                         T.C. Summary Opinion 2013-69



                         UNITED STATES TAX COURT



          BOAKE L. TERRY AND KELLIE R. TERRY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 30923-09S.                      Filed August 26, 2013.



      Kellie R. Terry, pro se.

      Ray M. Camp, Jr., for respondent.



                                 SUMMARY OPINION


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

provisions of section 74631 of the Internal Revenue Code in effect when the


      1
      Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986, as amended, in effect for the years in issue. Rule references are to
                                                                      (continued...)
                                           -2-

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.

      In a notice of deficiency (notice) dated September 23, 2009, respondent

determined deficiencies in petitioners’ Federal income tax, an addition to tax, and

accuracy-related penalties as follows:

                                         Addition to tax             Penalty
      Year            Deficiency         sec. 6651(a)(1)            sec. 6662(a)

      2006            $25,784                $377                      $5,156
      2007              5,539                 ---                       1,107

      The issues for decision are: (1) whether petitioners are entitled to

deductions claimed on Schedules A, Itemized Deductions, included with their

2006 and 2007 Federal income tax returns; (2) whether for either year in issue

petitioners are entitled to deduct a loss from a rental real estate activity (the

resolution of this issue for each year depends upon whether Kellie R. Terry

(petitioner) is an individual described in section 469(c)(7) with respect to the

activity); (3) whether petitioners are entitled to a domestic production activities

deduction for 2006; (4) whether a 2005 State income tax refund petitioners


      1
       (...continued)
the Tax Court Rules of Practice and Procedure.
                                         -3-

received in 2006 is includable in their 2006 income; (5) whether petitioners

understated their 2007 capital gain income; (6) whether petitioners’ 2006 Federal

income tax return was timely filed; and (7) whether petitioners are liable for the

section 6662(a) accuracy-related penalty for either of the years in issue.

                                    Background

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

and were at all times relevant, married to each other. They resided in California at

the time the petition was filed.

      In 2004 petitioners purchased a condominium in Santa Clarita, California,

that was held for rent at all times relevant here (rental property). Because of

various problems with tenants, the rental property was not rented for large portions

of each year in issue.

      As between petitioners, petitioner was responsible for managing the rental

property. She paid various expenses relating to the property, collected rent, made

minor repairs, did some maintenance, decorated, attended homeowners association

meetings, met with potential tenants, and met with repair persons for various

services. Petitioners paid others to have the rental property cleaned, and they

employed a lawn care service to maintain the rental property’s yard. Petitioner did

not maintain a contemporaneous written record showing the time that she spent
                                         -4-

providing services in connection with the rental property during either year in

issue.

         At all times relevant Mr. Terry was employed by Wal-Mart Stores, Inc.

(Walmart). As of January 2006 he was the manager of Walmart’s store in Simi

Valley, California (Simi Valley Walmart); early in 2006 he was assigned to

oversee the renovation of a Walmart store in Lancaster, California (Lancaster

Walmart), which assignment lasted until late 2007. The Lancaster Walmart is

approximately 77 miles from petitioners’ then residence in Moorpark, California.

Except for an occasional overnight spent closer to the Lancaster Walmart, Mr.

Terry commuted daily by car between his residence and the Lancaster Walmart.

By the close of 2007 Mr. Terry resumed his duties as the manager of the Simi

Valley Walmart.

         During the course of Mr. Terry’s employment he acquired shares of

Walmart stock through Walmart’s “Associate Stock Purchase Plan”. On

December 12, 2007, he sold 42.755 shares of Walmart stock for $2,065 (Walmart

stock sale). Taking into account his cost basis in those shares, he realized a $63

gain from the Walmart stock sale.
                                         -5-

      During 2006 petitioners received a $2,891 State income tax refund.

      Petitioners’ 2006 Federal income tax return, which petitioner prepared, was

received and filed by respondent on June 15, 2007; their 2007 Federal income tax

return, which petitioner also prepared, was filed March 10, 2008.

      As relevant here, each return includes: (1) a Schedule A and (2) a Schedule

E, Supplemental Income and Loss, showing rental income and expenses

attributable to the rental property. Petitioners’ 2006 return shows a $2,647

deduction for “domestic production activities”. The income reported on

petitioners’ 2006 return does not include: (1) the $2,891 refund of State income

tax or (2) any amount attributable to the Walmart stock sale.

