T.C. Summary Opinion 2009-191
UNITED STATES TAX COURT
VIRGINIA AGOSTO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2693-07S. Filed December 14, 2009.
Virginia Agosto, pro se.
Kim A. Palmerino, for respondent.
GOEKE, Judge: This case is before the Court pursuant to the
provisions of section 74631 of the Internal Revenue Code in
effect at the time the petition was filed. Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined a deficiency of $2,991 in petitioner’s
Federal income tax for 2005. After concessions,2 the issues for
decision are: (1) Whether petitioner substantiated her reduction
of gross income; (2) whether petitioner is entitled to deduct
automobile and parking expenses; (3) whether petitioner is
entitled to claim a $44,000 casualty loss; and (4) whether
petitioner is entitled to additional miscellaneous itemized
deductions.
Background
At the time the petition was filed, petitioner was a
resident of New York.
During 2005 petitioner owned two houses in New York and one
house in Connecticut. Petitioner ran two businesses: (1) A tax
return preparation business and (2) Agosto & Associates, a music
production business. Petitioner filed a Form 1040, U.S.
Individual Income Tax Return, reporting gross income of $18,000,
which all came from her tax preparation business. On her
Schedule C, Profit or Loss From Business, petitioner reported
$15,000 of losses from Agosto & Associates. Petitioner also
2
Petitioner concedes that she received and failed to include
in income $12,000 from her individual retirement account.
Petitioner also concedes the sec. 72(t)(1) 10-percent additional
tax of $1,200 on early withdrawal.
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filed a Schedule E, Supplemental Income and Loss, claiming
$60,000 of passive activity losses.
On November 2, 2006, respondent issued a notice of
deficiency to petitioner disallowing the $60,000 passive activity
loss to the extent it exceeded the $25,000 limit under section
469. On January 31, 2007, petitioner petitioned this Court
contesting respondent’s determination.
At trial petitioner produced a Form 1040X, Amended U.S.
Individual Income Tax Return, decreasing her gross income from
the tax return preparation business from $18,000 to $8,000,
claiming a typographical error. Petitioner also claimed an
additional $4,000 deduction for automobile and parking expenses
from Agosto & Associates. Petitioner conceded the $60,000
passive activity loss claim but claimed a $44,000 casualty loss
as a result of fire damage to property she owned in Connecticut.
Petitioner stated that she had $8,379 of gain from the sale of
property in New York and the $44,000 casualty loss, resulting in
a net loss of $36,000. Respondent claims that because the
$44,000 casualty loss was from rental activity, it should still
be limited to $25,000 pursuant to section 469.
Discussion
I. Reduction of Income
Petitioner reported $18,000 of gross income on her original
Federal income tax return yet reduced that amount to $8,000 on
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her amended return. Petitioner stated that she was in poor
health at the time she completed the original return and that she
accidently put a number “1” in front of the $8,000. As proof,
petitioner stated that she deposited $5,624 into her account from
her tax preparation business along with $2,250 in cash receipts
from other clients. We find petitioner’s testimony credible.
Accordingly, on the basis of the record at trial, we find that
petitioner’s gross income was $8,000 in 2005.
II. Automobile Expenses
At trial petitioner claimed a $4,116 deduction on her
amended Schedule C for automobile expenses, contending that they
were ordinary and necessary business expenses from Agosto &
Associates. Deductions are a matter of legislative grace, and
the taxpayer must prove he is entitled to the deductions claimed.
Rule 142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934). Section 162(a) generally allows as a deduction “all the
ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business”. See Primuth
v. Commissioner, 54 T.C. 374, 377-378 (1970). However,
deductions for travel and transportation expenses otherwise
allowable under section 162(a) are subject to strict
substantiation requirements. See sec. 274(d)(1); sec. 1.274-
5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6,
1985).
