GREGORIAN v. COMMISSIONER

T.C. Summary Opinion 2006-99

UNITED STATES TAX COURT

MICHAEL GREGORIAN AND YOLANDA GREGORIAN a.k.a. YOLANDA TRELLES,
Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 13787-04S. Filed July 6, 2006.

Michael Gregorian, pro se.

Michael W. Berwind, for respondent.

COUVILLION, Special Trial Judge: This case was heard

pursuant to section 7463 in effect when 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 year at issue.
All Rule references are to the Tax Court Rules of Practice and
Procedure.
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Respondent determined a deficiency of $15,883 in

petitioners’ Federal income tax for 2001 and an addition to tax

under section 6651(a)(1) in the amount of $1,298.75 for the late

filing of petitioners’ Federal income tax return for 2001.

The issues for decision are whether petitioners are (1)

entitled to an itemized deduction for a casualty loss under

section 165(c), (2) entitled to an itemized deduction for

unreimbursed employee expenses, (3) entitled to trade or business

expense deductions for rent, car and truck expenses, and other

expenses under section 162(a), and (4) liable for the section

6651(a)(1) addition to tax for the late filing of their 2001

Federal income tax return.2

Some of the facts were stipulated. Those facts, with the

exhibits annexed thereto, are so found and made part hereof.

2
Under sec. 7491(a), the burden of proof shifts to the
Commissioner if the taxpayer introduces credible evidence with
respect to any factual issue relevant to ascertaining the
taxpayer’s liability. Under sec. 7491(a)(2), the burden of proof
does not shift if the taxpayer has not complied with the
substantiation requirements with regard to any item, nor does the
burden of proof shift if the taxpayer has not cooperated with
reasonable requests by respondent for witnesses, information,
documents, meetings, and interviews. The facts of this case do
not, in the Court’s view, shift the burden of proof to
respondent. Under sec. 7491(c), the burden of production is on
the Commissioner with respect to the late filing penalty under
sec. 6651(a)(1). However, the burden of proof remains on the
taxpayer to persuade the Court that the imposition of the
addition to tax is incorrect. Higbee v. Commissioner, 116 T.C.
438, 446-447 (2001).
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Petitioners’ legal residence at the time the petition was filed

was Glendora, California.

Michael Gregorian (petitioner) was an employee of Royal

Coach, Inc. of Pasadena, California, during the year at issue.

Petitioner did auto body repair work for his employer. He earned

wages of $99,018.43 during 2001, which he reported as income on

his joint Federal income tax return. Additionally, petitioner

was also engaged during 2001 in a self-employed trade or business

activity doing the same kind of work, most of which came from car

dealers. The name of that activity was Gregorian’s Automotive.

As to that activity, for Federal income tax purposes, petitioners

reported the income and expenses on Schedule C, Profit or Loss

From Business, of their Federal income tax return.

On their joint Federal income tax return for 2001,

petitioners reported the following income and expenses:

Wage and salary income $99,018
Taxable refunds and credits 141
Schedule C loss (11,434)
Total adjusted gross income $87,725
Schedule A, Itemized Deductions (64,462)
Income (Prior to dependency $23,263
exemptions and credits)

On that return, petitioners claimed the following Schedule A

itemized deductions:
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State and local taxes $ 5,212
Home mortgage interest 17,740
Casualty and theft losses 21,127
Job expenses and misc. deductions 20,383
(in excess of the sec. 67(a) limit)
Total $64,462

Petitioners’ Schedule C claimed the following income and

expenses:

Gross income $15,500
Expenses: 26,934
Advertising $ 550
Car & truck expenses 5,044
Rent (other business 12,000
property)
Supplies 1,240
Other expenses 8,100
Net loss ($11,434)

In the notice of deficiency, respondent made the following

adjustments to petitioners’ tax return:

Schedule A:

(a) Disallowed the $21,127 casualty and theft loss.

(b) Disallowed the $20,383 job expenses and

miscellaneous deductions.

