T.C. Memo. 1998-170



                      UNITED STATES TAX COURT



           ALONZO AND EMMA J. BRADLEY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 24265-95.                       Filed May 11, 1998.



     Alonzo and Emma J. Bradley, pro sese.

     David E. Whitcomb, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     GALE, Judge:   Respondent determined a deficiency in

petitioners' 1992 Federal income taxes in the amount of $14,454,

an addition to tax under section 6651(a)1 in the amount of


     1
      Unless otherwise noted, all section references are to the
Internal Revenue Code in effect for the year in issue, and all
Rule references are to the Tax Court Rules of Practice and
                                                   (continued...)
                                - 2 -

$697.50, and an accuracy-related penalty under section 6662(d) in

the amount of $1,733.20.

     After concessions, the issues for decision are as follows:

(1) Whether petitioners are entitled to deductions claimed for

unreimbursed employee business expenses; (2) whether petitioners

are entitled to deductions claimed for losses with respect to

certain real property held by them in 1992; (3) whether

petitioners are liable for an addition to tax under section

6651(a)(1); and (4) whether petitioners are liable for an

accuracy-related penalty under section 6662(d).

                           FINDINGS OF FACT

     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.

     At the time the petition was filed, petitioners resided in

League City, Texas.

     During the taxable year 1992, petitioner Alonzo Bradley (Mr.

Bradley) was employed as an engineer by Paramax Systems Corp., an

affiliate of Unisys Corporation (Unisys).     Unisys served as a

subcontractor for the Johnson Space Center (Space Center) Shuttle

Flight Operation of the National Aeronautics and Space

Administration (NASA).   Mr. Bradley worked on the Shuttle

Operations Contract (SOC or SOP Contract) during 1992.     As part

     1
      (...continued)
Procedure.
                               - 3 -

of his duties, Mr. Bradley was required to travel from his office

at Unisys to various locations at the Space Center and to the

offices of Loral Space Systems (Loral), another subcontractor.

The distance between Mr. Bradley's office and the Space Center

complex was approximately 3 miles, and between Mr. Bradley's

office and Loral was between 3 and 3.5 miles.

     NASA operated a free shuttle service between sites within

the Space Center complex and locations outside the Space Center

complex, including Unisys and Loral, on weekdays during normal

business hours.   In addition, a taxi service between these sites

was also provided during normal business hours when time

constraints made the shuttle impractical.   Both the shuttle and

taxi services were available to Mr. Bradley.    Mr. Bradley also

routinely worked overtime after normal business hours and on

weekends, at which times the shuttle and taxi services were not

available.   Mr. Bradley was compensated for overtime work for 42

of the 52 weekly pay periods in 1992.

     Mr. Bradley did not seek reimbursement from his employer for

any transportation costs in 1992.   It is uncertain whether he was

eligible for such reimbursement because the written policy of his

employer is ambiguous for an employee in Mr. Bradley's

classification who is compensated for overtime.2   Mr. Bradley

     2
      We note that in a prior case involving an earlier year of
the same petitioners, the Court found as a fact that Mr. Bradley
was eligible for partial reimbursement from Unisys for business
                                                   (continued...)
                                - 4 -

claimed a deduction for unreimbursed employee business expenses

in the amount of $5,904 for costs associated with the use of his

personal automobile for trips from his office to the Space Center

and to Loral.   Petitioners computed this figure on Form 2106

attached to their return by multiplying Mr. Bradley's claimed

vehicle expenses for the year ($7,569) by a claimed business-use

percentage of 78 percent, for a product of $5,904 in vehicle

expenses attributable to business use.   The business-use

percentage used by Mr. Bradley was calculated by dividing the

claimed business-use mileage of his vehicle for 1992 (9,974

miles) by the claimed total mileage for that year (12,816 miles).

Petitioners claimed an additional $189 in miscellaneous business

expenses for a total of $6,093 in unreimbursed employee business

expenses attributable to Mr. Bradley's employment.

     In 1992, petitioner Emma J. Bradley (Mrs. Bradley) was

employed as a nurse by Gastroenterology Consultants (GC), a two-

physician medical practice with offices in Webster, Alvin,

Pasadena, and Houston, Texas.   In carrying out her duties, Mrs.

