                  T.C. Summary Opinion 2006-29



                     UNITED STATES TAX COURT



                RICHARD ORIN BERGE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7319-04S.              Filed February 21, 2006.


     Richard Orin Berge, pro se.

     Mindy S. Meigs, for respondent.



     GOLDBERG, Special Trial Judge:    This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.    The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.   Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in

effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.
                              - 2 -

     Respondent determined a deficiency in petitioner’s Federal

income tax of $3,346 for the taxable year 2000.

     After concessions,1 the issues for decision are:    (1)

Whether petitioner is entitled to a Schedule C car and truck

expense deduction in excess of the amount allowed by respondent;2

and (2) whether legal fees associated with the settlement of a

legal action are ordinary and necessary business expenses

properly deductible on Schedule C.

                           Background

     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 Los

Angeles, California, on the date the petition was filed in this

case.

     Petitioner graduated from Southwestern University Law School

in Los Angeles, California, in December 1998.   Petitioner was

admitted to the State Bar of California on July 26, 2000.      Also,

during taxable year 2000, petitioner became a certified public

accountant in the State of California.


     1
      Petitioner concedes that he is not entitled to deductions
claimed on Schedule A, Itemized Deductions, of $3,255.
     2
      Petitioner claimed a car and truck expense deduction of
$5,126 on his 2000 Schedule C, Profit or Loss From Business.
Respondent, in the notice of deficiency, disallowed $2,710 of the
claimed Schedule C car and truck expense deduction. Thus,
respondent allowed petitioner a car and truck expense deduction
for taxable year 2000 of $2,416.
                                - 3 -

     During taxable year 2000, petitioner was employed full-time

as a consultant for Arthur Anderson, LLP.   As part of his

employment with Arthur Anderson, LLP, petitioner traveled to

various Arthur Anderson, LLP offices.

     Also, during the year in issue, petitioner was a self-

employed attorney/accountant.   Petitioner assisted clients with

drafting documents for different types of transactions and

provided tax return preparation, valuation, and assorted legal

and paralegal accounting and tax consulting services

(petitioner’s business).

     Petitioner drove about 13,980 business-related miles of

which approximately 4,300 miles were for travel to the Chapman

University Law School Library in the city of Orange in Orange

County, California.   As previously stated, petitioner is an

alumnus of Southwestern University School of Law.   The

Southwestern University School of Law Library is located

approximately 5 miles from petitioner’s home.

     In 1995, petitioner and Donna Lynn Wold (Ms. Wold) entered

into an oral agreement, whereby Ms. Wold purchased a 1991 BMW

525i and then agreed to sell the vehicle to petitioner after he

paid her a downpayment and made 60 monthly payments.

     As a result of problems stemming from this oral agreement,

petitioner filed a complaint against Ms. Wold in the Superior

Court of the State of California for the County of Orange on
                                - 4 -

September 24, 1999, alleging breach of contract, fraud,

conversion, defamation, and specific performance.    This case was

docketed as Case No. 814944.    The complaint states, in pertinent

part, as follows:

          Plaintiff [petitioner], an individual, comes now and
     alleges as follows:

               *      *    *    *       *   *   *

           First Cause of Action - Breach of Contract

     On or about June, 1995 Plaintiff [petitioner] and Defendant
     [Ms. Wold] entered into an agreement whereby Plaintiff
     agreed to purchase a 1991 BMW 525I (the “Vehicle”) from the
     Defendant by tendering to Defendant a down payment on the
     Vehicle and by making sixty (60) monthly payments to
     Defendant, and Defendant agreed to sell said Vehicle to the
     Plaintiff by accepting said down payment and sixty (60)
     monthly payments.

     Pursuant to the agreement, Plaintiff was entitled to the
     exclusive use, possession, control, and ownership of the
     Vehicle subject only to Defendant’s security interest in the
     Vehicle and a third party security interest in the Vehicle,
     said security interests to be discharged by Defendant’s
     payment of the sixty (60) monthly payments to the third
     party.

