T.C. Memo. 2019-78



                         UNITED STATES TAX COURT



           HECTOR BACA AND MAGDALENA BACA, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 11459-15.                           Filed June 26, 2019.



      Joel Cruz-Esparza, for petitioners.

      Maria Cerina De Ramos, Brock E. Whalen, and Melinda K. Fisher, for

respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


      HOLMES, Judge: Hector Baca is always on the lookout for new ways to

make money for his family. If he hears about a new piece of equipment he can

learn to use, he’ll buy it and build a business around it; if he learns that someone
                                        -2-

[*2] needs something done, he’ll extend his business to grab the opportunity; if he

can qualify for high-paying temporary work, he’ll take the job.

      But his bookkeeping for all this work did not always meet the standard of

meticulousness the IRS prefers. The Commissioner has disallowed for lack of

substantiation a large number of deductions the Bacas claimed on their 2012 and

2013 returns, and he also says they owe a section 6651(a)(1)1 late-filing addition

to tax and section 6662(a) penalties.

                              FINDINGS OF FACT

      The Bacas are immigrants from Mexico who have grown roots in El Paso,

Texas. In 1997 Hector Baca started working as a dispatcher for a small local

company and went on to buy it just a few years later. What began as a delivery

company sprouted multiple other businesses, all of which Baca ran from the

El Paso home he owned with his wife Magdalena. She herself had risen to become

a vice president of WestStar Bank. Her income was mostly wages from the bank,

though she helped her husband with a multilevel marketing business.

      It was Hector Baca’s tangle of businesses that drew the Commissioner’s

attention, and we start by describing them.

      1
        All section references are to the Internal Revenue Code in effect for the
years in issue, and all Rule references are to the Tax Court Rules of Practice and
Procedure, unless we say otherwise.
                                          -3-

[*3] I.         Hector Baca’s Businesses and Employment

          Dependable Transportation Services (DTS). DTS is a limited liability

company (LLC) through which Baca sold delivery services. Baca referred to

DTS’s services as “hot shots” or “urgent deliveries,” but business cooled by 2012

and DTS was down to one client before it ceased business by the year’s end.

          Chile Relabeling Business. This was perhaps the most unusual and short-

term of Baca’s businesses--it lasted for only ten months in 2012. It came to life

when one of DTS’s clients, Farzin Tabatabai, bought a large number of chile bags

that he wanted to relabel with the name of his own company. He hired Baca to do

the job, and Baca simply tacked the relabeling onto the delivery services he was

already performing for Tabatabai. And so a chile-bag relabeling business became

a part of DTS.

          Baca would relabel the chile bags and then fax invoices to Tabatabai for

payment, which earned him a total of $9,196 in 2012. Baca claims, however, that

he hired Jay (“Pancho”) Merced as a contract laborer to perform these services.

The arrangement was not perhaps the most formal, and Baca claimed that he paid

Merced by letting him use a DTS debit card from Wells Fargo to withdraw “about

$9,000” in cash from DTS’s account. There is nothing in the record to confirm
                                          -4-

[*4] that these withdrawals occurred, or that DTS or Baca made any other payment

to anyone named “Merced” or “Pancho” for this work.

      Mobile 18-Wheeler Service. Baca also spotted an opportunity to do mobile

oil changes for 18-wheelers in the El Paso area. He added general tuneups to his

service, and offered it directly to drivers. To make this possible, he had to

purchase a good deal of equipment, including a GMC van,2 compressors (or car

lifts), a pump for oil and grease, and “everything to give service in 18-wheelers.”

This equipment wasn’t cheap, and Baca says he spent around $15,0003 to

“complete * * * the van” with everything necessary to perform the tuneups and oil

changes. We aren’t sure whether Baca is operating this service as a sole

proprietorship or within a more formal business structure.

      Multilevel Marketing Company. We also don’t have much information on

Baca’s involvement in what he claims is a “multilevel” business that sells health

and beauty products. As best we can tell, the “multilevel” business is some sort of

scheme--or multiple schemes--where a salesman earns commissions based not



      2
          Baca described his van as “kind of a truck closet.”
      3
       The compressor and lift alone cost about $2,000. Baca claimed to have a
“contract” for their purchase, but was “not sure exactly if [he had] a receipt” for
them. He also said he bought a used pump in 2011--the same year he bought the
compressor and lift.
                                       -5-

[*5] only on what he sells but also on how many others he can sign up to sell the

products. Mrs. Baca did help out with some of the marketing, but the Bacas don’t

seem to have earned much, if any, income from it during the years at issue.

