T.C. Summary Opinion 2004-46
UNITED STATES TAX COURT
NEAL N. AND RUBY W. VIAR, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13785-02S. Filed April 12, 2004.
Neal N. and Ruby W. Viar, pro se.
Dustin M. Starbuck, 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
1
Unless otherwise indicated, subsequent section
references are to the Internal Revenue Code in effect for the
years at issue. Rule references are to the Tax Court Rules of
Practice and Procedure.
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is not reviewable by any other court, and this opinion should not
be cited as authority.
In the notice of deficiency, respondent determined the
following deficiencies in Federal income taxes and penalties
against petitioners for the years indicated:
Year Deficiency Sec. 6662(a) Penalty
1999 $2,381 $476
2000 2,604 490
The issues for decision are: (1) Whether petitioners are
entitled to certain deductions claimed on Schedule C, Profit or
Loss From Business, for the years in question in excess of
amounts allowed by respondent; (2) whether petitioners are
entitled to certain deductions claimed on Schedules E,
Supplemental Income and Loss, in excess of amounts allowed by
respondent; and (3) whether petitioners are liable for the
accuracy-related penalties under section 6662(a) for 1999 and
2000.
Some of the facts were stipulated. Those facts, with the
annexed exhibits, are so found and are made part hereof.
Petitioners’ legal residence at the time the petition was filed
was Lynchburg, Virginia.
Petitioners are married. During the years at issue, Mr.
Viar conducted a Schedule C real estate sales activity out of
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their home. As further described below, he also engaged in
various additional activities to produce income.2 Mrs. Viar was
a bookkeeper. Petitioners filed joint income tax returns,
prepared by a return preparer, for 1999 and 2000.
Mr. Viar was a licensed real estate agent. He began selling
homes in 1995. Prior to 1995, he was a contractor installing
water and waste treatment plants throughout Virginia.
During the years at issue, Mr. Viar was an employee of CMH
Homes, Inc., on whose behalf he sold mobile homes. In this
activity during the years in question, Mr. Viar occasionally took
clients to lunch. He did not keep detailed records of his meals
and entertainment expenses. He used his own vehicle to show real
estate throughout five counties. He did not keep a mileage log.
In a separate self-employed activity, Mr. Viar provided the
necessary amenities for the mobile homes sold by CMH Homes,
including grading the land site, digging water wells, installing
the septic systems, constructing the brick underpinnings, and, in
some cases, installing a basement. The work required travel to
county seats and to the location of each home. Mr. Viar used his
own vehicle for these services, for which he was not reimbursed
2
Respondent did not argue that Mr. Viar’s additional
activities were activities not engaged in for profit under sec.
183(a).
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by CMH Homes, Inc. For this activity, Mr. Viar reported his
income and expenses on a Schedule C.
Mr. Viar has had several health ailments. In 1995, he was
diagnosed with prostate cancer, which required surgery. During
the years 1995 to 2000, he was diagnosed with diabetes and
suffered from depression. He traveled from his home in Lynchburg
to the Veterans’ Administration hospital in Salem, Virginia, for
treatment.
Because of his illnesses, Mr. Viar discontinued the water
and waste treatment activity in 1995 and began the mobile home
activity. He also engaged in a number of other income-generating
activities. As he described at trial:
I worked for H&R Block for two or three years on tax season,
believe it or not. I worked for Clayton Homes. I was in
the real estate business. I installed mobile homes where I
put the basements in and all. I did anything I could to try
to survive until I got on Social Security.
It appears from the record that Mr. Viar began receiving Social
Security benefits in 2000.
Petitioners have a son who owned a construction business.
During the years at issue, Mr. Viar assisted his son in his
business by “estimating jobs” and performing computer work. He
occasionally traveled, again using his own vehicle, to job sites
to assist his son. He performed the computer work at his home.
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Petitioners owned a number of commercial and residential
rental properties. Among these was a dwelling located at 418
Morningside Heights, Lynchburg, Virginia, in which petitioners
owned a 50-percent interest during the years at issue.
Petitioners reported their income and expenses, including
depreciation, from rental real estate on Schedule E. Three
properties, including the Morningside Heights dwelling, were
listed on their 1999 income tax return. Five properties,
including the Morningside Heights dwelling, were listed on their
2000 return.
Mrs. Viar has a brother who was 70 years old at the time of
trial. During 1999 and 2000, petitioners allowed Mrs. Viar’s
brother and his wife to live in the Morningside Heights dwelling
rent free because they were “unable to afford a place of their
own.” However, it was agreed that Mrs. Viar’s brother would make
improvements to the dwelling in exchange for living there. The
dwelling was old and in need of repairs. Mrs. Viar’s brother did
make a number of repairs and improvements to the dwelling;
however, petitioners did not maintain any records of these
expenditures.
