

they have failed to demonstrate that .thelpayment constituted a

deductible business expense .

Petitioners have not demonstrated that the $1,767 .60,wood

flooring expense constitutes .a deductibl repair expense rather

than a capital expenditure . . Further, at trial Mr . Campbel l

admitted that the wood flooring was not laced in service until

2006 or 2007 . Because the flooring is a item that must be .

claim its cost as a deductible repair expense nor depreciate i t

in 200 .5 . However, . we will treat the $20 .65 floor installation

8 kit as a tool which is separate from the wood flooring and need

not be capitalized .

As for the remaining disputed Schedule E deductions for

repairs, petitioners have not conclusively demonstrated to which

unit(s) they were attributable . Nevertheless, through thei r

u

receipts and bank records , petitioners have established that th e

expenses were-incurred in 2005 except as to one or two small

dollar items where the receipt date has faded and is no longer

legible .

The bank records petitioners submitted merely reflect

various purchases and their amounts . They do not specify exactly

what petitioners purchased or for which specific unit(s) the

purchases were made . They also do not provide enough information

to determine with any certainty whether those expenses would need

to be capitalized . Many are, however, for small items that do

not appear to be capital in nature, and respondent has provided

no evidence to the contrary . At trial Mr . Campbell acknowledged

that petitioners are missing receipts but asserted : "I think yo u

have to consider the fact that I normally shop at these place s

* * * for repair-type items, for my apartments, and I don't think

in the documentation that I do have that there was any evidence

that anything was personal in it . Many of those items cost $20

or less and were from retailers that sell repair and maintenance

items . The numerous receipts petitioners provided are for the

9 most part consistent with the purchase o

regular-repair and

maintenance items for petitioners' renta

units . Respondent' s

concern for additional details as to eac i expense regardless of

the materiality of the amounts at issue

)r the surrounding facts

reflects a failure to see the forest for the trees . 10

The resul t

has been a very inefficient and questio n ble use of th e

Examination Division's, Appeals', and t h

Court's time .

Petitioners have provided documenta ion for their Schedule E

repair and maintenance expenses, but it

s not perfect in al l

respects ." However, petitioners' Schedule E repair an d

maintenance expenses are . not subject t

he strict substantiatio n

requirements of section 274 . Under Cohai v . Commissioner , 3 9

F .2d at 543-544, petitioners may deduct cost of their repair an d

"of particular note is the refusal to allow deductions for

some items while allowing deductions for other items when all

items were purchased. at the same store o .the same date .

Respondent apparently disallowed those deductions because

petitioners had misplaced receipts even :hough petitioners had

produced credit card statements reflecti g the purchases . For

example, petitioners' credit card statem nt reflects that they

made four purchases at Sincere Plumbing nd Hardware on Feb . 19,

2005 . Respondent disallowed deductions or three of those

purchases on-the basis that petitioners ad misplaced the

receipts while allowing petitioners a $1 8 .73 deduction for one

of those purchases--a faucet for a kitch n sink .

11At trial petitioners provided more than 1,000 pages of

receipts, bank and accounting records, and tax returns and tax

documents . Petitioners' records as to tiese small dollar items

show (1) that each expense was incurred and paid, (2)the date on

which each expense was incurred, and (3) the place where each

expense was incurred . Petitioners' records are in many respects

more complete and detailed than those maintained by many

individual landlords in comparable renta businesses .

10

maintenance expenses because they have provided a sufficient .

evidentiary basis for doing so, which includes petitioners'

uncontroverted trial testimony . .l z

Because petitioners' documentation does not permit tracing

each expense to a particular unit, we will treat one-eighth as

attributable to petitioners' personal unit and nondeductible

under section 262(a) . We will allow petitioners to deduct the

remaining seven-eighths of . the amounts spent for each of the

items listed . infra note 13 and appendixes A and B 'to thi s

12We will not allow all of petitioners' claimed Schedule E

repair and maintenance . deductions because some of the claimed

expenses are clearly nondeductible . For example, petitioners

claimed a $10 .64 deduction for a Feb . 20, 2005, purchase at

"Hollywood Video" and a $423 .15 deduction for an Apr . 28, 2005,

purchase at "Simayof San Francisco", a jewelry store .

