T.C. Summary Opinion 2010-127
UNITED STATES TAX COURT
SVEND F. AND MISCHELLE T. STENSLET, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23402-05S. Filed August 30, 2010.
Svend F. and Mischelle T. Stenslet, pro sese.
Beth A. Nunnink, for respondent.
CARLUZZO, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463.1 Pursuant to section 7463(b),
the decision to be entered is not reviewable by any other court,
1
Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code of 1986, as amended, in effect
for the relevant period. Rule references are to the Tax Court
Rules of Practice and Procedure.
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and this opinion shall not be treated as precedent for any other
case.
In a notice of deficiency dated November 7, 2005, respondent
determined the following deficiencies in, and penalties with
respect to petitioners’ Federal income taxes:
Penalty
Year Deficiency Sec. 6662(a)
2002 $6,366 $1,273.20
2003 6,184 1,236.80
2004 8,977 1,795.40
After concessions, the issues for decision are as follows:
(1) Whether petitioners were engaged in the trade or business of
farming during any of the years in issue; (2) whether for 2003
and/or 2004 certain expenditures incurred by Mischelle T.
Stenslet to qualify her as a massage therapist are deductible as
trade or business expenses; (3) whether certain expenditures
incurred by Svend F. Stenslet in connection with his employment
as a commercial pilot are nondeductible personal expenses or
deductible as unreimbursed employee business expenses; (4)
whether petitioners are entitled to a deduction for the
mechanical failure of a lawnmower during 2004; and (5) whether
petitioners are liable for section 6662(a) accuracy-related
penalties for any of the years in issue.
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Background
Some of the facts have been stipulated and are so found. At
the time the petition was filed and at all times relevant here,
petitioners resided in Tennessee.
Petitioners’ Employment Backgrounds
1. Svend F. Stenslet (Petitioner)
At all times relevant to this proceeding petitioner was
employed full time as a pilot for United Express Airlines
(Airlines). In connection with that employment he performed
services as both a pilot and a flight simulator trainer.
Petitioner’s flight assignments during the years in issue
originated and terminated at Dulles International Airport
(Dulles) in Sterling, Virginia. In connection with his flight
assignments he routinely drove from his residence in Tennessee to
a nearby airport and then flew to Dulles in order to arrive in
sufficient time for his flight assignment. Upon returning to
Dulles when his flight assignment terminated, he returned to his
home in Tennessee.
Sometimes petitioner’s flight assignments required that he
spend the night near Dulles. Accordingly, from 2002 through 2004
petitioner incurred expenses for lodging in Sterling. He also
incurred lodging expenses in Sterling for the period that he
remained in the area for training purposes. From time to time
petitioner kept a car in the Dulles area.
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As an Airlines pilot, petitioner was entitled to and
received a per diem allowance in connection with his flight
assignments. The per diem allowance began accruing 1 hour before
the check-in time at Dulles and stopped accruing 1-1/2 hours
after arrival back at Dulles. Most of petitioner’s flight
assignments began and ended on the same day. If petitioner’s
flight assignment required that he spend a night away from the
Dulles area, then Airlines paid the expense of the overnight
lodging.
2. Mischelle T. Stenslet (Mrs. Stenslet)
As best as can be determined from the record, Mrs. Stenslet
was employed as a registered nurse during each year in issue. At
some point in her career as a registered nurse, Mrs. Stenslet
became interested in becoming a licensed massage therapist.
Starting in 2003 she began to pursue that interest.
Petitioners’ Farming Activity
In the early 1990s Mrs. Stenslet’s mother purchased 78 acres
in Tennessee described by petitioners as “untouched land”
consisting of fields and wooded areas covered in blackberry
bushes (the property). In 1997 petitioners, who expected that
they would “inherit at least a quarter” of the property, decided
to locate their residence there. They first began to live on the
property in a mobile home. Over the years they transformed the
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property from what was essentially undeveloped land to land
suitable to support a permanent residence.
During 2002 petitioners purchased approximately 20 chickens
and 2 emus. From time to time during that year they sold chicken
eggs for $1 a dozen. They also sold unspecified amounts of emu
feathers, apparently used to make lures for fly fishing purposes.
