Rosemann v. Comm'r

T.C. Memo. 2009-185

UNITED STATES TAX COURT

JAMES J. ROSEMANN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7573-08. Filed August 13, 2009.

James J. Rosemann, pro se.

Lynette Mayfield and Beth A. Nunnink, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

DAWSON, Judge: Respondent determined deficiencies in

petitioner’s Federal income taxes of $3,089 for 2004 and $4,213
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for 2005 and accuracy-related penalties under section 6662(a)1 of

$815.40 for 2004 and $842.60 for 2005.

After concessions,2 the issues we must decide are:

(1) Whether petitioner was a statutory employee for 2004 and

2005 entitled to report his income and expenses on Schedule C,

Profit or Loss From Business, or a common law employee whose

deductions for those years were reportable on Form 2106, Employee

Business Expenses, and Schedule A, Itemized Deductions, subject

to the 2-percent limitation imposed on miscellaneous itemized

deductions under section 67(a) and (b);

(2) whether petitioner has substantiated claimed employee

business expense deductions in 2004 and 2005 for mileage,

depreciation, section 179 expenses, and a repair with respect to

his personal vehicle; and

(3) whether petitioner is liable for accuracy-related

penalties for 2004 and 2005.

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
2
Petitioner conceded that he is not entitled to charitable
contribution deductions for cash contributions of $2,225 for 2004
and $1,887 for 2005 and deductions for travel and entertainment
expenses of $680 for 2004 and $3,112 for 2005. Respondent had
disallowed the charitable contribution deductions for lack of
substantiation and the travel and entertainment expense
deductions because they were reimbursed by petitioner’s employer.
 - 3 -

FINDINGS OF FACT

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

The stipulation of facts and the accompanying exhibits are

incorporated herein by this reference. Petitioner resided in

Tennessee when he filed his petition.

During 2004 and 2005 petitioner worked as an outside

salesman for Cooper Container Corp. (Cooper), and for a brief

period in 2004 he worked for Greathouse Packaging. He had worked

for Cooper since 1992 as an account manager. In 2004 and 2005

Cooper paid petitioner a salary and quarterly commissions for

taking orders for cardboard containers and packaging. He worked

mainly out of his vehicle and his home. Petitioner was required

by Cooper to work 40 hours per week during business hours and to

report to its place of business for meetings once or twice a

week. He could not wear casual clothes in Cooper’s offices or

when calling on customers. Cooper had the right to discharge

petitioner at will.

Cooper provided petitioner with the following benefits: A

$5,000 life insurance policy; 3 weeks of annual paid vacation

leave; sick leave; health insurance; and a section 401(k)

retirement plan.

In 2004 and 2005 Cooper leased a Mazda for petitioner’s

business use at the corporation’s expense and allowed him to use

it for some personal purposes. Petitioner regularly submitted
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weekly expense reports to Cooper that contained detailed

information regarding his auto mileage, meals and entertainment,

and the persons contacted at the companies served. He also

submitted a mileage log each month with odometer figures. Cooper

reimbursed petitioner for the automobile mileage expenses and

other business expenses related to his work as an outside

salesman of its products.

At times during the years at issue petitioner used his

personal sport utility vehicle, a Jeep Cherokee in 2004 and a

Ford Expedition in 2005, to make some deliveries to customers, to

deliver samples for design work to Cooper’s offices, or to return

bad products. Petitioner was not reimbursed by Cooper for

business travel in his personal vehicle. Petitioner kept no

records regarding the business use of the Jeep Cherokee and the

Ford Expedition. He kept no record of the deliveries to

customers and no mileage records. In 2005 he had the

transmission reconditioned in his Ford Expedition for $1,629 and

claimed a repair expense of $818 on his Federal income tax return

based on 50 percent business use.

