T.C. Memo. 2008-255
UNITED STATES TAX COURT
HENRY J. AND PATRICIA K. LANGER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13884-05. Filed November 12, 2008.
Henry J. and Patricia K. Langer, pro sese.
David L. Zoss, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HAINES, Judge: Respondent determined a deficiency in
petitioners’ 2001 Federal income tax of $56,474 and an accuracy-
related penalty under section 6662 of $11,295.1
1
Unless otherwise indicated, section references are to the
Internal Revenue Code, as amended. Rule references are to the
Tax Court Rules of Practice and Procedure. Amounts are rounded
(continued...)
-2-
After concessions, the issues for decision are whether
petitioners are entitled to business expense deductions in an
amount greater than respondent allowed, and whether petitioners
are liable for an accuracy-related penalty under section 6662.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits attached thereto are
incorporated herein by this reference. Petitioners resided in
Minnesota at the time their petition was filed.
In 1984 petitioners purchased their 5,500-square-foot home
for $501,358, and they have lived there at all times since.
Petitioners claim that in 1995 additional work was done to the
driveway and exterior lighting of their residence at a total cost
of $31,641. In 1999 they added a low-voltage outdoor lighting
system at a cost of $18,945, and the property was landscaped at a
cost of $9,420.
Mrs. Langer, a piano teacher, has operated a piano teaching
business from petitioners’ residence since its purchase. See
Langer v. Commissioner, T.C. Memo. 1992-46 (discussing the use of
the home for piano teaching and finding that 315 square feet of
petitioners’ home was used as a piano studio), affd. 989 F.2d 294
(8th Cir. 1993). Since June 1996 Mr. Langer, a former Internal
Revenue Service agent, has operated a financial investigations
1
(...continued)
to the nearest dollar.
-3-
business out of petitioners’ residence. Mr. Langer used office
space in the residence, which from 1984 to 1996 had been used by
a greeting card company run by Mrs. Langer and her sisters. See
id. (finding that 400 square feet of petitioners’ home was used
by the greeting card company).
Petitioners prepared their own joint Form 1040, U.S.
Individual Income Tax Return, for 2001 and submitted it to
respondent on May 8, 2002. The return included two Schedules C,
Profit or Loss from Business, one for Mr. Langer’s investigations
business and one for Mrs. Langer’s piano teaching business. Both
of the Schedules C reported substantial expenses with respect to
the businesses, including home office expenses and related
depreciation of the home, lighting, driveway, and landscaping.
On April 21, 2005, respondent issued petitioners a notice of
deficiency for 2001.2 Respondent disallowed most of petitioners’
2
In 2003 petitioners’ 2001 return was selected for
examination as part of respondent’s National Research Project
(NRP). Petitioners contested respondent’s right to examine them
as part of the NRP. Respondent issued petitioners administrative
summonses for information with respect to their 2001 return.
Petitioners contested enforcement of the summons in the U.S.
District Court for the District of Minnesota. On Nov. 24, 2004,
the District Court issued an order enforcing the summons. On
Apr. 1, 2005, petitioners deposited their records with the
District Court. Petitioners appealed the order to the U.S. Court
of Appeals for the Eighth Circuit, which affirmed the order on
Dec. 29, 2005. United States v. Langer, 158 Fed. Appx. 759 (8th
Cir. 2005). Petitioners subsequently petitioned the Supreme
Court of the United States for certiorari, but the Court denied
the petition on Oct. 10, 2006.
-4-
Schedule C expenses. Petitioners timely filed a petition with
this Court, and a trial was held in St. Paul, Minnesota.
OPINION
I. An Overview of the Evidence
On the basis of documentation petitioners provided,
respondent conceded that petitioners are entitled to some of the
disallowed business expense deductions, while petitioners
conceded they are not entitled to others. As evidence that the
remaining expenses should be allowed, petitioners presented only
Mr. Langer’s testimony and scant documentary evidence. Although
Mr. Langer testified with detail as to some of the disallowed
deductions, he merely identified others, and others were not
mentioned at all. His testimony was largely uncorroborated, and
we do not find it credible. Under the circumstances, we are not
required to accept Mr. Langer’s uncorroborated, self-serving
testimony, and we do not. See Tokarski v. Commissioner, 87 T.C.
74, 77 (1986).
