                              T.C. Memo. 2014-120



                        UNITED STATES TAX COURT



      JACKIE H. ROBINSON AND LOLITA I. ROBINSON, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 248-11.                           Filed June 16, 2014.



      Jackie H. Robinson and Lolita I. Robinson, for themselves.

      Erin R. Hines, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      GUSTAFSON, Judge: Pursuant to section 6212,1 the Internal Revenue

Service (“IRS”) issued petitioners Jackie and Lolita Robinson a statutory notice of


      1
       Unless otherwise indicated, all section reference to the Internal Revenue
Code of 1986 (26 U.S.C., “the Code”), as in effect for the tax years in issue, and
all Rule references are to the Tax Court Rules of Practice and Procedure. Some of
the amounts stated in this opinion have been rounded.
                                           -2-

[*2] deficiency on October 7, 2010, for the Robinsons’ 2007 and 2008 tax years.

In the notice the IRS determined that the Robinsons had deficiencies in tax of

$35,340 for 2007 and $6,423 for 2008, and that they are liable for corresponding

accuracy-related penalties of $7,028 and $1,285.2 This case arises from the

Robinsons’ timely petition for redetermination of the tax and penalties in the

notice. At the time they filed their petition, they resided in Virginia.

      After concessions by the parties, the issues to be decided are: (1) whether

the Robinsons are entitled to loss deductions claimed on their Schedules E,

“Supplemental Income and Loss”, for two rental properties (we hold they are not);

      2
        In an “Amendment to Answer”, the Commissioner asserted additional
adjustments that would increase those liabilities. The amendment disputed the
loss generated during the 2008 tax year for Schedule E activities related to the
property referred to herein as “the Eagle Beak house” and disputed whether
Mrs. Robinson “correctly characterized her income on Schedule C as a separate
trade or business and whether she was entitled to the additional Schedule C
expenses claimed for 2007 and 2008.” Because these matters were raised timely
before trial, the Commissioner is permitted to make these contentions; but since
they were not raised in the statutory notice of deficiency, the Commissioner bears
the burden of proof on them. See Rule 142(a)(1). However, we do not entertain
issues raised by the parties for the first time after trial. In his post-trial briefs, the
Commissioner attempts to recharacterize gross receipts from Mrs. Robinson’s
Schedule C, “Profit or Loss From Business”, as wage income and thereby to assert
liability for employment taxes. Similarly, in their post-trial briefs the Robinsons
assert for the first time that Mrs. Robinson understated the expenses of her
S corporation Annandale Play-Care, Inc. (“APC”), by failing to take into account
credit card balances the Robinsons paid on APC’s behalf. These arguments are
untimely, and therefore we will not address them. See Graham v. Commissioner,
79 T.C. 415, 423 (1982).
                                         -3-

[*3] (2) whether Mrs. Robinson conducted an active accounting trade or business

(we hold she did not); (3) whether the Robinsons may deduct certain expenses

claimed on their Schedules C, as unreimbursed employee expenses (we hold that

they may not, and also that they may not deduct them on Schedule A); (4) whether

the Robinsons may deduct mileage expenses as unreimbursed employee expenses

on their Schedules A, “Itemized Deductions”, (we hold that they may not); (5)

whether on APC’s tax returns Mrs. Robinson over-reported the gross receipts of

APC by mischaracterizing capital contributions as gross receipts (we hold that she

did not); and (6) whether the Robinsons are liable for section 6662 accuracy-

related penalties (we hold that they are).

                               FINDINGS OF FACT

I.    Background

      Mr. Robinson earned a bachelor’s degree from Rutgers University, is (and

was during the years at issue) a certified public accountant, and had certified

internal auditor (“CIA”) and certified fraud examiner (“CFE”) certificates. He

worked for the U.S. Army Audit Agency for approximately 28 years. Mrs.

Robinson earned a bachelor’s degree in business administration from Howard

University and a master’s degree from Antioch University, and she holds CIA and

CFE certificates. After spending approximately 7 years as an auditor for the U.S.
                                         -4-

[*4] Army Audit Agency, she worked for the Securities and Exchange

Commission for approximately 15 years.

      During the years at issue, Mr. and Mrs. Robinson resided in a house on

Heron Way in Woodbridge, Virginia (the “Heron Way house”). They paid

utilities, real estate taxes, and mortgage interest in connection with that house.

Mrs. Robinson used one room in the Heron Way house as an office (discussed

below). Of the house’s total area of 3,600 square feet, the room she used as an

office was 120 square feet (i.e., 3.33% of the total).

II.   Real estate activities

      In 2007 and 2008, the Robinsons owned two real properties (in addition to

the Heron Way house) as to which there are disputes in this case.

