                            T.C. Summary Opinion 2019-30



                           UNITED STATES TAX COURT



            DAVID BAGDAN AND MAUREEN BAGDAN, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 16317-15S.                           Filed October 1, 2019.



      David Bagdan and Maureen Bagdan, pro sese.

      Kimberly A. Trujillo and Catherine J. Caballero, for respondent.



                                SUMMARY OPINION


      LEYDEN, Special Trial 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


      1
          All section references are to the Internal Revenue Code, as amended, in
                                                                        (continued...)
                                        -2-

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 25, 2015, the Internal Revenue

Service (IRS)2 determined a deficiency in petitioners’ 2011 Federal income tax of

$10,370 and a section 6662(a) accuracy-related penalty of $2,074. The issues for

decision are whether petitioners are: (1) entitled to deduct $21,396 of

unreimbursed employee expenses reported on Schedule A, Itemized Deductions;

(2) entitled to deduct $16,579 of car and truck expenses with respect to Mr.

Bagdan’s business of officiating sports games reported on Schedule C, Profit or

Loss From Business; and (3) liable for a section 6662(a) accuracy-related penalty.

The Court holds that petitioners are: (1) not entitled to deduct $21,396 of

unreimbursed employee expenses; (2) not entitled to deduct $16,579 of car and




      1
        (...continued)
effect at all relevant times, and all Rule references are to the Tax Court Rules of
Practice and Procedure, unless otherwise indicated.
      2
        The Court uses the term “IRS” to refer to administrative actions taken
outside of these proceedings. The Court uses the term “respondent” to refer to the
Commissioner of Internal Revenue, who is the head of the IRS and is respondent
in this case, and to refer to actions taken in connection with this case.
                                         -3-

truck expenses; and (3) not liable for the section 6662(a) accuracy-related

penalty.3

                                     Background

      The parties submitted this case fully stipulated pursuant to Rule 122.

Petitioners resided in California when they timely filed their petition.

I.    Mr. Bagdan’s Employment During 2011

      During 2011 Mr. Bagdan was employed by On Demand Power, Inc. (On

Demand Power), as an outside sales and business development associate. During

2011 On Demand Power had a policy of reimbursing all sales-related expenses for

Mr. Bagdan’s position. On Demand Power’s reimbursement policy with respect to

Mr. Bagdan stated: “[On Demand Power] will reimburse * * * [Mr. Bagdan] for

all sales related expenses when all receipts are presented in a documented hard

copy (paper or fax), approved by * * * [Mr. Bagdan’s] signature as being business

related and approved by * * * [On Demand Power].” During 2011 On Demand

Power reimbursed Mr. Bagdan $525 for cellular phone expenses, $40 for an oil

change for his car, $40 for tolls, and $21.84 for brake repairs to his car.


      3
        Adjustments to the amounts of petitioners’ self-employment tax, self-
employment tax deduction, alternative minimum tax, and education credit are
purely computational matters, the resolution of which depends on our disposition
of the first and second disputed issues.
                                        -4-

II.   Mr. Bagdan’s Officiating Business

      During 2011 Mr. Bagdan officiated at a large number of basketball and

boys’ lacrosse games. He received $16,304 in gross receipts for this work. Mr.

Bagdan drove to and from most of the games using his own car and did not

maintain contemporaneous documentation for the miles he drove. The parties

stipulated three exhibits: (1) a list Mr. Bagdan prepared in connection with the

IRS audit of petitioners’ 2011 tax return that contained columns listing dates in

2011 in chronological order in the form of a day and month4 and names of the

school or place and locations where games were played;5 (2) another list Mr.

Bagdan prepared in connection with the IRS audit of petitioners’ 2011 tax return

that contained three columns titled “Game”, “Location”, and “Mileage”; and

(3) monthly calendars for January through December 2011 that Mr. Bagdan

prepared and printed on “2/17/2014 6:16pm”.




      4
       The list included dates for boys’ lacrosse games starting January 16, 2011,
and ending December 18, 2011, and dates for basketball games starting January 3,
2011, and ending February 15, 2011.
      5
       The basketball games listed did not include a second column listing the
locations where the games were played.
                                          -5-

III.   Petitioners’ 2011 Tax Return

       Petitioners prepared and timely filed a 2011 joint Federal income tax return.