In 2003 petitioners purchased a goat and a horse. The goat
was sold soon after it was purchased because, according to
petitioners, it was “scary”.
Although it is not entirely clear from the record, during
2004 petitioners might have purchased another horse. During that
year electric fencing was installed on the property.
Petitioners did not maintain formal books of account with
respect to any income generated from, or expenses incurred in
connection with, the chickens, horse(s), emus, and (if only for a
brief period) the goat maintained on the property. They did,
however, keep receipts evidencing the purchase of feed, fencing,
and various other supplies used or consumed in connection with
the maintenance of those animals.
Petitioners’ Federal Income Tax Returns
For each year in issue petitioners’ timely filed joint
Federal income tax return was prepared by a paid income tax
return preparer. As relevant here, the contents of each return
are summarized below.
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1. 2002
Petitioners’ 2002 return includes: (1) A Schedule A,
Itemized Deductions; (2) a Form 2106, Employee Business Expenses,
relating to petitioner’s employment as a pilot; and (3) a
Schedule F, Profit or Loss From Farming.
On the Schedule A petitioners claimed an employee business
expense deduction2 of $17,469 attributable to various expenses
(the majority of which are identified on the Form 2106)
petitioner incurred for lodging, meals, and the use of a vehicle
while he was working as an Airlines pilot and away from his
residence in Tennessee.
The Schedule F lists the principal product as “other
animal”. Income of $250 is reported and deductions totaling
$12,389 are claimed on the Schedule F. The resultant loss,
$12,139, is taken into account in the adjusted gross income shown
on the return.
2. 2003
Petitioners’ 2003 return includes: (1) A Schedule A; (2) a
Form 2106 relating to petitioner’s employment as a pilot; (3) a
Schedule F; and (4) a Schedule C, Profit or Loss From Business,
showing Mrs. Stenslet as the proprietor.
2
Amounts shown for this item each year are before the
application of sec. 67(a).
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On the Schedule A petitioners claimed an employee business
expense deduction of $16,303 attributable to various expenses
(the majority of which are identified on the Form 2106)
petitioner incurred for lodging, meals, and the use of a vehicle
while he was working as an Airlines pilot and away from his
residence in Tennessee.
The Schedule F lists the principal product as “other poultry
produc”. Income of $636 is reported and deductions totaling
$15,219 are claimed on the Schedule F. The resultant loss,
$14,583, is taken into account in the adjusted gross income shown
on the return.
The Schedule C identifies the “principle [sic] business or
profession” as “other personal care”. No income is reported on
the schedule. Deductions are claimed for depreciation and
supplies expenses totaling $1,124, which is the amount of the
resultant loss taken into account in the adjusted gross income
shown on the return. As best as can be determined from the
record, the expenses relate to expenses Mrs. Stenslet incurred in
pursuit of her intention to become a massage therapist.
3. 2004
Petitioners’ 2004 return includes: (1) A Schedule A; (2) a
Form 2106 relating to petitioner’s employment as a pilot; (3) a
Schedule F; (4) a Schedule C, showing Mrs. Stenslet as the
“proprietor”; and (5) a Form 4797, Sales of Business Property.
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On the Schedule A petitioners claimed an employee business
expense deduction of $17,308 attributable to various expenses
(the majority of which are identified on the Form 2106)
petitioner incurred for lodging, meals, and the use of a vehicle
while he was working as an Airlines pilot and away from his
residence in Tennessee.
The Schedule F lists the principal product as “horses and
other equ”. Income of $750 is reported and deductions totaling
$19,889 are claimed on the Schedule F. The resultant loss,
$19,139, is taken into account in the adjusted gross income shown
on the return.
The Schedule C identifies the “principle [sic] business or
profession” as “other personal care”. No income is reported on
the schedule. Deductions are claimed for depreciation and
utilities expenses totaling $2,459, which is the amount of the
resultant loss taken into account in the adjusted gross income
shown on the return. As best as can be determined from the
record, the expenses relate to Mrs. Stenslet’s intention to
become a massage therapist.
