                  T.C. Summary Opinion 2004-127



                     UNITED STATES TAX COURT



                 ROWLAND SETYONO, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5500-03S.            Filed September 13, 2004.


     Rowland Setyono, pro se.

     John D. Faucher, for respondent.



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

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.   Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the years in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

The decision to be entered is not reviewable by any other court,

and this opinion should not be cited as authority.
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     Respondent determined deficiencies of $9,845 and $3,846 in

petitioner's 1999 and 2000 Federal income taxes, respectively.

     The issues for decision are:   (1) Whether petitioner is

entitled to claim rental real estate losses in excess of those

allowed by respondent; (2) whether petitioner is entitled to

deductions for employee business expenses; and (3) whether

petitioner is liable for the 10-percent additional tax under

section 72(t) for early distributions from retirement plans.

                          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.   At the time the petition

in this case was filed, petitioner resided in Sacramento,

California.

1.   Petitioner's Rental Real Estate Losses

     During the years in issue, petitioner owned three houses:

(1) 8501 Canterbury (Canterbury) in Sun Valley, California; (2)

960 N. Adams (Adams) in Chandler, Arizona; and (3) 28705

Persimmon Lane (Persimmon) in Saugus, California.

     Petitioner purchased the Canterbury house around 1982 and

still owns it.   He did not have a tenant in this house during

either 1999 or 2000.
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      Petitioner purchased the Adams house in 1996 and still owns

it.   Petitioner would drive from California to Arizona weekly to

perform maintenance on the Adams house.

      Petitioner hired Desert Wide Properties (Desert Wide) to

manage the Adams property.   Desert Wide was not responsible for

cleaning the house or otherwise preparing it for rental.     They

simply advertised the property for rental and did not charge

petitioner a fee until the property was rented.   The Adams house

was rented from September 1999 through the entire 2000 tax year.

After it was rented, petitioner had no further need to drive to

Arizona.

      Petitioner has owned the Persimmon house since 1990.    In

1993, he hired Southern California Real Estate Management Co. to

manage the property.   During the years at issue, petitioner had a

tenant in the house and did not visit the property.

      On his 1999 Schedule E, Supplemental Income and Loss,

petitioner claimed deductions pertaining to the Adams and

Persimmon properties of $28,614.27 and $38,649.53, respectively.

Petitioner lived in the Adams house from January through June

1999.   In the notice of deficiency, respondent reclassified from

Schedule E to Schedule A, Itemized Deductions,

$5,860 of the mortgage interest and property taxes attributable

to the Adams property for the period during which petitioner

lived there.
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     On his 2000 Schedule E, petitioner claimed deductions

pertaining to the Adams and Persimmon rental properties of

$25,616.92 and $38,213.00, respectively.   Respondent determined

that petitioner qualifies for a $25,000 loss for active

participation in his rental real estate activity in each of the

years in issue.   Respondent disallowed loss deductions in excess

of that amount.

2.   Petitioner's Employee Business Expenses

     During the years in issue, petitioner was employed as a

computer analyst by Wells Fargo Bank (Wells Fargo), his employer

of more than 20 years.   At the beginning of 1999, petitioner was

working in Tempe, Arizona.   In June 1999 petitioner's job was

relocated from Arizona to Sacramento, California.   At that time,

petitioner rented an apartment in Sacramento.

     During one of the weekly trips he made from California to

the Adams house to perform maintenance, petitioner retrieved from

the Adams house computer manuals he needed for his job.   He was

not required by Wells Fargo to drive down and pick up the

manuals.   Petitioner did it for his own convenience.   He did not

keep records of the mileage he drove.

     On his 1999 Schedule A, petitioner deducted his mileage

expenses for trips to the Adams house as an employee business

expense, claiming a total deduction of $13,392.00, less the 2-

percent AGI floor of $1,360.87, or $12,031.13.   On his 2000
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Schedule A, petitioner deducted his mileage expenses for trips to

the Adams house as an employee business expense, claiming a total

deduction of $13,000, less the 2-percent AGI floor of $809.36, or

$12,190.64.   Respondent disallowed petitioner's claimed deduction

for mileage expenses because petitioner did not establish that

the expenses were related to his employment.

3.   Petitioner's Retirement Plan Withdrawals

     In 1999, petitioner made withdrawals from two retirement

plans.   A Form 1099-R, Distributions From Pensions, Annuities,

Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts,

etc., reflects that his gross distribution from the Federal

Savings Bank plan was $22,839.61.    The amount comprises

$6,957.18 as a return of employee contributions and $15,882.43 as

a taxable distribution.

     Petitioner's gross distribution from his Wells Fargo section

401(k) plan was $12,850.   The full amount is identified on the

Form 1099-R as a taxable distribution.    Petitioner reported both

distributions as income on his 1999 Form 1040, U.S. Individual

Income Tax Return.   He did not, however, report the 10-percent

additional tax attributable to a premature withdrawal from a

retirement plan.

     In 2000, petitioner again made a withdrawal from the Wells

Fargo section 401(k) plan.   The Form 1099-R reflects that his

gross distribution was $10,793.25.     The full amount is identified
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as taxable.    Petitioner reported the distribution as income on

his 2000 Form 1040, but once again he did not report the 10-

percent additional tax attributable to a premature withdrawal

from a retirement plan.    In the notice of deficiency, respondent

determined that petitioner is liable for the additional tax on

premature distributions for each year.

     Petitioner made the withdrawals to pay for his sister's

funeral and to stop foreclosure on one of his properties.

