T.C. Memo. 2010-184
UNITED STATES TAX COURT
MYRTIS STEWART, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10376-08. Filed August 16, 2010.
Myrtis Stewart, pro se.
Shawna A. Early and Robert A. Baxer, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: For 2004 and 2005 respondent determined
deficiencies in petitioner’s Federal income taxes and section
6662(a)1 accuracy-related penalties as follows:
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the years in
issue, and all Rule references are to the Tax Court Rules of
(continued...)
- 2 -
Penalty
Year Deficiency Sec. 6662(a)
2004 $9,240 $1,848.00
2005 12,447 2,489.40
The issues for decision are whether petitioner is:
(1) Entitled to deductions for losses of $25,000 for rental
expenses claimed on Schedule E, Supplemental Income and Loss, for
each year; (2) entitled to deductions for theft losses of $12,093
and $23,525.75 claimed on Schedules A, Itemized Deductions, for
2004 and 2005, respectively; (3) entitled to carryover losses of
$1,521.13 and $1,521 for 2004 and 2005, respectively; and (4)
liable for the section 6662(a) accuracy-related penalties.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. Petitioner resided in New
York when the petition was filed.
Petitioner has worked for the Internal Revenue Service (IRS)
as an international examiner, i.e., a revenue agent, for over 21
years, including 2004 and 2005. Through her work, which includes
examining tax returns, she has acquired a general knowledge of
the Federal income tax laws and the substantiation requirements
of the Code and the regulations thereunder. She also made
1
(...continued)
Practice and Procedure.
- 3 -
several business investments before or during 2004 and 2005
(discussed infra).
I. 116 Highland Lake (Highland Lake property), Highland, N.Y.
and 112 Hillside (Hillside property), Barryville, N.Y.
A. Background
Petitioner and Mary Anastasio (Ms. Anastasio) invested in
several properties together. They acquired the Hillside property
sometime before the years in issue. The Hillside property covers
4 to 5 acres of land and has a New England style double Cape Cod
house with an adjoining garage. Petitioner used the Hillside
property as her headquarters for the management of her real
estate.
Petitioner and Ms. Anastasio purchased the Highland Lake
property in or around 1995 for about $200,000 with a $25,000
downpayment. Petitioner paid $12,500 of the downpayment.
According to petitioner, Ms. Anastasio acquired the Highland Lake
property in her name because petitioner,2 an African American,
was not “able to purchase this property * * * in this town.” The
Highland Lake property is a 22-room Victorian style house with a
wraparound porch, which petitioner and Ms. Anastasio renovated.
They purchased it because they planned to operate a bed and
breakfast out of the house. But they sometimes rented it out.
2
Petitioner has purchased several properties in her name
or in a coinvestor’s name.
- 4 -
A first mortgage on the Highland Lake property of about
$100,000 was held by First National Bank of Jeffersonville (FNB),
and a second mortgage of about $100,000 was held by the seller of
the Highland Lake property. Petitioner and Ms. Anastasio each
made mortgage payments of $788.623 per month until Ms. Anastasio
became ill in 2000 and could not work. Thereafter, petitioner
paid both mortgages.
Petitioner used both properties to store her collectibles.
B. Collectibles Kept at the Highland Lake and Hillside
Properties
1. Stamps, Coins, and Currency Sheets
Petitioner has been collecting stamps and coins for over 50
years. As a young child she started collecting stamps and
Lincoln wheat pennies, Indian head pennies, and buffalo nickels.
In her teen years she started buying uncirculated and proof coins
from the Mint. In her twenties she started buying coins and
proof coins at coin shows and from coin shops. She usually
purchased stamps at trade shows or stamp shops. She recorded her
purchases in books (inventory records).
Petitioner accumulated a large coin collection: she had
rolls of coins, unopened bags of Mint nickels and dimes, and
uncut currency sheets of various denominations, including a
3
The mortgage payments amounted to $1,577.23 per month
($777.67 and $799.56 for the first and second mortgage,
respectively); $788.62 represents their equal share of both
payments.
- 5 -
Hawaiian dollar bill. She kept the less valuable coins at her
Manhattan apartment and kept the more valuable coins at her
Highland Lake and Hillside properties. She stored the coins in
closets in plastic containers that were on rollers like toolboxes
at her Highland Lake property. At the Hillside property,
petitioner stored her coins in a glass curio cabinet and in a
glass display cabinet with some stamps on a wall in her library.