- 11

opinion .13 However, we will require petitioners to capitalize an d

IV . Whether Petitioners Are Required To Ca italize Certain

Expenditures Relating to 4319 and 4J29 Rile a

After concessions, the parties dispute whether petitioners

are required to capitalize $6,347 in expenses incurred to install

or replace carpeting ($2,400), ceiling fens ($502), til e

($1,458), a toilet ($38), and baseboard molding ($474) . The

remaining $1,475 was for labor performed on petitioners' renta l

properties .

13(1) All of the $420 .74 of expenses listed in the "Missing

receipts" attachment to respondent's pretrial memorandum

including the $267 .96 paid to Home Depot on Oct . 6, 2005 ; (2)

$133 .60 paid to Home Depot on Feb . 19', 2005,-for a "HOMER

BUCKET", "1/2 RTD SHTG", and a "TOOLBAG" ; .(3) $36 .03 paid to Home

Depot in July 2005 for "CEDAR'SHIMS", "S REWS", and a`48-inch

level ; (4) the $20 .65 flooring installation kit purchased on Aug .

12, 2005 ; (5) $4 .34 paid to Laurel Ace Hardware and $20 .35 paid

to Foothill Hardware in Jan . 2005 ; (6) $6 .17 for pipe tape and

$17 .27 paid to Home Depot, .$6 .39 and $13 .73 paid to Foothill

Hardware, and $3 .24 paid to Laurel Ace Hardware in February 2005 ;

(7) $20 .04 and $6 .27 paid to Foothill Ha dware in March 2005 ; (8)

$1 .03 paid to Home Depot and $19 .84 and 20 .05 paid to Foothill

Hardware in April 2005 ; (9) $19 .52,$28 . 8, and $85 .88 paid to

Home Depot and $19 .84 and $57 .55 paid to Lowe's in July 2005 ;

(10) $12 .39, $25 .21, $11 .95, and $16 .83 . aid to Home Depot,

$17 .70 paid to Laurel Ace Hardware, and 3 .3 .9 paid to Foothill

Hardware in August .2005 ; and (11) $7 .60, $8 .34, and $6 .10 paid to

Foothill Hardware and $6 .48 paid to Home Depot in December 2005 .

To the extent that any expense list d in the paragraph above

is also listed in appendix B,to this opi ion, petitioners are

allowed only one deduction for seven-eig the of the expense .

a

i

14Petitioners must use the Modified Accelerated Cost

Recovery System and depreciate the proper ty over a 5-year

recovery period .

12 Petitioners argue that they were not required to capitalize

those expenses because they "were for incidental repairs to their

rental properties" and because "These costs neither materially

added to the value of the property nor appreciably prolonged its

life, but kept the properties in good operating condition . "

Section 263 generally prohibits deductions for capital

expenditures . Nondeductible capital expenditures include "Any

amount paid out * * * for permanent improvements or betterments

made to increase the value of any property" . Sec . .263(a)(1) .

In contrast, deductible expenditures include those made merely to

maintain property in operating condition . See

Ill . Merch . Trust

Co . v . Commissioner , 4 B .T .A . 103, 106 (1926) ("A repair is a n

expenditure for the purpose of keeping the property in an

ordinarily efficient operating condition .") . The distinction

between a nondeductible capital expenditure and a deductible

repair is summarized in section 1 .162-4, Income Tax Regs . :

The cost of incidental repairs which neither materially

add to the value of the property nor appreciably

prolong its life, but keep it in an ordinarily

efficient operating condition, may be deducted as an

expense, provided the cost of acquisition or production

or the gain or loss basis of the taxpayer's plant,`'

equipment, or other property, as the case may be, is

not increased by the amount of such expenditures .

Repairs in the nature of replacements, to the extent

that they arrest deterioration and appreciably prolong

the life of the property, shall either be capitalized

and depreciated in accordance with section 167 or

charged against the depreciation reserve if such an

account is kept .

13 The deductibility of repair expen s s also depends upon th e

context in which the repairs are made .

