                          T.C. Memo. 2003-229



                       UNITED STATES TAX COURT



                 EVERETT J. DIERS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 619-01.                Filed July 31, 2003.


     Everett J. Diers, pro se.

     Catherine S. Tyson, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    Respondent determined a $13,126 deficiency

in petitioner’s Federal income tax for 1996.     The issues for

decision are (1) whether petitioner failed to report on Schedule

C, Profit or Loss From Business, nonemployee compensation of

$26,738; (2) whether petitioner is entitled to claim Schedule C

automobile expenses of $8,910; (3) whether he is entitled to
                               - 2 -

claim Schedule C office expenses of $3,600; (4) whether he is

subject to self-employment tax of $6,365; and (5) whether he is

liable for an accuracy-related penalty under section 66621 of

$1,052.2

                          FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.    At the time he filed the

petition, petitioner resided in El Paso, Texas.

A.   Insurance Business

     From approximately 1988 through 1994, petitioner worked as

an insurance agent for American Income Life Insurance Co.

(American).   As part of its business practice, American would pay

petitioner the year’s commissions in advance for each insurance

policy petitioner sold during the year.      Petitioner also would

receive a renewal commission provided that the insured renewed

the policy.   American would also lend petitioner funds to cover

expenses related to his business for American.


     1
       All section references are to the Internal Revenue Code in
effect for the year in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
     2
       Respondent issued a notice of deficiency claiming, inter
alia, a negligence penalty of $2,627.20. However, because of
petitioner’s reliance on a letter from the attorney who
represented him during the insurance company settlement,
respondent concedes the penalty on the portion of the
underpayment related to this settlement.
                               - 3 -

     Because of the advance payment of commissions and loans made

to petitioner, American regularly carried a debt on its books for

petitioner.   In 1994, when petitioner left employment with

American, he had an obligation to repay American for commission

advances and loans.

     After petitioner resigned from American, he worked for

Capitol American Group of Companies (Capitol) and Life USA

Insurance Co. (Life USA).   During the year in issue, petitioner

received income of $175 and $797 from Capitol and Life USA,

respectively.

B.   Lawsuit and Settlement Agreement

     In 1994, American sued petitioner in the 74th Judicial

District Court of McLennan County, Texas, for allegedly taking

policyholders from American and for advances and loans American

had made to petitioner during his employment.   Petitioner

threatened to countersue.

     On April 25, 1995, petitioner entered a settlement agreement

with American (settlement agreement).   The settlement agreement

provided that American would look exclusively to renewal

commissions due or to become due to petitioner to satisfy the

outstanding loan balance.   In exchange, petitioner released all

claims and rights to renewal commissions attributable to past

services rendered for American that were due to petitioner or to

become due in the future.
                                 - 4 -

C.   Automobile Expenses

     For his work-related travel, petitioner estimated total

mileage for 1996 at 33,000 miles.    Petitioner did not maintain a

log of work-related travel during 1996.

D.   Home Office Expenses

     Petitioner lived with his girlfriend and maintained a home

office in her house.    Petitioner paid her $250 per week in cash.

Neither petitioner nor his girlfriend allocated a specific

portion of the weekly payment to particular expenses.    Instead,

petitioner left it to his girlfriend’s discretion how the money

was to be used.   Petitioner did not maintain receipts for any

home office expenses.

E.   1996 Tax Return

     On April 15, 1997, petitioner timely filed his 1996 Federal

income tax return.     On his 1996 return, petitioner claimed income

from insurance and other sales of $5,796 after Schedule C

deductions of $8,910 and $3,600 for automobile and office

expenses, respectively.     Because of a move from Albuquerque, New

Mexico, to El Paso, Texas, petitioner never received the Forms

1099 issued for his income from American, Capitol, or Life USA

for his 1996 tax year.

     Respondent issued a notice of deficiency to petitioner

regarding his 1996 tax year.    In the notice of deficiency,

respondent determined, inter alia, that for the year 1996
                                - 5 -

petitioner failed to report Schedule C nonemployee compensation

of $26,738,3 that petitioner is not entitled to claim Schedule C

automobile expenses or office expenses of $8,910 and $3,600,

respectively, and that petitioner is subject to self-employment

tax of $6,365.

                               OPINION

A.   Unreported Income

     Section 61(a) provides that “gross income means all income

from whatever source derived” except as otherwise provided.     The

definition of gross income is broad, Commissioner v. Glenshaw

Glass Co., 348 U.S. 426, 429-430 (1955), and exclusions from

gross income are narrowly construed, United States v. Burke, 504

U.S. 229, 248 (1992); United States v. Centennial Sav. Bank FSB,

499 U.S. 573, 583 (1991).

     Respondent’s determinations in the notice of deficiency are

presumed correct, and petitioner must prove those determinations

wrong in order to prevail.4   Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933).    As relevant to the present case,

petitioner asserts that the settlement agreement provided for


     3
       This amount comprises Form 1099 income of $25,766 from
American, $175 from Capitol, and $797 from Life USA.
     4
       Petitioner does not contend that sec. 7491(a) is
applicable to this case. Sec. 7491(a) is in any event
inapplicable because of petitioner’s failure to comply with the
substantiation and recordkeeping requirements of sec. 7491(a)(2)
or to introduce credible evidence within the meaning of sec.
7491(a)(1).
                                - 6 -

forgiveness of the debt to American in 1995 in exchange for

American’s right to keep petitioner’s renewal commissions.

