Morrissey v. Comm'r

T.C. Summary Opinion 2009-135

UNITED STATES TAX COURT

JOSEPH E. AND CECILIA A. MORRISSEY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12068-06S. Filed September 2, 2009.

Joseph E. and Cecilia A. Morrissey, pro sese.

Randall Preheim, for respondent.

PANUTHOS, Chief 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.1 Pursuant to

section 7463(b), the decision to be entered is not reviewable by

1
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years at issue, Rule
references are to the Tax Court Rules of Practice and Procedure,
and dollar amounts are rounded to the nearest whole dollar.
 - 2 -

any other court, and this opinion shall not be treated as

precedent for any other case.

Petitioners petitioned the Court to redetermine Internal

Revenue Service (IRS) determinations relating to their Federal

income taxes for taxable years 2001, 2002, and 2003 (the years at

issue). The IRS determined the following:

Penalty
Year Deficiency Sec. 6662(a)

2001 $4,652 $818
2002 6,118 1,072
2003 2,123 425

After concessions,2 the issues for decision are whether

petitioners: (1) Were engaged in an activity for profit and thus

whether $400 reported as income on Schedule C, Profit or Loss

From Business, and claimed Schedule C deductions were proper; (2)

are entitled to itemized deductions in amounts greater than the

IRS allowed for each year in issue; (3) are entitled to a capital

loss deduction greater than the IRS allowed for 2002; and (4) are

liable for an accuracy-related penalty for each year in issue.

2
Petitioners conceded that they are not entitled to the
educator expense deduction claimed for 2002 and that they are not
entitled to the gambling loss deduction claimed for 2003.
Respondent conceded that petitioners’ 2002 individual retirement
account distribution is not taxable. Petitioners concede that
their job expenses and miscellaneous deductions do not exceed the
2-percent floor imposed by sec. 67 for any year in issue. Other
concessions will be addressed in the discussion.
 - 3 -

Background

The parties submitted a stipulation of facts with

accompanying exhibits, and we incorporate the stipulation and

those exhibits by this reference. Petitioners were married to

each other throughout the years at issue, and they filed their

taxes jointly, using Form 1040, U.S. Individual Income Tax

Return, for each year. They resided in Colorado when they

petitioned the Court.

Joseph E. Morrissey (hereafter petitioner) worked full time

for the IRS from 1998 to 2006, initially as a customer service

representative and finally in a collections function. The record

does not reflect that the IRS provided any specific tax return

preparation training to petitioner. Cecilia A. Morrissey

(hereafter Mrs. Morrissey) worked for AT&T in 2001 and 2002 and

for Comcast for part of 2003. In October 2003 Mrs. Morrissey

commenced work for the IRS as a customer service representative.

The IRS provided her with several months of training on Form 1040

and Schedule A, Itemized Deductions, in order to certify her to

answer taxpayer questions about those forms.

Petitioner was also licensed as a real estate agent in

Colorado. During 2001 he received $400 as payment for assisting

two or three people to improve their credit scores so each might

qualify for a mortgage to purchase real estate. Petitioner did

not have contracts for the sale of any real estate, he did not
 - 4 -

have listings for real estate, and he did not earn income or

commissions from any real estate transactions during any of the

years in issue. Petitioner reported the following on Schedule C

for his purported business activity:

Item 2001 2002 2003

Gross receipts or sales $400 -0- -0-
Returns and allowances -0- -0- $1,500
Gross income 400 -0- (1,500)
Total expenses (19,802) ($19,700) (9,276)
Net profit or (loss) (19,402) (19,700) (10,776)

Examples of business expenses petitioner reported and

included in total expenses on Schedules C include: Payments to

petitioners’ children to help petitioner with his computer,

claimed as advertising expenses; funds given to petitioner’s

brother, claimed as bad debt expense; personal automobile

insurance, AAA membership, and homeowners insurance, claimed as

business expenses; life insurance premiums on policies covering

both petitioners and the cost of a theft insurance policy,

claimed as employee benefit programs; home repairs and remodeling

expenses following petitioner’s breaking a water pipe in his home

and causing water damage; expenses of traveling and staying a

week in petitioners’ timeshare condominium in Florida, claimed as

an expense relating to petitioner’s real estate activity; tickets

for petitioners to attend concerts, claimed as real estate

expenses; interest expenses for finance charges on cash advances
 - 5 -

from petitioners’ credit union and interest paid on a life

insurance policy loan, also deducted on Schedule A, claimed as

business interest.