2. Books
Petitioner also collected books for her libraries at the
Highland Lake and Hillside properties. She purchased a set of 20
books on financial rating services with yearly updates for her
professional library at the Highland Lake property and entire
collections of books from auctions for her library at the
Hillside property.
3. Artwork
Petitioner also collected art. Specifically, she owned a 2-
by 3-foot painting that depicts Custer’s Last Stand at the Battle
of the Little Bighorn in 1876 and was signed by the artist. She
kept this painting at the Hillside property.
C. Falling Out and Thefts
Petitioner and Ms. Anastasio’s business relationship
fragmented and eventually, in or around 2004, petitioner stopped
doing business with Ms. Anastasio.
- 6 -
Ms. Anastasio filed for bankruptcy and allowed the Highland
Lake property to go into foreclosure. Petitioner filed a notice
of pendency4 for the Highland Lake property in Ms. Anastasio’s
bankruptcy proceeding because Ms. Anastasio allegedly did not
comply with the terms of a settlement agreement and because
petitioner wanted to protect her interest in the Highland Lake
property. Ms. Anastasio sold the Highland Lake property in 2001
or 2002 without petitioner’s knowledge. Petitioner did not
receive any proceeds from the sale.
Petitioner’s collectibles allegedly were stolen from the
Hillside and Highland Park properties at some point. She
discovered the thefts from the Hillside and Highland Park
properties in 2004 and 2005, respectively, when she went to the
properties and discovered that the items were gone. Neither
property had been broken into or forcibly entered. The items
were purportedly stolen by an acquaintance of Ms. Anastasio to
whom Ms. Anastasio had given the keys to both properties.
Petitioner filed police reports in New Jersey for the thefts.5
4
A notice of pendency informs others about a lawsuit
affecting the title to or an interest in property. See, e.g.,
Debral Realty, Inc. v. DiChiara, 420 N.E.2d 343 (Mass. 1981).
5
Petitioner testified that she filed police reports in New
Jersey because the New York police would not allow her to file
police reports since the alleged perpetrators resided in New
Jersey.
- 7 -
D. Deductions Claimed for the Highland Lake and Hillside
properties
1. Legal Expenses and Bad Debt Deduction
Petitioner claimed on her 2004 Schedule E a deduction for
legal expenses of $768 for the Highland Lake property. She
provided a copy of a settlement agreement and a complaint for
another lawsuit that she filed against Ms. Anastasio as
substantiation of her legal expenses. The settlement agreement
provides in pertinent part that Ms. Anastasio will allow
petitioner to remove “clothing, books, shoes, furniture, toys,
and other collectibles” from the Highland Lake property.
Petitioner concluded that she had suffered a loss for a bad
debt in 2004 and 2005 after she had exhausted all legal avenues
against Ms. Anastasio. She claimed on her 2004 and 2005
Schedules E deductions for bad debts of $18,926.76 and
$18,328.62, respectively, for the Highland Lake property. She
reconstructed her mortgage payments from 1996 to 2000 and for
each of the years 2004 and 2005 deducted as a bad debt 2 years of
mortgage payments as her “basis” in the Highland Lake property.
Petitioner provided an account statement from FNB for
February 2 to May 1, 1996, to substantiate her basis. The
account statement shows that three mortgage payments of $777.67
were drawn from petitioner and Ms. Anastasio’s joint account.
- 8 -
2. Theft Loss Deduction
Petitioner was not compensated by insurance or otherwise for
the thefts of her collectibles, and she deducted the purchase
prices of the items as the amounts of her theft losses.
Petitioner claimed on her 2004 Schedule A a deduction for
theft losses of $12,093 for the Hillside property. Her deduction
for the theft loss relates to coins, paintings, antiques,
furniture, her library, and appliances.6
Petitioner claimed on her 2005 Schedule A a deduction for
theft losses of $18,525.75 for the Highland Lake property. Her
deduction for the theft loss relates to coins, paintings,
antiques, furniture, her professional library, and appliances.7
II. 229 East 29th Street (East 29th Street property), New York,
N.Y.
A. Background
Petitioner, Ms. Anastasio, and another coinvestor purchased
the East 29th Street property in 2003. They paid $3,000 and
assumed the $21,000 or $27,0008 debt to which the East 29th
Street property was subject. Ms. Anastasio and the other
coinvestor purchased the East 29th Street property in their names
6
Petitioner’s testimony about the items stolen in each
theft loss was less than clear.
