T.C. Summary Opinion 2012-96



                          UNITED STATES TAX COURT



                 BRANDON DEAN MORRIS, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 23655-09S.                           Filed September 25, 2012.



      Brandon Dean Morris, pro se.

      Ardney J. Boland, III, for respondent.



                               SUMMARY OPINION


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

74631 of the Internal Revenue Code in effect when the petition was filed. Pursuant


      1
       Unless otherwise indicated, all section references are to the Internal Revenue
Code in effect for the years at issue, and all Rule references are to the Tax Court
                                                                           (continued...)
                                            -2-

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 in petitioner’s Federal income tax of

$30,0642 and $19,466 for 2006 and 2007, respectively. Respondent also

determined a section 6651(a)(1) failure to timely file addition to tax of $1,503 for

2006 as well as section 6662(a) accuracy-related penalties of $6,013 and $3,893 for

2006 and 2007, respectively. After concessions,3 the issues remaining for decision

are:

       (1) whether petitioner is entitled to disputed deductions claimed on Schedule

C, Profit or Loss From Business, for car and truck expenses of $51,320 and $36,194

for 2006 and 2007, respectively. We hold that he is not entitled to the disputed car

and truck expense deductions for 2006 but is entitled to $3,033 of the disputed car

and truck expense deductions for 2007;




       1
       (...continued)
Rules of Practice and Procedure.
       2
           All dollar amounts are rounded to the nearest dollar.
       3
       After trial respondent conceded that petitioner is entitled to additional
deductions above those already allowed, totaling $538 and $15,783 for 2006 and
2007, respectively. These concessions will affect the amounts of the sec.
6651(a)(1) addition to tax and the sec. 6662(a) penalties.
                                         -3-

      (2) whether petitioner is entitled to disputed Schedule C deductions for travel

expenses of $24,000 and $10,062 for 2006 and 2007, respectively. We hold that he

is entitled to $1,950 of the disputed travel expenses for 2006 and $73 of the

disputed travel expenses for 2007;

      (3) whether petitioner is entitled to disputed Schedule C deductions for meal

and entertainment expenses of $9,955 and $1,887 for 2006 and 2007, respectively.

We hold that he is not;

      (4) whether petitioner is entitled to a section 163 mortgage interest deduction

for 2007 in excess of the $874 respondent already allowed. We hold that he is not;

      (5) whether petitioner is liable for the section 6651(a)(1) failure to timely file

addition to tax for 2006. We hold that he is; and

      (6) whether petitioner is liable for section 6662(a) accuracy-related penalties

for 2006 and 2007. We hold that he is.

                                     Background

      At the time the petition was filed, petitioner resided in Oklahoma.

1. Section 162 Business Expense Deductions

      During the years at issue petitioner worked as an independent contractor for

Total Impact Services, Inc. (Total Impact). Petitioner’s job involved traveling to
                                         -4-

various locations throughout the United States to “re-merchandise” goods in venues

such as Lowe’s or Home Depot. This work entailed adding new products, putting

up new displays, and rearranging current merchandise to catch the eye of customers.

During the years at issue petitioner’s significant other (now his wife), Brandi

Tarwater, was also employed by Total Impact and frequently traveled with

petitioner across the country.

      Total Impact did not pay or reimburse petitioner for automobile, meal and

entertainment, or travel expenses he incurred because of his work. Facts regarding

the various expenses are discussed infra.

      A. Car and Truck Expenses

      On his 2006 and 2007 tax returns petitioner claimed that he and Ms.

Tarwater4 drove 152,250 miles in 2006 and approximately 92,100 miles in 2007

because of their jobs with Total Impact. Petitioner claimed corresponding

deductions of $67,751 and $44,664 for 2006 and 2007, respectively. In the notice

of deficiency respondent allowed $16,431 of petitioner’s reported 2006 car and

truck expenses but allowed none of the reported 2007 car and truck expenses. After




      4
       When petitioner and Ms. Tarwater traveled together, they used only one
vehicle.
                                        -5-

reviewing evidence produced before and during the trial, respondent conceded

$8,470 of the reported 2007 expenses, but no additional expenses for 2006.

      B. Travel Expenses

      Because of his work travel, petitioner often spent nights in hotels. Petitioner

claimed $27,929 and $14,185 in travel expense deductions on his 2006 and 2007

Schedules C, respectively. In the notice of deficiency respondent allowed $3,391 of

petitioner’s reported 2006 travel expenses but allowed none of the reported 2007

travel expenses. After reviewing evidence produced both before and during trial,

respondent conceded an additional $538 and $4,123 of the reported 2006 and 2007

expenses, respectively.

