Mitic v. Commissioner

T.C. Memo. 2000-144

UNITED STATES TAX COURT

ILIJA & BRANKA MITIC, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5062-98. Filed April 20, 2000.

Ilija Mitic, pro se.

Paul K. Webb, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

CHIECHI, Judge: Respondent determined the following defi-

ciencies in, and accuracy-related penalties under section

6662(a)1 on, petitioners’ Federal income tax:

1
All section references are to the Internal Revenue Code in
effect for the years at issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
 - 2 -

Year Deficiency Accuracy-Related Penalty
1993 $3,778 $756
1994 17,720 3,544

The issues remaining for decision are:

(1) Are petitioners entitled to a medical expense deduction

for 1993 in excess of that allowed by respondent? We hold that

they are not.

(2) Are petitioners entitled to the casualty loss deduction

that they claimed for 1994 with respect to property damage

resulting from an automobile accident? We hold that they are

not.

(3) Are petitioners entitled to the depreciation deduction

that they claimed for 1994 with respect to a Geo automobile? We

hold that they are not.

(4) Are petitioners liable for each of the years at issue

for the accuracy-related penalty under section 6662(a)? We hold

that they are.

FINDINGS OF FACT

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

At all relevant times, including at the time the petition

was filed, petitioners Ilija Mitic (Mr. Mitic) and Branka Mitic

(Ms. Mitic) resided in a house (petitioners’ residence) located

at 726 Glenborough Drive, Mountain View, California.

Claimed Medical Expense Deduction

Since at least 1980, Ms. Mitic has suffered from various
 - 3 -

allergies, asthma, and related medical problems. A typewritten

letter regarding Ms. Mitic from James D. Wolfe, M.D. (Dr. Wolfe),

that was dated June 27, 1980 (June 27, 1980 letter), stated:

TO WHOM IT MAY CONCERN:

Mrs. Branka Mitic has perennial rhinitis and nasal
polyposis. She has been found to be allergic to dust
and would benefit from removal of the carpet in the
bedroom.

An individual whose identity is not disclosed by the record added

the letter “s” by hand to the typewritten word “bedroom” in the

June 27, 1980 letter.

Sometime in 1993, Ms. Mitic decided to attempt to conduct a

home decorating consulting activity known as Branka’s Interior

Design (Branka’s Design). The theory behind Branka’s Design was

to purchase furniture and other decorator items for petitioners’

residence so that that residence could be used as a showroom for

prospective customers of Branka’s Design. During 1993 and 1994,

Ms. Mitic purchased tens of thousands of dollars’ worth of

various items of furniture and other decorator items that were

placed in petitioners’ residence.

In addition, during the period from around mid-September to

November 1993, petitioners paid to have (1) all of the carpeting

removed from their residence, (2) ¾-inch by 2¼-inch red oak

select grade hardwood flooring installed in all areas of that

residence except the hallways, kitchen, and bathrooms, and

(3) the interior of their residence repainted after installation
 - 4 -

of the hardwood flooring. Petitioners rented and resided in an

apartment while the foregoing work was being done in their

residence in order to prevent exposure of Ms. Mitic to the dust,

paint, and other pollutants that were generated by that work.

Petitioners did not have their residence appraised either before

or after the carpeting was removed from, and the hardwood floors

were installed in, their residence and the interior of that

residence was repainted.

On February 7, 1994, Ms. Mitic purchased for a total price

of $8,370 a Chinese rug measuring approximately 6 feet by 9 feet

and a Persian rug measuring approximately 9 feet by 12½ feet.

Petitioners placed those rugs on the hardwood floor in their

residence.

Claimed Casualty Loss Deduction

On November 2, 1994, while driving on vacation in Mr.

Mitic’s 1989 Mercedes-Benz 560 SEL (Mr. Mitic’s Mercedes) to Lake

Tahoe, California, petitioners were involved in an automobile

accident (petitioners’ automobile accident). At the time of

petitioners’ automobile accident, Mr. Mitic’s Mercedes, which he

had purchased in 1989 for $67,500, had relatively low mileage

(i.e., 21,921 miles), had been exceptionally well maintained, and

was insured by State Farm Mutual Automobile Insurance Co. (State

Farm). As a result of petitioners’ automobile accident, Mr.

