                    T.C. Summary Opinion 2009-138



                       UNITED STATES TAX COURT



        RUSSELL S. ENGLE AND MICHELLE C. CHIOU, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2849-08S.                Filed September 3, 2009.



     Russell S. Engle and Michelle C. Chiou, pro sese.

     Brooke S. Laurie, for respondent.



     DEAN, Special Trial 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, subsequent section references

are to the Internal Revenue Code (Code) in effect for the year in
                                 - 2 -

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

     Respondent determined a $14,793 deficiency in petitioners’

2004 Federal income tax and a section 6662(a) accuracy-related

penalty.

     In a stipulation of settled issues the parties agree to the

following adjustments:
                                           Amount
                                         Reported/   Adjusted
               Item                       Claimed     Amount

     Income from a State
       income tax refund                    $93       $3,177
     Deduction for real
       estate taxes                       7,387        7,091
     Deduction for State and
       local income taxes                 9,782        7,788
     Deduction for charitable
       contributions                      7,416        6,376
     Deduction for insurance
       expenses                       12,329          10,937
     Deduction for utilities
       expenses                       13,552          10,164
     Deduction for other
       expenses                       15,146          11,379

     In a stipulation of facts the parties agree that petitioners

are entitled to deduct on Schedule C, Profit or Loss From

Business, the following depreciation and section 179 expenses

(and that these amounts were included in the amounts respondent

allowed in the notice of deficiency):

                                          Amount       Amount
            Description                  Claimed      Allowed

     Computers and peripherals       $7,155           $7,155
     Office furniture                 1,607            1,607
     Computer software                1,163            1,163
                                   - 3 -

       Mercedes ML320 light
                                                           1
         truck (truck)                      4,585           3,439
                                                             1
       Cellular telephone use                 987              740
       MACRS re: assets placed
         in service before 2004            17,006          17,006
       Other depreciation                     156             156
               1
                Based on business usage rates of 75 percent.

       The issues remaining1 for decision are whether petitioners

are:       (1) Entitled to a deduction for Schedule C depreciation and

section 179 expenses in an amount greater than the $2,445 that

respondent allowed; (2) entitled to a deduction for Schedule C

car and truck expenses in an amount greater than the $5,678 that

respondent allowed; and (3) liable for the section 6662(a)

accuracy-related penalty.

                                Background

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

The stipulation of facts and the exhibits received into evidence

are incorporated herein by reference.        When the petition was

filed, petitioners resided in California.

       During 2004 Michelle Chiou (Ms. Chiou) was a licensed real

estate broker who owned and operated Prestige Realty, a real

estate brokerage firm, and Russell Engle (Mr. Engle) worked for

Ms. Chiou as a licensed real estate salesperson.        In November



       1
      The amounts of petitioners’ self-employment tax, self-
employment tax deduction, child tax credit, and additional child
tax credit are computational matters to be resolved in the
parties’ Rule 155 computations consistent with the Court’s
decision. See secs. 24(a), (b), (d), 164(f), 1401, 1402.
                                - 4 -

2004 Ms. Chiou purchased a 2005 Honda Odyssey touring passenger

minivan (minivan) for use in her real estate business for a total

cash price of $41,519.29 (which includes a cash price of $38,310

for the minivan and accessories, a document preparation fee of

$45, and sales tax of $3,164.29).    On Form 4562, Depreciation and

Amortization, petitioners reported a cost basis of $41,524 for

the minivan, and they elected to expense that amount under

section 179.   They also claimed deductions for Schedule C car and

truck expenses of $7,571 for the minivan and truck.    Evidently,

petitioners claimed Schedule C car and truck expenses of $940 for

the minivan and $6,597 for the truck.

