                          T.C. Summary Opinion 2012-36



                         UNITED STATES TAX COURT



                GREGORY R. HIELSBERG, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 13729-10S.                       Filed April 23, 2012.



      Gregory R. Hielsberg, pro se.

      Vivian N. Rodriguez, for respondent.



                              SUMMARY OPINION


      CARLUZZO, Special Trial Judge: This case was heard pursuant to the

provisions of section 7463.1 Pursuant to section 7463(b), the decision to be entered


      1
      Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986, as amended, in effect for the relevant period. Rule references are to
                                                                       (continued...)
                                          -2-

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

precedent for any other case.

      In a notice of deficiency dated March 22, 2010 (notice), respondent

determined a $5,211 deficiency in petitioner’s 2007 Federal income tax and

imposed a $1,042.20 section 6662(a) accuracy-related penalty. The issues for

decision are: (1) whether petitioner is entitled to various deductions claimed on a

Schedule A, Itemized Deductions; and (2) whether petitioner is liable for the section

6662 accuracy-related penalty.

                                      Background

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

petition was filed, petitioner resided in Florida.

      From April 1 through September 30, 2007, petitioner was employed as an

outside salesperson for Vistar Maintenance Corp. (Vistar). The $33,901.20 of

compensation that he received from Vistar during 2007, which consisted of a base

salary plus commissions, is reported on a Form W-2, Wage and Tax Statement.

Petitioner described his position with Vistar as an “8-to-5” job and, without




      1
       (...continued)
the Tax Court Rules of Practice and Procedure.
                                         -3-

providing much detail, explained that his responsibilities were much like those of

any other outside salesperson.

      In December 2006 petitioner acquired his mortgage broker’s license from the

State of Florida. From January 1 through September 30, 2007, petitioner considered

himself an independent contractor/mortgage loan officer for Analyst & Consultants

Mortgage (ACM). Petitioner received no compensation from ACM during his

association with that company. For the most part, he described his activities in

connection with ACM as “training”. Other than an email from a former officer of

ACM indicating that ACM did not reimburse its “independent consultants” for

business-related expenses, no documentation showing petitioner’s relationship with

ACM or further describing his responsibilities with that company has been provided.

      Petitioner was also employed by Danka Office Imaging Co. and OCE

Imagistics, Inc., during 2007, but the record contains no detail with respect to these

employers.

      Petitioner’s timely filed 2007 Federal income tax return (return) was prepared

by a paid income tax return preparer. According to petitioner, he provided the

return preparer with a spreadsheet showing the amounts for the
                                         -4-

income and deductions reported on the return. The adjusted gross income shown on

the return is $64,207. The taxable income and income tax liability shown on that

return are computed with reference to petitioner’s election to claim itemized

deductions in lieu of a standard deduction. See sec. 63. The following expenses are

shown as miscellaneous itemized deductions on the Schedule A included with the

return:

                           Expense                               Amount

           Unreimbursed employee business expenses               $26,045
           Tax preparation fees                                      150
           Other expenses                                          1,259

      The details of the unreimbursed employee business expenses deduction are

shown on a Form 2106-EZ, Unreimbursed Employee Business Expenses, as

follows:

                        Expense                                  Amount

           Vehicle expenses                                      $12,901
           Parking fees, tolls, and transportation                   218
           Travel expenses                                         6,251
           Unidentified business expenses                          3,182
           Phone expenses                                          1,862
           Printing expenses                                       1,521
           Office and postage expenses                               110
                                         -5-

      The deduction for other expenses includes:

                           Expense                                    Amount

          Investment advisory fees and subscriptions                    $199
          Certain legal and accounting fees                              600
          Depreciation on home computer and office equipment             460

      According to petitioner, expenses included in the unreimbursed employee

business expense deduction and deduction for other expenses relate to his

employment with Vistar and his association with ACM as an independent

contractor.2 The record allows for no allocation of claimed expenses between these

companies.

      All of the above-listed deductions are disallowed in the notice, and all are

here in dispute. According to the notice, petitioner “did not establish that the

business expense shown on * * * [his] tax return was paid or incurred during the

taxable year and that the expense was ordinary and necessary to * * * [his]

business.” Respondent also imposed a section 6662(a) accuracy-related penalty on

several grounds, including “negligence or disregard of rules or regulations” and

“substantial understatement of income tax”.


      2
        Otherwise deductible expenses attributable to petitioner’s association with
ACM should have been claimed on a Schedule C, Profit or Loss From Business,
rather than the Schedule A. Because this technical distinction makes no difference
in this case, we take the parties’ lead and ignore it.
                                         -6-

                                     Discussion

      As we have observed in countless opinions, deductions are a matter of

legislative grace, and the taxpayer bears the burden of proof to establish entitlement

to any claimed deduction.3 Rule 142(a); INDOPCO, Inc. v. Commissioner, 503

U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

This burden requires the taxpayer to substantiate deductions claimed by keeping and

producing adequate records that enable the Commissioner to determine the

taxpayer’s correct tax liability. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87,

89-90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); Meneguzzo v.