Bradley was required to travel between the various offices.     GC

had an established travel reimbursement policy under which

employees were reimbursed for business-related travel between its


     2
      (...continued)
use of his personal automobile. Bradley v. Commissioner, T.C.
Memo. 1996-461. Our decision in the instant case does not, in
any event, depend upon Mr. Bradley's eligibility for
reimbursement.
                               - 5 -

various offices.3   Under GC's travel reimbursement procedure,

employees were provided log books in which to record their

business-related travel, and they were required to submit monthly

tallies of their business mileage in order to be reimbursed.

GC's business records for 1992 contain several monthly tallies

with respect to Mrs. Bradley, indicating that she was reimbursed

in the amount of $182.30 for 661.8 miles of business-related

travel in 1992.

     Mrs. Bradley claimed a deduction for unreimbursed employee

business expenses in the amount of $5,100 for costs associated

with the use of two personal automobiles.   Petitioners calculated

this figure on Form 2106 attached to their return by multiplying

Mrs. Bradley's claimed vehicle expenses (other than depreciation)

for each vehicle, in the amounts of $1,435 and $2,671, by the

claimed business-use percentage for each vehicle, 91 percent and

90 percent, respectively, for products of $1,306 and $2,404 in

vehicle expenses attributable to business use.   Petitioners

similarly calculated a $1,390 depreciation expense for one

vehicle based on a claimed business-use percentage of 91 percent.

The business-use percentages used by Mrs. Bradley were calculated

by dividing the claimed business-use mileage of her vehicles for

1992 (11,652 miles and 1,058 miles, respectively) by the claimed

     3
      Our findings regarding GC and its travel reimbursement
policies are based in part on the testimony of Nancy Montgomery,
office manager of GC in 1992. We hereby overrule petitioners'
objection to her testimony.
                                         - 6 -

total mileage for that year (12,867 miles and 1,176 miles,

respectively).         Petitioners claimed an additional $677 in

miscellaneous business expenses in connection with Mrs. Bradley's

employment for a total of $5,777 in unreimbursed employee

business expenses.

         In the notice of deficiency, respondent disallowed claimed

deductions for all of petitioners' employee business expenses on

the grounds that (i) they constituted reimbursable transportation

expenses and/or (ii) they constituted personal commuting

expenses.

         On Schedule E of their return, petitioners claimed $22,507

in losses with respect to four pieces of real property held by

them in 1992, consisting of three residential rental properties

(the Hearthwood Condominium, the River Stone II Condominium, and

a house in Windsor Village) and a parcel of vacant land in Utica,

Mississippi (the Mississippi land).                Petitioners computed losses

on Schedule E as follows:
                                                  Windsor    Mississippi
       Item            Hearthwood   River Stone    Village       Land        Total


Income (Rents)            $2,400     $3,000        $2,400      -0-          $7,800
Expenses (Management
 fees, mortgage
 interest, etc.)           6,472      8,886         4,743     $2,003        22,104
Depreciation               2,757      3,628         1,818       -0-          8,203

Loss                     ($6,829)   ($9,514)      ($4,161)   ($2,003)      ($22,507)



         In the notice of deficiency, respondent disallowed the

$22,104 in expenses claimed by petitioners with respect to the
                                - 7 -

four properties on the grounds that petitioners (i) failed to

establish that the expenses were paid or incurred during the

taxable year and/or (ii) failed to establish that the expenses

were ordinary and necessary.   Respondent also disallowed the

$8,203 in depreciation claimed on the grounds that petitioners

(i) failed to establish their cost or other basis in the

properties and/or (ii) failed to establish that the properties

were depreciable.

     Petitioners' return was due on April 15, 1993.   The return

was executed by petitioners on April 26, 1993, and filed on or

about that date.