Schedule C:

(a) Disallowed the $12,000 rent (other business

property).

(b) Disallowed the $5,044 car and truck expenses.

(c) Disallowed the $8,100 other expenses.
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The Court first considers the disallowed $21,127 for

casualty and theft loss claimed as an itemized deduction on

Schedule A of petitioners’ return. The claimed loss was for

damages to a second home petitioners owned in Hawaii resulting

from a flood that was caused by a series of heavy rains.

Petitioners base their casualty loss on the value of their home

prior to the flood rains, which they estimated to be $240,000,

and their estimated value of the property at $210,000 after the

rains. The resulting diminution in value of $30,000 is the basis

upon which petitioners claimed the $21,127 loss after application

of the section 165(h)(1) and (2) limitations.

Petitioners described their loss as flooding from heavy

rains over a period of several weeks in which water seeped into

their home causing damages that petitioners repaired.

Petitioners presented no documentation to show the nature and

cost of the repairs, nor any appraisals of the property before

and after the storms. At trial, petitioner calculated the

diminution in value based upon his estimate. He admitted at

trial that he “may have erred” in claiming the $21,127 loss.

Petitioner also admitted making additional improvements to the

property beyond the flood damages.

Section 165(a) allows as a deduction any loss sustained

during the taxable year which is not compensated for by insurance

or otherwise. In the case of an individual, section 165(c)(3)
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allows a taxpayer to deduct any loss from casualty to the extent

it exceeds $100, and the net casualty loss exceeds 10 percent of

the taxpayer’s adjusted gross income. Sec. 165(h). Section

1.165-1(b), Income Tax Regs., provides that, to be allowable as a

deduction under section 165(a), a loss must be evidenced by

closed and completed transactions, fixed by identifiable events,

and actually sustained during the taxable year, except disaster

losses which, pursuant to section 165(h) and section 1.165-11(a),

Income Tax Regs., may be deducted in the year preceding the

disaster if the taxpayer elects.

Section 1.165-7(b)(1), Income Tax Regs., provides, in

pertinent part, that the amount of the loss deductible under

section 165(a) shall be the lesser of either (i) the fair market

value of the property before the casualty reduced by the fair

market value of the property immediately after the casualty, or

(ii) the adjusted basis of the property. Section 1.165-

7(a)(2)(i), Income Tax Regs., provides that, in determining the

amount of the loss, the fair market value of the property

immediately before and immediately after the casualty shall

generally be ascertained by competent appraisal. The cost of

repairs to the property damaged is acceptable as evidence of the

loss of value if the taxpayer shows that (a) the repairs are

necessary to restore the property to its condition immediately

before the casualty, (b) the amount spent for repairs is not
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excessive, (c) the repairs do not care for more than the damage

suffered, and (d) the value of the property after the repairs

does not as a result of the repairs exceed the value of the

property immediately before the casualty.

Petitioners’ claim and the basis upon which they make that

claim fails to meet the criteria set out above entitling them to

a casualty loss deduction. The Court holds that the damage they

sustained did not result from a “closed and completed

transaction”. The damage occurred over a period of time.

Moreover, if petitioners sustained an allowable casualty loss,

petitioners failed to establish the amount of the loss. The

Court, therefore, sustains respondent on this issue.

The second issue is petitioners’ claim to an itemized

deduction for unreimbursed employee expenses in the amount of

$22,138 prior to the 2-percent limitation under section 67(a).