The Form 4797 shows a loss of $1,075 relating to a
mechanical failure of a lawnmower, which loss is taken into
account in the adjusted gross income shown on the return.
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The Notice of Deficiency
Some of the adjustments made in the above-referenced notice
of deficiency have been agreed to between the parties or
conceded, and other adjustments are computational. Those
adjustments will not be discussed.
In the notice of deficiency respondent disallowed: (1) With
minor exceptions, the employee business expense deduction claimed
for each year; (2) the net losses shown on the Schedules F for
2002 and 2003; (3) all of the deductions claimed on the Schedule
F for 2004; (4) all of the deductions claimed on the Schedules C
for 2003 and 2004; and (5) the loss claimed on the Form 4797 for
2004. Respondent also imposed a section 6662(a) accuracy-related
penalty for each year in issue.
Discussion
As we have observed in countless opinions, deductions are a
matter of legislative grace, and the taxpayer bears the burden of
proof to establish entitlement to any claimed deduction.3 Rule
142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);
New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
This burden requires the taxpayer to substantiate deductions
claimed by keeping and producing adequate records that enable the
Commissioner to determine the taxpayer’s correct tax liability.
3
Petitioners do not claim that the provisions of sec.
7491(a) are applicable, and we proceed as though they are not.
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Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89 (1975), affd.
per curiam 540 F.2d 821 (5th Cir. 1976); Meneguzzo v.
Commissioner, 43 T.C. 824, 831-832 (1965). A taxpayer claiming a
deduction on a Federal income tax return must demonstrate that
the deduction is allowable pursuant to some statutory provision
and must further substantiate that the expense to which the
deduction relates has been paid or incurred. See sec. 6001;
Hradesky v. Commissioner, supra; sec. 1.6001-1(a), Income Tax
Regs.
The types of deductions here in dispute are allowable, if at
all, under section 162(a). That section generally allows a
deduction for ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business.
The term “trade or business” as used in section 162(a) includes
the trade or business of being an employee. Primuth v.
Commissioner, 54 T.C. 374, 377-378 (1970); Christensen v.
Commissioner, 17 T.C. 1456, 1457 (1952). The determination of
whether an expenditure satisfies the requirements for
deductibility under section 162 is a question of fact. See
Commissioner v. Heininger, 320 U.S. 467, 475 (1943). On the
other hand, section 262(a) generally disallows a deduction for
personal, living, or family expenses.
Set against these fundamental principles, we turn our
attention first to the deductions here in dispute.
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Schedule F and Schedule C Deductions
Consistent with the manner in which petitioners filed their
2002, 2003, and 2004 returns, they contend that the deductions
claimed on the Schedules F and Schedules C are allowable as trade
or business expenses. Respondent argues that those deductions
are not allowable under section 162(a) because, according to
respondent, neither petitioners’ farming activity nor Mrs.
Stenslet’s massage therapist activity constitute a trade or
business during the years in issue.
1. Schedule F Deductions
Giving petitioners the benefit of the doubt, it appears that
the property very well might have been suitable for some farming
activity. We also note that the animals that they owned and
maintained over the years might be generally classified as “farm
animals”. Living on property suitable for farming and owning a
few farm animals, however, does not, without more, establish that
petitioners were in the trade or business of farming during any
of the years in issue.
We recognize that for purposes of deductions allowable under
section 162(a), the term “trade or business” is not precisely
defined in the Internal Revenue Code. Nevertheless, in
considering whether an activity constitutes a trade or business
for purposes of section 162(a), we apply a “common-sense”
approach to examine whether the activity was conducted “with
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continuity and regularity” for the “purpose of a livelihood or
profit”. Commissioner v. Groetzinger, 480 U.S. 23, 28, 35
(1987).
