                              T.C. Memo. 2015-189



                        UNITED STATES TAX COURT



                   MICHAEL R. YOUNG, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 17910-11.                         Filed September 22, 2015.



      Michael R. Young, pro se.

      Diana N. Wells and Denise A. Diloreto, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      GOEKE, Judge: During the taxable years 2008 and 2009 petitioner

engaged in a business as a registered lobbyist in the Commonwealth of Kentucky,

representing clients before the State government and legislature. Petitioner

claimed deductions on Schedules C, Profit of Loss From Business, for the business
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[*2] use of his home and other expenses for his automobile and travel related to

his work.

      On May 3, 2011, respondent issued petitioner a notice of deficiency for

taxable years 2008 and 2009 determining deficiencies of $11,064 and $17,428 and

accuracy-related penalties of $2,212.80 and $3,485.60, respectively. The notice of

deficiency disallowed Schedule C expense deductions for the business use of

petitioner’s home and for travel and automobile expenses.1

                               FINDINGS OF FACT

      Petitioner was a resident of Kentucky when his petition was filed. This case

was set for trial in Cincinnati, Ohio, on March 4, 2013. At petitioner’s request this

case was continued and was set for trial in Louisville, Kentucky. On November

18, 2013, a partial trial was held in Louisville. Both parties appeared, and

petitioner informed the Court that he had not provided respondent with his records

for 2008 and 2009. At petitioner’s request the Court continued the case for further

trial and directed him to submit to respondent on or before January 15, 2014, any

documents in support of petitioner’s position for 2008 and directed him to submit

to respondent on or before February 28, 2014, any documents in support of

      1
       All section references are to the Internal Revenue Code in effect for the
years in issue, and all Rule references are to the Tax Court Rules of Practice and
Procedure, unless otherwise indicated.
                                         -3-

[*3] petitioner’s position for 2009. Petitioner was advised that failure to cooperate

and produce documents to respondent might result in a dismissal of the case for

failing to properly prosecute.

      On March 17, 2014, respondent filed a status report informing the Court

that on January 17, 2014, he had received a letter from petitioner stating that the

2008 records were being delivered by first-class mail because of snow and ice that

had prevented safe travel to Louisville on January 15, 2014. Enclosed with

petitioner’s letter were a receipt, a highlighted bank statement, and copies of

checks for the period December 31, 2007, through January 31, 2008, and

highlighted credit card statements for an account number ending in 2424 for the

period December 13, 2007, through January 15, 2009. Although requested by

respondent to explain the business purpose for the identified expenses, petitioner

failed to do so. Respondent stated that on February 30, 2014, he received a letter

from petitioner advising that his efforts to replace the 2008 and 2009 records

allegedly lost in a flood at his residence had been unsuccessful. Some of the

information in the record would suggest that petitioner was reimbursed by his

clients for travel expenses at least on some occasions.

      By order dated June 3, 2014, this case was set for further trial on November

17, 2014, in Louisville, Kentucky, and petitioner was directed to provide to
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[*4] respondent on or before August 1, 2014, any records that he wished to

produce at trial.

      On November 17, 2014, further trial commenced. Petitioner provided no

details regarding the business purpose of the credit card charges and checks that

were introduced at trial.

      Petitioner ran his business from his home, and he had no other office space.

He had an office and business records in his basement.

                                      OPINION

I.    Legal Principles

      Taxpayers must “keep such permanent books of account or records * * * 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.” Sec. 1.6001-1(a), Income Tax Regs. Deductions relating to

expenses for travel, meals and entertainment, and certain listed property defined in

section 280F(d)(4), including passenger automobiles, computers, and cellular

phones, are subject to strict rules of substantiation that supersede the doctrine in

Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930) (allowing the Court to

estimate a deductible amount in certain circumstances). Sec. 274(d).
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[*5] For deductions to which section 274 applies, a taxpayer must substantiate

certain elements of the deductible activity or use through either adequate records

or sufficient evidence corroborating the taxpayer’s own statement. Id. At a

minimum, a taxpayer must substantiate: (1) the amount of the expense; (2) the

time and place the expense was incurred; (3) the business purpose of the expense;

and (4) the business relationship of the taxpayer to other persons benefited by the

expense. Id.; Shea v. Commissioner, 112 T.C. 183, 187 (1999). If a taxpayer

cannot satisfy the substantiation burden imposed by section 274(d) with respect to

a deduction to which it applies, he fails to carry his burden of establishing that he

is entitled to deduct that expense, regardless of any equities involved. Sec. 274(d);

Nicely v. Commissioner, T.C. Memo. 2006-172; sec. 1.274-5T(a), Temporary

Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).

II.   Burden of Proof

      The Commissioner’s determinations are generally presumed correct, and

taxpayers bear the burden of proving that the Commissioner’s determinations are

incorrect. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111 (1933). Deductions

are a matter of legislative grace, and taxpayers bear the burden of proving that they

are entitled to claimed deductions. INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 84 (1992). In addition, a taxpayer must keep sufficient records to substantiate
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[*6] deductions claimed. Sec. 6001; New Colonial Ice Co. v. Helvering, 292 U.S.

