                        T.C. Memo. 2010-69



                      UNITED STATES TAX COURT



               KRISTINE J. WOLFGRAM, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 27688-07, 28919-07.     Filed April 7, 2010.



     Kristine J. Wolfgram, pro se.

     Christian A. Speck, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     MORRISON, Judge:   On September 4 and 21, 2007, the

respondent IRS mailed petitioner Kristine J. Wolfgram (Wolfgram)

separate notices of deficiency for the taxable years 2005 and

2004, respectively.   In those notices the IRS determined the

following deficiencies, additions to tax for late filing,
                                - 2 -

additions to tax for late payment, and additions to tax for

failure to pay estimated income tax:1

                                          Additions to Tax
                                Sec.           Sec.            Sec.
    Year      Deficiency     6651(a)(1)     6651(a)(2)         6654
    2004         $145,658    $32,773.05     $20,392.12       $4,228.00
    2005            6,771      1,523.48         541.68         271.61

The issues for decision are:   (1) Whether Wolfgram is entitled to

business-expense deductions she claimed for 2004 and 2005

allegedly related to a house that was designed to be a bed-and-

breakfast inn, (2) whether she is entitled to dependency

exemptions and various educational credits, (3) whether she is

liable for the section 6651(a)(1) late-filing addition to tax for

2004 and 2005, and (4) whether she is liable for the section 6654

failure-to-pay-estimated-tax addition to tax for 2005.2

                           FINDINGS OF FACT

     We adopt as findings of fact all statements contained in the

stipulations of facts.   The stipulations of facts and the

attached exhibits are incorporated here by this reference.        At

the time she filed her petitions, Wolfgram resided in California.


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the years at
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
     2
      As discussed below, the IRS has conceded that Wolfgram is
not liable for the sec. 6651(a)(2) late-payment addition to tax
for 2004 and 2005 and the sec. 6654 failure-to-pay-estimated-tax
addition to tax for 2004.
                               - 3 -

Therefore, an appeal of our decision in these cases would go to

the Court of Appeals for the Ninth Circuit, unless the parties

both stipulate the jurisdiction of the Court of Appeals for

another circuit.   See sec. 7482(b)(2).

     In 2004 Wolfgram and her husband (the Wolfgrams) decided to

pursue their dream of building a bed-and-breakfast inn.    At some

point in the year the Wolfgrams sold their old house for $422,000

and used the money to buy a picturesque piece of land in Michigan

Bluff, California.   They rented a mobile home to serve as both

their office and living quarters, placing the mobile home on the

Michigan Bluff site.   They completed construction of the new

house in 2007 and now live in it.   As we recount later in this

opinion, after the petitions in these cases were filed the

Wolfgrams jointly submitted late tax returns for tax years 2004

and 2005 in which they claimed business expense deductions

related to the construction of the new house.

     During 2004 and 2005 Wolfgram commuted daily from the mobile

home in Michigan Bluff to her day job in Rancho Cordova,

California, where she worked for an entity called Alpha Fund

Joint Powers Agency.   It is unclear how much time she spent

building the new house.   Most of the work related to the house

was done by Wolfgram’s husband.
                               - 4 -

     It is also unclear whether the Wolfgrams had originally

intended to sell the house or to operate it as a bed-and-

breakfast inn.   On cross-examination, Wolfgram equivocated:

           Q    Could you explain to me exactly what is the
     business that’s represented on these Schedule Cs?
           A    It is the construction of the bed-and-
     breakfast.
           Q    How did you intend to make a profit from
     constructing the bed-and-breakfast?
           A    By buying various pieces of property and
     building them for commercial use.
           Q    Buying pieces of property would cost you
     money; when did you expect to receive income or any
     kind of money with respect to these bed-and-breakfasts?
           A    You know, I would like to--you to speak with
     my husband and have him comment on that.
           Q    Would you agree that you were not in the
     business of selling bed-and-breakfast facilities?
           A    In that particular facility, in that home, in
     that--
           Q    Yes, that particular facility?
           A    Would I agree?
           Q    Yes.
           A    No, I would not agree.
           Q    How then were you intending to make money
     from that particular facility?
           A    By eventually renting it out to bed-and-
     breakfast customers.
           Q    Were the expenses that are represented on the
     Schedule Cs, were they costs incurred in building the
     facility?
           A    Probably costs incurred in developing the
     land.
           Q    Building the building?
           A    You know, I’d really like you to talk with my
     husband regarding this.
           Q    So your answer is you’re not sure what these
     expenses were?
           A    That’s true. It would be up to
     interpretation.

Wolfgram’s husband initially asserted that the purpose of the

enterprise was “not running the bed-and-breakfast, it [was]
                               - 5 -

developing the real estate for the bed-and-breakfast, that is,

building it.”   But later in his testimony, he said that upon

completing a new building, they “expected to go full steam into

doing the bed-and-breakfast operation.”    He stated that the

couple was planning on charging customers to stay at the

establishment overnight.   Wolfgram and her husband have never had

any rent-paying customers at the new house.

     Although the structure could be used as a single-occupancy

family residence, as is evidenced by the fact that the Wolfgrams

live alone in the house, Wolfgram’s husband testified credibly

that the layout and design of the structure were those of an inn,

rather than those of a residence.    All doorways were built 36

inches wide to make the premises wheelchair accessible.    There

was a separate unit with a kitchenette.

     The Wolfgrams claimed deductions on their returns for “car

and truck expenses” related to the house.    The returns stated

that these expenses related to only one vehicle.    Wolfgram’s

husband initially testified that the expenses were related to

Wolfgram’s 104-mile round-trip commute in her car from the mobile

home in Michigan Bluff to her job as a workman’s compensation

administrator in Rancho Cordova.    But on cross-examination he

said that some of the expenses were related to a truck he used

“almost entirely for business in terms of running around to get

licenses, * * * to get a lot of permits, visit the county whole
                                - 6 -

lot of times. [sic]”    We find that Wolfgram’s husband owned a

truck and used it in the construction of the new house.     We have

no way of determining how much the truck was used in the

construction of the new house as opposed to other uses.     We find

that Wolfgram owned a car and used it to commute from the mobile

home to her place of employment.    We are unable to estimate

whether the mileage figures listed on the joint returns were

allocable to the car versus the truck.

