T.C. Summary Opinion 2005-155
UNITED STATES TAX COURT
MATTHEW P. BROWN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8242-04S. Filed October 20, 2005.
Matthew P. Brown, pro se.
Michael R. Fiore, for respondent.
PANUTHOS, Chief 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. The
decision to be entered is not reviewable by any other court, and
this opinion should not be cited as authority. 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 in petitioner’s Federal
income taxes for the taxable years 2001 and 2002 of $4,290 and
$1,188, respectively. Respondent also determined accuracy-
related penalties under section 6662(a) for the taxable years
2001 and 2002 of $858 and $237.60, respectively. The issues for
decision are: (1) Whether petitioner is entitled to deductions
for employee business expenses, and (2) whether petitioner is
liable for accuracy-related penalties under section 6662(a).
Background
Some of the facts have been stipulated, and they are so
found. The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time of filing his
petition, petitioner resided in Medford, Massachusetts.
During the years in issue petitioner was employed by
Paychex, Inc. (Paychex), as an outside sales representative.
Paychex provided payroll services to businesses. Petitioner
sought to bring in new customers to utilize the payroll services
provided by Paychex. Petitioner’s sales territory consisted of
southeastern New Hampshire and northeastern Massachusetts.
Petitioner was responsible for 27 separate towns in this
geographic area. Paychex’s offices were located in Woburn,
Massachusetts, and petitioner resided in Sandown, New Hampshire,
during the years in issue. Petitioner’s round trip commute
between his home and office was 68.8 miles.
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Petitioner drove his automobile to visit existing and
potential customers. From the beginning of 2001 until November
16, 2001, petitioner utilized his Honda Accord (Honda) for both
his business and personal transportation. On or after November
16, 2001, petitioner utilized a Nissan Maxima (Nissan) for all of
his transportation. Petitioner estimated use of his automobile
as approximately 20 percent personal and the remainder business.
Petitioner calculated his mileage expense for each of the years
in issue by reviewing the odometer of his automobile and
designating a percentage of the miles driven as business miles.
Petitioner submitted weekly activity reports to his
employer. Petitioner submitted to the Court copies of weekly
activity reports for approximately 15 weeks for 2001 and for the
entire year 2002. The weekly activity reports do not reflect the
number of miles driven, nor do they contain other details as to
specific business activity. Petitioner maintained a day planner;
however he lost the planner for 2001 sometime in early 2002.
Petitioner did not retain his day planner for 2002.
On his 2001 Federal income tax return, petitioner reported
wages of $59,358 and claimed itemized deductions on Schedule A,
Itemized Deductions, of $20,157. The claimed itemized deductions
consisted of $19,807 of employee business expenses and $350 of
gifts to charities. On his 2002 Federal income tax return
petitioner claimed itemized deductions of $9,091, consisting of
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taxes paid of $1,471, employee business expenses of $7,520, and
gifts to charities of $100.1 Petitioner also received
reimbursement of employee business expenses of $6,099 for each of
the years 2001 and 2002. The $6,099 that petitioner received in
each of the years in issue was not dependent on the actual
expenses incurred or miles driven. Petitioner was not required
to report the number of miles driven to his employer. The
payment was described by petitioner as an “expense allowance”.
Petitioner did not report the $6,099 as income on his respective
returns.
In a notice of deficiency respondent disallowed all the
itemized deductions claimed on the 2001 and 2002 returns. Before
trial the parties agreed that petitioner is entitled to
deductions for gifts to charities as claimed on the 2001 and 2002
returns. The parties further agreed that petitioner is entitled
to the claimed deduction for taxes for 2002.2 Respondent did not
adjust petitioner’s income to include the $6,099 in reimbursed
1
The 2002 Federal income tax return was not made part of
the record; however, other evidence, including copies of Forms W-
2, Wage and Tax Statement, reflect that petitioner received
salary in the amount of $61,868.83.
2
The notice of deficiency allowed a standard deduction in
lieu of the claimed itemized deductions for 2001 and 2002. It is
not clear whether the allowance of the itemized deductions for
gifts to charity and for taxes will result in any tax benefit to
petitioner. The Court will enter a decision under Rule 155 and
permit the parties to compute the tax liability that is most
advantageous to petitioner.
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employee business expenses which petitioner did not report on his
returns for each of the years 2001 and 2002.
The issues remaining for decision are the claimed employee
business expenses, which is composed of mileage expenses relating
to the business use of petitioner’s automobile for each of the
years in issue and the accuracy-related penalties.
Burden of Proof
Generally, the burden of proof is on the taxpayer. Rule
142(a)(1). Under section 7491, the burden of proof shifts from
the taxpayer to the Commissioner if the taxpayer produces
credible evidence with respect to any factual issue relevant to
ascertaining the taxpayer’s liability. Sec. 7491(a)(1).
Petitioner has neither argued that the burden of proof should
shift nor satisfied the criteria that would cause the burden of
proof to shift. Given the lack of documentation and information
provided by petitioner in this case, we conclude that the burden
of proof remains with petitioner.