Respondent argues that petitioner received income from the

renewal commissions when American credited these commissions

against the outstanding advances and loans in 1996.     For the

reasons stated below, we agree with respondent.

     Generally, income is taxable when it is received.     Sec. 451.

When a person receives amounts without an obligation to repay

them and without restriction as to their disposition or use,

those amounts are income to the person.      James v. United States,

366 U.S. 213 (1961).    The proceeds of a loan are generally not

taxable as income because the benefit of the income is offset by

an obligation to repay. United States v. Rochelle, 384 F.2d 748

(5th Cir. 1967); Milenbach v. Commissioner, 106 T.C. 184, 195

(1996) affd. in part, revd. in part and remanded 318 F.3d 924

(9th Cir. 2003).   The determination of whether moneys received

are the proceeds of a loan or income is to be made upon

consideration of all of the facts.      Fisher v. Commissioner, 54

T.C. 905, 909 (1970).

     In the context of insurance agents who receive advances

based on future commission income, whether those advances

constitute income depends on whether, at the time of the making

of the payment, the agent had unfettered use of the funds and

whether there was a bona fide obligation on the part of the agent
                                 - 7 -

to make repayment.     Dennis v. Commissioner, T.C. Memo. 1997-275.

In many instances, repayment is simply made out of future earned

commissions.   Where the repayments will be taken only from future

commissions earned, and the agent will not become personally

liable in the event that the future income does not cover the

repayment schedule, the payments will constitute income to the

agent for each year to the extent he received them.      Moorman v.

Commissioner, 26 T.C. 666, 673-674 (1956).     These payments are

nothing more than disguised salary.      Beaver v. Commissioner, 55

T.C. 85, 90 (1970).    However, in the situation where the advances

are actually loans, when the repayments are offset directly by

the future earned commissions, then the agent will have either

commission income or cancellation of indebtedness income at the

time of the offsets.     Cox v. Commissioner, T.C. Memo. 1996-241;

cf. Warden v. Commissioner, T.C. Memo. 1988-165.

     Although petitioner’s employment with American terminated in

1994, he continued to earn renewal commissions on policies he had

sold before his departure.    As provided in the settlement

agreement, instead of paying these commissions to petitioner,

American credited his account showing outstanding advances in

accordance with his settlement agreement with American.     When

American made the advances to petitioner, he was not taxable on

them because they were in effect loans.     See Beaver v.

Commissioner, supra at 91.    When the commissions he earned after
                                  - 8 -

his departure from American were credited to his account,

however, petitioner’s obligation to repay the loans was reduced

by those amounts, and the reduction of that obligation

constituted the receipt of taxable income.      See Newmark v.

Commissioner, 311 F.2d 913, 915 (2d Cir. 1962), affg. T.C. Memo.

1961-285.    On the basis of the foregoing, we find that petitioner

failed to report commission income in the amount determined by

respondent.5

B.   Schedule C Expenses

     Deductions are a matter of legislative grace, and the

taxpayer has the burden of showing that he is entitled to any

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

Helvering, 292 U.S. 435, 440 (1934).      During 1996, petitioner

continued his business as an insurance agent.      Petitioner,

however, failed to maintain adequate records to substantiate

claimed deductions for his automobile and home office expenses.

     1.     Automobile Expenses

     Section 162(a) allows a taxpayer to deduct all ordinary and

necessary expenses paid or incurred in carrying on a trade or

business.    Under section 274(d), however, automobile expenses are

not deductible as a business expense and will be disallowed in

full unless the taxpayer satisfies strict substantiation


     5
       Although the amount determined by respondent includes Form
1099 income from Capitol and Life USA, petitioner concedes this
point, and therefore the issue merits no further discussion.
                                   - 9 -

requirements.    These include adequate records or other

corroborating evidence of the amount of the expense, the time and

place of the automobile’s use, and the business purpose of its

use.    See Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968),

affd. 412 F.2d 201 (2d Cir. 1969); Maher v. Commissioner, T.C.

Memo. 2003-85.    Petitioner claims he is entitled to deduct $8,910

in business expenses related to mileage traveled for work.

Petitioner testified that he recorded annual mileage on December

31 of each year which tended to average approximately 36,000

miles and used that odometer reading as his mileage log to then

take 90 percent as a deduction for work-related travel.

Petitioner, however, submitted no documentation or receipts to

substantiate any of the business expenses he claims he incurred

in 1996.    Accordingly, we conclude petitioner is not entitled to

deduct mileage as an automobile expense.

