                   T.C. Summary Opinion 2011-123



                      UNITED STATES TAX COURT



          CECIL AND PATRICIA KIRKPATRICK, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 30252-08S.            Filed October 24, 2011.



     Cecil and Patricia Kirkpatrick, pro sese.

     Patricia Montero, for respondent.



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

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.   Pursuant to section 7463(b),

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

and this opinion shall not be treated as precedent for any other

case.   Unless otherwise indicated, subsequent section references

are to the Internal Revenue Code in effect for the year in issue,
                              - 2 -

and all Rule references are to the Tax Court Rules of Practice

and Rule Procedure.

     Respondent issued a notice of deficiency to petitioners in

which he determined a deficiency of $7,581 as well as a section

6662(a) accuracy-related penalty of $1,516 for 2006.   The issues

for decision are whether petitioners:   (1) Are entitled to

deductions claimed for unreimbursed employee business expenses

reported on Schedule A, Itemized Deductions;1 (2) are entitled to

deductions claimed for business expenses reported on Schedule C,

Profit or Loss From Business; and (3) are liable for a section

6662(a) accuracy-related penalty.

                           Background

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

The stipulation of facts, the supplemental stipulation of facts,

and the attached exhibits are incorporated herein by reference.

Petitioners resided in California when they filed their petition.

     Cecil Kirkpatrick (Mr. Kirkpatrick) and Patricia Kirkpatrick

(petitioner) were both employees for 2006.   Petitioner was

employed by the California Autism Foundation (CAF).

Additionally, petitioner operated a sole proprietorship business.




     1
      Other adjustments made to petitioners’ itemized deductions
are computational and will not be discussed.
                                - 3 -

Petitioner maintained a home office for her business.2    Mr.

Kirkpatrick was an employee of the State of California.

     CAF had a reimbursement policy (policy) in place during the

year in issue.   The policy listed four areas of education and

training.    The first area was minimal educational requirements.

CAF offered in-house training for these requirements, and those

employees who did not attend had to pay for equivalent training

elsewhere.   The second area was compulsory job skill enhancement.

CAF would pay course, workshop, or training fees for job skill

enhancement unless it offered in-house training for the same

subject matter and the employee did not attend.   The third area

was voluntary job skill enhancement.    CAF provided reimbursement

for training in this area at its discretion if there was money in

the budget and the employee committed to 1 year of service to CAF

after the training.   The fourth area was licensed administrator

certification training.   CAF would pay for the first course that

was required before an employee could take the licensed

administrator test.   If an employee did not take the test and

pass it within 30 days of completing the course, the employee had

to take the course and the test again.   The employee would be

responsible for the cost associated with retaking the course and




     2
      Respondent conceded at trial that petitioner maintained a
home office.
                               - 4 -

the test.   Employees were also responsible for certification

renewal costs.

      Petitioner submitted reimbursement request forms to CAF for

two training courses and one license renewal:   “infection

control”, “laughter in the workplace”, and her “physch tech

license”.   All of her requests were denied.

      In addition to her job with CAF, petitioner operated a

business.   Petitioner gave “DSP Educator” as her principal

business or profession on Schedule C.

      Petitioners claimed a deduction of $17,893 for job expenses

and certain miscellaneous deductions on Schedule A for 2006.    Two

Forms 2106-EZ, Unreimbursed Employee Business Expenses, were

attached to petitioners’ joint Federal income tax return, one for

petitioner and one for Mr. Kirkpatrick.

      On petitioner’s Form 2106-EZ petitioners claimed a deduction

of $11,744 for unreimbursed employee business expenses consisting

of:   Travel expenses of $199, other business expenses of $11,532,

and meals and entertainment expenses of $13.