7
Petitioner did not describe the antiques, furniture,
appliances, and paintings.
8
Petitioner could not recall the exact amount of the debt.
- 9 -
because, according to petitioner, she was not allowed to purchase
that property in her name. The East 29th Street property is a
co-op apartment that was occupied by tenants. Petitioner, Ms.
Anastasio, and the other coinvestor invested in the East 29th
Street property to obtain the benefits of appreciation and tax
deductions. Petitioner reported rental income received of $2,304
for 2004 and 2005.
B. Deductions Claimed for the East 29th Street Property
Petitioner claimed on each of her 2004 and 2005 Schedules E
deductions for management fees of $2,652.06 and property taxes of
$2,114.31 for the East 29th Street property. The management fees
include about $50 per month for maintenance. The property taxes
include some special assessments that were billed at the end of
each year. She paid $309.01 per month for the management fees,
maintenance fees, and property taxes.9 She made the payments by
checks drawn from her account.
Petitioner provided carbon copies of checks of $309.01 for
November 2004 and May 2005 payable to “229 E. 29th St. Owners
Corp.” to substantiate some of her payments. She also provided
copies of bank statements for the period November 2003 to
9
Ms. Anastasio and/or the other coinvestor gave petitioner
their portions of the expenses, and petitioner paid the payments
in whole. The $309.01 per month did not include amounts paid for
additional amounts owed at the end of each year, including
amounts paid for special assessments.
- 10 -
November 2004 that show checks of $309.01 were drawn from her
account.
III. Tighe Avenue (Tighe Ave. property) and Brookside
Lots (Brookside property), Newburgh (Newburgh) and Harriman,
N.Y.
A. Background
Petitioner purchased the Tighe Ave. and Brookside properties
for investment purposes with the intent to develop them. She
purchased the Tighe Ave. property in 2003 for $500 at an auction.
The Tighe Ave. property is undeveloped land. She rented the
Tighe Ave. property to a person who resided at the Tighe Ave.
property in an “RV” trailer or mobile home. The record is
unclear as to how and when petitioner acquired the Brookside
property. The Brookside property consists of two undeveloped,
“buildable”, and nonadjoining lots in a development. Petitioner
reported rental income received of $1,000 and $1,015 for 2004 and
2005, respectively.
B. Deductions Claimed for the Tighe Ave. and Brookside
Properties
Petitioner claimed the following deductions for her Tighe
Ave. and Brookside properties:
Auto./ Auto. Cleaning
Year Travel Ins. Maint. Supplies Mail Rent
2004 $1,500.00 $816.00 -0- -0- -0- $3,048
1
2005 1,526.01 916.23 $489.62 $525.36 $120.02 3,168
1
Petitioner explained that her $916.23 deduction for
automobile insurance was erroneously reported as an other
interest expense on Schedule E.
- 11 -
1. Automobile and Travel Expenses
Petitioner kept a car in Newburgh to travel to, from, or
between her Tighe Ave. and Brookside properties. Her deductions
for automobile insurance, automobile expenses, and travel
expenses are based on her actual costs, not mileage. Her actual
costs include amounts she paid for automobile insurance, travel
to, from, and between her properties with her car; bus fare from
her New York apartment to Newburgh, and taxi fare for travel
between the Tighe Ave. or Brookside properties and the taxi stand
at a Newburgh bus stop. She did not keep a mileage log for the
use of her car, and other than her testimony she did not provide
any written evidence to substantiate her expenditures.
2. Rent Expenses
Petitioner deducted payments of $254 per month to Uncle
Bob’s Storage as rent, of which she paid $52 per month for the
storage of her car and $202 per month for the storage of office
furniture, filing cabinets, and files.10 She moved the office
furniture, filing cabinets, and files from the Hillside property
to the Newburgh area.
Petitioner provided copies of account statements for the
period November 2003 to November 2004 to substantiate her rent
10
Petitioner’s rent expense increased by $120 in 2005. It
is unclear from the record how much, if any, of the $120 is
attributable to the storage of her car.
- 12 -
payments. The account statements show that checks of $254 per
month were drawn from her account in 2004.
3. Cleaning and Maintenance Expenses
Petitioner paid $489.62 in cash to a company to cut back and
clear the Tighe Ave. property because of downed power lines
caused by a storm.
4. Supplies and Mail Expenses
Petitioner deducted supplies expenses of $525.36 and mail
expenses of $120.02 for 2005. The supplies expenses were paid in
cash.
