KAY v. COMMISSIONER

T.C. Memo. 2002-197

UNITED STATES TAX COURT

PERRY H. KAY, SR., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10828-00. Filed August 8, 2002.

Emil R. Sargent, for petitioner.

Portia N. Rose, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GOLDBERG, Special Trial Judge: Respondent determined a

deficiency in petitioner’s Federal income tax for the taxable

year 1998 in the amount of $4,181.50. Unless otherwise

indicated, section references are to the Internal Revenue Code in

effect for the year at issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.
 - 2 -

After concessions by respondent,1 the remaining issues for

decision are (1) whether petitioner is entitled to deduct certain

Schedule C, Profit or Loss From Business, expenses for the year

at issue, and (2) whether petitioner is entitled to a casualty

loss deduction of $5,151.19 for 1998.

FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference. At the time the petition

was filed, petitioner resided in Houston, Texas.

Petitioner holds a master’s degree in music education from

the University of North Texas. Petitioner was employed as a

full-time band teacher for 31 years, 26 of those years at Lanier

Middle School in Houston, Texas. Since retiring from full-time

employment, petitioner has taught band part time. During 1998,

petitioner was employed as a part-time assistant band director

for the North Forest Independent School District.

1
In a Stipulation of Settled Issues filed with the Court
on Oct. 22, 2001, respondent conceded for the 1998 taxable year
that petitioner is entitled to: (1) A dependency exemption
claimed for his son; (2) head of household filing status; (3) an
educational credit of $1,250; and (4) business expense deductions
on Schedule C, Profit or Loss From Business, of $751 for legal or
professional expense and $121 for professional and musician dues.
At trial, respondent conceded that petitioner is entitled to
a Schedule C expense deduction of $1,047.49 for music educator
and professional convention expenses incurred with respect to
petitioner’s attending the International Association of Jazz
Educators Convention in New York City.
 - 3 -

During 1998, petitioner also operated PK Production and

Management (PK Production), a small business providing music

entertainment services. Petitioner managed and played in a band

for compensation. For the year at issue, the band only

participated in four or five paid engagements.

With respect to PK Production, petitioner claimed that on

January 1, 1998, he placed in service a 1995 Dodge Caravan (van),

which was purchased in 1997. During the year at issue,

petitioner used the van to transport musical equipment to and

from the band’s engagements. Petitioner testified that during

1998 the van was used primarily for PK Production business

purposes.

On Schedule C, petitioner claimed various business expense

deductions in the operation of PK Production. Petitioner’s

claimed expense deductions that are at issue include: (1) A

section 179 expense deduction of $7,000 for the van; (2) expenses

in connection with the van for business-related travel of $4,182;

(3) production and management fees of $999.20; and (4) music

educator and professional convention expenses of $333.95.

During 1998, petitioner owned a three-bedroom ranch-type

house located at 5134 Heatherbrook Drive, Houston, Texas. On

September 11, 1998, a rain and wind storm damaged the roof and

several rooms of petitioner’s house. Petitioner reported the

incident to the State Farm Insurance Company (State Farm), with
 - 4 -

whom petitioner maintained a homeowner’s insurance policy during

1998. On October 12, 1998, State Farm settled the claim with

petitioner for $857.12. On October 29, 1998, petitioner retained

a contractor to replace rotten decking and install a new roof on

petitioner’s house. For the year at issue, petitioner claimed a

casualty loss deduction on Schedule A, Itemized Deductions, of

$5,151.19 related to the damage caused by the storm.

In the notice of deficiency, respondent disallowed the

following: (1) The entire section 179 expense deduction claimed

on Schedule C because petitioner “did not establish the

percentage of business use” for the van and failed to provide

other supporting information required to substantiate the

deduction; (2) the business-related travel expense for the van

claimed on Schedule C because petitioner failed to provide the

supporting information necessary to establish that the deduction

was “(a) incurred during the taxable year, and (b) an ordinary

and necessary business expense”; (3) expenses claimed on Schedule

C for (a) production and management fees, and (b) music educator

and professional convention expenses because petitioner did not

substantiate that these expenses were paid or incurred during the

taxable year and were “ordinary and necessary” business expenses;

and (4) the entire casualty loss deduction claimed on Schedule A

because petitioner “did not establish that (a) a casualty or

theft occurred, and (b) any loss was sustained”.
 - 5 -

OPINION

The determinations of the Commissioner in a notice of

deficiency are presumed correct, and the burden is on the

taxpayer to show that the determinations are incorrect. Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).2

Deductions are a matter of legislative grace, and the

taxpayer bears the burden of proving the entitlement to any

deduction claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,

84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934). A taxpayer is required to maintain records sufficient to

establish the amount of his or her income and deductions. Sec.