They claimed a deduction on Schedule A of $21,396 for unreimbursed employee

expenses and reported an expense on Schedule C of $16,579 for car and truck

expenses with respect to Mr. Bagdan’s officiating business. Petitioners attached

to their 2011 tax return a Form 2106, Employee Business Expenses, and reported

unreimbursed employee expenses of $21,396 as follows: (1) $15,670 of vehicle

expenses;6 (2) $265 of parking fees, tolls, and transportation, including train, bus,

etc. that did not involve overnight travel or commuting to and from work; (3) $950

of travel expenses while away from home overnight, including lodging, airplane,

car rental, etc.; (4) $4,185 of business expenses not otherwise included and not

including meals and entertainment; and (5) $326 of meals and entertainment

expenses.7


       6
        On the Form 2106 petitioners listed business miles driven of 29,556 and
delineated the business miles as driven in “Vehicle 1” of 21,433 miles and in
“Vehicle 2” of 8,123 miles. It appears that the vehicle expense listed on Form
2106 of $15,670 was calculated by multiplying the total number of business miles
listed for Vehicle 1 and Vehicle 2 by 53 cents. The standard mileage rate set by
the IRS for 2011 was 51 cents per mile before July 1, 2011, and 55 cents per mile
on or after July 1, 2011. Announcement 2011-40, 2011-29 I.R.B. 56; Notice
2010-88, 2010-51 I.R.B. 882.
       7
           The total meals and entertainment expenses listed on the Form 2106 were
                                                                        (continued...)
                                        -6-

      Petitioners reported $16,579 of car and truck expenses on their Schedule C

but did not list in part IV, Information on Your Vehicle, information about any

vehicle including the total number of business miles driven. Petitioners also filed

a Form 4562, Depreciation and Amortization (Including Information on Listed

Property), with respect to Mr. Bagdan’s officiating business activity. On that form

petitioners reported in part IV, section B--Information on Use of Vehicles, total

business miles driven during 2011 of 27,129. The record does not show how

petitioners calculated the expense of $16,579, but it appears they used mileage

rather than actual costs.8

                                     Discussion

I.    Burden of Proof

      Generally, the Commissioner’s determination of a deficiency is presumed

correct, and a taxpayer bears the burden of proving it incorrect. See Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933). If the taxpayer introduces credible

evidence with respect to any factual issue relevant to ascertaining his or her



      7
      (...continued)
$651 before the 50% limitation prescribed in sec. 274(n)(1).
      8
       The car and truck expenses of $16,579 divided by 27,129, the number of
business miles reported on Form 4562, yields an expense per mile of
approximately 61 cents.
                                         -7-

liability and satisfies other conditions, then the burden of proof shifts to the

Commissioner with respect to that issue. Sec. 7491(a)(1) and (2). Petitioners have

not argued that section 7491(a) applies nor established that its requirements are

met. The burden of proof remains with them.

      As the Court has observed in countless opinions, deductions are a matter of

legislative grace, and a taxpayer generally bears the burden of proving entitlement

to any claimed deduction. 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).

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

II.   Unreimbursed Employee Expenses

      A cash basis taxpayer may deduct ordinary and necessary expenses paid

during the taxable year in carrying on a trade or business. Sec. 162(a). Generally,

the performance of services as an employee constitutes a trade or business.

O’Malley v. Commissioner, 91 T.C. 352, 363-364 (1988); Primuth v.
                                        -8-

Commissioner, 54 T.C. 374, 377 (1970). If as a condition of employment an

employee is required to incur certain expenses, then the employee is entitled to

deduct those expenses to the extent the expenses are not subject to reimbursement.

See Fountain v. Commissioner, 59 T.C. 696, 708 (1973); Podems v.

Commissioner, 24 T.C. 21, 22-23 (1955). Section 262(a) generally disallows a

deduction for personal, living, or family expenses.

      A taxpayer cannot deduct employee business expenses to the extent he is

entitled to reimbursement from his employer for those expenses. See Lucas v.

Commissioner, 79 T.C. 1, 7 (1982). The taxpayer bears the burden of proving that

he is not entitled to reimbursement. See Fountain v. Commissioner, 59 T.C at 708.

The taxpayer can prove that he is not entitled to reimbursement by showing, for

example, that he is expected to bear these costs. Id. An expense for which the

taxpayer is entitled to (but does not claim) reimbursement from his employer is

generally not considered “necessary” and thus is not deductible under section 162.