      More specifically, petitioners’ returns for the years in issue show:

                                               2006         2007

                 Total income              $196,451       $127,453
                 Rental loss                 (70,657)      (52,065)
                 Adjusted gross income      123,147         83,414
                 Itemized deductions        101,792        136,952
                 Taxable income                4,855          -0-
                 Income tax liability            255          -0-

      Among other things and as relevant here, the itemized deductions include

the following:
                                           -6-

                Expense                      2006                 2007

          Medical and dental               $27,750              $22,259
          Employee business                 19,927               33,168
          “Other”                            4,118               10,490

      The details of the unreimbursed employee business expense deduction for

2006 are shown on a Form 2106-EZ, Unreimbursed Employee Business Expenses,

for Mr. Terry as follows:

                                 Expense               Amount

                      Vehicle                          $11,136
                      Travel                             6,746
                      Business                           1,200
                                                          1
                      Meals and entertainment               845
                       Total                            19,927
                      1
                          After application of sec. 274(n).

Petitioners’ 2007 Federal income tax return does not include a Form 2106-EZ.

      The deduction for other expenses for 2006 includes:

                          Expense                     Amount

               INV COUNSEL AND ADV                      $350
               ATTR AND ACCT FEES                      3,644
               SAFE DEPOSIT BOX                          124
                 Total                                 4,118

The deduction for “other expenses” claimed on the Schedule A included

with petitioners’ 2007 Federal income return has not been explained.
                                         -7-

      In the notice, respondent: (1) disallowed the deductions for medical and

dental expenses, unreimbursed employee business expenses, and other expenses2

claimed on the Schedules A; (2) disallowed the rental loss deduction for 2006 and

disallowed $46,068 of the $52,065 rental loss deduction for 2007;3 (3) disallowed

the $2,647 domestic production activities deduction for 2006; (4) determined that

petitioners failed to include a $2,891 State income tax refund in their 2006 gross

income; (5) determined that petitioners failed to include a $2,065 capital gain from

the sale of stock in their 2007 gross income; (6) imposed a section 6651(a)(1)

addition to tax for 2006; and (7) imposed a section 6662(a) accuracy-related

penalty for each year in issue.

                                     Discussion

I. Deductions

      As we have observed in countless opinions, deductions are a matter of

legislative grace, and the taxpayer bears the burden of proof to establish




      2
       It appears that for 2006 respondent’s disallowance of petitioners’ deduction
for “other expenses” exceeds the deduction claimed by $350. The parties have
ignored this apparent anomaly, and we do likewise.
      3
        See sec. 469(i), which allows a limited deduction for a loss attributable to a
rental real estate activity.
                                        -8-

entitlement to any claimed deduction.4 Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292

U.S. 435, 440 (1934). This burden requires the taxpayer to substantiate

deductions claimed by keeping and producing adequate records that enable the

Commissioner to determine the taxpayer’s correct tax liability. Sec. 6001;

Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff’d per curiam, 540 F.2d

821 (5th Cir. 1976); Meneguzzo v. Commissioner, 43 T.C. 824, 831-832 (1965).

A taxpayer claiming a deduction on a Federal income tax return must demonstrate

that the deduction is allowable pursuant to some statutory provision and must

further substantiate that the expense to which the deduction relates has been paid

or incurred. See sec. 6001; Hradesky v. Commissioner, 65 T.C. at 89-90; sec.

1.6001-1(a), Income Tax Regs.

      Deductions for expenses attributable to travel, entertainment, gifts, and the

usage of “listed property” (including passenger automobiles), if otherwise

allowable, are subject to section 274(d). See Sanford v. Commissioner, 50 T.C.

823, 827 (1968), aff’d per curiam, 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a),

Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). With respect

      4
      Petitioners do not claim that the provisions of sec. 7491(a) are applicable,
and we proceed as though they are not.
                                         -9-

to deductions for these types of expenses, section 274(d) requires that the taxpayer

substantiate either by adequate records or by sufficient evidence corroborating the

taxpayer’s own statement: (1) the amount of the expense; (2) the time and place

the expense was incurred; (3) the business purpose of the expense; and (4) in the

case of an entertainment or gift expense, the business relationship to the taxpayer

of each expense incurred. For “listed property” expenses, the taxpayer must

establish the amount of business use and the amount of total use for such property.

See sec. 1.274-5T(b)(6)(i)(B), Temporary Income Tax Regs., 50 Fed. Reg. 46016

(Nov. 6, 1985).

