T.C. Summary Opinion 2010-49
UNITED STATES TAX COURT
AMANDA GENTRY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23501-08S. Filed April 19, 2010.
Amanda Gentry, pro se.
Michael T. Shelton, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed. Pursuant to section 7463(b),
the decision to be entered is not reviewable by any other court,
and this opinion shall not be treated as precedent for any other
case. Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year in issue,
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and all Rule references are to the Tax Court Rules of Practice
and Procedure.
The issues for decision1 are whether for 2005: (1)
Petitioner is entitled to a deduction for the business use of her
home in excess of respondent’s allowance; (2) she is entitled to
deduct car and truck expenses of $7,009; (3) she is entitled to
$37,879 of cost of goods sold (CGS) associated with her
manufacturing business; and (4) she is liable for the accuracy-
related penalty under section 6662(a).
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by reference. When petitioner filed her
petition, she resided in Illinois.
Petitioner timely filed her 2005 Federal income tax return.
For 2005 petitioner operated two separate businesses: A graphic
design business and a manufacturing business producing “buddha
bags”. On Schedule C, Profit or Loss From Business, petitioner
reported gross receipts of $103,551 for her graphic design
business. She reported several expenses for her graphic design
business, including $7,009 of car and truck expenses and $15,737
of expenses for the business use of her home. On a second
1
Petitioner’s eligibility for the education credit and the
amount of her self-employment tax are computational adjustments
to be determined consistent with this opinion.
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Schedule C petitioner reported $25,425 of gross receipts and
$59,244 of CGS for her manufacturing business.
During 2005 petitioner maintained a home office for her
graphic design business and worked as a freelance graphic
designer for VSA Partners, Inc. (VSA).
In the notice of deficiency respondent determined a tax
deficiency of $15,805, and an accuracy-related penalty of $3,161
under section 6662(a). Respondent disallowed: (1) $1,803 of
petitioner’s expenses related to the business use of her home;
and (2) car and truck expenses of $7,009. Respondent further
determined that $37,879 of petitioner’s claimed CGS was
includable as an inventory cost and that she was subject to the
accuracy-related penalty under section 6662(a).
Discussion
I. Burden of Proof
Generally, the Commissioner’s determinations are presumed
correct, and the taxpayer bears the burden of proving that those
determinations are erroneous.2 Rule 142(a); see INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, 290
U.S. 111, 115 (1933).
2
Petitioner has not claimed or shown that she meets the
requirements under sec. 7491(a) to shift the burden of proof to
respondent as to any factual issue relating to her liability for
tax.
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II. Claimed Business Expense Deductions
Deductions are strictly a matter of legislative grace, and
taxpayers must satisfy the specific requirements for any
deduction claimed. See INDOPCO, Inc. v. Commissioner, supra; New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Taxpayers bear the burden of substantiating the amount and
purpose of any claimed deduction. See Hradesky v. Commissioner,
65 T.C. 87 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).
A. Business Use of Home
Section 280A(c)(1)(A) permits the deduction of expenses
allocable to a portion of the dwelling unit that was used
exclusively and regularly as the principal place of business for
the taxpayer’s trade or business. Respondent disallowed $1,803
of petitioner’s claimed $15,737 deduction for the business use of
her home.
Petitioner did not testify as to the expenses or provide
documentation to substantiate the disallowed expenses.
Accordingly, respondent’s determination is sustained.
B. Car and Truck Expenses
Generally, expenses that a taxpayer incurs in commuting
between his home and place of business are personal and
nondeductible. Commissioner v. Flowers, 326 U.S. 465 (1946);
Heuer v. Commissioner, 32 T.C. 947, 951 (1959), affd. per curiam
283 F.2d 865 (5th Cir. 1960); secs. 1.162-2(e), 1.262-1(b)(5),
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Income Tax Regs. Expenses incurred, however, in going between
two or more places of business may be deductible as ordinary and
necessary business expenses under section 162 if incurred for
business reasons. Steinhort v. Commissioner, 335 F.2d 496, 503-
504 (5th Cir. 1964), affg. T.C. Memo. 1962-233; Heuer v.
Commissioner, supra. Where a taxpayer attempts to deduct the
expenses of transportation between two places of business, one of
which is an office in his home, such office must be the
taxpayer’s principal place of business for the trade or business
conducted by the taxpayer at those other work locations. Curphey
v. Commissioner, 73 T.C. 766, 777-778 (1980).
It is uncontested that petitioner’s home office was her
principal place of business for her graphic design business.
