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T.C. Memo. 2022-117

STEVEN F. HOAKISON AND JUDY C. HOAKISON,

Petitioners

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 16577-17.

Filed December 5, 2022.

—————

James R. Monroe, for petitioner.

Dennis R. Onnen, Robert C. Teutsch, and Douglas S. Polsky, for

respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PARIS, Judge: By notice of deficiency dated June 14, 2017,

respondent determined deficiencies in federal income tax of $55,485,

$44,781, and $34,325 and accuracy-related penalties under section

6662(a) 1 of $11,097, $8,956.20, and $6,865 for petitioners’ tax years

2013, 2014, and 2015, respectively.

After concessions, discussed below, the issues for decision are

whether petitioners are:

1 Unless otherwise indicated, all statutory references are to the Internal

Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references

are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant

times, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Served 12/05/22

[*2]

entitled to deduct depreciation claimed on Schedule F,

Profit or Loss From Farming, beyond those amounts

respondent has allowed;

entitled to deduct expenses for utilities; insurance (other

than health insurance); gasoline, fuel, and oil; repairs and

maintenance; and other expenses reported on Schedule F

beyond those amounts respondent has allowed;

liable for the penalties.

FINDINGS OF FACT

Background

Petitioners, husband and wife, are farmers. They resided in Iowa

when the Petition was timely filed.

Mr. Hoakison has a high school education and has been farming

since he completed high school in 1971. He also worked for United Parcel

Service (UPS) for more than two decades. During the years at issue, he

worked full time as a delivery driver, driving his route from about 8 a.m.

until he completed his route, typically between 5 p.m. and 7 p.m. Mrs.

Hoakison was employed full time as a receptionist at a veterinary clinic

during the years at issue.

Mr. Hoakison began farming after graduating from high school in

1971. In 1975 he purchased his first farm property (the Home Place) and

began his own cow-calf operation. The Home Place consisted of 101.89

acres of cropland and 19.81 acres of pasture. Petitioners married in 1977

and have lived together on the Home Place ever since.

Petitioners encountered difficult times during the farm crisis of

the 1980s, suffering serious financial hardship and nearly losing their

farm. At times they had to turn to public assistance just to get by, but

they managed to pull through and since that time have conducted both

their personal lives and their farm operation with determined frugality.

Petitioners live in a 100-year-old house on the Home Place, which is

heated with propane and does not have air conditioning. They purchase

used vehicles and rarely vacation or travel beyond the occasional family

reunion. They avoid debt whenever possible, generally buying used

equipment, which they pay for in cash. Mr. Hoakison performs a

significant amount of his own repairs and maintenance, as well. By

working tirelessly and managing their financial affairs in this way,

[*3] petitioners have been able to weather downturns in the farm

economy and by 2013 owned 422 acres of land debt-free.

II.

Farm Operation

Background

During the years at issue petitioners farmed five noncontiguous

tracts of land, totaling approximately 482 acres. Petitioners owned four

of those tracts outright. In addition to the Home Place, petitioners

owned a tract consisting of 36.62 acres of cropland and 36.96 acres of

pasture (Oscar’s), which they acquired in the early 2000s; a tract

consisting of 51.02 acres of cropland and 32 acres of pasture (Cherry

Street), acquired around 2009; and a tract consisting of 144.37 acres of

cropland (the Barn Farm), acquired around 2009. Petitioners farmed the

fifth, a 59.33-acre tract of cropland (Doug’s Place), on a crop share basis.

The Barn Farm was previously owned by Mr. Hoakison’s mother, and

Cherry Street was previously owned by his brother. Petitioners

purchased the Barn Farm and Cherry Street in an effort to settle his

family members’ debt problems and save the farm operations.

The Home Place is about 14 miles from Oscar’s, 11 miles from

Cherry Street, 12 miles from the Barn Farm, and 6 miles from Doug’s

Place. Driving a tractor from the Home Place to one of the other farms

could take between 45 and 60 minutes each way.

Petitioners grew row crops, alternating between corn and beans.

They also ran a cow-calf operation, for which they kept approximately

30 cows and 4 bulls. Petitioners’ farming activities, especially the cowcalf operation, required significant work and physical activity, most of

which Mr. Hoakison performed himself. During the years at issue Mr.

Hoakison received some assistance from various family members,

including his adult son, his brother, and his nephew, but they had fulltime jobs or their own farms, so that help was limited.

Because he was also working a full-time job during the years at

issue, Mr. Hoakison would typically perform most of his farm work

either before his UPS shift in the morning or at night after finishing his

shift. Mr. Hoakison would typically work from 6 a.m. until after 10 p.m.

During planting or harvest season, he would usually work as late as

midnight.

In 2011 Mr. Hoakison suffered a heart attack and underwent

triple bypass surgery. Following his surgery, Mr. Hoakison continued to

[*4] work his full-time job with UPS and still put in the necessary time

and effort with his farms.

Tractor Purchases

Petitioners used numerous tractors in their farm operation. Mr.

Hoakison believed that buying older, used tractors carried several

advantages. An older tractor costs a small fraction of a new tractor’s

price, allowing him to purchase a few at a time and still pay entirely in

cash. In addition, the types of tractors that Mr. Hoakison purchased

were the same types that he had been using all his life. He was familiar

with their operation and could perform most maintenance and repairs

himself rather than hiring someone.

With the acquisition of the new farms in 2009 and his declining

health after his surgery, Mr. Hoakison sought ways to make his farming

operation more efficient and maximize the limited time he had available

to work each day before and after his shift with UPS. Mr. Hoakison

would typically keep tractors at each of the farm locations, rather than

spending 45 to 60 minutes to move one from the Home Place to another

farm each day.

Before 2013 petitioners had purchased during their 50-year

farming career at least 17 tractors that were still in use during the years

at issue. Petitioners acquired another 8 tractors during 2013, 12 during

2014, and 9 during 2015.

Petitioners purchased, and claimed section 179 expense

deductions for the purchase price of, the following tractors placed in

service during 2013:

2013 Tractor Purchases

Price

Ford NAA tractor

$2,500

D-17 AC 2 tractor

2,300

IH 284 tractor

3,100

Ford 1210 tractor

3,000

2 Within petitioners’ returns and workpapers, “AC” refers to Allis Chalmers,

“IH” to International Harvester, and “JD” to John Deere.

[*5]

Oliver Super 55 tractor

3,300

D-17 diesel tractor

4,750

B Farmall tractor

2,700

Super C Farmall tractor

2,000

Petitioners purchased, and claimed section 179 expense

deductions for the purchase price of, the following tractors placed in

service during 2014:

2014 Tractor Purchases

Price

JD MT tractor

$3,500

Three AC tractors (616,

620, and 720)

8,200

AC D-10 tractor

3,950

1954 Case SC tractor

3,450

1946 Farmall A tractor

3,450

Farmall 450 tractor

2,700

Oliver 66 tractor

5,000

Case DC tractor

2,500

JD 530 tractor

5,408

1954 Super H Farmall

tractor

4,160

Petitioners purchased, and claimed section 179 expense

deductions for the purchase price of, the following tractors placed in

service during 2015:

[*6]

2015 Tractor Purchases

Price

Cub Farmall tractor

$1,458

AC 210 tractor

7,020

1954 JD 70 tractor

3,848

1941 Farmall M tractor

3,848

JD 5020 tractor

8,000

JD 730 tractor

1,137

1959 JD 630 tractor

AC D-21 tractor

1955 Ford 960 tractor

497

1,786

400

All of the tractors petitioners acquired during the years at issue were

manufactured in the 1940s, 1950s, or 1960s, with the exceptions of the

IH 284 and the Ford 1210, which were manufactured in 1979 and 1986,

respectively.

Petitioners’ tractors had specific features or used a variety of

mounted implements to perform the many tasks necessary to operate

the farms, 3 and not every tractor petitioners owned was compatible with

every implement or suitable for every task the farms required. Mr.

Hoakison would often dedicate a particular tractor to a particular

implement at each farm location, leaving the implement attached to the

tractor. Doing so also helped reduce the time and physical effort involved

in taking the implements off and reattaching them.

Pickup Trucks

Petitioners used five pickup trucks in their farm operation during

the years at issue: a 1995 Ford F250 diesel engine, a 1999 Ford F350

3 Among the implements petitioners used in the farm operation were one or

more of the following: planters (a 16-row planter for corn and a 31-row planter for

beans), blades, baler, grain drill, controls, rake, harrow, post digger, scoop, cultivator,

auger, bush hog, rotary hoe, sprayer, fertilizer spreader, wagons, and post driver.