      Respondent examined petitioners’ 2004 Federal income tax

return.   Respondent determined that petitioners were entitled to

a deduction for Schedule C depreciation and section 179 expenses

of $2,445 for the minivan.2    Respondent also determined that

petitioners were entitled to a deduction for Schedule C car and

truck expenses of $5,678.3

                              Discussion

I.   Burden of Proof

      The Commissioner’s determinations in a notice of deficiency

are presumed correct, and the taxpayer bears the burden to prove



      2
      There is no indication in the record of how respondent
determined the $2,445.
      3
      There is no indication in the record of how respondent
allocated the $5,678 between the minivan and the truck.
                                   - 5 -

that the determinations are in error.       See Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933); see also INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992) (stating that deductions are

strictly a matter of legislative grace and taxpayers bear the

burden of proving that they are entitled to claim the deduction).

But the burden of proof on factual issues that affect the

taxpayer’s tax liability may be shifted to the Commissioner if

the taxpayer introduces credible evidence with respect to the

issue and he/she satisfies certain conditions.       Sec. 7491(a)(1)

and (2).       Petitioners have not alleged that section 7491(a)

applies, and they have neither complied with the substantiation

requirements nor maintained all required records.       See sec.

7491(a)(2)(A) and (B).       Accordingly, the burden of proof remains

on them.

II.    Sections 162, 179, 274, 280F, and 6001 and the Regulations
       Thereunder

       Section 162(a) authorizes a deduction for all the ordinary

and necessary expenses paid or incurred during the taxable year

in carrying on any trade or business.       And when property is used

in a trade or business or held for the production of income, the

taxpayer may be allowed a depreciation deduction.       Secs. 167 and

168.       Alternatively, the cost of “section 179 property”4 may be

expensed and deducted in the year that the property is placed



       4
      See sec. 179(d) for the definition of the term “section 179
property”.
                                - 6 -

into service in certain circumstances.   Sec. 179(a).   If the

property is used for both business and other purposes, then the

portion of the cost that is attributable to the business use is

eligible for expensing under section 179(a) but only if more than

50 percent of the use is for business purposes.   Sec. 1.179-1(d),

Income Tax Regs.   In addition, the amount of the deduction

allowable under section 179(a) with respect to any listed

property is subject to the limitations of section 280F(a),5 (b),6

and (d)(3) in the same manner as if it were a recovery deduction

allowable under section 168.7   Sec. 280F(d)(1); sec. 1.280F-

2T(b), Temporary Income Tax Regs., 49 Fed. Reg. 42705 (Oct. 24,

1984); Rev. Proc. 2004-20, sec. 4.01 and .02, 2004-1 C.B. 642,

643-646.




     5
      Sec. 280F(a)(1) and (d)(7) limits the amount of the
depreciation deduction of passenger automobiles to certain
amounts for the applicable recovery period. See Rev. Proc. 2004-
20, sec. 4.01 and .02, 2004-1 C.B. 642, 643-646, for the
applicable amounts of the limitations.
     6
      Sec. 280F(b) provides that if listed property is not used
predominantly in a qualified business use, then the depreciation
deduction for the property is determined under sec. 168(g)
(relating to the alternative depreciation system; i.e., the
straight-line method) rather than sec. 168(a).
     7
      In addition, the American Jobs Creation Act of 2004, Pub.
L. 108-357, sec. 910, 118 Stat. 1659, amended sec. 179(b) by
adding par. (6) and limiting the expendable cost under sec.
179(a) of a “sport utility vehicle” placed into service after
Oct. 22, 2004, to $25,000. See sec. 179(b)(6) for the definition
of “sport utility vehicle”.
     Petitioners concede that the minivan’s expendable cost under
sec. 179(a) was limited to $25,000.
                               - 7 -

     “Listed property” is defined to include passenger

automobiles and any other property8 used as a means of

transportation.   Sec. 280F(d)(4)(A)(i) and (ii).   “Passenger

automobile” means any four-wheeled vehicle that is manufactured

primarily for use on public streets, roads, and highways and is

rated at 6,000 pounds gross vehicle weight or less in the case of

a truck or van.   Sec. 280F(d)(5).   It also includes any part,

component, or other item that is physically attached or

traditionally included in the purchase price of an automobile.

