Larson v. Comm'r

T.C. Memo. 2008-187

UNITED STATES TAX COURT

GARY L. LARSON, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 11501-06, 11502-06, Filed August 5, 2008.
11503-06.

Gary L. Larson and Carolyn J. Larson, pro sese.

David L. Zoss, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HAINES, Judge: These cases are before the Court

consolidated for purposes of trial, briefing, and opinion.

Gary L. Larson (Mr. Larson) and Carolyn J. Larson (Mrs. Larson)

1
Cases of the following petitioners are consolidated
herewith: Carolyn J. Larson, docket No. 11502-06; and Gary L.
Larson, docket No. 11503-06.
 - 2 -

separately petitioned the Court for redetermination of

respondent’s determinations of the following deficiencies in

Federal income tax and accuracy-related penalties:

Gary L. Larson, docket No. 11501-06

Accuracy-related penalty
Year Deficiency Sec. 6662(a)

2000 $13,102 $2,620

Carolyn J. Larson, docket No. 11502-06

Accuracy-related penalty
Year Deficiency Sec. 6662(a)

2002 $5,005 $1,001
2003 9,704 1,941
2004 4,028 806

Gary L. Larson, docket No. 11503-06

Accuracy-related penalty
Year Deficiency Sec. 6662(a)

2002 $22,810 $4,562
2003 29,618 5,924
2004 33,616 6,723

The issues for decision after concessions are: (1) Whether

Mr. Larson is entitled to deductions claimed on Schedule C,

Profit or Loss from Business, for car and truck expenses computed

using the optional standard mileage rate method for passenger

vehicles greater than those respondent allowed; (2) whether Mr.

Larson is entitled to Schedule C deductions for vehicle insurance

expenses, repairs and maintenance expenses, and vehicle leasing
 - 3 -

expenses relating to passenger and other business vehicles

computed using the actual expense method; (3) whether Mrs. Larson

is entitled to expense deductions claimed on Schedule E,

Supplemental Income and Loss, greater than those respondent

allowed; and (4) whether petitioners are liable for accuracy-

related penalties under section 6662.2 For all purposes

hereafter, the years at issue shall refer to 2000, 2002, 2003,

and 2004.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulation of facts and the supplemental stipulation of

facts, together with attached exhibits, are incorporated herein

by this reference. At the time petitioners filed their

petitions, they resided in Minnesota.

Petitioners are husband and wife. During the years at issue

Mr. Larson was a manufacturer’s representative for several major

vendors. In that capacity he traveled throughout Wisconsin,

Minnesota, North Dakota, South Dakota, and Iowa. Mr. Larson

conducted business under the name of E.L. Power, a sole

proprietorship. Mrs. Larson provided services to E.L. Power as

2
Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure. Amounts
are rounded to the nearest dollar.
 - 4 -

an independent contractor for which Mr. Larson paid her

commissions.

Petitioners filed separate Federal income tax returns for

the years at issue. Mr. Larson prepared the returns for both

himself and Mrs. Larson. Mr. Larson did not have the returns

reviewed by a certified public accountant before he filed them.

On March 27, 2006, respondent sent Mr. Larson a notice of

deficiency for 2002, 2003, and 2004. On March 28, 2006,

respondent sent Mrs. Larson a notice of deficiency for 2002,

2003, and 2004. On May 5, 2006, respondent issued Mr. Larson a

notice of deficiency for 2000. Respondent disallowed numerous

business and personal deductions of petitioners because of lack

of substantiation, including all of Mr. Larson’s car and truck

expenses save for $928 for 2000, $687 for 2002, $763 for 2003,

and $1,145 for 2004.

On April 6, 2006, petitioners filed separate amended returns

for 2002, 2003, and 2004.

Petitioners filed timely petitions with this Court, and a

trial was held on September 27, 2007, in St. Paul, Minnesota.

Petitioners conceded that they claimed a variety of deductions

and expenses to which they were not entitled,3 that Mr. Larson

3
Mr. Larson conceded he claimed Schedule C deductions for
various items to which he was not entitled for each of the years
at issue. Mr. Larson also conceded he incorrectly claimed real
estate taxes on Schedule A, Itemized Deductions, and on Forms
(continued...)
 - 5 -

incorrectly reported the gross receipts of E.L. Power in 2000 and

2003, and that Mrs. Larson incorrectly reported her income from

interest, gross receipts, capital gains, and rents.

