                  T.C. Summary Opinion 2004-46



                     UNITED STATES TAX COURT



            NEAL N. AND RUBY W. VIAR, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13785-02S.              Filed April 12, 2004.



     Neal N. and Ruby W. Viar, pro se.

     Dustin M. Starbuck, for respondent.



     COUVILLION, Special Trial Judge:    This case was heard

pursuant to section 7463 of the Internal Revenue Code in effect

at the time the petition was filed.1    The decision to be entered




     1
          Unless otherwise indicated, subsequent section
references are to the Internal Revenue Code in effect for the
years at issue. Rule references are to the Tax Court Rules of
Practice and Procedure.
                                - 2 -


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

be cited as authority.

     In the notice of deficiency, respondent determined the

following deficiencies in Federal income taxes and penalties

against petitioners for the years indicated:


     Year        Deficiency             Sec. 6662(a) Penalty

     1999          $2,381                      $476
     2000           2,604                       490


     The issues for decision are:   (1) Whether petitioners are

entitled to certain deductions claimed on Schedule C, Profit or

Loss From Business, for the years in question in excess of

amounts allowed by respondent; (2) whether petitioners are

entitled to certain deductions claimed on Schedules E,

Supplemental Income and Loss, in excess of amounts allowed by

respondent; and (3) whether petitioners are liable for the

accuracy-related penalties under section 6662(a) for 1999 and

2000.

     Some of the facts were stipulated.      Those facts, with the

annexed exhibits, are so found and are made part hereof.

Petitioners’ legal residence at the time the petition was filed

was Lynchburg, Virginia.

     Petitioners are married.   During the years at issue, Mr.

Viar conducted a Schedule C real estate sales activity out of
                                 - 3 -


their home.    As further described below, he also engaged in

various additional activities to produce income.2      Mrs. Viar was

a bookkeeper.     Petitioners filed joint income tax returns,

prepared by a return preparer, for 1999 and 2000.

     Mr. Viar was a licensed real estate agent.      He began selling

homes in 1995.     Prior to 1995, he was a contractor installing

water and waste treatment plants throughout Virginia.

     During the years at issue, Mr. Viar was an employee of CMH

Homes, Inc., on whose behalf he sold mobile homes.      In this

activity during the years in question, Mr. Viar occasionally took

clients to lunch.     He did not keep detailed records of his meals

and entertainment expenses.     He used his own vehicle to show real

estate throughout five counties.     He did not keep a mileage log.

         In a separate self-employed activity, Mr. Viar provided the

necessary amenities for the mobile homes sold by CMH Homes,

including grading the land site, digging water wells, installing

the septic systems, constructing the brick underpinnings, and, in

some cases, installing a basement.       The work required travel to

county seats and to the location of each home.      Mr. Viar used his

own vehicle for these services, for which he was not reimbursed




     2
          Respondent did not argue that Mr. Viar’s additional
activities were activities not engaged in for profit under sec.
183(a).
                                - 4 -


by CMH Homes, Inc.   For this activity, Mr. Viar reported his

income and expenses on a Schedule C.

     Mr. Viar has had several health ailments.   In 1995, he was

diagnosed with prostate cancer, which required surgery.   During

the years 1995 to 2000, he was diagnosed with diabetes and

suffered from depression.    He traveled from his home in Lynchburg

to the Veterans’ Administration hospital in Salem, Virginia, for

treatment.

     Because of his illnesses, Mr. Viar discontinued the water

and waste treatment activity in 1995 and began the mobile home

activity.    He also engaged in a number of other income-generating

activities.   As he described at trial:


     I worked for H&R Block for two or three years on tax season,
     believe it or not. I worked for Clayton Homes. I was in
     the real estate business. I installed mobile homes where I
     put the basements in and all. I did anything I could to try
     to survive until I got on Social Security.


It appears from the record that Mr. Viar began receiving Social

Security benefits in 2000.

     Petitioners have a son who owned a construction business.

During the years at issue, Mr. Viar assisted his son in his

business by “estimating jobs” and performing computer work.     He

occasionally traveled, again using his own vehicle, to job sites

to assist his son.   He performed the computer work at his home.
                                - 5 -


     Petitioners owned a number of commercial and residential

rental properties.    Among these was a dwelling located at 418

Morningside Heights, Lynchburg, Virginia, in which petitioners

owned a 50-percent interest during the years at issue.

