T.C. Memo. 1998-170
UNITED STATES TAX COURT
ALONZO AND EMMA J. BRADLEY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24265-95. Filed May 11, 1998.
Alonzo and Emma J. Bradley, pro sese.
David E. Whitcomb, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GALE, Judge: Respondent determined a deficiency in
petitioners' 1992 Federal income taxes in the amount of $14,454,
an addition to tax under section 6651(a)1 in the amount of
1
Unless otherwise noted, all section references are to the
Internal Revenue Code in effect for the year in issue, and all
Rule references are to the Tax Court Rules of Practice and
(continued...)
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$697.50, and an accuracy-related penalty under section 6662(d) in
the amount of $1,733.20.
After concessions, the issues for decision are as follows:
(1) Whether petitioners are entitled to deductions claimed for
unreimbursed employee business expenses; (2) whether petitioners
are entitled to deductions claimed for losses with respect to
certain real property held by them in 1992; (3) whether
petitioners are liable for an addition to tax under section
6651(a)(1); and (4) whether petitioners are liable for an
accuracy-related penalty under section 6662(d).
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference.
At the time the petition was filed, petitioners resided in
League City, Texas.
During the taxable year 1992, petitioner Alonzo Bradley (Mr.
Bradley) was employed as an engineer by Paramax Systems Corp., an
affiliate of Unisys Corporation (Unisys). Unisys served as a
subcontractor for the Johnson Space Center (Space Center) Shuttle
Flight Operation of the National Aeronautics and Space
Administration (NASA). Mr. Bradley worked on the Shuttle
Operations Contract (SOC or SOP Contract) during 1992. As part
1
(...continued)
Procedure.
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of his duties, Mr. Bradley was required to travel from his office
at Unisys to various locations at the Space Center and to the
offices of Loral Space Systems (Loral), another subcontractor.
The distance between Mr. Bradley's office and the Space Center
complex was approximately 3 miles, and between Mr. Bradley's
office and Loral was between 3 and 3.5 miles.
NASA operated a free shuttle service between sites within
the Space Center complex and locations outside the Space Center
complex, including Unisys and Loral, on weekdays during normal
business hours. In addition, a taxi service between these sites
was also provided during normal business hours when time
constraints made the shuttle impractical. Both the shuttle and
taxi services were available to Mr. Bradley. Mr. Bradley also
routinely worked overtime after normal business hours and on
weekends, at which times the shuttle and taxi services were not
available. Mr. Bradley was compensated for overtime work for 42
of the 52 weekly pay periods in 1992.
Mr. Bradley did not seek reimbursement from his employer for
any transportation costs in 1992. It is uncertain whether he was
eligible for such reimbursement because the written policy of his
employer is ambiguous for an employee in Mr. Bradley's
classification who is compensated for overtime.2 Mr. Bradley
2
We note that in a prior case involving an earlier year of
the same petitioners, the Court found as a fact that Mr. Bradley
was eligible for partial reimbursement from Unisys for business
(continued...)
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claimed a deduction for unreimbursed employee business expenses
in the amount of $5,904 for costs associated with the use of his
personal automobile for trips from his office to the Space Center
and to Loral. Petitioners computed this figure on Form 2106
attached to their return by multiplying Mr. Bradley's claimed
vehicle expenses for the year ($7,569) by a claimed business-use
percentage of 78 percent, for a product of $5,904 in vehicle
expenses attributable to business use. The business-use
percentage used by Mr. Bradley was calculated by dividing the
claimed business-use mileage of his vehicle for 1992 (9,974
miles) by the claimed total mileage for that year (12,816 miles).
Petitioners claimed an additional $189 in miscellaneous business
expenses for a total of $6,093 in unreimbursed employee business
expenses attributable to Mr. Bradley's employment.
In 1992, petitioner Emma J. Bradley (Mrs. Bradley) was
employed as a nurse by Gastroenterology Consultants (GC), a two-
physician medical practice with offices in Webster, Alvin,
Pasadena, and Houston, Texas. In carrying out her duties, Mrs.
