                            T.C. Summary Opinion 2019-13



                            UNITED STATES TAX COURT



                     JENNIFER ESTEEN, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 5367-18S.                             Filed July 2, 2019.



      Jennifer Esteen, pro se.

      Elizabeth F. Rodoni, for respondent.



                                 SUMMARY OPINION


      PANUTHOS, Special Trial 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 Pursuant to section 7463(b), the decision to be entered is not


      1
          Unless otherwise indicated, section references are to the Internal Revenue
                                                                          (continued...)
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reviewable by any other court, and this opinion shall not be treated as precedent

for any other case.

      In a notice of deficiency dated December 26, 2017, respondent determined a

deficiency in petitioner’s Federal income tax of $6,186 and a section 6662(a)

penalty of $1,237 for the taxable year 2015.

      After submission of this case the Court contacted the parties to consider

matters that had not been fully developed. Thereafter, a joint stipulation of settled

issues was filed with the Court on May 16, 2019. After concessions,2 the issues



      1
       (...continued)
Code in effect for the year in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure. All amounts are rounded to the nearest dollar
amount.
      2
        Petitioner withdrew $2,413 from her Roth individual retirement account
(IRA) account in 2015. The parties have stipulated that petitioner was entitled to
exclude $1,850 from gross income on that year’s tax return. Petitioner did not
allege, in her petition or at trial, that she was entitled to exclude the remaining
$563 distribution from gross income. That issue is therefore deemed conceded.
See Rule 34(b)(4) (“Any issue not raised in the assignments of error shall be
deemed to be conceded.”); cf. Lloyd v. Commissioner, T.C. Memo. 2017-60, at *7
n.3 (deeming similarly conceded any sec. 6751(b)(1) challenge to assessable
penalties in a sec. 6330 levy case). In the notice of deficiency respondent
determined a 10% additional tax pursuant to sec. 72(t) related to the Roth IRA.
However, petitioner used the distributed funds to purchase a home in 2015. The
parties have stipulated that petitioner qualified for the first time home purchase
exception under sec. 72(t)(2)(F) for tax year 2015. Thus, respondent has conceded
the issue, and petitioner is not subject to the additional tax for premature
distribution from a retirement plan. See sec. 72(t)(2)(F).
                                         -3-

for decision are whether petitioner is (1) entitled to certain car and truck expense

deductions claimed on Schedule C, Profit or Loss From Business, (2) entitled to a

claimed Schedule C expense deduction for “education” (education expense

deduction), (3) entitled to a deduction for use of a portion of her home as an

office, and (4) liable for a penalty pursuant to section 6662(a) for a substantial

understatement of income tax and/or negligence.

                                     Background

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

in California at the time the petition was filed. The facts in this record are

somewhat incomplete because of the limited documents and narrative provided by

the parties.

      During 2015 petitioner performed services as a psychiatric mental health

nurse and received salaries from the City and County of San Francisco and the

Kaiser Permanente Medical Group. In addition to her work as a salaried

employee, petitioner received $12,000 in gross receipts from her sole

proprietorship nursing activity. Petitioner apparently traveled to various facilities

to provide services to patients as a private nurse. With respect to her nonemployee

nursing activity, petitioner maintained a one-page calendar where she made notes

of locations to which she traveled. At some point after the year in issue petitioner
                                       -4-

completed a more detailed schedule which included the dates, locations, and

mileage.

      Petitioner purchased a home in 2015. See supra note 2. Petitioner asserts

that she used some part of the house as a home office. The record includes no

details of the work performed by petitioner in the home office.

      On her 2015 return petitioner completed a Schedule C, which reflected

$12,000 in gross receipts and $36,470 in reported expenses. In a notice of

deficiency respondent disallowed (1) claimed Schedule C car and truck expense

deductions of $15,813 and (2) a claimed Schedule C education expense deduction

of $3,221. The notice of deficiency also determined a penalty pursuant to section

6662(a).

      At the time of the filing of the petition an amended 2015 tax return was

submitted to the Court. The amended return, which was not processed by the

Internal Revenue Service (IRS), was attached as an exhibit to the stipulation of

facts. The amended return included a Schedule C which reported zero in gross

receipts and $40,926 in expenses. The increase in reported Schedule C expenses

is due to including a deduction for depreciation and insurance and other minor

changes to amounts reported on the original Schedule C. The amended return also

reported as income $2,413 as an IRA distribution and an additional tax of $241
                                        -5-

which was not reported on the original return. Petitioner claimed an education

expense deduction of $3,221 on the original Schedule C, as well as an apparent

duplicate education expense deduction of $3,107 on Schedule A, Itemized

Deductions, on the original return. The amended return did not make any changes

to the Schedule C education expense deduction.

