Summary Opinion 2011-8

T.C.

Summary Opinion 2011-8

UNITED STATES TAX COURT

RODGER L. GAMBLIN AND KATHLEEN J. BURCH, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No.

21480-09S.

Filed January 31,

2011.

Rodger L. Gamblin and Kathleen J. Burch, pro sese.

Archana Ravindranath,

for respondent.

DEAN, Special Trial Judge:

This case was heard pursuant to

the.provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.

Pursuant to section 7463(b),

the decision to be entered is not reviewable by any other court,

and thise opinion shall not be treated as precedent for any other

case.

Unless otherwise indicated, subsequentesection references

are to the Internal Revenue Code in effect for the years at

SERVED JAN 31 2011

- 2 issue, and Rule references are to the Tax Court Rules of Practice

and Procedure .

Respondent .determined def iciencies in - petitioners'

Federal

income taxes of $15, 221 for 2004', $12, 886 for 2005, and $3, 859

for 2006.

Respondent also determined that petitioners are liable

for accuracy-related penalties under section 6662(a) of $3,044.20

for 2004 and $2,577.20 for 2005.

The parties agree that during the years 2004, 2005, and

2006, Rodger L. Gamblin (Dr. Gamblin) received gross Social

Security benefits of $16,663,

respectively.

$17,108,

and $17,809,

The parties also- agree that petitioners are not

entitled to deduct:

(1) The $3, 764 advertising expense claimed

on Kathleen J. Burch's (Dr. Burch) Schedule C, Profit or Loss

From Business, for 2004;

(2) Dr. Gamblin's Sâhedule' C legal and

professional expenses of $1,077 for 2004;

(3) Schedule C office

expenses for Dr. Gamblin for 2004 in excess of those respondent

allowed; and (4) Schedule C other expenses for Dr. Burch for 2004

and 2006 in excess of those respondent allowed.

Petitioners offered no evidence and made no argument~with

respect to deductions claimed on their Schedules A,

Deductions, and Schedules C for:

Itemized

(a) Dr. Burch's legal and

Adjustments to the taxable amount of Dr. Gamblin' s Social

Security benefits and to petitioners' itemized deductions, selfemployment tax deductions, and self-employment taxes -are

computational and will be resolved consistent with the Court' s

deciéion.

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professional services expense for 2006

and (b) self-employed

health insurance expenses for 2004 and 2006.

Petitioners also

failed to offer anya evidence or argument to contest respondent's

determination that Dr. Gamblinshad no gross receipts or sales for

2006.

Thus, petitioners are deemed to have conceded these

issues.

See, e.g., Bradley v

Commiss'ioner, 100 T.C. 367, 370

(1993) ; Sundstrand Corp. Ee Subs.cv. Commissioner,

344

(1991); Rybak v.

Money v.

Commissioner,

Commissioner,

Commissioner,

87 T.C.

89 T.C.

56,

73-74

91 T.C.

46, 48

524,

96 T.C. 226, .

566 n.19

(1988);

(1987);. Leahy v.

(1986).

The parties further agree that petitioners are entitled to

deduct on Dr. Burch's Schedule C:

$3,439.83 of expenses for

legal and professional services for 2004, and an additional $739

for 2004 over the amount respondent allowed for insurance

(other

than health).

The issues remaining for decision are whether petitioners

are entitledato deduct on their respective Schedules:C amounts in

addition to those "respondent allowed,' and whether petitioners are

liable for accuracy-related penalties for 2004 and 2Ó05.

Some of the facts have been stipulated and are so found.

The stipulation of facts, supplemental stipulation of.facts, and

the exhibits received in evidence are incorporated herein by

reference.

filed.

Petitioners resided in Ohio when the petition was

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Background

Dr. Gamblin.is, and*was, during the years at issue, an

inventor and "tinkerer" who holds 36 U.S. patents.

Dr. Gamblin

is -currently working on a printing process involving "publication

gravure inks".

This printing process uses a special ink which is

designed for use in a high-speed and high-quality printing

process and is especially suited for printing large squantities of

the same item.

Dr. Gamblin is working on a formulation of this

special ink that is both biodegradable and cheaper to use than

current ink types.

