                        T.C. Memo. 2000-351



                      UNITED STATES TAX COURT



             KENNETH G. SCHLADWEILER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6167-98.                  Filed November 13, 2000.



     Kenneth G. Schladweiler, pro se.

     Blaine C. Holiday, for respondent.



                        MEMORANDUM OPINION


     MARVEL, Judge:   Respondent determined the following

deficiencies and accuracy-related penalties with respect to

petitioner’s Federal income taxes:
                                    - 2 -

                                                 Accuracy-related
Year                   Deficiency               penalty - sec. 66621

1992                     $4,053                        $811
1993                      3,612                         722
1994                      4,732                         946

       After concessions, discussed infra, the issues for decision
are:

       (1)   Whether petitioner may deduct business expenses claimed

in connection with his trucking/hauling business in excess of

those allowed by respondent; and

       (2)   whether petitioner is liable for the accuracy-related

penalty under section 6662 for each of the years at issue.

       Background

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

The stipulation of facts is incorporated herein by this

reference.

       Petitioner resided in Mitchell, South Dakota, on the date he

filed his petition in this case.

       Petitioner timely filed his Federal income tax returns for

each of the taxable years 1992, 1993, and 1994.     Each return

contained a Schedule C, Profit or Loss From Business, reporting

income and expenses claimed by petitioner from the




       1
      All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure. All monetary amounts
have been rounded to the nearest dollar.
                                - 3 -

trucking/hauling business he operated as a sole proprietorship

during each of the years at issue.

     Respondent audited petitioner’s Federal income tax returns

for 1992, 1993, and 1994.    By notice of deficiency dated January

26, 1998, respondent determined that the following adjustments to

petitioner’s Schedule C expenses were required:

                        1992              1993          1994
Car & truck           $4,170            $5,109            --
Depreciation          (1,630)           (2,609)       ($4,145)
Drivers exp.              --                --          2,522
Fuel                   2,601                242         4,528
Insurance                170                498           (29)
Legal                    (85)              (148)         (167)
Meals                  2,329             1,642          1,021
Plates & comp.        (1,132)               --            813
Repairs                8,276             4,748         12,041
Tires                     --            (2,644)          (203)
Utilities                 --                --            434
Self-employ.          (1,038)           (1,099)        (1,187)

Respondent also determined that petitioner had additional gross

receipts of $8,717 for 1993 and unreported interest income of

$125 for 1994 and that petitioner was liable for the accuracy-

related penalty in each of the years in issue.

     Petitioner conceded, or does not dispute, the adjustments to

gross income, insurance, legal, license plates and compensation,

and tires.    The adjustment concerning interest income is deemed

conceded because petitioner offered no evidence concerning the

adjustment.

     On brief, respondent conceded the driver expense adjustment

for 1994 and portions of the meal and repair expense adjustments
                               - 4 -

for each year.   Respondent also acknowledges that the allowance

for depreciation must be recomputed due to the allowance of

additional repair expenses that respondent previously classified

as capital expenses.

Discussion

     We address each of the remaining disputed adjustments below.

     Car and Truck Expenses

     On his Federal income tax returns for the years at issue,

petitioner claimed the following with respect to car and truck

expenses:

     1992 - Petitioner claimed that he drove a pickup truck 67

percent for business during 1992.   He also claimed that he drove

the pickup 22,194 miles, of which 14,892 were business miles, and

7,302 were personal (noncommuting) miles.   On his Schedule C, he

claimed car and truck expenses of $4,170.   The deduction was

calculated using the standard mileage rate for 1992.

     1993 - Petitioner claimed that he drove an automobile 74.4

percent for business during 1993.   He also claimed that he drove

the car 24,522 miles in 1993, of which 18,245 were business miles

and 6,277 were personal (noncommuting) miles.   On his Schedule C,

he claimed car and truck expenses of $5,109.    The deduction was

calculated using the standard mileage rate for 1993.

     At trial, petitioner testified that he used a 1979 Ford

pickup truck and a 1979 Mercury Cougar for his business travel.
                                - 5 -

He calculated the deduction for car and truck expenses by taking

the opening odometer reading on January 1 and the ending odometer

reading on December 31, calculating the annual mileage, and

applying the standard mileage rate to the annual mileage driven.

Contrary to the position taken on his tax returns, petitioner

testified that he drove the vehicles for business purposes only

and that part of the mileage may have been commuting miles.

