T.C. Summary Opinion 2001-107
UNITED STATES TAX COURT
GARY G. BENDICKSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 786-00S. Filed July 24, 2001.
Bruce N. Crawford, for petitioner.
Melissa J. Hedtke, for respondent.
PAJAK, 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. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
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effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
Respondent determined deficiencies of $3,177, $410, and
$1,559 in petitioner's Federal income taxes for the years 1993,
1994, and 1995, respectively, and additions to tax under section
6651(f) of $2,597 and $2,206.50, for the years 1993 and 1995,
respectively. Respondent conceded the additions to tax under
section 6651(f). Respondent in the answer to Amended Petition
alleged that petitioner is liable for the addition to tax under
section 6651(a)(1) for the years 1993 and 1995 in the amounts of
$794.25 and $389.75, respectively, and for the penalty under
section 6662(a) for the years 1993, 1994, and 1995 in the amounts
of $635.40, $82.00, and $311.80, respectively. Respondent has
the burden of proof as to those issues raised in the answer.
Rule 142(a).
We must decide: (1) Whether petitioner is entitled to deduct
net operating losses in excess of the amounts allowed by
respondent; (2) whether petitioner is entitled to deduct Schedule
C, Profit or Loss From Business, expenses disallowed by
respondent; (3) whether petitioner is liable for the additions to
tax under section 6651(a)(1); and (4) whether petitioner is
liable for the penalties under section 6662(a).
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Some of the facts in this case have been stipulated and are
so found. Petitioner resided in Plymouth, Minnesota, at the time
he filed his petition.
During 1993, 1994, and 1995, petitioner worked as an
accountant. During this time, petitioner resided at his family’s
cabin in Clearwater, Minnesota. The cabin was located
approximately 55 miles from his father’s office in Plymouth,
Minnesota. Petitioner’s father was a Certified Public
Accountant, with an accounting firm in Plymouth. Petitioner
traveled to his father’s business office, 11425 Highway 55,
Plymouth, Minnesota, approximately four times each week during
the years in issue. Petitioner met with clients at his father’s
office. Petitioner did not meet with clients at the cabin where
he was living. Petitioner listed the Plymouth office address as
his business address on the Schedules C for the years in issue.
Petitioner became involved in a horse breeding/racing
operation in the 1980s. Petitioner sold his final interest in
the horse breeding/racing operation in 1995. Partnership returns
for the horse breeding/racing operation were not filed for the
1993, 1994, and 1995 taxable years.
Petitioner deducted net operating loss carryforwards from
his horse breeding/racing operation in all 3 years. Respondent
allowed the net operating loss carryforwards to the extent
petitioner showed that he had a basis of $65,486, $47,255, and
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$35,910 for 1993, 1994, and 1995, respectively. Respondent
disallowed $94,268, $117,563, and $123,076 of the carryforwards
for 1993, 1994, and 1995, respectively.
A net operating loss is the excess of the deductions allowed
over the gross income. Sec. 172(c). A net operating loss for
any taxable year may be carried forward to each of the 20 taxable
years following the taxable year of the loss. Sec. 172(b).
However, deductions are strictly a matter of legislative grace.
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Taxpayers must substantiate claimed deductions. Hradesky v.
Commissioner, 65 T.C. 87, 89 (1975), affd. per curiam 540 F.2d
821 (5th Cir. 1976). Moreover, taxpayers must keep sufficient
records to establish the amounts of the deductions. Meneguzzo v.
Commissioner, 43 T.C. 824, 831 (1965); sec. 1.6001-1(a), Income
Tax Regs.
Petitioner presented no evidence. Petitioner made no
argument that would prove he was entitled to deduct the
disallowed carryforwards. Petitioner failed to substantiate his
basis in the partnership and the amount of the net operating loss
carryover. We hold that petitioner is not entitled to deduct any
net operating loss carryover in excess of the amounts allowed by
respondent.
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At trial, petitioner’s counsel said the only other issue
(other than the net operating loss carryover issue) was the
deductibility of auto and travel expenses. Counsel at that point
appeared to be conceding the disallowance of deductions for
entertainment and bookkeeping expenses in the years in question.
No evidence was introduced by petitioner on these two issues. On
brief, petitioner’s counsel erroneously states that bookkeeping
expenses are subject to the rules of section 274, as the
entertainment expenses are.
There is a complete lack of evidence with respect to the
entertainment and bookkeeping expenses, and no valid legal
argument regarding these issues was made by petitioner.
Petitioner has failed to substantiate these deductions. We
sustain respondent as to these two determinations.
There remains the question of petitioner’s disallowed
automobile expense deductions. Petitioner deducted car and truck
expenses of $8,877, $8,420, and $8,315 on his 1993, 1994, and
1995 returns, respectively. The exact amount of the
disallowances of the automobile expense are not part of the
record. At trial, respondent stated that all of the mileage was
allowed except for the commute between the cabin where petitioner
resided and his father’s office. Petitioner did not dispute this
statement.
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Petitioner’s position is that because his principal place of
business was the cabin where he lived, he could deduct daily
transportation expenses incurred between his residence and
another work location. Respondent’s position is that the
principal place of business was the office of petitioner’s
father.