»In the 1990s Dr. Gamblin developed a device called a

"cyclobelt" or "cyclomill", which is a grindingedevice that is.

unique in that a relatively cheap grinding medium rather than the

machine itself is degraded during the grinding sprocess.

The

cyclomill is also capable of grinding things that are "very

hard"; like diamonds, and it tgrinds them to "lower levels" than

can be-reached by other means.

According to*Dr. Gamblin,

however, -the Russians developed a-process that "was a lot

cheaper" tñan his process, ,and his "business kind of dried up."

Dr. Gamblin was able to rent a cyclomill to a company in

Fairfield, Ohio,* afor $5, 000 contingent on a ireviews of its patent

status:

Dr." Gamblin retained a Cincinnati -law firmy Wood,

Herridg, and Evans, to prepare a patent opinion document for the

company's review.

He received a rental payment of $5,000 in,

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2004~.

5

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Petitioners, however, failed to report the $5, 000 rental

payment on their Federal income tax return for 2004.

- During the years at issue Dr. Gamblin worked primarily on

the gravure'printing and other 'ink types.

He also developed a

häir shampoo which is a isôap rather than a~detergent so it will

not dryeout hair.

Bécause soaps do not work well in hard water,

Dr. Gamblin added a chemical agent to remove calcium from hard

water.

Dr. Burch holds a Ph.D. in clinical psychology and was a

sole practitioner from 1989 until her retirement in 2005.

Burch practiced psychotherapy

Dr.

but her main focus was

psychologicál and neuropsychological assessment.

She did a- lots

äf work for defense attorneys and has taught eneuropsychology at

the University of Daytön.

Dr. Burch maintained, for seeing

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patients, an office suite separate from her home cons.isting of

two looms, a waitiñg-room and a "consulting room" that contained:

(1) Two upholstered chairs;

set;

(4)

(2) one sofa;

coffee and end tables;

(3) a desk and chair

(5) a smallabookcase; -and (6)

a

ámall filing cabinet for current.patient clinical files.

Dry Burch san@atients at her office suite because she

perceived it to be too dangerous to see patients in her home.

However,

she did all of her administrative work,

insurance claim

filing, billing, and report writing at home on weekends.. The

- 6 psychological assessments she prepared required lots of- paperwork

and references.

Dri Gamblin and Dr. Burch used overlapping portions of the

home for :their respective businesses.

were used for business.

Two bedrooms of the home

The bedroom on-the third floor contained

a bed, but the bed was used for laying out in-process insurance

forms for Dr. Burch's practice; it,also contained a computer.

Outside of the third-floor bedroom in the hall were filing

cabinets full of f iles .

which had no bed

In the "big" room on the second f loor , 2

was Dr a Gamblin' s "mail place" for his

business,' where there were a fax machine, a copier,

lots of books

and catalogs for his supplies, and references, as iwell as Dr.

Burchys technical-books.

In addition, «there were stacks of boxes

f illed with insurance f,iles and f iling cabinets containing

professional literature .

There .was also a garage apartment where Dr . Burch wrote her

reports and kept a technical library.

The garage apartment was

about 21 by 17sfeet-and contained a computer and a "big plotter"

that Dr . Gamblin used in his engineering pursuits . . The basement

was used as Dr. Gamblin's "laboratory".

It hadca microscope, a

2While Dr.-Gamblin testified that the "big" bedroom was oh

the second floor, Dr. Burch inconsistently testified that the big

bedroom they used was on the third floor.

The Court will treat

Dr. Burch's testimony as having been given mistakenly.

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"K-proofer"

(a machin'e used to stest prints) ,: b'ottles of dyes,- 2.

colorants, i-eagents? and more boxes of files.

. Petitioners eaåh filed Schedules Cowith their Federal income

tax retuins fons2004

2005, and 2006.

Dr. Gamblin filed a

Schedule C for sthe "Dayton Tinker Company" and Dr. Burch filed

her Schedule C a's -"Kathleen J. Burch, Psy. D. "

Discussion

Geñeñálly, the Commissioner' si determinations in a notice dfr

deficiency are presumed correct; and the taxpayer has"the burden

of prövincj that those determinations are erroneous .