      The original and amended returns were prepared by petitioner’s tax return

preparer. Petitioner had very little knowledge of the contents of her return or

amended return.

                                    Discussion

Burden of Proof

      In general the Commissioner’s determination set forth in a notice of

deficiency is presumed correct, and the taxpayer bears the burden of proving that

the determination is in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). Pursuant to section 7491(a), the burden of proof as to factual matters

shifts to the Commissioner under certain circumstances. Petitioner has not

asserted or otherwise shown that section 7491(a) applies. See sec. 7491(a)(2)(A)

and (B). Therefore, petitioner bears the burden of proof.
                                         -6-

Claimed Schedule C Expense Deductions

      Section 162(a) generally allows deductions for all ordinary and necessary

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

business. In general no deduction is permitted for personal, living, or family

expenses. Sec. 262(a). The taxpayer bears the burden of proving that expenses

were of a business nature rather than personal and that they were ordinary and

necessary. Rule 142(a); Welch v. Helvering, 290 U.S. at 115.

      Deductions are a matter of legislative grace, and the taxpayer bears the

burden of proving he or she is entitled to any deduction claimed. Thus, the

taxpayer is required to maintain records sufficient to substantiate expenses

underlying deductions claimed on his or her return. Sec. 6001; sec. 1.6001-1(a),

Income Tax Regs.; see New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934). If the taxpayer is able to establish that he or she paid or incurred a

deductible expense but is unable to substantiate the precise amount, the Court

generally may approximate the deductible amount, but only if the taxpayer

presents sufficient evidence to establish a rational basis for making the estimate.

See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); see also

Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).
                                         -7-

      Business expenses specified in section 274 are subject to rules of

substantiation that supersede the Cohan rule. See sec. 274(d); Sanford v.

Commissioner, 50 T.C. 823, 827-828 (1968), aff’d per curiam, 412 F.2d 201 (2d

Cir. 1969); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014

(Nov. 6, 1985). Section 274(d) applies to certain business expenses including,

among other things, expenses for gifts, listed property,3 and travel (including

meals and lodging while away from home). To substantiate a deduction

attributable to travel expenses, a taxpayer must maintain adequate records or

present corroborative evidence of the taxpayer’s own statement to show the

following for each expense: (1) the amount, (2) the time, (3) the place, and (4) the

business purpose. Sec. 1.274-5T(b)(2), Temporary Income Tax Regs., 50 Fed.

Reg. 46014-46015 (Nov. 6, 1985). To substantiate expenses relating to passenger

automobiles, a taxpayer must substantiate with adequate records or sufficient

evidence corroborating his or her own statement: (1) the amount of each separate

expense, (2) the mileage for each business use of the passenger automobile and the

total mileage for all purposes during the taxable period, (3) the date of the

business use, and (4) the business purpose of the use. See id. subpara. (6), 50 Fed.

Reg. 46016.

      3
          Listed property includes any “passenger automobile”. Sec. 280F(d)(4).
                                        -8-

      With respect to the disallowed car and truck expense deduction, petitioner

has failed to satisfy her burden of proof. Petitioner’s testimony was vague and

lacked any specificity. Her meager records, including a one-page calendar, were

likewise not helpful. Petitioner has failed to adequately substantiate the reported

expenses as required by section 274(d). Accordingly, we sustain respondent’s

disallowance of the claimed Schedule C car and truck expense deduction.

      Petitioner failed to provide any explanation as to the claimed Schedule C

education expense deduction. When it was pointed out to petitioner that she also

claimed an education expense deduction in excess of $3,000 on her Schedule A,

she could not explain what appears to be a duplication. Accordingly, we sustain

respondent’s disallowance of the claimed Schedule C education expense

deduction.

Home Office Claim and the Amended Return

      Petitioner was unable to explain many of the differences between the

amounts shown on the original return and those on the amended return. For

example, she acknowledged that she received self-employment income and that

the $12,000 reported on the original return was accurate. She could not explain

why her amended return reported no gross receipts. Petitioner failed to provide

any explanation other than that she relied on her tax return preparer.
                                         -9-

      As a general rule, section 280A(a) denies a deduction with respect to a

dwelling unit that the taxpayer uses as a residence. Section 280A(c)(1)(A) permits

the deduction of expenses allocable to a portion of a dwelling unit that the

taxpayer uses exclusively and regularly as the principal place of business for the

taxpayer’s trade or business. As petitioner reported this amount on her Schedule

C, we presume that she believes this expenditure relates to her sole proprietorship

activity rather than her activity as an employee. Petitioner presented some general

testimony that she purchased a home and expended funds for improvements. She

further provided a document which details expenditures made for her home. The

document reflects that $24,429 was expended for home improvements, of which

$6,170 relates to a home office.

