T.C. Summary Opinion 2009-59



                      UNITED STATES TAX COURT



      PRESTON REECE AND CAROLYN YOUNG-REECE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8416-07S.              Filed April 30, 2009.



     Preston Reece and Carolyn Young-Reece, pro sese.

     Ashley Vaughan, for respondent.



     GOLDBERG, 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 Revenue Code in effect for
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the year in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

     Some of the issues have been settled.   The remaining issues

for decision are:   Whether petitioners are entitled to itemized

and business expense deductions that remain in dispute and

whether petitioners are liable for the accuracy-related penalty.

     This case centers on deductions for the 2005 tax year

claimed on Schedule A, Itemized Deductions, and Schedule C,

Profit or Loss From Business, that respondent disallowed.    We

provide an initial factual introduction to summarize the events

leading up to the commencement of this case.

                             Introduction

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

The stipulation of facts, the attached exhibits, and the

stipulation of settled issues are incorporated herein by this

reference.   Petitioners resided in Texas when they filed their

petition.

     During 2005 petitioner Preston Reece (Mr. Reece) worked for

Anheuser-Busch brewery as a machinist, and petitioner Carolyn

Young-Reece (Ms. Reece) operated an unincorporated real estate

sales business from her home.    Ms. Reece reported the income and

expenses for her real estate business on a Schedule C, using the

cash method of accounting.    Ms. Reece had a real estate broker’s

license for over 20 years preceding the date of trial; however,
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she was not very active in the real estate business for the 5

years preceding the date of trial.     In 2005 Ms. Reece spent

approximately two-thirds of her time as a self-employed real

estate broker selling three properties, which generated income

from sales commissions of $8,802.    Ms. Reece spent one-third of

her time as an employee of Norwood Management, Inc., where she

sold homes.

     Petitioners were members of Jasper Missionary Baptist Church

in New Waverly, Texas, during 2005.     This is the church that Mr.

Reece has attended since he was a boy.     Petitioners attended

services every other week and typically made contributions by

placing an envelope containing cash in the offering plate when it

was passed around.   Petitioners deducted $4,300 for cash

contributions given to their church.

     Christopher Young is Ms. Reece’s son.     Petitioners paid for

Christopher Young’s tuition at Houston Baptist University by

check in 2005.   The check was in the amount of $2,352.39.

Petitioners also claimed charitable contributions deductions for

clothes, books, furniture, kitchen appliances, and various other

items donated to Purple Heart and to Sand Dollar in the amounts

of $2,500, and $2,800, respectively, during 2005.

     The Internal Revenue Service (IRS) audited petitioners’ 2005

income tax return.   Petitioners failed to appear for the audit,

whereupon the IRS disallowed all of petitioners’ Schedule C
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business expense deductions and Schedule A itemized deductions,

made adjustments relating to the self-employment tax, and

determined an accuracy-related penalty.   Respondent issued to

petitioners a notice of deficiency reflecting an increase in

Federal income tax of $15,991, and an accuracy-related penalty of

$3,198 under section 6662(a).   After the petition was filed an

Appeals conference was scheduled, but petitioners failed to

appear.

                             Discussion

     Deductions are a matter of legislative grace, and the

taxpayer bears the burden of proving his entitlement to a

deduction.    Rule 142(a)(1); INDOPCO, Inc. v. Commissioner, 

, 84 (1992); New Colonial Ice Co. v. Helvering, 

, 440 (1934).   A taxpayer is required to maintain records

sufficient to establish the amount of his or her income and

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

Taxpayers may deduct only the business expenses that they can

substantiate.    Ronnen v. Commissioner, 

, 102 (1988).

     Under section 7491(a), the burden may shift to the

Commissioner regarding factual matters if the taxpayer produces

credible evidence and meets the other requirements of the

section.   Petitioners did not argue for a burden shift and thus

did not fulfill the requirements of section 7491(a); therefore,

the burden remains with them.
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     A taxpayer may deduct ordinary and necessary expenses that

he pays in connection with the operation of a trade or business.

Sec. 162(a); Boyd v. Commissioner, 

, 313 (2004).       To

be “ordinary” the expense must be of a common or frequent

occurrence in the type of business involved.     Deputy v. du Pont,

, 495 (1940).   To be “necessary” an expense must be

“appropriate and helpful” to the taxpayer’s business.        Welch v.

Helvering, 

, 113 (1933).     Additionally, the

expenditure must be “directly connected with or pertaining to the

taxpayer’s trade or business”.    Sec. 1.162-1(a), Income Tax Regs.

