                     T.C. Summary Opinion 2011-112



                        UNITED STATES TAX COURT



            ALBERT J. AND LOURDES E. FLORES, Petitioners v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 6009-10S.               Filed September 22, 2011.



        Albert J. and Lourdes E. Flores, pro sese.

        Sarah E. Sexton, 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
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are to the Internal Revenue Code (Code) in effect for the years

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

Practice and Procedure.

     Respondent issued a notice of deficiency to petitioners in

which he determined deficiencies for 2006 and 2007 of $9,589 and

$23,783, respectively, as well as section 6662(a) accuracy-

related penalties of $1,918 and $4,757, respectively.1    After

concessions,2 the issues for decision are whether petitioners:

(1) Are entitled to deduct business expenses reported on Schedule

C, Profit or Loss From Business,3 and (2) are liable for section

6662(a) accuracy-related penalties.

                            Background

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

The stipulation of facts and attached exhibits, the supplemental

stipulation of facts and attached exhibits, and the stipulation

of settled issues are incorporated herein by reference.

Petitioners resided in California when they filed their petition.


     1
      The penalty amounts are rounded to the nearest dollar.
     2
      Respondent concedes that petitioners are entitled to
mortgage interest deductions of $55,961 for 2006 and $58,113 for
2007. The notice of deficiency for 2007 lists the adjustment to
petitioners’ mortgage interest as $58,114. There is no
explanation for the $1 difference between the amount of the
adjustment in the notice of deficiency and the amount in the
stipulation of settled issues.
     3
      Other adjustments made to petitioners’ itemized deductions
are computational and will not be discussed.
                                - 3 -

     Albert J. Flores (petitioner) was an insurance salesman in

2006 and 2007.   Petitioner’s clients and business meetings

spanned almost the entire State of California.    He used a

calendar to document his appointments.    For each appointment he

listed the name of the client and an abbreviated description of

the purpose for the meeting.    For some of his appointments

petitioner included the address or location of the meeting.    For

other appointments he only listed a geographical area for the

meeting.    Petitioner did not include the mileage driven for each

appointment on the calendar.    Petitioner did begin “constructing

a log to reconstruct the mileage” for his appointments about 3

months before his trial date.

     Petitioner used two vehicles, a Volkswagen and an Infiniti,

for business travel, but he did not document which vehicle he

used for the appointments listed on his calendar.    Petitioner

used the optional standard mileage rate to calculate his claimed

deductions for the Volkswagen but used his actual expenses to

calculate his claimed deductions for the Infiniti.

     Petitioner also claimed deductions for meals and

entertainment expenses, travel expenses, and advertising

expenses.   He reported his income and expenses for each year on a

Schedule C.   For 2006 petitioner claimed deductions for car and

truck expenses of $15,630, travel expenses of $5,229, and meals

and entertainment expenses of $4,320.    For 2007 petitioner
                                 - 4 -

claimed deductions for car and truck expenses of $18,173, travel

expenses of $4,320, and advertising expenses of $48,917.     Instead

of giving his return preparer his calendar or receipts for his

expenses, petitioner gave his return preparer a worksheet with a

“guesstimate” of his expenses.

     Respondent disallowed petitioner’s deductions for all of the

car and truck expenses, travel expenses, and meals and

entertainment expenses for 2006.    Respondent disallowed

petitioner’s deductions for all of the car and truck expenses,

travel expenses, and advertising expenses for 2007.

                             Discussion

     Generally, the Commissioner’s determinations are presumed

correct, and the taxpayer bears the burden of proving that those

determinations are erroneous.    Rule 142(a); see INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, 290

U.S. 111, 115 (1933).    In some cases the burden of proof with

respect to relevant factual issues may shift to the Commissioner

under section 7491(a).    Petitioners did not argue or present

evidence that they satisfied the requirements of section 7491(a).

Therefore, petitioners bear the burden of proof with respect to

the issues in the notice of deficiency.

     Deductions and credits are a matter of legislative grace,

and the taxpayer bears the burden of proving that he is entitled

to any deduction or credit claimed.      Rule 142(a); Deputy v. du
                              - 5 -

Pont, 308 U.S. 488, 493 (1940); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934).   Additionally, a taxpayer

must substantiate all expenses.    Sec. 6001; Hradesky v.