Commissioner, 43 T.C. 824, 831-832 (1965). A taxpayer claiming a deduction on a

Federal income tax return must demonstrate that the deduction is allowable pursuant

to some statutory provision and must further substantiate that the expense to which

the deduction relates has been paid or incurred. See sec. 6001; Hradesky v.

Commissioner, 65 T.C. at 89-90; sec. 1.6001-1(a), Income Tax Regs. In the event

that a taxpayer establishes that a deductible expense has been paid but is unable to

substantiate the precise amount, we generally may estimate the amount of the

deductible expense, bearing heavily against the taxpayer whose inexactitude in


      3
      Petitioner does not claim that the provisions of sec. 7491(a) are applicable,
and we proceed as though they are not.
                                          -7-

substantiating the amount of the expense is of the taxpayer’s own making. Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). We cannot estimate a

deductible expense, however, unless the taxpayer presents evidence sufficient to

provide some basis upon which an estimate may be made. Vanicek v.

Commissioner, 85 T.C. 731, 743 (1985).

        Taxpayers may deduct ordinary and necessary expenses paid in connection

with operating a trade or business. Sec. 162(a); Boyd v. Commissioner, 122 T.C.

305, 313 (2004). Generally, the performance of services as an employee constitutes

a trade or business. Primuth v. Commissioner, 54 T.C. 374, 377 (1970). To be

ordinary 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. 111, 113 (1933). The expenditure must be “directly connected

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

Regs.

        Section 274(d) imposes strict substantiation requirements for travel,

entertainment, gift, and “listed property” (including passenger automobiles)

expenses. Sanford v. Commissioner, 50 T.C. 823, 827 (1968), aff’d per curiam,

412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary Income Tax Regs., 50
                                          -8-

Fed. Reg. 46014 (Nov. 6, 1985). Under section 274(d), the taxpayer generally must

substantiate either by adequate records or by sufficient evidence corroborating the

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

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

of an entertainment or gift expense, the business relationship to the taxpayer of each

expense incurred. For “listed property” expenses, the taxpayer must establish the

amount of business use and the amount of total use for such property. See sec.

1.274-5T(b)(6)(i)(B), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6,

1985).

         Substantiation by adequate records requires the taxpayer to maintain an

account book, a diary, a log, a statement of expense, trip sheets, or a similar record

prepared contemporaneously with the expenditure and documentary evidence (e.g.,

receipts or bills) of certain expenditures. Sec. 1.274-5(c)(2)(iii), Income Tax Regs.;

sec. 1.274-5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6,

1985). Substantiation by other sufficient evidence requires the production of

corroborative evidence in support of the taxpayer’s statement specifically detailing

the required elements. Sec. 1.274-5T(c)(3), Temporary Income Tax Regs., 50 Fed.

Reg. 46020 (Nov. 6, 1985).
                                          -9-

I. Disputed Deductions

      A. Unreimbursed Employee Business Expenses

             1. Vehicle Expenses

      Petitioner claims a $12,901 deduction for vehicle expenses. The deduction

was disallowed for lack of substantiation. According to petitioner, the disallowed

deduction is attributable to mileage incurred on behalf of ACM and Vistar, as

recorded in his mileage log. Petitioner’s mileage log, however, is deficient in

several respects. First, it is inconsistent with the mileage claimed on his return.

Second, it fails to distinguish between miles driven on behalf of ACM and Vistar.

Third, the log shows no specific appointments or the business purpose of any

appointment. Instead, only city pairs are shown, and only beginning and ending

mileage is recorded. Petitioner’s mileage log is not an adequate record within the

meaning of section 274(d) and the regulations thereunder, and he failed to provide

other corroborative evidence sufficient to satisfy the requirements of that section

and its corresponding regulations. Consequently, we sustain respondent’s

disallowance of the deduction for vehicle expenses.

             2. Parking Fees, Tolls, and Transportation

      According to petitioner, he paid $218 for parking fees, tolls, and

transportation in driving on behalf of ACM and Vistar. As stated above, expenses
                                         - 10 -

related to passenger automobiles, including expenses for parking fees and tolls, are

subject to the stringent substantiation requirements of section 274(d). The tolls

were paid through the use of a Sunpass. Petitioner’s credit card statements show

routine replenishment of his Sunpass account, but he has failed to show that any of

the charges actually relate to business trips. No charges for tolls are shown on

petitioner’s mileage log.