6001; sec. 1.6001-1(a), (e), Income Tax Regs.

1. Schedule C--Business Expense Deductions

Section 162(a) allows a taxpayer to deduct all ordinary and

necessary business expenses paid or incurred during the taxable

year in carrying on any trade or business. To be “ordinary” the

transaction which gives rise to the expense must be of a common

or frequent occurrence in the type of business involved. Deputy

v. Du Pont, 308 U.S. 488, 495 (1940). To be “necessary” an

expense must be “appropriate and helpful” to the taxpayer’s

business. Welch v. Helvering, supra at 113. Additionally, the

2
Sec. 7491 does not apply in this case to place the
burden of proof on respondent because petitioner neither alleged
that sec. 7491 was applicable nor established that he fully
complied with the substantiation requirements of sec.
7491(a)(2)(A).
 - 6 -

expenditure must be “directly connected with or pertaining to the

taxpayer’s trade or business”. Sec. 1.162-1(a), Income Tax Regs.

Generally, if a claimed business expense is deductible, but

the taxpayer is unable to fully substantiate it, the Court is

permitted to make as close an approximation as it can, bearing

heavily against the taxpayer whose inexactitude is of his or her

own making. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.

1930). The estimate must have a reasonable evidentiary basis.

Vanicek v. Commissioner, 85 T.C. 731, 743 (1985). However,

section 274 supersedes the doctrine of Cohan v. Commissioner,

supra, sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg.

46014 (Nov. 6, 1985), and requires strict substantiation of

expenses for travel, meals and entertainment, and gifts, and with

respect to any listed property as defined in section 280F(d)(4).

Sec. 274(d). Listed property includes any passenger automobile

or any other property used as a means of transportation. Sec.

280F(d)(4)(A)(i) and (ii).

A taxpayer is required by section 274(d) to substantiate a

claimed expense by adequate records or by sufficient evidence

corroborating the taxpayer’s own statement establishing the

amount, time, place, and business purpose of the expense. Sec.

274(d). Even if such an expense would otherwise be deductible,

the deduction may still be denied if there is insufficient
 - 7 -

substantiation to support it. Sec. 1.274-5T(a), Temporary Income

Tax Regs., supra.

A. Vehicle-Related Expenses

On Schedule C, petitioner claimed both a section 179 expense

deduction for $7,000 and business-related vehicle expenses of

$4,182 on the same vehicle. It is unclear from the record

whether petitioner used actual expenses or the standard mileage

rate to calculate the claimed deduction of $4,182. No evidence

was introduced to substantiate any actual expenses incurred and

the number of business miles claimed on Schedule C multiplied by

the 1998 standard mileage rate is not equal to the amount of the

claimed deduction.3

Actual expenses related to the business use of a vehicle are

deductible under section 274, if substantiated. If actual

expenses were used to determine the business-related vehicle

expenses claimed, petitioner, having failed to substantiate any

such expense, is not entitled to the business-related vehicle

expenses claimed. See sec. 274(d).

Alternatively, a taxpayer may choose to use the business

standard mileage rate in lieu of the actual automobile expenses.

Nash v. Commissioner, 60 T.C. 503, 520 (1973); Parker v.

Commissioner, T.C. Memo. 1993-15; Rev. Proc. 97-58, 1997-2 C.B.

3
Petitioner reported 12,370 business-related miles and
claimed a deduction of $4,182. The 1998 standard mileage rate of
32.5 cents per mile multiplied by 12,370 miles equals $4,020.25.
 - 8 -

587. However, the business standard mileage rate may not be used

to compute deductible expenses if the taxpayer has claimed a

section 179 expense deduction on the same vehicle. Rev. Proc.