Mitic’s Mercedes was totaled, i.e., damaged beyond reasonable
 - 5 -

repair.

Sometime shortly after petitioners’ automobile accident,

petitioners retained an attorney, Ismael D. Perez (Mr. Perez), to

represent them in dealing with State Farm regarding their prop-

erty damage claim with respect to Mr. Mitic’s Mercedes (automo-

bile damage claim). In a letter dated November 17, 1994, Mr.

Perez demanded $70,000 from State Farm to settle that claim. By

letter dated December 13, 1994, State Farm offered to settle the

automobile damage claim for $40,086 plus taxes and appropriate

fees (settlement offer). By letter dated December 18, 1994, Mr.

Perez rejected, and asked State Farm to reconsider, that settle-

ment offer. By letters dated December 19 and 20, 1994, State

Farm renewed its offer to settle the automobile damage claim for

$40,086 plus taxes and appropriate fees.

Thereafter, negotiations between State Farm and Mr. Perez

regarding the automobile damage claim continued until at least

March 28, 1995. By letters dated January 11 and 18, 1995, Mr.

Perez asked State Farm to remit to petitioners the full amount of

State Farm’s settlement offer in order to mitigate the damages

relating to the automobile damage claim. Those letters indicated

that such a request was not intended to release State Farm from

liability or to waive petitioners’ right to pursue that claim in

court.

In response, State Farm sent a letter to Mr. Perez dated
 - 6 -

January 24, 1995. That letter stated in pertinent part:

We believe the Actual Cash Value of the involved 1989
Mercedes is $40,086. To this figure we add sales tax,
$3,307.10, pro-rated license fees, $89.00, and subtract
the deductible, $200.00. This gives us a figure of
$43,282.10.

* * * * * * *

We will continue to handle the claim pursuant to the
California Code of Regulations, Title 10. [sic] Chapter
5, Subchapter 7.5, Section 2695.8.

By letter dated January 27, 1995, Mr. Perez asked State Farm to

issue a check payable to petitioners in the total amount of

$43,282.10 and stated that petitioners “will continue to keep the

claim open to determine if * * * [they] are entitled to more.”

By check dated February 2, 1995, State Farm sent petitioners

$43,282.10 in settlement of the automobile damage claim. By

letter dated March 8, 1995, Mr. Perez notified State Farm that

petitioners were unable to purchase an automobile that was

comparable to Mr. Mitic’s Mercedes for the amount of State Farm’s

settlement offer and asked State Farm to reopen the automobile

damage claim. By letter dated March 28, 1995, State Farm in-

formed Mr. Perez that, based on further investigation, “the

settlement amount of $40,086.00 (base selling price), plus sales

tax and pro-rated DMV fees which we paid for your clients’ car is

fair and reasonable.”

At no time in 1994 and 1995 during the negotiations between

State Farm and Mr. Perez with respect to the automobile damage
 - 7 -

claim did State Farm deny liability for that claim, although it

did dispute that it was liable as the insurer of Mr. Mitic’s

Mercedes for the amount demanded by Mr. Perez on behalf of

petitioners. The November-December 1994 edition of Kelley Blue

Book suggested a retail value of $42,560 for a 1989 Mercedes-Benz

560 SEL with under 40,000 miles.

Claimed Depreciation Deduction

Petitioners purchased a 1993 Geo automobile (Geo) from their

son in return for a check dated December 8, 1994, that they

issued to him. On December 20, 1994, title to that automobile

was registered in the names of Mr. Mitic and Ms. Mitic. Peti-

tioners kept no mileage log, calendar, or other documentation

regarding their use of the Geo in 1994.

Petitioners’ Returns for the Years at Issue

Petitioners filed a joint Form 1040, U.S. Individual Income

Tax Return (joint return), for each of the years 1993 and 1994.

