T.C. Summary Opinion 2008-132
UNITED STATES TAX COURT
EUGENIA GONZALEZ, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14909-04S. Filed October 15, 2008.
Eugenia Gonzalez, pro se.
Jeffrey D. Heiderscheit, for respondent.
VASQUEZ, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect
when the petition was filed.1 Pursuant to section 7463(b), the
decision to be entered is not reviewable by any other court, and
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for the
year in issue, and all Rule references are to the Tax Court Rules
of Practice and Procedure.
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this opinion shall not be treated as precedent for any other
case.
Respondent determined a $5,795 deficiency in petitioner’s
Federal income tax for 2002 and a $1,159 accuracy-related penalty
under section 6662(a).
After concessions,2 the issues for decision are: (1)
Whether petitioner had allowable business expense deductions for
tax year 2002; and (2) whether petitioner is liable for the
accuracy-related penalty under section 6662(a) for tax year 2002.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time she filed the
petition, petitioner resided in Texas.
During 2002 petitioner was employed by both Raytheon Co.
(Raytheon) and YMCA of Greater El Paso (YMCA). In 2002
petitioner reported wages from both Raytheon and YMCA on her
Federal income tax return. For the YMCA she facilitated group
exercise classes on an average of three nights per week. As a
group exercise instructor she was not reimbursed by the YMCA for
mileage, music, or clothing. Petitioner therefore purchased her
own clothing, music, and drove her personally owned vehicle to
2
Respondent concedes that there is no self-employment tax
due for tax year 2002, and that petitioner is entitled to deduct
$218.34 for music used as a group exercise instructor.
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and from the YMCA for the aerobics classes. The distance between
her jobs at Raytheon and the YMCA averaged 9.7 miles.3 In
addition to transportation between work sites, petitioner used
her vehicle for personal purposes.
Petitioner also worked as a Mary Kay consultant. As a Mary
Kay consultant she purchased cosmetics, attended meetings,
downloaded information and brochures, and performed one-on-one
skin care classes. She conducted this business out of her home.
For tax year 2002 petitioner reported $550 as cost of goods
sold on her Schedule C, Profit or Loss From Business, associated
with her Mary Kay consulting; however, she reported no sales and
no income. She deducted $3,016 in car and truck expenses,4 $563
for homeowners insurance,5 $1,850 in interest expenses,6 $1,496 in
3
During tax year 2002 petitioner worked at three different
YMCA work sites in El Paso, Texas. The distance between
petitioner’s Raytheon work location and the YMCA work locations
was 7.5 miles, 16.5 miles, and 5.1 miles.
4
This amount differs from the amounts claimed at trial.
At trial petitioner claimed $2,910.95 in car and truck expenses,
including $776.72 in gasoline, $1,200 in maintenance, and $934.23
in auto insurance.
5
Petitioner acknowledges that this amount is inaccurate
and should have been $349.
6
Petitioner acknowledges that this amount is inaccurate
and should have been $658.74.
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office expenses, $1,409 in repairs and maintenance,7 $2,942 for
supplies, and $2,322 for utilities.8
In the notice of deficiency, respondent disallowed all of
petitioner’s claimed Schedule C deductions due to a lack of
substantiation.9
Discussion
Petitioner has neither claimed nor shown that she satisfied
the requirements of section 7491(a) to shift the burden of proof
to respondent with regard to any factual issue.10 Accordingly,
petitioner bears the burden of proof. See Rule 142(a).
7
Petitioner acknowledges that this amount is inaccurate
and should have been $548.44.
8
The claimed amount for utilities includes $353.34 for
water, $144.54 for gas, $463.33 for telephone, $386.87 for
electricity, and $964.36 for cell phone.
9
In the notice of deficiency, respondent set forth self-
employment tax of $3,920 based on a $27,746 increase in self-
employment income. Respondent concedes that petitioner had no
self-employment income and therefore owes no self-employment tax.
