T.C. Summary Opinion 2015-68



                        UNITED STATES TAX COURT



     RICHARD A. BORING AND MARGARET A. BORING, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 13828-14S.                        Filed November 24, 2015.



      Richard A. Boring and Margaret A. Boring, pro sese.

      Christopher J. Richmond, for respondent.



                             SUMMARY OPINION


   WHERRY, 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 of 1986 as amended and in effect for the year at issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
                                         -2-

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 mailed a statutory notice of deficiency to petitioners on March

11, 2014, which determined an income tax deficiency for petitioners’ 2010 tax

year of $20,279. Respondent also determined an accuracy-related penalty under

section 6662(a) for 2010 of $4,055. Petitioners filed a timely Tax Court petition

in response on June 13, 2014.2 Petitioners’ case was tried in June 2015 in Los

Angeles, California.

      After a concession by petitioners3 and ignoring purely computational

matters, the issues for consideration are: (1) whether petitioners are entitled to

deduct various expenses reported on Schedule C, Profit or Loss From Business,

for 2010; (2) whether alternatively petitioners may deduct any of the claimed

Schedule C expenses on Schedule A, Itemized Deductions, in excess of the

amount respondent allowed; (3) whether petitioners are liable for an accuracy-

related penalty for 2010; and (4) whether the Court should impose a section 6673



      2
      The petition was sent to the Clerk of the Tax Court via the U.S. mail, in an
envelope postmarked June 9, 2014, and was therefore deemed timely. See sec.
7502(a).
      3
       Petitioners have conceded that they received $48 of taxable interest income
in 2010 which they neglected to report or pay Federal income tax on.
                                        -3-

penalty as respondent requested in his motion to impose sanctions, filed July 20,

2015, for “maintaining this case primarily to delay collection of their proper

income tax” utilizing arguments for which “their position is groundless.”

                                    Background

      Petitioners are no strangers to this Court. This case constitutes, at the

minimum, their 14th case, involving at least one of petitioners, spanning almost 30

taxable years from 1981 to 2010.4 Most recently they litigated the consolidated

cases at docket Nos. 16195-12S, 26201-12S, and 1070-13S, which were decided

by this Court’s T.C. Summary Opinion 2014-105. Those cases, like this one,

addressed similar continuing issues arising primarily from petitioners’ efforts to

substantiate and deduct expenses which they attribute to Mr. Boring’s Schedule C

sole proprietorship d.b.a. Rambor Technology (Rambor) or his partnership Board

Automation.5 The substantive tax disputes emanate from petitioners’

misunderstanding of the terms “ordinary” and “necessary” as used in



      4
       Their 10 cases as to which the Court still has retained records were
assigned docket Nos. as follows: 13828-14S, 1070-13S, 26201-12S, 16195-12S,
17698-05L, 17612-05L, 28046-92, 12836-99S, 4639-99S, 1864-89.
      5
        The partnership’s name used here is derived from the transcript of Mr.
Boring’s trial testimony; however, other documents in the record indicate the
name may have been Borett Automation Technologies. For simplicity we refer to
it as Board Automation.
                                         -4-

defining deductible business expenses pursuant to section 162 and the

interrelationship of that section with section 262, defining nondeductible personal

expenses.

      Petitioners resided in their longtime residence in California when they filed

their petition in this case. During the year 2010 petitioner Margaret Boring

worked as a bookkeeper for the Conejo Valley Unified School District. Petitioner

Richard Boring worked as an engineer for TECOM Industries, Inc. (TECOM), a

division of Smith’s Group, which is headquartered in Thousand Oaks, California.

Petitioners filed a late joint Federal income tax return, Form 1040, U.S. Individual

Income Tax Return, for the taxable calendar year 2010 on June 25, 2012.6 This

tax return references a “Federal Schedule 1” allegedly attached to that tax return.

Although no document entitled “Federal Schedule 1” was in fact attached to the

filed tax return, petitioners provided an Exhibit 3 during the pendency of this case

which they assert consists of the alluded-to “Federal Schedule 1”, and that exhibit

was admitted into the evidentiary record.

      Respondent disallowed all of the claimed Schedule C Rambor expense

deductions for lack of substantiation as follows:

      6
        The record does not explain why the revenue agent, who examined
petitioners’ 2010 tax return, and respondent failed to assert a sec. 6651(a) late-
filing penalty in this case.
                                          -5-

                            Expense                       Amount
            Business use of home                           $8,647
            Repairs and maintenance                         3,997
            Legal and professional services                 8,761
            Insurance (other than health insurance)         2,431
            Other                                          47,554
            Depreciation and section 179                    9,064
            Car and truck                                   8,073
             Total                                         88,527

      Mr. Boring was a motion control designer whose full-time job with Rambor

during 2010 and his earlier In The Air Networks (ITAN) work efforts have since

1995 involved semiconductors and signal directional and tracking devices. While

he has apparently worked diligently on his ITAN and Rambor activities and with

other associates achieved some technological successes, Rambor’s income has

never exceeded the reported expenses, and he has reported only losses on Schedule

C of his Federal income tax returns for a number of years. At trial Mr. Boring

explained that his business is “a business of intangible assets or liabilities

primarily. Our focus is to get the tangible assets, tangible products. Our business

is basically the sustainability of product development. We’re trying to survive to
                                          -6-

the point where we could take our research and experimentation, which has been

very successful, and take it to the next step to product development.”

