                     T.C. Summary Opinion 2007-65



                        UNITED STATES TAX COURT



              JOHN C. AND JOAN F. STUKES, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 16648-05S.             Filed April 26, 2007.


        John C. Stukes, pro se.

        David B. Mora, for respondent.



     JACOBS, Judge:     This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

at the time the petition was filed.      Pursuant to section 7463(b),

the decision to be entered is not reviewable by any other court,

and this opinion shall not be treated as precedent for any other

case.     Unless otherwise indicated, subsequent section references

are to the Internal Revenue Code in effect for the year in issue,
                               - 2 -

and Rule references are to the Tax Court Rules of Practice and

Procedure.

     Respondent determined a $7,908 deficiency in petitioners’

2002 Federal income tax.   The issues for decision are:   (1) The

amount of petitioners’ loss from farming; and (2) the amount of

the excess unreimbursed employee and other miscellaneous expenses

deduction1 to which petitioners are entitled.

                            Background

     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 they filed

the petition, petitioners resided in Katy, Texas.

     Petitioners timely filed a joint Form 1040, U.S. Individual

Income Tax Return, for 2002 in which they claimed:   (1) A loss

from farming, and (2) itemized deductions for excess unreimbursed

employee and other miscellaneous expenses.   Respondent determined

that a portion of the amount claimed as a farm loss and the

entire amount claimed as itemized deductions for excess

unreimbursed employee and other miscellaneous expenses were not


     1
      The excess unreimbursed employee and other miscellaneous
expenses deduction is claimed on Schedule A, Itemized Deductions.
The amount of the deduction equals the sum of: (1) Unreimbursed
employee expenses--job travel, union dues, job education, etc.;
(2) tax preparation fees; and (3) other expenses--investment,
safe deposit box, etc., less an amount equal to 2 percent (the 2-
percent floor) of the taxpayer’s adjusted gross income. See sec.
67(a).
                               - 3 -

allowable.   On the basis of those determinations, respondent

calculated a deficiency in tax of $7,908 and on July 5, 2005,

sent petitioners a notice of deficiency.    Petitioners timely

petitioned this Court for a redetermination of the disallowed

amounts.

                             Discussion

     As a general rule, the Commissioner’s determinations in the

notice of deficiency are presumed correct, and the burden of

proving an error is on the taxpayer.   Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).   However, pursuant to

section 7491(a), the burden of proof with respect to any factual

issue relating to ascertaining the liability for tax shifts to

the Commissioner if the taxpayer:   (1) Maintained adequate

records; (2) satisfied the substantiation requirements; (3)

cooperated with the Commissioner’s agents; and (4) during the

Court proceeding introduced credible evidence with respect to the

factual issue involved.   Except for the substantiation

requirements for some items, discussed infra, we find that

petitioners satisfied these requirements.

Issue 1. Loss From Farming

     During 2002, petitioners owned a 45-acre farm in Williamson

County, Texas.   In calculating their 2002 gross income,

petitioners included a loss of $20,116, which was supported by

Schedule F, Profit or Loss From Farming.    The Schedule F does not
                                - 4 -

report any farm income; the entire reported loss was due to

claimed expenses.    The expenses petitioners reported on Schedule

F were:   Car and truck expenses ($3,227), chemicals ($850),

custom hire ($9,500), depreciation ($3,449), fertilizers ($550),

gasoline ($350), insurance ($1,200), repairs and maintenance

($425), supplies purchased ($150), taxes ($250), and tractor

repairs ($165).

     In the notice of deficiency, respondent determined that

petitioners did not substantiate any of the items reported on

Schedule F and therefore none were allowable.    At trial,

respondent conceded petitioners’ entitlement to deduct $8,186 for

custom hire, $1,850 for depreciation, $126.48 for taxes, and $350

for gasoline, and petitioners conceded that $1,850 of claimed

depreciation expense was not allowable.

