                             T.C. Memo 2016-168



                       UNITED STATES TAX COURT



     JOHN R. GALBRAITH AND MARY M. GALBRAITH, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 1673-13.                        Filed September 12, 2016.



      John R. Galbraith and Mary M. Galbraith, pro se.

      Brenn C. Bouwhuis, for respondent.



           MEMORANDUM FINDINGS OF FACT AND OPINION


      HOLMES, Judge: This is a substantiation case arising from John

Galbraith’s Schedule C. He claimed numerous deductions for his work as a

traveling salesman, but his recordkeeping was spotty. The Commissioner
                                        -2-

[*2] determined a deficiency in tax of more than $20,000 and seeks an additional

$5,000 in penalties.

                               FINDINGS OF FACT

      During 2009 Galbraith was a traveling salesman selling maintenance parts

like nuts, bolts, power tools, and certain electrical items. He used to work for a

single company, but in 2009 he began to split his time between a distributor--

Winzer--which sent him a Form W-2 that he reported as wages on his return; and

his own business, whose receipts and expenses he reported on a Schedule C.

Whether he was on his own time or on the distributor’s time, Galbraith’s job was

the same. He would make cold calls on potential clients, visit those who would

receive him, and try to close sales.

      Many of the products that Galbraith sold were difficult to find, so he had a

niche market. His Schedule C sales were very specialized, and he had only one

customer in that business in the year before us, a Spanish windmill manufacturer

that needed a very particular kind of bolt that Galbraith knew how to procure.

      Even though Galbraith had only one non-Winzer customer that year, he

claimed a great deal of mileage for what he said were cold calls for his Schedule C

business. This raises an obvious question: How is it that an experienced salesman

gave such frequent and voluminous sales pitches yet gets only one customer? It
                                          -3-

[*3] seems more likely that Galbraith’s mileage was related to his work on

commission for Winzer rather than his Schedule C business. This hurts his

credibility, and it isn’t the only thing that does.

      The most serious problem came from discrepancies in his mileage logs. He

operated four vehicles during the 2009 tax year: a truck, a 1999 Jeep, a 2002

Acura, and a 2007 Acura. Galbraith claimed at trial that he recorded his daily

mileage by writing the starting and ending odometer readings for each trip on a

Post-it note. After he recorded the number, he would stick the Post-it note in his

Day-Timer. But the mileage log for the 1999 Jeep stated that its odometer read

118,905 miles on January 1, 2009, while a Carfax report on the same vehicle

showed an odometer reading of 126,121 in November 2007. Galbraith said that

after he had the Jeep’s dashboard replaced there was a “new starting mileage” on

the Jeep. But we also spotted a similar problem in the logs for Galbraith’s 2002

Acura: In November 2008 the Acura had an odometer reading of 109,422, but by

January 1, 2009, it had run backward to 103,723. This time, Galbraith admitted

that he couldn’t account for the discrepancy. We do not find Galbraith’s

testimony about these logs convincing.

      Galbraith also failed to report income from various sources and claimed

numerous other deductions on his 2009 tax return. In October 2012 the
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[*4] Commissioner sent him a notice of deficiency. Galbraith, a California

resident, timely filed his petition. After a slew of concessions, only his Schedule

C expenses and the section 6662(a)1 penalty remain at issue. Those expenses are:

     Expense        Amount claimed      Amount allowed        Amount disallowed
 Car & truck             $37,152               $750                  $36,402
 Depreciation               5,522                ---                    5,522
 Insurance
  (non-health)              2,133                ---                    2,133
 Office                     3,066                ---                    3,066
 Repairs &
  maintenance               3,281                ---                    3,281
 Travel                     2,177                ---                    2,177
 Meals &
  entertainment               342                ---                      342
 Utilities                  6,660               600                     6,060
 Other                      4,782               600                     4,182
 Non-transcribed          31,408                 ---                  31,408
  Total                   96,523              1,950                   94,573




      1
         All section references are to the Internal Revenue Code in effect for the
year in issue, and all Rule reference are to the Tax Court Rules of Practice and
Procedure, unless otherwise indicated.
                                       -5-

[*5]                                OPINION

       Section 162 allows a deduction for ordinary and necessary expenses paid or

incurred in connection with a trade or business. We generally presume the

Commissioner’s determination in the notice of deficiency is correct, and the

taxpayer has the burden of proving what he spent. Rule 142(a); Welch v.

