                              T.C. Memo. 2017-173



                        UNITED STATES TAX COURT



ROBERT DANIEL RODRIGUEZ AND NATALIA RODRIGUEZ, Petitioners v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 14579-15.                        Filed September 6, 2017.



      Robert Daniel Rodriguez and Natalia Rodriguez, pro sese.

      Sharyn M. Ortega and Charles Wiseman (specially recognized), for

respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


      PUGH, Judge: In a notice of deficiency respondent determined a deficiency

of $17,175 in petitioners’ Federal income tax for 2012 and an accuracy-related
                                         -2-

[*2] penalty under section 6662(a) of $3,435.1 The issues for decision are: (1)

whether Exhibits 3-P through 10-P, 12-P, and 13-P should be excluded from the

record for petitioners’ failure to comply with the 14-day rule;2 (2) whether section

274(d) precludes petitioners from deducting $47,315 of car and truck expenses,

$10,657 of travel expenses, and $6,493 of meals and entertainment expenses

reported on their 2012 Schedule C, Profit or Loss From Business; (3) whether

petitioners are entitled to deduct $7,471 of utility expenses on their 2012 Schedule

C;3 and (4) whether petitioners are liable for an accuracy-related penalty under

section 6662(a) and (b)(1) and (2) for 2012 for an underpayment due to

negligence, disregard of rules or regulations, or a substantial understatement of

income tax.




      1
       Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986, as amended, in effect for the relevant year. Rule references are to
the Tax Court Rules of Practice and Procedure. All monetary amounts are
rounded to the nearest dollar.
      2
        Respondent has withdrawn his objection to Exhibit 11-P, and therefore it
is admitted.
      3
        Respondent concedes that petitioners are entitled to a Schedule C utility
expense deduction of $396 for the messaging service for Mr. Rodriguez’ law
office.
                                          -3-

[*3]                           FINDINGS OF FACT

       Some of the facts have been stipulated, and the stipulated facts are

incorporated in our findings by this reference. At the time the petition was timely

filed, petitioners resided in San Ramon, California.

       During 2012 petitioners lived in Danville, California. Mr. Rodriguez

worked as an attorney at his own law firm, and Mrs. Rodriguez assisted him. Mr.

Rodriguez’ main office was in Modesto, California, which was approximately 65

miles from petitioners’ home and about one-fourth mile from the Stanislaus

County Superior Court. He often argued motions and trials at that court. He also

drove to the City of Alameda, and Fresno, San Joaquin, Sacramento, and Contra

Costa Counties to meet clients and sometimes to make court appearances.

Sometime in 2012 petitioners opened a second office for Mr. Rodriguez’ law firm

in Walnut Creek.

       At the calendar call on May 23, 2016, petitioners, for the first time,

produced to respondent over 700 pages of documents including meal receipts, a

mileage log, utility bills, car maintenance receipts, loan interest calculations, and a

residential lease. The receipts had names or client matters written on them. The

mileage log consisted only of dates and miles. The log did not include any

information regarding locations between which petitioners traveled; nor did it
                                            -4-

[*4] include any business purposes for the travel. In addition, the entries in the

mileage log totaled 35,087 miles, far fewer than the 83,256 miles reported on

petitioners’ 2012 Schedule C.

                                        OPINION

I. 14-Day Rule

       The standing pretrial order issued to the parties on December 22, 2015, set

forth two requirements relevant to the evidentiary ruling we must make: (1) that

the parties enter into a stipulation of facts to be submitted at the start of trial, if the

case could not be settled, in which “[a]ll documents and written evidence shall be

marked and stipulated in accordance with Rule 91(b)”; and (2) that “any

documents or materials which a party expects to use * * *, but which are not

stipulated, shall be identified in writing and exchanged by the parties at least 14

days before the first day of the trial session”. The standing pretrial order also

advised the parties that “[t]he Court may refuse to receive in evidence any

document or material that is not so stipulated or exchanged, unless the parties have

agreed otherwise or the Court so allows for good cause shown”. The notice

setting this case for trial also issued to the parties on December 22, 2015, referred

the parties to the standing pretrial order. Respondent objected to the admission of

the documents produced at the calendar call, citing the 14-day rule.
                                         -5-

[*5] Rule 131(b) states that failure to comply with a standing pretrial order may

subject a party to sanctions. The standing pretrial order warns that one possible

sanction for violating the 14-day rule is the exclusion of evidence that was not

exchanged in accordance with that requirement. Moretti v. Commissioner, 77

F.3d 637, 644 (2d Cir. 1996). The 14-day rule is intended to allow the opposing

party the opportunity to review evidence to prepare any challenge or rebuttal.

