Barajas v. Comm'r

T.C. Summary Opinion 2011-2

UNITED STATES TAX COURT

MARTIN AND MARINA BARAJAS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 13954-09S. Filed January 5, 2011.

Martin and Marina Barajas, pro sese.

Andrew R. Moore, for respondent.

PANUTHOS, Chief Special Trial Judge: This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect at the time 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
 - 2 -

Revenue Code (Code) in effect for the year in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

Respondent determined a $6,975 deficiency in petitioners’

Federal income tax as well as a $1,395 accuracy-related penalty

under section 6662(a) for 2006. After concessions, the issues

for decision are: (1) Whether petitioner husband is entitled to

a deduction of $22,460 for business use of his two personal

vehicles; and (2) whether petitioners are liable for an accuracy-

related penalty under section 6662(a).

Background

Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference. Petitioners resided in

California at the time the petition was filed. Petitioner wife

worked for the Federal Government during 2006, and her income and

deductions are not at issue.

In 2006 as he had for many years before, petitioner husband

(petitioner) used his knowledge of music industry production and

his creative talents as a songwriter, photographer, and design

artist to serve as a self-employed music producer. He operated

his business under the name Discos Barajas. Petitioner would

meet with a music group or band (group) and, depending on the

group’s needs, he would negotiate one of various types of

multiyear contracts or licensing agreements. In main part,
 - 3 -

petitioner would agree to produce the group’s music compact discs

(CDs) and/or their digital video discs (DVDs) (collectively CDs).

Petitioner was also available to help with lyrics, to compose

photographs, and to create artwork for the group’s posters,

business cards, and CDs. Once a group finished recording 10 to

20 songs and had decided on the final artwork, petitioner would

subcontract with manufacturers to produce the posters, business

cards, and CDs. The agreements generally called for petitioner

to produce one or two CDs for a group for each year of the

agreement.

In one typical arrangement petitioner would arrange the

production of, and give the group an agreed number of, completed

CDs, business cards, and posters, for example, in quantities of

1,000, 500, and 2,000, respectively. The group was free to sell

these items for their own profit or to give them away as

promotional materials. Petitioner was likewise entitled to

attempt to sell for his own profit the overproduction he had

ordered. On Saturdays and Sundays petitioner would attend flea

markets and swap meets where he would offer the CDs for sale.

Petitioner maintained a permanent booth at a flea market in

Folsom, California, but he also traveled to Galt, Lodi, and

Marysville, California, all within an hour’s drive of Sacramento,

California. Petitioner resided in Sacramento with petitioner

wife and their three minor children. He sold CDs from groups
 - 4 -

whose music he produced as well as from other artists.

Petitioner principally worked with Spanish-language Latin

American music artists, but he also contracted with groups

recording Cambodian, Korean, and Vietnamese music. During 2006

he entered into agreements or was under continuing contract with

about 28 groups.

Petitioner made most of his business telephone calls, faxes,

and emails from an office in his home, where he also kept his

records. He stored his inventory in a structure in his backyard.

On occasion, petitioner would meet with a group in the Sacramento

area or at his home.

Petitioner also met with groups in Los Angeles. Most of the

music CD manufacturers and recording studios with whom petitioner

conducted business maintained their facilities in Los Angeles.

These connections caused petitioner to drive one of his two

personal vehicles, a 2001 Lincoln or a 1999 Suburban, to Los

Angeles during almost every week, specifically 48 round trips in

2006. Petitioner almost always drove to Los Angeles on a Tuesday

or Wednesday, worked 1 or 2 days in the city, and then drove home

to Sacramento on Thursday or Friday. Petitioner spent a total of

116 days in Los Angeles during 2006. Each round trip, including

mileage within Los Angeles, totaled approximately 830 miles.

Petitioner usually stayed at a Motel 6 or at the Pueblo

Motel, which were centrally located to his business contacts.
 - 5 -

During 2006 petitioner paid almost all of his travel expenses in

cash. The Court received into evidence copies of petitioner’s

bank statements for 2006 showing numerous gas purchases and

automated teller machine (ATM) withdrawals in the Los Angeles

area and along the route.