IV. Other Real Property
A. Background
Petitioner and a coinvestor also invested in other real
property that they later sold. When the property was purchased,
it had a factory located on it that contained gold-spinning
machines from the 1700s to the 1800s. The gold-spinning machines
made gold threads for clothing from spools of gold. Petitioner
and the coinvestor agreed that petitioner could remove half of
the gold-spinning machines before the sale. The coinvestor,
however, locked the property, and petitioner could not remove her
half of the gold-spinning machines. Petitioner filed a lawsuit
against the coinvestor, and while the lawsuit was pending, the
gold-spinning machines disappeared from the property.
- 13 -
B. Deductions Claimed for the Other Real Property
Petitioner claimed on her 2005 Schedule A a theft loss
deduction of $5,000 for the theft of her gold-spinning machines.
She testified that her gold-spinning machines were worth a lot of
money and that her basis in them was $5,000. She explained that
she deducted only $5,000 because she was being conservative, and
the fair market value of her gold-spinning machines was
uncertain. According to petitioner, the purchase price of the
gold-spinning machines was included in the purchase price of the
real property, but it might have been separately listed. She
filed a police report in New Jersey for the theft, but she was
not compensated by insurance or otherwise for the theft.
V. Carryover Losses
Petitioner reported on Schedules E carryover losses of
$1,521.1311 and $1,521.2312 for 2004 and 2005, respectively, that
would carryover to 2005 and 2006. Respondent disallowed the
carryover losses in the notice of deficiency because petitioner
had not provided any information to substantiate her expenses.
OPINION
Deductions are a matter of legislative grace, and taxpayers
bear the burden of proving that they are entitled to any
11
$26,521.13 (claimed Schedule E losses) - $25,000 (sec.
469(i) limitation for individuals).
12
$26,521.23 (claimed Schedule E losses) - $25,000 (sec.
469(i) limitation for individuals).
- 14 -
deductions claimed.13 Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79 (1992); New Colonial Ice Co. v.
Helvering, 292 U.S. 435 (1934). In addition, taxpayers bear the
burden of substantiating the amount and purpose of the item
claimed as a deduction. Hradesky v. Commissioner, 65 T.C. 87, 90
(1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976). Taxpayers
are also required to maintain records that are sufficient to
enable the Commissioner to determine their correct tax liability.
Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.
When taxpayers establish that they have incurred deductible
expenses but are unable to substantiate the exact amounts, we can
estimate the deductible amounts, but only if the taxpayers
present sufficient evidence to establish a rational basis for
making the estimates. See Cohan v. Commissioner, 39 F.2d 540,
543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731,
742-743 (1985). In estimating the amount allowable, we bear
heavily upon the taxpayer whose inexactitude is of his or her own
making. See Cohan v. Commissioner, supra at 544. We may not use
the Cohan doctrine, however, to estimate expenses covered by
section 274(d). See Sanford v. Commissioner, 50 T.C. 823, 827
(1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969); sec.
13
Petitioner does not claim or show that sec. 7491(a)
applies. Accordingly, she bears the burden of proof. See Rule
142(a).
- 15 -
1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov.
6, 1985).
Generally, we find petitioner’s testimony and that of her
witness, Nelson Abrahante14 (Mr. Abrahante), honest and credible.
They testified credibly as to the investment purpose of many of
the deductions claimed on petitioner’s returns. For some of
those deductions, petitioner recalled the amounts of her
expenses. Where petitioner’s testimony provided a sufficient
basis for the Court to estimate the amounts of her expenditures,
we have done so, taking account of her inexactitude where
appropriate. Where the original documents were lost, but where
petitioner presented credible reconstructions of her expenses, we
have allowed the claimed amounts.15
14
Mr. Abrahante is a coinvestor and a former coworker of
petitioner.
15
It is well established that the Court may permit a
taxpayer to substantiate deductions through secondary evidence
where the underlying documents have been unintentionally lost or
destroyed. Boyd v. Commissioner, 122 T.C. 305, 320-321 (2004);
Malinowski v. Commissioner, 71 T.C. 1120, 1125 (1979); Furnish v.
Commissioner, T.C. Memo. 2001-286; Joseph v. Commissioner, T.C.
Memo. 1997-447; Watson v. Commissioner, T.C. Memo. 1988-29.
Moreover, even though Congress imposed heightened substantiation
requirements for certain deductions by enacting sec. 274, the
regulations thereunder allow a taxpayer to substantiate a
deduction by reasonable reconstruction of his or her expenditures
when records are lost through no fault of the taxpayer. Sec.