      A.     The Magnolia house

      The Robinsons owned a house (their former residence) in Magnolia, New

Jersey (the “Magnolia house”). The Magnolia house is a 170-mile drive from the

Heron Way house. In 2007 and 2008, Mr. Robinson frequently gambled in

Atlantic City, New Jersey. We take judicial notice of the fact that Atlantic City is

about a 220-mile drive from the Heron Way house and is about a 54-mile drive

from the Magnolia house. The Magnolia house is essentially on the way from the

Robinsons’ Heron Way house to Atlantic City. Stopping by the Magnolia house
                                         -5-

[*5] added only about three miles to Mr. Robinsons’s drive to Atlantic City.

Mr. Robinson did not sleep in the Magnolia house on these trips to Atlantic City;

rather, he usually stayed in casino hotels in Atlantic City.

      On some occasions, to an extent we cannot quantify, Mr. Robinson stopped

by the Magnolia house on his gambling trips and performed some work at the

house. This work was part of a multi-year, intermittent project of rehabilitating or

renovating the house. However, the principal reason for Mr. Robinson’s trips to

New Jersey was to gamble; and we find that he did not make work stops with the

frequency or duration that he claims.

      In addition to travel expenses, the Robinsons allege that they incurred (and

they claimed as deductions on their returns) other expenses related to the

Magnolia house--i.e., “Auto and travel”, “Insurance”, “Mortgage interest paid to

banks, etc.”, “Supplies”, “Taxes”, “Utilities”, “Cleaning and maintenance”, and

(duplicatively) “Maintenance”. The Robinsons provided little or no credible

documentation of the fact of these expenditures or of their business purpose; but

since the Commissioner did not contest substantiation of the expenditures, we

assume the expenditures were incurred as alleged.

      The Robinsons rented out the Magnolia house from 1995 through 1999 and

again in December 2009; but the property was not held out for rent from 1999
                                         -6-

[*6] until 2009, a 10-year period that includes both tax years at issue.

Consequently, the Robinsons received no rent from the property in 2007 or 2008.

Mr. Robinson’s efforts to sell the property during 2007 and 2008 consisted of his

contacting two commercial home investors via the Internet. We find that in 2007

and 2008 the Robinsons did not hold the Magnolia house for the production of

income and did not engage in any for-profit activity to which the Magnolia house

was connected.3

      B.     The Eagle Beak house

      In November 2007 the Robinsons’ daughter Vera Vaughn attempted to

purchase a house on Eagle Beak Circle in Woodbridge, Virginia (the “Eagle Beak

house”), but could not obtain a loan. Mrs. Robinson was able to obtain a loan for

the purchase. At the closing Mrs. Robinson and Ms. Vaughn were listed as co-

purchasers, and both their names appear on the deed with right of survivorship.

The right of survivorship was deliberate, since it was their intention that

Ms. Vaughn would own the house in the event of Mrs. Robinson’s death. Mrs.

Robinson also testified that the Robinsons intended to occupy the house “as a


      3
       Because this finding is sufficient to resolve the issue of the losses from the
Magnolia house, we do not address the additional issue of whether the
expenditures were nondeductible capital expenditures rather than deductible
“ordinary and necessary” expenses.
                                        -7-

[*7] retirement home.” The rental income the Robinsons reported on this property

was paid to them by their daughter, Ms. Vaughn. We find that Mrs. Robinson

participated in the purchase of the Eagle Beak house not as part of any rental

business but as an accommodation to their daughter and as an estate planning

device. We find that in 2007 and 2008 the Robinsons did not hold the Eagle Beak

house for the production of income.

III.   Annandale Play-Care, Inc.

       A.    Mrs. Robinson’s work for APC

       APC is an S corporation owned 40% by Mrs. Robinson and 60% by her

daughter Vera Vaughn. Mrs. Robinson is an officer (i.e., corporate secretary and

treasurer) and a director of APC. APC’s bylaws made her responsible, as

treasurer, for various financial functions.4 She performed various tasks for APC:

laundry, teaching, procurement of supplies, payroll and tax deposits, the

preparation of tax returns, preparing an annual budget, financial services, and

dealing with repairmen and salespeople. APC paid her $8,500 in 2007 and

$11,143 in 2008 (which, as is discussed below, she reported on her Schedules C).

