                        T.C. Memo. 2008-255



                      UNITED STATES TAX COURT



         HENRY J. AND PATRICIA K. LANGER, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13884-05.             Filed November 12, 2008.




     Henry J. and Patricia K. Langer, pro sese.

     David L. Zoss, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     HAINES, Judge:   Respondent determined a deficiency in

petitioners’ 2001 Federal income tax of $56,474 and an accuracy-

related penalty under section 6662 of $11,295.1

     1
      Unless otherwise indicated, section references are to the
Internal Revenue Code, as amended. Rule references are to the
Tax Court Rules of Practice and Procedure. Amounts are rounded
                                                   (continued...)
                                -2-

     After concessions, the issues for decision are whether

petitioners are entitled to business expense deductions in an

amount greater than respondent allowed, and whether petitioners

are liable for an accuracy-related penalty under section 6662.

                         FINDINGS OF FACT

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

The stipulation of facts and the exhibits attached thereto are

incorporated herein by this reference.   Petitioners resided in

Minnesota at the time their petition was filed.

     In 1984 petitioners purchased their 5,500-square-foot home

for $501,358, and they have lived there at all times since.

Petitioners claim that in 1995 additional work was done to the

driveway and exterior lighting of their residence at a total cost

of $31,641.   In 1999 they added a low-voltage outdoor lighting

system at a cost of $18,945, and the property was landscaped at a

cost of $9,420.

     Mrs. Langer, a piano teacher, has operated a piano teaching

business from petitioners’ residence since its purchase.   See

Langer v. Commissioner, T.C. Memo. 1992-46 (discussing the use of

the home for piano teaching and finding that 315 square feet of

petitioners’ home was used as a piano studio), affd. 989 F.2d 294

(8th Cir. 1993).   Since June 1996 Mr. Langer, a former Internal

Revenue Service agent, has operated a financial investigations


     1
      (...continued)
to the nearest dollar.
                                 -3-

business out of petitioners’ residence.   Mr. Langer used office

space in the residence, which from 1984 to 1996 had been used by

a greeting card company run by Mrs. Langer and her sisters.   See

id. (finding that 400 square feet of petitioners’ home was used

by the greeting card company).

     Petitioners prepared their own joint Form 1040, U.S.

Individual Income Tax Return, for 2001 and submitted it to

respondent on May 8, 2002.   The return included two Schedules C,

Profit or Loss from Business, one for Mr. Langer’s investigations

business and one for Mrs. Langer’s piano teaching business.   Both

of the Schedules C reported substantial expenses with respect to

the businesses, including home office expenses and related

depreciation of the home, lighting, driveway, and landscaping.

     On April 21, 2005, respondent issued petitioners a notice of

deficiency for 2001.2   Respondent disallowed most of petitioners’




     2
      In 2003 petitioners’ 2001 return was selected for
examination as part of respondent’s National Research Project
(NRP). Petitioners contested respondent’s right to examine them
as part of the NRP. Respondent issued petitioners administrative
summonses for information with respect to their 2001 return.
Petitioners contested enforcement of the summons in the U.S.
District Court for the District of Minnesota. On Nov. 24, 2004,
the District Court issued an order enforcing the summons. On
Apr. 1, 2005, petitioners deposited their records with the
District Court. Petitioners appealed the order to the U.S. Court
of Appeals for the Eighth Circuit, which affirmed the order on
Dec. 29, 2005. United States v. Langer, 158 Fed. Appx. 759 (8th
Cir. 2005). Petitioners subsequently petitioned the Supreme
Court of the United States for certiorari, but the Court denied
the petition on Oct. 10, 2006.
                                -4-

Schedule C expenses.   Petitioners timely filed a petition with

this Court, and a trial was held in St. Paul, Minnesota.

