T.C. Memo. 1997-106
UNITED STATES TAX COURT
NATHANIEL L. WARD, SR., AND IRENE E. WARD, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 2167-95, 19590-95. Filed March 3, 1997.
Nathaniel L. Ward, Sr., and Irene E. Ward, pro se.
William Henck, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GERBER, Judge: Respondent, by means of two separate notices
of deficiency, determined deficiencies in petitioners’ Federal
income tax and an accuracy-related penalty as follows:
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Penalty
Year Deficiency Sec. 6662(a)
1991 $11,344 ---
1992 15,419 $3,151
1993 13,349 2,762
After considering the parties' concessions,1 the following issues
remain for our consideration: (1) Whether petitioners are
entitled to various deductions claimed on the Schedule F
(farming) for the years 1991, 1992, and 1993; (2) whether
petitioners are entitled to employee business expenses in excess
of $243.62 and $771.92 conceded by respondent for 1992 and 1993,
respectively; (3) whether petitioners are entitled to
contribution deductions in excess of the amounts conceded by
respondent; and (4) whether petitioners are liable for the
accuracy-related penalty attributable to negligence under section
6662(a)2 for 1992 and 1993.
FINDINGS OF FACT3
Petitioners were married and resided at Snow Hill, Maryland,
at the dates their petitions were filed in these cases, which
have been consolidated for purposes of trial and opinion. During
1
Petitioners conceded that they omitted interest income and
a State tax refund, but stated that those omissions were not
intentional. Respondent conceded certain deduction items after
petitioners provided documentation. The documentation is part of
the trial record.
2
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the taxable years at issue,
and Rule references are to this Court’s Rules of Practice and
Procedure.
3
The parties’ stipulated facts and exhibits are
incorporated by this reference.
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the years 1991, 1992, and 1993, petitioners were school teachers,
and they filed joint Federal income tax returns. Petitioners,
during 1991 and 1992, used a residence in Snow Hill that was
situated on a 36-acre farm which they acquired during 1972.
Petitioners’ plan was to convert the farm from annual crops to
trees. During the years in question, 18 acres of the farm were
leased to a farmer for an annual rent of $820. Seven acres had
been cultivated with pine trees, and four additional acres were
cleared for the future planting of trees. The remainder of the
land was not specifically accounted for at trial but was where
the residence was located.
Nathaniel L. Ward, Sr. (petitioner), was a science teacher,
and he taught about 150 miles from the Snow Hill residence. He
maintained an apartment in the community where he taught. During
the years in question, petitioner made about three weekly round
trips from the location where he taught to the Snow Hill
residence, where his family generally resided. Petitioner
occasionally did some work at the farm tending to the trees and
performing general maintenance to the farm property.
Petitioners, on their Schedule F, reported income of $820
from rent each year and claimed expenses which would have
resulted in losses from farming of $30,340, $52,400, and $48,273
for 1991, 1992, and 1993, respectively, after considering the
$820 from rent. Respondent disallowed the claimed losses for
lack of substantiation for all 3 years and for lack of a profit
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motive for 1992 and 1993. Petitioner did not have any knowledge
of the value of timber in place or whether his claimed losses had
any relevance to the amount of gain he might have earned from
their harvest. Petitioner’s focus was on developing a tree farm
for his children or the next generation. Petitioners did not
produce any documentary evidence supporting the deductions
claimed on their Schedules F.
Petitioners, in connection with their professional
employment as teachers, paid union dues and purchased equipment
and teaching aids. Petitioners claimed employee business
expenses on Schedule A of their 1992 and 1993 returns in the
respective amounts of $3,691.42 and $4,605. At trial,
petitioners offered documentary evidence which corroborated
amounts that were substantially less than those claimed on their
1992 and 1993 returns.
