                  T.C. Summary Opinion 2010-95



                      UNITED STATES TAX COURT



                 COLLEEN A. LYNCH, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10688-09S.               Filed July 19, 2010.



     Colleen A. Lynch, pro se.

     Jeffery D. Rice, for respondent.



     GERBER, Judge:   This case was heard pursuant to the

provisions of 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 is not reviewable by any other court, and



     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 2006, the taxable year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                - 2 -

this opinion shall not be treated as precedent for any other

case.    Respondent determined a $2,994 deficiency in petitioner’s

2006 income tax.    The issues2 presented for our consideration are

whether:    (1) Petitioner substantiated certain employee business

deductions claimed on Schedule A, Itemized Deductions; and (2)

certain deductions claimed on Schedule A should have been claimed

as business deductions on Schedule C, Profit or Loss From

Business, and whether petitioner has substantiated those

deductions.

                                Background

     Petitioner resided in California at the time that her

petition was filed.    During the 2006 tax year petitioner had

three sources of income.    She engaged in an activity involving

the sale of jewelry and earned wages from two sources--Coworx

Staffing Services (Coworx) and United Way, Inc. (United).        In the

Coworx job petitioner was subcontracted to service the Waterford

Crystal Co. (Waterford) by going to various department stores and

making sure that the Waterford products were prominently and

properly displayed for sales potential.      Similarly, in her

position with United, petitioner was a fundraiser who promoted

the charitable goals of United at various corporate

establishments.    Petitioner’s travel and vehicle expenses in



     2
      Respondent conceded that petitioner is entitled to a $75
deduction for preparation of her tax return.
                                - 3 -

connection with her Waterford work were not reimbursed, but those

for United were.    For 2006 petitioner earned $24,499 from United

and $2,673 from Coworx.

     During 2004 petitioner took a course in entrepreneurial

skills with the intent of establishing a jewelry business.    Her

interest in a jewelry business overlapped with her involvement in

retailing of “fashion items” and retail promotion.    She made

plans to purchase lines of jewelry and ultimately sell the

jewelry to the big volume retailers.    To that end, petitioner had

a logo and business cards prepared.     The business name she chose

was “Amazonia” because her jewelry was Brazilian in origin and

style.   Petitioner had the business name registered with the

California Franchise Tax Board, and she investigated and

considered involvement with the local chamber of commerce.

     During 2005 and 2006, in her efforts to sell jewelry,

petitioner drove to jewelry shows to accumulate additional

information and contacts regarding jewelry purchasing and sales.

She became acquainted with a Brazilian jewelry manufacturer who

made the type of jewelry that petitioner thought would be

suitable for her business.   After purchasing some of the

Brazilian jewelry petitioner negotiated with the manufacturer;

and although the product quality was good, she was unable to

reach terms that would produce the quantity of product necessary

to be profitable.
                                - 4 -

     During 2006 petitioner continued her effort to duplicate the

Brazilian product, and she sought out the representative of a

Chinese jewelry manufacturer.    The product was produced and

acquired by petitioner; and although the manufacturer was able to

produce sufficient quantities, the quality was substandard.

     Petitioner’s 2006 tax return was prepared by a professional

tax return preparer.   Petitioner provided the preparer with her

tax papers, and he reported all of her expenditures, irrespective

of whether connected with employee activities or the Amazonia

activity on Schedule A.    After the audit and before trial

petitioner realized that her expenses connected with Amazonia

should have been claimed on a Schedule C as business, rather than

employee, expenses.

     The following expenses were claimed on Schedule A of

petitioner’s 2006 tax return and disallowed by respondent:

                    Item                  Amount

          Vehicle expense                 $18,418
          Travel expense                    3,548
          Meals and entertainment           2,415
          Business classes                    210
          Cellular phone                      665
          Computer landline                   720
          Office supplies                     345
          P.O. box                            120
          Web hosting and access              100
          Web site design                      50

     Petitioner also claimed $150 for tax return preparation, and

respondent now agrees and petitioner concedes that the amount

allowable is $75.
                                - 5 -

                            Discussion

     This case involves the classification and substantiation of

deductions.   Taxpayers are permitted deductions for ordinary and

necessary expenses incurred in carrying on a trade or business or

in the production of income.    Secs. 162, 212.   To be entitled to

the deduction, a taxpayer must keep sufficient records to

substantiate the amounts claimed.    Sec. 6001.   Regarding

unreimbursed expenses, an employee must show that there is no

entitlement to reimbursement.    Further, employee expenses are

generally allowed as miscellaneous itemized deductions and

subject to certain limitations.    Sec. 67(a) and (b).   Finally,

certain travel, entertainment and meals, and vehicle expense

deductions are subject to more stringent recordkeeping and

substantiation requirements.    Sec. 274(d).

     We consider each of petitioner’s disallowed deductions

separately and decide whether there has been sufficient

substantiation and, if so, whether the deduction is allowable on

Schedule A or Schedule C.

Amazonia Status

     Initially, we address the question of whether Amazonia,

petitioner’s jewelry activity, was a Schedule C activity (a

business entered into for a profit).     Because petitioner’s income

of $268 was less than her expenses, her activity for the year

resulted in a loss.   Respondent questions whether petitioner’s
                                 - 6 -

Amazonia activity was entered into with the intent to make a

profit, because that is determinative of whether any portion of

the deduction in excess of income is deductible.    See sec. 183;

sec. 1.183-2, Income Tax Regs.