       More specifically Rambor was attempting to capitalize on Mr. Boring’s

prior work as a contract worker and later as an employee whose wages were

reported on Form W-2, Wage and Tax Statement. He had focused on development

of manned or unmanned aerial vehicles (drones with high resolution video

cameras) with a low-profile tracking pedestal. That pedestal moved an MS DOS

RVT-2000 or similar triband antennas. The antenna followed the drone from the

ground or was attached to the drone, depending on the drone’s size and mission, so

that it could transmit real-time live video images from the drone or a NASA

satellite back to NASA or to army and marine operational unit headquarters. His

role in this effort was primarily as the architect of the device, including the

software design and implementation for bare metal software routines that ran at the

system algorithm and microcontroller interrupt levels. The software in turn

directed the operation of electric motors which controlled the tracking of the

aircraft or ground-based antennas and selection of the appropriate antennas.

      The principal purpose of the device was earth-satellite or earth-air

communications and battlefield intelligence. Particularly sought with respect to the

drones was real-time information regarding improvised explosive devices (IED)
                                         -7-

planted in the landscape which could be detected by comparing aerial pictures

taken before and after their implantation. This IED detection device

communications methodology was very successful, and Rambor with other

affiliated parties was attempting to adopt and modify it for use by Southwest

Airlines. That airline’s need for a similar device arose in connection with its airline

fleet and satellite or land-based linked communications during flight operations.

Complicating this effort was the requirement that the device be quite compact and

capable of operating continuously at temperatures ranging from minus 55 degrees

to plus 85 degrees centigrade, withstand airplane vibration, and maintain pointing

angles to a designated satellite within a tenth of one degree, at all times. The

device Mr. Boring and his associates developed for Southwest Airlines was also

very successful.

       Petitioners provided numerous documents, primarily bills and credit card and

bank statements, in an effort to substantiate the expenses underlying their claimed

Schedule C deductions. A review of the provided documents indicates they are

composed primarily of records documenting living expenses, personal automobile

expenses, costs of maintaining their personal residence, and costs of assisting

relatives.
                                        -8-

      Mr. Boring explained that his work was “as close to twenty-four- seven as

possible until there’s a positive outcome” with only Christmas, Easter, and

Thanksgiving off. He asserts that because of the long hours he incurs expenses

beyond what we would normally consider to be ordinary and necessary. He viewed

his home office as Rambor’s and Board Automation’s principal place of business

and their parts storage facility. Rambor’s and Board Automation’s (i.e., Mr.

Boring’s) business assets comprised intangible assets, knowledge, and data which

was provided to TECOM daily as an aspect of his employment. Consequently, any

travel from there to TECOM at locations where it does business was, in Mr.

Boring’s view, business travel miles, not personal commuting expenses. Similarly,

Mr. Boring’s daily expenses are often business expenses, in his opinion, as they are

incurred for his (Board Automation’s and Rambor’s intangible assets) continued

survival. His personal knowledge and abilities were intrinsic to these intangible

assets, and their operational survival in turn depended on his survival and his daily

living expenses.
                                         -9-

                                      Discussion

I. Schedule C Business Expense Deductions

      A. General Rules

      Deductions are a matter of “legislative grace”, and “a taxpayer seeking a

deduction must be able to point to an applicable statute and show that he comes

within its terms.”7 New Colonial Ice Co. v. Helvering, 

, 440 (1934);

see also Rule 142(a). As a general rule, section 162(a) authorizes a deduction for

“all the ordinary and necessary expenses paid or incurred during the taxable year in

carrying on any trade or business.”

      An expense is ordinary for purposes of this section if it is normal or

customary within a particular trade, business, or industry. Deputy v. du Pont, 

, 495 (1940). An expense is necessary if it is appropriate and helpful for

the development of the business. Commissioner v. Heininger, 

, 471

(1943). Section 262, in contrast, generally precludes deduction of “personal,

living, or family expenses.”


      7
       This burden may be shifted to the Commissioner as to factual issues,
pursuant to sec. 7491, under certain circumstances not present in this case.
Petitioners have not asserted such a shift, and petitioners have not maintained the
required records nor cooperated with reasonable requests of respondent as
required by sec. 7491(a)(2) to trigger the application of this burden-shifting
provision.
                                       - 10 -

      The breadth of section 162(a) is tempered by the requirement that any

amount reported as a business expense must be substantiated, and taxpayers are

required to maintain records sufficient therefor. Sec. 6001; Hradesky v.

Commissioner, 

, 89-90 (1975), aff’d, 

(5th Cir. 1976); sec.

1.6001-1(a), Income Tax Regs. When a taxpayer adequately establishes that he or

she paid or incurred a deductible expense but does not establish the precise amount,

we may in some circumstances estimate the allowable deduction, bearing heavily

against the taxpayer whose inexactitude is of his or her own making. Cohan v.

Commissioner, 

, 543-544 (2d Cir. 1930). There must, however, be

sufficient evidence in the record to provide a basis upon which an estimate may be

made and to permit us to conclude that a deductible expense, rather than a

nondeductible personal expense, was paid or incurred in at least the amount

allowed. Williams v. United States, 

, 560 (5th Cir. 1957); Vanicek v.

Commissioner, 

, 742-743 (1985). The record before us is rife with

inconsistencies as to nearly every element that would be germane to determining or

estimating the amounts of any deductible expenses.

      Furthermore, business expenses described in section 274(d) are subject to

rules of substantiation that supersede the Cohan doctrine. Sanford v.