                               OPINION

Employee Vehicle Expenses

     Respondent argues that petitioners failed to substantiate

their deductions for vehicle expenses as required by section 274

because they failed to establish the business use of their

personal automobiles, as well as the location or destination of

travel, and the business purpose.4




     4
      Respondent also argues in the alternative that Mr.
Bradley's vehicle expenses were not "ordinary and necessary"
because they were reimbursable by his employer or because the
shuttle and taxi services were available. Because we find that
petitioners fail to satisfy sec. 274 with respect to Mr.
Bradley's vehicle expenses, we do not address respondent's other
arguments.
                                 - 8 -

     Section 274(d) places strict substantiation requirements on

a taxpayer for claimed deductions relating to the use of "listed

property", which is defined under section 280F(d)(4)(A)(i) to

include passenger automobiles.    Under this provision, any

deduction claimed with respect to the use of a passenger

automobile will be disallowed unless the taxpayer substantiates

various elements of the use by adequate records or other

sufficiently corroborating evidence.     Sec. 274(d); see also sec.

1.274-5T(c)(2)(ii)(C)(1), Temporary Income Tax Regs., 50 Fed.

Reg. 46018 (Nov. 6, 1985).   Pursuant to the regulations

promulgated under section 274, one of the elements required to be

substantiated is the amount of business use and the amount of

total use of the automobile for the taxable period, based upon

mileage.   Makspringer v. Commissioner, T.C. Memo. 1994-468; sec.

1.274-5T(b)(6)(i)(B), Temporary Income Tax Regs., 50 Fed. Reg.

46016 (Nov. 6, 1985).

     With respect to Mrs. Bradley's vehicle expenses, the record

shows that she worked for GC in 1992, and there is no evidence

that she was employed anywhere else or otherwise involved in

carrying on another trade or business.    GC's records indicate

that Mrs. Bradley logged and was reimbursed for 661.8 miles of

business travel in 1992.   Nonetheless, Mr. Bradley submitted a

computer-generated spread sheet listing daily business mileage

for Mrs. Bradley totaling 11,652 miles in 1992, which is nearly

11,000 more miles than reported to her employer.    Mrs. Bradley
                               - 9 -

did not appear at trial or testify to explain this discrepancy.

In the absence of any corroborating evidence that Mrs. Bradley

used her personal automobiles for business purposes in excess of

the mileage reimbursed by GC, we do not find credible the claim

that Mrs. Bradley had an additional 10,990 miles of business use

in 1992.5   As a result, petitioners fail to meet the requirement

of the section 274 regulations that a taxpayer substantiate, with

adequate records or sufficiently corroborative evidence, the

amount of business use of a passenger automobile.   Accordingly,

we sustain respondent's determination disallowing all vehicle

expenses claimed by Mrs. Bradley.

     With respect to Mr. Bradley's vehicle expenses, Mr. Bradley

also introduced a similar computer-generated spread sheet

purporting to show his own daily business mileage in 1992.    Mr.

Bradley's daily entries record mileage ranging from 36 to 54

miles, with most entries ranging between 40 and 45 miles for each

day of every week that he received overtime pay (i.e., 42 of his

50 workweeks in 1992).   Mr. Bradley testified that this daily

mileage represented trips between his office at Unisys and

various buildings within the Space Center complex as well as the

offices of other subcontractors servicing the SOP Contract.    Mr.

     5
      The spread sheet introduced by Mr. Bradley at trial lists
mileage of 11,652, which is the business mileage claimed on the
return with respect to one of the two vehicles for which Mrs.
Bradley claimed business use. No evidence was offered with
respect to the 1,058 in business miles claimed with respect to
the other vehicle.
                              - 10 -

Bradley further testified that the trips occurred when the

shuttle and taxi services were not available, i.e., after normal

business hours (or when he anticipated completing his duties

after normal hours) or on weekends.

     We find a number of problems with Mr. Bradley's testimony.

First, although Mr. Bradley created the impression in his direct

testimony that he was required to travel to a number of

subcontractors' offices in addition to the Space Center, on

cross-examination Mr. Bradley conceded that there were only two

subcontractors that he was required to visit in 1992, Loral and

Bendix Corporation, and that Bendix's offices were located across

the street from Mr. Bradley's office.     As to how he incurred

daily mileage generally exceeding 40 miles, Mr. Bradley testified

that multiple trips were required.     Mr. Bradley also testified

that the distance between his office at Unisys and the Loral

location was 5.5 to 6.5 miles.   He did not offer an estimate of

the distance between Unisys and the Space Center.     However,

another Unisys employee called by respondent testified that the

distance between Unisys and Loral was 3 to 3.5 miles, and the

distance between Unisys and the Space Center was 3 miles.     A

scaled map introduced by respondent corroborates these estimates,

and we accordingly find that the distances are as estimated by

respondent's witness.   At these distances, Mr. Bradley would have

had to make approximately five to seven round-trips between

Unisys and Loral and/or the Space Center each day, after normal
                                - 11 -