       4
        Article V, section 5, of the bylaws made Mrs. Robinson responsible, as
treasurer, “for all funds, securities, receipts or disbursements of the Corporation”
and responsible to “deposit, or cause to be deposited, in the name of the
Corporation, all monies” and to “perform all the duties ordinarily incident to the
offices of a Treasurer of a corporation”.
                                         -8-

[*8] Mrs. Robinson admits that she was an employee of APC--i.e., when she

served as a teacher--but she contends that she was “an independent contractor

when she performed accounting services”.5 Although she characterized 100% of

her compensation from APC as revenue of her “accounting” business, we find that

in fact almost all of her work for APC was for clearly non-accounting work--i.e.,

teaching, laundry, and procurement of supplies6--and that her APC compensation

was wages for her employment there. Even her tasks most plausibly characterized

as “accounting”--i.e., payroll and tax deposits, the preparation of tax returns,

preparing an annual budget, and financial services--are just as plausibly

characterized as functions of her role as treasurer, and the bylaws of the

corporation effectively ascribe those tasks to that role. There is no



      5
        Mrs. Robinson implicitly characterized her APC work as employment when
she claimed APC-related travel as an “unreimbursed employee business expense”
on Schedules A of her returns, and she is identified as an APC “employee” on a
stipulated list of APC employees. The Robinsons’ pretrial memorandum contends
that Mrs. Robinson “performed services in 3 different capacities: (1) as an
employee, when she served as a substitute teacher, (2) as an officer, when she
performed the duties of Secretary and Treasurer, and (3) as an independent
contractor when she performed accounting services.”
      6
       On her list of 2007 trips yielding deductible mileage, she gives for every
day of the year (including weekends and holidays) an entry in which her
“employee duties” are listed as “afternoon teacher”. On an equivalent list for
2008, only 18 days have an entry that includes “substitute teacher”, but the list is
dominated by entries for “supplies”, “maintenance”, and “cleaning”.
                                         -9-

[*9] contemporaneous corroboration for any distinction being drawn between the

supposed categories of Mrs. Robinson’s work for APC, and there is no evidence

that APC distinctly retained her as an independent contractor to perform

accounting work. We find that she was an employee of APC, not an independent

contractor.

      B.      Use of the home office

      Mrs. Robinson had no office space at APC that was suitable for the fraction

of her APC activities that consisted of desk work, and she therefore used her home

office, for the convenience of APC. However, she did not use this home office

exclusively for her APC work but also used it for other purposes, such as to

prepare tax returns for her relatives.

      C.      Use of vehicles

      In 2007 and 2008, Mrs. Robinson drove her car in connection with her work

at APC. However, under the applicable standard of proof (described below), we

are unable to quantify the miles she drove, and we find that the miles she did drive

were for commuting between her home and her place of business, or were for

personal trips to the bank, the grocery store, and the like. We do not find any non-

personal business travel demonstrated by the evidence.
                                        - 10 -

[*10] IV.    Mrs. Robinson’s “accounting” activity

      Mrs. Robinson prepared tax returns for various relatives; and she argues that

this activity, when combined with certain of her work for APC, constituted an

“accounting” business. However, all the returns she prepared were for no charge,

and none of her work for APC was allocable to a distinct non-employee business

activity that could be aggregated with this return preparation. This unpaid return

preparation activity was not an activity that she undertook for profit.

V.    Income tax returns

      A.     APC’s Forms 1120S

      Mrs. Robinson prepared APC’s returns on Forms 1120S, “U.S. Income Tax

Return for an S Corporation”, and on those returns APC reported gross receipts of

$559,276 for 2007 and $513,519 for 2008. Mrs. Robinson alleges that she

computed those gross receipts by adding up the deposits made into APC’s bank

accounts; but in fact APC’s bank statements show gross deposits of larger

amounts--$698,273 in 2007 and $580,763 in 2008. Thus, APC had bank deposits

of $138,997 in 2007 and $67,244 in 2008 that it did not report as income (and that

the IRS does not contend should be added to APC’s gross receipts); and we are

therefore unable to tell what Mrs. Robinson’s method actually was.
                                        - 11 -

[*11] The Robinsons allege that they made contributions of capital to APC in the

amounts of $90,317 in 2007 and $35,857 in 2008 that they erroneously reported as

gross receipts. They do not document this allegation; and even if it is true, it is

accounted for by the unreported deposits. We find that APC did not report

excessive gross receipts by including contributions to capital as gross receipts.

      B.      The Robinsons’ Forms 1040

      For tax years 2007 and 2008 the Robinsons filed their Federal income tax

returns jointly on Forms 1040, “U.S. Individual Income Tax Return”, to which

they attached Schedules A; Schedules C, on which they reported the income and

expenses of Mrs. Robinson’s accounting activities (including APC); and

Schedules E, on which they reported income, deductions, and losses for two rental

properties.

              1.    Schedule E

      On each Schedule E, the Robinsons claimed loss deductions (i.e., $60,724

for 2007 and $61,053 for 2008) from the rental of the Magnolia house. These

losses were derived from the various Magnolia house expense deductions that the

Robinsons claimed.

