                                 T.C. Memo. 2017-99



                           UNITED STATES TAX COURT



            KATRINA E. TAYLOR AND AVERY TAYLOR, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 8965-15.                             Filed June 1, 2017.



      Katrina E. Taylor and Avery Taylor, pro sese.

      Deborah Aloof and Bradley Hiller Bentley (student), for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


      LAUBER, Judge: With respect to petitioners’ Federal income tax for 2012,

the Internal Revenue Service (IRS or respondent) determined a deficiency of

$13,885 and an accuracy-related penalty of $2,777 under section 6662(a).1 The


      1
          All statutory references are to the Internal Revenue Code (Code), in effect
                                                                        (continued...)
                                         -2-

[*2] issues for decision are whether petitioners are entitled to deduct car and truck

expenses reported on their Schedule C, Profit or Loss From Business, and whether

they are liable for an accuracy-related penalty. We resolve both issues in respond-

ent’s favor.

                               FINDINGS OF FACT

       The parties filed a stipulation of facts with accompanying exhibits that is

incorporated by this reference. Petitioners resided in West Virginia when they

filed their petition.

       During 2009-2011, the three years preceding the tax year in issue, petitioner

husband, Avery Taylor, operated as a sole proprietorship AW Recycling, a recy-

cling business. He transported products intended for recycling using a specialized

truck. Petitioners reported the income and expenses of this business on Schedules

C. For 2009 they reported gross profit of $3,590 and a net loss of $51,482; of

their reported expenses, $43,989 represented car and truck expenses. For 2010

they reported gross profit of $11,360 and a net loss of $65,375; of their reported

expenses, $56,244 represented car and truck expenses. For 2011 they reported

gross profit of $2,120 and a net loss of $93,982; of their reported expenses,

       1
        (...continued)
for the year in issue, and all Rule references are to the Tax Court Rules of Practice
and Procedure. We round all monetary amounts to the nearest dollar.
                                        -3-

[*3] $91,647 represented car and truck expenses. Petitioner wife, Katrina Taylor,

testified that the AW Recycling business terminated in 2012.

      During 2009-2011 Mrs. Taylor allegedly also operated a billing services

business called Long-Term Care Billing Solutions (LTC). She testified that she

sought out healthcare providers, mainly nursing homes and hospitals, and offered

to review their customer accounts. She allegedly proposed to prospective clients

that, if she collected on any past-due accounts, they would pay her a percentage of

the amount collected.

      Mrs. Taylor testified that she began her LTC activity in 2009 and continued

it through 2014. But petitioners did not include with their 2009, 2010, or 2011

return a distinct Schedule C for the LTC activity. Rather, Mrs. Taylor testified

that she included LTC’s income and expenses, consisting mostly of alleged car

and truck expenses, on the Schedules C for AW Recycling. Those Schedules C

did not indicate which income and expenses were attributable to which business.

      Petitioners timely filed their 2012 Federal income tax return, reporting

$96,735 of taxable wages attributable chiefly to Mrs. Taylor’s full-time employ-

ment at the Jefferson Memorial Hospital. They included in this return a Schedule

C for LTC that reported zero gross receipts and total expenses of $75,968, includ-

ing $74,373 of car and truck expenses. After taking into account that $75,968 net
                                        -4-

[*4] loss, the standard deduction, and personal exemptions, petitioners’ 2012

return showed zero income tax liability and claimed an earned income tax credit

(EITC) of $5,891 and an additional child tax credit of $2,665.

      The IRS selected petitioners’ 2012 return for examination. It disallowed the

deduction for car and truck expenses on the grounds that petitioners had failed to

substantiate these expenses and that the expenses (if substantiated) would consti-

tute nondeductible startup costs of a new business. After increasing petitioners’

net income to reflect this disallowance, the IRS determined an income tax liability

of $5,437. As a corollary of these adjustments, the IRS decreased petitioners’

EITC and additional child tax credit to zero. On February 20, 2015, the IRS sent

petitioners a timely notice of deficiency for 2012 that determined a deficiency of

$13,885 and an accuracy-related penalty of $2,777. Petitioners timely sought re-

determination in this Court.

                                     OPINION

      The IRS’ determinations in a notice of deficiency are generally presumed

correct, though the taxpayer can rebut this presumption. Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933). Petitioners do not contend that the burden

of proof should shift to respondent under section 7491(a) and, if they had ad-

vanced this contention, it would lack merit. They thus bear the burden of proof.
                                        -5-

[*5] Deductions are a matter of legislative grace. The taxpayer bears the burden

of proving that reported business expenses were actually paid and were “ordinary

and necessary.” Sec. 162(a); Rule 142(a). Taxpayers bear the burden of substan-

tiating the expenses underlying their claimed deductions by keeping and produ-

cing records sufficient to enable the IRS to determine the correct tax liability. Sec.