      Substantiation by adequate records requires the taxpayer to maintain an

account book, a diary, a log, a statement of expense, trip sheets, or a similar record

prepared contemporaneously with the expenditure and documentary evidence

(e.g., receipts or bills) of certain expenditures. Sec. 1.274-5(c)(2)(iii), Income Tax

Regs.; sec. 1.274-5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017

(Nov. 6, 1985). Substantiation by other sufficient evidence requires the

production of corroborative evidence in support of the taxpayer’s statement

specifically detailing the required elements. Sec. 1.274-5T(c)(3), Temporary

Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985).
                                        -10-

      Set against these fundamental principles of Federal income taxation, we

consider petitioners’ claims to the various deductions here in dispute.

      A. Medical and Dental Expenses

      In general, section 213(a) allows a deduction for expenses paid during the

taxable year for medical care that: (1) exceed 7.5% of adjusted gross income and

(2) are not compensated for by insurance or otherwise.

      Petitioners claimed medical and dental expense deductions of $27,750 and

$22,259 for 2006 and 2007, respectively. Petitioners have established that they

paid medical and dental expenses during 2006 and 2007; however, the evidence on

the point, which consists of petitioner’s testimony5 and some medical bills, hardly

supports deductions for the amounts claimed. After careful review of the

evidence, we find that petitioners paid medical expenses of $13,700 and $3,500

for 2006 and 2007, respectively, and their allowable medical and dental expense

deduction for each year in issue is to be computed accordingly.




      5
       Mr. Terry did not appear at trial or sign the stipulation of facts admitted
into evidence. This case will be dismissed for lack of prosecution as to him. The
decision entered with respect to him, however, will reflect the resolution of the
issues as determined in this Summary Opinion.
                                       -11-

      B. Unreimbursed Employee Business Expenses

      Taxpayers may deduct ordinary and necessary expenses paid in connection

with operating a trade or business. See sec. 162(a); Boyd v. Commissioner, 122

T.C. 305, 313 (2004). Generally, the performance of services as an employee

constitutes a trade or business. See Primuth v. Commissioner, 54 T.C. 374, 377

(1970). Travel expenses, including expenses for meals and lodging, are deductible

only if incurred while the taxpayer is traveling away from home on business. See

secs. 162(a)(2), 262. The reference to “home” in section 162 relates to the

taxpayer’s tax home and not necessarily to the place of the taxpayer’s residence.

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

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

      For 2006 petitioners claim an unreimbursed employee business expense

deduction for expenses Mr. Terry incurred for transportation, meals, and lodging

relating to his assignment at the Lancaster Walmart. The transportation expenses

relate primarily to the cost of driving between his residence and Lancaster. For

2007 petitioners claim an unreimbursed employee business expense deduction

presumably for the same type of expenses; as noted, petitioners did not attach a

Form 2106-EZ to their 2007 Federal income tax return and did not otherwise

identify the unreimbursed employee business expenses on their 2007 return.
                                          -12-

      Petitioners’ evidence in support of their claim to the deductions for

unreimbursed employee business expenses consists of: (1) petitioner’s testimony

(as noted, Mr. Terry did not appear at trial) and (2) photocopies of documents

described as Mr. Terry’s “mileage logs” that were offered in support of the vehicle

expense he claimed in commuting between his residence and the Lancaster

Walmart. Neither petitioner’s testimony nor those logs, which merely show a date

and a number for “mileage”, satisfy the strict substantiation requirements imposed

by section 274(d) for such expenses.

      Furthermore, as a general rule, expenses for traveling between one’s home

and one’s place of business or employment constitute commuting expenses and

are, consequently, nondeductible personal expenses. See sec. 262(a); Fausner v.

Commissioner, 413 U.S. 838 (1973); Commissioner v. Flowers, 326 U.S. 465

(1946); Feistman v. Commissioner, 63 T.C. 129, 134 (1974). We recognize that

there is an exception to this general rule found in Rev. Rul. 99-7, 1999-1 C.B. 361,

361, which states: “A taxpayer * * * may deduct daily transportation expenses

incurred in going between the taxpayer’s residence and a temporary work location

outside the metropolitan area where the taxpayer lives and normally works.” The

revenue ruling defines a temporary work location as one that “is realistically

expected to last (and does in fact last) for 1 year or less”.
                                        -13-

      If only by implication, petitioners seem to suggest that Mr. Terry’s

assignment to the Lancaster Walmart allows him to be treated as “temporarily

away from home” so as to allow for the deduction of travel expenses related to that

assignment. See sec. 162(a)(2). There is no evidence in the record that shows his

expectations as to the length of the assignment at the time it was made, however,

and the assignment lasted for more than one year. That being so, he is not treated

as being “temporarily away from home” for purposes of section 162 because the

Lancaster Walmart was not a “temporary work location” under Rev. Rul. 99-7,

supra. See sec. 162(a)(3). Accordingly, petitioners are not entitled to deductions

for travel expenses (including meals and lodging) Mr. Terry incurred in

connection with his assignment to the Lancaster Walmart.

