T.C. Summary Opinion 2003-146
UNITED STATES TAX COURT
EDWARD L. PYRDUM AND TERRI L. PYRDUM, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1052-02S. Filed October 2, 2003.
Edward L. Pyrdum and Terri L. Pyrdum, pro se.
Edsel Ford Holman, Jr., for respondent.
POWELL, Special Trial Judge: This case was heard pursuant
to the provisions of section 74631 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.
1
Unless otherwise indicated, subsequent section references are
to the Internal Revenue Code in effect for the years in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
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Respondent determined deficiencies and accuracy-related
penalties under section 6662(a) in petitioners’ 1999 and 2000
Federal income taxes in the following amounts:
Year Deficiency Sec. 6662(a) Penalty
1999 $6,783 $1,356.60
2000 10,565 2,113.00
The issues are (1) whether petitioners are entitled to deductions
on Schedule C, Profit or Loss From Business, for expenses of
$21,194 and $30,178 for the years in issue, and (2) whether
petitioners are liable for the accuracy-related penalties under
section 6662(a). Petitioners resided in Shelbyville, Tennessee,
at the time the petition was filed.
Background
The facts may be summarized as follows. On Schedule C
included in their 1999 and 2000 Federal income tax returns
petitioners claimed the following deductions:
1999 2000
Car & truck expenses $10,844 $16,268
Mortgage interest -0- 6,767
Depreciation 4,125 -0-
Supplies 750 375
Travel 2,750 1,265
Meals 325 238
Utilities 2,400 4,136
Business use of home -0- 1,129
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Petitioners reported income of $2,424 in 1999 and $2,679 in 2000
from the Schedule C activity.2 The car expenses were computed by
using the standard mileage expense method. See Rev. Proc. 98-63,
1998-2 C.B. 818 ($.31 per mile); Rev Proc. 99-38, 1999-2 C.B. 525
($.325 per mile). The depreciation deduction claimed for the
1999 taxable year was for automobiles for which deductions using
the standard rate were claimed, and petitioners concede that they
are not entitled to that deduction. On the 2000 tax return,
petitioners deducted the mortgage interest expense also as an
itemized deduction, and they concede that the deduction was
properly disallowed on the Schedule C.
The activity reported on the Schedules C related to
petitioner Terri L. Pyrdum (hereinafter petitioner). Petitioners
divorced in 2001, and petitioner is now married to Allan Brittain
(Mr. Brittain). During 1999 and 2000, petitioner was employed
full time as an inside sales representative by Holt Specialty
Equipment (Holt), a machinery manufacturer. As a sales
representative, she traveled to various machinery trade shows in
the region. Holt reimbursed petitioner for all of her travel
expenses incurred on behalf of Holt.
During the years in issue, petitioner was also associated
with Key Credit Corp. (Key Credit), a financing company. Key
2
In the notice of deficiency respondent increased petitioners’
income by these amounts. Respondent concedes that these items of
income were included in the returns.
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Credit financed equipment purchases. Petitioner would refer a
purchaser of equipment to Key Credit, and, if the financing were
approved, petitioner would get a nominal percentage of the profit
on the financing. According to Emelio Salinas, petitioner’s
contact with Key Credit, the maximum amount petitioner could have
made under the arrangement would have been $2,000 to $5,000 per
year. Key Credit treated petitioner as an independent contractor
and issued her Forms 1099 for 1999 and 2000.
Key Credit did not require that petitioner travel, and she
was informed that Key Credit would not reimburse her for any
travel expenses she incurred. The travel expenses shown on the
Schedules C allegedly were incurred by petitioner in connection
with her association with Key Credit. With respect to the car
expenses, petitioner did not maintain a log or other record of
mileage. With regard to the travel and meal expenses, petitioner
introduced receipts which consist of copies of a round trip air
travel itinerary for Mr. Brittain and petitioner to Columbus,
Ohio, in 2000 of $406, a round trip air travel itinerary for
petitioner to Buffalo, New York, in 2000 of $218 to meet with Mr.
Brittain, a hotel receipt from Columbus, Ohio, of $231, and a
ticket stub to a concert in Columbus, Ohio, of $61. The
deductions for utilities allegedly are derived from the utility
expenses at petitioners’ personal dwelling.
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Discussion
Section 162(a) allows a deduction for all ordinary and
necessary expenses incurred in carrying on a trade or business.
Section 274(d), however, provides that no deduction is allowed
for certain expenses unless the taxpayer “substantiates by
adequate records or by sufficient evidence corroborating the
taxpayer’s own statement”, inter alia, the time and place of the
travel and the business purpose of the expense. The deductions
that fall within section 274(d) include travel expenses including
meals and lodging, sec. 274(d)(1), and deductions “with respect
to any listed property (as defined in section 280F(d)(4)”, sec.
274(d)(4). Included within the ambit of “listed property” are
passenger automobiles. Sec. 280F(d)(4)(A)(i). To substantiate
the adequate records requirement for a passenger automobile, “a
taxpayer shall maintain an account book, diary, log, statement of
expense, trip sheets, or similar record * * * which, in
combination, are sufficient to establish each element of an
expenditure”. Sec. 1.274-5T(c)(2)(i), Temporary Income Tax
Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). To substantiate a
business purpose for listed property “the record must contain
sufficient information as to each element of every business/
investment use.” Sec. 1.275-5T(c)(2)(ii)(C), Temporary Income
Tax Regs., 50 Fed. Reg. 46018 (Nov. 6, 1985).
