                  T.C. Summary Opinion 2011-67



                        UNITED STATES TAX COURT



            KEVIN E. AND SONDRA WARD, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16637-09S.              Filed June 8, 2011.



     Kevin E. Ward and Sondra Ward, pro sese.

     Janice Bennett Geier, Kimberly L. Clark, and Aimee R. Lobo-

Berg, for respondent.



     VASQUEZ, Judge:     This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code (Code) in

effect when the petition was filed.1    Pursuant to section

7463(b), the decision to be entered is not reviewable by any


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

other court, and this opinion shall not be treated as precedent

for any other case.

     Respondent determined an $8,925 deficiency in petitioners’

2005 Federal income tax and a $1,785 accuracy-related penalty

under section 6662(a).   After concessions,2 the issues for

decision are whether petitioners are entitled to a $25,000

Schedule C expense deduction for business use of their car and

whether petitioners are liable for the section 6662 accuracy-

related penalty.

     Petitioners resided in Idaho when the petition was filed.

                            Background

     In 2005 petitioner Sondra Ward (Mrs. Ward) worked as a real

estate agent for Century 21 Advantage in Idaho.   Her job duties

(e.g., showing properties, networking, etc.) required her to do

an extensive amount of driving.   Mrs. Ward drove a 1996 Audi for

most of 2005.3   On December 21, 2005, petitioners purchased a

2006 BMW X5 (the BMW) for $49,431.50, which included $2,353.50


     2
        The parties agree that the loss claimed on Schedule E,
Supplemental Income and Loss, from Ward Insurance, Inc., reported
on petitioners’ return should be $84,197. Petitioners concede
that Schedule E depreciation recapture should be increased by
$11,951 and the $10,320 Schedule E depreciation expense reported
on their return should be reduced by $747. Petitioners also
concede that they are not entitled to any portion of the $49,431
rent/lease expense reported on Schedule C, Profit or Loss From
Business, on their return.
     3
        Petitioners did not keep a mileage log for the Audi or
claim a mileage deduction for the Audi in 2005.
                                - 3 -

for Idaho sales tax, and $208 for State title fees and dealer

documentation fees.4    Petitioners placed the BMW into service for

Mrs. Ward’s real estate business on December 21, 2005, the same

day it was purchased.    Petitioner Kevin E. Ward (Mr. Ward) drove

the BMW on occasion in 2005 as well.    The BMW had 66 miles on it

when petitioners drove it off the lot and 1,111.7 miles at the

end of the year; petitioners drove the BMW 1,045.7 miles from

December 21 to 31.

     Mrs. Ward concentrated most of her business in Bonneville,

Jefferson, and Bingham Counties, an area covering over 5,000

square miles.   She sold 33 properties in 2005.5

     Petitioners claimed a Schedule C depreciation expense for

the BMW of $2,349 on their Form 1040, U.S. Individual Income Tax

Return, for 2005.    During the examination of petitioners’ 2005

return, petitioners first raised the issue that they are entitled

to a $25,000 section 179 expense deduction and a $1,099

depreciation deduction for the BMW in lieu of the deduction

claimed on their return.

     On November 19, 2007, petitioners provided to the revenue

agent assigned to the audit a mileage log for the BMW with three



     4
        Petitioners did not sell or trade in the Audi when they
purchased the BMW.
     5
        It is not clear whether Mrs. Ward sold any of the 33
properties during the 11-day period from Dec. 21 to 31, 2005.
                                  - 4 -

entries for 2005 totaling 47 miles allocated to personal use.6

The log had no entries with a business use purpose and zero miles

were allocated to business use.      On December 11, 2007,

petitioners provided a computer printout of Mrs. Ward’s mobile

phone daily calendar covering December 21 through 31, 2005 (the

phone calendar).    After printing out the phone calendar Mrs. Ward

added handwritten mileage amounts for most of the entries, which

are almost exclusively for Mrs. Ward’s business appointments and

other business and/or networking obligations.      The revenue agent

determined that the business use percentage of the BMW for 2005

was 42.7 percent.      As a result, the revenue agent allowed a

Schedule C depreciation expense for the BMW of $528.      Respondent

issued a notice of deficiency to petitioners on May 1, 2009.

