T.C. Memo. 2011-80



                      UNITED STATES TAX COURT



                  MARK E. STROFF, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14070-08.               Filed April 5, 2011.



     Mark E. Stroff, pro se.

     Patricia H. Delzotti, for respondent.



                        MEMORANDUM OPINION


     GALE, Judge:   Respondent determined deficiencies in

petitioner’s 2005 and 2006 Federal income tax of $2,892 and

$1,642, respectively, and accuracy-related penalties under
                               -2-

section 6662(a)1 of $578.40 and $328.40, respectively.     After

concessions,2 the issues for decision are:   (1) Whether

petitioner is entitled to deduct certain expenses claimed on

Schedules C, Profit or Loss From Business, from his handyman

business for 2005 and 2006, and (2) whether petitioner is liable

for accuracy-related penalties under section 6662(a) and (b)(1)

for negligence or disregard of rules or regulations for 2005 and

2006.

                           Background

     At the time the petition was filed, petitioner resided in

New Jersey.

     Petitioner was self-employed as a handyman in 2005 and 2006

and operated from his residence a business called Mighty Unk

Handyman, L.L.C.

     On Schedule C of his timely Federal income tax return for

2005, petitioner claimed deductions of, inter alia, (i) $3,782

for “casual labor” expenses, (ii) $3,781 for meals and

entertainment expenses, and (iii) $9,452 for car and truck

expenses.

     Respondent issued a timely notice of deficiency for 2005

(2005 notice) disallowing all of petitioner’s claimed deductions

     1
      Unless otherwise noted, all section references are to the
Internal Revenue Code of 1986, as amended and in effect for the
years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
     2
      Respondent concedes that petitioner is not liable for the
accuracy-related penalties for 2005 and 2006 under sec.
6662(b)(2) or (3) determined in the notices of deficiency.
                                -3-

for “casual labor” and meals and entertainment expenses and

$4,038 of petitioner’s claimed deduction for car and truck

expenses.   The determination concerning the car and truck

expenses reflected respondent’s acceptance of petitioner’s

substantiation of $6,768 of the $9,452 in expenses claimed and an

allowance of 80 percent of the substantiated amount, or $5,414,

as constituting the allocable business use of a car that

petitioner used in his business.   Respondent disallowed the

balance of 20 percent as allocable to personal use of the car.

The 2005 notice also determined an accuracy-related penalty under

section 6662(a).

     On Schedule C of his timely Federal income tax return for

2006, petitioner claimed, inter alia, expenses of (i) $2,219 for

“telephone” and (ii) $3,693 for legal and professional services.

     Respondent issued a timely notice of deficiency for 2006

(2006 notice) disallowing all of petitioner’s claimed expenses

for telephone and legal and professional services for 2006 and

imposing an accuracy-related penalty under section 6662(a).

     In a timely petition, petitioner challenged respondent’s

determination of the deficiencies and accuracy-related penalties

for 2005 and 2006.

                            Discussion

     Deductions are a matter of legislative grace, and the burden

of showing entitlement to a claimed deduction is on the taxpayer.
                                 -4-

See, e.g., Rule 142(a); INDOPCO, Inc. v. Commissioner, 

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

,

440 (1934).3   Section 162(a) provides that there shall be allowed

as a deduction all the ordinary and necessary expenses paid or

incurred by the taxpayer during the taxable year in carrying on

any trade or business.   Taxpayers must maintain records

sufficient to substantiate the amounts and purposes of deductions

claimed.   See sec. 6001; Hradesky v. Commissioner, 

,

89-91 (1975), affd. per curiam 

(5th Cir. 1976).

     Under the Cohan rule, in the event that a taxpayer

establishes that he or she has incurred a deductible expense but

is unable to substantiate the precise amount, the Court may

approximate the amount of the expense.      Cohan v. Commissioner, 

, 543-544 (2d Cir. 1930).      The Court must have sufficient

evidence upon which to make a reasonable estimate to apply the

Cohan rule.    Vanicek v. Commissioner, 

, 742-743

(1985).

