WAGNER v. COMMISSIONER

T.C. Summary Opinion 2002-97

UNITED STATES TAX COURT

CHRISTOPHER WAGNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 11333-01S. Filed July 23, 2002.

Christopher Wagner, pro se.

Dennis R. Onnen, for respondent.

COUVILLION, Special Trial Judge: This case was heard

pursuant to 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, subsequent section
references are to the Internal Revenue Code in effect for the
years at issue.
 - 2 -

Respondent determined deficiencies of $3,372 and $1,765 in

petitioner's Federal income taxes, respectively, for 1999 and

2000 and corresponding penalties under section 6662(a) in the

amounts of $674 and $353.

Some of the facts were stipulated, and those facts, with the

annexed exhibits, are so found and are incorporated herein by

reference. At the time the petition was filed, petitioner's

legal residence was Albuquerque, New Mexico.

For each of the years in question, petitioner claimed

itemized deductions on a Schedule A, Itemized Deductions, of his

Federal income tax return. For 1999, petitioner claimed itemized

deductions totaling $21,337, which were all disallowed by

respondent. For 2000, petitioner deducted $14,803, all of which

were also disallowed by respondent. Some of the claimed itemized

deductions were allowable; however, because the total of such

deductions was less than the allowable standard deduction under

section 63, respondent allowed petitioner the standard deduction

for both years.

Some of the adjustments in the notice of deficiency have

been resolved. On petitioner's 1999 return, he claimed an

itemized deduction of $4,352 for gambling losses, which

respondent disallowed for lack of substantiation. At trial,

respondent conceded that the loss had been substantiated, and the

amount would be allowable if petitioner is otherwise entitled to
 - 3 -

itemized deductions in lieu of the standard deduction.2 Another

concession involves charitable contributions for the 2 years at

issue. At trial, petitioner conceded the adjustments disallowing

the cash portion of his contributions. With these concessions,

the remaining issues for decision are: (1) Whether petitioner is

entitled to itemized deductions for noncash charitable

contributions for the 2 years at issue; (2) whether petitioner is

entitled to itemized deductions for employee business expenses

and tax preparation fees for the 2 years in question; and (3)

whether petitioner is liable for the accuracy-related penalties

under section 6662(a) for the 2 years in question. In addition,

the Court considers the applicability of section 6673(a) to the

facts of this case.

2
One technical adjustment will be necessary if
petitioner is allowed to itemize his deductions. On his 1999
return, petitioner claimed an itemized deduction for State and
local taxes of $1,792. During 2000, petitioner received a refund
of State and local taxes of $672, which petitioner included as
income on his 2000 return. Since respondent determined in the
notice of deficiency that petitioner was entitled to the standard
deduction in lieu of itemized deductions for both 1999 and 2000,
petitioner, therefore, did not realize a tax benefit from his
itemized deduction of State and local taxes for 1999. Therefore,
petitioner's receipt of the $672 State and local tax refund
during 2000 would not constitute income for that year.
Consequently, in the notice of deficiency, respondent determined
that the $672 did not constitute gross income for the 2000 tax
year. However, respondent asserted at trial that, based on the
Court's holdings in the case, if petitioner is entitled to
itemized deductions for both years in lieu of the standard
deduction, petitioner's gross income for 2000 will be adjusted to
include as income the $672 State and local tax refund received by
petitioner that year.
 - 4 -

During the years in question, petitioner was employed as a

district sales manager for a uniform and apparel company catering

to hospitals, hotels, and casinos. His district comprised the

State of New Mexico and the western portion of the State of

Texas. In October 2000, petitioner left his employer and was

thereafter employed as a contract employee for another apparel

company.

Prior to the years in question, petitioner always prepared

his own Federal income tax returns. He never claimed itemized

deductions on his tax returns. Based on the recommendation of

his girlfriend, petitioner engaged a return preparer, Robin

Beltran, to prepare his 1999 and 2000 tax returns.3 On Mr.

Beltran's recommendation, petitioner decided to file his returns

for 1999 and 2000 claiming itemized deductions.