      Petitioner also introduced into evidence invoices from auto mechanics

showing payments made for automobile maintenance. Assuming that the charges on

the auto mechanic invoices somehow relate to petitioner’s use of his automobile and

are included in his otherwise unexplained deduction for “transportation” expenses,

he failed to establish that the charges were anything other than personal expenses.

See sec. 262(a). Petitioner is not entitled to a deduction for parking fees, tolls, and

transportation expenses.

             3. Travel Expenses

      Petitioner claims a $6,251 deduction for travel expenses. The deduction was

disallowed for lack of substantiation. As stated above, expenses related to travel,

including lodging, meals, and car rental, are subject to the stringent substantiation

requirements of section 274(d). According to petitioner, the travel expenses relate

to business trips on behalf of ACM.
                                         - 11 -

      The record includes numerous copies of credit card receipts showing

expenses petitioner incurred for meals at various restaurants. Many of the receipts

are dated after his association with ACM was terminated, and none show the

business purpose or client (or potential client) he claims to have been entertaining.

Other than his generalized testimony that all of the trips were related to ACM,

petitioner failed to offer sufficient specific testimony to allow deductions for

whatever expenses were incurred. Accordingly, we sustain respondent’s

disallowance of expenses that relate to petitioner’s travel expenses.

             4. Unidentified Business Expenses

      Petitioner claims a $3,182 deduction for unidentified business expenses. The

deduction was disallowed for lack of substantiation. At trial petitioner failed to

present any evidence to explain, much less substantiate, the amount so deducted.

Petitioner is not entitled to a deduction for unidentified business expenses.

             5. Phone Expenses

      Petitioner claims a $1,862 deduction for a cellular phone plan. The deduction

was disallowed for lack of substantiation. A cell phone is “listed property” and

subject to the strict substantiation requirements of section 274(d). Sec.
                                        - 12 -

280F(d)(4)(A)(v).4 The deduction includes the total cost of petitioner’s plan; no

allocation between business and personal use has been provided. A taxpayer must

establish the amount of business use and the amount of total use for the property to

substantiate the amount of expenses for listed property, which petitioner has failed

to do. Sec. 1.274-5T(b)(6)(i)(B), Temporary Income Tax Regs., supra. Petitioner’s

deduction for cell phone expenses is disallowed.

              6. Printing Expenses

       Petitioner claims a $1,521 deduction for printing expenses. The deduction

was disallowed for lack of substantiation. According to petitioner, the printing

expenses were incurred on behalf of ACM and relate to the cost of “letterheads,

envelopes, business cards, invoices,” and promotional pens. Petitioner did not

provide any receipts or other documents to substantiate these expenses. Although it

is more likely than not that petitioner incurred some expenses for printing, because

he did not present sufficient evidence to allow the expenses to be estimated, see

Vanicek v. Commissioner, 85 T.C. at 743, he is not entitled to deduct any amount

attributable to the cost of printing.


       4
       Effective for taxable years beginning after December 31, 2009, cellular
telephones are no longer listed property. See Small Business Jobs Act of 2010,
Pub. L. No. 111-240, sec. 2043, 124 Stat. at 2560.
                                        - 13 -

             7. Office and Postage Expenses

      Petitioner claims a $110 deduction for office and postage expenses. The

deduction was disallowed for lack of substantiation. According to petitioner, the

office and postage expenses were incurred on behalf of ACM. In support of his

claimed deduction petitioner provided receipts from Mail Boxes Etc. and the U.S.

Postal Service showing payments of $38.31 for postage. However, petitioner failed

to provide any additional testimony or evidence explaining the payments.

Accordingly, we conclude that, without more, petitioner’s evidence fails to provide

a sufficient evidentiary basis to allow us to estimate any such expenses. See id.

Consequently, we sustain respondent’s denial of petitioner’s deduction for office

and postage expenses.

      B. Tax Preparation Fees

      Section 212(3) allows a deduction for costs incurred in the preparation of a

tax return. Hughes v. Commissioner, T.C. Memo. 2008-249.          Petitioner claimed

a $150 deduction for tax return preparation fees. Like many of the other deductions

here in dispute, petitioner was unable to substantiate payment of this expense.

Nevertheless, we accept his testimony and find that in 2007 he paid a return

preparer $150 to prepare his 2006 Federal income tax return. Our finding on this

item, however, will have no consequence because after taking into account the
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disallowances of all of the other miscellaneous itemized deductions here in dispute

the amount allowed for return preparation fees will not exceed 2% of petitioner’s

adjusted gross income. See sec. 67(a).

