                             T.C. Summary Opinion 2012-92



                            UNITED STATES TAX COURT



                    LORETTA LEA WANAT, Petitioner v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 19944-07S, 19945-07S,            Filed September 17, 2012.
                   19946-07S.



      Loretta Lea Wanat, pro se.

      Kristen I. Nygren and Sebastian Voth (student), for respondent.



                                 SUMMARY OPINION


      CARLUZZO, Special Trial Judge: Each of these consolidated cases was

heard pursuant to the provisions of section 7463.1 Pursuant to section 7463(b), the


      1
          Unless otherwise indicated, section references are to the Internal Revenue
                                                                           (continued...)
                                          -2-

decision to be entered in each case is not reviewable by any other court, and this

opinion shall not be treated as precedent for any other case.

      In three notices of deficiency, all dated June 4, 2007, respondent determined

deficiencies in petitioner’s income tax and additions to tax as follows:

                                              Additions to Tax
                                       Sec.          Sec.      Sec.
             Year     Deficiency     6651(a)(1)  6651(a)(2) 6654(a)

            2002       $16,573      $1,629.45       $1,738.08      $207.35
            2003        22,246       1,718.55        1,374.84       157.41
            2004        22,316       1,510.65          805.68       144.56

      This Summary Opinion addresses issues that do not arise from adjustments

made in the notices of deficiency; those have been resolved by the parties.2

Petitioner neither prepared nor submitted to respondent a Federal income tax return

for any year in issue until shortly before these cases were tried. Had she done so

earlier, we expect that the parties might have reached agreement on some of the

deductions claimed on those returns. But she did not, so we do the best we


      1
       (...continued)
Code of 1986, as amended, in effect for the relevant period. Rule references are to
the Tax Court Rules of Practice and Procedure.
      2
       The parties also agree that petitioner’s liability for the additions to tax for
each year will be recomputed as necessary to reflect their agreement on the
adjustments made in the notices of deficiency and the resolution of the issues here
under consideration.
                                           -3-

can with the disorganized record that we have been given to work with and consider

petitioner’s entitlement to certain deductions claimed on those returns.3

Specifically, we consider: (1) whether for 2002 petitioner is entitled to trade or

business expense deductions for expenses attributable to a dog bed manufacturing

business; and (2) whether for 2003 and 2004 petitioner is entitled to trade or

business expense deductions for expenses attributable to a real estate activity.

                                       Background

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

petitions were filed in these consolidated cases, petitioner resided in Georgia.

       From 1996 until 2005 petitioner was employed full time as an airline pilot by

Northwest Airlines, Inc. (Northwest).




       3
         Issues arising from deductions yet to be shown on a Federal income tax
return are contemplated in the petitions filed in these cases. Ignoring what petitioner
labeled as “preliminary” returns submitted to respondent’s counsel after the
petitions were filed, the returns on which the deductions here in dispute are claimed
were not provided to respondent’s counsel until the day before trial. Sometimes late
is just as bad as never.
        Petitioner’s procrastination, coupled with respondent’s restraint from using
formal discovery in cases subject to a sec. 7463 election, in effect transformed one
of the traditional roles of a trial, that is, to resolve factual disputes between litigants,
into an exercise more in the nature of an examination of petitioner’s untimely
submitted returns. A trial even as informal as contemplated under Rule 174(b) is ill
suited for such purposes.
                                         -4-

      From 2000 through 2002 petitioner was the sole proprietor of a business that

manufactured dog beds. The dog beds, more simply described as cushions, were

available in three sizes. Each bed consisted of an outer layer of cloth, webbing, and

foam. Petitioner purchased these raw materials from various vendors. The cloth

that composed the outer layer of the dog beds was cut to patterns and sewn together

according to petitioner’s specifications by a company in Georgia. The partially

completed dog beds were then shipped to petitioner, who completed the

manufacturing process and offered the beds for sale through the Internet.

      Sometime during 2002 petitioner had a 40- by 60-foot cinder block building

(building) constructed on her property where her residence is located. She used the

building for a variety of purposes, including (1) storage for the raw materials,

finished products, and equipment related to the manufacture of the dog beds, and (2)

storage of equipment used in the maintenance of the property on which her

residence in Georgia is located.