Bradley was required to travel between the various offices. GC
had an established travel reimbursement policy under which
employees were reimbursed for business-related travel between its
2
(...continued)
use of his personal automobile. Bradley v. Commissioner, T.C.
Memo. 1996-461. Our decision in the instant case does not, in
any event, depend upon Mr. Bradley's eligibility for
reimbursement.
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various offices.3 Under GC's travel reimbursement procedure,
employees were provided log books in which to record their
business-related travel, and they were required to submit monthly
tallies of their business mileage in order to be reimbursed.
GC's business records for 1992 contain several monthly tallies
with respect to Mrs. Bradley, indicating that she was reimbursed
in the amount of $182.30 for 661.8 miles of business-related
travel in 1992.
Mrs. Bradley claimed a deduction for unreimbursed employee
business expenses in the amount of $5,100 for costs associated
with the use of two personal automobiles. Petitioners calculated
this figure on Form 2106 attached to their return by multiplying
Mrs. Bradley's claimed vehicle expenses (other than depreciation)
for each vehicle, in the amounts of $1,435 and $2,671, by the
claimed business-use percentage for each vehicle, 91 percent and
90 percent, respectively, for products of $1,306 and $2,404 in
vehicle expenses attributable to business use. Petitioners
similarly calculated a $1,390 depreciation expense for one
vehicle based on a claimed business-use percentage of 91 percent.
The business-use percentages used by Mrs. Bradley were calculated
by dividing the claimed business-use mileage of her vehicles for
1992 (11,652 miles and 1,058 miles, respectively) by the claimed
3
Our findings regarding GC and its travel reimbursement
policies are based in part on the testimony of Nancy Montgomery,
office manager of GC in 1992. We hereby overrule petitioners'
objection to her testimony.
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total mileage for that year (12,867 miles and 1,176 miles,
respectively). Petitioners claimed an additional $677 in
miscellaneous business expenses in connection with Mrs. Bradley's
employment for a total of $5,777 in unreimbursed employee
business expenses.
In the notice of deficiency, respondent disallowed claimed
deductions for all of petitioners' employee business expenses on
the grounds that (i) they constituted reimbursable transportation
expenses and/or (ii) they constituted personal commuting
expenses.
On Schedule E of their return, petitioners claimed $22,507
in losses with respect to four pieces of real property held by
them in 1992, consisting of three residential rental properties
(the Hearthwood Condominium, the River Stone II Condominium, and
a house in Windsor Village) and a parcel of vacant land in Utica,
Mississippi (the Mississippi land). Petitioners computed losses
on Schedule E as follows:
Windsor Mississippi
Item Hearthwood River Stone Village Land Total
Income (Rents) $2,400 $3,000 $2,400 -0- $7,800
Expenses (Management
fees, mortgage
interest, etc.) 6,472 8,886 4,743 $2,003 22,104
Depreciation 2,757 3,628 1,818 -0- 8,203
Loss ($6,829) ($9,514) ($4,161) ($2,003) ($22,507)
In the notice of deficiency, respondent disallowed the
$22,104 in expenses claimed by petitioners with respect to the
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four properties on the grounds that petitioners (i) failed to
establish that the expenses were paid or incurred during the
taxable year and/or (ii) failed to establish that the expenses
were ordinary and necessary. Respondent also disallowed the
$8,203 in depreciation claimed on the grounds that petitioners
(i) failed to establish their cost or other basis in the
properties and/or (ii) failed to establish that the properties
were depreciable.
Petitioners' return was due on April 15, 1993. The return
was executed by petitioners on April 26, 1993, and filed on or
about that date.
OPINION
Employee Vehicle Expenses
Respondent argues that petitioners failed to substantiate
their deductions for vehicle expenses as required by section 274
because they failed to establish the business use of their
personal automobiles, as well as the location or destination of
travel, and the business purpose.4
4
Respondent also argues in the alternative that Mr.
Bradley's vehicle expenses were not "ordinary and necessary"
because they were reimbursable by his employer or because the
shuttle and taxi services were available. Because we find that
petitioners fail to satisfy sec. 274 with respect to Mr.
