                          T.C. Summary Opinion 2015-33



                          UNITED STATES TAX COURT



                    PRISCILLA J. LEE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 29930-13S.                        Filed May 4, 2015.



      Priscilla J. Lee, pro se.

      Halvor R. Melom, for respondent.



                                  SUMMARY OPINION


      COHEN, Judge: This case was heard pursuant to the provisions of section

7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant

to section 7463(b), the decision to be entered is not reviewable by any other Court,

and this opinion shall not be treated as precedent for any other case. Unless

otherwise indicated, all section references are to the Internal Revenue Code in
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effect for the year in issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

      Respondent determined a $5,642 deficiency and a $1,128.40 section

6662(a) penalty with respect to petitioner’s 2010 Federal income tax. After

concessions, the issues for decision are whether certain expenses that petitioner

reported are deductible either as employee expenses or as business expenses on

Schedule C, Profit or Loss From Business, and whether petitioner is liable for the

penalty.

                                    Background

      Petitioner resided in California at the time she filed her petition. During

2010, she was retired from her prior position as an educator but continued to

consult with teachers and high school students involved in the UCLA (University

of California at Los Angeles) AP (advanced placement) Readiness Program. From

January 11 through April 17, 2010, petitioner participated in four workshops at

UCLA. During 2010, petitioner was paid $4,881 as wages for these services.

      During 2010 petitioner also acted as a travel agent consultant, working with

a travel agency to book cruises that would appeal to older people with needs for

accessible facilities and favorable passenger-to-staff ratios. Most of her travel
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agent clients were friends or friends of friends. During 2010, petitioner was paid

$3,143 in commissions for her travel agent activities.

      During 2010, petitioner and her companion took a cruise from New York to

Los Angeles by way of the Panama Canal. Stops along the way included the

Florida Everglades and the Costa Rican rain forests. She also made an advance

payment on a 40-day cruise from India to Africa to be taken in 2011. She and her

companion also visited universities and museums in California during 2010.

      Petitioner paid expenses in 2010 for a variety of other items, including

decorative items, subscriptions, local transportation, storage, telephone and

Internet, supplies, and postage. Petitioner maintained receipts for such expenses

but did not segregate them among expenses relating to her UCLA activities, her

travel agent activities, and personal expenses.

      On a Schedule C attached to her 2010 Form 1040, U.S. Individual Income

Tax Return, petitioner deducted $27,744 in expenses from the $3,143 gross

receipts from the travel agent activity, reporting a $24,601 net loss to be deducted

against her other reported income totaling $76,207. The largest item claimed as a

deduction was “research travel $15,288”. Petitioner did not itemize deductions

and thus did not attribute any of the expenses claimed as a deduction on the return

to her UCLA activities as employee business expenses. She claimed the standard
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deduction of $7,100. Her adjusted gross income for purposes of section 67(a) was

reported as $51,606.

                                      Discussion

      During negotiations with respondent’s counsel prior to trial and during her

testimony at trial, petitioner attempted to justify expenses as relating to either her

UCLA activities or her travel agent activities. Petitioner had deducted all of the

disputed expenses on Schedule C, but those, if any, properly allocable to her

UCLA employee expenses would be reportable on Schedule A, Itemized

Deductions, and subject to the 2% limitation of section 67(a).

Claimed Travel Expenses

      The largest amount in dispute relates to petitioner’s claim that expenses for

cruise travel with her companion enabled her to advise prospective travel agency

clients or to obtain information that would be relevant to counseling high school

students and teachers in the UCLA AP Program. She essentially claimed that any

information obtained through her travel was useful in broadening the knowledge

that she would convey to others.

      Under section 274(m)(2), no deduction is allowed “for expenses for travel

as a form of education.” Taxpayers may deduct expenses incurred while traveling

away from home if the trip is primarily to obtain education that has the requisite
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relation to the taxpayer’s business. Sec. 1.162-5(e)(1), Income Tax Regs. If as an

incident of such a trip the taxpayer engages in some personal activity such as

“sightseeing, social visiting, or entertaining, or other recreation”, the portion of the

expenses attributable to such personal activities is not deductible pursuant to

section 262. Id.

      To deduct expenses incurred for travel, meals, and lodging while away from

home on job-related education, a taxpayer must satisfy the strict substantiation

requirements of section 274(d). Section 274(d) disallows deductions for traveling

expenses, including meals and lodging, unless the taxpayer substantiates by

adequate records or by sufficient evidence corroborating the taxpayer’s own

statement: (1) the amounts of such expenses, (2) the time and place such expenses

were incurred, and (3) the business purpose for which such expenses were

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

46014 (Nov. 6, 1985). Adequate records generally must be written and must be

prepared or maintained such that a record of each element of an expenditure or use

that must be substantiated is made at or near the time of the expenditure or use

when the taxpayer has full present knowledge of each element. See sec. 1.274-

5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). In

the alternative, each element of an expenditure or use must be established by the
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taxpayer’s own written or oral statement “containing specific information in detail

as to such element” combined with corroborative evidence to establish such

element. Sec. 1.274-5T(c)(3)(i), Temporary Income Tax Regs., 50 Fed. Reg.