      On Mr. Kirkpatrick’s Form 2106-EZ petitioners claimed a

deduction of $6,149 for unreimbursed employee business expenses

consisting of:   Parking fees, tolls, and transportation expenses

that did not involve overnight travel of $121, travel expenses of

$1,771, other business expenses of $3,842, and meals and

entertainment expenses of $415.
                               - 5 -

     Petitioners reported gross income of $4,393 on Schedule C

for 2006.   They reported a tentative loss of $7,494 after

deducting all of petitioner’s expenses except the expenses for

business use of their home.   Petitioners claimed a deduction of

$7,158 for expenses for the business use of their home and

reported a net loss of $14,652 on Schedule C.    They attached Form

8829, Expenses for Business Use of Your Home, to their 2006

return.   They included deductible mortgage interest, real estate

taxes, insurance, repairs and maintenance, and depreciation of

their home in the computation of the home office deduction.    They

reported that petitioner used 14 percent of their home for her

office.   On line 8 of Form 8829, petitioners entered a loss of

$10,789 for “the amount from Schedule C, line 29, plus any net

gain or (loss) derived from the business use of your home and

shown on Schedule D or Form 4797.”     This amount is greater than

the amount petitioners reported on Schedule C, line 29, and

petitioners did not attach either a Schedule D, Capital Gains and

Loses, or Form 4797, Sales of Business Property, to their 2006

return.

     Respondent disallowed all of petitioners’ parking, tolls,

and transportation expenses, travel expenses, meals and

entertainment expenses, and other business expenses reported on

Schedule A.   Respondent also disallowed all of petitioners’ car

and truck expenses and expenses for business use of their home
                                - 6 -

reported on Schedule C.    Additionally, respondent determined that

petitioners are liable for an accuracy-related penalty of $1,516.

                             Discussion

     Generally, the Commissioner’s determinations are presumed

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

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

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

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

respect to relevant factual issues may shift to the Commissioner

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

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

Therefore, petitioners bear the burden of proof with respect to

the issues in the notice of deficiency.

     Deductions and credits are a matter of legislative grace,

and the taxpayer bears the burden of proving that he or she is

entitled to any deduction or credit claimed.      Rule 142(a); Deputy

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

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

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

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

821 (5th Cir. 1976).

     Section 162 generally allows a deduction for ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.    Generally, no deduction is
                               - 7 -

allowed for personal, family, or living expenses.   See sec. 262.

The taxpayer must show that any claimed business expenses were

incurred primarily for business rather than personal reasons.

See Rule 142(a); Walliser v. Commissioner, 72 T.C. 433, 437

(1979).   To show that the expense was not for personal reasons,

the taxpayer must show that the expense was incurred primarily to

benefit his or her business, and there must have been a proximate

relationship between the claimed expenses and the business.    See

Walliser v. Commissioner, supra at 437.   The performance of

services as an employee is considered a trade or business for

section 162 purposes.   Primuth v. Commissioner, 54 T.C. 374, 377

(1970).

     As a general rule, if the trial record provides sufficient

evidence that the taxpayer has incurred a deductible expense, but

the taxpayer is unable to adequately substantiate the precise

amount of the deduction to which he or she is otherwise entitled,

the Court may estimate the amount of the deductible expense and

allow the deduction to that extent, bearing heavily against the

taxpayer whose inexactitude in substantiating the amount of the

expense is of his or her own making.   Cohan v. Commissioner, 39

F.2d 540 (2d Cir. 1930).   In order for the Court to estimate the

amount of an expense, the Court must have some basis upon which

an estimate may be made.   Vanicek v. Commissioner, 85 T.C. 731,

742-743 (1985).   Without such a basis, any allowance would amount
                               - 8 -

to unguided largesse.   Williams v. United States, 245 F.2d 559,

560-561 (5th Cir. 1957).

     Travel expenses, including meals and lodging, entertainment

expenses, and expenses with respect to listed property, however,

must be substantiated by adequate records or sufficient evidence

corroborating the taxpayer’s own statement showing the:   (1)

Amount of each expenditure, (2) time and place of the travel or

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

the case of entertainment expenses, the business relationship to

the taxpayer of the person being entertained.   Sec. 274(d); sec.

1.274-5T(a) and (b), Temporary Income Tax Regs., 50 Fed. Reg.

46014 (Nov. 6, 1985).

     To satisfy the adequate records requirement of section

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

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

documentary evidence that in combination are sufficient to

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

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

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

substantiate each element of an expense, he may alternatively

establish an element by “his own statement, whether written or

oral, containing specific information in detail as to such

element,” and by “other corroborating evidence sufficient to
                                - 9 -

establish such element.”    Sec. 1.274-5T(c)(3), Temporary Income

Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985).

     The Court cannot estimate a taxpayer’s expenses with respect

to the items enumerated in section 274(d).      Sanford v.

Commissioner, 50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d

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

(the strict substantiation requirements of section 274(d)

preclude the Court and taxpayers from approximating certain

expenses).