Bradley's vehicle expenses, we do not address respondent's other
arguments.
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Section 274(d) places strict substantiation requirements on
a taxpayer for claimed deductions relating to the use of "listed
property", which is defined under section 280F(d)(4)(A)(i) to
include passenger automobiles. Under this provision, any
deduction claimed with respect to the use of a passenger
automobile will be disallowed unless the taxpayer substantiates
various elements of the use by adequate records or other
sufficiently corroborating evidence. Sec. 274(d); see also sec.
1.274-5T(c)(2)(ii)(C)(1), Temporary Income Tax Regs., 50 Fed.
Reg. 46018 (Nov. 6, 1985). Pursuant to the regulations
promulgated under section 274, one of the elements required to be
substantiated is the amount of business use and the amount of
total use of the automobile for the taxable period, based upon
mileage. Makspringer v. Commissioner, T.C. Memo. 1994-468; sec.
1.274-5T(b)(6)(i)(B), Temporary Income Tax Regs., 50 Fed. Reg.
46016 (Nov. 6, 1985).
With respect to Mrs. Bradley's vehicle expenses, the record
shows that she worked for GC in 1992, and there is no evidence
that she was employed anywhere else or otherwise involved in
carrying on another trade or business. GC's records indicate
that Mrs. Bradley logged and was reimbursed for 661.8 miles of
business travel in 1992. Nonetheless, Mr. Bradley submitted a
computer-generated spread sheet listing daily business mileage
for Mrs. Bradley totaling 11,652 miles in 1992, which is nearly
11,000 more miles than reported to her employer. Mrs. Bradley
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did not appear at trial or testify to explain this discrepancy.
In the absence of any corroborating evidence that Mrs. Bradley
used her personal automobiles for business purposes in excess of
the mileage reimbursed by GC, we do not find credible the claim
that Mrs. Bradley had an additional 10,990 miles of business use
in 1992.5 As a result, petitioners fail to meet the requirement
of the section 274 regulations that a taxpayer substantiate, with
adequate records or sufficiently corroborative evidence, the
amount of business use of a passenger automobile. Accordingly,
we sustain respondent's determination disallowing all vehicle
expenses claimed by Mrs. Bradley.
With respect to Mr. Bradley's vehicle expenses, Mr. Bradley
also introduced a similar computer-generated spread sheet
purporting to show his own daily business mileage in 1992. Mr.
Bradley's daily entries record mileage ranging from 36 to 54
miles, with most entries ranging between 40 and 45 miles for each
day of every week that he received overtime pay (i.e., 42 of his
50 workweeks in 1992). Mr. Bradley testified that this daily
mileage represented trips between his office at Unisys and
various buildings within the Space Center complex as well as the
offices of other subcontractors servicing the SOP Contract. Mr.
5
The spread sheet introduced by Mr. Bradley at trial lists
mileage of 11,652, which is the business mileage claimed on the
return with respect to one of the two vehicles for which Mrs.
Bradley claimed business use. No evidence was offered with
respect to the 1,058 in business miles claimed with respect to
the other vehicle.
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Bradley further testified that the trips occurred when the
shuttle and taxi services were not available, i.e., after normal
business hours (or when he anticipated completing his duties
after normal hours) or on weekends.
We find a number of problems with Mr. Bradley's testimony.