                              OPINION

I.    An Overview of the Evidence

      On the basis of documentation petitioners provided,

respondent conceded that petitioners are entitled to some of the

disallowed business expense deductions, while petitioners

conceded they are not entitled to others.   As evidence that the

remaining expenses should be allowed, petitioners presented only

Mr. Langer’s testimony and scant documentary evidence.   Although

Mr. Langer testified with detail as to some of the disallowed

deductions, he merely identified others, and others were not

mentioned at all.   His testimony was largely uncorroborated, and

we do not find it credible.   Under the circumstances, we are not

required to accept Mr. Langer’s uncorroborated, self-serving

testimony, and we do not.   See Tokarski v. Commissioner, 87 T.C.

74, 77 (1986).

II.   Business Expense Deductions Not Related to the Use of
      Petitioners’ Residence

      Deductions are a matter of “legislative grace”, and “a

taxpayer seeking a deduction must be able to point to an

applicable statute and show that he comes within its terms.”      New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); see also

Rule 142(a).   As a general rule, section 162(a) authorizes a

deduction for “all the ordinary and necessary expenses paid or
                                -5-

incurred during the taxable year in carrying on any trade or

business”.   An expense is ordinary for purposes of this section

if it is normal or customary within a particular trade, business,

or industry.   Deputy v. du Pont, 308 U.S. 488, 495 (1940).    An

expense is necessary if it is appropriate and helpful for the

development of the business.    Commissioner v. Heininger, 320 U.S.

467, 471 (1943).   Section 262(a), in contrast, precludes

deduction of “personal, living, or family expenses.”

     The breadth of section 162(a) is limited by the requirement

that any amount claimed as a business expense deduction must be

substantiated, and taxpayers are required to maintain records

sufficient therefor.   Sec. 6001; Hradesky v. Commissioner, 65

T.C. 87, 89-90 (1975), affd. 540 F.2d 821 (5th Cir. 1976); sec.

1.6001-1(a), Income Tax Regs.   Furthermore, business expenses

described in section 274 are subject to strict substantiation

rules.   Section 274(d) provides that no deduction shall be

allowed for, among other things, traveling expenses,

entertainment expenses, gifts, and expenses with respect to

listed property (including passenger automobiles) “unless the

taxpayer substantiates by adequate records or by sufficient

evidence corroborating the taxpayer’s own statement”:   (1) The

amount of the expenditure or use; (2) the time and place of the

expenditure or use, or date and description of the gift; (3) the

business purpose of the expenditure or use; and (4) in the case
                                 -6-

of entertainment or gifts, the business relationship to the

taxpayer of the recipients or persons entertained.

     In addition to the general business expense deduction rule

of section 162, section 167(a) authorizes “as a depreciation

deduction a reasonable allowance for the exhaustion, wear and

tear (including a reasonable allowance for obsolescence)--(1) of

property used in the trade or business, or (2) of property held

for the production of income.”    Depreciation deductions are

calculated with respect to the adjusted basis of the property

determined under section 1011, the applicable depreciation

method, the applicable recovery period, and the applicable

convention.    Secs. 167(c), 168(a); Hosp. Corp. of Am. v.

Commissioner, 109 T.C. 21, 45 (1997).

     A.     Expenses Related to Piano Teaching

     Respondent disallowed petitioners’ $9,003 Schedule C

deduction for “supplies” that comprised numerous separate items.

Respondent conceded that petitioners are entitled to $7,327 of

those expenses.    Mr. Langer testified as to two of the disallowed

expenses:    $70 spent at the Georgetown University Medical

Bookstore and $189 spent at the African Art Museum.    Mr. Langer

testified that Mrs. Langer intended to give these to her students

as awards.    However, the purchases are unidentified, and there is

no evidence Mrs. Langer actually gave them to her students, or

that if given to her students, they were awards and not gifts,
                                -7-

which would be subject to strict substantiation requirements.    No

evidence was presented as to the other deductions not conceded by

respondent.   Accordingly, petitioners are not entitled to the

Schedule C “supplies” expense in an amount greater than

respondent allowed.