      Petitioners’ are not entitled to the remaining unreimbursed employee

business expense or “other” deductions claimed on their 2006 and 2007 returns

because those deductions have been neither substantiated nor otherwise shown to

be deductible.

      C. Real Estate Loss

      Petitioners claimed a loss deduction attributable to the rental property for

each year in issue. In general, section 212 allows a deduction for ordinary and

necessary expenses paid or incurred during the taxable year for the management,
                                          -14-

conservation, or maintenance of property held for the production of income. The

specific expenses that give rise to the loss deduction for each year are

contemplated by section 212 and do not seem to be in dispute.

      Instead, according to respondent, the rental property loss incurred for each

year is deductible only as allowable under section 469. In general, that section

precludes a taxpayer from currently deducting a loss from a “passive activity”, a

term that is defined to include any rental activity regardless of the taxpayer’s level

of participation. Sec. 469(a), (c)(1), (2), (4).

      There is an exception to this general rule for an individual described in

section 469(c)(7) and sometimes referred to as a “real estate professional”. An

individual is described in section 469(c)(7) if, in addition to another requirement

that need not be discussed here, the individual “performs more than 750 hours of

services during the taxable year in real property trades or businesses in which the

taxpayer material participates.” See sec. 469(c)(7)(B). Petitioner’s rental property

activity constitutes a “real property” trade or business within the meaning of

section 469, see sec. 469(c)(6), and we assume, without finding, that petitioner

materially participated in the rental property activity during each year in issue, see

sec. 469(h). According to petitioners, petitioner has satisfied the 750-hour

requirement for each of the years in issue, and the rental property loss deductions
                                        -15-

are not subject to the limitation imposed by section 469. Respondent disagrees,

and so do we.

      Petitioner did not maintain any form of contemporaneous log in which she

recorded the time spent in connection with the rental property. See sec. 1.469-

5T(f)(4), Temporary Income Tax Regs., 53 Fed. Reg. 5727 (Feb. 25, 1988). Given

that the deductions relate to a single property that remained vacant for large

portions of each year in issue, petitioner’s testimony, standing alone and cast

mostly in generalized terms, is insufficient to establish that she spent more than

750 hours providing services in connection with the rental property. See Bailey v.

Commissioner, T.C. Memo. 2001-296 (“[W]hile the regulations are somewhat

ambivalent concerning the records to be maintained by taxpayers, they do not

allow a postevent ‘ballpark guesstimate.”’). It follows that petitioners are entitled

to deductions for the losses attributable to the rental property only as allowable

under section 469(i), and respondent’s adjustments to that end are sustained.

      D. Domestic Production Activities Deduction

      Petitioners claim a $2,647 domestic production activities deduction on their

2006 Federal income tax return. At trial it appeared that petitioner conceded this

deduction on petitioners’ behalf. In any event, petitioners have provided no

support for their entitlement to this deduction. Respondent’s disallowance of the
                                         -16-

domestic production activities deduction on their 2006 Federal income tax return

is sustained.

II. Omitted Income

      A. State Income Tax Refund

      In 2006 petitioners received, but did not include in their 2006 income, a

$2,891 State income tax refund for 2005.

       As a general rule, gross income includes a refund of State income tax in the

year received to the extent that the payment of such tax was claimed as a

deduction in a prior taxable year which resulted in a reduction of Federal income

tax. See sec. 111(a); Kadunc v. Commissioner, T.C. Memo. 1997-92.

      Although petitioner at one time during the trial conceded the issue, she later

argued that petitioners are not required to include the 2005 State income tax

refund in their 2006 income because the deduction for State income taxes paid in

2005 did not result in a tax benefit for that year. As with other issues in this case,

petitioners’ position is insufficiently supported by the evidence. A copy of

petitioners’ 2005 Federal income tax return has not been provided, and petitioner’s

generalized testimony on the point is insufficient to satisfy petitioners’ burden of

proof. Accordingly, we find that the State income tax refund here in dispute is

includable in petitioners’ 2006 income as respondent determined.
                                        -17-

      B. Capital Gain

      According to the notice, petitioners failed to report a $2,065 capital gain

with respect to the sale of Walmart stock on December 12, 2007. See secs.