142 (a) ; "Welch -v

Helvering,

290 U.:S.

111,

115

(1933)

See Rule

a

In some

cases the burden of proof with respect to relevant'factual issues

maÿ shift to the Commissioner under section 749I(à).

Petitioners

did -not 'argue ór present evidence that they sati'sfied the;

requirements of'section 7491(a).

Therefore, the-burden of proof

does not' shif t toerespondent .

Other Inconie

Section 6001 requirés a taxpayer to maintain sufficient

a ,

records to allow for the determination of the taxpayer's cörrect

tax liability.

(1989) .

Petzoldt v. Commissioner," 92 T.C. 661, 686

If a taxpayer fails 'to 'maintain or «does not produce

adequate books and records, the Commissioner is authorized to

reconstruct the taxpayer's income.

Commissioner; supra at 686-687.

Sec. 446(b); Petzoldt v.

Indirect methods may be used for

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this purpose. --Holland v. United States; 348 U.S. 121

(1954-).

The Commissioner's reconstruction need only -be reasonable in

light of all the ,surrounding facts and circumstances.

Petzoldt

v. Commissioner, supra at 687; Giddio v. Commissioner, 54 T.C.

1530, 41533

(1970).

Respondent determined through a bank deposits analysis that

petitioners had unreported income for 2004 of $8,405 and for 2006

of $3,774-.

income.

Bank.deposits constitute prima facie evidence of

Tokarski v. Commissioner, 87-T.C. 74, 77

(1986).

The

bank deposits method of determining :income assumes that all the

money deposited into a taxpayer's bank account during a specific

period constitutes taxable income.

Fr2d 671,

677

(5th Cire 1964).

Price v. United states, 335

The Commissioner,-however, must

take into account any nontaxable source or deductible expense of

which he has knowledge.

Id.

The method employed.is-not

invalidated even if the calculations of the Commissioner are not

completely correct.

(1991)., affd.

DiLeo v. Commissioner,

959 F.2d 16

(2d Cir.

96 T.C. 858, 868

,

1992).

Dr. Gamblin testified that he rented a cyclomill to a

company in.Fairfield, Ohio, for $5,000 contingent on a review of

its patent status.

Dr. Gamblin testified that he received.his

$5,000 payment in -2004.

Petitioners, however, failed to report

the rental earnings on their return for 2004.

Dr. Gamblin testified that "if yourtake that five thousand

dollars out"",rand-"dependingson' which day:you ,closed it out * * *

it is- going to vary from year to year by two or .three thousand

dollars."

Regarding 2005, Dr. Gamblin explained that "you know,

there was more money that came outaof the account ethan went in,

the whole thing-over the three yearaperiod- pretty much balances.

out."

Petitioners, however,3offered the Courtañosother evidence:

to :show that respondent' s bank deposits analysis is incorrect .

Respondent's determination on this issue is sustained.

Trade ór Business Expenses

i

Section 162 generally allows a ideduction 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.e

The tixpayer must therefore show that any claimed business

expenses were incurred primarily for business rather than

personal reasons.

T . C. 433, '4137

See Rule 142(a); Walliser v. Commissioner, 72

(1979)

sTo show that Ethe: expense was not personal, the taxpayer must

establish that the expense was incurred primarily to benefit his

business, 'and there must have been a proximate relationship .

between the claimedgexpensetand the business.

Commissioner, supra at 437.

See Walliser v:

Taxpayers are required to maintain

sufficient records to establish the-amounts of their income and

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deductions.

Sec.

6001; Higbee v. Commissioner,

(2001) ; sec .

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

116 T..C.

438,

440

Petitioners,

therefore, must produce evidence that they are entitled to the

-

deductions they claim.

Where,a taxpayer has established-that he has incurred a

trade or business expense,

failure to prove the exact amount of;

the otherwise deductible item may, not always rule out a

deduction.

. Generally, unless precluded by section 274, we may

estimate the amount of such an expense and allow the deduction to

that extent.

Cir.

1958),

F.2d 540,

See Finley v. Commissioner, 255 F.2d 128,

affg.