First, although Mr. Bradley created the impression in his direct
testimony that he was required to travel to a number of
subcontractors' offices in addition to the Space Center, on
cross-examination Mr. Bradley conceded that there were only two
subcontractors that he was required to visit in 1992, Loral and
Bendix Corporation, and that Bendix's offices were located across
the street from Mr. Bradley's office. As to how he incurred
daily mileage generally exceeding 40 miles, Mr. Bradley testified
that multiple trips were required. Mr. Bradley also testified
that the distance between his office at Unisys and the Loral
location was 5.5 to 6.5 miles. He did not offer an estimate of
the distance between Unisys and the Space Center. However,
another Unisys employee called by respondent testified that the
distance between Unisys and Loral was 3 to 3.5 miles, and the
distance between Unisys and the Space Center was 3 miles. A
scaled map introduced by respondent corroborates these estimates,
and we accordingly find that the distances are as estimated by
respondent's witness. At these distances, Mr. Bradley would have
had to make approximately five to seven round-trips between
Unisys and Loral and/or the Space Center each day, after normal
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business hours, to reach the claimed business mileage. Moreover,
Mr. Bradley claimed a relatively constant level of mileage for
each workday of an overtime week, whether his overtime hours for
the week were modest (e.g., 8 hours) or extensive (e.g., 31
hours).6 Given these circumstances, we do not find Mr. Bradley's
log of business use credible. We conclude that the claimed
business miles of 9,976 in 1992 are inflated. Because we find
unreliable the evidence offered by Mr. Bradley of his business
use, petitioners fail to meet the requirement of the section 274
regulations that a taxpayer substantiate, with adequate records
or sufficiently corroborative evidence, the amount of business
use of a passenger automobile. Accordingly, we sustain
respondent's determination disallowing all vehicle expenses
claimed by Mr. Bradley.
Miscellaneous Employee Business Expenses
Respondent also disallowed the deduction for miscellaneous
business expenses attributable to Mr. Bradley's employment in the
amount of $189. Since petitioners offered no evidence with
respect to this amount, we sustain respondent's determination.7
6
For the week ended Jan. 17, 1992, Mr. Bradley worked 8.5
hours of overtime and logged between 41-43 miles for each day
January 13th through January 17th. For the week ended Jan. 24,
1992, Mr. Bradley worked 31 hours of overtime and logged between
41-44 miles for each day January 20th through January 24th.
7
Respondent conceded the $677 in miscellaneous employee
business expenses claimed with respect to Mrs. Bradley's
employment.
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Real Estate Losses
In the notice of deficiency, respondent disallowed all
expenses, totaling $22,104, claimed by petitioners on Schedule E
with respect to four real properties, on the grounds that
petitioners failed to establish that the expenses were "paid or
incurred during the taxable year" or were "ordinary and
necessary". In addition, respondent disallowed the depreciation
claimed on Schedule E with respect to three of the properties,
totaling $8,203, on the grounds that petitioners failed to
establish their basis in each property or its depreciable
character. Respondent now concedes that petitioners have
substantiated the expenses and the depreciation claimed with
respect to the three residential properties (Hearthwood, River
Stone, and Windsor), but seeks to challenge the net losses from
these properties on the grounds that petitioners have failed to
substantiate the amount of rental income and have failed to
establish that they were in the business of renting property or
holding property for profit. With respect to the Mississippi
land, respondent challenges the net loss on the foregoing grounds
as well as on petitioners' failure to substantiate some of the
expenses.
Petitioners object to respondent's raising their failure to
substantiate rental income on the grounds that it is a new issue.
In the notice of deficiency, respondent specifically
disallowed the Schedule E expenses and the depreciation for each
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property. Neither the expense nor the depreciation figures
reflect rental income received. There was no mention of Schedule
E rental income or the business or profit-seeking status of
petitioners' real estate activities in respondent's Answer or in
his trial memorandum. Respondent first formally raised the
substantiation of the rental income at trial. The challenge to
the business or profit-seeking status of petitioners' activities
was not raised until the posttrial brief. Because the notice was
quite specific regarding the Schedule E items disallowed, we do
not believe that the issue of the "trade or business" or "for
profit" status of petitioners' real estate activities was fairly
raised in the pleadings prior to trial, or during the trial, and
decline to permit respondent to raise it for the first time in a
posttrial brief. See Fox Chevrolet, Inc. v. Commissioner, 76
T.C. 708, 735 (1981); Estate of Horvath v. Commissioner, 59 T.C.
551, 555-556 (1973). Since respondent has conceded the expenses
and depreciation disallowed in the notice, we allow deductions
for those items.
Finally, we consider whether petitioners have substantiated
the Schedule E expenses relating to the Mississippi land
disallowed in the notice.8 To substantiate the Schedule E auto
and travel expenses that were disallowed, petitioners offered
8
Respondent has conceded that petitioners are allowed a
deduction in the amount of $259 for taxes related to the
Mississippi land.