                               Discussion

I.   Vehicle Expense

      Deductions are a matter of legislative grace, and taxpayers

bear the burden of proving that they are entitled to any

deductions claimed.      New Colonial Ice Co. v. Helvering, 292 U.S.

435, 440 (1934).    Taxpayers are required to maintain records that




      6
        Petitioners listed the following dates and descriptions
for these personal use entries:

      Dec. 25   Church
      Dec. 25   Mom & Dad Ward
      Dec. 31   Town - grocery & new year stuff
                                - 5 -

are sufficient to determine their correct tax liability.     See

sec. 6001; sec. 1.6001-1(a), Income Tax Regs.

     When property is used in a trade or business or held for the

production of income, the taxpayer may be allowed a depreciation

deduction.   Secs. 161, 167.   Alternatively, the cost of property

acquired by purchase for use in the active conduct of a trade or

business may be expensed under section 179 during the year that

the property was placed in service if the requirements of that

section are satisfied.   If the property is used for both business

and other purposes, then the portion of the cost that is

attributable to the business use is eligible for expensing under

section 179, but only if more than 50 percent of the use is for

business purposes (the predominant use requirement).     See sec.

1.179-1(d), Income Tax Regs.   Moreover, to claim a section 179

deduction for “listed property”, which is defined in section

280F(d)(4) to include any passenger automobile, the taxpayer must

satisfy the strict substantiation requirements of section 274(d).

See Whalley v. Commissioner, T.C. Memo. 1996-533; see also sec.

280F(d)(1); sec. 1.179-1(d)(3), Income Tax Regs.     Section 274(d)

requires the taxpayer to substantiate the amount, time, place,

and business purpose of these expenditures and to provide

adequate records or sufficient evidence to corroborate his own

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

50 Fed. Reg. 46016 (Nov. 6, 1985).      In the absence of adequate
                               - 6 -

records to substantiate an element of an expense, a taxpayer may

establish an element by “his own statement, whether written or

oral, containing specific information in detail as to such

element”, and by “other corroborative evidence sufficient to

establish such element.”   Sec. 1.274-5T(c)(3)(i), Temporary

Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985).   However,

neither taxpayers nor the Court may estimate permissible

deductions that do not satisfy the strict substantiation

requirements of section 274(d), which supersedes the doctrine

found in Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).     See

Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968), affd. 412

F.2d 201 (2d Cir. 1969); Solomon v. Commissioner, T.C. Memo.

2011-91.

     Petitioners contend that they are entitled to a section 179

deduction for the BMW because it was used predominantly for

business purposes in 2005.   Respondent argues that the deduction

is not permitted because petitioners have not adequately

substantiated the business use of the BMW and fail to meet the

predominant use requirement.

     At trial petitioners introduced into evidence the mileage

log,7 Mrs. Ward’s phone calendar, and maps of the area in which

Mrs. Ward works.   The phone calendar did not include mileage


     7
        As discussed supra, the mileage log includes no entries
with a business use purpose and allocates zero miles to business
use for 2005.
                                - 7 -

amounts on the original printout.    Instead, the mileage amounts

were handwritten and added after the calendar was printed in

2007; thus, they were not contemporaneously recorded.    Mrs. Ward

testified that she arrived at the mileage totals by reading the

odometer at the time of the appointments and that she may have

written the mileage totals down earlier and moved them to the

calendar later.    However, she provided no other written evidence

of the mileage amounts.    The phone calendar also did not include

the addresses of the homes she showed to clients.    The entries

included vague descriptions such as “Sweet showing”, “Drop off

See’s Candy and Calendars”, “Flyers to all listings”, and “Show

mclane invest prop”.    Accordingly, petitioners have not

maintained adequate records.