      On their 2008 Schedule E, the Robinsons claimed a loss deduction of

$17,816 from the rental of the Eagle Beak house. Though the Robinsons reported
                                        - 12 -

[*12] rents of $40,140 (received from their daughter as tenant), the Robinsons

claimed various deductions, including insurance, mortgage interest, and

depreciation, that more than offset those rents.

             2.    Schedule C

      On each Schedule C, Mrs. Robinson listed her business activity as

“Accounting” and listed the address of the Heron Way house as the business

address. All of the gross receipts reported on her Schedules C ($8,500 for 2007

and $11,143 for 2008) consisted only of money received from APC.

      On the Schedules C, Mrs. Robinson reported “Car and truck expenses” on

line 9, in the amounts of $3,040 for 2007 and $3,420 for 2008, which are the

amounts still at issue.7 (As we explain below, she also claimed on Schedule A

vehicle expenses totaling $2,910 for 2007 and $926 for 2008.)

      For 2007 Mrs. Robinson deducted $5,634 on line 30 of Schedule C as

“Business expenses for the use of your home”, an amount that consisted of 15.28%

of the Robinsons’ deductible mortgage interest. For 2007 she also deducted on

Schedule C $5,800 as “Taxes and licenses”, consisting in fact of 97% of the real


      7
       Mrs. Robinson also deducted as “Other expenses” on Schedule C
duplicative vehicle expenses--i.e., depreciation of $870 for 2007 and claimed
expenditures for brakes, gas, maintenance, and tires ($7,200 for 2007 and $2,360
for 2008). In their brief the Robinsons concede these items.
                                          - 13 -

[*13] estate taxes paid on their Heron Way home (which they duplicatively

deducted on Schedule A), and deducted $3,600 as “Utilities”, consisting of 32% of

the utilities expenses paid on the Heron Way house. The 2007 home-related

deductions thus totaled $15,034. (None of these percentages--15.28%, 97%, and

32%--corresponded to the home office’s 3.33% portion of the house.)

      For 2008 Mrs. Robinson deducted $2,478 on Schedule C, line 30, as

“Business expenses for the use of your home”. The amount consisted entirely of

claimed depreciation on the home for 2008 plus a carryover of depreciation from

2007. As with mortgage interest, Mrs. Robinson used 15.28% (not 3.33%) as the

deductible portion of the depreciation.

             3.    Schedule A

      On each Schedule A, Mrs. Robinson reported unreimbursed employee

business expenses. The expenses were explained on Form 2106-EZ,

“Unreimbursed Employee Business Expenses”, as vehicle expenses measured by

miles driven.8 Her Forms 2106-EZ reported 6,000 miles driven for 2007 and

1,700 miles driven for 2008 for “Business” (and zero miles driven for

“Commuting”), yielding claimed vehicle expense deductions of $2,910 for 2007

      8
       Mrs. Robinson’s Forms 2106-EZ also claimed “Business expenses” of
$323 for 2007 and $324 for 2008, which consist of depreciation claimed on a
laptop computer, but it appears she has abandoned those claims.
                                       - 14 -

[*14] and $926 for 2008. (Thus, for each year Mrs. Robinson deducted vehicle

expense on Schedule C as an expense of her accounting activity and on Schedule

A as an unreimbursed employee business expense.)

      The Robinsons also deducted for each year, as itemized deductions on their

Schedules A, real property taxes ($11,258 for 2007 and $3,500 for 2008) and

home mortgage interest ($41,143 for 2007 and $40,940 for 2008). The

Commissioner does not challenge the Schedule A deductions for the real property

taxes and mortgage interest paid.

VI.   Audit and petition

      The IRS selected the Robinsons’ 2007 and 2008 returns for examination.

The IRS disallowed all the Schedule C and Schedule E deductions and disallowed

or proposed adjustments to certain itemized Schedule A deductions. On October

7, 2010, the IRS issued to the Robinsons a notice of deficiency for their 2007 and

2008 tax years. On January 3, 2011, the Robinsons timely mailed their petition to

this Court for redetermination of the deficiencies in the notice. By an

“Amendment to Answer” filed November 7, 2012, the Commissioner raised

additional adjustments. See supra note 2.
                                        - 15 -

[*15]                                 OPINION

I.      Burden of proof

        The IRS’s determinations are presumed correct, and taxpayers generally

bear the burden to prove their entitlement to any deduction they claim, Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933), and must satisfy the

specific requirements for any deduction claimed, INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992). To that end, taxpayers must substantiate

each claimed deduction by maintaining records sufficient to establish the amount

of the deduction and to enable the Commissioner to determine the correct tax

liability. Sec. 6001; Higbee v. Commissioner, 116 T.C. 438, 440 (2001).