Petitioners reported their income and expenses, including

depreciation, from rental real estate on Schedule E.    Three

properties, including the Morningside Heights dwelling, were

listed on their 1999 income tax return.    Five properties,

including the Morningside Heights dwelling, were listed on their

2000 return.

     Mrs. Viar has a brother who was 70 years old at the time of

trial.    During 1999 and 2000, petitioners allowed Mrs. Viar’s

brother and his wife to live in the Morningside Heights dwelling

rent free because they were “unable to afford a place of their

own.”    However, it was agreed that Mrs. Viar’s brother would make

improvements to the dwelling in exchange for living there.      The

dwelling was old and in need of repairs.    Mrs. Viar’s brother did

make a number of repairs and improvements to the dwelling;

however, petitioners did not maintain any records of these

expenditures.

     During 1999 and 2000, Mr. Viar had telephone service with

several different carriers.    He maintained two local telephone

numbers, one personal and one business line, with Verizon as the

telephone provider.    His long distance service was with AT&T.    He
                                - 6 -

carried a pager in which Metrocall was the provider.    Finally, he

had two cell phones, one through Alltel and one through Intelos.

He had two cell phones because, although one of the carriers did

not provide clear reception at his residence, that number was

listed in the multiple listing service for real estate agents,

and he did not want to lose that benefit.    At trial, petitioners

produced billing statements from the various telecommunications

carriers that provided them services.    These statements reflected

over $2,400 in telecommunications expenses for 1999.3

Petitioners based their Schedule C deduction for utilities for

1999 on the available receipts and adjusted the amount downward

by half.

     On their 1999 return, petitioners reported $24,283 in wage

income.    On Schedule C, they reported gross receipts of $1,489,

expenses of $26,563, and a net loss of $25,074 from Mr. Viar’s

real estate activity.    They reported no rental income from the

Morningside Heights dwelling on Schedule E and claimed taxes,

depreciation, and insurance expenses of $1,322 relating to it.

     On their 2000 return, petitioners reported $17,415 in wage

income.    On Schedule C, they reported gross receipts of $644,

expenses of $14,843, and a net loss of $14,199 from the real


     3
          Petitioners provided Metrocall statements for the
entire 1999 year. Eleven months of AT&T statements were
provided, 10 months for Alltel, 8 months for Intelos, and 4
months for Verizon.
                               - 7 -

estate activity.   On Schedule E, they again reported no rental

income from the Morningside Heights dwelling and claimed

deductions of $1,322 for taxes, depreciation, and insurance

expenses, for a net loss from this property of $1,322.

     The following is a list of the specific Schedule C expenses

at issue for which petitioners claimed and respondent allowed

deductions in the statutory notice of deficiency.

For 1999:


                                       Claimed      Allowed
     Deductions                        On Sch. C    On Sch. C

     Car and truck expenses            $17,446          $1,050
     Travel/meals/entertainment          1,500             304
     Utilities                           1,220             223


For 2000:

                                       Claimed      Allowed
     Deductions                        On Sch. C    On Sch. C
                                                    1
     Car and truck expenses             $7,800          $ 305
     Travel/meals/entertainment          1,500            248
     Utilities                           1,300          1,300

     1
       The stipulations incorrectly state that respondent allowed
$395 for this expense for 2000. The record reflects that $7,800
was claimed and $7,495 was disallowed in the explanation of
adjustments, for a difference of $305. The Court is not bound by
a stipulation of fact that appears contrary to the facts
disclosed by the record. Rule 91(e); Estate of Eddy v.
Commissioner, 115 T.C. 135, 137 n.4 (2000); Jasionowski v.
Commissioner, 66 T.C. 312, 318 (1976).
                                 - 8 -

For both years, the car and truck expenses were claimed with

respect to a vehicle placed in service for business purposes on

July 1, 1994.     On line 44 of Schedule C, petitioners reported

that the vehicle was used 55,600 miles for business, 2,400 miles

for commuting, and 0 for other, in 1999.     For 2000, petitioners

reported that the vehicle was used 24,000 miles for business, 0

miles for commuting, and 2,500 miles for other.