Courts have held tha t

expenses incurred as part of a general

lan of rehabilitation

must be capitalized even if they would

ave been deductible a s

ordinary and necessary business expenses

if separately incurred .

See United States v . Wehrli , 400 F .2d 68 6,'689 (10th Cir . 1968) ;

Norwest Corp . & Subs . v . Commissioner ,

1 08'T .C . 265, 280 (1997) .

Although it is a close call, petiti oners may deduct th e

amounts paid for the tile, baseboard mol ding, and toilet because

we are satisfied that those expenses wer e incurred to . maintai n

rather than improve the rental units .

For the reasons provided below, pet itioners may not-deduc t

the carpeting, ceiling fan, and labor col sts . Petitioners are

.required to capitalize those expenses .

Concerning the carpeting ,

respondent correctly notes,that petition rs did not provide any

evidence (aside from Mr . Campbell's self -serving testimony) "as

to when the original carpet was purchase

in each apartment uni t

and when each unit's carpet was replaced " In any event, the

cost of the original carpet should have

was installed, and the remaining undepre

been capitalized when it

fated cost of the carpe t

should have been deducted when it was re moved and scrapped . The

purchase of new carpeting to replace exi sting carpeting was an

improvement or replacement and not a rep air . Accordingly ,

petitioners are required to capitalize a d depreciate it .

14 -

Mr . Campbell testified that the ceiling fans were purchased

as decorative items to be . added to the rental units "in place of

the lights ." By Mr . Campbell's own testimony, the ceiling fans

were improvements or replacements and not repairs .

Petitioners paid the $1,475 in disputed labor expenses to

someone named "Alex Cuevas" . At trial Mr . Campbell was unable to

remember exactly what Alex Cuevas had done for petitioners in

2005 . Mr . Campbell testified that "Alex does a lot of things for

me . I could not tell you specifically what Alex does, but what

Alex will do is he will walk around with me and just simply make

incidental repairs for me, like fix this, fix that, you know,

just making incidental repairs ." Because they have provided no

other evidence as to the nature of Alex Cuevas's work on their

rental properties, petitioners have not demonstrated that they

are entitled to claim a current deduction rather than capitalize

the cost of his labor .

V.

Automobile Expenses Subject to Strict Substantiation Under

Section 274(d )

Certain business expenses described in section 274(d) are

subject to strict substantiation rules that supersede the

doctrine .

Cohan

Sanford v . Commissioner , 50 T .C . 823, 827-828 (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) .

Section 274(d) applies to : (1) Any traveling expense, including

meals and lodging away from home ; (2) entertainment, amusement,

- 15 and recreational expenses ; (3) any expe se for gifts ;' or (4) the

use of "listed property", as defined in section 280F(d)(4) ,

including passenger automobiles . To de uct expenses to which

section 274(d) applies, the taxpayer mus t substantiate by

adequate records or sufficient evidence

to corroborate the

taxpayer's own testimony : (1) The amou t of the expenditure or

use, which includes mileage in the case

of automobiles ; (2) the

time .and place of the travel', entertain ent, or use ; (3) its

business purpose ; and (4) the business r elationship to the

taxpayer of each expenditure or use . Se c .

274(d)

(flus h

language) .

The parties dispute petitioners' claimed Schedule

C

deductions (which were based on the actu dal cost method) of $1,43 8

for automobile insurance15 and-$1,814 foif -car and truck .

expenses .16 Respondent also disputes $3 , 678 of the $4,357 i n

15That amount comprises $1,269 .20 t at Mr . Campbell paid hiss

automobile insurance company and $169 in membership fees that h e

paid the American Automobile Associatio n

"in his general ledger Mr . Campbell listed $2,728 .66 in

.automobile expenses relating to his Sche ule C business . He

asserts that he used the Nissan Maxima 6 6 .48 percent fo r

business, which explains the claimed $1, 814 deduction ($2,728 .66

x 66 .480) . It is unclear how he came up with his percentage of

business use, particularly in light of h is less-than-perfec t

recordkeeping .

We also note that the parties had d sputed whether

petitioners were entitled to $1,961 in c aimed Schedule C

deductions for depreciation and sec . 179 expense . On brief,

petitioners concede that issue .