     The Wolfgrams claimed deductions on their returns for

“contract labor” expenses related to the house.     Wolfgram’s

husband testified credibly that the contract labor expense of

$2,600 that the couple deducted for 2004 was a payment to an

architect to design the new house.      He could not recall the name

of the company but claimed to have an invoice for its services

and the original design plans on his computer in his car near the

courthouse.   Wolfgram’s husband did not produce these items.      He

did not explain the $2,500 contract labor expense claimed as a

deduction in 2005.   We find that the Wolfgrams spent $2,600 in

2004 to pay an architect to design the new house.     We have no

basis to find any other fact regarding the claimed expenses for

contract labor.

     The Wolfgrams claimed deductions for the rent expense

related to the house.    Wolfgram’s husband testified that the rent

expense which the Wolfgrams claimed ($3,420 for each year) was
                               - 7 -

for “storage for things we brought up from the old house”.    But

at another point, he stated that the rent expense was in part (or

entirely) allocable to the cost of renting the mobile home:

“Well, the rent for the motor--there was a rent for the motor

home that I forget the exact amount, but that’s what is reflected

here as a 3420 is the rent or leasing of the motor home.”    We

find that some of the $3,420 claimed on the return for each year

corresponded to rent for the mobile home that the Wolfgrams lived

in during construction.

     The Wolfgrams claimed a deduction for $300 in “repairs and

maintenance” expenses related to the house.    Wolfgram’s husband

testified that the $300 repairs-and-maintenance expense was for

“wind damage to the motor home that winter.”   We find that this

is true.

     The Wolfgrams deducted utility expenses related to the

house.   The $600 utility expense deducted for 2004 was for “the

price that the electric and power company charged for the

temporary hookup in order to provide with water and with tool

power necessary to do the building.”   The $1,000 utility expense

deducted for 2005 was for electricity used for:

     power tools, lights, heaters, things like that,
     especially the winter of 2005 where we had to heat an
     open house. And we had a lot of ice forming that
     winter. So I suspect that it is a compilation and it
     may be an estimate, a low estimate, of the electrical
     power bills that are going in there at that time.
                                - 8 -

The electric bills for the house and the mobile home were not

separate.    Wolfgram did not introduce any electric bills or any

other documentary evidence.   The testimony was imprecise and

uncertain.   Thus, we are unsure what services the 2004 and 2005

utility expenses were for (i.e., electric, gas, telephone, or

water) and how much of each expense was allocable to the new

house instead of the mobile home.

     Wolfgram’s husband testified that he forbade his wife to

file a timely tax return:

          Q [by Wolfgram] Do you think I could have done the
     taxes myself?

          A [by Wolfgram’s husband] I think it is no way and
     you couldn’t have taken it to anybody to do them.
     The--I was absolutely prohibitive with respect to you
     doing that. Had threatened to take them to a tax
     specialist and I refused to let you. You had begged
     and pleaded with me at least 40 times, probably lot
     more, during those two years, to do them. I promised
     regularly that I would do them, I would do them. I
     just couldn’t do them.

He stated that he threatened to leave his wife if she hired a

tax-return preparer.   Although he asserted that this was a

“financial” threat, he did not describe how leaving his wife

would hurt her financially.   We find that Wolfgram’s husband

threatened to leave her if she filed her own timely tax return.

     Wolfgram received the following payments in 2004:

     • $52,265 of wages from her employer, Alpha Fund Joint
       Powers Agency

     • $489 of interest “income”, and
                                - 9 -

     • An $812 refund of a prior year’s State income tax payment,
       a payment that she had deducted on the prior year’s
       Federal income-tax return.

And in 2005, Wolfgram received:

     • $47,907 of wages from the same employer, Alpha Fund Joint
       Powers Agency, and

     • $742 of interest “income”.

The Wolfgrams did not file timely income tax returns for 2004 and

2005.    The IRS received information returns showing that Wolfgram

had received the unreported amounts listed above.    It did not

receive information returns showing that her husband earned any

money.    Not having received tax returns from either Wolfgram or

her husband, the IRS sent to Wolfgram--and to her alone--a notice

of deficiency dated September 21, 2007, for the 2004 tax year and

a notice of deficiency dated September 4, 2007, for the 2005 tax

year.    The two notices were based on the above items of

unreported income (and the capital gain from the sale of the

Wolfgrams’ home in 2004, which the IRS later conceded to be

excludable from gross income, as discussed below).    The notices

determined additions to tax against Wolfgram for failing to file

timely tax returns, failing to timely pay tax, and failing to pay

estimated taxes.    The IRS has conceded some of the additions to

tax, as discussed below.

     Wolfgram timely petitioned the Court on December 3, 2007,

for the 2005 tax year (docket No. 27688-07) and December 14,
                              - 10 -

2007, for the 2004 tax year (docket No. 28919-07).3   Wolfgram’s

husband also signed both petitions, but on February 22, 2008, the

Court dismissed him from both cases for lack of jurisdiction.