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Expenses associated with travel, meals, and certain listed
property defined in section 280F(d)(4), including passenger
automobiles, computers, and cellular telephones, are subject to a
heightened level of substantiation, requiring taxpayers to
corroborate their statements with adequate records or sufficient
other evidence establishing the amount, time, place, and business
purpose of the expense. Sec. 274(d). In order to substantiate
the amount of an automobile expense, the taxpayer must prove:
(1) The amount of the expenditure (i.e., cost of maintenance,
repairs, or other expenditures); (2) the amount of each business
use and the amount of the vehicle’s total use by establishing the
amount of its business mileage and total mileage; (3) the time
(i.e., the date of the expenditure or use); and (4) the business
purpose of the expenditure or use. Sec. 1.274-5T(b)(6),
Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
The taxpayer may substantiate the mileage by “adequate
records” or sufficient evidence that corroborates her statements.
Sec. 274(d). To meet the adequate records requirement, the
taxpayer must maintain an account book, diary, log, statement of
expense, trip sheets, or similar record and documentary evidence
that in combination are sufficient to establish each element of
the expenditure or use. Sec. 1.274-5T(c)(2)(i), Temporary Income
Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). An adequate record
must be prepared or maintained in such a manner that each
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recording of an element of an expenditure 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., supra. “‘[M]ade at or
near the time of the expenditure or use’ means 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.
Petitioner’s only evidence consisted of receipts from gas
stations. However, petitioner provided no other evidence of
whether these trips were business or personal. She provided no
travel log detailing trips that she made. Petitioner has not met
the section 274(d) substantiation requirements and is not
entitled to the claimed deductions.3
III. Casualty Loss
Petitioner claims a $44,000 casualty loss due to fire damage
to her Connecticut property. Petitioner also claims an $8,379
gain from her sale of property in New York. The combination from
both properties equals roughly $36,000 of net loss. Respondent
does not contest the amount of the net loss but argues that
because the Connecticut property was used in rental activity, the
3
Petitioner also seeks to deduct payment of parking tickets.
Such expenses are fines or penalties that are nondeductible, even
if related to business. See sec. 162(f).
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passive activity limitation limits the $44,000 casualty loss to
$25,000.
Section 165(a) allows a deduction for any loss sustained
during the taxable year and not compensated for by insurance or
otherwise. For individuals, section 165(c)(3) allows a taxpayer
to deduct a loss from fire, storm, shipwreck, or other casualty,
or from theft.
The section 469 passive activity loss rules disallow the
current deduction of losses and credits from activities in which
a given owner does not materially participate. Section 469(i)
permits a passive activity loss up to $25,000 attributable to a
rental real estate activity in which an individual actively
participates. However, section 469 does not apply to all
casualty and theft losses. Section 1.469-2(d)(2)(xi), Income Tax
Regs., provides that certain casualty and theft losses are not
passive activity deductions. This rule applies to any deduction
for a loss from fire, storm, shipwreck, or other casualty, or
from theft, as those terms are used in section 165(c)(3), if
losses that are similar in cause and severity do not recur
regularly in the conduct of the activity and the taxpayer
sustains the loss during a taxable year beginning after December
31, 1989. Even though an activity is passive, casualty losses
are permitted if the casualty requirements in section 165 are
met. Because respondent has conceded that petitioner’s property
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sustained $44,000 of casualty loss and the passive loss
limitation will not apply, petitioner is entitled to the $44,000
casualty loss.
IV. Miscellaneous Itemized Deductions
Petitioner claimed on Schedule A, Itemized Deductions, of
her amended return miscellaneous itemized deductions for
unreimbursed employee business expenses totaling $4,114.
Respondent reduced petitioner’s expenses and miscellaneous
deductions by $658.
The only evidence petitioner presented at trial was copies
of miscellaneous receipts for medical expenses, which were
subsequently returned to her. Petitioner claims that these
receipts were additional credits and expenses which she
erroneously failed to report. We do not find this explanation
credible. Petitioner does not meet the substantiation
requirements of section 274, and her miscellaneous itemized
deductions were properly reduced.
Accordingly, we conclude that: (1) Petitioner’s gross
income was $8,000; (2) petitioner was not entitled to deduct
automobile and parking expenses; (3) petitioner is entitled to
the full $44,000 casualty loss; and (4) petitioner is not
entitled to additional miscellaneous itemized deductions.
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To reflect the foregoing,
Decision will be entered
under Rule 155.