T.C. Summary Opinion 2009-101
UNITED STATES TAX COURT
JILL E. HAGER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10422-06S. Filed July 7, 2009.
Jill E. Hager, pro se.
Edward L. Walter, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed. Pursuant to section 7463(b),
the decision to be entered is not reviewable by any other court,
and this opinion shall not be treated as precedent for any other
case. Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year in issue,
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and all Rule references are to the Tax Court Rules of Practice
and Procedure.
Respondent determined an $8,173 deficiency in petitioner’s
2003 Federal income tax and additions to tax under sections
6651(a)(1) and (2) and 6654(a). Respondent concedes that
petitioner is entitled to the following deductions: (1) $8,257
for “contract labor”; (2) $871 for supplies; and (3) $1,800 for
office expenses.
By submitting a 2003 Form 1040, U.S. Individual Income Tax
Return, petitioner concedes that she: (1) Received interest of
$1,145, distributions of $6,808, and nonemployee compensation of
$27,956; and (2) is liable for self-employment tax.1 See Lare v.
Commissioner, 62 T.C. 739, 750 (1974) (statements made in a tax
return signed by a taxpayer may be treated as admissions), affd.
without published opinion 521 F.2d 1399 (3d Cir. 1975).
Petitioner also concedes that she is not entitled to deduct the
following expenses: (1) $3,100 for supplies; (2) $1,978 for
utilities; and (3) $350 for postage. Petitioner presented no
argument or evidence as to her liability for the 10-percent
additional tax on early distributions from her qualified
retirement plan; she is therefore deemed to have conceded the
1
Adjustments to petitioner’s self-employment tax and her
deduction therefor are computational and are to be resolved
consistent with the Court’s opinion in the parties’ Rule 155
computations. See secs. 164(f), 1401, 1402.
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issue. See sec. 72(t)(1); Nielsen v. Commissioner, 61 T.C. 311,
312 (1973); Mikalonis v. Commissioner, T.C. Memo. 2000-281.
The issues remaining for decision are whether petitioner is:
(1) Entitled to a $13,773 deduction for vehicle expenses; and
(2) liable for the additions to tax under sections 6651(a)(1) and
(2) and 6654(a).
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits received into evidence
are incorporated herein by reference. When the petition was
filed, petitioner resided in Ohio.
During 2003 petitioner was self-employed in promotions and
marketing for various entities in Ohio. She drove to various
locations, changing out displays or advertisements or sending
models to various restaurants or bars to promote certain liquor
brands.
Petitioner did not timely file her 2003 Form 1040.
Therefore, respondent prepared a substitute for return for
petitioner pursuant to section 6020(b). From third-party payor
reports respondent determined that petitioner received $35,809 in
gross income. Respondent allowed petitioner one personal
exemption of $3,050, a standard deduction of $4,750, and a credit
for withheld tax of $3. Respondent also determined a net tax of
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$8,1702 and that petitioner was liable for additions to tax
pursuant to sections 6651(a)(1) and (2) and 6654(a). In
response, petitioner filed a petition with the Court; she was
ordered to file her 2003 Form 1040 by December 17, 2007, which
she submitted to respondent on February 17, 2008.
Discussion
I. Burden of Proof
The Commissioner’s determinations in a notice of deficiency
are presumed correct, and the taxpayer bears the burden to prove
that the determinations are in error. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). But the burden of proof on
factual issues that affect the taxpayer’s tax liability may be
shifted to the Commissioner if the taxpayer introduces credible
evidence with respect to the issue and the taxpayer has satisfied
certain conditions. Sec. 7491(a)(1). Petitioner has not alleged
that section 7491(a) applies, and she has not complied with the
substantiation requirements. See sec. 7491(a)(2)(A). Thus, the
burden of proof remains on her.
II. Vehicle Expenses
Section 162(a) authorizes a deduction for all the ordinary
and necessary expenses paid or incurred during the taxable year
in carrying on any trade or business. But as a general rule,
2
The net tax includes income tax of $3,556 plus self-
employment tax of $3,936 and an IRA early withdrawal penalty of
$681.
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deductions are allowed only to the extent that they are
substantiated. Secs. 274(d) (no deductions are allowed for
gifts, listed property,3 traveling, entertainment, amusement, or
recreation unless substantiated), 6001 (taxpayers must keep
records sufficient to establish the amount of the items required
to be shown on their Federal income tax returns). If the
taxpayer establishes that she has incurred a deductible expense
yet is unable to substantiate the exact amount, the Court may
estimate the deductible amount in some circumstances. Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). But the Court
cannot estimate a taxpayer’s expenses with respect to the items
enumerated in section 274(d). Sanford v. Commissioner, 50 T.C.
823, 827 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969);
Rodriguez v. Commissioner, T.C. Memo. 2009-22 (the strict
substantiation requirements of section 274(d) preclude the Court
and taxpayers from approximating expenses).
