                               T.C. Memo. 2014-164



                         UNITED STATES TAX COURT



                 HARRISON R. HUNTER, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 7277-13.                           Filed August 14, 2014.



      Harrison R. Hunter, pro se.

      Heather K. McCluskey, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      LARO, Judge: The instant case involves petitioner’s Federal income tax

returns for 2009, 2010, and 2011 (years at issue). In a notice of deficiency,

respondent determined deficiencies and accuracy-related penalties under section

6662 as follows:
                                         -2-


               [*2]                                    Penalty
                  Year          Deficiency            sec. 6662
                   2009           $4,823                  n/a
                   2010           10,653              $2,130.60
                   2011           10,364               2,072.80

      Petitioner timely petitioned this Court for redetermination of the determined

deficiencies and accuracy-related penalties. See sec. 6213(a).1 Petitioner resided

in California at the time the petition was filed.

      After petitioner’s concessions,2 we decide the following issues: (1) whether

petitioner was entitled to deductions claimed on Schedule E, Supplemental Income

and Loss, for the years at issue. We hold he is not; and (2) whether petitioner is

liable for accuracy-related penalties for the years at issue. We hold he is.




      1
      Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
      2
       For the tax year 2009 petitioner claimed a dependency exemption
deduction for “M.C.C.”, a person he claimed was his nephew. For tax years 2010
and 2011 petitioner claimed a dependency exemption deduction for “M.C.”, a
person he claimed was his grandchild. Before trial petitioner conceded that he was
not entitled to the claimed dependency exemption deductions for the years at
issue. Additionally, respondent conceded that petitioner did not underreport
Social Security income by $1 for each of his tax years 2009 and 2011.
                                       -3-

[*3]                          FINDINGS OF FACT

       Some of the facts have been stipulated, and they are so found. We

incorporate by reference the parties’ stipulation of facts and the accompanying

exhibits.

       Petitioner was employed as a merchant marine with the Military Sealift

Command during all the years at issue and until his retirement on December 31,

2013. Petitioner reported total income of $125,689, $117,635, and $120,504 for

the years at issue, respectively. Though petitioner’s formal education ended in the

eighth grade, he earned his general education development while working for the

Navy. Petitioner’s occupation required him to be at sea for long periods. From

November 28, 2008, to April 4, 2012, petitioner was deployed on the USNS Alan

Shepard.

       In 1992 petitioner purchased a three-bedroom house at 18078 Indiana

Avenue in Lemoore, California (Lemoore property). For the years at issue

petitioner used the address of his brother, James Hunter, on his tax returns. James

Hunter resides at 1658 West 126th Street, Los Angeles, California. It is unclear

from the record whether petitioner stayed with his brother when he was not at sea.

       The Lemoore property was occupied by petitioner’s friend Minerva

Corfman from 2009 to 2011, but he was unsure exactly when Ms. Corfman moved
                                        -4-

[*4] into and out of the property. Petitioner’s furniture was kept in the Lemoore

property during this period. Ms. Corfman had an agreement with petitioner to pay

James Hunter, petitioner’s brother, monthly rent of $450 and $210 for utilities.

James Hunter did not have an ownership interest in the Lemoore property but

managed the property on behalf of petitioner. James Hunter received one payment

of $450 in 2008 or 2009 but did not receive any rent payments in 2010 or 2011.

Petitioner made no attempts to collect rent from Ms. Corfman, nor did he take any

steps to evict Ms. Corfman on the grounds of failure to pay rent. Petitioner moved

into the Lemoore property in 2012.

      Petitioner did not research comparable rental rates in the Lemoore,

California, area and instead based the rental rate on what he believed Ms. Corfman

could afford. The $450 rental rate was less than petitioner’s monthly mortgage

payment for the property, but it is unclear how much more the mortgage was.

      Petitioner timely filed his tax returns for the years at issue. For each return

petitioner attached a Schedule E on which he claimed a deduction for rental real

estate losses. On his 2009 return petitioner reported zero rental real estate income

and claimed deductions totaling $21,570, which included a mortgage interest

deduction of $9,069 and a tax deduction of $974. On his 2010 return, petitioner

reported zero rental real estate income and claimed deductions totaling $35,471,
                                         -5-

[*5] which included a mortgage interest deduction of $8,656 and a tax deduction

of $1,991. On his 2011 return, petitioner reported zero rental real estate income

and claimed deductions totaling $35,029, which included a mortgage interest

deduction of $8,206 and a tax deduction of $1,991. In total petitioner claimed

$92,070 of rental expenses and reported zero rental income for the years at issue.