In each of those joint returns, Mr. Mitic listed his occupation

as “Accountant”. In the 1993 joint return, Ms. Mitic listed her

occupation as “Accountant”, and in the 1994 joint return, she

listed her occupation as “S.E. interior design”. Mr. Mitic

signed the 1993 and 1994 joint returns on February 1, 1994, and

February 3, 1995, respectively. Ms. Mitic signed the 1994 joint
 - 8 -

return on February 3, 1995.2

In Schedule A, Itemized Deductions, of the 1993 joint

return, petitioners claimed a deduction totaling $20,607.57 for

“Medical and dental expenses”. That deduction consisted of:

(1) $3,889 for physicians and medicines; (2) $8,573 for the

removal of carpeting from, and the installation of hardwood

flooring in, petitioners’ residence; (3) $5,525 for repainting

the interior of petitioners’ residence after the hardwood floor-

ing was installed; and (4) $2,621 for renting an apartment in

which petitioners lived while they had the foregoing work done in

their residence.

In the 1993 joint return, petitioners claimed depreciation

deductions with respect to a Toyota automobile (Toyota) and

claimed depreciation deductions and other deductions with respect

to Mr. Mitic’s Mercedes and another automobile.

In Schedule A of the 1994 joint return, petitioners claimed

a casualty loss deduction of $40,500 with respect to Mr. Mitic’s

Mercedes. As required, petitioners filed Form 4684, Casualties

and Thefts (Form 4684), with the 1994 joint return. In section B

of Form 4684, Business and Income-Producing Property, part I,

Casualty or Theft Gain or Loss, petitioners indicated (1) that

the “Cost or adjusted basis” of Mr. Mitic’s Mercedes was $67,500,

2
The record does not disclose when Ms. Mitic signed the 1993
joint return.
 - 9 -

(2) that the “Insurance or other reimbursement” with respect to

that automobile was $27,000, (3) that they had no gain from a

casualty or theft, (4) that the fair market value before the

casualty or theft of Mr. Mitic’s Mercedes was $55,000, (5) that

the fair market value of that automobile after the casualty or

theft was zero, and (6) that the amount of the casualty loss with

respect to Mr. Mitic’s Mercedes was $40,500. The amount of

$27,000 that petitioners indicated in Form 4684 was the “Insur-

ance or other reimbursement” with respect to that vehicle repre-

sented petitioners’ estimate of the amount to be paid by State

Farm in settlement of the automobile damage claim.

In the 1994 joint return, petitioners claimed a depreciation

deduction for the entire year with respect to the Geo that they

had purchased from their son in December 1994. Petitioners also

claimed in the 1994 joint return depreciation deductions with

respect to the Toyota and another automobile.

Notice of Deficiency

In the notice of deficiency (notice) issued to petitioners

for the years at issue, respondent, inter alia, disallowed:

(1) For 1993 the entire medical expense deduction, except for

$3,889 for physicians and medicines, that petitioners claimed in

the 1993 joint return (petitioners’ claimed medical expense

deduction at issue) and (2) for 1994 (a) the casualty loss

deduction with respect to Mr. Mitic’s Mercedes and (b) the
 - 10 -

claimed depreciation deduction with respect to the Geo. Respon-

dent also determined in the notice that petitioners are liable

for each of the years at issue for the accuracy-related penalty

under section 6662(a).

OPINION

Petitioners bear the burden of proving that the determina-

tions in the notice are erroneous.3 See Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).

Claimed Medical Expense Deduction

Petitioners claimed in the 1993 joint return a medical

expense deduction for, inter alia, expenditures incurred in

removing carpeting from, installing hardwood flooring in, and

repainting the interior of petitioners’ residence and renting an

apartment in which they resided while that work was being done.

Respondent disallowed the deduction claimed for those expendi-

tures.

Section 213 allows a deduction for expenses paid during the

taxable year, and not compensated for by insurance or otherwise,

for medical care of a taxpayer, his spouse, or a dependent to the

extent that those expenses exceed 7.5 percent of the taxpayer’s

3
Each petitioner and respondent signed the first stipulation
of settled issues filed in this case. However, only Mr. Mitic,
and not Ms. Mitic, appeared at trial and signed the stipulation
of facts which respondent also executed. Consequently, respon-
dent filed a motion to dismiss for lack of prosecution as to Ms.
Mitic (respondent’s motion), which the Court took under advise-
ment. See infra note 11.
 - 11 -