With respect to the first issue, the 1999 and 2000 returns

listed the following deductions for charitable contributions:

1999 2000

Cash $4,083 $2,600
Noncash 413 $4,496 2,000 $4,600

3
The Court notes that this case is one of numerous cases
heard by the Court involving tax returns prepared by Mr. Beltran,
which essentially involve the same deductions at issue here.
 - 5 -

As noted earlier, petitioner conceded the disallowance of the

cash contributions. At trial, petitioner argued he is entitled

to deduct the noncash portion of the contributions.

Although petitioner deducted $413 in noncash charitable

contributions for 1999, he presented at trial copies of three

receipts from two recipient organizations totaling $1,512.99 for

that year. For the 2000 tax year, petitioner presented two

receipts totaling $630. For both years, the receipts described

the items donated as household goods, designer clothing, and

"fine clothing". Except for one receipt, all the amounts shown

as values of the donated items were amounts inserted on the

receipts by petitioner. Petitioner presented no detailed

information regarding the property, any appraisals, cost, or the

manner in which the amounts claimed as deductions were

determined. No explanation was offered at trial as to the cost

or basis of the donated properties.

Section 170(a)(1) allows a deduction for any charitable

contribution to or for the use of an organization described in

section 170(c), payment of which is made during the taxable year.

No question was raised by respondent as to whether the donees in

this case were qualified organizations under section 170(c).

Leaving that question aside, in general, the amount of a

charitable contribution made in property other than money is the

fair market value of the property at the time of the
 - 6 -

contribution. Petitioner contended that his noncash

contributions were in excess of $500 for each of the years in

question. However, neither of his returns included IRS Form

8283, Noncash Charitable Contributions, which is required under

section 1.170A-13(b)(3), Income Tax Regs., relating to deductions

in excess of $500 for charitable contributions of property other

than money. Moreover, the Court is satisfied from the record

that the amounts deducted as charitable contributions on

petitioner's returns were arbitrarily determined by the return

preparer. On this record, the Court sustains respondent on the

disallowed charitable contribution deductions for 1999 and 2000.

With respect to the second issue, the employee expenses,

petitioner claimed $11,153 and $9,600, respectively, for 1999 and

2000, for unreimbursed employee business expenses, prior to

application of the limitation under section 67(a). The expenses

claimed relate to petitioner's use of his personal vehicle in

connection with his employment, as well as other expenses,

including a telephone and a pager. Petitioner was required as a

condition of his employment to travel to places that required

overnight stays, while other uses of his vehicle were not away

from home. The expenses claimed represent approximately 20.9

percent and 26.8 percent, respectively, of petitioner's wages for

the 2 years in question.
 - 7 -

Generally, section l62(a) allows a deduction for all

ordinary and necessary expenses incurred in carrying on a trade

or business. Performance of services as an employee constitutes

a trade or business. O'Malley v. Commissioner, 9l T.C. 352, 363-

364 (l988).

The deduction of travel expenses away from home, including

meals and lodging, under section l62(a)(2), is conditioned on

such expenses' being substantiated by "adequate records" or by

other sufficient evidence corroborating the claimed expenses

pursuant to section 274(d). Sec. l.274-5T(a)(l), Temporary

Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). To meet the

adequate records requirements of section 274(d), a taxpayer

"shall maintain an account book, diary, log, statement of

expense, trip sheets, or similar record * * * and documentary

evidence * * * which, in combination, are sufficient to establish

each element of an expenditure". Sec. l.274-5T(c)(2)(i),

Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).

(Emphasis added.) The elements to be proven with respect to each

traveling expense are the amount, time, place, and business

purpose of the travel. Sec. l.274-5T(b)(2), Temporary Income Tax

Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). The substantiation

requirements of section 274(d) are designed to encourage

taxpayers to maintain records, together with documentary evidence

substantiating each element of the expense sought to be deducted.
 - 8 -

Sec. l.274-5T(c)(l), Temporary Income Tax Regs., 50 Fed. Reg.

46016 (Nov. 6, 1985).

