                                 T.C. Memo. 2015-232

                            UNITED STATES TAX COURT



           DAVID L. CHARLEY AND JULIA A. CHARLEY, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 13516-13.                             Filed December 2, 2015.



      David L. Charley and Julia A. Charley, pro se.

      Britton G. Wilson, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


      PARIS, Judge: Respondent determined a deficiency of $5,046 in, and a

section 6662 accuracy-related penalty of $1,009.20 in relation to, petitioners’ 2010

Federal income tax.1 After concessions,2 the issue for decision is whether

      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code of 1986, as amended and in effect for the year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
      2
          Respondent conceded that petitioners: (1) are entitled to their claimed
                                                                          (continued...)
                                        -2-

[*2] petitioners are entitled to car and truck expenses they reported on the

Schedule C, Profit or Loss From Business, attached to their 2010 Federal income

tax return.3

                               FINDINGS OF FACT

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

facts and facts drawn from stipulated exhibits are incorporated herein by this

reference. Petitioners resided in Missouri when they filed their petition.

      In 2010 Mr. Charley was doing business as LubriDyne--a business he was

reestablishing.4 LubriDyne was an oil purification business and owned equipment

valued at over $200,000 that “filtered reclaimed spilled oil to remove particulate,

condensated [sic] water, and acid, which depletes oil’s lubrication qualities.”




      2
        (...continued)
deduction for legal and professional services expenses of $1,221; (2) are not liable
for self-employment tax or entitled to the corresponding adjustment to adjusted
gross income of one-half of such tax; and (3) are not liable for the sec. 6662
accuracy-related penalty.
      3
       Respondent also determined that a portion of petitioners’ reported Social
Security benefits was taxable. That determination is computational and will not be
discussed further.
      4
       Mr. Charley’s legal and professional services expenses were for the
drafting of multiple business service agreements. The attorney who drafted the
agreements passed away before trial.
                                       -3-

[*3] LubriDyne’s target clients were plastic injection molding operators who

worked primarily with hydraulic oil.

      In 2010 petitioners owned three automobiles--one for Mr. Charley’s

personal use, one for Mrs. Charley’s personal and work use,5 and a third

automobile purchased that year for Mr. Charley’s business travel. Petitioners also

had access to Mrs. Charley’s mother’s vehicle for personal use because she lived

with them in 2010.

      On January 27, 2010, Mr. Charley purchased a 2002 Cadillac DeVille with

63,745 miles because his personal automobile had too many miles on it for

business travel and its trunk was not big enough for the equipment’s test unit. In

2010 only Mr. Charley drove the Cadillac.

      The most effective way for Mr. Charley to pitch LubriDyne was to drive to

clients and demonstrate how the equipment worked. He began most trips from his

home where he officed and stored his equipment. All of Mr. Charley’s business

trips were made in the Cadillac. Many of LubriDyne’s clients were within a four-

to five-hour radius of Mr. Charley’s Missouri home although he also visited


      5
        Mrs. Charley was a nanny and had a round-trip commute of approximately
an hour and a half to her employers’ home. The disallowed car and truck expenses
relate solely to Mr. Charley’s business reported on the Schedule C attached to
petitioners’ return.
                                        -4-

[*4] clients in Colorado, California, and Wisconsin. If Mr. Charley did not return

home at the end of each day, he would either spend the night in his car or drive

through the night.6 When he did stay overnight somewhere, he stayed with friends

at their houses. Mrs. Charley did not accompany Mr. Charley on any of his

business trips in 2010.

      Mr. Charley recorded the point-of-contact, telephone number, date he

visited the client, and the client’s business address on an index card.7 Each index

card was created at the time of the travel to that client. Although the mileage from

Mr. Charley’s home to each client was not included on the index cards, most of his

client’s business addresses included the city and State where the client was

located. Some of the index cards record visits to multiple clients in the same

geographical area. Mr. Charley’s business plan was to generate more income for

LubriDyne so he could sell the oil purification equipment and retire.


      6
        Mr. Charley testified that petitioners had spent $2,500 to rid their home of
bed bugs after one hotel stay. Since then, he does not stay at hotels when he
travels.
      7
        The parties filed a supplemental stipulation of facts after trial. Attached
were copies of Mr. Charley’s index cards marked as Exhibit 11-P. Respondent
objected to the admission of the copies of the index cards on the grounds of
hearsay and that petitioners did not lay a proper foundation for the business
records exception to hearsay. By order dated May 12, 2014, the Court overruled
respondent’s objection and admitted the copies of Mr. Charley’s index cards as
part of the record.
                                       -5-

[*5] Mr. Charley drove to Mountain Grove, Missouri, to meet with a client on

February 17, 2010, and then on to Flippin, Arkansas, to meet with a client on

February 18, 2010. Mr. Charley next met with clients in Sainte Genevieve,

Missouri, on February 24 and 25, 2010.