Commissioner, 

, 827-828 (1968), aff’d, 

(2d Cir. 1969);
                                         - 11 -

sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6,

1985). Section 274(d) provides that no deduction shall be allowed for, among

other things, traveling expenses, entertainment expenses, gifts, and expenses with

respect to listed property (as defined in section 280F(d)(4) and including passenger

automobiles, computer equipment, and property generally used for entertainment,

recreation or amusement) “unless the taxpayer substantiates by adequate records or

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

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

or date and description of the gift; (3) the business purpose of the expenditure or

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

taxpayer of the recipients or person entertained. Sec. 274 (d).

      In addition to the general business expense deduction rule of section 162,

section 167(a) authorizes “as a depreciation deduction a reasonable allowance for

the exhaustion, wear and tear (including a reasonable allowance for obsolescence)

--(1) of property used in the trade or business, or (2) of property held for the

production of income.” In some limited circumstances capital asset costs may be

expensed rather than capitalized for future expense recovery through depreciation

or amortization. See sec. 179.
                                        - 12 -

      When applying sections 162, 167, and 179 in the context of particular items

of property, the following general framework has emerged through caselaw. Under

those sections, the initial question is whether ownership and maintenance of the

property is related primarily to business or to personal purposes. Int’l Artists, Ltd.

v. Commissioner, 

, 104 (1970) (and cases cited thereat); see also, e.g.,

Richardson v. Commissioner, T.C. Memo. 1996-368; Griffith v. Commissioner,

T.C. Memo. 1988-445. The answer to this question determines which of three

approaches is appropriate: (1) if acquisition and maintenance of the property are

primarily associated with profit-motivated purposes and any personal use is

distinctly secondary and incidental, expenses and depreciation are deductible; (2) if

acquisition and maintenance are motivated primarily by personal considerations,

deductions are disallowed; and (3) if substantial business and personal motives

exist, allocation becomes necessary. Int’l Trading Co. v. Commissioner, 

, 584-587 (7th Cir. 1960), aff’g T.C. Memo. 1958-104; Int’l Artists, Ltd. v.

Commissioner, 

; Richardson v. Commissioner, T.C. Memo. 1996-368;

Griffith v. Commissioner, T.C. Memo 1988-445; Kenerly v. Commissioner, T.C.

Memo. 1984-117.
                                        - 13 -

      Where the property in question is residential, section 280A provides a further

limitation with potential bearing on business-related deductions claimed under

section 162 or 167. That statute reads in part as follows:

      SEC. 280A. DISALLOWANCE OF CERTAIN EXPENSES IN
                 CONNECTION WITH BUSINESS USE OF HOME,
                 RENTAL OF VACATION HOMES, ETC.

             (a) General Rule.--Except as otherwise provided in this section,
      in the case of a taxpayer who is an individual or an S corporation, no
      deduction otherwise allowable under this chapter shall be allowed
      with respect to the use of a dwelling unit which is used by the taxpayer
      during the taxable year as a residence.

       *           *          *           *          *          *          *

           (c) Exceptions for Certain Business or Rental Use; Limitation
      on Deductions for Such Use.--

                   (1) Certain business use.--Subsection (a) shall not apply
             to any item to the extent such item is allocable to a portion of
             the dwelling unit which is exclusively used on a regular basis--

                         (A) as the principal place of business for any trade
                   or business of the taxpayer,

                          (B) as a place of business which is used by patients,
                   clients, or customers in meeting or dealing with the
                   taxpayer in the normal course of his trade or business, or

                         (C) in the case or a separate structure which is not
                   attached to the dwelling unit, in connection with the
                   taxpayer’s trade or business.
                                        - 14 -

                   In the case of an employee, the preceding sentence shall
                   apply only if the exclusive use referred to in the
                   preceding sentence is for the convenience of his
                   employer. * * *

                    (2) Certain storage use.--Subsection (a) shall not apply to
             any item to the extent such item is allocable to space within the
             dwelling unit which is used on a regular basis as a storage unit
             for the inventory or product samples of the taxpayer held for use
             in the taxpayer’s trade or business of selling products at retail or
             wholesale, but only if the dwelling unit is the sole fixed location
             of such trade or business.

                   (3) Rental use.-- * * *

      To support their claimed Schedule C expense deductions, petitioners

produced documents, categorized according to the expense headings on Schedule

C, that were stipulated by the parties and admitted into evidence. In addition, a

spreadsheet schedule that Mr. Boring prepared entitled “Rab Biz Expenditures

2010.xls” was provided to respondent to explain petitioners’ claimed deductions

and on respondent’s motion, without objection by petitioners, was admitted into

evidence as Exhibit 14-R. The documents were supplemented by Mr. Boring’s

sworn testimony which, as to specific expenses was broad in scope with very few,

if any, specific details as to any individual item’s business purpose or amount. On

cross-examination Mr. Boring acknowledged that several items listed on Exhibit

14-R as Schedule C deductible expenses for “plant operating expenses” included
                                         - 15 -

expenses for various individual credit card bills and other personal items. Mr.

Boring’s accounting methods and procedures, labeled “Idiosyncratic views” by

respondent in his brief, allegedly treated petitioners’ outside employment wage

income as Rambor revenue although both petitioners were employees whose wages

were reported on Forms W-2 and the record does not indicate that Rambor had

contracted with TECOM or the school district to provide either petitioner’s

services to his or her employer or that they had employment agreements with

Rambor.

      B. Business Use of Home

      Mr. Boring characterized his home office as his principal place of business

although he was a full-time employee of TECOM during 2010 and was provided

with office workspace at TECOM. He also characterized Rambor and his

partnership Board Automation, which had earlier in the 2000s contracted with

S&D Engineering, a vendor to TECOM, as his principal businesses. Consequently,

it is petitioners’ view that because of their intent to report all income, including

their employer expense reimbursements, through Rambor or Board Automation,

their home was their principal office for all of their income activities.