97-58, 1997-2 C.B. 587. Thus, petitioner may not claim

deductions on the van for both the section 179 expense and the

standard mileage rate. Assuming petitioner could substantiate

entitlement to a deduction for both expenses, petitioner would be

limited to either the section 179 expense deduction or the

standard mileage rate deduction, but not both.

i. Section 179 Expense

Petitioner claimed a section 179 expense deduction of $7,000

on Schedule C for the year at issue. For the 1998 taxable year,

section 179 allows a taxpayer to elect to expense, as a deduction

for the year in which the property was placed in service, up to

$18,500 of the cost of certain property acquired for use in the

active conduct of a trade or business. Sec. 179(a), (b), (d).

“The term ‘placed in service’ means the time that property is

first placed by the taxpayer in a condition or state of readiness

and availability for a specifically assigned function, whether

for use in a trade or business, for the production of income, in

a tax-exempt activity, or in a personal activity.” Sec. 1.179-

4(e), Income Tax Regs.

Petitioner claimed on Form 4562, Depreciation and

Amortization, that the van was placed in service on January 1,
 - 9 -

1998. However, petitioner presented an invoice at trial for the

purchase of the van dated March 6, 1997. Further, petitioner

testified that the van was driven for personal use “part of the

time.” Therefore, the only evidence presented on this point

indicates that the van was first placed in service in a personal

activity in 1997. The section 179 expense is allowed as a

deduction only in the year the property is placed in service.

See sec. 179(a); Hendrix v. Commissioner, T.C. Memo. 1990-221;

sec. 1.179-4(e), Income Tax Regs. Accordingly, petitioner is not

entitled to the section 179 expense deduction claimed on the van

in 1998.

ii. Business Standard Mileage Rate Expense

Since we found above that petitioner is not entitled to a

section 179 expense deduction, petitioner may use the standard

mileage rate to calculate the business-related vehicle expenses

on the van, if substantiated.

The business standard mileage rate in lieu of operating and

fixed costs allows the taxpayer to deduct an amount determined by

multiplying the business standard mileage rate for the year at

issue by the number of miles driven for business purposes. Rev.

Proc. 97-58, 1997-2 C.B. 587. The standard mileage rate for 1998

was 32.5 cents per mile. Id.

Petitioner reported 12,370 miles driven for business

purposes on Schedule C for the year at issue. Petitioner claimed
 - 10 -

a vehicle expense deduction of $4,182. At trial, petitioner

presented no evidence to substantiate the business mileage

reported or the vehicle expense claimed. Petitioner testified

that he did not “keep” his business mileage. Petitioner’s

witness, Alonza O. C. Sargent, testified that petitioner did

maintain a mileage log, but no such log was introduced at trial.

As stated above, section 274 requires strict substantiation

for deductions claimed for transportation in a passenger car.

Petitioner is required to provide a mileage log or other

corroborative evidence sufficient to establish the amount, time,

place, and business purpose of the expense. Sec. 274(d). At

trial, petitioner failed to provide any corroborating evidence

whatsoever to satisfy the section 274 substantiation

requirements.

Based on a partial mileage log reviewed by respondent during

an examination prior to trial, respondent conceded that

petitioner was entitled to 5,742 business miles.4 Applying the

standard mileage rate for 1998, respondent concedes that

petitioner is entitled to a vehicle expense deduction of $1,866

for the year at issue. Although petitioner did not substantiate

entitlement to a deduction in any amount at trial, we shall not

disturb the respondent’s concession. Accordingly, petitioner is

4
The partial mileage log was not introduced at trial.
 - 11 -

entitled to a vehicle expense deduction of $1,866 for the year at

issue.

B. Production and Management Fees

Petitioner claimed a business expense deduction for

production and management fees in the amount of $999.20 on

Schedule C for the year at issue. At trial, petitioner presented

documentation substantiating $486.70 of the amount claimed. We

are satisfied that the substantiated items are ordinary and

necessary business expenses directly connected with petitioner’s

Schedule C business, as required under section 162(a) and the

regulations thereunder.

