T.C. Summary Opinion 2011-133



                      UNITED STATES TAX COURT



                    JEFFREY GUNN, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15834-09S.              Filed November 28, 2011.



     Jeffrey Gunn, pro se.

     Daniel C. Munce, for respondent.



     DEAN, Special Trial Judge:   This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect when 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 (Code) in effect for the year at
                              - 2 -

issue, and Rule references are to the Tax Court Rules of Practice

and Procedure.

     Respondent determined a deficiency in petitioner’s Federal

income tax of $21,613 for 2004.   Respondent also determined an

addition to tax for failure to file timely under section

6651(a)(1) of $2,271.50 and an accuracy-related penalty under

section 6662(a) of $4,322.60 for 2004.

     The issues for decision1 are whether petitioner:   (1) Had

unreported capital gain income;2 (2) is entitled to itemized

deductions in excess of those respondent allowed; (3) is entitled

to a deduction for a rent or lease expense on Schedule C, Profit

or Loss From Business; (4) is entitled to deductions for supplies

and repairs expenses on Schedule E, Supplemental Income and Loss

(From rental real estate, royalties, partnerships, S

corporations, estates, trusts, REMICs, etc.); (5) is liable for

the addition to tax under section 6651(a)(1) for failure to file

timely; and (6) is liable for the accuracy-related penalty under

section 6662(a).




     1
      Petitioner’s liability for the alternative minimum tax is
computational and should be resolved in accordance with the
decision of the Court.
     2
      Respondent’s pretrial memorandum states that petitioner
failed to report $22,038 in capital gain rather than the $71,711
determined in the notice of deficiency. The Court will treat
this as a concession by respondent of the $49,673 difference.
                               - 3 -

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

The stipulation of facts and the exhibits received in evidence

are incorporated herein by reference.    Petitioner resided in

Pennsylvania when the petition was filed.

                            Background

Capital Gain

     During the taxable year petitioner was employed as a

mortgage application specialist for GMAC Mortgage Corp. (GMAC)

and Doherty Employment Group, Inc., which was doing business as

Superior Mortgage (Doherty Employment).3    Petitioner also sold

and rented refurbished properties.

     Petitioner “had access to distressed properties” as a result

of his employment.   Petitioner’s first acquisition in his pursuit

of property rehabilitation and sales was the Walker Street

property (Walker Street).   Petitioner purchased Walker Street in

2000 for $43,000, financed by a loan from CTX Mortgage.    He

refinanced Walker Street in January 2001 with another loan from

CTX Mortgage of $58,000, of which $45,099.32 was used to pay the

original mortgage and $12,900.68 was received by petitioner as a

cash payment.




     3
      The nature of the relationship between the two entities is
not clear from the record, the former having been described by
the parties as a “PEO” for Superior Mortgage. Doherty Employment
issued petitioner a Form W-2, Wage and Tax Statement, for the
year.
                               - 4 -

     Petitioner sold Walker Street on October 15, 2004, for

$108,000.   After paying closing costs that included taxes,

settlement costs, a “seller credit”, a “payoff of first Mortgage

to Wachovia Bank” of $14,174.16, and a “payoff of second Mortgage

to Bank of America” of $49,329.23, petitioner received at

settlement a cash payment of $37,575.74.   Petitioner presented a

statement from Chase Bank addressed to him at his home address

showing a payment to Chase Bank of $20,000 on December 6, 2004.

Petitioner did not attach to his return a Schedule D, Capital

Gain or Loss, but reported on line 13 of the return a capital

gain of $20,001.

Itemized Deductions

     Petitioner deducted on Schedule A, Itemized Deductions,

unreimbursed employee business expenses of $12,842, of which

$9,377 was for vehicle expenses and $3,465 was for other

expenses, including meals and entertainment.   The parties

stipulated a letter, computer-generated spreadsheets, and copies

of receipts related to the deductions.