Kornhauser v. Commissioner, T.C. Memo. 2013-230, at *9 n.4 (citing Dunn v.

Commissioner, T.C. Memo. 1988-45), aff’d, 632 F. App’x 421 (9th Cir. 2016).

“[T]he rule prevents an ‘ambush’ with last-minute evidence that could have been

presented to the opposing party during preparation for trial.” Id.

      In weighing the appropriate sanction for violation of the 14-day rule, the

Court considers whether the opposing party was prejudiced by the failure. See

Thompson v. Commissioner, T.C. Memo. 2011-291, 2011 WL 6382704, at *2 n.8;

Morris v. Commissioner, T.C. Memo. 2008-65, 2008 WL 704208, at *1, aff’d, 431

F. App’x 535 (9th Cir. 2011). In Morris v. Commissioner, 2008 WL 704208, at *1

for example, we concluded that the Commissioner was prejudiced because the

taxpayer’s records were discovered at trial to be full of errors and the

Commissioner had insufficient time to review the proferred documents.
                                           -6-

[*6] We also consider why a party failed to comply with the standing pretrial

order, and absent good cause, we do not hesitate to enforce the 14-day rule. See

Kaplan v. Commissioner, T.C. Memo. 2016-149, at *9-*10. Petitioners claim that

respondent has not been prejudiced by their providing their documentary evidence

the day the case was called from the calendar for trial rather than 14 days before

trial as ordered. We disagree.

      Respondent’s counsel was able to demonstrate at trial that the documentary

evidence was likely full of errors and was not reliable. The cross-examination of

Mr. Rodriguez demonstrated the unreliability of the mileage log, for example:

             The Court:          Okay. So the -- starting at your apartment
                                 going where?

             The Witness:        To Stanislaus County Superior Court most
                                 of the time. So Modesto, California, about a
                                 70-mile or 65-mile route.

             The Court:          And then did you also go to your office
                                 then?

             The Witness:        I did, after court, the court appearances.
                                 Because usually court was at 8:30, I had to
                                 go straight there, or I was meeting with a
                                 client.

                   *      *      *     *         *   *    *

             The Court:          And then how far was it from the court to
                                 your office?
                                           -7-

      [*7] The Witness:         Half a mile. No, I take that back, closer than
                                that, quarter mile.

                   *     *      *      *         *   *    *

      By Ms. Ortega:

            Q      Is it your contention that you went from your office to
                   the Stanislaus Court 208 times in 2012?[4]

            A      Unless the court was closed. On a holiday or something
                   like that, and I may have had another meeting or
                   something.

                   *     *      *      *         *   *    *

            Q      How many miles does * * *[the mileage log] say you
                   traveled on July 4th?

            A      One hundred twenty-nine.

            Q      Could you please look at November 22nd, 2012, tell me
                   how many miles you traveled, claimed you travel on that
                   day?

            A      One hundred twenty-nine.

            Q      And would you please look at December 25th, 2012, and
                   tell me how many miles your log claims you drove that
                   day?

            A      Well, 129, but I didn’t --

            Q      That –

      4
        Of the 258 entries on the mileage log, 210 are 129 miles. We also note
that the log itself appears to have an erroneous total of miles for the entries.
                                           -8-

      [*8] A       -- drive to my office on Christmas Day, I can tell you
                   that.

In addition the cross-examination of Mr. Rodriguez demonstrated the lack of

reliability of petitioners’ meal and entertainment receipts:

      By Ms. Ortega:

             Q     Could you please look at those two receipts?

             A     Yes.

             Q     Are they both on the same date?

             A     Yes --

             Q     Are they both the same amount?

             A     They are.

             Q     Same location?

             A     Yes, they are.

             Q     Are the names written on them the same?

             A     No.

                   *        *    *     *         *   *      *

             Q     Those two copies of receipts I handed you, they were --
                   what was the date on both of them?

             A     One’s hard to see, but it looks like it’s -- they’re both
                   October 5th, 2012.
                                  -9-

[*9] Q     And the amount on both of them?

     A     27.07.

     Q     And the names written on them are not the same?

     A     No.

           *        *   *     *         *     *     *

     The Court:         So while she’s walking back, these are --
                        you give the date on the three receipts?

