                  T.C. Summary Opinion 2008-99



                     UNITED STATES TAX COURT



           TERRY ROGERS AND DIANNE ROGERS, Petitioners
         v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 21238-05S.                Filed August 12, 2008.



     Terry Rogers and Dianne Rogers, pro sese.

     Beth A. Nunnink, for respondent.



     CARLUZZO, Special Trial Judge:     This case was heard

pursuant to the provisions of section 7463.1    Pursuant to section

7463(b), the decision to be entered is not reviewable by any



     1
       Unless otherwise indicated, section references are to the
Internal Revenue Code of 1986, as amended, in effect for the
relevant period. Rule references are to the Tax Court Rules of
Practice and Procedure.
                                  - 2 -

other court, and this opinion shall not be cited as precedent for

any other case.

     In a notice of deficiency dated September 28, 2005,

respondent determined deficiencies in petitioners’ income taxes

and penalties as follows:


                                            Penalty
           Year      Deficiency           Sec. 6662(a)

           2002        $5,420               $1,084
           2003         5,765                1,153

     The issues for decision for each year are:          (1) Whether

petitioners are entitled to various trade or business expense

deductions in excess of the amounts allowed by respondent; and

(2) whether petitioners are liable for a section 6662(a)

accuracy-related penalty.

                            Background

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

Petitioners are, and were at all times relevant, married to each

other.   At the time the petition was filed, they resided in

Tennessee.

Petitioners’ Employment Situations

     Dianne Rogers was employed by David Smallbone Management Co.

(Management) during each year in issue.        Her employment

responsibilities during those years related mostly, if not

entirely, to arranging performances and tours and otherwise
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promoting the career of Rebecca St. James, a recording artist who

was a client of Management.

     Dianne Rogers’s specific employment duties varied.    As she

described them during her trial testimony, she “ran the

business”.    For example, she scheduled performances, made travel

arrangements, processed payments, paid bills, picked up and

dropped off mail at the post office, and, from time to time,

traveled with the artist during promotional or performance tours.

     According to Management, the company had no “official”

policy with respect to reimbursing its employees for

employment/business-related expenses paid or incurred by the

employee.    Nevertheless, for the years in issue, Management

described its reimbursement practice as follows:

     Employees of Smallbone Management were only reimbursed
     for business travel that was directly related to their
     duties. Any leisure trips, sanctioned vacation days,
     etc. were not reimbursed unless approved in advance.

With respect to Dianne Rogers, Management’s reimbursement

practice was as follows during those years:

     Dianne [Rogers’s] * * * duties * * * included both
     reimbursed and non-reimbursed trips. She was
     reimbursed regularly for task oriented duties on a day
     to day basis like trips to the post office, bank, Fed
     Ex, etc. She was not reimbursed for donated time,
     vacation days taken mixing business and pleasure, etc.

     Terry Rogers’s employment situation during each year in

issue is not so clear.    By profession he was a bus driver.    He

had an employment arrangement with Pioneer Coach (Coach).      During
                                  - 4 -

the years in issue Coach considered him to be “contract labor”

who was “paid per trip by the [artist’s] company.”      Coach further

described the company’s arrangement with Terry Rogers as follows:

     He is not reimbursed for items he provides for the bus
     including candy, candles, supplies, etc. These are
     items needed to make the bus enjoyable for the artists
     and are the responsibility of the driver. He is also
     not reimbursed for his computer. The laptop is needed
     on the road for driver logs, fuel logs, e[-]mailing to
     the [artist’s] management company, directions, maps,
     etc.

As best can be determined from the record, one of the artists

that Terry Rogers regularly provided transportation services for

during the years in issue was Rebecca St. James.

Petitioners’ Federal Income Tax Returns

     Petitioners filed a timely joint Federal income tax return

for each year in issue.      Both returns were prepared by H&R Block.