adjusted gross income. See sec. 213(a). As pertinent here,

section 213(d)(1)(A) defines the term “medical care” to mean

“amounts paid for the * * * cure, mitigation, treatment, or

prevention of disease, or for the purpose of affecting any

structure or function of the body”. Section 1.213-1(e)(1)(ii),

Income Tax Regs., provides that “Deductions for expenditures for

medical care allowable under section 213 will be confined strict-

ly to expenses incurred primarily for the prevention or allevia-

tion of a physical or mental defect or illness.” An expenditure

that “is merely beneficial to the general health of an individ-

ual, such as an expenditure for a vacation, is not an expenditure

for medical care.” Id. Capital expenditures generally are not

deductible. See sec. 263 and the regulations thereunder.

However, an expenditure which otherwise qualifies as a
medical expense under section 213 shall not be disqual-
ified merely because it is a capital expenditure. For
purposes of section 213 and this paragraph, a capital
expenditure made by the taxpayer may qualify as a
medical expense, if it has as its primary purpose the
medical care (as defined in subdivisions (i) and (ii)
of this subparagraph) of the taxpayer, his spouse, or
his dependent. Thus, a capital expenditure which is
related only to the sick person and is not related to
permanent improvement or betterment of property, if it
otherwise qualifies as an expenditure for medical care,
shall be deductible * * *. Moreover, a capital expen-
diture for permanent improvement or betterment of
property which would not ordinarily be for the purpose
of medical care (within the meaning of this paragraph)
may, nevertheless, qualify as a medical expense to the
extent that the expenditure exceeds the increase in the
value of the related property, if the particular expen-
diture is related directly to medical care. Such a
situation could arise, for example, where a taxpayer is
advised by a physician to install an elevator in his
 - 12 -

residence so that the taxpayer’s wife who is afflicted
with heart disease will not be required to climb
stairs. If the cost of installing the elevator is
$1,000 and the increase in the value of the residence
is determined to be only $700, the difference of $300,
which is the amount in excess of the value enhancement,
is deductible as a medical expense. If, however, by
reason of this expenditure, it is determined that the
value of the residence has not been increased, the
entire cost of installing the elevator would qualify as
a medical expense.

Sec. 1.213-1(e)(1)(iii), Income Tax Regs.

Section 213(d)(2) provides that amounts which are not lavish

or extravagant under the circumstances that are paid for lodging

while away from home primarily for and essential to medical care

referred to in section 213(d)(1)(A) are to be treated as amounts

paid for medical care if --

(A) the medical care referred to in * * *
[section 213(d)(1)(A)] is provided by a physician
in a licensed hospital (or in a medical care fa-
cility which is related to, or the equivalent of,
a licensed hospital), and

(B) there is no significant element of per-
sonal pleasure, recreation, or vacation in the
travel away from home.

The amount taken into account under the preceding
sentence shall not exceed $50 for each night for each
individual.

Mr. Mitic contends that petitioners took “deductions for

medical expenditures in the past which were not challenged by IRS

and have been allowed”. Consequently, according to Mr. Mitic,

this Court should allow petitioners’ claimed medical expense

deduction at issue for 1993. We disagree. This Court is not
 - 13 -

bound by the actions or inactions of respondent with respect to

medical expense deductions claimed by petitioners for years prior

to 1993.

Mr. Mitic also contends that petitioners are entitled to

petitioners’ claimed medical expense deduction at issue for 1993

because the expenditures in question (1) “were approved and

recommended [by] Dr. James Wolfe” as expenditures from which Ms.

Mitic “would benefit medically” and (2) “were reasonable and

medically related to wife’s [Ms. Mitic’s] chronic asthma condi-

tion.” Those contentions are not supported by the record in this

case. Even if they were, on the record before us, we find that

Mr. Mitic has failed to prove that the expenditures in question

qualify under section 213 and the regulations thereunder as

deductible expenses for the medical care of Ms. Mitic.

We consider first the rental expense incurred by petitioners

while the carpeting was removed from, and the hardwood flooring

was installed in, petitioners’ residence and the interior of that

residence was repainted. On the record before us, we find that

Mr. Mitic has failed to show that Dr. Wolfe approved and recom-

mended that rental expense and that it qualifies as an expense

paid for medical care under section 213. See sec. 213(d)(2).