Orvis v. Commissioner, 788 F.2d 1406, 1408 (9th Cir. 1986), aff’g T.C. Memo.

1984-533; Podems v. Commissioner, 24 T.C. at 22-23.

      Mr. Bagdan’s employer, On Power Demand, did have a reimbursement

policy that provided reimbursements to Mr. Bagdan for all sales-related expenses.

Therefore, petitioners have the burden of proving that the reported “unreimbursed
                                        -9-

employee expenses” were not covered by Mr. Bagdan’s employer’s reimbursement

policy. Petitioners have not provided any documents demonstrating the expenses

reported on the Schedule A were not covered. Therefore, petitioners have failed to

meet their burden of proof.

       Moreover, Mr. Bagdan did not maintain a log, a calendar, or a similar record

required to properly substantiate or demonstrate the business purpose of the

unreimbursed employee expenses. Accordingly, the Court concludes that

petitioners are not entitled to deduct $21,396 of unreimbursed employee expenses.

III.   Schedule C Car and Truck Expenses

       Petitioners reported $16,579 for car and truck expenses on Schedule C with

respect to Mr. Bagdan’s officiating business. Deductions for expenses with

respect to the use of passenger automobiles, if otherwise allowable, are subject to

strict substantiation rules. See secs. 274(d), 280F(d)(4); 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 Fed. Reg. 46014 (Nov. 6, 1985).

For expenses relating to passenger automobiles, a taxpayer must substantiate with

adequate records or sufficient evidence corroborating his or her own statement:

(1) the amount of each separate expense; (2) the mileage for each business use of

the passenger automobile and the total mileage for all purposes during the taxable
                                        - 10 -

period; (3) the date of the business use; and (4) the business purpose of the use.

See sec. 1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016

(Nov. 6, 1985). Substantiation by adequate records generally requires the taxpayer

to “maintain an account book, diary, log, statement of expense, trip sheets, or

similar record” prepared contemporaneously with the use of the passenger

automobile as well as documentary evidence of the individual, actual expenses.

Id. para. (c)(2), 50 Fed. Reg. 46017.

      In lieu of substantiating actual passenger automobile expenses, a taxpayer

may calculate them by using the standard mileage rate established by the

Commissioner. See sec. 1.274-5(j)(2), Income Tax Regs. The taxpayer may base

the deduction on either actual expenses or standard mileage, not both. Nash v.

Commissioner, 60 T.C. 503, 520 (1973). If the taxpayer elects the actual expense

method, he must substantiate his business use percentage for the passenger

automobile. Larson v. Commissioner, T.C. Memo. 2008-187, 2008 Tax Ct. Memo

LEXIS 182, at *12; sec. 1.274-5T(d)(2)(i), Temporary Income Tax Regs., 50 Fed.

Reg. 46025 (Nov. 6, 1985).

      Petitioners submitted this case fully stipulated and thus did not testify.

Petitioners submitted, and the parties stipulated, calendar pages for the months of

January through December 2011 and spreadsheets that purport to show the games
                                        - 11 -

Mr. Bagdan officiated at and the miles he drove to and from the games. Many of

the games listed on the two lists do not appear on the calendar.9 Further, as

respondent has noted in his brief, a comparison of the calendar and the mileage

logs shows discrepancies in the number of miles petitioners assert Mr. Bagdan

drove to officiate at games. The comparison shows that 102 entries with a total of

8,790 miles driven by Mr. Bagdan do not have a corresponding game listed on the

calendar, but it does show 44 entries with a total of 2,220 miles driven by Mr.

Bagdan that do have a corresponding game listed on the calendar.10

      However, neither the mileage logs nor the calendar satisfies the requirement

under section 274(d) to show the business purpose. While petitioners assert that

Mr. Bagdan officiated at over 300 games, his notations on his calendar are at best

vague. For example, an entry on the calendar for April 2, 2011, is “12:00pm UC

Merced @ UDP”. It does not indicate whether the notation was for a basketball or


      9
        For some days the block on the calendar is filled and there is an arrow at
the end, which might be an indication that there were more entries. However,
petitioners have not presented any further evidence of any additional entries in
those instances.
      10
         Respondent’s simultaneous opening brief compared the mileage logs and
the calendar. His comparison reveals 102 games with a total of 8,704 miles driven
for games shown on the mileage logs that do not have a corresponding game listed
on the calendar and 44 games with a total of 2,306 miles driven for games that are
listed on both the mileage logs and the calendar. The Court’s comparison revealed
a different conclusion from respondent’s comparison.
                                       - 12 -

a boys’ lacrosse game or whether Mr. Bagdan was officiating at the game. Only

two entries for games listed on the calendar indicate Mr. Bagdan’s connection to

the games. Further, some games on the two lists are not listed on the

corresponding dates on the calendar. As a result of this inconsistency the Court

does not afford much weight to the lists or the calendar.