Petitioners claimed contributions to charity by cash or
check in 1991, 1992, and 1993 in the respective amounts of
$3,530, $3,470, and $3,160. At trial, petitioners presented
documentary evidence substantiating $10 and $25 of contributions
for 1992 and 1993, respectively, and no documentary evidence was
presented for 1991. Petitioner contended that he and his wife
tithed at a 10-percent rate during the years in question, which
would have resulted in contributions of $8,000 in each year under
consideration. He offered the explanation that he claimed only
about $3,000 in each year because larger claims might have
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triggered an audit by the Internal Revenue Service. Petitioner
did not go to church very often, but his wife and daughter
attended regularly.
OPINION
Respondent determined that petitioners failed to
substantiate their farm or Schedule F deductions for the 1991
taxable year. For 1992 and 1993, respondent also determined that
petitioners failed to substantiate farm or Schedule F deductions
and that they failed to show that the farming activity was a
trade or business entered into for profit and that the expenses
were ordinary and necessary. The evidence in this record reveals
that petitioners held and used the land with a dual purpose.
They leased a substantial portion of their farm to an individual
for farming purposes and had a secondary purpose to hold and
manage the property for investment purposes and the eventual
benefit of their children. We do not find that petitioners were
in the business of growing trees for a profit as they contended.
Of the $30,340, $52,400, and $48,273 of claimed farming
expenditures for 1991, 1992, and 1993, respectively, the largest
portions were claimed for travel by car and truck. As an
example, for 1993 petitioners claimed $22,693 for car and truck
expenses and $21,000 for travel,4 or $43,693 of the $48,273 total
4
If we accepted that petitioner traveled a 300-mile round
trip three times per week, then his cost per mile for 1993 would
have approximated $.045 per mile--($21,000 divided by (50 weeks x
3 x 300)).
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claimed. Meals expenses at $3,900 was the next largest item
claimed on Schedule F for 1993, leaving $1,500 for repairs,
maintenance, and supplies accounting for the balance. The 1991
and 1992 Schedules F are substantially similar in amount and
proportion.
Petitioners failed to substantiate the car and truck or
meals expenses claimed, and accordingly it is not necessary to
give them further consideration. Petitioner contended that the
travel was for about three weekly 300-mile round trips from the
location of his employment as a teacher to the farm, where his
wife generally resided. Petitioner contended that those trips
were to work on his tree-farming activity.
Section 162(a) allows a deduction for "ordinary and
necessary" expenses paid or incurred during the taxable year in
carrying on a trade or business. Sanford v. Commissioner, 50
T.C. 823, 826 (1968), affd. per curiam 412 F.2d 201 (2d Cir.
1969). An ordinary and necessary expense is one that is
appropriate and helpful to the taxpayer's business and that
results from an activity which is a common and accepted practice.
Boser v. Commissioner, 77 T.C. 1124, 1132 (1981).
Deductions are a matter of legislative grace, and
petitioners bear the burden of proving that they are entitled to
the deductions claimed. Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.
Helvering, 292 U.S. 435 (1934). Taxpayers must keep sufficient
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records to establish the amount of their deductions. Sec. 6001.
Under certain circumstances, when taxpayers establish that they
incurred a trade or business expense but do not substantiate the
amount of the expense, the Court may estimate the amount of the
deductible expense. Cohan v. Commissioner, 39 F.2d 540, 543-544
(2d Cir. 1930). The estimate must, however, have some reasonable
evidentiary basis. Vanicek v. Commissioner, 85 T.C. 731, 743
(1985). In estimating the amount deductible, the Court considers
that taxpayers' inexactitude is of their own making. Cohan v.
Commissioner, supra at 544.
Initially, we do not accept petitioners's testimony that he
was engaged in any profit-seeking activity concerning the growing
of trees. Secondly, we cannot find that petitioner’s travel was
ordinary or necessary in connection with either his leasing
activity or investment goals. Simply, the travel was for
petitioner’s personal convenience to be with his family.
