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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

CZ

T.C. Memo. 2016-21

UNITED STATES TAX COURT

JUAN CARLOS GARCIA AND CARIDAD LEON-GARCIA, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 190-14.

Filed February 16, 2016.

Juan Carlos Garcia and Caridad Leon-Garcia, pro sese.
Lydia A. Branche and Shawna A. Early, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION
LAUBER, Judge: With respect to petitioners' Federal income tax for 2010,
the Internal Revenue Service (IRS or respondent) determined a deficiency in tax of
$12,733 and a penalty of $2,547 under section 6662(a). After concessions, the
issues for decision are: (1) whether petitioners are entitled to deductions for unreimbursed employee business expenses, charitable contributions, and medical

SERVED Feb 16 2016

-2[*2] expenses in excess of the amounts respondent allowed and (2) whether
petitioners are liable for the accuracy-related penalty.¹ With certain exceptions,
we resolve these issues in respondent's favor.

FINDINGS OF FACT
The parties submitted before trial a partial stipulation of settled issues, a
stipulation of facts, and a supplemental stipulation of facts. We incorporate the
stipulation of settled issues, the stipulations of facts, and the related exhibits by
this reference. Petitioners resided in New Jersey when they filed their petition.
Petitioners, Juan Carlos Garcia and Caridad Leon-Garcia, are married and
have two minor children. Mr. Garcia is a truck driver. Early in 2010 he engaged
in a job search after his situation with his prior employer deteriorated. In March
2010 he was hired by J.B. Hunt Transport Services and continued working there
for the remainder of 2010. Mrs. Garcia worked as an elementary school teacher

during 2010.
Petitioners timely filed for 2010 a joint Federal income tax return on which
they reported adjusted gross income (AGI) of $131,847. That amount is not in

¹Unless otherwise indicated, all statutory references are to the Internal
Revenue Code (Code), as amended and in effect for the taxable year in issue, and
all Rule references are to the Tax Court Rules of Practice and Procedure. We
round all monetary amounts to the nearest dollar.

-3[*3] dispute. On the attached Schedule A, Itemized Deductions, petitioners
reported charitable contributions of $13,279, medical and dental expenses of
$37,942, unreimbursed employee business expenses of $25,625, and other
expenses of $8,284.
Petitioners prepared their 2010 return using tax return preparation software.

The IRS selected this return for examination. Following the examination, the IRS
issued them a timely notice of deficiency that denied, for lack of substantiation,
most of the deductions they had claimed.2
During 2010 Mr. Garcia allegedly incurred travel expenses as part of his
employment search and various expenses related to his job as a truck driver. He
incurred expenses for meals and lodging while on the road, and he occasionally
paid to park his truck at truck stops while eating. He enjoys smoking cigars and
testified that he sometimes gave cigars as gifts to workers who unloaded his truck.
He purchased clothing and boots to wear for work; some of his shirts were embroidered with his company logo and he paid to have these items cleaned. He pur2The notice of deficiency allowed a charitable contribution deduction of
$2,415. The IRS determined that petitioners had adequately substantiated $3,589
of medical expenses, $1,036 of unreimbursed employee business expenses
(corresponding to Mrs. Garcia's union dues), and $149 of other expenses
(representing tax return preparation fees). However, because these amounts were
below the applicable thresholds of sections 213(a) and 67(a), no deductions were
allowed for these items.

-4[*4] chased a cell phone that he used for business and personal purposes. As part
of his job, he was required to be present during inspections of his truck, but he was
not paid for the time he spent waiting.
During 2010 Mrs. Garcia purchased and wore to work dresses, skirts,
blouses, and similar attire acceptable to her school district. These clothes were
also acceptable for everyday wear on the street. She bought a laptop computer that
enabled her to perform some of her school-related tasks while at home. Petitioners
had internet service in their home primarily for personal use, but Mrs. Garcia
occasionally used the internet when preparing for class. Petitioners' claimed
deduction for "other" expenses included $8,135 of alleged legal and accounting
fees; petitioners conceded at trial that these items were nondeductible.
Petitioners have donated cash, property, and their own time to a variety of
not-for-profit organizations. The IRS allowed a charitable contribution deduction
of $2,415 for certain cash contributions they made in 2010. Petitioners donated an
additional $400 to the Catholic Diocese of Trenton and received a letter substantiating this contribution. Petitioners allegedly contributed clothing to AMVETS
through unattended donation bins, but they were unable to substantiate these gifts.
The remaining contributions in dispute involve the local chapter of the Knights of
Columbus (KoC), of which Mr. Garcia was an active member. Petitioners made