James Clark, an unenrolled return preparer, prepared

petitioner’s 2004 and 2005 Federal income tax returns. On Form

4562, Depreciation and Amortization, for 2004 petitioner claimed a

section 179 expense deduction of $4,000 on his personal vehicle,

the Jeep Cherokee, based on business use of 80.67 percent, with an
 - 5 -

estimated 7,004 business miles driven. For 2005 he erroneously

claimed on Form 4562 a depreciation deduction of $1,537 on the

Jeep Cherokee, rather than the Ford Expedition which he then

owned, based on business use of 93.37 percent with an estimated

26,148 miles driven.

Respondent disallowed car expenses of $3,571 for 2004 and

$8,008 for 2005 that petitioner claimed on his tax returns. These

expenses included amounts claimed for mileage for using his

personal vehicle for some alleged business purposes.

On his Federal income tax returns petitioner claimed

deductions on Schedule C of $4,745 for 2004 and $6,438 for 2005.

Respondent determined in the notice of deficiency that the

deductions were improperly claimed on Schedule C and should have

been claimed on Schedule A as employee business expenses, which

are subject to the 2-percent adjusted gross income limitation.

Respondent determined that petitioner was a common law employee

and not a statutory employee. The Forms W-2, Wage and Tax

Statement, which petitioner received from Cooper did not indicate

in box 13 that petitioner was a statutory employee. Cooper

withheld Federal taxes as well as Social Security and Medicare

taxes from petitioner’s wages and commissions.
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OPINION

I. Burden of Proof

As a general rule, the Commissioner’s determination of a

taxpayer’s liability is presumed correct, and the taxpayer bears

the burden of proving that the determination is improper. See

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

However, pursuant to section 7491(a), the burden of proof on

factual issues that affect the taxpayer’s tax liability may be

shifted to the Commissioner where the “taxpayer introduces

credible evidence with respect to * * * such issue.” The burden

will shift only if the taxpayer has, inter alia, complied with

substantiation requirements pursuant to the Internal Revenue Code,

maintained required records and “cooperated with reasonable

requests by the Secretary for witnesses, information, documents,

meetings, and interviews”. Sec. 7491(a)(2). Petitioner has not

asserted that the burden of proof has shifted to respondent.

Moreover, petitioner has neither complied with the substantiation

requirements nor maintained the required records. Accordingly,

the burden of proof remains on petitioner.

II. Employment Classification

A. Statutory Employee

A statutory employee may properly reflect business income and

expenses in full on Schedule C of Form 1040, U.S. Individual

Income Tax Return, and thereby avoid the Schedule A limitations on
 - 7 -

the deduction of employee business expenses and the phaseout of

itemized deductions.3 See Prouty v. Commissioner, T.C. Memo.

2002-175 (citing Rev. Rul. 90-93, 1990-2 C.B. 33). An individual

qualifies as a statutory employee pursuant to section 3121(d)(3)

only if such individual is not a common law employee pursuant to

section 3121(d)(2). Ewens & Miller, Inc. v. Commissioner, 117

T.C. 263, 269 (2001). Section 3121(d) defines employee, in

pertinent part, as follows:

(1) any officer of a corporation; or

(2) any individual who, under the usual common law
rules applicable in determining the employer-employee
relationship, has the status of an employee; or

(3) any individual (other than an individual who is
an employee under paragraph (1) or (2)) who performs
services for remuneration for any person--

* * * * * * *

(D) as a traveling or city salesman, other
than as an agent-driver or commission-driver,
engaged upon a full-time basis in the solicitation
on behalf of, and the transmission to, his
principal (except for side-line sales activities on
behalf of some other person) of orders from
wholesalers, retailers, contractors, or operators
of hotels, restaurants, or other similar
establishments for merchandise for resale or
supplies for use in their business operations;