Only after Wolfgram received the deficiency notices did Wolfgram

and her husband file joint returns for 2004 and 2005.4   The 2004

return was received by the IRS on April 8, 2008; the 2005 return

was received on some day in February 2008.   Both returns bore the

date February 17, 2008.   In the returns, Wolfgram and her husband

included all of the previously unreported items of income

mentioned above.   Attached to each return was a Schedule C,

Profit or Loss From Business, for a legal writing and research

business operated by Wolfgram’s husband.   For this business the

schedules reported net business income of $336.25 for 2004 and

$42.75 for 2005.   The IRS does not challenge the amounts on these

schedules.   Also attached to each return was a Schedule C for

“Developing Real Estate for Bed + Breakfast.”   The schedules,

which reported no income, listed the expenses as follows:



     3
      At trial on Nov. 17, 2008, the IRS made an oral motion to
consolidate the two cases, which the Court subsequently granted.
     4
      Even though the Wolfgrams submitted their returns after the
filing deadline, the claims of joint filing status on the returns
entitle Wolfgram to joint filing status because the returns were
made part of the record before these cases were submitted to this
Court for decision. See Phillips v. Commissioner, 86 T.C. 433,
441 n.7 (1986), affd. in part and revd. in part 851 F.2d 1492
(D.C. Cir. 1988). Thus she qualifies for the tax rates
applicable to “Married Individuals Filing Joint Returns”. See
secs. 1(a)(1), 6013.
                              - 11 -

          Schedule C Expense Category            2004         2005
Car and Truck Expenses1                         $6,131   $11,764
Contract Labor                                   2,600        2,500
Insurance                                          600         600
Interest: Other                                    400         -0-
Office Expenses                                    -0-         200
Rent or Lease:
    Vehicles, Machinery and Equipment            3,420        3,420
    Other Business Property                        880        1,320
Repairs and Maintenance                            300         -0-
Utilities                                          600        1,000
  Total                                         14,931      20,804

     1
      In pt. IV of Schedule C, entitled “Information on Your
Vehicle”, the Wolfgrams further detailed their claimed car and
truck expenses. Line 44 of Schedule C requests the following
information:

     Of the total number of miles you drove your vehicle
     during * * * [the taxable year], enter the number of
     miles you used your vehicle for:

     a Business......     b Commuting......   c Other......

For 2004 the Wolfgrams identified a vehicle as having been placed
into service on May 1, 2004, and listed the miles driven as
follows: 16,352 for “Business”, the phrase “between jobs” for
“Commuting” (even though the form requested a number), and 7,448
for “Other”. For 2005 they listed miles for the same vehicle as
follows: 26,436 for “Business”, zero for “Commuting”, and 15,000
for “Other”. They answered “Yes” to the question “Was your
vehicle available for personal use during off-duty hours?” The
Wolfgrams claimed on their returns that they had written evidence
to support their car-and-truck expense claims but presented none
to the IRS or to the Court.


The Wolfgrams also claimed exemptions for two sons as dependents

on the 2004 return and an exemption for one son as a dependent on
                                  - 12 -

the 2005 return.       They also claimed a $680 Lifetime Learning

Credit for 2004 and a $828 Hope Scholarship Credit for 2005 with

respect to one son.       Wolfgram provided no documentation

substantiating any of these expenses, credits, or exemptions.

Finally, the Wolfgrams reported a $1,200 payment for 2004 in the

box on Form 1040, U.S. Individual Income Tax Return, used to

report estimated taxes.       The Wolfgrams presented no evidence that

this payment was ever made, nor has the IRS conceded that it was

made.       As a result of their claims for deductions, credits,

exemptions, and payments, their joint returns showed an

overpayment of $64 for 2004 and no tax due for 2005.

     A trial was held in San Francisco on November 17, 2008.

                                  OPINION

I.   Arguments of the Parties

        In her opening brief, Wolfgram asserts that her husband

should not have been dismissed from the cases, claiming that he

has constitutional standing and that the Federal Rules of Civil

Procedure require that he be joined as a party to these cases.5

Wolfgram says that the IRS’s challenge to the Schedule C

deductions is somehow procedurally defective:


        5
      The reasoning contained in the order of Feb. 22, 2008, was
sufficient to address Wolfgram’s argument. The order explained
that we do not have jurisdiction over Wolfgram’s husband because
the IRS did not mail him a notice of deficiency. The Tax Court
cannot join a person in a case under its Rules or the Federal
Rules of Civil Procedure if it has no jurisdiction over that
person. Guarino v. Commissioner, 67 T.C. 329, 332-333 (1976).
                               - 13 -

       While Respondent seeks to challenge individual matters
       on the Schedule C, Respondent waived such issues in
       preliminary proceedings by refusing to either allow the
       Schedule C’s so that the parties could discuss
       individual items * * * or to state legal authority
       under relevant facts, why the Schedule Cs should not be
       allowed. Mr. Specks [sic] own statement of the issue
       implies that he still thinks that business losses
       should not be allowed to offset wage slave earnings;
       but he cites no authority for that position.

She argues that the “failure to timely file is obviously John’s

fault and not Kristine’s” and that “all punishable conduct, if

any, was by John who completely over reached or dominated

Kristine into what ever position that she was in.”

       The IRS’s answering brief begins with several concessions of

determinations made in the notices of deficiency.    It concedes

that

       • the amount of the capital gain received from the sale of
         the Wolfgrams’ home in 2004 was excludable from income
         under section 121.

       • Wolfgram should be permitted to elect joint filing status,
         and

       • the estimated-tax penalty for the 2004 tax year and the
         failure-to-pay penalties for both the 2004 and 2005 tax
         years should not be imposed.

The IRS also states that because Wolfgram’s husband was dismissed

from this case as he was not a recipient of a notice of

deficiency, it would not assert an increased deficiency for

either tax year to reflect the net income attributable to his

legal writing and research business reflected on the Schedule Cs

for the business.
                              - 14 -

     The IRS notes that Wolfgram stipulated that she received

payments in the amounts stated supra pp. 8-9, including (1) wages

for both years at issue, (2) interest for both tax years at

issue, and (3) the 2004 State income tax refund.   It contends

that Wolfgram failed to prove that the Schedule C expenses she

allegedly incurred were not personal expenses under section 262

and that she failed to provide any records to substantiate that

she incurred the expenses.   It notes in particular that Wolfgram

failed to document her car and truck expenses as required under

section 274(d).   In addition, the IRS asserts that any expenses

incurred in connection with a bed-and-breakfast activity were

capital expenses under section 263(a)(1) or startup expenses

under section 195(a) and thus are not currently deductible.     The

IRS argues that Wolfgram is not entitled to her claimed dependent

exemptions for her children and Hope Scholarship and Lifetime

Learning Credits for each year because she failed to provide

evidence to support her entitlement to them.