     A taxpayer who is carrying on a trade or business generally

may deduct ordinary and necessary expenses paid or incurred in

connection with the operation of the business.    Sec. 162(a); see

also Commissioner v. Lincoln Sav. & Loan Association, 403 U.S.

345, 352 (1971); FMR Corp. & Subs. v. Commissioner, 110 T.C. 402,

414 (1998).    Respondent does not dispute that petitioners’

farming activity qualifies as a trade or business and that the

expenses from this activity, if incurred, were ordinary and

necessary.    Thus, we need address only whether the claimed
                                 - 5 -

expenses were incurred, and if so, through substantiation, the

amounts paid and hence allowable as deductions.

     When a taxpayer establishes that he/she has incurred

deductible expenses but is unable to establish the exact amounts,

we can estimate the deductible amounts, but only if the taxpayer

presents sufficient evidence to establish a rational basis for

making the estimates.    See Cohan v. Commissioner, 39 F.2d 540,

543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731,

742-743 (1985).   In estimating the amount allowable, we bear

heavily on the taxpayer whose inexactitude in substantiating the

amount of the expense is of his own making.    See Cohan v.

Commissioner, supra at 544.    However, without a rational basis

for making the estimate, any allowance we make would amount to

unguided largesse.     Williams v. United States, 245 F.2d 559, 560-

561 (5th Cir. 1957).

     In the case of expenses paid or incurred with respect to

certain listed property, section 274 overrides the Cohan

doctrine, and those expenses are deductible only if the taxpayer

meets the stringent substantiation requirements of section

274(d).   Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968),

affd. per curiam 412 F.2d 201 (2d Cir. 1969).

     Section 274 contemplates that no deduction may be allowed

for specified expenses on the basis of any approximation or the

unsupported testimony of the taxpayer.    Sec. 1.274-5T(a),
                               - 6 -

Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).

At a minimum, the taxpayer must substantiate:    (1) The amount of

the expense; (2) the time and place the expense was incurred; and

(3) the business purpose for which the expense was incurred.

     The strict substantiation requirements of section 274 apply

to deductions with respect to “any listed property (as defined in

section 280F(d)(4))”.   Section 280F(d)(4)(A)(i), in turn,

includes “passenger automobile” in the definition of listed

property.   Further, section 1.274-5T(b)(6)(i)(A), Temporary

Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985), includes the

cost of maintenance and repairs for listed property as subject to

the section 274 substantiation rules.

     Petitioners claimed automobile expenses of $3,227; these

expenses related to petitioners’ pickup truck.   Mr. Stukes

testified that some substantiating documents pertaining to the

automobile mileage were lost when petitioners moved.   However, he

introduced a truck mileage log (the mileage log) with 24 entries.

The mileage log, which shows that petitioners drove the truck

6,684 miles for farm-related business, was not prepared

contemporaneously with the incurrence of the claimed expenses but

rather was a reconstruction by petitioners of their use of the

truck.   The mileage log shows the date of each use and the

specific destination (such as Home Depot, Wal-Mart, farm

equipment vendors, gas stations, and truck supplies vendors).
                               - 7 -

The mileage log is supplemented by bank records which show

purchases from the retail establishments or vendors on specific

dates.   The date claimed for the business use of the truck in the

mileage log does not correspond in every instance to the date of

the related purchase shown on the bank records.   Further, neither

the mileage log nor the bank records show the specific

merchandise purchased from each seller, and it is possible that

petitioners purchased items for their personal consumption as

well as for their farm when they made these excursions using the

truck.   It is equally possible that petitioners made additional

trips to acquire farm equipment or supplies but did not actually

make a purchase, so that there might have been additional mileage

costs that do not appear in the mileage log.   In any event, Mr.

Stukes testified that the trips shown on the mileage log were

made for the purpose of acquiring farm equipment or supplies, and

we found that testimony credible.   Therefore, we find that

petitioners have met the substantiation requirements of section

274 with respect to trips on dates for which there is a

corresponding purchase from a vendor of farm equipment or

supplies.   Consequently, we hold that petitioners are entitled to

deduct the cost of using their truck on those occasions.