      C. Meal and Entertainment Expenses

      Petitioner often ate meals at restaurants while traveling for work. Petitioner

and Ms. Tarwater also engaged in various recreational activities while traveling,

such as going to the movies or visiting parks which charged an admittance fee.

      Petitioner claimed $13,331 and $5,077 in meal and entertainment expense

deductions on his 2006 and 2007 Schedules C, respectively. In the notice of

deficiency respondent allowed $3,376 of petitioner’s reported 2006 meal and

entertainment expenses but allowed none of the reported 2007 meal and

entertainment expenses. After reviewing evidence produced before and during trial,
                                         -6-

respondent conceded $3,190 of the reported 2007 expenses, but no additional

expenses for 2006.

2. Section 163 Mortgage Interest Deduction

      On his 2007 Schedule A, Itemized Deductions, petitioner claimed a mortgage

interest deduction of $4,129. In the notice of deficiency respondent allowed a

mortgage interest deduction of only $874. In support of the claimed deduction

petitioner introduced a Form 1098, Mortgage Interest Statement, and a timeshare

agreement. The Form 1098 listed petitioner, John D. Morris, and Denise R. Morris

as the borrowers5 and reflected $4,390 in total interest, points, and mortgage

insurance premiums paid. The timeshare agreement was unsigned but listed

petitioner and Ms. Tarwater as owners. Ms. Tarwater’s credit card information was

listed on the timeshare agreement page entitled “Authorization for Auto Pay”.

3. Additional Information

      Petitioner received an extension to October 15, 2007, to file his 2006 Federal

tax return. However, petitioner did not sign or mail his self-prepared return until

October 16, 2007. Petitioner timely filed his 2007 return, which was prepared by a




      5
      The relationship between petitioner, John D. Morris, and Denise R. Morris
was not established.
                                          -7-

certified public accountant. On June 30, 2009, respondent issued a notice of

deficiency to petitioner for 2006 and 2007. Petitioner timely filed a petition

contesting the deficiencies, addition to tax, and penalties.

                                      Discussion

I. Burden of Proof

      The Commissioner’s determinations in a notice of deficiency are presumed

correct, and taxpayers bear the burden of proving that the Commissioner’s

determinations are incorrect. Rule 142(a)(1); Welch v. Helvering, 

,

115 (1933). Deductions are a matter of legislative grace, and taxpayers bear the

burden of proving that they have met all requirements necessary to be entitled to the

claimed deductions. Rule 142(a); INDOPCO, Inc. v. Commissioner, 

,

84 (1992). Petitioner has not argued that section 7491(a) applies in this case, and

the record does not support a conclusion that the requirements of section 7491(a)

have been met. Petitioner therefore bears the burden of proof.

II. Section 162 Business Expense Deductions

      Section 162 allows a deduction for all ordinary and necessary business

expenses paid or incurred during the taxable year in carrying on any trade or

business. The determination of whether an expenditure satisfies the requirements of
                                         -8-

section 162 is a question of fact. Commissioner v. Heininger, 

, 475

(1943).

      Taxpayers are required to maintain records sufficient to establish the amounts

of allowable deductions and to enable the Commissioner to determine the correct

tax liability. Sec. 6001; Shea v. Commissioner, 

, 186 (1999). No

deduction is allowed for personal, living, and family expenses. Sec. 262(a). Certain

expenses described in section 274 are subject to strict substantiation rules. No

deduction under section 162 shall be allowed for, among other things, travel

expenses, entertainment, gifts, and expenses with respect to “listed property”

defined in section 280F(d)(4) “unless the taxpayer substantiates by adequate records

or by sufficient evidence corroborating the taxpayer’s own statement”: (1) the

amount of the expense or other item; (2) the time and place of the travel,

entertainment, or use, or date and description of the gift; (3) the business purpose of

the expense or other item; and (4) in the case of entertainment or gifts, the business

relationship to the taxpayer of the recipients or persons entertained.6 Sec. 274(d).




      6
       “We may not use the Cohan doctrine * * * to estimate expenses covered by
section 274(d).” Hough v. Commissioner, T.C. Memo. 2006-58, slip op. at 4.
                                         -9-

       Passenger automobiles and any other property used as a means of

transportation are generally “listed property” as defined by section 280F(d)(4).

Secs. 274(d)(4), 280F(d)(4)(A)(i) and (ii). Accordingly, with certain exceptions

(none of which petitioner has shown he meets), taxpayer’s claiming deductions for

car and truck expenses must satisfy the strict substantiation requirements of section

274.