     Petitioners claimed and respondent allowed deductions for

the following Schedule E expenses for the Morningside Heights

dwelling.   For 1999:

                                 Claimed             Allowed
     Deductions                  On Sch. E           On Sch. E

     Insurance                     $350                 -0-
     Taxes                          516                 -0-
     Depreciation                   456                 -0-


For 2000:

                                 Claimed             Allowed
     Deductions                  On Sch. E           On Sch. E

     Insurance                     $350                 -0-
     Taxes                          516                 -0-
     Depreciation                   456                 -0-


Although disallowed on Schedule E, the petitioners’ deductions

for real estate taxes paid were allowed by respondent as itemized

deductions on Schedule A, Itemized Deductions.

     The first issue is whether petitioners are entitled to

certain deductions claimed on Schedule C in excess of amounts
                               - 9 -

allowed by respondent in the notice of deficiency.   Petitioners

bear the burden of proof on this issue.   Rule 142; Welch v.

Helvering, 290 U.S. 111, 115 (1933).4

     In general, deductions are a matter of legislative grace.

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).   Taxpayers

are required to maintain records sufficient to enable the

Commissioner to determine their correct tax liability.   Sec.

6001; Higbee v. Commissioner, 116 T.C. 438 (2001); sec. 1.6001-

1(a), Income Tax Regs.   Such records must substantiate both the

amount and purpose of the claimed deductions.   Higbee v.

Commissioner, supra.

     Section 162 allows a deduction for ordinary and necessary

expenses that are paid or incurred during the taxable year in

carrying on a trade of business.   Sec. 162(a); Deputy v. Dupont,

308 U.S. 488, 495 (1940).   In the case of travel expenses and

certain other expenses, such as entertainment, gifts, and

expenses relating to the use of listed properties, including


     4
          Because of the years involved, the examination of
petitioners’ returns at issue commenced after July 22, 1998.
Therefore, sec. 7491, which under certain circumstances shifts
the burden of proof to the Commissioner, applies. However, for
the burden to be placed on the Commissioner on this issue, the
taxpayer must comply with the substantiation and record keeping
requirements of the Internal Revenue Code. Sec. 7491(a)(2)(A)
and (B). On this record, petitioners have not wholly satisfied
that requirement; therefore, the burden has not shifted to
respondent under sec. 7491. Higbee v. Commissioner, 116 T.C. 438
(2001).
                              - 10 -

passenger automobiles, cell phones, and other similar

telecommunications equipment under section 280F(d)(4)(A), section

274(d) imposes stringent substantiation requirements to document

particularly the nature and amount of such expenses.    For such

expenses, substantiation of the amounts claimed by adequate

records or by other sufficient evidence corroborating the claimed

expenses is required.   Sec. 274(d); sec. 1.274-5T(a)(1),

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

To meet the adequate records requirements of section 274(d), a

taxpayer "shall maintain an account book, diary, log, statement

of expense, trip sheets, or similar record * * * and documentary

evidence * * * which, in combination, are sufficient to establish

each element of an expenditure".   Sec. 1.274-5T(c)(2)(i),

Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).

The elements to be proven with respect to each traveling expense

are the amount, time, place, and business purpose of the travel.

Sec. 1.274-5T(b)(2), Temporary Income Tax Regs., 50 Fed. Reg.

46014 (Nov. 6, 1985).   These substantiation requirements are

designed to encourage taxpayers to maintain records, together

with documentary evidence substantiating each element of the

expense sought to be deducted.   Sec. 1.274-5T(c)(l), Temporary

Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).

     Petitioners’ records with respect to the car and truck

expenses and travel, meals, and entertainment expenses do not
                                - 11 -

satisfy the requirements of section 274(d) and the regulations

cited.   Mr. Viar used his vehicle for a number of purposes,

including commuting, business, and personal travel.      He

admittedly failed to maintain logs or contemporaneous records of

his mileage or the amount, time, place, and business purpose of

his trips.   After petitioners were audited, Mr. Viar

“reconstructed” his mileage for the different purposes based on

his annual odometer readings.    Similarly, Mr. Viar did not keep a

contemporaneous record of his meals and entertainment expenses

detailing the times he provided such services for real estate

clients and other business colleagues.    He reconstructed these

expenses from credit card statements.

