                   T.C. Summary Opinion 2009-119



                      UNITED STATES TAX COURT



           REYNARD AND JOYCE M. CAMPBELL, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3530-07S.               Filed July 30, 2009.



     Reynard and Joyce M. Campbell, pro sese.

     Shannon Edelstone, for respondent.



     WHERRY, Judge:   This case was heard pursuant to section 7463

of the Internal Revenue Code in effect when the petition was

filed.1   Pursuant to section 7463(b), the decision to be entered




     1
      All subsequent section references are to the Internal
Revenue Code of 1986, as amended and in effect for the tax year
at issue. Rule references are to the Tax Court Rules of Practice
and Procedure.
                                - 2 -

is not reviewable by any other court, and this opinion shall not

be treated as precedent for any other case.

         Petitioners are husband and wife.   Respondent determined a

$31,153 deficiency in petitioners’ Federal income tax and a

$6,230.60 accuracy-related penalty under section 6662(a) for

petitioners’ 2005 tax year.    After concessions by the parties,

the issues remaining before the Court are:    (1) Whether

petitioners are entitled to additional deductions claimed on

Schedule C, Profit or Loss From Business, for insurance expenses,

car and truck expenses, and expenses for business use of their

home;2 (2) whether petitioners are entitled to additional

deductions claimed on Schedule E, Supplemental Income and Loss,

for repairs to two multiunit dwellings used as rental properties

and as petitioners’ home (4319 and 4329 Rilea);3 (3) whether

petitioners were required to capitalize certain expenditures




     2
      Respondent has conceded that petitioners are entitled to a
$1,444 Schedule C deduction for expenses for business use of
their home. The amounts remaining in dispute relating to
petitioners’ claimed Schedule C deductions for business use of
their home are $1,718 in depreciation and a $5,154 carryover loss
from 2004. Those amounts are computational and will be resolved
in the Rule 155 computation in accordance with our decision in
Campbell v. Commissioner, T.C. Summ. Op. 2008-154, which
concerned Mr. Campbell’s 2004 tax year.
     3
      The two rental properties are located at 4319 and 4329
Rilea Way in Oakland, California.
                                 - 3 -

relating to 4319 and 4329 Rilea; and (4) whether petitioners are

liable for an accuracy-related penalty under section 6662(a).4

                              Background

     Some of the facts have been stipulated, and the stipulated

facts and accompanying exhibits are hereby incorporated by

reference into our findings.    At the time they filed their

petition, petitioners resided in California.

         Reynard Campbell is a certified public accountant (C.P.A.),

and Joyce Campbell is a PBX operator.5     In 2005 Mr. Campbell was

employed by Bay Area Rapid Transit (BART).     In addition, Mr.

Campbell maintained his own auditing and accounting business,

with respect to which petitioners reported Schedule C gross

income of $22,161 and a net profit of $11,062 on their 2005 joint

Form 1040, U.S. Individual Income Tax Return.6     Petitioners

reported a Schedule E loss of $14,219 relating to 4319 and 4329

Rilea Way.7


     4
      In addition, respondent made a $1,566 computational
adjustment that resulted from adjustments to petitioners’ net
income from self-employment. That computational adjustment will
be resolved in the Rule 155 computation that the Court will
direct in accordance with this opinion.
     5
      PBX stands for “private branch exchange”.    PBXs are
privately owned telephone switching systems.
     6
      Petitioners calculated that profit by subtracting $11,099
in reported business expenses from $22,161 in reported business
income.
     7
      Petitioners reported an actual loss of $25,716 by
                                                   (continued...)
                                  - 4 -

         On January 18, 2007, respondent issued a notice of

deficiency disallowing many of petitioners’ claimed Schedule C

and E deductions.      Petitioners filed a timely petition with this

Court on February 12, 2007.      A trial was held on March 21, 2008,

in San Francisco, California.

