T.C. Summary Opinion 2011-67
UNITED STATES TAX COURT
KEVIN E. AND SONDRA WARD, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16637-09S. Filed June 8, 2011.
Kevin E. Ward and Sondra Ward, pro sese.
Janice Bennett Geier, Kimberly L. Clark, and Aimee R. Lobo-
Berg, for respondent.
VASQUEZ, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code (Code) in
effect when the petition was filed.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, all section references are to
the Code in effect for the year in issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
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other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined an $8,925 deficiency in petitioners’
2005 Federal income tax and a $1,785 accuracy-related penalty
under section 6662(a). After concessions,2 the issues for
decision are whether petitioners are entitled to a $25,000
Schedule C expense deduction for business use of their car and
whether petitioners are liable for the section 6662 accuracy-
related penalty.
Petitioners resided in Idaho when the petition was filed.
Background
In 2005 petitioner Sondra Ward (Mrs. Ward) worked as a real
estate agent for Century 21 Advantage in Idaho. Her job duties
(e.g., showing properties, networking, etc.) required her to do
an extensive amount of driving. Mrs. Ward drove a 1996 Audi for
most of 2005.3 On December 21, 2005, petitioners purchased a
2006 BMW X5 (the BMW) for $49,431.50, which included $2,353.50
2
The parties agree that the loss claimed on Schedule E,
Supplemental Income and Loss, from Ward Insurance, Inc., reported
on petitioners’ return should be $84,197. Petitioners concede
that Schedule E depreciation recapture should be increased by
$11,951 and the $10,320 Schedule E depreciation expense reported
on their return should be reduced by $747. Petitioners also
concede that they are not entitled to any portion of the $49,431
rent/lease expense reported on Schedule C, Profit or Loss From
Business, on their return.
3
Petitioners did not keep a mileage log for the Audi or
claim a mileage deduction for the Audi in 2005.
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for Idaho sales tax, and $208 for State title fees and dealer
documentation fees.4 Petitioners placed the BMW into service for
Mrs. Ward’s real estate business on December 21, 2005, the same
day it was purchased. Petitioner Kevin E. Ward (Mr. Ward) drove
the BMW on occasion in 2005 as well. The BMW had 66 miles on it
when petitioners drove it off the lot and 1,111.7 miles at the
end of the year; petitioners drove the BMW 1,045.7 miles from
December 21 to 31.
Mrs. Ward concentrated most of her business in Bonneville,
Jefferson, and Bingham Counties, an area covering over 5,000
square miles. She sold 33 properties in 2005.5
Petitioners claimed a Schedule C depreciation expense for
the BMW of $2,349 on their Form 1040, U.S. Individual Income Tax
Return, for 2005. During the examination of petitioners’ 2005
return, petitioners first raised the issue that they are entitled
to a $25,000 section 179 expense deduction and a $1,099
depreciation deduction for the BMW in lieu of the deduction
claimed on their return.
On November 19, 2007, petitioners provided to the revenue
agent assigned to the audit a mileage log for the BMW with three
4
Petitioners did not sell or trade in the Audi when they
purchased the BMW.
5
It is not clear whether Mrs. Ward sold any of the 33
properties during the 11-day period from Dec. 21 to 31, 2005.
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entries for 2005 totaling 47 miles allocated to personal use.6
The log had no entries with a business use purpose and zero miles
were allocated to business use. On December 11, 2007,
petitioners provided a computer printout of Mrs. Ward’s mobile
phone daily calendar covering December 21 through 31, 2005 (the
phone calendar). After printing out the phone calendar Mrs. Ward
added handwritten mileage amounts for most of the entries, which
are almost exclusively for Mrs. Ward’s business appointments and
other business and/or networking obligations. The revenue agent
determined that the business use percentage of the BMW for 2005
was 42.7 percent. As a result, the revenue agent allowed a
Schedule C depreciation expense for the BMW of $528. Respondent
issued a notice of deficiency to petitioners on May 1, 2009.
Discussion
I. Vehicle Expense
Deductions are a matter of legislative grace, and taxpayers
bear the burden of proving that they are entitled to any
deductions claimed. New Colonial Ice Co. v. Helvering, 292 U.S.
435, 440 (1934). Taxpayers are required to maintain records that
6
Petitioners listed the following dates and descriptions
for these personal use entries:
Dec. 25 Church
Dec. 25 Mom & Dad Ward
Dec. 31 Town - grocery & new year stuff
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are sufficient to determine their correct tax liability. See
sec. 6001; sec. 1.6001-1(a), Income Tax Regs.
When property is used in a trade or business or held for the
production of income, the taxpayer may be allowed a depreciation
deduction. Secs. 161, 167. Alternatively, the cost of property
acquired by purchase for use in the active conduct of a trade or
business may be expensed under section 179 during the year that
the property was placed in service if the requirements of that
section are satisfied. If the property is used for both business
and other purposes, then the portion of the cost that is
attributable to the business use is eligible for expensing under
section 179, but only if more than 50 percent of the use is for
business purposes (the predominant use requirement). See sec.
1.179-1(d), Income Tax Regs. Moreover, to claim a section 179
deduction for “listed property”, which is defined in section
280F(d)(4) to include any passenger automobile, the taxpayer must
satisfy the strict substantiation requirements of section 274(d).
See Whalley v. Commissioner, T.C. Memo. 1996-533; see also sec.