               *      *    *    *       *   *   *

     As a proximate result of Defendant’s failure to perform in
     accordance with the agreement, as herein alleged, Plaintiff
     has suffered monetary damages in an amount to be proven at
     trial.

                    Second Cause of Action - Fraud

               *      *    *    *       *   *   *

     On or about June, 1995, Plaintiff and Defendant entered into
     an agreement wherein Defendant represented to Plaintiff that
     upon payment by Plaintiff of all amounts to be paid to
     Rockwell Federal Credit Union and Defendant under the
     purchase agreement for the Vehicle between Defendant and
                         - 5 -

Tilo’s European Autohaus, that Defendant would transfer
title to the Vehicle to Plaintiff.

At the time Defendant made this agreement with Plaintiff,
Defendant intended [sic] keep the title to the Vehicle in
the name of Defendant and not transfer title to the Vehicle
to Plaintiff as was required per the terms of the agreement
between Plaintiff and Defendant. Defendant has previously
represented to Plaintiff that Plaintiff is the owner of the
Vehicle, yet Defendant continues to refuse to execute any
necessary documents to transfer title to the Vehicle to
Plaintiff. Defendant never intended to transfer the Vehicle
to Plaintiff per Defendant’s earlier representations,
instead Defendant has subsequently represented that
Defendant always intended to demand the return of the
Plaintiff’s Vehicle upon payment in full of the liability
for the Vehicle.

          *    *    *    *       *   *   *

As a result of Defendant’s fraudulent statements and acts
and failure to transfer title per the agreement, plaintiff
has suffered damages in the form of monies expended for the
purchase, maintenance, and repair of the Vehicle which
Defendant refuses to transfer to the Plaintiff.

          Third Cause of Action - Conversion

          *    *    *    *       *   *   *

On June 30, 1998, Defendant wrongfully took possession of
said Vehicle and numerous items of Plaintiff’s personal
property contained inside said Vehicle, against Plaintiff’s
wishes and despite Plaintiff’s objections. Defendant
maintained exclusive possession and control of said vehicle
and items of personal property, and refused to return same
to Plaintiff until July 11, 1999.

          *    *    *    *       *   *   *

Defendant’s actions have caused Plaintiff to suffer damages,
including lost work time, transportation costs, and other
damages as a result of Defendant’s deprivation of
Plaintiff’s ownership interest in said vehicle.
Additionally, pursuant to California Civil Code Section 3336
Plaintiff is presumptively entitled to damages for the value
of the converted property in the amount of $40,000.
                               - 6 -

                Fourth Cause of Action - Defamation

                *    *    *    *       *   *   *

     On or about August 1, 1999, and on numerous occasions
     thereafter, Defendant made numerous statements concerning
     Plaintiff to Toni Arzate (“Arzate”), a close personal friend
     of Plaintiff’s. These statements were made to Arzate in the
     form of messages left for Arzate by Defendant, which were
     recorded and maintained in permanent form on magnetic tape.

     The statements that Defendant made to Arzate imputed to
     Plaintiff characteristics of infidelity, dishonesty,
     criminal behavior, fraud, and other loathsome
     characteristics. These statements exposed Plaintiff to
     hatred, contempt, and ridicule from Arzate, which has caused
     Plaintiff to be shunned and avoided by Arzate. Said
     statements were made by Defendant in an attempt to damage
     Plaintiff’s personal relationship with Arzate, and did
     damage said relationship because Plaintiff is involved in an
     intimate personal relationship with Arzate which has been
     damaged due to Defendant’s libelous statements to Arzate.

                *    *    *    *       *   *   *

            Fifth Cause of Action - Specific Performance

                *    *    *    *       *   *   *

     Plaintiff’s request for specific performance is necessary to
     ensure Plaintiff has an adequate remedy for Defendant’s
     failure to transfer the vehicle per the agreement or June,
     1995.