      Over the years petitioner acquired several mostly unimproved parcels of real

estate in the Florida Keys (properties). During the years in issue petitioner traveled,

sometimes by automobile and sometimes by air, back and forth between her

residence and one or the other of the properties. Petitioner purchased the properties
                                          -5-

with an expectation to profit from their appreciation. One of the properties could be

used as a fishing pier, and petitioner intended to hold it for rent for that purpose,

although it does not appear that she did so for any of the years in issue. Petitioner

intended to construct a “spec” house on another parcel, but she had not begun that

process as of the close of 2004.

      In 2003 petitioner entered into a contract to purchase an unimproved lot on

Big Coppitt Key. According to petitioner, “the seller backed out of” the contract on

“the day we were supposed to close.” Petitioner retained an attorney to sue the

seller over the contract dispute, and as of the time of trial in these cases, the dispute

remained in litigation. Petitioner was reimbursed by her attorney (who she fired

during 2005) for some, but not all, of the legal fees she incurred in that proceeding.

      In 2004 petitioner purchased an unimproved lot in Seaside Resort. According

to petitioner, she rented it “a couple of times” during that year to people who parked

their recreational vehicles there. The 2004 Federal income tax return petitioner

provided to respondent on the day before trial shows no rental income attributable to

this or any other of the properties.

      Each of the returns provided to respondent on the day before trial includes a

Schedule C, Profit or Loss From Business. For 2002 the Schedule C relates to
                                          -6-

petitioner’s dog bed manufacturing business. For 2003 and 2004 the Schedules C

relate to petitioner’s real estate activity; no income is reported on either of these

Schedules C. Otherwise, the income reported and deductions claimed on the three

Schedules C are shown in detail in the appendix.

                                       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.4 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).

      A taxpayer claiming a deduction to be taken into account in arriving at the

taxpayer’s Federal income tax liability for any given year 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. 87, 89-90 (1975),

aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); sec. 1.6001-1(a), Income Tax

Regs. In these cases the “statutory provisions” are section 162, which, in general,


      4
       Under the circumstances, the provisions of sec. 7491(a) are clearly not
applicable.
                                         -7-

allows a deduction for ordinary and necessary expenses paid or incurred during the

taxable year in carrying on any trade or business, and section 212, which, in general,

allows a deduction for ordinary and necessary expenses paid or incurred during the

taxable year for the management, conservation, or maintenance of property held for

the production of income. Property held for the production of income includes

property expected to appreciate over time, even though the property generates no

current income. Sec. 1.212-1(b), Income Tax Regs.

      Petitioner claims, and we agree, that expenses incurred during 2002 in

carrying on her dog bed manufacturing business are deductible under section 162.

Each deduction, of course, must be properly substantiated, and some are subject to

limitations imposed by other sections of the Internal Revenue Code.

      After careful consideration of the record, we find that, with two exceptions,

petitioner is entitled to the deductions claimed on the Schedule C included with the

2002 Federal income tax return she provided to respondent’s counsel on the day

before trial. She is not entitled to a deduction for vehicle expenses because she did

not substantiate by the use of a contemporaneous log or by any other reasonable

means the number of miles traveled, the date, the place, and the business purpose of

such travel as required by section 274 and its corresponding regulation. Also, she is

not entitled to a depreciation and/or section 179 expense deduction because she did
                                          -8-

not adequately distinguish between personal use and business use with respect to

the items to which those deductions relate, and we have insufficient information to

formulate a reasonable allocation between use that would allow for a deduction and

use that would not. See sec. 262; Vanicek v. Commissioner, 85 T.C. 731, 742-743

(1985).