                               Discussion

I.   Burden of Proof

     The Commissioner’s determination of a taxpayer’s liability

is generally presumed correct, and the taxpayer bears the burden

of proving that the determination is improper.        See Rule 142(a);

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

to section 7491(a), the burden of proof on factual issues that

affect the taxpayer’s tax liability may be shifted to the

Commissioner where the “taxpayer introduces credible evidence

with respect to * * * such issue.”        Petitioners have not

established that they meet the requirements under section




     7
     (...continued)
subtracting $85,895 in expenses and depreciation from $60,179 in
rents received. But because of passive activity loss
limitations, they were not allowed to deduct that entire loss in
2005. Although sec. 469(i) provides an exemption to the passive
activity loss rules for taxpayers who “actively participated” in
a rental real estate activity that allows such taxpayers to
deduct a maximum loss of $25,000 per year related to the rental
real estate activity, that exemption begins to phase out for
taxpayers with modified adjusted gross income (AGI) in excess of
$100,000. Sec. 469(i)(3)(A). Petitioners’ modified AGI in 2005
was $121,562.
                                 - 5 -

7491(a)(1) and (2) for such a shift.     Consequently, the burden of

proof remains on them.

II.   General Deduction Rules

      Deductions are a matter of legislative grace, and the

taxpayer must maintain adequate records to substantiate the

amounts of any deductions or credits claimed.    Sec. 6001;

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); sec.

1.6001-1(a), Income Tax Regs.

      Generally, the Court may allow for the deduction of a

claimed expense even where the taxpayer is unable to fully

substantiate it, provided the Court has an evidentiary basis for

doing so.   Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.

1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).     But

see sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg.

46014 (Nov. 6, 1985).    In these instances, the Court is permitted

to approximate the allowable expense, bearing heavily against the

taxpayer whose inexactitude is of his or her own making.      Cohan

v. Commissioner, supra at 544.

III. Deductibility of Repair Expenses Relating to Petitioners’
     Schedule E Business

      Section 162(a) authorizes a deduction for “all the ordinary

and necessary expenses paid or incurred during the taxable year

in carrying on any trade or business”.     A trade or business

expense is ordinary for purposes of section 162 if it is normal

or customary within a particular trade, business, or industry and
                                 - 6 -

is necessary if it is appropriate and helpful for the development

of the business.    Commissioner v. Heininger, 320 U.S. 467, 471

(1943); Deputy v. du Pont, 308 U.S. 488, 495 (1940).    In

contrast, “personal, living, or family expenses” are generally

nondeductible.   Sec. 262(a).8

     Respondent concedes that petitioners have substantiated

$26,857 of the $37,076 in claimed Schedule E deductions for

repair expenses.9   Respondent argues that petitioners have failed

to substantiate the remaining $10,219.   The precise source of the

$10,219 remaining in dispute is not entirely clear.    That amount

appears to comprise in part $1,767.60 that Mr. Campbell paid on

April 24, 2005, for wood flooring, $20.65 paid on August 12,

2005, for a related flooring installation kit, and $450 that Mr.

Campbell paid Mrs. Campbell for contract labor.   The remainder


     8
      Appendix A contains a summary of our conclusions as to each
of the adjustments contained in the notice of deficiency.
Appendix B contains a breakdown of the additional repair expenses
that we are allowing petitioners to deduct.
     9
      More specifically, respondent concedes that petitioners
have substantiated $14,494 of repair expenses but contends that
$1,789 of this amount is neither deductible nor depreciable. The
$1,789 comprises a wood floor and related installation kit
costing $1,767.60 and $20.65, respectively. Respondent would
have petitioners capitalize those items and would allow
depreciation, but not until 2006 or 2007--when they were placed
in service. This, in respondent’s view, leaves $12,705 in
deductible 2005 repair expenses. Respondent also concedes that
petitioners have substantiated another $12,363 in repair expenses
but argues that those expenses must be capitalized. Petitioners
agree that $6,016.32 of the $12,363 must be capitalized. The
parties dispute whether the remaining $6,346.68 of the $12,363
must be capitalized or is fully deductible. We will address
these issues in the next section of our opinion.
                                - 7 -

apparently relates to a multitude of purchases by Mr. Campbell at

Home Depot and various hardware, flooring, paint, and other

stores.    Petitioners have provided receipts and bank records

reflecting most of those purchases.