3
Generally, an employee may deduct unreimbursed employment
expenses on Schedule A subject to an overall 2-percent of
adjusted gross income limitation. See secs. 62(a), 67(a). A
statutory employee is not an employee for purposes of sec. 62.
See sec. 3121(d); Prouty v. Commissioner, T.C. Memo. 2002-175.
As the Court concludes, infra, that petitioner is not a statutory
employee, petitioner’s expenses are subject to this overall 2-
percent of adjusted gross income limitation.
 - 8 -

if the contract of service contemplates that
substantially all of such services are to be performed
personally by such individual; except that an individual
shall not be included in the term “employee” under the
provisions of this paragraph if such individual has a
substantial investment in facilities used in connection
with the performance of such services (other than in
facilities for transportation), or if the services are
in the nature of a single transaction not part of a
continuing relationship with the person for whom the
services are performed; * * *

Because an individual qualifies as a statutory employee only

if the individual is not a common law employee, the Court will

initially decide whether petitioner was a common law employee of

Cooper.

B. Common Law Employee

Whether an individual is an independent contractor or a

common law employee is a question of fact. See Ware v. United

States, 67 F.3d 574 (6th Cir. 1995); Weber v. Commissioner, 103

T.C. 378, 386 (1994), affd. 60 F.3d 1104 (4th Cir. 1995).

Doubtful questions should be resolved in favor of employment.

Breaux & Daigle, Inc. v. United States, 900 F.2d 49, 52 (5th Cir.

1990). Generally, petitioner has the burden of proving error in

respondent’s notice of deficiency determination that he was a

common law employee. See Rule 142(a); Profl. & Executive Leasing,

Inc. v. Commissioner, 89 T.C. 225, 231 (1987), affd. 862 F.2d 751

(9th Cir. 1988).

In determining whether a worker is a common law employee or

an independent contractor, the Court generally considers: (1) The
 - 9 -

degree of control exercised by the principal; (2) which party

invests in work facilities used by the individual; (3) the

opportunity of the individual for profit or loss; (4) whether the

principal can discharge the individual; (5) whether the work is

part of the principal’s regular business; (6) the permanency of

the relationship; (7) the relationship the parties believed they

were creating; and (8) the provision of employee benefits. See

Ewens & Miller, Inc. v. Commissioner, supra at 270; Weber v.

Commissioner, supra at 387. All the facts and circumstances of

each case are considered, and no single factor is dispositive.

1. Degree of Control

The degree of control necessary to find employee status

varies with the nature of the services the worker provides.

Although petitioner had some independence and flexibility in

planning his sales work and contacting customers in promoting his

employer’s products, Cooper retained and exercised considerable

control over petitioner’s activities. He was an at-will employee,

as were all who worked for Cooper. He was subject to dismissal;

he was required to attend regular weekly meetings at the Cooper

facility; he had to keep normal business hours; he was required to

work a minimum of 40 hours per week; he had to observe Cooper’s

no-jeans dress code; his productivity was periodically checked;

and Cooper’s officers treated him as an employee. Thus, we find
 - 10 -

that Cooper had a right of control over petitioner sufficient for

an employment relationship.

2. Investment in Facilities

The parties have stipulated that petitioner’s work for Cooper

did not involve a risk of financial loss. Cooper invested in the

facilities, but petitioner did not. The fact that petitioner

maintained a home office, standing alone, does not constitute a

sufficient basis for a finding of independent contractor status.

See Colvin v. Commissioner, T.C. Memo. 2007-157, affd. 285 Fed.

Appx. 157 (5th Cir. 2008). Furthermore, Cooper provided

petitioner with a vehicle for his sales work in 2004 and 2005 and

reimbursed him for his travel expenses. This factor supports

common law employee status.

3. Opportunity for Profit or Loss

Petitioner was paid a salary and commissions, with periodic

reconciliations. There is no evidence that petitioner otherwise

had any opportunity for profit or loss while he worked for Cooper.

This factor weighs in favor of petitioner’s being a common law

employee.

4. Right To Discharge

Where the principal retains the right to discharge a worker,

it is indicative of an employer-employee relationship. Id.

Cooper retained the right to discharge petitioner at will. This

factor weighs in favor of common law employee status.
 - 11 -

5. Integral Part of Regular Business

Petitioner’s services were an integral part of Cooper’s

regular business of manufacturing and selling cardboard shipping

containers and packaging. Petitioner made sales presentations and

solicited orders for cardboard shipping containers and packaging

for Cooper. Petitioner’s sales were therefore a key factor in

Cooper’s business. Where work is part of the principal’s regular

business, it is indicative of employee status. Simpson v.