-5[*5] cash gifts to this chapter, St. Mary's Council 11527, and provided meals and
financial assistance to the family of a KoC member who lost his job.
During 2010 petitioners and their children required treatment for various

medical conditions including diabetes, chronic pain, and scoliosis. In some cases
petitioners followed the advice of a medical service provider in treating these conditions, but the disputed pharmacy items did not require prescriptions. Alleged
medical expenses that respondent disallowed included those for over-the-counter
pain relievers (such as ibuprofen or Aspercreme), diabetic testing supplies, knee
braces, shoe inserts, allergy medications, diet products, moisturizers, throat
lozenges, and eye drops. Petitioners paid for heating and air conditioning in their
home; both were helpful in managing the family's medical conditions, but the
utility expenses thus incurred did not exceed what was required for their general
comfort. Petitioners also incurred expenses for toiletries such as shampoo, toothpaste, and dental floss.
By way of substantiating these expenses petitioners submitted canceled
checks, credit card bills, and bank account statements. While petitioners had
receipts for some purchases, the documentation of their medical expenses was
poor; and they maintained no contemporaneous records of the amount, timing, or
business nature of their alleged unreimbursed employee business expenses.

-6[*6] During the IRS audit they prepared a "log" of their various expenses and
contributions. This log included estimates of the total amounts petitioners spent
on various items throughout the year (i.e., an estimated price per item multiplied
by the estimated number of times it was purchased).

OPINION
I.

Burden of Proof
The Commissioner's determinations in a notice of deficiency are generally

presumed correct. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
The taxpayer must establish his entitlement to deductions allowed by the Code and
substantiate the amounts of claimed deductions. INDOPCO, Inc. v. Commissiong, 503 U.S. 79, 84 (1992); sec. 1.6001-1(a), Income Tax Regs. Petitioners do not
contend, and the evidence does not establish, that the burden of proof shifts to respondent under section 7491(a) as to any issue of fact. See sec. 7491(a)(1).
Taxpayers must maintain sufficient records to establish their claimed deductions, retain these records for as long as the contents may become material, and
keep these records available for inspection. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs. In certain circumstances, the Court may approximate the amount
of an expense if the taxpayer proves it was incurred but cannot substantiate the

exact amount. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). But

-7[*7] the taxpayer must provide some basis for such an estimate. Vanicek v. Com-

missioner, 85 T.C. 731, 742-743 (1985). The failure to keep and produce appropriate records counts heavily against a taxpayer's attempted proof. Rogers v.

Commissioner, T.C. Memo. 2014-141, at *17.
II.

Schedule A Deductions
A.

Unreimbursed Employee Business Expenses

Section 162(a) allows a deduction for ordinary and necessary business expenses paid or incurred during the taxable year in carrying on any trade or business. The determination whether an expenditure satisfies the requirements for
deductibility is a question of fact. See Commissioner v. Heininger, 320 U.S. 467,
475 (1943). An individual may be in the trade or business of being an employee;
ordinary and necessary expenses incurred in that trade or business are deductible.
Kurkjian v. Commissioner, 65 T.C. 862, 869 (1976). Expenses incurred in searching for new employment in the employee's existing trade or business may also be
deductible business expenses. Cremona v. Commissioner, 58 T.C. 219 (1972);
Primuth v. Commissioner, 54 T.C. 374 (1970). Deductions are not available for
personal, living, or family expenses. Sec. 262(a).

-8[*8]

1.

