                          T.C. Memo. 1999-226



                        UNITED STATES TAX COURT



            VASHON C. AND BEVERLY C. JACKSON, Petitioners v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 20815-97.              Filed July 9, 1999.



        Vashon C. Jackson, pro se.

        William Henck, for respondent.



                           MEMORANDUM OPINION


        DINAN, Special Trial Judge:   This case was heard pursuant to

the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1


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

     Respondent determined deficiencies in petitioners' Federal

income taxes for 1990, 1991, and 1992 in the amounts of $6,959,

$7,039, and $8,013, respectively, and accuracy-related penalties

pursuant to section 6662(a) in the amounts of $303, $239, and

$232, respectively.

     The issues for decision are:   (1) The amount of rents

received by petitioners during the taxable years in issue; (2)

whether petitioners are entitled to any deductions with respect

to the rented property; (3) whether petitioners are entitled to

any deductions for unreimbursed employee business expenses; (4)

whether petitioners are entitled to charitable contribution

deductions in excess of the amounts allowed by respondent; and

(5) whether petitioners are liable for the section 6662(a)

accuracy-related penalties.

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

The stipulations of fact and attached exhibits are incorporated

herein by this reference.   Petitioners resided in Chesapeake,

Virginia, on the date the petition was filed in this case.

     Petitioner husband worked as an auditor for the Army Corps

of Engineers during the taxable years in issue.   Petitioner wife

worked as a schoolteacher during the taxable years in issue.

Petitioners reside at 2105 Hollins Court in Chesapeake, Virginia.


     1
      (...continued)
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
                               - 3 -

     Petitioners purchased the residence of petitioner wife's

parents, Mr. and Mrs. Charity, and her maternal grandmother (the

Charitys) in 1987.   This residence is located at 2117 Hollins

Court.   The Charitys continued to use 2117 Hollins Court as their

residence after the sale and paid petitioners rent for such use.

     The first issue for decision is the amount of rents received

by petitioners during the taxable years in issue.

     On Schedules E attached to their 1990, 1991, and 1992

returns, petitioners reported "rents received" from 2117 Hollins

Court in the amount of $7,200 per year.   This amount is equal to

the fair rental value appraisal of 2117 Hollins Court obtained by

petitioner in 1988 from Eagle Realty, a local real estate agency.

In the statutory notice of deficiency, respondent determined that

petitioners received rents from 2117 Hollins Court during 1990,

1991, and 1992 in the amounts of $8,400, $8,400, and $11,700,

respectively.

     Section 61(a) includes in gross income all income from

whatever source derived including, but not limited to, rents.

See sec. 61(a)(5).

     Petitioner husband testified that the Charitys paid $500 per

month as rent during the taxable years in issue.    He further

testified that petitioners reported their "rents received" on

their tax returns as $7,200 per year ($600 per month), on the

advice of one of respondent's revenue agents, in order to satisfy
                                - 4 -

the "fair rental requirement" of section 280A.   Respondent's

counsel stated at trial that the "rents received" determined in

the statutory notice of deficiency were based on bank records and

statements from the Charitys.   The record does not include any

such evidence, and respondent's counsel's statement alone does

not have any probative value.

     Based on petitioner husband's testimony and the lack of any

evidence which supports respondent's determinations of the "rents

received", we find that the Charitys paid $500 per month during

the taxable years in issue for their use of 2117 Hollins Court.

We hold that petitioners received rents in the amount of $6,000

during 1990, 1991, and 1992.

     The second issue for decision is whether petitioners are

entitled to any deductions with respect to 2117 Hollins Court.

     Petitioners claimed rental expenses for 1990, 1991, and 1992

in the amounts of $25,453, $23,586, and $23,859, respectively.

In the statutory notice of deficiency, respondent limited the

deductible amounts of petitioners' substantiated expenses to the

rents which he determined they had received on the ground that

"the rental arrangement with [their] relatives was not at fair

market value."   Respondent also determined that petitioners only

substantiated $11,735, $14,717, and $12,247, respectively, of the

expenses claimed on their 1990, 1991, and 1992 returns.
                               - 5 -

     Section 212(2) allows as a deduction all the ordinary and

necessary expenses paid or incurred during the taxable year for

the management, conservation, or maintenance of property held for

the production of income.   Section 262(a) provides that no

deduction shall be allowed for personal, living, or family

expenses.

