                          T.C. Summary Opinion 2012-57



                         UNITED STATES TAX COURT



     DARREN J. NEWELL AND KATHERINE M. NEWELL, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 29052-10S.                        Filed June 18, 2012.



      Allen Reed Davison II, for petitioners,

      Shaina E. Boatright, for respondent.



                              SUMMARY OPINION


      ARMEN, Special Trial Judge: This case was heard pursuant to the

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

        Respondent determined a deficiency in petitioners’ 2008 Federal income tax

of $1,553 and an accuracy-related penalty of $310.60. After concessions by both

parties, the issues for decision are:2

        (1) Whether the “tax home” of petitioner Darren J. Newell remained in

Phoenix, Arizona, until he moved into an apartment in Pasadena, California, on

October 10, 2008, and, if so;

        (2) whether petitioners are entitled to deduct travel expenses and lease

cancellation expenses paid in connection with petitioner Darren J. Newell’s transfer

to Pasadena, California, and, if so;

        (3) whether petitioners properly substantiated those expenses, and finally;

        (4) whether petitioners are liable for the accuracy-related penalty under

section 6662(a).

        1
         Unless otherwise indicated, all subsequent section references are to the
Internal Revenue Code in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
        2
        Respondent concedes that petitioners are entitled to deduct $369.33 for
moving expenses under sec. 217. Petitioners concede that the remaining expenses
claimed on their tax return as moving expenses are not deductible under sec. 217.
                                         -3-

                                      Background

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

incorporate by reference the parties’ stipulation of facts and accompanying exhibits.

Petitioners resided in the State of Kansas when the petition was filed.

      At all times relevant, Darren J. Newell (petitioner) worked as a general

manager in the restaurant business and was employed by LGO Hospitality (LGO).

During the first eight months of 2008 petitioner managed one of LGO’s restaurants

located in Phoenix, Arizona (Phoenix restaurant). While working at the Phoenix

restaurant, petitioner lived in an apartment with his wife and daughter in the nearby

adjacent city of Scottsdale, Arizona.

      In August 2008 petitioner’s supervisor offered him a permanent position as

general manager of LGO’s restaurant in Pasadena, California (Pasadena restaurant).

After consultation with his wife, petitioner accepted the general manager position

and agreed to relocate to Pasadena.

      On or about September 1, 2008, petitioner began work as the general

manager of the Pasadena restaurant. Although the exact date is not entirely clear

from the record, petitioner and his family moved to Pasadena around the same time

period. Petitioners terminated their lease with respect to their apartment in

Scottsdale and paid expenses associated with that early cancellation (2008 lease
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cancellation expense). Petitioners used a rented moving truck and their personal

automobile to transport their personal belongings and the family dog to Pasadena.

Because they had yet to secure an apartment before moving, petitioners paid for

hotel accommodations and storage for their personal belongings in Pasadena.

Petitioner and his family lived in hotel accommodations until the beginning of

October 2008 while he worked at the Pasadena restaurant.

      On October 10, 2008, petitioners executed a lease and moved into an

apartment in Pasadena (Pasadena apartment). Petitioner and his family lived in the

Pasadena apartment through the end of 2008 and into the following year.

      In February 2009 petitioner transferred from the Pasadena restaurant to a

newly constructed LGO restaurant located in Santa Monica, California (Santa

Monica restaurant). When petitioner moved his family to Santa Monica in 2009,

petitioners terminated the lease with respect to the Pasadena apartment and again

paid expenses associated with that early lease cancellation (2009 lease cancellation

expense). Petitioner worked as the general manager of the Santa Monica restaurant

until approximately February 2010.

      Petitioners timely filed a joint Federal income tax return for 2008 (tax return),

which was prepared by a commercial tax return preparer. Petitioner provided the

return preparer with information regarding his move from Phoenix to Pasadena in
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2008, including receipts for the expenses he paid. Petitioners had hired the same

commercial tax return preparer to complete their tax returns for at least seven years

before 2008 without incident. On their tax return, petitioners claimed a deduction

for moving expenses of $9,433.

