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. 90RDED

STAT.

T.C. Memo. 2000-20

UNITED STATES TAX COURT

CHARLES AND BEATRICE M. REYNOLDS, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12112-97.

Filed January 19, 2000.

Thomas F. Howard, for petitioners.

Michael F. O'Donnell, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

DEAN, Special Trial Judge:

Respondent determined

deficiencies of $4,732 and $3,092 in petitioners' Federal income

taxes for taxable years 1993 and 1994 respectively.

Respondent

SERVED

JAN 1 9 200

- 2 also determined accuracy-related penalties under section 6662¹ of

$946 and $618 for 1993 and 1994 respectively.

Respondent concedes that petitioners are entitled to deduct

a dependency exemption amount for Mrs. Reynolds' mother for tax

year 1993 and that petitioners expended at least $6,125 for her

medical expenses in 1993.

Respondent also concedes that Charles

Reynolds (petitioner) was engaged in the practice of law with a

profit motive and for 1993 had $140 of deductible expenses for

bar membership fees.

After concessions by respondent, the issues for decision2

are:

(1)

Whether respondent is estopped from asserting

deficiencies against petitioners;

(2) whether respondent has

offered evidence of petitioners' tax returns for either year at

issue;

(3) whether petitioners are entitled to deductions for

medical expenses;

(4) whether legal expenses incurred by

petitioners are itemized deductions or trade or business

expenses;

(5) whether petitioners are entitled to deduct various

Schedule C expenses;

(6) whether petitioners are entitled to

Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the years at issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.

The amount of petitioners' self-employment tax, if any, and

their deduction for self-employment tax, if any, will be

determined by our resolution of the issues to be decided in this

case.

automobile and travel and meals and entertainment expense

deductions;

(7) whether petitioners are entitled to claim for

1994 an additional expense under section 179 for a depreciable

asset; and (8) whether there is underpayment of petitioners' tax

due to negligence.

Some of the facts have been stipulated.

Stipulated facts

and accompanying exhibits are incorporated herein by reference.

FINDINGS OF FACT

Petitioners resided in Lisle, Illinois, at the time the

petition was filed in this case.

During the years at issue and at the time of trial, Mrs.

Reynolds was a manager for Service America Corp., and petitioner

was a supervisory internal revenue agent.

Petitioner has been an

employee of the Internal Revenue Service (IRS) since 1976.

Before his employment with the IRS, petitioner was an electronics

engineer with the Department of Defense.

Petitioner also holds a

certified public accountant's license from the State of South

Carolina, is a 1982 graduate of the Indiana University Law

School, and was licensed as an attorney by the State of Illinois

in 1985.

Petitioner prepared the joint individual Federal income tax

returns for himself and his wife for 1993 and 1994.

In April of 1998, a year after respondent issued the

- 4 statutory notice of deficiency in this case, respondent replied

by letters to petitioners' March 1998 correspondence to the

Problem Resolution Office.

Respondent's reply advised of changes

to petitioners' statements of account for both 1993 and 1994 and

indicated for each year that "the amount you now owe" is "none".

The parties have stipulated that Exhibit 1-J "is a copy of

petitioners' joint federal income tax return for the year 1993."

Respondent has produced, and the Court has admitted into

evidence, a certified copy of petitioners' joint individual

Federal income tax return for 1994.

Medical Expenses

Mrs. Reynolds' mother, Mrs. Maxey, lived in a nursing home

in Salem, Virginia, in 1993.

She was 84 years old, suffering

from Parkinson's disease, bedridden, and unable to feed or to

care for herself.

There were two other residents of the home

where Mrs. Maxey resided.

Mrs. Maxey was provided with around-

the-clock care; the proprietor of the home was a registered

nurse.

Mrs. Reynolds' sister, Judy Maxey, held power of attorney

for their mother's bank accounts.

Mrs. Reynolds had an agreement

with her sister and their five brothers that they would share the

expense of maintaining their mother in the Virginia nursing home.

The family members agreed to make their monetary contributions

- 5 for their mother's support to their sister, Judy Maxey.

Judy

Maxey would then make the required payments to the nursing home

or other payee.

With one exception, petitioners wrote a check to Judy or

Mrs. Maxey for $600 monthly in 1993 until Mrs. Maxey's death in

December of the year.

It was Mrs. Reynolds' understanding that

the money was to be used for "my mother's room and board at the

nursing home", which was $2,400 per month.

Petitioners also paid

for health insurance to supplement medicare and medicaid for Mrs.

Reynolds' mother as well as additional amounts for miscellaneous

small items.

In connection with her employment with the Service America

Corporation, most of Mrs. Reynolds' personal medical expenses

were reimbursed by the Travelers managed care system (the

Travelers).

Mrs. Reynolds incurred $1,419.71 of dental, optical,

and prescription expenses that were not covered by the Travelers

in 1993.

Petitioner received medical insurance under a plan

subsidized by the Federal Government for which he paid $1,250 in

1994.

Petitioners claimed medical expenses of $13,664 for 1993.

Respondent disallowed any deduction for medical expenses for the

year.