- 16 auto and travel expenses that petitioners claimed as deductions

on Schedule E . Petitioners concede that item on brief .

Mr . Campbell owns four automobiles : (1) A 2004 Nissan

Maxima ; (2) a 1980 Toyota pickup truck (model unknown) ; (3) a

1998 Honda Civic ; and (4) a 2002 Chevrolet Impala . Mr . Campbell

testified that the Nissan Maxima is used for his Schedule C

business and that the Toyota truck is used for his Schedule E

business . but that "the personal automobiles are used sometimes in

business ." He then apparently conceded that petitioners, : are not

entitled to any deductions relating to the Honda Civic or the

Chevrolet Impala .17 After the parties' concessions, all of the

disputed automobile-related deductions appear to be Schedule C

deductions relating to the Nissan Maxima .

Mr . Campbell has presented a copy of a day planner in an

attempt to satisfy the requirements of section 274(d) . He has

fallen far short . The day planner entries are devoid of much

vital information : they do not list which of Mr . Campbell's fou r

automobiles were used, the number, of miles traveled (the,-amount

of use), or the specific business purpose of those miles . Some

of the entries are incomprehensible . Moreover, at trial Mr .

Campbell conceded that a $750 payment and a $446 payment tha t

17Although petitioners had claimed a Schedule C deduction

for automobile insurance paid on all four vehicles, at trial Mr .

Campbell testified that an adjustment was warranted and that "I

think that the relative percentage of the Nissan Maxima and the

truck to the whole value should be allowed ."

- 17 petitioners claimed in Schedule C deductions for automobile

expenses are nondeductible personal expe ses related to th e

Chevrolet Impala .

Petitioners have provided receipts for parking, fuel, and

N

repair expenses . But there is no way of telling to which of Mr .

Campbell's four automobiles they relate .

Regarding the parking

fees, at trial Mr . Campbell testified th t although the garage at

which he parked is near his place of emp oyment with BART, he

needed his car (apparently the Nissan Ma ima) "to deal wit h

business as it arises ." As to the Niss a

Maxima, he als o

testifie d

I should get .to take a 100 percent

I only take a 66 percent deduction

consider it a commute from my home '

eduction ; however,

ecause * * * I

o my job, buts since

I'm required to come back, the firs

thing I'm required

to do when I .return from my job or

ven if there's an

emergency or whatever else, is to c eck out thos e

apartments, : okay . .-

.Mr . Campbell's conclusory testimony is s rained, and we reject

it .18 Petitioners have not satisfied th e strict substantiation

requirements of section 274(d) .with resp ct to the Nissan Maxima .

See sec .

1 .274-5T(c)(1), Temporary Incom

Tax Regs ., 50 Fed . Reg .

46016 (Nov . 6, 1985) . Accordingly, we s

stain respondent' s

"Petitioners live in one of the fo u

and rent out the other three units . Mrsl.

units in 4319 Rilea

Campbell testified tha t

4329 Rilea, which also contains four un i

of a block" away from 4319 Rilea and tha

three minutes" to walk from 4319 Rilea t

s, is "about [a] quarte r

it takes her "about

4329 Rilea .

18 adjustments as to petitioners' claimed . . Schedule C deductions for

insurance ($1,438)19 and for car and truck expenses ($1,814 )

VI .

Section 6662 Penalt y

Under'section~7491(c), respondent bears the-burden of

production with respect to petitioners' liability for the section

6662(a) penalty . This means that respondent "must come forward

with sufficient evidence indicating that it is appropriate to

impose the relevant penalty ."

Higbee v . Commissioner , 116 T .C .

438, 446 (2001) . Respondent has done so .

Subsection (a) of section 6662 imposes an accuracy related

penalty on an underpayment of tax that is equal to 20 percent of

any underpayment that is attributable to alist of causes in

subsection (b) . Among . the causes justifying the imposition of

the penalty are (1) negligence or disregard of rules or

regulations and (2) any substantial understatement of income tax .

Section 6662(c) defines negligence as "any failure to make a

reasonable attempt to comply with the provisions of this title" .

"[D]isregard" is defined to include "any careless, reckless, or

intentional disregard ."