     The letter the parties stipulated was sent to the Internal

Revenue Service (IRS) by the chief financial officer of Superior

Mortgage.   According to the letter, the types of expenses

identified on petitioner’s Form 2106, Employee Business Expenses,

were a condition of his employment and “appear reasonable in

amount and type (office supplies and postage)”.   The letter
                               - 5 -

further explains that although petitioner was not reimbursed for

the listed expenses, he was reimbursed $2,100 for business

mileage driven between January and July 2004.

Schedule C Loss

     Petitioner filed a Schedule C for G Family Construction LLC

(G Family), as a home remodeling contractor.    The Schedule C

reported no gross receipts and only one deduction of $14,400 for

the rental or lease of other business property.    Petitioner, on

Schedule E, reported $14,400 as rent received in respect of a

single-family dwelling on Poquessing Avenue and deducted $17,741

in total expenses.   The parties stipulated a document titled

“Residential Lease” naming Joseph Gunn, petitioner’s brother, as

lessor and petitioner as lessee of the Poquessing Avenue property

(Poquessing Avenue).

Schedule E Supplies and Repairs

     Petitioner deducted supplies and repairs expenses for three

properties, Walker Street, Poquessing Avenue, and a property on

South Maple Avenue (South Maple Avenue).   Petitioner provided as

substantiation for the expenses a computer listing for each

category of expense for each property along with copies of

various receipts and invoices, including those issued by his home

remodeling company, G Family, and by his brother, Joseph Gunn.
                                - 6 -

                             Discussion

     Generally, the Commissioner’s determinations in a notice of

deficiency are presumed correct, and the taxpayer has the burden

of proving that those determinations are erroneous.      See Rule

142(a); Welch v. Helvering, 

, 115 (1933).      In some

cases the burden of proof with respect to relevant factual issues

may shift to the Commissioner under section 7491(a).      As

petitioner did not argue or prove that the requirements of

section 7491(a) have been met, the burden of proof does not shift

to respondent.

Capital Gain

     The gain from the sale or other disposition of property is

the excess of the amount realized over the adjusted basis of the

property.   Sec. 1001(a).   Generally, a taxpayer’s basis in

property is the cost of the property.     Sec. 1012.   The amount

realized on the sale or disposition is the amount of money

received plus the fair market value of any property received.

Sec. 1001(b).    Petitioner’s adjusted basis in Walker Street was

$43,000 reduced by the amount of depreciation allowed or

allowable under subtitle A.4   Sec. 1016(a)(2).5   The amount


     4
      Petitioner deducted $992 of depreciation expense on
Schedule E for 2004; respondent calculated depreciation and a
basis reduction of $4,464 during petitioner’s ownership of the
property.
     5
      Although sec. 1016(a) also provides for adjustments to
                                                   (continued...)
                                - 7 -

petitioner realized upon the sale of the property was $108,000,

resulting in a gain of approximately $65,000.

     Petitioner did not attach a Schedule D to his return but did

report on line 13 a capital gain of $20,001.    Petitioner deducted

expenses on Schedule E for Walker Street for repairs of $1,265

for 2004 and alleges but has not shown that funds from the

refinancing of the property were used for “major repairs” to the

property.    As an alternative, petitioner alleges that he is

entitled to exclude the gain from the sale of Walker Street under

section 121, exclusion of gain from sale of a principal

residence.    But petitioner failed to present any evidence of the

factual prerequisites for the exclusion.

    Respondent concedes, without explanation, however, that

petitioner failed to report $22,038 in capital gain rather than

the $71,711 determined in the notice of deficiency.    Because of

respondent’s concession, the Court holds that petitioner must

include in income additional capital gain of $22,038.

Itemized Deductions

     Petitioner deducted as miscellaneous expenses on Schedule A

expenses related to his employment as a mortgage application

specialist for GMAC and Doherty Employment.    Although the parties

stipulated some items petitioner presented as substantiation for


     5
      (...continued)
basis for amounts chargeable to capital account, petitioner
offered no evidence of such expenditures.
                                 - 8 -

his deductions, respondent argues that many of the items are

illegible, that the letter from one employer shows that he was

reimbursed for business mileage expenses, and that he failed to

produce from the other employer any statement of its

reimbursement policy.