business hours, to reach the claimed business mileage.      Moreover,

Mr. Bradley claimed a relatively constant level of mileage for

each workday of an overtime week, whether his overtime hours for

the week were modest (e.g., 8 hours) or extensive (e.g., 31

hours).6   Given these circumstances, we do not find Mr. Bradley's

log of business use credible.    We conclude that the claimed

business miles of 9,976 in 1992 are inflated.    Because we find

unreliable the evidence offered by Mr. Bradley of his business

use, petitioners fail to meet the requirement of the section 274

regulations that a taxpayer substantiate, with adequate records

or sufficiently corroborative evidence, the amount of business

use of a passenger automobile.    Accordingly, we sustain

respondent's determination disallowing all vehicle expenses

claimed by Mr. Bradley.

Miscellaneous Employee Business Expenses

     Respondent also disallowed the deduction for miscellaneous

business expenses attributable to Mr. Bradley's employment in the

amount of $189.   Since petitioners offered no evidence with

respect to this amount, we sustain respondent's determination.7


     6
      For the week ended Jan. 17, 1992, Mr. Bradley worked 8.5
hours of overtime and logged between 41-43 miles for each day
January 13th through January 17th. For the week ended Jan. 24,
1992, Mr. Bradley worked 31 hours of overtime and logged between
41-44 miles for each day January 20th through January 24th.
     7
      Respondent conceded the $677 in miscellaneous employee
business expenses claimed with respect to Mrs. Bradley's
employment.
                               - 12 -

Real Estate Losses

     In the notice of deficiency, respondent disallowed all

expenses, totaling $22,104, claimed by petitioners on Schedule E

with respect to four real properties, on the grounds that

petitioners failed to establish that the expenses were "paid or

incurred during the taxable year" or were "ordinary and

necessary".    In addition, respondent disallowed the depreciation

claimed on Schedule E with respect to three of the properties,

totaling $8,203, on the grounds that petitioners failed to

establish their basis in each property or its depreciable

character.    Respondent now concedes that petitioners have

substantiated the expenses and the depreciation claimed with

respect to the three residential properties (Hearthwood, River

Stone, and Windsor), but seeks to challenge the net losses from

these properties on the grounds that petitioners have failed to

substantiate the amount of rental income and have failed to

establish that they were in the business of renting property or

holding property for profit.    With respect to the Mississippi

land, respondent challenges the net loss on the foregoing grounds

as well as on petitioners' failure to substantiate some of the

expenses.

     Petitioners object to respondent's raising their failure to

substantiate rental income on the grounds that it is a new issue.

     In the notice of deficiency, respondent specifically

disallowed the Schedule E expenses and the depreciation for each
                               - 13 -

property.   Neither the expense nor the depreciation figures

reflect rental income received.   There was no mention of Schedule

E rental income or the business or profit-seeking status of

petitioners' real estate activities in respondent's Answer or in

his trial memorandum.   Respondent first formally raised the

substantiation of the rental income at trial.   The challenge to

the business or profit-seeking status of petitioners' activities

was not raised until the posttrial brief.   Because the notice was

quite specific regarding the Schedule E items disallowed, we do

not believe that the issue of the "trade or business" or "for

profit" status of petitioners' real estate activities was fairly

raised in the pleadings prior to trial, or during the trial, and

decline to permit respondent to raise it for the first time in a

posttrial brief.   See Fox Chevrolet, Inc. v. Commissioner, 

, 735 (1981); Estate of Horvath v. Commissioner, 

, 555-556 (1973).    Since respondent has conceded the expenses

and depreciation disallowed in the notice, we allow deductions

for those items.

