Martin v. Comm'r

T.C. Summary Opinion 2013-1

UNITED STATES TAX COURT

GLENN R. MARTIN AND BARBARA MARTIN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16494-10S. Filed January 2, 2013.

Glenn R. Martin and Barbara Martin, pro sese.

Craig A. Ashford and David Sorensen, for respondent.

SUMMARY OPINION

VASQUEZ, Judge: This case was heard pursuant to the provisions of

section 7463 of the Internal Revenue Code in effect when the petition was filed.1

1
Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect for the years in issue, and all Rule references are to
(continued...)
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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.

Respondent determined deficiencies of $3,904 and $9,775 and section

6662(a) accuracy-related penalties of $781 and $1,955 in petitioners’ Federal

income tax for 2006 and 2007, respectively. After concessions,2 the issues

remaining for decision as to each year in issue are: (1) whether petitioners are

entitled to a home office deduction; (2) whether petitioners are entitled to a

deduction for traveling expenses while away from home; and (3) whether petitioners

are liable for an accuracy-related penalty for negligence or disregard of rules or

regulations.

1
(...continued)
the Tax Court Rules of Practice and Procedure. All amounts are rounded to the
nearest dollar.
2
Petitioners concede that they are not entitled to deductions for supplies,
office expenses in excess of the amounts respondent allowed, or investment interest
on their Schedules C, Profit or Loss From Business, for 2006 and 2007.
Respondent concedes that petitioners are entitled to deduct their investment interest
on Schedules A, Itemized Deductions, and that petitioners’ allowable total Schedule
A deductions are $68,070 and $60,189 for 2006 and 2007, respectively.
 -3-

Background

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

facts and accompanying exhibits are incorporated herein by this reference. At the

time they filed their petition, petitioners resided in Nevada.

I. The Real Estate Business

Mr. Martin is a licensed real estate broker in Nevada and California, and Mrs.

Martin is a licensed salesperson in Nevada and acts as an unlicensed assistant3 in

California. They operate Re/Max Scenic Properties (real estate business), a real

estate brokerage franchise, in the Tahoe area.4 Before the years in issue they

operated the real estate business primarily out of their Nevada home office. They

also maintained a small office in a commercial building in California, which they

used to register their California broker’s license and to store records as required by

the California Department of Real Estate.

II. Semiretirement in Florida

On November 14, 2005, petitioners became semiretired and moved to their

second home in Sanibel, Florida, but soon discovered that it had sustained mold

3
An unlicensed assistant is a person who is permitted to assist with real
property transactions in California, subject to certain restrictions.
4
The Tahoe area is on the border of Nevada and California, approximately
40 miles southwest of Reno.
 -4-

damage from Hurricane Charlie. It was not until June 23, 2006, that they finished

repairing the damage and began occupying the home. However, around that time

their real estate business was picking up in the Tahoe area. They tried listing their

Florida home for sale or rent, but their efforts met with little success. They decided

to continue residing there and converted the guest bedroom into a home office.

III. Home Office and Travel

During the years in issue petitioners regularly performed administrative tasks

for their real estate business from the Florida home office, including calling clients

in the Tahoe area, sending faxes, filling out paperwork, and initiating contracts.

They did not use the office for any other purpose. Neither Mr. nor Mrs. Martin was

a licensed broker in Florida, and their real estate business did not have any clients or

property in Florida. They periodically traveled from Florida to the Tahoe area for

one or two weeks at a time to meet with clients, host open houses, and sell property.

While in the Tahoe area, they performed a minimal amount of administrative work

from their Nevada home office.

IV. Tax Returns

Petitioners timely filed joint Federal income tax returns for 2006 and 2007.

As relevant here, they claimed travel expenses on their Schedules C of $9,168 and
 -5-

$9,136 for 2006 and 2007, respectively, for airfare from Florida to the Tahoe area

and for meal and incidental expenses on a per diem basis. They did not claim any

home office deductions on the returns. On October 15, 2009, petitioners executed a

Form 872, Consent to Extend the Time to Assess Tax, in which they agreed to

extend the period of limitations for assessment of their 2006 tax to December 31,

2010. On May 5, 2010, respondent mailed petitioners a notice of deficiency for

2006 and 2007 disallowing, among other things, their claimed travel expense

deductions.5 On July 20, 2010, petitioners timely petitioned the Court for

redetermination of the deficiency and alleged in their petition that they are entitled to

deductions of $8,831 and $11,544 for 2006 and 2007, respectively, for their Florida

home office.