      Regarding the $450 deduction petitioners claimed for

“contract labor”, Mr. Campbell testified that he paid his wife

$450 to help him clean petitioners’ rental units.    A canceled

check reflects that such a payment was made on May 23, 2005.      At

trial the Court apprised petitioners that it would allow the

deduction if they could show that they reported the $450 as

income on their joint return.    In response, Mr. Campbell

asserted:    “Okay, well, I don’t think that I can parse it out to

that degree.”    Petitioners have not since demonstrated that they

reported the $450 as income on their joint return.    Accordingly,

they have failed to demonstrate that the payment constituted a

deductible business expense.

     Petitioners have not demonstrated that the $1,767.60 wood

flooring expense constitutes a deductible repair expense rather

than a capital expenditure.    Further, at trial Mr. Campbell

admitted that the wood flooring was not placed in service until

2006 or 2007.    Because the flooring is an item that must be

capitalized and was not used until after 2005, petitioners cannot

claim its cost as a deductible repair expense nor depreciate it

in 2005.    However, we will treat the $20.65 floor installation
                                - 8 -

kit as a tool which is separate from the wood flooring and need

not be capitalized.

     As for the remaining disputed Schedule E deductions for

repairs, petitioners have not conclusively demonstrated to which

unit(s) they were attributable.    Nevertheless, through their

receipts and bank records, petitioners have established that the

expenses were incurred in 2005 except as to one or two small

dollar items where the receipt date has faded and is no longer

legible.

     The bank records petitioners submitted merely reflect

various purchases and their amounts.     They do not specify exactly

what petitioners purchased or for which specific unit(s) the

purchases were made.    They also do not provide enough information

to determine with any certainty whether those expenses would need

to be capitalized.    Many are, however, for small items that do

not appear to be capital in nature, and respondent has provided

no evidence to the contrary.    At trial Mr. Campbell acknowledged

that petitioners are missing receipts but asserted:     “I think you

have to consider the fact that I normally shop at these places

* * * for repair-type items, for my apartments, and I don’t think

in the documentation that I do have that there was any evidence

that anything was personal in it.”      Many of those items cost $20

or less and were from retailers that sell repair and maintenance

items.   The numerous receipts petitioners provided are for the
                                - 9 -

most part consistent with the purchase of regular repair and

maintenance items for petitioners’ rental units.   Respondent’s

concern for additional details as to each expense regardless of

the materiality of the amounts at issue or the surrounding facts

reflects a failure to see the forest for the trees.10   The result

has been a very inefficient and questionable use of the

Examination Division’s, Appeals’, and the Court’s time.

     Petitioners have provided documentation for their Schedule E

repair and maintenance expenses, but it is not perfect in all

respects.11   However, petitioners’ Schedule E repair and

maintenance expenses are not subject to the strict substantiation

requirements of section 274.   Under Cohan v. Commissioner, 39

F.2d at 543-544, petitioners may deduct most of their repair and


      10
      Of particular note is the refusal to allow deductions for
some items while allowing deductions for other items when all
items were purchased at the same store on the same date.
Respondent apparently disallowed those deductions because
petitioners had misplaced receipts even though petitioners had
produced credit card statements reflecting the purchases. For
example, petitioners’ credit card statement reflects that they
made four purchases at Sincere Plumbing and Hardware on Feb. 19,
2005. Respondent disallowed deductions for three of those
purchases on the basis that petitioners had misplaced the
receipts while allowing petitioners a $108.73 deduction for one
of those purchases--a faucet for a kitchen sink.
      11
      At trial petitioners provided more than 1,000 pages of
receipts, bank and accounting records, and tax returns and tax
documents. Petitioners’ records as to these small dollar items
show (1) that each expense was incurred and paid, (2) the date on
which each expense was incurred, and (3) the place where each
expense was incurred. Petitioners’ records are in many respects
more complete and detailed than those maintained by many
individual landlords in comparable rental businesses.
                              - 10 -

maintenance expenses because they have provided a sufficient

evidentiary basis for doing so, which includes petitioners’