Petitioners claimed the following deductions on Schedule A,

for the years in issue:3

Deduction claimed 2001 2002 2003

Medical and dental expenses $3,186 $4,798 $1,709
Taxes 4,968 4,585 3,914
Interest 9,354 8,636 8,774
Gifts to charity (1040X for 2001) 3,408 2,925 3,119
Job expenses and miscellaneous
deductions (subject to 2% floor) 2,398 2,452 494
Miscellaneous deductions (not
subject to 2% floor) 1,500 -0- 150
Total itemized deductions 24,814 23,396 18,160

The IRS issued a notice of deficiency on April 10, 2006,

determining deficiencies in petitioners’ income taxes for the

years in issue. The IRS disallowed in full the deductions

petitioners claimed for petitioner’s purported business activity,

determining that petitioner did not establish either that he

conducted his activity for profit, that the expenses were

ordinary and necessary expenses, or that he expended funds for

the purposes reported on his Schedules C.

3
Petitioners submitted a Form 1040X, Amended U.S.
Individual Income Tax Return, in March 2002 to correct a $1,842
overstatement of their charitable contributions for 2001. This
adjustment reduced their claimed contributions from $5,250 to
$3,408. The IRS accepted this adjustment and determined a
deficiency relative to the smaller amount.
 - 6 -

The IRS also disallowed certain of petitioners’ claimed

itemized deductions, as follows:

Disallowed deductions 2001 2002 2003

Medical and dental expenses $2,547 $4,798 $1,709
Taxes1 845 (59) (711)
Interest -0- 313 1,257
Gifts to charity (after 1040X) 567 173 666
Job expenses and miscellaneous
deductions (subject to 2% floor)2 2,398 2,452 494
Miscellaneous deductions (not
subject to 2% floor) 1,500 -0- -0-
Total disallowed deductions 7,857 7,677 3,415
1
The amounts in parentheses represent amounts the IRS
allowed in excess of the amounts petitioners claimed.
2
As indicated, petitioners conceded that they are not
entitled to any deductions for job expenses or miscellaneous
deductions.

In the notice of deficiency the IRS explained that many of

petitioners’ medical expenses were not allowable and that

petitioners’ deductible medical expenses exceeded the 7.5-percent

floor by $639 in 2001 but did not exceed the floor for either

2002 or 2003. The IRS disallowed petitioners’ claimed deduction

for sales tax paid when they purchased a car in 2001 but allowed

additional deductions for taxes paid of $59 and $711,

respectively, for 2002 and 2003. The IRS disallowed some of

petitioners’ claimed interest expense deductions and charitable

contribution deductions, determining that petitioners did not

substantiate that the amounts were paid or that the expenditures,

if incurred, were properly deductible. Finally, the IRS
 - 7 -

determined that the $1,500 miscellaneous deduction petitioners

claimed in 2001 and described as “Lawyers” was nondeductible

because petitioners did not establish: That the expense was an

ordinary and necessary business expense, that it was paid, or if

paid that it was expended for the production of income. The IRS

noted that if this $1,500 was deductible, then it was deductible

as a miscellaneous itemized deduction subject to the section 67

limitation, and it was taxable when the amount was returned in

2003.

For convenience, additional findings of fact are combined

with the discussion of each issue.

Discussion

I. Schedule C Expenses

The Commissioner’s determinations are presumed correct, and

a taxpayer bears the burden of proving that a determination set

forth in a notice of deficiency is incorrect. See Rule

142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).

Deductions are a matter of legislative grace, and a taxpayer

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

claimed. Rule 142(a); New Colonial Ice Co. v. Helvering, 292

U.S. 435, 440 (1934). This includes the burden of

substantiation. Hradesky v. Commissioner, 65 T.C. 87, 90 (1975),

affd. per curiam 540 F.2d 821 (5th Cir. 1976). Although section

7491(a) may shift the burden of proof to the Commissioner, that
 - 8 -

section is not applicable where, as here, a taxpayer has failed

to satisfy the recordkeeping and substantiation requirements of

the Code. See sec. 7491(a)(2)(A) and (B).

Section 162(a) allows a deduction for all ordinary and

necessary expenses paid or incurred in carrying on a trade or

business. An ordinary expense is one that is common and

acceptable in the particular business. Welch v. Helvering, supra

at 113-114. A necessary expense is an expense that is

appropriate and helpful in carrying on the trade or business.

Heineman v. Commissioner, 82 T.C. 538, 543 (1984).

Section 183(a) provides generally that in the case of an

individual, no deduction attributable to an activity which is not

engaged in for profit is allowed except as provided in section

183(b). Section 183(b)(1) allows those deductions which would be

allowable without regard to whether the activity is engaged in

for profit. Section 183(b)(2) allows a deduction equal to the

amount of the deductions that would be allowable for the taxable

year if the activity were engaged in for profit, but only to the

extent the gross income derived from the activity exceeds the

deductions allowable under section 183(b)(1).