     Section 274(d) provides more stringent substantiation

requirements in the case of expenditures or the use of property

that may readily serve personal as well as business purposes.

Such expenditures or property use include those for

entertainment, including meals, or automobile use.     Secs.

274(d)(2), (4), 280F(d)(4); sec. 1.274-2(b)(1), Income Tax Regs.

     3
      Petitioner has not claimed or shown entitlement to any
shift in the burden of proof pursuant to sec. 7491(a).
                                -5-

Taxpayers must substantiate such expenditures or property use by

adequate records made at or near the time of the expenditure or

use of (i) the amount of the expense, (ii) the time and place of

the entertainment or use of the property, (iii) the business

purpose of the expense, and (iv) the business relationship to the

taxpayer of the persons who were entertained or who used the

property.   Sec. 274(d); sec. 1.274-5T(b)(3), (6), Temporary

Income Tax Regs., 50 Fed. Reg. 46015, 46016 (Nov. 6, 1985); see

also sec. 274(k).   Under the regulations promulgated under

section 274, one of the elements that the taxpayer must

substantiate for an automobile expense is the amount of the

business use and the amount of the total use of the automobile

for the taxable period, based on mileage.   Bradley v.

Commissioner, T.C. Memo. 1998-170; Makspringer v. Commissioner,

T.C. Memo. 1994-468; sec. 1.274-5T(b)(6)(i)(B), Temporary Income

Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).

     As an alternative to providing adequate documentation

meeting the foregoing standards, a taxpayer may substantiate an

expense covered by section 274(d) by sufficient evidence

corroborating the taxpayer’s own statement of the required

elements of section 274(d).   Sec. 274(d); sec. 1.274-5T(c)(3),

Temporary Income Tax Regs., 50 Fed. Reg. 46010 (Nov. 6, 1985).

     The substantiation requirements for expenses covered by

section 274(d) preclude use of the Cohan rule.   Sanford v.
                                 -6-

Commissioner, 

, 827-828 (1968), affd. per curiam 

(2d Cir. 1969); Fessey v. Commissioner, T.C. Memo. 2010-

191.    Otherwise, unless the failure to produce adequate records

or sufficient evidence is due to the loss of such records through

circumstances beyond the taxpayer’s control, “No deduction * * *

shall be allowed”.    See sec. 274(d); Sanford v. Commissioner,

supra at 827; sec. 1.274-5T(c)(5), Temporary Income Tax Regs., 50

Fed. Reg. 46022 (Nov. 6, 1985).

2005 Deductions

       Casual Labor

       On his 2005 Schedule C, petitioner claimed a deduction for

$3,782 for “casual labor”; that is, amounts he claimed he paid to

individuals who assisted him in performing jobs for clients.

Respondent disallowed all of the claimed deduction for lack of

substantiation.

       Petitioner testified that he hired individuals to assist him

with projects that were time sensitive or otherwise could not be

accomplished by petitioner alone.      For instance, petitioner

testified that he was once hired to paint a retail store

overnight, which required the assistance of another individual.

Petitioner also testified, however, that some portion of the

casual labor expense was attributable to payments he made to

helpers on projects he performed for his church free of charge.
                                -7-

According to petitioner, he paid for helpers on 10 to 20 percent

of his projects in 2005.

     To substantiate his casual labor expense, petitioner

proffered a list of 13 individuals’ first names.    Those names

correspond to some extent to entries on petitioner’s weekly

planners for 2005 that recorded his work projects.    However,

there is no record of actual amounts paid to any individual on

either the list or the weekly planners.

     We are persuaded by petitioner’s testimony that he required

assistance on some of his compensated projects in 2005 for which

he incurred casual labor expenses.    However, we are unable to

account for the payments that may have been made in connection

with projects that petitioner performed for his church without

compensation.   His expenses for such projects were not incurred

in carrying on a trade or business, see sec. 162(a), and would

not offset gross receipts from compensated projects.    “[B]earing

heavily * * * upon the taxpayer whose inexactitude is of his own

making”, we find that petitioner is entitled to a deduction of

$1,500 as a casual labor expense.     Cohan v. Commissioner, supra

at 543-544.