To prepare the couple’s 2006 Federal income tax return,

petitioner engaged Judy Shorten, an enrolled agent in Sacramento.

She had served as their preparer for more than 10 years and had

been in practice for about 25 years. Petitioner reported his

business activity on Schedule C, Profit or Loss From Business.

He reported gross receipts of $152,061 and a net profit of

$8,757. Pertinent here, among the business expenses, petitioner

deducted car and truck expenses of $22,460, overnight lodging

expenses of $7,735, and business meal expenses of $2,256.

Petitioner computed his vehicle expense deduction using the 2006

Internal Revenue Service standard mileage rate of 44.5 cents per

mile. He multiplied the rate times 50,472 business miles.

Respondent selected petitioners’ 2006 Federal income tax

return for examination. Respondent determined that Los Angeles,

not Sacramento, was petitioner’s tax home.1 Consequently, in a

1
Sec. 162(a)(2) permits a deduction for traveling expenses
that a taxpayer incurs “while away from home” in pursuit of a
trade or business. Commissioner v. Flowers, 326 U.S. 465, 470
(1946); Nicholls v. Commissioner, T.C. Memo. 1995-291. This
Court holds as a general rule that “home” as sec. 162(a)(2)
applies the term means the vicinity of the taxpayer’s principal
(continued...)
 - 6 -

notice of determination, respondent made the following three

adjustments: (1) Disallowed $15,891 of petitioner’s $22,460 car

and truck expense deduction; (2) disallowed all of petitioner’s

$7,735 deduction for overnight lodging expenses; and (3)

disallowed all of petitioner’s $2,256 deduction for business meal

expenses. Respondent’s allowance of $6,569 ($22,460 minus

$15,891) for car and truck expenses consisted of petitioner’s

business mileage around the Sacramento area and within the Los

Angeles area, but not his mileage to and from Los Angeles.

Respondent listed two reasons for the disallowances: Petitioner

lacked substantiation, and petitioner did not incur the expenses

while “away from home”.

The sum of respondent’s adjustments caused computational

adjustments to the couple’s child care credits and to

petitioner’s self-employment tax, resulting in a total deficiency

of $6,975. Respondent also determined a 20-percent accuracy-

related penalty of $1,395.

Petitioner and his enrolled agent, Ms. Shorten, testified at

trial. Near the end of trial, respondent conceded that

1
(...continued)
place of employment and not the location of his personal
residence. Mitchell v. Commissioner, 74 T.C. 578, 581 (1980);
Daly v. Commissioner, 72 T.C. 190, 195 (1979), affd. 662 F.2d 253
(4th Cir. 1981); Foote v. Commissioner, 67 T.C. 1, 4 (1976);
Nicholls v. Commissioner, supra; Wheeler v. Commissioner, T.C.
Memo. 1984-502, affd. without published opinion 791 F.2d 168 (9th
Cir. 1986).
 - 7 -

Sacramento, not Los Angeles, was petitioner’s tax home.

Respondent further conceded that petitioner was entitled to all

of the $2,256 business meal expense deduction that he had

claimed.

Regarding overnight lodging, petitioner was able to produce

receipts totaling only $798.70 of the $7,735 lodging expense

deduction. Petitioner conceded that he is entitled to a

deduction of only $798.70, and respondent allowed that amount.

With respect to business mileage, the Court received into

evidence a copy of a contemporaneous mileage log that petitioner

maintained detailing his vehicle use for 2006. The log showed

the dates, destinations, business contacts, and mileage for his

business travel. The Court also received into evidence copies of

manufacturer invoices, petitioner’s canceled checks, and other

supporting evidence corroborating a business purpose for 37 of

the 48 trips to Los Angeles. As of the close of the record, the

parties were still unable to agree on petitioner’s deductible

business mileage. Furthermore, the 20-percent accuracy-related

penalty is still in dispute.

Discussion

In general, the Commissioner’s determination set forth in a

notice of deficiency is presumed correct, and the taxpayer bears

the burden of showing that the determination is in error. Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions
 - 8 -

are a matter of legislative grace. Deputy v. du Pont, 308 U.S.

488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435,

440 (1934). A taxpayer bears the burden of proving entitlement

to any deduction claimed. Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, supra

at 115; Wilson v. Commissioner, T.C. Memo. 2001-139.