      Advanced Stimulation Technologies (AST). Baca heard, probably in 2011,

that there was good money to be made in the West Texas oilfields rejuvenated by

the advent of fracking. From 2011 through 2014 a company called AST paid

Baca, who already had a commercial driver’s license, to move and operate

fracking equipment. He was assigned to projects in the oilfields in and around

Midland and Odessa, Texas, where he worked an average of 16 hours each day,

4 days a week. And he did this all while maintaining his residence in El Paso.

      Baca was an on-call employee, but he’d ask that AST give him at least four

hours notice of a new project to allow him to make the commute from El Paso to

Midland. Certain projects required him to transport equipment or car pool with

other workers to locations beyond Midland--trips that could take one to three

hours one way. Other projects required him to spend the night in Midland, where

he would stay in onsite mobile homes or in his truck at a truck stop. Otherwise,

he’d take to the highway to make the long drive home to his family in El Paso

after working a long day. Every project was different, with some lasting weeks at

a time, and others done within a day. Even with this difficult commute, the Bacas
                                        -6-

[*6] never considered moving to Midland because Mrs. Baca had a good job at the

bank, and also because they say they didn’t “know when [the job opportunities]

would finish.”4 Baca’s intention was always to make good money while it lasted

and then return to El Paso. And that’s exactly what happened--he made around

$99,000 in 2012 and $74,000 in 2013 from these oilfield projects alone.

      Belly Dump Service. While Baca was in Midland for oilfield work, he “tried

to make a business for the location” with one of his friends by purchasing a belly

dump trailer and forming a partnership5 to operate it in 2012. The belly dump is

“kind of a box, and you carry land,” meaning the soil and dirt, etc., that is removed

from the ground when a piece of land is being cleared. And between 2012 and

2013, Baca and his friend used the belly dump to move the soil and dirt they

cleared from oil-drilling land. Baca claims the belly dump cost him $7,500 plus

an additional $2,000 in maintenance and repairs (i.e., paint, brakes, and lights).




      4
        Baca claims that his AST work was temporary and project-by-project, such
that he never knew when it might end, yet he ended up working consistently for
AST for nearly all of 2012 and 2013--the years at issue--as well as through 2014.
He was later laid off at the beginning of 2015 when all the work dried up.
      5
        Baca and his friend organized the business as a partnership and named it
MEBA Oilfield Services. The partnership agreement shows that Baca contributed
the belly dump to the partnership, which means that Baca bought it but MEBA
owned it.
                                        -7-

[*7] But our own review of the contract6 for the belly dump shows a purchase

price of $6,700 and a downpayment of $1,000. This downpayment left a balance

of $5,700. Baca sold the belly dump in 2013, he “think[s]”.

      Other businesses. Before the years at issue, Baca operated an oil-changing

business called Master Lube, which he ran through B&B Express, LLC, from 2008

to 2011. He also opened an auto carrier business in 2008 that he used to move

cars from New York to Mexico. He financed the carrier with a small business loan

of $39,000 in 2008. This business became unprofitable, and he sold the carrier in

2012. As far as we can tell, Baca’s operation of these businesses did not affect

either the Commissioner’s calculation of a deficiency or any income or claimed

losses on the record before us.

II.   Returns, Trial, and More

      A.     2012 and 2013 Income Tax Returns

       The Bacas timely filed their return for 2012, but were late with their return

for 2013. Filed with both returns were Schedules C, Profit or Loss From Business,

for Baca’s multilevel marketing business, as well as Schedules A, Itemized




      6
        While the contract is in Spanish, we feel confident in our ability to read
pure numbers and combine these numbers with translations provided by the parties
to arrive at our conclusion regarding the belly dump’s purchase price.
                                         -8-

[*8] Deductions, which showed large unreimbursed employee-business-expense

(UEBE) deductions for Baca’s “oil field” work.

      The Bacas’ returns do not make clear what income came from which

business. We do have W-2 statements for the income Baca earned from AST and

his wife earned from WestStar Bank.7 DTS’s income got mixed up with Baca’s

other income, though by trial Baca seemed to understand that each business should

have had a separate Schedule C or other form.

      B.     Audit and Trial

      Audit and Notice of Deficiency. The Commissioner noticed these problems,

and began an audit. That did not resolve the issues, so he refined them into a

notice of deficiency for tax years 2012 and 2013. In this notice the Commissioner

disallowed the vast majority of the Bacas’ 2012 Schedule C deductions, all their

2013 Schedule C deductions, and UEBE deductions for both years. He topped off

his notice with a late-filing addition to tax and two section 6662(a) penalties, but

did determine that the Bacas were entitled to car and truck expenses of $1,548 and




      7
        The parties included in their stipulation a second 2013 W-2 for Baca that
was not mentioned in the notice of deficiency, the pleadings, or anywhere else in
the record. It showed that he earned $25,000 from a company named “Universal
Pressure Pumping, Inc.” We know nothing more about this job.
                                          -9-

[*9] an adjustment for cost of goods sold of $6,438 for 2012, even though they

had not claimed these on their return.