During 1999 and 2000, Mr. Viar had telephone service with
several different carriers. He maintained two local telephone
numbers, one personal and one business line, with Verizon as the
telephone provider. His long distance service was with AT&T. He
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carried a pager in which Metrocall was the provider. Finally, he
had two cell phones, one through Alltel and one through Intelos.
He had two cell phones because, although one of the carriers did
not provide clear reception at his residence, that number was
listed in the multiple listing service for real estate agents,
and he did not want to lose that benefit. At trial, petitioners
produced billing statements from the various telecommunications
carriers that provided them services. These statements reflected
over $2,400 in telecommunications expenses for 1999.3
Petitioners based their Schedule C deduction for utilities for
1999 on the available receipts and adjusted the amount downward
by half.
On their 1999 return, petitioners reported $24,283 in wage
income. On Schedule C, they reported gross receipts of $1,489,
expenses of $26,563, and a net loss of $25,074 from Mr. Viar’s
real estate activity. They reported no rental income from the
Morningside Heights dwelling on Schedule E and claimed taxes,
depreciation, and insurance expenses of $1,322 relating to it.
On their 2000 return, petitioners reported $17,415 in wage
income. On Schedule C, they reported gross receipts of $644,
expenses of $14,843, and a net loss of $14,199 from the real
3
Petitioners provided Metrocall statements for the
entire 1999 year. Eleven months of AT&T statements were
provided, 10 months for Alltel, 8 months for Intelos, and 4
months for Verizon.
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estate activity. On Schedule E, they again reported no rental
income from the Morningside Heights dwelling and claimed
deductions of $1,322 for taxes, depreciation, and insurance
expenses, for a net loss from this property of $1,322.
The following is a list of the specific Schedule C expenses
at issue for which petitioners claimed and respondent allowed
deductions in the statutory notice of deficiency.
For 1999:
Claimed Allowed
Deductions On Sch. C On Sch. C
Car and truck expenses $17,446 $1,050
Travel/meals/entertainment 1,500 304
Utilities 1,220 223
For 2000:
Claimed Allowed
Deductions On Sch. C On Sch. C
1
Car and truck expenses $7,800 $ 305
Travel/meals/entertainment 1,500 248
Utilities 1,300 1,300
1
The stipulations incorrectly state that respondent allowed
$395 for this expense for 2000. The record reflects that $7,800
was claimed and $7,495 was disallowed in the explanation of
adjustments, for a difference of $305. The Court is not bound by
a stipulation of fact that appears contrary to the facts
disclosed by the record. Rule 91(e); Estate of Eddy v.
Commissioner, 115 T.C. 135, 137 n.4 (2000); Jasionowski v.
Commissioner, 66 T.C. 312, 318 (1976).
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For both years, the car and truck expenses were claimed with
respect to a vehicle placed in service for business purposes on
July 1, 1994. On line 44 of Schedule C, petitioners reported
that the vehicle was used 55,600 miles for business, 2,400 miles
for commuting, and 0 for other, in 1999. For 2000, petitioners
reported that the vehicle was used 24,000 miles for business, 0
miles for commuting, and 2,500 miles for other.
Petitioners claimed and respondent allowed deductions for
the following Schedule E expenses for the Morningside Heights
dwelling. For 1999:
Claimed Allowed
Deductions On Sch. E On Sch. E
Insurance $350 -0-
Taxes 516 -0-
Depreciation 456 -0-
For 2000:
Claimed Allowed
Deductions On Sch. E On Sch. E
Insurance $350 -0-
Taxes 516 -0-
Depreciation 456 -0-
Although disallowed on Schedule E, the petitioners’ deductions
for real estate taxes paid were allowed by respondent as itemized
deductions on Schedule A, Itemized Deductions.
The first issue is whether petitioners are entitled to
certain deductions claimed on Schedule C in excess of amounts
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allowed by respondent in the notice of deficiency. Petitioners
bear the burden of proof on this issue. Rule 142; Welch v.
Helvering, 290 U.S. 111, 115 (1933).4
In general, deductions are a matter of legislative grace.
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Taxpayers
are required to maintain records sufficient to enable the
Commissioner to determine their correct tax liability. Sec.
6001; Higbee v. Commissioner, 116 T.C. 438 (2001); sec. 1.6001-
1(a), Income Tax Regs. Such records must substantiate both the
amount and purpose of the claimed deductions. Higbee v.
Commissioner, supra.
Section 162 allows a deduction for ordinary and necessary
expenses that are paid or incurred during the taxable year in
carrying on a trade of business. Sec. 162(a); Deputy v. Dupont,
308 U.S. 488, 495 (1940). In the case of travel expenses and
certain other expenses, such as entertainment, gifts, and
expenses relating to the use of listed properties, including
4
Because of the years involved, the examination of
petitioners’ returns at issue commenced after July 22, 1998.