We turn now to the remaining expenditures in question

consisting of the amounts paid by petitioners to have the carpet-

ing removed and hardwood flooring installed throughout their
 - 14 -

residence and the interior of that residence repainted. On the

instant record, we reject Mr. Mitic’s contentions that all of

those expenditures “were approved and recommended” by Dr. Wolfe

as expenditures from which Ms. Mitic “would benefit medically”

and were “medically related” to Ms. Mitic’s asthmatic condition.

To support his contention regarding Dr. Wolfe, Mr. Mitic

apparently relies on the June 27, 1980 letter from Dr. Wolfe. We

find Mr. Mitic’s reliance on that letter to be misplaced. The

June 27, 1980 letter was prepared over 13 years before the

expenditures in question were incurred. We find that letter to

have very little, if any, probative value regarding why petition-

ers decided to remove carpeting from, and install hardwood

flooring in, their residence and have that residence repainted.

In this connection, during 1993 and 1994, Ms. Mitic purchased

tens of thousands of dollars’ worth of various items of furni-

ture, rugs, and other decorator items that were placed in peti-

tioners’ residence. She purchased those items in an effort to

begin an interior design activity that was based on the theory

that petitioners’ residence was to be used as a showcase for

prospective customers of that design activity. On the record

before us, we believe that it is more reasonable to conclude that

the expenditures relating to the removal of carpeting, installa-

tion of hardwood flooring, and painting throughout petitioners’

residence were incurred primarily to accomplish Ms. Mitic’s
 - 15 -

objective of converting petitioners’ residence into a showcase to

be used in her interior design activity, rather than “primarily

for the prevention or alleviation of a physical * * * illness” of

Ms. Mitic within the meaning of section 1.213-1(e)(1)(ii), Income

Tax Regs.

Moreover, removal of carpeting and installation of hardwood

flooring throughout petitioners’ residence and repainting of that

residence were not approved and recommended by Dr. Wolfe in the

June 27, 1980 letter, as Mr. Mitic contends, as expenditures that

would benefit medically Ms. Mitic. In fact, the June 27, 1980

letter, as typewritten, merely stated that Ms. Mitic “has been

found to be allergic to dust and would benefit from removal of

the carpet in the bedroom”.4 Furthermore, we find that Ms.

Mitic’s purchase in early February 1994 of a Chinese rug and a

Persian rug for $8,370, which were placed on the newly installed

hardwood flooring of petitioners’ residence, belies Mr. Mitic’s

contentions (1) that the carpeting was removed from, and hardwood

flooring was installed in, petitioners’ residence and the inte-

rior of that residence was repainted because Dr. Wolfe approved

and recommended that that work be done and (2) that the expendi-

4
Although the June 27, 1980 letter is a typewritten letter,
the letter “s” was added by hand to the word “bedroom” in that
letter. We are not persuaded by the June 27, 1980 letter that
Dr. Wolfe, who did not testify at trial, stated in the June 27,
1980 letter that Ms. Mitic would benefit from removal of the
carpeting in bedrooms other than Ms. Mitic’s bedroom or in other
rooms in petitioners’ residence.
 - 16 -

tures for that work were medically related to Ms. Mitic’s asth-

matic condition.

Based on our examination of the entire record in this case,

we find that Mr. Mitic has failed to prove that petitioners’

claimed medical expense deduction at issue for 1993 was for

expenses for medical care of Ms. Mitic under section 213 and the

regulations thereunder.5 We further find on that record that Mr.

Mitic has failed to show error in respondent’s determination

disallowing that deduction. Consequently, we sustain that

determination.