Commissioner, 64 T.C. 974, 985, 989 (1975). Accordingly, this

factor weighs in favor of petitioner’s being a common law

employee.

6. Permanency of Relationship

There has been a significant permanency of the relationship

between petitioner and Cooper. Petitioner has worked for Cooper

since 1992. Permanency of a working relationship is indicative of

common law employee status. Thus the lengthy working relationship

between Cooper and petitioner weighs in favor of petitioner’s

being a common law employee.

7. Relationship the Parties Thought They Created

While petitioner and Cooper had no written employment

contract, the relationship the parties thought they were creating

was shown by the testimony of Cooper’s vice president. She

testified that Cooper retained the right to discharge petitioner;

retained other controls over his employment; elected not to check
 - 12 -

the box 13 on Forms W-2 indicating that petitioner was a statutory

employee; withheld income taxes, employment taxes, and Medicare

taxes; and provided several employee benefits. Her testimony

shows that the nature of the relationship Cooper thought it was

creating with petitioner was that of employer-employee. This

factor weighs in favor of finding that petitioner was a common law

employee during the years at issue.

8. Provision for Employee Benefits

Benefits such as health insurance, life insurance, paid

vacations, and retirement plans are typically provided to

employees. Weber v. Commissioner, 103 T.C. at 393-394.

Petitioner received 3 weeks of annual paid vacation, health

insurance, a life insurance policy, and sick leave and

participated in Cooper’s section 401(k) retirement plan. Cooper

also provided petitioner with a company car and reimbursed him for

his business expenses with the exception of cell phone, home

phone, home computer, Internet services, and home fax expenses,

which respondent allowed as nonreimbursable expense deductions.

All of these benefits clearly support a finding that petitioner

was a common law employee during 2004 and 2005.

We realize, as petitioner testified, that the IRS audited his

1995 and 1996 income tax returns to determine whether he qualified

as a statutory employee. Because the auditor agreed with

petitioner that he was then qualified as a statutory employee,
 - 13 -

petitioner continued using that same status in his income tax

returns for later years. It was not until the audit for 2004 and

2005 that respondent again challenged petitioner’s claimed

statutory employee status. As the Court informed petitioner, each

taxable year stands alone, and the Commissioner may challenge in a

succeeding year what was condoned or agreed to in a previous year.

Auto. Club of Mich. v. Commissioner, 353 U.S. 180 (1957); Rose v.

Commissioner, 55 T.C. 28 (1970). Thus the IRS’s failure to

challenge petitioner’s claimed statutory employee status during

the prior years does not entitle petitioner to that status for the

years in suit.

9. Conclusion

Even though there are some aspects of petitioner’s work

indicating independent contractor status and therefore the

possibility that he may have been a statutory employee during the

years at issue, our analysis of the applicable factors strongly

supports the conclusion that petitioner was a common law employee

of Cooper. Hence petitioner is precluded from being a statutory

employee pursuant to section 3121(d)(3). See Ewens & Miller, Inc.

v. Commissioner, 117 T.C. at 269. Accordingly, he is not entitled

to deduct expenses on Schedule C.

III. Petitioner’s Deductions Relating to Personal Vehicle
Expenses, Depreciation, Section 179 Expenses, and a Repair

In view of our conclusion that petitioner is not entitled to

deduct expenses on Schedule C, we must now decide whether
 - 14 -

petitioner is entitled to deduct expenses incurred in connection

with his employment on Schedule A. See sec. 67(a).

A. Schedule A Deductions

An individual performing services as an employee may deduct

miscellaneous itemized expenses incurred in the performance of

services as an employee only to the extent such expenses exceed 2

percent of the individual’s adjusted gross income. Sec. 67(a).