       Section 1.274-5A(c)(5), Income Tax Regs., exempts taxpayers from the strict

substantiation requirements when there is a loss of records beyond their control.

Although petitioner testified that some of his records were destroyed as a result of

water damage to a storage unit, he offered no other evidence (such as photographs,

insurance claims, or corroborating testimony) that such records were indeed

destroyed. We thus find that section 1.274-5A(c)(5), Income Tax Regs., does not

apply in this case. We proceed to determine whether the records petitioner

produced are sufficient for us to sustain certain deductions greater than those

respondent allowed in the notice of deficiency or conceded after trial.

       A. Car and Truck Expenses

       In support of the claimed miles driven for 2006 petitioner introduced oil

change receipts which showed mileage on his various vehicles, emails from Total

Impact listing the dates and locations of the stores he was scheduled to
                                         - 10 -

remerchandise, and a daily planner which listed many of the cities he traveled to as

well as certain odometer readings from his vehicles. Petitioner introduced fewer

supporting documents regarding his 2007 mileage, although he did introduce emails

from Total Impact listing the dates and locations of the stores he was scheduled to

remerchandise during that year.

      On his 2006 Schedule C petitioner claimed a $67,751 deduction for car and

truck expenses corresponding to the 152,250 miles he claimed to have driven during

that year. Respondent allowed a deduction for $16,431 of these expenses in the

notice of deficiency and conceded no additional amounts after trial. After reviewing

the records petitioner provided for 2006, we find that petitioner failed to prove that

he drove sufficient miles to entitle him to a car and truck expense deduction greater

than that respondent already allowed in the notice of deficiency. Because the

odometer readings on certain oil change receipts seemed incredible (and in any case

did not take into account any personal miles petitioner drove), we chose to rely

primarily on the schedules of cities kept by petitioner and sent to him by Total

Impact. Using the schedules of cities to calculate the business miles petitioner

drove yields a number of miles slightly below the number of miles respondent

allowed. As a result we find that petitioner has failed to prove entitlement to any
                                         - 11 -

additional deduction for 2006 car and truck expenses above that respondent already

allowed in the notice of deficiency.

      On his 2007 Schedule C petitioner claimed a $44,664 deduction for car and

truck expenses corresponding to the 92,100 miles he claimed to have driven during

that year. Respondent allowed none of this deduction in the notice of deficiency but

conceded $8,470 in car and truck expenses after the trial. After reviewing the

records petitioner supplied, we find that petitioner has proven he traveled 23,716

miles on business during 2007. Using the standard mileage rate in effect for 2007 of

$0.485, we find that petitioner is entitled to a total deduction of $11,503 for car and

truck expenses in 2007, or $3,033 above the amount respondent conceded.

      B. Travel Expenses

      Petitioner claimed $27,929 and $14,185 in travel expense deductions on his

2006 and 2007 Schedules C, respectively. In the notice of deficiency respondent

allowed $3,391 of petitioner’s claimed 2006 travel expense deduction but none of

the claimed 2007 travel expense deduction. After trial respondent conceded an

additional $538 of the reported 2006 expenses and $4,123 of the reported 2007

expenses.
                                         - 12 -

      In support of his claimed travel expense deductions petitioner introduced a

number of hotel reservations and receipts. After reviewing the records petitioner

supplied, we find that he has proven entitlement to deduct an additional $1,950 of

travel expenses for 2006 and an additional $73 of travel expenses for 2007. These

amounts are in excess of the amounts respondent already allowed or conceded.

      C. Meal and Entertainment Expenses

      Petitioner claimed deductions of $13,331 and $5,077 in meal and

entertainment expenses on his 2006 and 2007 Schedules C, respectively. In the

notice of deficiency respondent allowed $3,376 of petitioner’s claimed 2006 meal

and entertainment expense deductions but allowed none of the claimed 2007

deduction. After trial respondent conceded $3,190 of the reported 2007 expenses

but no additional 2006 expenses. Respondent allowed both the 2006 and 2007

expenses on a per diem basis.

      In support of his claimed meal and entertainment expense deductions,

petitioner introduced numerous receipts from restaurants around the country. In

addition to the meal receipts, petitioner also introduced a multitude of other receipts

from movie theaters, parks, and stores, as well as other evidence of expenditures,

such as copies of checks/money orders.
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      A large number of petitioner’s records are insufficient in various ways: (1)

many of the meals were paid for with Ms. Tarwater’s credit card;7 (2) many of the

receipts do not clearly reflect the business purpose of the expenditure;8 and (3)

many receipts are illegible or else the item purchased is unclear. After reviewing the

records petitioner supplied, we find that he has failed to prove entitlement to any

additional deductions for meal and entertainment expenses above those already

allowed by respondent in the notice of deficiency or conceded after trial.

