T.C. Summary Opinion 2011-52
UNITED STATES TAX COURT
CRISTIAN AND GABRIELA BURERIU, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14064-09S. Filed April 18, 2011.
Cristian and Gabriela Bureriu, pro sese.
Melanie E. Senick, for respondent.
HAINES, Judge: This case was heard pursuant to section 7463
of the Internal Revenue Code in effect when the petition was
filed.1 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.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended, and Rule
references are to the Tax Court Rules of Practice and Procedure.
Amounts are rounded to the nearest dollar.
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The stipulation of facts and the supplemental stipulation of
facts, together with the attached exhibits, are incorporated
herein by this reference and are so found. At the time
petitioners filed their petition, they resided in Washington.
Respondent determined a deficiency in petitioners’ 2006
Federal income tax of $19,151 and a section 6662(a) penalty of
$3,830. The deficiency was the result of the denial of
deductions claimed on petitioners’ Schedule C, Profit or Loss
From Business, attached to their 2006 Federal income tax return.
Before trial respondent conceded that: (1) Petitioners are
entitled to their claimed $2,813 depreciation expense for
property placed in service for taxable years beginning before
2006; (2) in 2006 petitioners paid $9,801 of the $12,974 of other
expenses listed on Schedule C but have not proven that those
expenses were ordinary and necessary; (3) in 2006 petitioners
paid mortgage interest, real estate taxes, utilities expenses,
$1,533 of other expenses, $3,312 of repair and maintenance
expenses, and $2,282 of capital expenditures but have not proven
that those amounts relate to the regular and exclusive business
use of their home; and (4) petitioners are entitled to depreciate
their home using the 27.5-year recovery period for residential
rental property.
We must decide whether petitioners are entitled to
deductions for 2006 for: (1) Car and truck expenses; (2)
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depreciation expenses for their four vehicles; (3) expenses
related to the business use of their home; and (4) other Schedule
C expenses. We must further decide whether petitioners are
subject to the section 6662(a) penalty.
Background
During 2006 petitioner Gabriela Bureriu (Ms. Bureriu) ran an
adult caregiver business, Gentle Care AFH, out of petitioners’
home. Gentle Care AFH’s clients lived full time with petitioners
and their two children, ages 3 and 4. The total square footage
of petitioners’ home was approximately 1,780 square feet and
included four bedrooms, a living room, a dining room, a kitchen,
a laundry room, and a recreation room.
Petitioners used the master bedroom and master bathroom in
their home predominantly for personal purposes. On occasion,
petitioners and their children also used the kitchen and the
laundry room for personal purposes. The three other bedrooms
were used exclusively for the occupancy and care of Gentle Care
AFH’s clients. On petitioners’ 2006 Form 1040, U.S. Individual
Income Tax Return, they claimed that 1,520 square feet, or 85.39
percent of their home, was used exclusively for business
purposes. Petitioners provided a floor plan of their home but
the dimensions of each room are not clear.
Petitioners owned four vehicles in 2006: A 1999 Lexus
GS300, a 1999 Toyota Camry, a 2001 Toyota Sequoia, and a 2003
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Chevy Silverado. Petitioners claim they used each of the four
vehicles for business in 2006. Mileage logs petitioners kept for
the Lexus, the Camry, and the Silverado listed the business miles
driven in 2006 for each car to be 3,109, 1,820, and 1,470,
respectively. Ms. Bureriu estimated the mileage on the logs, and
the logs did not include details or the business purpose for each
trip. A log was not kept for the Sequoia in 2006.
On petitioners’ 2006 Federal income tax return they reported
business use of 5,127, 3,127, and 4,996 miles for the Lexus, the
Camry, and the Silverado, respectively. Petitioners did not
report any business use for the Sequoia. The mileage amounts
reported on petitioners’ Federal income tax return in excess of
those in the mileage logs were determined solely on the basis of
petitioners’ oral communications to their accountant.
Petitioners’ Schedule C listed “other expenses” totaling
$12,974. These expenses comprised bank charges, computer
expenses, decorations, disposal fees, dues and subscriptions,
first aid, food and groceries, laundry and cleaning, licenses and
fees, linens, medical supplies, postage, printing, promotions and
gifts, seminars, small tools, telephone, uniforms, videos, and
tapes. Respondent has conceded, on the basis of petitioners’
receipts, bank records, and credit card statements, that in 2006
petitioners paid $9,801 of the $12,974 of “other expenses” listed
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on their Schedule C but argues that petitioners have not proven
they were ordinary and necessary.
Petitioners occasionally paid for the “other expenses” using
the same credit card they used for personal expenses.
Additionally, petitioners used business accounts to pay personal
expenses, and those expenses were not noted when incurred.
Petitioners’ accountant relied on petitioners’ bank statements
and oral representations as the only evidence that the “other
expenses” listed on Schedule C were attributable to ordinary and
necessary business expenses.
On March 5, 2009, respondent issued a notice of deficiency.
Petitioners timely mailed and postmarked their petition to this
Court on June 3, 2009.