      We can summarize what remains in dispute. Here are the unreimbursed

employee-business expenses on the Bacas’ Schedules A:

                                         2012     Disputed?    2013     Disputed?
  Mileage                            $20,260        Yes       $17,804     Yes

  Overnight travel                       32,500     Yes        32,500     Yes
   Total1                                52,760      ---       50,304      ---
       1
         These totals are what’s in dispute, not what’s disallowed, because they
 don’t account for the 2% floor on miscellaneous itemized deductions. See sec.
 67(a). The Tax Cuts and Jobs Act, Pub. L. No. 115-97, sec. 11045(a), 131 Stat.
 at 2088 (2017), amended section 67 by adding subsection (g), which suspends
 the miscellaneous itemized deduction for tax years 2018 through 2025. We
 apply the law as in effect for the tax years in question.

       And here are the business expenses on the Bacas’ Schedules C:
                                       - 10 -

 [*10]                                 2012     Disputed?      2013      Disputed?
  Contract labor                      $9,000        Yes         -0-          ---
  Depreciation and section 179        64,600        Yes       $49,103       Yes
   expense deduction
  Legal and professional
   services                              700        No          -0-          ---
  Office                               2,388        No          -0-          ---
  Repairs and maintenance              2,152        No          -0-          ---
  Other (i.e., fuel)                    4,732       Yes         -0-          ---
   Total                              83,572        ---        49,103        ---

      Trial. The Bacas timely petitioned our Court, and we tried the case in

El Paso.8 Baca’s testimony allowed us to piece more of his story together--but

also left some things unclear. He told us about his different businesses, his alleged

home office, and which vehicles and tools he and his wife depreciated or expensed

on their Schedules C.

      These depreciation and section 179 deductions were especially difficult to

understand. According to Baca, he drove a 2008 Isuzu car and his wife drove a

2004 Honda Odyssey van during 2012--the costs of which he says were deductible

for that year. These cars were not listed on the Bacas’ 2012 Form 4562,



      8
       The Bacas lived in Texas at all relevant times, which means this case is
appealable to the Fifth Circuit. See sec. 7482(b)(1)(A).
                                        - 11 -

[*11] Depreciation and Amortization, but were listed on an attached “2012 Asset

Detail Report” submitted with the parties’ stipulation. We also find that Baca

bought his belly dump in 2012 and paid for its maintenance in that year. He

deducted the cost of some tools and equipment in 2012 that he had bought in 2011

because, he said, he “never did it in 2011.” In 2013 Baca says he bought a new

Honda Oydssey for his wife--the cost of which they deducted.

      The Bacas’ home-office expenses were even less clear. When questioned

about a deduction for his family’s household utilities, Baca said that “[t]he thing is

* * * in my house I have my office” and that this office is for DTS and also “for

[his] other businesses except for any duties related to [his] oil field position.” He

testified that the home office comprised both a single room that’s around 200

square feet, and a backyard shed where he stored supplies, and which cost him

about $5,000 to build. Baca reported on his 2012 return, however, that the shed

and other unspecified “equipment” cost a total of $42,000, and he deducted

$20,000 of that total under section 179.

      What made this still more confusing is that the Commissioner seems to

think that this testimony related to the Bacas’ 2012 Schedule C “[o]ffice expense”

of $2,388. But the Commissioner did not list this item as in dispute in the notice

of deficiency, and it seems fairly clear to us that Baca’s testimony--though lacking
                                        - 12 -

[*12] specifics--directed us to the $20,000 section 179 deduction and $1,100

depreciation deduction that the Bacas took for “office/storage.” The Bacas did not

attach Forms 8829, Expenses for Business Use of Your Home, to either their 2012

or 2013 return.

       Baca shed more light on his UEBE deductions. He said these were for his

“gas, meal, [and] insurance” costs while working in Midland and that he had

provided his return preparer with the receipts and bank statements to prove these

deductions. He also provided us with a summary of expenses for 2012, which

includes payments for his car insurance, his cell-phone, and some of his other

utility bills.

                                      OPINION

       This leaves us with an unusually messy substantiation case, which we start

to untangle by noting that it is up to the Bacas to show that they are entitled to the

deductions they took for 2012 and 2013. See Rule 142(a). The Bacas, however,

urge us to look only to the administrative record compiled during the audit. When

considering just this record, they insist we must find that the Commissioner’s

notice of deficiency is “defective and perfunctory” under the Administrative

Procedure Act (APA), 5 U.S.C. secs. 501-559, 701-706 (2006), because it is
                                       - 13 -

[*13] arbitrary, capricious, and an abuse of discretion.9 The Bacas also argue that,

if this case is reviewed de novo, they have substantiated every deduction that the

Commissioner disallowed. The Commissioner disagrees.