Accordingly, any substantiated driving expenses between her
business office in her home and VSA3 are business expenses. See
Walker v. Commissioner, 101 T.C. 537, 545 (1993); Wicker v.
Commissioner, T.C. Memo. 1986-1.
An expense is considered ordinary if commonly or frequently
incurred in the trade or business of the taxpayer. Deputy v. du
Pont, 308 U.S. 488, 495-496 (1940). An expense is necessary if
it is appropriate or helpful in carrying on a taxpayer’s trade or
3
Petitioner’s mileage logs indicate other destinations;
however, she did not explain the business purpose of trips to
those destinations.
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business. Commissioner v. Heininger, 320 U.S. 467, 471 (1943);
Welch v. Helvering, supra at 113.
A taxpayer must maintain records sufficient to substantiate
the amounts of the deductions claimed. Sec. 1.6001-1(a), Income
Tax Regs. With respect to certain business expenses subject to
section 274(d), more stringent substantiation requirements apply
than with respect to other ordinary and necessary business
expenses. Section 274(d) imposes stringent substantiation
requirements for claimed deductions relating to the use of
“listed property”, which is defined under section 280F(d)(4)(A)
to include passenger automobiles. Under this provision, any
deduction claimed with respect to the use of a passenger
automobile will be disallowed unless the taxpayer substantiates
specified elements of the use by adequate records or by
sufficient evidence corroborating the taxpayer’s own statement.
See sec. 274(d); sec. 1.274-5T(c)(1), Temporary Income Tax Regs.,
50 Fed. Reg. 46016 (Nov. 6, 1985).
To meet the adequate records requirements of section 274(d),
a taxpayer must maintain some form of records and documentary
evidence that in combination are sufficient to establish each
element of an expenditure or use. See sec. 1.274-5T(c)(2),
Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). A
contemporaneous log is not required, but corroborative evidence
to support a taxpayer’s reconstruction of the elements of an
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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., supra.
The elements that must be substantiated to deduct expenses
for the business use of an automobile are: (1) The amount of the
expenditure; (2) the mileage for each business use of the
automobile and the total mileage for all use of the automobile
during the taxable period; (3) the date of the business use; and
(4) the business purpose of the use of the automobile. See sec.
1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016
(Nov. 6, 1985).
Petitioner explained that in 2005 she drove frequently from
her home office to VSA to drop off files and check in as their
freelance graphic designer. Petitioner substantiated her mileage
with a computerized log listing the date, destination, and total
mileage of each trip. The Court is satisfied that petitioner
drove to VSA for business purposes and that she presented
sufficient evidence to satisfy the strict substantiation
requirements pursuant to section 274(d).
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Petitioner’s trips to VSA in 2005 totaled 1,022 miles.
Accordingly, petitioner is entitled to a deduction of $435.194 for
car and truck expenses for 2005.
III. Cost of Goods Sold
In calculating gross income, taxpayers may offset gross
revenue with cost of goods sold. B.C. Cook & Sons, Inc. v.
Commissioner, 65 T.C. 422, 428 (1975), affd. 584 F.2d 53 (5th
Cir. 1978). The CGS is computed with reference to the value of a
taxpayer’s opening and closing inventory for the year. The cost
of goods purchased for resale, with an adjustment for the
difference between opening and closing inventories for the year,
is then deducted from gross sales in computing gross income.
Sec. 1.162-1(a), Income Tax Regs.; see sec. 1.61-3, Income Tax
Regs. Taxpayers are required to take “inventories at the
beginning and end of each taxable year” in which “the production,
purchase, or sale of merchandise is an income-producing factor.”
Sec. 1.471-1, Income Tax Regs.
There is an exception to the inventory accounting
requirement for small business owners whose average annual gross
4
The mileage rate for January to August 2005 was 40.5 cents
per mile (756 miles driven x .405 mileage rate). See Rev. Proc.
2004-64, sec. 5.01, 2004-2 C.B. 898, 900. The mileage rate from
September to December 2005 was 48.5 cents per mile (266 miles
driven x .485 mileage rate). See Announcement 2005-71, 2005-2
C.B. 714.
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receipts do not exceed $1 million. Rev. Proc. 2001-10, sec. 1,
2001-1 C.B. 272, 272.
If the exception applies, the taxpayer may choose to treat
inventory in the same manner as nonincidental materials and
supplies under section 162. See sec. 1.162-3, Income Tax Regs.