The only documentation presented by petitioner at trial with

respect to his claimed expenses was a document he prepared, which

purported to establish the mileage of his vehicle in connection

with his employment but only for 9 months of 1999. He had no

documentary information for 2000. He presented no hotel or

restaurant receipts, nor did the documentary information include

information as to the time, place, and business purpose for each

occasion or instance in which the vehicle was used in connection

with his employment. Petitioner also submitted receipts from

various service stations that reflected various mechanical

services to the vehicle; however, nothing on those documents has

any relevance to the issue before the Court. The documentation

does not satisfy the substantiation requirements of section

274(d), and, to the extent petitioner's claimed expenses relate

to travel expenses away from home, respondent is sustained.

The Court recognizes that petitioner also used his vehicle

in connection with his employment, which did not involve his

being away from home within the intent and meaning of section

162(a)(2). Such expenses are subject to the same substantiation

requirements. Section 274(d) includes transportation expenses

incurred in the use of "listed property" as defined in section

280F(d)(4). Under that section, "listed property" includes,
 - 9 -

among other means of transportation, the use of any passenger

automobile. Sec. 280F(d)(4)(A)(i) and (ii). Petitioner

presented no documentation, other than the log and other receipts

referred to above, to document the use of his vehicle for local

transportation in connection with his employment. Respondent,

therefore, is also sustained with respect to those expenses.

Petitioner also claimed other expenses incurred in his

employment for a telephone and a pager. He presented no evidence

to establish the amount claimed for such expenses. Consequently,

no amount is allowed to petitioner for such expenses.

Petitioner also claimed a deduction of $700 for tax

preparation fees on his 1999 return. Although he presented no

evidence to establish payment of that amount, with the

disallowance of the other claimed miscellaneous expenses, the

claimed $700 would be less than 2 percent of petitioner's

adjusted gross income for 1999. Therefore, petitioner would

realize no tax benefit therefrom because of the section 67(a)

limitation.

The third issue is the applicability of the accuracy-related

penalties under section 6662(a) determined against petitioner for

the 2 years at issue. Petitioner contended that he should be

exonerated from these penalties because he relied on his return

preparer.
 - 10 -

Section 6662(a) provides for an accuracy-related penalty

equal to 20 percent of any portion of an underpayment of tax

required to be shown on the return that is attributable to the

taxpayer's negligence or disregard of rules or regulations. Sec.

6662(a) and (b)(1). Negligence consists of any failure to make a

reasonable attempt to comply with the provisions of the Internal

Revenue Code, and disregard consists of any careless, reckless,

or intentional disregard. Sec. 6662(c). The courts have refined

the Code definition of negligence as a lack of due care or

failure to do what a reasonable and prudent person would do under

similar circumstances. Allen v. Commissioner, 925 F.2d 348, 353

(9th Cir. 1991), affg. 92 T.C. 1 (1989). Section 1.6662-3(b)(1),

Income Tax Regs., provides that "Negligence is strongly indicated

where * * * a taxpayer fails to make a reasonable attempt to

ascertain the correctness of a deduction * * * on a return which

would seem to a reasonable and prudent person to be 'too good to

be true' under the circumstances".

An exception applies when the taxpayer demonstrates (1)

there was reasonable cause for the underpayment, and (2) the

taxpayer acted in good faith with respect to the underpayment.

Sec. 6664(c). Whether the taxpayer acted with reasonable cause

and in good faith is determined by the relevant facts and

circumstances. The most important factor is the extent of the

taxpayer's effort to assess the proper tax liability.
 - 11 -

Stubblefield v. Commissioner, T.C. Memo. 1996-537; sec. 1.6664-

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

Tax Regs., "Circumstances that may indicate reasonable cause and

good faith include an honest misunderstanding of fact or law that

is reasonable in light of all of the facts and circumstances,

including the experience, knowledge, and education of the

taxpayer." Moreover, a taxpayer is generally charged with

knowledge of the law. Niedringhaus v. Commissioner, 99 T.C. 202,

222 (1992). Although a taxpayer is not subject to the addition

to tax for negligence where the taxpayer makes honest mistakes in

complex matters, the taxpayer must take reasonable steps to

determine the law and to comply with it. Id.