Helvering, 290 U.S. 111 (1933). To prove these deductions, a taxpayer usually

must keep sufficient records to substantiate them. Sec. 6001; sec. 1.6001-1(a),

Income Tax Regs. We may estimate some types of business expenses, but only if

the taxpayer provides at least some evidence to support an estimate and only if we

are convinced from the record that he incurred them. Cohan v. Commissioner, 39

F.2d 540, 543-44 (2d Cir. 1930); Blythe v. Commissioner, T.C. Memo. 1999-11.

       Some expenses have enhanced substantiation requirements under section

274. These include expenses for travel and meals and entertainment. Id. For

these expenses, a taxpayer must show the amount, the time, the place, and the

business purpose of each expense. Sec. 1.274-5T(b), (c)(1), Temporary Income

Tax Regs. A taxpayer usually presents some sort of account book, diary, or log

made near the time of the expense, but in their absence, a taxpayer’s testimony

along with corroborative evidence may suffice. Id. para. (c)(2) and (3).
                                        -6-

[*6] Galbraith claimed $96,000 in Schedule C expenses and the Commissioner

allowed only about $2,000. We will group these expenses by category.

I.    Section 274 Expenses

      A.     Car and Truck

     Expense         Amount claimed       Amount allowed       Amount disallowed
 Car & truck             $37,152                $750                $36,402

      Galbraith claimed $37,152 in car-and-truck expenses for the 2009 tax year--

opting to use the standard mileage rate. He provided pages of purported mileage

logs for the four vehicles he operated, but the discrepancies with the odometer

readings make them not credible. Another problem with the logs is that Galbraith

admitted twice during trial that he was out of town or doing work in his capacity

as Winzer’s employee on a day that he logged miles for his Schedule C business.

See Barton v. Commissioner, T.C. Memo. 2005-97 (finding numerous

inconsistencies in the evidence submitted by the taxpayer to substantiate his

automobile expenses and not allowing additional expenses). Even if we could

trust Galbraith’s logs, they do not identify the business purpose of each expense,

and so still wouldn’t meet section 274’s requirements. See sec. 1.274-5T(b),

(c)(1), Temporary Income Tax Regs. We therefore find that he is not entitled to a

larger deduction for his car-and-truck expenses beyond the small amount the
                                        -7-

[*7] Commissioner already allowed. See Meridian Wood Prods. Co. Inc., v.

United States, 725 F.2d 1183, 1190 (9th Cir. 1984); Pace v. Commissioner, T.C.

Memo. 2010-272; Royster v. Commissioner, T.C. Memo. 2010-16.

      B.     Travel, meals, and entertainment

     Expense         Amount claimed       Amount allowed       Amount disallowed
 Travel                    $2,177                 ---                 $2,177
Meals &
 entertainment               342                  ---                      342

      Galbraith claimed just over $2,177 in travel expenses and another $342 for

his meals and entertainment. To substantiate these expenses, Galbraith submitted

various credit-card statements and receipts for airfare, hotels, and meals. There is

no way to tell from these documents, however, what the business purpose of each

expense was--or if there even was one at all. Therefore, we find for the

Commissioner on these expenses.

      C.     Cell phones

     Expense         Amount claimed       Amount allowed       Amount disallowed
 Cellular phone            $2,887               $361                  $2,526

      Galbraith claimed $2,887 in expenses for his cellular phones. The

Commissioner did allow $361, so we are only deciding whether Galbraith is
                                        -8-

[*8] entitled to any deduction beyond that. To substantiate these expenses he

submitted 2009 bills from Verizon Wireless.