     Of the 44 occasions on which petitioners claim to have used

their truck for the purpose of acquiring farm supplies or

equipment, there are records which confirm farm-related purchases
                                - 8 -

on 22 of those occasions (or within a day or two of the claimed

date for those occasions).2    The total number of miles

petitioners drove the truck for the purpose of acquiring farm

equipment or supplies on those 22 occasions was 2,368.

Petitioners did not present receipts for the actual cost of this

use, but we may apply the standard mileage rate to determine the

allowable deduction.3    The standard mileage rate for 2002 was

36.5 cents per mile.    Accordingly, the total allowable expense

for farm-related use of the truck amounted to $864.32.

     Petitioners’ mileage log contains three entries pertaining

to automobile maintenance and repair that are corroborated by

bank records, showing purchases of $224.99.4    In addition,

petitioners submitted a credit card receipt for $100 of repairs

to the truck.


     2
      The dates of use   that are matched by substantiating
purchases are: Feb. 2    and 18; Mar. 3, 13, 16, and 18; May 6, 7,
and 24; July 5 and 17;   Aug. 5, 14 (two purchases on Aug. 14), and
31; Sept. 1, 2, 3 (two   purchases on Sept. 3), 16, and 21; Oct. 1
and 10; and Nov. 29.
     3
      The standard mileage rate is a matter of administrative
convenience by which a taxpayer may compute the amount of
deductible automobile expenses using a standard rate rather than
separately establishing the amount of an expenditure for travel
or transportation. Sec. 1.274-5(j), Income Tax Regs., in part,
grants the Commissioner the authority to establish a method under
which a taxpayer may use mileage rates to substantiate, for
purposes of sec. 274(d), the expense of using a vehicle for
business purposes. See Rev. Proc. 2001-54, 2001-2 C.B. 530.
     4
      These dates are: Mar. 13, Mar. 16, and Nov. 29. The
corresponding claimed expenses are $141.79, $69.20, and $14.
                                 - 9 -

Thus, petitioners have substantiated that they spent $324.99 for

maintenance and repair of the truck.

     The deduction for automobile expenses based on the standard

rate may be used only in lieu of all operating and fixed costs of

the automobile allocable to business purposes such as

depreciation, maintenance and repairs, tires, gasoline (including

all taxes thereon), oil, insurance, and license and registration

fees.   See sec. 1.274-5(j)(2), Income Tax Regs.; Rev. Proc. 2001-

54, 2001-2 C.B. 530.    As stated previously, petitioners are

entitled to a deduction based on the standard rate.    This amount

($864.32) exceeds the amount of the deduction to which

petitioners would be entitled for the corroborated maintenance

and repair of the truck ($324.99).

     On Schedule F of their 2002 return, petitioners claimed $850

of expenses for purchase of chemicals for use on their farm.

Petitioners’ mileage log, described supra, indicates that

petitioners purchased chemicals from Home Depot on various

occasions in 2002.    Petitioners’ bank records establish that

payment was made to Home Depot at or near the date indicated by

petitioners on nine occasions.    The total amount of these

purchases was $491.    Consequently, we hold that petitioners are

entitled to a deduction of $491 for farm chemicals.

     Other amounts petitioners claimed as deductible farm

expenses and disallowed by respondent include custom hire
                              - 10 -

($1,314), depreciation ($1,599), fertilizers ($550), insurance

($1,200), supplies purchased ($150), and taxes ($123.52).   Of

these amounts, we find substantiation for $39.87 for supplies.5

In addition, we accept Mr. Stukes’s testimony that petitioners

paid $1,200 for farm insurance for 2002.   We therefore hold that

these amounts are allowable deductions.

     The amounts for custom hire and depreciation were

unsubstantiated.   The amounts claimed as deductions for

fertilizers and taxes were also unsubstantiated.   As there is no

rational basis upon which we can estimate the amounts of these

expenses, we hold that they are not deductible.