      In a notice of deficiency (notice) respondent disallowed the claimed moving

expense deduction. According to the notice petitioners “did not establish that the

amount shown was (a) a moving expense, and (b) paid”.3

                                     Discussion

I. Burden of Proof

      Deductions are a matter of legislative grace, and a taxpayer bears the burden

of proving that the taxpayer is entitled to any deduction claimed. Deputy v. du Pont,

308 U.S. 488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934).4 A taxpayer claiming a deduction on a Federal income tax return must

demonstrate that the deduction is allowable pursuant to some statutory provision.

      3
         Respondent also adjusted the amount of petitioners’ itemized deduction for
medical expenses because of the resulting increase in their adjusted gross income.
The parties agree that this is a computational matter to be resolved by the Rule 155
process.
      4
         Sec. 7491 does not apply in this case to shift the burden of proof to
respondent because petitioners neither alleged that sec. 7491 was applicable nor
established that they fully complied with the requirements of sec. 7491(a)(2) with
respect to any of the issues before the Court.
                                         -6-

New Colonial Ice Co. v. Helvering, 292 U.S. at 440 (“[A] taxpayer seeking a

deduction must be able to point to an applicable statute and show that he comes

within its terms.”). For the reasons that follow, we hold that petitioners have not

established that they are entitled to the business expense deductions claimed.

II. Business Expenses

      As stated above petitioners now concede that the expenses originally claimed

on their tax return (other than the amount conceded by respondent) are not

deductible as moving expenses under section 217. See supra note 2. Petitioners

argue in the alternative, however, that these expenses are deductible under section

162 as business expenses. Specifically, petitioners now assert that they are entitled

to deduct the following expenses:

                          Description                 Amount

                    Lodging                          $1,735.15
                    Meals                             1,000.00
                    2008 lease cancellation           1,895.36
                    2009 lease cancellation           1,970.96

                     Total                            6,601.47

      According to petitioners the above expenses are not personal living expenses

but deductible business expenses related to petitioner’s employment with LGO

Hospitality.
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      Section 262 generally provides that no deduction shall be allowed for

personal, living, or family expenses. On the other hand, section 162 allows a

deduction for ordinary and necessary expenses paid or incurred during the taxable

year in carrying on a trade or business. The term “trade or business” as used in

section 162(a) includes the trade or business of being an employee. Primuth v.

Commissioner, 54 T.C. 374, 377-378 (1970). Whether an expenditure satisfies the

requirements for deductibility under section 162(a) is a question of fact.

Commissioner v. Heininger, 320 U.S. 467, 475 (1943).

      A. Lodging and Meals

      Section 162(a)(2) allows a taxpayer to deduct ordinary and necessary travel

expenses (including amounts for lodging and meals) paid or incurred during the

taxable year if such expenses are paid or incurred while away from home in pursuit

of a trade or business. Commissioner v. Flowers, 326 U.S. 465, 470 (1946);

Cockrell v. Commissioner, 38 T.C. 470 (1962), aff’d, 321 F.2d 504 (8th Cir. 1963).

The reference to “home” in section 162(a)(2) means the taxpayer’s “tax home”.

Mitchell v. Commissioner, 74 T.C. 578, 581 (1980); Kroll v. Commissioner, 49

T.C. 557, 561-562 (1968).
                                         -8-

      As a general rule, the location of a taxpayer’s principal place of employment

is the taxpayer’s tax home, not the location of the taxpayer’s personal residence.5

Mitchell v. Commissioner, 74 T.C. at 581; Kroll v. Commissioner, 49 T.C. at

561-562. Once a taxpayer accepts employment that is located either permanently

or for an indefinite time away from his old principal place of employment, the

taxpayer’s tax home shifts to the location of the new principal place of

employment.6 Allen v. Commissioner, T.C. Memo. 2009-102 (citing Coombs v.

Commissioner, 608 F.2d 1269 (9th Cir. 1979), aff’g in part, rev’g in part on a

different issue 67 T.C. 426 (1976)); see also Kroll v. Commissioner, 49 T.C. at

562-563.