Claimed Casualty Loss Deduction

In the 1994 joint return, petitioners claimed a casualty

loss deduction of $40,500 with respect to Mr. Mitic’s Mercedes

5
Assuming arguendo that we had found that petitioners’
claimed medical expense deduction at issue for 1993 as it relates
to petitioners’ expenditures for removing carpeting and install-
ing hardwood flooring throughout petitioners’ residence and
painting the interior of that residence was for expenses for
medical care under sec. 213 and the regulations thereunder, we
find on the instant record that petitioners nonetheless are not
entitled to deduct those expenditures under sec. 213. That is
because on the instant record we find that Mr. Mitic has failed
to establish that those expenditures, which we find to be capital
expenditures for the permanent improvement or betterment of
petitioners’ residence, satisfy the requirements of sec. 1.213-
1(e)(1)(iii), Income Tax Regs., relating to capital expenditures
otherwise qualifying as medical expenses under sec. 213 and the
regulations thereunder. In this connection, Mr. Mitic admitted
at trial that no appraisal was made of petitioners’ residence
either before or after petitioners had the carpeting removed
from, and hardwood flooring installed in, that residence and had
it repainted.
 - 17 -

which was totaled in petitioners’ automobile accident that

occurred in early November 1994. Petitioners calculated that

claimed casualty loss deduction by subtracting their $27,000

estimate of the amount of insurance to be paid by State Farm from

$67,500, the amount that they paid to purchase that automobile.

Respondent disallowed petitioners’ claimed casualty loss deduc-

tion for 1994.

Section 165(a) allows a deduction for any loss sustained

during the taxable year and not compensated for by insurance or

otherwise.6 A loss is treated as sustained during the taxable

year in which the loss occurs, as evidenced by closed and com-

6
The amount of any deductible casualty loss sustained gener-
ally is equal to the lesser of (1) the amount equal to the fair
market value of the property in question immediately before the
casualty reduced by the fair market value of that property
immediately after the casualty or (2) the amount of the adjusted
basis of the property prescribed in sec. 1.1011-1, Income Tax
Regs., for determining the loss from the sale or other disposi-
tion of the property involved. See sec. 1.165-7(b), Income Tax
Regs. However, if property used in a trade or business or held
for the production of income is totally destroyed by casualty,
and if the fair market value of such property immediately before
the casualty is less than the adjusted basis of such property
prescribed in sec. 1.1011-1, Income Tax Regs., the amount of the
adjusted basis of such property is to be treated as the amount of
the loss for purposes of sec. 165(a). See id.

Moreover, in the case of a personal casualty loss (i.e., a
casualty loss of an individual of property not connected with a
trade or business or a transaction entered into for profit), the
amount of such loss otherwise properly calculated under sec. 165
and the regulations thereunder is deductible for the taxable year
only to the extent such loss (assuming there are no personal
casualty gains) exceeds 10 percent of the individual taxpayer’s
adjusted gross income. See sec. 165(h)(2)(A).
 - 18 -

pleted transactions and as fixed by identifiable events occurring

in such taxable year. See sec. 1.165-1(d)(1), Income Tax Regs.

If a casualty occurs that may result in a loss and, in the year

of such casualty, there exists a claim for reimbursement with

respect to which there is a reasonable prospect of recovery, for

purposes of section 165 no portion of the loss with respect to

which reimbursement may be received is sustained until it can be

ascertained with reasonable certainty whether or not such reim-

bursement will be received. See sec. 1.165-1(d)(2)(i), Income

Tax Regs. Whether a reasonable prospect of recovery exists with

respect to a claim for reimbursement of a loss is a question of

fact that must be determined upon an examination of all the facts

and circumstances. See id. Whether or not reimbursement of a

loss will be received may be ascertained with reasonable cer-

tainty by, for example, a settlement of the claim, an adjudica-

tion of the claim, or an abandonment of the claim. See id.

Mr. Mitic contends that respondent erred in disallowing

petitioners’ claimed casualty loss deduction for 1994. According

to Mr. Mitic, petitioners’ position in the 1994 joint return with

respect to the claimed casualty loss deduction was required by

Form 4684 and the instructions for that form.7 We disagree.

7
As we understand it, Mr. Mitic alternatively argues that if
we were to find that petitioners are not entitled to the claimed
casualty loss deduction for 1994, they would be entitled to a
casualty loss deduction for 1995 that is calculated by subtract-
(continued...)
 - 19 -

As for Form 4684, it was petitioners who took the position

in that form which they filed with the 1994 joint return that Mr.