Section 262(a) disallows deductions for personal, living, or

family expenses.

     If a taxpayer establishes that an expense is deductible but

is unable to substantiate the precise amount, we may estimate the

amount, bearing heavily against the taxpayer whose inexactitude

is of his own making.   Cohan v. Commissioner, 

, 543-

544 (2d Cir. 1930).   However, the taxpayer must present

sufficient evidence for the Court to make an estimate because

without such a basis, any allowance would amount to unguided

largesse.   Williams v. United States, 

, 560-561 (5th

Cir. 1957); Vanicek v. Commissioner, 

, 742-743 (1985).
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I.   Itemized and Business Expense Deductions

      A.     Itemized Deductions at Issue--$15,192

      The table below shows the three itemized deductions that

remain in dispute.

             Itemized             Amount Per    Amount Per   Amount in
             Deduction            Tax Return   Examination    Dispute
        Real property taxes         $2,892         -0-        $2,892
        Charitable
           contributions:
               Cash                  7,000         -0-           7,000
                   Noncash           5,300         -0-           5,300

              1.    Real Property Taxes--$2,892

      Petitioners testified that they have owned their home for

approximately 10 years, and they had their property tax statement

at the time they prepared their return.        Petitioners failed to

provide the IRS with any documentation that would substantiate

this deduction; however, at trial petitioners provided a 2007

property tax bill for an amount similar to the amount claimed for

2005.      Although petitioners did not have a 2005 property tax

bill, we believe they owned the property and paid real estate

taxes in 2005.        Therefore, petitioners are entitled to a

deduction for real property taxes of $2,892.

              2.    Charitable Contributions–-$12,300

                     a.   Cash–-$7,000

      Petitioners testified that they have been parishioners at

Jasper Missionary Baptist Church for a long time and that they
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attend services approximately every other week, contributing

approximately $300 in cash per visit.    The letter from Jasper

Missionary Baptist Church states that petitioners contributed

$4,300 to the church during the 2005 tax year.    The letter is

contemporaneous with the donation and was signed by the clerk of

the church.   See sec. 170(f)(8).   We find that the letter is

credible evidence.   Petitioners testified that the other $2,700

consists of a $2,352.39 payment for college tuition at Houston

Baptist University for their son, miscellaneous gifts, and

donations of $347.61.

     Assuming that Houston Baptist University was a qualified

organization as defined by section 170(c), in order for

petitioners to be entitled to a charitable contribution deduction

under section 170 for the payment made to the university, they

must show the extent to which the tuition payment exceeds the

market value of their son’s education and that the excess payment

was made with the intention of making a gift.    See United States

v. American Bar Endowment, 

 (1986).

     Petitioners have failed to establish that the amount paid to

Houston Baptist University exceeded the market value of the

education received by their son so as to take on the dual

character of both a tuition payment and a charitable

contribution.   Additionally, even if we assume that the $2,352.39

was a qualified tuition expense, it is not deductible by
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petitioners because petitioners did not claim a dependency

exemption for their son on their return for the 2005 tax year.

See secs. 222(d)(1), 25A(f).      Therefore, petitioners are not

entitled to a charitable contribution deduction for their son’s

tuition.

     Petitioners have failed to substantiate the remaining

$347.61; however, they have adequately substantiated charitable

contributions to Jasper Missionary Baptist Church in the amount

of $4,300.    Accordingly, petitioners are entitled to a deduction

of $4,300 for cash charitable contributions.

                 b.    Noncash--$5,300

     At trial, petitioners offered a handwritten list of numerous

items donated to charitable organizations, such as Purple Heart

and Sand Dollar.      This list fails to provide the dollar amount

assigned to the various donated items.      Ms. Reece testified that

the amount deducted on their income tax return was a mere

estimate.    Further, petitioners did not provide any type of

receipt given to them by the charitable organizations to evidence

their contributions.      Accordingly, because petitioners have

failed to adequately substantiate their contributions,

respondent’s determination is sustained and no deduction shall be

allowed.
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     B.    Business Expense Deductions at Issue--$9,974.95

     The table below shows the 10 business expense deductions on

Schedule C that remain in dispute.