III. Section 163 Mortgage Interest Deduction

      Section 163(a) allows a deduction for all interest paid or accrued within the

taxable year on indebtedness. As an exception, section 163(h) generally disallows a

deduction for personal interest. Personal interest, however, does not include

qualified residence interest. Sec. 163(h)(2)(D). In general a qualified residence is

defined as a taxpayer’s principal residence and one other home that is used as a

residence by the taxpayer. Sec. 163(h)(4)(A)(i). Qualified residence interest means

any interest paid or accrued during a tax year on acquisition indebtedness or home

      7
        As Ms. Tarwater and petitioner were not married in 2006 or 2007
(petitioner’s filing status was “single” during those years), petitioner is not entitled
to deduct expenses paid by Ms. Tarwater.
      8
       For example a Best Buy receipt for $1,798 was included in petitioner’s
records. The receipt appears to be for a camera and a warranty. No business
purpose for this expense was provided.
                                         - 14 -

equity indebtedness with respect to the taxpayer’s qualified residence. Sec.

163(h)(3)(A).

      Although petitioner introduced a Form 1098 reflecting $4,390 in total interest,

points, and mortgage insurance premiums paid, as well as a timeshare agreement,

those items are not sufficient in this case to prove petitioner paid the interest he

claims to have paid. The Form 1098 listed three people as the borrowers:

petitioner, John D. Morris, and Denise R. Morris. The amount paid by each was not

specified. In addition, the timeshare agreement was unsigned and, in any case,

listed Ms. Tarwater’s credit card information on the page entitled “Authorization for

Auto Pay”. After reviewing the relevant evidence, we find that petitioner has failed

to prove that he paid qualified resident interest above the $874 respondent already

allowed in the notice of deficiency.

IV. Section 6651(a)(1) Failure To File Addition to Tax for 2006

      Section 6651(a)(1) provides for an addition to tax for failure to timely file

Federal income tax returns (determined with regard to any extension of time for

filing) unless the taxpayer shows that such failure was due to reasonable cause, and

not willful neglect. Mendes v. Commissioner, 

, 320 (2003).

Regarding the amount of the addition to tax, section 6651(a)(1) provides that “there

shall be added to the amount required to be shown as tax on such return 5 percent of
                                        - 15 -

the amount of such tax if the failure is for not more than 1 month, with an additional

5 percent for each additional month or fraction thereof during which such failure

continues, not exceeding 25 percent in the aggregate”.

      Petitioner filed his 2006 return on October 16, 2007, one day after the return

was due. Petitioner testified that he “planned on filing the weekend before the

deadline, but * * * was delayed in Southern Oklahoma due to work.” However,

petitioner did not present any additional facts to support whether the delay was due

to reasonable cause. Similarly, petitioner did not introduce any facts or argument

regarding why he would not have been able to file before leaving for southern

Oklahoma. Considering the facts we find petitioner has not established that the

delay in filing was due to reasonable cause. Accordingly, we find that petitioner is

liable for a 5% section 6651(a)(1) addition to tax.

V. Section 6662(a) Accuracy-Related Penalties

      Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-related penalty if

any part of an underpayment of tax required to be shown on a return is due to,

among other things, negligence or disregard of rules or regulations or a substantial

understatement of income tax. The penalty is 20% of the portion of the

underpayment of tax to which the section applies. Sec. 6662(a).
                                         - 16 -

      The Commissioner bears the burden of production on the applicability of an

accuracy-related penalty in that he must come forward with sufficient evidence

indicating that it is proper to impose the penalty. See sec. 7491(c); see also Higbee

v. Commissioner, 

, 446 (2001). Once the Commissioner meets this

burden, the burden of proof remains with the taxpayer, including the burden of

proving that the penalty is inappropriate because of reasonable cause and good faith.

See Higbee v. Commissioner, 

.

      The Commissioner satisfies his burden of production by showing that the

understatement meets the definition of “substantial”. See Janis v. Commissioner,

T.C. Memo. 2004-117, aff’d, 

(9th Cir. 2006), and aff’d, 

(2d Cir. 2006). An understatement of income tax is “substantial” if it exceeds

the greater of 10% of the tax required to be shown on the return or $5,000. Sec.