I.   Petitioners’ Unreimbursed Employee Business Expenses

     In order to deduct unreimbursed employee business expenses,

a taxpayer must not have received reimbursement and must not have

had the right to obtain reimbursement from his employer.      Orvis

v. Commissioner, 788 F.2d 1406, 1408 (9th Cir. 1986), affg. T.C.

Memo. 1984-533.

     A.   Petitioners’ Other Business Expenses

     Petitioner introduced into evidence CAF’s reimbursement

policy for education and training.      Petitioner also introduced

into evidence reimbursement requests for training courses that

were denied by CAF.    It is clear from the record CAF did not

reimburse petitioner, but the question remains whether

petitioners substantiated the fees for petitioner’s training

courses and license.
                               - 10 -

     Petitioners introduced into evidence certificates of

completion for two training courses.    Petitioners did not produce

any evidence that they paid for the training courses.

Petitioners did introduce into evidence checking account

statements, but there were no entries for payments made for

either of the training courses.    Petitioners have not

substantiated the fees for the training courses; therefore, they

are not entitled to a deduction for those fees.

     Petitioners also introduced into evidence petitioner’s

renewal record from the Board of Vocational Nursing and

Psychiatric Technicians.    The renewal record reflects a renewal

fee paid for petitioner’s nursing and psychiatric technician

license (license) of $360.3   The Court finds that petitioner paid

$360 to renew her license and that petitioners are entitled to a

deduction in that amount.

     Petitioners claimed a deduction for thousands of dollars for

other business expenses.    Petitioners introduced into evidence

copious receipts for expenses, many for years not in issue.

Although some receipts for 2006 were introduced into evidence, no

explanation was given as to the business purpose for those




     3
      Petitioner requested reimbursement of $240 for the renewal
of her license. She provided no explanation why she requested
less than the full amount she paid to renew her license.
                                - 11 -

expenditures.4    See sec. 274(d); sec. 1.274-5T(a) and (b),

Temporary Income Tax Regs., supra.       For those expenses that could

be estimated, petitioners provided no basis upon which the Court

could make an estimate.     See Vanicek v. Commissioner, 85 T.C. at

742-743.     Therefore, respondent’s determination to disallow

petitioners’ deductions for other business expenses in excess of

the $360 petitioner paid to renew her license is sustained.

     B.      Petitioners’ Meals and Entertainment, Travel, and
             Parking, Tolls, and Transportation Expenses

     Petitioners claimed a deduction for meals and entertainment

expenses of $428, travel expenses of $1,970, and parking, tolls,

and transportation expenses of $121.      Petitioners introduced into

evidence receipts for vehicle repairs, auto insurance, car

registration renewals, and a toll charge account statement for

2006.     Neither petitioner nor Mr. Kirkpatrick testified to the

business purposes of these expenses or provided any additional

information about how these expenses related to either of their

positions as employees.     Petitioners have failed to substantiate

any of these expenses.     Therefore respondent’s determination to



     4
      Petitioners introduced into evidence telephone bills for
three different telephone carriers, but they gave no explanation
as to the business purpose of any of their telephone calls.
Petitioner testified that the “advance” on her paycheck stubs was
for her cell phone. She provided no further explanation.
Petitioners also introduced into evidence receipts for pool
repairs and home improvements. No business purpose was given for
the pool repairs, and most of the home improvement receipts were
for years not in issue.
                               - 12 -

disallow petitioners’ meals and entertainment, travel, and

parking, tolls, and transportation expenses is sustained.

II.   Petitioners’ Schedule C Expenses

      Petitioners’ car and truck expenses and home office

deduction are the only Schedule C items in issue.

      A.    Petitioners’ Car and Truck Expenses

      At trial respondent clarified that before trial petitioners

substantiated all of their car and truck expenses but that some

of the expenses are deductible as unreimbursed employee expenses

and should have been properly reported on Schedule A.

Petitioners provided no evidence that respondent’s

reclassification of a portion of their car and truck expenses was

improper.    Therefore, the Court sustains respondent’s

reclassification of a portion of petitioners’ car and truck

expenses claimed on Schedule C as expenses that should have been

properly reported on Schedule A.