    Business Expense         Amount Per      Amount Per   Amount in
        Deduction            Tax Return     Stipulation    Dispute
Advertising                    $2,732          $950.00    $1,782.00
Legal & professional            1,488         1,243.05       244.95
Office expense                  2,656           -0-        2,656.00
Repairs & maintenance             811           -0-          811.00
Supplies                        1,617           -0-        1,617.00
Taxes and licenses                625           511.00       114.00
Travel                            408           -0-          408.00
Meals and entertainment           259           -0-          259.00
Other expenses-                 1,083           -0-        1,083.00
   promotion
Other expenses-MLS              1,000           -0-        1,000.00

            1. Advertising, Legal and Professional, and Taxes and
               Licenses--$2,140.95

     The parties stipulated that petitioners substantiated

advertising, legal and professional, and tax and license expenses

of $950, $1,243.05, and $511, respectively.     Petitioners failed

to provide any documentation that would substantiate any amount

in excess of the amounts stipulated.      On the basis of the record,

the Court is unable to make a reasoned estimate.      Accordingly,

petitioners are not entitled to deductions in excess of the

amounts stipulated.
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           2.   Travel--$408

      Ms. Reece produced documentation at trial showing that she

traveled from Houston to Oakland on August 4, 2005, and from

Oakland back to Houston on August 7, 2005, at a total cost of

$377.30.   She further testified that she traveled to San

Francisco, to meet with a client, at the client’s request, about

selling a property located in Houston, and that she met with the

client every day for approximately 5 or 6 hours.     Ms. Reece was

engaged by the customer to list the property for sale, but never

did sell it.    During her weekend trip to San Francisco, Ms. Reece

stayed with her niece.   We find it implausible that Ms. Reece

spent such a prolonged period of time discussing the sale of a

single piece of property and believe that the trip was made

primarily for personal reasons.     See sec. 1.162-2, Income Tax

Regs.   Therefore, respondent’s determination is sustained.

           3.   Office Expense, Repairs and Maintenance, Supplies,
                Meals and Entertainment, Other Expenses-Promotion,
                and Other Expenses-MLS–-$7,426

      Petitioners have failed to provide any documentation that

would substantiate these expenses or enable the Court to make a

reasoned estimate.   Accordingly, respondent’s determination is

sustained as to these expense deductions.

II.   Accuracy-Related Penalty

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

portion of an underpayment of tax attributable to negligence,
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disregard of rules or regulations, or a substantial

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

Negligence is a failure to make a reasonable attempt to comply

with the provisions of the Code.    The taxpayer is required to

prove he acted with due care.    Sec. 6662(c); Collins v.

Commissioner, 

, 1386 (9th Cir. 1988), affg. Dister

v. Commissioner, T.C. Memo. 1987-217; sec. 1.6662-3(b)(1), Income

Tax Regs.

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

failure to make a reasonable attempt to comply with the Code.

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, 

, 12 (1989), affd. 

, 353 (9th Cir. 1991); Neely

v. Commissioner, 

, 947 (1985).    The term “disregard”

includes any careless, reckless, or intentional disregard.      Sec.

6662(c).    Failure to keep adequate records may be evidence not

only of negligence, but also of intentional disregard of

regulations.    See sec. 1.6662-3(b)(1) and (2), Income Tax Regs.;

see also Benson v. Commissioner, T.C. Memo. 2007-113.

     Negligence penalties do not apply where the taxpayer shows

that he had reasonable cause and acted in good faith.    Sec.

6664(c)(1).    The determination depends on the facts and

circumstances of each case and includes the knowledge and
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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.   Most important in this determination is the extent of

the taxpayer’s effort to determine the proper tax liability.       Id.

     Respondent has the burden of production under section

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

section 6662.    To satisfy that burden, respondent must produce

sufficient evidence showing that it is appropriate to impose the

penalty.    Higbee v. Commissioner, 

, 446 (2001).

Respondent has met his burden of production by establishing that

petitioners maintained their books and records in a negligent

manner.    Petitioners have failed to demonstrate reasonable cause

for inadequate recordkeeping and their inability to substantiate

a good number of their deductions.      Petitioners claim that they

were unable to obtain many of their tax records because of

shortness of time and because of Mr. Reece’s May 2006 hip

surgery.    However, we note that on November 20, 2007, petitioners

were served with a notice setting the case for trial at the

Houston trial session beginning April 14, 2008.     We believe that

petitioners had ample time to obtain such records.     These reasons

are not sufficient to establish reasonable cause for inadequate
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recordkeeping.   We sustain respondent on the accuracy-related

penalty.   To reflect our disposition of the issues,


                                         Decision will be entered

                                    under Rule 155.