T.C. Memo. 2010-132
UNITED STATES TAX COURT
DIANA M. COURY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17747-07. Filed June 15, 2010.
Diana M. Coury, pro se.
William J. Gregg, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: Respondent determined deficiencies in
petitioner’s Federal income tax and additions to tax under
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section 6651(a)1 for 1999 through 2004. The amounts remaining in
dispute are as follows:
Additions to Tax
Year Deficiency Sec. 6651(a)(1)
1999 $13,922 $2,974.25
2000 18,262 4,108.95
2001 22,490 5,060.25
2002 20,127 4,528.58
2003 16,466 3,704.85
2004 11,111 2,499.98
After concessions,2 the issues left for decision are: (1)
Whether petitioner is entitled to deductions in excess of those
respondent allowed; and (2) whether petitioner is liable for the
additions to tax under section 6651(a)(1). For the reasons
stated herein, we hold that petitioner is not entitled to
deductions in excess of those respondent allowed and is liable
for the additions to tax under section 6651(a)(1).
FINDINGS OF FACT
Petitioner resided in Maryland when she filed her petition.
Petitioner is a self-employed insurance broker selling life,
health, and disability insurance. Since 1999 petitioner has
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.
2
Respondent conceded petitioner is entitled to: (1)
Depreciation deductions for all years at issue claimed on
Schedule C, Profit or Loss From Business; (2) Schedule C auto
expense deductions for 2001; (3) a long-term capital loss
deduction for 2002; and (4) Schedule C expense deductions for
2003.
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suffered several medical problems including injuries from two car
accidents, one occurring in June 1999 and the other in April
2003. Despite her accidents, illnesses and medical conditions,
petitioner received the following income from her insurance
business:
1999 2000 2001 2002 2003 2004
$86,640 $100,226 $115,521 $108,933 $102,856 $91,683
Although petitioner requested extensions of time to file
income tax returns for all years at issue, she failed to actually
file the returns. Respondent prepared substitutes for returns.
On May 7, 2007, respondent issued to petitioner a notice of
deficiency for the years in issue. Petitioner filed a timely
petition to the Court. Petitioner conceded receipt of the income
but contended that she was entitled to deductions. During the
discovery process respondent conceded that petitioner was
entitled to portions of the deductions she claimed. The
deductions petitioner claims and the amounts respondent has
allowed are as follows:
Expense 1999 2000 2001 2002 2003 2004
Car & truck
P seeks $18,844 $16,389 $20,038 $14,564 $13,748 $12,215
R allowed 9,432 8,195 10,019 7,283 6,875 6,108
Business use
of Home
P seeks 23,669 25,625 26,932 27,676 27,151 30,553
R allowed 16,568 17,938 18,852 19,374 19,006 21,387
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Expense 1999 2000 2001 2002 2003 2004
Self-employed
health insurance
P seeks 3,512 4,531 5,618 6,510 8,887 11,033
R allowed 2,108 2,719 3,371 4,457 8,888 11,034
Medical
P seeks 90 2,095 6,990 2,040 2,368 1,142
R allowed -0- -0- -0- -0- -0- -0-
Travel1
P seeks --- --- --- --- --- ---
R allowed 2,154 2,154 2,154 2,154 2,154 2,154
Total
P seeks 48,269 50,794 61,732 52,949 54,308 57,094
R allowed 30,262 31,006 34,396 33,268 36,932 40,683
1
Petitioner seeks unspecified amounts of deductions in excess
of those respondent allowed.
In the notice of deficiency, respondent determined additions
to tax for late filing and late payment under section 6651(a)(1)
and (2). Respondent concedes that petitioner is not liable for
the section 6651(a)(2) additions to tax. Rather, respondent
seeks to increase the section 6651(a)(1) additions to tax for the
years in issue.
OPINION
Burden of Proof
The taxpayer bears the burden of proving by a preponderance
of the evidence that the Commissioner’s determinations are
incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933). Deductions are a matter of legislative grace, and a
taxpayer bears the burden of proving entitlement to any claimed
deductions. Rule 142(a)(1); INDOPCO, Inc. v. Commissioner, 503
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U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S.
