GLENN v. COMMISSIONER

T.C. Summary Opinion 2001-83

UNITED STATES TAX COURT

EVELYN J. GLENN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7906-99S. Filed June 12, 2001.

Evelyn J. Glenn, pro se.

Joanne B. Minsky, for respondent.

ARMEN, Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.1 The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.

1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 1995
and 1996, the taxable years in issue, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
 - 2 -

Respondent determined deficiencies in petitioner’s Federal

income taxes for 1995 and 1996 in the amounts of $21,583 and

$23,917, respectively. Respondent also determined that

petitioner is liable for accuracy-related penalties under

section 6662(a) for 1995 and 1996 in the amounts of $4,316 and

$4,783, respectively.

The issues for decision are as follows:

1. Whether petitioner underreported gross income on her

Schedules C for 1995 and 1996. We hold that she did for 1995

to the extent provided herein but that she did not for 1996.

2. Whether petitioner is entitled to net operating loss

deductions in 1995 and 1996. We hold that she is not.

3. Whether petitioner is entitled to deductions for “rent”

(automobile) in 1995 and 1996. We hold that she is not.

4. Whether petitioner is entitled to deductions for travel

in 1995 and 1996 in excess of the amounts allowed by

respondent. We hold that she is not.

5. Whether petitioner is entitled to deductions for “rent”

(office in the home) in 1995 and 1996. We hold that she is

not.

6. Whether petitioner is entitled to deductions for

telephone expense in 1995 and 1996. We hold that she is to the

extent provided herein.
 - 3 -

7. Whether petitioner is liable for accuracy-related

penalties for 1995 and 1996. We hold that she is.

Adjustments in the notice of deficiency relating to the

self-employment tax, the related deduction under section

164(f), the deductible amount of petitioner’s medical expenses,

and the earned income credit are purely mechanical matters, the

resolution of which is dependent on our disposition of the

disputed issues.

Background

Some of the facts have been stipulated, and they are so

found.

Petitioner resided in Ponte Vedra Beach, Florida, at the

time that her petition was filed with the Court.

During the years in issue, petitioner was a self-employed

marketing consultant. Petitioner offered advertising and

marketing services to a clientele consisting principally, if

not exclusively, of medical doctors.

During 1995, petitioner’s principal client was Dr. Elliott

Jacobs (Dr. Jacobs), a plastic surgeon in New York City.

During 1996, Dr. Jacobs was petitioner’s only client.

Petitioner publicized and promoted Dr. Jacobs’ medical

practice by, among other ways, placing periodic advertisements

in the New York Post. Dr. Jacobs compensated petitioner for

her services, and he reimbursed her for the cost of the
 - 4 -

newspaper advertisements. Petitioner received the following

amounts from Dr. Jacobs in 1995 and 1996:

1995 1996
Services rendered $54,500 $40,750
Reimbursement 61,004 75,120
Total received 115,504 115,870

In 1995, petitioner had a second client, Dr. Socha, an

ophthalmologist, who also practiced in New York. Dr. Socha

paid petitioner $8,166 for her services in 1995.

During the years in issue, petitioner maintained her

personal residence in Ponte Vedra Beach, Florida, where she

lived alone. Ponte Vedra Beach is located in the metropolitan

Jacksonville area, about 18 miles from downtown Jacksonville.

During the years in issue, petitioner also rented a 2-

bedroom condominium apartment at Deerwood, a gated, residential

golf course community located in DuVal County (Jacksonville),

about 8 miles from downtown Jacksonville. At various times

during the years in issue, petitioner’s adult daughter, adult

son (a practicing attorney), and elderly mother lived in

petitioner’s condominium at Deerwood.

During the years in issue, petitioner leased an

automobile. Petitioner did not have any other motor vehicle at

her disposal during those years.

Petitioner filed an income tax return, Form 1040, U.S.