Mitic’s Mercedes was property used in a trade or business or for

income-producing purposes.8 Consequently, it was they who de-

cided to report the casualty loss with respect to that automobile

in section B, Business and Income-Producing Property, of Form

4684. Furthermore, in completing part I, Casualty or Theft Gain

or Loss, in section B of Form 4684, it was petitioners who

decided to report as the “Cost or adjusted basis” of Mr. Mitic’s

Mercedes the original purchase price ($67,500) of that automo-

bile. They took that position even though they had depreciated

Mr. Mitic’s Mercedes in prior years, and consequently the ad-

justed basis of that automobile, as depreciated by petitioners,

would have been less than its original cost. It was also peti-

7
(...continued)
ing the amount of insurance ($43,282.10) actually paid to them by
State Farm in early February 1995 with respect to Mr. Mitic’s
Mercedes from the amount ($67,500) that petitioners paid to
purchase that vehicle. We have no jurisdiction over petitioners’
taxable year 1995. Both the notice issued by respondent and the
petition filed by petitioners relate only to petitioners’ taxable
years 1993 and 1994.
8
Except for Mr. Mitic’s general and conclusory testimony on
which we are unwilling to rely, the record contains no evidence
establishing that in 1994 Mr. Mitic’s Mercedes was property used
in a trade or business or in a transaction entered into for
profit. Nor does the record establish that the loss, if any,
sustained with respect to that vehicle was incurred in a trade or
business or in a transaction entered into for profit. To the
contrary, Mr. Mitic stipulated that petitioners were traveling to
Lake Tahoe on vacation at the time petitioners’ automobile
accident occurred.
 - 20 -

tioners who decided to report as “Insurance or other reimburse-

ment” in part I of section B of Form 4684 an estimate of $27,000,

and not the settlement amount of $40,086 plus taxes and appropri-

ate fees that State Farm offered to petitioners at the end of

1994 in settlement of the automobile damage claim.

As for the instructions for Form 4684, we take judicial

notice of those instructions which are not part of the record in

this case. Those instructions explicitly state that if the

taxpayer is not sure whether part of the claimed casualty loss

will be reimbursed, the taxpayer may not deduct that part until

the tax year when it is reasonably certain that it will not be

reimbursed. The instructions for Form 4684 thus are totally

consistent with section 1.165-1(d)(2)(i), Income Tax Regs. In

addition, those instructions explicitly state that, in reporting

in part I of section B of Form 4684 the “Cost or adjusted basis”

of property used in a trade or business or for income-producing

purposes, it is necessary to deduct depreciation allowed or

allowable.

We conclude that Mr. Mitic’s contention that petitioners’

position in the 1994 joint return with respect to their claimed

casualty loss deduction was required by Form 4684 and the in-

structions for that form is without merit.

We shall now determine on the basis of the instant record

and the applicable law whether petitioners are entitled to the
 - 21 -

casualty loss deduction that they claimed in the 1994 joint

return. The record establishes that shortly after petitioners’

automobile accident in early November 1994 petitioners hired Mr.

Perez, an attorney, to represent them, and he submitted the

automobile damage claim to State Farm on their behalf with

respect to Mr. Mitic’s Mercedes. At no time in 1994 and 1995

during the negotiations between State Farm and Mr. Perez with

respect to the automobile damage claim did State Farm deny

liability for that claim, although it did dispute that it was

liable as the insurer of Mr. Mitic’s Mercedes for the amount

demanded by Mr. Perez on behalf of petitioners. In fact, at the

end of December 1994, State Farm offered to settle the automobile

damage claim for $40,086 plus taxes and appropriate fees.

On the record before us, we find that in 1994 petitioners

had a reasonable prospect of recovery with respect to the automo-

bile damage claim and that they could not have ascertained with

reasonable certainty in that year whether they would receive the

entire amount of that claim. We further find on the instant

record that although petitioners knew with reasonable certainty

in 1994 that they would collect some insurance with respect to

the automobile damage claim, they did not know with reasonable

certainty the amount thereof. See Commissioner v. Harwick, 184

F.2d 835 (5th Cir. 1950), affg. a Memorandum Opinion of this

Court dated Oct. 4, 1949; Hudock v. Commissioner, 65 T.C. 351,
 - 22 -

361 (1975); sec. 1.165-1(d)(2), Income Tax Regs.