Section 183(c) defines “activity not engaged in for profit”

as “any activity other than one with respect to which deductions

are allowable for the taxable year under section 162 or under

paragraph (1) or (2) of section 212.” Deductions are allowable
 - 9 -

under section 162 for expenses related to a taxpayer’s carrying

on a trade or business and under section 212(1) and (2) for

expenses incurred for the production or collection of income or

for the management, conservation, or maintenance of property held

for the production of income.

The test for determining whether an activity is engaged in

for profit is whether the individual is engaged in the activity

with “the actual and honest objective of making a profit.” See

Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd. without

published opinion 702 F.2d 1205 (D.C. Cir. 1983); Brannen v.

Commissioner, 78 T.C. 471, 502 (1982), affd. 722 F.2d 695 (11th

Cir. 1984); Allen v. Commissioner, 72 T.C. 28, 33 (1979).

Although a taxpayer need not have a reasonable expectation of

earning a profit, he must have entered into or continued the

activity with a bona fide objective of doing so. See Keanini v.

Commissioner, 94 T.C. 41, 46 (1990); Hulter v. Commissioner, 91

T.C. 371, 393 (1988); Beck v. Commissioner, 85 T.C. 557, 569

(1985); Dreicer v. Commissioner, supra; Golanty v. Commissioner,

72 T.C. 411, 425-426 (1979), affd. without published opinion 647

F.2d 170 (9th Cir. 1981); sec. 1.183-2(a), Income Tax Regs.

“[P]rofit” in this context means economic profit, independent of

tax savings. See Hayden v. Commissioner, 889 F.2d 1548, 1552

(6th Cir. 1989), affg. T.C. Memo. 1988-310; Antonides v.
 - 10 -

Commissioner, 91 T.C. 686, 694 (1988), affd. 893 F.2d 656 (4th

Cir. 1990); Landry v. Commissioner, 86 T.C. 1284, 1303 (1986).

Whether a taxpayer engages in an activity with the requisite

profit objective is a question of fact to be resolved on a

consideration of all the facts and circumstances in the record.

See Lemmen v. Commissioner, 77 T.C. 1326, 1340 (1981); Allen v.

Commissioner, supra; sec. 1.183-2(b), Income Tax Regs. A

taxpayer bears the burden of proving that he engaged in the

subject activity with the requisite profit objective, and greater

weight is given to objective facts than to his mere statement of

intent. See Rule 142(a); Siegel v. Commissioner, 78 T.C. 659,

699 (1982); Churchman v. Commissioner, 68 T.C. 696, 701 (1977);

sec. 1.183-2(a), Income Tax Regs.

Section 1.183-2(b), Income Tax Regs., lists the following

factors relevant to determining whether an activity is engaged in

for profit: (1) The manner in which the taxpayer carries on the

activity; (2) the expertise of the taxpayer or his advisers; (3)

the time and effort expended by the taxpayer in carrying on the

activity; (4) an expectation that the assets used in the activity

may appreciate in value; (5) the success of the taxpayer in

carrying on similar or dissimilar activities; (6) the taxpayer’s

history of income or losses with respect to the activity; (7) the

amount of occasional profits, if any, which are earned; (8) the

financial status of the taxpayer; and (9) elements of personal
 - 11 -

pleasure or recreation involved. These factors are not

exclusive, and no single factor or number of factors is

conclusive in determining whether an activity is engaged in for

profit. See Dreicer v. Commissioner, supra at 645; Vandeyacht v.

Commissioner, T.C. Memo. 1994-148; sec. 1.183-2(b), Income Tax

Regs.

Petitioner provided very little information about the

conduct of his purported business activity. He apparently

provided assistance to a few individuals to improve their credit

scores and received $400 for this service in 2001. Petitioner

described his expenses and asserted that he had one or two

clients for whom he had worked on real estate purchases in the

past.4 Other than this brief description, petitioner did not

provide any information on the manner in which he conducted his

purported business activity. Petitioner did not introduce any

books and records to demonstrate that he conducted this activity

in a businesslike manner. Petitioner has held a real estate

license since 1978, but he did not provide any information about

his or any adviser’s qualifications or expertise in running a

4
Petitioner introduced a preprinted form contract titled
“Contract to buy and sell real estate (residential)”. However,
the contract is incomplete, it appears to have been filled out by
petitioner, and it does not bear either his purported client’s
signature or his purported client’s initials on the spaces
provided for the client to initial each page of the agreement.
This document does not show that petitioner was actively involved
in any real estate transactions during the years in issue.
 - 12 -

business. He testified that he worked for the IRS full time and

sold real estate part time.5 Petitioner did not hold any assets

related to this activity that he expected would appreciate, and

he did not introduce any evidence that he ever successfully ran a

profitable business venture. For the 3 years in issue petitioner

claimed expenses totaling $48,778 while reporting a total of $400

in gross receipts. As a result of the losses claimed,

petitioners have substantially reduced the tax liabilities

resulting from their wages. There is no indication in the record

whether petitioner’s activity was recreational or pursued for

pleasure.