In so doing we find the record to be sorely lacking in the
details necessary to consider petitioners’ farming activity to be
a trade or business.4 Petitioners’ generalized explanation of
the property and the animals maintained there does little more
than describe a family that resides in a rural setting. Their
description hardly suggests, much less establishes, that they
were engaged in a farming trade or business during any of the
years in issue. Respondent’s disallowances of the losses shown
on the Schedules F for 2002 and 2003 are sustained, as are
respondent’s disallowances of all of the deductions claimed on
the Schedule F for 2004.5
2. Schedule C Deductions
Although the expenses are not so described on either
Schedule C, Mrs. Stenslet testified that the Schedule C
4
Little point would be served by including a detailed
analysis of the factors normally taken into account in
considering a taxpayer’s profit motive. See sec. 1.183-2(b),
Income Tax Regs. The lack of evidence on many of the factors
leads to the inescapable conclusion that petitioners’ farming
activity was not conducted with an objective intent to profit
during any of the years in issue. See Golanty v. Commissioner,
72 T.C. 411, 426 (1979), affd. without published opinion 647 F.2d
170 (9th Cir. 1981).
5
Deductions up to the amount of income shown on the Schedule
F for 2004 should be allowed. See sec. 183(a) and (b).
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deductions reported on petitioners’ 2003 and 2004 returns relate
to educational expenses incurred in pursuit of her certification
as a massage therapist. The record does not allow for an
informed finding on whether the expenses are accurately described
on the returns or by the testimony of Mrs. Stenslet. Be that as
it may, as of the close of 2004 she had not obtained that
certification and she was not performing services as a massage
therapist. Because Mrs. Stenslet was not yet in a trade or
business of being a massage therapist at the time the expenses
were incurred, petitioners may not deduct the expenses under
section 162(a). See Richmond Television Corp. v. United States,
345 F.2d 901, 907 (4th Cir. 1965), vacated and remanded on other
grounds 382 U.S. 68 (1965). Furthermore, if the expenses were
educational, petitioners would not be entitled to a deduction for
the expenses because the expenses were incurred as part of a
program designed to qualify Mrs. Stenslet for a new trade or
business. See sec. 1.162-5(b)(3), Income Tax Regs.
Schedule A Deductions
The employee business expense deduction petitioners claimed
for each year in issue relates to petitioner’s employment with
Airlines. In general, the deductions consist of the following
items: (1) Vehicle expenses; (2) parking fees and tolls
expenses; (3) meals and lodging; (4) union dues; (5) uniforms for
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work; (6) small tools for work; (7) job supplies; and (8) other
business expenses not specifically identified or explained.
1. Vehicle Expenses, Parking Fees and Tolls, and Meals and
Lodging
The expenses in this category relate to the amounts expended
by petitioner in traveling back and forth from his residence in
Tennessee to Sterling, Virginia, and for expenses incurred for
meals, lodging, and vehicle expenses while present in Sterling.
According to petitioners, those expenses are properly deductible
as travel expenses petitioner incurred while traveling away from
home as an employee of Airlines. According to respondent, those
expenses represent nondeductible personal, living, or family
expenses.
In general, expenses incurred for a taxpayer’s meals,
lodging, and for commuting between the taxpayer’s residence and
the taxpayer’s place of business are nondeductible personal
expenses. Sec. 262(a); see, e.g., Commissioner v. Flowers, 326
U.S. 465, 472-473 (1946); see also secs. 1.162-2(e),
1.262-1(b)(5), Income Tax Regs. On the other hand, traveling
expenses, including amounts expended for meals and lodging (other
than amounts that are lavish or extravagant under the
circumstances), may be deducted if they are incurred while away
from home in connection with employee’s employment. Sec.
162(a)(2); Primuth v. Commissioner, 54 T.C. at 377. The word
“home” in section 162(a)(2) means the taxpayer’s tax home.
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Mitchell v. Commissioner, 74 T.C. 578, 581 (1980); Foote v.
Commissioner, 67 T.C. 1, 4 (1976); Kroll v. Commissioner, 49 T.C.
557, 561-562 (1968).
The dispute between the parties reduces to their
disagreement regarding the location of petitioner’s tax
home during the years in issue. According to petitioners,
petitioner’s tax home was defined by the location of their
residence in Tennessee, and traveling expenses incurred in
connection with traveling to, or remaining in, Sterling are
deductible under section 162(a)(2). According to respondent,
petitioner’s tax home was Sterling, and expenses incurred to
travel there and any expenses incurred for meals, lodging, and
vehicle expenses while present in Sterling are not deductible
because the expenses are personal in nature. For the following
reasons, we agree with respondent.