435, 440 (1934).
In general, the burden of proof with regard to factual
matters rests with the taxpayer. Under section 7491(a), if the
taxpayer produces credible evidence with respect to any factual
issue relevant to ascertaining the taxpayer’s liability for tax
and meets other requirements, the burden of proof shifts from the
taxpayer to the Commissioner as to that factual issue.
Petitioner has not alleged that section 7491(a) applies or
established her compliance with its requirements. Therefore, the
burden of proof remains on petitioner. See Rule 142(a).
Section 6214(a) grants the Court jurisdiction to redetermine
a deficiency and to determine whether any additional amounts or
any additions to tax should be assessed. Respondent may assert
an increased amount under section 6214(a). Thus, with respect to
the increased section 6651(a)(1) additions to tax, respondent
bears the burden of proof.
Deductions
A taxpayer may deduct ordinary and necessary expenses paid
or incurred during the taxable year in carrying on any trade or
business. See sec. 162. Where a taxpayer claims a business
expense but cannot fully substantiate it, the Court generally may
approximate the allowable amount. Cohan v. Commissioner, 39 F.2d
540, 543-544 (2d Cir. 1930). We may do so only when the taxpayer
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provides evidence sufficient to establish a rational basis upon
which an estimate can be made. Vanicek v. Commissioner, 85 T.C.
731, 743 (1985).
For certain kinds of expenses otherwise deductible under
section 162(a), a taxpayer must satisfy substantiation
requirements set forth in section 274(d) before such expenses
will be allowed as deductions. Section 274(d) substantiation
requirements supersede the Cohan doctrine. Sec. 1.274-5T(a),
Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
Section 274(d) disallows deductions for travel expenses, gifts,
meals, and entertainment, as well as for listed property as
defined by section 280F(d)(4), unless the taxpayer substantiates
by adequate records or corroborates by sufficient evidence the
taxpayer’s own statements as to: (1) The amount of the expense;
(2) the time and place of the travel or entertainment, or the
date and description of the gift; (3) the business purpose of the
expense; and (4) the business relationship of the taxpayer to the
persons entertained.
Petitioner claimed a number of deductions for her insurance
business. We will take each expense in turn.
1. Car and Truck Expenses
Respondent conceded that petitioner is entitled to a
deduction of 50 percent of her claimed auto expenses for each
year. Petitioner claims she is entitled to deduct the total
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costs associated with vehicle ownership including car payments,
car insurance, and other maintenance charges for 1999 to 2004.
Petitioner’s passenger automobile is listed property under
section 280F(d)(4)(A)(i) and thus related expenses are subject to
the substantiation requirements of section 274(d). A taxpayer
must prove four elements to be allowed a deduction for listed
property: (1) Amount of expenditures, (2) amount of use (3)
time, and (4) business or investment purpose. Sec. 1.274-
5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6,
1985). The amount of expenditure concerns the amount of each
separate expenditure with respect to an item of listed property
whereas the amount of use concerns the amount of each business or
investment use based on the appropriate measure and the total use
of the listed property for the taxable period. Sec. 1.274-
5T(b)(6)(i)(A) and (B), Temporary Income Tax Regs., supra.
Additionally, a taxpayer must substantiate each element by
adequate records or by sufficient evidence corroborating her
testimony. Sec. 1.274-5T(c)(1), Temporary Income Tax Regs., 50
Fed. Reg. 46016 (Nov. 6, 1985). To satisfy the adequate records
standard, the taxpayer shall maintain an account book, diary,
log, statement of expense, trip sheets or similar record, and
other documentary evidence such as receipts. Sec. 1.274-
5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6,
1985).
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Petitioner submitted a printout of all transactions
conducted through her checking account for every year at issue.
Petitioner attached separate calculations to each year’s
checking records, one of which was labeled “Auto expenses”.
Petitioner also presented an invoice from February 2002 for the
purchase of two radial tires. Petitioner failed to produce any
appointment books, mileage records, or driving summaries
indicating business use of the vehicle. Petitioner has failed to
adequately substantiate under section 274(d) the vehicle’s
business use. Thus, petitioner is not entitled to additional
deductions for her vehicle for any year at issue.