      C. Other Expenses

             1. Investment Advisory Fees and Subscriptions

      Petitioner claims a $199 deduction for investment advisory fees and

subscriptions. The deduction was disallowed for lack of substantiation. According

to petitioner, this expense was incurred on behalf of ACM. Petitioner did not

present any records to substantiate the deduction, and there is no evidence in the

record that would allow us to estimate the amount of the deductible expense. See

Vanicek v. Commissioner, 85 T.C. at 743. Consequently, respondent’s

determination with respect to the investment advisory fees and subscriptions

expense is sustained.

             2. Certain Legal and Accounting Fees

      Petitioner claims a $600 deduction for certain legal and accounting fees. The

deduction was disallowed for lack of substantiation. At trial petitioner failed to

present any evidence to explain, much less substantiate, the amount so deducted.

Petitioner is not entitled to a deduction for certain legal and accounting fees.
                                         - 15 -

             3. Depreciation on Home Computer and Office Equipment

      Section 167 allows a depreciation deduction for property used in a trade or

business or held for the production of income. Sec. 167(a).

      Petitioner claims a $460 deduction for depreciation on items in his home

office. The deduction was disallowed for lack of substantiation. According to

petitioner, this expense was incurred primarily on behalf of ACM, but it appears that

a portion of the depreciation deduction relates to Vistar, even though Vistar

provided him with an office. Petitioner did not substantiate the bases of

the items in his home office, nor could he remember how the depreciation deduction

was calculated. Consequently, respondent’s determination with respect to the

depreciation deduction for computer and office equipment is sustained.

II. Accuracy-Related Penalty

      Section 6662(a) imposes a penalty of 20% of the portion of the underpayment

of tax attributable to the taxpayer’s negligence, disregard of rules or regulations, or

substantial understatement of income tax. Sec. 6662(a) and (b)(1) and (2).5

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

provisions of the Code, including any failure to keep adequate books and records or


      5
      In this case, the deficiency, the underpayment, and the understatement of
income tax are all computed in the same manner. See secs. 6211, 6662(d)(2),
6664(a).
                                         - 16 -

to substantiate items properly. See sec. 6662(c); sec. 1.6662-3(b)(1), Income

Tax Regs. A “substantial understatement” includes an understatement of

income tax that exceeds the greater of 10% of the tax required to be shown

on the return or $5,000. See sec. 6662(d); sec. 1.6662-4(b), Income Tax

Regs.

        With respect to a taxpayer’s liability for any penalty, section 7491(c) places

on the Commissioner the burden of production, thereby requiring the Commissioner

to come forward with sufficient evidence indicating that it is appropriate to impose

the penalty. Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). Once the

Commissioner meets his burden of production, the taxpayer must come forward

with persuasive evidence that the Commissioner’s determination is incorrect. See

Higbee v. Commissioner, 116 T.C. at 447; see also Rule 142(a); Welch v.

Helvering, 290 U.S. at 115.

        Petitioner claimed deductions on his return for expenses that he is unable to

substantiate. Furthermore, the underpayment of tax required to be shown on that

return is a substantial understatement of income tax because the understatement

exceeds $5,000. See sec. 6662(b)(2), (d)(1); sec. 1.6662-3(b)(1), Income Tax

Regs. Respondent’s burden of production under section 7491(c) has been satisfied.
                                         - 17 -

      Section 6664(c)(1) provides an exception to the imposition of the

accuracy-related penalty if the taxpayer establishes that there was reasonable cause

for, and the taxpayer acted in good faith with respect to, the underpayment. Sec.

1.6664-4(a), Income Tax Regs. The determination of whether the taxpayer acted

with reasonable cause and in good faith is made on a case-by-case basis, taking into

account the pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax

Regs. Under certain circumstances, a taxpayer’s reliance upon professional advice

may establish the taxpayer’s “reasonable cause” and “good faith” with respect to an

underpayment of tax if the taxpayer establishes that: (1) the professional was

provided with complete and accurate information, (2) an incorrect return was a

result of the preparer’s mistakes, and (3) the taxpayer demonstrates good-faith

reliance on a competent professional. See Estate of Goldman v. Commissioner, 112

T.C. 317, 324 (1999), aff’d without published opinion sub nom. Schutter v.

Commissioner, 242 F.3d 390 (10th Cir. 2000); see also Neonatology Assocs. P.A.

v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002).

      Although petitioner’s return was prepared by a paid income tax return

preparer, petitioner has failed to establish that he provided his return preparer with

complete and accurate information. According to petitioner, the return preparer
                                         - 18 -

did little more than transfer information to the return from a spreadsheet petitioner

had prepared. Accordingly, petitioner failed to establish that he acted in good faith

with respect to any portion of the underpayment of tax and that any portion of the

underpayment is due to reasonable cause. Petitioner is liable for the section

6662(a) accuracy-related penalty, and respondent’s imposition of that penalty is

sustained.

      To reflect the foregoing,


                                                        Decision will be entered

                                                  for respondent.