     Section 280A(a) generally provides that no deduction shall

be allowed with respect to the use of a dwelling unit which is

used by the taxpayer during the taxable year as a residence.

Congress enacted section 280A in the Tax Reform Act of 1976, Pub.

L. 94-455, sec. 601, 90 Stat. 1520, 1569, as its response to the

concern that the rental of property used as a residence "afforded

the taxpayer unwarranted opportunities to obtain deductions for

expenses of a personal nature."   Bolton v. Commissioner, 77 T.C.

104, 108 (1981), affd. 694 F.2d 556 (9th Cir. 1982).   For

purposes of section 280A(a), a taxpayer uses a dwelling unit as a

residence during the taxable year if he uses it for personal

purposes for a number of days which exceeds the greater of 14

days or 10 percent of the number of days during such year that it

is rented at a fair rental.   See sec. 280A(d)(1).   As pertinent

in this case, a taxpayer is deemed to have used a dwelling unit

for personal purposes on any day that it is used for personal

purposes by any member of the taxpayer's family, unless the

family member rents the dwelling unit at a fair rental for use as
                                - 6 -

his principal residence.    See sec. 280A(d)(2)(A) and (3)(A);

Kotowicz v. Commissioner, T.C. Memo. 1991-563.

     Since the Charitys paid only $500 per month for their use of

2117 Hollins Court as their principal residence and its fair

rental value was at least $600 per month (based on Eagle Realty's

1988 estimate), their personal use of 2117 Hollins Court is

treated as petitioners' personal use for every day of the taxable

years in issue.   Thus, under section 280A(d)(1), 2117 Hollins

Court was used by petitioners as a residence during the taxable

years in issue.   See Dinsmore v. Commissioner, T.C. Memo. 1994-

134, affd. in part and remanded in part without published opinion

78 F.3d 592 (9th Cir. 1996).    Accordingly, section 280A(a) is

generally applicable to the amounts in issue.

     Section 280A(a) does not, however, apply to any item which

is attributable to the rental of the dwelling unit, as determined

under section 280A(e).    See sec. 280A(c)(3).   Section 280A(e)(1)

provides that, where an individual uses a dwelling unit for

personal purposes for any day during the taxable year, the amount

deductible with respect to the expenses attributable to the

rental of the dwelling unit for the taxable year shall not exceed

an amount which bears the same relationship to such expenses as

the number of days during each year that the unit is rented at a

fair rental bears to the total number of days during such year

that such unit is used.
                               - 7 -

     Pursuant to section 280A(d)(2)(A), petitioners are deemed to

have used 2117 Hollins Court for personal purposes during the

taxable years in issue.   Since 2117 Hollins Court was not rented

at a fair rental for any day of the taxable years in issue, none

of the claimed deductions are allowable under section 280A(c)(3)

and (e)(1) by reason of being attributable to its rental.2    See

Colbert v. Commissioner, T.C. Memo. 1992-30; Gilchrist v.

Commissioner, T.C. Memo. 1983-288.     The only expenses which are

deductible by petitioners with respect to 2117 Hollins Court are

those expenses which are deductible without regard to whether it

was rented.   See sec. 280A(b) and (e)(2).

     Based on the record, we find that petitioners paid the

following amounts3 with respect to 2117 Hollins Court:

                Year      Interest           Taxes

                1990       $4,522          $1,140
                1991        6,881           1,180
                1992        4,659           1,195


     2
          It appears that respondent erroneously determined that
all of the substantiated expenses were deductible under sec.
280A(c)(3) and (e)(1) and relied only on the sec. 280A(c)(5)
gross income limitation. We do not reach sec. 280A(c)(5) where,
as in this case, none of the disputed amounts in the first
instance meet the sec. 280A(c)(3) and (e)(1) conditions for
deductibility. See sec. 280A(c)(5); Bolton v. Commissioner,
supra at 109.
     3
          These amounts consist of the interest and taxes
determined by respondent in the statutory notice of deficiency to
have been substantiated. We find that petitioners have failed to
substantiate the "other interest" claimed by them and disallowed
by respondent which they claim was paid on a promissory note
secured by a second deed of trust on 2117 Hollins Court.
                                    - 8 -

     We hold that petitioners are entitled to additional Schedule

A itemized deductions for the foregoing amounts of interest and

taxes paid on 2117 Hollins Court under section 163(h)(3) and

section 164(a), respectively.       See infra note 5.