I. Optional Standard Mileage Rate Expenses

During 2000, 2002, and January through November 2003 Mr.

Larson drove a 1991 Land Rover for business travel. In December

2003 through 2004 Mr. Larson drove a Mercedes 300TE for business

travel. During 2000, 2002, 2003, and 2004 Mr. Larson used a 1989

Cross Country Motorhome Recreational Vehicle (RV) for both

business travel and personal travel. When Mr. Larson drove the

RV for business travel, he towed a passenger vehicle, either the

Land Rover or a Karmann Ghia he owned, for local use.

Mr. Larson testified that he kept small hand-held mileage

logs in his passenger vehicles in which he recorded his business

trips and mileage each day, but he did not produce them at the

time of trial. He further testified that at the end of the week

he transferred the information in his hand-held mileage log to

weekly “rough charts”, but he likewise did not produce them at

the time of trial. Mr. Larson further testified that he then

3
(...continued)
8829, Expenses for Business Use of Your Home, for 2002, 2003, and
2004 and incorrectly claimed Schedule A deductions for medical
expenses exclusive of health insurance premiums for 2002, 2003,
and 2004. Mrs. Larson conceded she incorrectly claimed Schedule
C and Schedule E deductions for each of the years at issue, and
claimed incorrect amounts of health expenses exclusive of health
insurance premiums for each of the years at issue.
 - 6 -

prepared monthly mileage logs from his weekly rough charts. The

monthly mileage logs were produced at the time of trial and

contain the date, destination, business purpose, mileage, and

odometer readings of every business trip Mr. Larson made within a

given month. Petitioners never kept any type of mileage log

relating to their use of the RV.

Mr. Larson’s reported business miles for the years at issue

vary depending on the respective source:

Source 2000 2002 2003 2004

Monthly logs 40,367 40,480 28,820 36,578
Miles disclosed
on original
returns¹ 35,000 32,000 31,500 32,000
Miles used for
deductions
claimed² 36,653 32,274 32,334 32,400

¹These business miles were reported on Mr. Larson’s
four returns at line 44 of Schedule C.

²These business miles are extrapolated from the
amounts of the business deductions Mr. Larson claimed
for the years at issue using the optional standard
mileage rate. For example, in 2000 Mr. Larson claimed a
business deduction of $11,912 for passenger vehicle
expenses using the optional standard mileage rate. At a
rate of $.325 per mile, Mr. Larson would have to have
driven 36,653 miles to deduct this amount.

II. Actual Expenses

A. Leasing Expenses

Mrs. Larson held title to certain vehicles that she would

lease to Mr. Larson for use in the E.L. Power business. These

included the Land Rover, the RV, and the Mercedes. Vehicle
 - 7 -

leases between Mrs. Larson and Mr. Larson reflected the

following:

Date Vehicle End Date Terms

11/6/1998 Land Rover 12/6/2003 $400 x 60 months
5/2/2000 RV 11/30/2000 $1,500 x 6 months
5/01/2002 RV 11/1/2002 $1,500 x 6 months
5/01/2003 RV 11/1/2003 $1,500 x 6 months
12/01/2003 Mercedes 12/26/2006 $450 x 36 months

The vehicle leases provided that Mr. Larson was responsible for

providing casualty insurance coverage for the leased vehicles and

that Mrs. Larson was responsible for maintenance and repair costs

for the leased vehicles.

During 2002 Mr. Larson paid Mrs. Larson at least $4,800 on

the Land Rover lease and at least $9,000 on the RV lease. During

2003 Mr. Larson paid Mrs. Larson at least $4,400 on the Land

Rover lease, at least $450 on the Mercedes lease, and at least

$9,000 on the RV lease. During 2004 Mr. Larson paid Mrs. Larson

at least $5,400 on the Mercedes lease and at least $9,000 on the

RV lease. The record does not indicate that Mr. Larson issued

Forms 1099-MISC, Miscellaneous Income, to Mrs. Larson or filed

Forms 1096, Annual Summary and Transmittal of U.S. Information

Returns, with respondent regarding the commissions and vehicle

lease payments he paid to Mrs. Larson during 2002, 2003, or 2004.