I.    Substantiation

      Section 162(a) allows taxpayers to deduct all “ordinary and necessary”

expenses paid in carrying on a trade or business, see sec. 1.162-1(a), Income Tax

Regs., but generally doesn’t allow deductions for personal, living, and family

expenditures, sec. 262(a). To establish entitlement to a trade or business expense

deduction, a taxpayer must provide sufficient records to substantiate the expense.

Sec. 6001; Shea v. Commissioner, 

, 186 (1999). Credit card and

bank statements may be sufficient to show that an expense was paid, but usually

aren’t good enough without more to show that it was related to a trade or business




      9
        We won’t discuss this issue beyond noting that the Bacas have preserved
it. We have already held that the default provisions of the APA do not apply to
our deficiency cases. See Ax v. Commissioner, 

, 161-63 (2016).
Every circuit court to consider the question has agreed with us. See QinetiQ US
Holdings, Inc. & Subs. v. Commissioner, 

, 559-61 (4th Cir. 2017),
aff’g T.C. Memo. 2015-123; Bratcher v. Commissioner, 

(7th Cir.
1997), aff’g without published opinion T.C. Memo. 1996-252; Clapp v.
Commissioner, 

, 1403 (9th Cir. 1989); see also Humphreys v.
United States, 

, 672 (5th Cir. 1995) (the Code and not the APA
provides a basis for review of a taxpayer’s tax liability).
                                       - 14 -

[*14] because such statements often don’t show an expense’s purpose. See, e.g.,

Fessey v. Commissioner, T.C. Memo. 2010-191, 

, at *4.

      Section 274(d) makes proving a business expense even harder where the

line between personal and business expenses is blurry. This section affects

expenses for entertainment, meals, lodging, and deductions for certain kinds of

property such as cars. Secs. 274(d), 280F(d)(4)(A); sec. 1.274-2(b)(1), Income

Tax Regs. When such expenses are at issue, taxpayers must have proof of:

      •      the expense’s amount,

      •      the time and place it was incurred, and

      •      a description of its business purpose.

Sec. 274(d) (flush language); sec. 1.274-5T(b)(3), (6), Temporary Income Tax

Regs., 50 Fed. Reg. 46015, 46016 (Nov. 6, 1985).

      The records that section 274 requires may be any document that can

establish any of these three elements but are usually an account book, a diary, a

log, a statement of expenses, or trip sheets. See sec. 1.274-5T(c)(2)(i), Temporary

Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). Section 274 bars us from

estimating such expenses.
                                         - 15 -

[*15] A.     Schedule A Unreimbursed Employee Expenses

      We’ll begin with the Bacas’ Schedule A deductions for UEBE. They

claimed more than $50,000 of such expenses on both their 2012 and 2013 tax

returns. The amounts claimed were comprised of mileage and travel expenses--

expenses subject to section 274. The Commissioner disallowed these in full, and

claims that the Bacas have failed to adequately link the expenses to a business

purpose.

      On their returns, specifically on their Forms 2106-EZ, Unreimbursed

Employee Business Expenses, the Bacas limited their UEBE deductions to two

items: “mileage” and “travel expense while away from home overnight, including

lodging, airplane, car rental, etc.” The return (and its instructions) specifically

state, “Do not include meals and entertainment” as travel expenses. And the

Bacas did not claim a specific deduction for “meals and entertainment” expenses

on either of the returns at issue. At trial, however, Baca stated that he provided

receipts for meals in Midland to his tax preparer, and the Bacas even listed a

grocery expense as proof of their UEBE mileage and travel expenses in their brief.

If the Bacas claimed any grocery bills as mileage or travel expenses, they are out.
                                        - 16 -

[*16]         1.    Amount and Time of Mileage; Overnight and Travel Expenses

        The cost of lodging can be a business expense, and the Bacas deducted

$32,500 for lodging in 2012. Baca credibly testified that during his stays in

Midland that year he either slept in his car or stayed in a mobile home at a cost of

around $400 to $500 a month. There is no proof in the record of such expenses

that satisfies section 274(d)’s stringent requirements. A cost of $400 to $500 a

month for lodging in Midland would be reasonable, but it would mean the total

amount for each year would be only between $4,800 and $6,000--nowhere close to

what the Bacas claimed. And without some sort of detailed record showing the

exact amount of Baca’s lodging expenses, we simply cannot allow the Bacas this

deduction.