Nevertheless, whatever the intent, petitioners properly reported their wages on line

7 of their Form 1040. Attached to that was Form 8829, Expenses for Business Use
                                        - 16 -

of Your Home. Petitioners reported that the area of their home regularly and

exclusively used for business was 790 square feet out of the home’s total area of

2,113 square feet.8 Thus, 37.39% of their home was, they contend, used

exclusively for business.

      On the basis of these facts, they concluded that $8,647 of their reported

$23,127 of home mortgage interest expense was properly deductible for the

business use of their home. They deducted the balance of $14,480 of the reported

home mortgage interest expense on Form 1040, Schedule A. Other than their Form

8829 and Mr. Boring’s uncorroborated testimony, which we do not accept as

correct and credible, petitioners did not introduce any evidence substantiating the

expenses underlying their home office expense deduction. Section 280A generally

prohibits the deduction of certain costs in connection with the business use of a

taxpayer’s residence. Section 280A(c)(1), however, permits a deduction for any




      8
        On page 13 of their Exhibit 8-P there is a floor plan for their home with a
living area breakdown table. The table itemizes the square footage and size of
each room on the first and second floors. It indicates a total of 2,522 square feet
plus a 462-square-foot garage. The approximately 400-square-foot variance
between the Form 8829 information as to total square feet and the floor plan
schematic and table is not explained or addressed by the record. The discrepancy
does portend some doubts as to petitioners’ credibility but may also be attributed
to inconsistently counting the garage space for business use but failing to include
its square footage in the home’s total square footage.
                                        - 17 -

item allocable to a portion of a residence that is regularly and exclusively used as

the principal place of business for any of the taxpayer’s trades or businesses.

      In deciding whether a residence is the principal place of business, we

compare the business use of the residence with the business use of all of the other

places where business is transacted. See Commissioner v. Soliman, 

,

174 (1993). A deduction is allowed only when the residence is the most important

or significant place for the business. The two primary considerations are the

relative importance of the activities performed at each business location and the

time spent at each place. See 

The relative importance of business

activities engaged in at the office in the home “may be substantially outweighed by

business activities engaged in at another location.” See Strohmaier v.

Commissioner, 

, 112 (1999). The flush language following section

280A(c)(1)(C) was liberalized by Congress in the Taxpayer Relief Act of 1997,

Pub. L. No. 105-34, sec. 932(a), 111 Stat. at 881. See H.R. Rept. No. 105-148, at

407 (1997), 1997-4 C.B. (Vol. 1) 319, 729. This flush language provides that

      the term “principal place of business” includes a place of business
      which is used by the taxpayer for the administrative or management
      activities of any trade or business of the taxpayer if there is no other
      fixed location of such trade or business where the taxpayer conducts
      substantial administrative or management activities of such trade
      or business.
                                       - 18 -

Sec. 280A(c)(1); see Flying Hawk v. Commissioner, T.C. Memo. 2015-139, at

*8-*9.

      In the case of a taxpayer who is an employee, the home office must be for the

convenience of the employer; it cannot just be a place in which the employee

chooses to do some of his work. Sec. 280A(c)(1) (flush language); Frankel v.

Commissioner, 

, 323, 326 (1984). It must be used exclusively for the

employer’s work and not for personal use. Sec. 280A(c)(1); Cadwallader v.

Commissioner, 

, 1275 (7th Cir. 1990), aff’g T.C. Memo. 1989-356.

A taxpayer may have only one principal place of business for each business in

which he is engaged. See Curphey v. Commissioner, 

, 776 (1980). To

determine the principal place of business within the meaning of section

280A(c)(1)(A) the Court may also ascertain the “focal point” of a taxpayer’s

business activities. Jackson v. Commissioner, 

, 700 (1981); Baie v.

Commissioner, 

, 109 (1980).

      The fact that the employer provides inadequate office facilities is not

dispositive of whether a home office is for the convenience of the employer. See

Dudley v. Commissioner, T.C. Memo. 1987-607, aff’d without published opinion,

(6th Cir. 1988). However, it is unclear from the record whether Mr.

Boring was able to conduct all of his antenna communication technology activities
                                        - 19 -

at TECOM. Therefore, the Court must look to whether Mr. Boring’s home office is

his principal focal point of business and vital to his communications technology

engineering efforts.

      Although it might, in Mr. Boring’s opinion, have been less convenient or

inadequate, TECOM did provide Mr. Boring with an office or workplace facilities.

Additionally, on the basis of the record, the Court cannot conduct an accurate

comparison of the time Mr. Boring spent working at his home relative to the time

he spent working elsewhere or determine that a home office was vital to his

communications technology efforts. Mr. Boring’s Form W-2 employment income

greatly exceeded his Schedule C gross income; and as his work activities with

respect to both were interrelated, we conclude that his principal place of business

for Federal income tax purposes was TECOM.

      Petitioners did not show that the home office was used exclusively for

business or was for business storage or that the use was for the convenience of their

employers, TECOM and the school district. Pictures of the home’s interior,

included as a part of Exhibit 13-P, appear to show business documents, books,

work-related devices, and allegedly stored items haphazardly distributed in various

rooms of the house, some of which apparently also served as living areas and

access points for other rooms. Accordingly, the Court concludes that petitioners
                                       - 20 -

have failed to meet the requirements of section 280A(c)(1) or (2) and are not

entitled to a deduction for the expenses of maintaining a home office. Therefore,

the $8,647 is not allowable as a Schedule C deduction. See Christine v.