      In 2009 cellular phones were listed property and thus subject to strict

substantiation requirements under section 274.2 Secs. 280F(d)(4)(A)(v), 274(d).

Each Verizon Wireless statement shows a cell phone plan for four numbers: The

first number was for a phone Galbraith used substantially, but not exclusively, for

business; the second was for a phone he used not at all; the third was for his son’s

phone and used for an unrelated business; and the fourth was for his wife’s

personal phone. And Galbraith used his business phone not just for his own

business, but for his Winzer work. The Commissioner determined that only one-

half of one-fourth of Galbraith’s cellphone expenses should be deductible. We do

not find that Galbraith showed that he was entitled to any more.

II.   Non-Section 274 Expenses

      A.     Depreciation

      Expense        Amount claimed       Amount allowed       Amount disallowed
 Depreciation             $5,522                 ---                  $5,522




      2
       Section 280F no longer includes cellular phones as listed property. Sec.
280F(d).
                                       -9-

[*9] Galbraith claimed $5,522 in depreciation expenses for the 2009 tax year.

He did not submit any documents into evidence, nor did he offer any testimony

during trial to substantiate his claim to depreciation expenses. See INDOPCO,

Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Adler v. Commissioner, T.C.

Memo. 2010-47, aff’d, 443 F. App’x 736 (3d Cir. 2011). His lack of

documentation makes an estimation under Cohan impossible. We therefore find

for the Commissioner.

      B.    Insurance

     Expense        Amount claimed       Amount allowed      Amount disallowed
 Insurance
  (non-health)           $2,133                 ---                 $2,133

      Galbraith claimed $2,133 in insurance expenses. The only document he

submitted as substantiation was something titled “Evidence of Insurance” for the

1999 Jeep and the 2007 Acura. This document did not identify the cost of the

insurance, or show that he had paid it (and it wasn’t even for 2009). Again, we

cannot apply Cohan, and we find for the Commissioner.
                                         - 10 -

[*10] C.       Office Expenses

     Expense           Amount claimed       Amount allowed      Amount disallowed
 Office                    $3,066                 ---                  $3,066

         Galbraith claimed $3,066 in office expenses. As he did for his meals-and-

entertainment expenses, Galbraith submitted only credit-card statements and

receipts as substantiation. This does not help us to figure out if the expenses were

personal or served a business purpose. We find for the Commissioner on this

issue.

         D.    Repairs and Maintenance

     Expense          Amount Claimed       Amount Allowed       Amount Disallowed
 Repairs &
  maintenance              $3,281                 ---                  $3,281

         Galbraith claimed $3,281 in expenses for repairs and maintenance. He

didn’t provide any documents--either contemporaneous or reconstructed--to

substantiate these expenses. We were also unable to figure out what he was

claiming had to be repaired or maintained. So again, Galbraith failed to

substantiate his expenses. See Fernandez v. Commissioner, T.C. Memo. 2011-216

(taxpayer not entitled to deductions if unable to tie specific expenditures to

business). We find for the Commissioner on this issue.
                                       - 11 -

[*11] E.     Utilities

     Expense         Amount claimed       Amount allowed       Amount disallowed
 Utilities (other
  than cellular
  phone)                  $3,773                $239                  $3,534

      Galbraith claimed $3,773 in other utility expenses. The Commissioner did

allow $239, so we are only deciding whether Galbraith is entitled to any deduction

beyond that. To substantiate these expenses he submitted 2009 bills from PG&E

and AT&T.

      Galbraith submitted AT&T statements for landline phones for his wife and

sister-in-law. Galbraith claimed that he sometimes used his sister-in-law’s phone

for his own business, but even if we found his testimony credible, there is no way

to distinguish between charges for personal use and charges that had a business

purpose. See Bennett v. Commissioner, T.C. Memo. 2010-114. It’s the same

story for the other two lines: Galbraith claims that these lines had a business

purpose, but we do not find his testimony credible and he gave us no way to

distinguish between business and personal charges. We therefore find that the

primary purpose of these phone lines was personal. See Int’l Artists, Ltd. v.