     Meals and Entertainment Expenses

     On his 2005 Schedule C, petitioner claimed a deduction for

$3,781 in meals and entertainment expenses.    Respondent
                                  -8-

disallowed all of the claimed deduction for lack of

substantiation.

     At trial, petitioner testified that he would purchase meals

for individuals for business purposes as a means of generating

leads for jobs or in exchange for their lending him tools and

equipment needed to complete jobs.      To substantiate his meals

expenses, petitioner produced only his weekly planners, on which

he noted amounts paid for meals.    Most of the entries on the

planners do not state for whom petitioner bought meals or other

information required pursuant to section 274(d).      Sec. 1.274-

5T(b)(3), Temporary Income Tax 

.

     Petitioner’s vague testimony and the incomplete entries on

his weekly planners do not satisfy the substantiation

requirements of section 274(d).    See

respondent’s disallowance of all of petitioner’s deduction for

meals and entertainment expenses for 2005.

     Car and Truck Expenses

     Petitioner claimed $9,452 in car and truck expenses on his

2005 Schedule C, representing repair expenses for the car he used

in his handyman business.   Respondent disallowed $2,684 of this

amount for lack of substantiation and allowed 80 percent, or

$5,414, of the remainder, treating 20 percent as allocable to

petitioner’s personal use of the car.      Petitioner has not offered
                                  -9-

any further substantiation but instead contends that his business

use of the car was greater than 80 percent.

     In support of his claim that his business use of the car

exceeded 80 percent, petitioner testified that his personal use

of the car was quite limited because he kept his tools and

equipment in the car, making it unsuitable for personal use.

Instead, he contends, he would generally borrow his parents’ car

for personal use, as they were unable to drive in the evenings.

Petitioner relies on his weekly planners for 2005 to substantiate

that his business use was greater than 80 percent.    The entries

for mileage on the planners, however, were not contemporaneous.

Instead, in connection with the examination of his return,

petitioner attempted to reconstruct his mileage by taking the

odometer readings on car repair invoices prepared at various

times during 2005 and then allocating the expended miles to each

week on the basis of that week’s appointments, making notations

to that effect on the weekly planners.

     The substantiation requirements of section 274(d) apply to

the business use of passenger automobiles, such as petitioner’s

car, which are listed property.    Secs. 274(d)(4), 280F(d)(4).   As

noted, the records offered to substantiate petitioner’s business

use of the car are not contemporaneous, and for the reasons

discussed below we conclude that petitioner has not substantiated

business use in excess of 80 percent by his own statement and
                               -10-

sufficient corroborating evidence, as provided in section 1.274-

5T(c)(3), Temporary Income Tax 

.

     We have reviewed the weekly planners as annotated by

petitioner and do not find them reliable for at least two

reasons.   First, most of the business appointments do not

indicate the location of the project.   Consequently, the Court

has no means to assess the reasonableness of petitioner’s

estimate of the mileage driven for a given project.   Second, it

is clear from a review of the planners that petitioner has

included several personal appointments (e.g., choir practice) as

giving rise to business mileage.   Given the infirmities of

petitioner’s attempt at reconstructing his business mileage, we

conclude that he has failed to substantiate business use of the

car in excess of 80 percent for 2005.   As a consequence, he has

failed to demonstrate error in respondent’s determination that

the car was used no more than 80 percent for business purposes.

Respondent’s disallowance of the claimed car and truck expenses

in excess of $5,414 is therefore sustained.

2006 Deductions

     Telephone Expense

     On his 2006 Schedule C, petitioner claimed a deduction of

$2,219 for telephone expenses that respondent disallowed for lack

of substantiation.   Although petitioner testified that the

expense was for a landline telephone used exclusively for
                               -11-

business purposes, he provided no documentary substantiation at

trial.   The expense is improbably high, and we conclude that

petitioner has failed to substantiate it.   See also sec. 262(b).