6662(d)(1)(A). An “understatement” is defined as the excess of the tax required to

be shown on the return over the tax actually shown on the return, less any rebate.

Sec. 6662(d)(2)(A). Even considering the additional deductions we have found

petitioner to be entitled to, the understatement of income tax still exceeds the greater

of 10% of the tax required to be shown on the return or $5,000 and is thus

“substantial”. Respondent has therefore met his burden of production.
                                         - 17 -

      The amount of an understatement shall be reduced by that portion of the

understatement which is attributable to: (1) the tax treatment of any item by the

taxpayer if there is or was substantial authority for such treatment; or (2) any item if

the taxpayer adequately disclosed relevant facts affecting the item’s tax treatment in

the return or in a statement attached to the return and there is a reasonable basis for

the tax treatment of the item by the taxpayer. Sec. 6662(d)(2)(B). Considering the

facts and law, we find that neither of these reductions applies in this case.9

      Pursuant to section 6664(c)(1), the accuracy-related penalty under section

6662 does not apply to any portion of an underpayment for which a taxpayer

establishes that he or she: (1) had reasonable cause; and (2) acted in good faith.

Dunlap v. Commissioner, T.C. Memo. 2012-126, slip op. at 69. Whether a

taxpayer has acted with reasonable cause and in good faith depends on the pertinent

facts and circumstances, including efforts to assess the proper tax liability, the

taxpayer’s knowledge and experience, and the extent to which the taxpayer relied

on the advice of a tax professional. Sec. 1.6664-4(b)(1), Income Tax Regs.




      9
        Petitioner made no argument at trial on this point and did not submit a pre- or
post-trial brief.
                                            - 18 -

“Generally, the most important factor is the extent of the taxpayer’s effort to assess

the taxpayer’s proper tax liability.” 

his own tax return for 2006 using various receipts and

logs, most of which were introduced into evidence. As previously discussed, such

evidence was insufficient for us to sustain most deductions petitioner claimed for

2006. Petitioner introduced no other relevant evidence which could establish

reasonable cause and good faith in the preparation of his 2006 tax return. Although

petitioner testified that many of his records were destroyed, he introduced no

corroborating evidence.

      Unlike the 2006 return, petitioner’s 2007 return was prepared by an

unidentified certified public accountant. Petitioner testified that he gave the

accountant all relevant information, including a “box of receipts”. Although

petitioner claims to have followed the advice given to him by his accountant, he has

made an insufficient attempt to establish that the reliance was reasonable. See

Freytag v. Commissioner, 

, 888 (1987), aff’d on another issue, 

(5th Cir. 1990), aff’d, 

(1991); sec. 1.6664-4(b)(1), Income Tax

Regs. We have previously held that--

      for a taxpayer to rely reasonably upon advice so as possibly to negate a
      section 6662(a) accuracy-related penalty determined by the
      Commissioner, the taxpayer must prove * * * that the taxpayer meets
                                         - 19 -

      each requirement of the following three-prong test: (1) The adviser
      was a competent professional who had sufficient expertise to justify
      reliance, (2) the taxpayer provided necessary and accurate information
      to the adviser, and (3) the taxpayer actually relied in good faith on the
      adviser’s judgment. * * *

Neonatology Assocs., P.A. v. Commissioner, 

, 99 (2000), aff’d, 

(3d Cir. 2002). Considering the records petitioner produced at trial, and

the lack of information supplied regarding the accountant and the records petitioner

supplied to the accountant, we find that petitioner did not satisfy these three

requirements.

      Considering the facts and law, we find that petitioner has also failed to prove

he meets the reasonable cause defense of section 6664(c)(1). As previously

discussed, petitioner has also failed to show substantial authority or a reasonable

basis for the positions he took on his 2006 and 2007 tax returns. As a result, we

hold petitioner is liable for the 20% accuracy-related penalty with respect to those

deficiencies for which we have found him liable.

VI. Conclusion

      We find petitioner is entitled to deduct $1,950 and $3,106 of the disputed

2006 and 2007 Schedule C expenses, respectively. We also find that petitioner is

not entitled to deduct mortgage interest for 2007 in excess of the $874 respondent

already allowed. Further, we find petitioner liable for the 5% addition to tax under
                                       - 20 -

section 6651(a)(1) for 2006, as well as the 20% section 6662(a) accuracy-related

penalty for both 2006 and 2007.

      To reflect the foregoing and concessions by the parties,


                                                      Decision will be entered

                                                under Rule 155.