                             T.C. Memo. 2015-127



                        UNITED STATES TAX COURT



                SARAH GROSSNICKLE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 5810-14.                         Filed July 13, 2015.



      Sarah Grossnickle, pro se.

      David A. Indek, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      RUWE, Judge: Respondent determined a $2,743 deficiency in petitioner’s

2010 Federal income tax as well as additions to tax of $617.18 and $411.45
                                         -2-

[*2] pursuant to section 6651(a)(1) and (2),1 respectively. In his posttrial brief

respondent concedes the section 6651(a)(2) addition to tax. The issues remaining

for decision are: (1) whether petitioner is entitled to various Schedule C, Profit or

Loss From Business, deductions for the taxable year 2010; (2) whether petitioner

was required to file a Federal income tax return for the taxable year 2010; and

(3) whether petitioner is liable for an addition to tax under section 6651(a)(1).

                               FINDINGS OF FACT

      Some of the facts have been stipulated and are so found. The stipulation of

facts and the attached exhibits are incorporated herein by this reference.

      Petitioner resided in Maryland at the time she filed her petition. Petitioner

was over the age of 65 in the taxable year 2010.

      During the taxable year 2010 petitioner conducted business as an

independent real estate agent associated with RE/MAX Realty Group (RE/MAX).

RE/MAX provided petitioner with shared office space that included telephone and

Internet service.

      Petitioner was issued a Form 1099-MISC, Miscellaneous Income, for 2010

reporting $17,409 of nonemployee compensation from RE/MAX. Of this amount

      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect for the year at issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
                                        -3-

[*3] RE/MAX withheld $10,122 to cover expenses petitioner incurred as a real

estate agent. In the stipulation of facts respondent concedes that petitioner is

entitled to deduct business expenses of $10,122 that RE/MAX withheld from

petitioner in the taxable year 2010. As discussed infra, petitioner claims

deductions for additional professional fees and expenses incurred in 2010, some of

which respondent has conceded.

      Petitioner did not file a Federal income tax return for the taxable year 2010,

alleging that she did not have enough gross income to have a filing requirement.

On December 9, 2013, respondent issued to petitioner a notice of deficiency for

the taxable year 2010.

      After trial on May 4, 2015, petitioner filed a motion to supplement the

record to allow the introduction of petitioner’s Exhibits 9-P, 10-P, and 11-P. We

will grant petitioner’s motion but note that this evidence has only a small effect on

the outcome.

                                     OPINION

      The Commissioner’s determinations in a notice of deficiency are generally

presumed correct, and the taxpayer bears the burden of proving that the

determinations are in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). Petitioner does not contend, and the evidence does not establish, that the
                                         -4-

[*4] burden of proof shifts to respondent under section 7491(a) as to any issue of

fact.

A. Petitioner’s Claimed Deductions

        Deductions are a matter of legislative grace, and the taxpayer bears the

burden of proving entitlement to any deduction claimed. 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). Section 6001 requires the taxpayer to maintain records

sufficient to establish the amount of each deduction claimed. See also sec. 1.6001-

1(a), Income Tax Regs.

        Section 162(a) allows as a deduction “all the ordinary and necessary

expenses paid or incurred during the taxable year in carrying on any trade or

business”. See Boyd v. Commissioner, 122 T.C. 305, 313 (2004). 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 is necessary if it is

appropriate and helpful for the development of the business. Commissioner v.

Heininger, 320 U.S. 467, 471-472 (1943); Deputy v. du Pont, 308 U.S. 488, 495

(1940). In contrast, section 262(a) disallows deductions for personal, living, or

family expenses.
                                         -5-

[*5] If the taxpayer establishes that an expense is deductible but is unable to

substantiate the precise amount, we may estimate the amount, bearing heavily

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

v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). The taxpayer must present

sufficient evidence for the Court to form an estimate because without such a basis,

any allowance would amount to unguided largesse. Williams v. United States, 245

F.2d 559, 560-561 (5th Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731, 742-

743 (1985).