[*7] one-ton diesel engine, a 1999 Dodge Dakota, a 2008 Ford F350 oneton diesel engine, and a 2011 Ford F350 one-ton diesel engine. The 1995

Ford F250 had an attached hay bale stabber that was not readily

detachable, and Mr. Hoakison used the truck for transporting hay. He

used the 1999 Ford F350 as his tool truck; it was equipped with a torch

and an air compressor and carried tools and two 60-gallon fuel tanks to

service the farm equipment. The 1999 Dodge Dakota had mud tires, and

Mr. Hoakison used it primarily to go out into pastures. He would

sometimes drive it to the UPS office as well. The 2008 and 2011 Ford

F350 one-ton diesel trucks were used primarily with petitioners’ two

trailers to transport cattle from farm to farm, to the veterinarian, or to

market in Anita, Iowa. The 30-foot livestock trailer required a one-ton

truck and almost always stayed hooked to one of the Ford F350s.

Machine Shed

In 2012 petitioners had a machine shed constructed on the Home

Place for a cost of $108,856, which they paid in cash. During the years

at issue the machine shed housed petitioners’ farming equipment,

including the tool truck, welder, torch, auger wagons, combines, and

tractors during the winter or when otherwise not in use. The machine

shed had two sections: a smaller section, approximately 3,840 square

feet, and a tall section to store the combine, approximately 7,200 square

feet.

When it was built, the machine shed had no electricity,

insulation, or heat, and the floor was dirt. Petitioners added these items

over the next few years as they could afford to pay for them in cash.

In 2013 petitioners paid $2,979 to add electricity. In 2013 they

also paid $16,408 to pour a concrete floor for the smaller section of the

machine shed. Before adding the concrete, petitioners placed gravel

around the smaller section to serve as a base. Petitioners also laid gravel

in front of the machine shed. In total, the gravel cost $715.77. In 2014

petitioners added insulation to the smaller section using supplies

purchased from Menard’s for a total cost of $4,473.11.

III.

Return Preparation

Petitioners’ tax returns for 2013, 2014, and 2015 were prepared

by Ray Powell. Mr. Powell holds a master’s degree in agricultural

education and completed coursework for a Ph.D. in agricultural

economics. Mr. Powell began his career as a farm management specialist

in the Creston area agricultural extension office, then later served as a

[*8] vice president and loan supervisor with the Production Credit

Association. Since the early 1980s he has been self-employed as a farm

business consultant, assisting with economic problems and preparing

income tax returns for farmers in the Creston area.

Mr. Powell has known Mr. Hoakison for nearly 50 years and

prepared petitioners’ tax returns for nearly 30 years. He taught Mrs.

Hoakison how to keep records for the farm operation and provided her

with worksheets to help track income and expenses. Mr. Powell relied

on the information petitioners provided to him to prepare their returns

for the years at issue.

On petitioners’ timely filed 2013 tax return, the Schedule F

reported gross farm income of $245,996 and farm expenses totaling

$294,336. Among the reported expenses were $95,873 for depreciation

and section 179 expense; $3,143 for utilities; $5,714 for insurance (other

than health insurance); $9,724 for gasoline, fuel, and oil; $67,386 for

repairs and maintenance; and $20,022 for “other expenses.” Petitioners

reported taxable income of $28,670, which included wages from their

employers, taxable interest, and a farm loss of $48,340.

On petitioners’ timely filed 2014 tax return, the Schedule F

reported gross farm income of $194,002 and farm expenses totaling

$248,012. Among the reported expenses were $95,741 for depreciation

and section 179 expense; $3,254 for utilities; $5,435 for insurance (other

than health insurance); $9,306 for gasoline, fuel, and oil; $28,602 for

repairs and maintenance; and $18,151 for “other expenses.” Petitioners

reported taxable income of $33,399, which included wages from their

employers, taxable interest, and a farm loss of $54,010.

On petitioner’s timely filed 2015 tax return, the Schedule F

reported gross farm income of $169,317 and farm expenses totaling

$214,251. Among the reported expenses were $75,888 for depreciation

and section 179 expense; $3,432 for utilities; $5,502 for insurance (other

than health insurance); $7,074 for gasoline, fuel, and oil; $33,541 for

repairs and maintenance; and $14,672 for “other expenses.” Petitioners

reported taxable income of $30,817, which included wages from their

employers, taxable interest, pensions and annuities, Social Security

benefits, and a farm loss of $44,934.

For 2013, 2014, and 2015, petitioners made section 179 elections

on Forms 4562, Depreciation and Amortization, in the allowable

amounts of $54,300, $54,168, and $25,000 for the acquisition of property

[*9] placed in service for those years, respectively. These amounts are

included in the total depreciation and section 179 expenses of $95,873,

$95,741, and $75,888 reported on Schedules F for those years. The

expenses reported as “other expenses” on Schedules F of petitioners’

returns were based on worksheets prepared by Mrs. Hoakison. The

worksheets for 2013, 2014, and 2015 listed amounts in the categories of

(1) Auto, farm share, (2) PU-Truck expense, (3) Legal-accounting, and

(4) Publ-dues. Mr. Powell transferred these amounts to the other

expense section of Schedule F for each year. He then combined the auto

and pickup truck expenses onto one line for 2013 and combined the

legal-accounting and publication expenses onto one line for each year.

IV.

Examination

Respondent selected petitioners’ 2013, 2014, and 2015 returns for

examination. Revenue Agent Anna Smith (RA Smith) conducted the

examination and determined that petitioners were not entitled to

deductions for a number of expenses reported on their Schedule F for

each of the years. Respondent determined a deficiency of $55,485 for

2013, on the basis of the following adjustments to petitioners’ 2013

return:

Item

1. Other Gains or Losses

From Form 4797

Amount

$10,189

Petitioners concede

2. Sch F1 – Utilities

2,223

3. Sch F1 – Insurance (Other

Than Health)

1,308

4. Sch F1 – Gasoline, Fuel,

and Oil

2,802

5. Sch F1 – Depreciation and

Section 179 Expense

6. Sch F1 – Sales–Raised

Livestock/Produce/Grains/Etc.

7. Sch F1 – Other Expenses

59,761

Respondent concedes

$16,028; petitioners

concede $12,305

3,371

Respondent concedes

19,986

[*10]

8. Sch F1 – Repairs and

Maintenance

51,922

9. Sch F1 – Custom Hire

(Machine Work)

17,892

Respondent concedes

$16,489, petitioners

concede the balance

10. Sch F1 – Cost/Other Basis

of Livestock/Other

6,000

Petitioners concede

11. SE AGI Adjustment

(8,261)

Total Adjustments 4

167,193

Respondent determined a deficiency of $44,781 for 2014 on the

basis of the following adjustments to petitioners’ 2014 return:

Item

Amount

1. Sch F1 – Utilities

$2,306

2. Sch F1 – Insurance (Other

Than Health)

1,295

3. Sch F1 – Gasoline, Fuel,

and Oil

3,483

4 Rows 1, 6, 9, and 10 are amounts fully conceded by the parties and will not

be further addressed. In row 5, the Schedule F depreciation and section 179 expenses,

petitioners concede deductions totaling $12,305 relating to the Ford Dept Hack and

the 2010 farm pickup. Respondent concedes that petitioners are entitled to additional

depreciation of $5,228 with respect to a combine and an additional section 179

deduction of $9,800 with respect to a flatbed trailer. Petitioners further concede that

they are not entitled to depreciation deductions for a fifth-wheel trailer for any of the

years at issue; because the 5th wheel trailer depreciation was not claimed on

petitioners’ returns but raised for the first time during the examination, this

concession does not affect the deficiency determination. Any amounts conceded by the

parties will not be further addressed. In addition, the adjustments to self-employment

tax, the self-employment tax deduction, and the retirement savings credit are

computational, and the Court will not further address them. The parties have made

further concessions with respect to other deductions still at issue, which the Court will

address in the body of this Opinion.

[*11]

4. Sch F1 – Depreciation and

Section 179 Expense

71,444

Respondent concedes

$5,228; petitioners

concede $5,805

5. Sch F1 - Sales–Raised

Livestock/Produce/Grains/Etc.

6,915

Petitioners concede

6. Sch F1 – Other Expenses

17,830

7. Sch F1 – Repairs and

Maintenance

17,129

8. Sch F1 – Custom Hire

(Machine Work)

1,958

Respondent concedes

$1,882, petitioners

concede the balance

9. Sch F1 – Cost/Other Basis

of Livestock/Other

24,000

Petitioners concede

10. SE AGI Adjustment

(6,525)

Total Adjustments 5

139,835

Respondent determined a deficiency of $34,325 for 2015, on the

basis of the following adjustments to petitioners’ 2015 return:

Item

Amount

1. Sch F1 – Utilities

$2,415

2. Sch F1 – Insurance (Other

Than Health)

1,455

3. Sch F1 – Gasoline, Fuel,

and Oil

2,648

5 Rows 5, 8, and 9 are amounts fully conceded by the parties and will not be

further addressed. In row 4, the Schedule F depreciation and section 179 expenses,

petitioners concede $5,805 with respect to the 2010 farm pickup. Respondent concedes

that petitioners are entitled to additional depreciation of $5,228 with respect to a

combine.