1. 2002

     The 2002 return includes a Schedule A, Itemized Deductions,

and a Schedule C, Profit or Loss From Business.      As relevant

here, on the Schedule A petitioners claimed the following

deductions:

                 Deduction                  Amount

          Charitable donations              $6,579
          Employee business expenses         8,687

The above amount shown for the employee business expense

deduction relates to Dianne Rogers and does not take into account

section 67(a).   To some extent, the details of that deduction are
                               - 5 -

shown on a Form 2106-EZ, Unreimbursed Employee Business Expenses,

also included with petitioners’ 2002 return.    The Form 2106-EZ

shows amounts claimed for “Vehicle expense using the standard

mileage rate” ($3,723), “Travel expenses while away from home

overnight” ($3,500), “Business expenses” not previously included

in other categories ($1,008), and “Meals and entertainment

expenses” ($456, after 50-percent reduction pursuant to section

274(n)).

     The Schedule C included with petitioners’ 2002 return

identifies Terry Rogers as the proprietor and indicates that the

business income and deductions shown on that schedule are

computed in accordance with the cash receipts and disbursements

method of accounting.   The Schedule C shows gross receipts and

gross income in the same amount, $6,965.     As relevant here, the

following deductions are claimed on the Schedule C:

                Deduction                       Amount

           Depreciation/sec. 179                $2,021
           Supplies                              3,077
           Meal and entertainment                3,796
             (after sec. 274(n) reduction)
           Utilities                             1,689
           Business use of home                  2,096

The depreciation/section 179 deduction includes $1,843 identified

by petitioners as the cost of a computer.
                                - 6 -

2. 2003

     Petitioners’ 2003 return includes a Schedule A and two

Schedules C.

     As relevant here, on the Schedule A petitioners claimed the

following deductions:

                 Deduction                     Amount

           Charitable donations                $6,514
           Tax preparation                        263
           Employee business expenses           2,208

     The above amount shown for the employee business expense

deduction relates to Dianne Rogers and does not take into account

section 67(a).    To some extent, the details of that deduction are

shown on a Form 2106-EZ, also included with petitioners’ 2003

return.   The Form 2106-EZ shows amounts claimed for “Vehicle

expense using the standard mileage rate” ($936), “Travel expenses

while away from home overnight” ($150), “Business expenses” not

previously included in other categories ($324), and “Meals and

entertainment expenses” ($798, after 50-percent reduction

pursuant to section 274(n)).

     One of the Schedules C identifies Dianne Rogers as the

proprietor.    The business is described as “tour promotions:tour

promotionals”, and the business income and deductions shown on

that schedule are computed in accordance with the cash receipts

and disbursements method of accounting.   As relevant here, the

following deductions are claimed on the Schedule C:
                               - 7 -

               Deduction                       Amount

           Depreciation/sec. 179               $  417
           Rent or lease                        1,589
           Supplies                             1,800
           Office expenses                      2,641
           Utilities                            2,356

     The second Schedule C included with petitioners’ 2003 return

identifies Terry Rogers as the proprietor.    As with 2002, that

Schedule C relates to his employment as a bus driver and

indicates that the income and deductions attributable to his

business are computed in accordance with the cash receipts and

disbursements method of accounting.    As relevant here, the

following deductions are claimed on the second Schedule C:

               Deduction                       Amount

           Depreciation/sec. 179               $1,339
           Supplies                             1,774
           Meals and entertainment              3,363
             (after sec. 274(n) reduction)
           Business use of home                 5,570
           Other expenses                         775

The Notice of Deficiency

     The notice of deficiency that forms the basis for this case

contains no fewer than 26 adjustments relating to the 2 years in

issue.   Adjustments that have been agreed to by petitioners or

are otherwise in their favor are not discussed.    Similarly,

computational adjustments are not addressed in this opinion.
                               - 8 -

     For 2002 respondent disallowed:     (1) $2,191 of the

charitable contribution deduction; (2) the employee business

expense deduction claimed on the Schedule A; and (3) all of the

Schedule C deductions shown above.