Petitioners did not claim any medical expense deduction

for 1994.

- 6 B.

Legal Expenses

In or about 1988, petitioner obtained permission from the

IRS to engage in the limited practice of law.

Petitioner's law

practice was limited by standard employee rules of conduct

promulgated by the IRS.

Petitioner's law practice generated receipts from real

estate closings and related activities.

During 1993, petitioner

performed approximately four real estate closings and reported

gross receipts of $700.

Petitioner conducted two real estate

closings in 1994 and reported gross receipts of $450.

Sometime in 1992, petitioner was "invited" to a meeting with

the Inspection Division of the IRS (Inspection).

At the meeting,

Inspection told petitioner that he was under investigation for

practicing law during the official hours of his employment with

the IRS.

Finding himself under investigation by his employer,

petitioner obtained legal counsel.

Legal counsel represented

petitioner throughout the investigation.

not end until 1995.

The investigation did

Petitioner claimed attorney's fees on

Schedule C of his joint individual Federal income tax returns of

$2,380 in 1993 and $5,615 in 1994 in connection with the

investigation.

In 1994 petitioners were considering suing Mrs. Reynolds'

employer for sex discrimination.

Lori D. Ecker of Chicago was

retained to perform legal services on "litigation and technical

matters" preliminary to filing a law suit.

"The Law Offices of

Lori D. Ecker" submitted an invoice dated September 21, 1994, for

$175 to "Mrs. Reynolds" for "initial consultation".

On December

27, 1994, petitioner wrote a check for $2,500 to "Trent &

•

Butcher" that was paid by his bank on January 10, 1995.

Schedule C, petitioners deducted legal expenses related to Mrs.

Reynolds' sex discrimination claim.

Respondent determined that, to the extent substantiated,

petitioners' legal expenses are deductible as itemized deductions

on Schedule A rather than business expenses on Schedule C.

Various Schedule C Expenses

Respondent disallowed petitioners' claimed Schedule C

expenses for 1993 and 1994.

At trial, petitioners provided.

copies of miscellaneous checks, receipts, and invoices from 1993

as substantiation for Schedule C expenses for office expense,

repairs and maintenance, and supplies.

Respondent concedes that

petitioners expended $140 for professional licenses for 1993.

Petitioners offered no evidence to substantiate expenditures for

business interest, commissions and fees, telephone expenses, and

expenses for professional journals for either year.

Car and Truck Expenses

Petitioners owned three automobiles in 1993 including a 1992

Lexus, a 1989 Chevrolet, and a 1988 Toyota Camry.

The Lexus was

used exclusively, or nearly so, by Mrs. Reynolds.

The Chevrolet

was used exclusively for personal transportation.

In October of

1994 petitioners traded the Chevrolet, along with cash, for a

Ford van.

Petitioner testified that he used the Toyota Camry in

his law practice and to travel to and from his farm and his

various rental properties.

Petitioner did not maintain a log for his business

automobile mileage.

During his testimony petitioner presented

documents that were reconstructions of his business mileage.

The

reconstructions were created as a result of the examination of

his Federal income tax returns.

As a preliminary step in his reconstructions, petitioner

determined the ratio of business mileage to nonbusiness mileage

for computing depreciation deducted on Schedule C.

Included in

total.reconstructed business miles is employee business mileage

for which he was compensated by the IRS.

Also included in total

business mileage is mileage accumulated commuting to and from his

home and the Cook County courthouse to do research and "back and

forth to the title company" for real estate closings.

- 9 Respondent determined that petitioner has not substantiated

his business use of the Toyota Camry.

Travel and Meals and Entertainment Expenses

Petitioners owned rental properties in Indiana, Kentucky,

and Virginia and farmland in Kentucky.

The farmland was

inherited from petitioner's father in 1990.

There are no structures on the farmland except for fences.

Many of petitioner's family members live near his Kentucky

farmland.

His brothers own farmland on either side of his land.

There was no crop grown on or harvested from the farmland in

1993.

His farm equipment was stored in his brother's barn.

1994, petitioner's brother raised the tobacco crop grown on the

land, and petitioner and his brother split the expenses and

proceeds from the sale of the crop.

On Schedules C and E, petitioners claimed travel and meals

and entertainment expenses related to visiting their various

properties.

Respondent denied petitioners' deductions on both

schedules for lack of substantiation.

Petitioners now claim

additional travel expenses related to Schedule E.

OPINION

Issue 1.

Estoppel

As a preliminary matter, petitioners argue that letters sent

to them by respondent after the issuance of the notice of

- 10 deficiency indicating that "the amount you now owe" is "none" are

"binding admissions".

Such "binding admissions", petitioners

believe, are determinative of their case and according to them

the government is "estopped from challenging its own .

correspondence, which claims No Deficiency for 1993 and 1994."

Petitioners cite no legal authority for their assertions,

and we are unable to find any.

Their primary position is

contrary to well-established law.

Congress has provided that

closing agreements under section 7121 and compromise agreements

under section 7122 are the exclusive means for the IRS to settle

civil tax disputes with finality.