[*12]

4. Sch F1 – Depreciation and

Section 179 Expense

63,184

Respondent concedes

$5,228; petitioner

concedes $3,785

5. Sch F1 – Other Expenses

14,652

6. Sch F1 – Repairs and

Maintenance

18,031

7. Sch F1 – Custom Hire

(Machine Work)

200

Petitioners concede

8. Sch F1 – Cost/Other Basis

of Livestock/Other

15,000

Petitioners concede

9. SE AGI Adjustment

(5,193)

10. Sch F1 - Interest – Other

858

Petitioners concede

11. Social Security RRB

Total Adjustments 6

113,251

Respondent’s adjustments to petitioners’ Schedule F depreciation

and section 179 expense deductions were based on the following

disallowed items:

2013

2014

2015

Grain Vac

$1,500

NH Rake

359

Disc

214

1,100

30’ Trailer

6 Rows 7, 8, and 10 are amounts fully conceded by the parties and will not be

further addressed. In row 4, the Schedule F depreciation and section 179 expenses,

petitioners concede $2,902 with respect to the 2010 farm pickup and $883 with respect

to a JD G tractor. Respondent concedes that petitioners are entitled to additional

depreciation of $5,228 with respect to a combine.

[*13]

7060 Tractor

929

7240 CIH Mag

Tractor

8,322

CIH Field

Cultivator

2,643

118 Dozer

1,607

Total

16,674

The above items were placed into service in previous years not at

issue and were expensed under section 179. The items were erroneously

included in the subsequent depreciation schedules and petitioners

concede the claimed straight line method depreciation deduction of

$16,674 for each year. These items will not be further addressed.

Respondent’s adjustments to petitioners’ Schedule F depreciation

and section 179 expense deductions continued as follows:

2013

2014

2015

Machine Shed

2,721

G Allis tractor

557

5020 AC tractor

357

2010 Farm PU

5,805

2011 Ford Pickup

4,259

D-19 tractor

571

F350 – 99 Tool

Truck

850

Ford Dept Hack

6,500

—

[*14]

Tractor purchases 7

23,650

42,318

JD G

—

883

Farm vehicle

—

5,181

Trailer Featherlite

(1,698)

(485)

(969)

43,087

54,771

46,510

Moved from

Repairs

Total

27,994

After the concessions detailed in footnotes 4–6, the following

Schedule F depreciation items remain in dispute:

2013

2014

2015

Machine Shed

$2,721

D-17 tractor

572

G Allis tractor

557

5020 AC tractor

357

1999 Dodge pickup

787

394

D-15 tractor

357

4,259

D-19 tractor

571

Farm tractors 8

2,603

2011 Ford pickup

7 The detailed list of petitioners’ tractor purchases during the years at issue

was previously discussed. See supra Findings of Fact section II.B.

8 The Farm tractors entry consists of six tractors and a wagon, acquired in

2011. Petitioners initially claimed a total basis of $18,222, but now concede the correct

basis is $14,500, as follows:

[*15] The following section 179 expense deductions remain in dispute:

Ford NAA tractor

2,500

—

D-17 AC tractor

2,300

—

IH 284 tractor

3,100

—

Ford 1210 tractor

3,000

—

Oliver Super 55

tractor

3,330

—

D-17 diesel tractor

4,750

—

B Farmall tractor

2,700

—

Super C Farmall

tractor

2,000

—

JD MT tractor

—

3,500

—

AC tractors

—

8,200

—

AC D-10 tractor

—

3,950

—

1954 Case SC

tractor

—

3,450

—

1946 Farmall A

tractor

—

3,450

—

D-12 tractor

$3,250

D-14 tractor

1,600

G Allis tractor

2,850

Oliver 88 tractor

1,700

D-14 tractor

2,100

Wagon

1,700

H Farmall tractor

1,300

[*16]

Farmall 450

tractor

—

2,700

—

Oliver 66 tractor

—

5,000

—

Case DC tractor

—

2,500

—

JD 530 tractor

—

5,408

—

1954 Super H

Farmall tractor

—

4,160

—

Cub Farmall

tractor

—

1,458

AC 210 tractor

—

7,020

1954 JD 70 tractor

—

3,848

1941 Farmall M

tractor

—

3,848

JD 5020 tractor

—

8,000

JD 730 tractor

—

1,137

1959 JD 630

tractor

—

497

AC D-21 tractor

—

1,786

Farm vehicle 9

—

7,253

1955 Ford 960

—

400

In addition respondent determined accuracy-related penalties for

underpayments attributable to substantial understatements of income

tax under section 6662(a) and (b)(2) of $11,097, $8,956.20, and $6,865

for the years at issue.

9 Depreciation of $7,253 was claimed for 2015 for a Farm vehicle which

represents a 2014 Lincoln Navigator. On brief, petitioners concede that they are not

entitled to this deduction.

[*17] By letter dated April 3, 2017, petitioners were notified of the

proposed changes to their federal income tax for the years at issue,

including the imposition of accuracy-related penalties, via Letter 950

(30-day letter) and an accompanying Form 4549–A, Income Tax

Examination Changes (examination report). The 30-day letter provided

petitioners with the opportunity to protest the proposed changes with

the Office of Appeals and bears the signature of Supervisory Revenue

Agent Kathleen Roberts, who was RA Smith’s immediate supervisor

when the letter was mailed. The administrative file reflects that, as of

May 30, 2017, there was no signed Civil Penalty Approval Form signed

by the Group Manager. Ms. Roberts electronically signed Work Paper

#300-1.1, Civil Penalty Approval Form, on June 5, 2017. At that time,

she was on temporary detail and was not RA Smith’s immediate

supervisor.

Respondent issued the notice of deficiency on June 14, 2017, and

petitioners timely petitioned the Court for redetermination.

OPINION

Introduction

Generally, the Commissioner’s determinations set forth in a

notice of deficiency are presumed correct, and the taxpayer bears the

burden of showing the determinations are in error. 10 Rule 142(a); Welch

v. Helvering, 290 U.S. 111, 115 (1933). Deductions are a matter of

legislative grace, and petitioners have the burden of establishing

entitlement to any claimed deductions. See INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); Van Velzor v. Commissioner, T.C.

Memo. 2014-71, at *3; see also Rule 142(a). Section 6001 requires every

person subject to income tax to maintain books and records sufficient to

establish the amount of gross income and deductions shown on its

income tax return. See also Treas. Reg. § 1.6001-1(a).

10 Section 7491(a) provides that if, in any court proceeding, a taxpayer

introduces credible evidence with respect to any factual issue relevant to ascertaining

the liability for tax and meets other prerequisites, the burden of proof rests on the

Commissioner as to that factual issue. See Higbee v. Commissioner, 116 T.C. 438, 440–

41 (2001). Petitioners do not contend that the burden of proof should shift to

respondent under section 7491(a), nor have they established that the requirements for

shifting the burden of proof have been met. Accordingly, the burden of proof remains

on petitioners. See § 7491(a)(2).

[*18] Section 274(d)(4) provides that no deduction shall be allowed

“with respect to any listed property (as defined in section 280F(d)(4))”

unless the taxpayer substantiates “by adequate records or by sufficient

evidence corroborating the taxpayer’s own statement.” Listed property

includes, among other things, any passenger automobile or any other

property used as a means of transportation. § 280F(d)(4)(A)(i) and (ii).

The flush text of section 274(d), however, excludes from the strict

substantiation requirements any “qualified nonpersonal use vehicle.” A

“qualified nonpersonal use vehicle” is “any vehicle which, by reason of

its nature, is not likely to be used more than a de minimis amount for

personal purposes.” § 274(i). The strict substantiation requirements of

section 274(d) generally apply to any pickup truck or van “unless the

truck or van has been specially modified with the result that it is not

likely to be used more than a de minimis amount for personal purposes.”

Treas. Reg. § 1.274-5(k)(7). Other qualified nonpersonal use vehicles not

subject to the strict substantiation requirements of section 274(d)

include several relevant categories. Those include any vehicle designed

to carry cargo with a loaded gross vehicle weight over 14,000 pounds,

combines, flatbed trucks, and tractors and other special purpose farm

vehicles. Treas. Reg. § 1.274-5(k)(2)(ii)(C), (F), (J), (Q). Respondent has

previously conceded additional depreciation of $5,228 for each year with

respect to a combine and an additional section 179 deduction of $9,800

with respect to a flatbed trailer for 2013.

Respondent argues that the depreciation and other deductions

claimed in connection with petitioners’ pickup trucks and other vehicles

are subject to the strict substantiation requirements of section 274(d).