Petitioner presented absolutely no evidence, either

documentary or testimonial, to substantiate the additional

$512.50 of expenses claimed. Petitioner is not entitled to a

deduction for business expenses that are completely

unsubstantiated. Ronnen v. Commissioner, 90 T.C. 74, 102 (1988).

Therefore, petitioner is entitled to a Schedule C business

expense deduction only for production and management fees in the

amount of $486.70 for the year at issue.

C. Music Educator and Professional Convention Expense

Petitioner claimed a business expense deduction for music

educator and professional convention expenses in the amount of

$1,381.44 on Schedule C for the year at issue. After

respondent’s concession allowing a deduction of $1,047.49 for
 - 12 -

expenses related to the New York City Convention, only $333.95 of

the total claimed expense remains at issue. The majority of the

remaining expenses was incurred in connection with two other

conventions attended by petitioner during 1998.

In February 1998, petitioner attended the Texas Music

Educators Association Convention in San Antonio, Texas.

Petitioner claimed business expenses relating to the convention

in the amount of $113.10.

In July 1998, petitioner attended the Texas Bandmasters

Association Convention in San Antonio, Texas. Petitioner claimed

business expenses relating to the convention in the amount of

$155.79.

Respondent asserts that the expenses incurred with respect

to both San Antonio, Texas, conventions relate to petitioner’s

employment as an assistant band director and not to PK

Production.

At trial, petitioner testified that the claimed expenses

relating to the conventions pertained to both PK Production and

his employment as a band educator. However, petitioner failed to

allocate the expenses accordingly, claiming the expenses entirely

as business expenses on Schedule C.

Petitioner further testified that the conventions were

related to his Schedule C business because the conventions (1)

offered seminars and workshops that benefited petitioner as a
 - 13 -

musician, (2) were attended by other bands’ members who shared

“some different techniques and various things *** that would

benefit any professional musician”, and (3) provided exhibits

featuring manufacturers and distributors selling professional

equipment.

While petitioner may have attended seminars and engaged in

conversations with various individuals about techniques and

equipment at the conventions, we believe that these activities

are not “directly connected with or pertaining to” petitioner’s

Schedule C business. Sec. 1.162-1(a), Income Tax Regs. The fact

that petitioner may have derived some incidental or indirect

benefit to his business by attending the conventions is not

sufficient to satisfy the requirements of section 162(a). See

Henry v. Commissioner, 36 T.C. 879, 884 (1961).

The registration forms presented by petitioner at trial

clearly establish that the conventions were organized by

educational associations for the benefit of music educators.

The Texas Music Educators Association Convention Membership

Application requested information pertaining to the applicant’s

teaching division and level. On the application, petitioner

selected that he taught band at the middle school/junior high

school level.

Petitioner completed the Texas Bandmasters Association

Convention Registration Form indicating that he was affiliated
 - 14 -

with the Oak Village Middle School. Further, petitioner only

selected the middle school option when asked to select the

appropriate options that applied to the applicant.

Petitioner unequivocally completed both applications as an

educator, making no mention whatsoever of PK Production.

Petitioner testified that he had a choice of associating himself

with the school or PK Production when completing the

applications, yet petitioner chose to affiliate himself with the

school on both occasions.

It appears to the Court that from the evidence presented

that petitioner attended both San Antonio, Texas, conventions

primarily in his capacity as an assistant band director. The

record is clear that petitioner has failed to establish that the

expenses associated with the San Antonio, Texas, conventions

claimed on Schedule C were ordinary and necessary expenses

directly related to PK Production. See sec. 162(a); sec. 1.162-

1(a), Income Tax Regs.

Petitioner presented absolutely no evidence, either

documentary or testimonial, to substantiate the additional $65.06

of expenses claimed as music educator and professional convention

expenses. Petitioner is not entitled to a deduction for business

expenses that are completely unsubstantiated. Ronnen v.

Commissioner, supra.

Therefore, petitioner is not entitled to a Schedule C
 - 15 -

deduction in any amount for the $333.95 of expense claimed as

music educator and professional convention expenses.

