T.C. Summary Opinion 2010-145
UNITED STATES TAX COURT
GARY ALLEN ROZAR AND MISA ROZAR, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15145-09S. Filed September 27, 2010,
Gary Allen Rozar and Misa Rozar, pro sese.
Jeffrey W. Belcher, 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 years at
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issue, and Rule references are to the Tax Court Rules of Practice
and Procedure.
Respondent determined for 2006 a deficiency of $5,564 in
petitioners’ Federal income tax and an accuracy-related penalty
under section 6662(a) of $1,112.80. Respondent determined for
2007 a deficiency of $4,681 in petitioners’ Federal income tax.
The issues for decision are whether petitioners have
properly substantiated deductions claimed on Schedules C, Profit
or Loss From Business, on their Federal income tax returns for
2006 and 2007 and whether petitioners are liable for the
accuracy-related penalty for 2006.1
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits received in evidence
are incorporated herein by reference. Petitioners resided in
California when the petition was filed.
Background
Gary Allen Rozar (petitioner) at the time of trial had been
a minister of religion for over 20 years. He was a missionary
for 10 years and traveled to every continent except South
America. Petitioner wife was a teacher and waitress.
Petitioners filed a Form 1040, U.S. Individual Income Tax
Return, jointly for 2006 reporting on Schedule C gross income of
1
Adjustments to petitioners’ self-employment tax deductions
and self-employment taxes are computational and will be resolved
consistent with the Court’s decision.
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$100, car and truck expenses of $21,197, travel, meals, and
entertainment expenses of $1,289, and other expenses of $4,960,
for a net loss of $27,346.2 Petitioners jointly filed their
Federal income tax return for 2007 reporting on Schedule C gross
income of $800, car and truck expenses of $20,564, insurance
expenses of $3,500, repairs and maintenance expenses of $1,850,
supplies expenses of $590, and other expenses of $3,525, for a
net loss of $29,229.
Petitioners later submitted to respondent Forms 1040X,
Amended U.S. Individual Income Tax Return, for 2006 and 2007 on
which they claimed to have “Grossly over-stated our income for
the year”. The amended returns showed all income and tax
liability amounts as zero. Attached to the returns were Forms W-
2, Wage and Tax Statement, that had been altered to show zero
wages. Although petitioners reported for 2006 total credits for
tax payments of $2,462, including Federal withholding tax of
$2,412, the Form 1040X for 2006 claimed Federal withholding tax
payments and a refund of $6,373.
Petitioners filed a second Form 1040X for 2007 that claimed
a refund of Federal withholding taxes of $6,493 despite having
2
The adjustments in the statutory notice for 2006 are
overstated. The statutory notice includes an adjustment of
$4,960 to other expenses both in the total adjustment for “Sch C1
- All Expenses” of $27,346 as well as in a separate adjustment
for “Sch C1 - Other Expenses”. The adjustment for “Sch C1 - All
Expenses” should be reduced by $4,960 or the adjustment to “Sch
C1 - Other Expenses” should be eliminated.
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reported Federal withholding taxes of $2,468 on their original
return.
Discussion
Generally, the Commissioner’s determinations in a notice of
deficiency are presumed correct, and the taxpayer has the burden
of proving that those determinations are erroneous. See Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In some
cases the burden of proof with respect to relevant factual issues
may shift to the Commissioner under section 7491(a). Because
petitioners have not satisfied the requirements of section
7491(a), the burden of proof does not shift to respondent.
Section 162 generally allows a deduction for ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on a trade or business. Generally, no deduction is
allowed for personal, living, or family expenses. See sec. 262.
The taxpayer must show that any claimed business expenses were
incurred primarily for business rather than personal reasons.
See Rule 142(a). To show that an expense was not personal, the
taxpayer must show that the expense was incurred primarily to
benefit his business, and there must have been a proximate
relationship between the claimed expense and the business.
Walliser v. Commissioner, 72 T.C. 433, 437 (1979).
Where a taxpayer has established that he has incurred a
trade or business expense, failure to prove the exact amount of
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the otherwise deductible item may not always be fatal.
Generally, unless prevented by section 274, we may estimate the
amount of such an expense and allow the deduction to that extent.
See Finley v. Commissioner, 255 F.2d 128, 133 (10th Cir. 1958),
affg. 27 T.C. 413 (1956); Cohan v. Commissioner, 39 F.2d 540,
543-544 (2d Cir. 1930). In order for the Court to estimate the
amount of an expense, however, we must have some basis upon which
an estimate may be made. See Vanicek v. Commissioner, 85 T.C.
