T.C. Memo. 2010-16
UNITED STATES TAX COURT
DOUGLAS ARTHUR ROYSTER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3039-08. Filed February 1, 2010.
Douglas Arthur Royster, pro se.
Brenda M. Fitzgerald, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
WELLS, Judge: Respondent determined the following
deficiencies in petitioner’s Federal income taxes and accuracy-
related penalties for the following tax years:
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Penalty
Year Deficiency Sec. 6662(a)
2003 $204 --
2004 9,549 $1,910
2005 4,081 816
We must decide the following issues: (1) Whether petitioner is
entitled, pursuant to sections 162 and 274(d), to deductions for
car and truck expenses claimed on Schedules C, Profit or Loss
From Business, for mileage driven during the tax years in issue;
(2) whether petitioner failed to report net taxable gain from the
sale of real property received during tax year 2003; (3) whether
petitioner is entitled to a capital loss carryover for tax year
2004; (4) whether petitioner’s gross income should be increased
for a State tax refund, interest income, and retirement income he
received during tax year 2004; and (5) whether petitioner is
liable for the accuracy-related penalties pursuant to section
6662 for tax years 2004 and 2005.1
1
Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code (Code), as amended,
for the years in issue. Amounts are rounded to the nearest
dollar.
Petitioner claimed net operating loss carryovers for tax
years 2004 and 2005, self-employment tax deductions for tax years
2003, 2004, and 2005, and an earned income credit for 2004. The
net operating loss carryovers, self-employment taxes and their
corresponding deduction and the earned income credit are
mechanical calculations that depend on the Court’s resolution of
the issues discussed herein. Respondent’s determinations in the
notice of deficiency include such calculations based upon the
(continued...)
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FINDINGS OF FACT
Some of the facts and certain exhibits have been stipulated
by the parties. The parties’ stipulations of fact are
incorporated in this opinion by reference and are so found.
At the time he filed his petition, petitioner resided in
Georgia.
During 2003, petitioner sold real property at 6906 Speese
Drive, Hiawassee, Georgia (real property), for $132,500.
According to his settlement statement, at the time he purchased
the real property in 2001, petitioner had a basis of $122,670 in
the real property.
During the years in issue, petitioner was self-employed in
the business of selling merchandise to retailers for resale to
their customers. In connection with his business, petitioner
drove to his customers’ places of business in Georgia, South
Carolina, North Carolina, and Virginia. Petitioner did not have
a dedicated vehicle for his business travel, but rather used
several vehicles for both business and personal use. Petitioner
owned at least two vehicles during the years in issue, but he was
unable to substantiate the number of vehicles he owned.
During each year in issue, petitioner kept a log of his
travel (log). Each day, petitioner noted in his log the
1
(...continued)
other determinations respondent made in the notice of deficiency.
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beginning and ending mileage but did not note each place he
stopped or the business purpose of the stop. For tax year 2003,
petitioner claimed a deduction for 67,910 miles on his Federal
income tax return; however, the log for business purposes for
that year was lost. For tax year 2004, petitioner claimed on his
return a deduction for 62,456 miles for business purposes;
however, the log for that year totals 63,398 miles. For tax year
2005, petitioner claimed on his return a deduction for 58,616
miles for business purposes, which is the same total miles in his
log for that year.
OPINION
Generally, the Commissioner’s determination of a deficiency
is presumed correct, and the taxpayer has the burden of proving
it incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933).2
We first address the issue of whether petitioner is
entitled, pursuant to sections 162 and 274, to deductions for
mileage on his Schedules C for the years in issue. Petitioner
contends that he substantiated his mileage deductions through his
2
Petitioner does not contend that sec. 7491(a) should apply
to shift the burden of proof to respondent, nor did he establish
that it should apply to the instant case.
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logs.3 Respondent contends that petitioner’s logs do not meet
the strict substantiation requirements of section 274(d).
Deductions are a matter of legislative grace, and taxpayers
bear the burden of proving their entitlement to the deductions
claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).
Section 162 allows a deduction from income for all ordinary and
necessary expenses for carrying on a trade or business during the
taxable year. Sec. 162(a). A deduction is not allowed for any
listed property unless the taxpayer properly substantiates: (1)
The amount of such expense, (2) the time and place of the travel,
and (3) the business purpose. Sec. 274(d). Section 280F(d)(4)
includes as listed property any passenger automobile. Generally,
automobile expenses must be disallowed in full unless the
taxpayer satisfies the strict substantiation requirements of
section 274(d). Sanford v. Commissioner, 50 T.C. 823, 827-828
(1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969); Larson v.
Commissioner, T.C. Memo. 2008-187; sec. 1.274-5T(a), Temporary
Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
3
Petitioner deducted amounts for car and truck expenses
based on the standard mileage rates pursuant to sec. 1.274-
5(g)(1), Income Tax Regs. For 2003 the standard mileage rate was
36 cents per mile. Rev. Proc. 2002-61, sec. 5.01, 2002-2 C.B.