uncontroverted trial testimony.12

     Because petitioners’ documentation does not permit tracing

each expense to a particular unit, we will treat one-eighth as

attributable to petitioners’ personal unit and nondeductible

under section 262(a).   We will allow petitioners to deduct the

remaining seven-eighths of the amounts spent for each of the

items listed infra note 13 and appendixes A and B to this




     12
      We will not allow all of petitioners’ claimed Schedule E
repair and maintenance deductions because some of the claimed
expenses are clearly nondeductible. For example, petitioners
claimed a $10.64 deduction for a Feb. 20, 2005, purchase at
“Hollywood Video” and a $423.15 deduction for an Apr. 28, 2005,
purchase at “Simayof San Francisco”, a jewelry store.
                                - 11 -

opinion.13    However, we will require petitioners to capitalize and

depreciate any expense that exceeds $250.14

IV.   Whether Petitioners Are Required To Capitalize Certain
      Expenditures Relating to 4319 and 4329 Rilea

      After concessions, the parties dispute whether petitioners

are required to capitalize $6,347 in expenses incurred to install

or replace carpeting ($2,400), ceiling fans ($502), tile

($1,458), a toilet ($38), and baseboard molding ($474).    The

remaining $1,475 was for labor performed on petitioners’ rental

properties.



      13
      (1) All of the $420.74 of expenses listed in the “Missing
receipts” attachment to respondent’s pretrial memorandum
including the $267.96 paid to Home Depot on Oct. 6, 2005; (2)
$133.60 paid to Home Depot on Feb. 19, 2005, for a “HOMER
BUCKET”, “1/2 RTD SHTG”, and a “TOOLBAG”; (3) $36.03 paid to Home
Depot in July 2005 for “CEDAR SHIMS”, “SCREWS”, and a 48-inch
level; (4) the $20.65 flooring installation kit purchased on Aug.
12, 2005; (5) $4.34 paid to Laurel Ace Hardware and $20.35 paid
to Foothill Hardware in Jan. 2005; (6) $6.17 for pipe tape and
$17.27 paid to Home Depot, $6.39 and $13.73 paid to Foothill
Hardware, and $3.24 paid to Laurel Ace Hardware in February 2005;
(7) $20.04 and $6.27 paid to Foothill Hardware in March 2005; (8)
$1.03 paid to Home Depot and $19.84 and $20.05 paid to Foothill
Hardware in April 2005; (9) $19.52, $28.28, and $85.88 paid to
Home Depot and $19.84 and $57.55 paid to Lowe’s in July 2005;
(10) $12.39, $25.21, $11.95, and $16.83 paid to Home Depot,
$17.70 paid to Laurel Ace Hardware, and $3.39 paid to Foothill
Hardware in August 2005; and (11) $7.60, $8.34, and $6.10 paid to
Foothill Hardware and $6.48 paid to Home Depot in December 2005.

     To the extent that any expense listed in the paragraph above
is also listed in appendix B to this opinion, petitioners are
allowed only one deduction for seven-eighths of the expense.
      14
      Petitioners must use the Modified Accelerated Cost
Recovery System and depreciate the property over a 5-year
recovery period.
                              - 12 -

     Petitioners argue that they were not required to capitalize

those expenses because they “were for incidental repairs to their

rental properties” and because “These costs neither materially

added to the value of the property nor appreciably prolonged its

life, but kept the properties in good operating condition.”

     Section 263 generally prohibits deductions for capital

expenditures.   Nondeductible capital expenditures include “Any

amount paid out * * * for permanent improvements or betterments

made to increase the value of any property”.   Sec. 263(a)(1).

In contrast, deductible expenditures include those made merely to

maintain property in operating condition.   See Ill. Merch. Trust

Co. v. Commissioner, 4 B.T.A. 103, 106 (1926) (“A repair is an

expenditure for the purpose of keeping the property in an

ordinarily efficient operating condition.”).   The distinction

between a nondeductible capital expenditure and a deductible

repair is summarized in section 1.162-4, Income Tax Regs.:

     The cost of incidental repairs which neither materially
     add to the value of the property nor appreciably
     prolong its life, but keep it in an ordinarily
     efficient operating condition, may be deducted as an
     expense, provided the cost of acquisition or production
     or the gain or loss basis of the taxpayer’s plant,
     equipment, or other property, as the case may be, is
     not increased by the amount of such expenditures.
     Repairs in the nature of replacements, to the extent
     that they arrest deterioration and appreciably prolong
     the life of the property, shall either be capitalized
     and depreciated in accordance with section 167 or
     charged against the depreciation reserve if such an
     account is kept.
                             - 13 -

     The deductibility of repair expenses also depends upon the

context in which the repairs are made.   Courts have held that

expenses incurred as part of a general plan of rehabilitation

must be capitalized even if they would have been deductible as

ordinary and necessary business expenses if separately incurred.