Petitioner's sister passed away during the 1999 tax year.     She

had lived in Indonesia, and her funeral was held there.

According to petitioner, the Muslim funeral ceremonies for his

sister were required to span 3 years.    In 1999, petitioner spent

approximately $12,000 to $15,000 for her funeral expenses.     He

also spent the funds he withdrew in 2000 on his sister's funeral

expenses.

     At the end of 1998, First Nationwide Mortgage notified

petitioner of its intent to foreclose on the Canterbury house.

In 1999, petitioner spent approximately $15,000 of the funds

distributed to him from his pension plan to avoid the

foreclosure.   At the time of trial, petitioner had not yet

reached the age of 59-1/2 years.

                           Discussion

     The Commissioner's determinations in the notice of

deficiency are presumed correct, and, generally, taxpayers must
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prove those determinations wrong in order to prevail.   Rule

142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).     Because

the issues to be decided are questions of law, section 7491(a) is

inapplicable, and the Court decides the issues without regard to

the burden of proof.

1.   Petitioner's Rental Real Estate Losses

     Section 469(a) generally disallows passive activity losses.

Section 469(d)(1) defines "passive activity loss" as the excess

of passive activity losses over passive activity income for the

taxable year.   Under section 469(c)(2), passive activity includes

any rental activity, "without regard to whether or not the

taxpayer materially participates in the activity."   Sec.

469(c)(4).

     However, under section 469(c)(7), section 469(c)(2) does not

apply to the rental real estate activities of a taxpayer in the

real property business (a real estate professional) if:

               (i) more than one-half of the personal
          services performed in trades or businesses by
          the taxpayer during such taxable year are
          performed in real property trades or
          businesses in which the taxpayer materially
          participates, and

               (ii) such taxpayer performs more than
          750 hours of services during the taxable year
          in real property trades or businesses in
          which the taxpayer materially participates.

Sec. 469(c)(7)(B).
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     Petitioner was employed full time as a computer analyst with

Wells Fargo.   He testified that he retained two property

management companies to manage the Adams and Persimmon

properties.    Petitioner also admitted that he did not keep any

records as to how much time he devoted to his real estate

activities.    The Court concludes that petitioner does not satisfy

the exception set forth in section 469(c)(7) and he is not

entitled to deduct real estate losses in excess of the $25,000

loss allowed by respondent.

2.   Petitioner's Employee Business Expenses

     Deductions are a matter of legislative grace, and taxpayers

must maintain adequate records to substantiate the amounts of any

deductions or credits claimed.    Sec. 6001; INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); sec. 1.6001-1(a), Income

Tax Regs.

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

necessary expenses incurred in carrying on a trade or business.

Generally, a taxpayer must establish that deductions claimed

pursuant to section 162 are ordinary and necessary expenses and

must maintain records sufficient to substantiate the amounts of

the deductions claimed.   Sec. 6001; Meneguzzo v. Commissioner, 43

T.C. 824, 831-832 (1965); sec. 1.6001-1(a), (e), Income Tax Regs.

     With respect to certain business expenses specified in

section 274(d), however, more stringent substantiation
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requirements apply.    Section 274(d) disallows deductions for

traveling expenses, gifts, and meals and entertainment, as well

as for listed property, unless the taxpayer substantiates by

adequate records or by sufficient evidence corroborating the

taxpayer's own statement:    (1) The amount of the expense,

(2) the time and place of the expense, (3) the business purpose

of the expense, and (4) the business relationship to the taxpayer

of the persons involved in the expense.    The term "listed

property" is defined in section 280F(d) and includes passenger

vehicles.    See sec. 280F(d)(4)(A)(i).

       Under section 274(d), substantiation by means of adequate

records requires a taxpayer to maintain a diary, a log, or a

similar record, and documentary evidence that, in combination,

are sufficient to establish each element of each expenditure or

use.    Sec. 1.274-5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed.

Reg. 46017 (Nov. 6, 1985).    To be adequate, a record must

generally be written.    Each element of an expenditure or use that

must be substantiated should be recorded at or near the time of

that expenditure or use.    Sec. 1.274-5T(c)(2)(ii)(A), Temporary

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

section 274(d) no deduction may be allowed for expenses incurred

for use of a passenger automobile on the basis of any
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approximation or the unsupported testimony of the taxpayer.

Bradley v. Commissioner, T.C. Memo. 1996-461; Golden v.

Commissioner, T.C. Memo. 1993-602.

     Petitioner's employment as a computer analyst did not

require that he drive 13,392 miles in 1999 or 13,000 miles in

2000.   Therefore, the Court finds that petitioner's mileage

expenses are unrelated to his employment and thus are not

deductible.   Respondent's disallowance of petitioner's claimed

employee business expenses is sustained.

3.   Petitioner's Retirement Plan Withdrawals

     Section 72 typically operates to include distributions in

gross income, and subsection (t) provides for an additional tax

on premature distributions.   For purposes of the statute, section

4974(c) includes a pension plan described in section 401(a) as a

qualified retirement plan.

     None of the exceptions enumerated in section 72(t)(2) is

applicable.   Petitioner acknowledges that the funds were

withdrawn from his retirement plan accounts and that he had not

reached age 59-1/2.   The foreclosure of petitioner's property and

his sister's funeral expenses do not satisfy any of the

exceptions set forth in section 72(t).   Therefore, respondent's

determination that petitioner is liable for each year for the 10-
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percent additional tax on his premature distributions is

sustained.

     Reviewed and adopted as the report of the Small Tax Case

Division.


                                   Decision will be entered

                              for respondent.