5
Petitioners argue for the first time on reply brief that the period of
limitations in which respondent may assess their tax liabilities for 2006 and 2007
has expired. They do not dispute receiving a timely notice of deficiency but argue
that the notice of deficiency was a “Proposed Deficiency” and “not an assessment
of tax”. Petitioners’ argument is erroneous because the period of limitations on
assessment is suspended during the 90-day period following the mailing of a notice
of deficiency, and where, as here, the taxpayer petitions the Court in response to the
notice, until our decision becomes final and for an additional 60 days thereafter.
See secs. 6213(a), 6503(a)(1).
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Discussion

I. General Rules

The Commissioner’s determinations are generally presumed correct, and the

taxpayer bears the burden of proving the determinations erroneous.6 Rule 142(a).

The taxpayer bears the burden of proving that he or she is entitled to any deduction

claimed, and this includes the burden of substantiation. Id.; Hradesky v.

Commissioner, 65 T.C. 87, 89-90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir.

1976). A taxpayer must substantiate amounts claimed as deductions by maintaining

the records necessary to establish he or she is entitled to the deductions. Sec. 6001.

Section 162(a) provides a deduction for certain business expenses. In order

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 Ass’n, 403 U.S. 345, 352 (1971); see also

Commissioner v. Tellier, 383 U.S. 687, 689 (1966) (the term “necessary” imposes

6
We interpret petitioners’ argument on reply brief to be that the burden of
proof should shift to respondent under sec. 7491(a). However, petitioners have not
complied with the Code’s substantiation requirements, as discussed infra.
Accordingly, the burden of proof does not shift to respondent.
 -7-

“only the minimal requirement that the expense be ‘appropriate and helpful’ for ‘the

development of the [taxpayer’s] business’” (alteration in original) (quoting Welch v.

Helvering, 290 U.S. 111, 113 (1933))); Deputy v. du Pont, 308 U.S. 488, 495

(1940) (to qualify as “ordinary”, the expense must relate to a transaction “of

common or frequent occurrence in the type of the business involved”). Whether an

expense is ordinary is determined by time, place, and circumstance. Welch v.

Helvering, 290 U.S. at 113-114.

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 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

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), aff’d per

curiam, 412 F.2d 201 (2d Cir. 1969).
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II. Home Office Deduction

A. Eligibility

Generally, a deduction for an expense relating to property occupied by a

taxpayer as a residence is disallowed. Sec. 280A(a). An exception to the general

rule is found in section 280A(c)(1)(A), which provides that an expense that is

allocable to a portion of the taxpayer’s dwelling that is used exclusively on a regular

basis as the taxpayer’s principal place of business will be allowed as a deduction.

The Taxpayer Relief Act of 1997, Pub. L. No. 105-34, sec. 932(a), 111 Stat. at 881,

amended section 280A to provide that the term “principal place of business”

includes a place of business that is used by a taxpayer for administrative and

management activities if no other fixed location of the trade or business is used by

the taxpayer to conduct substantial administrative or management activities. A

portion of the taxpayer’s dwelling is a room or other separately identifiable space.

Hefti v. Commissioner, T.C. Memo. 1993-128.

Mr. Martin credibly testified that petitioners used the Florida home office on

a regular basis during the years in issue to call clients in the Tahoe area, send faxes,

fill out paperwork, initiate contracts, and perform other administrative tasks

associated with operating the real estate business. He further credibly testified that

petitioners used the Florida home office exclusively for business purposes.
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Petitioners admit that they performed a “minimal amount of work” out of their

Nevada home office during the years in issue and stored records in the California

office, but these activities do not rise to the level of “substantial administrative or

management activities”.7 We find that petitioners used their Florida home office

regularly and exclusively for the administrative and management tasks of their real

estate business and accordingly it qualifies as their “principal place of business”

under section 280A(c)(1).