United States, 278 U.S. 282, 288

See Botany Worsted Mills v.

(1929); Estate of Meyer v.

Commissioner, 58 T.C. 69, 70 (1972); see also Sampson v.

Commissioner, 444 F.2d 530, 531 (6th Cir. 1971), affg. T.C. Memo.

1970-212.

The record is devoid of any evidence that petitioners

and respondent entered into a valid closing agreement or

compromise agreement.

Petitioners further argue that respondent is estopped from

challenging the letters, which they inaccurately characterize as

stating that they owe "no deficiency" for 1993 and 1994.

What

the letters actually purport to address is petitioners' "account"

for each of the years at issue.

The numbers by which peti-

tioners' "account" was adjusted bear no relationship to those

- 11 contained in the statutory notice of deficiency.

We would not

expect the account to reflect the amounts that are the subject of

this litigation because the proposed deficiencies and penalties

may not properly be assessed until our decision in this case has

become final.

See secs. 6211(a), 6212(a), and 6213(a).

In a tax

case, the doctrine of estoppel is not applicable unless the party

relying on it establishes all of the following elements at a

minimum:

(1) There must be a false representation or

wrongful misleading silence; (2) the error

must be in a statement of fact and not in an

opinion or a statement of law; (3) the person

claiming the benefits of estoppel must be

ignorant of the true facts; and (4) he must

be adversely affected by the acts or

statements of the person against whom an

estoppel is claimed. * * *

Estate of Emerson v. Commissioner, 67 T.C. 612, 617-618 (1977);

see also Lignos v. United States, 439 F.2d 1365, 1368 (2d Cir.

1971).

Petitioners have not established the required elements to

claim estoppel successfully.

Among other things, they have not

presented any evidence that they were adversely affected by their

reliance on the letters.

781, 789 (1975).

Cf. Schwager v. Commissioner, 64 T.C.

Accordingly, the doctrine of estoppel does not

apply in the instant case.

Issue 2.

Evidence of Petitioners' Tax Returns

- 12 -

Petitioners also argue that this case should be dismissed

because respondent did not produce the original tax returns they

filed for 1993 and 1994, "or copies or reasonable versions" of

them.

Petitioners cite no authority for this position and it is

without merit.

See Fed. R. Evid. 1004 and 1005; Estate of Clarke

v. Commissioner, 54 T.C. 1149, 1163 (1970).

Furthermore, the

parties have stipulated an exhibit that they have represented to

be a copy of petitioners' joint Federal income tax return for the

year 1993.3

As part of the stipulation the parties agree that

"all exhibits referred to herein and attached hereto may be

accepted as authentic".

In addition, the Court has admitted into

evidence, upon motion after trial, a certified copy of

petitioners' joint Federal income tax return for 1994.

Issue 3.

Medical Expenses

Under section 213, individuals are allowed to deduct the

expenses paid for the "medical care" of the taxpayer, the

taxpayer's spouse, or a dependent, to the extent the expenses

exceed 7.5 percent of adjusted gross income and are not

compensated for by insurance or otherwise.

The term "medical care" includes amounts paid for the

diagnosis, cure, mitigation, treatment, or prevention of disease,

Under our Rules "A stipulation shall be treated * * * as a

conclusive admission by the parties to the stipulation".

Rule

91(e); see, e.g., Noneman v. Commissioner, T.C. Memo. 1978-283.

- 13 or for insurance covering the diagnosis, cure, mitigation,

treatment, or prevention of disease.

Petitioners claimed medical and dental expenses totaling

$13,644 for 1993.

1994.

They did not deduct any medical expenses for

Respondent denied the deductions, determining that Mrs.

Maxey was not petitioners' dependent and that medical expenses had

not been substantiated.

Respondent has conceded the dependency

issue.

Mrs. Maxey's Medical Expenses

Mrs. Reynolds testified that her mother's nursing home was

State certified and that the proprietor was a registered nurse.

She further testified that she had an agreement with her family

that she would pay to her sister $600 per month to help with her

mother's nursing home expenses.

She also testified that she paid

twice a year for her mother's Blue Cross/Blue Shield supplemental

health ïnsurance premiums and, in addition, for miscellaneous

items, such as "Depends" and bed pads.

According to Mrs.

Reynolds, her sister held power of attorney for their mother's

bank accounts.

As substantiation of the amounts paid for Mrs. Reynolds'

mother's care, petitioners introduced copies of the front sides of

19 checks drawn on three different checking accounts, bearing

- 14 dates in 1993.

The copies indicate that the checks were drawn in

favor of either Mrs. Reynolds' sister or her mother.

Included in the copies are images of the front sides of 11

checks for $600, including 2 for the month of May and 1 for each

of the other months, ·except October and December.

On the March

check the magnetic numbers at the bottom right do not match the

amount for which the check was written.4

There is a copy of the

front side of a check dated October of 1993 for $1,000 bearing a

notation that $600 is for "support" and $400 is for "Home Health

Care".

There is no evidence of a payment in December of 1993, the

month Mrs. Reynolds' mother died.