Under certain circumstances, a taxpayer may avoid the

accuracy-related penalty for negligence where the taxpayer

reasonably relied on the advice of a competent professional.

Sec. 1.6664-4(b)(1), Income Tax Regs.; see sec. 6664(c); Freytag

v. Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d 1011

(5th Cir. 1990), affd. 501 U.S. 868 (1991). However, reliance on

a professional adviser, standing alone, is not an absolute

defense to negligence; it is only one factor to be considered.

In order for reliance on a professional adviser to relieve a

taxpayer from the negligence penalty, the taxpayer must establish

that the professional adviser on whom he or she relied had the

expertise and knowledge of the relevant facts to provide informed
 - 12 -

advice on the subject matter. Freytag v. Commissioner, supra at

888.

Petitioner knew that the charitable contribution and

employee business expense deductions claimed on his returns were

false. There is no evidence that the deductions claimed on the

returns were based upon any documentary evidence submitted by

petitioner. Petitioner admitted in his testimony that the

charitable contributions deducted on the returns were based on an

"average" determined by the return preparer.

Petitioner made no effort to ascertain the professional

background and qualifications of his return preparer, nor did he

make any effort to determine whether the representations of Mr.

Beltran were correct. He did not consult other tax professionals

to verify the accuracy of the returns prepared by Mr. Beltran or

the representations he made regarding the deductions claimed.

The Court is satisfied from the record that Mr. Beltran knew, or

had reason to know, all the relevant facts upon which, had he

been a qualified professional, he could have accurately advised

petitioner on the amount of his allowable deductions. Mr.

Beltran claimed unrealistic and false amounts as deductions on

petitioner's returns. The Court is satisfied that petitioner

knew he was required under the law to substantiate deductions

claimed on his returns. The amounts claimed as deductions on the

returns, which petitioner knew were not substantiated and were
 - 13 -

incorrect, should have prompted him to look beyond and ascertain

the accuracy of the representations of his preparer. Petitioner,

therefore, made no effort to assess his correct tax liability.

On this record, the Court sustains respondent on the section

6662(a) accuracy-related penalties for the years in question.

Section 6673(a) authorizes the Court to require a taxpayer

to pay to the United States a penalty not exceeding $25,000 when,

in the Court's judgment, proceedings have been instituted or

maintained by the taxpayer primarily for delay or where the

taxpayer's position in the proceeding is frivolous or groundless.

The Court considers petitioner's claim that he should not be

liable for the deficiencies and penalties to be frivolous and

groundless. Petitioner knew, or should have known, that a

substantial portion of the itemized deductions at issue was false

and could not be sustained. Petitioner knew that he could deduct

only amounts that he had actually paid. He made no attempt to

determine the qualifications of his return preparer and,

moreover, did not seek other professional advice to satisfy the

concerns he had, or should have had, over the returns prepared by

Mr. Beltran. Petitioner cited no legal authority to the Court

that, under similar facts, would exonerate him from the penalties

under section 6662(a).

The function of this Court is to provide a forum to decide

issues relating to liability for Federal taxes. Any reasonable
 - 14 -

and prudent person, under the facts presented to the Court,

should have known that petitioner's claimed deductions could not

have been sustained, and petitioner knew that. This Court does

not and should not countenance the use of this Court as a vehicle

for disgruntled litigants to proclaim the wrongdoing of another,

his return preparer, as a basis for relief from penalties that

were determined by respondent on facts that clearly are not

sustainable. Golub v. Commissioner, T.C. Memo. 1999-288.

Petitioner, therefore, has interfered with the Court's function

to the detriment of other parties having cases with legitimate

issues for the Court to consider. Petitioner has caused needless

expense and wasted resources, not only for the Court, but for its

personnel, respondent, and respondent's counsel. Under these

circumstances, the penalty under section 6673 is warranted, and

petitioner will be ordered to pay a penalty of $500 to the United

States under section 6673(a).

Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered

for respondent.