     Deductions are strictly a matter of legislative grace, and a

taxpayer bears the burden of proving entitlement to any deduction

claimed.   Rule 142(a); New Colonial Ice Co. v. Helvering, 

(1934); Welch v. Helvering, supra at 115.     Moreover,

taxpayers are required to maintain records that are sufficient to

substantiate their deductions.    Sec. 6001.

     Section 162 generally allows a deduction for ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.    Generally, no deduction is

allowed for personal, living, or family expenses.    See sec. 262.

The taxpayer must show that any claimed business expenses were

incurred primarily for business rather than personal reasons.

See Rule 142(a); Walliser v. Commissioner, 

, 437

(1979).    To show that the expense was not personal, the taxpayer

must show that the expense was incurred primarily to benefit his

business, and there must have been a proximate relationship

between the claimed expense and the business.    See Walliser v.

Commissioner, supra at 437.
                               - 9 -

     An employee’s performance of services is a trade or

business.   Primuth v. Commissioner, 

(1970).   An

expense, however, is not deductible as ordinary and necessary to

the extent that it was subject to reimbursement by the employer.

Podems v. Commissioner, 

, 22-23 (1955); see also Orvis

v. Commissioner, 

, 1408 (9th Cir. 1986), affg. T.C.

Memo. 1984-533.

     Petitioner provided copies of receipts showing the purchase

in 2004 of $210.76 of postage stamps.   Copies of other receipts

or documents were from such places as Gelfand’s, Sears,

Burlington Coat Factory, Staples, Walmart, Value City, and

others.   Many of the receipts were illegible and the others were

not, without further explanation, identifiable as relating to

business expenses.

     The other expenses petitioner deducted related to his

employment were business transportation expenses.   Petitioner’s

only substantiation for his transportation expenses for the year

was a computer printout listing dates, miles driven for business

or for personal purposes,6 and most often a truncated apparent

destination point like Phila-Delco, Montg-Delco, 308 phila-

trenton, or Phila-Bucs.




     6
      The printout lists for every date zero personal miles
driven even though his Form 2106 shows 36,010 total miles driven
and 25,005 business miles driven.
                              - 10 -

     Certain business deductions as provided in section 274 are

subject to strict rules of substantiation that supersede the

doctrine in Cohan v. Commissioner, 

, 543-544 (2d Cir.

1930), that allows the Court to estimate expenses in certain

circumstances.   See sec. 1.274-5T(c)(2), Temporary Income Tax

Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).   Section 274(d)

provides that no deduction shall be allowed with respect to:

(a) Any traveling expense, including meals and lodging away from

home; (b) any item related to an activity of a type considered to

be entertainment, amusement, or recreation; or (c) the use of any

“listed property”, as defined in section 280F(d)(4)(A)(i),

including any passenger automobile, unless the taxpayer

substantiates certain elements.

     For an expense described in one of the above categories, the

taxpayer must substantiate by adequate records or sufficient

evidence to corroborate the taxpayer’s own testimony:   (1) The

amount of the expenditure or use; (2) the time and place of the

expenditure or use; (3) the business purpose of the expenditure

or use; and in the case of entertainment, (4) the business

relationship to the taxpayer of the persons entertained.     See

sec. 274(d).

     To meet the adequate records requirements of section 274, a

taxpayer must maintain some form of records and documentary

evidence that in combination are sufficient to establish each
                                - 11 -

element of an expenditure or use.    See sec. 1.274-5T(c)(2),

Temporary Income Tax 

.       A contemporaneous log is not

required, but corroborative evidence to support a taxpayer’s

reconstruction of the elements of an expenditure or use must have

“a high degree of probative value to elevate such statement” to

the level of credibility of a contemporaneous record.      Sec.

1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016

(Nov. 6, 1985).