There are copies of two checks drawn to Mrs. Reynolds'

sister, Judy Maxey, with notations that the check is for Blue

Cross health insurance, one for $855 in March and for $805 in

August.

There are two checks, one drawn to Mrs. Maxey, the other

to Judy Maxey, that bear notations that they are for the "Home

Health Care" of Mrs. Maxey for $300 and $200, respectively.

There are three checks drawn to Mrs. Reynolds' sister in the

respective amounts of $1,000, $400, and $500 that bear no

notation, or no notation that they are for the health care of Mrs.

Maxey.

Petitioners submitted a reconstruction of medical expenses

indicating, among other items, a "Check-Paid but reimbursed" in

the amount of $600.

- 15 Petitioners also produced copies of both sides of a check

dated April 7, 1994, drawn on Mrs. Reynolds' account to the order

of Judy Maxey for $750.

The front side bears the notation

"Remaining Medical Bills for Mrs. Maxey".

At trial, petitioners

argued that the expense represented by this check may be deducted

on their 1993 tax return because "there's an exception in the Code

* * * for this type of a situation."

We are unaware of the exception to which petitioners refer.

As a general rule, cash method taxpayers deduct expenses in the

year actual payment takes place.

Tax Regs.

See sec. 1.461-1(a)(1), Income

Petitioners have failed to point out any "exception in

the Code" that would exclude them from the general rule.

To the

extent they may be relying on section 213(c)(1), they are in

error.

That provision allows an income tax deduction to a

deceased taxpayer for medical expenses paid out of his estate

within a year of his death as though they were paid at the time

incurred.

Even if the $750 of expenses had been paid out of the

Estate of Mrs. Maxey, petitioners would not be entitled to claim

them as deductions on their joint income tax return.

We find that petitioners paid in 1993 deductible expenses for

medical care for Mrs. Maxey totaling $9,160.

The total consists

of 10 monthly payments of $600, an October payment of $1,000,

- 16 insurance payments of $855 and $805, and general "Home Health

Care" payments of $300, and $200 for miscellaneous items.

Petitioners' Personal Medical Expenses

Petitioners assert that they are entitled to deduct, as

medical expenses, payments of medical insurance premiums for 1993

made under their respective health plans, as well as the payments

of medical expenses not covered by their health plans. .

Petitioners' explanation of their entitlement to deductions

for medical insurance premiums they claimed to have paid for 1993

is both unsubstantiated and abstruse.

During his testimony, petitioner produced copies of IRS

statements of earnings for 1994 that substantiate payroll

deductions for health plan payments of $1,252 during that year.

Petitioner offered no evidence showing payroll deductions for

health insurance payments for 1993.

Petitioner testified,

however, that to the best of his knowledge, his treatment of his

health insurance premiums on his tax return for 1993 was

"consistent" with his 1994 return.

His treatment of the 2 years' returns was "consistent",

according to petitioner, in that he included only a fraction of

his insurance payments in his medical expense deduction on

Schedule A for both years' returns.

He testified that he did not

- 17 -

fully deduct the expense as an itemized deduction on his tax

returns because:

I'm a self-employed person, and a self-employed person

is allowed to -- was allowed to deduct a portion of

their medical insurance premiums. Okay. At that point .

as we were going through this, I realized, well, I'm

also a full-time. employee of the Service and obviously

paid these expenses, so if an employee's entitled to the

deduction, then I'm entitled to the full thing, and

therefore, I changed my posture on that.

We find petitioner's position difficult to understand from

both a factual and a legal standpoint.

Since petitioner did not

claim any amount on Schedule A of his Federal income tax return

for 1994 as a medical expense,5 we fail to see how this is

"consistent" with his claim of medical expenses for 1993.

The term "medical care" as used in section 213, allowing the

deduction, includes amounts paid for insurance covering medical

care.

Petitioners were entitled to claim as a deduction on

Schedule A the full amount of medical insurance payments made

during the tax year subject to the 7.5-percent limitation.

petitioners are arguing that a portion of Mr. Reynolds' payments

for his Government-sponsored medical plan is deductible on

Schedule C, because of his self-employment, we decline to accept

their argument.

Petitioners reported adjusted gross income of $104,213 for

1994.

In order to obtain the benefit of deducting medical

expenses for the year, total medical expenses would have to

exceed $7,816 (7.5% x $104,213).

- 18 Self-employed individuals may deduct as a business expense

the "applicable percentage" of amounts paid for medical insurance.

Sec. 162(1)(1)(A).

But no deduction is allowed in excess of the

taxpayer's earned income from self-employment derived from the

trade or business with respect to which the plan providing the

medical coverage is established.

See sec. 162(1)(2) (A); King v.

Commissioner, T.C. Memo. 1996-231.

Petitioner's Government-

sponsored health plan was not established with respect to his

Schedule C business.

Furthermore, allowance of the deduction does

not apply to any taxpayer for any month for which the taxpayer is

eligible to participate in a subsidized health plan maintained by

his employer.

See sec. 162(1)(2)(B).