Individual Income Tax Return, for 1995. On her return,
 - 5 -

petitioner reported total income in the amount of negative

$19,611, consisting of a “prior year NOL” in the amount of

$14,672 and a net loss from her marketing business in the

amount of $4,939. Petitioner attached to her return a Schedule

C, Profit or Loss From Business, reporting income and deducting

expenses as follows:

Income
Gross receipts $94,064
Less: cost of goods sold -61,004
Gross Profit 33,060

Expenses
Advertising $1,838
Car expenses 4,682
Insurance 765
Legal & professional 1,525
Office expense 2,647
Rent or lease (vehicle) 4,011
Rent (other business property) 7,200
Repairs/Maintenance 1,821
Travel 3,271
Meals/entertainment $2,162
Less: 50% -1,081 1,081
Utilities 2,690
Other
Dues & memberships $830
Telephone 4,848
Bank charges 790 6,468
Total expenses 37,999

Net loss 4,939

On her 1995 Schedule C, petitioner made no entry on line

30 for “Expenses for business use of your home”, nor did

petitioner attach Form 8829, Expenses for Business Use of Your

Home, to her 1995 return.
 - 6 -

On part IV of her 1995 Schedule C, petitioner claimed that

she drove her automobile 9,000 miles for business and 3,000 for

“other”, for a total of 12,000 miles for the year.

Petitioner also filed an income tax return, Form 1040, for

1996. On her return, petitioner reported total income in the

amount of negative $11,266, consisting of a “prior year NOL” in

the amount of $19,611 and net profit from her marketing

business in the amount of $8,345. Petitioner attached to her

return a Schedule C, reporting income and deducting expenses as

follows:

Income
Gross receipts $102,513
Less: cost of goods sold -58,350
Gross Profit 44,163

Expenses
Advertising 3,134
Car expenses 5,301
Legal & professional 2,674
Office expense 4,934
Pension & profit-sharing plans 8
Rent or lease (vehicle) 3,968
Rent (other business property) 4,800
Travel 2,667
Utilities 1,712
Other
Dues & memberships $135
Telephone 5,300
Bank charges 584
License 66
Continuing education 535 6,620
Total expenses 35,818

Net profit 8,345
 - 7 -

On her 1996 Schedule C, petitioner made no entry on line

30 for “Expenses for business use of your home”, nor did

petitioner attach Form 8829, Expenses for Business Use of Your

Home, to her 1996 return.

On part IV of her 1996 Schedule C, petitioner claimed (as

she had on part IV of her 1995 Schedule C) that she drove her

automobile 9,000 miles for business and 3,000 for “other”, for

a total of 12,000 miles for the year.

Respondent commenced an examination of petitioner’s 1995

income tax return no later than June 1997. Respondent

commenced an examination of petitioner’s 1996 income tax return

on July 28, 1998.

In the notice of deficiency, respondent determined that

petitioner underreported gross income on her Schedules C for

1995 and 1996. Respondent also disallowed for lack of

substantiation: (1) The NOL deductions claimed by petitioner

for 1995 and 1996; and (2) the following Schedule C deductions

claimed by petitioner for those years:

1995 1996
Allowed Disallowed Allowed Disallowed
Rent (auto) --- $4,011 --- $3,968
Rent (home office) --- 7,200 --- 4,800
Travel $506 2,765 $506 2,161
Telephone --- 4,848 --- 5,300

Finally, for each of the years in issue, respondent

determined that petitioner is liable for the accuracy-related
 - 8 -

penalty under section 6662(a) for negligence or intentional

disregard of rules or regulations.

Discussion

As a general rule, the burden of proof in a deficiency

action is on the taxpayer. See Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, 290

U.S. 111, 115 (1933). Effective for court proceedings arising

in connection with examinations commencing after July 22, 1998,

section 7491(a)(1) serves to shift the burden of proof to the

Commissioner when the taxpayer introduces credible evidence

with respect to a factual issue relevant to ascertaining the

liability of the taxpayer. However, section 7491(a)(2) places

limitations on this burden-shifting rule. Thus, section

7491(a)(1) applies with respect to an issue only if (inter

alia) the taxpayer has complied with all statutory and

regulatory requirements to substantiate any item and the

taxpayer has maintained all records required under the Internal

Revenue Code. See sec. 7491(a)(2)(A) and (B).