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With regard to the deductions for car expenses, petitioner
has no logs or trip sheets.3 Rather, from what we gather, she
totaled the mileage driven for various periods and extrapolated
the total yearly mileage. This does not meet the substantiation
requirements of section 274 and the regulations thereunder.
Moreover, we note that the indicated business mileage driven
during 1999 was 34,981 miles ($10,844 ÷ .31) and during 2000 was
51,644 miles ($16,268 ÷ .315). During this time petitioner was
also a full time employee at Holt, and Holt reimbursed her for
any travel expenses to trade shows.4 While it may not have been
impossible to accomplish this driving, we find it highly
unlikely. For example, during 2000, she would have had to have
driven almost 1,000 miles per week, and, since she worked for
Holt full time, that driving would have to have been done on the
weekends. That would be approximately 500 miles per day.5
Respondent’s disallowance of the car expenses is sustained.
3
Sec. 7491, concerning the burden of proof, is not applicable
here because petitioners have not satisfied the substantiation
requirement. Sec. 7491(a)(2)(A).
4
Petitioner also introduced a copy of a hotel receipt from a
hotel in Alpharetta, Georgia, with the written notation “Show
Atlanta (16-18) - May - (Took vacation from work to go)”. The
notation is contradicted by petitioner’s testimony that Holt
reimbursed her for travel to trade shows.
5
We note that petitioner was in Buffalo, New York, and
Columbus, Ohio, on two weekends and her husband testified that
she was not away every weekend. Given that, the actual mileage
per week would have been even greater.
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Similarly, with regard to the other travel expenses,
petitioner has no records indicating the business purpose of the
trips. Petitioner testified that the trip to Buffalo, New York,
was to meet a “potential customer”, but there is no indication of
any business discussions. While in preparation for the trial
petitioner wrote the name Davis Evans on the Columbus, Ohio,
hotel receipt, there again is no indication of any business
discussions. These records do not satisfy the adequate record
requirements of section 274, and we sustain respondent’s
disallowance of the travel expense deductions.6
Turning to the deductions claimed for “utilities”, as we
understand, petitioners claim that petitioner used a portion of
their home for her business. For the 2000 taxable year
petitioners also claimed a deduction for business use of their
home. Section 280A(a) prohibits any deduction “with respect to
the use of a dwelling unit which is used by the taxpayer * * * as
a residence.” A portion of a dwelling may be exempted from
section 280A(a) if it is exclusively used on a regular basis “as
the principal place of business for any trade or business of the
taxpayer”. Sec. 280A(c)(1).
6
Petitioner also introduced into evidence pages of a January
and December 2000 calendar and what she describes as customer
sheets containing the names, addresses, and telephone numbers of
potential customers. Neither indicated whether she had any
business meetings with these customers during her travels.
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We begin by noting that petitioners have no records showing
the total amounts paid for utilities. For the 2000 taxable year
they claimed a deduction based on the business use of a portion
of the dwelling and for both years they claimed utility expenses
connected with this use. According to a Form 8829, Expenses for
Business Use of Your Home, included in the 2000 tax return,
petitioner used 14.81 percent of the home exclusively for her Key
Credit business. If this were correct, petitioners’ total
utility bills for 2000 would have been approximately $27,000
($4,000 ÷ .1481). We decline to visit further into this land of
Oz.7 Respondent’s disallowance of the utility expenses is
sustained.
Furthermore, petitioners have not substantiated that
petitioner used a portion of the home exclusively for her
business. Petitioner-husband testified that the home office was
in the living room of the house. But, there is nothing to
indicate that exclusive use of that room was for the Key Credit
business. Petitioners have not shown that the exception to
section 280A(a) applies, and we sustain respondent’s
determination.
The remaining deductions for 1999 and 2000 were for
supplies. Again, petitioners have no receipts or other documents
7
According to petitioners, the utility records could not be
located. We suspect that we know the reason for this.
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substantiating these alleged expenditures. Respondent’s
determinations are sustained.
Penalties Under Section 6662(a)
As relevant here, section 6662(a) imposes a penalty in the
amount of 20 percent of the underpayment due to, inter alia,
negligence or substantial understatement of tax. Negligence
includes “any failure to make a reasonable attempt to comply with
the provisions of” the revenue laws and any failure to keep
adequate books and records or to substantiate items properly.
Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs. We find that
there was no reasonable attempt to comply.8 Petitioner-husband
prepared the returns using information supplied by petitioner.
Petitioners failed to comply with the substantiation requirements
of section 274. Petitioners claimed double deductions for
mortgage interest in 2000 and, in essence, for automobile
expenses in 1999. Putting aside the section 280A failure to
substantiate the business use of any portion of the home, the
amounts claimed for utilities were, at best, fanciful, and the
same may be said for the claims of the mileage driven.
Respondent’s determinations of the accuracy-related penalties
under section 6662(a) are sustained.
8
Respondent has satisfied his burden of production with
respect to the penalties. Sec. 7491(c).
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Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
under Rule 155.