                    T.C. Summary Opinion 2010-42



                        UNITED STATES TAX COURT



          ROGER R. AND BRENDA J. HOLMES, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9622-08S.               Filed April 12, 2010.



     Roger R. Holmes, pro se.

     Archana Ravindranath, for respondent.



     RUWE, Judge:     This case was heard pursuant to the provisions

of section 74631 of the Internal Revenue Code in effect when the

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




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 2 -

be entered is not reviewable by any other court, and this opinion

shall not be treated as precedent for any other case.

     Respondent determined deficiencies of $8,791 and $11,532 in

petitioners’ Federal income taxes for taxable years 2005 and 2006

(years at issue), respectively.   The issues for decision are:

(1) Whether petitioners are entitled to the deductions claimed on

Schedule A, Itemized Deductions, and Schedules C, Profit or Loss

From Business (Sole Proprietorship), for the years at issue; and

(2) whether petitioners must include in gross income for the

years at issue a $13,000 annual housing allowance paid to

petitioner Roger R. Holmes (Mr. Holmes) as a pastor at Paul’s

Chapel Baptist Church (Paul’s Chapel).

                            Background

     Some of the facts have been stipulated.   The stipulation of

facts and the attached exhibits are incorporated herein by this

reference.   At the time the petition was filed, petitioners

resided in Ohio.

     During the years at issue Mr. Holmes was an ordained Baptist

pastor for Paul’s Chapel, and his wife, petitioner Brenda J.

Holmes, worked for Maytag Manufacturing, L.L.C.   In addition to

spending his time as a pastor for Paul’s Chapel, Mr. Holmes

reported that he operated a computer servicing business, PC

Unlimited, from his home.
                                 - 3 -

     For the years at issue Mr. Holmes prepared petitioners’

Federal income tax returns using TurboTax.   Petitioners jointly

filed 2005 and 2006 Federal income tax returns, which included a

Schedule A and two Schedules C for each year.   For each of the

years at issue petitioners filed one Schedule C for Mr. Holmes’

pastoral activities and one Schedule C for PC Unlimited.    For

2005 petitioners reported total Form W-2, Wage and Tax Statement,

and substitute Form W-2 income of $61,797.   For 2006 petitioners

reported total Form W-2 and substitute Form W-2 income of

$67,199.

Schedules A

     On the respective 2005 and 2006 Schedules A, petitioners

claimed total itemized deductions of $26,581 and $16,198.    The

respective total itemized deductions included unreimbursed job-

related expenses and certain miscellaneous deductions of $15,257

for 2005 and $10,129 for 2006.

Schedules C

     Pastoral Activities

     On the respective 2005 and 2006 Schedules C, petitioners

reported gross receipts or sales of $13,535 and $13,530 from

pastoral activities.   Petitioners claimed an annual parsonage

housing allowance of $13,000, thereby reducing their gross

profits from pastoral activities to $535 in 2005 and $530 in

2006.   Petitioners state in their petition that “Paul’s Chapel is
                               - 4 -

a small church with limited resources and revenue” and,

therefore, during the years at issue Mr. Holmes’ primary

compensation was a $250 weekly housing allowance (i.e., $13,000

per year).   The claimed Schedule C expenses related to pastoral

activities were as follows:

                                                   Tax Year
                Expenses                        2005      2006

   Advertising                                 $135       $85
   Car and truck expenses                     4,961     4,542
   Commissions and fees                          30        30
   Depreciation                                   0         0
   Interest: Other                               --     1,500
   Legal and professional services               75        75
   Office expense                                59       287
   Supplies                                     135       105
   Taxes and licenses                            65        26
   Travel expenses                              748       526
   Deductible meals and entertainment           216        68
   Utilities                                  2,409     3,095
   Other expenses                             3,976       160
     Total                                   12,809    10,499

     PC Unlimited

     During 2005 and 2006 Mr. Holmes reported gross sales or

receipts from PC Unlimited of $1,856 and $13,812, respectively.

For PC Unlimited petitioners claimed Schedule C expenses as

follows:

                                                   Tax Year
                Expenses                        2005      2006

   Advertising                                  $78        --
   Car and truck expenses                     2,211    $4,295
   Depreciation                                 376         0
   Insurance                                  1,140        --
   Interest: other                              765     3,896
   Legal and professional services               38       360
   Office expense                               465       355
                              - 5 -

   Taxes and licenses                               0      240
   Travel expenses                                376      656
   Deductible meals and entertainment             106      171
   Utilities                                    2,791    2,020
   Other expenses                               1,355      275
     Total                                      9,701   12,268

     In addition to the above Schedule C expenses, on their 2006

Schedule C for PC Unlimited petitioners claimed a $7,347 expense

for the business use of their home.   The Forms 8829, Expenses for

Business Use of Your Home, indicate that petitioners claimed

147.24 percent of their home was used for business purposes,

47.24 percent for business related to Mr. Holmes’s pastoral

activities and 100 percent for business related to PC Unlimited.

Mr. Holmes explained this inconsistency at trial as simply a

software defect (i.e., that TurboTax should not have allowed him

to claim more than 100 percent of the use of petitioners’ home as

a business expense) and that “Undoubtedly that is incorrect.”

     In the notice of deficiency, which pertains to both 2005 and

2006, respondent denied deductions for all of the job expenses

and certain miscellaneous deductions claimed on Schedule A.

Because the denial of the job expenses and certain miscellaneous

deductions reduced petitioners’ itemized deductions to an amount

that was less than the standard deduction, respondent also

eliminated all other Schedule A expenses for each of the years at

issue and substituted the standard deduction.   Respondent also

disallowed the $13,000 annual housing allowance as well as all of
                                 - 6 -

the claimed Schedule C expenses for both the pastoral activities

and PC Unlimited.2

                              Discussion

     In general, the Commissioner’s determinations in a notice of

deficiency are presumed correct, and the taxpayer bears the

burden of proving error in the Commissioner’s determinations.