Issue 2. Schedule A Deductions

     We now turn to the amount of the excess unreimbursed

employee and other miscellaneous expenses deduction to which

petitioners are entitled.   On Schedule A of their 2002 return,

petitioners reported itemized deductions of $72,921.   Respondent

disallowed $39,048 of this amount, which consisted of claimed

unreimbursed employee business expenses of $7,930, attorney’s and

accountant’s fees of $32,610, and tax preparation fees of $20,

reduced by 2 percent of petitioners’ adjusted gross income.6




     5
      Petitioners’ mileage records and corresponding bank records
show purchases of supplies on Sept. 3 and Oct. 1.
     6
      See supra note 1.
                               - 11 -

     The unreimbursed employee business expenses consisted of job

search expenses incurred by Mr. Stukes.    Mr. Stukes worked in the

computer industry, and during part of 2002 had been employed in

Austin, Texas, as a software development manager for a company

that produced energy software.   In 2002, he was involuntarily

terminated from that job, which led him to file a complaint with

the Equal Employment Opportunity Commission (EEOC), alleging that

his termination was the result of age discrimination.      While that

matter was pending, Mr. Stukes commenced an intensive search for

a new job and succeeded in finding employment in January of 2003.

During his search for employment, Mr. Stukes provided his

attorney with documentation to assist with the preparation of the

EEOC proceeding.   He testified that this documentation had

subsequently been destroyed.

     Job search expenses are deductible under section 162(a) to

the extent they are incurred in searching for new employment in

the employee’s same trade or business.    See Primuth v.

Commissioner, 54 T.C. 374, 377-378 (1970).   However, if the

employee is seeking a job in a new trade or business, the

expenses are not deductible under section 162(a).   See Frank v.

Commissioner, 20 T.C. 511, 513-514 (1953).   Job search expenses

include preparation expenses, postage, and travel and

transportation expenses.   See Murata v. Commissioner, T.C. Memo.

1996-321.
                              - 12 -

     Petitioners’ claimed deduction for job search expenses of

$7,930 consisted of:   The cost of transportation to job

interviews, the cost of retaining a search firm to assist with

the search, and the cost of preparing and printing Mr. Stukes’s

calling cards, résumé, and envelopes.   Respondent does not

dispute that petitioners would be entitled to deduct these

expenses if they substantiated them adequately, but respondent

maintains that they failed to do so.

     As discussed supra, section 274, which imposes strict

substantiation requirements, applies to transportation expenses

involving a “passenger automobile”.    In order to establish the

number of miles Mr. Stukes drove pursuant to his job search,

petitioners submitted a log captioned “Job Search Mileage

Expenses/Deductions” (petitioners’ job search mileage log) which

was not prepared contemporaneously with the interviews but rather

was prepared on the basis of contemporaneous calendar records and

bank statements that show costs incurred on specific dates.

     It appears from the record that Mr. Stukes was terminated

from his employment in June 2002.   We find that petitioners’ job

search mileage log, taken together with the calendar, bank

records, and Mr. Stukes’s credible testimony, substantiates the

transportation expense in search of a job between June and
                                  - 13 -

December 2002, to the extent of 1,137 miles.7      The standard

mileage rate for 2002 was 36.5 cents per mile.8      Consequently, the

total allowable mileage expense is $415.

     Petitioners incurred expenses in retaining a search firm to

help Mr. Stukes with his job search.       We find that petitioners’

records and Mr. Stukes’s testimony substantiate these expenses to

the extent of $1,300.

     Petitioners also incurred expenses in preparing and printing

Mr. Stukes’s calling cards, résumé, and envelopes.       We find that

petitioners’ records and Mr. Stukes’s testimony substantiate

these expenses to the extent of $1,100.

     On Schedule A of their 2002 return, petitioners reported

attorney’s fees and accountant’s fees of $32,610, all of which

was disallowed by respondent.       The attorney’s fees stem from a

controversy involving the sale of real property in May of 2001.