Considering these factors, petitioner’s vague testimony

about his activities, and the personal nature of the deductions

claimed on Schedules C, we conclude that Petitioner did not

pursue his activity with an actual and honest objective of making

a profit. See Dreicer v. Commissioner, supra. We sustain the

disallowance of petitioners’ claimed business deductions for each

year in issue. Since petitioner was not engaged in a business

5
The IRS approved petitioner’s request to work outside the
IRS as a sales associate in 1998 and his request to work as a
real estate agent in 2000. The record also indicates that
petitioner sold a piece of property in 1999 on commission for a
relative and that he had no sales during any of the years in
issue.
 - 13 -

activity, we also sustain respondent’s determination that the

$400 reported as income in 2001 was not taxable income.6

II. Itemized Deductions

A. Medical and Dental Expenses

Section 213(a) provides:

There shall be allowed as a deduction the expenses paid
during the taxable year, not compensated for by insurance or
otherwise, for medical care of the taxpayer, his spouse, or
a dependent (as defined in section 152), to the extent that
such expenses exceed 7.5 percent of adjusted gross income.

Section 213(d) provides in relevant part:

(1) The term “medical care” means amounts paid--

(A) for the diagnosis, cure, mitigation, treatment, or
prevention of disease, or for the purpose of affecting any
structure or function of the body,

(B) for transportation primarily for and essential to
medical care referred to in subparagraph (A),

An expenditure that is merely beneficial to the general

health of an individual is not an expenditure for medical care.

Sec. 1.213-1(e)(1)(ii), Income Tax Regs.

6
Petitioner improperly reported $1,500 in returns or
allowances on his Schedule C for 2003. He explained that this
amount represented the receipt of $1,500. Petitioner testified
that he paid $1,500 to a lawyer in 2001 and that the lawyer paid
this amount back to petitioner in 2003. Petitioner did not
explain how the Social Security dispute for which he retained
this attorney related to his purported real estate activity.

Furthermore, petitioner has not identified or
substantiated any expenses that would be allowable without regard
to whether he conducted his real estate activity for profit. See
sec. 183(b)(1).
 - 14 -

To substantiate medical and dental expenses, a taxpayer must

furnish the name and address of each payee, the amount of the

expense, and the date paid. If requested by the Commissioner, a

taxpayer must furnish an itemized invoice from the payee that

identifies the patient, the type of service rendered, the

specific purpose of the expense, the amount paid, the date paid,

and any other information the Commissioner deems necessary. See

sec. 1.213-1(h), Income Tax Regs.; see also Davis v.

Commissioner, T.C. Memo. 2006-272; Cotton v. Commissioner, T.C.

Memo. 2000-333.

If a taxpayer establishes that deductible expenses were

incurred but has not established the exact amounts, the Court may

estimate the amounts allowable in some circumstances (the Cohan

rule). See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.

1930). The Court can estimate the amount of a deductible expense

only when the taxpayer provides evidence sufficient to establish

a rational basis for making the estimate. Vanicek v.

Commissioner, 85 T.C. 731, 743 (1985). Where a taxpayer fails to

provide adequate evidence of his expenses, the Court may uphold

the Commissioner’s determination denying the deduction for

medical and dental expenses. See Davis v. Commissioner, supra

(citing Hunter v. Commissioner, T.C. Memo. 2000-249, and

Nwachukwu v. Commissioner, T.C. Memo. 2000-27).
 - 15 -

Congress overrode the Cohan rule with section 274(d), which

requires strict substantiation for certain categories of

expenses; in the absence of evidence demonstrating the exact

amounts of those expenses, deductions are to be disallowed

entirely. Sanford v. Commissioner, 50 T.C. 823, 827 (1968),

affd. per curiam 412 F.2d 201 (2d Cir. 1969). Expenses subject

to section 274(d) include expenses for listed property, such as

passenger automobiles. Secs. 274(d)(4), 280F(d)(4).