     The IRS maintains that it has met its burden of producing

evidence that Wolfgram is liable for the late-filing penalty for

both 2004 and 2005 and the estimated tax penalty for 2005.    It

denies that her husband’s threat to leave her was a reasonable

cause for her failure to file the tax returns on time.   The IRS

observes that Wolfgram was not “trapped” in her house, that she

commuted over 100 miles to work every day, and that she paid her
                              - 15 -

other bills on time.   It claims that she could have driven to the

post office to deposit a separate return in the mail.

     In her reply brief, Wolfgram discusses the purpose of

constructing the new house, but she equivocates.   She states that

the house “was not intended to be a ‘personal residence’ but

after completed, a business structure which the law requires that

Petitioners also live in * * * An operating bed and breakfast.”

But later she states that “while it is true that Petitioner did

not bring the bed and breakfast into operation in 2004 or 2005,

that fact is irrelevant because the Schedule Cs did not purport

to be generated or supported by that business but rather by the

land development business.”

     She argues that it does not matter that she has no documents

to substantiate her expenses because the IRS failed to adequately

discuss the business expense deductions with her before trial.

Furthermore, she claims that section 162 does not require that

she demonstrate how much of the mobile home rent was allocable to

a bed-and-breakfast business as opposed to the couple’s personal

expenses.   She suggests that the entire rental expense is

deductible because it was necessary to live on site for the

business venture to be successful.

     Addressing the late-filing penalty, Wolfgram acknowledged

that she

     was aware that a return was not filed and she would
     remind her legal counsel husband and he would promise
                              - 16 -

      to file and tell her that there was not need to file it
      then because there was no tax due and no penalty for
      failure to file where no tax was due. Over time she
      became more insistent and he responded more insistently
      including outright refusals to allow her to file
      returns and threatened to leave her which would cause
      serious financial loss.

Regarding the estimated-tax penalty, Wolfgram argues it is

      not established * * * that out of the multiple bills
      she had to pay, that she reasonably knew that there was
      any bill due and owing to the IRS. * * * she reasonably
      knew that she didn’t need a whole lot of write offs
      including automobile business mileage to ‘zero her
      income tax obligation for those two years’. That
      spending $100,000 on a business as against about
      $50,000 gross income should zero the income tax
      liability for that year is not unusual.

II.   Deficiencies

      Wolfgram must prove that the determinations of the

deficiencies contained in the notices are wrong.   Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).   Wolfgram agreed in

the stipulations of facts that she received the wages, interest,

and State income-tax refund determined in both notices of

deficiency.   She does not dispute that these payments are

includable in her income.   See secs. 61(a)(1) (compensation for

services), (4) (interest), 111 (refund of State taxes, the

payment of which was deducted by the taxpayer in a prior year);

Brobst v. Commissioner, T.C. Memo. 1988-456;    Tracy v.

Commissioner, T.C. Memo. 1985-40.   Thus, we address her arguments

that, in the tax years at issue, she is entitled to:   (1) The

Schedule C deductions from her purported bed-and-breakfast
                             - 17 -

business, (2) Hope Scholarship and Lifetime Learning Credits, and

(3) dependency exemptions.

     A.   Deductions Claimed for the Cost of Constructing the
          House

     As noted above, the Wolfgrams deducted expenses on their

2004 and 2005 Schedule Cs that they claim were related to the

building of a bed-and-breakfast inn.   Because some of these

expenses were indeed related to building a house that was

designed, in part, to be operated as a bed-and-breakfast inn, a

threshold issue is whether the Wolfgrams’ involvement in building

the house constitutes the carrying on of a business.   As we

explain below in part II.A.1, we hold that it does not.   Then, in

part II.A.2.a through i, we discuss each line item of the 2004

and 2005 Schedule Cs and explain additional reasons why Wolfgram

is not entitled to her Schedule C deductions.

          1.   The Bed-and-Breakfast Activity Did Not Constitute
               a Trade or Business

     Section 162(a) provides that a taxpayer who is “carrying on”

a “trade or business” may deduct ordinary and necessary expenses

incurred in connection with the operation of the business.     The

Supreme Court held in Commissioner v. Groetzinger, 480 U.S. 23,

35 (1987), that to be considered to be carrying on a trade or

business within the meaning of section 162, “the taxpayer must be

involved in the activity with continuity and regularity and * * *

the taxpayer’s primary purpose for engaging in the activity must
                              - 18 -

be for income or profit.”   Thus, a threshold determination under

Groetzinger is whether the taxpayer engaged in an activity with

sufficient continuity and regularity that the activity

constitutes a trade or business.

     In considering whether the Wolfgrams’ involvement with the

alleged bed-and-breakfast inn was sufficiently continuous and

regular, it does not matter whether the Wolfgrams intended to

sell the house or operate it as a bed-and-breakfast inn.   If they

intended to operate it as a bed-and-breakfast inn, no such

operation ever began because the Wolfgrams never had a customer.

Nor is there any evidence of any sales efforts that could have

led to customers.   See Charlton v. Commissioner, 114 T.C. 333,

338 (2000) (expenses incurred before cabin rental activity became

an active trade or business were not deductible); Goodwin v.