     Mrs. Langer’s Schedule C expenses included a $24,601

deduction for a category of items labeled “incentive programs”.

Respondent conceded $1,592 of the expenses.   Mr. Langer testified

as to some of the disputed expenses.   The disputed items include

expenses for entertainment, gifts/awards to students, business

meals, and travel away from home, all subject to the strict

substantiation requirements of section 274(d).   Petitioners have

not substantiated those amounts in accordance with section

274(d).

     The awards given to her students present the same problem as

the awards from Georgetown’s bookstore and the African Art Museum

discussed above.   The purchases are unidentified, and there is no

evidence Mrs. Langer actually gave them to her students, or that

if given to her students, they were not gifts.

     Other expenses are clearly personal and not business

expenses.   For example, petitioners claim as expenses:   Swimming

pool supplies and maintenance, home and holiday decorations, a

nativity set, cookbooks, and a television set.   Mr. Langer

testified and attempted to explain how these items were related
                                    -8-

to the piano teaching business.       His arguments are beyond belief

and contrary to all reason.       We need not address each of the

disputed items, but we give one illuminating and representative

example.       Petitioners argue that $2,446 spent for pool supplies

and maintenance are related to Mrs. Langer’s piano teaching

because the parents of the students would sit by the pool while

waiting for their children to finish a lesson.        Pool supplies and

maintenance are not ordinary and necessary expenses for Mrs.

Langer’s piano teaching business.         Therefore, they are not

deductible.

       Petitioners also claimed an expense deduction for sweaters

Mrs. Langer purchased.       Expenses for clothing adaptable for

general use are not deductible.       Yeomans v. Commissioner, 30 T.C.

757, 767-769 (1958); Wilbert v. Commissioner, T.C. Memo. 2007-

152.       There is no evidence that the sweaters were not adaptable

for general purposes, and thus the expense was properly

disallowed.

       As to the other “incentive programs” expenses, petitioners

presented either only Mr. Langer’s vague, self-serving,

uncorroborated testimony or no evidence at all.         Accordingly, we

find that petitioners are not entitled to the deductions for

“incentive programs” beyond those respondent allowed.3


       3
      We note that one of the disputed expenses, amounts paid for
home security, is deductible. However, it must be allocated to
the personal and business portions of the residence.
                                -9-

     B.   Expenses Related to the Investigations Business

     Petitioners owned a 2000 Mercedes sport utility vehicle

which was driven a total of 15,127 miles during 2001.4   Mr.

Langer claims that 65 percent of the use of the Mercedes was for

his investigations business.5   Petitioners claimed a $4,297

deduction for “car and truck” expenses and a $1,918 depreciation

deduction with respect to the Mercedes in 2001.   Automobile

expenses are subject to the strict substantiation requirements of

section 274(d).   Petitioners presented no evidence substantiating

the business use of the automobile or the expenses paid.

Accordingly, petitioners are not entitled to these automobile-

related deductions.

     Petitioners claimed a $5,223 deduction for other (non-

mortgage) interest accruing on credit cards and other loans,

including a loan from their daughter.   The record does not

contain the origination dates of the loans, the interest rates,

the balance and payment histories, or any of the terms of any of

the debts on which the alleged interest expense accrued.    Nor is

there any evidence that if the interest was in fact paid, it



     4
      Petitioners’ Forms 4562, Depreciation and Amortization,
report that the Mercedes was used to drive only 13,866 miles.
     5
      Petitioners argue that the determination made by the
Minnesota Office of Attorney General with respect to many of the
disallowed deductions is evidence that those deductions are
proper. A determination made by the State of Minnesota is not
binding on this Court, nor does it relieve petitioners of their
burden of proving respondent’s determination is incorrect.
                                -10-

related to the investigations business.    Accordingly, petitioners

are not entitled to these interest deductions for 2001.