Pursuant to section 7491(a), the burden of proof as to

factual matters shifts to the Commissioner under certain

circumstances. Petitioner has neither alleged that section

7491(a) applies nor established his compliance with the

substantiation and recordkeeping requirements. See sec.

7491(a)(2)(A) and (B). Petitioner therefore bears the burden of

proof. See Rule 142(a).

I. Petitioner’s Deduction for Business Use of Personal Vehicles

A taxpayer is required to maintain records sufficient to

substantiate deductions claimed on a Federal income tax return.

Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs. In other

words, the taxpayer bears the burden of proving entitlement to

the deductions he claimed, and this includes the burden of

substantiation. Rule 142(a); Hradesky v. Commissioner, 65 T.C.

87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).

The fact that a taxpayer reports a deduction on an income tax

return is not sufficient to substantiate the claimed deduction.

Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979); Roberts v.
 - 9 -

Commissioner, 62 T.C. 834, 837 (1974). Rather, an income tax

return is merely a statement of the taxpayer’s claim; it is not

presumed to be correct. Wilkinson v. Commissioner, supra at 639;

Roberts v. Commissioner, supra at 837; see also Seaboard

Commercial Corp. v. Commissioner, 28 T.C. 1034, 1051 (1957) (a

taxpayer’s income tax return is a self-serving declaration that

may not be accepted as proof for the claimed deduction or

exclusion); Halle v. Commissioner, 7 T.C. 245 (1946) (a

taxpayer’s income tax return is not self-proving as to the truth

of its contents), affd. 175 F.2d 500 (2d Cir. 1949).

Section 162(a) provides a deduction for certain

business-related expenses. To qualify for the deduction under

section 162(a), “an item must (1) be ‘paid or incurred during the

taxable year,’ (2) be for ‘carrying on any trade or business,’

(3) be an ‘expense,’ (4) be a ‘necessary’ expense, and (5) be an

‘ordinary’ expense.” Commissioner v. Lincoln Sav. & Loan

Association, 403 U.S. 345, 352 (1971); Commissioner v. Flowers,

326 U.S. 465, 470 (1946); Deputy v. du Pont, supra at 495. An

ordinary expense is “of common or frequent occurrence in the type

of business involved.” Deputy v. du Pont, supra at 495. A

necessary expense is appropriate and helpful in carrying on the

trade or business. Commissioner v. Heininger, 320 U.S. 467, 471

(1943); Heineman v. Commissioner, 82 T.C. 538, 543 (1984). Under

section 262, however, no portion of the cost of operating an
 - 10 -

automobile that is attributable to personal use is deductible.

Michaels v. Commissioner, 53 T.C. 269, 275 (1969). Similarly,

ordinary commuting expenses are not deductible. Commissioner v.

Flowers, supra at 472-473; Neal v. Commissioner, 681 F.2d 1157

(9th Cir. 1982), affg. T.C. Memo. 1981-407.

If a taxpayer establishes that he or she paid or incurred a

deductible business expense but does not establish the amount of

the expense, we generally may approximate the amount of the

allowable deduction, bearing heavily against the taxpayer whose

inexactitude is of his or her own making. Cohan v. Commissioner,

39 F.2d 540, 543-544 (2d Cir. 1930). However, for the Cohan rule

to apply, there must be sufficient evidence in the record to

provide a basis for the estimate. Vanicek v. Commissioner, 85

T.C. 731, 743 (1985). Certain expenses may not be estimated

under the Cohan rule because of the strict substantiation

requirements of section 274(d). See sec. 280F(d)(4)(A); Sanford

v. Commissioner, 50 T.C. 823, 827-828 (1968), affd. per curiam

412 F.2d 201 (2d Cir. 1969).

The expenses to which section 274(d) applies include, among

other types, expenses for listed property (e.g., automobiles,

cellular telephones, computer equipment, or any property of a

type generally used for purposes of entertainment, recreation, or

amusement) and travel expenses (including meals and lodging while

away from home). Secs. 274(d)(4), 280F(d)(4)(A). To
 - 11 -

substantiate a deduction attributable to listed property, a

taxpayer must maintain adequate records or present corroborative

evidence to show the following: (1) The amount of the expense;

(2) the time and place of use of the listed property; and (3) the

business purpose of the use. Sec. 1.274-5T(b)(6), Temporary

Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).