     Finally, we consider whether petitioners have substantiated

the Schedule E expenses relating to the Mississippi land

disallowed in the notice.8   To substantiate the Schedule E auto

and travel expenses that were disallowed, petitioners offered


     8
      Respondent has conceded that petitioners are allowed a
deduction in the amount of $259 for taxes related to the
Mississippi land.
                              - 14 -

into evidence copies of receipts for food and gasoline totaling

$232.77 and a copy of an airline ticket in the amount of $318.

Mr. Bradley testified that he incurred the food and gasoline

expenses in an attempt to generate interest in the property by

showing it to a friend from Houston and holding a picnic for

local residents.   He testified that the airline ticket was

purchased to meet with a former business partner in Chicago to

discuss developing the land as a low-income housing project.

Since the foregoing expenses are for travel and entertainment

they must, in addition to meeting the requirements of sections

162 or 212, be substantiated in accordance with the requirements

of section 274(d).   Since petitioners have not substantiated the

business purpose of the foregoing expenditures with a written

explanation, see sec. 1.274-5T(c)(2)(ii)(B), Temporary Income Tax

Regs., 50 Fed. Reg. 46018 (Nov. 6, 1985), or corroborated Mr.

Bradley's statements with direct or circumstantial evidence of

the time, place, or business purpose of the expenditures, see

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

46020-46021 (Nov. 6, 1985), we find the receipts and Mr.

Bradley's testimony insufficient for purposes of section 274(d)

substantiation and therefore sustain respondent's determination

disallowing the auto and travel expenses.

     With respect to the disallowance of a $1,500 management fee

claimed on Schedule E for the Mississippi land, petitioners

offered a copy of a check made out to "DECA Corp." as payee in
                                - 15 -

the amount of $1,500 dated August 31, 1992, and endorsed on

behalf of "Utica Deca Corporation."      Mr. Bradley testified that

he paid this amount as a management fee to have the property

monitored to prevent unauthorized woodcutting or hunting.        Under

section 212(2), a deduction is allowable for expenses that are

ordinary and necessary "for the management, conservation, or

maintenance of property held for the production of income."       The

regulations promulgated under section 212 provide that the term

"ordinary and necessary" means that the expenses must be

reasonable in amount and bear a reasonable and proximate relation

to the management, conservation, or maintenance of property held

for such purposes.    Sec. 1.212-1(a)(2), (d), Income Tax Regs.

The term "held for the production of income" includes held for

appreciation in value, whether to maximize gain or to minimize

loss.     See sec. 1.212-1(b), Income Tax Regs.   On this record, we

find the management fees satisfy section 212(2) and decline to

sustain respondent's disallowance of the deduction for them.

Addition to Tax for Failure To File a Timely Return

        Section 6651(a)(1) imposes an addition to tax for failure to

file timely Federal income tax returns unless the taxpayer shows

that such failure was due to reasonable cause and not willful

neglect.     United States v. Boyle, 

, 245 (1985).     To

prove "reasonable cause", a taxpayer must show that he exercised

ordinary business care and prudence and was nevertheless unable

to file the return within the prescribed time.      Crocker v.
                                - 16 -

Commissioner, 

, 913 (1989); sec. 301.6651-1(c)(1),

Proced. & Admin. Regs.   Petitioners' return was due on April 15,

1993, and was not filed until on or about April 26, 1993.

Petitioners argued that they did not believe they owed any tax,

but their mistaken belief is not reasonable cause for failure to

timely file a return.    Linseman v. Commissioner, 

, 523

(1984); Cox v. Commissioner, 

, 1744 (1970).

Therefore, we find petitioners liable for the addition to tax

under section 6651(a)(1).

Penalty for Substantial Understatement of Tax

     Respondent also determined that petitioners are liable for

the accuracy-related penalty for substantial understatement of

tax under section 6662(b)(2).    Since petitioners have not

provided substantial authority for the positions taken on their

return, or made any disclosure within the meaning of section

6662(d)(2)(B)(ii), the penalty is sustained in the event that the

Rule 155 computation indicates that petitioners' understatement

of tax exceeds the greater of $5,000 or 10 percent of the amount

of tax required to be shown on the return.

     To reflect the foregoing and concessions,

                                         Decision will be entered

                                   under Rule 155.