Expenses Subject to Section 274(d)

Section 274(d) prescribes more stringent substantiation requirements for
certain categories of expenses. These include "traveling expense (including meals
and lodging while away from home)," "any expense for gifts," and expenses "with
respect to any listed property." Sec. 274(d)(1), (3), (4). "Listed property" is
defined by section 280F(d)(4)(A)(iv) to include "any computer or peripheral
equipment." The substantiation requirements of section 274(d) thus apply to
petitioners' reported expenses for travel, parking, meals, business gifts, and a
laptop computer.
To satisfy the section 274(d) requirements, a taxpayer generally must maintain records and documentary evidence sufficient to establish the amount, date,
and business purpose for an expenditure or the business use of listed property.

Sec. 1.274-5T(b)(2), (5), (6), Temporary Income Tax Regs., 50 Fed. Reg. 46014,
46016 (Nov. 6, 1985). In the absence of adequate records, the substantiation
requirements can be met by other sufficient evidence corroborating the taxpayer's
own statement. See id. para. (c)(3), 50 Fed. Reg. 46020.
Petitioners have not carried their burden of substantiating any of the expenses governed by section 274(d). They produced some receipts and canceled
checks, made out to Mr. Garcia or to cash, in an attempt to substantiate travel,

-9[*9] parking, and meal expenses. Their only "log" was created during the audit
and does not establish the timing or business nature of the expenses. While petitioners had receipts for the laptop and numerous cigars, they maintained no
contemporaneous documentation to separate personal from business use; their
testimony that these items were used exclusively for business purposes was not
credible. Because petitioners failed to substantiate properly the expenses subject
to section 274(d), we cannot make our own estimate and must disallow in full the
deductions they claimed. See Deely v. Commissioner, 73 T.C. 1081, 1101 (1980);
sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6,

1985).
2.

Other Trucking Expenses

Mr. Garcia testified that his employer requires him to have a cell phone and
that he used that phone exclusively for business purposes. We found this testimony unconvincing, especially given the nature of his occupation. Petitioners
have not adequately substantiated any expense connected with business use of Mr.
Garcia's cell phone.
Mr. Garcia testified that he spent approximately one hour of unpaid time per
day waiting for his truck to be inspected. Petitioners claimed a deduction for the
value of this unpaid time. Petitioners have articulated no theory to support this

- 10 [*10] claim, nor have they established any expenses that Mr. Garcia incurred in
consequence of his downtime. The IRS properly disallowed the claimed
deductions.
3.

Clothing

The cost of clothing may be deductible as a business expense if the clothing
is "of a type specifically required as a condition of employment," it is "not
adaptable to general usage as ordinary clothing," and "it is not so worn." Pevsner

v. Commissioner, 628 F.2d 467, 469 (5th Cir. 1980), rev'g T.C. Memo. 1979-311;
Yeomans v. Commissioner, 30 T.C. 757, 767 (1958); see Wasik v. Commissioner,

T.C. Memo. 2007-148, 93 T.C.M. (CCH) 1341. If clothing is adaptable to
ordinary use, its cost does not qualify for a business expense deduction even
though the taxpayer's job causes it to be "subjected to harder use and more wear

and tear than usual." Donnelly v. Commissioner, 28 T.C. 1278, 1280 (1957),
a_f[d, 262 F.2d 411, 412-413 (2d Cir. 1959); see Drill v. Commissioner, 8 T.C.
902, 904 (1947).
The school district did not require Mrs. Garcia to wear a uniform of any
kind; the clothing she wore to work was suitable for use as ordinary street wear.
Mr. Garcia's boots and work pants, while perhaps heavy duty, were likewise
suitable for ordinary usage, and their costs are thus nondeductible. Mr. Garcia

- 11 [*11] testified that he purchased from a uniform supplier several shirts embroidered with his employer's logo. While costs of these items might qualify for
deduction as a uniform, he submitted substantiation of only one such purchase, for

$60.
Because petitioners' AGI in 2010 was $131,847, they can deduct unreimbursed employee business expenses only to the extent such expenses exceeded
$2,637 ($131,847 × .02). See sec. 67(a). Respondent conceded that petitioners
had substantiated $1,036 of such expenses. Resolving all doubts in favor of petitioners, we conclude that they could substantiate no more than $200 of additional
expenses, even if the cost of cleaning Mr. Garcia's work clothes were included.
Petitioners' claimed deduction under section 162 must therefore be disallowed in
its entirety.
B.