     On January 13, 2000, Ms. Wold answered petitioner’s

complaint and filed a cross-complaint against petitioner for

breach of contract, fraud, conversion, and for possession of

personal property related to the sale of an automobile and loans

of money.   Ms. Wold’s answer and cross-complaint states, in

pertinent part, as follows:

             First Cause of Action - Breach of Contract
                          - 7 -

Plaintiff, Donna Wold, alleges that on or about 1995 through
1998 an oral agreement was made between Donna Wold and
Richard O. Berge.

Plaintiff, Donna Wold, lent money to defendant, Richard O.
Berge, and paid his expenses and debts on defendant’s
promise that he would repay said money lent and paid on
behalf of and for the benefit of defendant. Defendant was
to repay said money lent and paid upon his graduation from
law school. Plaintiff is informed and believes and thereon
alleges that defendant has graduated from law school and
despite plaintiff’s demand therefore, has failed and refused
to repay the said money lent and paid by plaintiff on behalf
of and for the benefit of defendant.

On or about February 2, 1999, the defendant breached the
agreement by the following acts: Defendant has failed and
refused to repay the money lent to him and has failed and
refused to repay the money paid by plaintiff on behalf of
and for the benefit of defendant.

          *     *    *    *       *   *   *

Plaintiff suffered damages legally (proximately) caused by
defendant’s breach of the agreement * * * as follows: The
sum of $50,978 lent to defendant and paid on behalf of and
for the benefit of defendant.

        Second Cause of Action - Common Counts

Plaintiff, Donna Wold, alleges that defendant, Richard O.
Berge, became indebted to plaintiff within the last four
years for goods, wares, and merchandise sold and delivered
to defendant and for which defendant promised to pay
plaintiff the sum of the total of all payments according to
proof on auto, for money lent by plaintiff to defendant at
defendant’s request, and for money paid, laid out, and
expended to or for defendant at defendant’s special instance
and request. [The amount of] $50,978 plus all payments
owing on auto, which is the reasonable value, is due and
unpaid despite plaintiff’s demand, plus prejudgment interest
according to proof.

              Third Cause of Action - Fraud

Plaintiff, Donna Wold, alleges that defendant, Richard O.
Berge, on or about 1995 through 1998 defrauded plaintiff as
follows:
                         - 8 -

     Promise without intent to perform. Defendant made a
     promise about a material matter without any intention
     of performing it as follows:

     Defendant promised to repay plaintiff for money lent to
     him and paid for his benefit and on his behalf, by
     plaintiff. Plaintiff would not have lent defendant
     money, nor paid money for his benefit if plaintiff had
     known that defendant did not intend to repay plaintiff.

     Defendant was to repay plaintiff upon his graduation
     from law school. Plaintiff is informed and believes
     that defendant has graduated from law school.
     Defendant has failed and refused to repay plaintiff.

     Plaintiff, Donna Wold, discovered defendant’s intention
     not to perform within the last year.

In justifiable reliance upon defendant’s conduct, plaintiff
was induced to act as follows:

     Plaintiff lent money to defendant and paid money for
     the benefit, and on behalf of, defendant in the total
     sum of $50,978.

     Because of plaintiff’s reliance upon defendant’s
conduct, plaintiff has been damaged in the sum of $50,978.

          Fourth Cause of Action - Conversion

Plaintiff, Donna Wold, alleges that defendant, Richard O.
Berge, was the legal (proximate) cause of damages to
plaintiff. By the following acts or omissions to act,
defendant intentionally caused the damage to plaintiff on or
about a date uncertain at this time, discovered within 1
year, at Orange County, California.

Defendant converted a coin collection belonging to, and in
the custody and control of plaintiff. Defendant converted
said coin collection to his own use without the permission
or consent or knowledge of plaintiff. Defendant has failed
and refused to return the coin collection to plaintiff or
its reasonable value of $18,000 despite demand therefore.
Plaintiff is informed and believes and thereon alleges that
defendant has sold the coin collection and has retained
and/or spent the proceeds for his own use or benefit.
                               - 9 -

     Plaintiff prays for damages in the sum of $18,000 and for
     exemplary damages pursuant to Exemplary Damages Attachment,
     page 9 of this Complaint, incorporated herein by this
     reference.