Petitioners argue that section 274(d) is inapplicable to the pickup trucks

because each was modified in some way to be used on the farm and was

not likely to be used more than a de minimis amount for personal

purposes. With respect to the 1995 Ford F250 and the 1999 Ford F350,

the Court agrees. The 1995 Ford F250 had a bale stabber attached and

was used exclusively to transport hay, and the 1999 Ford F350 was

equipped with tools and equipment, including a torch, oil, and two 60gallon fuel tanks. The Court finds that both were modified with the

result that they were not likely to be used more than a de minimis

amount for personal purposes and that the strict substantiation

requirements of section 274(d) do not apply with respect to those two

trucks.

The 2008 Ford F350 and the 2011 Ford F350 were both one-ton

diesel engines that petitioners used to transport livestock between

farms, to the veterinarian, or to market. Petitioners kept trailers

[*19] attached to both trucks at nearly all times, including a 24-foot

flatbed and a 30-foot livestock trailer for transporting livestock to the

veterinarian in the case of an emergency. On the basis of petitioners’

credible testimony, as well as the weight and function of the vehicles

and the attached trailers, the Court finds that strict substantiation

requirements of section 274(d) do not apply with respect to the 2008

Ford F350 and the 2011 Ford F350.

With respect to the 1999 Dodge Dakota, which was equipped with

mud tires, Mr. Hoakison testified that he used the truck primarily in the

field and that it was not suitable for driving more than a few miles over

roads. Petitioners also testified, however, that he used the 1999 Dodge

Dakota to travel from farm to farm, as well as from the Home Place to

the UPS office. Petitioners have not shown that the modifications to the

1999 Dodge Dakota were such that it was “not likely to be used more

than a de minimis amount for personal purposes.” Accordingly, the

Court finds that the strict substantiation requirements of section 274(d)

are applicable to the 1999 Dodge Dakota.

II.

Depreciation Deductions

Overview

On Schedules F attached to their returns, petitioners claimed

depreciation and section 179 deductions totaling $95,873, $95,741, and

$75,888 for 2013, 2014, and 2015, respectively. Respondent disallowed

depreciation totaling $59,761, $71,444, and $63,184 for 2013, 2014, and

2015, respectively. After concessions, the remaining amounts in dispute

relate to 40 tractors, the machine shed, and two pickup trucks.

Tractors

Respondent disallowed claimed Schedule F depreciation and

section 179 deductions totaling $30,831, $49,499, and $35,175 for 2013,

2014, and 2015, respectively, relating to a total of 40 tractors.

Petitioners argue that they are entitled to depreciation deductions for

the following tractors in the following amounts:

[*20]

2013

2014

2015

D-17 tractor

$572

G Allis tractor

557

5020 AC tractor

357

D-15 tractor

357

D-19 tractor

571

2,603

Farm tractors 11

Petitioners assert the following tractors purchased and placed in

service in 2013 qualify for section 179 expense deductions:

Tractor

Amount

Ford NAA tractor

2,500

D-17 AC tractor

2,300

IH 284 tractor

3,100

Ford 1210 tractor

3,000

Oliver Super 55

tractor

3,330

D-17 diesel tractor

4,750

B Farmall tractor

2,700

Super C Farmall

tractor

2,000

11 The depreciation deductions for the “Farm tractors” claimed for 2013, 2014,

and 2015 were calculated using a basis of $18,222. The parties have stipulated that

the correct basis for those items is $14,500. The depreciation deductions should be

adjusted accordingly.

[*21] Petitioners assert the following tractors purchased and placed in

service in 2014 qualify for section 179 expense deductions:

Tractor

Amount

JD MT tractor

3,500

AC tractors

8,200

AC D-10 tractor

3,950

1954 Case SC

tractor

3,450

1946 Farmall A

tractor

3,450

Farmall 450 tractor

2,700

Oliver 66 tractor

5,000

Case DC tractor

2,500

JD 530 tractor

5,408

1954 Super H

Farmall tractor

4,160

Petitioners assert the following tractors purchased and placed in service

in 2015 qualify for section 179 expense deductions:

Tractor

Amount

Cub Farmall tractor

1,458

AC 210 tractor

7,020

1954 JD 70 tractor

3,848

1941 Farmall M

tractor

3,848

JD 5020 tractor

8,000

[*22]

JD 730 tractor

1959 JD 630 tractor

1,137

497

AC D-21 tractor

1,786

1955 Ford 960

400

Respondent contends that petitioners are not entitled to the

deductions because they have not established that the tractors were

used in their business and, further, that they have failed to show that

the tractors were not acquired for personal reasons. Respondent further

contends that petitioners have not established their bases in the G Allis

tractor and the 5020 AC tractor, both acquired in 2009 and for which

depreciation deductions were claimed for all three years at issue.

Section 167(a) allows as a depreciation deduction a reasonable

allowance for exhaustion and wear and tear (including a reasonable

allowance for obsolescence) of property used in a trade or business or

held for the production of income. Section 168(a) specifies that the

amount allowed as a depreciation deduction under section 167(a) is

determined by using the applicable depreciation method, the applicable

recovery period, and the applicable convention. The basis on which

exhaustion, wear and tear, and obsolescence are to be allowed in respect

of any property is the adjusted basis as provided in section 1011.

§ 167(c).

A taxpayer may elect to deduct as a current expense the cost of

section 179 property acquired and used in the active conduct of a trade

or business and placed in service during the year. § 179(a), (b), (d)(1);

Treas. Reg. § 1.179-4(a). Section 179 property includes tangible property

(to which section 168 applies) that is section 1245 property which is

acquired by purchase for use in the active conduct of a trade or business.

§ 179(d)(1). The deduction under section 179 is allowable for the tax year

in which the qualifying property is placed in service. During the years

at issue, qualifying property included used property purchased and

placed in service. The aggregate cost of section 179 property was limited

to $25,000 in 2015, but in 2010 through 2014, up to $500,000 of newly

purchased business property per year could be expensed under section

179. § 179(b)(1).

When applying sections 167 and 179 in the context of particular

items of property, the initial question is whether ownership and

[*23] maintenance of the property are related primarily to business or

personal purposes. Int’l Artists, Ltd. v. Commissioner, 55 T.C. 94, 104

(1970); Deihl v. Commissioner, T.C. Memo. 2005-287, 2005 WL 3446081,

at *10. If acquisition and maintenance of the property are associated

primarily with profit-motivated purposes and any personal use is

distinctly secondary and incidental, expenses and depreciation are

deductible. Deihl v. Commissioner, 2005 WL 3446081, at *10. If,

however, acquisition and maintenance is motivated primarily by

personal considerations, deductions are disallowed. Id. Where

substantial business and personal motives exist, allocation becomes

necessary. Id.

Respondent contends that Mr. Hoakison is a collector of antique

tractors and that the acquisition and maintenance of the 40 tractors in

dispute were motivated primarily by personal considerations and served

no business purpose. Respondent emphasizes the age of the tractors,

pointing out that 37 of the 40 tractors in dispute were more than 40

years old at the time Mr. Hoakison purchased them, and that the

remaining three tractors were between 27 and 34 years old at the time

of purchase. Respondent underscores this argument by insisting that

there “is obviously an element of nostalgia” involved, as the tractors

were similar to those that Mr. Hoakison grew up using.

Further, respondent maintains that Mr. Hoakison could not have

actually needed the number of tractors reported for the years at issue.

Respondent argues that, because the work performed by each of the

tractors acquired in the years at issue could also have been performed

by the tractors acquired before 2013, the newly acquired tractors

“clearly served no business purpose.” Respondent alleges that there was

no increase in petitioners’ acreage or farm income that would suggest

the acquisition of the additional tractors was necessary or beneficial.

Finally, respondent contrasts petitioners, who farmed 482 acres during

the years at issue, with Mr. Powell, who testified that he uses “five or

six tractors” to farm approximately 240 acres.

Respondent’s position glosses over or ignores many critical details

of Mr. Hoakison’s situation. Mr. Hoakison credibly testified that he used

each of the tractors in his farm operation. At trial, petitioners introduced

photographs of all of the tractors and their attachments and provided

detailed testimony regarding their use on the farms. Mr. Hoakison

explained that he buys older, used tractors because he can afford to

purchase several tractors at a time, in cash and without incurring debt,

while a single newer model tractor could cost $120,000 or more. Further,

[*24] Mr. Hoakison had a better understanding of the mechanics of

older tractors, allowing him to perform most repairs and maintenance

himself, saving time and avoiding the need to hire someone else to do so,

as he would need to do with modern, more sophisticated tractors.

As to the number of tractors petitioners acquired, respondent fails

to take into account the nature of petitioners’ operation. Petitioners’

farms consisted of five noncontiguous pieces of property located miles

apart. Driving a tractor from the Home Place to one of the other farms

could take between 45 and 60 minutes each way. Mr. Hoakison worked

a full-time, often physically demanding job as a delivery driver. To make

the best use of the limited time he had available to farm each day, he

would leave his tractors at the different farms, rather than driving them

from the Home Place and back, or from farm to farm, each day. Mr.

