                         T.C. Summary Opinion 2016-66



                         UNITED STATES TAX COURT



JAMES CLEMENT POWELL AND LUCY HAMRICK POWELL, Petitioners v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 9562-14S.                          Filed October 6, 2016.



      James Clement Powell and Lucy Hamrick Powell, pro se.

      Timothy B. Heavner and Matthew S. Reddington, for respondent.



                              SUMMARY OPINION


      WELLS, Judge: This case was heard pursuant to the provisions of section

7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant

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

and this opinion shall not be treated as precedent for any other case. All section

references are to the Internal Revenue Code (Code) in effect for the years in issue,
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and all Rule references are to the Tax Court Rules of Practice and Procedure,

unless otherwise indicated. All dollar amounts are rounded to the nearest dollar.

      Respondent determined a deficiency of $11,611 against petitioners for tax

year 2010. Petitioners timely filed their petition on April 29, 2014.

                                    Background

      Petitioners timely filed a Form 1040, U.S. Individual Income Tax Return,

for the taxable year 2010. Petitioners also timely filed a 2010 Form 1120, U.S.

Corporation Income Tax Return, for WPL, Inc. (WPL), an S corporation wholly

owned by petitioner husband. On December 9, 2013, petitioners submitted a Form

1040X, Amended U.S. Individual Income Tax Return, for 2010 showing a tax

overpayment of $13,873. Respondent did not accept the Form 1040X for filing

and made no adjustments to petitioners’ tax liability as a result of its submission.

Instead, on February 3, 2014, respondent mailed petitioners a statutory notice of

deficiency determining a deficiency in income tax of $11,611. Petitioners dispute

the entire $11,611 deficiency and demand the overpayment reported in their

amended return. Additionally, petitioners seek $40,000 in damages from

respondent under section 7433.
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I.    Notice of Deficiency

      In the notice of deficiency, respondent disallowed a WPL vehicle expense

deduction of $19,687; a WPL employee benefit expense deduction of $5,832; and

a loss carryforward deduction of $33,006 claimed on Schedule C, Profit or Loss

From Business. Respondent also reduced petitioners’ self-employment tax, and

the related self-employment tax deduction, by excluding WPL’s income from the

self-employment tax calculation. As a result of these adjustments, respondent also

disallowed the “Make work pay/government retiree” credit petitioners claimed on

their 2010 return.

II.   WPL

      WPL is engaged in petroleum acquisitions and sales. WPL’s workforce

includes petitioner husband, two consultants, one full-time employee, and

petitioner wife, who keeps the books. Petitioner husband kept a daily logbook

during 2010 showing all of WPL’s activities with respect to its customers, only

some of which involved travel. During 2010 WPL workers traveled to several

States for various business purposes. The relevant logbook entries show dates,

customer names, the purpose or description of the work, hours spent and billed,

and miles driven. Petitioners reported on an attachment to the return that 39,375

business miles were driven during 2010.
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      Roughly two-thirds of the entries listing mileage specify the city traveled to

in the “purpose or description of work” section. The remaining entries either

include the State traveled to or do not list any location. All mileage entries are

multiples of 25. For a trip totaling 501.2 miles, for example, petitioner would

have recorded 500 miles. There is also an entry for each month showing the sum

of miles driven for marketing, client development, and bank errands. Petitioner

husband recorded the miles driven for each marketing and client development

event, but the logbook does not break down the dates, locations, or mileage of

each event. Nor does the entry separate the marketing and development entries

from the banking entries. The banking entries were determined by estimating the

number of WPL workers’ trips to the bank for the month.

      WPL also deducted $5,832 in employee benefits. The notice of deficiency

does not explain why the deduction was disallowed. Petitioner husband testified

that there was never an explanation given for why it was denied. Petitioners

believed the deduction was denied on a legal basis, rather than a factual basis.

Petitioners litigated their 2008 and 2009 tax years before the Tax Court, and the

opinion issued in that case discusses the deductibility of WPL’s employee benefits

as a legal issue, not a factual one. See Powell v. Commissioner, T.C. Memo.