Charitable Contributions

Section 170(a) allows as a deduction contributions made within the taxable
year to churches, charities, and other specified entities. See sec. 170(c)(2). No deduction is allowed for a contribution of services; however, unreimbursed travel or
similar expenses paid incident to the rendition of services to a charitable organization may be deductible. Smith v. Commissioner, 60 T.C. 988 (1973); sec.
1.170A-1(g), Income Tax Regs. Charitable contributions are allowable as

- 12 [*12] deductions "only if verified under regulations prescribed by the Secretary."
Sec. 170(a)(1). The nature of the required substantiation depends on the size of
the contribution and whether it is a gift of cash or property. See sec. 1.170A-13,
Income Tax Regs.
For all contributions, taxpayers are required to keep "reliable written records," such as canceled checks or receipts, establishing the identity of the donee
and the date and amount of the contribution. Sec. 1.170A-13(a)(1), Income Tax
Regs. For noncash contributions additional documentation is required. See id.
para. (b)(1). Factors indicating that records are reliable include "[t]he
contemporaneous nature of the writing evidencing the contribution" and the
regularity of the taxpayer's recordkeeping procedures. Id. para. (a)(2)(i). For
contributions of $250 or more, the taxpayer must obtain a "contemporaneous
written acknowledgment" from the donee. Sec. 170(f)(8)(A). Additional and
more stringent substantiation requirements are imposed for contributions of

property with a claimed value exceeding $500. See sec. 170(f)(11)(B).
The IRS concluded that petitioners had substantiated cash contributions of
$2,415. For the other reported contributions, petitioners generally did not have
contemporaneous records or receipts but relied on a "log" they created during the

- 13 [*13] audit. Finding this inadequate, the IRS disallowed the balance of the
claimed deduction for lack of substantiation.
In an effort to substantiate charitable contributions in addition to the $2,415
that the IRS allowed, petitioners produced at trial a letter dated July 10, 2010,
from the Diocese of Trenton indicating that they had made a $400 contribution to
the Bishop's Annual Appeal. This letter, which states that petitioners received no
goods or services in exchange, appears to qualify as a "contemporaneous written
acknowledgment" under section 170(f)(8). We will therefore allow an additional
charitable contribution deduction of $400.
Petitioners claimed a deduction of $390 for travel expenses allegedly incurred in performing services for their church. Petitioners provided no contemporaneous record of this travel and no evidence as to how this amount was computed.
They likewise produced no evidence that they performed distinct services for their
church apart from attending regular worship services. We conclude that the IRS
properly disallowed this claimed deduction.
Petitioners claimed a deduction of $3,560 for clothing allegedly donated to
AMVETS during 2010. During the IRS examination petitioners created a "log"
listing approximately 450 articles of clothing, along with a value supposedly de-

- 14 [*14] rived from a valuation tool included in their tax return preparation software.
Petitioners testified that these gifts were made through an unattended donation bin.
To substantiate these alleged contributions, petitioners submitted a letter
from AMVETS dated August 2014. This letter, which petitioners secured during
the IRS audit, was not a "contemporaneous written acknowledgment" of their
alleged 2010 gifts. See sec. 170(f)(8)(C). Petitioners likewise have not satisfied
the additional substantiation requirements for gifts of property valued in excess of
$500. See sec. 170(f)(11)(B), (F) (providing that "similar items of property" must
be aggregated in determining whether contribution exceeds the $500 threshold);
sec. 1.170A-13(b)(3), Income Tax Regs. And petitioners submitted no evidence
that the clothing they allegedly contributed was "in good used condition or better."
S_e_e sec. 170(f)(16)(A). For all these reasons, the IRS properly disallowed this
claimed deduction.
Petitioners claimed a deduction of $5,350 for gifts of cash and property to
their local KoC chapter, of which Mr. Garcia was a member. Before detennining
whether petitioners have adequately substantiated these gifts, we must decide whether they have met their burden of establishing that the donee entity was recognized by the IRS as an organization described in section 501(c)(3) and entitled to