Commissioner, 55 T.C. 94, 105 (1970); see also Rowell v. Commissioner, T.C.

Memo. 1988-410, aff’d, 884 F.2d 1085 (8th Cir. 1989).
                                        - 12 -

[*12] Galbraith also claimed utility expenses for electricity and heat. He

submitted PG&E statements for his personal residence. He also testified that he

conducted business in only one room of the house and that even when he did it

was mostly to fax documents. Galbraith testified that he used this room only as a

home office, but we don’t find him credible. There’s also a subtler failure of proof

here: A taxpayer is only entitled to claim utilities expenses for the portion of a

personal residence that he uses exclusively for business purposes. Sec. 280A(c).

Galbraith submitted no documents and gave no testimony about the size of the

house and the room, which leaves us unable to do the math of proportional

allocation even if we believed that he used the room exclusively for business. See

Gaylord v. Commissioner, T.C. Memo. 2003-273 (no home-office deductions

without proof of allocation of space in residence).

      To recap, the Commissioner allowed $600 in utilities expenses. Galbraith is

not entitled to anything more.

      F.     Other Expenses

     Expense         Amount claimed        Amount allowed       Amount disallowed
 Other                    $4,782                 $600                  $4,182
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[*13] Galbraith claimed $4,782 in other expenses. The Commissioner allowed

$600, but there was no evidence of what these expenses even were, much less how

they related to Galbraith’s business. No more deductions here.

      G.    Non-Transcribed Expenses

     Expense         Amount claimed       Amount allowed       Amount disallowed
 Non-transcribed
 expenses                $31,408                 ---                $31,408

      Galbraith claimed $31,408 in “non-transcribed” expenses. These expenses

are a miscellaneous-expense category, and there was no evidence to support their

deductibility. See Fernandez v. Commissioner, T.C. Memo. 2011-216 (no

deductions without substantiation). Galbraith testified that even he didn’t know

what these expenses were for. No deductions here.

      H.    Rent

      Even though Galbraith did not claim rent as an expense on his 2009

Schedule C, he submitted a lease document relating to other years. He also

submitted invoices for rent allegedly due in 2009, but no proof that he paid the

rent. These documents don’t prove that there was a lease or that rent was paid for

the 2009 tax year, so Galbraith is not entitled to a deduction. See Edwards v.

Commissioner, T.C. Memo. 2002-169, aff’d, 119 F. App’x 293 (D.C. Cir. 2005).
                                        - 14 -

[*14] To sum up, poor recordkeeping--and for some categories, no recordkeeping

at all--means no deductions beyond what the Commissioner already allowed.

III.   Section 6662(a) Penalty

       The Commissioner determined an accuracy-related penalty under section

6662(a), which imposes a penalty of 20 percent of the portion of the underpayment

of tax attributable to any substantial understatement of tax.3 The initial burden of

production is on the Commissioner to show that the understatement of tax was

substantial. Sec. 7491(c). An understatement of tax is substantial if it exceeds the

greater of $5,000 or “10 percent of the tax required to be shown on the return.”

Sec. 6662(d)(1)(A). Here, Galbraith’s corrected tax liability for the 2009 tax year

was over $21,000 and his reported tax liability was only $151. The

understatement is well over both 10 percent of the tax required to be shown and

over $5,000. The Commissioner has met his burden.

       A taxpayer can rebut the penalty only by proving that he acted with

reasonable cause and in good faith. See sec. 6664(c)(1); sec. 1.6664-4(a), Income

Tax Regs. Galbraith offered no evidence on this issue, and the discrepancies in

what records he did present make it difficult for us to believe he acted in good

       3
         The Code also imposes this penalty for negligence or disregard of rules or
regulations, sec. 6662(b)(1), but because we find that there was a substantial
understatement, we need not address Galbraith’s negligence.
                                        - 15 -

[*15] faith in claiming those deductions that the Commissioner disallowed. We

therefore find that Galbraith is liable for the section 6662(a) accuracy-related

penalty.


                                                 Decision will be entered for

                                       respondent.