We have previously found as a fact that respondent

commenced the examination of petitioner’s 1995 income tax

return no later than June 1997. Accordingly, the burden-

shifting rule of section 7491(a)(1) has no application to that

year. In contrast, we have found as a fact that respondent

commenced the examination of petitioner’s 1996 income tax
 - 9 -

return on July 28, 1998, after the effective date of section

7491. Therefore, the burden-shifting rule of section

7491(a)(1) may apply to that year. However, as will be

discussed below, the limitations on the burden-shifting rule

that are set forth in section 7491(a)(2)(A) and (B) serve to

preclude the applicability of that rule to the factual issues

in this case involving the NOL and Schedule C deductions.2

A. Schedule C Gross Income

The record demonstrates that petitioner received

unreported gross income in 1995 in the amount of $29,606,

determined as follows:

Gross receipts
Dr. Jacobs
Services rendered $54,500
Reimbursement 61,004 $115,504
Dr. Socha 8,166
Total gross receipts 123,670
Less: cost of goods sold -61,004
Gross profit/gross income 62,666
Less: reported gross profit/gross income -33,060
Unreported gross profit/gross income 29,606

In contrast, the record demonstrates that petitioner did

not receive unreported gross income in 1996, but rather

overreported her gross income for that year, determined as

follows:

2
We decide the issue involving Schedule C gross income
without regard to the burden of proof.
 - 10 -

Gross receipts: Dr. Jacobs
Services rendered $40,750
Reimbursement 75,120
Total gross receipts 115,870
Less: cost of goods sold -75,120
Gross profit/gross income 40,750
Less: reported gross profit/gross income -44,163
Overreported gross profit/gross income (3,413)

In view of the foregoing, we sustain respondent’s income

determination for 1995 in that we hold that petitioner received

unreported gross income for that year in the amount of $29,606.

However, we do not sustain respondent’s income determination

for 1996; rather, we hold that petitioner overreported gross

income for that year in the amount of $3,413.

B. Net Operating Loss Deductions

Section 172 allows a deduction for a net operating loss

(NOL) for the taxable year in an amount equal to the NOL

carried back to the taxable year and the NOL carried forward to

the taxable year. See sec. 172(a). An NOL is defined as the

excess of deductions over gross income for a particular taxable

year, with certain modifications. See sec. 172(c) and (d). As

claimant of an NOL deduction, petitioner must prove her right

thereto. See United States v. Olympic Radio & Television,

Inc., 349 U.S. 232, 235 (1955).

On her 1995 return, petitioner claimed a deduction for a

“prior year NOL”, relating to an alleged NOL for 1994. On her

1996 return, petitioner again claimed a deduction for a “prior
 - 11 -

year NOL”, relating to alleged NOL’s for 1994 and 1995.3

At trial, petitioner did not introduce one iota of

evidence that she incurred a net operating loss in 1994. This

failure alone is sufficient to bar any deduction under section

172 for either of the years in issue. See Myers v.

Commissioner, T.C. Memo. 1995-329, affd. without published

opinion 99 F.3d 1135 (5th Cir. 1996); see also Halle v.

Commissioner, 7 T.C. 245 (1946) (a taxpayer’s return is not

self-proving as to the truth of its contents), affd. 175 F.2d

500 (2d Cir. 1949); Caruso v. Commissioner, T.C. Memo. 1966-190

(same). Assuming arguendo that petitioner incurred a net

operating loss in 1994, petitioner failed to demonstrate that

the NOL was not fully absorbed in a year(s) to which she was

required to carry it back or that petitioner properly elected

to relinquish the entire carryback period and instead carry the

loss forward. See sec. 172(b)(1)(A), (b)(3); Gerstenberger v.

Commissioner, T.C. Memo. 2001-50 n.7.

