WILEY v. COMMISSIONER

T.C. Summary Opinion 2002-116

UNITED STATES TAX COURT

ROYAL AND SHELLY SPENCE WILEY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 11332-01S. Filed September 4, 2002.

Royal and Shelly Spence Wiley, pro se.

Douglas S. Polsky, 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. All Rule references are to the Tax Court Rules
of Practice and Procedure.
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Respondent determined deficiencies of $20,993 and $21,898 in

petitioners' Federal income taxes, respectively, for 1998 and

1999 and corresponding penalties under section 6662(a) in the

amounts of $4,199 and $4,380.

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, petitioners'

legal residence was Rio Rancho, New Mexico.

The issues for decision are: (1) Whether petitioners are

entitled to disallowed itemized deductions for charitable

contributions, job expenses, and other miscellaneous deductions,

and (2) whether petitioners are liable for the penalties under

section 6662(a).

For each of the years in question, petitioners claimed

itemized deductions on a Schedule A, Itemized Deductions, of

their Federal income tax returns. For 1998, petitioners claimed

itemized deductions totaling $36,703, of which $20,895 was

disallowed by respondent. For 1999, petitioners deducted

$43,948, of which $19,800 was disallowed by respondent.

Petitioners, nevertheless, were allowed itemized deductions for

both years, since the total of their other claimed and allowed

deductions exceeded the standard deduction under section 63(c).

For the 2 years at issue, the disallowed deductions consisted of

charitable contributions, job expenses, and other miscellaneous
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deductions. Additionally, petitioners included with their tax

returns for the 2 years at issue a Schedule D, Capital Gains and

Losses, with respect to capital assets they sold or exchanged.

On the 1998 return, petitioners reported sales of Intel Corp.

stock of $52,280, with a basis of $54,603, and claimed a capital

loss of $2,323. On the 1999 return, petitioners reported sales

of Intel Corp. stock for a selling price of $71,063, a basis of

$72,229, and a net capital loss of $1,166. In the notice of

deficiency, respondent not only disallowed the capital losses

claimed for the 2 years but determined that petitioners realized

capital gains of $54,603 and $72,229, respectively, for the 2

years for the stated reason that petitioners failed to establish

any basis in the stocks sold. At trial, the parties agreed to

petitioners' entitlement to capital losses of $1,568 and $1,473,

respectively, for 1998 and 1999. Respondent further agreed that

the section 6662(a) penalty would not be applicable to any

portion of the deficiencies attributable to the capital gain

settlement (which apparently would apply only to the 1998 tax

year).

Royal Wiley (petitioner) was employed by Intel Corp. during

the years at issue. Mrs. Wiley was not employed. Prior to the

years at issue, petitioners had utilized the services of a

commercial tax preparation service for the preparation of their

Federal income tax returns. Petitioners were not satisfied with
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this service because of what they perceived to be complications

in the reporting of transactions involving stock options

petitioner received as an employee of Intel Corp. On the

recommendation of several of his coworkers at Intel Corp.,

petitioners engaged a tax return preparer, Robin Beltran, for

their 1998 and 1999 returns.2

With respect to the contested issues, petitioners claimed

the following charitable contributions as itemized deductions on

their income tax returns:

1998 1999

Cash contributions $7,270 $7,446
Noncash contributions 413 413
Totals $7,683 $7,859

In the notice of deficiency, respondent disallowed the amounts

claimed for each year for lack of substantiation.

At trial, petitioners produced documentation that would

establish payment of some charitable contributions for the years

at issue but nowhere near the amounts claimed on their returns.

They agreed that their noncash contributions were considerably in

excess of the $413 claimed each year but produced no

documentation as to their noncash contributions. Their return

2
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.
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preparer, Mr. Beltran, advised petitioners not to claim noncash

contributions in excess of $500 but instead to report the value

of such contributions as part of their cash contributions. The

reason for that, as he explained to petitioners, was to avoid the

necessity of filing additional forms.3 Moreover, the Court is

satisfied that the total charitable contribution claimed on the

returns was not based on any records petitioners may have had

regarding their charitable contributions.

The Court is satisfied from the record that petitioners did

make qualifying charitable contributions during the years at

issue and, therefore, under the Court's discretionary authority

pursuant to Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.

1930), allows petitioners charitable contribution deductions of

$500 for each year at issue.

The other itemized deductions disallowed by respondent were

"Job Expenses and Most Other Miscellaneous Deductions" claimed on

petitioners' returns, as follows:

3
Petitioners' tax returns did not include Internal
Revenue Service Form 8283, Noncash Charitable Contributions, of
property other than money, which form is required for noncash
contributions in excess of $500.
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1998 1999

Unreimbursed employee expenses
(before the sec. 67(a)
limitation) $13,788 $11,110
Tax preparation fees 500 1,200
Totals $14,288 $12,310

These amounts were disallowed in the notice of deficiency. At

trial, respondent conceded petitioners' entitlement to

deductions, subject to the section 67(a) limitation, of $65 and

$1,220, respectively, for 1998 and 1999 for tax preparation fees.