See United States v. Wehrli, 400 F.2d 686, 689 (10th Cir. 1968);

Norwest Corp. & Subs. v. Commissioner, 108 T.C. 265, 280 (1997).

     Although it is a close call, petitioners may deduct the

amounts paid for the tile, baseboard molding, and toilet because

we are satisfied that those expenses were incurred to maintain

rather than improve the rental units.

     For the reasons provided below, petitioners may not deduct

the carpeting, ceiling fan, and labor costs.   Petitioners are

required to capitalize those expenses.   Concerning the carpeting,

respondent correctly notes that petitioners did not provide any

evidence (aside from Mr. Campbell’s self-serving testimony) “as

to when the original carpet was purchased in each apartment unit

and when each unit’s carpet was replaced.”   In any event, the

cost of the original carpet should have been capitalized when it

was installed, and the remaining undepreciated cost of the carpet

should have been deducted when it was removed and scrapped.    The

purchase of new carpeting to replace existing carpeting was an

improvement or replacement and not a repair.   Accordingly,

petitioners are required to capitalize and depreciate it.
                                - 14 -

      Mr. Campbell testified that the ceiling fans were purchased

as decorative items to be added to the rental units “in place of

the lights.”     By Mr. Campbell’s own testimony, the ceiling fans

were improvements or replacements and not repairs.

      Petitioners paid the $1,475 in disputed labor expenses to

someone named “Alex Cuevas”.     At trial Mr. Campbell was unable to

remember exactly what Alex Cuevas had done for petitioners in

2005.     Mr. Campbell testified that “Alex does a lot of things for

me.   I could not tell you specifically what Alex does, but what

Alex will do is he will walk around with me and just simply make

incidental repairs for me, like fix this, fix that, you know,

just making incidental repairs.”     Because they have provided no

other evidence as to the nature of Alex Cuevas’s work on their

rental properties, petitioners have not demonstrated that they

are entitled to claim a current deduction rather than capitalize

the cost of his labor.

V.    Automobile Expenses Subject to Strict Substantiation Under
      Section 274(d)

        Certain business expenses described in section 274(d) are

subject to strict substantiation rules that supersede the Cohan

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

affd. per curiam 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a),

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

Section 274(d) applies to:     (1) Any traveling expense, including

meals and lodging away from home; (2) entertainment, amusement,
                               - 15 -

and recreational expenses; (3) any expense for gifts; or (4) the

use of “listed property”, as defined in section 280F(d)(4),

including passenger automobiles.   To deduct expenses to which

section 274(d) applies, the taxpayer must substantiate by

adequate records or sufficient evidence to corroborate the

taxpayer’s own testimony:   (1) The amount of the expenditure or

use, which includes mileage in the case of automobiles; (2) the

time and place of the travel, entertainment, or use; (3) its

business purpose; and (4) the business relationship to the

taxpayer of each expenditure or use.    Sec. 274(d) (flush

language).

     The parties dispute petitioners’ claimed Schedule C

deductions (which were based on the actual cost method) of $1,438

for automobile insurance15 and $1,814 for car and truck

expenses.16   Respondent also disputes $3,678 of the $4,357 in



     15
      That amount comprises $1,269.20 that Mr. Campbell paid his
automobile insurance company and $169 in membership fees that he
paid the American Automobile Association.
     16
      In his general ledger Mr. Campbell listed $2,728.66 in
automobile expenses relating to his Schedule C business. He
asserts that he used the Nissan Maxima 66.48 percent for
business, which explains the claimed $1,814 deduction ($2,728.66
x 66.48%). It is unclear how he came up with his percentage of
business use, particularly in light of his less-than-perfect
recordkeeping.