Therefore, sec. 7491, which under certain circumstances shifts
the burden of proof to the Commissioner, applies. However, for
the burden to be placed on the Commissioner on this issue, the
taxpayer must comply with the substantiation and record keeping
requirements of the Internal Revenue Code. Sec. 7491(a)(2)(A)
and (B). On this record, petitioners have not wholly satisfied
that requirement; therefore, the burden has not shifted to
respondent under sec. 7491. Higbee v. Commissioner, 116 T.C. 438
(2001).
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passenger automobiles, cell phones, and other similar
telecommunications equipment under section 280F(d)(4)(A), section
274(d) imposes stringent substantiation requirements to document
particularly the nature and amount of such expenses. For such
expenses, substantiation of the amounts claimed by adequate
records or by other sufficient evidence corroborating the claimed
expenses is required. Sec. 274(d); sec. 1.274-5T(a)(1),
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. 1.274-5T(c)(2)(i),
Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).
The elements to be proven with respect to each traveling expense
are the amount, time, place, and business purpose of the travel.
Sec. 1.274-5T(b)(2), Temporary Income Tax Regs., 50 Fed. Reg.
46014 (Nov. 6, 1985). These substantiation requirements are
designed to encourage taxpayers to maintain records, together
with documentary evidence substantiating each element of the
expense sought to be deducted. Sec. 1.274-5T(c)(l), Temporary
Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
Petitioners’ records with respect to the car and truck
expenses and travel, meals, and entertainment expenses do not
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satisfy the requirements of section 274(d) and the regulations
cited. Mr. Viar used his vehicle for a number of purposes,
including commuting, business, and personal travel. He
admittedly failed to maintain logs or contemporaneous records of
his mileage or the amount, time, place, and business purpose of
his trips. After petitioners were audited, Mr. Viar
“reconstructed” his mileage for the different purposes based on
his annual odometer readings. Similarly, Mr. Viar did not keep a
contemporaneous record of his meals and entertainment expenses
detailing the times he provided such services for real estate
clients and other business colleagues. He reconstructed these
expenses from credit card statements.
The Court is not bound to accept petitioners’ uncorroborated
or self-serving testimony. Tokarski v. Commissioner, 87 T.C. 74,
77 (1986). Moreover, to the extent petitioner used his vehicle
to commute to and from work, such expenses are considered
nondeductible personal living expenses. Sullivan v.
Commissioner, 45 T.C. 217 (1965), affd. 368 F.2d 1007 (2d Cir.
1966); sec. 1.262-1(b)(5), Income Tax Regs. The Court holds that
the car and truck expenses and travel, meals, and entertainment
expenses at issue were not properly substantiated under the cited
legal standards. Petitioners, therefore, are not entitled to
deductions in excess of amounts allowed by respondent for their
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car and truck expenses and travel, meals, and entertainment
expenses.
With respect to the Schedule C utilities expenses disallowed
for 1999, petitioners produced substantiating records in the form
of utility bills and thereby met the requirements of section
274(d) and the regulations. Sec. 280F(d)(4)(A)(v). The Court is
satisfied from petitioners' records that they incurred ordinary
and necessary business-related utility expenses in excess of
those allowed by respondent. Mr. Viar's testimony with regard to
the number of telecommunications devices and services he utilized
for business was credible. Some of his utility bills were
missing, but petitioners based their deductions only on the bills
provided. Their receipts reflected over $2,400 in expenses, yet
petitioners only deducted one-half of these, adjusting downward
in part so as not to include their residential or other
nondeductible phone expenses. The Court is satisfied that the
business utilities expenses documented exceeded the amount
allowed by respondent, and that the amount claimed was
substantiated. Therefore, the Court allows petitioners to deduct
the full amount claimed for utilities on Schedule C of their
return for 1999.5
5
As noted earlier, respondent allowed the entire amount
of $1,300 claimed by petitioners for utilities expenses for the
year 2000.
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The next issue is whether petitioners are entitled to
certain deductions claimed on Schedule E in excess of amounts
allowed by respondent. This issue is decided on a preponderance
of the evidence and without regard to the burden of proof.
Respondent disallowed petitioners’ claimed Schedule E
deductions for insurance and depreciation expenses with respect
to the Morningside Heights dwelling on the basis of section 280A.