At trial respondent attempted to raise issues regarding
filing status, capital loss, and receipt of rental income. These
issues were not referenced in the statutory notice of deficiency
nor did respondent assert a claim for an increased deficiency
pursuant to sec. 6214(a) and Rules 36 and 41. We find that these
issues are not before the Court. See Foil v. Commissioner, 92
T.C. 376, 418 (1989), affd. per curiam 920 F.2d 1196 (5th Cir.
1990); Markwardt v. Commissioner, 64 T.C. 989, 997 (1975).
10
Petitioner does not contend that sec. 7491(a) applies to
this case. Sec. 7491(a) is in any event inapplicable because of
petitioner’s failure to comply with the substantiation
requirements of sec. 7491(a)(2).
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Business expenses are deductible from gross income pursuant
to section 162. Deductions are a matter of legislative grace,
and the taxpayer has the burden of showing that he or she is
entitled to any deduction claimed. Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, 290
U.S. 111, 115 (1933). During 2002 petitioner maintained a
business as a Mary Kay consultant and was employed as a group
exercise instructor. However, petitioner failed to meet her
burden of proving that she is entitled to claim deductions in
excess of those amounts conceded by respondent.
Home Office Expenses
Section 280A(a) provides that no deduction otherwise
allowable shall be allowed with respect to the business use of a
taxpayer’s residence. Section 280A(c) provides exceptions to the
general rule of section 280A(a) and requires that expenses be
allocated between the business and personal use of the dwelling.
Accordingly, in order to qualify under section 280A(c), a portion
of petitioner’s dwelling must be exclusively used on a regular
basis as the principal place of business for her trade or
business. See Hamacher v. Commissioner, 94 T.C. 348, 353 (1990).
Petitioner has not established that a portion of her home was
used exclusively on a regular basis as the principal place of
business for her Mary Kay consulting. Furthermore, section
280A(c)(5) limits the home office deduction to the amount of
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gross income received from the business (reduced by deductions
otherwise allowable). Petitioner reported no income from her
Mary Kay business. Accordingly, she is not entitled to any home
office deductions. Id.
Petitioner has claimed business expense deductions for
office expenses, repairs, maintenance, supplies, utilities, and
other expenses. Specifically petitioner has indicated that the
$2,322 she claimed in utilities expenses included water, gas,
telephone, electric, cell phone, and Internet access fees.
For expenses that include both personal and business uses,
the taxpayer must show that the total expense was greater than
what would have been made for personal use only, and if it is
not, then the expense is entirely nondeductible. See secs.
162(a), 274(d), 280F(d)(4)(A)(v); Sutter v. Commissioner, 21 T.C.
170, 173-174 (1953). Petitioner has not established that she
made expenditures and she has not substantiated either her total
usage or the amount of business use.
Section 274(d)(4) provides that no deduction shall be
allowed with respect to any listed property (as defined under
section 280F(d)(4)) without strict substantiation. Listed
property under section 280F(d)(4) includes but is not limited to
cellular phones, passenger automobiles, and computer equipment.
See sec. 280F(d)(4)(A)(i), (iv), (v). Pursuant to section
274(d)(4), petitioner must substantiate the amount of total use
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and the amount of business use, and only the portion of the
expense that petitioner has substantiated to be ordinary and
necessary business expense is deductible. See secs. 162(a),
274(d)(4), 280F(d)(4)(A); sec. 1.274-5T(b)(6)(i)(B), Temporary
Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985). Petitioner
has not substantiated either total usage or amounts of business
use for her cellular phone, or demonstrated that the expenses
were greater than they would have been had there been no business
use.
For utility expenses that are not listed items under section
274(d)(4), the strict substantiation rules of section 274 do not
apply, and the Court may estimate the business portion of a
utility expense. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d
Cir. 1930); Farran v. Commissioner, T.C. Memo. 2007-151;
Pistoresi v. Commissioner, T.C. Memo. 1999-39. However,
petitioner still must present evidence supporting the amount of
the expense and the portion attributable to a business purpose to
allow the Court to apply the Cohan rule. Cohan v. Commissioner,
supra; Davis v. Commissioner, T.C. Memo. 2006-272. Although
petitioner did in fact present copies of her water, gas, and
electric statements, there is nothing in the record that would
indicate what portions of these expenses are attributable to
ordinary and necessary business purposes, or what portions are
attributable to personal use. We therefore find that petitioner
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has not adequately substantiated these expenses and they are
personal and nondeductible.