Before trial the parties agreed that for 2001 petitioners

were entitled to deduct claimed medical expenses with the

exception of prescription expenses claimed for their adult son

and medical transportation expenses.7 At trial petitioners

conceded the disputed prescription expenses for their son and

testified to making 84-100 trips to the pharmacy in 2001, driving

2 miles round trip each time, and to making 8 trips to their

doctor, at 25 miles per trip.

The standard mileage rate for medical transportation was

12 cents per mile for 2001.8 Rev. Proc. 2000-48, sec. 7.62,

7
Claimed medical expenses are deductible only to the extent
they exceed 7.5 percent of a taxpayer’s adjusted gross income.
Sec. 213(a). The expenses discussed herein reflect medical
expenses petitioners claimed before the application of the 7.5-
percent floor.
8
The rates for 2002 and 2003 were 13 cents per mile and
12 cents per mile, respectively. Rev. Proc. 2001-54, sec. 7.02,
2001-2 C.B. 530, 532; Rev. Proc. 2002-61, sec. 7.02, 2002-2 C.B.
616, 619.
 - 16 -

2000-2 C.B. 570, 572. Petitioners claimed $596 in medical

mileage expenses, which would represent 4,967 miles driven for

medical purposes in 2001. Petitioners testified to driving

approximately 400 miles in 2001 for medical purposes but did not

explain the discrepancy between the deduction claimed and the

miles driven. Furthermore, sections 274(d) and 280F(d)(4) impose

strict substantiation requirements on deductions for passenger

automobile expenses. Petitioners did not introduce any evidence

to support their claimed medical transportation expenses. We may

not estimate these expenses, and we sustain the disallowance of

this item. Petitioners are not entitled to claim any medical

expenses for 2001 beyond the $6,190 which the parties

stipulated.9

Petitioners claimed itemized medical expenses of $9,089 on

their return for 2002 and claimed increased medical expenses of

$9,136.23 before trial. The parties stipulated that petitioners

substantiated the $9,136.23 except for $3,216.55 for a bed,

$163.78 for expenditures at Walgreens for their adult son, and

$688.25 for medical transportation.

Petitioners did not offer testimony or other evidence

related to medical transportation expenses for 2002, and we

9
For 2001 petitioners’ substantiated medical expenses
exceed the 7.5-percent floor of sec. 213(a), and the amount in
excess of that floor is allowable as a deduction.
 - 17 -

sustain the disallowance of this item for the reasons discussed

above.

Respondent agrees that petitioners paid $3,216.55 for an

adjustable bed they purchased in 2002, but he argues that this

expense is not deductible as an expenditure for medical care

because petitioners purchased the bed for their general health.

Petitioner referred to a letter from a doctor stating that

petitioners’ purchase of an adjustable bed was justified by his

rheumatoid arthritis, and he referenced a sleep study performed

on him.10 Mrs. Morrissey explained that the bed provided

adjustments that alleviated her sleep apnea. However, she did

not assert either that she was diagnosed with sleep apnea or that

they purchased the bed in 2002 on the instruction of her

physician. We conclude that petitioners have not shown that they

purchased the bed in 2002 for their medical care rather than for

their general health. See sec. 1.213-1(e)(1), Income Tax Regs.

We sustain the determination as to the cost of the bed.

Petitioners’ son was 21 years old and attended Metro State

College in 2002. Petitioner testified that deducting expenses of

items purchased at Walgreens for their son was appropriate

because petitioners were supporting their son while he was in

10
At trial petitioners did not introduce into evidence
either the letter from the doctor or the report of the sleep
study, but respondent noted that the doctor’s letter was written
in 2004 and that the sleep study was conducted in 2005.
 - 18 -

school. Section 213 allows a deduction for medical expenses of

the taxpayer, his spouse, and his dependents. Sections 151 and

152 define a dependent to include a taxpayer’s child under the

age of 19 or a child who is a student under the age of 24 over

half of whose support was received from the taxpayer.

Petitioners did not show that their son was their dependent for

2002 or any year in issue, and they did not claim their son as a

dependent on any of the tax returns at issue. We sustain the

disallowance of this item. Petitioners are not entitled to claim

any medical expenses for 2002 beyond the $5,068 which the parties

stipulated.11

For 2003 petitioners claimed they paid $6,525 in medical and

dental expenses. At trial they asserted their expenditures were

$7,335.07. Of this amount the parties dispute two items:

(1) Medical transportation of $547, and (2) chiropractic services

of $490.

Petitioners did not introduce testimony or other evidence

supporting their medical transportation expenses in 2003.

Accordingly, we sustain that determination for the reasons

discussed above.