Id .

Under caselaw, "`Negligence is a

lack of due care or the failure to'do what a reasonable and

ordinarily prudent person would do under the circumstances .'"

Freytag v . Commissioner , 89 T .C . 84 .9, 887 (1987) (quoting

Marcello v . Commissioner , 380 F .2d 499, 506 (5th Cir . .1967) ,

19That is, except as to $92 that respondent has conceded .

- 19 affg . on this issue 43T .C . 168 (1964) and T .C . Memo . 1964-299),

affd . 904 F .2d 1011 (5th Cir . 1990), affd . 501 U .S . 868 (1991) .

There is .a ."substantial understatement" of income tax for a n

individual in any tax year-where the amount of the understatement

exceeds the greater of (1) 10 percent of the tax .required to be

shown on the return for the taxable-year or (2) $5,000 .

Sec . 6662(d)(1)(A) . However, the amount of the understatement is

reduced to the extent attributable to an item (1) for which there

is or was substantial authority for the taxpayer's treatment .

thereof, or (2)_ with respect to which the relevant facts were

adequately disclosed on the taxpayer's return or an attached

statement and there is a reasonable basis for the taxpayer's

treatment of the item . See sec . 6662(d)(2)(B) .

There is an exception to the secti n 6662(a) penalty when a

taxpayer can demonstrate (1) reasonable ause for the

underpayment and (2) that the taxpayer a ted in good faith with

respect to the underpayment . Sec .

6664( ::)(1) .

Regulations

promulgated under section 6664(c) further provide that the

determination. of reasonable cause and go d faith "is made on a

case-by-case basis, taking into account ll pertinent facts and

circumstances ." Sec . 1 .6664-4(b)(1), In ome Tax Regs .

On brief, petitioners argue only tiat they are not liable

for the penalty because their claimed de uctions were proper .

- 20 They have not even attempted to demonstrate reasonable cause an d

.good faith with respect to the underpayment .

Because Mr . Campbell is a C .P .A . who knew or should have

known that petitioners were . claiming many deductions to which

they were not entitled, petitioners were negligent in underpayin g

their 2005 Federal income tax . Because they have not

demonstrated reasonable cause and good faith for the

underpayment, we sustain the section 6662(a) penalty .2 0

The Court has considered all of petitioner's-contentions,

arguments, requests, and statements . To the extent not discussed

herein, we conclude that they'are meritless, moot, or irrelevant .

To reflect the foregoing and concessions made by th e

parties,

Decision will be entere d

under Rule 155 .

20Because the underpayment is attributable to negligence, we

need not determine whether after accounting for respondent's

concessions and the deductions that we have allowed, petitioners

substantially understated their 2005 Federal income tax

liability .

21 APPENDIX A

Summary of Our Conclusions as to Each of the Adjustments in the Notice of Deficienc y

Adjustment

Amount of

Adjustment

Amount Conceded by P and/or R

Additiona l

Deduction Allowe d

as a Result of Ou r

Opinion (if any )

Schedule E :

Depreciation

Expense or

Depletion

$17,117

Parties agree that Ps are entitled to

a $15,156 deduction .

$0

Schedule E :

All Other

Renta l

Expenses

Claimed

$64,519

Ps-concede $3,678 in auto and travel

$8,7 60 .63 2

Schedule C : $1,321

Meals an d

Entertainmen t

deductions . R concedes that P s

have substantiated $26,857 of

repair expenses .' The parties have

settled the remaining Schedule E

deductions for all other rental

expenses (e .g . ., utilities and

taxes) .

P

concedes

$1,047 . R concedes $274 .

'The parties dispute whether a portion of the repair expenses must be capitalized .

We addressed that issue in .our opinion .

2Appendix B contains a detailed list of expenses that we are allowing petitioners to

deduct to the extent of seven-eighths of the stated amounts . Petitioners must capitalize

and depreciate any expense over $250 . Petitioners must use the Modified Accelerated Cost

Recovery System and depreciate the property over a 5-year recovery period .

- 22

-

Schedule C :

Insuranc e

(Other Tha n

Health )

$1,438

R concedes $92 .