      5
         The vocational “tax home” concept was first articulated by this Court in
Bixler v. Commissioner, 5 B.T.A. 1181, 1184 (1927), and has been consistently
applied by this Court. See, e.g., Horton v. Commissioner, 86 T.C. 589 (1986);
Leamy v. Commissioner, 85 T.C. 798 (1985); Foote v. Commissioner, 67 T.C. 1
(1976); Kroll v. Commissioner, 49 T.C. 557 (1968).
      6
         An exception to the general rule exists where a taxpayer accepts temporary,
rather than indefinite, employment away from his personal residence; in that case,
the taxpayer’s personal residence may be considered his tax home. Peurifoy v.
Commissioner, 358 U.S. 59, 60 (1958). The purpose of the exception is to mitigate
the burden of the taxpayer who must incur duplicate living expenses because of the
exigencies of business. Kroll v. Commissioner, 49 T.C. at 562. The record does
not support a finding that petitioners maintained a personal residence in Phoenix
while petitioner worked in Pasadena or that they incurred duplicate living expenses.
See Jones v. Commissioner, 54 T.C. 734, 740-741 (1970), aff’d, 444 F.2d 508 (5th
Cir. 1971). Moreover, the record demonstrates that petitioner’s employment in
California was not temporary, and petitioners do not appear to contend otherwise.
                                         -9-

       Petitioners acknowledge that petitioner’s tax home changed from Phoenix to

Pasadena in 2008. Petitioners contend, however, that although petitioner moved his

family to Pasadena and began work at the Pasadena restaurant on or about

September 1, 2008, his tax home did not shift to Pasadena until October 10, 2008,

when he and his family moved into the Pasadena apartment. According to

petitioners the time period between September 1 and October 10, 2008, was a

“transitional period” within which petitioner’s tax home remained in Phoenix. In

petitioners’ view the expenses petitioner paid for hotel lodging and meals in

Pasadena during that “transitional period” constituted business travel expenses or

temporary living expenses incurred while petitioner was away from his tax home in

Phoenix and are thus deductible under section 162(a)(2).

      Respondent, on the other hand, argues that petitioner’s tax home shifted from

Phoenix to Pasadena no later than September 1, 2008, when he moved his family to

Pasadena and began working at the Pasadena restaurant. Respondent contends that

the lodging and meal expenses petitioner paid between September 1 and October

10, 2008, were therefore not incurred while he was away from his tax home.

Consequently, respondent maintains that the disputed lodging and meal
                                         - 10 -

expenses constitute nondeductible personal living expenses. We agree with

respondent.

      During the first eight months of 2008 petitioners lived in Scottsdale, Arizona,

and petitioner worked at the Phoenix restaurant. On or about September 1, 2008,

petitioners moved to Pasadena, California, and petitioner began working as general

manager of the Pasadena restaurant. Petitioner left his employment at the Phoenix

restaurant, and petitioners no longer lived in the Phoenix area.7 Therefore, the

location of petitioner’s principal place of employment shifted to Pasadena when he

began employment at the Pasadena restaurant.

      Petitioner’s lodging and meal expenses were not paid or incurred while away

from his tax home. Petitioners did not secure an apartment before moving to

Pasadena. Rather, petitioner and his family lived in hotel accommodations from

approximately September 1 until October 10, 2008, when petitioners executed a

lease and moved into the Pasadena apartment. Petitioners contend that they are

entitled to deduct their expenses for lodging and meals incurred during this

“transitional period” as business travel expenses. When the location of petitioner’s

principal place of employment changed, however, so did the vicinity of his tax

      7
          Although he took a return trip to Phoenix sometime in September 2008,
petitioner admitted at trial that the trip was taken for personal reasons and that he
visited the Phoenix restaurant for only six hours to finalize some documents.
                                         - 11 -

home. See Allen v. Commissioner, T.C. Memo. 2009-102. Although petitioner

moved from the Phoenix area to Pasadena in pursuit of a business, the lodging and

meal expenses he paid were not incurred while away from his tax home in

Pasadena. Therefore, the lodging and meal expenses petitioner paid during his

“transitional period” from September 1 to October 10, 2008, are not deductible

under section 162(a)(2). See Commissioner v. Flowers, 326 U.S. at 470.