Commissioner, 75 T.C. 424, 433 (1980) (expenses incurred before

the commencement of business operations are not deductible under

section 162(a)), affd. without published opinion 691 F.2d 490 (3d

Cir. 1982); Frank v. Commissioner, 20 T.C. 511, 513 (1953) (“The

petitioners were not engaged in any trade or business at the time

the expenses were incurred. * * * [The expenses] were not related

to the conduct of the business that they were then engaged in but

were preparatory”.).   If the Wolfgrams intended to sell the

house, the construction and sale of a single bed-and-breakfast

inn did not constitute continuous and regular activity; it was a
                               - 19 -

“one-time job”.    Batok v. Commissioner, T.C. Memo. 1992-727; see

also Kling v. Commissioner, T.C. Memo. 2001-78 (no trade or

business found when taxpayer sold sports memorabilia only

sporadically).    The Wolfgrams have not started building any other

structures in the substantial time that has elapsed since the

completion of the one at issue here, although they claimed at

trial that they were “in the process of * * * examining other

lands that can be built on or rebuilt.”    They did not provide

evidence that they ever attempted to sell the new house to a bed-

and-breakfast operator.   Thus, they were not carrying on a trade

or business during the years at issue because they did not show

they were engaged in an activity with regularity and continuity.

See Sloan v. Commissioner, T.C. Memo. 1988-294, affd. without

published opinion 896 F.2d 547 (4th Cir. 1990).

     Under Commissioner v. Groetzinger, supra at 35, “the

taxpayer's primary purpose for engaging in the activity must be

for income or profit.”    The taxpayer must have “entered into the

activity, or continued the activity, with the actual and honest

objective of making a profit.”     Dreicer v. Commissioner, 78 T.C.

642, 644-645 (1982), affd. without published opinion 702 F.2d

1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income Tax Regs.    And the

taxpayer must prove that profit was the dominant or primary

objective of his or her venture.     Mattfeld v. Commissioner, 73 15

73 AFTR 2d 94-1167 (9th Cir. 1994) (citing Polakof v.
                              - 20 -

Commissioner, 820 F.2d 321, 323 n.2 (9th Cir. 1987), affg. T.C.

Memo. 1985-197), affg. T.C. Memo. 1992-273.     Wolfgram did not

prove that earning a profit was the primary purpose of building

the house.   The testimony is equivocal as to the exact purpose of

the venture--operating a bed-and-breakfast inn or selling a bed-

and-breakfast inn.   As Wolfgram has the burden of proof, we

conclude that she intended to operate the inn, not to sell it.

We do not know how much of the inn was to be allocated to rent-

paying tenants.   Therefore, we cannot say that Wolfgram’s primary

motive in operating the inn was to turn a profit, as opposed to

providing an abode for herself and her husband.     See Rule 142(a);

Welch v. Helvering, 290 U.S. at 115.

     Even if the Wolfgrams were carrying on a trade or business,

the amounts incurred to construct the house would not be fully

deductible in the year they were incurred.    Section 263 requires

capitalization of “Any amount paid out for new buildings or for

permanent improvements or betterments made to increase the value

of any property or estate.”   Sec. 263(a)(1).    The regulations

list examples of capital expenditures, one of which is the “cost

of acquisition, construction, or erection of buildings”.     Sec.

1.263(a)-2(a), Income Tax Regs.   The statute thus prohibits full
                              - 21 -

deductions of construction costs for the same tax year as the

year in which they were incurred.6

          2.   Additional Reasons, Primarily the Lack of
               Substantiation, That Wolfgram Is Not Entitled to
               the Schedule C Deductions (Line-by-Line Analysis)

     Having rejected the Schedule C deductions generally for the

reasons described in part II.A.1, we now examine why each line

item on the Schedule C should be disallowed.   A common theme in

this line-by-line discussion is Wolfgram’s failure to meet her

burden of proving that she is entitled to her deductions.    In

particular, she had to prove she incurred the amounts that

support her claims for the deductions.   See INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992) (citing Interstate Transit

Lines v. Commissioner, 319 U.S. 590, 593 (1943)).     A taxpayer

must maintain records relating to their expenses and must prove

his or her entitlement to all claimed deductions, credits, and

expenses in controversy; the taxpayer's burden thus includes the

burden of substantiation.   See sec. 6001; Rule 142(a); Hradesky

v. Commissioner, 65 T.C. 87, 89-90 (1975), affd. per curiam 540

F.2d 821 (5th Cir. 1976); sec. 1.6001-1(a), Income Tax Regs.7


     6
      Although an amount that is required to be capitalized under
sec. 263 can be partially deducted under sec. 167 as
depreciation, Wolfgram has not demonstrated that she is entitled
to a depreciation deduction.
     7
      Sec. 1.6001-1(a), Income Tax Regs., provides:

     any person subject to tax * * * [under the Code] shall
                                                   (continued...)
                              - 22 -

     The Code and the regulations do not expressly say what the

remedy is if the taxpayer has no records proving the exact amount

of an expense.   The caselaw provides guidance.    If a taxpayer

establishes that he or she paid or incurred a deductible expense

but does not establish the amount of the expense, under Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930), a court may

approximate the amount of the allowable deduction, “bearing

heavily if * * * [the court] chooses against the taxpayer whose

inexactitude is of his [or her] own making.”      For the rule in

Cohan to apply, there must be sufficient evidence in the trial

record to provide a rational basis for the estimate; otherwise,

the claimed deduction must be disallowed.   Polyak v.

Commissioner, 94 T.C. 337, 345 (1990); Vanicek v. Commissioner,

85 T.C. 731, 743 (1985); Profl. Servs. v. Commissioner, 79 T.C.

888, 919-920 (1982); Luman v. Commissioner, 79 T.C. 846, 859

(1982); Epp v. Commissioner, 78 T.C. 801, 807 (1982).     We discuss

whether Wolfgram has met her burden of proving that the couple

incurred each expense deducted on the bed-and-breakfast Schedule

Cs for 2004 and 2005 in parts a through i below.




     7
      (...continued)
     keep such permanent books of account or records,
     including inventories, as are sufficient to establish
     the amount of gross income, deductions, credits, or
     other matters required to be shown by such person in
     any return of such tax or information.
                              - 23 -

                a.   Amounts Deducted as “Car and Truck”
                     Expenses

     On the joint returns that the Wolfgrams filed several years

later, they claimed that in May 2004 they began using a vehicle

for a combination of “business” and “other” uses and that in 2005

they used the same vehicle for a combination of “business” and

“other” uses.   It is unclear whether the vehicle described on the

return was Wolfgram’s car, which she drove from the mobile home

to her place of employment and back, or whether the vehicle is

the truck used by Wolfgram’s husband, which he used in part in

the construction of the new house.