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

burden of proof may shift to the Commissioner in certain

circumstances if the taxpayer introduces credible evidence and

establishes that he substantiated items, maintained required

records, and fully cooperated with the Commissioner’s reasonable

requests.   Sec. 7491(a)(1) and (2)(A) and (B).   Petitioners have

neither asserted that the burden of proof has shifted to

respondent nor provided adequate substantiation of the expenses

claimed on their 2005 and 2006 Federal income tax returns;

therefore, the burden of proof remains with petitioners.

Disallowed Deductions

     Deductions are a matter of legislative grace, and the

taxpayer bears the burden of proving he is entitled to the

deductions claimed.     Rule 142(a); INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292



     2
      Respondent also made adjustments to self-employment
adjusted gross income and self-employment tax. Although neither
party has contested these adjustments, they are computational and
will need to be addressed in the Rule 155 computations.
                                 - 7 -

U.S. 435, 440 (1934).    A taxpayer must substantiate amounts

claimed as deductions by maintaining the records necessary to

establish that he is entitled to the deductions.    Sec. 6001; sec.

1.6001-1(a), Income Tax Regs.

     Section 162(a) allows a taxpayer to deduct all the ordinary

and necessary expenses paid or incurred in carrying on a trade or

business.    Personal expenses, however, generally are not

deductible.    Sec. 262(a).   Furthermore, in the case of expenses

for automobiles, traveling (including meals and lodging while

away from home), and entertainment, section 274(d) disallows any

deductions unless the taxpayer substantiates 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 the expense; and (3) the business purpose of the expense.    See

Oswandel v. Commissioner, T.C. Memo. 2007-183.     Section 1.274-

5T(c)(5), Temporary Income Tax Regs., 50 Fed. Reg. 46022 (Nov. 6,

1985), provides:

          (5) Loss of records due to circumstances beyond
     control of the taxpayer. Where the taxpayer
     establishes that the failure to produce adequate
     records is due to the loss of such records through
     circumstances beyond the taxpayer’s control, such as
     destruction by fire, flood, earthquake, or other
     casualty, the taxpayer shall have a right to
     substantiate a deduction by reasonable reconstruction
     of his expenditures or use.

“Under these regulations, therefore, a taxpayer may be deemed to

meet the requirements of section 274(d) if he or she establishes
                               - 8 -

the occurrence of a casualty causing the loss of records and has

adequately reconstructed the expenditures.”   Oswandel v.

Commissioner, supra (citing section 1.274-5T(c)(5), Temporary

Income Tax Regs., supra).

     At trial Mr. Holmes testified that he lacked the records

necessary to substantiate the deductions claimed on petitioners’

2005 and 2006 Federal income tax returns.   Mr. Holmes testified

that during 2007 petitioners moved from Illinois to Ohio and in

the process his wife and daughter cleaned out his office

discarding many, if not all, of his business records, including

his mileage books for 2005 and 2006.   In an effort to

substantiate his automobile and travel expenses for the years at

issue, Mr. Holmes testified that 3 days before trial he

reconstructed from memory a mileage log for both his pastoral

activities and his computer servicing business.

     We find that petitioners have failed to substantiate any of

the disallowed deductions.   They have certainly not met the

heightened substantiation requirements for automobile and travel

expenses under section 274(d) nor established that their business

records were lost through circumstances beyond their control.

We, therefore, sustain respondent’s corresponding determinations.

Housing Allowance

     During the years at issue Mr. Holmes received a parsonage

allowance of $250 per week, or $13,000 per year.   In the notice
                                 - 9 -

of deficiency respondent disallowed the $13,000 parsonage

allowance, thereby increasing petitioners’ gross income by the

same amount.     Respondent concedes that if petitioners used the

$13,000 housing allowance to provide a home, then the $13,000

allowance should be excludable from their gross income.

     Compensation for services is generally included in gross

income.   Sec. 61(a)(1).    Section 107, however, provides the

following exception:

     SEC. 107.    RENTAL VALUE OF PARSONAGES.

          In the case of a minister of the gospel, gross
     income does not include--

                (1) the rental value of a home furnished
           to him as part of his compensation; or

                (2) the rental allowance paid to him as
           part of his compensation, to the extent used
           by him to rent or provide a home and to the
           extent such allowance does not exceed the
           fair rental value of the home, including
           furnishings and appurtenances such as a
           garage, plus the cost of utilities.

     Respondent has acknowledged that petitioners provided

documentation from Paul’s Chapel establishing that Mr. Holmes

received $13,000 annually as a housing allowance.     At trial Mr.

Holmes credibly testified that he did not receive any

compensation from Paul’s Chapel beyond the $13,000 annual housing

allowance.   Mr. Holmes also credibly testified that the housing

allowance provided by Paul’s Chapel was insufficient to cover his

mortgage expenses and utilities.     In this respect, Mr. Holmes
                               - 10 -

testified that his mortgage payment alone was approximately

$1,000 per month before refinancing.     Consequently, we find that

the $13,000 per year parsonage allowance petitioners received was

used to provide a home as defined in section 107(2).     See sec.

1.107-1(c), Income Tax Regs.     Accordingly, the $13,000 annual

housing allowance Paul’s Chapel paid to Mr. Holmes during the

years at issue is not includable in petitioners’ gross income.

     To reflect the foregoing,


                                           Decision will be entered

                                      under Rule 155.