     The Witness:       June 22nd, 2012.

           *        *   *     *         *     *     *

By Ms. Ortega:

     Q     The amount on each one?

     A     Twenty-three dollars fifty-four cents.

     Q     And are the names written on them [the] same on all
           three?

     A     No.

     Q     Are they different on all three?

     A     Or, no, wait a minute, there’s -- okay, two of them are
           the same, I see. Yes, two of them are the same.

     Q     Are they -- are, is the handwriting identical on each one,
           they’re in the exact same position on the receipt?
                               -10-

[*10] A   The two are identical, but this one -- well, the
          handwritings are identical but it’s -- doesn’t say the same
          thing.

          *      *      *      *      *   *        *

     Q    I’ve handed you a receipt, the amount is for $124.76, the
          time of this receipt is date -- is time-stamped 9:43 p.m.?

     A    Yes.

     Q    And the date is Valentine’s Day, February 14th, 2012?

     A    Yes.

          *      *      *      *      *   *        *

     Q    I handed you a stack of receipts, you could quickly
          thumb through them?

     A    I did, yes.

     Q    And written on each one is N. Rodriguez or Natalia
          Rodriguez dash immigration?

     A    Yes.

     Q    There’s no client name on it?

     A    Well, I -- she’s –

     Q    There’s no client name on the receipt?

     A    N. Rodriguez, she’s my client. I represent her in legal
          issues.
                                        -11-

      [*11] Q      We’ll get back to that. In what legal issues do you
                   represent her?

             A     Well, she’s --

             Q     In 2012, what legal issues did you represent her in?

             A     Immigration. She’s asked me for legal advice regarding
                   it.

             Q     Did she pay you for that advice?

             A     No. Not all my clients pay me for legal advice.

             Q     Did you have a written contract with her for that advice?

             A     No. I don’t need to have a contract.

      The receipts petitioners submitted appear rife with discrepancies and

include duplicates and personal expenses. Respondent identified these issues after

one day of review. With additional time we believe other errors would have been

identified, and respondent could have verified the accuracy of the claims that Mr.

Rodriguez offered in support of admissibility. Thus this is the kind of evidence

that the 14-day rule is intended to protect against. Mr. Rodriguez, an attorney, had

no explanation for his failure to comply with our order and notice, other than that

he “did not have time to do it”, even though the standing pretrial order was issued

five months before trial. He testified to his extensive court experience. He should

know, then, the importance of complying with court orders. For this reason we
                                        -12-

[*12] reject his argument that respondent should have filed a motion in limine or

sought a hearing or continuance. Our Rules provide for, and petitioners were

warned of the possibility of, sanctions for failure to comply; they should have been

aware of the possible consequences.

      Given the demonstrated unreliability of these documents, we hold that

respondent was prejudiced by petitioners’ failure to comply with the 14-day rule.

We therefore exclude Exhibits 3-P through 10-P, 12-P and 13-P.

II. Petitioners’ Tax Liability

      Ordinarily, the burden of proof in cases before the Court is on the taxpayer.

Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). Under section

7491(a), in certain circumstances the burden of proof may shift from the taxpayer

to the Commissioner. Petitioners have not claimed or shown that they meet the

specifications of section 7491(a) to shift the burden of proof to respondent as to

any relevant factual issue.

      Deductions are a matter of legislative grace, and a taxpayer must prove his

or her entitlement to deductions. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,

84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). Section

162(a) provides a deduction for certain business-related expenses. Taxpayers

must maintain records sufficient to substantiate the section 162 deductions they
                                         -13-

[*13] claim. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975),

aff’d, 540 F.2d 821 (5th Cir. 1976); see also sec. 1.6001-1(a), (e), Income Tax

Regs.

        A. Expenses Under Section 274

        Taxpayers are required to substantiate expenses underlying a claimed

deduction by maintaining records sufficient to establish the amounts of the

expenses and to enable the Commissioner to determine the correct tax liability.