     To the extent that Wolfgram seeks to deduct the expense of

operating her car, the expense is not deductible.    The

regulations under section 262 state that “The taxpayer’s costs of

commuting to his place of business or employment are personal

expenses and do not qualify as deductible expenses.”8      Sec.

1.262-1(b)(5), Income Tax Regs.   Thus, the cost of Wolfgram’s

commute to and from her full-time job is not deductible.

     But even if the deducted miles were for Wolfgram’s husband’s

truck, the mileage expense would not be allowable.    Section

274(d) disallows any deduction with respect to “listed property”

unless the taxpayer adequately substantiates:   (1) The amount of



     8
      Sec. 262(a) provides that “Except as otherwise expressly
provided * * *, no deduction shall be allowed for personal,
living, or family expenses.”
                                 - 24 -

the expense, (2) the time and place of the travel or the use of

the property, (3) the business purpose of the expense, and (4)

the business relationship of the persons using the property.       A

passenger vehicle and “any other property used as a means of

transportation” are “listed property”.     Sec. 280F(d)(4)(A)(i) and

(ii).     Testimony alone, without corroborative evidence, does not

satisfy the requirements of section 274(d), and thus the Cohan

rule is inapplicable.     Sec. 274(d); United Title Ins. Co. v.

Commissioner, T.C. Memo. 1988-38.      Wolfgram’s husband’s testimony

that he used the truck in the construction effort is not

sufficient on its own to satisfy the strict substantiation

requirement without a travel log.     Furthermore, even if some of

the miles driven in the truck were related to the house, we have

found that the construction of the house does not constitute a

business under section 162(a) and that a profit motive was not

the dominant purpose of the venture.

                  b.    Amounts Deducted for Contract Labor
                        Expenses

        Wolfgram deducted $2,600 in 2004 and $2,500 in 2005 for

“Contract labor”.      Wolfgram’s husband testified that the $2,600

was the payment he made to an architect in 2004 to design the new

house.     He did not substantiate the 2005 deduction through

testimony or documentation.     He offered to get his laptop

computer from his car during the Court’s recess to find data

regarding the contract labor expenditures.     He did not do so.
                                - 25 -

     The deduction for contract labor is not allowable for at

least two reasons.   First, we find that the Wolfgrams did not

expend any money for “contract labor” in 2005, on account of the

void in the trial record regarding the expense for this year.

Second, even to the extent that the Wolfgrams spent the money to

construct the new house, this activity does not qualify as the

“carrying on” of a business under section 162(a).

                c.   Amounts Deducted as Insurance

     Wolfgram deducted $600 for insurance for both tax years at

issue.   The record does not show that the $600 was paid for

insurance.   Thus, the amount is not deductible because Wolfgram

has the burden of proof.   Even if the amount was a cost of

constructing the new house, this construction does not qualify as

a “business” activity for purposes of section 162(a).

                d.   Amounts Deducted as Interest

     Wolfgram deducted $400 for interest for 2004.   The record

lacks any proof of what this $400 entry represented.    The amount

is therefore not deductible because Wolfgram has the burden of

proving she is entitled to the deduction.   See INDOPCO, Inc. v.

Commissioner, 503 U.S. at 84.    Even if the amount financed the

new house, the Wolfgrams were not engaged in a trade or business

under section 162(a).
                                     - 26 -

                    e.      Amount Deducted as Office Expense

     The Wolfgrams’ 2005 joint income tax return deducted $200 as

“Office expense”.         The record does not show what this amount

corresponds to.          The amount is therefore not deductible because

none of the requirements for deduction were proven.            And even if

the amount related to the new house, the activity is not a

“business” activity for purposes of section 162(a).

                    f.      Amounts Deducted for Mobile Home Rent

     The Wolfgrams deducted $3,420 in each year as a rental

expense.       This amount corresponded to the yearly rent for the

mobile home.       The amount is not deductible for either year.

First, the Wolfgrams cannot deduct a portion of the mobile home

rent because the Wolfgrams were not engaged in a trade or

business.       See sec. 280A(c)(1)(A).9      Second, even if this


     9
      Sec. 280A provides, in relevant part:

          SEC. 280A(a). (a) General Rule.--Except as
     otherwise provided in this section, in the case of a
     taxpayer who is an individual or an S corporation, no
     deduction otherwise allowable under this chapter shall
     be allowed with respect to the use of a dwelling unit
     which is used by the taxpayer during the taxable year
     as a residence.

           *         *        *      *        *     *      *

          (c) Exceptions for Certain Business or Rental
     Use; Limitation on Deductions for Such Use.--

                    (1) Certain business use.--Subsection(a)
               shall not apply to any item to the extent such
               item is allocable to a portion of the dwelling unit
                                                        (continued...)
                                - 27 -

requirement was satisfied, Wolfgram has not demonstrated that a

portion of the mobile home was used exclusively for her alleged

business.     See sec. 280A(c)(1).

                  g.   Other Amounts Deducted as Rent

     The Wolfgrams deducted $880 and $1,320 for the expense of

renting “Other business property” in 2004 and 2005,

respectively.10    This amount is not deductible because (1) the

record does not show what this amount is for, and (2) the

Wolfgrams were not carrying on a business.

                  h.   Amounts Deducted for Repairing the Mobile
                       Home

     The Wolfgrams deducted $300 in 2004 for repair of the mobile

home.     The amount is not deductible for the same reasons that the

rental expense of the mobile home is not deductible; i.e., no



     9
        (...continued)
            which is exclusively used on a regular basis--

                       (A) as the principal place of business
                  for any trade or business of the taxpayer,

                       (B) as a place of business which is used
                  by patients, clients, or customers in meeting
                  or dealing with the taxpayer in the normal
                  course of his trade or business; or

                       (C) in the case of a separate structure
                  which is not attached to the dwelling unit,
                  in connection with the taxpayer’s trade or
                  business.
     10
      Schedule C contains a line item for reporting the expense
of renting or leasing “Other business property” (i.e., business
property other than vehicles, machinery, and equipment).
                                - 28 -

regular conduct of a business and no exclusive use of the

property.   See sec. 280A(c)(1).

                i.     Amounts Deducted for Utilities

     The Wolfgrams deducted $600 and $1,000 for utilities in 2004

and 2005, respectively.    Wolfgram’s husband testified at trial

that the utility expenses were payments for the electricity that

was used to construct the new house.     He acknowledged that the

couple did not maintain separate accounts with their electric

utility provider for service to the mobile home and the new

house.