B. Substantiation

Respondent conceded at trial that petitioners have substantiated deductions

for their Florida home office to the extent of $3,123 for 2006 and $810 for 2007.

Petitioners argue on brief that they are entitled to deduct $8,831 for 2006 and

$11,544 for 2007, but they have neither introduced into evidence any records or

receipts substantiating amounts in excess of those respondent conceded nor

7
The House conference report accompanying the amendment to sec. 280A
states that “a taxpayer’s eligibility to claim a home office deduction under the bill
will not be affected by the fact that the taxpayer conducts substantial
non-administrative or non-management business activities at a fixed location of the
business outside the home (e.g., meeting with, or providing services to, customers,
clients, or patients at a fixed location of the business away from home).” H.R.
Conf. Rept. No. 105-220, at 464 (1997), 1997-4 C.B. (Vol. 2) 1457, 1934.
Therefore, petitioners’ eligibility to claim a deduction for their Florida home office
is also not affected by the substantial nonadministrative and nonmanagement
activities (such as meeting with clients, hosting open houses, and selling property)
they performed in the Tahoe area.
 - 10 -

presented sufficient evidence to permit a reasonable estimate of such amounts under

the Cohan rule. Accordingly, we allow them home office deductions of $3,123 for

2006 and $810 for 2007.

III. Travel Expenses

Section 162(a)(2) allows a taxpayer to deduct ordinary and necessary travel

expenses (including amounts for lodging and meals) paid or incurred during the

taxable year if such expenses are paid or incurred while away from home in pursuit

of a trade or business. Commissioner v. Flowers, 326 U.S. 465, 470 (1946);

Cockrell v. Commissioner, 38 T.C. 470 (1962), aff’d, 321 F.2d 504 (8th Cir. 1963).

The reference to “home” in section 162(a)(2) means the taxpayer’s “tax home”.

Mitchell v. Commissioner, 74 T.C. 578, 581 (1980); Kroll v. Commissioner, 49

T.C. 557, 561-562 (1968). Respondent contends that petitioners do not satisfy the

requirements of section 162(a)(2) and have not met the strict substantiation

requirements of section 274(d). We will focus our inquiry on section 274(d).

In addition to satisfying the criteria for deductibility under section 162, a

taxpayer must satisfy the strict substantiation requirements of section 274(d) in

order for a travel expense deduction to be allowed. Sec. 274(d)(1). We may not

use the Cohan doctrine to estimate expenses covered by section 274(d). See
 - 11 -

Sanford v. Commissioner, 50 T.C. at 827; sec. 1.274-5T(a), Temporary Income Tax

Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). To substantiate a deduction attributable

to travel, a taxpayer must maintain adequate records or present corroborative

evidence of the taxpayer’s own statements to show the following: (1) the amount of

the expense; (2) the time and place of the travel; (3) the business purpose of the

expense; and (4) the business relationship to the taxpayer. Sec. 274(d) (flush

language). “To meet the ‘adequate records’ requirements of section 274(d), a

taxpayer shall maintain an account book, diary, log, statement of expense, trip

sheets, or similar record * * *, and documentary evidence”. Sec. 1.274-5T(c)(2)(i),

Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).

Mr. Martin testified that petitioners incurred expenses for airfare from

Florida to the Tahoe area and for meal and incidental expenses while in the Tahoe

area. However, his testimony was general, vague, and conclusory. He did not

provide a specific travel time, business purpose, or account of petitioners’

expenses for any trip. Furthermore, petitioners did not produce any records,

receipts, or other evidence to corroborate Mr. Martin’s testimony. We do not

doubt that petitioners incurred travel expenses; however, Mr. Martin’s testimony

alone is not sufficient to meet the strict substantiation requirements of section
 - 12 -

274(d). See Wolfgram v. Commissioner, T.C. Memo. 2010-69 (“Testimony alone,

without corroborative evidence, does not satisfy the requirements of section

274(d)”); Zand v. Commissioner, T.C. Memo. 1996-19 (“The unsupported

testimony of a taxpayer at trial is not sufficient to meet the stringent substantiation

requirements of section 274(d). To adequately substantiate the deductibility of

travel and entertainment expenses, specificity is imperative.”), aff’d, 143 F.3d 1393