280F(d)(1); sec. 1.179-1(d)(3), Income Tax Regs. Section 274(d)
requires the taxpayer to substantiate the amount, time, place,
and business purpose of these expenditures and to provide
adequate records or sufficient evidence to corroborate his own
statement. See sec. 1.274-5T(c)(1), Temporary Income Tax Regs.,
50 Fed. Reg. 46016 (Nov. 6, 1985). In the absence of adequate
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records to substantiate an element of an expense, a taxpayer may
establish an element by “his own statement, whether written or
oral, containing specific information in detail as to such
element”, and by “other corroborative evidence sufficient to
establish such element.” Sec. 1.274-5T(c)(3)(i), Temporary
Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985). However,
neither taxpayers nor the Court may estimate permissible
deductions that do not satisfy the strict substantiation
requirements of section 274(d), which supersedes the doctrine
found in Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930). See
Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968), affd. 412
F.2d 201 (2d Cir. 1969); Solomon v. Commissioner, T.C. Memo.
2011-91.
Petitioners contend that they are entitled to a section 179
deduction for the BMW because it was used predominantly for
business purposes in 2005. Respondent argues that the deduction
is not permitted because petitioners have not adequately
substantiated the business use of the BMW and fail to meet the
predominant use requirement.
At trial petitioners introduced into evidence the mileage
log,7 Mrs. Ward’s phone calendar, and maps of the area in which
Mrs. Ward works. The phone calendar did not include mileage
7
As discussed supra, the mileage log includes no entries
with a business use purpose and allocates zero miles to business
use for 2005.
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amounts on the original printout. Instead, the mileage amounts
were handwritten and added after the calendar was printed in
2007; thus, they were not contemporaneously recorded. Mrs. Ward
testified that she arrived at the mileage totals by reading the
odometer at the time of the appointments and that she may have
written the mileage totals down earlier and moved them to the
calendar later. However, she provided no other written evidence
of the mileage amounts. The phone calendar also did not include
the addresses of the homes she showed to clients. The entries
included vague descriptions such as “Sweet showing”, “Drop off
See’s Candy and Calendars”, “Flyers to all listings”, and “Show
mclane invest prop”. Accordingly, petitioners have not
maintained adequate records.
Mrs. Ward testified in depth about her overall job duties
and specific appointments during the 11-day period at the heart
of this matter. She also showed the Court maps of her working
area and distances from her home in Idaho to the locations of
several of her appointments. However, she produced no evidence
to corroborate her statements about the specific locations of her
appointments in 2005 (e.g., addresses of listings, emails from
clients referring to specific listings, etc.), or where she was
driving from.8 Furthermore, in the absence of adequate records
8
Sec. 1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed.
Reg. 46016 (Nov. 6, 1985), states, in pertinent part:
(continued...)
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and more precise evidence, we must conclude that Mrs. Ward’s
mileage totals, which were written on the phone calendar in 2007
and included miles driven around the areas where the listings
were located, were best estimates, which cannot be the basis for
a deduction under section 274.
While we do not doubt that Mrs. Ward used the BMW for
business purposes in 2005, she has not met the strict
substantiation requirements of section 274. Accordingly,
respondent’s determination with respect to the section 179
deduction for the BMW is sustained.
II. Accuracy-Related Penalty
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 (1) due to negligence or disregard of rules
or regulations or (2) attributable to a substantial
understatement of income tax. See sec. 6662(b). “Negligence”
8
(...continued)
A contemporaneous log is not required, but a record of
the elements of an expenditure or of a business use of
listed property made at or near the time of the expenditure
or use, supported by sufficient documentary evidence, has a
high degree of credibility not present with respect to a
statement prepared subsequent thereto when generally there
is a lack of accurate recall. Thus, the corroborative
evidence required to support a statement not made at or near
the time of the expenditure or use must have a high degree
of probative value to elevate such statement and evidence to
the level of credibility reflected by a record made at or
near the time of the expenditure or use supported by
sufficient documentary evidence. * * *
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includes any failure to make a reasonable attempt to comply with
the provisions of the Code or to exercise ordinary care in the
preparation of a return, and “disregard” means any careless,
reckless, or intentional disregard. Sec. 6662(c); sec. 1.6662-
3(b)(1) and (2), Income Tax Regs. A substantial understatement
of income tax is defined as an understatement of tax that exceeds
the greater of 10 percent of the tax required to be shown on the
tax return or $5,000. See sec. 6662(d)(1)(A).
Respondent determined that some or all of the underpayment
of petitioners’ tax for 2005 is attributable to negligence or
disregard of rules or regulations or a substantial understatement
of income tax. Respondent calculated the 20-percent penalty on
the entire amount of the deficiency.9 However, in the notice of
deficiency respondent listed only “Sch C1 - Rent/Lease - Other
Business Property” as an adjustment to which the accuracy-related
penalty applies.10 Thus, respondent should have calculated the
20-percent penalty only on the amount of the deficiency resulting
from petitioners’ improper deduction for rent expense.
Petitioners have conceded this adjustment as well as the
resulting penalty. Accordingly, we sustain respondent’s
9
Respondent applied the 20-percent penalty to the $8,925
deficiency determined in the notice.
10
This adjustment increased petitioners’ taxable income by
$49,431.
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determination that a penalty applies for the corresponding
portion of the underpayment.
The penalty shall not be imposed on the portion of the
underpayment due to any other adjustment, including the
additional adjustments that petitioners have conceded and the
adjustment discussed herein. As part of the Rule 155
computations, respondent shall recalculate the 20-percent penalty
and apply it only to the portion of the underpayment resulting
from the adjustment for the Schedule C rent expense.
Decision will be entered
under Rule 155.