     The utility expenses are not deductible.     First, we have no

way of estimating the amounts of the expenses attributable to the

mobile home because the Wolfgrams did not maintain separate

accounts and because they provided us with no documents.      The

testimony of Wolfgram’s husband was too vague for us to believe

that the entire amount for each year was attributable to the

mobile home.   Even if we could make an estimate, the amounts

attributable to the mobile home are not deductible for the same

reasons that the rental expense of the mobile home is not

deductible; i.e., no conduct of a business and no exclusive use.

See sec. 280A(c)(1).    Second, any amounts attributable to

construction are not deductible because the Wolfgrams were not

carrying on a business during the tax years at issue.
                                - 29 -

     B.   Various Exemptions and Credits

     Wolfgram claimed dependency exemptions for two sons on the

2004 joint return and for one son on the 2005 joint return.

Section 151(c) (as in effect during the tax years at issue)

permits an exemption for each of a taxpayer’s children who is

younger than 19, or younger than 24 if a student.     The Wolfgrams

did not testify how old their children were, where they lived,

who supported them, or even if they had children at all.      Under

these circumstances, Wolfgram is not entitled to any dependency

exemptions.11

     Wolfgram also claimed a $680 Lifetime Learning Credit for

2004 and a $828 Hope Scholarship Credit for 2005 on behalf of one

of her sons.    See sec. 25A.   Wolfgram did not submit any

documents to this Court that substantiate the claims for these

educational credits, nor did either of the Wolfgrams provide any

testimony on the issue.12   Although Cohan allows us to estimate

the amounts of deductions if the taxpayer proves that some

deductible expenses were incurred and if there is a reasonable

basis for estimating the amounts, these two conditions are not

satisfied here.


     11
      Wolfgram did not discuss the exemptions in her opening or
reply briefs; the IRS noted Wolfgram’s lack of proof in its
answering brief.
     12
      They also failed to discuss it in both their opening and
reply briefs; the IRS mentioned the issue in its answering brief.
                                - 30 -

III. Additions to Tax

     The IRS bears the burden of production with respect to the

additions to tax determined under sections 6651(a)(1) and 6654.

Sec. 7491(c).     Thus, once the taxpayer files a petition alleging

an error in the determination of an addition to tax or penalty,

the taxpayer’s challenge will succeed unless the IRS produces

evidence that the addition to tax or penalty is appropriate.

Swain v. Commissioner, 118 T.C. 358, 364-365 (2002).     Once the

IRS has produced the evidence demonstrating that the addition to

tax or penalty is appropriate, the taxpayer must provide the

Court with sufficient evidence that the IRS’s determination is

incorrect.     Higbee v. Commissioner, 116 T.C. 438, 447 (2001).

The IRS’s burden of producing evidence to show that the

imposition of the penalty is appropriate does not require the IRS

to defeat various defenses that the taxpayer can assert in

response to penalties, such as the possibility that the taxpayer

had reasonable cause for engaging in the conduct.     Id. at 446.

     A.      Section 6651(a)(1) Failure-To-File Addition to Tax

     The IRS determined that Wolfgram was liable for the section

6651(a)(1) late-filing addition to tax for the tax years 2004 and

2005.     Section 6651(a)(1) imposes an addition to tax for failing

to file a return by the filing deadline (determined by taking

into account any extensions), unless such failure is due to

reasonable cause and not due to willful neglect.     The late-filing
                             - 31 -

addition to tax is 5 percent of the net amount of tax due on the

date prescribed for payment for each month such failure

continues, for up to 5 months.    Sec. 6651(a)(1, (b)(1).

     Wolfgram stipulated that she and her husband submitted joint

returns for 2004 and 2005 that the IRS received in early 2008,

several years after the returns were due.    The stipulation

satisfies the IRS’s burden of producing evidence that the late-

filing addition to tax should be imposed for each of the tax

years at issue.

     Section 6651(a)(1) provides that the late-filing addition to

tax shall not be imposed if “it is shown that such failure [to

file] is due to reasonable cause and not due to willful neglect”.

Reasonable cause is demonstrated if the taxpayer “exercised

ordinary business care and prudence and was nevertheless unable

to file the return within the prescribed time”.    Sec. 301.6651-

1(c)(1), Proced. & Admin. Regs.    Willful neglect involves a

“conscious, intentional failure or reckless indifference.”

United States v. Boyle, 469 U.S. 241, 245 (1985).    Wolfgram

claims in her brief that she had reasonable cause for her failure

to file timely returns because her husband threatened to leave

her and this would cause her financial injury.    She also claimed

that her husband promised to file a return but told her they did

not need to do so because “there was no tax due and no penalty

for failure to file where no tax was due.”
                               - 32 -

     Wolfgram has not cited any case that has considered whether

spousal threats can constitute reasonable cause for failing to

file a return.    Even if we were to accept that Wolfgram’s husband

threatened to leave her, she did not prove her contention that

the threat was financially significant.    As far as we know,

Wolfgram’s husband did not earn any money during the years at

issue.    Wolfgram submitted no evidence that he owned any

substantial assets.    Therefore, we do not know why her husband’s

threat was significant enough to bend Wolfgram’s will to her

husband’s directive that she not file a return.    And without her

testimony about the effect of his threat, we are unconvinced that

she was unable to resist his demands.13

     Wolfgram also claimed that she relied on her husband’s

assurances (1) that he would file a return, and (2) that the

couple owed no tax anyway and would not be penalized.    His first

assurance does not constitute reasonable cause.    Wolfgram had an

obligation to monitor her husband’s compliance with the filing

deadline and ensure he followed through.    See United States v.