     The third issue for decision is whether petitioners are

entitled to deductions for unreimbursed employee business

expenses.

     On Schedules A and Forms 2106 attached to their 1990, 1991,

and 1992 returns, petitioners claimed unreimbursed employee

business expenses, before the section 67(a) limitations, as

follows:

                             1990            1991     1992

     Vashon C. Jackson      $4,222          $4,889   $5,182
     Beverly C. Jackson      1,950           2,795    4,680
                             6,172           7,684    9,862

     In the statutory notice of deficiency, respondent disallowed

any deductions for the claimed expenses.

     Section 162(a) allows a deduction for the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business, including the trade or business

of being an employee.     Commissioner v. Flowers, 326 U.S. 465

(1946).    If an employee's ordinary and necessary business

expenses exceed the amounts received from his employer as

advances or reimbursements, the employee is entitled to a

deduction for such excess, if adequately substantiated.       See sec.
                               - 9 -

1.162-17(b)(3), Income Tax Regs.; sec. 1.274-5T(f)(2)(iii),

(5)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46028 (Nov. 6,

1985).

     Section 274(d) provides that no deduction is allowable under

section 162 for any traveling expenses, including meals and

lodging while away from home, or with respect to any listed

property, defined in section 280F(d)(4) to include passenger

automobiles, unless the taxpayer complies with strict

substantiation rules.   See sec. 274(d)(1), (4).   In particular,

the taxpayer must substantiate the amount, time, place, and

business purpose of the expenses by adequate records or by

sufficient evidence corroborating his own statement.    See sec.

274(d); sec. 1.274-5T(b)(2), (6), (c), Temporary Income Tax

Regs., 50 Fed. Reg. 46014, 46016 (Nov. 6, 1985).

     Petitioners admit that some of their employee business

expenses were reimbursed by their respective employers.    They

contend, however, that some of their employee business expenses

were not reimbursed and therefore are deductible.

     Petitioners argue that petitioner husband was reimbursed for

the use of his automobile at mileage rates which were less than

the "standard mileage rates" established by respondent for the

taxable years in issue.4   They contend that the differences in


     4
          The standard mileage rates for an employee's use of his
own passenger vehicle for business purposes during 1990, 1991,
                                                   (continued...)
                              - 10 -

the rates are deductible as unreimbursed employee business

expenses.   Petitioner husband's travel vouchers show that he was

generally reimbursed at the rate of 24 cents per mile in 1990 and

early 1991 and at the rate of 25 cents per mile in late 1991 and

1992 and, on limited occasions, at 9-1/2 cents per mile.    It is

not clear from the travel vouchers or petitioner husband's

testimony as to why or for which miles he was reimbursed at a

lesser rate of 9-1/2 cents per mile.

     Based on the travel vouchers and petitioner husband's

testimony, we find that petitioners have substantiated the number

of miles which they claimed petitioner husband used his

automobile in connection with his employment as an auditor.    See

sec. 1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg.

46016 (Nov. 6, 1985).   After accounting for the differences

between the standard mileage rates and the rates at which he was

generally reimbursed, we find that petitioners have established

that petitioner husband's allowable expenses for the use of his

car during 1990, 1991, and 1992 exceeded his advances and

reimbursements for such use by $642, $1,388, and $1,248,

respectively.




     4
      (...continued)
and 1992 were 26 cents, 27-1/2 cents, and 28 cents, respectively.
See Rev. Proc. 89-66, sec. 4.01, 1989-2 C.B. 792, 793; Rev. Proc.
90-59, sec. 4.01, 1990-2 C.B. 644, 645; Rev. Proc. 91-67, sec.
5.01, 1991-2 C.B. 887, 888.
                               - 11 -

     Petitioners also argue that petitioner wife was not

reimbursed for certain expenses which she paid in connection with

her employment as a schoolteacher.      Petitioner wife did not

testify at trial.   Petitioners submitted some records of her

claimed vehicle and travel expenses for 1991 which are not

helpful because they do not indicate whether or not the listed

expenses were reimbursed.    They submitted no records of her

expenses for 1990 or 1992.    After reviewing the record, we find

that petitioner husband's testimony with respect to petitioner

wife's claimed expenses and the little written evidence in the

record does not satisfy the substantiation requirements of

section 274(d).