Hoakison credibly testified that he would typically leave implements

mounted to his tractors, essentially designating each tractor to a specific

task.

Respondent’s assertion that there was no increase in acreage that

would possibly require more tractors in 2013, 2014, and 2015 is also

misplaced. Respondent ignores that, in 2009, petitioners acquired two

additional farms totaling almost 200 acres. Moreover, Mr. Hoakison

underwent triple bypass surgery in 2011. Given the limitations on his

time and physical capacity relatively soon after his acreage nearly

doubled, the Court finds Mr. Hoakison’s explanation credible. The fact

that petitioners could have performed the same work with other

tractors, as respondent argues, is inapposite to the question of

deductibility, provided that the requirements of sections 167 and 168

are satisfied. Nowhere in the language of section 168 is there a

suggestion that availability of the depreciation deduction is dependent

on the ordinary, necessary, and reasonable requirements of section 162.

Noyce v. Commissioner, 97 T.C. 670, 689–90 (1991); see also Simon v.

Commissioner, 103 T.C. 247, 259 (1994), aff’d, 68 F.3d 41 (2d Cir. 1995);

Liddle v. Commissioner, 103 T.C. 285, 292–93 (1994), aff’d, 65 F.3d 329

(3d Cir. 1995). The only requirement is that the depreciable property be

used in the taxpayer’s trade or business. Noyce, 97 T.C. at 690. The type

or number of tractors whether new or used in the farm operation is

within petitioners’ business judgment, and it is not respondent’s or the

Court’s role to second-guess that judgment or substitute its own unless

the facts and circumstance require us to do so. See Snow Mfg. Co. v.

Commissioner, 86 T.C. 260, 269 (1986).

[*25] The evidence shows, and the Court so finds, that petitioners

purchased the tractors for use in their farming business and did so use

them in the years at issue. With respect to the G Allis tractor and the

5020 AC tractor, both acquired in 2009, petitioners claimed depreciation

deductions of $557 and $357, respectively, for each year at issue.

Petitioners have not introduced any evidence to substantiate their bases

in those items. Accordingly, petitioners have not demonstrated their

entitlement to deduct the depreciation for those two items for each of

the years at issue. Petitioners are therefore entitled to the depreciation

and section 179 deductions, other than those attributable to the G Allis

and 5020 AC tractors and subject to the adjustments to the bases of the

“Farm tractors” discussed above.

Machine Shed

For each of the years at issue, petitioners claimed a depreciation

deduction of $5,443 with respect to the machine shed. Respondent

disallowed $2,771, or approximately 50% of that amount, for each year

on the grounds that, because the costs of the tractors were personal and

not business expenses, the portion of the machine shed in which they

were stored was also personal. Having found, supra, that the tractors

were purchased for and used in petitioners’ farming operation, the Court

also finds that the machine shed was used entirely for business

purposes. Petitioners are entitled to the disallowed $2,771 depreciation

deduction for each year at issue.

Pickup Trucks

Petitioners claimed, and respondent disallowed, depreciation

deductions of $787, $787, and $394 with respect to a 1999 Dodge Dakota

for 2013, 2014, and 2015, and $4,259 with respect to a 2011 Ford F350

pickup truck for each of the years at issue. Respondent contends that

petitioners are not entitled to the depreciation deductions because they

have not met the substantiation requirements of section 274(d) and have

not shown that the vehicles were used in their farming operation.

Petitioners introduced into evidence receipts, credit card

statements, and canceled checks relating to the use of the pickup trucks

but acknowledge that they did not maintain a mileage log or other record

of the vehicles’ use. Petitioners argue that the claimed depreciation

deductions should be allowed because the bases of the pickup trucks

have been substantiated and they were used almost exclusively on the

farm. With respect to the 2011 Ford F350, the Court agrees and will

[*26] allow the claimed depreciation for all three years. With respect to

the 1999 Dodge Dakota, however, the strict substantiation requirements

of section 274(d) are applicable, and petitioners’ documentation is

insufficient. Although the Court generally may estimate the amount of

a deductible expense when the taxpayer shows that a deductible expense

was incurred but is unable to substantiate the amount, see Cohan v.

Commissioner, 39 F.2d 540, 543–44 (2d Cir. 1930), the Court may not

use the Cohan doctrine to estimate expenses covered by section 274(d),

Sanford v. Commissioner, 50 T.C. 823, 827–28 (1968), aff’d per curiam,

412 F.2d 201 (2d Cir. 1969); Hough v. Commissioner, T.C. Memo. 200658, 2006 WL 784856, at *2. The strict substantiation requirements must

be satisfied before a deduction is allowable. Accordingly, petitioners are

entitled to an additional depreciation deduction of $4,259 for each of the

years at issue with respect to the 2011 Ford F350. Respondent’s

disallowance of the claimed depreciation deductions with respect to the

1999 Dodge Dakota is sustained.

III.

Disallowed Schedule F Expenses

Overview

Respondent disallowed petitioners’ reported Schedule F expenses

as follows:

2013

2014

2015

Utilities

$2,223

$2,306

$2,415

Insurance (other than health)

1,308

1,295

1,455

Gasoline, fuel, and oil

2,802

3,483

2,648

Other expenses

19,986

17,830

14,652

Repairs and maintenance

51,922

17,129

18,031

Section 162(a) allows a deduction for all ordinary and necessary

expenses paid or incurred during the taxable year in carrying on any

trade or business. An ordinary and necessary expense is one which is

appropriate and helpful to the taxpayer’s business and results from an

activity that is common and accepted practice in the business. Amdahl

Corp. v. Commissioner, 108 T.C. 507, 523 (1997); Blossom Day Care

Ctrs., Inc. v. Commissioner, T.C. Memo. 2021-87, at *36. Whether a

[*27] payment qualifies as a deduction under section 162(a) is a factual

issue which must be decided on the basis of all relevant facts and

circumstances. Commissioner v. Heininger, 320 U.S. 467, 475 (1943). To

prove entitlement to deduct an expense, the taxpayer must prove not

only the fact of the expenditure but also the business purpose (or other

deductible character) of the expense. “Business expenses deductible

from gross income include the ordinary and necessary expenditures

directly connected with or pertaining to the taxpayer’s trade or business

. . . .” Treas. Reg. § 1.162-1(a). The taxpayer must show that a reported

business expense was incurred primarily for business rather than

personal reasons and that there was a proximate relationship between

the expense and the business. Walliser v. Commissioner, 72 T.C. 433,

437 (1979); Rogers v. Commissioner, T.C. Memo. 2014-141, at *18.

As discussed above, petitioners bear the burden of proving their

entitlement to the disallowed expense deductions. See Rule 142(a);

Welch v. Helvering, 290 U.S. at 115. Section 274(d) disallows any

deduction for any listed property, including automobile expenses, unless

the taxpayer substantiates by adequate records or sufficient evidence

corroborating the taxpayer’s own statement the amount, time, place,

and business purpose of the expense. No deduction is allowed for

personal, living, or family expenses. § 262(a).

Utilities

Petitioners deducted utilities expenses of $3,143, $3,254, and

$3,432 reported on Schedules F attached to their returns for 2013, 2014,

and 2015, respectively. Respondent disallowed $2,223, $2,306, and

$2,415 of the claimed deductions for 2013, 2014, and 2015, respectively.

Petitioners’ deductions for utilities included electricity, cell

phone, internet, and water. 12 Petitioners did not maintain separate

accounts for their farm and personal utilities but, instead, attempted to

apportion them on their returns. Respondent does not dispute that the

amounts in question were paid but only how petitioners apportioned

them between personal and business.

Petitioners paid a total of $2,281, $2,717, and $2,559 to Alliant

Energy for electricity in 2013, 2014, and 2015, respectively, and claimed

deductions for 65% of those amounts, or $1,483, $1,766, and $1,663, for

12 Petitioners do not raise any argument with respect to adjustment to the

claimed internet or water expense deductions. The Court deems that petitioners have

conceded those adjustments.

[*28] 2013, 2014, and 2015. Petitioners did not have separate electric

meters to track their electricity use at home versus in the farm

operation. Respondent allowed a deduction for 20% of the amounts paid

and disallowed the difference.

When a taxpayer establishes that he has paid deductible expenses

but is unable to substantiate the exact amounts, the Court may estimate

the deductible amounts, bearing heavily upon the taxpayer whose

inexactitude is of his own making. See Cohan v. Commissioner, 39 F.2d

at 543–44. Petitioners’ home is over 100 years old, does not have air

conditioning, and is heated by propane, while the farm requires

substantial electricity to run the water pump, the hydrants, the machine

shed, the power tools, and the heater for cattle water. The Court agrees

with petitioners that their electricity use in their farming operation was

substantial in comparison to their use in their home; and, applying the

principles of Cohan, the Court agrees that petitioners are entitled to a

deduction of 65% of the amount paid for electricity for each year, or

$1,483, $1,766, and $1,663 for 2013, 2014, and 2015, respectively.