- 15 [*15] receive tax-deductible contributions under section 170(c)(2). We conclude
that they have not met this burden.
Petitioners presented no evidence establishing that their local KoC chapter
was eligible to receive tax-deductible contributions. An undated letter from the
chapter states only that it is a "not for profit organization [that] works very closely
with the charities of the Roman Catholic Church." This letter indicates that the
chapter is organized under section 501(c), but many entities tax-exempt under section 501(c), such as civic leagues, social clubs, and fraternal societies, are ineligible to receive tax-deductible contributions. See sec. 501(c)(4), (7), (8). We take
notice that neither the KoC nor any of its local councils is listed on the IRS master
list of section 501(c)(3) organizations.3 Petitioners also did not establish that their

3A court may take judicial notice of appropriate adjudicative facts at any
stage in a proceeding whether or not the parties request it. See Fed. R. Evid.

201(a), (c); Reyn's Pasta Bella, LLC v. Visa USA, Inc., 442 F.3d 741, 746 n.6 (9th
Cir. 2006) (stating that the court "may take judicial notice of court filings and

other matters of public record"); United States v. Harris, 331 F.2d 600, 601 (6th
Cir. 1964) (explaining that a court may take judicial notice sua sponte). In
general, a court may take notice of facts that are capable of accurate and ready
determination by resort to sources whose accuracy cannot be reasonably ques-

tioned. Fed. R. Evid. 201(b).

- 16 [*16] gifts were to be used exclusively for any exempt purpose.4 We accordingly
conclude that the IRS properly disallowed the claimed deductions.
C.

Medical Expenses

As in effect for 2010, section 213(a) allowed as a deduction "the expenses
paid during the taxable year, not compensated for by insurance or otherwise, for
medical care of the taxpayer, his spouse, or a dependent," to the extent that such
expenses exceeded 7.5% of AGI.5 "Medical care" is defined to include expenditures "for the diagnosis, cure, mitigation, treatment, or prevention of disease,
or for the purpose of affecting any structure or function of the body." Sec.
213(d)(1)(A). Medical expense deductions are "confined strictly to expenses
incurred primarily" for these purposes. Sec. 1.213-1(e)(1)(ii), Income Tax Regs.
Such deductions must thus satisfy a "but for" test: The taxpayer must show that
the expenditure was an essential element of the treatment and that it "would not
have otherwise been incurred for nonmedical reasons." Jacobs v. Commissioner,

4Section 170(c)(4) defines "charitable contributions" to include amounts
given by an individual to a domestic fraternal society but only if the contribution
or gift is to be used exclusively for religious, charitable, scientific, literary, or
educational purposes or for the prevention of cruelty to children or animals.
5The AGI floor was raised to 10% for taxable years beginning after December 31, 2012. See Patient Protection and Affordable Care Act, Pub. L. No.

111-148, sec. 9013(a), 124 Stat. at 868 (2010).

- 17 [*17] 62 T.C. 813, 819 (1974); Stringham v. Commissioner, 12 T.C. 580, 584-585

(1949), aff'd per curiam, 183 F.2d 579 (6th Cir. 1950). Inquiries of this nature are
primarily factual.

Amounts paid for medicine and drugs, including over-the-counter medications, are deductible "only if such medicine or drug is a prescribed drug or is
insulin." Sec. 213(b). The term "prescribed drug" means "a drug or biological
which requires a prescription of a physician for its use by an individual." Sec.
213(d)(3). Expenses for items such as toothpaste, shaving cream, toiletries, and
cosmetics are not deductible as costs of medicine or drugs. Sec. 1.213-1(e)(2),
Income Tax Regs. Likewise, the expenses of maintaining a household, including
rent and utilities, are not deductible. Sec. 1.262-1(b)(3), Income Tax Regs.
Petitioners deducted as medical expenses the full cost of heating and cooling their home, along with their expenditures for lawn service. To support the
medical necessity of these items, petitioners submitted letters from alleged healthcare providers, several of which are suspect on their face. In any event, petitioners
did not establish that these expenses exceeded what was required for their general
comfort or that these expenses "would not have otherwise been incurred for nonmedical reasons." h Jacobs v. Commissioner, 62 T.C. at 819; see also Randolph