Section 280A provides generally that, in the case of an
individual or an S corporation, no deduction otherwise allowable
shall be allowed with respect to the use of a dwelling unit that
is used by the taxpayer during the taxable year as a residence,
except as otherwise provided in section 280A. Section 280A(d)(1)
provides generally that a taxpayer is considered as using a
dwelling unit as a residence if the taxpayer uses the unit for
personal purposes during the taxable year for the greater of 14
days or 10 percent of the number of days the unit is rented at a
fair value. Section 280A(d)(2) defines use of a dwelling as
personal if it is used:
(A) for personal purposes by the taxpayer or any other
person who has an interest in such unit, or by any member of
the family (as defined in section 267(c)(4)) of the taxpayer
or such other person; [or]
* * * * * * *
(C) by any individual * * * unless for such day the
dwelling unit is rented for a rental which, under the facts
and circumstances, is fair rental.
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However, a taxpayer shall not be treated as using a dwelling unit
for personal purposes by reason of a rental arrangement for any
period if for such period such dwelling unit is rented, at a fair
rental, to any person for use as such person’s principal
residence. Sec. 280A(d)(3).
Under section 267(c)(4), “The family of an individual shall
include only his brothers and sisters (whether by the whole or
half blood), spouse, ancestors, and lineal descendants”. Mrs.
Viar’s brother, therefore, was a family member of petitioners
under the plain language of section 267(c)(4). As a result, the
use of that dwelling was personal as to petitioners, and section
280A precludes their deduction of the expenses related thereto.
Moreover, because no evidence was presented as to the fair rental
value of the dwelling or the value of the improvements made by
Mrs. Viar’s brother, petitioners do not fall under the fair
rental exception of section 280A(d)(3). McDonald v.
Commissioner, T.C. Memo. 1991-242; Gilchrist v. Commissioner,
T.C. Memo. 1983-288. Accordingly, petitioners are not entitled
to deduct the depreciation and insurance expenses associated with
the Morningside Heights property under the legal provisions
cited. Respondent is sustained on this issue.6
6
As noted earlier, respondent allowed the claimed
deductions for taxes on the dwelling as an itemized deduction.
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The final issue is whether petitioners are liable for the
accuracy-related penalty under section 6662(a) for the years at
issue. As relevant here, section 7491(c) places the burden of
production on respondent in court proceedings with respect to the
liability of any individual for any penalty, addition to tax, or
additional amount imposed. The additional tax imposed pursuant
to section 6662(a) falls within the scope of section 7491(c).
Respondent, therefore, bears the burden of production on this
issue. However, petitioners continue to bear the burden of
proving that respondent's determination is incorrect. Higbee v.
Commissioner, 116 T.C. 438, 446-447 (2001).
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. Sec. 6662(c). Disregard consists of any careless,
reckless, or intentional disregard. Id.
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). Treasury regulations further provide that negligence
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includes any failure to exercise ordinary and reasonable care in
the preparation of a tax return, failure to keep books and
records, or failure to substantiate items properly. Sec. 1.6662-
3(b)(1), Income Tax Regs. A return position that has a
“reasonable basis” as defined in the regulation is not
attributable to negligence. Id.
An exception to the section 6662 penalty applies when the
taxpayer demonstrates that: (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 on a case-by-case basis.
Stubblefield v. Commissioner, T.C. Memo. 1996-537; sec. 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 the facts and circumstances, including the experience,
knowledge and education of the taxpayer.” Sec. 1.6664-4(b)(1),
Income Tax Regs. A taxpayer is not subject to the addition to
tax for negligence where the taxpayer makes honest mistakes in
complex matters, but the taxpayer must take reasonable steps to
determine the law and to comply with it. Niedringhaus v.
Commissioner, 99 T.C. 202, 222 (1992). The most important factor
is the extent of the taxpayer’s effort to assess the proper tax
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liability. Stubblefield v. Commissioner, supra; sec. 1.6664-
4(b)(1), Income Tax Regs.
On this record, the Court holds that petitioners are liable
for the penalty under section 6662(a) with respect to the
Schedule C car and truck expenses, travel, meals, and
entertainment expenses. Mr. Viar offered the following
explanation for his failure to keep contemporaneous logs and
adequate records for his Schedule C expenses: “I had a rough
time during that five-year period. I used to keep MacAffie
receipts prior to that.” He further stated: “I think my
personal problems, my medical problems, I just didn’t keep the
receipts that I should have kept, and the ones I did keep, I
misplaced.” Nonetheless, the applicable legal standards on
deductibility and record keeping are clear, and Mr. Viar’s
testimony does not support a finding of reasonable cause for the
tax underpayment attributable to the items described.
Petitioners are also liable for the section 6662(a) penalty
with respect to the disallowed Schedule E expenses. The law is
clear that the use of a dwelling unit by a family member is
deemed personal. Petitioners did not exercise reasonable care in
the reporting of this item, nor did they take reasonable steps to
determine the law and comply with it. Respondent is sustained on
the penalty for the disallowed Schedule C and Schedule E
expenses.
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Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
under Rule 155.