544

133

(10th

27 T.C.9413

(1956.)2; Cohan v: Commissioner,

(2d Cir. s1930) .

We cannot, however, -estimate

39

deductible expenses unless the taxpayer presents evidence

sufficient to provide some rational basis upon which estimates

may be made.

See Vanicek v. Commissioner, 85.T.C., 731., 742-743

(1985) .

Office Expenses for Dr. Gamblin

Dr. Gamblin testified that he "didn't have receipts for

every little thi-ng" making up his office expenses.:. Dr. Gamblin

supplied respondent with canceled checks, Quicken sheets, and

credit card billing records showing various expenditures .

He

offered, however, no receipts to show that the expenditures" were

his office expenses for either 2004" or 2005.

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Because there is insufficient evidence on which to base an

estimate of Dr. Gamblin's office expenses, respondent's

determination on this issue is sustained.

Of fice Expenses "for Dr . Burch

a

Dr.E Burch deducted on Schedule C $3,467 for 2004,' $3,341 for

2005, and $4,066 for 2006 as office expenses for-her psychology

practice.

2004,

Of those deductions respondent disallowed $488 for

$784 for 2005,* and $2,460 for 2006.

Petitioners provided

canceled checks drawn to various payees but did not-offer any

evidence other than their own testimony that they are entitled to

office expense deductions in excess of those respondent allowed.

Expenses for Supplies for 2004 and 2006

Dr. Gamblin deducted $2, 945 as expenses for supplies on his

2004 Schedule C of which respondent disallowed $788.

For 2006,

Dr. Gamblin deducted supplies expenses of $4,528 of which

respondent disallowed $73.

Dr. Burch deducted expenses for

supplies of $4, 866 on her 2006 Schedule C all of which respondent

disallowed.

Petitioners offered as evidence their own testimony

and canceled checks payable to credit card companies, MBNA, GE

Money Bank Credit Card, and Discovery.

Petitioners have not

shown that they are entitled to deduct expenses for supplies in

excess of those respondent allowed.

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Expenses for Insurance (Other Than Health)

Dr. Burch deducted $3,358 of expenses forginsurance (other

than health) on her 2004 Schedule C.

$2,860 of the deduction.

.Respondent disallowed

Petitioners provided canceled checks,

bank statements, and withdrawals for multiple lines of insurance

totaling $3,357.88.4

Petitioners, :however,

copies of the insurance policies.

failed to provide «

Respondent -agrees.that

petitioners are entitled to an additional-deduction of $739 for

2004.

Petitioners have not shown thatsthey are entitled to

deduct insurance (other than health) expenses in excess of the.

amount respondent agreed to.

"Contract Labor" Expenses of Dr. Burch Treated as Schedule C

"Income" of Dr. Gamblin

Dr. Burch deducted on her 2005 Schedule C $67,000 of

"contract labor" expenses from her $82,479 gross income.

Dr.

Gamblin reported on his Schedule C'for 2005 gross receipts and

gross income of $67,000.

Respondent adjusted petitioners'

tax

return, disallowing the deduction on Dr. Burch's Schedule C and

removing the income in the same amount from Dr. Gamblin's

Schedule C.

Petitioners callege that Dr. Burch paid Dr. Gamblin for

performing administrative duties for her business.

Dr. Gamblin

testified that the payment was related to his research and

development for his inventions because he "would not be able to

carry on except for the amount of money that was being furnished

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by Dr. Burch's practice;

I mean, she financed my'operations".

Dr. Burch testified -that "we do work together.

I work for Roger-

-well, r was a partner -in'his business, and he works for me."

There was no written contract for services between

petitioners.

Dr. Gamblin'helped Dr. Burch"witheadministrative

duties in 2004 and assisted with "a few little things" -in 2006

but did not report gross income for those years from Dr. Burch,

nor did she claim deductions.

Petitioners kept no records of the

work that Dr. Gamblin performedifor Dr

Burch, and'Dr? Burch

could not recall therrate at which she paid her husband.

She was

vague in her testimony as to how she determined the total amount

to be paid to him.

Petitioners offered no.documentary evidence

that Dr. Burch paid Dr. Gamblin $67,000 in 2005 or, if she did,

that the amount-was compensation for Dr

Gamblin's services.