Petitioner was eligible to

participate in such a plan throughout 1993 and 1994.

secs. 8905 and 8906(b)(1) and (2)

(1994).

See 5 U.S.C.

Petitioners may not

deduct on Schedule C any amount paid for employer-sponsored

medical insurance.

On the basis of the record, petitioners are

not entitled to claim on Schedule C any medical expense deduction

for 1993 or 1994.

Petitioner testified that the amount deducted on Schedule A

as medical expenses for 1993 included $1,216 for his wife's health

insurance payments.

Petitioners produced copies of "Explanation

of Benefits" (EOB's) that are evidence that Mrs. Reynolds was

covered during 1993 by a health insurance plan sponsored by her

- 19 employer.

The EOB's are not, however, evidence of the amount, if

any, that Mrs. Reynolds paid for her health plan coverage.

Mrs.

Reynolds, who testified on other matters, gave no testimony on the

subject of health insurance payments.

Petitioners have failed to

substantiate that they made any expenditure in.1993 for medical

insurance.

Copies of the EOB's in evidence, along with other receipts

supplied by petitioners, show that Mrs. Reynolds incurred

$1,419.71 of dental, optical, and prescription expenses that were

not covered by her employer sponsored health plan in 1993.

We hold that petitioners have substantiated medical expenses

in 1993, deductible on Schedule A, of $9,160 paid for their

dependent, Mrs. Maxey, and $1,419.71 of their personal medical

expenses that were not covered by medical insurance.

In 1994,

petitioners had medical expenses of $1,252 for health insurance.

Petitioners' medical expense deductions are allowable to the

extent they exceed 7.5 percent of their adjusted gross income for

each year.

Issue 4.

See sec. 213(a).

Legal Expenses

Petitioner claimed on his Schedules C for 1993 and 1994

expenses for legal and professional services of $2,380 and $8,290,

respectively.

All of the expenses for 1993 and $5,615 of the

expenses claimed for 1994 relate to legal counsel petitioner

- 20 engaged to represent him while he was being investigated by

Inspection.

Origin and Character of the Claim

The investigation concerned allegations that petitioner was

engaged in the private practice of law during government working

hours.

According to petitioners, the claimed legal expenses are

correctly claimed on Schedule C because the expenses are directly

related to petitioner's practice of law.

The expenses are

directly related to the law practice, petitioners argue on brief,

because "Such conduct, if proved, could result in sanctions

against the law license of Petitioner Charles Reynolds in

Illinois."

Petitioner explained during his testimony that

Inspection was "investigating" his Schedule C gross receipts

related "directly to my practice of law" and to his alleged

practice on government time.

Respondent contends that petitioner's motivation in making

payments for legal.representation is irrelevant; it is the origin

of the claim that is important.

The origin of the claim, in

respondent's view, is in connection with "defending" petitioner's

employment with the IRS.

Respondent points out that such

expenses are deductible on Schedule A as employee business

expenses subject to the 2-percent "floor" of section 67(a).

agree with respondent.

- 21 The Supreme Court, in United States v. Gilmore, 372 U.S. 39

(1963), held that the characterization of legal expenses depends

on the activities from which the claim arises for which the

expenses were incurred.

The Court said that "the origin and

character of the claim with respect to which an expense was

incurred, rather than its potential consequences upon the fortunes

of the taxpayer, is the controlling basic test".

Id. at 49.

The "origin-of-the-claim" rule is not "a mechanical search

for the first in the chain of events which led to the litigation

but, rather, requires an examination of all the facts."

Commissioner, 59 T.C. 708, 713 (1973).

Boagni v.

The question to be

answered is: out of what kind of transaction did the claim arise?

See id.

When determining the origin of the claim, the Court must

consider the issues, the nature and objectives of the potential

action, the defenses asserted, the purpose for the legal fees, the

background of the claim out of which the dispute arose, and "all

facts pertaining to the controversy."

Id. (citing Morgan's Estate

v. Commissioner, 332 F.2d 144, 151 (5th Cir. 1964)); see Barr v.

Commissioner, T.C. Memo. 1989-420.

•

According to 6 Administration, Internal Revenue Manual (CCH)

sec. 331.1, at 38,063, Inspection's purpose in conducting

investigations of allegations against employees of the Internal

- 22 Revenue Service is to determine facts and to report them to

management for a decision as to "whether the employee is suitable

for retention in the Service" and for other necessary action.

Inspection does not examine tax returns.

See id. sec. 331.22.

Petitioners argue that "As a consequence of the

investigation, Charles Reynolds may have lost his law license" or

might have suffered a negative impact on his law practice or

professional reputation.

The relevant question, however, asks

what the expense arose in connection with, not what consequences

might have resulted from the taxpayer's failure to defeat the

claim.

See United States v. Gilmore, supra at 48; Patch v.

Commissioner, T.C. Memo. 1980-11.

The purpose of the legal fees

incurred by petitioner in this case was for petitioner to obtain

representation during the investigation by Inspection.

The origin

of the claim here had to do with petitioner's conduct as an .

employee of the Internal Revenue Service, not with his trade or

business as an attorney.