      Unfortunately for petitioners, the law requires more than what petitioners

have provided to substantiate expenses related to driving vehicles for a business.

The Court concludes that petitioners are not entitled to deduct $16,579 for car and

truck expenses.

IV.   Accuracy-Related Penalty

      Respondent determined the accuracy-related penalty for 2011 because

petitioners’ underpayment was due to a substantial understatement of income tax

or negligence or disregard of rules or regulations. See sec. 6662(a) and (b)(1)

and (2). A taxpayer may be liable for a 20% accuracy-related penalty on the

portion of an underpayment of income tax attributable to a substantial

understatement of income tax or to negligence or disregard of rules or regulations.

Sec. 6662(a)-(d). Only one section 6662 accuracy-related penalty may be imposed

with respect to any given portion of an underpayment, even if that portion is

attributable to more than one type of conduct listed in section 6662(b). See New
                                       - 13 -

Phoenix Sunrise Corp. v. Commissioner, 132 T.C. 161, 187 (2009), aff’d, 408 F.

App’x 908 (6th Cir. 2010); sec. 1.6662-2(c), Income Tax Regs. The

Commissioner bears the burden of production with respect to a section 6662

accuracy-related penalty in any court proceedings with respect to the liability of

any individual. Sec. 7491(c).

      Section 6751(b)(1) provides that, subject to certain exceptions in section

6751(b)(2), no penalty shall be assessed unless the initial determination of the

assessment is personally approved in writing by the immediate supervisor of the

individual making the determination or such higher level official as the Secretary

may designate. Written approval of the initial penalty determination under section

6751(b)(1) must be obtained no later than the date the notice of deficiency is

issued or the date the Commissioner files an answer or amended answer asserting

the penalty. Chai v. Commissioner, 851 F.3d 190, 221 (2d Cir. 2017), aff’g in

part, rev’g in part T.C. Memo. 2015-42; see also Graev v. Commissioner, 149 T.C.

485, 493 (2017), supplementing and overruling in part 147 T.C. 460 (2016).

Compliance with section 6751(b)(1) is part of the Commissioner’s burden of

production in any deficiency case in which a penalty subject to section 6751(b)(1)

is asserted. Chai v. Commissioner, 851 F.3d at 221.
                                        - 14 -

      The parties stipulated a copy of a Workpaper #300, Civil Penalty Approval

Form, that approved imposition of an accuracy-related penalty against petitioners

on the basis of a substantial understatement or negligence or disregard of rules or

regulations. That form bore a signature of Elain Li in the group manager signature

line and was signed on May 16, 2014.

      After this case was submitted, the Court issued its Opinion in Clay v.

Commissioner, 152 T.C. __ (Apr. 24, 2019). In Clay the Court concluded that

section 6751(b) may require written approval of penalties before the issuance of a

notice of deficiency. The Court held that the “initial determination” of the

penalties occurred when the IRS mailed a 30-day letter, which formally

communicated to the taxpayers proposed adjustments that included penalties and

gave the taxpayers their right to protest the proposed penalties.

      The Court by order permitted respondent to file a motion to reopen the

record to provide evidence of compliance with Clay and provided petitioners an

opportunity to file a response if respondent filed a motion to reopen the record.

Respondent filed a motion to reopen the record supported by a declaration of Elain

Li, who was the group manager of the revenue agent who examined petitioners’

2011 return. The Court granted that motion. Petitioners did not file a response.
                                       - 15 -

      The Court finds on the basis of the stipulated record and the declaration of

Elain Li that respondent has failed to meet his burden of production and he may

not impose the section 6662(a) penalty. See id.

      To reflect the foregoing,


                                                Decision will be entered for

                                      respondent as to the deficiency and for

                                      petitioners as to the accuracy-related penalty

                                      under section 6662(a).