Mileage Expense
Section 162(a) permits a deduction for the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on a trade or business. A trade or business includes
the trade or business of being an employee. O’Malley v.
Commissioner, 91 T.C. 352, 363-364 (1988). Expenses that are
personal in nature are generally not allowed as deductions. Sec.
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262(a). A taxpayer is required to maintain records sufficient to
establish the amount of his income and deductions. Sec. 6001;
sec. 1.6001-1(a), (e), Income Tax Regs. A taxpayer must
substantiate his deductions by maintaining sufficient books and
records to be entitled to a deduction under section 162(a).
When a taxpayer establishes that he has incurred a
deductible expense but is unable to substantiate the exact
amount, we are permitted to estimate the deductible amount.
Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). We
can estimate the amount of the deductible expense only when the
taxpayer provides evidence sufficient to establish a rational
basis upon which the estimate can be made. Vanicek v.
Commissioner, 85 T.C. 731, 743 (1985).
Section 274(d) supersedes the general rule of Cohan v.
Commissioner, supra, and prohibits the Court from estimating the
taxpayer’s expenses with respect to certain items. Sanford v.
Commissioner, 50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d
201 (2d Cir. 1969). Section 274(d) imposes strict substantiation
requirements for listed property as defined in section
280F(d)(4), gifts, travel, entertainment, and meal expenses.
Sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014
(Nov. 6, 1985). To obtain a deduction for a listed property,
travel, meal, or entertainment expense, a taxpayer must
substantiate by adequate records or sufficient evidence to
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corroborate the taxpayer’s own testimony the amount of the
expense, the time and place of the use, the business purpose of
the use and, in the case of entertainment, the business
relationship to the taxpayer of each person entertained. Sec.
274(d); sec. 1.274-5T(b), Temporary Income Tax Regs., 50 Fed.
Reg. 46014 (Nov. 6, 1985). Section 274 requires that expenses
be recorded at or near the time when the expense is incurred.
Sec. 1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg.
46016 (Nov. 6, 1985). Listed property includes passenger
automobiles. Sec. 280F(d)(4)(A)(i). Petitioner therefore must
meet the strict requirements of section 274 to be entitled to a
deduction related to car expenses. If a taxpayer is unable to
fulfill the requirements of section 274(d), he is not entitled to
the deduction.
Petitioner’s records with respect to his car expenses fail
to satisfy the requirements of section 274(d). The weekly
activity sheets prepared by petitioner and provided to his
employer do not contain sufficient information to satisfy the
requirements of section 274(d). Petitioner’s day planners, which
may have contained additional detailed information, were not
available. Petitioner testified that he lost the planner for
2001 and disposed of the planner for 2002. Petitioner did not
provide a reconstruction of his mileage expenses in an attempt to
satisfy the substantiation requirements. Petitioner failed to
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establish the amount of the expense, the time and place of each
use, and the business purpose of the use of the Honda and Nissan.
Respondent is sustained on this issue.
Accuracy-Related Penalty
Respondent determined that petitioner is liable for the
accuracy-related penalties under section 6662(a) for 2001 and
2002. The accuracy-related penalty is 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 and
also includes 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. “Disregard” consists of any careless,
reckless, or intentional disregard. Sec. 6662(c).
An exception applies to the accuracy-related penalty when
the taxpayer demonstrates (1) there was reasonable cause for the
underpayment, and (2) he acted in good faith with respect to such
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 his proper tax liability.
Stubblefield v. Commissioner, T.C. Memo. 1996-537; sec. 1.6664-
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4(b)(1), Income Tax Regs. Section 1.6664-4(b)(1), Income Tax
Regs., specifically states: “Circumstances that may indicate
reasonable cause and good faith include an honest
misunderstanding of fact or law that is reasonable in light of
* * * the experience, knowledge, and education of the taxpayer.”
Pursuant to section 7491(c), the Commissioner has the burden
of production with respect to a section 6662 accuracy-related
penalty. To meet this burden, the Commissioner must produce
sufficient evidence indicating that it is appropriate to impose
the relevant penalty. Higbee v. Commissioner, 116 T.C. 438, 446
(2001). Once the Commissioner meets this burden of production,
the taxpayer continues to have the burden of proof with regard to
whether the Commissioner’s determination of the penalty is
correct. Rule 142(a); Higbee v. Commissioner, supra. Further,
the taxpayer bears the burden of proving that he or she acted
with reasonable cause and in good faith. See sec. 6664(c)(1).
Respondent’s burden of production is satisfied in this case
since petitioner failed to maintain records to substantiate
expenses as required. Petitioner did not present any argument or
evidence that the reporting of the claimed mileage deductions was
based on reasonable cause or good faith. Petitioner did not
attempt to satisfy the record-keeping requirements for his
mileage expense deductions, nor did he attempt to reconstruct the
expense deductions at trial. We conclude that petitioner has
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failed to show that he acted with reasonable cause or in good
faith. Accordingly, we hold petitioner is liable for the
accuracy-related penalties.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
under Rule 155.