Section 274(d) and the regulations thereunder require
taxpayers to substantiate their deductions by adequate records or
sufficient evidence to corroborate the taxpayer’s own testimony
as to: (1) The amount of the expenditure or use; (2) the time of
the expenditure or use; (3) the place of the expenditure or use;
(3) the business purpose of the expenditure or use; and (4) the
3
The term “listed property” is defined to include passenger
automobiles. Sec. 280F(d)(4)(A)(i).
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business relationship to the taxpayer of the persons entertained
or receiving the gift. Sec. 1.274-5T(a) and (b), Temporary
Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
Taxpayers are required to maintain and produce such
substantiation as will constitute proof of each expenditure or
use. Sec. 1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed.
Reg. 46016 (Nov. 6, 1985). Written evidence has considerably
more probative value than oral evidence, and the probative value
of written evidence is greater the closer in time it is to the
expenditure or use. Id. Although a contemporaneous log is not
required, a record made at or near the time of the expenditure or
use that is supported by sufficient documentary evidence has a
higher degree of credibility than a subsequently prepared
statement. Id. The corroborative evidence required to support a
statement not made at or near the time of the expenditure or use
must have a high degree of probative value to elevate the
statement and evidence to the level of credibility reflected by a
record made at or near the time of the expenditure or use
supported by sufficient documentary evidence. Id.
To satisfy the “adequate records” requirement of section
274(d), the taxpayer shall maintain an account book, a diary, a
log, a statement of expense, a trip sheet, or a similar record
and documentary evidence that in combination are sufficient to
establish each element of expenditure or use. Sec. 1.274-
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5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov.
6, 1985). The adequate record must be prepared or maintained in
such manner that each recording of an element or use is made at
or near the time of the expenditure or use. Sec. 1.274-
5T(c)(2)(ii), Temporary Income Tax Regs., 50 Fed. Reg. 46017
(Nov. 6, 1985). “‘[M]ade at or near the time of the expenditure
or use’ means [that] the elements of an expenditure or use are
recorded at a time when, in relation to the use or making of an
expenditure, the taxpayer has full present knowledge of each
element of the expenditure or use”. Sec. 1.274-5T(c)(2)(ii)(A),
Temporary Income Tax Regs., supra.
To substantiate petitioner’s deduction for vehicle expenses,
she submitted: (1) Certain “Client Care Representative Payment
[Reports]” that include the clients’ names and locations by city
and ZIP Code and the months and years that she serviced the
accounts;4 (2) a “Suave Event Staffing Schedule” that includes
the clients’ store numbers and addresses and the dates she
serviced the accounts; (3) certain timesheets that include the
clients’ names, store numbers, and addresses (in some cases) and
the dates she serviced the accounts and the durations thereof;
(4) a list entitled “2003 Approximate Mileage” that includes the
miles she drove round trip from her home to certain cities and
4
Petitioner testified that these were “just some of them
that [she] happened to keep.”
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the miles she drove within each city (in some cases); and (5) her
testimony.
Petitioner testified that she drove to various locations
within the cities to set up displays and to change out
advertisements or wallboards. She also testified that her “2003
Approximate Mileage” list was prepared “last year” (i.e., 2007)
and that she “tried to at least Mapquest all of these so that
[she] would have an idea of what the mileage was.” According to
petitioner, she wrote down her mileage in a mileage booklet5 but
not every time: “It was sometimes shoddy. I was [driving and]
sometimes somebody would tell me a different way to go. So it
was pretty messy.”
Petitioner’s testimony established that she did not
accurately record her business mileage at or near the time of her
business use. See sec. 1.274-5T(b)(6)(i)(B), (c)(2), Temporary
Income Tax Regs., 50 Fed. Reg. 46016, 46017 (Nov. 6, 1985). In
addition, her mileage was based upon estimates or approximations
that were derived from Mapquest after the notice of deficiency
was issued in March 2006. The Court therefore holds that
petitioner is not entitled to a deduction for mileage. See
Sanford v. Commissioner, supra at 827; Rodriguez v. Commissioner,
supra; see also sec. 1.274-5T(c)(1), Temporary Income Tax Regs.,
5
Petitioner testified that she could not find her mileage
booklet and that she did not believe that she got it back from
her accountant.
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supra (the substantiation requirements are designed to encourage
taxpayers to maintain records and documentary evidence).
Respondent’s determination is sustained.
III. Additions to Tax
Initially, the Commissioner has the burden of production
with respect to any penalty, addition to tax, or additional
amount. Sec. 7491(c). The Commissioner satisfies this burden of
production by coming forward with sufficient evidence that
indicates that it is appropriate to impose the penalty or
addition to tax. See Higbee v. Commissioner, 116 T.C. 438, 446
(2001). Once the Commissioner satisfies this burden of
production, the taxpayer must persuade the Court that the
Commissioner’s determination is in error by supplying sufficient
evidence of an applicable exception. Id.