On the other hand,- Dr. Gamblin's testimony that he received

money from his- wife related to his tresearchiand development and

that she "financed" his operations and Dr. Burch's testimony that

she was "a partner in his business" leads the Court to conclude

that any payments Dr. GBurch may have made to Dr. Gamblin in 2005

were in the nature of capital expenditures rather than

compensation for services.

Generally, no deduction is allowed

for capital expenditures.

Sec. 263(a)

the costs of creating an intangible,

. Taxpayers may not deduct

like a patent or trademark,

or of acquiring an interest in a partnership unläs.s sbme

- 14 exception applies . - Sec .

(d) (1) ,

(2) ,

263 (a) (1) (B) ; sec .

(5) , Income Tax Regs . 3

1.,263 (a) -4 (b) ,

"Capital expenditures are

subsequently recovered through.depreciation, amortization, cost

of goods sold, as an adjustment to basis, or otherwise, at such

time as the property to which the amount relates", is used, sold,

or disposed of by the taxpayer.

Sec. 1.263 (a)-1(b) , ,Income Tax

Regs.

Because petitioners have not shown -that the contested

$67,000 was

aid, was paid as compensation to Dr. Gamblin,- or was

expended for Dr. Gamblin's business, .respondent's determinations

on these issues are sustained.

-Home Of f ice Expenses i

Drs. Gamblin and Burch each filed Forms 88290 Expenses for Business Use of -Your Home, and claimed on their respective

Schedules C home office expense deductions for all 3 years at

issue . - Respondent edisallowed all of the home of f ice .expenses

deducted by Dr. «Gamblin and almost all of the home office

expenses deducted-by Dr. Burch.

Generally, section 280A(a) sprohibits a taxpayer from

deducting expenses for the ,userof a dwelling unit that is the

3Sed. 174 (a) (1) Allows a taxpayer to dèdudt certain research

and experimental expenditures without consent of the Secretary

for his first taxáble year beginning aftEi- Dec. 31, 1953, and

ending after Aug.,16, 1954, or at any time with consent of the

Secretary.

Sec-. 174 (a) (2) ". ' Petitioners' expehditures do not .

qualify for deduction under either provision.

- 15 taxpayer's residence. "But the prohibition--on deductions does not

apply sto an item of expense allocable to a portion of the dwelling that is used "exclusively" and -"on a regular basis" as

the principal place 'of business of the taxpayer'-s trade or

business

Sec.

280A (c) (1) (A) .

Assuming that à taxpayer has a qualifying trade or business,

allowable home office deductions are strictly limited under the

statute.

Home office expense deddctions are limi-ted to the

amount of gross 'income from the use 'of-therdwelling for a trade

or business, reduced by the sum of the.deductions allocablecto

the dwelling regardless of its use as-the -location of-a trade or

business and the allocable business expense deductions not

related ato the use of the dwe:lling itsel'f.

See sec. 280A(c).(5).

Amounts not allowable on'account of the slimitation may be carried

over to the succeeding taxable5year subject to the alimitation of

that taxable year.

Id.

Dr. Gamblin

The "Court has sustained respondent!s determination that Dr.

Gamblin did not-receive ýross:income -from his inventing activity

reportable on Schedule- C forS2005, and he is deemed to have

conceded that hechad norScheduleaC gross income for 2006.

Because Dr. Gamblin had no gross income from business in 2005 and

2006, his'home office expenge deduction for each of'those years

is zero.

See id.

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Although-Dr. Gamblin reported no gross income on.Schedule C

for 2004, the- Court has found that he received-gross income from

businêss of $5,000 for the rental of his cyclomill.

But

respondent-has allowed him as business ,deductions:

(1)

truck expenses of $1,280

$2,410);

(2)

($3,690 deducted less aan adjustment of

office expenses of $3,663

adjustmènt óf .$640) ;

Car and

($4,303 deducted less an

(3) expenses for the rent sor lease of other

business property sof .$3, 430 ,($3, 130 deducted plus an adjustment

of $300);

(4)

supplies expensestof $2,157

an adjustment of $788);

($2,945 deducted less

(5)ttravel expenses of $L,724

($2,650

deducted less an adjustment of $926); and (6) meals and

entertainment expenses of $140

After.reduction of Dr. Gamblin's

gross ,income of $5,0004 for Schedule C expenses described in

-section 280A(c) (5) (B)i,his allowable home office expense

deduction is zero, ;and the Court ,so holds.