Based on our examination of the entire record before us, we

find that Mr. Mitic has failed to establish that under section

1.165-1(d)(1) and (2), Income Tax Regs., petitioners sustained

any loss in 1994 with respect to Mr. Mitic’s Mercedes. We

further find on that record that Mr. Mitic has failed to show

that petitioners are entitled to the casualty loss deduction

claimed in the 1994 joint return. Consequently, we sustain

respondent’s determination disallowing that claimed deduction.

Claimed Depreciation Deduction

In the 1994 joint return, petitioners claimed a depreciation

deduction for the entire year with respect to the Geo that

petitioners acquired from their son in December 1994. Respondent

disallowed that deduction. Mr. Mitic makes no argument on brief

with respect to the depreciation deduction that petitioners

claimed for 1994 with respect to the Geo.

Section 167(a) allows a deduction for depreciation with

respect to property used in a trade or business or held for the

production of income. Based on our examination of the entire

record before us, we find that Mr. Mitic has failed to establish

that during 1994 petitioners used the Geo in a trade or business

or held it for the production of income.9 We further find on

9
Mr. Mitic conceded at trial that petitioners kept no mile-
age log, calendar, or other documentation to show that the Geo
(continued...)
 - 23 -

that record that Mr. Mitic has failed to prove that petitioners

are entitled to the depreciation deduction claimed with respect

to the Geo in the 1994 joint return. Consequently, we sustain

respondent’s determination disallowing that deduction.

Accuracy-Related Penalty Under Section 6662(a)

Respondent determined that petitioners are liable for each

of the years at issue for the accuracy-related penalty under

section 6662(a). Mr. Mitic makes no argument on brief regarding

those penalties.

Section 6662(a) imposes an accuracy-related penalty equal to

20 percent of the underpayment of tax resulting from a substan-

tial understatement of income tax. An understatement is equal to

the excess of the amount of tax required to be shown in the tax

return over the amount of tax shown in the tax return, see sec.

6662(d)(2)(A), and is substantial in the case of an individual if

it exceeds the greater of 10 percent of the tax required to be

shown or $5,000, see sec. 6662(d)(1)(A).

The accuracy-related penalty under section 6662(a) does not

9
(...continued)
was used during 1994 in a trade or business or held for the
production of income. In this connection, the record establishes
that petitioners also claimed in the 1994 joint return deprecia-
tion deductions with respect to at least two other automobiles.
We find it incredible that petitioners used the Geo as well as
those two other vehicles during 1994 in one or more trades or
businesses or held them for the production of income, especially
in light of Mr. Mitic’s testimony that Ms. Mitic was too ill to
work during 1994.
 - 24 -

apply to any portion of an underpayment if it is shown that there

was reasonable cause for such portion and that the taxpayer acted

in good faith. See sec. 6664(c)(1). The determination of

whether a taxpayer acted with reasonable cause and in good faith

depends on the pertinent facts and circumstances, including the

taxpayer’s efforts to assess his or her proper tax liability, the

knowledge and experience of the taxpayer, and the reliance on the

advice of a professional, such as an accountant. See sec.

1.6664-4(b)(1), Income Tax Regs.

Based on our examination of the entire record before us, we

find that Mr. Mitic, who listed his occupation in both the 1993

and 1994 joint returns as “Accountant”, has failed to establish

that petitioners are not liable for the years at issue for the

accuracy-related penalties under section 6662(a).10

We have considered all of the arguments of Mr. Mitic that

are not discussed herein, and we find them to be without merit

and/or irrelevant.

To reflect the foregoing and the concessions of the

parties,11

10
The amount of the accuracy-related penalty for which
petitioners are liable for each of the years at issue shall be
determined in the Rule 155 computations by taking into account
the concessions of the parties in the first stipulation of
settled issues filed in this case.
11
After Rule 155 computations have been submitted, we shall
grant respondent’s motion and enter a decision with respect to
(continued...)
 - 25 -

Decision will be entered under

Rule 155.

11
(...continued)
Ms. Mitic in the same amounts as the amounts reflected in the
decision entered with respect to Mr. Mitic.