      However, section 274 overrides the Cohan rule with regard to certain

expenses. See Sanford v. Commissioner, 50 T.C. 823, 828 (1968), aff’d 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). Under section 274(d), the taxpayer

must meet stricter substantiation requirements to be allowed a deduction under

section 162. The heightened substantiation requirements of section 274(d) apply

to: (1) any traveling expense, including meals and lodging away from home;

(2) any item with respect to an activity in the nature of entertainment, amusement,

or recreation; (3) an expense for gifts; or (4) the use of “listed property” as defined

in section 280F(d)(4), including any passenger automobiles. To deduct these

expenses, the taxpayer must substantiate by adequate records or by sufficient
                                         -6-

[*6] 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. Sec. 274(d); see also Oswandel v. Commissioner, T.C. Memo. 2007-

183, 2007 Tax Ct. Memo LEXIS 185, at *7. Even if such an expense would

otherwise be deductible, section 274 may still preclude a deduction if the taxpayer

does not present sufficient substantiation. Sec. 1.274-5T(a), Temporary Income

Tax Regs., supra.

      1. Professional and Licensing Fees

      In the stipulation of facts respondent concedes that petitioner is entitled to

deduct $489.64 for annual professional and licensing fees paid in 2010. In

addition to respondent’s concessions, petitioner contends that she is entitled to a

deduction of $654 for professional and licensing fees for 2010, including:

(1) $564 for realtor association dues and (2) $90 for a real estate license fee.

Respondent argues that petitioner has not adequately substantiated that either of

these expenses was paid and/or incurred in 2010.2


      2
        In the stipulation of facts respondent concedes that petitioner is entitled to
deduct promotion, advertising, and listing expenses of $1,770.50 and professional
education expenses of $229 for 2010. In his posttrial brief respondent concedes
that petitioner is entitled to deduct additional promotion, advertising, and listing
expenses of $169.39 and additional professional education expenses of $14 for
2010.
                                         -7-

[*7] Petitioner has sufficiently substantiated that she paid the disputed realtor

association dues and licensing fees for 2010. To substantiate her realtor

association dues, petitioner provided an itemized invoice with a receipt from the

Frederick County Association of Realtors showing that $564 was due for 2010.3

This receipt substantiates that petitioner paid $564 for local, State, and national

realtor association dues using a Visa credit card. However, the “Tax Information”

at the bottom of this invoice states that $1274 of this amount is nondeductible for

Federal income tax purposes. Thus, petitioner is entitled to a $437 deduction for

realtor association dues for 2010.

      To substantiate the payment of her real estate license fee, petitioner

submitted a money order receipt from the U.S. Postal Service showing that $90

was payable to the “Real Estate Commission” on November 18, 2010.

Accordingly, petitioner is entitled to a deduction of $90 for the cost of her real

estate license fee for 2010.




      3
       The invoice indicates that petitioner paid $544 for her 2010 local, State,
and national realtor association dues and a voluntary $20 “RPAC” contribution.
      4
        The invoice states that the nondeductible portion of local association dues
is $11; the nondeductible portion of State association dues is $70; and the
nondeductible portion of national association dues is $26. In addition, the invoice
states that all “RPAC” contributions are nondeductible.
                                        -8-

[*8] 2. Home Office Space, Supplies, and Equipment

      In his posttrial brief respondent concedes that petitioner is entitled to deduct

$395.26 for office supplies and equipment expenses paid in 2010. Petitioner

contends that she is also entitled to a home office expense deduction of $470.40

for 2010. At trial petitioner testified that she rented from her sister approximately

500 square feet of living space for $350 per month and dedicated “50 square feet

to about 100 square feet” of this rented space to her real estate business. Petitioner

estimates that she is entitled to a home office expense deduction of $39.20 per

month for 2010. Respondent argues that petitioner has not provided sufficient

information about the home office to substantiate the expense.

      As a general rule, section 280A(a) provides that no deduction otherwise

allowable to an individual “shall be allowed with respect to the use of a dwelling

unit which is used by the taxpayer during the taxable year as a residence.” The

term “dwelling unit” is defined as “a house, apartment, condominium, mobile

home, boat, or similar property, and all structures or other property appurtenant to

such dwelling unit.” Sec. 280A(f)(1)(A). However, section 280A(c) contains an

exception to the general disallowance of subsection (a). In pertinent part, section

280A(c)(1) provides:
                                        -9-

[*9]         SEC. 280A(c). Exceptions for Certain Business or Rental Use;
       Limitation on Deductions for Such Use.--

                   (1) Certain business use.--Subsection (a) shall not apply
             to any item to the extent such item is allocable to a portion of
             the dwelling unit which is exclusively used on a regular basis--

                          (A) as the principal place of business for any trade
                    or business of the taxpayer,

                           (B) as a place of business which is used by
                    patients, clients, or customers in meeting or dealing with
                    the taxpayer in the normal course of his trade or
                    business, or

                          (C) in the case of a separate structure which is not
                    attached to the dwelling unit, in connection with the
                    taxpayer’s trade or business.