In the notice of deficiency, respondent disallowed deductions for the mortgage

interest expenses under Schedule E but allowed the deductions in full under

Schedule A, Itemized Deductions. In addition, respondent allowed a deduction for

$1,000 of interest expense for each of the years at issue. Petitioner did not

maintain books or records for his rental activities.

                                      OPINION

I.    Burden of Proof

      In general, the Commissioner’s determination in a notice of deficiency is

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

determination is incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). Pursuant to section 7491(a), the burden of proof as to factual matters

shifts to the Commissioner under certain circumstances. Petitioner has neither

alleged that section 7491(a) applies nor has he established his compliance with its

requirements. Accordingly, petitioner bears the burden of proof.
                                         -6-

[*6] II.     Schedule E Real Estate Loss Deductions

       Deductions are allowed solely as a matter of legislative grace. Deputy v. du

Pont, 308 U.S. 488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435,

440 (1934). A taxpayer bears the burden of proving entitlement to any deduction

claimed. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992); Welch v. Helvering, 290 U.S. at 115. In addition, a taxpayer is required to

maintain records sufficient to substantiate deductions claimed on a Federal income

tax return. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs.

       A.    Personal Use of the Lemoore Property

       Section 212 allows for a deduction of ordinary and necessary expenses paid

or incurred while managing or maintaining property held out for the production of

income. Where a taxpayer uses a dwelling as a personal residence during the

taxable year, however, deductions under section 212 are not allowed. Sec.

280A(a), (d); Osborne v. Commissioner, T.C. Memo. 1987-553. Pursuant to

section 280A(d)(1), a dwelling is used as a personal residence if the taxpayer

resides in the dwelling for the greater of 14 days or 10% of the number of days the

dwelling is rented at fair rental value. Further, a dwelling is treated as a personal

residence for each day that the dwelling is rented for less than fair rental value.

Sec. 280A(d)(2)(C). “Fair rental value” is determined under a facts and
                                         -7-

[*7] circumstances analysis. Id. To determine fair rental value, the Court will

look at comparable rental rates in the rental property’s area. See DiDonato v.

Commissioner, T.C. Memo. 2013-11, at *92. Where there is no evidence to

substantiate a taxpayer’s claim that property was rented at fair market value, the

trier of fact may determine that the property was not rented at fair rental value. Id.

at *93 (citing Epstein v. Commissioner, T.C. Memo. 1994-34).

      Petitioner has failed to establish that he did not use the Lemoore property as

a personal residence while he was in California during the years at issue. At trial

petitioner admitted that his furniture was left in the Lemoore property from 2009

to 2011. Petitioner did not provide any information regarding how much time he

was not at sea (if any) and where he stayed during those times. Petitioner has

failed to establish that he did not reside at the Lemoore property for the greater of

14 days or 10% of the number of days the dwelling was rented at fair rental value

during the years at issue.

      Even if petitioner did not reside at the Lemoore property, we still find that

he used the property for personal purposes because he rented the dwelling for less

than fair rental value. Petitioner stated that he based the amount of rent on what

Ms. Corfman could pay rather than on the fair rental value rates for comparable

properties in the Lemoore, California, area. In fact, petitioner collected only $450
                                         -8-

[*8] in rent from 2008 to 2012. Petitioner is deemed to have used the property as

a personal residence under section 280A(d)(2)(C). Because we find that he used

the property as a personal residence, he is not entitled to claimed deductions other

than deductions that are allowable without regard to its connection to the

taxpayer’s income producing activity, i.e., interest and taxes. Secs. 280A(b),

164(a), 163(h)(2)(D), and (4)(A).3

      B.     Failure To Substantiate Claimed Deductions

      Petitioner claimed tax deductions for $974, $1,991, and $1,991 for the years

at issue, respectively. In the notice of deficiency, respondent allowed a deduction