2014-235, at *12-*13 (discussing section 162(l) and Rev. Rul. 91-26, 1991-1 C.B.
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184, 185-186 to determine whether petitioners’ inclusion of the benefit amount in

income was required for WPL to be entitled to the deduction), aff’d in part,

vacated in part, and remanded, ___F. App’x ___, 117 A.F.T.R.2d (RIA) 2016-

2089 (4th Cir. June 14, 2016). On appeal of that case, respondent conceded,

among other things, the entitlement to the health insurance deduction of $5,832 for

each of the two tax years. Powell v. Commissioner, 117 A.F.T.R.2d (RIA)

2016-2089. In the instant case, respondent’s sole contention in the pretrial

memorandum is that the expense was denied for lack of substantiation. At trial,

however, respondent echoed the previous litigation by asking whether the

employee benefits were included in petitioners’ personal income as well as in the

WPL deductions. Petitioner husband answered no and also testified that the

amount deducted was the amount paid for long-term healthcare. Petitioners

submitted into evidence a detailed list of expenses, which was filed with the

return, showing the $5,832 expense as “employee health insurance”.

III.   Loss Carryforward Deduction

       Petitioners claimed a loss carryforward deduction of $33,006 related to

claimed losses from the tax years 2008 and 2009. As discussed above, petitioners’

2008 and 2009 tax years were litigated before the Tax Court. See Powell v.

Commissioner, T.C. Memo. 2014-235. The final decision determined that for tax
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years 2008 and 2009 petitioners had deficiencies in income tax totaling $44,545

and penalties totaling $8,908.96. Id. (order dated April 22, 2015). Petitioners

concede that their 2010 loss carryforward is determined by the 2008 and 2009

litigation, the decision from which they appealed. Respondent largely prevailed

on appeal, although a few concessions were made. Powell v. Commissioner, 117

A.F.T.R.2d (RIA) 2016-2089. The concessions, which consist of a deduction of

$5,832 for each year, an $839 increase in the basis of sold property, and a $15,000

reduction of the amount realized upon the sale of the real property, will reduce the

amounts of the deficiencies determined in the Tax Court’s decision, but will not

eliminate them.

                                    Discussion

      Generally, the Commissioner’s determinations in a notice of deficiency are

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

determinations are erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111,

115 (1933). Furthermore, deductions are a matter of legislative grace, and a

taxpayer must prove his or her entitlement to a deduction. INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992). Under section 7491(a), in certain

circumstances the burden of proof may shift from the taxpayer to the

Commissioner. Petitioners have not claimed or shown that they meet the
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specifications of section 7491(a) to shift the burden of proof to respondent as to

any relevant factual issue.

I.    WPL

      We must determine whether WPL properly claimed its deductions for 2010

before we can determine the effect on petitioners’ return for 2010. Generally, an S

corporation shareholder determines his or her tax liability by taking into account a

pro rata share of the S corporation's income, losses, deductions, and credits. Sec.

1366(a)(1). Where a notice of deficiency includes adjustments for S corporation

items with other items, we have jurisdiction to determine the correctness of all

adjustments. See Winter v. Commissioner, 135 T.C. 238 (2010). Respondent

disallowed two expense deductions related to WPL, vehicle expenses and

employee health insurance expenses. As a result, respondent increased the

corresponding flowthrough business income that petitioners reported on their 2010

Form 1040. We now turn to the two expenses.

      A.     Vehicle Expenses

      Taxpayers are required to substantiate expenses underlying each claimed

deduction by maintaining records sufficient to establish the amount of the expense

and to enable the Commissioner to determine the correct tax liability. Sec. 6001;

Higbee v. Commissioner, 116 T.C. 438, 440 (2001). Certain expenses specified in
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section 274, such as vehicle expenses, are subject to strict substantiation rules.

Secs. 274(d)(4), 280F(d)(4)(A)(i). In deducting vehicle expenses, in lieu of

calculating expenses using actual expenditures, a taxpayer may use a standard

mileage rate as established by the Internal Revenue Service (IRS). Kavuma v.

Commissioner, T.C. Memo. 2016-101, at *19; sec. 1.274-5(j)(2), Income Tax

Regs. To meet these strict substantiation rules, for each claimed expense a

taxpayer must substantiate, by adequate records or by sufficient evidence

corroborating the taxpayer’s own statement, (1) the amount, (2) the time and place

of the travel or use, and (3) the business purpose. Sec. 274(d).

      Petitioners claimed deductions for WPL’s vehicle expenses using the IRS

standard mileage rate. Adequate records substantiating vehicle expenses when

using the standard mileage rate generally consist of an account book, a diary, a

log, a statement of expense, trip sheets, or a similar record made at or near the time

of the expenditure or use, along with supporting documentary evidence. Sec.

1.274-5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).