     Petitioner invested a great deal of time and money with the

intent of making Amazonia profitable.    She began taking

entrepreneurial courses in 2004, and she consulted various

professionals concerning her business logo, business card,

approach, and related matters.    She also did extensive research

on various types of jewelry and decided that Brazilian jewelry

had the right combination of appeal and cost to be mass

marketable.   She found a Brazilian manufacturer, bought some of

his product, and negotiated various terms, including the quantity

of production.   Petitioner was very satisfied with the cost,

appearance, and quality of the Brazilian manufacturer’s jewelry,

but he was not able to produce it in sufficient quantities for

mass marketing purposes.

     Petitioner then found a Chinese manufacturer and sought to

have him reproduce the Brazilian style jewelry in China.    The

Chinese manufacturer could produce large quantities in a short

time, but the product quality turned out to be substandard.     By

the end of 2006 petitioner made some sales of the product

acquired but was unable to introduce her jewelry to the large-

scale retailers.   Although petitioner enjoyed selling jewelry,
                                 - 7 -

she worked hard in seeking a profit, even though her extensive

efforts resulted in a loss for 2006.     Under these circumstances,

we hold that petitioner was engaged in the wholesale jewelry

business with the intent to make a profit.    Accordingly, any

ordinary, necessary, and substantiated expenses while she was

engaged in that business are deductible as business expenses on

Schedule C.

Vehicle Expenses--$18,418

     Petitioner drove her personal car extensively as an employee

and for her Amazonia business.    Initially, we must note that

petitioner did not keep particularly good records and that fact

weighs heavily against her.   The $18,418 claimed on the 2006 tax

return is the total of all automobile expenses.    Because

petitioner admits that she was entitled to and/or was reimbursed

for her United vehicle expenses, she is not allowed any deduction

for them.   See Tokh v. Commissioner, T.C. Memo. 2001-45, affd. 25

Fed. Appx. 440 (7th Cir. 2001); sec. 1.67-1T(a)(1)(i), Temporary

Income Tax Regs., 53 Fed. Reg. 9875 (Mar. 28, 1988).

     With respect to petitioner’s vehicle expenses for Coworx,

her trips occurred at the end of the year, beginning in November.

The evidence in the record is sufficient to establish the date

and purpose of each trip.   She would drive 50 miles round trip to

Bloomingdale’s in Newport on some days and 20 miles round trip to

Macy’s in Westminster on others.    The travel occurred during all
                               - 8 -

of November and December, when petitioner made approximately 38

round trips to promote Waterford products.   Because petitioner

was not entitled to reimbursement from Coworx or Waterford, we

hold that she is entitled to a deduction based upon 1,330 total

miles at the standard mileage rate for her 2006 tax year on

Schedule A, subject to any limitations that may apply.

     With respect to the jewelry business, petitioner drove to

several cities.   Amongst others, she drove to Las Vegas, Phoenix,

Santa Barbara, Palm Springs, and San Francisco during 2006 in

pursuit of her Amazonia activity, as indicated in a

contemporaneously maintained log.   She drove to those cities to

attend jewelry shows or to visit specialty jewelry retailers for

purposes of enhancing her line of jewelry.   According to her

records, she drove at least 3,200 miles for purposes of attending

jewelry shows and/or checking suitable product lines.    Petitioner

is entitled to deduct that amount of mileage at the standard rate

as a business expense on her Schedule C for 2006.   Although

petitioner’s log refers to more mileage than is being allowed,

her recordkeeping was inadequate to properly substantiate any

amount in excess of 3,200 miles for 2006.

Travel Expense--$3,548; Meals and Entertainment--$2,415; Business
Classes--$210; and Office Supplies--$345

     With respect to the travel and meals and entertainment

deductions, petitioner’s records are far from sufficient to meet

the requirements of section 274(d).    The educational and office
                               - 9 -

supplies deductions were not sufficiently substantiated although

subject to a less rigorous standard.   Accordingly, we hold that

petitioner is not entitled to deduct any of the amounts in the

above categories for 2006.

Cellular Phone--$665

     Petitioner testified that she estimated the business use of

her cellular phone for 2006.   Although it is reasonable to expect

that petitioner used her cell phone for employee and Amazonia

business purposes, petitioner’s rough methodology in estimating

leaves a substantiation gap because deductions for the use of a

cell phone are subject to the more rigorous recordkeeping

requirements of section 274(d).   Accordingly, petitioner is not

entitled to a deduction for cell phone use.

Computer Land Line--$720; P.O. Box--$120; Web Hosting and
Access--$100; and Web Site Design--$50

     Each of these expenditures was exclusively for the Amazonia

business.   The telephone number and service, P.O. box, and

related items were listed in the name “Amazonia” and used

exclusively for that business activity.   Cf. sec. 262(b).

Accordingly, we hold that petitioner is entitled to deduct the

above amounts on her Schedule C for 2006.

     Although we have decided the allowable amounts and whether

the expenses are employee or business related, we leave to the

parties the obligation of applying our above holdings and

computing the amount of the income tax deficiency, if any.    To
                             - 10 -

the extent that petitioner’s allowable Schedule A deductions are

less than the standard deduction otherwise allowable, that should

be taken into account in the computation.

     To reflect the foregoing,


                                        Decision will be entered

                                   under Rule 155.