11
Petitioners’ substantiated medical expenses for 2002 are
less than the 7.5-percent floor imposed by sec. 213(a).
Accordingly, they are not entitled to any medical expense
deduction for 2002.
 - 19 -

Petitioner testified that the $490 for chiropractic services

was for services provided to Mrs. Morrissey in 2003. Mrs.

Morrissey did not testify about any chiropractic services.

Petitioners did not introduce evidence of the name and address of

the service provider, the dates of service, or the amounts paid

for any visits. See sec. 1.213-1(h), Income Tax Regs. We

sustain the disallowance of this item.

Petitioners are not entitled to claim any medical expenses

for 2003 beyond the $5,713 which the parties stipulated.12

B. Taxes

In the notice of deficiency the IRS allowed greater

deductions for taxes than petitioners claimed for 2002 and 2003.

For 2001 the parties dispute whether petitioners are entitled to

deduct sales tax paid when they purchased a car. Petitioner

testified that he thought the sales tax on that purchase was

deductible along with State and local income taxes, real estate

taxes, and personal property taxes.

State and local real estate property taxes, State and local

personal property taxes, and State, local, and foreign income

taxes are allowed as a deduction. Sec. 164(a)(1), (2), and (3).

Section 164 in effect for taxable year 2001 did not permit the

12
Petitioners’ substantiated medical expenses for 2003 are
less than the 7.5-percent floor imposed by sec. 213(a).
Accordingly, they are not entitled to any medical expense
deduction for 2003.
 - 20 -

deduction of State and local general sales taxes on personal

purchases;13 rather taxes paid in connection with the acquisition

of property are treated as part of the cost of the acquired

property. Sec. 164(a). Thus, petitioners are not entitled to

deduct the sales tax paid when they purchased a car in 2001.

C. Interest

The parties dispute whether petitioners are entitled to

deduct interest expenses of $313 in 2002 and $1,257 in 2003.

The disallowed interest in 2002 represents interest on

a loan against a State Farm life insurance policy. Petitioners

argue that the IRS allowed this deduction in 2001 and that it

should be allowed for 2002 also.

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).

Petitioners appear to argue that respondent is estopped from

disallowing the claimed interest deductions. Equitable estoppel

is a judicial doctrine that precludes a party from denying his

own acts or representations which induced another to act to his

detriment. Hofstetter v. Commissioner, 98 T.C. 695, 700 (1992).

It is well settled, however, that the Commissioner cannot be

13
For taxable years beginning after Dec. 31, 2003, and
before Jan. 1, 2008, taxpayers could elect to deduct sales taxes
in lieu of State and local income taxes. Sec. 164(b)(5).
 - 21 -

estopped from correcting a mistake of law, even where a taxpayer

may have relied to his detriment on that mistake. Norfolk S.

Corp. v. Commissioner, 104 T.C. 13, 59-60 (1995), affd. 140 F.3d

240 (4th Cir. 1998). An exception exists only in the rare case

where a taxpayer can prove he or she would suffer an

unconscionable injury because of that reliance. Id. at 60.

The following conditions must be satisfied before equitable

estoppel will be applied against the Government: (1) A false

representation or wrongful, misleading silence by the party

against whom the opposing party seeks to invoke the doctrine;

(2) an error in a statement of fact and not in an opinion or

statement of law; (3) ignorance of the true facts; (4) reasonable

reliance on the acts or statements of the one against whom

estoppel is claimed; and (5) adverse effects of the acts or

statement of the one against whom estoppel is claimed. Id.

Petitioners have not demonstrated affirmative misconduct by

respondent, nor have they established the other elements

necessary for equitable estoppel to apply. Accordingly,

respondent is not estopped from disallowing the claimed interest

deductions.

Section 163(h) provides that no deduction shall be allowed

for personal interest paid or accrued during the taxable year.

Section 163(h)(2) defines personal interest as all interest

allowable as a deduction other than six enumerated exceptions,
 - 22 -

including interest on trade or business indebtedness, investment

interest, and qualified residence interest, inter alia.

Petitioners have not shown that the interest they paid in

2002 to State Farm was anything other than personal interest. We

conclude that any interest paid on their life insurance loan is

not deductible. See sec. 163(h).

On their 2003 return petitioners claimed a $1,280 interest

expense deduction for points paid during the refinancing of a

home mortgage loan. Generally, a cash basis taxpayer must

amortize prepaid interest over the life of the loan. Sec.

461(g)(1). There is an exception for points paid “in respect of

any indebtedness incurred in connection with the purchase or

improvement of, and secured by, the principal residence of the

taxpayer”. Sec. 461(g)(2). Petitioners concede they are not

entitled to deduct the entire amount in 2003. The IRS disallowed

$1,257 of the $1,280 petitioners claimed. Petitioners have not

demonstrated any error in the IRS’s determination for 2003.