616, 618. For 2004 the standard mileage rate was 37.5 cents per
mile. Rev. Proc. 2003-76, sec. 5.01, 2003-2 C.B. 924, 925. From
Jan. 1 to Aug. 31, 2005, the standard mileage rate was 40.5 cents
per mile. Rev. Proc. 2004-64, sec. 5.01, 2004-2 C.B. 898, 900.
From Sept. 1 to Dec. 31, 2005, the standard mileage rate was 48.5
cents per mile. Announcement 2005-71, 2005-2 C.B. 714.
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Taxpayers may substantiate their mileage either by adequate
records or by sufficient evidence that corroborates the
taxpayer’s own statement. Sec. 274(d). To satisfy the adequate
records requirement, a taxpayer must maintain records and
documentary evidence that in combination are sufficient to
establish each element of an expenditure or use. Larson v.
Commissioner, supra; sec. 1.274-5T(c)(2)(i), Temporary Income Tax
Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). A contemporaneous log
is not required, but corroborative evidence used 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. Larson v. Commissioner, supra; sec.
1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016
(Nov. 6, 1985).
In the absence of adequate records, a taxpayer may
alternatively establish an element by “his own statement, whether
written or oral, containing specific information in detail as to
such element” and by “other corroborative evidence sufficient to
establish such element.” Larson v. Commissioner, supra; sec.
1.274-5T(c)(3), Temporary Income Tax Regs., 50 Fed. Reg. 46020
(Nov. 6, 1985). If a factual basis exists to do so, the Court
may in some instances approximate an allowable expense, bearing
heavily against the taxpayer who failed to maintain adequate
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records. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.
1930). However, section 274(d) specifically precludes the
deduction of automobile expenses on the basis of an approximation
or a taxpayer’s uncorroborated testimony. Sanford v.
Commissioner, supra at 827-828; Larson v. Commissioner, supra.
For tax year 2003, we conclude that petitioner has not
offered sufficient proof of his mileage. Petitioner testified
that his mileage logs for his 2003 tax year were kept but had
been lost. Petitioner offered a random sampling of invoices to
corroborate his mileage. However, as section 274(d) requires a
specific showing of time, place of travel, and business purpose,
we are not persuaded that such evidence rises to the “level of
credibility of a contemporaneous record.” See Larson v.
Commissioner, supra; sec. 1.274-5T(c)(1), Temporary Income Tax
Regs., supra. Consequently, petitioner has not met the
requirements for deducting the claimed mileage. Accordingly, we
sustain respondent’s deficiency determination disallowing the
deduction for car and truck expenses petitioner claimed for tax
year 2003.
For tax year 2004, petitioner offered a log purporting to
show that he drove a total of 63,398 miles in connection with his
business. We note that petitioner claimed fewer miles on his
Schedule C for 2004 than those recorded in his log but offered no
explanation of the difference. For 2005, petitioner offered a
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log similar to that offered in 2004. The total mileage of 58,616
from the 2005 log matches the total mileage claimed on
petitioner’s Schedule C for tax year 2005.
Petitioner’s logs contain entries for only the beginning and
ending odometer reading of the vehicle for each day. The logs do
not contain any entries regarding the business purpose of the
trips or the destination of each trip as required by section
274(d). The logs also indicate that petitioner drove multiple
vehicles during tax years 2004 and 2005. However, petitioner was
unable to verify how many vehicles he used for business during
tax years 2004 and 2005 and how much of his mileage was personal.
Accordingly, we conclude that the logs do not adequately
substantiate petitioner’s car and truck expenses for tax years
2004 and 2005.
Petitioner also offered a bookkeeping record and invoices
for tax years 2004 and 2005. The invoices are a sampling of the
total invoices for the respective tax year. We conclude that the
bookkeeping record and invoices fail to meet the strict
requirements of section 274(d). See Larson v. Commissioner,
supra; sec. 1.274-5T(c)(1), Temporary Income Tax Regs., supra.
Additionally, petitioner offered his testimony regarding the
mileage expenses. Petitioner’s testimony, however, was vague,
unspecific, and unpersuasive as to the business purpose of the
respective trips. Moreover, section 274(d) specifically
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precludes the allowance of automobile expenses on the basis of an
approximation or a taxpayer’s uncorroborated testimony. Larson
v. Commissioner, T.C. Memo. 2008-187. Petitioner’s testimony was
not sufficiently corroborated to be persuasive. Consequently, we
sustain respondent’s denial of petitioner’s deductions for car
and truck expenses for tax years 2004 and 2005.
We next turn to the issue of petitioner’s income from
capital gains. Respondent contends that petitioner failed to
include $9,830 of income from capital gains received in 2003 and
claimed an improper capital loss carryover for tax year 2004.