     For 2003 respondent disallowed:     (1) $250 of the charitable

contribution deduction; (2) the tax preparation fee expense

deduction claimed on the Schedule A; (3) the employee business

expense deduction claimed on the Schedule A; (4) $1,031 of

deduction for “Supplies”, $1,572 of the deduction for “Office

expense”, the entire deduction for “Depreciation/section 179”,

and the entire deduction for “Rent or lease” claimed on the

Schedule C for Dianne Rogers; and (5) all of the deductions

listed above claimed on the Schedule C for Terry Rogers.

     For each year respondent also imposed a section 6662(a)

accuracy-related penalty on several grounds, including

“negligence or disregard of rules or regulations” and

“substantial understatement of income tax”.

                            Discussion

     There is no dispute that deductions are allowable for the

types of expenses that are involved in this case.     See secs.

162(a), 170.   Nevertheless, as stated and established in opinions

too numerous to count, otherwise deductible expenses, such as the

ones in dispute in this case, must be substantiated.     See sec.

6001; Hradesky v. Commissioner, 65 T.C. 87 (1975), affd. per
                                - 9 -

curiam 540 F.2d 821 (5th Cir. 1976); sec. 1.6001-1(a), Income Tax

Regs.    Furthermore, certain deductions, such as those relating to

travel and entertainment expenses, are subject to very strict

substantiation requirements.    See sec. 274(d).

     Taking into account the concessions respondent made at

trial, the dispute between the parties focuses on the extent to

which petitioners have properly substantiated the expenses that

underlie the deductions, or portions of deductions, that remain

in dispute.    That being so, we briefly discuss the evidence, or

the lack of evidence, that informs our findings.

Witness Testimony

     Dianne Rogers appeared at trial and testified on

petitioners’ behalf.2    She explained how she and her spouse were

employed during the years in issue, but her knowledge of the

items of income and deductions claimed on petitioners’ returns

for the years in issue was limited.     She began her testimony as

follows:

     Well, just a little history that when we went and had
     our taxes filed, we went to H&R Block. We always used
     the same auditor. Her name was Carol, and I’m not sure
     what her last name was. She was an accountant for the
     State of Tennessee. We went to her every single year
     for probably seven years, because we felt her being an
     accountant and knowing –- for the State of Tennessee,
     and so she handled all of our deductions, where to
     place them. We took everything to her.




     2
         Terry Rogers did not appear at trial.
                               - 10 -

          When we received the letter from the IRS saying
     that we were audited, I went back to H&R Block and gave
     them the letter, and you know, had them look up
     everything. They came back and said they couldn’t help
     me, because I did not take out the Peace of Mind
     insurance, so that was how I got Lisa Unge, because at
     that point, I received the letters from the IRS, and
     then she had to refile everything.

     Lisa Unge was called as a witness on petitioners’ behalf.

Following preliminary points, and after acknowledging that she

did not prepare petitioners’ return for either year in issue, she

began her testimony as follows:    “I prepared the amended return

that she’s [Dianne Rogers] referring in the stipulation of facts,

and all the handwriting on your evidence is mine.   Not all of it,

but --”.

     For what it is worth, we point out that no amended returns

have been made part of the record by stipulation or otherwise.

Apparently the “amended returns” to which Lisa Unge referred were

actually copies of the original returns for the years in issue

that contained handwritten strikeouts and substituted numbers for

many of the items of income and deductions initially in dispute.

Some of the strikeouts and insertions suggest that petitioners

agree to adjustments made in the notice of deficiency.   When the

Court ask Dianne Rogers whether that, in effect, was the case,

she responded:   “I think that’s a question you’ll have to ask

Lisa [Unge]”.    Lisa Unge did not know.

     Other than Dianne Rogers and Lisa Unge, no witnesses were

called to testify on behalf of petitioners.   Neither witness
                              - 11 -

could explain how the deductions, or portions of the deductions,

remaining in dispute were computed.