Commissioner, T.C. Memo. 2010-144, 

, 1597-1598 (2010),

aff’d, 475 F. App’x 259 (9th Cir. 2012); Deihl v. Commissioner, T.C. Memo. 2005-

287, 

, 586-587 (2005).

      C. Repairs and Maintenance

      Petitioners deducted as a Schedule C repairs and maintenance expense

$3,997, all of which respondent disallowed. In support of this deduction

petitioners provided bills from Fisher Plumbing for $295; Westlake Management

Association annual dues and an electric boat and nonelectric boat dock fees

schedule reflecting charges in January 2010 of $1,817.30; and an invoice from

Southshore P.D.A. for $720 of annual dues. The balance of the reported expense is

not explained. Petitioners have failed to carry their Rule 142(a) evidentiary

burden. There is no evidence in the record to show that these expenses were other

than personal pleasure, recreation, or residence expenses, all of which are

nondeductible as provided by section 262. Section 262(a) provides unequivocally

that “[e]xcept as otherwise expressly provided in this chapter, no deduction shall

be allowed for personal, living, or family expenses.” Consequently, respondent’s
                                         - 21 -

determination that the $3,997 Schedule C repairs and maintenance expense

deduction is not allowable is upheld by the Court.

      D. Legal and Professional

      Respondent disallowed petitioners’ claimed deduction for $8,761 of legal

and professional expenses. In support of their claimed section 162 deduction

petitioners submitted three items: (1) an architect’s charge apparently for the

$4,466.29 portion of the total $8,194.60 paid, before December 2010, for design,

construction, engineering, homeowner review and approval, and governmental

agency approval with respect to an addition to and remodeling of their personal

residence; (2) their Chase bank January 31 through February 17, 2010, statement

reflecting a February 12, 2010, check No. 3312 payment of $3,300 which they

assert, but do not document, was paid to the construction contractor, Dream Tree

Construction, in February 2010 for its work on their personal residence; and (3) a

letter invoice for an additional $994.60 paid to the architect, Scott E. Fajnar, in

December 2010 to pay off the balance of the $8,194.60 total charge for his work

related to petitioners’ personal residence.
                                          - 22 -

      In addition to the fact that these charges appear to be capital expenditures

which would not be currently deductible pursuant to section 263(a),9 they again

constitute personal expenditures which are nondeductible as mandated by section

262. Thus, respondent’s disallowance of the claimed $8,761 Schedule C deduction

will be upheld.

      E. Insurance

      In support of their claimed deduction for a $2,431 Schedule C insurance

expense, all of which respondent disallowed, petitioners provided 2010 statements

from USAA Insurance Co. These statements were with respect to a balance due of

$2,704.27 as of December 29, 2009, for their valuable personal property,

automobile, and residential homeowners insurance policies. The statements

document payments during 2010 of $3,441.72 and indicate a balance due, as of

September 28, 2010, of $1,118.46. The record, which does not contain every

month’s statement and which includes no statements after September 2010, does




      9
          Sec. 263(a) provides in relevant part:

               SEC. 263(a). General Rule.--No deduction shall be allowed for--

                     (1) Any amount paid out for new buildings or for permanent
               improvements or betterments made to increase the value of any
               property or estate.
                                        - 23 -

not explain the discrepancy between the amounts paid and the amount claimed.

But we need not resolve this discrepancy.

      As explained previously, petitioners do not qualify for a home office expense

deduction for use of their residence; consequently, their personal property and

residential USAA casualty insurance premiums are personal expenses covered by

section 262 that are not allowable as a deduction for Federal income tax purposes.

Their personal automobile insurance for a 1989 Ford Bronco, a 2005 Nissan

Pathfinder, and a 2008 Nissan Pathfinder is also nondeductible since they also took

the USAA automobile insurance charges into account in their computations of

deductible car and truck expenses. The same expense even if shown to be

deductible may not be deducted twice.

      F. Other Expenses

      Petitioners deducted Schedule C other expenses of $47,554, all of which

respondent disallowed. This amount comprised IP license subscription services of

$7,344; subsystems, software, components, parts, travel, and supply expenses of

$6,300; “Rambor M” (for Margaret Boring) plant operating expenses of $18,737;

and “Rambor R” (for Richard Boring) plant operating expenses of $23,650; minus

$8,477 of unexplained adjustments to the claimed expenditures. In support of the

reported net deduction petitioners submitted two receipts from the California
                                        - 24 -

School Employees Association, apparently for 12 Sees candy items (total cost

$129) and six Mann Theaters tickets (total cost $49) plus numerous credit card and

bank statements for 2010.

      As was the case with their similarly self-prepared tax returns for years at

issue in their earlier tax cases, decided by this Court’s T.C. Summary Opinion

2014-105, the credit card and bank statements appear to consist of an accounting of

the payment of petitioners’ normally incurred daily living expenses. Exhibit 14-R

prepared by petitioners purports to itemize inter alia the reported other expenses.

As to the $7,394 of IP license subscription services it and credit card and bank

statements indicate: for AT&T/Open $1,640.89; for Sprint Broadband $780; for

Adan LOC Services $1,560; for Verizon Cellular I $540; for Verizon Cellular 2

$180; for Time Warner $616.93; and for utilities $2,025.75. There was no specific

evidence provided as to the actual business use of these communications and utility

services nor any attempt to allocate charges between business and personal use.

Without more, petitioners have failed to meet their burden of proof. See Rule

142(a); Welch v. Helvering, 

, 115 (1933).