1.274-5T(c)(5), Temporary Income Tax Regs., 50 Fed. Reg. 46022
(Nov. 6, 1985).
Petitioner testified that Ms. Anastasio took some of her
records and that other records were submitted to other courts in
(continued...)
- 16 -
I. Section 165 and 166 Theft Loss and Bad Debt Deductions
Section 165(a) provides that there shall be allowed as a
deduction any loss sustained during the taxable year and not
compensated by insurance or otherwise. Section 165(c) limits the
loss deduction for individuals to losses incurred in a trade or
business, losses incurred in a transaction entered into for
profit, and certain other losses including those arising from a
theft. Petitioner has the burden of proving that she sustained a
loss during the taxable year.
Section 166(a) generally provides that a taxpayer may deduct
a debt that become worthless during the taxable year. A bona
fide debt is a debt that arises from a debtor-creditor
relationship reflecting an enforceable and unconditional
obligation to repay a fixed sum of money. Sec. 1.166-1(c),
Income Tax Regs. The existence of a bona fide debt is a factual
inquiry, and the taxpayer bears the burden of proving that a bona
fide debt existed. Dixie Dairies Corp. v. Commissioner, 74 T.C.
476, 493 (1980); Litton Bus. Sys., Inc. v. Commissioner, 61 T.C.
367, 377 (1973).
15
(...continued)
her lawsuits against Ms. Anastasio.
- 17 -
A. Highland Lake Property
As stated supra, petitioner claimed on her 2004 and 2005
Schedules E deductions for bad debts of $18,926.76 and
$18,328.62, respectively, for the Highland Lake property.
Respondent asserts that to the extent petitioner has
realized a gain or loss on the Highland Lake property, the gain
or loss is capital and was incurred upon the disposition of the
property in 2001 or 2002, not during either of the years in
issue. Therefore, according to respondent, petitioner is not
entitled to her deductions for bad debts.
Petitioner’s testimony on this issue was less than clear.
She testified that she had initiated lawsuits against Ms.
Anastasio, which she later withdrew, and that ownership of the
Highland Lake property was being negotiated as part of a
settlement. She also testified, however, that she was occupying
the Hillside property and had exchanged her interest in the
Highland Lake property for Ms. Anastasio’s interest in the
Hillside property. But, according to petitioner, Ms. Anastasio
breached their settlement agreement; and she initiated another
lawsuit against Ms. Anastasio, which she also withdrew. She
testified further that Ms. Anastasio sold the Highland Lake
property without her knowledge in either 2001 or 2002, and she
did not receive any of the proceeds. She explained that she
deducted 2 years of mortgage payments as her basis in the
- 18 -
Highland Lake property as a bad debt in 2004 and 2005 after she
exhausted her legal remedies and concluded that she had sustained
a loss.
Petitioner has not established that a debt owed to her by
Ms. Anastasio became worthless during either year in issue or
that she otherwise sustained a loss during either year with
respect to the Highland Lake property. Petitioner’s testimony on
this issue and her records are confused, uncertain, and
ambiguous. She has not substantiated a basis in the Highland
Lake property or in a purported debt owed to her by Ms.
Anastasio. See secs. 165(b), 166(b); Whitaker v. Commissioner,
T.C. Memo. 1988-418. Consequently, respondent’s disallowance of
the bad debt deductions claimed in respect of the Highland Lake
property is sustained.
B. Antiques, Artwork, Coins and Currency Sheets, Libraries,
Gold-Spinning Machines, Furniture, and Appliances
As stated supra, petitioner claimed deductions for theft
losses of $12,093 and $23,525.7516 for 2004 and 2005,
respectively. She deducted her bases and not the fair market
values of her artwork, coins and currency sheets, libraries,
gold-spinning machines, furniture, and appliances as the amount
of her theft losses.
16
As stated supra, $18,525.75 is attributable to the theft
of her coins, paintings, antiques, furniture, her professional
library, and appliances, while $5,000 is attributable to the
theft of her gold-spinning machines.
- 19 -
Petitioner has not substantiated the items’ fair market
values immediately before the alleged theft. See secs. 1.165-
7(b)(1), 1.165-8(c), Income Tax Regs. (in the case of property
held for personal use the amount of the theft loss is the lesser
of the property’s fair market value immediately before the theft
or its adjusted basis). She also has not substantiated the
items’ bases. See Hubert Enters., Inc. v. Commissioner, T.C.