A contemporaneous log has a high degree of credibility.

Sec. 1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg.

46016 (Nov. 6, 1985). The log need not duplicate information on

receipts so long as the log and receipts complement each other in

an orderly manner. Sec. 1.274-5T(c)(2), Temporary Income Tax

Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). If a taxpayer fails to

establish to the district director’s satisfaction that his

records are adequate, then the taxpayer must establish the

adequacy by “his own statement” and by “other corroborative

evidence”. Sec. 1.274-5T(c)(3)(i), Temporary Income Tax Regs.,

50 Fed. Reg. 46020 (Nov. 6, 1985).

Respondent’s continuing disallowance of car and truck

expenses relating to petitioner’s business mileage to and from

Los Angeles stems from petitioner’s ability to provide supporting

documentation for only 37 (or 77 percent) of his 48 trips.

Respondent’s insistence on 100 percent corroboration of the

mileage log, however, contradicts the Secretary’s own regulation.

A taxpayer may substantiate his consistent pattern of business
 - 12 -

use of listed property for the entire year if he can establish by

corroborative evidence that the periods for which he has adequate

records are representative of the whole year. Sec.

1.274-5T(c)(3)(ii)(A), Temporary Income Tax Regs., 50 Fed. Reg.

46021 (Nov. 6, 1985).

The regulation provides three examples to illustrate this

point. The first two examples show acceptable support for a log,

and the third example shows unacceptable support. Sec.

1.274-5T(c)(3)(ii)(C), Temporary Income Tax Regs., supra. In the

first example, the taxpayer maintained adequate records for the

first 3 months of the year, and in the second example the

taxpayer provided records for the first week of every month. Id.

Thus, in the first two examples, the taxpayers had corroborative

records for only one-quarter of the year. Nonetheless, because

the taxpayers maintained consistent driving patterns throughout

the year, their partial substantiation was adequate to

corroborate the log for the entire year. The third example

illustrates unsatisfactory substantiation. The third taxpayer

similarly provided documentation for one-quarter of the year; the

last week of every month. Id. The taxpayer’s critical failure,

however, was that the last week’s business use pattern was not

reflective of his driving pattern during the rest of the month.

Id. Therefore, the taxpayer’s partial substantiation was “not

representative of use during other periods.” Id.
 - 13 -

Petitioner’s circumstance is far more analogous to the first

two positive examples and is highly dissimilar to the third

unfavorable example. Petitioner maintained a consistent pattern

of business use of his personal vehicles throughout 2006. During

almost every week (48 of 52 weeks), petitioner drove to Los

Angeles on Tuesday or Wednesday and returned to Sacramento on

Thursday or Friday. Petitioner corroborated this consistent

pattern with supporting documentation from 77 percent of his

trips, not just the 25 percent that even the two successful

examples supplied. Petitioner’s corroboration included his

contemporaneous mileage log, his own testimony, and documentary

evidence from ATM withdrawals, gas purchases, subcontractor

invoices, and canceled checks. Respondent, on the other hand,

did not controvert or even attempt to controvert any of the

entries in the log. Respondent gave no reason to question the

validity of petitioner’s business mileage, and after examining

the entire record, we find none.

For all of the foregoing reasons, petitioner has

substantiated the business use of his personal vehicles in

accordance with the heightened substantiation requirements for

listed property under section 274(d)(4). Therefore, petitioner

is entitled to a deduction for the full $22,460 of car and truck

expenses that he claimed for 2006.
 - 14 -

II. Accuracy-Related Penalty

Taxpayers may be liable for a 20-percent penalty on the

portion of an underpayment of tax attributable to negligence,

disregard of rules or regulations, or a substantial

understatement of income tax. Sec. 6662(a) and (b)(1) and (2).