1001(a), (c), 1012. The adjustment made in the notice with respect to this item of

income is attributable to the Walmart stock sale; however, the adjustment takes

into account only the sale proceeds. Taking petitioners’ basis in the Walmart

stock into account reduces their gain to $63.

III. Section 6651(a) Addition to Tax

      Section 6651(a)(1) imposes an addition to tax for the failure timely to file a

Federal income tax return. Respondent bears the burden of production with

respect to the imposition of the addition to tax. See sec. 7491(c). Respondent’s

records show that petitioners’ 2006 return was received and filed on June 15,

2007, a date not in dispute by petitioners and beyond the date set by section

6072(a). According to respondent, the due date for the filing of petitioners’ 2006

return was not extended. That being so, according to respondent, petitioners’

2006 return was not timely filed and they are liable for a section 6651(a)(1)

addition to tax.

      According to petitioners, their 2006 return was timely filed because the due

date for the filing of the return was extended until August 15, 2007, pursuant to
                                        -18-

their timely, electronic submission of a Form 4868, Application for Automatic

Extension of Time To File U.S. Individual Income Tax Return. To be effective, a

request for an automatic extension to file a Federal income tax return must be filed

on or before the date prescribed for filing the return. Raskin v. Commissioner,

T.C. Memo. 1981-153, aff’d without published opinion, 685 F.2d 436 (8th Cir.

1982); sec. 1.6081-4(a)(3), Income Tax Regs.

      The instructions shown on a Form 4868 intended to be electronically

submitted state: “You will receive an electronic acknowledgment once you

complete the transaction.” At trial petitioner readily admitted that petitioners

never received the acknowledgment contemplated by those instructions. The

failure to receive the acknowledgment should have put petitioners on notice that

there was some problem in the submission of the Form 4868 and, more

importantly, that the form was not received by respondent. The failure to have

received an acknowledgment for the Form 4868 petitioners claim to have

submitted undermines their claim that they reasonably believed that the filing date

for their 2006 return had been extended. It follows that they are liable for a

section 6651(a)(1) addition to tax.
                                         -19-

IV. Section 6662(a) Accuracy-Related Penalty

      Lastly, we consider whether petitioners are liable for a section 6662(a)

accuracy-related penalty for either year in issue.

      Section 6662(a) imposes a 20% accuracy-related penalty on the portion of

“an underpayment of tax required to be shown on a return” if the underpayment is

due to negligence or to one or more of the other reasons listed in section 6662(b).

As with the section 6651(a)(1) addition to tax previously discussed, respondent

bears the burden of production with respect to the imposition of a section 6662(a)

accuracy-related penalty. See sec. 7491(c). The section 6662(a) accuracy-related

penalty does not apply to any portion of an underpayment as to which there was

reasonable cause and the taxpayer acted in good faith. Sec. 6664(c)(1); sec.

1.6664-4(b)(1), Income Tax Regs.

      A taxpayer’s failure to maintain sufficient records to support the allowance

of deductions claimed on the taxpayer’s Federal income tax return is a sufficient

ground for the imposition of a section 6662(a) accuracy-related penalty upon the

ground of negligence. See Sanderlin v. Commissioner, T.C. Memo. 2008-209;

Corrigan v. Commissioner, T.C. Memo. 2005-119; sec. 1.6662-3(b)(1), Income

Tax Regs. For each year in issue, petitioners claimed but failed to substantiate

deductions for: (1) medical and dental expenses and (2) “other” expenses, some of
                                        -20-

which went completely unexplained. They also failed to substantiate, or otherwise

explain, the disallowed deduction for “domestic production activities” claimed on

their 2006 return. No explanation was given for their failure to include in their

2007 income the proper amount of the capital gain from the Walmart stock sale,

and to the extent explained, no reasonable explanation was given for their failure

to include the 2005 State income tax refund in the income reported on their 2006

return. They are liable for a section 6662(a) accuracy-related penalty on the

portion of the underpayments of tax attributable to these items.

      On the other hand, the resolutions of petitioners’ entitlement to the

deductions claimed for the rental losses and unreimbursed employee business

expenses are based more on technical grounds rather than their failure to explain

or substantiate those deductions. We find that there was reasonable cause for

those portions of the underpayments and petitioners acted in good faith, so they

are not liable for a section 6662(a) accuracy-related penalty on the portion of the

underpayment of tax attributable to those deductions for either year in issue.

      To reflect the foregoing,


                                               An appropriate order of dismissal and

                                       decision under Rule 155 will be entered.