Memo. 2008-46 (the basis of property, under section 1012, is
generally defined as cost and that cost is adjusted pursuant to
section 1016); see also Kikalos v. Commissioner, T.C. Memo.
1998-92 (it is settled that the deductible amount of a theft loss
may not exceed basis), revd. on other grounds 190 F.3d 791 (7th
Cir. 1999). Neither the items’ fair market values nor their
bases can be determined from the record with any degree of
certainty. Therefore, we cannot apply the Cohan rule to
determine a reasonable allowance for the theft losses.
Consequently, petitioner is not entitled to her claimed theft
losses, and respondent’s determinations in that respect are
sustained.
II. Section 212 Expenses
Section 212 allows an individual to deduct all of the
ordinary and necessary expenses paid or incurred: (1) For the
production of income; (2) for management, conservation, or
maintenance of property held for the production of income; or
- 20 -
(3) in connection with the determination, collection, or refund
of a tax.
A. Legal Expenses
We apply the origin of the claim test to determine whether a
taxpayer’s legal expenses are personal, for the production of
income, or capital. The ascertainment of a claim’s origin and
character is a factual determination that must be made on the
basis of the facts and circumstances of the litigation. United
States v. Gilmore, 372 U.S. 39, 47-49 (1963). The most important
factor to consider is the circumstances out of which the
litigation arose. Boagni v. Commissioner, 59 T.C. 708 (1973).
Petitioner testified that she initiated the lawsuit against
Ms. Anastasio because Ms. Anastasio breached a settlement
agreement allowing petitioner to remove “clothing, books, shoes,
furniture, toys, and other collectibles” from the Highland Lake
property.
Petitioner has not established that her claim against Ms.
Anastasio, out of which her legal expenses arose, has its origin
in a profit-seeking activity as distinct from a personal one.
Petitioner, therefore, is not entitled to her claimed deductions
for legal expenses, and respondent’s determination, in that
respect, is sustained.
- 21 -
B. Management Fees and Property Taxes
Petitioner credibly testified about the amounts of and the
purposes for her deductions for management fees and property
taxes for 2004 and 2005 for the 229 East 29th Street property.
She also provided additional substantiation for some of her 2004
payments with copies of her account statements and carbon copies
of checks. Petitioner is entitled to her claimed deductions for
management fees of $2,652.06 and property taxes of $2,114.31 for
2004 and 2005.
C. Cleaning and Maintenance Expenses
Petitioner credibly testified that she paid $489.62 in 2005
to a company to cut back and clear the Tighe Ave. property
because of downed power lines caused by a storm. Petitioner is
entitled to her claimed deduction for cleaning and maintenance
expenses of $489.62 for 2005.
D. Supplies and Mail Expenses
Petitioner credibly testified that she paid $525.36 for
supplies expenses and $120.02 for mail expenses in 2005 for the
Tighe Ave and Brookside properties. Petitioner is entitled to
her claimed deductions for supplies and mail expenses.
E. Rent Expenses
Petitioner credibly testified that she paid about $202 per
month in 2004 and 2005 for the cost of storing office furniture,
filing cabinets, and files (we discuss the storage of her car
- 22 -
infra). She also provided additional substantiation for some of
her 2004 payments with copies of her account statements.
Petitioner is entitled to deductions of $202 per month for rent
expenses for 2004 and 2005.17
III. Section 212 Expenses Subject to Section 274
In addition to satisfying the criteria for deductibility
under section 212, certain expenses must also satisfy the strict
substantiation requirements of section 274(d). Section 274(d)
and section 1.274-5T(a), (b)(2), and (6), Temporary Income Tax
Regs., 50 Fed. Reg. 46014, 46016 (Nov. 6, 1985), provide that no
deduction or credit shall be allowed for travel or automobile
expenses unless the taxpayer substantiates his or her expenses
with adequate records or other corroborating evidence.
A. Travel Expenses
For travel away from home expenses, section 274(d) and the
regulations thereunder require the taxpayer to substantiate:
(1) The amount of each expenditure; (2) the time of the travel;
(3) the place of the travel; and (4) the business purpose of the
travel. Sec. 1.274-5T (b)(2), Temporary Income Tax Regs., supra.
As stated supra, petitioner’s travel expenses include her
actual costs of travel by taxi between her properties and a taxi
stand and travel by bus to Newburgh. It is unclear from the
record whether petitioner’s travel to Newburgh was travel away
17
See supra note 10.