The term “negligence” in section 6662(b)(1) includes any

failure to make a reasonable attempt to comply with the Code, and

the term “disregard” includes any careless, reckless, or

intentional disregard. Sec. 6662(c). Negligence has also been

defined as the failure to exercise due care or the failure to do

what a reasonable person would do under the circumstances. See

Allen v. Commissioner, 92 T.C. 1, 12 (1989), affd. 925 F.2d 348,

353 (9th Cir. 1991); Neely v. Commissioner, 85 T.C. 934, 947

(1985). Negligence also includes any failure by the taxpayer to

keep adequate books and records or to substantiate items

properly. Sec. 1.6662-3(b)(1), Income Tax Regs. An

“understatement of income tax” is substantial if it exceeds the

greater of 10 percent of the tax required to be shown on the

return or $5,000. Sec. 6662(d)(1)(A).

The section 6662 accuracy-related penalty does not apply

where the taxpayer shows that he acted in good faith and with

reasonable cause. Sec. 6664(c)(1). The determination of whether

a taxpayer acted in good faith and with reasonable cause depends

on the facts and circumstances of each case and includes the
 - 15 -

knowledge and experience of the taxpayer and the reliance on the

advice of a professional, such as an accountant. Sec. 1.6664-

4(b)(1), Income Tax Regs. For a taxpayer to rely reasonably upon

the advice of a tax adviser, the taxpayer must, at a minimum,

prove by a preponderance of the evidence that: (1) The adviser

was a competent professional with sufficient expertise to justify

reliance, (2) the taxpayer provided necessary and accurate

information to the adviser, and (3) the taxpayer actually relied

in good faith on the adviser’s judgment. Neonatology Associates,

P.A. v. Commissioner, 115 T.C. 43, 99 (2000), affd. 299 F.3d 221

(3d Cir. 2002). Most important in this determination is the

extent of the taxpayer’s effort to determine the proper tax

liability. Id.; sec. 1.6664-4(b)(1), Income Tax Regs.

The Commissioner has the burden of production under section

7491(c) with respect to the accuracy-related penalty under

section 6662. To satisfy that burden, the Commissioner must

produce sufficient evidence showing that it is appropriate to

impose the penalty. Higbee v. Commissioner, 116 T.C. 438, 446

(2001). Respondent has satisfied his burden by producing

evidence that petitioner substantiated only $798.70 of his $7,735

deduction for overnight lodging expenses. Accordingly, because

respondent has met his burden of production, petitioner must come

forward with persuasive evidence that the accuracy-related

penalty should not be imposed with respect to the portion of the
 - 16 -

underpayment attributable to the overnight lodging expenses

because he acted with reasonable cause and in good faith. See

sec. 6664(c)(1); Rule 142(a); Higbee v. Commissioner, supra at

446.

Petitioner engaged Ms. Shorten, an enrolled agent, to

prepare his 2006 Federal income tax return. Ms. Shorten had been

petitioner’s preparer for 10 years, and she had been in practice

for 25 years. Respondent did not dispute the competency of Ms.

Shorten. Petitioner provided Ms. Shorten with the necessary and

accurate information to prepare his return, and Ms. Shorten

determined that petitioner’s information was sufficient to

support a deduction of $7,735 for overnight lodging expenses.

Petitioner’s deduction for lodging expenses, even though he did

not keep most of the motel receipts, appears to be a reasonable

amount. A $7,735 expense divided by 116 days in Los Angeles

equals an average cost, including tax, of $67 per night, a

credible figure for Los Angeles. Furthermore, petitioner, though

hardworking, apparently had no formal training in taxation and

worked in an unrelated field, music production. Therefore, he

relied on Ms. Shorten’s judgment for accurately reporting his

overnight lodging expenses. In other words, petitioner has met

each of the requirements for good faith reliance on a competent

professional.
 - 17 -

Moreover, respondent did not challenge the reporting of any

of petitioner wife’s income or deductions. Further, respondent

has conceded or we have already decided that petitioner

accurately reported all of his other business expense deductions

for 2006. Consequently, on the basis of the entire record before

us, we conclude that petitioners acted in good faith and with

reasonable cause and made a good faith effort to determine their

proper tax liability. Accordingly, we do not sustain

respondent’s determination that the section 6662 accuracy-related

penalty applies for 2006.

To reflect the foregoing,

Decision will be entered

under Rule 155.