- 18 [*18] v. Commissioner, 67 T.C. 481 (1976); Harris v. Commissioner, 46 T.C. 672
(1966).
Petitioners allegedly spent considerable sums on over-the-counter pharmacy
items, such as pain relievers, diet products, eye drops, skin care products, and
allergy medications. While these items are no doubt beneficial to petitioners and
their family, section 213 does not allow a deduction for amounts spent to purchase
a medicine or drug for which no prescription is required. Sec. 213(b), (d)(3). Nor
are deductions allowed for items such as toothpaste, dental floss, shampoo, shaving cream, or similar personal items. Sec. 1.213-1(e)(2), Income Tax Regs.
Petitioners' testimony established that they incurred medical expenses in
2010 for treatment for scoliosis and for testing blood sugar. However, resolving
all evidentiary doubts in petitioners' favor, the additional expenses they could be
thought to have substantiated, besides the $3,589 that respondent conceded, could
not exceed $2,000. Because petitioners' AGI in 2010 was $131,847, section 213
would allow a deduction only to the extent petitioners' deductible medical expenses exceeded $9,889 ($131,847 × .075). The IRS properly disallowed their
claimed deduction in its entirety.

- 19 [*19] III.

Accuracy-Related Penalty

The Code imposes a 20% penalty upon the portion of any underpayment of
tax that is attributable (among other things) to "[a]ny substantial understatement of
income tax." Sec. 6662(a), (b)(2). An understatement of income tax is "substantial" if it exceeds the greater of $5,000 or 10% of the tax required to be shown on

the return. Sec. 6662(d)(1)(A).
Under section 7491(c) the Commissioner bears the burden of production
with respect to the liability of an individual for any penalty. See Higbee v. Com-

missioner, 116 T.C. 438, 446 (2001). Taking into account the additional deduction that we have allowed, there is an understatement in petitioners' 2010 income
tax in excess of $14,000. This amount comfortably exceeds both $5,000 and 10%
of the total tax required to be shown on their 2010 return. Respondent has thus
carried his burden of production by demonstrating a "substantial understatement of
income tax." See sec. 7491(c).
The section 6662 penalty does not apply to any portion of an underpayment
"if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith" with respect to it. Sec. 6664(c)(1). The decision whether the taxpayer acted with reasonable cause and in good faith is made on a caseby-case basis, taking into account all pertinent facts and circumstances. Sec.

- 20 [*20] 1.6664-4(b)(1), Income Tax Regs. Generally, the most important factor is a
taxpayer's effort to ascertain his or her tax liability correctly. Other circumstances
that may signal reasonable cause and good faith "include an honest misunderstanding of fact or law that is reasonable in light of all the facts and circumstances,
including the experience, knowledge, and education of the taxpayer." M
Petitioners offered no evidence that they attempted to ascertain their tax liability correctly. They had no colorable basis for deducting most of their personal
expenses, and they had few if any reliable contemporaneous records. They do not
contend that they relied on the advice of a competent tax professional in taking
these positions. See sec. 1.6664-4(c)(1), Income Tax Regs.
Mr. Garcia understood that the KoC chapter to which he belonged was a
not-for-profit entity. But he made no effort to determine whether it was an organization entitled to receive tax-deductible contributions; he received no contemporaneous written acknowledgment letter from it; and he kept no contemporaneous
record of his alleged gifts. Given the receipts and acknowledgment letters that
petitioners received and maintained from their church and from other charities,
they were clearly aware of the documentation they should have sought and received. We accordingly sustain the accuracy-related penalty in its entirety.

- 21 [*21] To reflect the foregoing,

Decision will be entered under

Rule 155.

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