For an expense related to a dwelling unit to fit within this exception, some portion

of the dwelling unit must be used regularly and exclusively for the taxpayer’s trade

or business. See Scully v. Commissioner, T.C. Memo. 2013-229, at *21.

       Petitioner has failed to demonstrate that any portion of the dwelling unit

was regularly and exclusively used for business purposes in 2010. Petitioner

testified at trial that she rented approximately 500 square feet of living space from

her sister for $350 per month. According to petitioner, “50 square feet to about

100 square feet” of this space was dedicated to her real estate business. As

support petitioner offered into evidence two Google “aerial view” photographs of
                                        - 10 -

[*10] a residential structure with handwritten notations. Petitioner did not

produce any documentation, receipts, or canceled checks to substantiate the rental

arrangement. Furthermore, petitioner did not offer sufficient evidence to prove

that the 50 to 100 square feet of purported office space was regularly and

exclusively used for her real estate business. Because petitioner has not proven

that she rented a dwelling unit or that a portion of it was regularly and exclusively

used for business purposes, we cannot allow her any deduction attributable to a

home office.

      3. Phone and Internet Expenses

      In his posttrial brief respondent concedes that petitioner is entitled to deduct

$931.75 for communication expenses and $20.50 for a miscellaneous expense for

2010. Petitioner contends that she is entitled to additional deductions for various

phone and Internet expenses incurred in carrying on her real estate business in

2010, including: (1) $107 to Verizon Wireless in March 2010 for business

phone/Internet; (2) $315 to Verizon Wireless for three months of estimated

business phone expenses; and (3) $360 to her sister, consisting of $30 per month

for Internet use in the purported home office. Respondent argues that petitioner

has not substantiated any of these expenses.
                                        - 11 -

[*11] Petitioner has failed to demonstrate that she incurred and/or paid any of the

claimed phone and Internet expenses for 2010. To substantiate the first

phone/Internet expense petitioner offered into evidence a Verizon Wireless bill

providing that $107 was due on the account by March 1, 2010. However,

petitioner did not provide any documentation, receipts, or corresponding credit

card charges to substantiate that this bill was paid or that it was for business

purposes. Additionally, petitioner did not offer any documentation to substantiate

that she incurred or paid $315 for a business phone expense in 2010.

      Petitioner also testified that she paid her sister $30 per month for Internet

access to “research, upload, download, and update listings, and email clients.”

However, petitioner did not provide any documentation, bills, or receipts to show

that she incurred or paid this expense. Accordingly, we conclude that petitioner

has failed to substantiate the claimed phone and Internet expenses in excess of the

amounts already allowed by respondent.

      4. Business Mileage

      Petitioner argues that she is entitled to a $1,040 deduction for car and truck

expenses resulting from mileage driven during her real estate activities in 2010.

Petitioner contends that she lost her original mileage calendar “during her move in

November and December of 2014”. Thus, to substantiate her claimed mileage
                                       - 12 -

[*12] petitioner offered into evidence at trial a typewritten statement that showed

only total business miles and the total dollar amount claimed. According to

petitioner, this statement provides “[e]xtremely conservative estimate[s]” and a

“guesstimat[e]” of miles she drove (1) from her home to RE/MAX and (2) while

“showing properties.” Respondent argues that petitioner has not substantiated any

of her claimed business mileage for 2010.

      Petitioner’s claimed mileage is subject to the heightened substantiation

requirements of section 274(d). See secs. 274(d)(4), 280F(d)(4)(A)(i). As

applicable to vehicle expenses, section 274(d) requires the taxpayer to substantiate

by adequate records: (1) the mileage; (2) the time and place of the use; and (3) the

business purpose of the use. See Solomon v. Commissioner, T.C. Memo. 2011-

91, 2011 Tax Ct. Memo LEXIS 90, at *8. 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 use

or expenditure and documentary evidence (e.g., receipts or bills) of certain

expenditures. See 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). A log that is

kept on a weekly basis is considered contemporaneous for this purpose. See sec.

1.274-5T(c)(2)(ii)(A), Temporary Income Tax Regs., 50 Fed. Reg. 46017-46018
                                         - 13 -

[*13] (Nov. 6, 1985). The level of detail required for substantiating by adequate

records the business use of listed property depends on the facts and circumstances

of such use. See id. subdiv. (ii)(C), 50 Fed. Reg. 46018-46019. The typewritten

statement that petitioner offered at trial for 2010 is insufficient substantiation

under the requirements of section 274(d).