Respondent s

a

determination on this issue is sustained..

Dr. Burch

Dr. Burch deducted as home,office expenses on her Schedule C

$44c,514 for 2004,

$2,'798.for-2005 and $11,3103 for 2006.

Respondent disallowed $44,097 for 2004, $2,211 for 2005, and

$10,286 foi-2006.

Respondent,"by allowing Dr.. Burch a portione

4Although respondent determined that petitioners had

unreported incoèè of $8,405 för 2004 as determined by à bank

deposits analysis, there is no evidence that all of it was earned

by Dr. Gamblin.

In any event, the total of Dr. Gamblin's sec.

280A(c) (5) (B) (ii) expenses alone exceeds $12,000.

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albeït- small, òf the home office expenses that she>dedudted, has

tacitly adm'itted that .she qúalifies for the deduction under

section 280A and thit sonly the ainòunt is in question.

s -

The Colirt finds thatt Dr. Burch's Förms 8829 overstate -the

home of fice 'ekpense dedûcti'ons to which sheris entitled

«Some of

thesmofesprominent reasons"include her calculation, of home office

ežpenåes - for -2004 to -include a $28, 346 "Carryover of operating

4

experises"from 2003" for which she offered no evidence. »Dr.

Gamblin testified ,that when he entéred Dr. Burch's home office

e

exp'enses for 200-4 into the t'ax return preparation softwarei,a thesoftware "immediitely took the accumulated back charges", and gave

them to her . " ~ " Dr . Burch also inc luded in her cal culat ionsa

$13,223 for "CarryoierMfaexcess dasualty-losses and depteciation

froni'2003" for which she offered no evidence

Dr . Burch' s claimed deduction 4 of $67, O O O of contract labor

expenses for 2005 was disallòeediby-respondent,' and the

disallowànce is suàtiained by thetCoùrt.

She' will therefore have

no careyover lof òperating expenses ffom 2005 to -2006

Pétitiòners used oveflapping pontions of -theit home for théir redpectiver businesses .' aAnd 'bothtDr . Burch and Dr . - Gamblin

deducted home officë expensesuori their Schedules C, claiming a

combined use of 27.85 percent of their 6,570-square-foot home, or

1,83.0 square feet, for t heir respective businesses for 2004 2005,

and 2006.

Petitioners, as support for, their deduct-ions,

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submittediphotographs of the.interior of their home (including

the garage apartment), a diagram of the basement without

dimensions, and diagrams with dimensions of the garagesapartment

and the first, second, and thirc1 floors pf thei

home.

There is no evidence from which the Court can determine the

areaN of the basement, most of which seems to have been used by

Dr. Gamblin.

feet.

The area of the third-floor bedroom -is 104 square

The Court ;has no.evidence on which to base a determination

of the square footage of the hallway outside the third-floor

bedroom that was used for file storage.4 According to the diagram

that petitioners submitted, the area of the garage apartment is

367.5 square feet, and the area of.the large bedroom on the

second.floorris 264 square feet.

The total area of the three

rooms used by both petitioners for business for which the Court

I

has dimensions .is :735.5 square feet.

Dr. Burch, however, used only a portion of..each.of the.rooms

for her business.

Petitioners did not provide the Court with

evidence sufficient to determine the area of their respective

portions of, the rooms used -for their businesses

The ,Court will

estimate that Dr. Burch used 50 percent of the garage apartment

and the two bedrooms, or 367.75 square feet for her business.

*Expenses attributable to use of a home office in conducting

two or more separate businesses may be deductible where they each

meet the requirements of sec. 280A(c) (i). Hamacher v. Commissioner,

94 T.C.

348

(1990).

- 19 See Cohan v. -Commissioner, 39 F.2d at 544..

the estimate b

Any finexactitude in -

he tourt is öf petitioners' own making and due

to their failure tò2maintain proper búsieness records. - See id.