        Mileage can also be a deductible business expense, and the Bacas deducted

more than $20,000 in mileage for 2012 and just over $17,800 in 2013. But these

expenses are also subject to the heightened substantiation requirements of section

274(d). Baca did not have a log or notebook in which he kept track of his business

travel. He instead provided credit-card statements, which demonstrate that he

spent a significant amount of time in Midland, and spent money at what seem to be

gas stations there. But without something like a log of the trips he made to
                                       - 17 -

[*17] Midland, Baca cannot adequately establish how many miles he drove for his

oilfield work--especially since he also operated the belly dump in the same area.

      We disallow these deductions.

             2.    Baca’s 2012-13 Tax Home

      There’s a second problem lurking with these expenses. Even if Baca’s

credit-card statements were sufficient for us to determine how often he drove to

Midland in 2012 and 2013, he would still need to show that his “tax home” wasn’t

where he was working. The reason is that section 162(a)(2) requires a taxpayer be

“away from home” to deduct travel expenses in pursuit of a trade or business.

This is one of those instances in tax law where an ordinary word means something

different from what normal people might think it means--courts continue to hold

that a taxpayer’s “home” for tax purposes is not where he lives but is the vicinity

of his principal place of business, where he has a permanent job, or at least where

he is working indefinitely. The leading case on this issue is Commissioner v.

Flowers, 

, 473-74 (1946), where the Supreme Court made clear that

keeping a house far away from where one works is a personal decision, which

makes the expenses of going back and forth to work a nondeductible personal

expense. See sec. 262(a). Baca is careful to point out that he didn’t expect his

work for AST to last forever--he never thought of it as a permanent job. But we
                                       - 18 -

[*18] have to look at the facts and circumstances to decide whether it was

“sufficiently indefinite”, see Markey v. Commissioner, 

, 1255 (6th

Cir. 1974) (quoting Six v. United States, 

, 69 (2d Cir. 1971)), rev’g

T.C. Memo. 1972-154, and the Code makes clear that “the taxpayer shall not be

treated as being temporarily away from home during any period of employment if

such period exceeds 1 year,” sec. 162(a) (flush language).

      The Fifth Circuit--where this case would go on appeal--has told us to look at

four factors to decide whether a taxpayer’s employment is sufficiently indefinite:

      •     whether the taxpayer’s job required him to travel to the distant
            worksite;

      •     where the taxpayer spends more of his time;

      •     where the taxpayer engages in greater business activity, even if he
            still maintains business at his perceived place of abode; and

      •     where the taxpayer derives a greater proportion of his income.

See Robertson v. Commissioner, 

, 395-96 (5th Cir. 1999), aff’g T.C.

Memo. 1997-526; Putnam v. United States, 

, 916-17 (5th Cir. 1994);

see also Ham v. United States, 

, 672 (6th Cir. 1969) (construction

worker spent four years working on a project distant from place where family

resided, returning only on weekends, was away indefinitely); Ney v. United States,

(8th Cir. 1948) (denying travel deductions as personal where
                                        - 19 -

[*19] taxpayer spent six-sevenths of his time working in one city away from his

place of abode).

      In Robertson, a Mississippi Supreme Court justice worked in Jackson where

his court was located, but lived with his family in Oxford where he also taught a

course at Ole Miss law school. 

. Each Sunday

afternoon, the justice would drive from Oxford to Jackson where he would remain

through Thursday afternoon to fulfill his duties as a judge before returning home

to his family and professorial duties in Oxford. 

Circuit denied his

claimed deduction for travel and meal expenses because it found that the justice

spent most of his time and earned most of his money in Jackson. 

The Court also didn’t think the justice’s status as an elected state official was

enough to find that the exigencies of business required him to travel from Oxford

to the state capital. 

      So was Baca’s work in Midland “sufficiently indefinite” such that Midland

became his tax home during the years at issue? We don’t doubt the sincerity of

the Bacas’ belief that the oilfield work was too likely to prove temporary to justify

thinking about moving from El Paso to Midland. The key fact, however, is that

Baca’s job with AST did not require him to travel back and forth to Midland.

Baca chose to take the job in Midland because he knew the job paid well and he
                                        - 20 -

[*20] hoped to earn a lot of overtime. And he was right about this--the record

shows that he spent an average of 16 hours a day, 4 days a week, from 2011

through 2014 working in Midland. Some projects may have been shorter, and

some longer, but he spent the bulk of his time working for AST. The fact that

Mrs. Baca stepped in to help with Baca’s multilevel business confirms for us that

his Midland job consumed much of his time. What’s more, even though Baca may

have gone into the job with AST in 2011 worried that it could end at any moment,

we find that at some point after his first year he felt some assurance that the work

would continue. Buying a belly dump and starting a business with it in Midland is

evidence of such assurance. And finally, Baca’s AST income was much higher

than what he earned from his other businesses--nearly $100,000 versus $13,000 in

2012. That makes his situation quite similar to the judge’s in Robertson. It is

understandable that the Bacas didn’t want to pack up their home and move to

Midland, especially with Mrs. Baca’s job at the bank, but the work in Midland was

consistent for nearly four full years. The Bacas’ decision to remain in El Paso was

their personal decision.