In Commissioner v. Soliman, 506 U.S. 168 (1993), the Supreme
Court held that when a taxpayer carries on business in more than
one location the principal place of a taxpayer’s business is the
most important or significant place of business. This turns on
two conditions: (1) The relative importance of the activities
performed at each business location, and (2) the time spent at
each place. Id. at 175. Here we find that most of petitioner’s
accounting services were rendered on the premises of his father’s
office in Plymouth, Minnesota. Petitioner went to that office
four times each week during the years in issue. Petitioner met
with clients at his father’s Plymouth office. Petitioner
admitted that he did not meet with clients at the cabin where he
was living. On his Schedules C for the 3 years, petitioner
listed the Plymouth office address as his business address.
Petitioner testified that his principal place of business was the
cabin where he resided and that he kept some records there. We
are not required to accept the self-serving testimony of
petitioner as gospel. Tokarski v. Commissioner, 87 T.C. 74, 77
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(1986). We find that petitioner’s principal place of business
was the Plymouth office. Accordingly, petitioner’s expenses of
driving to and from Plymouth are nondeductible commuting
expenses. Commissioner v. Flowers, 326 U.S. 465, 473-474 (1946).
Because the record is not clear as to the exact amounts of
disallowance of car and truck expense deductions, we consider
section 274(d). Section 274(d)(4) imposes stringent
substantiation requirements for the deduction of certain listed
property as defined under section 280F(d)(4), such as an
automobile. Taxpayers must substantiate by adequate records the
following items in order to claim automobile deductions: The
amount of each separate expenditure, the listed property’s
business and total usage, the date of the expenditure or use, and
the business purpose for an expenditure or use. Sec. 274(d);
sec. 1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg.
46016 (Nov. 6, 1985). To substantiate a deduction by means of
adequate records, a taxpayer must maintain an account book,
diary, log, statement of expense, trip sheets, and/or other
documentary evidence which, in combination, are sufficient to
establish each element of expenditure or use. Sec. 1.274-
5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov.
6, 1985).
Petitioner had no such records. Petitioner did not attempt
to satisfy the requirements of section 274(d). Because of
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petitioner’s failure to substantiate the expenses as required
under section 274(d), respondent’s disallowance of car and truck
expense deductions is sustained in all respects.
Respondent contends that petitioner is liable for additions
to tax pursuant to section 6651(a)(1). Section 6651(a)(1)
imposes an addition to tax for failure to file a Federal income
tax return by its due date, determined with regard to any
extension of time for filing previously granted. The addition
equals 5 percent for each month that the return is late, not to
exceed 25 percent. Sec. 6651(a)(1).
Additions to tax under section 6651(a)(1) are imposed unless
the taxpayer establishes that the failure was due to reasonable
cause and not willful neglect. Sec. 6651(a)(1). The taxpayer
must prove both reasonable cause and a lack of willful neglect.
Crocker v. Commissioner, 92 T.C. 899, 912 (1989). "Reasonable
cause" requires the taxpayer to demonstrate that he exercised
ordinary business care and prudence. United States v. Boyle, 469
U.S. 241, 246 (1985). Willful neglect is defined as a
"conscious, intentional failure or reckless indifference." Id.
at 245.
Petitioner filed his 1993 return on September 16, 1996, and
his 1995 return on December 29, 1997. Respondent established
that the returns were not filed by their due date. Petitioner
made no argument and presented no evidence to show that his
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failure to file was due to reasonable cause and not due to
willful neglect. Accordingly, we hold that petitioner is liable
for additions to tax under section 6651(a)(1) for the years 1993
and 1995 in the amounts of $794.25 and $389.75, respectively.
Respondent contends that petitioner is also liable for the
section 6662(a) penalty. Section 6662(a) provides for an
accuracy-related penalty in the amount of 20 percent of the
portion of an underpayment of tax attributable to, among other
things, negligence or disregard of rules or regulations. Sec.
6662(a) and (b)(1). Negligence is defined to include any failure
to make a reasonable attempt to comply with the provisions of the
Internal Revenue laws, and also includes any failure by the
taxpayer to keep adequate books and records, or to substantiate
items properly. Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax
Regs. Moreover, negligence is the failure to exercise due care
or the failure to do what a reasonable and prudent person would
do under the circumstances. Neely v. Commissioner, 85 T.C. 934,
947 (1985). Disregard is defined to include any careless,
reckless, or intentional disregard of rules or regulations. Sec.
6662(c); sec. 1.6662-3(b)(2), Income Tax Regs.
Petitioner did not provide any substantiation at trial for
the deductions he claimed. He did not maintain adequate records
as required under section 6001. We find that respondent
established that petitioner was negligent and that he disregarded
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the rules and regulations. Petitioner made no argument to the
contrary. Accordingly, we hold that petitioner is liable for
accuracy-related penalties under section 6662(a) for the years
1993, 1994, and 1995 in the amounts of $635.40, $82.00, and
$311.80, respectively.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent for the
deficiencies and the additions
to tax under section 6651 and
the penalties under section
6662(a) and for petitioner
for the additions to tax under
section 6651(f).