On his returns Mr. Larson claimed deductions for vehicle

lease expenses on Schedule C in the following amounts:
 - 8 -

Year Deduction

2002 $500
2003 18,900
2004 14,400

On his amended returns Mr. Larson claimed deductions for

vehicle lease expenses on Schedule C in the following amounts:

Year Deduction

2002 $14,600
2003 14,400
2004 14,400

B. Vehicle Insurance Expenses

During 2002, 2003, and 2004 Mr. Larson incurred and paid

vehicle insurance expenses of $1,930, $1,670, and $1,490,

respectively, for the vehicles he used for business travel. The

record does not indicate the specific vehicles for which Mr.

Larson incurred and paid vehicle insurance expenses or the

separate cost of the vehicle insurance for each insured vehicle.

On his returns Mr. Larson claimed deductions for vehicle

insurance expenses on Schedule C in the following amounts:

Year Deduction

2002 $1,930
2003 1,670
2004 1,490

C. Vehicle Repair and Maintenance Expenses

On his 2000 return Mr. Larson claimed a deduction of $1,031

for repair and maintenance expenses on Schedule C. The record

does not indicate the specific vehicles for which Mr. Larson
 - 9 -

incurred and paid repair and maintenance expenses, or the actual

cost of such repairs.

III. Mrs. Larson’s Schedule E Expenses

On her amended returns Mrs. Larson claimed various Schedule

E expenses. After concessions, Mrs. Larson continues to claim

Schedule E expenses in the following amounts:

2002

Item Motorhome Land Rover

Cleaning & maintenance ---- $250
Other interest $450 ----

2003

Item Motorhome Mercedes

Cleaning & maintenance $250 $200
Management fees 200 ----
Other interest 6,000 ----

2004

Item Motorhome Mercedes

Cleaning & maintenance $150 ----
Mortgage interest 500 $450
Repairs 4,000 350

Petitioners produced no evidence at the time of trial to support

these figures.

OPINION

I. Mr. Larson’s Automobile Expenses

Respondent determined that Mr. Larson has failed to

substantiate either his business mileage or his actual expenses

in any of the years at issue. Respondent also determined that
 - 10 -

Mr. Larson is barred from claiming actual expense deductions for

the Land Rover and the Mercedes because he deducted the costs of

those vehicles by using the optional standard mileage rate. For

the reasons discussed below, we disagree that Mr. Larson failed

to substantiate his business mileage for the years at issue.

Deductions are a matter of legislative grace, and the

taxpayer must prove he is entitled to the deductions claimed.4

Rule 142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934). Section 162(a) allows a taxpayer to deduct all ordinary

and necessary expenses paid or incurred in carrying on a trade or

business. Pursuant to section 274(d), however, automobile

expenses otherwise deductible as a business expense will be

disallowed in full unless the taxpayer satisfies strict

substantiation requirements. The taxpayer must substantiate the

automobile expenses by adequate records or other corroborating

evidence of items such as the amount of the expense, the time and

place of the automobile’s use, and the business purpose of its

use. See Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968),

affd. per curiam 412 F.2d 201 (2d Cir. 1969); Maher v.

Commissioner, T.C. Memo. 2003-85.

4
Petitioners do not argue that the burden of proof shifts
to respondent pursuant to sec. 7491(a), nor have they shown that
the threshold requirements of sec. 7491(a) have been met. In any
event, we decide the issue on the basis of the preponderance of
evidence on the record.
 - 11 -

To satisfy the adequate records requirement of section

274(d), a taxpayer must maintain records and documentary evidence

that in combination are sufficient to establish each element of

an expenditure or use. Sec. 1.274-5T(c)(2), Temporary Income Tax

Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). Although a

contemporaneous log is not required, corroborative evidence to

support a taxpayer’s reconstruction “of the elements * * * of the

expenditure or use must have a high degree of probative value to

elevate such statement” to the level of credibility of a

contemporaneous record. Sec. 1.274-5T(c)(1), Temporary Income

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

In the absence of adequate records to substantiate each

element of an expense, a taxpayer may alternatively establish an

element by “his own statement, whether written or oral,

containing specific information in detail as to such element,”

and by “other corroborative evidence sufficient to establish such

element.” Sec. 1.274-5T(c)(3), Temporary Income Tax Regs., 50

Fed. Reg. 46020 (Nov. 6 1985).