     Mrs. Ward testified in depth about her overall job duties

and specific appointments during the 11-day period at the heart

of this matter.    She also showed the Court maps of her working

area and distances from her home in Idaho to the locations of

several of her appointments.    However, she produced no evidence

to corroborate her statements about the specific locations of her

appointments in 2005 (e.g., addresses of listings, emails from

clients referring to specific listings, etc.), or where she was

driving from.8    Furthermore, in the absence of adequate records


     8
        Sec. 1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed.
Reg. 46016 (Nov. 6, 1985), states, in pertinent part:
                                                   (continued...)
                                 - 8 -

and more precise evidence, we must conclude that Mrs. Ward’s

mileage totals, which were written on the phone calendar in 2007

and included miles driven around the areas where the listings

were located, were best estimates, which cannot be the basis for

a deduction under section 274.

      While we do not doubt that Mrs. Ward used the BMW for

business purposes in 2005, she has not met the strict

substantiation requirements of section 274.    Accordingly,

respondent’s determination with respect to the section 179

deduction for the BMW is sustained.

II.   Accuracy-Related Penalty

      Pursuant to section 6662(a) and (b)(1) and (2), a taxpayer

may be liable for a penalty of 20 percent on the portion of an

underpayment of tax (1) due to negligence or disregard of rules

or regulations or (2) attributable to a substantial

understatement of income tax.    See sec. 6662(b).   “Negligence”



      8
       (...continued)
           A contemporaneous log is not required, but a record of
      the elements of an expenditure or of a business use of
      listed property made at or near the time of the expenditure
      or use, supported by sufficient documentary evidence, has a
      high degree of credibility not present with respect to a
      statement prepared subsequent thereto when generally there
      is a lack of accurate recall. Thus, the corroborative
      evidence required to support a statement not made at or near
      the time of the expenditure or use must have a high degree
      of probative value to elevate such statement and evidence to
      the level of credibility reflected by a record made at or
      near the time of the expenditure or use supported by
      sufficient documentary evidence. * * *
                                - 9 -

includes any failure to make a reasonable attempt to comply with

the provisions of the Code or to exercise ordinary care in the

preparation of a return, and “disregard” means any careless,

reckless, or intentional disregard.     Sec. 6662(c); sec. 1.6662-

3(b)(1) and (2), Income Tax Regs.    A substantial understatement

of income tax is defined as an understatement of tax that exceeds

the greater of 10 percent of the tax required to be shown on the

tax return or $5,000.    See sec. 6662(d)(1)(A).

     Respondent determined that some or all of the underpayment

of petitioners’ tax for 2005 is attributable to negligence or

disregard of rules or regulations or a substantial understatement

of income tax.    Respondent calculated the 20-percent penalty on

the entire amount of the deficiency.9    However, in the notice of

deficiency respondent listed only “Sch C1 - Rent/Lease - Other

Business Property” as an adjustment to which the accuracy-related

penalty applies.10    Thus, respondent should have calculated the

20-percent penalty only on the amount of the deficiency resulting

from petitioners’ improper deduction for rent expense.

Petitioners have conceded this adjustment as well as the

resulting penalty.    Accordingly, we sustain respondent’s




     9
        Respondent applied the 20-percent penalty to the $8,925
deficiency determined in the notice.
     10
           This adjustment increased petitioners’ taxable income by
$49,431.
                               - 10 -

determination that a penalty applies for the corresponding

portion of the underpayment.

     The penalty shall not be imposed on the portion of the

underpayment due to any other adjustment, including the

additional adjustments that petitioners have conceded and the

adjustment discussed herein.   As part of the Rule 155

computations, respondent shall recalculate the 20-percent penalty

and apply it only to the portion of the underpayment resulting

from the adjustment for the Schedule C rent expense.


                                         Decision will be entered

                                    under Rule 155.