Petitioners had acquired the property (the Lakeshore property) in

2000.       At the time of acquisition, petitioners intended to

renovate the Lakeshore property and resell it at a profit.

Petitioners were successful, and they reported $7,633 of capital



        7
      In reaching this amount, we excluded miles driven before
Mr. Stukes was terminated from his job, miles driven in pursuit
of the Equal Employment Opportunity Commission (EEOC) claim, and
miles for which there is no corresponding bank record or calendar
entry.
        8
         See supra note 3.
                               - 14 -

gain from the sale of the Lakeshore property on their 2001

Federal income tax return.

     Difficulty arose at the time of closing the sale of the

Lakeshore property in 2001.   Petitioners believed that the real

estate agent who had organized the sale had damaged the Lakeshore

property and the contents of the house, consisting of

furnishings, appliances, and other personal property.9

Petitioners therefore refused to pay the realtor’s commission and

instead placed an amount equal to the realtor’s commission in an

escrow account.   When negotiation and mediation attempts failed,

the realtor brought suit against petitioners in the District

Court of Llano County, Texas, seeking payment of the commission

as well as recovery of attorney’s fees.   Petitioners

counterclaimed, alleging negligence, conversion, breach of

contract, and violation of the Texas Deceptive Trade Practices-

Consumer Protection Act set forth in Tex. Bus. & Com. Code Ann.

secs. 17.41-17.63 (Vernon, 2002).   Specifically, petitioners

alleged that they had been deprived of personal property

consisting of household furnishings and appliances that had been

in the Lakeshore property.    The realtor prevailed in the district

court proceeding, and the amount of the realtor’s commission was

released from the escrow account.   The realtor was also awarded

     9
      At the trial of this case, Mr. Stukes testified that the
personal property was already in the house when petitioners
bought it.
                              - 15 -

his attorney’s fees of $12,750, which petitioners paid in

September of 2002.   During 2002, petitioners paid their attorney10

for services in connection with the lawsuit brought by the

realtor and paid $250 for mediation services.   We are unable to

determine the exact amount that petitioners paid their attorney

because although petitioners submitted bank records which show

that such payments were made, they redacted the amounts.

     Respondent contends that petitioners have not shown that the

Lakeshore property was other than their second home, for which

Schedule A itemized deductions are not available.   Further,

respondent contends that even if Schedule A itemized deductions

were appropriate in connection with the lawsuit involving the

Lakeshore property, petitioners have not shown the extent to

which the litigation costs were related to the realtor’s demand

for the commission on the sale of the property as opposed to

petitioners’ counterclaims with respect to damage to their

personal property.

     Payment of litigation costs may result in a tax benefit in

one of three ways.   Section 162(a) governs the deductibility of

litigation costs as a business expense.   Section 162(a) allows an

individual to deduct all of the ordinary and necessary expenses

of carrying on his trade or business.   Closely related to this

     10
      At trial, petitioners conceded that they had erroneously
included in the Schedule A amount some payments to their attorney
that had been made in 2001.
                              - 16 -

provision is section 212, which allows an individual to deduct

all of the ordinary and necessary expenses paid or incurred in:

(1) Producing income, (2) managing, conserving, or maintaining

property held for the production of income, or (3) determining,

collecting, or refunding a tax.   Sections 162(a) and 212 are

considered in pari materia, except the income-producing activity

of section 162(a) is a trade or business whereas the income-

producing activity of section 212 is a pursuit of investing or

other profit-making that lacks the regularity and continuity of a

business.   Guill v. Commissioner, 112 T.C. 325, 328 (1999).      A

deduction under 162(a) reduces gross income to arrive at adjusted

gross income, while a deduction under section 212 reduces

adjusted gross income to arrive at taxable income.11    Id.   Neither

party contends that the Lakeshore property was property used in a

trade or business under section 162.