     The Court is not bound to accept petitioners’ uncorroborated

or self-serving testimony.   Tokarski v. Commissioner, 87 T.C. 74,

77 (1986).   Moreover, to the extent petitioner used his vehicle

to commute to and from work, such expenses are considered

nondeductible personal living expenses.    Sullivan v.

Commissioner, 45 T.C. 217 (1965), affd. 368 F.2d 1007 (2d Cir.

1966); sec. 1.262-1(b)(5), Income Tax Regs.    The Court holds that

the car and truck expenses and travel, meals, and entertainment

expenses at issue were not properly substantiated under the cited

legal standards.   Petitioners, therefore, are not entitled to

deductions in excess of amounts allowed by respondent for their
                                - 12 -

car and truck expenses and travel, meals, and entertainment

expenses.

     With respect to the Schedule C utilities expenses disallowed

for 1999, petitioners produced substantiating records in the form

of utility bills and thereby met the requirements of section

274(d) and the regulations.    Sec. 280F(d)(4)(A)(v).   The Court is

satisfied from petitioners' records that they incurred ordinary

and necessary business-related utility expenses in excess of

those allowed by respondent.    Mr. Viar's testimony with regard to

the number of telecommunications devices and services he utilized

for business was credible.    Some of his utility bills were

missing, but petitioners based their deductions only on the bills

provided.   Their receipts reflected over $2,400 in expenses, yet

petitioners only deducted one-half of these, adjusting downward

in part so as not to include their residential or other

nondeductible phone expenses.    The Court is satisfied that the

business utilities expenses documented exceeded the amount

allowed by respondent, and that the amount claimed was

substantiated.   Therefore, the Court allows petitioners to deduct

the full amount claimed for utilities on Schedule C of their

return for 1999.5



     5
           As noted earlier, respondent allowed the entire amount
of $1,300 claimed by petitioners for utilities expenses for the
year 2000.
                               - 13 -

     The next issue is whether petitioners are entitled to

certain deductions claimed on Schedule E in excess of amounts

allowed by respondent.    This issue is decided on a preponderance

of the evidence and without regard to the burden of proof.

     Respondent disallowed petitioners’ claimed Schedule E

deductions for insurance and depreciation expenses with respect

to the Morningside Heights dwelling on the basis of section 280A.

Section 280A provides generally that, in the case of an

individual or an S corporation, no deduction otherwise allowable

shall be allowed with respect to the use of a dwelling unit that

is used by the taxpayer during the taxable year as a residence,

except as otherwise provided in section 280A.   Section 280A(d)(1)

provides generally that a taxpayer is considered as using a

dwelling unit as a residence if the taxpayer uses the unit for

personal purposes during the taxable year for the greater of 14

days or 10 percent of the number of days the unit is rented at a

fair value.   Section 280A(d)(2) defines use of a dwelling as

personal if it is used:


          (A) for personal purposes by the taxpayer or any other
     person who has an interest in such unit, or by any member of
     the family (as defined in section 267(c)(4)) of the taxpayer
     or such other person; [or]

       *       *          *       *        *        *         *

          (C) by any individual * * * unless for such day the
     dwelling unit is rented for a rental which, under the facts
     and circumstances, is fair rental.
                                - 14 -

However, a taxpayer shall not be treated as using a dwelling unit

for personal purposes by reason of a rental arrangement for any

period if for such period such dwelling unit is rented, at a fair

rental, to any person for use as such person’s principal

residence.   Sec. 280A(d)(3).

     Under section 267(c)(4), “The family of an individual shall

include only his brothers and sisters (whether by the whole or

half blood), spouse, ancestors, and lineal descendants”.    Mrs.

Viar’s brother, therefore, was a family member of petitioners

under the plain language of section 267(c)(4).     As a result, the

use of that dwelling was personal as to petitioners, and section

280A precludes their deduction of the expenses related thereto.

Moreover, because no evidence was presented as to the fair rental

value of the dwelling or the value of the improvements made by

Mrs. Viar’s brother, petitioners do not fall under the fair

rental exception of section 280A(d)(3).   McDonald v.