In view of the foregoing, we sustain respondent’s

determination and hold that petitioner is not entitled to any

NOL deduction in either 1995 or 1996.

3
It should be recalled that petitioner reported a net loss
on her 1995 return. However, our disposition of the disputed
issues for 1995 eliminates any loss for that year. Accordingly,
we need only decide whether petitioner incurred an NOL in 1994,
and, if so, whether such loss may be carried forward to 1995
and/or 1996.
 - 12 -

C. Deductions for Rent (Auto) and Travel

During the years in issue, petitioner operated only one

automobile, which she leased. On her Schedules C for 1995 and

1996, petitioner claimed deductions for rent (auto) in the

amounts of $4,011 and $3,968, respectively. Petitioner also

claimed deductions for “car expenses” in the amounts of $4,682

and $5,301, respectively. In the notice of deficiency,

respondent disallowed the deductions claimed for rent (auto)

but, inexplicably, did not adjust the deductions claimed for

“car expenses”.

Petitioner apparently determined the deductions for rent

(auto) by allocating the cost of the lease between business and

nonbusiness use of the automobile based on mileage. In this

regard, petitioner claimed on both of her 1995 and 1996

Schedules C that she drove the vehicle a total of 12,000 miles,

of which 9,000 miles were for business and the remaining 3,000

miles were for “other”.

At trial, petitioner introduced no mileage logs or other

documentary evidence regarding the use of her automobile.

Petitioner admitted that the vehicle was used for personal

purposes, including commuting. Regarding the allocation based

on mileage, petitioner testified:

My accountant did it. * * * I’m not too familiar
with that part of the deduction.
 - 13 -

Petitioner also deducted on her 1995 and 1996 Schedules C

travel expenses in the amounts of $3,271 and $2,667,

respectively. In the notice of deficiency, respondent

disallowed $2,765 and $2,161 for 1995 and 1996, respectively.

At trial, petitioner introduced no documentary evidence

regarding travel expense.

By virtue of the strict substantiation requirements of

section 274(d), no deduction may be allowed either for travel

or with respect to any “listed property” on the basis of any

approximation or the unsupported testimony of the taxpayer.

See Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd. per

curiam 412 F.2d 201 (2d Cir. 1969); Golden v. Commissioner,

T.C. Memo. 1993-602; sec. 1.274-5T(a), Temporary Income Tax

Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985); see also sec.

280(F)(d)(4)(A)(i) defining listed property to include a

passenger automobile. Rather, the taxpayer must substantiate

the deduction by adequate records, or by sufficient evidence

corroborating the taxpayer’s own statement, showing: (1) The

amount of each expense or other item; (2) the time and place of

the travel or use of the property; and (3) the business purpose

of the expense or other item. See sec. 274(d). See sec.

1.274-5T(b)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46014

(Nov. 6, 1985), regarding the requisite elements of each

expenditure for travel that must be substantiated; sec. 1.274-
 - 14 -

5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov.

6, 1985), regarding the requisite elements to be substantiated

with respect to any listed property; sec. 1.274-5T(c),

Temporary Income Tax Regs., regarding the specific rules of

substantiation.

In view of the foregoing, we sustain respondent’s

determination and hold that petitioner is not entitled to any

deduction for rent (auto), or for travel in excess of the

amount allowed by respondent, in either 1995 or 1996.

D. Deduction for Rent (Office in the Home)

As a general rule, no deduction is allowable with respect

to the use of a dwelling unit that is used by the taxpayer

during the taxable year as a residence. See sec. 280A(a).

Pursuant to section 280A(d)(2)(A), the taxpayer shall be deemed

to have used a dwelling unit for personal purposes if the unit

is used for personal purposes by the taxpayer or by any member

of the taxpayer’s family, specifically including the taxpayer’s

children and parents. See sec. 267(c)(4). Exceptions to the

general rule of disallowance exist to the extent that a portion

of the dwelling unit is exclusively used on a regular basis as

either (1) the principal place of business for the taxpayer’s

trade or business or (2) a place of business that is used by

clients or customers in meeting or dealing with the taxpayer in

the normal course of the taxpayer’s trade or business. See
 - 15 -

sec. 280A(c)(1).