435, 440 (1934). Petitioner has neither alleged that section 7491(a) applies nor

established his compliance with its requirements. Therefore, the burden of proof

remains with petitioner.

III.   Substantiation

       Respondent argues that petitioner’s testimony is inconsistent and his

inability to substantiate his 2008 and 2009 Schedule C expenses should prevent

him from using secondary evidence to substantiate them. Respondent also argues,

arguendo, that if the relevant records were destroyed in a flood, petitioner has not

produced sufficient secondary evidence to substantiate the travel expenses. We

agree with the latter argument. See, e.g., Adler v. Commissioner, T.C. Memo.

2010-47, aff’d, 443 F. App’x 736 (3d Cir. 2011).

       On November 18, 2013, we conducted a partial trial and offered petitioner

approximately 90 days to provide substantiating documentation for 2009 and 60

days to submit the 2008 records to respondent since petitioner already had

obtained “reproductions of credit card bills and some other documents”. Thus, we

concluded by ordering petitioner to submit the 2008 documents to respondent on

or before January 15, 2014, and the 2009 documents on or before February 28,

2014. On March 17, 2014, respondent submitted a status report indicating that
                                         -7-

[*7] petitioner had contacted respondent claiming that most of the 2008 receipts

were on a laptop to which he had no access.

      On January 17, 2014, respondent received a letter from petitioner that

included a receipt, a highlighted bank statement, and copies of checks for the

period December 31, 2007, through January 31, 2008, and highlighted credit card

statements for the period December 13, 2007, through January 15, 2009. In the

letter petitioner indicated that he could not hand deliver the records as requested

because of snow and ice that prevented safe travel. This letter did not include an

explanation regarding the business purpose of any of the expenses. By the

November 21, 2014, trial, petitioner still had not submitted substantiation to

respondent aside from the items listed above.

      Petitioner maintains he lost his records in a flood, but we find this argument

unconvincing in the light of the records he has produced, which while voluminous

are disorganized and unhelpful. He has failed to take even basic steps to

reconstruct his alleged expenses even though he has some available

documentation in the record. Nevertheless, these records demonstrate he had

access to information for the years in issue. Also we note that petitioner has

shown little or no evidence of efforts to seek records from the original banking

sources. He has been given several opportunities and ample time to develop the
                                         -8-

[*8] information he alleges would support his travel, transportation, and

entertainment expense deductions. Most importantly, petitioner has offered no

testimony to link the records in evidence with the claimed deductions in dispute.

      This Court has established that “[w]e need not (and will not) undertake the

task of sorting through the voluminous evidence petitioner has provided in an

attempt to see what is, and what is not, adequate substantiation of the items on

petitioner’s returns.” Akey v. Commissioner, T.C. Memo. 2014-211, at *20.

Here, we have no way to tie client activities with specific travel expenses, nor has

petitioner attempted to reconstruct a log or other record of his automobile

expenses. Finally, he has not provided a basis to distinguish reimbursed expenses

from unreimbursed expenses.

IV.   Business Use of Home

      Petitioner claimed and respondent disallowed deductions of $7,535 and

$7,686 for business use of his home for 2008 and 2009, respectively.

      Section 280A(a) generally provides that no deduction shall be allowed for a

home office, but subsection (c)(1)(A) allows an exception for the portion of a

dwelling unit exclusively used on a regularly basis as the principal place of

business for a trade or business. Petitioner exclusively used the basement of his

residence as his office and business storage room on a regular basis. His 2008 and
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[*9] 2009 income tax returns vary slightly regarding how the office space was

determined, but we hold that 800 square feet of the 2,940 square feet of livable

space are the figures that should be used. Noting that petitioner’s business

required data and written communications, we find the basement office was his

principal place of business.

      Respondent also objects to the amounts of home office expenses that

petitioner deducted, and we agree that petitioner has failed to substantiate the

amounts deducted as “miscellaneous” expenses on the income tax returns.

However, on the basis of the evidence in the record we sustain the use of the other

items deducted as home expenses in computing the allowable home office expense

deductions.

V.    Penalties Under Section 6662(a) and (b)(2)

      Respondent determined penalties for 2008 and 2009 for underpayments of

tax attributable to substantial understatements of income tax. Sec. 6662(a) and

(b)(2). Petitioner has offered as a reasonable cause for the underpayments that he

lost records in a flood and a computer crash. We do not find either reason credible

because according to his testimony and the records in evidence the deductions

claimed were not based upon an accurate analysis of the properly deductible

amounts. Therefore, if the amount of the tax understatement exceeds the greater
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[*10] of 10% of the tax required to be shown for each year or $5,000, the penalty

will be sustained. Sec. 6662(d).

      In reaching our holding herein, we have considered all arguments the parties

made, and to the extent we did not mention them above, we conclude they are

moot, irrelevant, or without merit.

      To reflect the foregoing,


                                              Decision will be entered under

                                      Rule 155.