     We also note that the parties had disputed whether
petitioners were entitled to $1,961 in claimed Schedule C
deductions for depreciation and sec. 179 expense. On brief,
petitioners concede that issue.
                                - 16 -

auto and travel expenses that petitioners claimed as deductions

on Schedule E.   Petitioners concede that item on brief.

     Mr. Campbell owns four automobiles:     (1) A 2004 Nissan

Maxima; (2) a 1980 Toyota pickup truck (model unknown); (3) a

1998 Honda Civic; and (4) a 2002 Chevrolet Impala.     Mr. Campbell

testified that the Nissan Maxima is used for his Schedule C

business and that the Toyota truck is used for his Schedule E

business but that “the personal automobiles are used sometimes in

business.”   He then apparently conceded that petitioners are not

entitled to any deductions relating to the Honda Civic or the

Chevrolet Impala.17    After the parties’ concessions, all of the

disputed automobile-related deductions appear to be Schedule C

deductions relating to the Nissan Maxima.

     Mr. Campbell has presented a copy of a day planner in an

attempt to satisfy the requirements of section 274(d).     He has

fallen far short.     The day planner entries are devoid of much

vital information:     they do not list which of Mr. Campbell’s four

automobiles were used, the number of miles traveled (the amount

of use), or the specific business purpose of those miles.     Some

of the entries are incomprehensible.     Moreover, at trial Mr.

Campbell conceded that a $750 payment and a $446 payment that


     17
      Although petitioners had claimed a Schedule C deduction
for automobile insurance paid on all four vehicles, at trial Mr.
Campbell testified that an adjustment was warranted and that “I
think that the relative percentage of the Nissan Maxima and the
truck to the whole value should be allowed.”
                                    - 17 -

petitioners claimed in Schedule C deductions for automobile

expenses are nondeductible personal expenses related to the

Chevrolet Impala.

        Petitioners have provided receipts for parking, fuel, and

repair expenses.        But there is no way of telling to which of Mr.

Campbell’s four automobiles they relate.        Regarding the parking

fees, at trial Mr. Campbell testified that although the garage at

which he parked is near his place of employment with BART, he

needed his car (apparently the Nissan Maxima) “to deal with

business as it arises.”        As to the Nissan Maxima, he also

testified

        I should get to take a 100 percent deduction; however,
        I only take a 66 percent deduction because * * * I
        consider it a commute from my home to my job, but since
        I’m required to come back, the first thing I’m required
        to do when I return from my job or even if there’s an
        emergency or whatever else, is to check out those
        apartments, okay.


Mr. Campbell’s conclusory testimony is strained, and we reject

it.18        Petitioners have not satisfied the strict substantiation

requirements of section 274(d) with respect to the Nissan Maxima.

See sec. 1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg.

46016 (Nov. 6, 1985).        Accordingly, we sustain respondent’s



        18
      Petitioners live in one of the four units in 4319 Rilea
and rent out the other three units. Mrs. Campbell testified that
4329 Rilea, which also contains four units, is “about [a] quarter
of a block” away from 4319 Rilea and that it takes her “about
three minutes” to walk from 4319 Rilea to 4329 Rilea.
                                   - 18 -

adjustments as to petitioners’ claimed Schedule C deductions for

insurance ($1,438)19 and for car and truck expenses ($1,814).

VI.   Section 6662 Penalty

      Under section 7491(c), respondent bears the burden of

production with respect to petitioners’ liability for the section

6662(a) penalty.      This means that respondent “must come forward

with sufficient evidence indicating that it is appropriate to

impose the relevant penalty.”       Higbee v. Commissioner, 116 T.C.

438, 446 (2001).      Respondent has done so.

       Subsection (a) of section 6662 imposes an accuracy-related

penalty on an underpayment of tax that is equal to 20 percent of

any underpayment that is attributable to a list of causes in

subsection (b).      Among the causes justifying the imposition of

the penalty are (1) negligence or disregard of rules or

regulations and (2) any substantial understatement of income tax.