     Not only does petitioner’s evidence not meet the required

standard; one of his employers confirmed that petitioner was

reimbursed $2,100 for business mileage driven between January and

July 2004.   Petitioner failed to produce the reimbursement policy

of his other employer and is therefore unable to show that he

incurred ordinary and necessary business transportation expenses

for that employer.     See Podems v. Commissioner, supra at 22-23.

     The Court finds that petitioner had deductible postal

expenses of $210.76.    Except to the extent of petitioner’s postal

expenses, respondent’s determination of petitioner’s itemized

deductions of unreimbursed employee business expenses is

sustained.

Schedule C Loss

     Petitioner filed a Schedule C for “G Family Construction

LLC” as a home remodeling contractor.      Although the business

includes the letters “LLC” in its name, the Court concludes that
                              - 12 -

by reporting his business activities on Schedule C of his Federal

income tax return, petitioner is treating the business as a sole

proprietorship for Federal income tax purposes.   See sec.

301.7701-3(b)(1)(ii), Proced. & Admin. Regs.   The Schedule C

reported no gross receipts and only one deduction of $14,400 for

the expense of the rental or lease of other business property.

Petitioner, on Schedule E, reported $14,400 as rent received in

respect of Poquessing Avenue and deducted $17,741 in total

expenses associated with the property.   The parties stipulated a

document titled “Residential Lease” naming Joseph Gunn,

petitioner’s brother, as lessor and petitioner as lessee of

Poquessing Avenue.

     Petitioner took the position in a letter to the IRS,

stipulated by the parties, that his brother, Joseph Gunn, lived

at Poquessing Avenue rent free and in return performed work there

and elsewhere.   Petitioner, offering no evidence of fair rental

value or the value of his brother’s services, valued both the

rental of the house and the labor of his brother, whose

affiliation with G Family is unexplained, at $14,400.7

     In the alternative petitioner argues that if the Schedule C

rental expense is disallowed, there is nothing to “support” the



     7
      Petitioner’s brother’s name is listed on some unsigned G
Family correspondence as “General Manager” but there is no
indication on the Schedule C that G Family had any employees
during the year at issue.
                                - 13 -

equal amount of rental income reported for the property on

Schedule E; it would be “an investment property” according to

petitioner.

     The Court accepts petitioner’s invitation to treat the

Schedule C loss and the Poquessing Avenue rental income as a

nullity, and respondent’s determination with respect to the

Schedule C loss is sustained.

Schedule E Supplies and Repairs

     Petitioner deducted supplies and repairs expenses for his

three properties, Walker Street, South Maple Avenue, and

Poquessing Avenue, and provided as substantiation a computer

listing for each category of expense for each property, along

with copies of receipts and invoices.    Some of the receipts are

illegible, some receipts while legible do not contain sufficient

information to determine the type of or purpose for the purchase,

and some of the invoices and receipts are from G Family,

petitioner’s proprietorship, or his brother.   Although it is not

apparent from the copies of the invoices and receipts which

expenditure was made for a particular property, the putative

totals can be “tied” to the amounts deducted for each property on

the Schedule E.

     Where a taxpayer has established that he has incurred an

expense, failure to prove the exact amount of the otherwise

deductible item may not be fatal.    Generally, unless precluded by
                              - 14 -

section 274, the Court may estimate the amount of such an expense

and allow the deduction to that extent.   See Finley v.

Commissioner, 

, 133 (10th Cir. 1958), affg. 

(1956); Cohan v. 

.     Any

inexactitude in the estimate by the Court is of the taxpayer’s

own making because of his failure to maintain proper business

records.   See Cohan v. Commissioner, supra at 543-544.

     The Court, having examined the documents petitioner

submitted as evidence of his supplies and repairs expenses for

the three properties on Schedule E, concludes that petitioner is

entitled to deduct:   (1) Walker Street repairs expenses of $693

and supplies expenses of $3,163; (2) South Maple Avenue repairs

expenses of $2,250 and supplies expenses of $245; and (3)

Poquessing Avenue repairs expenses of $682 and supplies expenses

of $140.   The Court has found above that there is no rental

income for Poquessing Avenue for 2004.