We have found, however, that petitioners repaired and
maintained the farm property in connection with their leasing
activity and, based on the record, find that they are entitled to
a total deduction of $1,500 in Schedule F expenses for each of
the 3 taxable years.
Petitioner’s testimony regarding the claimed contribution
deductions was generally not credible and was uncorroborated.
However, we find that petitioner Irene E. Ward did regularly make
cash contributions upon her visits to church. Relying on Cohan
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v. Commissioner, supra at 543-544, we find that petitioners are
entitled to $500 in contributions for each of the 3 taxable
years.
Petitioners purchased supplies, teaching aides, and computer
items in connection with their teaching activity. In addition,
petitioners had expenditures for the maintenance of their
computers. To some extent, the computers were used for personal
purposes. At trial, petitioners provided some documentation of
their expenditures concerning their employee business expenses.
The amounts documented were less than one-half of the amounts
claimed for 1992 and 1993. However, some of the documentation
for one year provided a basis for allowance of a similar amount
in the other year. For example, petitioners provided
substantiation of $771.92 for union dues in 1993, and respondent
conceded that amount.
The claimed deductions relating to computers are subject to
the more rigorous requirements of section 274(d) because they are
"listed property" as described in section 274(d)(4) and listed in
section 280F(d)(4)(A)(iv). See also sec. 1.274-5T(a), Temporary
Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). In that
regard, petitioners provided specific proof of computer
expenditures during 1992 and 1993 in the amounts of $1,224.40 and
$1,668.93. Taking into consideration personal use, we hold that
petitioners are entitled to employee computer-related business
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expenses for 1992 and 1993 in the amounts of $612.20 and $834.47,
respectively.
Regarding the remainder of the deduction for employment-
related expenditures, we have taken into consideration the
totality of the circumstances, including payments in one year
that would likely have been paid in other years in connection
with their teaching activities. Accordingly, and relying on
Cohan v. Commissioner, supra at 543-544, we find that petitioners
are entitled to $1,0005 of employee business expenses, in
addition to the amounts allowed in connection with the computers,
all of which are subject to any computational limitations for
each of the taxable years 1992 and 1993.
Respondent determined an accuracy-related penalty due to
negligence under section 6662(a) for petitioners' 1992 and 1993
taxable years. The accuracy-related penalty is equal to 20
percent of any portion of an underpayment attributable to a
taxpayer's negligence or disregard of rules or regulations. Sec.
6662(a) and (b)(1). The term "negligence" includes any failure
to do what a reasonable and ordinarily prudent person would do
under the same circumstances. Neely v. Commissioner, 85 T.C.
934, 947 (1985). The term "disregard" includes any careless,
reckless, or intentional disregard. Sec. 6662(c). The penalty
does not apply to any portion of an underpayment for which there
5
This amount includes the $771.92 documentation of union
dues that respondent conceded for 1993.
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was reasonable cause and with respect to which the taxpayer acted
in good faith. Sec. 6664(c). Petitioners bear the burden of
showing that they were not negligent. Rule 142(a); Bixby v.
Commissioner, 58 T.C. 757, 791-792 (1972).
Petitioners have stated that they did not intentionally omit
interest income and State tax refunds. Petitioners, however, did
omit interest income in 2 different years and also conceded that
respondent correctly disallowed all of the medical expense
deductions claimed for each of the 3 years. More significantly,
petitioners were substantially without supporting documentation
for most of the items claimed on Schedules A and F of each of
their 1992 and 1993 income tax returns. In addition, the manner
in which petitioner estimated the amount deductible reflected a
huge exaggeration. Under these circumstances, we cannot find
that petitioners acted with reasonable cause or in good faith.
Accordingly, petitioners are liable for the accuracy-related
penalty attributable to negligence for the entire underpayment
for the taxable years 1992 and 1993.
To reflect the foregoing and considering concessions of the
parties,
Decisions will be entered
under Rule 155.