Section 1.162-3, Income Tax Regs., provides:
Taxpayers carrying materials and supplies on hand
should include in expenses the charges for materials
and supplies only in the amount that they are actually
consumed and used in operation during the taxable year
for which the return is made, provided that the costs
of such materials and supplies have not been deducted
in determining the net income or loss or taxable income
for any previous year. * * *
For a taxpayer using the exception under Rev. Proc. 2001-10,
supra, nonincidental materials and supplies are considered
consumed and used in the year in which the taxpayer sells the
merchandise or finished goods. See id. sec. 4.02, 2001-1 C.B. at
273. For a cash method taxpayer, the costs of such inventoriable
items are deductible only for the year of sale, or for the year
in which the taxpayer actually pays for the inventoriable items,
whichever is later. Id.
Any amount claimed as CGS must be substantiated, and
taxpayers are required to maintain records sufficient for this
purpose. Sec. 6001; Nunn v. Commissioner, T.C. Memo. 2002-250;
Wright v. Commissioner, T.C. Memo. 1993-27; sec. 1.6001-1(a),
Income Tax Regs.
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Notwithstanding whether petitioner qualified for the
exception to the inventory accounting requirements under Rev.
Proc. 2001-10, supra, she did not comply with the requirements of
section 162 for reporting nonincidental materials and supplies.
Petitioner believed that because she was excepted from the
inventory accounting requirements as a small business owner, she
was not required to track her inventory.5 Consequently, she
presented no evidence of her opening and closing inventories for
2005 or the amount of materials and supplies actually consumed
during the year. Accordingly, the Court must sustain
respondent’s determination.
IV. Accuracy-Related Penalty
Respondent determined that petitioner is liable for an
accuracy-related penalty under section 6662(a). In pertinent
part, section 6662(a) and (b)(1) and (2) imposes an accuracy-
related penalty equal to 20 percent of the underpayment that is
attributable to: (1) Negligence or disregard of rules or
regulations; or (2) a substantial understatement of income tax.
A “substantial understatement” includes an understatement of
5
Respondent also cites Rev. Proc. 2002-28, 2002-1 C.B. 815,
as applicable to petitioner. Rev. Proc. 2002-28, supra, expands
the scope of Rev. Proc. 2001-10, 2001-1 C.B. 272, to additional
taxpayers not otherwise qualifying under Rev. Proc. 2001-10,
supra. Both revenue procedures require a qualifying small
business to follow the reporting requirements of sec. 162 for
reporting nonincidental materials and supplies. Accordingly, the
Court need not discuss petitioner’s eligibility under Rev. Proc.
2002-28, supra.
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income tax that exceeds the greater of 10 percent of the tax
required to be shown on the return or $5,000. See sec.
6662(d)(1)(A); sec. 1.6662-4(b), Income Tax Regs. The
Commissioner bears the burden of production. Sec. 7491(c); see
Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
Petitioner had a substantial understatement of income tax
for 2005 since the understatement amount exceeded the greater of
10 percent of the tax required to be shown on the return or
$5,000. The Court concludes that respondent has produced
sufficient evidence to show that the accuracy-related penalty
under section 6662 is appropriate.
Section 6664(c)(1) provides an exception to the section
6662(a) penalty if it is shown that there was reasonable cause
for any portion of the underpayment and the taxpayer acted in
good faith. 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
important factor is the extent of the taxpayer’s effort to assess
his proper tax liability. Id. Circumstances that may indicate
reasonable cause and good faith include an honest
misunderstanding of fact or law that is reasonable in view of the
taxpayer’s experience, knowledge, and education. Id.
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Petitioner believed that as the owner of a qualifying small
business under Rev. Proc. 2001-10, supra, she was exempt from the
inventory accounting requirements and was allowed to deduct her
business expenses as they were paid.
Given the complexity of the rules and exceptions regarding
the inventory reporting requirements, the Court finds that
petitioner had a reasonable belief that as a small business owner
she was exempt from the inventory reporting requirements and was
not required to track the amount of materials and supplies
actually consumed during the year. Therefore, the Court finds
that petitioner is not subject to the accuracy-related penalty
with respect to her exclusion of CGS from inventory costs.
With respect to the disallowed car expense and business use
of home deductions, petitioner has failed to present any evidence
or argument as to why she should not be subject to the accuracy-
related penalty for those claimed deductions. Accordingly, she
will be subject to the accuracy-related penalty for those items.
Other arguments made by the parties and not discussed herein
were considered and rejected as irrelevant, without merit, or
moot.
To reflect the foregoing,
Decision will be entered
under Rule 155.