- 23 -
from home--that is, overnight trips in which the exigencies of
her investment activity required her to sleep or rest before
returning home. See United States v. Correll, 389 U.S. 299
(1967); Lackey v. Commissioner, T.C. Memo. 1977-213; see also
I.T. 3395, 1940-2 C.B. 64. To the extent, however, that
petitioner’s travel was travel away from home, she has not
complied with the substantiation requirements of section 274(d).
Petitioner is not entitled to deduct her travel expenses under
section 212, and respondent’s determination, in that respect, is
sustained. See Lackey v. Commissioner, supra.
B. Automobile Expenses
For automobile expenses, section 274(d) and the regulations
thereunder require the taxpayer to substantiate: (1) The amount
of each expenditure or use; (2) the time of the expenditure or
use; and (3) the business or investment purpose of the expense or
use. See sec. 1.274-5T(b)(6)(i)(B), Temporary Income Tax Regs.,
supra.
As stated supra, petitioner’s automobile expenses include
her actual costs for automobile insurance, travel with her car
to, from, or between her properties, and $52 per month for the
storage cost of her car.
Other than the $52 per month petitioner paid for the storage
of her car, she did not substantiate the amounts of her
expenditures. She also did not substantiate the amounts or the
- 24 -
times of the automobile’s use. Consequently, petitioner is not
entitled to her deductions for automobile expenses or the
deductions claimed for storage costs attributable to her car.
The Cohan rule is not applicable, see Sanford v. Commissioner, 50
T.C. at 827, and respondent’s determinations, in that respect,
are sustained.
IV. Carryover Losses
As stated supra, petitioner reported on Schedules E losses
of $1,521.13 and $1,521.23 for 2004 and 2005, respectively, that
would carry over to 2005 and 2006.
The section 469 passive activity loss rules generally
disallow the current deduction of losses and credits from
activities in which the taxpayer does not materially participate.
Rental activity is generally treated as a per se passive activity
regardless of whether the taxpayer materially participates. Sec.
469(c)(2). Section 469(i)(1), however, permits a passive
activity loss up to $25,000 attributable to a rental real estate
activity in which an individual actively participates (subject to
certain phaseouts not applicable here). Amounts disallowed may
be carried forward to subsequent years. Sec. 469(b); sec.
1.469-1(f)(4), Income Tax Regs.
Petitioner reported on Schedules E rental income totaling
$3,304 and $3,319 for 2004 and 2005, respectively. We have
- 25 -
allowed petitioner Schedule E deductions of $7,190.3718 and
$8,325.3719 for 2004 and 2005, respectively, which result in
losses of only $3,886.3720 and $5,006.3721 for 2004 and 2005,
respectively. Petitioner, therefore, does not have any carryover
loss for either year.
V. Section 6662(a) Accuracy-Related Penalties
Section 7491(c) provides that the Commissioner will bear the
burden of production with respect to the liability of any
individual for additions to tax and penalties. The
Commissioner’s burden of production under section 7491(c) is to
produce evidence that it is appropriate to impose the relevant
penalty, addition to tax, or additional amount. Higbee v.
Commissioner, 116 T.C. 438, 446 (2001); see also Swain v.
Commissioner, 118 T.C. 358, 363 (2002). Once the Commissioner
satisfies this burden of production, the taxpayer must persuade
the Court that the Commissioner’s determination is in error by
18
$2,652.06 (management fees) + $2,114.31 (property tax) +
$2,424 (rent expense).
19
$2,652.06 (management fees) + $489.62 (cleaning and
maintenance expense) + $525.36 (supplies expense) + $120.02 (mail
expense) + $2,114.31 (property tax) + $2,424 (rent expense).
20
$3,304 (total rental income) - $7,190.37 (total rental
expenses).
21
$3,319 (total rental income) - $8,325.37 (total rental
expenses).
- 26 -
supplying sufficient evidence of an applicable exception. Higbee
v. Commissioner, supra at 446.
Pursuant to section 6662(a) and (b)(1) and (2), a taxpayer
may be liable for a penalty of 20 percent on the portion of an
underpayment of tax due to negligence or disregard of rules or
regulations or a substantial understatement of income tax.22 The
term “negligence” includes any failure to make a reasonable
attempt to comply with the Code and any failure to keep adequate
books and records or to substantiate items properly. Sec.
6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.