Commissioner, T.C. Memo. 1991-242; Gilchrist v. Commissioner,

T.C. Memo. 1983-288.   Accordingly, petitioners are not entitled

to deduct the depreciation and insurance expenses associated with

the Morningside Heights property under the legal provisions

cited.   Respondent is sustained on this issue.6




     6
          As noted earlier, respondent allowed the claimed
deductions for taxes on the dwelling as an itemized deduction.
                                 - 15 -

     The final issue is whether petitioners are liable for the

accuracy-related penalty under section 6662(a) for the years at

issue.    As relevant here, section 7491(c) places the burden of

production on respondent in court proceedings with respect to the

liability of any individual for any penalty, addition to tax, or

additional amount imposed.       The additional tax imposed pursuant

to section 6662(a) falls within the scope of section 7491(c).

Respondent, therefore, bears the burden of production on this

issue.    However, petitioners continue to bear the burden of

proving that respondent's determination is incorrect.        Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001).

     Section 6662(a) provides for an accuracy-related penalty

equal to 20 percent of any portion of an underpayment of tax

required to be shown on the return that is attributable to the

taxpayer’s negligence or disregard of rules or regulations.       Sec.

6662(a) and (b)(1).    Negligence consists of any failure to make a

reasonable attempt to comply with the provisions of the Internal

Revenue Code.    Sec. 6662(c).   Disregard consists of any careless,

reckless, or intentional disregard.       Id.

     The courts have refined the Code definition of negligence as

a lack of due care or failure to do what a reasonable and prudent

person would do under similar circumstances.      Allen v.

Commissioner, 925 F.2d 348, 353 (9th Cir. 1991), affg. 92 T.C. 1

(1989).    Treasury regulations further provide that negligence
                                - 16 -

includes any failure to exercise ordinary and reasonable care in

the preparation of a tax return, failure to keep books and

records, or failure to substantiate items properly.     Sec. 1.6662-

3(b)(1), Income Tax Regs.   A return position that has a

“reasonable basis” as defined in the regulation is not

attributable to negligence.     Id.

     An exception to the section 6662 penalty applies when the

taxpayer demonstrates that:    (1) There was reasonable cause for

the underpayment, and (2) the taxpayer acted in good faith with

respect to the underpayment.    Sec. 6664(c).   Whether the taxpayer

acted with reasonable cause and in good faith is determined by

the relevant facts and circumstances on a case-by-case basis.

Stubblefield v. Commissioner, T.C. Memo. 1996-537; sec. 1.6664-

4(b)(1), Income Tax Regs.     “Circumstances that may indicate

reasonable cause and good faith include an honest

misunderstanding of fact or law that is reasonable in light of

all the facts and circumstances, including the experience,

knowledge and education of the taxpayer.”       Sec. 1.6664-4(b)(1),

Income Tax Regs.   A taxpayer is not subject to the addition to

tax for negligence where the taxpayer makes honest mistakes in

complex matters, but the taxpayer must take reasonable steps to

determine the law and to comply with it.     Niedringhaus v.
Commissioner, 99 T.C. 202, 222 (1992).     The most important factor

is the extent of the taxpayer’s effort to assess the proper tax
                               - 17 -

liability.    Stubblefield v. Commissioner, supra; sec. 1.6664-

4(b)(1), Income Tax Regs.

     On this record, the Court holds that petitioners are liable

for the penalty under section 6662(a) with respect to the

Schedule C car and truck expenses, travel, meals, and

entertainment expenses.    Mr. Viar offered the following

explanation for his failure to keep contemporaneous logs and

adequate records for his Schedule C expenses:      “I had a rough

time during that five-year period.      I used to keep MacAffie

receipts prior to that.”    He further stated:    “I think my

personal problems, my medical problems, I just didn’t keep the

receipts that I should have kept, and the ones I did keep, I

misplaced.”   Nonetheless, the applicable legal standards on

deductibility and record keeping are clear, and Mr. Viar’s

testimony does not support a finding of reasonable cause for the

tax underpayment attributable to the items described.

     Petitioners are also liable for the section 6662(a) penalty

with respect to the disallowed Schedule E expenses.      The law is

clear that the use of a dwelling unit by a family member is

deemed personal.   Petitioners did not exercise reasonable care in

the reporting of this item, nor did they take reasonable steps to

determine the law and comply with it.      Respondent is sustained on

the penalty for the disallowed Schedule C and Schedule E

expenses.
                            - 18 -

    Reviewed and adopted as the report of the Small Tax Case

Division.



                                       Decision will be entered

                                  under Rule 155.