Discussion
I. Burden of Proof
Respondent’s determinations in the notice of deficiency are
presumed correct, and petitioners bear the burden of proving that
respondent’s determinations are incorrect. See Rule 142(a)(1).
Petitioners do not argue that the burden of proof shifts to
respondent pursuant to section 7491(a), nor have they shown that
the threshold requirements of section 7491(a) have been met for
any of the determinations at issue. Accordingly, the burden of
proof remains on petitioners to prove that respondent’s
determination of a deficiency in their income tax is erroneous.
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II. Business Use of Home
Deductions are a matter of legislative grace, and the
taxpayers must prove they are entitled to the deductions claimed.
Rule 142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934). Section 162(a) provides that “There shall be allowed as
a deduction all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or
business”. Taxpayers are required to maintain records sufficient
to establish the amounts of allowable deductions and to enable
the Commissioner to determine the correct tax liability. Sec.
6001; Shea v. Commissioner, 112 T.C. 183, 186 (1999).
If a factual basis exists to do so, the Court may in some
circumstances approximate an allowable expense, bearing heavily
against the taxpayer who failed to maintain adequate records.
Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); see
sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014
(Nov. 6, 1985). However, in order for the Court to estimate the
amount of an expense, the Court must have some basis upon which
an estimate may be made. Vanicek v. Commissioner, 85 T.C. 731,
742-743 (1985). Without such a basis, any allowance would amount
to unguided largesse. Williams v. United States, 245 F.2d 559,
560-561 (5th Cir. 1957).
In addition to the requirements discussed above, section
280A(a) provides the general rule that deductions with respect to
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the use of the taxpayer’s residence are not allowable unless an
exception applies. The exceptions are found in section 280A(c),
which provides in relevant part:2
SEC. 280A(c). Exceptions for Certain Business or
Rental Use; Limitation on Deductions for Such Use.--
(1) Certain business use.--Subsection (a) shall
not apply to any item to the extent such item is
allocable to a portion of the dwelling unit which is
exclusively used on a regular basis--
(A) as the principal place of business for
any trade or business of the taxpayer,
(B) as a place of business which is used by
patients, clients, or customers in meeting or
dealing with the taxpayer in the normal course of
his trade or business * * *
Because there are substantial business and personal motives for
the expenses related to petitioners’ residence, we must determine
what portion of the residence was used regularly and exclusively
for petitioners’ business. See Intl. Trading Co. v.
Commissioner, 275 F.2d 578, 584-587 (7th Cir. 1960), affg. T.C.
Memo. 1958-104; Deihl v. Commissioner, T.C. Memo. 2005-287.
Combined personal and business use of a section of the residence
2
Sec. 280A(c)(4) generally provides an exception to sec.
280A(a) for items allocable to the use of any portion of a
dwelling unit on a regular basis in a taxpayer’s trade or
business of providing “day care” services for children,
individuals who have attained the age of 65, and individuals who
are physically or mentally incapable of taking care of
themselves. Sec. 280A(c)(4) is not applicable to petitioners
because Gentle Care AFH was not a “day care” service in 2006, but
rather, provided 24-hour care to its clients.
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precludes deductibility. See generally Sam Goldberger, Inc. v.
Commissioner, 88 T.C. 1532, 1557 (1987).
Petitioners argue that the personal use of their home was
limited to the master bedroom and master bathroom and, therefore,
1,520 square feet, or 85.39 percent of their home, was used
exclusively for business purposes. Petitioners admit, however,
that they occasionally used the kitchen and the laundry room for
personal purposes. With respect to the living room, dining room,
and recreation room, petitioners have not presented any evidence
outside of Ms. Bureriu’s testimony to support their contention
that those rooms were exclusively used for business purposes.
Common sense tells us that petitioners’ young children, ages 3
and 4, were not confined to the master bedroom and master
bathroom at all times while in petitioners’ home. Accordingly,
petitioners have failed to overcome their burden and are not
entitled to deductions with respect to the kitchen, laundry room,
living room, dining room, and recreation room.
At trial respondent did not question Ms. Bureriu as to
whether the three bedrooms where Gentle Care AFH’s clients
resided were used exclusively for business purposes. There is
nothing in the record to indicate that petitioners used those
bedrooms for any personal purpose in 2006. Accordingly, in
accordance with Cohan v. Commissioner, supra at 543-544, and the
floor plans of petitioners’ home, we estimate that the three
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bedrooms, covering approximately 400 square feet of petitioners’
home, were used exclusively for business purposes. Any
inexactitude in the estimate by the Court is of petitioners’ own
making and due to their failure to maintain proper business
records. See id. As 400/1,780 represents about 22.47 percent of
the total area of the home, petitioners are entitled to 22.47
percent of their allowable expenses allocable to the portion of
their home used exclusively for business purposes.
III. Other Expenses
As noted above, respondent concedes that petitioners paid
$9,801 of the $12,974 of “other expenses” listed on Schedule C.