     Fifth Cause of Action - Possession of Personal Property

               *    *    *     *       *   *   *

     Cross-complainant [Ms. Wold] is, and at all times herein
     mentioned, was, the owner and legal title holder, of a
     certain 1991 BMW 525I automobile valued at approximately
     $25,000.

     Plaintiff [Ms. Wold] is entitled to the immediate and
     exclusive possession of the personal property, automobile,
     described above.

     On, or about, 1995, cross-complainant deposited with cross-
     defendant [petitioner] the personal property, automobile,
     described above in consideration of an oral agreement that
     cross defendant make all monthly payments required under the
     purchase contract whereby cross-complainant purchased said
     automobile; that cross-defendant maintain comprehensive
     insurance on said automobile; that cross-defendant maintain
     the vehicle in good working order; and pay the annual
     registration fees and any other costs associated with the
     operation and maintenance of the automobile until all
     payments required under the purchase contract were made by
     cross-defendant. Upon cross-defendants [sic] performance of
     all the foregoing terms, cross-complainant would transfer
     title of the automobile to cross-defendant.

     Cross-defendant breached the agreement by failing to perform
     all terms of the agreement as aforesaid, to wit, cross-
     defendant has failed to make all payments required under the
     agreement; has failed to pay registration fees for the
     automobile, and has failed to maintain comprehensive
     insurance on the automobile at all times.

     On June 28, 2000, petitioner and Ms. Wold agreed to

mediation of their dispute.   On December 15, 2000, petitioner and

Ms. Wold filed a Conditional Settlement Agreement and Stipulation

For Entry Of Judgment (settlement agreement) with respect to Case
                              - 10 -

No. 814944.   The settlement agreement states, in pertinent part,

as follows:


          Whereas, the parties hereto desire to resolve all
     matters between them without further litigation, together
     with all claims, accounts, damages, demands and causes of
     action which said parties ever had, now have, or may have in
     the future arising from or in any way connected with the
     matters asserted in the action herein, or which could have
     been asserted in the action, including but not limited to a
     claim or cause of action of any kind not arising from or
     connected with the matters asserted in the action herein,
     together with any and all representations made in connection
     herewith by the parties;

          THEREFORE, in consideration of the following covenants,
     obligations, and undertakings, it is hereby stipulated by
     and between the parties as follows:

          1. Judgment: Payment by Plaintiff [petitioner].
     Defendant [Ms. Wold] shall have judgment in her favor and
     against plaintiff in the sum of Fifteen Thousand Dollars
     ($15,000), plus interest at the legal rate from entry of
     judgment, if any, in this action. Defendant shall not have
     the Judgement entered so long as plaintiff pays to Defendant
     the following sum:

               (a) Six Thousand ($6,000) in Cash, Cashier’s
     Check or Certified Funds on or before December 30, 2000;

               (b) In no event shall the Six Thousand Dollars
     ($6,000) be paid later than December 30, 2000, 5:00 p.m.
     without such later payment being deemed a default on the
     part of defendants, except by modification of this
     Stipulation in writing and executed by all parties hereto.

                *    *    *    *    *    *    *

               (d) Provided that the payment and Letter pursuant
     to this Stipulation are received by defendant on or before
     December 30, 2000, defendant will provide plaintiff with an
     executed Request For Dismissal of her cross-complaint, with
     prejudice upon payment timely made and plaintiff will
     provide defendant with an executed Request For Dismissal of
     his complaint, with prejudice, and will execute a transfer
                              - 11 -

     of title to plaintiff of the BMW automobile at issue in this
     litigation.


     On or about January 30, 2001, petitioner filed his Form

1040, U.S. Individual Income Tax Return, for taxable year 2000.

