T.C. Summary Opinion 2003-100
UNITED STATES TAX COURT
GREGORY C. AND PHYLLIS LAM, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12153-00S. Filed July 23, 2003.
Gregory C. and Phyllis Lam, pro sese.
Margaret Rigg, 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. Unless otherwise
indicated, section references are to the Internal Revenue Code in
effect for the year in issue. The decision to be entered is not
reviewable by any other court, and this opinion should not be
cited as authority.
Respondent determined a deficiency of $1,981 and an
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accuracy-related penalty of $396.20 in petitioners’ 1998 Federal
income tax. This Court must decide: (1) Whether petitioners are
entitled to deduct expenses claimed on Schedule C, Profit or Loss
From Business, and (2) whether petitioners are liable for the
accuracy-related penalty under section 6662(a).
Some of the facts in this case have been stipulated and are
so found. Petitioners resided in San Mateo, California, at the
time they filed their petition.
During taxable year 1998, petitioner Gregory C. Lam
(petitioner) purportedly was involved in three businesses:
project management, photography, and construction. In connection
with these businesses, petitioners attached three Schedules C,
Profit or Loss From Business, to their 1998 Form 1040, U.S.
Individual Income Tax Return. The deductions claimed on the
Schedule C relating to petitioner’s photography business are not
at issue. Respondent disallowed deductions claimed on the other
two Schedules C because petitioners did not establish that the
claimed expenses were paid or incurred during taxable year 1998
or that the expenses were ordinary and necessary to petitioner’s
businesses.
On the Schedule C pertaining to petitioner’s project
management business, petitioner reported gross income of $250 and
a net loss of $6,695. Respondent disallowed deductions claimed
on that Schedule C for car and truck expenses of $755,
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depreciation expense of $2,810, and other expenses of $1,586. On
the Schedule C pertaining to petitioner’s construction business,
petitioner reported gross income of $1,000 and a net loss of
$10,763. Respondent disallowed deductions claimed on that
Schedule C for car and truck expenses of $1,356, depreciation
expense of $1,501, insurance expense of $1,422, and other
expenses of $5,326.
Respondent contends that the documents offered by petitioner
provide insufficient evidence to support the claimed deductions.
We agree. Section 7491 is inapplicable here because petitioners
have not complied with the requisite substantiation requirements.
Sec. 7491(a)(2)(A).
Section 162(a) allows a deduction for ordinary and necessary
expenses paid or incurred during the taxable year in carrying on
a trade or business. Taxpayers, however, must maintain
sufficient records to establish the amount of claimed deductions.
Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.
Section 274(d)(4) imposes stringent substantiation
requirements for the deduction of certain listed property defined
under section 280F(d)(4). Listed property includes, inter alia,
automobiles and computers. Sec. 280F(d)(4)(A). To deduct
expenses for such listed property, including depreciation,
taxpayers must substantiate by adequate records the following
items: The amount of each separate expenditure, the listed
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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). Each element of an expenditure or use must be made at
or near the time of the expenditure or use. Sec. 1.274-
5T(c)(2)(ii)(A), Temporary Income Tax Regs., 50 Fed. Reg. 46017
(Nov. 6, 1985). Moreover, when section 274(d) applies, as here,
this Court cannot rely on Cohan v. Commissioner, 39 F.2d 540 (2d
Cir. 1930), to estimate the taxpayer’s expenses. Sanford v.
Commissioner, 50 T.C. 823, 827-828 (1968), affd. per curiam 412
F.2d 201 (2d Cir. 1969).
Petitioner had no books of account or other records
concerning his alleged businesses or any evidence of the
expenditures in issue. At trial, petitioner had no reconstructed
records to support his claimed deductions. Petitioner’s
miscellaneous documents from third parties and some items from
petitioner or his wife were not adequate to support any of his
deductions. Petitioner relied on his own testimony.
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It is well established that this Court is not bound to
accept a taxpayer’s self-serving, unverified, and undocumented
testimony. Tokarski v. Commissioner, 87 T.C. 74, 77 (1986);
Hradesky v. Commissioner, 65 T.C. 87 (1975). We find
petitioner’s testimony to be just that, self-serving, unverified,
and undocumented. As such, we conclude that petitioners have
failed to establish that they are entitled to the deductions
claimed on their Schedules C under section 162, much less under
the strict standards of section 274.
As to the accuracy-related penalty, section 6662(a) imposes
a 20 percent penalty on the portion of any underpayment of tax
attributable to negligence or disregard of rules or regulations.
Sec. 6662(b)(1). Negligence is any failure to make a reasonable
attempt to comply with the provisions of the internal revenue
laws and 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 failure to do
what a reasonable and prudent person would do under the
circumstances. Neely v. Commissioner, 85 T.C. 934, 947 (1985).
Disregard includes any careless, reckless, or intentional
disregard of rules or regulations. Sec. 6662(c); sec. 1.6662-
3(b)(2), Income Tax Regs. No penalty will be imposed with
respect to any portion of any underpayment if it is shown that
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there was a reasonable cause for such portion and that the
taxpayer acted in good faith with respect to such portion. Sec.
6664(c).
On this record, we conclude that petitioners are liable for
the accuracy-related penalty under section 6662(a) as imposed by
respondent. Petitioners have failed to provide any reasonable
explanation or credible evidence to substantiate entitlement to
the claimed deductions. Such actions are not those of a
reasonable and prudent person under the circumstances.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.