Sec. 6001; Higbee v. Commissioner, 116 T.C. 438, 440 (2001). Under the Cohan

rule, where a taxpayer is able to demonstrate that he or she has paid or incurred a

deductible expense but cannot substantiate the precise amount, the Court may

estimate the amount of the expense if the taxpayer produces credible evidence

providing a basis for the Court to do so. Cohan v. Commissioner, 39 F.2d 540,

544 (2d Cir. 1930). Section 274(d) supersedes the Cohan rule, however, imposing

strict substantiation requirements for certain expenses such as vehicle expenses,

travel expenses, and meals and entertainment expenses. Sec. 1.274-5T(a),

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

        To meet these strict substantiation requirements, a taxpayer must

substantiate by adequate records or by sufficient evidence corroborating the

taxpayer’s own statement: (1) the amount of the expense; (2) the time and place of
                                        -14-

[*14] the travel or use; and (3) the business purpose of the expense. Sec. 274(d).

To substantiate by adequate records, the taxpayer must provide: (1) an account

book, a log, or a similar record and (2) documentary evidence, which together are

sufficient to establish each element with respect to an expenditure. Sec. 1.274-

5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).

      Section 274(d) contemplates that no deduction or credit shall be allowed on

the basis of mere approximations or unsupported testimony of the taxpayer.

Although a contemporaneous log is not required, corroborative evidence to

support a taxpayer’s reconstruction “of the elements * * * of the expenditure or

use must have a high degree of probative value to elevate such statement” to the

level of credibility of a contemporaneous record. Sec. 1.274-5T(c)(1), Temporary

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

      At issue is whether petitioners are entitled to a $47,3155 car and truck

expense deduction, a $10,657 travel expense deduction, and a $6,493 meals and


      5
        Petitioners’ Schedule C reported 83,256 miles driven for business in 2012,
and petitioners appeared to claim the standard mileage rate in lieu of actual costs
of using their vehicles for business, as prescribed by Rev. Proc. 2010-51, sec.
4.02, 2010-51 I.R.B. 883, 884. See sec. 1.274-5(g)(1), Income Tax Regs. At the
standard mileage rate for 2012, Notice 2012-1, sec. 2, 2012-2 I.R.B. 260,
petitioners would be entitled to a deduction of $46,207 if they could establish that
those miles were driven for business. Petitioners have offered no explanation for
the discrepancy between this amount and the amount reported on their Schedule C.
                                         -15-

[*15] entertainment expense deduction, as reported on their 2012 Schedule C.

Because petitioners did not comply with the 14-day rule, no documentary evidence

supports these expenses. Moreover, had we admitted petitioners’ documents into

evidence, we would conclude that they fell short of the strict substantiation

requirements of section 274(d). Petitioners’ mileage log simply states dates and

the number of miles driven on each date, with no business purposes or locations.

At trial respondent’s counsel demonstrated that several of the entries that Mr.

Rodriguez justified as trips to Stanislaus County Court, rather than commuting to

his office, were on Federal holidays. Mr. Rodriguez stated that “I didn’t * * *

drive to my office on Christmas Day, I can tell you that”, even though the log had

an entry of 129 miles on that date. The log does not rise to the level of credibility

of a contemporaneous record. See Aldea v. Commissioner, T.C. Memo. 2000-136,

2000 WL 371549, at *5 (holding that the taxpayer did not substantiate her

automobile mileage expense deduction despite having a detailed mileage log

because her mileage log did not appear to be contemporaneously written and her

testimony about the mileage log was not credible).

      Petitioners also offered, and we did not admit, receipts for vehicle

maintenance and vehicle loan payments. Aside from the inadmissibility of those

exhibits, petitioners failed to establish the business use of the vehicles and
                                         -16-

[*16] therefore failed to meet the strict substantiation requirements with respect to

their vehicle expenses.

      The receipts petitioners offered to support meals and entertainment

expenses of $6,493 are equally unreliable. Most of the receipts simply have an

individual’s name or case name written on them. The receipts fail to demonstrate

the business purpose of the expense or whether petitioners met a client. In

addition, several receipts were identical but for the different names handwritten on

them, and several receipts were for items in the nature of personal expenses rather

than business expenses.

      As to the $10,657 travel expense deduction, petitioners admit that they did

not bring any documents to substantiate their expenses with the exception of the

toll and parking receipts totaling $215. These receipts fail to state any additional

information, such as business purpose.

      Because of petitioners’ failure to comply with the 14-day rule, their self-

serving testimony is the only evidence in the record supporting their claimed

deductions. We do not find their testimony credible. Tokarski v. Commissioner,

87 T.C. 74, 77 (1986) (holding that the taxpayer’s and his mother’s testimony were

insufficient where the testimony was self-serving and where it was not supported

by corroborative testimony or evidence). We therefore sustain respondent’s
                                        -17-

[*17] disallowance of petitioners’ car and truck expense deduction, travel expense

deduction, and meals and entertainment expense deduction.