Car and Truck Expenses
Automobile expenses are not deductible as a business expense
and will be disallowed in full unless the taxpayer satisfies the
substantiation requirements under section 274(d). Substantiation
includes adequate records or other corroborating evidence of 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. 412 F.2d 201 (2d
Cir. 1969); Maher v. Commissioner, T.C. Memo. 2003-85.
Respondent concedes that petitioner is entitled to a
deduction for the cost of driving between her job at Raytheon and
her aerobics instruction classes at the YMCA. The average
distance between petitioner’s places of employment is 9.7 miles,
and petitioner traveled between workplaces 3 times a week during
tax year 2002, for a total of 1,513.2 miles. As such respondent
concedes that petitioner may properly claim a deduction of
$552.32 for mileage on Schedule A as a miscellaneous itemized
deduction. Petitioner did not, however, substantiate that she
incurred any mileage in pursuance of her Mary Kay consulting
activities. We therefore find that petitioner has not adequately
substantiated these expenses and they are nondeductible.
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Fitness-Related Expenses
Petitioner has provided receipts that she claims represent
deductible business expenses associated with her work as a
fitness instructor. The receipts include expenses for music,11
clothing, laundry, and hairstyling. Petitioner argues that these
expenses should be deductible because she was required to be
“presentable”12 during the course of her aerobics instruction.
Clothing is deductible as a business expense only if it is
required for the taxpayer’s employment, unsuitable for general
wear, and not worn for personal use. See Hynes v. Commissioner,
74 T.C. 1266, 1290 (1980); Yeomans v. Commissioner, 30 T.C. 757,
767 (1958). The determination of suitability for general use is
an objective measure and does not rely on whether the taxpayer
actually used the items in general use. Pevsner v. Commissioner,
628 F.2d 467 (5th Cir. 1980), revg. T.C. Memo. 1979-311. Such
costs are not deductible even when it has been shown that the
particular clothes would not have been purchased but for the
employment. Stiner v. United States, 524 F.2d 640 (10th Cir.
1975); Donnelly v. Commissioner, 262 F.2d 411 (2d Cir. 1959),
affg. 28 T.C. 1278 (1957); Hynes v. Commissioner, supra at 1290.
11
Respondent concedes that petitioner is entitled to
deduct $218.34 for music used as a group exercise instructor for
the YMCA.
12
Petitioner believes that it is through her appearance
that she is able to bring them (YMCA) a profit.
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Clothing and shoes purchased for use while exercising may be used
in a variety of other settings and therefore are generally not a
deductible expense. See Mella v. Commissioner, T.C. Memo. 1986-
594. Further expenses incurred for maintenance of nondeductible
clothing are also nondeductible. See, e.g., Pevsner v.
Commissioner, supra.
Hairstyling and grooming expenses are generally considered
nondeductible personal expenses. See Hynes v. Commissioner,
supra at 1290; Boltinghouse v. Commissioner, T.C. Memo. 2007-324.
Like clothing expenses, deductions for grooming expenses are
limited to those that are considered unsuitable for general wear.
See Genck v. Commissioner, T.C. Memo. 1998-105. Petitioner has
not substantiated that her clothing or hairstyling were required
for the fitness activities, or that they were unsuitable for
general use.
Accuracy-Related Penalty
Section 7491(c) provides that the Commissioner will bear the
burden of production with respect to the liability of any
individual for additions to tax and penalties. “The
Commissioner’s burden of production under section 7491(c) is to
produce evidence that it is appropriate to impose the relevant
penalty, addition to tax, or additional amount”. Swain v.
Commissioner, 118 T.C. 358, 363 (2002); see also Higbee v.