On Schedule C, Profit or Loss From Business, attached to the

return, petitioner claimed a car and truck expense deduction of

$5,126.3   Petitioner also claimed, on Schedule C, a legal and

professional service expense deduction of $6,000.

     Subsequently, respondent determined that petitioner was not

entitled to $2,710 of the claimed Schedule C car and truck

expense deduction nor any portion of the claimed Schedule C legal

and professional service expense deduction.     Accordingly,

respondent issued to petitioner a notice of deficiency

determining a deficiency of $3,346 in petitioner’s 2000 Federal

income tax.

                            Discussion

     As a general rule, the determinations of the Commissioner in

a notice of deficiency are presumed correct, and the taxpayer

bears the burden of proving the Commissioner’s determinations in

the notice of deficiency to be in error.     Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).     As one exception to this



     3
      At trial, petitioner conceded, that due to a
miscalculation, the proper amount of the car and truck expense
deduction based on mileage traveled should have been $4,544 (this
amount is rounded to the nearest dollar).
                                - 12 -

rule, section 7491(a) places upon the Commissioner the burden of

proof with respect to any factual issue relating to liability for

tax if the taxpayer maintained adequate records, satisfied the

substantiation requirements, cooperated with the Commissioner,

and introduced during the Court proceeding credible evidence with

respect to the factual issue.    Although neither party alleges the

applicability of section 7491(a), we conclude that the burden of

proof has not shifted to respondent with respect to any of the

issues in the present case.

     Deductions are a matter of legislative grace and are allowed

only as specifically provided by statute, and, as previously

stated, petitioner bears the burden of proving that he is

entitled to the claimed deductions.      INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934).

1.   Car and Truck Expenses

     As previously stated, petitioner claimed a car and truck

expense deduction of $5,126 on his 2000 Schedule C.     However, as

previously noted, at trial, petitioner conceded that due to a

miscalculation the proper amount of the car and truck expense

deduction that should have been claimed was $4,544; i.e., 13,980

miles at 32.5 cents per mile.    Respondent, in the 2000 notice of

deficiency, disallowed $2,710 of the claimed Schedule C car and

truck expense deduction, allowing the remainder of $2,416.
                               - 13 -

Respondent contends that the disallowed portion of the deduction

represents the miles driven by petitioner for personal reasons;

i.e., to visit his family in Orange County, California, and,

therefore, said travel was not an ordinary and necessary expense

relating to his trade or business.

     Petitioner maintained a contemporaneous trip sheet which

established:    (1) The trips taken by petitioner; (2) the starting

point and destination of each trip; and (3) the specific mileage

of each trip.   The trip sheet establishes that petitioner drove

13,950 miles in taxable year 2000.      Therefore, since petitioner

satisfies all other substantiation provisions of section 274(d),

the only issue for us to decide is whether the disallowed portion

of the mileage was driven for business purposes.

     As previously stated, respondent alleges that the disallowed

mileage for trips taken by petitioner to the Chapman Law School

Library for legal research and claimed on the trip sheet were for

personal reasons; i.e., to visit his family in Orange County, and

not for business reasons.

     Petitioner testified in response to respondent’s questioning

that:   (1) His family lived in Orange County; (2) approximately

60 of the trips or approximately 4,300 of the claimed miles on

the trip sheet were to Chapman Law School Library, located in

Orange County; and (3) there were law school libraries closer

than Chapman Law School Library to petitioner’s Arthur Anderson,
                                - 14 -

LLP office and his home in Los Angeles, California, one of which

was the Southwestern University School of Law Library.       In other

words, respondent argues that petitioner should have conducted

his legal research at a law library that was closer to

petitioner’s home and work office than the Chapman Law School

Library.    Respondent argues that, since the primary reason

petitioner traveled to the Chapman Law School Library was to

visit his family, the mileage associated with this travel is not

deductible under section 262 as a personal expense.