II. Business Expense Deductions Not Related to the Use of
Petitioners’ Residence
Deductions are a matter of “legislative grace”, and “a
taxpayer seeking a deduction must be able to point to an
applicable statute and show that he comes within its terms.” New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); see also
Rule 142(a). As a general rule, section 162(a) authorizes a
deduction for “all the ordinary and necessary expenses paid or
-5-
incurred during the taxable year in carrying on any trade or
business”. An expense is ordinary for purposes of this section
if it is normal or customary within a particular trade, business,
or industry. Deputy v. du Pont, 308 U.S. 488, 495 (1940). An
expense is necessary if it is appropriate and helpful for the
development of the business. Commissioner v. Heininger, 320 U.S.
467, 471 (1943). Section 262(a), in contrast, precludes
deduction of “personal, living, or family expenses.”
The breadth of section 162(a) is limited by the requirement
that any amount claimed as a business expense deduction must be
substantiated, and taxpayers are required to maintain records
sufficient therefor. Sec. 6001; Hradesky v. Commissioner, 65
T.C. 87, 89-90 (1975), affd. 540 F.2d 821 (5th Cir. 1976); sec.
1.6001-1(a), Income Tax Regs. Furthermore, business expenses
described in section 274 are subject to strict substantiation
rules. Section 274(d) provides that no deduction shall be
allowed for, among other things, traveling expenses,
entertainment expenses, gifts, and expenses with respect to
listed property (including passenger automobiles) “unless the
taxpayer substantiates by adequate records or by sufficient
evidence corroborating the taxpayer’s own statement”: (1) The
amount of the expenditure or use; (2) the time and place of the
expenditure or use, or date and description of the gift; (3) the
business purpose of the expenditure or use; and (4) in the case
-6-
of entertainment or gifts, the business relationship to the
taxpayer of the recipients or persons entertained.
In addition to the general business expense deduction rule
of section 162, section 167(a) authorizes “as a depreciation
deduction a reasonable allowance for the exhaustion, wear and
tear (including a reasonable allowance for obsolescence)--(1) of
property used in the trade or business, or (2) of property held
for the production of income.” Depreciation deductions are
calculated with respect to the adjusted basis of the property
determined under section 1011, the applicable depreciation
method, the applicable recovery period, and the applicable
convention. Secs. 167(c), 168(a); Hosp. Corp. of Am. v.
Commissioner, 109 T.C. 21, 45 (1997).
A. Expenses Related to Piano Teaching
Respondent disallowed petitioners’ $9,003 Schedule C
deduction for “supplies” that comprised numerous separate items.
Respondent conceded that petitioners are entitled to $7,327 of
those expenses. Mr. Langer testified as to two of the disallowed
expenses: $70 spent at the Georgetown University Medical
Bookstore and $189 spent at the African Art Museum. Mr. Langer
testified that Mrs. Langer intended to give these to her students
as awards. However, the purchases are unidentified, and there is
no evidence Mrs. Langer actually gave them to her students, or
that if given to her students, they were awards and not gifts,
-7-
which would be subject to strict substantiation requirements. No
evidence was presented as to the other deductions not conceded by
respondent. Accordingly, petitioners are not entitled to the
Schedule C “supplies” expense in an amount greater than
respondent allowed.
Mrs. Langer’s Schedule C expenses included a $24,601
deduction for a category of items labeled “incentive programs”.
Respondent conceded $1,592 of the expenses. Mr. Langer testified
as to some of the disputed expenses. The disputed items include
expenses for entertainment, gifts/awards to students, business
meals, and travel away from home, all subject to the strict
substantiation requirements of section 274(d). Petitioners have
not substantiated those amounts in accordance with section
274(d).
The awards given to her students present the same problem as
the awards from Georgetown’s bookstore and the African Art Museum
discussed above. The purchases are unidentified, and there is no
evidence Mrs. Langer actually gave them to her students, or that
if given to her students, they were not gifts.
Other expenses are clearly personal and not business
expenses. For example, petitioners claim as expenses: Swimming
pool supplies and maintenance, home and holiday decorations, a
nativity set, cookbooks, and a television set. Mr. Langer
testified and attempted to explain how these items were related
-8-
to the piano teaching business. His arguments are beyond belief
and contrary to all reason. We need not address each of the
disputed items, but we give one illuminating and representative
example. Petitioners argue that $2,446 spent for pool supplies
and maintenance are related to Mrs. Langer’s piano teaching
because the parents of the students would sit by the pool while
waiting for their children to finish a lesson. Pool supplies and
maintenance are not ordinary and necessary expenses for Mrs.
Langer’s piano teaching business. Therefore, they are not
deductible.
Petitioners also claimed an expense deduction for sweaters
Mrs. Langer purchased. Expenses for clothing adaptable for
general use are not deductible. Yeomans v. Commissioner, 30 T.C.