Petitioner was attempting to protect his

employment, not his part-time activity as an attorney.

Petitioner's legal expenses incurred for representation in

connection with the Inspection inquiry are therefore deductible as

employee business expenses on Schedule A.

- 23 B.

Time of Payment

Of the legal expenses claimed for 1994 that relate to the

Inspection inquiry, the parties disagree over the deductibility of

a payment of $872.

Respondent takes the position that the amount

was not paid until 1995, while petitioners argue that it was paid

in December of 1994.

Petitioners introduced into evidence a computer printout of

the attorney's ledger card indicating that $820 in fees and $52 in

costs were billed to petitioner on December 21, 1994.

But the

ledger card also indicates that the payment of $872 by check No.

3084 was not posted to petitioner's account until February 20,

1995.

Petitioner testified that he remembered writing the check

for $872 in December of 1994, "so that I got the tax deduction" in

that year.

Petitioners offered, however, no canceled check, bank

statement, or other documentary evidence of the date of the

contested payment although they produced a bank statement for the

same general time period reflecting other payments at issue.6

Petitioners had more than one checking account. Checks

written on account No. 302386-8 bore three-digit numbers in the

two hundreds at the end of 1993. Petitioners introduced as

evidence for other items, checks written on account Nos. 039-0950

and 016020109603. Checks written on the latter accounts in 1993

bore four digits in the high two thousands and low three

thousands and three-digit numbers, respectively. Check No. 3084

is either out of order by months or was written on a fourth

account.

Petitioners offered no explanation for their inability

to produce canceled check No. 3084, a copy of it, or a statement

(continued...)

- 24 Once again we cite the general rule that cash method

taxpayers may deduct expenses in the year actual payment takes

place.

See sec. 1.461-1(a)(1), Income Tax Regs.

delivery of a check will constitute payment.

Generally,

See Estate of

Spiegel v. Commissioner, 12 T.C. 524, 533 (1949).

If a check is

dated in one year but cashed in the next year, the deduction will

not be allowed absent proof of delivery in the year of the

deduction.

See Odom v. Commissioner, T.C. Memo. 1982-531, affd.

707 F.2d 508

(4th Cir. 1983); McCoy v. Commissioner, T.C. Memo.

1971-34.

Petitioners have not offered any evidence that check No.

3084 for $872 was delivered to the payee in 1994 and the amount is

therefore not deductible for that year.

On Schedule C for 1994 petitioners also seek to deduct legal

expenses incurred for Mrs. Reynolds' representation in a sex

discrimination action.

They produced a copy of a September 1994

invoice for legal services submitted to Mrs. Reynolds requesting

payment of $175 and a copy of a bank statement on account No.

302386-8 that shows that check No. 242 for $2,500 was presented to

the bank for payment on January 10, 1995.

A copy of petitioners'

check register indicates that check No. 242 was written on

6(...continued)

showing it.

- 25 December 27, 1994.

Petitioners did not produce the original or a

copy of check No. 242.

The evidence does not show that the invoice for $175 was paid

in 1994 or that check No. 242 for $2,500 was delivered in 1994.

The amounts are therefore not deductible for that year.'

See Odom

v. Commissioner, supra; McCoy v. Commissioner, supra.

•

Issue 5.

Various Schedule C Expenses

Section 162 generally allows a deduction for ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.

Generally, no deduction is

allowed for personal, living, or family expenses.

See sec. 262.

The taxpayer must show that any claimed business expenses were

incurred primarily for business rather than social reasons.

Rule 142(a).

See

To show that an expense was not personal, the

taxpayer must show that the expense was incurred primarily to

benefit his business, and there must have been a proximate

relationship between the claimed expense and the business.

See

Walliser v. Commissioner, 72 T.C. 433, 437 (1979).

Where a taxpayer has established that he has incurred a trade

or business expense, failure to prove the exact amount of the

Because petitioners have not shown that the payments were

made in 1994, we need not address respondent's arguments that

Mrs. Reynolds' legal expenses are not otherwise deductible, or if

deductible, must be claimed on Schedule A.

- 26 otherwise deductible item may not always be fatal.

Generally,

unless prevented by section 274, we may estimate the amount of

such an expense and allow the deduction to that extent.

See

Finley v. Commissioner, 255 F.2d 128, 133 (10th Cir. 1958), affg.

27 T.C. 413 (1956); Cohan v. Commissioner, 39 F.2d 540, 543-544

(2d Cir. 1930).

In order for the Court to estimate the amount of

an expense, however, we must have some basis upon which an

estimate may be made.

742-743

(1985).

See Vanicek v. Commissioner, 85 T.C. 731,

Without such a basis, an allowance would amount

to unguided largesse.

See Williams v. Commissioner, 245 F.2d 559,

560 (5th Cir. 1957).

Petitioner provided at trial copies of miscellaneous checks,

receipts, and invoices as substantiation for Schedule C expenses

for office expense, repairs and maintenance, and supplies for

1993.

Respondent concedes that petitioner has shown his

expenditure in 1993 of $140 for professional licenses.