The degree of substantiation necessary to establish business purpose varies

depending upon the facts and circumstances of each case. Id. subdiv. (ii)(B), 50

Fed. Reg. 46018. Mileage logs, even contemporary ones, that report only the State

to which the taxpayer traveled fall short of the strict reporting requirements
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because they fail to specify the location. Adams v. Commissioner, T.C. Memo.

2013-92.

      Petitioners’ log book largely meets the strict substantiation rules. The

entries specify dates traveled, the number of miles driven, the city driven to, and

the client or business purpose. Respondent contends that petitioners’ logbook

entries must be estimates because the mileage numbers all end in 0 or 5. Petitioner

husband testified that the numbers were not estimated, but rather rounded. We

find petitioner to be a credible witness and believe his testimony that the miles

listed are based on actual, contemporaneous calculations of the miles driven.

      Certain of the entries, however, do not amount to adequate substantiation.

The entries listing a State, rather than a specific location, for example, are too

vague to satisfy the regulations. The client and market development and banking

entries also fail to satisfy the regulations. Petitioner husband explicitly testified

that the banking entries were estimates, and we cannot untangle the client and

market development mileage from the banking mileage. Nor do we have locations

or dates for the client and market development entries, rendering them too vague

to satisfy the regulations.

      Pursuant to this analysis, petitioners substantiated that during 2010 WPL

workers drove 10,725 miles. For 2010 a deduction of 50 cents was allowed for
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each mile driven related to business. See Rev. Proc. 2009-54, sec. 2.01, 2009-51

I.R.B. 930, 930. Accordingly, petitioners’ deduction for travel is limited to

$5,363.

      B.     Health Insurance Expenses

      WPL is entitled to deductions for health insurance benefits paid on behalf of

petitioner husband. See sec. 1372; Powell v. Commissioner, at *13; Rev. Rul. 91-

26, supra. In the instant case, respondent contends that petitioners did not provide

any evidence beyond self-serving testimony that any expense had actually been

paid. However, we have found petitioner husband to be a reliable witness, and the

reliability of his records and testimony is bolstered by the consistent treatment of

the expense throughout several tax years, as well as respondent’s previous years’

concessions. See Exxon Corp. v. Commissioner, T.C. Memo. 1993-616, 1993 WL

534017, at *59; Koufman v. Commissioner, T.C. Memo. 1976-330, 1976 WL

3510 (“The petitioner’s testimony on this issue was consistent with all the other

circumstances, and we found it to be credible and reliable.”). Accordingly, WPL

is entitled to the claimed health insurance expense deduction.

II.   Carryforward Loss

      Petitioners concede that the loss carryforward deduction they claimed from

the 2009 tax year is determined by their previous litigation. In the litigation, the
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Tax Court sustained a determined deficiency for petitioners’ 2009 tax year, rather

than a loss. Powell v. Commissioner, T.C. Memo. 2014-235. Although

respondent conceded on appeal that petitioners were entitled to certain

adjustments, the amounts involved in the concessions are insufficient to change

the deficiency into a loss. See Powell v. Commissioner, 117 A.F.T.R.2d (RIA)

2016-2089. Accordingly, petitioners are not entitled to a carryforward loss

deduction for the 2010 tax year.

III.   Other Adjustments

       Petitioners’ filings discuss several additional adjustments in the notice of

deficiency, such as the “Make work pay/government retiree” credit, amounts for

personal exemptions, an increase in petitioners’ AGI, and the calculation of self-

employment tax and its accompanying deduction. The changes to petitioners’

adjusted gross income due to the adjustments discussed above will affect the

operation of items such as credits. Any computational issues that remain will be

adjusted and confirmed in the Rule 155 computations.

IV.    Section 7433 Damages

       Petitioners seek $40,000 in damages from respondent under section 7433.

Section 7433(a) provides that a taxpayer may bring a civil action for damages

against the United States for intentional, reckless, or negligent disregard of any
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provision of the Code or any regulation promulgated under the Code by any

officer or employee of the IRS in connection with any collection of Federal tax.

Section 7433(a) further provides that the taxpayer must bring the civil action in a

District Court of the United States and that (except as provided in section 7432)

the civil action in District Court “shall be the exclusive remedy for recovering

damages resulting from such actions.” Therefore, we lack jurisdiction to hear

petitioners’ section 7433 claim. See, e.g., Powell v. Commissioner, at *20-*21;

Petito v. Commissioner, T.C. Memo. 2002-271, 2002 WL 31415493, at *7.

      Any contentions we have not addressed we deem irrelevant, moot, or

meritless.

      To reflect the foregoing,


                                                     Decision will be entered under

                                                Rule 155.