Section 6662(c) defines negligence as “any failure to make a

reasonable attempt to comply with the provisions of this title”.

“[D]isregard” is defined to include “any careless, reckless, or

intentional disregard.”      Id.   Under caselaw, “‘Negligence is a

lack of due care or the failure to do what a reasonable and

ordinarily prudent person would do under the circumstances.’”

Freytag v. Commissioner, 89 T.C. 849, 887 (1987) (quoting

Marcello v. Commissioner, 380 F.2d 499, 506 (5th Cir. 1967),


      19
           That is, except as to $92 that respondent has conceded.
                               - 19 -

affg. on this issue 43 T.C. 168 (1964) and T.C. Memo. 1964-299),

affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991).

     There is a “substantial understatement” of income tax for an

individual in any tax year where the amount of the understatement

exceeds the greater of (1) 10 percent of the tax required to be

shown on the return for the taxable year or (2) $5,000.

Sec. 6662(d)(1)(A).   However, the amount of the understatement is

reduced to the extent attributable to an item (1) for which there

is or was substantial authority for the taxpayer’s treatment

thereof, or (2) with respect to which the relevant facts were

adequately disclosed on the taxpayer’s return or an attached

statement and there is a reasonable basis for the taxpayer’s

treatment of the item.   See sec. 6662(d)(2)(B).

      There is an exception to the section 6662(a) penalty when a

taxpayer can demonstrate (1) reasonable cause for the

underpayment and (2) that the taxpayer acted in good faith with

respect to the underpayment.   Sec. 6664(c)(1).    Regulations

promulgated under section 6664(c) further provide that the

determination of reasonable cause and good faith “is made on a

case-by-case basis, taking into account all pertinent facts and

circumstances.”   Sec. 1.6664-4(b)(1), Income Tax Regs.

      On brief, petitioners argue only that they are not liable

for the penalty because their claimed deductions were proper.
                             - 20 -

They have not even attempted to demonstrate reasonable cause and

good faith with respect to the underpayment.

     Because Mr. Campbell is a C.P.A. who knew or should have

known that petitioners were claiming many deductions to which

they were not entitled, petitioners were negligent in underpaying

their 2005 Federal income tax.   Because they have not

demonstrated reasonable cause and good faith for the

underpayment, we sustain the section 6662(a) penalty.20

     The Court has considered all of petitioner’s contentions,

arguments, requests, and statements.   To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.

     To reflect the foregoing and concessions made by the

parties,


                                         Decision will be entered

                                    under Rule 155.




     20
      Because the underpayment is attributable to negligence, we
need not determine whether after accounting for respondent’s
concessions and the deductions that we have allowed, petitioners
substantially understated their 2005 Federal income tax
liability.
                                            - 21 -

                                          APPENDIX A

   Summary of Our Conclusions as to Each of the Adjustments in the Notice of Deficiency

                                                                        Additional
                                                                        Deduction Allowed
                   Amount of                                            as a Result of Our
  Adjustment       Adjustment   Amount Conceded by P and/or R           Opinion (if any)
  Schedule E:       $17,117     Parties agree that Ps are entitled to           $0
   Depreciation                   a $15,156 deduction.
   Expense or
   Depletion
  Schedule E:       $64,519     Ps concede $3,678 in auto and travel        $8,760.632
   All Other                      deductions. R concedes that Ps
   Rental                         have substantiated $26,857 of
   Expenses                       repair expenses.1 The parties have
   Claimed                        settled the remaining Schedule E
                                  deductions for all other rental
                                  expenses (e.g., utilities and
                                  taxes).
  Schedule C:        $1,321     P concedes $1,047.   R concedes $274.           $0
   Meals and
   Entertainment

     1
      The parties dispute whether a portion of the repair expenses must be capitalized.
We addressed that issue in our opinion.
     2
      Appendix B contains a detailed list of expenses that we are allowing petitioners to
deduct to the extent of seven-eighths of the stated amounts. Petitioners must capitalize
and depreciate any expense over $250. Petitioners must use the Modified Accelerated Cost
Recovery System and depreciate the property over a 5-year recovery period.
                                        - 22 -