In his

testimony, petitioner pointed out copies of checks and receipts

substantiating the expenditure of $1,106 for repair and

maintenance of a business computer in 1993.

Petitioners offered no coherent substantiation for office and

supplies expenses for 1993.

Petitioners offered no evidence to

substantiate expenditures for business interest, commissions and

fees, telephone expenses, and expenses for professional journals

- 27 in 1993 and no .substantiation for various Schedule C deductions

for 1994.

Petitioners are entitled to deduct various Schedule C

expenses of $1,246 for 1993 but may deduct no amount for 1994.

Issue 6.

Section 274 Expenses

Certain business deductions described in section 274 are

subject to rules of substantiation that supersede the doctrine in

Cohan v. Commissioner, supra.

See sec. 1.274-5T(c)(2), Temporary

Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).

Section

274(d) provides that no deduction shall be allowed with respect

to:

(a) Any traveling expense, including meals and lodging away

from home;

(b) any item related to an activity of a type

considered to be entertainment, amusement, or recreation; or (c)

the use of any "listed property", as defined in section

280F(d)(4),8 unless the taxpayer substantiates certain elements.

For an expense described in one of the above categories, the

taxpayer must substantiate by adequate records or sufficient

evidence to corroborate the taxpayer's own testimony:

(1) The

amount of the expenditure or use based on the appropriate measure

(mileage may be used in the case of automobiles);

place of the expenditure or use;

(2) the time and

(3) the business purpose of the

"Listed property" includes any passenger automobile.

280F(d) (4) (A) (i) .

Sec.

- 28 expenditure or use; and in the case of entertainment,

(4) the

business relationship to the taxpayer of each expenditure or use.

See sec. 274(d).

To meet the adequate records requirements of section 274, a

taxpayer must maintain some form of records and documentary

evidence that in combination are sufficient to establish each

element of an expenditure or use.

See sec. 1.274-5T(c)(2),

Temporary Income Tax Regs., supra.

A contemporaneous log is not

required, but corroborative evidence to support a taxpayer's

reconstruction of the elements of expenditure or use must have "a

high degree of probative value to elevate such statement" to the

level of credibility of a contemporaneous record.

Sec. 1.274-

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

1985).

Automobile Expenses

Petitioners owned three automobiles in 1993, including a 1988

Toyota Camry.

Petitioners claimed as deductions in 1993 and 1994

miscellaneous and depreciation expenses for use of the Toyota in

petitioner's law practice and to travel to and from his farm and

the various rental properties.

Petitioners claimed all of the

depreciation on Schedule C and miscellaneous automobile expenses

on Schedules C and E.

- 29 -

Respondent disallowed petitioners' deductions for automobile

expenses on Schedules C and E for 1993 and on Schedule C for 1994.

Respondent's position is that petitioners have failed to

substantiate their deductions as required by section 274(d).

.Petitioner did not maintain a log for his business automobile

mileage.

He testified that he thought that maintaining a log was

unnecessary on the basis of his reading of the Master Tax Guide,

an unofficial publication of CCH Corporation; all he had to do was

"be able to substantiate the elements of the expense."

At trial, petitioner attempted to substantiate his expenses

by presenting reconstructions of his business mileage.

provided the Court with three documents for 1993 and one for 1994.

One of the 1993 documents is titled "Reconstruction of Miles

Driven".

It has. seven columns, one each for month, activity,

destination, "R/T MILE", tolls, gas, "OILMAINT/REP", and hotel.

Under the activity column for each month are listed four items,

"LAW",

"R/E MGMT", "FARM", and "OFFICIAL".

Although petitioner

testified that he was unable to allocate mileage between his

various business activities, his "Reconstruction of Miles Driven"

purports to list the monthly mileage and expenses for each

category of activity and to determine the totals for each category

of activity for 1993.

- 30 Petitioner also provided documents reconstructing automobile

expenses for 1993 and for 1994 that are called "Schedule C Car

Expenses".

They show beginning, ending, and total mileage driven

and total personal and business miles driven.

The reconstructions

state that the car was "Used for" petitioner's legal practice,

real estate rental, and farm management travel.

Petitioner

computed depreciation in the documents and listed expenses for

"Gas/Oil", insurance, "Title", "Repair-Tire", and "Tolls/Parking".

The third document for 1993 is "Schedule E: Automobile

Expenses".

It purports to allocate miscellaneous automobile

expenses to the "Rental Real Estate Management/Maintenance" of

three properties, one each located in Kentucky, Virginia, and

Illinois.

Law Practice Use

Petitioner takes the position that he is entitled to Schedule

C deductions for use of the Toyota automobile in his legal

practice.

He used his car in his legal practice, petitioner

testified, "commuting to and from" his home "for the practice of

law".

He said he had several real estate closings and commuted to

and from the title company.

Generally, expenses that a taxpayer incurs in commuting

between his home and place of business are personal and

nondeductible.