757, 767-769 (1958); Wilbert v. Commissioner, T.C. Memo. 2007-
152. There is no evidence that the sweaters were not adaptable
for general purposes, and thus the expense was properly
disallowed.
As to the other “incentive programs” expenses, petitioners
presented either only Mr. Langer’s vague, self-serving,
uncorroborated testimony or no evidence at all. Accordingly, we
find that petitioners are not entitled to the deductions for
“incentive programs” beyond those respondent allowed.3
3
We note that one of the disputed expenses, amounts paid for
home security, is deductible. However, it must be allocated to
the personal and business portions of the residence.
-9-
B. Expenses Related to the Investigations Business
Petitioners owned a 2000 Mercedes sport utility vehicle
which was driven a total of 15,127 miles during 2001.4 Mr.
Langer claims that 65 percent of the use of the Mercedes was for
his investigations business.5 Petitioners claimed a $4,297
deduction for “car and truck” expenses and a $1,918 depreciation
deduction with respect to the Mercedes in 2001. Automobile
expenses are subject to the strict substantiation requirements of
section 274(d). Petitioners presented no evidence substantiating
the business use of the automobile or the expenses paid.
Accordingly, petitioners are not entitled to these automobile-
related deductions.
Petitioners claimed a $5,223 deduction for other (non-
mortgage) interest accruing on credit cards and other loans,
including a loan from their daughter. The record does not
contain the origination dates of the loans, the interest rates,
the balance and payment histories, or any of the terms of any of
the debts on which the alleged interest expense accrued. Nor is
there any evidence that if the interest was in fact paid, it
4
Petitioners’ Forms 4562, Depreciation and Amortization,
report that the Mercedes was used to drive only 13,866 miles.
5
Petitioners argue that the determination made by the
Minnesota Office of Attorney General with respect to many of the
disallowed deductions is evidence that those deductions are
proper. A determination made by the State of Minnesota is not
binding on this Court, nor does it relieve petitioners of their
burden of proving respondent’s determination is incorrect.
-10-
related to the investigations business. Accordingly, petitioners
are not entitled to these interest deductions for 2001.
Petitioners claimed a $28,573 expense deduction for “other
expenses”. A portion of that deduction relates to depreciation
and home-office-related expenses discussed below. The “other
expenses” also include a $10,901 deduction for “behavior
modification” expenses. Mr. Langer testified as to some of the
disputed items, most of which are personal and not business
expenses. For example, petitioners claimed as expenses the cost
of their son’s graduation party and flowers given by Mr. Langer
to Mrs. Langer and to their daughter for special occasions, such
as a birthday and Valentine’s Day. Fees paid by Mr. Langer to
his college alumni club are rendered nondeductible by section
274(a)(3). The cost of meals allegedly related to Mr. Langer’s
business was not substantiated as required by section 274(d) and
is thus not allowed as a deduction. A crystal vase costing
$2,635 purchased to cheer Mr. Langer up after the events of
September 11, 2001, and because he likes fresh-cut flowers is
also not deductible. A vase kept in one’s home can be used for
any purpose at any time, and there is no evidence that the vase
was used primarily in Mr. Langer’s office. Petitioners offered
no evidence to substantiate any of the remaining “behavior
modification” expenses or $357 of “miscellaneous expenses”
claimed. Accordingly, petitioners are not entitled to these
claimed expense deductions.
-11-
III. Business Expenses Related to Petitioners’ Use of Their
Residence
In addition to the limitations on business expenses
discussed above, section 280A(a) provides that a deduction
otherwise allowable is not allowed with respect to the use of the
taxpayer’s residence. However, section 280A(c) provides an
exception to the general rule:
SEC. 280A(c). Exceptions for Certain Business or
Rental Use; Limitation on Deductions for Such Use.--
(1) Certain business use.--Subsection
(a) shall not apply to any item to the extent
such item is allocable to a portion of the
dwelling unit which is exclusively used on a
regular basis--
(A) as the principal place of business
for any trade or business of the taxpayer,
(B) as a place of business which is
used by patients, clients, or customers in
meeting or dealing with the taxpayer in the
normal course of his trade or business * * *
A. Use of the Residence by the Businesses
Because there are substantial business and personal motives
for the purchase and improvement of petitioners’ residence, we
must determine what portion of the residence was used regularly
and exclusively for petitioners’ businesses. See Intl. Trading
Co. v. Commissioner, 275 F.2d 578, 584-587 (7th Cir. 1960), affg.
T.C. Memo. 1958-104; Deihl v. Commissioner, T.C. Memo. 2005-287.