      While we recognize that Baca’s work for AST seemed unlikely to last a

lifetime, we don’t think the law in this area cares about long-term career prospects

as much as it cares about consistency and time spent working in a certain location
                                       - 21 -

[*21] such that a person could make a reasonable choice to move there, even if it

wasn’t convenient for personal reasons. And there is nothing in the record to

suggest that Baca went without work for any significant time while employed by

AST. We therefore find that Baca’s work in Midland was sufficiently indefinite to

make Midland his tax home during the years at issue. This makes his travel

expenses personal and nondeductible even if the Bacas had substantiated them.

      B.     Schedule C Deductions

      The Commissioner also disallowed expenses taken on the Bacas’ Schedules

C.10 For 2012 he disallowed different deductions they took that included

depreciation and expenses for section 179 property, contract labor, and fuel. For

2013 he disallowed their lone depreciation and section 179 expense deductions.

             1.    Depreciation

      Section 167(a) allows a depreciation deduction for the exhaustion or wear

and tear of property used in a trade or business or held for the production of

income. To substantiate their depreciation deductions, the Bacas have to

demonstrate that the property was used in one of their trades or businesses and

also “establish the property’s depreciable basis, by showing the cost of the

      10
        We note here again that many of these expenses were not properly
reported as the Bacas lumped them onto one Schedule C--for “retail sales
support”--that doesn’t fit with what we know about Baca’s different businesses.
                                         - 22 -

[*22] property, its useful life, and [any] previously allowable depreciation.” Cluck

v. Commissioner, 

, 337 (1995). Some property types listed in section

179 get special treatment--even though they might be property that lasts for years,

a taxpayer who buys them may deduct rather than depreciate their costs. Sec.

179(a), (d)(1). A taxpayer who chooses to deduct, however, must deduct the

property’s cost in the year he puts it into service in his trade or business--not

before and not after. Sec. 179(a). And the deduction is limited to the taxpayer’s

aggregate taxable income derived from any of his trades or businesses during the

taxable year. Sec. 179(b)(3). The taxpayer must also prove by adequate records

how and from whom the section 179 property was acquired, and he must show

when it was placed into service. Sec. 1.179-5(a), Income Tax Regs. (flush

language). The heightened substantiation requirements of section 274(d) must

also be met for proving the business use of “listed property.” See Singh v.

Commissioner, T.C. Memo. 2009-36, 

, at *1.

      Belly dump. Some of the best records in this case are those for the belly

dump. The Bacas took a $9,500 section 179 deduction for the belly dump on their

2012 return. And the belly dump doesn’t have to lurch over the section 274 hurdle

for listed property--the Code doesn’t consider such a specialized vehicle to be a

“passenger automobile.” See sec. 280F(d)(5)(B)(ii). That’s not enough, however,
                                        - 23 -

[*23] to sustain the deduction. For one thing, Baca’s contract to buy the belly

dump shows a price of $6,700, including a downpayment of $1,000--an amount

nearly $3,000 less than the claimed deduction. Baca explained at least part of this

difference as his inclusion in the belly dump’s cost of $2,000 that he later spent to

repair it. There are invoices in the record from “Mission Truck Sales” and

“Wofford Truck Parts, Inc.,” but there’s no clear link to the belly dump. So we

won’t just add these unidentified “maintenance expenses” to the purchase price.

      There’s also another problem--MEBA, not Baca as an individual, operated

the belly dump. Baca bought the belly dump in February 2012, but MEBA’s

partnership agreement plainly says that he contributed the “Hobb Belly Dump” to

the partnership in exchange for a 50% ownership share in May 2012. The Bacas

argue in their brief that the partnership agreement shows that the belly dump

“continued to be placed in transportation services” through 2013. We don’t doubt

this at all, but what it means is that MEBA and not Baca used the belly dump for

business in 2012. And MEBA didn’t “purchase” the belly dump, because Baca

contributed it to MEBA. See sec. 179(d)(1)(C), (2)(C)(i). That means no

deduction for MEBA passes through to Baca to deduct on his joint return.

      We can’t ignore the partnership agreement and pretend the belly dump is

Baca’s section 179 property just because he bought it. Even if we did, we have
                                       - 24 -

[*24] nothing to show that he used the belly dump in a business other than MEBA.

See, e.g., Green v. Commissioner, T.C. Memo. 1998-356, 

, at *3-

*4. We can’t even confirm that MEBA made enough income during 2012 to allow

such an expense. We therefore find that the Bacas are not entitled to a section 179

deduction for the belly dump.