6001; INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); sec. 1.6001-1(a),

(e), Income Tax Regs. The failure to keep and present such records counts heavily

against a taxpayer’s attempted proof. Rogers v. Commissioner, T.C. Memo. 2014-

141, 108 T.C.M. (CCH) 39, 43.

      Section 274(d) imposes relatively strict substantiation requirements for de-

ductions claimed for (among other things) “listed property.” Under section

280F(d)(4) listed property includes any “passenger automobile.” No deduction is

allowed under section 274(d) unless the taxpayer substantiates, by adequate rec-

ords or by sufficient evidence corroborating her own statements, the amount, time

and place, and business purpose for each expenditure. Sec. 1.274-5T(a), (b), and

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

A.    Car and Truck Expenses

      Because passenger automobiles constitute “listed property,” petitioners’ re-

ported car and truck expenses are subject to the heightened substantiation require-
                                        -6-

[*6] ments described above. See Fernandez v. Commissioner, T.C. Memo. 2011-

216. To satisfy these requirements, the taxpayer generally must keep a

contemporaneous mileage log or a similar record, such as a diary or trip sheets,

that substantiates the extent to which the vehicle was actually used for business

rather than personal purposes. See Michaels v. Commissioner, 53 T.C. 269, 275

(1969); Flake v. Commissioner, T.C. Memo. 2014-76; sec. 1.274-5T(c),

Temporary Income Tax Regs., supra. Lacking contemporaneous records, the

taxpayer must produce other credible evidence sufficient to corroborate his or her

own statements concerning business use. Sec. 1.274-5T(a), (b), and (c), Tempo-

rary Income Tax Regs., supra.

      Petitioners reported on their 2012 Schedule C car and truck expenses of

$74,373. At trial petitioners produced a spreadsheet showing mileage allegedly

driven in four vehicles: a 2006 Toyota Camry, a 2004 Cadillac Escalade, a 2003

Volkswagen Jetta, and a 2006 BMW. Mrs. Taylor admitted at trial that none of

these vehicles was used exclusively for business purposes in 2012.

      We note initially that petitioners’ trial evidence differed significantly from

their tax reporting. Petitioners attached to their 2012 return Form 4562, Depre-

ciation and Amortization, on which they listed only two vehicles and reported that

each was used 100% for business purposes. On this Form 4562 they reported
                                        -7-

[*7] 132,456 business miles, with 61,226 business miles driven by the first vehicle

and 71,230 by the second. Their trial spreadsheet shows the same number of

alleged business miles, 132,456, but divided among four vehicles rather than two.

      Mrs. Taylor allegedly used the four vehicles to visit prospective clients and

market her services by distributing a one-page promotional flier. She testified

that, before 2012, she had sought clients chiefly in West Virginia. But in 2012 she

allegedly attempted to expand her business by seeking clients in other States, in-

cluding some as distant as Connecticut, New Jersey, and South Carolina.

      The spreadsheets petitioners produced at trial purport to show that Mrs.

Taylor during 2012 made 144 distinct trips between petitioners’ residence in

Martinsburg, West Virginia, and the prospective client sites. Each entry has a

date, a destination, beginning and ending odometer readings, total miles driven,

and a description of the work allegedly performed. In each instance the descrip-

tion of that work was identical: “Distribute Informational Brochures/Market.”

      For a variety of reasons we did not find these spreadsheets or Mrs. Taylor’s

testimony to be credible evidence. First, it is clear that these spreadsheets were

not prepared contemporaneously with her alleged travel. She testified that she had

recently created the spreadsheets using notes of beginning and ending odometer
                                        -8-

[*8] readings that she had kept during 2012. But she did not produce at trial either

these notes or any other contemporaneous record of her travel.

       Second, none of the spreadsheet entries shows the time she actually spent at

any destination or the specific activity she performed there. All that appears is the

vague and generic phrase “Distribute Informational Brochures/Market,” which

was repeated for every one of the 144 alleged trips. We find that this description

does not constitute sufficient evidence corroborating her own statements as to the

amount, time and place, and business purpose for each expenditure. See sec.

274(d); sec. 1.274-5T(a), (b), and (c), Temporary Income Tax Regs., supra.

      Third, we discern in these spreadsheets numerous internal inconsistencies

that make them unreliable. These include the following:

      • On several occasions the ending odometer reading for a trip is higher than

the beginning odometer reading for the next succeeding trip. For example, the

January 7 entry for the Camry shows an ending odometer reading of 156,572, but

the subsequent entry on January 10 shows a starting odometer reading of 156,500.