Petitioners produced receipts, bank records, and credit card
statements as proof of the $9,801 respondent conceded. However,
petitioners have failed to maintain adequate records or produce
any evidence outside of Ms. Bureriu’s testimony to prove that the
$9,801 of “other expenses” paid in 2006 was incurred for ordinary
and necessary business purposes.
The Cohan doctrine allows the Court to approximate allowable
expenses, bearing heavily against the taxpayer who failed to
maintain adequate records. It is not disputed that Gentle Care
AFH provided 24-hour care for three to four elderly clients
throughout 2006 and such care required the payment of certain
expenses. An approximation weighing heavily against petitioners
is therefore warranted under the Cohan doctrine because we are
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satisfied that some of the “other expenses” were incurred for
business purposes. Accordingly, for 2006, petitioners may deduct
50 percent of each “other expense” that respondent has conceded
as paid.
IV. Car Expenses
Passenger automobiles and any other property used as a means
of transportation are “listed property” as defined by section
280F(d)(4). Secs. 274(d)(4), 280F(d)(4)(A)(i). Expenses for
items described in section 274 are subject to strict
substantiation rules. No deduction shall be allowed for, among
other things, traveling expenses, entertainment expenses, gifts,
and expenses with respect to listed property (including passenger
automobiles) “unless the taxpayer substantiates by adequate
records or by sufficient evidence corroborating the taxpayer’s
own statement”: (1) The amount of the expense or other item; (2)
the time and place of the travel, entertainment or use, or date
and description of the gift; (3) the business purpose of the
expense or other item; and (4) in the case of entertainment or
gifts, the business relationship to the taxpayer of the
recipients or persons entertained. Sec. 274(d). We may not use
the Cohan doctrine 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. 1.274-5T(a),
Temporary Income Tax Regs., supra.
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Petitioners kept logs to track business miles driven in 2006
for three of their four vehicles. Petitioners’ mileage logs do
not include a description of the business purpose of each trip.
On their 2006 Federal income tax return, petitioners claimed that
the total miles driven for business purposes in each vehicle in
2006 far exceeded the mileage reported on the logs. At trial Ms.
Bureriu testified that this discrepancy was the result of
emergency miles driven to care for her elderly clients.
Petitioners argue that they were too busy with emergencies to
properly document their mileage. As a result, petitioners
communicated their final mileage calculations orally to their
accountant for purposes of preparing their 2006 Federal income
tax return.
Petitioners’ oral account of mileage records with respect to
the business use of their vehicles in 2006 is not sufficient to
substantiate the associated deductions. Further, petitioners’
mileage logs fail to provide any detail regarding the business
purpose of each entry. As discussed above, we may not use the
Cohan doctrine to estimate section 274(d) expenses. Accordingly,
petitioners have failed to meet the heightened substantiation
requirements of section 274, and we sustain respondent’s
determination with regard to the car and truck expenses.
Petitioners also claimed depreciation deductions with
respect to their vehicles for 2006. Because petitioners have
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failed to substantiate the business use of the vehicles pursuant
to section 274 for 2006, we sustain respondent’s determinations
with respect to petitioners’ depreciation deductions.
V. Section 6662(a) Penalty
Section 6662(a) and (b)(2) imposes an accuracy-related
penalty upon any underpayment of tax resulting from a substantial
understatement of income tax. The penalty is equal to 20 percent
of the portion of any underpayment attributable to a substantial
understatement of income tax. Id. The term “substantial
understatement” is defined as exceeding the greater of: (1) 10
percent of the tax required to be shown on the return for the
taxable year or (2) $5,000. Sec. 6662(d)(1)(A). Section 6662(a)
and (b)(1) also imposes a penalty equal to 20 percent of the
amount of an underpayment attributable to negligence or disregard
of rules or regulations. Negligence includes any failure to make
a reasonable attempt to comply with the provisions of the
Internal Revenue Code, including any failure to maintain adequate
books and records or to substantiate items properly. Sec.
6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.
Petitioners’ failure to produce records substantiating their
Schedule C deductions supports the imposition of the accuracy-
related penalty for negligence for 2006. The applicability of
section 6662(b)(2) will depend on the magnitude of the
understatement of income tax as calculated under Rule 155. If
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petitioners’ understatement of income tax as calculated under
Rule 155 exceeds the greater of $5,000 or 10 percent of the tax
required to be shown on the return for 2006, respondent will have
met his burden of production under section 7491(c). If not,
respondent will have failed to meet his burden of production
under section 7491(c).
An accuracy-related penalty is not imposed on any portion of
the underpayment as to which the taxpayer acted with reasonable
cause and in good faith. Sec. 6664(c)(1). The taxpayer bears
the burden of proof with regard to those issues. Higbee v.
Commissioner, 116 T.C. 438, 446 (2001). Petitioners have failed
to show reasonable cause, substantial authority, or any other
basis for reducing the penalties. Accordingly, pending a final
calculation of petitioners’ understatement of income tax under
Rule 155, we find petitioner liable for the section 6662 penalty
for 2006 as commensurate with respondent’s concessions and our
holding. See id.
In reaching our holdings herein, we have considered all
arguments made, and, to the extent not mentioned above, we
conclude they are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.