Accordingly, petitioners are entitled to deductions in excess of those

amounts respondent allowed of $1,027, $1,223, and $1,151 for

electricity.

With respect to petitioners’ reported cell phone expenses, the

parties agree that petitioners paid $1,985, $1,634, and $2,235 to Chat

Mobility for cellular phone service in 2013, 2014, and 2015, respectively.

Petitioners claimed 60% of those amounts as utilities on Schedule F but

concede on brief that they are entitled to deduct no more than 43.3% of

the amounts paid. Respondent allowed a deduction for 16.7% of the

payments, allocating one-third of the expense to Mr. Hoakison, allowing

a deduction for 50% of that amount for each year, and disallowing the

remaining amounts.

Petitioners’ cell phone bills covered three phone lines: one for Mr.

Hoakison, one for Mrs. Hoakison, and one for Mrs. Hoakison’s mother.

Petitioners did not maintain any log or records regarding their cell

phone use, however, but estimate that Mr. Hoakison used his phone 75%

to 80% for business purposes, Mrs. Hoakison used hers 50% for business

purposes, and that Mrs. Hoakison’s mother’s phone use was not business

related. Mrs. Hoakison testified that her business use of the phone was

“probably 50[%]”, and Mr. Hoakison testified that he used his phone

almost exclusively for business. The Court found petitioners’ testimony

[*29] credible. Under the principles of Cohan, 13 bearing against

petitioners whose inexactitude is of their own making, the Court finds

that they are entitled to deduct 33.3% of the total cell phone use. That

amount represents allocation of one-third of the total cell phone

expenses to each individual line, with business use of 75% by Mr.

Hoakison, business use of 25% by Mrs. Hoakison, and no business use

by Mrs. Hoakison’s mother. Accordingly, petitioners are allowed

deductions of $330, $271, and $371 above those amounts allowed by

respondent for 2013, 2014, and 2015, respectively.

On the basis of the foregoing, the Court holds that petitioners are

entitled to additional Schedule F deductions for utilities of $1,357,

$1,494, and $1,522 in excess of those amounts respondent allowed or

otherwise conceded for 2013, 2014, and 2015, respectively.

Insurance

Generally, premiums paid on insurance policies are deductible if

the insurance coverage is ordinary and necessary for a taxpayer’s trade

or business, Treas. Reg. § 1.162-1(a), but no deduction is allowed for

insurance with respect to property that is not used in a trade or

business, Rogers, T.C. Memo. 2014-141, at *30. Respondent disallowed

claimed Schedule F insurance (other than health) expense deductions of

$1,308, $1,295, and $1,455 for 2013, 2014, and 2015, respectively. After

concessions by both parties, 14 two items remain in dispute for each year:

payments of $410, $426, and $542 to State Farm, representing 50% of

the insurance payments for the machine shed in 2013, 2014, and 2015,

respectively; and payments of $201, $229, and $229 to State Farm for

an umbrella policy in 2013, 2014, and 2015, respectively. The parties

agree that these amounts were in fact paid; at issue is their deductibility

as business expenses.

13 Although the Court may not approximate business expenses that are subject

to the strict substantiation requirements of section 274(d), Boyd v. Commissioner, 122

T.C. 305, 320 (2004), section 274(d) does not apply to cell phone or internet expenses,

see Small Business Jobs Act of 2010, Pub. L. No. 111-240, § 2043(a), 124 Stat. 2504,

2560 (removing cell phones from the definition of section 280F(d)(4) listed property for

tax years beginning after December 31, 2009); Kellett v. Commissioner, T.C. Memo.

2022-62, at *8 n.10.

14 Respondent concedes that petitioners are entitled to additional Schedule F

deductions for insurance (other than health) of $640, $640, and $676 for 2013, 2014,

and 2015, respectively, and petitioners concede $57 and $8 for 2013 and 2015,

respectively.

[*30] As with other disallowed deductions relating to the machine shed,

respondent disallowed the insurance payments on the basis that

petitioners’ tractors were personal expenditures, rather than business

expenses. Having found supra that the tractors were purchased for and

used in petitioners’ farm operation, the Court holds the payments for

insurance on the machine shed were appropriately claimed as business

expense deductions.

Respondent determined that petitioners’ umbrella insurance

policy payments were nondeductible personal expenses because the

policy covered all potential liability, regardless of whether personal or

business, and the $1 million amount covered more than their regular

home policy. Petitioners argue that the coverage extended beyond home

coverage and that they purchased the insurance to protect against farm

catastrophes. Petitioners maintain a farming operation that includes

over 400 acres of land, heavy machinery, and a cattle herd of over 30

head of cattle, and maintaining an insurance policy to protect against

potential liability is a common business expense. Because the insurance

covered both personal and business liability, however, the Court must

allocate the expense. The size and value of the farming operation far

exceeding that of petitioners’ home (which was already covered by

petitioners’ homeowners insurance policy), the Court concludes that

75% of the umbrella policy premiums were business-related expenses.

The Court holds that petitioners are entitled to Schedule F

deductions for insurance (other than health) of $560.75, $597.75, and

$713.75 above the amounts respondent allowed in the notice or

otherwise conceded.

Gasoline, Fuel, and Oil

Petitioners claimed Schedule F deductions for gasoline, fuel, and

oil expenses of $9,724, $9,306, and $7,074 for 2013, 2014, and 2015,

respectively. Respondent determined that petitioners were entitled to

deduct $6,922, $5,823, and $4,426 for 2013, 2014, and 2015, respectively,

but disallowed payments to Farmers Cooperative Co. for ethanol

totaling $1,233 in 2013, $785 in 2014, and $1,022 in 2015, for highway

diesel totaling $2,142 in 2013, $3,141 in 2014, and $3,646 in 2015, and

for unleaded gasoline totaling $215 in 2013. 15 Petitioners further claim

15 Respondent concedes that petitioners are entitled to a fuel expense deduction

of $374 for ag diesel purchased from Farmers Cooperative Co. in 2014, over and above

the $5,823 that was allowed in the Notice.

[*31] that they are entitled to additional fuel expense deductions of

payments totaling $494 to True Value for propane and payments of $119

to Farm and Home in 2013 and two payments totaling $84 to Pokorny

BP for oil and filter in 2015.

Mr. Hoakison testified that he used the ethanol for his smaller

tractors and the 1999 Dodge Dakota, while the highway diesel was used

for a semi-truck and the four Ford pickup trucks. The evidence supports

Mr. Hoakison’s testimony, and the Court finds that he is entitled to the

claimed deductions for the highway diesel. As discussed above, however,

the strict substantiation requirements of section 274(d) are applicable

to the 1999 Dodge Dakota, and petitioners have not provided the

requisite evidence to satisfy those requirements. Petitioners thus have

not demonstrated that they are entitled to the deductions for the

ethanol.

Nor have petitioners provided sufficient evidence to satisfy the

strict substantiation requirements for the unleaded gasoline purchases

or the 2015 oil and filter purchases. With respect to the $494 and $119

payments in 2013, Mr. Hoakison testified that the propane was used for

the space heater in his machine shed and cutting torch and the $119 was

for grease. The Court accepts Mr. Hoakison’s testimony on these points

and will allow those deductions. Accordingly, the Court holds that

petitioners are entitled to additional deductions for gasoline, fuel, and

oil expenses of $2,755, $3,141, and $3,646 for 2013, 2014, and 2015,

respectively.

Other Expenses

Respondent disallowed deductions for Schedule F “other

expenses” of $19,986, $17,830, and $14,652 for 2013, 2014, and 2015,

respectively. After concessions by both parties, 16 the amounts still in

dispute are pickup truck and other vehicle expenses, including

insurance and license and registration fees, totaling $15,504, $14,361,

and $8,750 for 2013, 2014, and 2015, respectively, and payments for

16 Respondent concedes that petitioners are entitled to additional Schedule F

deductions for other expenses totaling $2,798, $1,913, and $1,568 for 2013, 2014, and

2015, respectively. Petitioners concede Schedule F deductions for other expenses

totaling $1,627, $1,463, and $1,460 for 2013, 2014, and 2015, respectively. Petitioners

additionally concede that they are not entitled to any of the claimed deductions related

to the 2004 Lincoln Navigator or the 2014 Navigator.

[*32] magazine subscriptions totaling $57, $93, and $155 for 2013, 2014,

and 2015, respectively.