On her Schedules C for 1995 and 1996, petitioner claimed

deductions for “office expense” in the amounts of $2,647 and

$4,934, respectively, for “utilities” in the amounts of $2,690

and $1,712, respectively, and for “rent (other business

property)” in the amounts of $7,200 and $4,800, respectively.

In the notice of deficiency, respondent disallowed the

deductions claimed for “rent (other business property)”, but,

inexplicably, did not adjust the other deductions.

The deductions claimed by petitioner for “rent (other

business property)” represent deductions for an office in the

home.4 Notably, petitioner made no entry on line 30 of either

her 1995 or 1996 Schedule C for “Expenses for business use of

your home”, nor did she attach Form 8829, Expenses for Business

Use of Your Home, to either of her returns for those years.

At trial, petitioner testified that she rented the

Deerwood condominium in order to be closer to downtown

Jacksonville, where the printing company she patronized was

located. However, we are unable to accept petitioner’s

testimony at face value. See Tokarski v. Commissioner, 87 T.C.

74, 77 (1986); Diaz v. Commissioner, 58 T.C. 560, 564 (1972);

4
As we understand petitioner’s testimony, the deduction in
1995 represents 50 percent of the rent paid for the Deerwood
condominium, whereas the deduction in 1996 relates to
petitioner’s residence in Ponte Vedra Beach.
 - 16 -

Kropp v. Commissioner, T.C. Memo. 2000-148. Deerwood is only

about 10 miles closer to downtown Jacksonville than is Ponte

Vedra Beach, which is within the metropolitan Jacksonville

area, and petitioner did not convincingly establish that she

patronized the printing company on such a frequent basis or

that her time was so valuable as to justify paying considerable

rent on a condominium only marginally closer to downtown than

her personal residence.

More compelling is the fact that Deerwood is a gated,

residential golf course community and not a business office

park. Petitioner’s adult daughter, adult son (a practicing

attorney), and elderly mother all lived in petitioner’s

condominium at Deerwood at various times during the years in

issue. Under these circumstances, we think it was incumbent on

petitioner to demonstrate that some portion of the Deerwood

condominium was exclusively used on a regular basis as either

her principal place of business or as a place of business used

by clients in meeting or dealing with her in the normal course

of her trade or business. See sec. 280A(c)(1)(A) and (B);

Hefti v. Commissioner, T.C. Memo. 1993-128. However,

petitioner failed to do so.

Insofar as the residence in Ponte Vedra Beach is

concerned, petitioner introduced no persuasive evidence

whatsoever to support a finding that some portion of that
 - 17 -

residence was exclusively used on a regular basis as either her

principal place of business or as a place of business. See

sec. 280A(c)(1)(A) and (B); Hefti v. Commissioner, supra.

In view of the foregoing, we sustain respondent’s

determination, see sec. 280A(a), (d)(2), and hold that

petitioner is not entitled to any deduction for rent (office in

the home) for either of the years in issue.

E. Deduction for Telephone Expense

Personal, living, and family expenses are not generally

deductible. See sec. 262(a). Section 262(b) specifically

provides that the cost of basic local telephone service

provided to the first telephone line at the taxpayer's

residence is a nondeductible expense. Additionally, in order

to be deductible, telephone expense must be incurred for

business, rather than for personal, reasons. See sec. 162(a);

Walliser v. Commissioner, 72 T.C. 433, 437 (1979).

Petitioner deducted telephone expenses in 1995 and 1996 in

the amounts of $4,848 and $5,300, respectively. Respondent

disallowed these amounts for lack of substantiation.