     Petitioners claimed a $28,573 expense deduction for “other

expenses”.    A portion of that deduction relates to depreciation

and home-office-related expenses discussed below.    The “other

expenses” also include a $10,901 deduction for “behavior

modification” expenses.    Mr. Langer testified as to some of the

disputed items, most of which are personal and not business

expenses.    For example, petitioners claimed as expenses the cost

of their son’s graduation party and flowers given by Mr. Langer

to Mrs. Langer and to their daughter for special occasions, such

as a birthday and Valentine’s Day.     Fees paid by Mr. Langer to

his college alumni club are rendered nondeductible by section

274(a)(3).    The cost of meals allegedly related to Mr. Langer’s

business was not substantiated as required by section 274(d) and

is thus not allowed as a deduction.    A crystal vase costing

$2,635 purchased to cheer Mr. Langer up after the events of

September 11, 2001, and because he likes fresh-cut flowers is

also not deductible.    A vase kept in one’s home can be used for

any purpose at any time, and there is no evidence that the vase

was used primarily in Mr. Langer’s office.    Petitioners offered

no evidence to substantiate any of the remaining “behavior

modification” expenses or $357 of “miscellaneous expenses”

claimed.    Accordingly, petitioners are not entitled to these

claimed expense deductions.
                                 -11-

III. Business Expenses Related to Petitioners’ Use of Their
     Residence

     In addition to the limitations on business expenses

discussed above, section 280A(a) provides that a deduction

otherwise allowable is not allowed with respect to the use of the

taxpayer’s residence.   However, section 280A(c) provides an

exception to the general rule:

          SEC. 280A(c). Exceptions for Certain Business or
     Rental Use; Limitation on Deductions for Such Use.--

               (1) Certain business use.--Subsection
          (a) shall not apply to any item to the extent
          such item is allocable to a portion of the
          dwelling unit which is exclusively used on a
          regular basis--

                    (A) as the principal place of business
               for any trade or business of the taxpayer,

                    (B) as a place of business which is
               used by patients, clients, or customers in
               meeting or dealing with the taxpayer in the
               normal course of his trade or business * * *

     A.   Use of the Residence by the Businesses

     Because there are substantial business and personal motives

for the purchase and improvement of petitioners’ residence, we

must determine what portion of the residence was used regularly

and exclusively for petitioners’ businesses.   See Intl. Trading

Co. v. Commissioner, 275 F.2d 578, 584-587 (7th Cir. 1960), affg.

T.C. Memo. 1958-104; Deihl v. Commissioner, T.C. Memo. 2005-287.

Combined personal and business use of a section of the residence

precludes deductibility.   See generally Sam Goldberger, Inc. v.

Commissioner, 88 T.C. 1532, 1557 (1987).
                               -12-

     Respondent contends that 315 square feet, or 5.73 percent of

petitioners’ residence, was used exclusively and regularly as a

piano studio and that 400 square feet, or 7.27 percent, was used

exclusively and regularly as an office for the investigations

business.6   Petitioners contend that 27 percent of the premises

was used exclusively and regularly for the piano teaching

business and 15 percent was used exclusively and regularly for

the investigations business.   Mr. Langer testified that the

living room, solarium, bathroom, and two separate lounges were

used exclusively and regularly for piano teaching.   Specifically,

Mr. Langer testified that the students and their parents used the

solarium, living room, and lounges while waiting for lessons and

that the bathroom was used by students because Mrs. Langer

required that they wash their hands before playing the piano.

     With respect to the investigations business, Mr. Langer

testified that in addition to his office he used a 252-square-

foot service area, as well as a 300-square-foot garage to store

client records including 15 boxes for one client.

     The only evidence petitioners presented to support their

contention that these areas were used exclusively and regularly

for their businesses is Mr. Langer’s uncorroborated testimony,


     6
      Petitioners argue that respondent’s Office of Appeals found
that petitioners used 18 percent of the home for the piano
teaching business in prior years. Even if Appeals’ determination
with respect to prior years was in the record, which it is not,
petitioners would not be relieved of their burden of proving
their exclusive and regular business use of the residence.
                                 -13-

which is not credible.    Accordingly, we find that petitioners

used 5.73 and 7.27 percent of their home in connection with their

respective businesses.