        As an exception to the general rule, the Commissioner bears the burden of

proof as to “new matter” raised in the answer that was not included in the notice of

deficiency. See Rule 142(a)(1). For the new matter in this case, see supra note 2,

the Commissioner has met his burden, as is explained below. A further exception

to the general rule is found in section 7491(a), which shifts the burden if “a

taxpayer introduces credible evidence with respect to any factual issue”; and the

Robinsons attempt to invoke this exception with respect to other issues in this

case. That attempt fails, however, precisely because “credible evidence” is

lacking.
                                        - 16 -

[*16] II.    Schedule E deductions

      The Robinsons contend that they may deduct depreciation, interest, and

other business expenses related to their ownership of two real properties, either

under section 162(a) as part of a real estate trade or business or under section 212

in connection with the holding of property for the production of income. We have

found that the Robinsons did not engage in any real estate activity as a trade or

business and did not hold these properties for the production of income; and for

the reasons explained below, the Robinsons are not entitled to any Schedule E

deductions. In the alternative, these expenses are subject to the section 469

passive activity loss limits.

      A.     Basic legal principles

      Section 162 allows a taxpayer to deduct all ordinary and necessary expenses

paid or incurred during the taxable year in carrying on a trade or business. An

ordinary expense is one that commonly or frequently occurs in the taxpayer’s

business, Deputy v. du Pont, 308 U.S. 488, 495 (1940), and a necessary expense is

one that is appropriate and helpful in carrying on the taxpayer’s business, Welch v.

Helvering, 290 U.S. at 113. The expense must directly connect with or pertain to

the taxpayer’s business. 26 C.F.R. sec. 1.162-1(a), Income Tax Regs. For

purposes of section 162, a “trade or business” must be engaged in for profit. See
                                       - 17 -

[*17] Dreicer v. Commissioner, 78 T.C. 642, 643 (1982), aff’d without published

opinion, 702 F.2d 1205 (D.C. Cir. 1983).

      Section 212(1) and (2) allows a taxpayer to deduct all the ordinary and

necessary expenses paid or incurred (1) for the production or collection of income

or (2) for the management, conservation, or maintenance of property held for the

production of income (albeit not as part of a trade or business). Whether property

is held for the production of income is a factual question and turns on whether the

use of the property was of a nature that, in good faith, the taxpayer genuinely

expected or intended to make a profit. Coors v. Commissioner, 60 T.C. 368, 410

(1973), aff’d, 519 F.2d 1280 (10th Cir. 1975). Expenses incurred in holding

property for the production of income may be currently deductible even though the

property is not currently productive. 26 C.F.R. sec. 1.212-1(b), Income Tax Regs.

However, a serious lack of effort to rent or sell a taxpayer’s former personal

residence indicates that the property was not held for the production of income

pursuant to section 212. Meredith v. Commissioner, 65 T.C. 34, 43 (1975).

      Thus, sections 162 and 212 allow deductions for expenses incurred in for-

profit activities, and the Code includes corresponding provisions that disallow

deductions for expenses incurred otherwise: Section 262(a) disallows the
                                         - 18 -

[*18] deduction of personal, living, or family expenses, and section 183 disallows

the deduction of expenses incurred in an “activity not engaged in for profit”.

         B.    The Magnolia house

               1.    Lack of profit motive

         The Robinsons claimed losses for 2007 and 2008 derived from rental real

estate expenses and depreciation on the Magnolia house. Though the Robinsons

rented out the Magnolia house from 1995 through 1999 and again in December

2009, they received no rents in 2007 or 2008. The property was not held out for

rent from 1999 until 2009, a 10-year period which includes both tax years at issue.

Mr. Robinson made only a perfunctory effort to sell the property during 2007 and

2008.9

         We have found that the Robinsons did not engage in a real estate trade or

business or hold the Magnolia house out for the production of income. They

failed to make any significant attempt to sell the property during the years at issue,

and the house went unrented for the 10-year period encompassing the tax years at

issue. Therefore, the expenses are not currently deductible pursuant to




         9
       Mr. Robinson performed no market research when listing a price in these
negotiations and refused to sell the property for less than the principal amount due
on the mortgage.
                                        - 19 -

[*19] section 162(a)(2) or 212(2). Accordingly, we disallow the loss deductions

related to the Magnolia house that the Robinsons claimed on Schedule E.

             2.     Passive activity loss

      In the alternative, even assuming the property was held for production of

income in a rental endeavor, losses from the Robinsons’ real estate activities

would be (as the Commissioner correctly contends) subject to the passive activity

loss limits of section 469, which prohibit taxpayers from claiming losses from

passive activities, specifically losses generated from the rental of real property.