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into evidence copies of receipts for food and gasoline totaling
$232.77 and a copy of an airline ticket in the amount of $318.
Mr. Bradley testified that he incurred the food and gasoline
expenses in an attempt to generate interest in the property by
showing it to a friend from Houston and holding a picnic for
local residents. He testified that the airline ticket was
purchased to meet with a former business partner in Chicago to
discuss developing the land as a low-income housing project.
Since the foregoing expenses are for travel and entertainment
they must, in addition to meeting the requirements of sections
162 or 212, be substantiated in accordance with the requirements
of section 274(d). Since petitioners have not substantiated the
business purpose of the foregoing expenditures with a written
explanation, see sec. 1.274-5T(c)(2)(ii)(B), Temporary Income Tax
Regs., 50 Fed. Reg. 46018 (Nov. 6, 1985), or corroborated Mr.
Bradley's statements with direct or circumstantial evidence of
the time, place, or business purpose of the expenditures, see
sec. 1.274-5T(c)(3)(i), Temporary Income Tax Regs., 50 Fed. Reg.
46020-46021 (Nov. 6, 1985), we find the receipts and Mr.
Bradley's testimony insufficient for purposes of section 274(d)
substantiation and therefore sustain respondent's determination
disallowing the auto and travel expenses.
With respect to the disallowance of a $1,500 management fee
claimed on Schedule E for the Mississippi land, petitioners
offered a copy of a check made out to "DECA Corp." as payee in
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the amount of $1,500 dated August 31, 1992, and endorsed on
behalf of "Utica Deca Corporation." Mr. Bradley testified that
he paid this amount as a management fee to have the property
monitored to prevent unauthorized woodcutting or hunting. Under
section 212(2), a deduction is allowable for expenses that are
ordinary and necessary "for the management, conservation, or
maintenance of property held for the production of income." The
regulations promulgated under section 212 provide that the term
"ordinary and necessary" means that the expenses must be
reasonable in amount and bear a reasonable and proximate relation
to the management, conservation, or maintenance of property held
for such purposes. Sec. 1.212-1(a)(2), (d), Income Tax Regs.
The term "held for the production of income" includes held for
appreciation in value, whether to maximize gain or to minimize
loss. See sec. 1.212-1(b), Income Tax Regs. On this record, we
find the management fees satisfy section 212(2) and decline to
sustain respondent's disallowance of the deduction for them.
Addition to Tax for Failure To File a Timely Return
Section 6651(a)(1) imposes an addition to tax for failure to
file timely Federal income tax returns unless the taxpayer shows
that such failure was due to reasonable cause and not willful
neglect. United States v. Boyle, 469 U.S. 241, 245 (1985). To
prove "reasonable cause", a taxpayer must show that he exercised
ordinary business care and prudence and was nevertheless unable
to file the return within the prescribed time. Crocker v.
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Commissioner, 92 T.C. 899, 913 (1989); sec. 301.6651-1(c)(1),
Proced. & Admin. Regs. Petitioners' return was due on April 15,
1993, and was not filed until on or about April 26, 1993.
Petitioners argued that they did not believe they owed any tax,
but their mistaken belief is not reasonable cause for failure to
timely file a return. Linseman v. Commissioner, 82 T.C. 514, 523
(1984); Cox v. Commissioner, 54 T.C. 1735, 1744 (1970).
Therefore, we find petitioners liable for the addition to tax
under section 6651(a)(1).
Penalty for Substantial Understatement of Tax
Respondent also determined that petitioners are liable for
the accuracy-related penalty for substantial understatement of
tax under section 6662(b)(2). Since petitioners have not
provided substantial authority for the positions taken on their
return, or made any disclosure within the meaning of section
6662(d)(2)(B)(ii), the penalty is sustained in the event that the
Rule 155 computation indicates that petitioners' understatement
of tax exceeds the greater of $5,000 or 10 percent of the amount
of tax required to be shown on the return.
To reflect the foregoing and concessions,
Decision will be entered
under Rule 155.