(11th Cir. 1998). Accordingly, petitioners are not entitled to deduct their claimed

travel expenses for 2006 or 2007.8

8
We are not persuaded by petitioners’ argument that they are entitled to
deduct the cost of meals and incidentals using the applicable Federal meal and
incidental expense (M&IE) per diem rate for each day they traveled to the Tahoe
area. Sec. 1.274-5(j), Income Tax Regs., grants the Commissioner the authority to
establish a method under which a taxpayer may elect to use a specified amount for
meals and incidentals paid or incurred while traveling away from home in lieu of
substantiating the actual costs. For the taxable years in issue, the Commissioner
established that method through Rev. Proc. 2005-67, 2005-2 C.B. 729 (January
2006 to September 2006), Rev. Proc. 2006-41, 2006-2 C.B. 777 (October 2006 to
September 2007), and Rev. Proc. 2007-63, 2007-2 C.B. 809 (October 2007 to
December 2007). Although use of the M&IE rate does eliminate some of the
substantiation requirements of sec. 274 (essentially, the cost element), the taxpayer
is not relieved of substantiating the time, place, and business purpose of the travel.
See sec. 1.274-5(j), Income Tax Regs.; Rev. Proc. 2005-67, sec. 4.03, 2005-2 C.B.
at 732; Rev. Proc. 2006-41, sec. 4.03, 2006-2 C.B. at 780; Rev. Proc. 2007-63, sec.
4.03, 2007-2 C.B. at 811-812. Mr. Martin’s testimony is insufficient to substantiate
the time and business purpose of petitioners’ travel, and therefore petitioners may
not deduct their travel expenses for 2006 or 2007 using the per diem rate.
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IV. Accuracy-Related Penalties

Section 6662(a) and (b)(1) imposes a penalty equal to 20% of the amount of

any underpayment attributable to negligence or disregard of rules or regulations. The

term “negligence” includes any failure to make a reasonable attempt to comply with

the tax laws, and “disregard” includes any careless, reckless, or intentional

disregard of rules or regulations. Sec. 6662(c). Negligence also includes any failure

to keep adequate books and records or to substantiate items properly. Sec. 1.6662-

3(b)(1), Income Tax Regs.

Section 6664(c)(1) provides an exception to the imposition of the

accuracy-related penalty if the taxpayer establishes that there was reasonable cause

for, and the taxpayer acted in good faith with respect to, the underpayment. Sec.

1.6664-4(a), Income Tax Regs. The determination of whether the taxpayer acted

with reasonable cause and in good faith is made on a case-by-case basis, taking into

account the pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax

Regs.

With respect to a taxpayer’s liability for any penalty, section 7491(c) places

on the Commissioner the burden of production, thereby requiring the

Commissioner to come forward with sufficient evidence indicating that it is

appropriate to impose the penalty. Higbee v. Commissioner, 116 T.C. 438, 446-
 - 14 -

447 (2001). Once the Commissioner meets his burden of production, the taxpayer

must come forward with persuasive evidence that the Commissioner’s determination

is incorrect. See id. at 447; see also Rule 142(a); Welch v. Helvering, 290 U.S. at

115.

Petitioners failed to keep adequate records and to properly substantiate their

claimed travel expenses.9 Mr. Martin admitted at trial that petitioners had not

substantiated the office expenses they conceded. As to the remaining items

petitioners conceded, nothing suggests that their failures were other than negligent.

See Perry Funeral Home, Inc. v. Commissioner, T.C. Memo. 2003-340 (finding that

the Commissioner met his burden of production under section 7491(c) with respect

to items the taxpayer conceded when the record was silent as to the taxpayer’s

position on those items and there was no evidence that the taxpayer’s errors were

other than negligent). Therefore, we find that respondent has met his burden of

production. Petitioners offered no evidence that they acted with reasonable cause

and in good faith. Accordingly, we find that petitioners are liable for the 20%

accuracy-related penalty for 2006 and 2007.

9
There is no underpayment of tax attributable to the home office deductions
as they were not claimed on petitioners’ tax return for 2006 or 2007.
 - 15 -

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.