Commissioner, 116 T.C. 438, 446 (2001). Once the Commissioner
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has done so, the taxpayer must come forward with evidence
sufficient to persuade a Court that the Commissioner’s
determination is incorrect. See Higbee v. Commissioner, supra at
446.
Pursuant to section 6662(a), a taxpayer may be liable for a
penalty of 20 percent on the portion of an underpayment of tax
attributable to negligence or disregard of rules or regulations.13
See sec. 6662(b)(1). A taxpayer is negligent when he or she
failed “‘to do what a reasonable and ordinarily prudent person
would do under the circumstances.’” Korshin v. Commissioner, 91
F.3d 670, 672 (4th Cir. 1996) (quoting Schrum v. Commissioner, 33
F.3d 426, 437 (4th Cir. 1994), affg. in part, vacating in part
and remanding T.C. Memo. 1993-124), affg. T.C. Memo. 1995-46.
Negligence includes the 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. See sec. 6662(c); sec. 1.6662-
3(b)(1), Income Tax Regs.
A taxpayer, however, may avoid the application of the
accuracy-related penalty by proving that he or she acted with
reasonable cause and in good faith. See sec. 6664(c). Whether a
13
Sec. 6662(d)(1)(A) is not applicable in this case due to
respondent’s concession that petitioner had no self-employment
income or self-employment tax, thereby reducing the deficiency by
$3,920.
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taxpayer acted with reasonable cause and in good faith depends
upon all the pertinent facts and circumstances (and, most
importantly, the extent to which he or she attempted to assess
the proper tax liability). See Neely v. Commissioner, 85 T.C.
934 (1985); Stubblefield v. Commissioner, T.C. Memo. 1996-537;
sec. 1.6664-4(b)(1), Income Tax Regs.
Petitioner failed to maintain adequate records relating to
claimed business expenses. Petitioner knew or should have known
at all times that the claimed expenses were personal expenses and
not deductible business expenses. Petitioner argues that she
should be excused from the accuracy-related penalties because she
relied on her tax return preparer. Reliance on a return preparer
may relieve a taxpayer from the accuracy-related penalty where
the taxpayer’s reliance is reasonable. Freytag v. Commissioner,
89 T.C. 849, 888 (1987), affd. 904 F.2d 1011 (5th Cir. 1990),
affd. 501 U.S. 868 (1991). However, a taxpayer’s reliance must
be in good faith and demonstrably reasonable. Ewing v.
Commissioner, 91 T.C. 396, 423 (1988), affd. without published
opinion 940 F.2d 1534 (9th Cir. 1991); Freytag v. Commissioner,
supra at 888-889.
The ultimate responsibility for a correct return lies with
the taxpayer, who must furnish the necessary information to the
agent who prepared the return. Enoch v. Commissioner, 57 T.C.
781, 802 (1972). In other words, reliance upon expert advice
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will not exculpate a taxpayer who supplies the return preparer
with incomplete or inaccurate information. Lester Lumber Co. v.
Commissioner, 14 T.C. 255, 263 (1950). Petitioner’s reliance on
the advice of her tax return preparer was not reasonable.
Petitioner provided information to the preparer, and she knew, or
should have known that the amounts entered on the return were not
accurate. Reliance on a preparer is not reasonable where even a
cursory review of the return would reveal inaccurate entries.
See Pratt v. Commissioner, T.C. Memo. 2002-279. Petitioner
failed to establish that she had reasonable cause or acted in
good faith for the year at issue.
Respondent has shown that petitioner has failed to keep
adequate books and records or to properly substantiate the items
in question. Accordingly, we conclude that respondent has
produced sufficient evidence to show that the section 6662(a)
accuracy-related penalty is appropriate, and petitioner has not
proven that her negligence was due to reasonable cause.
Petitioner is therefore liable for the section 6662(a) accuracy-
related penalty.
In reaching our holdings herein, we have considered all
arguments made by the parties, and to the extent not mentioned
above, we conclude they are irrelevant or without merit.
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To reflect the foregoing,
Decision will be entered
under Rule 155.