for $1,000 of property tax for each of the years at issue.4



      3
        Respondent also argues that the claimed deductions should be disallowed
under sec. 183. Sec. 280A was enacted to address congressional concern that the
use of rental property by a taxpayer as a residence gave the taxpayer unwarranted
opportunities to deduct personal expenses. Bolton v. Commissioner, 77 T.C. 104,
108 (1981) (citing S. Rept. No. 94-938, 94th Cong., 2d Sess. 150-152 (1976), and
H.R. Rept. No. 94-658, 94th Cong., 1st Sess. 162-164 (1975), aff’d, 694 F.2d 556
(9th Cir. 1982). Sec. 280A was intended to provide “‘definitive rules * * * to
specify the extent to which personal use [of a home] would result in the
disallowance of certain deductions in excess of gross income’” from the property.
Id. Because we determined that petitioner is not entitled to certain deductions
under sec. 280A, we need not conduct a sec. 183 analysis.
      4
       Petitioner also claimed mortgage interest deductions of $9,069, $8,656, and
$8,206 for the years at issue, respectively. Respondent allowed the interest
deductions in full as itemized deductions under Schedule A. Accordingly, the
mortgage interest deductions are not at issue.
                                        -9-

[*9] To be entitled to a deduction, a taxpayer must meet applicable substantiation

requirements, whether generally imposed or imposed with respect to a specific

item. Sec. 6001; Roberts v. Commissioner, 62 T.C. 834, 836-37 (1974). A

taxpayer is required to maintain records sufficient to substantiate deductions

claimed on a Federal income tax return. Sec. 6001; sec. 1.6001-1(a), (e), Income

Tax Regs. Taxpayers who fail to substantiate any item may be denied the claimed

deduction.

       Petitioner did not substantiate the property tax deductions he claimed for the

years at issue. Accordingly, we deny petitioner’s interest deductions beyond what

respondent has already allowed.

III.   Accuracy-Related Penalty

       Section 6662(a) and (b)(2) imposes a 20% accuracy-related penalty on any

underpayment attributable to any substantial understatement of income tax. An

understatement is “substantial” if it exceeds the greater of $5,000 or 10% of the

tax required to be shown on the return. Sec. 6662(d)(1)(A). The Commissioner

bears the burden of production with respect to this penalty. Sec. 7491(c).

       The accuracy-related penalty is not imposed with respect to any portion of

an underpayment as to which the taxpayer acted with reasonable cause and in good

faith. See sec. 6664(c)(1). The decision as to whether the taxpayer acted with
                                         - 10 -

[*10] reasonable cause and in good faith depends upon all the relevant facts and

circumstances. See sec. 1.6664-4(b)(1), Income Tax Regs. Relevant factors

include the taxpayer’s efforts to assess his proper tax liability, including the

taxpayer’s reasonable and good faith reliance on the advice of a professional such

as an accountant. Id. Further, an honest misunderstanding of fact or law that is

reasonable in the light of the experience, knowledge, and education of the

taxpayer may indicate reasonable cause and good faith. See Remy v.

Commissioner, T.C. Memo. 1997-72.

      Respondent’s notice of deficiency, whose determinations we have sustained,

determined an underpayment of $10,653 for 2010. The understatement of income

tax exceeds the greater of $5,000 and 10% of the total tax required to be shown on

petitioner’s 2010 return. Likewise, respondent determined an underpayment of

$10,364 on petitioner’s 2011 return. The understatement of income tax exceeds

the greater of $5,000 and 10% of the total tax required to be shown on that return.

We find that petitioner’s understatements of income tax for 2010 and 2011 are

substantial and thus he is liable for section 6662(a) and (b)(2) accuracy-related

penalties.

      Petitioner has not provided any evidence that he acted with reasonable cause

and in good faith for the years at issue. At trial petitioner claimed to have relied
                                          - 11 -

[*11] upon the advice of a tax return preparer during the years at issue, but he

failed to provide the tax return preparer’s name, credentials, contact information,

or any other information. To show that he reasonably relied on the advice of a

professional and is thus not liable for section 6662(a) penalties, the taxpayer must

prove: (1) the adviser was a competent professional who had sufficient expertise

to justify the reliance; (2) the taxpayer provided necessary and accurate

information to the adviser; and (3) the taxpayer actually relied in good faith on the

adviser’s judgment. Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99

(2000), aff’d, 299 F.3d 221 (3d Cir. 2002). Petitioner has failed to establish that

any of the above requirements are satisfied.

      Accordingly, we sustain respondent’s imposition of the accuracy-related

penalties for 2010 and 2011.

      We have considered all of the arguments advanced by petitioner, and, to the

extent not expressly addressed, we conclude that those arguments do not support a

result contrary to that reached herein.

      To reflect the foregoing,


                                                        Decision will be entered under

                                                   Rule 155.