Boyle, supra at 252 (“The failure to make a timely filing of a

tax return is not excused by the taxpayer's reliance on an agent,

and such reliance is not ‘reasonable cause’ for a late filing”).


     13
      Indeed, because Wolfgram failed to testify that she could
not resist her husband’s demands, we infer that she was able to
resist his demands. See Wichita Terminal Elevator Co. v.
Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th
Cir. 1947).
                               - 33 -

     Wolfgram was not reasonable in relying on her husband’s

second assurance that the couple would not be penalized for

failing to file.    Section 6012(a)(1)(A) generally requires a

taxpayer to file a return if his or her gross income exceeds the

applicable exemption amount.    Neither the Code nor the caselaw

excepts from this filing requirement a taxpayer who has

deductions or credits sufficient to eliminate the tax liability

that would otherwise be due.    Thus, Wolfgram’s husband’s advice

that the couple need not file a return was incorrect.    The

regulations state that “Reliance on * * * professional advice

* * * constitutes reasonable cause and good faith if, under all

the circumstances, such reliance was reasonable and the taxpayer

acted in good faith.”    Sec. 1.6664-4(b)(1), Income Tax Regs.

Wolfgram did not consult a tax professional; thus, she cannot

claim reliance on professional advice.    See Huang v.

Commissioner, T.C. Memo. 1997-257 (taxpayers had no reasonable

cause for avoiding negligence penalty when taxpayers failed to

consult a tax professional to verify the disallowed claims made

on their return).    We find that Wolfgram had no reasonable cause

for failing to file her tax returns on time for the tax years

2004 and 2005.

     B.   Section 6654(a) Failure-To-Pay-Estimated-Tax Addition
          to Tax

     The IRS determined in its notices of deficiency that

Wolfgram was liable for the section 6654(a) addition to tax for
                                 - 34 -

failing to pay estimated income tax for the tax years 2004 and

2005.     It later conceded that she was not liable for the addition

for 2004.     Wolfgram contends that no penalty should be imposed

because she estimated that she owed no tax for 2005.     But the

penalty calculations do not depend on what a taxpayer estimates

the tax will be.     According to the Code, Wolfgram’s “required

annual payment” is 90 percent of her actual tax liability for

2005 if she did not file a return for either 2004 or 2005.        See

sec. 6654(d)(1)(B).14     Wolfgram admits in her reply brief that

she “filed no return” for 2005; she also did not file a return

for 2004.15     Therefore, her “required annual payment” is equal to


     14
          The “required annual payment” is equal to

     the lesser of--

             (i) 90 percent of the tax shown on the return for
             the taxable year (or, if no return is filed, 90
             percent of the tax for such year), or

             (ii) 100 percent of the tax shown on the return of
             the individual for the preceding taxable year.

     Clause (ii) shall not apply if the preceding taxable
     year was not a taxable year of 12 months or if the
     individual did not file a return for such preceding
     taxable year.

Sec. 6654(d)(1)(B).
     15
      Wolfgram did not file a return for either 2004 or 2005
until after the notices of deficiency for those years were
issued. A return filed after a notice of deficiency is issued is
not a filed return for purposes of the test contained in sec.
6654(d)(1)(B)(i). Mendes v. Commissioner, 121 T.C. 308, 325
(2003) (“the taxpayer would be able to negate the addition to tax
                                                   (continued...)
                              - 35 -

90 percent of her actual tax liability for 2005.16    Wolfgram did

not make any part of the required annual payment on the dates

required by the statute.   Consequently, the IRS has satisfied its

burden of production under section 7491(c) for the section

6654(a) addition to tax.   See Wheeler v. Commissioner, 127 T.C.

200, 210-211 (2006), affd. 521 F.3d 1289 (10th Cir. 2008).

     Wolfgram’s claim that she should not be subject to the

estimated-tax penalty because she estimated that she owed no tax

for 2005 amounts to a reasonable cause defense--but there is no

reasonable cause defense available for the penalty.    Only the

exceptions set forth in section 6654(e) exonerate a taxpayer from

the penalty.   Grosshandler v. Commissioner, 75 T.C. 1, 20-21

(1980); Estate of Ruben v. Commissioner, 33 T.C. 1071, 1072

(1960); sec. 1.6654-1(a)(1), Income Tax Regs.   None of the

exceptions is applicable here.   Therefore, Wolfgram is liable for

the section 6654(a) addition to tax for 2005.


     15
      (...continued)
simply by filing a return for that year that showed a tax
liability less than the quarterly estimated payments actually
made or, if none had been made, that showed a zero tax liability.
Such a result is inconsistent with both the purpose and function
of section 6654(d)(1)(B)(i)”). The same reasoning applies to the
test contained in sec. 6654(d)(1)(B)(ii).
     16
      We need not compare the sec. 6654(d)(1)(B)(i) amount to
the sec. 6654(d)(1)(B)(ii) amount because Wolfgram did not file a
return for 2004. See sec. 6654(d)(1)(B); Wheeler v.
Commissioner, 127 T.C. 200, 210-212 (2006), affd. 521 F.3d 1289
(10th Cir. 2008). She did not file a return for 2005; thus, her
required annual payment is 90 percent of her actual tax liability
for 2005.
                             - 36 -

     In reaching our holdings, we have considered all arguments

made, and, to the extent not mentioned above, we conclude they

are moot, irrelevant, or without merit.

     To reflect the foregoing,


                                          Decision will be entered

                                   under Rule 155.