Schedule C:       $1,438    R concedes $92.                                 $0
 Insurance
 (Other Than
 Health)
Schedule C:       $1,814    N/A                                             $0
 Car and Truck
 Expenses
Schedule C:       $1,961    P concedes all $1,961.                          $0
 Depreciation
 and Sec. 179
 Expense
Schedule C:       $2,204    Parties agree that Ps are entitled to           $0
 Other                        a $1,678 deduction.
 Expenses


Schedule C:      $11,062    Parties agree that Ps are entitled to   Depreciation and
 Expenses for                 a $1,444 deduction.                     carryover loss
 Business Use                                                         will be resolved
 of Home                                                              in Rule 155
                                                                      computation.
Schedule C:       $2,361    Parties agree that Ps are entitled to           $0
 All Other                    a $2,304 deduction.
 Expenses
 Claimed
Self             ($1,566)   N/A                                     Issue will be
 Employment                                                           resolved in Rule
 Adjusted                                                             155 computation.
 Gross Income
 Adjustment
                                      - 23 -


                                  APPENDIX B

                   Additional Deductible Schedule E Expenses

Date of Purchase        Seller                        Amount
 1/06/2005              Kelly-Moore                   $55.83
 1/13/2005              Home Depot                    $86.88
 1/18/2005              Airport Appliance             $937.32
 1/20/2005              Airport Appliance             $318.64
 1/19/2005              Foothill Home Center          $47.87
 1/21/2005              Laurel Ace Hardware           $14.30
 1/23/2005              Home Depot                    $394.44
 1/23/2005              Home Depot                    $394.44
 1/25/2005              Laurel Ace Hardware           $2.14
 1/27/2005              Foothill Hardware             $9.79
 1/31/2005              Frigidaire Consumer Service   $73.03
 2/19/2005              Home Depot                    $5.40
 2/19/2005              Home Depot                    $33.60
 2/19/2005              Sincere Plumbing and          $300.64
                        Hardware
                         - 24 -

2/19/2005   Sincere Plumbing and   $50
            Hardware
2/19/2005   Sincere Plumbing and   $21.74
            Hardware
3/13/2005   Home Depot             $41.72
3/24/2005   Home Depot             $25.60
4/06/2005   Home Depot             $142.08
4/19/2005   Home Depot             $103.23
5/06/2005   Laurel Ace Hardware    $4.64
5/10/2005   Sears Roebuck          $10.86
5/21/2005   Home Depot             $86.34
5/30/2005   Home Depot             $20
6/10/2005   Home Depot             $16.82
6/11/2005   Laurel Ace Hardware    $16.69
6/13/2005   Sears Roebuck          $32.61
6/19/2005   Home Depot             $183.79
7/03/2005   Home Depot             $950.87
7/07/2005   Laurel Ace Hardware    $6.42
7/09/2005   Home Depot             $146.95
                          - 25 -

 7/10/2005   Home Depot             $24.99
 7/10/2005   Home Depot             $154.36
 7/11/2005   Home Depot             $238.11
 7/16/2005   Home Depot             $72.98
 7/23/2005   Home Depot             $184.76
 7/30/2005   Floor Dimensions       $1,429.23
 8/06/2005   Sincere Plumbing and   $739.48
             Hardware
 8/09/2005   Foothill Home Center   $73.70
 8/20/2005   Home Depot             $435.36
 9/16/2005   Office Depot           $22.27
 9/24/2005   Laurel Ace Hardware    $5.59
10/03/2005   Lowe’s                 $424.38
10/06/2005   Home Depot             $267.96
10/07/2005   Home Depot             $45.22
10/09/2005   Laurel Ace Hardware    $18.36
10/22/2005   Laurel Ace Hardware    $3.89
10/25/2005   DAL-Tile               $5.79
10/29/2005   Foothill Home Center   $20.65
                          - 26 -

11/20/2005   Home Depot             $26
12/03/2005   Foothill Home Center   $8.34
12/17/2005   Foothill Hardware      $6.10
12/23/2005   Home Depot             $6.48
12/23/2005   Laurel Ace Hardware    $11.95