The vehicle and pickup truck expenses for 2013 include payments

to State Farm, EMC Insurance, and the Union County Treasurer with

respect to those vehicles as follows:

Amount

Payee

Vehicles

$1,102

State Farm

1995 Ford F250

1999 Ford F350

2011 Ford F350

2,578

EMC Insurance

various

Union County Treasurer

1995 Ford F250

2008 Ford F350

2011 Ford F350

520

The automobile and pickup truck expenses for 2014 include

payments to State Farm, Farmers Mutual, 17 and the Union County

Treasurer with respect to petitioners’ vehicles as follows:

Amount

Payee

Vehicle

$1,011

State Farm

1995 Ford F250

1999 Ford F350

2011 Ford F350

2,924

Farmers Mutual

various

Union County Treasurer

1999 Dodge Dakota

520

Union County Treasurer

1995 Ford F250

2008 Ford F350

2011 Ford F350

The automobile and pickup truck expenses for 2015 include

payments to State Farm, Farmers Mutual, and the Union County

Treasurer with respect to petitioners’ vehicles as follows:

17 Petitioners changed their insurance carrier from EMC to Farmers Mutual

beginning in 2014.

[*33]

Amount

Payee

Vehicle

$884

State Farm

1995 Ford F250

1999 Ford F350

2011 Ford F350

State Farm

1992 Chevy S10

Farmers Mutual

various

Union County Treasurer

1999 Dodge Dakota

440

Union County Treasurer

2008 Ford F350

2,950

2011 Ford F350

The Court held supra that the strict substantiation requirements

of section 274(d) are not applicable to the 1995 Ford F250, the 1999 Ford

F350, which served as Mr. Hoakison’s tool truck, the 2008 Ford F350, or

the 2011 Ford F350. Petitioners have demonstrated the business use

and purpose of those vehicles, and the payments to State Farm and the

Union County Treasurer with respect to those vehicles will be allowed

as deductions. The strict substantiation requirements are applicable to

the 1999 Dodge Dakota, however, and petitioners have not satisfied

those requirements. They have not provided sufficient substantiation of

the business use of the vehicle. Accordingly, those deductions will not be

allowed. Similarly, petitioners have not introduced any information

regarding the use of the 1992 Chevy S10, and respondent’s disallowance

of a deduction for the insurance payment for that vehicle is also

sustained.

With respect to the payments to Farmers Mutual, petitioners

introduced into evidence pages from a 2015 invoice showing $1,492 due

and bank records showing payment of the invoice. The invoice lists

several vehicles and other equipment covered by the policy, but

petitioners have not introduced any additional evidence connecting

those items with the farming operation or, in the case of the vehicles,

have not satisfied the requirements of section 274(d). On the basis of the

invoice and petitioners’ other records, the Court will allow an additional

deduction of $36, representing the premiums paid for equipment

designated on the invoice as “Farm Use Only.” The remaining amounts

paid to EMC and Farmers Mutual are disallowed.

[*34] The remaining vehicle expenses relate to items charged on

petitioners’ Discover credit card, the bulk of which were at Casey’s

General Store in Creston, Iowa. Petitioners argue that these amounts

represented fuel and other purchases related to their vehicles. However,

they did not introduce receipts or other evidence demonstrating what

those charges represent or allocating the fuel purchases among their

personal and business vehicles. Although Mrs. Hoakison documented

the purchases in her ledger, the ledgers do not provide sufficient detail

to allow the Court a basis for allocation.

Finally, respondent disallowed petitioners’ claimed deductions of

$57, $93, and $155 for the cost of magazine subscriptions to Farm Show

in 2013, Ageless Iron Almanac and Farm Show in 2014, and Farm Show,

Farm Collector, and Ageless Iron Almanac in 2015, respectively. Mr.

Hoakison testified that he used the magazines for information about

farming, tractors, and tractor maintenance. On review of the evidence,

the Court will allow deductions of $50 and $20 for 2014 and 2015,

respectively, for the cost of Ageless Iron Almanac. The Court finds that

petitioners have not sufficiently demonstrated that the remaining

amounts were not personal expenses and will disallow the deductions.

Petitioners are entitled to deductions for other expenses of $1,622,

$1,581, and $1,380 over and above those amounts respondent allowed in

the notice or otherwise conceded for 2013, 2014, and 2015, respectively.

Repairs and Maintenance

The parties have made significant concessions regarding the

reported Schedule F repairs and maintenance expenses and agree that

several of the items were not repairs or maintenance but capital

improvements that should be added to the basis of the machine shed and

depreciated. 18 After concessions, payments totaling $20,335.73 for 2013,

$11,758.93 for 2014, and $15,032.74 for 2015 remain in dispute. There

is no dispute that the amounts in question were paid, only whether the

18 Petitioners concede $30,522, $16, and $1,102 for 2013, 2014, and 2015,

respectively, and respondent concedes $2,134, $3,239, and $728 for 2013, 2014, and

2015, respectively. The conceded amounts include disallowed repairs expense

deductions of $2,979 for electrical work and $16,408 for the pouring of concrete for the

floor of the machine shed for 2013 and 2014, respectively, for which respondent allowed

depreciation deductions for 2013, 2014, and 2015, and a deduction of $7,500 for a bale

processor purchased in 2013, which was claimed on Schedule F as both a repairs

expense and a depreciation deduction. On brief, petitioners concede an additional $315,

$2,115, and $1,168 for 2013, 2014, and 2015, respectively, on the basis of Mr.

Hoakison’s testimony at trial.

[*35] payments were business rather than personal expenses.

Respondent’s primary contention is that petitioners have not

demonstrated the business purpose of the expenses and, more

specifically, the expenses that related to tractor parts and maintenance

lacked specificity as to which tractor the purchases pertained to.

At trial Mr. Hoakison testified as to the nature of the purchases,

nearly all of which related to parts, labor, or other expenses for the

maintenance of petitioners’ tractors and other farm equipment. Mr.

Hoakison identified a number of payments as personal expenditures,

and petitioners have conceded those amounts. See supra note 18. Mr.

Hoakison also identified a payment of $715.77 to Schildberg

Construction in 2013 as payment for gravel for the machine shed, and

payments totaling $4,473.11 to Menard’s in 2014 as payments for

building materials to install insulation in the machine shed. The Court

has found supra that the tractors at issue and the machine shed were

used in petitioners’ farm operation. On the basis of Mr. Hoakison’s

testimony and the other evidence in the record, the Court finds that

petitioners have demonstrated entitlement to additional repairs and

maintenance expense deductions of $19,619.96, $7,285.82, and

$15,032.74 for 2013, 2014, and 2015, respectively. In addition, the

amounts expended on improvements to the machine shed, $715.77 and

$4,473.11 in 2013 and 2014, respectively, are business related, but

represent capital improvements that should be depreciated rather than

deducted, consistent with the parties’ treatment of the related work on

the machine shed.

IV.

Penalties

Burden of Production

Respondent determined that petitioners are liable for section

6662(a) accuracy-related penalties on the basis of underpayments due

to substantial understatements of income tax for the years at issue.

Section 6662(a) and (b)(2) imposes a 20% accuracy-related penalty on

any portion of an underpayment of tax required to be shown on a return

if the underpayment is attributable to a substantial understatement of

income tax. An understatement of income tax is a “substantial

understatement” if it exceeds the greater of 10% of the tax required to

be shown on the return or $5,000. § 6662(d)(1)(A). Taxpayers may avoid

a section 6662(a) penalty if they can show that they had reasonable

cause for the underpayments and acted in good faith. § 6664(c)(1).

[*36] The Commissioner bears the burden of production with respect to

an individual taxpayer’s liability for any penalty, requiring the

Commissioner to come forward with sufficient evidence indicating that

the imposition of the penalty is appropriate. See § 7491(c); Higbee, 116

T.C. at 446–47. As part of that burden, the Commissioner must produce

evidence that he complied with the procedural requirements of section

6751(b)(1). See Graev v. Commissioner, 149 T.C. 485, 492–93 (2017),

supplementing and overruling in part 147 T.C. 460 (2016). Section

6751(b)(1) requires the initial determination of certain penalties to be

“personally approved (in writing) by the immediate supervisor of the

individual making such determination.” See Graev, 149 T.C. at 492–93;

see also Clay v. Commissioner, 152 T.C. 223, 248 (2019) (quoting section

6751(b)(1)), aff’d, 990 F.3d 1296 (11th Cir. 2021).

Where the taxpayer has challenged the Commissioner’s penalty

determination, the Commissioner must come forward with evidence of

penalty approval as part of his initial burden of production under section

7491(c). Frost v. Commissioner, 154 T.C. 23, 34 (2020). Once the

Commissioner makes that showing, the taxpayer must come forward

with contrary evidence. Id. The supervisory approval must be secured

no later than (1) the date on which the IRS issues the notice of deficiency

or (2) the date, if earlier, on which the IRS formally communicates to the

taxpayer the Examination Division’s determination to assert a

penalty. 19 Belair Woods, LLC v. Commissioner, 154 T.C. 1, 15 (2020).

