                          T.C. Summary Opinion 2013-14



                         UNITED STATES TAX COURT



                 THOMAS A. WAGONER, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 5654-11S.                           Filed February 21, 2013.



      Thomas A. Wagoner, pro se.

      Joline M. Wang, for respondent.



                              SUMMARY OPINION


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

7463 of the Internal Revenue Code in effect when the petition was filed.1 Pursuant


      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the years in issue. All Rule references are to the Tax
                                                                        (continued...)
                                           -2-

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.

        Respondent determined deficiencies of $7,852 and $27,610 and section

6662(a) accuracy-related penalties of $1,570 and $5,522 in petitioner’s Federal

income tax for 2007 and 2008, respectively. After concessions,2 the issues

remaining for decision are: (1) whether petitioner is entitled to deduct car and truck

expenses for 2007 and 2008; (2) whether, with respect to his Federal income tax

liabilities for 1996 to 2002, petitioner is entitled to deduct interest and penalties for

2008; and (3) whether petitioner is liable for accuracy-related penalties for 2007 and

2008.




        1
        (...continued)
Court Rules of Practice and Procedure. All amounts are rounded to the nearest
dollar.
        2
          Petitioner concedes that he failed to report income of $3,565 on Schedule
F, Profit or Loss From Farming, for 2008. Petitioner further concedes that he is not
entitled to deduct interest expenses for 2007 and travel expenses for 2007 and 2008
on Schedule C, Profit or Loss From Business. Respondent concedes that petitioner
is entitled to deduct insurance expenses of $1,395 each year for 2007 and 2008 and
tax and license expenses of $640 for 2007 and $984 for 2008 on Schedule C. The
remaining adjustments in the notice of deficiency are computational and will be
resolved under Rule 155.
                                          -3-

                                      Background

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

facts and the accompanying exhibits are incorporated herein by this reference. At

the time he filed his petition, petitioner resided in Nebraska.

       Petitioner, a self-employed attorney, failed to pay his Federal income tax for

1996 to 2002 after notice and demand for payment. Consequently, liens in favor of

the United States arose and attached to all his property, including his personal

residence. The Internal Revenue Service (IRS) filed notices of Federal tax lien on

March 4, 2003, March 5, 2004, and June 19, 2007, in Hall County, Nebraska, and

on December 19, 2006, and June 19, 2007, in Hitchcock County, Nebraska. On

June 26, 2008, petitioner made a payment of $132,580 to the IRS, which included

interest of $46,308 and penalties of $16,683 with respect to the unpaid tax

liabilities.

       During 2007 and 2008 petitioner operated a law practice in Nebraska as a

sole proprietorship. He drove a BMW in 2007 and the first six months of 2008. On

July 1, 2008, he traded in the BMW for a Lexus, which he drove for the second half

of the year. He used the automobiles in his law practice and for his personal needs,

but he did not keep any records separating the uses.
                                         -4-

      For each year in issue petitioner filed a Form 1040, U.S. Individual Income

Tax Return, and attached a Schedule C for his law practice. For 2007 he claimed a

deduction on Schedule C of $15,200 for car and truck expenses. For 2008 he

claimed deductions on Schedule C of $11,700 for car and truck expenses, $51,045

for interest, and $14,790 for penalties.3 Respondent disallowed these deductions in

a notice of deficiency mailed to petitioner on December 7, 2010. Petitioner timely

filed a petition with the Court contesting respondent’s determinations.

                                      Discussion

I.    General Rules

      The Commissioner’s determinations are generally presumed correct, and the

taxpayer bears the burden of proving the determinations erroneous.4 Rule 142(a).

The taxpayer bears the burden of proving that he or she is entitled to any deduction

claimed, and this includes the burden of substantiation. Id.; Hradesky v.

Commissioner, 65 T.C. 87, 89-90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir.




      3
          Petitioner admitted at trial that the amounts of the deductions he claimed on
his 2008 return for interest and penalties were in error, and he contended that he is
entitled to deduct $46,308 for interest and $16,683 for penalties.
      4
         Petitioner has neither claimed nor established that he satisfies the
requirements of sec. 7491(a) to shift the burden of proof to respondent with regard
to any factual issue.
                                         -5-

1976). A taxpayer must substantiate amounts claimed as deductions by maintaining

the records necessary to establish he or she is entitled to the deductions. Sec. 6001.

      Section 162(a) provides a deduction for certain business expenses. In order

to qualify for the deduction under section 162(a), “an item must (1) be ‘paid or

incurred during the taxable year’, (2) be for ‘carrying on any trade or business’, (3)

be an ‘expense’, (4) be a ‘necessary’ expense, and (5) be an ‘ordinary’ expense.”

Commissioner v. Lincoln Sav. & Loan Ass’n, 403 U.S. 345, 352 (1971); see also

Commissioner v. Tellier, 383 U.S. 687, 689 (1966) (the term “necessary” imposes

“only the minimal requirement that the expense be ‘appropriate and helpful’ for ‘the

development of the [taxpayer’s] business’” (alteration in original) (quoting Welch v.