Sec. 469(a), (c)(2), (4), (6). The Robinsons invoke an exception to that general

rule: Section 469(c)(7) provides an exception (and allows loss deductions) for

taxpayers engaged in a real property businesses (i.e., performing more than 50% of

personal services during the year in “real property trades or businesses” and

materially participating for more than 750 hours in real property trades or

businesses). But given our findings, this exception does not apply. First, as a

threshold matter, we note that Mr. Robinson looks solely to the Magnolia house to

support his claim to real estate professional status. On some occasions, but to an

extent that the credible evidence does not enable us to quantify, Mr. Robinson did,

while traveling from his home in Virginia to Atlantic City, stop at the Magnolia

house to make repairs. But the evidence does not support Mr. Robinson’s
                                       - 20 -

[*20] implausible assertion that, on numerous occasions, he rose early in Atlantic

City, drove an hour to Magnolia, worked a six-hour day, drove an hour back to

Atlantic City, and gambled in the evening. We do not believe that he spent more

than 750 hours working on the property. This would have required that he work

125 six-hour workdays--more than a third of the year--and no evidence

corroborates this assertion. Thus, even leaving aside the preliminary consideration

of whether Mr. Robinson “materially participated” with respect to the Magnolia

house, he cannot in any event show 750 hours and thereby meet the statutory

requirement of conducting a real property trade or business. Consequently, he

may not currently deduct the passive activity losses related to the Magnolia house.

      C.    The Eagle Beak house

      The Commissioner contends--and has the burden to prove, see supra note

2--that the Robinsons did not hold the Eagle Beak house as part of a trade or

business or for the production of income. We have found that the Commissioner

met that burden and that the Robinsons did not hold the house for the purpose of

making a profit. Rather, Mrs. Robinson participated in the purchase of that house

for the personal purpose of helping her daughter.

      The facts of this case are similar to those in Redfield v. Commissioner, T.C.

Memo. 1993-611, 66 T.C.M. (CCH) 1687 (1993), in which a mother invested in a
                                       - 21 -

[*21] property to provide a permanent residence for her daughter and son-in-law.

Mrs. Redfield entered into an agreement with her daughter and son-in-law under

which she agreed to pay $5,000 for the downpayment, in return for a 75%

ownership interest, while the daughter and son-in-law obtained a $49,000

mortgage and received a 25% interest. The daughter and son-in-law further

agreed to rent the property from Mrs. Redfield for $500 per month. Id., 66 T.C.M.

(CCH) at 1688-1689. We held that the agreement was entered into for the sole

purpose of helping her daughter and son-in-law obtain the property, and we

disallowed related losses because the agreement lacked an actual and honest

objective of making a profit on the transaction. Id. at 1689.

      The arrangement between Mrs. Robinson and her daughter similarly lacked

the profit motive required by sections 162(a) and 212(2). Ms. Vaughn was listed

along with Mrs. Robinson on the paperwork as a co-purchaser, and both their

names appear on the deed with right of survivorship. The Robinsons made no

showing as to whether the rent their daughter paid was an arm’s-length rate and

made no showing as to any expectation that the property would appreciate (or that

they, and not Ms. Vaughn, would profit from any such appreciation). In reality,

the Robinsons were helping their daughter to obtain housing and making possible

provision for their own future housing. Ms. Vaughn made the mortgage payments
                                       - 22 -

[*22] to the Robinsons on a house that the Robinsons planned to occupy later; and

the Robinsons sought to deduct, as Schedule E expenses, amounts that were

essentially Ms. Vaughn’s living expenses.10 While helping a family member may

be entirely appropriate, a taxpayer may not structure her affairs to transform

personal expenses (such as a daughter’s living expenses for a residence) into

deductible items that create loss. See secs. 262(a), 7701(o). We therefore sustain

the IRS’s determination to disallow the Schedule E loss attributable to the Eagle

Beak house.

III.   Schedule C deductions

       Mrs. Robinson filed her 2007 and 2008 Schedules C to report the income

and expenses (i.e., vehicle expenses and home office expenses) from her supposed

activity as an accountant. Her entitlement to do so depends on whether, as she

contends, she was engaged in a distinct, for-profit “accounting” trade or business

or whether instead, as respondent contends (and has the burden to prove), she had




       10
         If the Robinsons had simply given or lent money to Ms. Vaughn to buy or
rent a house, their gift or loan would have generated no tax advantage for them.
But by reporting the transaction on Schedule E and claiming deductions in excess
of the rent that the arrangement yielded, they attempted to use the resulting losses
to shelter their other income from tax.
                                        - 23 -

[*23] no such activity but rather earned as an employee the revenue she reported

on Schedule C.11

      The only gross receipts reported on her Schedules C for 2007 and 2008

were in fact compensation for her work at APC. That work consisted principally

of tasks involved in the regular daily operation of the daycare center, such as

teaching, cleaning, and obtaining supplies; and there is no basis for allocating her

pay instead to the fraction of her time spent on tasks that might arguably have

related to accounting.