      B.     Depreciation Deductions

      Petitioners claim depreciation deductions with respect to

their residence as well as improvements to the property that were

done in the 1990s.    The piano studio was placed in service in

1984; thus petitioners began to claim depreciation with respect

to it at that time.    See Langer v. Commissioner, T.C. Memo. 1992-

46.   Depending on the date the property was placed in service in

1984, the piano studio would have been classified as either 15-

year property or 18-year property.      Real property (other than

low-income housing and property with a class life of less than

12.5 years) placed in service on or before March 15, 1984, is 15-

year property.    Real property placed in service after March 15,

1984, is 18-year property.    Sec. 168(c)(2)(D); Deficit Reduction

Act of 1984, Pub. L. 98-369, sec. 111(b)(3)(B), 98 Stat. 632.       If

the property was 15-year property, a taxpayer could elect to

depreciate the property over a period of 15, 35, or 45 years

using the straight-line method under section 168(b)(3) or over 15

years using a 175-percent declining balance method under section

168(b)(2).    If the property was 18-year property, a taxpayer

could elect to depreciate the property over a period of 18, 35,

or 45 years using the straight-line method under section
                                 -14-

168(b)(3) or over 18 years using a 175-percent declining balance

method under section 168(b)(2).7

     The record does not show at what point in 1984 the property

was placed in service.     If it was placed in service before March

15, 1984, petitioners could have, and likely would have, elected

to depreciate the property over 15 years.     After 1999 no

depreciation would be allowed.     Accordingly, petitioners have not

met their burden of proving they are entitled to a depreciation

deduction with respect to the piano studio for 2001.

     In 1996 Mr. Langer began using an office in the residence

for his investigations business.     However, the office had been

used by Mrs. Langer’s greeting card business since 1984, and

petitioners claimed depreciation deductions with respect to the

office, thus reducing its adjusted basis.8    The record does not

contain any information with respect to the office’s adjusted

basis in 1996 or the amount of depreciation claimed with respect

to that office before it was put in service as part of the

investigations business.    Accordingly, petitioners have not met




     7
      In their brief petitioners showed that on their return they
calculated depreciation with respect to their residence using a
20-year period. They now claim that they are entitled to
depreciation using a 29.5-year period. Neither 29.5 years nor 20
years is a possible recovery period under the Internal Revenue
Code, either in 1984 or in any pertinent year thereafter.
     8
      The basis of depreciable property is reduced by the amount
of allowable depreciation even if the taxpayer does not claim a
depreciation deduction. Sec. 1016(a)(2); sec. 1.1016-3(a)(2)(i),
Income Tax Regs.
                                 -15-

their burden of proving they are entitled to a depreciation

deduction with respect to the investigations office.

     We turn to the improvements made to the residence.

Improvements to real property are depreciated in the same way

that the existing property would be depreciated if it were placed

in service at the same time as the improvement.     Sec.

168(i)(6)(A).   However, the recovery period for the improvement

begins on the later of the date the improvement is placed in

service or the date the existing property was placed in service.

Sec. 168(i)(6)(B).

     Petitioners have taken the position that the landscaping

done in 1999 was a capital asset requiring depreciation.

Depreciation for land is generally not allowed.     Sec. 1.167(a)-2,

Income Tax Regs.   However, land preparation may be subject to

depreciation allowance if it is closely associated with a

depreciable asset.     S. Natural Gas Co. v. United States, 188 Ct.

Cl. 302, 412 F.2d 1222, 1230 (1969); Trailmont Park, Inc. v.