      Normally, telephone and cable broadband services and home utility charges

would constitute personal expenses which are nondeductible pursuant to section

262. If there is a true independent business component, it must be established by
                                       - 25 -

the case record and the amount thereof determinable from the admitted evidence.

Any contention that all such expenses, including the personal living component,

are deductible is flatly mistaken.

      As to the $6,300 of reported subsystem, component parts, travel, software,

and supply expenses consisting of open source engineering duplication expenses

they are also not deductible. Petitioners provided no other information or

documentation regarding these expenses. Looking further through the record for

specific evidence as to their business purpose, available payment or supplier

information provides no factual or evidentiary help to petitioners. Thus, these

expenses too are not sufficiently substantiated and petitioners’ evidentiary burden

remains unmet; and respondent’s disallowance determination is upheld. See Rule

142(a); Welch v. Helvering, 

.

      G. Rambor M and Rambor R Plant Operating Expenses

      Respondent disallowed $42,387 of reported expenses classified by

petitioners, as noted above, as “Rambor M” or “Rambor R” plant expenses. In

support of the reported expenses petitioners’ computer-generated “Exhibit 14-R

Rab Biz Expenditures 2010.xls” lists numerous payments which do not always

correlate with amounts on the Schedule C. The list references such items as:

multiple S. Cheevers Procurement/Development Services charges; Costco charges;
                                        - 26 -

a Target charge; various Chase and HSDC check or credit card payments; Chevron,

Texaco, American Express, and Visa credit card payments; petty cash

expenditures; a USAA insurance payment of $381.24; Tax Software Store charges

of $155; and other miscellaneous items. Petitioners did not adequately explain

these charges or their specific business purpose, use, or specific need.

      On cross-examination by respondent’s counsel the following colloquy with

Mr. Boring occurred.

             Q     Mr. Boring, as I am looking at this spreadsheet under

      Plant Operating Expenses back on page 1, I see a line that says S.

      Cheevers Procurement Services.

             A     Right.

             Q     UGS contracts for $1,000.

             A     Right.

             Q     That is a payment to your son-in-law; is that right?

             A     Say again.

             Q     That is a payment to your son-in-law, Mrs. Boring’s child

      from her previous marriage?

             A     It’s my stepson.

             Q     Sorry, your stepson, my apologies.
                                    - 27 -

       A        Yes.

       Q        And the next line says Chase, and then it has the numbers

8825 C/C 1/12/10. Do you see that?

       A.       Yes, I do.

       Q        That’s the payment of your credit card.

       A        Correct.

       Q        And as we go down through the rest of this, we also see a

payment to HSBC. That’s also a payment to a credit card.

       A        Okay.

       Q        Another payment to Chase 2/11/10. Do you see that?

       A        Sure.

*           *              *        *            *           *           *

       Q        So your position is that although this spreadsheet [Exhibit

4-R] that you have provided explaining your expenses includes your

credit card bills, that these credit card bills in fact are not part of the

plant operating expenses?

       A        Are not part of--

       Q        Your plant operating expenses, the Rambor R Plant

operating expenses.
                                       - 28 -

             A     Not in total.

             Q     And there is nothing in these documents that shows what

      the Rambor R Plant operating expenses might otherwise be?

             A     That is correct.

      Although Mr. Boring contends that at least some of the charges on his credit

card statements were business related, he did not adequately substantiate those

charges other than by vague general testimony. While he specifically referenced

HSBCidentityplan.com, Sprint Wireless, and the ADI analog device as business

expenses, he presented no further evidence that they were not section 262 personal

expenses. He speculated that the “Starbucks most likely was a meeting with some

guys” and for business purposes. Likewise, he asserted from memory that

“Tandoree Oven in Los Gatos, California, that was at the embedded systems

conference” and the convention center; the Bob Hope Airport charges were

associated with that business trip. Such general claims are not sufficient where, as

here, the supposedly deductible items are so intertwined with clearly personal

expenses. We cannot allow a deduction in such circumstances given the total

absence of the records required to meet the previously discussed section 274(d)

enhanced substantiation provisions. Consequently, none of the reported $47,554
                                        - 29 -

“Other Expenses” are allowable and respondent’s disallowance determination is

sustained in full.10

       10
         Petitioners’ apparent theory that their personal living costs are ordinary
and necessary to permit them to stay healthy, work, and convert the business
intangible assets, composed of their knowledge, to tangible products and gross
income is simply incorrect under Federal tax law. See generally sec. 61(a),
defining gross income generally as “all income from whatever source derived”,
and sec. 262, addressed and quoted above. A much stronger factual case was
considered by this Court in Green v. Commissioner, 

(1980). The
taxpayer there had a rare AB negative blood type. Her blood plasma, which she
could and did sell to users willing to pay her significant amounts for her plasma,
was the source of her income. She, like petitioners here, sought to deduct her
daily living expenses. We explained:

       Generally stated, the question presented by this case is whether
       petitioner may offset her taxable income by the expenses she incurred
       in obtaining payment for her blood plasma “donations.” The ability
       to offset income with expenses incurred either under section 162, in
       carrying on a trade or business, or under section 212, for the
       production of income, requires by definition the existence of related
       income. * * * [Id. at 1232.]