As 367 . 75 square f eët 'repre sent s' 367 75[6 , 57 0 , or about 6 per cent

of t e total a'rëa of the home," Dr. Buráh is entitled to 6 percent

of her allo'wâble sexpenses :allócable td her use of a portion of

hâr4hoine assanaöffice.'aSee seco 28ÓÄ(c) (1); see also Culp v.

Commissioner, T.C. "Memö. 1993-290F Hefti v. -Commissioner, T.C.

Memo. "1988-22, affd. without published opinion 894 F.,2d 1340 a(8th

Cir .

1989) .

Cardnd Trtick- Expenses and Travel

Expenses

Meals

and Entertainment

Certain business deductions described in section 274 are

subject to strict rules of substantiation that supersede the

doctrine in Cohan v. Commissioner, supra at 543-544.

1.274-5T(c), Temporary Income Tax Regs.,

6, 1985) .

See sec;

50 Fed. Reg. 46016

(Nov. -

Section 274 (d) provides that no deduction shall be

allowed with respect to:

(a) Any traveling expense,

meals and lodging away from home;

including

(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", defined in

'It appears respondent' s adjustments to increase

petitioners' "home interest experise" deduction for each year will

result in an increase in Dr. Burch's allowable home office

expense deductions for each year. The Court will leave the exact

calculation, for the Rule 155 computation.

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section 280F (d) (4) (A) (i) to include , any passengers automobile ,

unless the taxpayer substantiates certain elements

For an expense described in one of thesabovescategories, the

taxpayer must substantiate by adequate records -or sufficient

evidence to corroborate the taxpayer' s own testimony

amount of the expenditure or use;

expenditure or use;

.

(1) The

(2) ,the time and place sof the

(3) the business purpose of ythesexpenditure

or muse; and in the-case of entertainment, (4) the businessa

relationship to the taxpayer of each expenditure orruse.

sec.

See

274(d).

To meet the adequate .records requirements: of .section 274, a

taxpayer must maintain some form of records as well as

documentary evidence that in combination are sufficient to

establish each element of an expenditure or use .

See sec . 1 . 274 -

ST(c) (2), Temporary Income Tax Regs., 50 Fed. Reg. 46017

1985) .

(Nov. 6,

"Documentary evidence" includes receipts, paid bills, - or

similar evidence.

Sec.

1.274-5(c) (2) (iii),

Income Tax Regs.

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 þrobative value to

elevate such statement" to the level of credibility of a

contemporaneous record supported by sufficient .documentary

evidence .

Sec . 1. 274 -5T (c ) (1) , Temporary Income Tax Regs . , 50

Fed. Reg. 46Ò16-46017

(Nov.

6,

1985) .

21 -

Dr. Gamblin's car and truck,- traver, meal, and entertainment

expense deductions

indlüding meals and lodging away from-home,

are subject to section 274(d) and the regulations thereunder.

The Court allowed petitioners to confer with respondent after

trial in order to present any additional dócumentary evidence

they might-haúè that would betsusceptible to stipulation.

- Dr. Ganiblin, iri prepa'ration afor thë posttrial meeting with

respondént, created a travel log for this car and truck expenses

and a log·for hisstravel, meal,. andsentertainment expenses-that

herdeducted on~his ScheduÍes C for 2004,

2·005,

and 2006.

Dr.

Gamblin têsdïfied*at trial that he did not keep a 'logsof each

individual±tripebudainstead at the end of the year he "would go

off and check the mileage, and:write it down on a slip of paper

in the glove dox."

Nevertheless, the travel'log lists apparent

depatture dates, destinàtions, a very brief "purpose of trip" and

"nights" and "days", apparently away from- home.

Drt. Gamblin's

log of travel, nealj and entertainment exèenses lists -an alleged

check number and theccösts of three instances of -"air travel" and

calculateå per diem~amounts based on the travel log.

Petitióners failed to provide copies of receipts, paid

bilis, or"simialar evidence.