If a factual basis exists to do so, the Court may in another

context approximate an allowable expense, bearing heavily against

the taxpayer who failed to maintain adequate records. Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); sec. 1.274-

5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6,

1985). However, section 274(d) overrides the Cohan rule with
 - 12 -

respect to section 280F(d)(4) “listed property” and thus

specifically precludes the Court from allowing automobile

expenses on the basis of any approximation or the taxpayer's

uncorroborated testimony.

A. Optional Standard Mileage Rate Expenses

In lieu of substantiating the actual amount of any

expenditure relating to the business use of a passenger

automobile, a taxpayer may use a standard mileage rate as

established by the Internal Revenue Service. See sec. 1.274-

5(j)(2), Income Tax Regs. The use of the standard mileage rate

establishes only the amount deemed expended with respect to the

business use of a passenger automobile. Id. The taxpayer must

still establish the amount (i.e., business mileage), the time,

and the business purpose of each use. Id.

Mr. Larson has shown that he is entitled to more business

miles than respondent conceded under the adequate records

requirement of section 274(d). Mr. Larson’s monthly mileage logs

were exhaustively detailed. Although they were not themselves

contemporaneous, Mr. Larson credibly testified that the logs were

prepared from weekly charts which were in turn prepared from

contemporaneous hand-held mileage logs. Section 274(d) requires

any record to be supported by documentary evidence and a

noncontemporaneous record to be supported by evidence with a

“high degree of probative value”. Sec. 1.274-5T(c)(1), Temporary
 - 13 -

Income Tax Regs., supra. Mr. Larson’s voluminous monthly mileage

logs, coupled with his highly probative testimony, satisfy the

substantiation requirements of section 274(d).

To the extent that the business miles reported in Mr.

Larson’s monthly mileage logs do not correlate with the miles

disclosed on his returns, we shall allow Mr. Larson to claim the

lesser of the mileage shown on his returns, the mileage used to

calculate his deduction, or the mileage substantiated by his

monthly mileage logs as an automobile expense. None of these

figures deviate substantially from the highest figure reported in

their respective years. Thus we shall permit Mr. Larson to

deduct optional standard mileage rate automobile expenses based

on 35,000 business miles in 2000, 32,000 in 2002, 28,820 in 2003,

and 32,000 in 2004.

B. Actual Expenses

The vehicle expenses for which Mr. Larson claims deductions

using the actual expense method are not allowable for any of the

years at issue. First, Mr. Larson is entitled to only one

deduction per year. He chose to use the optional standard

mileage rate to calculate his Land Rover and Mercedes expenses,

and we have allowed him to deduct the cost of a substantial

number of miles using that method. This deduction is in lieu of

an itemized list of expenses including leasing, insurance, and

maintenance. Since Mr. Larson chose the optional method, he is
 - 14 -

not entitled to deduct these actual expenses. See Nash v.

Commissioner, 60 T.C. 503, 520 (1973).

Second, Mr. Larson has not substantiated his business use

percentage for each of the vehicles he used each year. Under the

actual expense method Mr. Larson is entitled to deduct only that

percentage of the expense he incurred and paid in respect of a

particular vehicle that equals his business use percentage for

that same vehicle. Sec. 1.274-5T(d)(2), Temporary Income Tax

Regs., 50 Fed. Reg. 46025 (Nov. 6, 1985). Likewise, Mr. Larson

has provided no evidence at all concerning the yearly business

and personal mileage for the RV. For the foregoing reasons, we

find that Mr. Larson is not entitled to any deductions for

leasing, insurance, and maintenance expenses based on the actual

expense method.

II. Mrs. Larson’s Schedule E Expenses

Respondent alleges that Mrs. Larson has failed to

substantiate her various Schedule E expenses. We agree. The

record is devoid of any evidence that substantiates Mrs. Larson’s

Schedule E expenses for which she still claims deductions. Thus,

Mrs. Larson has not met her burden of proof with respect to her

Schedule E expenses. See Rule 142(a). Accordingly, we conclude

that Mrs. Larson is unable to deduct any Schedule E expenses not

already allowed by respondent.
 - 15 -

III. Accuracy-Related Penalties

Respondent determined that petitioners are liable for

accuracy-related penalties under section 6662(a) for each of the

years at issue. The accuracy-related penalty applies to any

underpayment of tax required to be shown on a return that is

attributable to negligence or disregard of rules or regulations

under section 6662(b)(1).