B. General Deduction Rules

Deductions are a matter of legislative grace, and the

taxpayer bears the burden of proving that he is entitled to any

claimed deductions. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,

84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934). Taxpayers must maintain records relating to their

expenses and must prove their entitlement to all claimed

deductions, credits, and expenses in controversy. See sec. 6001;

Rule 142(a).

Pursuant to section 162(a), a taxpayer is entitled to deduct

all of the ordinary and necessary business expenses paid or

incurred during the taxable year in carrying on a trade or

business. The deduction for an employed individual’s unreimbursed

business expenses under section 162 is claimed on Form 2106 and

included in the miscellaneous itemized deductions claimed on Form

1040 Schedule A. Expenses incurred in the performance of services

as an employee are to be reported and memorialized as required by
 - 15 -

the regulations promulgated under section 162. See sec. 1.162-

17(a), Income Tax Regs. The taxpayer bears the burden of proving

that the claimed expenses were ordinary and necessary according to

section 162. The employee must show the relationship between the

expenditures and the employment. See Evans v. Commissioner, T.C.

Memo. 1974-267, affd. in part and revd. in part on another ground

557 F.2d 1095 (5th Cir. 1977). In certain instances the taxpayer

must meet specific substantiation requirements in addition to the

requirements of section 162. See sec. 274.

If a claimed expense (other than one subject to heightened

scrutiny under section 274) is not fully substantiated, we are

permitted to estimate the expense when we are convinced from the

record that the taxpayer has incurred it. Cohan v. Commissioner,

39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85

T.C. 731, 742-743 (1985); Sanford v. Commissioner, 50 T.C. 823,

827-828 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969); sec.

1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov.

6, 1985). However, the taxpayer must present credible evidence

that provides a rational basis for our estimate. Vanicek v.

Commissioner, supra at 743. Petitioner has presented no evidence

that would provide a reasonable basis upon which we can estimate

any expense under the Cohan rule.
 - 16 -

C. Vehicle Mileage

Vehicle mileage deductions are subject to the strict

substantiation requirements of section 274(d). Where a taxpayer

fails to establish that his records satisfy the heightened

substantiation requirements of section 274(d), the expenses will

not be allowable.

Section 274(d) applies, in part, to the use of “listed

property”, which includes passenger automobiles. To deduct such

expenses, the taxpayer must substantiate by adequate records or

sufficient evidence to corroborate the taxpayer’s own testimony:

(1) The amount of the expenditure or use, which includes mileage

in the case of automobiles; (2) the time and place of the travel,

or use; and (3) the business purpose of the expense. Id.

To satisfy the adequate records requirement of section 274, 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).
 - 17 -

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 IRS. See sec. 1.274-5(j)(2), Income Tax Regs.

The standard mileage rate is to be multiplied by the number of

business miles traveled. The use of the standard mileage rate

establishes only the amount deemed expended with respect to the

use of a passenger automobile. The taxpayer must still establish

the amount (i.e., business mileage), the time, and the business

purpose of each use.

Petitioner claimed in his 2004 income tax return a section

179 expense deduction of $4,000 for his personal 2001 Jeep

Cherokee, placed in service on January 13, 2004, based on 80.67

percent business use, and in his 2005 return a depreciation

deduction of $1,537, based on 93.37 percent business use. For

2004 he claimed 7,004 business miles and for 2005 he claimed

26,148 business miles. At trial he admitted that he had no

records to substantiate these claimed deductions or the business

miles driven in those years and no records of any of the

deliveries made to Cooper’s customers. The amounts claimed for

business use of the Jeep Cherokee were only estimates. He

testified that he did not even use the Jeep Cherokee in 2005 but

bought a used Ford Expedition in that year and used it for

personal as well as some business purposes. He also testified
 - 18 -

that the Jeep Cherokee and the Ford Expedition were probably not

used more than 50 percent for business, even though he reported

80.67 percent business use in 2004 and 93.37 percent business use

in 2005. We think his estimates were greatly exaggerated and not

supported by any contemporaneous or permanent records. Petitioner

further claimed a repair expense of $818 for replacing the

transmission in his personal Ford Expedition.