      In her posttrial submission petitioner offered a more detailed log that was

prepared after the trial. However, the source of this information and petitioner’s

methodology in its preparation are not adequately explained, and the log does not

rise to the level of credibility of a contemporaneous record. Accordingly,

petitioner is not entitled to any deduction for car and truck expenses for 2010.5

B. Filing Requirement

      Petitioner contends that she was not required to file a 2010 Federal income

tax return. Petitioner’s position appears to be that her “profit or gain” from her

real estate activities (i.e., nonemployee compensation of $17,409 minus claimed

trade or business expenses) does not equal or exceed the filing threshold provided




      5
      As previously held, petitioner did not substantiate that she maintained a
home office in 2010. For this reason, any mileage claimed by petitioner for travel
between her residence and the RE/MAX office is nondeductible commuting
mileage. See Commissioner v. Flowers, 326 U.S. 465, 473-474 (1946); Curphey
v. Commissioner, 73 T.C. 766, 777 (1980).
                                        - 14 -

[*14] for in section 6012. Respondent argues that petitioner was required to file

an income tax return for tax year 2010.

      The Code imposes a Federal tax on the taxable income of every individual.

Sec. 1. Gross income for the purpose of calculating taxable income is defined as

“all income from whatever source derived”. Sec. 61(a). Every U.S. resident

individual having for the taxable year gross income which equals or exceeds the

exemption amount is--with enumerated exceptions not applicable here--required to

file an income tax return. Sec. 6012(a)(1)(A). For 2010 the exemption amount for

a single individual age 65 or older is $10,750. See secs. 63(c), (f), 151(d); see also

IRS Publication 501, Exemptions, Standard Deduction, and Filing Information

(For use in preparing 2010 Returns).

      There is no dispute that petitioner worked as a real estate agent in 2010 and

earned nonemployee compensation of $17,409 from RE/MAX. RE/MAX issued

to petitioner a Form 1099-MISC reporting this amount. It is well settled that

amounts received by a taxpayer in the form of nonemployee compensation are

includable in gross income. See Walbaum v. Commissioner, T.C. Memo. 2013-
                                        - 15 -

[*15] 173, at *3-*4. Accordingly, $17,409 is includable in petitioner’s gross

income, and therefore she was required to file a 2010 income tax return.6

C. Section 6651(a)(1) Addition to Tax

      Section 6651(a)(1) imposes an addition to tax for the failure to timely file a

return unless the taxpayer establishes that the failure was due to reasonable cause

and not due to willful neglect. The addition to tax is equal to 5% of the amount

required to be shown as tax on the delinquent return for each month or fraction

thereof during which the return remains delinquent, up to a maximum addition of

25% in the aggregate. Id. Section 7491(c) provides that the Commissioner bears

the burden of production with respect to the liability of an individual for any

penalty or addition to tax. The Commissioner may meet this burden of production

by coming forward with sufficient evidence indicating that it is appropriate to

impose the relevant penalty. Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

      As discussed above, petitioner was required to file a Federal income tax

return for 2010. Because the parties have stipulated that petitioner did not file a

tax return for 2010, respondent has met his burden of production.




      6
       In addition, sec. 6017 imposes a filing requirement on any individual who
has net self-employment earnings of $400 or more. Petitioner’s net self-
employment earnings for 2010 exceed this amount.
                                        - 16 -

[*16] Additionally, petitioner has not offered any documentary or testimonial

evidence to establish that her failure to file a tax return was due to reasonable

cause and not due to willful neglect. See sec. 6651(a)(1). Petitioner contends that

she had a “reasonable belief” that she was not required to file a tax return for 2010

because her expenses from real estate exceeded her income. However, an

uninformed or unsupported belief does not constitute reasonable cause for the

failure to file a return. Henningsen v. Commissioner, 243 F.2d 954, 958-959 (4th

Cir. 1957), aff’g 26 T.C. 528 (1956). Accordingly, we sustain respondent’s

determination of the section 6651(a)(1) addition to tax but note that, because of

our previous holdings and several concessions by the parties, respondent’s original

section 6651(a)(1) addition to tax computations in the notice of deficiency must be

adjusted to reflect those changes.

      In reaching our decision, we have considered all arguments made by the

parties, and to the extent not mentioned or addressed, they are irrelevant or

without merit.

      To reflect the foregoing,


                                                            Decision will be entered

                                                     under Rule 155.