      While petitioner presented some limited substantiation of expenditures

relating to her home improvement activities, no information was provided to the

Court describing the nature of any business activity that took place in petitioner’s

home or the physical space in which any such activity might have taken place.

Petitioner simply failed to present sufficient evidence to establish entitlement to a

home office deduction.
                                        - 10 -

Accuracy-Related Penalty--Section 6662

      Section 6662(a) and (b)(2) imposes an accuracy-related penalty on any

portion of an underpayment of Federal income tax that is attributable to the

taxpayer’s “substantial understatement of income tax.” An understatement of

Federal income tax is substantial if the amount of the understatement for the

taxable year exceeds the greater of 10% of the tax required to be shown on the

return or $5,000. Sec. 6662(d)(1)(A).

      The Commissioner bears the burden of production with respect to a section

6662 penalty. Sec. 7491(c).4 In order to meet this burden the Commissioner need

only make a prima facie case that imposition of the penalty is appropriate. Higbee

      4
        The Commissioner’s burden of production for penalties imposed under sec.
6662(a) includes the burden of producing evidence establishing that the penalties
were “personally approved (in writing) by the immediate supervisor of the
individual making such determination” as required by sec. 6751(b)(1), unless a
statutory exception applies. See Chai v. Commissioner, 851 F.3d 190, 217, 221-
222 (2d Cir. 2017), aff’g in part, rev’g in part T.C. Memo. 2015-42; Graev v.
Commissioner, 149 T.C. 485 (2017), supplementing and overruling in part, 147
T.C. 460 (2016). Respondent asserts that the penalty is subject to the exception
for calculation through electronic means, see sec. 6751(b)(2)(B), because
petitioner’s return was examined by respondent’s Correspondence Examination
Automation Support program and no response was received from petitioner before
the issuance of the notice of deficiency. We note that in Walquist v.
Commissioner, 152 T.C. __, __ (slip op. at 15) (Feb. 25, 2019), the Court held that
where “the penalty was determined mathematically by a computer software
program without the involvement of a human IRS examiner, * * * the penalty was
‘automatically calculated through electronic means,’ sec. 6751(b)(2)(B), as the
plain text of the statutory exception requires.” The exception applies in this case.
                                         - 11 -

v. Commissioner, 116 T.C. 438, 446 (2001). If the understatement of income tax

for the year in issue is substantial, the Commissioner has satisfied the burden of

producing evidence that the penalty is justified. Respondent met this burden

because the amount of petitioner’s understatement for 2015 is substantial.

      Once the Commissioner has met his burden, the taxpayer may avoid a

section 6662(a) accuracy-related penalty to the extent he or she can demonstrate

(1) reasonable cause for the underpayment and (2) that she acted in good faith with

respect to the amount paid. Sec. 6664(c)(1). A determination of reasonable cause

and good faith “is made on a case-by-case basis, taking into account all pertinent

facts and circumstances”, including: (1) the taxpayer’s efforts to assess the proper

tax liability, (2) the knowledge and the experience of the taxpayer, and (3) any

reliance on the advice of a professional such as an accountant. Sec. 1.6664-

4(b)(1), Income Tax Regs. Circumstances that indicate reasonable cause and good

faith include an honest misunderstanding of law that is reasonable in the light of

all the surrounding facts. Id. Generally, the most important factor is the extent of

the taxpayer’s effort to assess his or her proper tax liability. Id. Statutory

complexity alone does not constitute reasonable cause. Barnes v. Commissioner,

T.C. Memo. 2012-80, 2012 WL 952760, at *15, aff’d, 712 F.3d 581 (D.C. Cir.

2013).
                                         - 12 -

      Petitioner offered little argument or evidence to meet her burden of proof

that there was reasonable cause for the underpayment. Petitioner asserted that she

relied upon her tax return preparer for the original tax return and the amended

return submitted to the Court. As discussed herein the original and amended

returns are not consistent with petitioner’s testimony. The varying positions do

not assist the Court in attempting to discern the facts and the correct tax liability.

      Petitioner did not demonstrate that she made a sufficient effort to assess the

proper tax liability. Therefore, while petitioner may very well have acted in good

faith, we conclude that she did not prove that she acted with reasonable cause as to

any of the issues for which we have sustained respondent’s determination.

Accordingly, we sustain the accuracy-related penalty.

      We have considered all of the parties’ arguments, and, to the extent not

addressed herein, we conclude that they are moot, irrelevant, or without merit. To

give effect to our disposition of the disputed issues, as well as the parties’

concessions, see supra note 2,


                                                  Decision will be entered under

                                        Rule 155.