A. Section 6651(a)(1) and (2)
Section 6651(a)(1) imposes an addition to tax for failure to
file a return on the date prescribed (determined with regard to
any extension of time for filing) unless the taxpayer can
establish that the failure is due to reasonable cause and not due
to willful neglect.6 To prove reasonable cause for a failure to
6
If the Secretary makes a return for the taxpayer under sec.
6020(b), it is disregarded for purposes of determining the amount
of the addition to tax under sec. 6651(a)(1), but it is treated
as a return filed by the taxpayer for purposes of determining the
amount of the addition to tax under sec. 6651(a)(2). Sec.
6651(g).
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file timely, a taxpayer must show that she exercised ordinary
business care and prudence and was nevertheless unable to file
the return within the prescribed time. Crocker v. Commissioner,
92 T.C. 899, 913 (1989); sec. 301.6651-1(c)(1), Proced. & Admin.
Regs.
Section 6651(a)(2) imposes an addition to tax for failure to
pay the amount shown as tax on the taxpayer’s return on the date
prescribed (determined with regard to any extension of time for
payment) unless the taxpayer can establish that the failure is
due to reasonable cause and not due to willful neglect.7 To
prove reasonable cause for a failure to pay the tax, the taxpayer
must show that she exercised ordinary business care and prudence
in providing for payment of the tax and nevertheless was either
unable to pay the tax or would suffer undue hardship if she paid
the tax on the due date. Sec. 301.6651-1(c)(1), Proced. & Admin.
Regs. In determining whether the taxpayer was unable to pay the
tax in spite of the exercise of ordinary business care and
prudence, consideration will be given to all of the facts and
circumstances of the taxpayer’s financial situation, including
the amount and nature of the taxpayer’s expenditures in view of
the income (or other amounts) she could at the time of the
7
The amount of the addition to tax under sec. 6651(a)(2)
reduces the amount of the addition under sec. 6651(a)(1) for any
month to which an addition to tax applies under both paragraphs.
Sec. 6651(c)(1).
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expenditures reasonably expect to receive before the date
prescribed for the payment of the tax. Id.
Petitioner did not file her 2003 Form 1040; however, she
submitted a 2003 Form 1040 to respondent on February 17, 2008.
Respondent has met his burden of production as to the section
6651(a)(1) addition to tax for failure to file timely. See
Higbee v. Commissioner, supra at 446; Ruggeri v. Commissioner,
T.C. Memo. 2008-300.
Respondent provided a copy of the substitute for return that
he prepared for petitioner, and petitioner did not pay the tax as
shown on the substitute for return on April 15, 2004. See
Wheeler v. Commissioner, 127 T.C. 200, 208-209 (2006), affd. 521
F.3d 1289 (10th Cir. 2008); Hawkins v. Commissioner, T.C. Memo.
2008-168. Respondent has met his burden of production as to the
section 6651(a)(2) addition to tax for failure to pay.8
Petitioner has not established a reasonable cause defense
for the section 6651(a)(1) and (2) additions to tax.
Respondent’s determinations are sustained.
B. Section 6654(a)
Section 6654(a) imposes an addition to tax on an
underpayment of estimated tax unless an exception applies. Sec.
6654(e). The addition to tax is calculated with reference to
8
Petitioner submitted a $989 payment with her 2003 Form 1040
that she submitted on Feb. 17, 2008.
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four required installment payments of the taxpayer’s estimated
tax. Sec. 6654(c)(1); Wheeler v. Commissioner, supra at 210.
Each required installment of estimated tax is equal to 25 percent
of the “required annual payment.” Sec. 6654(d)(1)(A). The
required annual payment is generally equal to the lesser of: (i)
90 percent of the tax shown on the taxpayer’s return for the year
(or, if no return is filed, 90 percent of the taxpayer’s tax for
the year); or (ii) if the taxpayer filed a return for the
immediately preceding taxable year, 100 percent of the tax shown
on that return. Sec. 6654(d)(1)(B); Wheeler v. Commissioner,
supra at 210-211. But if the taxpayer did not file a return for
the preceding year, then clause (ii) does not apply. Sec.
6654(d)(1)(B). A taxpayer has an obligation to pay estimated tax
for a particular year only if she has a “required annual payment”
for that year. Wheeler v. Commissioner, supra at 211.
Petitioner failed to file a return for 2003 and that is
sufficient for the Court to make the analysis required by section
6654(d)(1)(B)(i). Respondent, however, failed to introduce
evidence showing whether petitioner filed a return for the
preceding taxable year, i.e., 2002, and if she did, the amount of
tax shown on her 2002 return. Without that evidence, the Court
cannot identify the amount equal to 100 percent of the tax shown
on her 2002 return. Therefore, the Court cannot conclude that
petitioner had a required annual payment for 2003 because
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respondent failed to produce sufficient evidence, as required by
section 7491(c), to allow the Court to complete the comparison
required by section 6654(d)(1)(B). See Wheeler v. Commissioner,
supra at 211-212. Accordingly, petitioner is not liable for the
addition to tax under section 6654(a) for 2003.
To reflect the foregoing,
Decision will be entered
under Rule 155.