We accordingly sustain the disallowance.

     Legal and Professional Expenses

     On his 2006 Schedule C, petitioner claimed a deduction of

$3,693 for legal and professional expenses that respondent

disallowed for lack of substantiation.   Petitioner produced no

documentary substantiation of this expense and at trial was

unable to recall any details concerning the expenditure.   In the

absence of any substantiation, we sustain the disallowance.

Accuracy-Related Penalties for 2005 and 2006

     Respondent determined that petitioner is liable for

accuracy-related penalties under section 6662(a) and (b)(1) for

negligence or disregard of rules or regulations with respect to

the underpayments determined for 2005 and 2006.

     Section 6662(a) and (b)(1) imposes a penalty of 20 percent

on that portion of an underpayment of tax that is attributable to

negligence or disregard of rules of regulations.   Generally, no

penalty shall be imposed under section 6662 with respect to any

portion of an underpayment if with respect to such portion it is

shown that there was reasonable cause and that the taxpayer acted

in good faith.   Sec. 6664(c); Higbee v. Commissioner, 

, 446 (2001).   The determination of whether a taxpayer acted
                                 -12-

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

basis, taking into account all pertinent facts and circumstances,

including the experience, knowledge, and education of the

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

        Pursuant to section 7491(c), the Commissioner bears the

burden of production with respect to a taxpayer’s liability for

any penalty.     To meet his burden of production, the Commissioner

must come forward with sufficient evidence to indicate that it is

appropriate to impose the relevant penalty on the taxpayer.

Higbee v. Commissioner, supra at 446.     Once the Commissioner

meets his burden of production, the taxpayer bears the burden of

proving error in the Commissioner’s determination to impose a

penalty, including proving reasonable cause or other exculpatory

factors.

sec. 1.6664-4(a), Income Tax Regs.

     Negligence is a lack of due care or failure to do what a

reasonable and ordinarily prudent person would do under the

circumstances and “includes any failure to make a reasonable

attempt to comply with the provisions of” the internal revenue

laws.     Sec. 6662(c); Marcello v. Commissioner, 

, 506

(5th Cir. 1967), affg. in part and remanding in part 

(1964) and T.C. Memo. 1964-299.     The failure to keep adequate

books and records or to substantiate items properly may

constitute negligence.     Sec. 1.6662-3(b)(1), Income Tax Regs.
                               -13-

     With respect to petitioner’s 2005 deduction for casual

labor, petitioner’s credible testimony and the list of

individuals’ names he produced, which corresponds to his weekly

planners, convince the Court that taking into account the nature

of petitioner’s handyman work he was not negligent.     He made an

attempt to keep track of his casual labor expenditures, although

one that fell short of adequate substantiation.

     By contrast, we sustain respondent’s determination that

petitioner is liable for an accuracy-related penalty for

negligence with respect to his 2005 deduction for meals expenses,

because respondent met his burden of production and petitioner

did not act reasonably and in good faith in claiming a $3,781

deduction based only on the vague and incomplete entries on his

weekly planners.   Similarly, we sustain respondent’s

determination that petitioner is liable for accuracy-related

penalties for negligence with respect to petitioner’s 2006

deductions for telephone and legal and professional expenses,

because petitioner provided nothing at all to substantiate these

deductions.

     With respect to respondent’s disallowance of $4,038 of

petitioner’s 2005 deduction for car and truck expenses, which we

have sustained, we conclude that respondent has met his burden of

producing sufficient evidence to show negligence and that

petitioner has failed to show reasonable cause.   Petitioner
                                 -14-

produced no substantiation at all for $2,684 of the claimed

deduction.   For the remainder that was substantiated,

petitioner’s own records reveal instances where personal use of

the car was claimed as business use.      In these circumstances, it

was negligent for petitioner to take the position that all use of

his car was for business purposes.

     To reflect the foregoing,


                                        Decision will be entered under

                                 Rule 155.