Documents Introduced Into Evidence

     All of the documents introduced into evidence were

stipulated.   None of the exhibits tie the evidence to the

computation of the deductions, or portions of deductions, that

remain in dispute.   Instead the documents introduced into

evidence include, among other things:   (1) Copies of hundreds of

receipts (some illegible) from numerous vendors and restaurants,

arranged in no relevant order that is apparent to the Court; (2)

numerous copies of monthly credit card statements, some reported

transactions having been obliterated by what might have been

highlighting on the original; (3) numerous copies of monthly bank

statements; and (4) printed calendars containing handwritten

notations.

     At trial it became obvious to the Court that it would be

difficult, if at all possible, to connect specific exhibits (more

accurately specific copies of receipts or transactions shown on

an exhibit) with the deductions or portions of deductions that

remain in dispute without a schedule showing/explaining how an

exhibit or a portion of an exhibit provides substantiation for a

related deduction or portion of a deduction.   Following the

trial, petitioners were directed by order to “submit to the Court

a written schedule that shows the computation of each disputed
                                - 12 -

deduction by reference to specific items or transactions shown in

an exhibit”.   Petitioners submitted a two-page “summary” that

complies somewhat with the Court’s directive, but only to a

limited extent (the summary).    Attached to the summary are copies

of “corrected” Forms 1040, U.S. Individual Income Tax Return, for

the years in issue.   Even if properly before the Court, which

they are not, it is unclear what conclusions petitioners intended

the Court to draw from the “corrected” Forms 1040.

     In part, instead of connecting disputed deductions with

exhibits, the summary recharacterizes some of the disputed

deductions without providing a basis for the recharacterization.

Where the summary does reference specific exhibits to disputed

deductions, the reference is often to an entire exhibit.   Even if

it appears or can be determined that an item shown on the exhibit

substantiates a deduction, it cannot be determined whether

respondent has already taken that item into account in a partial

allowance or subsequent concession, or whether petitioners were

or could have been reimbursed for the expenditure.

Findings With Respect To Disputed Deductions

     After careful review of the evidence we arrive at the

following conclusions.   The testimony of the witnesses provides

no basis for allowing a deduction for any expense in excess of

the amount already allowed by respondent.   Furthermore, although

there might be “needles” of substantiating documents in the
                               - 13 -

numerous exhibits admitted into evidence in this case, for the

most part those needles are effectively obscured by the

“haystacks” of exhibits in which they are buried.

       That being so, and keenly aware that the generation of

business income routinely involves business expenditures, see

Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), we are unable

to find that petitioners are entitled to deductions in excess of

the amounts already allowed by respondent with the following

possible exception.

       For each year in issue Terry Rogers was employed as a bus

driver.    It appears that the amounts now allowed by respondent

for meals expenses for each year might not properly reflect his

status as an individual involved in the transportation industry.

See sec. 274(n)(3); Rev. Proc. 2003-80, 2003-2 C.B. 1037; Rev.

Proc. 2002-63, 2002-2 C.B. 691; Rev. Proc. 2001-47, 2001-2 C.B.

332.    If not, the proper amounts should be determined and

respondent’s allowances adjusted.

Section 6662(a) Accuracy-Related Penalty

       For each year in issue respondent determined that

petitioners are liable for a section 6662(a) accuracy-related

penalty.    Various grounds for the imposition of that penalty are

set forth in the notice of deficiency.    If it is shown that the

taxpayer acted in good faith and there is reasonable cause for
                                - 14 -

the deficiency, then the section 6662(a) accuracy-related

penalty is not applicable.   Sec. 6664(c); Higbee v. Commissioner,

116 T.C. 438, 446-447 (2001).

     As best can be determined from the record, petitioners

relied upon a paid income tax return preparer to compute their

Federal income tax liability for each year in issue.    Nothing in

the record suggests that such reliance was not reasonable.

Furthermore, when selected for examination, petitioners returned

to their return preparer for assistance, only to be turned away

because they did not subscribe to “Peace of Mind” coverage for

either year in issue.   We are satisfied that petitioners had

reasonable cause and acted in good faith with respect to whatever

deficiency remains after respondent’s concessions for each year

in issue are taken into account.    They are not liable for the

section 6662(a) accuracy-related penalty for either year in

issue.


                                     Decision will be entered

                                under Rule 155.