Combined personal and business use of a section of the residence
precludes deductibility. See generally Sam Goldberger, Inc. v.
Commissioner, 88 T.C. 1532, 1557 (1987).
-12-
Respondent contends that 315 square feet, or 5.73 percent of
petitioners’ residence, was used exclusively and regularly as a
piano studio and that 400 square feet, or 7.27 percent, was used
exclusively and regularly as an office for the investigations
business.6 Petitioners contend that 27 percent of the premises
was used exclusively and regularly for the piano teaching
business and 15 percent was used exclusively and regularly for
the investigations business. Mr. Langer testified that the
living room, solarium, bathroom, and two separate lounges were
used exclusively and regularly for piano teaching. Specifically,
Mr. Langer testified that the students and their parents used the
solarium, living room, and lounges while waiting for lessons and
that the bathroom was used by students because Mrs. Langer
required that they wash their hands before playing the piano.
With respect to the investigations business, Mr. Langer
testified that in addition to his office he used a 252-square-
foot service area, as well as a 300-square-foot garage to store
client records including 15 boxes for one client.
The only evidence petitioners presented to support their
contention that these areas were used exclusively and regularly
for their businesses is Mr. Langer’s uncorroborated testimony,
6
Petitioners argue that respondent’s Office of Appeals found
that petitioners used 18 percent of the home for the piano
teaching business in prior years. Even if Appeals’ determination
with respect to prior years was in the record, which it is not,
petitioners would not be relieved of their burden of proving
their exclusive and regular business use of the residence.
-13-
which is not credible. Accordingly, we find that petitioners
used 5.73 and 7.27 percent of their home in connection with their
respective businesses.
B. Depreciation Deductions
Petitioners claim depreciation deductions with respect to
their residence as well as improvements to the property that were
done in the 1990s. The piano studio was placed in service in
1984; thus petitioners began to claim depreciation with respect
to it at that time. See Langer v. Commissioner, T.C. Memo. 1992-
46. Depending on the date the property was placed in service in
1984, the piano studio would have been classified as either 15-
year property or 18-year property. Real property (other than
low-income housing and property with a class life of less than
12.5 years) placed in service on or before March 15, 1984, is 15-
year property. Real property placed in service after March 15,
1984, is 18-year property. Sec. 168(c)(2)(D); Deficit Reduction
Act of 1984, Pub. L. 98-369, sec. 111(b)(3)(B), 98 Stat. 632. If
the property was 15-year property, a taxpayer could elect to
depreciate the property over a period of 15, 35, or 45 years
using the straight-line method under section 168(b)(3) or over 15
years using a 175-percent declining balance method under section
168(b)(2). If the property was 18-year property, a taxpayer
could elect to depreciate the property over a period of 18, 35,
or 45 years using the straight-line method under section
-14-
168(b)(3) or over 18 years using a 175-percent declining balance
method under section 168(b)(2).7
The record does not show at what point in 1984 the property
was placed in service. If it was placed in service before March
15, 1984, petitioners could have, and likely would have, elected
to depreciate the property over 15 years. After 1999 no
depreciation would be allowed. Accordingly, petitioners have not
met their burden of proving they are entitled to a depreciation
deduction with respect to the piano studio for 2001.
In 1996 Mr. Langer began using an office in the residence
for his investigations business. However, the office had been
used by Mrs. Langer’s greeting card business since 1984, and
petitioners claimed depreciation deductions with respect to the
office, thus reducing its adjusted basis.8 The record does not
contain any information with respect to the office’s adjusted
basis in 1996 or the amount of depreciation claimed with respect
to that office before it was put in service as part of the
investigations business. Accordingly, petitioners have not met
7
In their brief petitioners showed that on their return they
calculated depreciation with respect to their residence using a
20-year period. They now claim that they are entitled to
depreciation using a 29.5-year period. Neither 29.5 years nor 20
years is a possible recovery period under the Internal Revenue
Code, either in 1984 or in any pertinent year thereafter.
8
The basis of depreciable property is reduced by the amount
of allowable depreciation even if the taxpayer does not claim a
depreciation deduction. Sec. 1016(a)(2); sec. 1.1016-3(a)(2)(i),
Income Tax Regs.
-15-
their burden of proving they are entitled to a depreciation
deduction with respect to the investigations office.
We turn to the improvements made to the residence.
Improvements to real property are depreciated in the same way
that the existing property would be depreciated if it were placed
in service at the same time as the improvement. Sec.