Because petitioners paid points relating to a refinancing loan

rather than to a loan for purchasing or improving their principal

residence, we sustain the disallowance of this deduction.

D. Gifts to Charity

In the notice of deficiency the IRS disallowed part of

petitioners’ charitable contribution deduction for each year in
 - 23 -

issue, in the amounts of $567, $173, and $579 for 2001, 2002, and

2003, respectively.14

A taxpayer may deduct contributions or gifts made to

qualifying organizations. See sec. 170(a). Subject to certain

exceptions, when property other than money is donated “the amount

of the contribution is the fair market value of the property at

the time of the contribution”. Sec. 1.170A-1(c)(1), Income Tax

Regs. Taxpayers must substantiate a charitable contribution by

at least one of the following: (1) A canceled check; (2) a

receipt from the donee charitable organization showing the name

of the donee, the date of the contribution, and the amount of the

contribution; or (3) in the absence of a canceled check or

receipt from the donee charitable organization, other reliable

written records showing the name of the donee, the date of the

contribution, and the amount of the contribution. Sec. 1.170A-

13(a)(1), Income Tax Regs.

Petitioners’ only evidence relating to the charitable

contributions was vague testimony about differences of opinion

over the value of noncash donations. Petitioners argued that an

examiner from Arizona could not properly value petitioners’

donations of cold weather clothing in Colorado. Petitioners did

14
The notice of deficiency recites that the IRS disallowed
$666 of charitable contributions for 2003, but the stipulation of
facts indicates that the parties dispute petitioners’ entitlement
to $579 in charitable contributions for 2003. We take this
discrepancy as a concession by respondent.
 - 24 -

not introduce any evidence indicating the fair market value of

items donated, identify any specific valuation errors by the IRS,

nor introduce any evidence substantiating the disputed

deductions.

We sustain the disallowance of the disputed charitable

contribution deductions. Petitioners are entitled to charitable

contribution deductions of $2,841 for 2001, $2,752 for 2002, and

$2,453 for 2003, the amounts the parties agreed to in the

stipulation of facts.

E. Miscellaneous Deductions (Not Subject to 2-Percent
Limitation)

Respondent disallowed the deduction petitioners claimed for

a $1,500 expense identified as “Lawyers” for 2001.

Petitioner submitted a fee agreement that recites that his

$1,500 retainer would be depleted at a rate of $200 per hour for

an action described as “Overpayment of DIB benefits.” The record

indicates that petitioner sought a hearing to contest an

administrative determination by the Social Security

Administration (SSA). Legal expenses may be deductible if the

claim with respect to which the expense was incurred originated

in a trade or business or in connection with an income-producing

activity. United States v. Gilmore, 372 U.S. 39 (1963).

Petitioners have not introduced any evidence demonstrating that

this expense is deductible under section 162 or 212 or otherwise

and was not a personal expense rendered nondeductible by section
 - 25 -

262. Furthermore, petitioners repaid $293 to the SSA in 2003

(and claimed a deduction in that amount), and the law firm

returned the retainer in 2003. We are not convinced that

petitioner’s payment in 2001 is deductible. Thus, we sustain the

disallowance of this deduction.15

III. Capital Loss Deduction

Petitioners reported a capital loss on the sale of General

Electric (GE) stock in 2002 but underreported the basis in that

stock on their Schedule D, Capital Gains and Losses. Respondent

concedes that petitioners are entitled to an additional long-term

capital loss of $440. The GE stock split 3-for-1 while

petitioners owned the shares.

15
As noted, see supra note 6, in 2003 the law firm repaid
the entire amount petitioner paid his attorney in 2001,
apparently without reduction for any attorney time billed to
petitioner’s account. Petitioner did not include the repayment
in income for 2003 but rather improperly reported it as a return
or allowance on his 2003 Schedule C. If we allowed a deduction
for the payment in 2001, then the repayment would be income in
2003. However, because we have determined that petitioner was
not engaged in the activity for profit, we have disallowed his
claimed business loss for 2003. Thus, the repayment in 2003 is
no longer part of his 2003 return. This $1,500 is now
symmetrically treated: deduction disallowed in 2001 as a
personal, family, or living expense, and repayment omitted from
income in 2003 as a return of a nondeductible expenditure.
 - 26 -

Petitioners’ purchase and sale transactions follow:

Purchased 38 shares @ 159.125 3/29/2000
Purchase price $6,046.75
Commission on purchase 40.00
Handling/service fee 2.75
SEC fee -0-
Petitioners’ basis 6,089.50

Sold 114 shares @ 30.48 8/9/2002
Gross sale proceeds $3,474.72
Commission on sale (85.00)
Handling/service fee (4.75)
SEC fee (0.11)
Petitioners’ amount realized 3,384.86

The record reflects that petitioners’ basis in the stock was

$6,089.50 and that the amount realized on the sale of the stock

(sales proceeds, net of commissions and fees) was $3,384.86.