Commissioner, T.C. Memo. 1971-212.      This principle has been

applied to allow depreciation for filling and grading swampy land

to be used as a lumber yard, Lord & Bushnell Co. v. Commissioner,

7 B.T.A. 86 (1927), and for the clearing, grading, and shaping of

land for a mobile home park, Trailmont Park, Inc. v.

Commissioner, supra.    Any landscaping done around petitioners’

residence has not been shown to be so closely associated with
                               -16-

their businesses as to allow a depreciation deduction.9   Thus,

petitioners are not entitled to a depreciation deduction with

respect to the landscaping.

     Petitioners claim they paid $31,640 for their driveway and

lighting in 1995.   The only evidence petitioners presented

substantiating that amount is Mr. Langer’s handwritten notes used

to prepare the return.   Therefore, petitioners have not met their

burden of proving they are entitled to a depreciation deduction

with respect to the driveway and lighting.

     Petitioners installed a low-voltage outdoor lighting system

in 1999 at a cost of $9,420.   Because there were substantial

business and personal reasons for installing the lighting, its

cost must be allocated in accordance with petitioners’ business

use of the residence, 5.73 and 7.27 percent.   To that extent, the

lighting is nonresidential real property to be depreciated over

39 years using the straight-line method.   Sec. 168(c), (e)(2)(B).

Thus, petitioners are entitled to deduct 5.73 and 7.27 percent of

the cost of the lighting over a 39-year period for the piano

teaching business and investigations business, respectively.




     9
      We note that the Commissioner has taken the position that
if landscaping would need to be replaced contemporaneously with
the replacement of the related depreciable asset, the landscaping
may also be depreciable. Rev. Rul. 74-265, 1974-1 C.B. 56.
There is no evidence in the record which would indicate replacing
petitioners’ residence would destroy the landscaping.
                               -17-

      C.   Mortgage Interest Expense Deductions

      Of their $64,238 of mortgage interest paid in 2001,

petitioners deducted $13,334 and $14,961 on their respective

Schedules C.   The amount of mortgage interest deductible is

limited to the business use of the home, 7.27 and 5.73 percent,

or $4,670 and $3,681, respectively.10    The remaining mortgage

interest is allowed as an itemized deduction, subject to the

limitations on itemized deductions imposed by section 68(a).

IV.   Penalty Under Section 6662(a)

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

the portion of an underpayment attributable to negligence or

disregard of the rules or regulations.    Although the Commissioner

bears the initial burden of production and must come forward with

sufficient evidence showing it is appropriate to impose an

accuracy-related penalty, the taxpayer bears the burden of proof

as to reasonable cause, substantial authority, or similar defense

to the penalty.   Sec. 7491(c); Rule 142(a); Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001).    To meet the burden,

a taxpayer must present evidence sufficient to persuade the Court

that the Commissioner’s determination is incorrect.      Higbee v.

Commissioner, supra at 447.


      10
      Respondent conceded that petitioners are entitled to
deduct these amounts as interest expenses on their Schedules C.
Therefore, we do not address respondent’s argument in his reply
brief that petitioners are not entitled to deduct interest
expenses on their Schedules C because the loans may be equity-
based loans used for personal expenses, not business expenses.
                                 -18-

     Mr. Langer admitted that he did not attempt to investigate

the applicable rules and regulations.      He admitted that

petitioners did not keep certain records for their businesses.

Petitioners did not include Form 8829, Expenses for Business Use

of Your Home, for either of their Schedules C.      Furthermore,

petitioners claimed as business expense deductions many obviously

personal items.   A former Internal Revenue Service agent should

have known better.   Therefore, we conclude that respondent has

met his burden of production.

     Petitioners presented no evidence which would indicate the

accuracy-related penalty should not be imposed.      Accordingly,

petitioners are liable for the accuracy-related penalty under

section 6662.

     In reaching our holdings, we have considered all arguments

made, and to the extent not mentioned, we conclude that they are

moot, irrelevant, or without merit.

     To reflect the foregoing,


                                        Decision will be entered

                                 under Rule 155.