      All other--cars, tools, and office storage. The Bacas took a $54,000 section

179 deduction for a category of expenses they called “all others” on their 2012

return. The Commissioner says the Bacas did not explain this category, but the

parties submitted with their supplemental stipulation of facts a copy of the Bacas’

2012 tax return including a Form 4562 accompanied by a “2012 Asset Detail

Report.” The report lists two cars (a Honda and an Isuzu), office/storage, and

tools. Baca explained that he was trying to deduct the costs of the Baca’s cars,

some work tools, and a storage shed in the yard of his home in El Paso. So we

think we at least know what was in the “all others” category.

      We’ll start with the cars. These deductions require heightened

substantiation because cars are listed property. Secs. 274(d)(4), 280F(d)(4)(A)(i).

We find Baca’s testimony that he and his wife drove those cars during 2012

credible, but we don’t have any evidence that they bought these cars and placed

them into service in a trade or business in 2012. We also don’t have any evidence
                                        - 25 -

[*25] in the record about what they cost. And we have none of the detailed

evidence that section 274(d) requires about the cars’ time and place of use, or their

business purpose. That makes the cars’ cost not deductible.

      Turning to the tools, the Bacas run into a timing issue. Baca admitted that

he bought the tools in 2011 for his mobile 18-wheeler service, but didn’t take a

first-year expense deduction until 2012 because he just “never did it.” Section 179

property must be deducted in the year it is placed in service, sec. 179(a), which is

the time when it is “placed in a condition or state of readiness and availability

* * * in a trade or business,” sec. 1.167(a)-11(e)(1)(i), Income Tax Regs. This

even includes property that is “acquired and set aside during the taxable year.”

Sec. 1.46-3(d)(2)(i), Income Tax Regs.; see also sec. 1.167(a)-11(e)(1)(i), Income

Tax Regs. (stating that section 1.46-3(d)(2), Income Tax Regs., applies for

purposes of determining when property is placed in service). We therefore find

that the Bacas can’t deduct the cost of these tools for 2012.

      That leaves a $20,000 section 179 expense, plus an $1,100 depreciation

expense, for unspecified equipment associated with Baca’s purported office and an

“office/storage” unit that Baca says he built in his backyard. He listed the total

cost of these office/storage assets as $42,000. There are problems here too.

Section 280A generally disallows deductions claimed for expenses associated with
                                         - 26 -

[*26] the business use of a taxpayer’s home. There are exceptions, and one of

them is for “[c]ertain storage use” where the expense is “allocable to space within

the dwelling unit which is used on a regular basis as a storage unit for the

inventory * * * 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.” Sec. 280A(c)(2).

      So there may be something here. But the only evidence that we have about

this storage unit and office is Baca’s testimony. He credibly testified, if perhaps

with a bit of exaggeration, that his “wife [would] kill [him] if [he] put everything

in [the] garage,” so he built the storage unit for “equipment [he has] and that’s part

of * * * the storage and office” that he uses for DTS and his other businesses, with

the exception of his oilfield work. That’s not enough, though--he didn’t produce

any photos of the storage unit, or any bills to establish its construction cost or the

cost of any of the unspecified office “equipment”. He also didn’t say how

regularly he used the unit or describe the type and use of the equipment that

supposedly makes up the rest of the $42,000. And while the Bacas have

businesses that very well may result in inventory that requires at least some

storage space, we are very skeptical that the Bacas paid $42,000 for office and
                                       - 27 -

[*27] storage-unit costs for businesses that made less than $13,000 in the same

year. These expenses are disallowed, too.

      Honda Odyssey. The Bacas don’t fare any better with their claimed section

179 deductions for the next tax year. They claimed a deduction for a Honda

Odyssey on their 2013 return. But the Commissioner correctly points out that the

only evidence in the record about this deduction is Baca’s testimony, which is less

than clear and seems to admit that the family used the Odyssey only for personal

purposes. That is much less than section 274 requires, so the Bacas are not

allowed to take this deduction.

      ‘97 Chevrolet Mobil. The other section 179 expense the Bacas took on their

2013 return was for a used Chevrolet. There is zero evidence allowing us to

confirm what exactly this $11,000 expense is for, let alone the “Chevrolet’s”

purchase price, when it was purchased, or the year that it was placed in service.

This expense--whatever it is for--is therefore also disallowed.