168(i)(6)(A). However, the recovery period for the improvement
begins on the later of the date the improvement is placed in
service or the date the existing property was placed in service.
Sec. 168(i)(6)(B).
Petitioners have taken the position that the landscaping
done in 1999 was a capital asset requiring depreciation.
Depreciation for land is generally not allowed. Sec. 1.167(a)-2,
Income Tax Regs. However, land preparation may be subject to
depreciation allowance if it is closely associated with a
depreciable asset. S. Natural Gas Co. v. United States, 188 Ct.
Cl. 302, 412 F.2d 1222, 1230 (1969); Trailmont Park, Inc. v.
Commissioner, T.C. Memo. 1971-212. This principle has been
applied to allow depreciation for filling and grading swampy land
to be used as a lumber yard, Lord & Bushnell Co. v. Commissioner,
7 B.T.A. 86 (1927), and for the clearing, grading, and shaping of
land for a mobile home park, Trailmont Park, Inc. v.
Commissioner, supra. Any landscaping done around petitioners’
residence has not been shown to be so closely associated with
-16-
their businesses as to allow a depreciation deduction.9 Thus,
petitioners are not entitled to a depreciation deduction with
respect to the landscaping.
Petitioners claim they paid $31,640 for their driveway and
lighting in 1995. The only evidence petitioners presented
substantiating that amount is Mr. Langer’s handwritten notes used
to prepare the return. Therefore, petitioners have not met their
burden of proving they are entitled to a depreciation deduction
with respect to the driveway and lighting.
Petitioners installed a low-voltage outdoor lighting system
in 1999 at a cost of $9,420. Because there were substantial
business and personal reasons for installing the lighting, its
cost must be allocated in accordance with petitioners’ business
use of the residence, 5.73 and 7.27 percent. To that extent, the
lighting is nonresidential real property to be depreciated over
39 years using the straight-line method. Sec. 168(c), (e)(2)(B).
Thus, petitioners are entitled to deduct 5.73 and 7.27 percent of
the cost of the lighting over a 39-year period for the piano
teaching business and investigations business, respectively.
9
We note that the Commissioner has taken the position that
if landscaping would need to be replaced contemporaneously with
the replacement of the related depreciable asset, the landscaping
may also be depreciable. Rev. Rul. 74-265, 1974-1 C.B. 56.
There is no evidence in the record which would indicate replacing
petitioners’ residence would destroy the landscaping.
-17-
C. Mortgage Interest Expense Deductions
Of their $64,238 of mortgage interest paid in 2001,
petitioners deducted $13,334 and $14,961 on their respective
Schedules C. The amount of mortgage interest deductible is
limited to the business use of the home, 7.27 and 5.73 percent,
or $4,670 and $3,681, respectively.10 The remaining mortgage
interest is allowed as an itemized deduction, subject to the
limitations on itemized deductions imposed by section 68(a).
IV. Penalty Under Section 6662(a)
Section 6662(a) and (b)(1) imposes a 20-percent penalty on
the portion of an underpayment attributable to negligence or
disregard of the rules or regulations. Although the Commissioner
bears the initial burden of production and must come forward with
sufficient evidence showing it is appropriate to impose an
accuracy-related penalty, the taxpayer bears the burden of proof
as to reasonable cause, substantial authority, or similar defense
to the penalty. Sec. 7491(c); Rule 142(a); Higbee v.
Commissioner, 116 T.C. 438, 446-447 (2001). To meet the burden,
a taxpayer must present evidence sufficient to persuade the Court
that the Commissioner’s determination is incorrect. Higbee v.
Commissioner, supra at 447.
10
Respondent conceded that petitioners are entitled to
deduct these amounts as interest expenses on their Schedules C.
Therefore, we do not address respondent’s argument in his reply
brief that petitioners are not entitled to deduct interest
expenses on their Schedules C because the loans may be equity-
based loans used for personal expenses, not business expenses.
-18-
Mr. Langer admitted that he did not attempt to investigate
the applicable rules and regulations. He admitted that
petitioners did not keep certain records for their businesses.
Petitioners did not include Form 8829, Expenses for Business Use
of Your Home, for either of their Schedules C. Furthermore,
petitioners claimed as business expense deductions many obviously
personal items. A former Internal Revenue Service agent should
have known better. Therefore, we conclude that respondent has
met his burden of production.
Petitioners presented no evidence which would indicate the
accuracy-related penalty should not be imposed. Accordingly,
petitioners are liable for the accuracy-related penalty under
section 6662.
In reaching our holdings, we have considered all arguments
made, and to the extent not mentioned, we conclude that they are
moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.