Commissioner, 65 T.C. 87, 89 (1975), affd. per curiam 540 F.2d

821 (5th Cir. 1976).

     Section 162 generally allows a deduction for ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.   As a general rule, if the trial

record provides sufficient evidence that the taxpayer has

incurred a deductible expense, but the taxpayer is unable to

adequately substantiate the precise amount of the deduction to

which he is otherwise entitled, the Court may estimate the amount

of the deductible expense and allow the deduction to that extent,

bearing heavily against the taxpayer whose inexactitude in

substantiating the amount of the expense is of his own making.

Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).    In order for

the Court to estimate the amount of an expense, the Court must

have some basis upon which an estimate may be made.     Vanicek v.

Commissioner, 85 T.C. 731, 742-743 (1985).   Without such a basis,

any allowance would amount to unguided largesse.     Williams v.

United States, 245 F.2d 559, 560-561 (5th Cir. 1957).

     Travel expenses, however, including meals and lodging,

entertainment expenses, and expenses with respect to listed

property must be substantiated by adequate records or sufficient
                               - 6 -

evidence corroborating the taxpayer’s own statement showing the:

(1) Amount of such expenditure, (2) time and place of the travel

or entertainment, (3) business purpose of the expense, and (4)

the business relationship to the taxpayer of the person being

entertained.   Sec. 274(d); sec. 1.274-5T(a) and (b), Temporary

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

property includes any passenger automobile.   Sec.

280F(d)(4)(A)(i).

     To satisfy the adequate records requirement of section

274(d), the taxpayer shall maintain an account book, a diary, a

log, a statement of expense, trip sheets, or similar record and

documentary evidence that in combination are sufficient to

establish each element of the expenditure or use.    Sec. 1.274-

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

6, 1985).   If a taxpayer does not have adequate records to

substantiate each element of an expense, he 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).

     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
                                - 7 -

201 (2d Cir. 1969); Rodriguez v. Commissioner, T.C. Memo. 2009-22

(the strict substantiation requirements of section 274(d)

preclude the Court and taxpayers from approximating certain

expenses).

Petitioner’s Car and Truck Expenses

     Petitioner used two different vehicles when he conducted

business in 2006 and 2007.   For the Volkswagen he used the

optional standard mileage rate to calculate his expenses.

Petitioner used his actual expenses for the Infiniti.   A taxpayer

may use a standard mileage rate as established by the Internal

Revenue Service in lieu of substantiating actual expenses for the

business use of a passenger automobile.   See sec. 1.274-5(j)(2),

Income Tax Regs.   A taxpayer may use either method but may not

use both.    See Larson v. Commissioner, T.C. Memo. 2008-187.

     Petitioner has not substantiated his expenses under either

method.   The calendars that petitioner introduced into evidence,

although contemporaneous, did not include the number of miles he

drove for each business trip nor which vehicle he used.4    He did

not begin to construct a mileage log until 3 months before trial.

The mileage log lists several business places as an “area” as



     4
      Petitioner entered into evidence calendars for 5 months of
2006 and 6 months of 2007. He testified that he kept his
calendars on his smartphone that was linked to his computer.
Petitioner provided no explanation for why he could not produce
complete calendars for each year in issue.
                                 - 8 -

opposed to a specific location.5    “[T]he probative value of

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

expenditure or use.”    Sec. 1.274-5T(c)(1), Temporary Income Tax

Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).    The lack of

specificity in petitioner’s mileage log does little to

corroborate his testimony of business use for either vehicle.

     Petitioner also introduced into evidence repair records and

gas receipts for the Infiniti.     No evidence was presented to show

the ratio of the business use to the personal use of the

Infiniti.    Petitioner is entitled to deduct only that percentage

of the expense he incurred that equals the business use

percentage of the Infiniti.   See Larson v. Commissioner, supra;

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

46025 (Nov. 6, 1985).   Petitioner did not substantiate the

business use percentage for the Infiniti.

     Petitioner has failed to substantiate his car and truck

expenses for 2006 and 2007.   Respondent’s determination to

disallow petitioner’s car and truck expenses is sustained.

Petitioner’s Meals and Entertainment Expenses

     Petitioner entered into evidence receipts for meals and golf

outings.    Generally, the deduction for meals and entertainment

expenses is limited to 50 percent of the amount substantiated.