The written supervisory approval of an initial penalty determination is

not required to take any specific form. See Palmolive Bldg. Invs., LLC v.

Commissioner, 152 T.C. 75, 85–86 (2019).

The parties agree that the April 3, 2017, 30-day letter with RA

Smith’s examination report embodied the initial determination that

assertion of the penalties in this case was warranted, and petitioners do

19 In Kroner v. Commissioner, 48 F.4th 1272 (11th Cir. 2022), rev’g in part T.C.

Memo. 2020-73, the U.S. Court of Appeals for the Eleventh Circuit disagreed with the

Tax Court regarding the timing of the section 6751(b) approval requirement. The

Eleventh Circuit concluded that “the IRS satisfies [s]ection 6751(b) so long as a

supervisor approves an initial determination of a penalty assessment before it assesses

those penalties.” Id. at 1276; see also Laidlaw’s Harley Daivdson Sales, Inc. v.

Commissioner, 29 F.4th 1066, 1071 (9th Cir. 2022) (finding agent’s timely approval

where supervisor signed approval nearly three months after revenue agent’s formal

communication of proposed section 6707A penalty but before assessment), rev’g and

remanding 154 T.C. 68 (2020). The U.S. Court of Appeals for the Eighth Circuit has

not directly addressed the timing requirement under section 6751(b). Because the

immediate supervisor’s signature on the 30-day letter is timely under either standard,

the Court does not address the potential conflict.

[*37] not claim that respondent formally communicated his initial

penalty determination before April 3, 2017. Petitioners contend that

respondent has failed to satisfy his burden of production, arguing that

no supervisory approval was obtained for the penalties. When the 30day letter was sent, Ms. Roberts had not signed the Civil Penalty

Approval Form and when she did so, on June 5, 2017, she was on

temporary detail and no longer RA Smith’s immediate supervisor. This

Court has previously found, however, that a supervisor’s signature on a

cover letter sent to a taxpayer along with an examination report is

sufficient to satisfy the written supervisory approval requirement. See,

e.g., PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193, 213 (5th Cir.

2018); Flume v. Commissioner, T.C. Memo. 2020-80, at *34. Ms. Roberts

signed the 30-day letter, which included the examination report

explaining the determination of penalties for substantial

understatements, before RA Smith’s providing it to petitioners.

Accordingly, the supervisory approval requirement of section 6751(b)

has been satisfied.

Petitioners reported income tax of $3,343, $4,021, and $3,666 for

2013, 2014, and 2015, respectively. Even allowing for the adjustments

the Court has made to respondent’s determinations, petitioners’

understatements of income tax were substantial for all years at issue.

Accordingly, respondent’s burden of production has been met, and

petitioners now bear the burden of showing that respondent’s

determination is incorrect or that they had reasonable cause for the

understatements. See Higbee, 116 T.C. at 446–47.

Reasonable Cause

Petitioners argue that they should not be liable for the penalties

because they acted in good faith and reasonably relied on the advice of

Mr. Powell. Section 6664(c)(1) provides that the accuracy-related

penalty shall not be imposed with respect 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. The

decision as to whether the taxpayer acted with reasonable cause and in

good faith is made on a case-by-case basis, considering all pertinent facts

and circumstances. See Treas. Reg. § 1.6664-4(b)(1). Generally, the most

important factor in determining the existence of reasonable cause is the

taxpayer’s effort to ascertain his or her correct tax liability. Id.

Circumstances that may signal reasonable cause and good faith “include

an honest misunderstanding of fact or law that is reasonable in light of

[*38] all of the facts and circumstances, including the experience,

knowledge, and education of the taxpayer.” Id.

A taxpayer acts with reasonable cause when he or she exercises

ordinary business care and prudence with respect to a disputed tax item.

Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 98 (2000), aff’d,

299 F.3d 221 (3d Cir. 2002). Good-faith reliance on the advice of an

independent, competent professional as to the tax treatment of an item

may meet this requirement. See Treas. Reg. § 1.6664-4(b)(1). A taxpayer

acts in good faith when he or she acts upon honest belief and with intent

to perform all lawful obligations. See Rutter v. Commissioner, T.C.

Memo. 2017-174, at *45.

A taxpayer alleging reasonable, good-faith reliance on the advice

of an independent, competent professional must prove that (1) the

adviser was a competent professional who had sufficient expertise to

justify reliance, (2) the taxpayer provided necessary and accurate

information to the adviser, and (3) the taxpayer actually relied in good

faith on the adviser’s judgment. Neonatology Assocs., P.A., 115 T.C.

at 99. A taxpayer’s unconditional reliance on an otherwise qualified

professional does not constitute reasonable reliance in good faith for

purposes of section 6664(c)(1). See Stough v. Commissioner, 144 T.C.

306, 323 (2015). A taxpayer asserting reasonable reliance must show

that the opinion of a qualified adviser considered all facts and

circumstances and was not based on unreasonable facts or legal

assumptions. Treas. Reg. § 1.6664-4(c)(1).

Competent Tax Adviser

There is no precise threshold of competence that a tax adviser

must have to justify a taxpayer’s reliance. Rather, the Court looks for

expertise in the context of the facts of each case. CNT Invs., LLC v.

Commissioner, 144 T.C. 161, 224 (2015); see also 106 Ltd. v.

Commissioner, 136 T.C. 67, 77 (2011) (finding the taxpayer’s longtime

attorney and accounting firm, who “would have appeared competent to

a layman,” and especially so to the taxpayer, had adequate expertise),

aff’d, 684 F.3d 84 (D.C. Cir. 2012); Rogerson v. Commissioner, T.C.

Memo. 2022-49, at *35.

Examining the facts in this case, the Court finds that Mr. Powell

was a competent tax adviser with sufficient expertise to justify

petitioners’ reliance. Mr. Powell held a master’s degree in agricultural

education and had decades of experience assisting farmers with

[*39] economic and financial matters, including preparing income tax

returns for farmers since 1981. He had met Mr. Hoakison nearly 50

years earlier and had prepared petitioners’ returns for nearly 30 years.

He was familiar with petitioners’ personal and business affairs through

his long relationship with them and provided detailed instruction on

what information they would need to collect for their tax returns each

year. Nothing in the record indicates that petitioners had any reason to

doubt his competence to provide the advice they sought.

Provision of Information

To satisfy the second requirement of reasonable reliance, the

taxpayer must provide necessary and accurate information to the

adviser. See Alt. Health Care Advocs. v. Commissioner, 151 T.C. 225, 246

(2018); Rogerson, T.C. Memo. 2022-49, at *35. This element requires

that the taxpayer disclose all facts that he knows, or reasonably should

know, are relevant to the proper tax treatment of an item. See Treas.

Reg. § 1.6664-4(c)(1)(i).

Mr. Powell taught Mrs. Hoakison how to track income and

expenses related to their farm, and Mrs. Hoakison maintained detailed

records based on his instruction. Each year, Mr. Powell provided

petitioners with a yearend tax worksheet, which asked for information

concerning farm income and expenses, including depreciation, and

petitioners dutifully filled it out before their annual appointment with

Mr. Powell. Petitioners supplied Mr. Powell with everything that he

requested from them and withheld nothing that they or Mr. Powell

believed relevant to the preparation of their returns.

Good Faith Reliance on Advice

The last requirement is that a taxpayer must have actually

received advice and relied upon it in good faith. Neonatology Assocs.,

P.A., 115 T.C. at 99. Good faith, or lack thereof, is determined by looking

at all of the facts and circumstances in the case, including the taxpayers’

“experience, knowledge, and education.” Treas. Reg. § 1.6664-4(b)(1).

Petitioners are farmers with no training or educational

background in accounting or tax return preparation. Mr. Hoakison has

a high school education. They retained Mr. Powell to prepare their

returns for nearly three decades and followed his instructions regarding

tracking of expenses and the depreciation of their tractors and other

equipment. Mr. Powell credibly testified that petitioners followed his

instructions.

[*40] With respect to the items for which petitioners claimed

depreciation deductions, despite having previously expensed them

under section 179, the Court finds that petitioners’ reliance was not

reasonable. Petitioners knew or should have known that the claimed

depreciation deductions, totaling $16,674 for each year at issue, were

duplicates and were not proper. Petitioners are liable for the penalties

with respect to portions of the underpayment attributable to those

adjustments. With respect to the remaining adjustments, however, in

view of the above considerations, the Court holds that petitioners had

reasonable cause and acted in good faith.

Conclusion

Petitioners are liable for deficiencies for 2013, 2014, and 2015 to

the extent discussed herein. Petitioners are not liable for the penalties

to the extent discussed herein.

The Court has considered all of the arguments made by the

parties, and to the extent they are not addressed herein, they are

considered moot, irrelevant, or otherwise without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.

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