Additions to Tax and Penalties

     Section 7491(c) imposes on the Commissioner the burden of

production in any court proceeding with respect to the liability

of any individual for penalties and additions to tax.     Higbee v.

Commissioner, 

, 446 (2001); Trowbridge v.

Commissioner, T.C. Memo. 2003-164, affd. 

(5th Cir.

2004).   In order to meet the burden of production under section

7491(c), the Commissioner need only make a prima facie case that
                                - 15 -

imposition of the penalty or addition to tax is appropriate.

Higbee v. Commissioner, supra at 446.

     Section 6651(a)(1) Addition to Tax

     The parties agree that petitioner filed his 2004 Federal

income tax return on September 25, 2007.   Respondent has met his

burden of production under section 7491(c) with respect to

imposing the addition to tax under section 6651(a)(1).

     It is petitioner’s burden to prove that he had reasonable

cause and lacked willful neglect in not filing the return timely.

See United States v. Boyle, 

, 245 (1985); Higbee v.

Commissioner, supra at 446; sec. 301.6651-1(a)(2), Proced. &

Admin. Regs.   Because petitioner failed to offer any evidence of

reasonable cause and lack of willful neglect for his failure to

file timely, respondent’s determination that petitioner is liable

for the addition to tax under section 6651(a)(1) is sustained.

     Section 6662(a) Accuracy-Related Penalty

     Respondent determined that for 2004 petitioner underpaid a

portion of his income tax because of negligence or disregard of

rules or regulations and that there was a substantial

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

imposes a 20-percent penalty on the portion of an underpayment of

tax attributable to any one of various factors, including

negligence or disregard of rules or regulations and a substantial

understatement of income tax.    “Negligence” includes any failure
                                - 16 -

to make a reasonable attempt to comply with the provisions of the

Code, including any failure to keep adequate books and records or

to substantiate items properly.     See sec. 6662(c); sec.

1.6662-3(b)(1), Income Tax Regs.     A “substantial understatement”

includes an understatement of income tax that exceeds the greater

of 10 percent of the tax required to be shown on the return or

$5,000.    See sec. 6662(d); sec. 1.6662-4(b), Income Tax Regs.

     Section 6664(c)(1) provides that the penalty under section

6662(a) shall not apply to any portion of an underpayment if it

is shown that there was reasonable cause for the taxpayer’s

position and that the taxpayer acted in good faith with respect

to that portion.    The determination of whether a taxpayer acted

with reasonable cause and in good faith is made on a case-by-case

basis, taking into account all the pertinent facts and

circumstances.    Sec. 1.6664-4(b)(1), Income Tax Regs.   The most

important factor is the extent of the taxpayer’s effort to assess

his proper tax liability for the year.

a substantial understatement of income

tax for 2004 that would be determined by the computations of the

parties.     The Court, however, concludes that respondent has

produced sufficient evidence of negligence to show that the

accuracy-related penalty under section 6662 is appropriate for

2004.     Petitioner failed to report capital gain income and failed
                               - 17 -

to keep adequate books and records or to substantiate properly

items that he deducted.

     The accuracy-related penalty will apply unless petitioner

demonstrates that there was reasonable cause for the underpayment

and that he acted in good faith with respect to the underpayment.

See sec. 6664(c).   Section 1.6664-4(b)(1), Income Tax Regs.,

specifically provides:    “Circumstances that may indicate

reasonable cause and good faith include an honest

misunderstanding of fact or law that is reasonable in light of

all the facts and circumstances, including the experience,

knowledge, and education of the taxpayer.”

     Petitioner did not show that there was reasonable cause for,

and that he acted in good faith with respect to, the underpayment

of tax for 2004.

      Respondent’s determination of the accuracy-related penalty

under section 6662(a) for 2004 is sustained.

     To reflect the foregoing,


                                          Decision will be entered

                                     under Rule 155.