      Ms. Robinson’s non-APC “accounting” work was for non-paying clients

who were members of her family, an activity that was not undertaken for profit.

Thus Mrs. Robinson’s alleged activities as an accountant were not a trade or

business motivated by profit but rather an artificial combination of the duties she

performed as an employee of APC and the help she rendered to her family for

personal reasons. For that reason the income she reported on Schedule C should


      11
        Where it is necessary to distinguish an independent contractor from an
employee, we consult the common law rules that govern this distinction. See
Weber v. Commissioner, 103 T.C. 378, 386-387 (1994), aff’d, 60 F.3d 1104
(4th Cir. 1995). In this case, however, Mrs. Robinson admits that she was an
employee as to some of her activities; and we have held, as a matter of fact, that
the bulk of her work for which she was compensated by APC was these admitted
employee activities. Consequently, we do not need to further analyze the nature of
her work under the common law rules.
                                        - 24 -

[*24] instead be reported as “other income” on the first page of Form 1040, and

the deductions claimed on Schedule C are disallowed.12

IV.   Schedule A deductions

      However, since Mrs. Robinson did perform certain activities as an employee

of APC, she can argue that some of the expenses disallowed on Schedule C might

be allowed on Schedule A as unreimbursed employee business expenses. Such

expenses may be deductible if the total of such deductions exceed the 2% floor

imposed by section 67(a). At issue in this connection are home office expenses

(consisting potentially of real property taxes, mortgage interest, and utilities paid

on their home at Heron Way) and vehicle expenses.

      A.     Home office expenses

      Unless a relevant exception applies, “no deduction otherwise allowable

under this chapter 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.” Sec. 280A(a).




      12
        Even if Mrs. Robinson were entitled to Schedule C deductions, the
amounts of her home office deductions would be radically reduced (to 3.33% of
the relevant amounts, rather than the much larger percentages she claimed) and her
vehicle expense deductions would be disallowed in full for lack of adequate
substantiation, as we discuss below in conjunction with the vehicle expenses
claimed as unreimbursed employee business expense deductions on Schedule A.
See infra part IV.B.
                                        - 25 -

[*25] However, Mrs. Robinson relies upon the “home office” exception, of

section 280A(c)(1), which allows a taxpayer to deduct certain expenses “to the

extent such item is allocable to a portion of the dwelling unit which is

exclusively[13] used on a regular basis * * * as the principal place of business for

any trade or business of the taxpayer”. We have found that Mrs. Robinson did

maintain a home office that she used for the convenience of her employer, APC.

However, we have also found that this use was not exclusive and that this office

was not her principal place of business as an APC employee. That being so, she

may not deduct her home office expenses.

      B.     Vehicle expenses

      Mrs. Robinson deducted $3,223 for 2007 and $1,250 for 2008 as

unreimbursed employee travel expenses on Schedule A. Deductions related to

passenger vehicles are subject to strict substantiation requirements under sections

274(d) and 280F(d)(4). Taxpayers must establish: (a) the amount of the business


      13
        When the home is used “on a regular basis in the taxpayer’s trade or
business of providing day care for children”, sec. 280A(c)(4)(A), then a home
office deduction may be available even where the use is not exclusive, see
sec. 280A(c)(4)(C). On Mrs. Robinson’s Forms 8829, “Expenses for Business
Use of Your Home”, she took the position that she was entitled to this day care
treatment. However, although she worked for APC, which did provide day care,
Mrs. Robinson did not have or claim any daycare trade or business of her own, and
she made no suggestion that children were ever cared for in her home.
                                        - 26 -

[*26] use of each vehicle in terms of mileage; (b) the exact date(s) of the uses of

the vehicle; and (c) the business purpose with respect to each expenditure or use.

26 C.F.R. sec. 1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016

(Nov. 6, 1985). “The taxpayer’s costs of commuting[14] to * * * [her] place of

business or employment are personal expenses and do not qualify as deductible

expenses.” 26 C.F.R. sec. 1.262-1(b)(5), Income Tax Regs. Personal

transportation expenses are not deductible. Sec. 262(a).

      Mrs. Robinson failed to adequately substantiate the business purpose of the

amounts deducted on her Schedules A and Forms 2106-EZ for vehicle expenses.