Generally, a taxpayer’s tax home is determined by the
location of the taxpayer’s regular or principal (if more than one
regular) place of business. Mitchell v. Commissioner, supra at
581; Kroll v. Commissioner, supra at 561-562; cf. sec. 1.911-
2(b), Income Tax Regs.
As an Airlines employee, petitioner was based at Dulles
during each year in issue and his flight assignments began and
ended there. It follows that Dulles was petitioner’s regular or
principal place of business, and Sterling was his tax home during
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those years. Consequently, expenses for meals and lodging
incurred in Sterling may not be deducted under section 162(a)
because those expenses were not incurred while petitioner was
away from home. Furthermore, because a taxpayer’s cost of
commuting between the taxpayer’s personal residence and place of
employment, no matter how far, is a nondeductible personal
expense, Commissioner v. Flowers, supra at 473-474; secs.
1.162-2(e), 1.262-1(b)(5), Income Tax Regs., petitioner is not
entitled to a deduction for amounts incurred to travel between
petitioner’s residence in Tennessee and Sterling, or for vehicle
expenses incurred while in Sterling.
2. Union Dues, Uniforms, Small Tools, Job Supplies,
and Other Business Expenses
Respondent has conceded that petitioners have substantiated
and are otherwise entitled to deduct various amounts for each
category of the above-listed expenses. Petitioners have failed
to establish that they are entitled to additional amounts for
these expenses to the extent necessary to exceed the limitations
imposed by section 67(a).6 Respondent’s adjustments with respect
to these items are sustained.
6
Sec. 67(a) provides that unreimbursed employee business
expenses otherwise deductible may only be deducted to the extent
that the expenses exceed 2 percent of the taxpayers’ adjusted
gross income.
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Loss Attributable to Lawnmower
Petitioners’ 2004 return includes a Form 4797 on which
petitioners reported a capital loss of $1,075 attributable to a
lawnmower purchased in 2002. According to petitioners, the
mechanical failure of the lawnmower should be treated as a loss
resulting from the involuntary conversion of property used in a
trade or business. See secs. 165(a), (c)(1) and (2),
1231(a)(4)(B). According to respondent, petitioners are not
entitled to any loss deduction because the lawnmower was not used
in a trade or business or held in connection with a transaction
entered into for profit.
As relevant here, a loss from the destruction, in whole or
in part, of property used in the taxpayer’s trade or business, or
held in connection with a transaction entered into for profit,
shall be treated as loss from an involuntary conversion. Sec.
1231(a)(4)(B). According to petitioners, the lawnmower was used
in their farming activity, which they considered to be a trade or
business.
Because we have found that petitioners’ farming activity did
not constitute a trade or business for purposes of section
162(a), and because there is no support in the record for a
finding that petitioners’ farming activity was entered into for
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profit, it follows that petitioners are not entitled to a
deduction for the loss from the destruction of the lawnmower.7
The Accuracy-Related Penalties
Lastly, we consider whether petitioners are liable for a
section 6662(a) accuracy-related penalty for any of the years in
issue.
Various grounds for the imposition of that penalty are set
forth in the notice of deficiency. Nevertheless, if it is shown
that petitioners acted in good faith and there is reasonable
cause for the underpayment of tax for each year, then the section
6662(a) accuracy-related penalty is not applicable to any of
those years. See sec. 6664(c); Higbee v. Commissioner, 116 T.C.
438, 446-447 (2001).
For each year in issue, petitioners relied upon a paid
income tax return preparer to prepare their Federal income tax
return and to compute the Federal income tax liability shown on
the return. We are satisfied that petitioners had reasonable
cause and acted in good faith with respect to the underpayment of
tax that will remain for each year. See sec. 6664(c). They are
not liable for the section 6662(a) accuracy-related penalty for
any year in issue.
7
There is insufficient evidence in the record to allow us to
consider whether the loss resulted from a “casualty”. See sec.
165(c)(3).
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To reflect the foregoing,
Decision will be entered
under Rule 155.