2. Travel Expenses
Respondent allowed a deduction of $2,154 for travel expenses
for each of the years at issue. Petitioner claims she is
entitled to an unspecified amount of additional travel expenses
for each year.
A deduction is allowed for ordinary and necessary travel
expenses in the conduct of a taxpayer’s trade or business. Sec.
1.162-2(a), Income Tax Regs. Travel expenses, including
transportation and lodging while away from home, are subject to
the strict substantiation requirements of section 274(d). Sec.
274-5T(b), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov.
6, 1985). To substantiate a deduction attributable to travel
away from home, a taxpayer must maintain adequate records or
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present corroborative evidence to show: (1) The amounts of the
expenses, (2) time and place of travel, and (3) the business or
investment purpose of the expenses. Sec. 274(d) (flush
language); sec. 1.274-5T(b)(2), (c)(1), Temporary Income Tax
Regs., 50 Fed. Reg. 46014, 46016 (Nov. 6, 1985).
Petitioner did not claim any specific amounts of deductions
but vaguely testified that she was entitled to deduct additional
travel expenses. Petitioner testified that her customer accounts
were located throughout the United States and offered as evidence
boarding passes, shuttle receipts, and flight itineraries for
both US Airways and Southwest Airlines. However, petitioner did
not testify as to the specific business purposes of these trips.
Petitioner has failed to produce trip logs, meeting records, or
any documentary evidence connecting the details of her travel
with a business purpose. Thus, because petitioner has not
satisfied the strict substantiation requirements of section
274(d), petitioner is denied additional travel expense
deductions.
3. Business Use of Home
Respondent allowed petitioner a deduction equal to 70
percent of the expenses she claimed for business use of her home
for each year at issue. Petitioner claims she is entitled to
deduct her total monthly payments for rent, cable, Internet, and
other utilities.
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a. Rent
Section 280A(a) disallows deductions with respect to a
dwelling unit used by a taxpayer as a residence during the
taxable year, with certain exceptions. One of those exceptions
applies to use of a home office. Sec. 280A(c)(1). Home office
expenses are allowable if a portion of the dwelling unit is (1)
used exclusively, (2) on a regular basis, (3) for the purposes
enumerated in section 280A(c)(1). Hamacher v. Commissioner, 94
T.C. 348, 353-354 (1990). A taxpayer may not deduct 100 percent
of home expenses where only a portion of the property is used
exclusively for the taxpayer’s business. See, e.g., Stricker v.
Commissioner, T.C. Memo. 1995-530.
Petitioner claims that she used her apartment 100 percent
for work, but she gave no testimony in support of how the
apartment was used solely for business.
b. Utilities
Section 262(a) provides that personal, living and family
expenses are not deductible unless expressly allowed. The
regulations specify that personal, living, and family expenses
include utilities tied to a taxpayer’s home unless the taxpayer
uses a part of the home for business. Sec. 1.262-1(b)(3), Income
Tax Regs. If part of the home is used as a place of business, a
corresponding portion of the rent and other similar expenses,
such as utilities, as is properly attributable to such place of
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business is deductible as a business expense. Id.; see
Boltinghouse v. Commissioner, T.C. Memo. 2007-324 (determining
the taxpayer could not deduct cable costs when he provided no
evidence establishing use of the home for business purposes even
though a small portion of the taxpayer’s cable use was for a
business purpose). Utility expenses may be deductible under
section 162(a) if the expenses incurred are ordinary and
necessary in carrying on a trade or business. Vanicek v.
Commissioner, 85 T.C. at 742. Internet expenses have been
characterized as utility expenses. See Verma v. Commissioner,
T.C. Memo. 2001-132. Taxpayers must provide the Court with a
basis to determine what portion of the utilities was allocable to
their business. Adler v. Commissioner, T.C. Memo. 2010-47.
Petitioner claims that the cable, Internet, and utilities
were solely for her job. The only evidence petitioner presented
was her Nation’s Bank report showing monthly payments to the
power and cable companies. Petitioner did not testify as to why
the cable was necessary for her work.