We concluded that only the extraordinary additional living expenses such as those
for “special drugs” and supplements were deductible. Normal living expenses
such as her health insurance were not deductible as business expenses although a
portion of the health insurance was allowable as a Schedule A itemized medical
expense deduction. We explained that

       [a]lthough petitioner attempts to justify the deduction by comparing
       her body to some insured manufacturing machinery, the instant set of
       facts prevents such a comparison; her body is not a replaceable, or
       easily repairable, machine maintained solely for the production of
       blood plasma. The unique nature of the“manufacturing machinery” in
       this instance makes the personal nature of the health insurance
                                                                        (continued...)
                                        - 30 -

      H. Depreciation and Section 179 Expenses

      Respondent has disallowed $9,064 of claimed deductions for depreciation

and section 179 expenses. Petitioners provided Exhibit 8-P in addition to their

Form 4562, Depreciation and Amortization filed with their 2010 Form 1040 to

explain and substantiate the expenses underlying these deductions. The documents

indicate that the claimed deductions emanate entirely from their use of their

personal residence, its subsequent structural improvements, and their three personal

automobiles, a 1989 Ford Bronco II, a 2005 Nissan Pathfinder, and a 2008 Nissan

Pathfinder. As the Ford Bronco was already fully depreciated, the claimed

deduction was for their home and the two Nissan Pathfinders.

      We have previously stated that section 280A tightly restricts business

deductions for personal residences. Petitioners have not shown that any part of the

home was used exclusively for business. Further, their calculation of space which

they conclude was used exclusively for business includes 150 square feet in the

garage for “Business parking” and 120 square feet for storage. The parking was

apparently for, at any one time, one of their three personal cars. This is not

      10
        (...continued)
      premiums unavoidable. Insuring against the costs of maintaining
      petitioner’s health is primarily a personal concern, not merely a
      business concern. Cf. Sparkman v. Commissioner,112 F.2d 774, 777
      (9th Cir. 1940). [Id. at 1235-1236; fn. refs. omitted.]
                                        - 31 -

exclusive business use within the meaning of section 280A(c)(1)(A) and (C), and

petitioners have similarly failed to prove exclusive business use (or business need)

for any of their reported 790 square feet allegedly devoted to business use. In

addition to the garage (which was not proven to be regularly used for storage as

required by section 280A(c)(2)), this space allegedly included two office areas and

a bathroom.

      The automobiles are subject to the strict substantiation rules of section

274(d), and petitioners have provided no credible evidence of any deductible

expenses. Petitioners are mistaken to believe their home is their principal or even a

secondary place of business such that their daily trips to their TECOM or school

locations are deductible business miles rather than commuting expenses.

Consequently, respondent’s disallowance of the reported $9,064 of depreciation

expenses for petitioners’ residence and automobiles is sustained.

      I. Car and Truck Expenses

      Petitioners reported and respondent disallowed $8,073 of car and truck

expenses for 2010 in addition to petitioners’ claimed depreciation expense for cars

and trucks of $9,064. As noted above these expenses related to their three personal

automobiles. Exhibit 8-P, offered to substantiate these expenses, itemizes expenses

for each vehicle and asserts the Bronco II was used 97%, the 2005 Nissan
                                        - 32 -

Pathfinder 95%, and the 2008 Nissan Pathfinder 90% for business. As noted, the

strict substantiation rules of section 274(d) apply to these deduction claims.

Petitioners have not provided any records, much less contemporary records or their

equivalent, containing the information required for “listed property” as defined in

section 280F(d)(4), which includes passenger automobiles. See our 

and section 1.274-5T(c)(2) and (3)(i), Temporary Income Tax Regs., 50 Fed.

Reg. 46017, 46020 (Nov. 6, 1985). Consequently, none of their claimed car and

truck expenses is allowable and respondent’s disallowance of the reported $8,073

is sustained in full.

II. Itemized Deductions

       Since we have sustained respondent’s disallowance of deductions for various

reported Schedule C business expenses, the question arises as to whether any of

these expenses are allowable as additional itemized deductions on Schedule A.

Although not explicitly addressed by the parties, one such expense stands out. It is

the $8,647.29 portion of their $23,127.29 home mortgage interest expense

deduction claimed on Schedule C and disallowed by respondent.11

       11
        Another item of interest is the $155 Tax Software Store item on page 2 of
Exhibit 14-R Rab Biz Expenditures 2010.xls. This could be for an item deductible
under sec. 212(3). However, the PayPal payment references on page 94 of Exhibit
12-P and its listing on page 2 of Exhibit 14-R do not provide the needed
                                                                       (continued...)
                                        - 33 -

      Section 163(a), except as otherwise provided, allows a deduction for

“all interest paid or accrued within the taxable year on indebtedness.” Section

163(h)(2)(d) provides an exception from the general rule for “Personal interest”

which is defined as “any interest allowable as a deduction under this chapter other

than--[inter alia] * * * (D) any qualified residence interest”. Section 163(h)(3)

defines “qualified residence interest” generally as including the interest paid on the

taxpayers’ personal residence’s “acquisition indebtedness” up to $1 million and

“home equity indebtedness” up to $100,000 where, as here, a joint return was filed.

      The parties have stipulated a Substitute Form 1098, Mortgage Interest

Statement, issued by USAA Federal Savings Bank reflecting mortgage interest

received by that bank from petitioners during 2010 of $23,127.29. As this

document is required to be filed with the Internal Revenue Service, it should have

been in respondent’s administrative file for petitioners’ 2010 taxable year. On

audit and in the statutory notice of deficiency respondent allowed the $14,480

home mortgage interest deduction claimed on Schedule A, but disallowed the

$8,647.29 home mortgage interest deduction claimed on Schedule C as an expense

“for business use of home.” However, respondent failed to make a correlative

      11
       (...continued)
information as to what was purchased for us to determine that this item is
deductible, and the record contains no other information about this item.
                                        - 34 -

adjustment, in the same amount, to petitioners’ allowable qualified home mortgage

interest deduction.