             2.    Contract Labor

      The Bacas also claim a deduction for $9,000 worth of contract labor in

2012. This expense, they say, was to hire Pancho Merced to handle DTS’s chile-

bag relabeling work. Even if we look past the fact that this deduction was listed

on a Schedule C for “retail sales support,” we still don’t think the Bacas have
                                       - 28 -

[*28] substantiated it. Baca’s only evidence was his testimony that he paid

Pancho by giving him a debit card linked to the Bacas’ account so that Pancho

could make cash withdrawals. Although the Bacas introduced copies of their bank

records for the year, there’s no evidence of what each withdrawal was for, or

which withdrawals from which bank accounts were for those putative Pancho

payments.

      We disallow this deduction.

            3.     Other Deductions (Fuel)

      The final disputed item is the Bacas’ 2012 “other expenses” deduction for

fuel. We’ll assume these fuel expenses relate only to Baca’s personal businesses,

and not the expense of his commuting to the oilfields. In support of this

deduction, the Bacas again pointed to the copies of their bank records, but

provided no receipts and no log that tracks the time they spent driving for business

purposes. We cannot know what part of these fuel expenses was for personal

rather than business purposes, and the bank records fail to make the distinction

any clearer. We recognize that the Bacas were running multiple businesses and

must have had some legitimately deductible vehicle expenses. The Commissioner

himself allowed some such expenses during the audit that the Bacas didn’t even

claim on their return. But bank records alone don’t show what section 274(d)
                                        - 29 -

[*29] requires, or even what we need to distinguish an expense of one business

from an expense of another. They cannot take this deduction either.

      This means the Bacas may not take any of their contested Schedule C

deductions.

II.   Penalties

      The last issue for us to resolve is whether the Bacas are liable for penalties.

There are two--a section 6651(a)(1) late-filing penalty for 2013, and a section

6662(a) accuracy-related penalty for each year. The Bacas don’t contest the late-

filing penalty.11 This leaves us with the accuracy-related penalties. Section

6662(a) imposes a 20% penalty for an underpayment of tax attributable to

“[n]egligence or disregard of rules or regulations” or a “substantial understatement

of income tax.” Sec. 6662(b)(1) and (2), (c), (d). The Commissioner has the

initial burden of production on these penalties under section 7491(c).12 He meets


      11
         They did not assign error to the Commissioner’s failure-to-timely-file
addition to tax in their petition. In their pretrial memorandum, they did say that
they would “produce evidence to establish that they filed [their] income tax return
for 2013 on time and even if it was late it was due to reasonable cause and not
willful neglect.” But they offered no such evidence at trial, and they never
addressed the issue again. This amounts to a concession. See Swain v.
Commissioner, 

, 365 (2002).
      12
       We have already granted the Commissioner’s motion to reopen the record
and admitted his penalty-approval form. See sec. 6751(b)(1); Graev v.
                                                                    (continued...)
                                        - 30 -

[*30] part of his burden for substantial-understatement penalties here because the

Bacas’ understatements are more than the greater of $5,000 or 10% of the tax they

should’ve reported each year. See sec. 6662(d)(1)(A). He also meets the initial

part of his burden for negligence because the Bacas should’ve known that many of

their return positions were too good to be true, and they made no real effort to

ascertain the correctness of those positions. See sec. 1.6662-3(b)(1)(ii), Income

Tax Regs.

      But the Bacas claim they’re not liable for the accuracy-related penalties

because they had reasonable cause for their return positions and acted in good

faith when they took them. See sec. 6664(c)(1); sec. 1.6664-4(b)(1), Income Tax

Regs. The Bacas never explained the basis of their reasonable cause or showed

any evidence of good faith for their return positions in either year. The most they

can do is point to Baca’s testimony where he said: “My accountant put together

everything * * * [h]e put together this business with my other income.” We could

stretch this statement to suggest that the Bacas are claiming that they acted out of

reasonable reliance on an adviser, see Neonatology Assocs., P.A. v.


      12
       (...continued)
Commissioner, 

, 493 n.14 (2017) (citing Chai v. Commissioner, 

, 221 (2d Cir. 2017), aff’g in part, rev’g in part T.C. Memo. 2015-42),
supplementing and overruling in part 

(2016).
                                        - 31 -

[*31] Commissioner, 

, 99 (2000), aff’d, 

(3d Cir. 2002),

especially since we are sympathetic to the language barrier that the Bacas face.

But we simply do not have enough information to properly review the factors that

proof of this reliance requires:

      •      the Bacas’ return preparer was a competent professional who had
             sufficient expertise to justify reliance;

      •      the Bacas provided necessary and accurate information to their return
             preparer; and

      •      the Bacas actually relied in good faith on their return preparer’s
             judgment.

See 

nothing about the Bacas’ “accountant”, much less enough to

decide whether he was a competent professional with sufficient expertise to justify

their reliance. We therefore find that the Bacas have not established that they had

reasonable cause for their return positions.

      This all means that


                                                 Decision will be entered for

                                       respondent.