$0

Schedule C :

Car and Truc k

Expense s

1,814

/A

0

Schedule C :

Depreciatio n

and Sec . 17 9

Expens e

$1,961

P concedes all $1,961 .

Schedule C :

Other

2,204

arties agree that Ps are entitled t o

$0

a $1,678 deduction .

Expense s

Schedule C :

Expenses for

$11,062

Parties agree that Ps are entitled to

a $1,444 deduction .

Business Use

of Home

in Rule 15 5

computation .

Schedule C :

All Othe r

Expense s

Claimed

$2,361

Parties agree that Ps are entitled to

a $2,304 deduction .

Self

Employment

Adjusted

($1,566)

N/A

Gross Income

Adjustment

Depreciation an d

carryover los s

will be resolve d

$0

Issue will b e

resolved in Rul e

155 computation .

- 23 -

APPENDIX B

Additional Deductible Schedule E Expense s

Seller

Amount

1/06/2005

Kelly-Moore

$55 .8 3

1/13/2005

Home Depot

$86 .8 8

1/18/2005

Airport Appliance

$937 .3 2

1/20/2005

Airport Appliance

$318 .6 4

1/19/2005

Foothill Home Center

$47 .8 7

1/21/2005

Laurel Ace Hardware

$14 .3 0

1/23/2005

Home Depot

$394 .4 4

1/23/2005

Home Depo t

1/25/2005

Laurel Ace Hardware

$2 .1 4

1/27/2005

Foothill Hardware

$9 .7 9

1/31/2005

Frigidaire Consumer Service

$73 .0 3

2/19/2005

Home Depot

$5 .4 0

2/19/2005

Home Depot

$33 .6 0

2/19/2 .005

Sincere Plumbing and

Hardware

$300 .64

Date of Purchase

- 24

-

2/19/2005

Sincere Plumbing an d

Hardware -

$5 0

2/19/2005

Sincere Plumbing an d

Hardware

$21 .7 4

3/13/2005

Home Depot

$41 .7 2

3/24/2005

Home Depot

$25 .6 0

4/06/2005

Home Depot

$142 .0 8

4/-19/2005

Home Depot

$103 .2 3

5/06/2005

Laurel Ace Hardware

$4 .6 4

5/10/2005

Sears Roebuck

$10 .8 6

5/21/2005

Home Depot

$86 .3 4

5/30/2005

Home Depot

$2 0

6/10/2005

Home Depot

$16 .8 2

6/11/2005

Laurel Ace Hardware

$16 .6 9

6/13/2005

Sears Roebuck

$32 .6 1

6/19/2005

Home Depot

$183 .7 9

7/03/2005

Home Depot

$950 .8 7

7/07/2005

Laurel-Ace Hardware,

$6 .4 2

7/09/2005

Home Depot

$146 .95

- 25

7/10/2005

Home Depot

$24 .9 9

7/10/2005

Home Depot

$154 .3 6

7/11/2005

Home Depot

$238 .1 1

7/16/2005

-Home Depot .

$72 .9 8

7/23/2005

Home Depot

$184 .7 6

7/30/2005

Floor Dimensions

$1,429 .2 3

8/06/2005

Sincere Plumbing an d

Hardware

$739.4 8

8/09/2005

Foothill Home Center

$73 .7 0

8/20/2005

Home Depot

$435 .36

9/16/2005

Office Depot

$22 .2 7

9/24/2005

Laurel Ace Hardware

$5 .5 9

10/03/2005

Lowe 's

$424 .3 8

10/06/2005

Home Depot

$267 .9 6

10/07/2005

Home Depot

$45 .2 2

10/09/2005

Laurel Ace Hardware

$18 .3 6

10/22/2005

Laurel Ace Hardware

$3 .8 9

10/25/2005

DAL-Tile

$5 .7 9

10/29/2005

Foothill Home Center

$20 .65

- 26

-

11/20 /2005

Home Depot

$2 6

12/03/2005

Foothill Home Center

$8 .3 4

12/17/2005

Foothill

$6 .1 0

12/23 /2005

Home Depot

$6 .4 8

12/23/2005

Laurel Ace Hardware

$11 .95

Hardware