      Mr. Charley’s next client meetings were in Brownsville, Texas, and Laredo,

Texas, on March 4, 2010. He next traveled from his home office to Kansas City,

Missouri, on March 9, 2010, and Grandview, Missouri, on March 10, 2010. Mr.

Charley then met with clients in Lenexa, Kansas, and Lawrence, Kansas, on March

11 and 17, 2010, respectively. He next met with clients in McPherson, Kansas, on

March 18, 2010. Mr. Charley also met with a client in Chesterfield, Missouri, on

March 31, 2010.

      His next client meeting was in Ames, Iowa, on April 9, 2010. Mr. Charley

then traveled to Iowa Falls, Iowa, on April 15, 2010, and to Franklin, Iowa, on

April 28, 2010. Mr. Charley’s next client meetings were in Indianapolis, Indiana,

on April 29, 2010. From there he traveled to meet a client in Nicholasville,

Kentucky, on April 30, 2010.

      Mr. Charley next traveled to meet clients in Iowa City, Iowa, and

Muscatine, Iowa, on May 12 and 13, 2010, respectively. Mr. Charley then

traveled to Wisconsin to meet with several clients. He was in Oshkosh on May 27
                                        -6-

[*6] and 28, 2010; Walworth on June 2, 2010; and Sheboygan and Janesville on

June 3, 2010. Mr. Charley then traveled from his home office to Oklahoma to

meet with several clients. He was in Sand Springs on June 17, 2010, and Tulsa on

June 18, 2010. Mr. Charley finished the month of June by meeting with a client in

Joplin, Missouri, on June 24, 2010.

      Mr. Charley’s first client meeting in July was in Excelsior Springs,

Missouri, on July 7, 2010. He then visited clients in California by way of Denver

Colorado, where he met with one client.8 Mr. Charley met with clients in Chino,

Bakersfield, and Fresno, California, on July 14, 20, and 21, 2010, respectively.9

      Mr. Charley also drove the Cadillac when he helped a friend with a

demolition business in 2010. He did not include the mileage driven for the

demolition business in his reported car and truck expenses.




      8
      The index card for Mr. Charley’s client meeting in Denver is not dated.
Mr. Charley credibly testified that he stopped in Denver en route to California.
      9
        Mr. Charley met with two clients in Fresno, California. One client’s index
card is dated July 21, 2010. The other client’s index card is dated “6-21-2010”.
The Court finds, because of Mr. Charley’s credible testimony about his business
travel, that the index card dated “6-21-2010” is misdated and that all of Mr.
Charley’s California client meetings occurred in July 2010.
                                        -7-

[*7] On November 30, 2010, Mr. Charley had a remanufactured transmission

installed in the Cadillac. The invoice for that repair listed the Cadillac’s mileage

as 130,367.

      Petitioners timely filed their 2010 Federal income tax return. On the

attached Schedule C they reported gross receipts or sales of $2,500 and total

expenses of $24,713 for a net loss of $22,213. Petitioners’ largest reported

expense was car and truck expenses of $20,625. Petitioners reported 41,250

business miles and used the standard mileage rate for 2010 to calculate their car

and truck expenses.10

      Respondent issued a notice of deficiency to petitioners disallowing their

reported car and truck expenses in full for 2010.

                                     OPINION

      Generally, the Commissioner’s determination set forth in a notice of

deficiency is presumed correct, and the taxpayer bears the burden of showing the

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

(1933). Deductions and credits are a matter of legislative grace, and the taxpayer

bears the burden of proving entitlement to any deduction or credit claimed on a


      10
        The standard mileage rate for the business use of a car was 50 cents per
mile for 2010. Rev. Proc. 2009-54, 2009-51 I.R.B. 930.
                                        -8-

[*8] return. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New

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

      Under certain circumstances the burden of proof as to factual matters may

shift to the Commissioner pursuant to section 7491(a). Petitioners did not argue

for a burden shift under section 7491(a), and the record does not establish that the

prerequisites for a burden shift have been met; therefore, the burden of proof

remains theirs.

I.    Sections 162 and 274 Generally

      Section 162(a) allows as a deduction all ordinary and necessary expenses

paid or incurred in carrying on any activity that constitutes a trade or business. To

be “ordinary” the transaction that gives rise to the expense must be of a common

or frequent occurrence in the type of business involved. Deputy v. du Pont, 308

U.S. 488, 495 (1940). To be “necessary” an expense must be “appropriate and

helpful” to the taxpayer’s business. Welch v. Helvering, 290 U.S. at 113.

Additionally, for a deduction under section 162, the expenditure must be “directly

connected with or pertaining to the taxpayer’s trade or business”. Sec. 1.162-1(a),

Income Tax Regs.