Negligence is defined as any failure to make a reasonable

attempt to comply with the provisions of the Internal Revenue

Code. Sec. 6662(c). However, section 6664(c)(1) provides that a

penalty under section 6662 will not be imposed on any portion of

an underpayment if the taxpayer shows reasonable cause for such

portion of the underpayment and that the taxpayer acted in good

faith with respect to such portion. Reliance on the advice of a

professional, such as a certified public accountant, may

constitute a showing of reasonable cause if, under all the facts

and circumstances, such reliance is reasonable and the taxpayer

acted in good faith. Henry v. Commissioner, 170 F.3d 1217, 1219-

1223 (9th Cir. 1999), revg. T.C. Memo. 1997-29; Betson v.

Commissioner, 802 F.2d 365, 372 (9th Cir. 1986), affg. in part

and revg. in part T.C. Memo. 1984-264; sec. 1.6664-4(b)(1), (c),

Income Tax Regs. To prove reasonable cause based on the receipt

of professional advice, a taxpayer must show that he reasonably

relied in good faith upon a qualified adviser after full
 - 16 -

disclosure of all necessary and relevant facts. Collins v.

Commissioner, 857 F.2d 1383, 1386 (9th Cir. 1988), affg. Dister

v. Commissioner, T.C. Memo. 1987-217; sec. 1.6664-4(b)(1), Income

Tax Regs.

Under section 7491(c) the Commissioner has the burden of

production with respect to the taxpayer’s liability for the

penalty provided by section 6662 and must come forward with

sufficient evidence to impose the penalty. Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001). But once the

Commissioner meets that burden, the taxpayer has the burden of

proof concerning whether the Commissioner’s determination to

impose the penalty is correct. Allen v. Commissioner, T.C. Memo.

2005-118.

Applying these principles to the cases before us, we

conclude that respondent has met his burden of production under

section 6662 for each of the years and cases at issue.

Respondent has demonstrated that Mr. Larson incorrectly reported

the receipts of E.L. Power for 2000 and 2003 and incorrectly

claimed Schedule A and Schedule C deductions for all of the years

at issue. Mrs. Larson incorrectly reported her Schedule C and E

income for all of the years at issue and incorrectly claimed

Schedule C and E deductions each year. Mrs. Larson failed to
 - 17 -

maintain records to support her claimed Schedule E expenses.5

These facts indicate that petitioners in general failed to make a

reasonable attempt to comply with the provisions of the Internal

Revenue Code.

However, we find Mr. Larson’s attempt to comply with the

Internal Revenue Code’s requirements regarding the substantiation

of optional standard mileage rate expenses to be reasonable and

made in good faith. See sec. 6664(c)(1). In the light of the

fact that Mr. Larson is not a sophisticated taxpayer, the Court

is impressed with his attempt to comply with the substantiation

requirements of section 274(d). Accordingly, Mr. Larson is not

liable for the accuracy-related penalty as it relates to

adjustments to his optional standard mileage rate expenses.

Petitioners are otherwise unable to show why respondent’s

determination to impose the penalty is incorrect. Neither relied

on the advice of a tax professional to prepare the returns. Nor

have petitioners offered any reasonable cause (except as noted)

for their inability to substantiate their claimed deductions.

Accordingly, with the exception of those penalties attributable

to adjustments to Mr. Larson’s optional standard mileage

expenses, petitioners are liable for their respective accuracy-

related penalties under section 6662(a).

5
Negligence includes a failure to keep adequate books and
records or to substantiate items properly. Sec. 1.6662-3(b)(1),
Income Tax Regs.
 - 18 -

In reaching our holdings herein, we have considered all

arguments made, and, to the extent not mentioned above, we find

them to be moot, irrelevant, or without merit.

To reflect the foregoing,

Decisions will be entered

under Rule 155 in docket Nos.

11501-06, 11502-06, and 11503-

06.