      • The number of miles allegedly driven, both on individual trips and collec-

tively, seems obviously inflated. The March 10 entry for the Camry shows that

Mrs. Taylor drove 1,696 miles in a single day. To accomplish this feat she would

have had to drive at an average speed of 70 miles per hour for 24 consecutive
                                        -9-

[*9] hours while still squeezing in time for rest stops and a client meeting. On

other days she allegedly made one-day round trips of 1,613 miles, 1,606 miles,

1,604 miles, 1,584 miles, 1,583 miles, 1,391 miles, 1,387 miles, and 1,302 miles.

The average length of her 144 alleged trips was 920 miles. We are not persuaded

that Mrs. Taylor could have taken 144 full-day trips of this length while concur-

rently holding a full-time job at Jefferson Memorial Hospital.

      • Many spreadsheet entries show significantly different mileage for round

trips to the same destination. For example, the May 25 and June 1 entries for the

Escalade show Mrs. Taylor’s destination as Charleston, South Carolina. The first

entry shows a round trip of 1,382 miles and the second shows a round trip of 1,583

miles. She could not explain the 200-mile difference.

       • Many spreadsheet entries show vastly different mileage for trips to desti-

nations within the same State. For example, entries for the Escalade show a 632-

mile round trip to Absecon, New Jersey, and a 1,606-mile round trip to Mount

Holly, New Jersey. Petitioner acknowledged that these New Jersey cities are not

500 miles apart.

      • Finally, the spreadsheets frequently show multiple trips, a few days apart,

to destinations in the same State. For example, during the 30-day period begin-

ning May 26, entries for the Escalade show five round trips, each averaging more
                                        - 10 -

[*10] than 800 miles, to different destinations in New Jersey. During the six-week

period beginning August 5, entries for the BMW show five round trips, each

averaging more than 1,100 miles, to different destinations in South Carolina. To

avoid wasting time and money, Mrs. Taylor presumably could have arranged to

visit multiple prospective clients on a single trip. She had no plausible explana-

tion as to why she did not do this.

        Petitioners offered no credible evidence to explain these inconsistencies and

improbabilities. Mrs. Taylor repeatedly asserted that her spreadsheets were accur-

ate, but we are not obligated to accept such self-serving testimony. See Tokarski

v. Commissioner, 87 T.C. 74, 77 (1986). Because petitioners have come up far

short of meeting the strict substantiation requirements of section 274(d), we con-

clude that they are not entitled to deduct any of their reported car and truck expen-

ses.2




        2
        Respondent alternatively contends that any vehicle costs deemed substan-
tiated would constitute nondeductible startup costs of a new business. See sec.
195(a) (requiring capitalization of costs incurred during startup period). In sup-
port of this contention, respondent notes that Mrs. Taylor reported no gross re-
ceipts for LTV for 2012 and could not establish that LTV (as opposed to AW Re-
cycling) had any gross receipts during 2009-2011. Because petitioners have not
come close to substantiating their reported car and truck expenses, we need not
address respondent’s alternative position.
                                        - 11 -

[*11] B.     Penalties

      The Code imposes a 20% penalty on the portion of any underpayment of tax

attributable to “[n]egligence or disregard of rules or regulations” or “[a]ny sub-

stantial understatement of income tax.” Sec. 6662(a) and (b)(1) and (2). Negli-

gence includes “any failure to make a reasonable attempt to comply” with the

internal revenue laws. Sec. 6662(c). An understatement of income tax is “sub-

stantial” 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). Under section 7491(c) respondent bears the

burden of production with respect to the liability of an individual for any penalty.

See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). No penalty is imposed

with respect to any portion of an underpayment if the taxpayer acted with reason-

able cause and in good faith with respect thereto. Sec. 6664(c)(1). The taxpayer

bears the burden of proving reasonable cause and good faith. Higbee, 116 T.C. at

446-447.

      Respondent has met his burden of production with respect to petitioners’

negligence and disregard of rules and regulations. Petitioners claimed nearly

$75,000 of deductions for which they had wholly inadequate substantiation. The

mileage spreadsheets they offered were not prepared contemporaneously, and

many of the entries were internally inconsistent, improbable, and inflated.
                                         - 12 -

[*12] Petitioners have not demonstrated that these failures were due to reasonable

cause.

         We find that the entirety of petitioners’ underpayment for 2012, $13,885,

was attributable to negligence. Because the tax liability reported on their return

was zero, petitioners’ understatement of income tax exceeds $5,000, which is

greater than 10% of the tax required to be shown on the return, $13,885. Thus, the

underpayment is alternatively attributable to a substantial understatement of in-

come tax for which they have not shown reasonable cause.

         To reflect the foregoing,


                                                  Decision will be entered for

                                        respondent.