      Generally, a taxpayer must keep records sufficient to establish the amounts

of income, deductions, credits, and other items reported on his or her Federal
                                        -9-

[*9] income tax return. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs. Cohan

v. Commissioner, 39 F.2d 540 (2d Cir. 1930), allows the Court to estimate the

amounts of some deductible expenses. The Cohan rule is not applicable to

expenses under section 274(d). See Sanford v. Commissioner, 50 T.C. 823, 827-

828 (1968), aff’d per curiam, 412 F.2d 201 (2d Cir. 1969).

      Under section 274(d), a taxpayer must satisfy strict substantiation

requirements before a deduction is allowed. To deduct expenses related to travel,

meals and entertainment, gifts, or listed property, the taxpayer must “substantiate

by adequate records or by sufficient evidence corroborating the taxpayer’s own

statement”: (1) the amount of the expense (i.e., mileage); (2) the time and place of

the expense; (3) the business purpose of the expense; and (4) in the case of

entertainment, the business relationship between the taxpayer and the person being

entertained. Sec. 274(d). Listed property includes passenger automobiles. Sec.

280F(d)(4)(A)(i). To satisfy the requirements of section 274(d) by adequate

records, a taxpayer must maintain records and documentary evidence that in

combination are sufficient to establish each element of an expenditure or use. Sec.

1.274-5T(c)(1) and (2), Temporary Income Tax Regs., 50 Fed. Reg. 46016-46017

(Nov. 6, 1985).
                                          - 10 -

[*10] II.     Petitioners’ Car and Truck Expenses

       Petitioners reported car and truck expenses for 41,250 business miles on the

Schedule C attached to their 2010 return. The clients Mr. Charley met with in

2010, as discussed supra, are documented by the index cards he created

contemporaneously for all clients, which were submitted to the Court and made a

part of the record over respondent’s objection. At trial Mr. Charley credibly

testified that he visited all the clients on his list.11 He also credibly testified that he

used the Cadillac only for business because he had other automobiles for personal

use.

       Petitioners reported 41,250 business miles for 2010. Mr. Charley drove the

Cadillac over 66,000 miles in 2010. He credibly testified that the 41,250 miles

reported on the return did not include the miles driven in relation to his friend’s

demolition business because those miles were not related to LubriDyne. To

account for the fact that the Cadillac was driven more miles than petitioners

claimed as an expense for 2010, Mr. Charley also testified that he did not drive

directly to a client and then directly home. Although the Court finds Mr.

Charley’s testimony credible, business mileage must be strictly substantiated and


       11
      The client list Mr. Charley referenced at trial was compiled from his
contemporaneously created client index cards.
                                        - 11 -

[*11] cannot be estimated solely on the basis of his testimony about driving

circuitous routes to visit his clients. See sec. 274(d); Sanford v. Commissioner, 50

T.C. at 827-828.

      While Mr. Charley cannot substantiate his business miles with a mere

statement about his driving habits, he can substantiate them by “his own statement,

whether written or oral, containing specific information in detail” about them and

by “other corroborative evidence sufficient to establish” them. Sec. 1.274-

5T(c)(3)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985).

The Court finds that Mr. Charley substantiated that he had business mileage

expenses for 2010 through his index cards and testimony--although not the amount

reported on petitioners’ return. See Smith v. Commissioner, 80 T.C. 1165 (1983)

(taxpayer substantiated business mileage by producing schedule of his business

travel that listed city and State he traveled to and from and dates of travel). While

Mr. Charley’s travel schedule may have been extreme, such extremity is not a bar

to deducting otherwise properly substantiated expenses. See Scully v.

Commissioner, T.C. Memo. 2013-229, at *18.

      Mr. Charley left from his home office to begin each business trip. He would

return home that day, drive through the night to return home the following day, or

continue to another client in the same geographic location as the first client on the
                                        - 12 -

[*12] business trip. Mr. Charley’s index cards contain the business address for

almost every client his visited in 2010. Allowing Mr. Charley the mileage for the

shortest routes between his home office and his clients’ addresses, the Court finds

that petitioners are entitled to car and truck expenses for 13,731 business miles for

2010.12

      To reflect the foregoing,


                                                 Decision will be entered

                                       under Rule 155.




      12
        Mr. Charley included index cards for Amcor plants in Michigan and
Florida. These index cards included addresses and contact information but no
dates for when he visited these plants. Each index card has an “X” over the
information on the card. Mr. Charley did not testify about trips to Michigan or
Florida, and his list of clients visited in 2010 did not include the Amcor plants in
Michigan and Florida. Petitioners are not entitled to include the Michigan and
Florida index card information in the computation of their 2010 car and truck
expenses.