The Court finds that petitioners,did

not offër corroborative evidence to support their reconstruction

of the elements of expeniliture or use häving "a high degree of probativeavalue to elevate- such*statement"*ofeeventse that

e

- 22 -

happened in 2004, 2005, ande2006 to the level of credibility of a

contemporaneousi record supported - by suf f icient documentary

evidencea 'Respondent'sædetermination on these issues is

sustained.

Accuracy-Related Penalties

Section3491(c)

imposes on -the Commissioner the bur en of

production in any court proceeding?with respect t örthe' liability

of any individual for penalties and additi-ons to tax.

>Iigbee v

Cóniniisuioner, 116 T.C. ata446; Tronbridge v. Commissioner, T.C.

Memos12003:164.

Iri order to meet the burden of production sunder

section 7491(c), the Commissionereneéd,only make a prima facie

case that imposition of ithe penalty-orythe addji.tion to i ax is

appropriate . i GHighee av.: Commissioner,« supra sat 446

Respondent determined that for eboth 2004 ande2005

pettitioners'-:underpayments of portions < of their income taxes were

due'to 'negligence or intentional disregard of rulessor

regulátions . i SSections6662 (a) imposes a 20 -percent penalty on; the

portiori of an underpayment óf tax;attributable toyany one of

various -factors

including anegligence ore disregard of rules,or

regulátions and a substantial understatement- of income t ax.

sec .- 66629(b) (1) and (2) .

See

"Negligence" . includes any, failure to

make"a reasonable- áttempt to comply with the provisions of the

Internal Revenué Code-, including any failure to-keepeadequates

books and records- or to substantiate items- properly.

See sec.o

- 23 6662 (c )-; sec .

1. 6662-3 (b) (1) ,

Income Tax Regs .

A "substantial

understatement" includes an understatement of tax that exceedse

the greater of 10 percent 'of the tar required to be shown on the

return or- $5, 00 0 .

See sec . 6662 (d) (1-) (A) ; sec . 1. 6662 -4 (b) -(1) , a

Inc ome Tax Regs .

Section 6664*(c);(1) provides that the penalty under section a

6662 (a) shall not apply to any portion of an underpayment- if its

is shown that there was reasonable cause for the. taxpayer' s

position and thate the taxpayer acted ins good faith with respect

to that-portion

The determination of whether a taxpayer acted

with reasonable cause and in good faith is made on atcaserby-case

basis, taking into account all the -pertinent facts and

circumstances .

Sec . 1 . 6664 -4 (b)s(1) ,-Incòme «Tax Regs .

The mostr

important factor is the extent of the taxpayer's effort to assess

his »proper tax liability for the:year.

Id.

Petitionefs tappear to haveusubstantial understatements ofe

incomertax for 2005 and 2006 since theaunderstatement amounts

wiill exceed the greater of 10apercent of the tax required4to be

shown on the return or $5,000.

Petitioners also. failedeto keep

adequate books and records or to substantiate items properly,

claimed itemizedadeductions and business expenses to which they

were not entitled;

and: failed to report portions of their income .

The Court concludes that respondent has produced sufficient

- 24 -

evidence t·o shod that the máccuracy-related penalties under

sectionM6662 are appropriateafor both years

The raccuracy-related penalties - will apply unless spetitioners

demoristrate that there was deasonable cause sfor the underpayments

and thatt they acted in good faith with respect to t-he

un~dàì aymen s.

Tax à ga.

See sec

6664 (c) .

Section 1.6664 4t(b) (1) ,

specifically provides:

"Circumstances that may

ncome

indicate3reasonabFe cause-ánd góodafaith include arishonest

mi'sunderstanding of fact or law thatcis.reasonable in lightsof

ala of the «facts and circumstances, including -the experience

knowledge and education of; the taxpayer "

Petitioners, both -of àhom are hiejhly educated, did not show

thatatheir underrepärting of sincome and claiming of deductions a

were-actions .taken twith reasonable cause and in goodifaith. 6

Respondent' s determinations- of the accuracy-felated penalties - e

underesection 6662(a)

for 2004 and 2005 are sustained.

, ThedCourt has considered the-other arguments of the parties

and they areseither without merit or not necessary in viewoof our

resolútion of- the issues infthis case

To reflect the foregoing,

Decision ,wil

under Rule 155.

be entered