731, 742-743 (1985). Without such a basis, an allowance would
amount to unguided largesse. See Williams v. United States, 245
F.2d 559, 560 (5th Cir. 1957).
Petitioner testified that petitioners were “scammed” into
filing the amended returns showing zero amounts for income and
tax. Petitioner further testified that they have lost all of
their tax records for 2006 and 2007 except for the 2006 “driving
log”. He testified that “We have nothing to show for 2007, and
we have no other [sic] to show for 2006 than the driving log.”
Petitioner called it the “ministry driving log”.
Petitioners have failed to provide the Court with sufficient
evidence on which to base an estimate of deductions for business
expenses other than those represented by the ministry driving
log.
The ministry driving log purports to cover the period of
January 3 through September 18, 2006. It indicates that
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petitioner generally drove between 276 and 301 miles 4 or 5 days
a week, every week, throughout those months. Although the listed
mileage varies, every trip is listed as starting in Costa Mesa,
then continuing to Bonita, San Bernardino, and Huntington Beach,
California. There is no explanation for the purpose of the
trips, nor was there any testimony putting the locations in
context.
Certain business expense deductions described in section 274
are subject to strict rules of substantiation that supersede the
doctrine in Cohan v. Commissioner, supra. See sec. 1.274-
5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6,
1985). Section 274(d) provides that no deduction shall be
allowed with respect to: (a) Any traveling expense, including
meals and lodging away from home; (b) any item related to an
activity of a type considered to be entertainment, amusement, or
recreation; or (c) the use of any “listed property”, as defined
in section 280F(d)(4),3 unless the taxpayer substantiates certain
elements.
For an expense described in one of the above categories, the
taxpayer must substantiate by adequate records or sufficient
evidence to corroborate the taxpayer’s own testimony: (1) The
amount of the expenditure or use based on the appropriate measure
3
“Listed property” includes any passenger automobile. Sec.
280F(d)(4)(A)(i).
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(mileage may be used in the case of automobiles); (2) the time
and place of the expenditure or use; (3) the business purpose of
the expenditure or use; and in the case of entertainment, (4) the
business relationship to the taxpayer of each expenditure or use.
See sec. 274(d).
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., supra. A contemporaneous log is not
required, but corroborative evidence to support a taxpayer’s
reconstruction of the elements of 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., 50 Fed. Reg. 46016 (Nov. 6,
1985).
Petitioners’ ministry driving log does not meet the
requirements of section 274(d). Petitioners did not adequately
substantiate the business expense deductions they claimed on
their Schedules C for 2006 and 2007.
Respondent’s adjustments for 2007 are sustained.
Respondent’s adjustments to Schedule C for 2006 are sustained
except to the extent of $4,960 as described supra note 2.
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Section 7491(c) imposes on the Commissioner the burden of
production in any court proceeding with respect to the liability
of any individual for penalties and additions to tax. Higbee v.
Commissioner, 116 T.C. 438, 446 (2001); Trowbridge v.
Commissioner, T.C. Memo. 2003-164. In order to meet the burden
of production under section 7491(c), the Commissioner need only
make a prima facie case that imposition of the penalty or
addition to tax is appropriate. Higbee v. Commissioner, supra at
446.
Respondent determined that petitioners are liable for an
accuracy-related penalty under section 6662(a). Section 6662(a)
imposes a 20-percent penalty on the portion of an underpayment
attributable to any one of various factors, including negligence
or disregard of rules or regulations and a substantial
understatement of income tax. See sec. 6662(b)(1) and (2).
“Negligence” includes any failure to make a reasonable attempt to
comply with the provisions of the Internal Revenue Code,
including any failure to keep adequate books and records or to
substantiate items properly. See sec. 6662(c); sec.
1.6662-3(b)(1), Income Tax Regs. A “substantial understatement”
is an understatement of 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.
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Section 6664(c)(1) provides that the penalty under section
6662(a) shall not apply to any portion of an underpayment if it
is shown that there was reasonable cause for the taxpayer’s
position and that the taxpayer acted in good faith with respect
to that portion. 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 for the year. Id.
Petitioners deducted business expenses which they failed to
substantiate with adequate books and records. The Court
concludes that respondent has produced sufficient evidence to
show that the imposition of the accuracy-related penalty under
section 6662(a) is appropriate.
Petitioners did not show that their failure to properly
substantiate their business expense deductions was due to
reasonable cause and in good faith. Respondent’s determination
of the accuracy-related penalty under section 6662(a) for 2006 is
sustained.
To reflect the foregoing,
Decision will be entered
under Rule 155.