Sec. 1.280F-6(c)(2), Income Tax Regs.

     The parties agree that the minivan’s gross vehicle weight

without any part, component, or other item is 5,953 pounds.       In

addition, Mr. Engle testified that they purchased the minivan

with five accessories, which were all-season floor mats that

weighed 18 pounds, cargo boards that weighed 10 pounds, a cargo

tray that weighed 6 pounds, a third-row sunshade that weighed 8

pounds, and a cargo mat that weighed 10 pounds.9    He testified

that the cargo tray was stored in a well, the cargo boards “go on


     8
      The term “listed property” does not include any other
property used as a means of transportation if substantially all
of the use of it is in a trade or business of providing to
unrelated persons services consisting of the transportation of
persons or property for compensation or hire. Sec.
280F(d)(4)(C). Petitioner’s use of the minivan does not qualify
for this exception.
     9
      The sale/finance contract sets forth a cash price of
$38,310 for the minivan and accessories that includes a cash
price of $38,310 for the minivan and a cash price of “N/A” for
accessories.
                                 - 8 -

top of that area”, and the cargo mat covered those.    He testified

that the combined weight of the five accessories is 52 pounds,

and when they are added to the minivan’s gross vehicle weight of

5,953 pounds, the total is 6,005 pounds.    According to Mr. Engle,

“since this exceeds 6,000 pounds, it is not a section 280F

passenger vehicle, subject to the strict [substantiation and

mileage log] rules for listed property.”

     To corroborate Mr. Engle’s testimony on the acquired

accessories, petitioners provided photographs of the minivan’s

interior that show the all-season floor mats, cargo mat, and

third-row sunshade.   Although there is no evidence to corroborate

Mr. Engle’s testimony as to the acquisition of the cargo boards

and cargo tray, the Court observed his appearance and demeanor at

trial and finds his testimony to be honest, sincere, and

credible.

     The Court therefore finds that the minivan’s gross vehicle

weight exceeds 6,000 pounds and that the minivan is excepted from

the definition of passenger automobile.    See sec. 280F(d)(5).

Consequently, the amount of petitioners’ deduction for Schedule C

depreciation and section 179 expenses is not limited by section

280F(a).    See supra note 5.   But the catchall provision of

section 280F(d)(4)(A)(ii) (relating to any other property used as

a means of transportation) nevertheless applies, and the minivan

is listed property.   In addition, the minivan is not a qualified
                                - 9 -

non-personal-use vehicle.10    In short, petitioners’ deductions

for Schedule C depreciation and section 179 expenses and Schedule

C car and truck expenses must be substantiated in accordance with

section 274(d) and the regulations thereunder.

     As a general rule, deductions are allowed only to the extent

that they are substantiated.    Secs. 274(d) (no deductions are

allowed for gifts, listed property, traveling, entertainment,

amusement, or recreation unless substantiated), 6001 (taxpayers

must keep records sufficient to establish the amounts of the

items required to be shown on their Federal income tax returns).

If the taxpayer establishes that he/she has incurred a deductible

expense yet is unable to substantiate the exact amount, the Court

may estimate a deductible amount in some circumstances.    Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930).    But the Court

cannot estimate a taxpayer’s expenses with respect to the items

enumerated in section 274(d).    Sanford v. Commissioner, 50 T.C.

823, 827 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969);

Rodriguez v. Commissioner, T.C. Memo. 2009-22.