     Section 162(a) allows a deduction for ordinary and necessary

business expenses paid or incurred during the taxable year in

carrying on any trade or business.       For an expense to be

“ordinary” the transaction that gives rise to the expense must be

of a common or frequent occurrence in the type of business

involved.    Deputy v. du Pont, 308 U.S. 488, 495 (1940).       To be

“necessary” an expense must be “appropriate and helpful” to the

taxpayer’s business.     Welch v. Helvering, supra at 113-114.      The

taxpayer bears the burden of demonstrating that the amount of the

expenditure disallowed satisfies the requirements of section 162.

Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam

540 F.2d 821 (5th Cir. 1976).    “The determination of whether an

expenditure satisfies the requirements of section 162 is a

question of fact.”     Shea v. Commissioner, 112 T.C. 183, 186

(1999).
                              - 15 -

      Petitioner testified, at trial, that the primary reason for

his trips to Chapman Law School Library was to conduct legal

research for his business clients.     Further, petitioner testified

that he found the Chapman Law School Library was superior to the

libraries that were closer to his residence.

      Upon the basis of the record in this case, we find that the

primary purpose for petitioner’s trips to Chapman Law School

Library was to conduct legal research for his business clients,

and, therefore, said travel is directly connected to petitioner’s

business.   Petitioner’s visits to his family, if such visits

occurred, were a secondary consideration.    We hold for petitioner

on this issue, as modified by petitioner’s concession at trial.

2.   Legal Fees

      At issue in the present case are legal fees of $6,000 for

taxable year 2000 incurred by petitioner in connection with a

lawsuit and its subsequent settlement.

      Petitioner maintains that the legal fees are deductible by

him under section 162 as ordinary and necessary business expenses

relating to his sole proprietorship.    Respondent, however, argues

that the legal fees are nondeductible because the origin of the

claim in the underlying action is personal and not proximately

related to petitioner’s business.

      In order to be deductible on Schedule C, an expense must be

directly connected with, or proximately result from, a trade or
                               - 16 -

business of the taxpayer.   See Kornhauser v. United States, 276

U.S. 145, 153 (1928); O’Malley v. Commissioner, 91 T.C. 352, 361

(1988).

     The deductibility of the legal fees, in the present case,

depends on the origin and character of the claim for which the

expenses were incurred and whether the claim bears a sufficient

nexus to the taxpayer’s business or income-producing activities.

See United States v. Gilmore, 372 U.S. 39 (1963).    The Supreme

Court stated that “the origin and character of the claim with

respect to which an expense was incurred, rather than its

potential consequences upon the fortunes of the taxpayer, is the

controlling basic test”.    Id. at 49.   The origin of the claim

test is factual, and the factors to be considered include:     (1)

Allegations in the complaint; (2) the legal issues involved; (3)

the nature and objectives of the litigation; (4) the defenses

asserted; (5) the purposes for which the amounts claimed as

deductible were expended; and (6) the background of litigation

and all facts pertaining to the controversy.     Boagni v.

Commissioner, 59 T.C. 708, 713 (1973).    Thus, in order for

petitioner’s legal fees to be deductible on his Schedule C, the

origin of those legal services must have been rooted in his

business.

     In Case No. 814944, filed by petitioner on September 24,

1999, in the Superior Court of the State of California, County of
                              - 17 -

Orange, petitioner pleaded five causes of action.     Four of the

causes of action (breach of contract, fraud, conversion, and

specific performance) were related to an oral agreement between

petitioner and Ms. Wold.   The fifth cause of action was brought

for defamation, which allegedly resulted in damage to an intimate

personal relationship between petitioner and another individual.

     It is obvious from the allegations in the complaint and

cross-complaint, the legal issues involved, the nature and

objectives of the litigation, the background of the litigation

and all facts pertaining to the controversy, that the origin of

the lawsuit was of a personal nature and not proximately related

to petitioner’s trade or business.     Therefore, we sustain

respondent’s determination on this issue.

     We have considered all of the other arguments made by the

parties, and, to the extent that we have not specifically

addressed them, we conclude they are without merit.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                     Decision will be entered

                               under Rule 155.