Petitioners included with their return Form 2106-EZ, Unreimbursed

Employee Business Expenses, on which they claimed the following

expenses:

Vehicle expenses $12,213
Parking fees, tolls, etc. 725
Travel expenses away from home 4,250
Business expenses 2,240
Meals and entertainment 2,710
Total $22,138

The amount claimed was disallowed in full in the notice of

deficiency.
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Section 162 allows a deduction for ordinary and necessary

expenses that are paid or incurred during the taxable year in

carrying on a trade or 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

passenger vehicles and other property used as a means of

transportation, computers, and cellular phones 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). These substantiation requirements are designed

to encourage taxpayers to maintain records, together with

documentary evidence substantiating each element of the expense
 - 9 -

sought to be deducted. Sec. 1.274-5T(c)(1), Temporary Income Tax

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

At trial, petitioner presented no documentary evidence to

substantiate the claimed expenses. He testified that these

expenses related to his employment with Marco’s Auto Body and in

the startup of his self-employed activity. Petitioner, however,

could not recall what some of the expenses were about. The Court

accordingly sustains respondent on this issue.

The third issue is respondent’s disallowance of $12,000 in

rent claimed as an expense on Schedule C relating to petitioner’s

self-employed activity. Petitioner’s auto repair business,

Gregorian’s Automotive, was conducted in a separate facility he

rented that was located approximately 12 miles away from the

location of his employment with Royal Coach, Inc. He testified

that he leased the building and paid $1,000 per month for rent.

Petitioner presented no documentation, such as canceled checks or

receipts to substantiate the $12,000. The Court notes from the

evidence that there was some degree of strain between petitioner

and Royal Coach, Inc., regarding the private work of petitioner

at Royal Coach’s place of business. To relieve that pressure,

petitioner rented the separate facility for the purpose of

operating his self-employment activity. The Court accepts that

testimony but is not prepared to allow petitioner the deduction
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of $12,000 claimed to have been paid for rent due to petitioner’s

lack of substantiation.

Where a taxpayer establishes entitlement to a deduction but

does not establish the amount of the deduction, the Court in some

circumstances is allowed to estimate the amount allowable. Cohan

v. Commissioner, 39 F.2d 540 (2d Cir. 1930). But see sec. 1.274-

5T(a), Temporary Income Tax Regs., supra. However, there must be

sufficient evidence in the record to permit the Court to conclude

that a deductible expense was incurred in at least the amount

allowed. Williams v. United States, 245 F.2d 559, 560 (5th Cir.

1957). In estimating the amount allowable, the Court bears

heavily against the taxpayer whose inexactitude is of his or her

own making. Cohan v. Commissioner, supra at 544. Pursuant to

Cohan, the Court allows petitioner a deduction of $3,000 as

rental expense in the conduct of his self-employment activity.

Petitioners also claimed on Schedule C of their return a

deduction of $5,044 for car and truck expenses. Respondent

disallowed the claimed deduction for the reason that the expenses

related to the use of automobiles and, for such expenses, the

strict substantiation rules of section 274(d) applied. Since

petitioners did not maintain the necessary books and records

relating to the use of the vehicles as required by section

274(d), the $5,044 claimed deduction was disallowed.
 - 11 -

Section 274(d)(4) provides generally that no deduction or

credit shall be allowed with respect to any listed property

defined in section 280F(d)(4). Included as listed property under

section 280F(d)(4)(A)(i) and (ii) are passenger automobiles or

any other property used as a means of transportation.

At trial, petitioner testified that, as a means of

establishing his business, and because of the elite clientele of

some of his customers, he or his employees went to the residences

or places of business of customers who either had inoperable

vehicles or for personal reasons did not care to drive the

vehicles themselves, and petitioner or his employees drove or

towed the vehicles to petitioner’s place of business for repairs.

After the repairs, the cars were driven by petitioner or his

employees and returned to the customer. As explained by

petitioner, some of his customers were elite individuals in the

entertainment industry, and some customers simply refused to

drive their vehicle, even if the problem was minor, such as a

nonfunctioning headlight.

Petitioner maintained no records to document this service.

The expenses he incurred in providing this service comes within

the record keeping requirements of sections 274(d)(4) and

280F(d)(4)(A)(i) and (ii) referred to above. The records

necessary to substantiate the amounts claimed should include the

dates they were incurred, the times and places they were
 - 12 -

incurred, and the business purposes. Sec. 274(d). The

provisions of section 274(d) preclude the allowance of any

estimated amount by this Court as the Court may allow in other

circumstances under Cohan v. Commissioner, supra at 543-544, even

if the Court is convinced the taxpayer incurred such expenses.

Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd. per

curiam 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary

Income Tax Regs., supra. Respondent, therefore, is sustained on

this issue.

The final issue with respect to petitioner’s Schedule C

self-employment activity is $8,100 deducted as “other expenses”

that respondent disallowed. In a statement attached to the

return, these expenses were listed as accounting, bank charges,

janitorial, laundry and cleaning, a pager, postage, printing,

safety equipment, telephone, tools, and uniforms. The Court is

satisfied that petitioner incurred some of these expenses,

although some of the claimed expenses are listed properties under

section 280F(d)(4), and no amount is allowable as a deduction for

such expenses unless proper substantiation is provided as

required under section 274(d). Petitioners did not substantiate

any of the claimed expenses. The Court is satisfied that

petitioners incurred some expenses that are not subject to the

strict substantiation rules of section 274, and, for such

expenses, the Court allows petitioners a deduction of $2,000.
 - 13 -

Cohan v. Commissioner, supra. In all other respects, respondent

is sustained on this adjustment.

The final issue is the addition to tax under section

6651(a)(1) for the late filing of petitioners’ Federal income tax

return for 2001. This addition to tax does not apply if the

taxpayer can show that the failure to file timely was due to

reasonable cause and not due to willful neglect. Under section

6072(a), calendar year taxpayers, such as petitioners, are

required to file their income tax returns by April 15, following

the close of the calendar year (or the next business day if the

15th falls on a Sunday or legal holiday). In this case,

petitioners twice filed and received approvals for extensions to

file their 2001 return to October 15, 2002. Petitioners’ 2001

return was received by the IRS on July 16, 2003. Respondent had

no record of any return filed by petitioners for 2001 other than

the return received on July 16, 2003.

The copy of the return offered into evidence at trial bears

the dates of October 12, 2002, on the signature lines for

petitioners as well as the signature line of the return preparer.

The return also bears a bold stamp “Duplicate” on the front page

and at the bottom on the signature page (the second page).

Petitioners contend the return was mailed on or about October 12,

2002, which was within the extended date granted petitioners for
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the filing of their return. Respondent had no record of

receiving that return on or near that date.

Petitioner testified he was unaware that the return had not

been received and processed within a reasonable time period from

the date petitioners claimed the return was mailed. Petitioner

later became concerned when he failed to receive the refund of

the claimed overpayment in the amount of $10,688. It is for that

reason that petitioners mailed a return they clearly labeled as a

duplicate return, which respondent received on July 16, 2003.

The Court is hard-pressed to believe that a taxpayer would

willfully neglect to file a timely income tax return where the

taxpayer has claimed an overpayment of more than $10,000.

Respondent offered no explanations to the contrary. The Court

finds, therefore, there was no willful neglect by petitioners in

the late filing of their 2001 return. That satisfies one prong

of section 6651(a)(1). The other element of section 6651(a)(1)

is the taxpayer’s burden of establishing that the failure to file

timely was due to reasonable cause. The Court finds petitioner’s

testimony credible as to the circumstances in which the duplicate

return was filed. Although petitioners produced no proof of

mailing on October 12, 2002, the Court has no reason from the

record to question petitioner’s testimony that he acted, in the

manner described, upon the advice and assistance of his return

preparer. There is no evidence that would lead the Court to
 - 15 -

conclude otherwise. On this record, the Court finds that

petitioners mailed their return on October 12, 2002, and the

failure of that return’s being delivered to the IRS within a

reasonable time period was due to circumstances not within

petitioners’ control. The failure to file the duplicate return

timely, therefore, was due to reasonable cause. Petitioners,

therefore, are sustained on this issue.

Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered

under Rule 155.