      B. Petitioner’s Utility Expense Deduction

      Because petitioners violated the 14-day rule, the utility bills in Exhibit 10-P

were not admitted; and, even if they had been, they are deficient because they do

not include sufficient information to allow us to determine whether the utility

expenses were personal or business. The utility bills in Exhibit 11-P from Ring

Central totaling $396, on the other hand, identify the messaging service associated

with the telephone number of Mr. Rodriguez’ law firm. With the exception of this

$396 utility expense deduction that respondent has conceded, petitioners have not

provided any admissible evidence of utility expenses attributable to the law firm.

Except for the conceded amount, we find that petitioners have failed to

substantiate the claimed utility expense deduction on their Schedule C. We

therefore sustain respondent’s disallowance.

III. Section 6662 Penalty

      Respondent determined that petitioners were liable for a penalty under

section 6662(a) because they were negligent or in the alternative they substantially

understated their income tax liability. Section 6662(a) and (b)(1) and (2) imposes

a penalty equal to 20% of the portion of an underpayment of tax required to be
                                        -18-

[*18] shown on the return that is attributable to “negligence or disregard of rules

or regulations” and/or a “substantial understatement of income tax.” Negligence

includes “any failure to make a reasonable attempt to comply with the provisions

of this title”. Sec. 6662(c). We have defined negligence as the failure to exercise

due care or the failure to do what a reasonable person would do under the

circumstances. See Allen v. Commissioner, 92 T.C. 1, 12 (1989), aff’d, 925 F.2d

348, 353 (9th Cir. 1991); Neely v. Commissioner, 85 T.C. 934, 947 (1985).

“‘Negligence’ also includes any failure by the taxpayer to keep adequate books

and records or to substantiate items properly.” Sec. 1.6662-3(b)(1), Income Tax

Regs. An understatement of income tax is a “substantial understatement” if it

exceeds the greater of 10% of the tax required to be shown on the return or

$5,000. Sec. 6662(d).

      With respect to an individual taxpayer’s liability for a penalty, section

7491(c) places the burden of production on the Commissioner, requiring the

Commissioner to come forward with sufficient evidence indicating that imposition

of a penalty is appropriate. Higbee v. Commissioner, 116 T.C. at 446-447. Once

the Commissioner meets his burden of production, the taxpayer bears the burden

of proving that the Commissioner’s determination is incorrect. Id.; see Rule

142(a). If the Rule 155 computations confirm a substantial understatement, then
                                         -19-

[*19] respondent has met his burden of production as to the applicability of the

accuracy-related penalty on that basis. See sec. 7491(c). We hold that petitioners’

failure to keep adequate records and to substantiate their claimed expenses was not

what a reasonable person would do under the circumstances and constitutes

negligence. Therefore petitioners are liable for the penalty unless they can

demonstrate that respondent’s penalty determination was incorrect, for example

because there was reasonable cause for any portion of the underpayment and that

they acted in good faith. See sec. 6664(c)(1); Higbee v. Commissioner, 116 T.C.

at 446-447.

      The decision as to whether a taxpayer acted with reasonable cause and in

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

and circumstances. See sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the

most important factor is the extent of the taxpayer’s efforts to assess the proper tax

liability. Id.; see Halby v. Commissioner, T.C. Memo. 2009-204. We also

consider the taxpayer’s experience, knowledge, and education. Sec. 1.6664-

4(b)(1), Income Tax Regs.

      Petitioners have not shown reasonable cause for the underpayment of tax for

2012. They offered no explanation for their underpayment, and we conclude that

their substantiation would have been inadequate even had they complied with the
                                        -20-

[*20] 14-day rule. In addition, Mr. Rodriguez is an attorney and was capable of

reading the rules regarding substantiation (and our standing pretrial order). We

therefore hold that petitioners are liable for the penalty for an underpayment

attributable to negligence under section 6662(b)(1). We therefore need not

consider whether there was a substantial understatement. See New Phoenix

Sunrise Corp. v. Commissioner, 132 T.C. 161, 187 (2009), aff’d, 408 F. App’x

908 (6th Cir. 2010); sec. 1.6662-2(c), Income Tax Regs.

      Any contentions we have not addressed we deem irrelevant, moot, or

meritless.

      To reflect the foregoing,

                                                    Decision will be entered under

                                               Rule 155.