      B.    Petitioners’ Home Office Deduction

      Section 280A(a) provides as a general rule that no deduction

otherwise allowable to an individual “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.”    Section
                              - 13 -

280A(c)(1), however, provides that the general rule of section

280A(a) is not applicable for certain business use of the home.5

     There are limits to the deductions allowed in section

280A(c).   Section 280A(c)(5) limits a taxpayer’s deductions for

the business use of a dwelling to the amount by which the gross

income generated from the business activity conducted in the

dwelling exceeds the sum of the deductions for expenses allocable

to such activity whether or not the dwelling is so used and the

deductions allocable to the trade or business in which the use

occurs but not allocable to such use.    See Martin v.

Commissioner, T.C. Memo. 1996-503, affd. per curiam without

published opinion 155 F.3d 559 (4th Cir. 1998).    In other words,

no deduction for use of a dwelling may be claimed if the

deduction would give rise to, or increase, a net loss from the

business to which the deduction relates.     Id. (citing Grinalds v.

Commissioner, T.C. Memo. 1993-66).     This interpretation of

section 280A(c)(5) is confirmed by the legislative history of the

most recent relevant amendment to that section.




     5
      Respondent does not dispute that petitioners are allowed a
home office deduction; the issue is the amount of the deduction.
See supra note 2.
                                - 14 -

                         Reasons for Change

          *       *       *        *      *          *       *

     Limitations on deduction

          * * * The committee believes that a home office
     deduction to which section 280A applies should not be used
     to reduce taxable income from the activity to less than
     zero. In adopting the provisions of the bill, the committee
     reemphasizes that section 280A was enacted because of
     concerns about allowing deductions for items which have a
     substantial personal component relating to the home,    which
     most taxpayers cannot deduct, and which frequently do not
     reflect the incurring of significantly increased costs as a
     result of the business activity, and that the provision
     should be interpreted to carry out its objectives.

          *       *        *        *         *       *       *

                      Explanation of Provisions

          *       *        *        *         *       *       *

     Limitations on deduction

          In general.--The bill limits the amount of a home
     office deduction (other than expenses that are deductible
     without regard to business use, such as home mortgage
     interest) to the taxpayer’s gross income from the
     activity, reduced by all other deductible expenses
     attributable to the activity but not allocable to the
     use of the unit itself. Thus, home office deductions
     are not allowed to the extent that they create or
     increase a net loss from the business activity to which
     they relate.

          [H. Rept. 99-426, at 133-135 (1985), 1986-3
     C.B. (Vol. 2) 1, 133-135).]

     Petitioners reported Schedule C gross income of $4,393 and,

after expenses, a tentative loss of $7,494.       As discussed above

the home office deduction cannot create or increase a net loss

from the business activity to which the deduction relates.
                                  - 15 -

Therefore petitioners are not entitled to a home office deduction

for 2006.6

III.       Accuracy-Related Penalty

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

related penalty on the portion of an underpayment that is

attributable to a substantial understatement of income tax.7          An

understatement of income tax is the excess of the amount of

income tax required to be shown on the return for the taxable

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

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

understatement is substantial if it exceeds the greater of 10

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

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

       The Commissioner bears the burden of production with respect

to the applicability of an accuracy-related penalty determined in

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

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

imposition of the penalty is appropriate.        Higbee v.


       6
      After the notice of deficiency was issued and before trial,
petitioners substantiated expenses of $2,391 for the business use
of their home to respondent’s satisfaction. At trial petitioners
failed to substantiate any further expenses for the business use
of their home. The Court notes that to the extent substantiated
deductions are disallowed under sec. 280A(c)(5) they may be
carried forward to the succeeding taxable year. See sec.
280A(c)(5)(B).
       7
      The Court need not determine whether petitioners are liable
for the accuracy-related penalty due to negligence.
                              - 16 -

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

the taxpayer bears the burden of proving that the accuracy-

related penalty does not apply because of reasonable cause,

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

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

met his burden of production for an accuracy-related penalty

based on a substantial understatement of income tax because

petitioners’ understatement of income tax exceeds $5,000.

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

the underpayment as to which the taxpayer acted with reasonable

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

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

test to determine whether the taxpayer acted with reasonable

cause and in good faith.   The most important factor is the extent

of the taxpayer’s effort to assess his or her proper tax

liability.   Id.

     Petitioners provided no evidence that they acted in good

faith and with reasonable cause.   Accordingly, respondent’s

determination of the accuracy-related penalty is sustained.

     To reflect the foregoing,


                                           Decision will be entered

                                       under Rule 155.