The unreimbursed employee expenses relate to petitioner's

use of his vehicle, both locally and away from home, in

connection with his employment, a home computer used in

connection with his employment, and special clothing required at

work. Petitioners also included as part of their vehicle

expense, the mileage for use of their vehicle in connection with

their charitable contributions.

Petitioners presented no documentation that would satisfy

the requirements for deduction of travel expenses away from home,

including meals and lodging. To deduct such expenses, section

162(a)(2) requires substantiation of the amounts claimed 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
 - 7 -

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. Sec. l.274-5T(c)(l), Temporary Income Tax

Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985). Petitioners presented

no records or other documentary information that would satisfy

the requirements of section 274(d) and the regulations cited.

Moreover, to the extent petitioner used his vehicle locally and

not for travel away from home within the intent and meaning of

section 162(a)(2), such expenses are also subject to the same

substantiation requirements because section 274(d) includes

transportation expenses incurred in the use of "listed property"

as defined in section 280F(d)(4). A passenger automobile is

listed property. Sec. 280F(d)(4)(A)(i) and (ii). Similarly, any

computer or peripheral equipment not used at a regular business
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establishment is also listed property, and, therefore, deductions

for the use of such property are also subject to the same

substantiation requirements. Sec. 280F(d)(4)(A)(ii) and (B).

Moreover, there is evidence in the record that petitioner's

employer, Intel Corp., had a reimbursement policy that would have

covered at least some of the expenses petitioner incurred in his

employment. There is no evidence that petitioner claimed

reimbursement from his employer for any of the expenses claimed

on the tax returns. The law is well settled that reimbursable

expenses for which an employee claims no reimbursement are not

deductible. Orvis v. Commissioner, 788 F.2d 1406 (9th Cir.

1986), affg. T.C. Memo. 1984-533. With respect to that portion

of petitioner's expenses relating to special clothing necessary

in his employment, the amount of which was not specified, this

Court has held that expenses for clothing used by an employee at

work that is suitable for ordinary wear, including expenses for

the purchasing and laundering of such clothing, constitute

personal expenses and are not deductible under section 262.

Barone v. Commissioner, 85 T.C. 462, 469 (1985), affd. without

published opinion 807 F.2d 177 (9th Cir. 1986). On the other

hand, shoes or clothing worn by an employee that are not

adaptable to personal use and are necessary for the employee's

safety and protection while at work are deductible as employee

business expenses. Kozera v. Commissioner, T.C. Memo. 1986-604.
 - 9 -

Petitioners presented no evidence that they purchased any

clothing or shoes that were used by petitioner in his employment

that was not adaptable to personal use. The Court recognizes

that petitioner was required to wear at work a "bunny", an

apparel over his regular clothing, which more than likely would

not be suitable for ordinary wear. However, petitioner presented

no evidence that he was required to purchase or did in fact

purchase such clothing. The inference from the record is that

such clothing was provided by petitioner's employer. On this

record, petitioners have not established their entitlement to a

deduction for unreimbursed employee expenses. The concessions by

respondent relate to tax preparation fees, subject to the

limitations of section 67(a). Respondent, therefore, is

sustained in the disallowance of the itemized deductions at

issue, except as to the amounts allowed by the Court and

respondent's concessions.

The second issue is whether petitioners should be held

liable for the section 6662(a) penalties. Petitioners contend

they should be absolved of liability for such penalties because

they relied on the representations of their return preparer, Mr.

Beltran.

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
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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. 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
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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). 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 advice on

the subject matter. Freytag v. Commissioner, supra at 888.

Petitioners made no effort to ascertain the professional

background and qualifications of their return preparer. They
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admitted on brief that the deductions at issue were not based on

books and records and even acknowledged at trial that they

questioned Mr. Beltran regarding certain expenses that they had

not claimed as deductions on prior years' returns. Petitioners

did not look beyond Mr. Beltran's representations. The Court is

satisfied that petitioners knew that they could only claim

deductions that could be substantiated, and, even if they did not

know that, at the very least, the representations that such

deductions could be claimed without documentation should have

prompted them to verify the accuracy of such a representation

with a qualified preparer. In addition, petitioners' failure to

question Mr. Beltran's representations that noncash charitable

contributions could be lumped in or considered as cash

contributions should have raised additional questions as the

income tax forms clearly specify the need for an additional form

and other information where such contributions exceed $500.

Moreover, the amounts claimed for unreimbursed employee expenses

were clearly disproportionate to petitioner's wages, which also

should have merited further inquiry. Petitioner's failure to

claim reimbursement from his employer for at least some of his

expenses casts further doubt that such expenses were in fact

incurred. These facts demonstrate to the Court that petitioners

made no reasonable effort to ascertain their correct tax

liability for the years at issue. Stubblefield v. Commissioner,
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supra. The Court, therefore, sustains respondent on the section

6662(a) penalties.

Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered

under Rule 155.