In the notice of deficiency respondent disallowed all of the

deductions for vehicle expenses, depreciation, section 179

expenses, and the repair because of inadequate substantiation. We

agree with respondent. It is clear on this record that petitioner

did not maintain the necessary books and records required to

substantiate his claimed business expense deductions for the use

of his personal vehicle during the years in issue in accordance

with the provisions of sections 6001 and 274 and the regulations

thereunder. Therefore, we hold that petitioner failed to prove

that he is entitled to any employee business expense deductions in

excess of those respondent allowed.

IV. Section 6662(a) Accuracy-Related Penalties

Section 7491(c) imposes on the Commissioner the burden of

production in any court proceeding with respect to the liability

of any individual for penalties and additions to tax. Higbee v.

Commissioner, 116 T.C. 438, 446 (2001). In order to meet the

burden of production under section 7491(c), the Commissioner need
 - 19 -

only make a prima facie case that imposition of the penalty or

addition to tax is appropriate. On the basis of our findings

herein, respondent has met his burden of production with respect

to the disallowed deductions. Petitioner did not make a

reasonable attempt to comply with the law in some respects or

maintain adequate records with respect to his claimed deductions.

Respondent determined that petitioner is liable for the

accuracy-related penalties under section 6662(a) for 2004 and

2005. Section 6662(a) imposes a 20-percent penalty on the portion

of an underpayment attributable to any one of various factors,

including negligence or disregard of rules or regulations. See

sec. 6662(b)(1). “Negligence” includes any failure to make a

reasonable attempt to comply with the provisions of the Internal

Revenue Code, including 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.

Section 6664(c)(1) provides that the penalty under section

6662(a) shall not apply to any portion of an underpayment if it is

shown that there was reasonable cause for the taxpayer’s position

and that the taxpayer acted in good faith with respect to that

portion. The determination of whether a taxpayer acted with

reasonable cause and in good faith is made on a case-by-case

basis, taking into account all the pertinent facts and

circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The most
 - 20 -

important factor is the extent of the taxpayer’s effort to assess

his proper tax liability for the year. Id.

We impose no accuracy-related penalties against petitioner

with respect to the issue of whether he was a statutory or common

law employee during 2004 and 2005. We conclude on these

particular facts and circumstances that petitioner acted

reasonably and in good faith because he relied on respondent’s

determination in a prior audit for the 1995 and 1996 taxable years

that he qualified as a statutory employee entitled to use Schedule

C for tax purposes. See sec. 1.6664-4(b)(1), Income Tax Regs.;

see also Tesar v. Commissioner, T.C. Memo. 1997-207; De Boer v.

Commissioner, T.C. Memo. 1996-174; Balis v. Commissioner, T.C.

Memo. 1992-34, affd. without published opinion 987 F.2d 770 (5th

Cir. 1993).

As to petitioner’s concessions that he is not entitled to the

unsubstantiated charitable contribution deductions he claimed for

2004 and 2005 and the claimed travel and entertainment expenses

which were reimbursed by his employer, we sustain the accuracy-

related penalties pursuant to section 6662(a) because of

petitioner’s disregard of rules or regulations.

Finally, we sustain respondent’s determination of accuracy-

related penalties with respect to petitioner’s claimed business

expense deductions pertaining to his personal vehicle. Here again

petitioner disregarded the substantiation rules or regulations.
 - 21 -

In view of petitioner’s detailed expense reports required to be

submitted to his employer, Cooper, for reimbursement of the leased

vehicle mileage, and for his meal and entertainment expenses, we

think petitioner was well aware of his responsibility to maintain

separate records to support his claimed expense deductions for any

business use of his personal sport utility vehicle. He was

negligent in failing to do so. Accordingly, we hold that he is

liable for the accuracy-related penalties with respect to such

unsubstantiated deductions.

To reflect the foregoing,

Decision will be entered

under Rule 155.