During the examination process (i.e., not contemporaneously during 2007 and

2008), Mrs. Robinson constructed two mileage logs which purport to show the

business mileage and the exact dates of the uses of her vehicle. One log lists the

mileage related to her Schedule A deductions, and one log lists the mileage related

to her Schedule C deductions (with some trips claimed on both). However, each

alleged trip originated from Mrs. Robinson’s home on Heron Way, and the

destinations of the trips included the bank, grocery stores, and Mrs. Robinson’s


      14
        Because Mrs. Robinson’s home office was not the principal place of
business for her employment at APC, she cannot invoke the so-called “home
office exception” to the general rule disallowing commuting expenses. See
Gorokhovsky v. Commissioner, T.C. Memo. 2013-65, *18-*19.
                                       - 27 -

[*27] places of employment at the APC locations. We have found that these trips

were either for commuting (a nondeductible expense under 26 C.F.R. section

1.262-1(b)(5)) or for personal transportation and errands (nondeductible under

section 262). Because of the lack of credible substantiating evidence, we sustain

the disallowance of the deduction of the vehicle expenses as Schedule A

unreimbursed employee expenses.

V.       APC’s gross receipts

         Mrs. Robinson prepared APC’s Forms 1120S for 2007 and 2008. She

contends that she overstated the gross receipts of APC by $90,317 for 2007 and

$35,857 for 2008 by mischaracterizing contributions of capital from the Robinsons

to APC as gross receipts. We note first that the Robinsons presented no

documentation substantiating the exact amounts they contributed to APC. Even

assuming that the Robinsons contributed the amounts claimed for 2007 and 2008--

an issue we do not decide--evidence in the record indicates that APC’s actual

gross receipts for 2007 and 2008 exceeded the gross receipts reported on the

Forms 1120S by more than the claimed contributions of the Robinsons. We

therefore decline to readjust the gross receipts of APC for the 2007 and 2008 tax

years.
                                         - 28 -

[*28] VI.    Accuracy-related penalties

      Section 6662 imposes an “accuracy-related penalty” of 20% of the portion

of the underpayment of tax that is attributable to the taxpayer’s negligence or

disregard of rules or regulations or that is attributable to any substantial

understatement of income tax. Sec. 6662(a), (b)(1), (2). The Commissioner

asserts that the Robinsons’ understatements of income tax were substantial.15

Under section 7491(c), the Commissioner bears the burden of production and must

produce sufficient evidence that the imposition of the penalty is appropriate in a

given case. Once the Commissioner meets this burden, the taxpayer must come

forward with persuasive evidence that the Commissioner’s determination is

incorrect. Rule 142(a); Higbee v. Commissioner, 116 T.C. at 446-447.

      An understatement of an individual’s income tax is substantial if it exceeds

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

Sec. 6662(d)(1). Even though we have allowed additional deductions not allowed

in the notice of deficiency, it appears that for both 2007 and 2008 the Robinsons’

understatements of income tax (which will be recomputed pursuant to Rule 155)

      15
         The IRS also asserts that the Robinsons were negligent in the preparation
of their returns for 2007 and 2008. See sec. 6662(b)(1) (a taxpayer’s negligence or
disregard for the income tax rules or regulations also gives rise to the accuracy-
related penalty). Since it appears that there are substantial understatements, we do
not address the issue of negligence.
                                         - 29 -

[*29] will exceed the greater of 10% of the tax required to be shown on the return

or $5,000. Accordingly, the Commissioner has met his burden to establish that the

Robinsons’ returns reflected “substantial understatement[s]”. The Robinsons will

therefore owe the accuracy-related penalty on the entire amount of the

underpayment for each year unless they successfully invoke a defense to the

penalty.

      The section 6662(a) penalty is not imposed if a taxpayer can demonstrate

(1) reasonable cause for the underpayment and (2) that the taxpayer acted in good

faith. Sec. 6664(c)(1). Whether a taxpayer acted with reasonable cause and in

good faith is a facts and circumstances decision, with the most important factor

being the extent of the taxpayer’s efforts to assess his or her proper tax liability.

26 C.F.R. sec. 1.6664-4(b)(1), Income Tax Regs.

      The Robinsons assert that errors on their 2007 and 2008 tax returns were

caused by commercial tax preparation software. However, tax preparation

software is only as good as the information the taxpayer puts into it. See Bunney

v. Commissioner, 114 T.C. 259, 266-267 (2000). The misuse of tax preparation

software, even if unintentional or accidental, is no defense to penalties under

section 6662. Langley v. Commissioner, T.C. Memo. 2013-22, at *9-*10.

Taxpayers have a duty to read their returns to ensure that all income items are
                                         - 30 -

[*30] correctly included. The Robinsons, and not their software, were responsible

for their positions that we have overruled. We hold that the Robinsons have not

established reasonable cause and good faith.

VII. Conclusion

      The determinations in the IRS’s notice of deficiency are sustained in large

part, as is explained above. So that the liabilities for the years in issue can be

recomputed,


                                                  Decision will be entered under

                                        Rule 155.