Helvering, 290 U.S. 111, 113 (1933))); Deputy v. du Pont, 308 U.S. 488, 495

(1940) (to qualify as “ordinary”, the expense must relate to a transaction “of

common or frequent occurrence in the type of the business involved”). Whether an

expense is ordinary is determined by time, place, and circumstance. Welch v.

Helvering, 290 U.S. at 113-114.

      If a taxpayer establishes that he or she paid or incurred a deductible business

expense but does not establish the amount of the expense, we may approximate the

amount of the allowable deduction, bearing heavily against the taxpayer whose
                                         -6-

inexactitude is of his or her own making. Cohan v. Commissioner, 39 F.2d 540,

543-544 (2d Cir. 1930). However, for the Cohan rule to apply, there must be

sufficient evidence in the record to provide a basis for the estimate. Vanicek v.

Commissioner, 85 T.C. 731, 743 (1985). Certain expenses may not be estimated

because of the strict substantiation requirements of section 274(d). See sec.

280F(d)(4)(A); Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968), aff’d per

curiam, 412 F.2d 201 (2d Cir. 1969).

II.   Car and Truck Expenses

      Generally, passenger automobiles and any other property used as a means of

transportation are listed property, see sec. 280F(d)(4)(A)(i) and (ii), and these

expenses are subject to the strict substantiation requirements of section 274(d).

Section 274(d) requires a taxpayer to substantiate the expenses by adequate records

or other corroborating evidence of (1) the amount of each use (i.e., the mileage), (2)

the time and place of the use, and (3) the business purposes of the use. See Fessey

v. Commissioner, T.C. Memo. 2010-191, slip op. at 7; sec. 1.274-5T(b)(6), (c)(2),

Temporary Income Tax Regs., 50 Fed. Reg. 46016-46017 (Nov. 6, 1985).

      To satisfy the adequate records requirement of section 274(d), a taxpayer

must maintain records and documentary evidence that in combination are
                                         -7-

sufficient to establish each element of an expenditure or use. Sec. 1.274-5T(c)(2),

Temporary Income Tax Regs., supra. Although a contemporaneous log is not

required, corroborative evidence to support a taxpayer’s reconstruction “of the

elements * * * of the expenditure or use must have a high degree of probative value

to elevate such statement and evidence to the level of credibility” of a

contemporaneous record. Sec. 1.274-5T(c)(1), Temporary Income Tax Regs., 50

Fed. Reg. 46016 (Nov. 6, 1985). In the absence of adequate records to substantiate

each element of an expense, a taxpayer may alternatively establish an element by

“his own statement, whether written or oral, containing specific information in detail

as to such element”, and by “other corroborative evidence sufficient to establish

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

46020 (Nov. 6, 1985). Section 274(d) overrides the Cohan rule with respect to

section 280F(d)(4) “listed property” and thus specifically precludes the Court from

allowing automobile expenses on the basis of any approximation or the taxpayer’s

uncorroborated testimony.

      Petitioner claimed deductions of $15,200 and $11,700 for car and truck

expenses on Schedule C for 2007 and 2008, respectively. He testified that he

incurred expenses each year of approximately $9,000 for depreciation, $3,500 for

fuel, $1,200 for insurance, and $1,000 for maintenance. He further testified that he
                                          -8-

drove approximately 20,000 miles per year and “figured just slightly more than half

of * * * [the] miles are driven for * * * work”. The only documents that he

introduced into evidence to substantiate the expenses are copies of the sales

invoices for the BMW and the Lexus and a sales tax receipt for the Lexus. Except

for some vague testimony, he did not introduce any evidence to establish the

elements of time and place or business purpose. Furthermore, his testimony as to

the mileage is just an approximation and is not corroborated by any other evidence.

We do not doubt that petitioner incurred car and truck expenses for the years in

issue; however, we find that he has not met the strict substantiation requirements of

section 274(d). Accordingly, petitioner is not entitled to deduct the car and truck

expenses for 2007 and 2008.

III.   Interest and Penalties With Respect to Federal Income Tax Liabilities

       Section 163(a) allows a deduction for all interest paid or accrued within the

taxable year on indebtedness. However, section 163(h) disallows deductions of

personal interest paid or accrued during the taxable year in the case of a taxpayer

other than a corporation. Personal interest is any interest allowable as a deduction

other than interest listed in section 163(h)(2).

       Qualified residence interest is excluded from the definition of personal

interest and thus is deductible under section 163(a). See sec. 163(h)(2)(D).
                                          -9-

Qualified residence interest is any interest that is paid or accrued during the taxable

year on acquisition indebtedness or home equity indebtedness. See sec.

163(h)(3)(A). Acquisition indebtedness means any indebtedness which is incurred

in acquiring, constructing, or substantially improving any qualified residence of the

taxpayer and is secured by such residence. Sec. 163(h)(3)(B). Home equity

indebtedness means any indebtedness (other than acquisition indebtedness) secured

by a qualified residence to the extent the aggregate amount of such indebtedness

does not exceed the fair market value of such qualified residence reduced by the

amount of acquisition indebtedness with respect to such residence. Sec.