      Petitioner claims that expenses incurred during 2003 and 2004 are likewise

deductible under section 162 and further takes the position that she was a taxpayer

in a “real property business” within the meaning of section 469(c)(7). We disagree

on both points. Petitioner’s acquisition and/or holding of various parcels of

essentially unimproved real estate during 2003 and 2004 does not constitute a trade

or business, see Commissioner v. Groetzinger, 480 U.S. 23, 32, 35 (1987) (the

taxpayer’s real estate activity was hardly intended by her to be her “means of

making a living” during either 2003 or 2004), and the record does not begin to allow

for a quantitative analysis to determine whether the tests set forth in section

469(c)(7) have been satisfied (no specific evidence of time spent with respect to

each parcel of real estate, or basis to compare that time to the time that she spent as

a Northwest employee/pilot).

      Nevertheless, we find that petitioner’s real estate activity was conducted with

the intent to make a profit and that she acquired or held the various parcels of real
                                          -9-

estate for the production of income. Consequently, we find that she is entitled by

virtue of section 212 to certain of the deductions claimed on the Schedules C

included with the 2003 and 2004 Federal income tax returns she provided to

respondent’s counsel on the day before trial. As with deductions allowable under

section 162, deductions otherwise allowable under section 212 must be

substantiated by adequate records, and some are subject to limitations imposed by

other provisions of the Internal Revenue Code.

      Specifically for 2003 and 2004 we find that petitioner is entitled to deductions

for advertising, interest (2004 only), and utilities, in the amounts shown on the

Schedules C. She is not entitled to a deduction for the legal expenses incurred in

her unsuccessful attempt to acquire the unimproved lot on Big Coppitt Key during

2003. Cf. sec. 1.212-1(k), Income Tax Regs. Furthermore, since the depreciation

deductions shown on the Schedules C do not relate to depreciable portions, if any,

of the properties, she is not entitled to a depreciation deduction for either year.

      Other deductions shown on the Schedules C relating to petitioner’s real estate

activity are not allowable because: (1) petitioner failed to establish that the related

expense was ordinary and necessary to her real estate activity, see sec. 1.212-

1(a)(2), Income Tax Regs.; (2) petitioner failed to substantiate the amount claimed,
                                         - 10 -

(3) the expenditure is capital in nature, see sec. 1.212-1(n), Income Tax Regs.; or

(4) the expense does not relate to one of the properties, but rather to a vehicle that

she purchased during 2003.

      To reflect the foregoing,


                                                        Decisions will be entered

                                                  under Rule 155.
                                      - 11 -

                                    APPENDIX

              2002 Schedule C--Dog Bed Manufacturing Business

                             Item                 Amount

                   Income:

                     Gross receipts or sales      $3,950
                     Cost of goods sold            1,963
                     Gross profit                  1,987

                   Expenses:

                      Car and truck                 662
                      Depreciation and section
                       179                         3,237
                     Interest (Other)                443
                     Office                          171
                     Rent or lease of vehicles,
                      machinery, and equipment         21
                     Utilities                        346
                     Other1                           465
                       Net loss                    (3,358)

      1
      The 2002 Schedule C reported other expenses of $465 composed of $215 for
“Annual Web Hosting” and $250 for “Web Design Services”.
                   - 12 -

  2003 Schedule C--Real Estate Activity

            Item             Amount

Expenses:

   Advertising                  $323
   Depreciation and section
    179                        7,567
  Interest (Other)               647
  Legal and professional
   services                    2,000
  Office                         246
  Rent or lease of vehicles,
   machinery, and equipment      775
  Repairs and maintenance        418
  Taxes and licenses             151
  Travel                         619
  Meals and entertainment        129
  Utilities                      375
    Net loss                 (13,250)
                                      - 13 -

                     2004 Schedule C--Real Estate Activity

                               Item             Amount

                   Expenses:

                     Depreciation and section
                      179                       $11,980
                     Interest (Other)              1,235
                     Office                          353
                     Rent or lease of vehicles,
                      machinery, and equipment       453
                     Repairs and maintenance         150
                     Taxes and licenses              227
                     Travel                        1,699
                     Meals and entertainment         163
                           1
                     Other                           175
                       Net loss                  (16,435)
      1
      The 2004 Schedule C reported other expenses of $172 composed of $150 for
a “Vegetation Survey” and $25 for a subscription to “Realty Trac”.