     Taxpayers are required to substantiate their deductions for

listed property by adequate records or sufficient evidence to

corroborate his/her testimony as to:    (1) The amount of the


     10
      The flush language of sec. 274(d) provides that any
qualified non-personal-use vehicle (as defined in sec. 274(i)) is
not subject to the substantiation requirements of sec. 274(d).
See sec. 1.274-5T(k)(2)(ii), Temporary Income Tax Regs., 50 Fed.
Reg. 46033 (Nov. 6, 1985), for a list of examples of vehicles
that constitute qualified non-personal-use vehicles.
                                - 10 -

expenditure (e.g., the cost of acquisition, maintenance or

repairs, or other expenditures); (2) the amount of each business

use and total use by establishing the amount of its business

mileage and total mileage in the case of automobiles and other

means of transportation; (3) time (i.e., the date of the

expenditure or use); and (4) the business purpose for the

expenditure or use.   Sec. 274(d); sec. 1.274-5T(b)(6), Temporary

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

     The temporary regulation further provides that taxpayers

must maintain and produce such substantiation as will constitute

proof of each expenditure or use.    Sec. 1.274-5T(c)(1), Temporary

Income Tax Regs., supra.     Written evidence has considerably more

probative value than oral evidence, and the probative value of

written evidence is greater the closer in time it is to the

expenditure or use.    Id.   Although a contemporaneous log is not

required, a record made at or near the time of the expenditure or

use that is supported by sufficient documentary evidence has a

higher degree of credibility than a subsequently prepared

statement.   Id.   The corroborative evidence required to support a

statement not made at or near the time of the expenditure or use

must have a high degree of probative value to elevate the

statement and evidence to the level of credibility reflected by a

record made at or near the time of the expenditure or use

supported by sufficient documentary evidence.     Id.
                             - 11 -

     To satisfy the adequate record requirement, the taxpayer

must maintain an account book, a diary, a log, a statement of

expense, trip sheets, or a similar record and documentary

evidence that in combination are sufficient to establish each

element of expenditure or use.    Sec. 1.274-5T(c)(2)(i), Temporary

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

adequate record must be prepared or maintained in such manner

that each recording of an element or use is made at or near the

time of the expenditure or use.   Sec. 1.274-5T(c)(2)(ii),

Temporary Income Tax Regs., supra.

     Mr. Engle testified that the reason they “didn’t keep a

vehicle log is because, since it was being used exclusively for

business, we didn’t need to allocate between the business and the

personal usage of the vehicle.”   He testified that the minivan’s

actual expenses were automatically downloaded by his Quicken

software from their credit card and bank accounts, he “set the

code for which expense belongs to which”, and he used that

information to prepare their tax return.   He testified that the

minivan was kept at their office and was used exclusively in

their real estate business for business purposes, including:

(1) Taking a buyer’s initial deposit check to the title company;

(2) taking disclosure paperwork to the buyer’s agent;

(3) representing sellers at inspection appointments; (4) meeting

with contractors at the properties; (5) arranging clients’ moves
                                 - 12 -

and placing their things in storage; (6) taking clients to see

properties; (7) driving to newly listed properties for brokers’

tours; (8) driving to clients’ properties to hold open houses;

(9) meeting with buyers to prepare offers and meeting with

sellers to present offers; and (10) driving from “Fremont to

warehouses in Oakland, Hayward, I believe to San Jose, to look

for tile that would match * * * the tile in the house.”       He

testified that the truck was used a little after they purchased

the minivan, but “almost all the driving was done with” the

minivan because it was newer, looked better, got better mileage,

and had a better navigation system.       According to Mr. Engle, “we

do remember * * * many of the trips.”       He testified that “we

estimated that about a thousand miles of mileage was driven * * *

in that” 5- to 6-week period.

     Petitioners admitted that their reported 1,000 miles of

business use and 1,000 miles of total use were mere estimates.

Thus, they have failed to substantiate the amounts of the

minivan’s use.     See sec. 274(d); sec. 1.274-5T(b)(6)(i)(B),

Temporary Income Tax Regs., supra.        With the exception of the

minivan’s cost, petitioners have not substantiated the amounts of

each expenditure because their evidence does not establish that

the amounts were expended for the minivan rather than for their

truck or a sedan they also owned.11       See sec. 274(d); sec.