       2.   Home Office Expenses

       Section 280A(a) generally provides that no deduction

otherwise allowable shall be allowed with respect to the business

use of a taxpayer’s residence.      Section 280A(c) provides

exceptions to the general rule of section 280A(a) and requires

that expenses be allocated between the business and personal use

of the dwelling.    Thus, as relevant herein, section 280A(a) does

not apply to any item to the extent that the item is allocable to

a portion of the dwelling unit that is exclusively used on a
                               - 10 -

regular basis as the principal place of business for any trade or

business of the taxpayer.   See sec. 280A(c)(1)(A).    Accordingly,

in order to qualify under section 280A(c), a portion of

petitioner’s dwelling must be exclusively used on a regular basis

as the principal place of business for his trade or business.

See Hamacher v. Commissioner, 94 T.C. 348, 353 (1990).

     Petitioner has not established that he made expenditures or

that he allocated the expenses between personal and business use.

Petitioner did not provide any evidence of expenditures for the

home office.    Petitioner testified that he paid $250 per week to

his friend to reside in her home, and she was entitled to use

these funds for any purpose.   However, petitioner failed to

provide any substantiation beyond his testimony that the

expenditures were pursuant to a trade or business.     Though

petitioner claims that a portion of this weekly payment included

expenses associated with the home office, he provided neither any

receipts showing the expenditures nor any evidence to indicate

any allocation of expenses.    We need not examine the technical

requirements of section 280A(c) regarding the use of a portion of

a residence as a home office, because in any event petitioner has

failed to substantiate any home office expenses.      Accordingly,

petitioner is not entitled to a home office deduction under

section 280A.
                               - 11 -

C.   Self-Employment Tax

     Section 1401(a) imposes a tax upon the self-employment

income of every individual.    Self-employment income consists of

gross income an individual derives from carrying on any trade or

business.   Sec. 1402(a) and (b); Spiegelman v. Commissioner, 102

T.C. 394, 396 (1994).

     Petitioner’s self-employment tax has increased because of

the increase in income from the disallowance of claimed Schedule

C business expenses and the inclusion of unreported income.

Petitioner admits that he was self-employed and he earned his

income from his business as an insurance agent.   Accordingly, we

sustain respondent’s determination that petitioner is liable for

self-employment tax.6   See Rule 142(a); Simpson v. Commissioner,

64 T.C. 974 (1975).

D.   Negligence Penalty

     Section 6662 provides for an accuracy-related penalty equal

to 20 percent of the underpayment if the underpayment was due to

a taxpayer’s negligence or disregard of rules or regulations.

See sec. 6662(a) and (b)(1).   A taxpayer is negligent when he or

she fails “‘to do what a reasonable and ordinarily prudent person


     6
        We note that although full-time life insurance salesmen
are statutory employees and not liable for self-employment tax,
the record does not establish that petitioner was a full-time
salesman or a life insurance salesman in 1996. Secs. 1402(b),
(c)(2), and (d), 3121(a), (d)(3)(B).
                                - 12 -

would do under the circumstances.’”      Korshin v. Commissioner, 91

F.3d 670, 672 (4th Cir. 1996) (quoting Schrum v. Commissioner, 33

F.3d 426, 437 (4th Cir. 1994), affg. in part, vacating and

remanding in part T.C. Memo. 1993-124), affg. T.C. Memo. 1995-46.

     As pertinent here, “negligence” includes the failure to make

a reasonable attempt to comply with the provisions of the

Internal Revenue Code and also includes any failure to keep

adequate books and records or to substantiate items properly.

See sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.     A

taxpayer may, however, avoid the application of the accuracy-

related penalty by proving that he or she acted with reasonable

cause and in good faith.    See sec. 6664(c).   Whether a taxpayer

acted with reasonable cause and in good faith is measured by

examining the relevant facts and circumstances, and most

importantly, the extent to which he or she attempted to assess

the proper tax liability.    See Neely v. Commissioner, 85 T.C. 934

(1985); Stubblefield v. Commissioner, T.C. Memo. 1996-537; sec.

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

     Petitioner concedes he did not report Form 1099 income from

Capitol and Life USA in 1996.    Additionally, we have found that

petitioner failed to maintain adequate records related to claimed

automobile and home office expenses.     Therefore, we find the

underpayment due to the omitted Form 1099 income and the

disallowed Schedule C expenses to be attributable to negligence
                              - 13 -

or disregard of rules and regulations.

     We have found that petitioner did not report an additional

$25,766 of income for 1996.   Nevertheless, respondent concedes

that the omission of the Form 1099 income from American was

justified because of petitioner’s reliance on a letter from the

attorney who represented him during his settlement with American.

Accordingly, no penalty will be imposed on this portion of the

underpayment.

     We conclude that petitioner is liable for a penalty pursuant

to section 6662 for 1996 in the recalculated amount of $1,052.

In reaching all of our holdings herein, we have considered all

arguments made by the parties, and to the extent not mentioned

above, we find them to be irrelevant or without merit.

     To reflect the foregoing,

                                         Decision will be entered

                                    under Rule 155.