In conclusion, petitioner is not entitled to deductions in
excess of the amount respondent allowed for any year at issue
because she has not shown that more than 70 percent of her home
expenses, including rent and utilities, related to business.
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4. Self-Employed Health Insurance
Respondent allowed petitioner deductions of 60 percent of
claimed self-employed health insurance for years 1999-2001 and 70
percent for 2002. Petitioner claims she is entitled to deduct
100 percent of the costs of health insurance for the years 1999-
2002.
The deductibility of health insurance costs paid or incurred
by self-employed individuals is subject to section 162(l).
Section 162(l) limits the amount of deductions allowed for health
insurance of self-employed individuals. For 1999-2001, self-
employed individuals may deduct only 60 percent of the amount
paid or incurred during the year for health insurance. Sec.
162(l)(1). For 2002 self-employed individuals may deduct only 70
percent of the amount. Id. Respondent allowed petitioner the
appropriate deductions. Because petitioner received the maximum
deductions possible for years 1999-2002, she is not entitled to
additional deductions.
5. Medical Expenses
Respondent did not allow petitioner any medical expense
deductions in excess of the insurance discussed above.
Petitioner seeks deductions for medical care expenses for 1999-
2004. She claims medical expenses of:
1999 2000 2001 2002 2003 2004
$90 $2,095 $6,990 $2,040 $2,368 $1,142
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Section 213(a) allows a deduction for expenses paid during
the taxable year for medical care that is not compensated for by
insurance or otherwise, to the extent that such expenses exceed
7.5 percent of adjusted gross income.
Petitioner’s medical expenses do not exceed 7.5 percent of
her adjusted gross income for any of the years at issue.
Accordingly, she is not entitled to deduct additional medical
expenses.
Section 6651(a)(1) Addition to Tax
For taxable years 1999-2004, petitioner requested extensions
of time to file, but never submitted, returns. Section
6651(a)(1) imposes an addition to tax equal to 5 percent of the
amount required to be shown as tax on the return. An additional
5 percent is imposed for each additional month or fraction
thereof during which the failure continues, but not to exceed 25
percent in the aggregate. Id. Under section 7491(c), the
Commissioner must come forward with sufficient evidence to show
that an addition to tax is appropriate. Higbee v. Commissioner,
116 T.C. 438, 446 (2001). Here respondent also bears the burden
of proof of the additional amounts asserted at trial.
This addition to tax may be avoided if the failure to file
was due to reasonable cause and not willful neglect. United
States v. Boyle, 469 U.S. 241, 245-246 (1985). Reasonable cause
exists for late filing if the taxpayer exercised ordinary care
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and prudence but was nevertheless unable to file on time. Sec.
301.6651-1(c)(1), Proced. & Admin. Regs. Illness or incapacity
may constitute reasonable cause if the illness caused an
inability to file. Joseph v. Commissioner, T.C. Memo. 2003-19.
Petitioner argues that she had reasonable cause because her
health problems prevented her from filing and notes that she
attempted to file as evidenced by timely requests for extensions.
She provided numerous medical records detailing her health
complications during the years at issue and continuing to the
present. We note that she was involved in two car accidents and
was diagnosed with other medical conditions. We acknowledge the
severity of these medical issues, but we note that throughout the
duration of petitioner’s health problems she generated
significant compensation as a self-employed insurance broker,
traveled, and remained aware of her tax responsibilities.
Finally, a request for an extension is not a license never to
file, and thus petitioner’s extension requests do not absolve her
from actually filing. Because petitioner conceded her receipt of
income and respondent established that she never filed,
respondent has met the burden of production under section
7491(c); and on the record as a whole we find the addition to tax
under section 6651(a)(1) is applicable as respondent asserted.
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We therefore find that petitioner did not have reasonable cause
and is liable for the section 6651(a)(1) addition to tax for
failure to file for each year at issue.
Conclusion
Because petitioner has not adequately substantiated her
deductions, she is not entitled to deductions in excess of those
respondent allowed. Respondent has met the burdens of production
and proof with respect to the addition to tax for failure to
file, and petitioner is liable for the section 6651(a)(1)
addition to tax for 1999-2004.
To reflect the foregoing,
Decision will be entered
under Rule 155.