At trial, petitioner did not introduce any documentary

evidence, such as telephone logs or monthly service statements,

that would substantiate the deductions in issue. However, we

are satisfied that petitioner did, in fact, incur deductible

telephone expenses during the years in issue. Accordingly,
 - 18 -

using our best judgment, but bearing heavily against petitioner

whose inexactitude is of her own making, we hold that

petitioner is entitled to deduct telephone expense in the

amount of $1,000 for each of the years in issue. See Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).

F. Accuracy-Related Penalties

Finally, we turn to respondent's determination that

petitioner is liable for accuracy-related penalties under

section 6662(a).

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

to 20 percent of the underpayment of tax resulting from, inter

alia, negligence or disregard of rules or regulations. See

sec. 6662(b)(1). For purposes of section 6662(a), the term

"negligence" includes any failure to make a reasonable attempt

to comply with the Code, and the term "disregard" includes any

careless, reckless, or intentional disregard. Sec. 6662(c).

Negligence has also been defined as a lack of due care or

failure to do what a reasonable person would do under the

circumstances. See Antonides v. Commissioner, 91 T.C. 686, 699

(1988), affd. 893 F.2d 656 (4th Cir. 1990).

The accuracy-related penalty under section 6662(a) does

not 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
 - 19 -

determination of whether the taxpayer acted with reasonable

cause and in good faith depends on the pertinent facts and

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

As a general rule, the taxpayer bears the burden of

proving that the taxpayer is not liable for the accuracy-

related penalty. See Compaq Computer Corp. v. Commissioner,

113 T.C. 214, 226 (1999). Effective for court proceedings

arising in connection with examinations commencing after July

22, 1998, section 7491(c) provides that the Commissioner shall

have the burden of production with respect to the liability of

any individual for any penalty. However, the Commissioner’s

burden does not extend to whether the taxpayer acted with

reasonable cause and in good faith; rather, it is the

taxpayer’s responsibility to raise that defense. See H. Conf.

Rept. 105-599, 1998-3 C.B. 747, 995, 996.

As previously discussed, section 7491 has no application

to the taxable year 1995, but it does apply to the taxable year

1996.

We turn now to the merits of the issue.

Negligence often takes the form of an understatement of

income or an overstatement of deductions. See Healey v.

Commissioner, T.C. Memo. 1996-260, and cases cited therein.

Understatement of income or overstatement of deductions may

reflect the inadequacy of the taxpayer's records, which is, of
 - 20 -

itself, a basis for sustaining the accuracy-related penalty.

In this regard, we observe that a taxpayer is required to

maintain records sufficient to establish all items of income,

deduction, and credit that are required to be shown on the

taxpayer’s tax return. See sec. 6001; sec. 1.6001-1(a), Income

Tax Regs.; see also Lysek v. Commissioner, 583 F.2d 1088, 1094

(9th Cir. 1978), affg. T.C. Memo. 1975-293; Crocker v.

Commissioner, 92 T.C. 899, 916 (1989); Schroeder v.

Commissioner, 40 T.C. 30, 34 (1963); sec. 1.6662-3(b)(1),

Income Tax Regs. Additionally, failure to keep adequate

records is evidence of intentional disregard of the

regulations. See Crocker v. Commissioner, supra at 917.

In the present case, petitioner failed to report over

$29,000 of gross income from her proprietorship in 1995.

Moreover, for both 1995 and 1996, petitioner claimed NOL

deductions and various Schedule C deductions for which she did

not maintain substantiation required by law.

Based on the foregoing, and insofar as 1996 is concerned,

respondent has satisfied his burden of production under section

7491(c). Insofar as 1995 and 1996 are concerned, petitioner

has failed to establish that she acted reasonably with respect

to the underpayment of her taxes for those years. We therefore

sustain respondent’s determination and hold that petitioner is

liable for the accuracy-related penalties for 1995 and 1996.
 - 21 -

Conclusion

We have carefully considered the remaining arguments of

both parties for results contrary to those expressed herein,

and, to the extent not discussed above, we find those arguments

to be irrelevant, moot, or without merit.

Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect our disposition of the disputed issues,

Decision will be entered

under Rule 155.