163(h)(3)(C). “A debt will not be considered to be secured by a qualified residence

if it is secured solely by virtue of a lien upon the general assets of the taxpayer or by

a security interest, such as a mechanic’s lien or judgment lien, that attaches to the

property without the consent of the debtor.” Sec. 1.163-10T(o)(1) (flush language),

Temporary Income Tax Regs., 52 Fed. Reg. 48417 (Dec. 22, 1987).

      Petitioner contends that the interest with respect to his Federal income tax

liabilities for 1996 to 2002 is deductible under section 163(h)(3)(C) as interest paid

on home equity indebtedness because a Federal tax lien with respect to those

liabilities attached to his personal residence. However, his argument is erroneous
                                           - 10 -

insofar as neither a Federal tax lien nor the filing of a notice of Federal tax lien

caused his tax indebtedness to be secured by a qualified residence.5 See sec. 1.163-

10T(o)(1) (flush language), Temporary Income Tax Regs., supra. Furthermore,

section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409

(Dec. 22, 1987), specifically provides that interest paid on income tax liabilities of

individuals, regardless of the source of the income or other adjustments to which the

tax liabilities relate, is to be treated as personal interest.6 We find that the interest

petitioner paid with respect to his Federal income tax liabilities is nondeductible

personal interest and not interest paid on home equity indebtedness. Petitioner has




       5
           A Federal tax lien under sec. 6321 arises by operation of law when a
taxpayer fails to pay an assessed tax liability after receiving a notice and demand for
payment. Sec. 6322; Wadleigh v. Commissioner, 134 T.C. 280, 289-290 (2010).
The lien attaches to all property and rights to property belonging to the taxpayer
(i.e., his general assets). Sec. 6321. The IRS files a notice of Federal tax lien to
preserve priority and put other creditors on notice. See sec. 6323.
       6
         In Robinson v. Commissioner, 119 T.C. 44 (2002), we concluded that sec.
1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22,
1987), is valid, that pre-sec. 163(h) caselaw was inapplicable, that we would no
longer follow our Opinion in Redlark v. Commissioner, 106 T.C. 31 (1996), rev’d,
141 F.3d 936 (9th Cir. 1998), and that interest paid on individual tax liabilities
relating to income from a sole proprietorship is to be treated as nondeductible
personal interest.
                                          - 11 -

failed to cite any authority for his position that the penalties are deductible.7

Accordingly, petitioner is not entitled to deduct the interest and penalties for 2008.

IV.   Accuracy-Related Penalties

      Section 6662(a) and (b)(1) imposes a penalty equal to 20% of the amount of

any underpayment attributable to negligence or disregard of rules or regulations. The

term “negligence” includes any failure to make a reasonable attempt to comply with

the tax laws, and “disregard” includes any careless, reckless, or intentional

disregard of rules or regulations. Sec. 6662(c). Negligence also includes any failure

to keep adequate books and records or to substantiate items properly. Sec. 1.6662-

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

      Section 6664(c)(1) provides an exception to the imposition of the

accuracy-related penalty if the taxpayer establishes that there was reasonable cause

for, and the taxpayer acted in good faith with respect to, the underpayment. Sec.

1.6664-4(a), Income Tax Regs. The determination of whether the taxpayer acted

with reasonable cause and in good faith is made on a case-by-case basis, taking into


      7
          Petitioner bears the burden of proving that he is entitled to any deduction
claimed. See Rule 142(a). He seemed to argue at trial that the penalties are also
deductible as having been paid on home equity indebtedness; however, we likewise
reject this argument. Additionally, sec. 162(f) specifically prohibits a business
expense deduction under sec. 162(a) for any fines or penalties paid to a government
for the violation of any law.
                                         - 12 -

account the pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax

Regs.

        With respect to a taxpayer’s liability for any penalty, section 7491(c) places

on the Commissioner the burden of production, thereby requiring the Commissioner

to come forward with sufficient evidence indicating that it is appropriate to impose

the penalty. Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). Once the

Commissioner meets his burden of production, the taxpayer must come forward

with persuasive evidence that the Commissioner’s determination is incorrect. See

id. at 447; see also Rule 142(a); Welch v. Helvering, 290 U.S. at 115.

        Petitioner failed to keep adequate records and to properly substantiate the car

and truck expenses and the expenses that he conceded. He failed to report income

on Schedule F, and he disregarded rules or regulations in claiming a deduction for

the interest and penalties with respect to his Federal income tax liabilities for 1996

to 2002. Therefore, we find that respondent has met his burden of production.

Petitioner offered no evidence that he acted with reasonable cause and in good faith.

Accordingly, we find that petitioner is liable for the 20% accuracy-related penalty

for 2007 and 2008.
                                         - 13 -

         In reaching our holdings herein, we have considered all arguments made, and,

to the extent not mentioned above, we conclude they are moot, irrelevant, or without

merit.

         To reflect the foregoing,


                                                        Decision will be entered under

                                                  Rule 155.