      Neither party specifically addressed this issue at trial or on brief, but

petitioners have claimed the full $23,127.29 amount as a deduction for 2010 and

have carried their burden of going forward with credible evidence. Respondent has

not argued and has produced no evidence that the total reported interest expense of

$23,127.29 was in any way limited by the $1 million or less acquisition

indebtedness limitation or the $100,000 home equity indebtedness limitation of

section 163(h)(3)(B)(ii) or (C)(ii). Consequently, petitioners will be allowed an

additional $8,647.29 deduction for Schedule A itemized home mortgage interest.

III. Accuracy-Related Penalty

      The statutory notice of deficiency unfortunately determines a penalty here on

a “shotgun” basis for one or more or all of the reasons set out in section 6662(b)

without any specificity. On brief, at last, respondent has clarified the issue and

now contends the penalty applies because of an underpayment due to negligence

and/or intentional disregard of rules or regulations and because there is a

substantial understatement of income tax.

      Section 6662(a) imposes an accuracy-related penalty equal to 20% of the

portion of the underpayment to which section 6662 applies. Section 6662(a)
                                         - 35 -

applies to the portion of any underpayment which is attributable to, inter alia,

negligence or disregard of rules or regulations, sec. 6662(b)(1), or a substantial

understatement of income tax, sec. 6662(b)(2). “Negligence” is defined in section

6662(c) as “any failure to make a reasonable attempt to comply with the provisions

of this title”, and “disregard” as “any careless, reckless, or intentional disregard.”

Caselaw similarly states that “[n]egligence is a lack of due care or the failure to do

what a reasonable and ordinarily prudent person would do under the

circumstances.” Freytag v. Commissioner, 

, 887 (1987) (quoting

Marcello v. Commissioner, 

, 506 (5th Cir. 1967), aff’g on this issue

(1964) and T.C. Memo. 1964-299), aff’d, 

(5th Cir.

1990), aff’d, 

(1991). Pursuant to regulations, “‘[n]egligence’ also

includes any failure by the taxpayer to keep adequate books and records or to

substantiate items properly.” Sec. 1.6662-3(b)(1), Income Tax Regs. In the

instance of individuals there is a substantial understatement of income tax for any

taxable year if the amount of the understatement exceeds the greater of 10% of the

tax required to be shown on the return for the taxable year or $5,000. Sec.

6662(d)(1)(A). The understatement for the 2010 taxable year comes within the

definition of a substantial understatement. Petitioners had reported no income tax

liability on their filed income tax return for 2010.
                                         - 36 -

      An exception to the section 6662(a) penalty is set forth in section 6664(c)(1),

which provides: “No penalty shall be imposed under * * * [this part, which

includes sections 6662 and 6663] with respect to any portion of an underpayment if

it is shown that there was a reasonable cause for such portion and that the taxpayer

acted in good faith with respect to such portion.” Regulations interpreting section

6664(c) provide: “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

pertinent facts and circumstances. * * * Generally, the most important factor is the

extent of the taxpayer’s effort to assess the taxpayer’s proper tax liability.” Sec.

1.6664-4(b)(1), Income Tax Regs.

      We conclude that respondent has met the section 7491(c) burden of

production with respect to the negligence penalty. The evidence adduced in this

case reveals a serious dearth of adequate records and substantiation for reported

items. With this threshold showing, the burden shifts to petitioners to establish that

they acted with reasonable cause and in good faith as to the claimed items. See

Higbee v. Commissioner, 

, 448 (2001).

      Other than their incorrect substantive position that they were entitled to the

deductions they reported, as discussed previously, petitioners have introduced no

evidence to excuse them from the accuracy-related penalty. On these facts,
                                        - 37 -

petitioners have failed to establish that they met each and every requirement

necessary for a successful reasonable cause defense. Petitioners are liable for the

section 6662(a) accuracy-related penalty.

IV. Discretionary Penalty

      By motion filed July 20, 2015, respondent has moved the Court to impose a

section 6673 penalty of $5,000 for petitioners’ conduct in pursuing this case

“primarily to delay collection of their proper income tax.” Respondent also asserts

that “petitioners know (or should know) that their position is groundless.” To be

certain, these are good grounds for respondent’s motion given petitioners’ history

in this Court, previously described. Nevertheless, there is a problem with

respondent’s request.

      As noted above, in denying petitioners their claimed $8,647.29 Schedule C

home mortgage interest expense deduction respondent inexplicably failed to make

the needed correlative adjustment to petitioners’ claimed deduction for $14,480 of

home mortgage interest on Schedule A. Given respondent’s omission, we cannot

conclude that this case was maintained primarily for delay or that petitioners’

positions were entirely frivolous. Consequently, the Court will not impose a

section 6673 penalty in this case.
                                         - 38 -

      We warn petitioners, however, that their conduct is in material

noncompliance with Federal tax law. Our opinions here and in T.C. Summary

Opinion 2014-105 are tailored to explain what the law requires. Petitioners have

been fairly warned; consequently, any further conduct in the same vein as that

considered here and in our previous cases addressing their tax liabilities and tax

payments may well, under present law, result in the application of a section 6673

penalty in an amount of up to $25,000.

      To reflect the foregoing and to account for the increased deduction for

Schedule A home mortgage interest,


                                                        An order denying respondent’s

                                                  motion will be issued, and decision

                                                  will be entered under Rule 155.