     A third possible treatment of litigation costs that may

confer a tax benefit is as a capital expenditure.    See sec. 1221;

Woodward v. Commissioner, 397 U.S. 572, 575 (1970).    Litigating

costs that are incurred in connection with the sale of a capital

asset are capital expenditures.   Sec. 1211(b)(1).    A capital

asset is property held by the taxpayer and not specifically

excluded from capital asset status by section 1221.    Sec.


     11
      The sec. 212 deduction is reported on Schedule A and is
subject to the 2-percent floor. See supra note 1.
                              - 17 -

1221(a).   The regulations under section 1221 provide that

“Property held for the production of income, but not used in a

trade or business of the taxpayer, is not excluded from the term

‘capital assets’”.   Sec. 1.1221-1(b), Income Tax Regs.

     The Lakeshore property was a capital asset in petitioners’

hands, and petitioners properly reported the gain on the sale of

the Lakeshore property as capital gain in 2001.   Petitioners’

expenditures for the legal fees and expenses arose in connection

with the disposition of the Lakeshore property, rather than with

its conservation or maintenance, and are therefore capital

expenditures.

     Respondent contends that the legal costs borne by

petitioners did not relate to the sale of the Lakeshore property

but rather, at least in part, to petitioners’ counterclaim

against the realtor for damages with respect to petitioners’

personal property.   Consequently, according to respondent, the

legal costs are personal items which under section 262 are not

deductible.

     The proper characterization of legal fees and expenses is

governed by the “origin of the claim” test.    Woodward v.

Commissioner, supra at 577-578.   The object of the “origin of the

claim” test is to find the transaction or activity from which the

taxable event proximately resulted.    United States v. Gilmore,

372 U.S. 39, 47 (1963).   The origin is determined by analyzing
                              - 18 -

the facts and determining the nature of the transaction.       Keller

St. Dev. Co. v. Commissioner, 688 F.2d 675, 681 (9th Cir. 1982),

affg. T.C. Memo. 1978-350.

     Petitioners do not dispute that commissions are generally

payable to a realtor in connection with the sale of property.

Petitioners believed that the commission they owed the realtor

should have been reduced or entirely offset by damages due to

them from the realtor.   Petitioners withheld the realtor’s

commission in an attempt to ensure that they would be compensated

for the loss allegedly caused by the realtor.     A lawsuit ensued,

and petitioners incurred legal fees in defending their actions.

     But for the sale of the Lakeshore property, petitioners

would not have incurred realtor’s commission.     Had they not

disputed the realtor’s commission, petitioners would not have

incurred the legal fees at issue.    Thus, the origin of the

realtor’s claim and the proximate cause of all of petitioners’

legal fees was the sale of the Lakeshore property, a capital

asset in the hands of petitioners.     Therefore, we hold that

petitioners’ payment of legal fees in 2002 constituted a capital

expenditure.12



     12
      Petitioners showed that they paid $21.64 for the purchase
of tax preparation software. This expense might be deductible
but for the fact that it appears to have been incurred and paid
in 2003. Therefore, respondent properly disallowed this amount
for 2002.
                               - 19 -

     Petitioners may offset any capital gains they had in 2002

with their capital losses, and they are allowed an additional

capital loss deduction of up to $3,000 per year for the excess

losses that cannot be offset by capital gains.   Sec. 1211(b).

Petitioners’ excess capital losses may be carried over to

subsequent years.   Sec. 1212(b).

     On their 2002 return, petitioners reported a capital loss

carryover of $38,427 from 2001 as well as a short-term capital

loss from 2002.   The expenses petitioners incurred in 2002

relating to the sale of the Lakeshore property in 2001 should be

aggregated with (and increase) the capital loss carryover

petitioners already reported for 2002.

     Petitioners realized no tax benefit in 2002 from the payment

of attorney’s fees relating to the disposition of their capital

asset in 2001.    However, those expenditures may be beneficial in

future periods.   Only the year 2002 is before us; we do not

address the treatment of petitioners’ capital losses in

subsequent years.

     To reflect the foregoing and concessions by the parties,


                                          Decision will be entered

                                     under Rule 155.