However, since we found that petitioner incurred convention

expenses of $268.89 relating to his employment as an assistant

band director, we must determine whether these expenses are

deductible as unreimbursed employee expenses on Schedule A,

Itemized Deductions, subject to the 2-percent floor under section

67(a).

A taxpayer is not allowed an unreimbursed employee expense

deduction if the employer maintains a reimbursement plan and the

employee fails to seek reimbursement for work-related expenses.

Leamy v. Commissioner, 85 T.C. 798, 810 (1985).

There is absolutely nothing in the record to indicate

whether petitioner’s employer maintained a reimbursement plan in

the year at issue, nor has petitioner provided any evidence to

establish that he sought reimbursement for the convention

expenses. Accordingly, petitioner is not entitled to claim

unreimbursed employee expenses on Schedule A for the expenses

related to either of the San Antonio, Texas, conventions.5

5
Assuming, arguendo, that petitioner was entitled to
claim unreimbursed employee expenses of $268.89 on Schedule A,
petitioner would not be entitled to a deduction because the total
unreimbursed employee expenses are not greater than 2 percent of
the recomputed adjusted gross income, as required under sec.
67(a).
 - 16 -

D. Result of Schedule C Adjustments Above

Consistent with the findings above, we have recalculated

petitioner’s Schedule C loss from PK Production. Petitioner is

entitled to a loss of $1,748.19 on Schedule C for the year at

issue. Petitioner’s adjusted gross income is also recomputed to

reflect this amount. Petitioner’s recomputed adjusted gross

income is $28,919.35 for the year at issue.

2. Casualty Loss Deduction

Section 165(a) allows a taxpayer to deduct any loss

sustained during the taxable year and not compensated for by

insurance or otherwise. As relevant here, section 165(c)(3)

allows a deduction to an individual for loss of “property not

connected with a trade or business or a transaction entered into

for profit, if such loss arises from fire, storm, shipwreck, or

other casualty”.

Pursuant to section 165(h), personal casualty losses

described under section 165(c)(3) are deductible only to the

extent that the loss exceeds $100 and 10 percent of the

taxpayer’s adjusted gross income. Moreover, such losses are

deductible as itemized deductions on Schedule A of the taxpayer’s

return.

Pursuant to section 1.165-7(b)(1), Income Tax Regs., in the

case of property partially destroyed by casualty, the loss

deductible for purposes of section 165(a) is the difference
 - 17 -

between the fair market value of the property immediately before

the casualty and the fair market value of the property

immediately after the casualty, with the deductible amount not to

exceed the adjusted basis of the property (fair market value

approach).

To establish the amount of the loss, the relevant fair

market values of the property “shall generally be ascertained by

competent appraisal.” Sec. 1.165-7(a)(2)(i), Income Tax Regs.

The appraisal must be conducted in a manner to ensure that any

casualty loss deduction “be limited to the actual loss resulting

from damage to the property.” Id.

Section 1.165-7(a)(2)(ii), Income Tax Regs., provides that

the cost of repairs to the damaged property is acceptable as

evidence of the loss of value to the property (cost of repairs

approach). In order to use this alternative approach, the

taxpayer must show: (1) The repairs are necessary to restore the

property to its condition immediately before the casualty; (2)

the amount spent for such repairs is not excessive; (3) the

repairs do not care for more than the damage suffered; and (4)

the value of the property after the repairs does not as a result

of the repairs exceed its value immediately before the casualty.

Id.

For the year at issue, petitioner claimed a casualty loss

deduction of $5,151.19 on Schedule A. Petitioner determined the
 - 18 -

casualty loss amount on Form 4684, Casualties and Thefts,

applying the fair market value approach. On Form 4684,

petitioner reported the fair market value of the property before

and after the casualty to be $60,000 and $52,870, respectively.

The $7,130 difference in the fair market values reported was

first reduced by $100, then further reduced by $1,888.81, 10

percent of the adjusted gross income shown on the return.

Thereby, petitioner computed a casualty loss of $5,151.19. No

insurance reimbursement was reported on the Form 4684.