Petitioner stipulated that he realized gross income of $132,500
from the sale of real property in tax year 2003. Petitioner’s
settlement statement from 2001 when he purchased the real
property in issue provides a basis of $122,670.4 Petitioner has
the burden of proving that respondent’s determination was
incorrect. See Rule 142(a); Welch v. Helvering, 290 U.S. at 115.
Petitioner did not include the $9,830 gain from the sale of the
real property in his gross income for tax year 2003 and has not
presented any evidence or argument regarding that amount.
Petitioner, therefore, has failed to meet his burden of proof.
Accordingly, we sustain respondent’s determination of a
4
Neither petitioner nor respondent has presented evidence
that petitioner’s basis in the real property should be any amount
other than the amount of the purchase price shown on the 2001
settlement statement.
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deficiency with respect to the capital gain income from the sale
of real property in 2003.
On his 2004 return, petitioner claimed a net capital gain
of $53,256 after deducting both short-term and long-term capital
losses. Respondent disallowed $6,700 of capital losses,
increasing petitioner’s income for tax year 2004 by $6,700.
Petitioner bears the burden of proving that respondent’s
determination was incorrect. See Rule 142(a); Welch v.
Helvering, supra at 115. Petitioner presented no evidence or
argument regarding the issue and therefore has failed to meet his
burden of proof. Accordingly, we hold that petitioner has failed
to meet his burden, and we sustain respondent’s deficiency
determination regarding petitioner’s income from capital gains
for tax year 2004.
As to the issue of whether petitioner’s gross income for
tax year 2004 should be increased for a State income tax refund,
interest income, and retirement income of $3,150, $131, and
$6,395, respectively, petitioner bears the burden of proving that
respondent’s determination was incorrect. See Rule 142(a); Welch
v. Helvering, supra at 115. Petitioner failed to present any
evidence or argument on such issue, and therefore, fails to meet
his burden of proof. Accordingly, we sustain respondent’s
deficiency determinations regarding the State income tax refund,
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interest income, and retirement income petitioner received in tax
year 2004.
Lastly, we turn to the issue of whether petitioner is liable
for accuracy-related penalties for tax years 2004 and 2005
pursuant to section 6662. Taxpayers are subject to a 20-percent
penalty for any underpayment which is attributable to, among
other things, (1) negligence or disregard of rules or regulations
or (2) any substantial understatement of income tax. Sec.
6662(a) and (b)(1) and (2); New Phoenix Sunrise Corp. & Subs. v.
Commissioner, 132 T.C. , (2009) (slip op. at 45-47).
Negligence includes any failure to make a reasonable attempt to
comply with the provisions of the Code. Sec. 6662(c); see Neely
v. Commissioner, 85 T.C. 934, 947 (1985) (negligence is lack of
due care or failure to do what a reasonably prudent person would
do under the circumstances). “‘Negligence’ also includes any
failure by the taxpayer to keep adequate books and records or to
substantiate items properly.” Sec. 1.6662-3(b)(1), Income Tax
Regs. For individual taxpayers, there is a substantial
understatement of income tax if the amount of the understatement
for the tax year exceeds the greater of 10 percent of the amount
required to be shown on the return or $5,000. Sec.
6662(d)(1)(A). Pursuant to section 7491(c), the Commissioner
generally bears the burden of production for any penalty, but the
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taxpayer bears the ultimate burden of proof. Higbee v.
Commissioner, 116 T.C. 438, 446 (2001).
The accuracy-related penalty does not apply to any part of
an underpayment of tax if it is shown that the taxpayer acted
with reasonable cause and in good faith. Sec. 6664(c)(1). This
determination 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. Taxpayers bear the burden of proving
that they had reasonable cause and acted in good faith. See
Higbee v. Commissioner, supra at 446; Dollander v. Commissioner,
T.C. Memo. 2009-187.
Respondent contends that petitioner is liable for an
accuracy-related penalty on account of negligence or disregard of
rules or regulations for tax years 2004 and 2005. Alternatively,
respondent contends that petitioner’s understatement for tax year
2005 was a substantial understatement.
The record establishes that respondent has met his burden of
production. Petitioner has failed to meet his burden of proving
that he was not negligent or that he acted with reasonable cause
and in good faith. As discussed above, petitioner’s mileage logs
are not adequate records for his car or truck expenses claimed on
Schedules C. Furthermore, petitioner was not able to provide
sufficient additional evidence to meet the strict substantiation
requirements of section 274(d) or to prove that he did not
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receive the unreported income items for his 2004 tax year.
Accordingly, we hold that petitioner is liable for the accuracy-
related penalties determined for tax years 2004 and 2005.5
The Court has considered all other arguments made by the
parties and, to the extent we have not addressed them herein, we
consider them moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered
for respondent.
5
Because we hold petitioner liable for the accuracy-related
penalty for his 2005 tax year on account of negligence or
disregard of rules and regulations, we do not need to reach
respondent’s alternative argument that petitioner substantially
understated his income tax.