See Commissioner v. Flowers, 326 U.S. 465, 473-474

- 31 (1946); Heuer v. Commissioner, 32 T.C. 947, 951 (1959), affd. per

curiam 283 F.2d 865 (5th Cir. 1960); secs. 1.162-2(e), .1.2621(b)(5), Income Tax Regs.

Expenses incurred, however, in going

between two or more places of business may be deductible as

ordinary and necessary business expenses under section 162 if

incurred for business reasons.

F.2d 496, 503-504

See Steinhort v. Commissioner, 335

(5th Cir. 1964), affg. T.C. Memo. 1962-233;

Heuer v. Commissioner, supra at 953.

Where a taxpayer attempts to deduct the expenses of traveling

between two places of business, one of which is an office in his

home, that office must be the taxpayer's principal place of

business for the trade or business conducted by the taxpayer at

those other work locations.

See Strohmaier v. Commissioner, 113

T.C. 106 (1999); Curphey v. Commissioner, 73 T.C. 766, 777-778

(1980).

On his Schedules C for 1993 and 1994, line 30, "Expenses

for business use of your home", petitioner listed zero.

Petitioner offered no evidence and made no argument that his

"principal place of business" was at his home.

Commissioner v.

Soliman, 506 U.S. 168, 175-177 (1993).

Farm Use

At the very bottom of the second page of his "Reconstruction

of Miles Driven" for 1993, there is a notation that petitioner

drove a total of 3,715 miles to and from ''Farm" on April 22, June

- 32 13, July 28, and October 11, 1993, for "CROPS".

In view of other

evidence in the record, we are not sure what to make of this

rather terse explanation.

Petitioners' 1993 Schedule F, Profit or Loss From Farming,

reports no income from crops for 1993 but states on line 34:

"NOTE: CROP SOLD 1/94-NOT Included In Income-CASH Basis TP".

trial, petitioner's testimony about his farm activities was vague,

confusing, and evasive.

Petitioner did testify, eventually, that

"I did not raise a crop * * * in '93 on that land."

Property Management Use

The Schedule E reconstruction includes as "real estate

property management" expenses of petitioner's Kentucky property

travel expenses (including airfare) for a trip to Florida in 1993

for both petitioners.

The stated purpose of the trip was for them

to bid for vacant property suitable for residential real estate

development.

Petitioners submitted copies of credit card receipts

and airline ticket receipts as substantiation for their expenses.

Although the trip took place between February 7 and 12, 1993, the

copy of the airline ticket receipt that petitioner entered into

evidence shows that it was not issued until December 27, 1993.

- 33 Mrs. Reynolds' ticket was issued for travel on January 30 and 31,

1993.9

Petitioner testified that he reconstructed·his business

records from memory aided by review of his retained receipts.

Petitioner-provided the Court with copies of what he characterizes

as receipts "representative" of those upon which he relied for his

1993 and 1994 reconstructions.

We are, however, unable to

determine from the copies of receipts the purpose of any of his

automobile trips.

The most detailed description that the

reconstructions give to explain his trips for "real estate

management" is "cleaning, leasing", with reference to 3,646 miles

driven in 1993.

The most detailed of the three reconstructions for 1993

states mileage by month rather than by trip.

The reconstruction

for 1994 gives only Schedule C totals for the year.

Many of the

"representative" receipts are for automobile repairs having no

apparent relationship to any particular trip or business purpose.

Petitioner's residential real estate development activity

generated, at best, startup or preopening expenses. See sec.

195(c)(1). Startup or preopening expenses are not deductible

under either sec. 162 or sec. 212. See Hardy v. Commissioner, 93

T.C. 684, 687-689 (1989); Goodwin v. Commissioner, 75 T.C. 424,

433 (1980), affd. without published opinion 691 F.2d 490 (3d Cir.

1982); Dean v. Commissioner, 56 T.C. 895, 902 (1971); Pólachek v.

Commissioner, 22 T.C. 858, 863 (1954). Even if substantiated,

deduction of such expenses.is specifically denied by sec. 195(a).

- 34 Some of the gasoline receipt copies show that purchases were made

in States in which petitioners maintained property, adjacent

States, or States through which one might travel to reach such

States.

But petitioners have failed to show that personal reasons

were not the primary reasons for the trips.

See Masat v.

Commissioner, 784 F.2d 573 (5th Cir. 1986), affg. on this issue

T.C. Memo. 1984-313.

The mere fact that petitioners own business or investment

property in a certain location does not mean that any expense

incurred in traveling to that location is automatically

deductible.

See Lawler v. Commissioner, T.C. Memo. 1995-26.

Employee Use

Petitioner's computations of business use of the Toyota

automobile in order to allocate depreciation among his activities

include mileage from using his car in his capacity as an employee

of the IRS, for which he was reimbursed.

Petitioner's

reconstruction for 1993 shows 2,264 "official" miles driven, but

he provided substantiation for only 105 miles driven.

He offered

no evidence of his "official" miles driven, if any, in 1994.

Under section 280F(d)(3), employee use of listed property

shall not be treated as use in a trade or business for determining

the amount of depreciation allowable to the employee unless the

use is for the convenience of the employer and is required as a

- 35 condition of employment.