     We hold that petitioner husband's unreimbursed expenses for

the use of his automobile in the course of his employment as an

auditor are deductible as miscellaneous itemized deductions to

the extent the total of such expenses and petitioners' other

allowed miscellaneous itemized deductions for the taxable years

in issue exceed the section 67(a) limitation for such years.

     The fourth issue for decision is whether petitioners are

entitled to charitable contribution deductions in excess of the

amounts allowed by respondent.    Petitioners claimed and

respondent disallowed in the statutory notice of deficiency

deductions for charitable contributions as follows:
                                - 12 -

                     1990            1991           1992

     Claimed        $6,892          $5,300         $5,300
     Disallowed      5,419           4,270          4,168
     Allowed         1,473           1,030          1,132

     Section 170 allows a taxpayer to deduct a charitable

contribution "only if verified under regulations prescribed by

the Secretary."   Sec. 170(a)(1).    The regulations provide

specific record-keeping requirements.        See sec. 1.170A-13, Income

Tax Regs.   The written evidence submitted by petitioners with

respect to their claimed charitable contribution deductions

establishes only a 1992 cash gift in the amount of $275 and a

1992 donation of six tennis lessons to the Williams School

located in Norfolk, Virginia.    Petitioners did not submit any

other receipts or canceled checks by which the amounts claimed on

their returns may be "verified".

     Respondent allowed petitioners charitable contribution

deductions in excess of $1,000 for each of the taxable years in

issue.   We find that petitioners have failed to substantiate

charitable contributions in excess of the allowed amounts.

Accordingly, we hold that petitioners are not entitled to

charitable contribution deductions in excess of the amounts

allowed by respondent.

     The fifth issue for decision is whether petitioners are

liable for the section 6662(a) accuracy-related penalties.
                               - 13 -

     Respondent determined that petitioners are liable for the

accuracy-related penalty imposed by section 6662(a) for their

underpayments of taxes for 1990, 1991, and 1992 that are

attributable to their disallowed charitable contribution

deductions, and that such underpayments were due to negligence or

disregard of rules or regulations.

     Section 6662(a) imposes a 20-percent penalty on the portion

of an underpayment attributable to any one of various factors,

one of which is negligence or disregard of rules or regulations.

See sec. 6662(b)(1).    "Negligence" includes any failure to make a

reasonable attempt to comply with the provisions of the Internal

Revenue laws or to exercise ordinary and reasonable care in the

preparation of a tax return.    See sec. 6662(c); sec.

1.6662-3(b)(1), Income Tax Regs.    It also includes any failure to

keep adequate books and records or to substantiate items

properly.   See sec. 1.6662-3(b)(1), Income Tax Regs.    "Disregard"

includes any careless, reckless, or intentional disregard of

rules or regulations.   See sec. 6662(c); sec. 1.6662-3(b)(2),

Income Tax Regs.

     Section 6664(c)(1), however, provides that the section

6662(a) penalty shall not apply to any portion of an

underpayment, if it is shown that there was reasonable cause for

the taxpayer's position with respect to that portion of the

underpayment and that the taxpayer acted in good faith with
                               - 14 -

respect to that portion.    The determination of whether a taxpayer

acted with reasonable cause and in good faith is made on a case-

by-case basis, taking into account all the pertinent facts and

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

most important factor is the extent of the taxpayer's effort to

assess his proper tax liability for the year.    See id.

     Based on the record, we find that petitioners have not

proved that their underpayments attributable to the disallowed

charitable contribution deductions were due to reasonable cause

or that they acted in good faith.   We hold that petitioners are

liable for the section 6662(a) accuracy-related penalties as

determined by respondent.

     To reflect the foregoing,



                                          Decision will be entered

                                     under Rule 155.5




     5
          We lack jurisdiction over any increased deficiencies
which may result from our holdings on the issues in this case
because respondent has not asserted any claim for increased
deficiencies. See sec. 6214(a).