Section 1001 provides that the loss on the sale of property is

the excess of the adjusted basis over the amount realized on the

sale. Accordingly, petitioners had a net loss of $2,705 on this

GE stock transaction. Petitioners reported a $2,195 loss. The

difference is $510, and petitioners are entitled to an additional

long-term capital loss deduction of $510.16

16
At trial respondent accepted petitioners’ computation of
the long-term capital loss on this transaction. Petitioners
subtracted $3,454.89 from their $6,089.50 basis in the GE stock
and calculated a loss of $2,634.61, which is $439.61 greater than
the loss petitioners initially reported (hence the $440
additional loss respondent conceded at trial). The $3,454.89
figure, however, appears to come from an information return that
does not properly reflect the amount petitioners realized from
the sale of these shares. Expenses incurred in selling property
(continued...)
 - 27 -

IV. Accuracy-Related Penalties

The IRS determined a 20-percent penalty under section

6662(a) for each year on the underpayment of tax resulting from

petitioners’ disallowed real estate activity losses and their

disallowed itemized deductions. Respondent asserts that the

underpayment is attributable to negligence or disregard of rules

or regulations. See sec. 6662(b)(1).

For the purpose of section 6662, negligence includes any

failure to make a reasonable attempt to comply with tax laws, and

disregard includes any careless, reckless, or intentional

disregard of rules or regulations. Sec. 6662(c). Section 6664

provides a defense if a taxpayer establishes that there was

reasonable cause for the underpayment and that he acted in good

faith with respect to that portion. Sec. 6664(c)(1); sec.

1.6664-4(a), Income Tax Regs.; see also Higbee v. Commissioner,

116 T.C. 438, 448 (2001). 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.

16
(...continued)
generally reduce the gain realized. See, e.g., United States v.
Gen. Bancshares Corp., 388 F.2d 184, 187 (8th Cir. 1968)
(“selling expenses incurred in the sale of a capital asset are
treated as capital in nature and chargeable only against the
capital proceeds”). Thus, the amount of commission and fees
petitioners paid on the sale is properly subtracted from the sale
proceeds to arrive at the amount realized from the sale.
 - 28 -

Generally, the most important factor is the extent of the

taxpayer’s effort to assess the proper tax liability, including

reliance on the advice of a tax return preparer.

Respondent asserts that petitioners’ failure to investigate

fully the propriety of their deductions indicates negligence and

disregard of rules and regulations.

Petitioner testified that he prepared the returns at issue.

Petitioners did not rely on a paid preparer. Petitioners

deducted numerous obviously personal expenses on the Schedules C

for petitioner’s purported real estate activity. They also

claimed some itemized deductions that they could not

substantiate, some that appear inflated, and some to which they

are not entitled. Petitioner prepared each of the returns at

issue while working for the IRS, where he had access to expertise

and research materials sufficient to answer any conceivable tax

question.17 Under these circumstances, we are satisfied that

17
The record indicates that petitioners were advised after
the examination of their 2001 and 2002 returns not to continue
claiming business expenses for petitioner’s purported real estate
activity. They were aware before filing their 2003 return that
the IRS had proposed to disallow their 2001 and 2002 business
loss deductions as well as many of their claimed itemized
deductions. As noted, on their 2003 return petitioners claimed
Schedule C expenses and a deduction for an alleged loss from
petitioner’s purported real estate activity, and they also
claimed itemized deductions for 2003 similar to those claimed for
2001 and 2002.

Petitioner agreed to retire from the IRS in 2006 in
exchange for the IRS’s rescinding a proposed employment
(continued...)
 - 29 -

respondent has met his burden of production under section 7491(c)

to show that imposing the section 6662 accuracy-related penalties

is appropriate.

Petitioners have not shown that the positions they took on

their tax returns for the years in issue were taken with

reasonable cause and in good faith. We are satisfied that

petitioners disregarded applicable rules and regulations and

acted negligently in filing their tax returns, and we sustain the

determination of the accuracy-related penalty for each year in

issue.

To reflect the foregoing,

Decision will be entered

under Rule 155.

17
(...continued)
termination action against him. The IRS terminated Mrs.
Morrissey’s employment in 2007 on the grounds that she improperly
filed her 2003 Federal income tax return by improperly claiming
Schedule A and Schedule C deductions.