     5
      Petitioner listed the majority of his business locations as
the “Concord area”.
                               - 9 -

Sec. 274(n).   Petitioner testified that the golf outings were

related to business, but he did not give any further details.

None of the receipts introduced into evidence list a business

purpose, and the golf receipts do not show the business

relationship to the taxpayer of the person being entertained.

See sec. 274(d).   Therefore, petitioner failed to substantiate

his meals and entertainment expenses for 2006.   Respondent’s

determination to disallow petitioner’s meals and entertainment

expenses is sustained.

Petitioner’s Advertising Expenses

     Petitioner introduced into evidence three duplicate checks

totaling $3,714.15 to substantiate a portion of his advertising

expenses.6   The three checks are written to the same individual.

The memo line of each check is difficult to read.   Petitioner

testified that one of the memo lines read “rent and Ing annuity”.

Petitioner did not explain how a check written for the rental of

office space was an advertising expense.   Petitioner did not

explain the Ing annuity or any of the other memo lines.   No

evidence was introduced to explain the other $45,202.85 of

expenses petitioner deducted for advertising.    Petitioner failed

to substantiate his advertising expenses and failed to provide a

basis upon which the Court could estimate his advertising

     6
      A fourth duplicate check entered into evidence is
illegible. A duplicate check is the carbon copy of the written
check.
                               - 10 -

expenses.   See Vanicek v. Commissioner, 85 T.C. at 742-743.

Respondent’s determination to disallow petitioner’s advertising

expenses is sustained.

Petitioner’s Travel Expenses

     Petitioner did not provide any substantiation, written or

oral, for his travel expenses for 2006 or 2007.   Therefore,

respondent’s determination to disallow petitioner’s travel

expenses is sustained.

Accuracy-Related Penalties

     Section 6662(a) and (b)(1) and (2) imposes a 20-percent

accuracy-related penalty on the portion of an underpayment that

is attributable to negligence, disregard of rules or regulations,

or a substantial understatement of income tax.

     The term “negligence” in section 6662(b)(1) includes any

failure to make a reasonable attempt to comply with the Code and

the term “disregard” includes any careless, reckless, or

intentional disregard.   Sec. 6662(c).   Negligence has also been

defined as the failure to exercise due care or the failure to do

what a reasonable person would do under the circumstances.     See

Allen v. Commissioner, 92 T.C. 1, 12 (1989), affd. 925 F.2d 348,

353 (9th Cir. 1991); Neely v. Commissioner, 85 T.C. 934, 947

(1985).

     An understatement of income tax is the excess of the amount

of income tax required to be shown on the return for the taxable
                               - 11 -

year over the amount of income tax that is shown on the return,

reduced by any rebate.    See sec. 6662(d)(2)(A).     An

understatement is substantial if it exceeds the greater of 10

percent of the tax required to be shown on the return for the

taxable year or $5,000.    See sec. 6662(d)(1)(A).7

     The Commissioner bears the burden of production with respect

to the applicability of an accuracy-related penalty determined in

a notice of deficiency.    Sec. 7491(c).   In order to meet that

burden, the Commissioner need only make a prima facie case that

imposition of the penalty is appropriate.      Higbee v.

Commissioner, 116 T.C. 438, 446 (2001).     Once that burden is met,

the taxpayer bears the burden of proving that the accuracy-

related penalty does not apply because of reasonable cause,

substantial authority, or the like.     Secs. 6662(d)(2)(B),

6664(c); Higbee v. Commissioner, supra at 449.      Respondent has

met that burden here.

     An accuracy-related penalty is not imposed on any portion of

the underpayment as to which the taxpayer acted with reasonable

cause and in good faith.    Sec. 6664(c)(1).   Section 1.6664-

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

     7
      After respondent’s concessions, see supra note 2, it is not
clear that petitioners will have a substantial understatement of
income tax for 2006 or 2007. Because the Court finds that
petitioners are liable for a sec. 6662(a) penalty for each year
because of negligence, we need not decide whether they are liable
for the penalties due to substantial understatements of income
tax.
                              - 12 -

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 or her proper tax

liability.   Id.

     Petitioners failed to substantiate thousands of dollars of

expenses for the years in issue.   Petitioners provided no

evidence that they acted in good faith and with reasonable cause.

Accordingly, respondent’s determination of the accuracy-related

penalties is sustained.

     To reflect the foregoing,


                                          Decision will be entered

                                    under Rule 155.