      Petitioners provide no legal authority to support their “transitional” theory of

deductibility. As stated above, petitioners acknowledge that Pasadena was

petitioner’s tax home after October 10, 2008, when they moved into the Pasadena

apartment. On brief, petitioners point out that a hotel generally does not constitute a

tax home. We agree; however, petitioners’ theory that petitioner’s tax home

changed only when he established an apartment in Pasadena on October 10, 2008, is

unpersuasive and contrary to well-established precedent. See, e.g., Horton v.

Commissioner, 86 T.C. 589 (1986); Leamy v. Commissioner, 85 T.C. 798 (1985);

Foote v. Commissioner, 67 T.C. 1 (1976); Kroll v. Commissioner, 49 T.C. 557.

Therefore, we hold that petitioners’ claimed lodging and meal expenses are

nondeductible personal living expenses. See sec. 1.262-1(b)(5), Income Tax Regs.
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      B. Lease Cancellation

       Taxpayers may be allowed to deduct amounts paid to cancel a lease as

business expenses if the leased property was used for business purposes. See sec.

1.262-1(b)(3), Income Tax Regs. There is no evidence that petitioners used their

apartment in Phoenix or their apartment in Pasadena for business purposes. To the

contrary, the evidence overwhelmingly supports a finding that both apartments were

used as petitioners’ personal residence. Moreover, expenses related to lease

cancellation are generally deductible by cash method taxpayers, such as petitioners,

for the taxable year in which those expenses were paid. See, e.g., Cassatt v.

Commissioner, 47 B.T.A. 400, 407 (1942) (“It has long been a rule that the

consideration paid for the termination or cancellation of a lease by the lessee is

deductible in full by him as an ordinary and necessary expense for the year in which

the expense is paid or incurred.”), aff’d, 137 F.2d 745 (3d Cir. 1943). Thus,

petitioners’ 2009 lease cancellation expense would not be deductible for 2008

because that expense was paid in 2009. In any event, we hold that petitioners’ early

lease cancellation expenses are nondeductible personal expenses. See sec. 262;

secs. 1.162-2(a), 1.262-1(b)(3), Income Tax Regs.8

      8
        Because we hold that petitioners are not entitled to deduct the claimed
expenses for lodging, meals, or lease cancellation described above, we need not
                                                                        (continued...)
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III. Accuracy-Related Penalty

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

disregard of rules or regulations. Sec. 6662(c). The Commissioner bears the burden

of production, sec. 7491(c), but, if satisfied, the taxpayer then bears the ultimate

burden of persuasion, Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

      Section 6664 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. 6664(c)(1);

sec. 1.6664-4(a), Income Tax Regs. The decision as to whether a taxpayer acted

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

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

Regs. An honest misunderstanding of fact or law that is reasonable in light of the

experience, knowledge, and education of the taxpayer may indicate reasonable




      8
       (...continued)
decide whether they properly substantiated such expenses.
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cause and good faith. See Furnish v. Commissioner, T.C. Memo. 2001-286. The

most important factor, however, in determining whether a taxpayer acted with

reasonable cause and in good faith is the extent of the taxpayer’s effort to assess the

proper tax liability. Sec. 1.6664-4(b)(1), Income Tax Regs. This factor includes the

taxpayer’s reasonable and good faith reliance on the advice of a tax professional.

Id.

      It is clear from the record that petitioners are not tax experts or experienced in

tax matters and relied reasonably and in good faith on their preparer to determine

the proper treatment of their expenses. See United States v. Boyle, 469 U.S. 241,

251 (1985). After considering the totality of the facts and circumstances, we are

satisfied that petitioners, who provided their commercial tax return preparer with

receipts and all of the necessary information regarding petitioner’s employment

transfer, acted in good faith and come within the reasonable cause exception of

section 6664(c)(1). Therefore, we hold that petitioners are not liable for the

accuracy-related penalty under section 6662.
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                                     Conclusion

      We have considered all of the arguments advanced by the parties, and, to the

extent not addressed herein, we conclude that those arguments are irrelevant, moot,

or meritless.

      To give effect to the foregoing,


                                                        Decision will be entered

                                                  under Rule 155.