     11
          Petitioners did not submit the underlying receipts for the
                                                       (continued...)
                                 - 13 -

1.274-5T(b)(6)(i)(A), Temporary Income Tax Regs., supra.

Petitioners’ evidence also does not establish the date of each

expenditure or use.     See sec. 274(d); sec. 1.274-5T(b)(6)(ii),

Temporary Income Tax Regs., supra.        Their evidence also does not

substantiate the business purpose of each expenditure or use.12

See sec. 274(d); sec. 1.274-5T(b)(6)(iii), Temporary Income Tax

Regs., supra.     Accordingly, respondent’s determinations are

sustained, and petitioners are not entitled to allowances for

Schedule C depreciation and section 179 expenses and Schedule C

car and truck expenses greater than the amounts that respondent

determined.

III.    Accuracy-Related Penalty

       Initially, the Commissioner has the burden of production

with respect to any penalty, addition to tax, or additional

amount.     Sec. 7491(c).   The Commissioner satisfies this burden of

production by coming forward with sufficient evidence that

indicates that it is appropriate to impose the penalty.       See

Higbee v. Commissioner, 116 T.C. 438, 446 (2001).       Once the

Commissioner satisfies this burden of production, the taxpayer




       11
      (...continued)
expenditures but rather a spreadsheet entitled “Tax Schedule
2004” and bank/credit card statements.
       12
      The Court also notes that although not determinative, the
sale/finance contract shows that the primary use for which the
minivan was purchased was for “personal, family, or household”,
not “business or commercial”.
                                 - 14 -

must persuade the Court that the Commissioner’s determination is

in error by supplying sufficient evidence of an exception.         Id.

     In pertinent part, section 6662(a) and (b)(1) and (2)

imposes an accuracy-related penalty equal to 20 percent of the

underpayment that is attributable to negligence or disregard of

rules or regulations or a substantial understatement of income

tax.13    “Negligence” includes “any failure to make a reasonable

attempt to comply with the provisions of this title”.      Sec.

6662(c).     Negligence also includes any failure by the taxpayer to

substantiate items properly.     Sec. 1.6662-3(b)(1), Income Tax

Regs.     The term “disregard” includes “any careless, reckless, or

intentional disregard.”     Sec. 6662(c).

     Section 6664(c)(1) is an exception to the section 6662(a)

penalty:     no penalty is imposed with respect to any portion of an

underpayment if it is shown that there was reasonable cause

therefor and the taxpayer acted in good faith.      Section

1.6664-4(b)(1), Income Tax Regs., incorporates a facts and

circumstances test to determine whether the taxpayer acted with

reasonable cause and in good faith.       The most important factor is

the extent of the taxpayer’s effort to assess his/her proper tax

liability.     Id.   “Circumstances that may indicate reasonable

cause and good faith include an honest misunderstanding of fact


     13
      Because the Court finds that petitioners were negligent or
disregarded rules or regulations, the Court need not discuss
whether there is a substantial understatement of income tax. See
sec. 6662(b); Fields v. Commissioner, T.C. Memo. 2008-207.
                              - 15 -

or law that is reasonable in light of * * * [the taxpayer’s]

experience, knowledge and education”.   Id.

     Petitioners conceded that they understated the income from

their State income tax refund by $3,084.    See supra p. 2.   In

addition, they conceded that they overstated many of their

claimed deductions.   See supra pp. 2-3 and note 7.    They also

have not maintained adequate books or records nor substantiated

their deductions in accordance with sections 274 and 6001 and the

regulations thereunder.   See sec. 1.6662-3(b)(1), Income Tax

Regs.   The Court, therefore, finds that respondent has met his

burden of production, petitioners were negligent or disregarded

rules or regulations, and they have not established that they

acted with reasonable cause and in good faith with respect to

their noncompliance with the Code’s requirements.     Respondent’s

determination is sustained.

     To reflect the foregoing,


                                           Decision will be entered

                                    under Rule 155.