Petitioner failed to provide respondent with any records and
was unable to substantiate her deductions at the administrative
level. Accordingly, respondent has met his burden of production.
See sec. 1.6662-3(b)(1), Income Tax Regs.; see also Smith v.
Commissioner, T.C. Memo. 1998-33.
The accuracy-related penalty, however, is not imposed with
respect to any portion of the underpayment as to which the
taxpayer acted with reasonable cause and in good faith. Sec.
6664(c)(1). The decision as to whether the taxpayer acted with
reasonable cause and in good faith depends upon all the pertinent
22
Because we find that petitioner was negligent, we need
not discuss whether she substantially understated her Federal
income taxes. See sec. 6662(b); Ochsner v. Commissioner, T.C.
Memo. 2010-122; Fields v. Commissioner, T.C. Memo. 2008-207.
- 27 -
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 or her proper tax liability. Id. Petitioner
argues she has shown reasonable cause or good faith on account of
her medical illness and/or lost or stolen records.
Although we sympathize with petitioner’s circumstances
(i.e., her alleged illnesses), we are reluctant to rely on her
self-serving and uncorroborated testimony about her illness.
Moreover, she continued to work for the IRS and to participate in
her investment activity during the years in issue. Consequently,
petitioner’s illness does not support a reasonable cause or good
faith defense.
In certain circumstances, however, the loss or theft of a
taxpayer’s records may support a reasonable cause or good faith
defense to an accuracy-related penalty. See Allemeier v.
Commissioner, T.C. Memo. 2005-207; Brown v. Commissioner, T.C.
Memo. 1997-418; Burkart v. Commissioner, T.C. Memo. 1984-429;
Cavell v. Commissioner, T.C. Memo. 1980-516.
As stated supra, petitioner claimed deductions for bad debts
and legal expenses for the Highland Lake property that she was
not able to substantiate. Petitioner credibly testified that she
maintained records, but that Ms. Anastasio took some of the
records, some records were submitted to other courts in her
lawsuits against Ms. Anastasio, and in either case, petitioner
- 28 -
was unable to retrieve the records. She also attempted to
reconstruct her records for the Highland Lake property. We find
that petitioner has a reasonable cause or good faith defense for
the portions of the underpayments attributable to her claimed
deductions for bad debts and legal expenses attributable to the
Highland Lake property. See Irving v. Commissioner, T.C. Memo.
2006-169; Lyons v. Commissioner, T.C. Memo. 1991-84; Haley v.
Commissioner, T.C. Memo. 1977-348.
Petitioner’s claimed deductions for theft losses related to
coins and uncut currency sheets, paintings, antiques, furniture,
her libraries, appliances, and the gold-spinning machines. She
credibly testified that she maintained records of her purchases
of her coins and uncut currency sheets and that her inventory
records were stolen with her coin collections and uncut currency
sheets. It is unclear from the evidence, however, whether she
maintained records of her purchases for the other stolen items.
The evidence also provides no mechanism for allocating the
amounts of her theft losses among the stolen items.23 In
addition, she did not attempt to reconstruct the records of her
purchases for any of the stolen items. Consequently, petitioner
does not have a reasonable cause or good faith defense for the
portions of the underpayments attributable to her claimed
23
On her 2004 Schedule A, petitioner only wrote “Orange
Co. The”, and on her 2005 Form 4684, Casualties and Thefts,
petitioner only wrote “Su-Berryvil Prop.”
- 29 -
deductions for theft losses. See Kolbeck v. Commissioner, T.C.
Memo. 2005-253; Cherry v. Commissioner, T.C. Memo. 1998-360;
Smith v. Commissioner, supra; Cook v. Commissioner, T.C. Memo.
1991-590.
Similarly, there is no evidence that petitioner maintained
records during the years in issue sufficient to meet the strict
substantiation requirements of section 274(d) for travel and
automobile expenses. Moreover, even if such records existed,
there is no evidence that those records were lost or stolen. And
except for the amounts of her parking expenses, she did not
attempt to reconstruct those records. Consequently, petitioner
does not have a reasonable cause or good faith defense for the
portions of the underpayments attributable to her claimed
deductions for travel and automobile expenses. See Makspringer
v. Commissioner, T.C. Memo. 1994-468; Robbins v. Commissioner,
T.C. Memo. 1981-449.
In reaching all of our holdings herein, we have considered
all arguments made by the parties, and to the extent not
mentioned above, we find them to be irrelevant or without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.