A. Fair Market Value Approach

At trial, petitioner offered no evidence to substantiate the

fair market values reported on Form 4684. Petitioner did present

a Uniform Residential Appraisal Report (report), which estimated

the market value of petitioner’s residence, as of October 10,

1998, to be $53,000. The report makes no mention of the damage

claimed by petitioner, nor states that the appraised amount was

based on a value before or after the date of the storm. Because

the appraised value was determined as of October 10, 1998,

approximately 1 month after the storm and before any repairs were

made, we believe the $53,000 figure represents the fair market

value of the property taking into consideration any damage

resulting from the storm.6 Since no evidence of the fair market

6
The Uniform Residential Appraisal Report states that
Oct. 10, 1998, was the date of inspection of the property.
 - 19 -

value of the property immediately prior to the storm was

presented at trial, petitioner has failed to provide the

information necessary to apply the fair market value approach.

Thus, petitioner is not entitled to the $5,151.19 casualty loss

deduction claimed applying the fair market value approach.

B. Cost of Repairs Approach

At trial, petitioner presented many documents in his

attempt to substantiate the casualty loss deduction applying the

cost of repairs approach. The documents were stipulated by the

parties and are part of the record. Petitioner presented a copy

of: (1) The insurance settlement claim from State Farm in the

amount of $857.12; (2) a contract with Carl B. Adams to install a

new roof and replace rotten decking for $1,500; (3) three

receipts from Carl B. Adams acknowledging payment of $1,500; (4)

a receipt to haul and dump roofing materials for $125; (5) two

receipts from Commercial Sand totaling $50; (6) three receipts

from Builders Square Store # 1409 totaling $123.64; (7) a receipt

from Olshan Lumber Company for $1,070.11; and (8) a credit

invoice from Olshan Lumber Company for items returned in the

amount of $280.74. Accordingly, petitioner presented

documentation totaling $2,588.01 to replace his roof and received

$857.12 in insurance proceeds. Thus, petitioner’s net out-of-

pocket expense was $1,730.88 (net expense).

Petitioner testified that he spent “over $4,000" to repair
 - 20 -

the damage to his residence, but could not remember the exact

amount. While we are permitted to estimate the amount of a

deduction under certain circumstances, there must be evidence in

the record upon which to base our decision. Cohan v.

Commissioner, 39 F.2d 540 (2d Cir. 1930). Petitioner did not

corroborate his testimony with any evidence whatsoever to

establish the $4,000 figure. It is well settled that we are not

required to accept a taxpayer’s self-serving testimony in the

absence of corroborating evidence. Niedringhaus v. Commissioner,

99 T.C. 202, 212 (1992).

Petitioner presented receipts totaling only $2,588.01 for

labor and materials to replace the roof and received $857.12 in

insurance proceeds. Therefore, only the $1,730.88 of net expense

corroborated by documentary evidence is considered in determining

petitioner’s casualty loss deduction.

We need not determine on the merits if petitioner has met

the four substantiation requirements of section 1.165-

7(a)(2)(ii), Income Tax Regs., because petitioner’s net expense

is less than the amount of the section 165(h) limitations.

Applying the section 165(h) limitations, petitioner’s net expense

of $1,730.88 minus the $100 limitation, or $1,630.88, is far less
 - 21 -

than 10 percent of petitioner’s recomputed adjusted gross income

for the year at issue.7

Petitioner has failed to meet the minimum dollar amount

threshold required to deduct a casualty loss.8 Since

petitioner’s net expense does not exceed the limitations under

section 165(h), petitioner is precluded from deducting any of the

net expense incurred. Accordingly, petitioner is not entitled to

a casualty loss deduction applying the cost of repairs approach.

To reflect the foregoing,

Decision will be entered

under Rule 155.

7
We recomputed petitioner’s adjusted gross income to be
$28,919.35, 10 percent of which is $2,892. See supra p. 16.
8
Assuming, arguendo, that petitioner had corroborated
$4,000 of expense, the casualty loss deduction after the sec.
165(h) limitations would be reduced to such a small amount that,
when added to the other items claimed on Schedule A, petitioner’s
total itemized deductions would be less than the standard
deduction for the year at issue.