46020 (Nov. 6, 1985). For expenses subject to section 274(d), neither a taxpayer

nor the Court may estimate otherwise permissible deductions. See Sanford v.

Commissioner, 50 T.C. 823, 827-828 (1968), aff’d per curiam, 412 F.2d 201 (2d

Cir. 1969).

      Petitioner produced receipts for the cruises, shipboard purchases, and

related expenses. The receipts do not show any business purpose for the expenses,

and petitioner’s testimony was not corroborated. Her rationale for deductibility is

unpersuasive, and we need not accept it. The shifting explanations and the failure

to allocate among expenses related to UCLA activities involving high school

students and teachers, travel agent activities involving older travelers, and

personal expenses of traveling with her companion undermine the reliability of her

testimony. We conclude that she has not satisfied the strict substantiation

requirements of section 274(d).

Other Expenses

       Petitioner deducted travel and meals and entertainment expenses in

addition to those claimed as “research travel” expenses. Some of the expenses
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related to travel to universities within California that she claimed related to her

UCLA activities. To substantiate the other expenses reported on Schedule C of

her 2010 return, petitioner presented credit card statements and receipts but no

evidence corroborating the claimed business purpose. These items were not

substantiated as required by section 274(d) and cannot be allowed.

      Petitioner offered proof of amounts spent for gifts, purchases at Hallmark

stores, postage, bank charges, telephone, parking and tolls, dues and subscriptions,

books and magazines, and museum and theater admissions. She presented a

charge for storage of $2,527.20 as proof of “outside services”, although the

amount in that category on her Schedule C was $269. For such items to be

deductible, petitioner must prove by a preponderance of the evidence that they are

ordinary and necessary to her business activities under section 162 and not

nondeductible personal expenses under section 262. See Rule 142(a); New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); Rockwell v.

Commissioner, 512 F.2d 882, 886 (9th Cir. 1975), aff’g T.C. Memo. 1972-133.

After review of petitioner’s credit card statements and telephone bills, respondent

conceded that certain minor items are deductible as Schedule C business expenses.

      Although petitioner offered a rationale as to why approximately a third of

her disposable income was deductible as related to either her UCLA employment
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or her travel agent activity, we are not persuaded that the disputed expenses are

ordinary, necessary, or directly or proximately related to either. See Deputy v. du

Pont, 308 U.S. 488, 493-495 (1940); sec. 1.162-1, Income Tax Regs. We cannot

conclude that petitioner has satisfied her burden of proof. Many of the expenses

are inherently personal, and petitioner’s explanation is improbable and not

persuasive. For example, with respect to an amount for “Hummel membership”,

petitioner explained: “Yes. I--I had thought that that was okay because I used

them as displays because they were made in Germany and I would use them to tell

people that this is some of the things you could get when you go there, but it may

be stretching a point there.”

      Moreover, the amounts that she has specifically identified as relating to her

UCLA employment, particularly after reduction by 2% of her adjusted gross

income, are less than the standard deduction claimed on the return and would not

justify an additional deduction. Petitioner is not entitled to deduct the items

remaining in dispute as business expenses on Schedule C.

Accuracy-Related Penalty

      Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-related penalty

on any underpayment of Federal income tax attributable to a taxpayer’s negligence

or disregard of rules or regulations or substantial understatement of income tax. A
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substantial understatement of income tax exists if the understatement exceeds the

greater of 10% of the tax required to be shown on the return or $5,000. Sec.

6662(d)(1)(A).

        Under section 7491(c) the Commissioner bears the burden of production

with regard to penalties and must come forward with sufficient evidence

indicating that it is appropriate to impose penalties. See Higbee v. Commissioner,

116 T.C. 438, 446 (2001). Once the Commissioner has met the burden of

production, the burden of proof remains with the taxpayer, including the burden of

proving that the penalties are inappropriate because of reasonable cause or

substantial authority. See Rule 142(a); Higbee v. Commissioner, 116 T.C. at 446-

447. It appears that petitioner’s understatement will exceed $5,000,

notwithstanding respondent’s minor concessions. In any event, claiming personal

expenses as business expenses and failing to maintain records substantiating any

valid deductions constitute negligence for purposes of section 6662(a) and (b)(1).

See Higbee v. Commissioner, 116 T.C. at 449; sec. 1.6662-3(b)(1), Income Tax

Regs.

        The accuracy-related penalty under section 6662(a) is not imposed with

respect to any portion of the underpayment as to which the taxpayer acted with

reasonable cause and in good faith. Sec. 6664(c)(1); see Higbee v. Commissioner,
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116 T.C. at 448. Petitioner did not claim reliance on a professional tax adviser.

She testified that she just provided information to her return preparer; apparently

she did not identify to the preparer the specific items she was deducting.

Petitioner is an educated and intelligent person, and we conclude that she knew or

should have known that she was “stretching the point” with respect to many more

significant items and not just regarding the Hummel membership. The section

6662(a) penalty will be sustained.

      To reflect respondent’s concessions,


                                                 Decision will be entered

                                          under Rule 155.