Petitioner did not keep a mileage log or any other records that

would have enabled respondent to determine the total mileage

driven by petitioner during 1992 and 1993 and how much of that

mileage was for business use.

     Ordinarily, a taxpayer is permitted to deduct the ordinary

and necessary expenses that he pays or incurs during the taxable

year in carrying on a trade or business.   See sec. 162(a).   A

taxpayer is required to maintain records sufficient to establish

the amount of his deductions.   See sec. 6001; sec. 1.6001-1(a),

Income Tax Regs.   When a taxpayer establishes that he paid or

incurred a deductible expense, but does not establish the amount

of the deduction, we may estimate the amount allowable in some

circumstances.    See Cohan v. Commissioner, 39 F.2d 540, 543-544

(2d Cir. 1930).    There must be sufficient evidence in the record,

however, to permit us to conclude that a deductible expense was

incurred in at least the amount allowed.   See Williams v. United

States, 245 F.2d 559, 560 (5th Cir. 1957).   In estimating the
                               - 6 -

amount allowable, we bear heavily upon the taxpayer whose

inexactitude is of his or her own making.   See Cohan v.

Commissioner, supra at 544.

     For certain kinds of business expenses, such as travel,

meal, and entertainment expenses, and those expenses attributable

to “listed property”, section 274(d) overrides the rule of Cohan

v. Commissioner.   See Sanford v. Commissioner, 50 T.C. 823, 827

(1968), affd. 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).   Under section 274(d), a taxpayer must satisfy strict

substantiation requirements before a deduction is allowable.    See

sec. 274(d); sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs.

If section 274(d) applies, we may not use the Cohan doctrine to

estimate a taxpayer’s expenses covered by that section.

     The substantiation requirements of section 274(d) apply to

any listed property described in section 280F(d)(4).   Listed

property includes passenger automobile and any other property

used as a means of transportation, see sec. 280F(d)(4)(A)(i) and

(ii), unless excepted by section 280F(d)(4)(C) or (d)(5)(B).

Petitioner’s pickup truck and car are listed property, and,

consequently, section 274(d) applies to the car and truck

expenses claimed by petitioner in 1992 and 1993.

     To obtain a deduction for travel expenses under section 274,

a taxpayer must substantiate the amount of the expense, the time
                               - 7 -

and place of the use, and the business purpose of the use by

adequate records or sufficient evidence to corroborate the

taxpayer’s own statement.   See sec. 274(d); sec. 1.274-5T(b),

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

Adequate records for purposes of section 274(d) include an

account book, diary, log, statement of expense, trip sheets, or

similar records.   See sec. 1.274-5T(c)(2), Temporary Income Tax

Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).   If a taxpayer does not

substantiate the travel expense as required by section 274(d), he

is not entitled to a deduction for the expense no matter how

plausible it may be that he paid the expense.   For expenses

covered by section 274, the proposition is simple--a taxpayer who

cannot prove the expense loses the deduction.

     In this case, petitioner offered no probative evidence as

required by section 274(d) to substantiate his car and truck

expenses.   The only evidence in the record is petitioner’s

general testimony concerning his use of the two vehicles and some

odometer readings for 1993, which are not consistent with the

mileage claimed on petitioner’s 1993 return.    This evidence falls

far short of the substantiation required by section 274(d).

Respondent’s determination as to petitioner’s claimed car and

truck expenses, therefore, must be sustained.
                                - 8 -

     Fuel Expenses

     Petitioner claimed fuel expenses of $25,864, $17,982, and

$24,041, respectively, on his 1992, 1993, and 1994 Federal income

tax returns.    In the notice of deficiency, respondent disallowed

a portion of the fuel expenses paid in each year-–$2,601 for

1992, $242 for 1993, and $4,528 for 1994.    Respondent asserts

that petitioner failed to substantiate the actual payment of the

expense in some cases and the business purpose for the payment in

others.   Petitioner’s documentation of his disallowed fuel

expenses, as described by respondent, included receipts for

unleaded gasoline and checks written to gas stations/convenience

stores with no receipts to indicate what, if anything, was

purchased.    Petitioner did not offer the documentation into

evidence.    Petitioner’s dump truck used diesel fuel, so we can

only conclude, based on respondent’s description of petitioner’s

documentation, that the receipts for unleaded gasoline related to

one of petitioner’s other vehicles.

     Petitioner has failed to prove that he is entitled to fuel

expense deductions in excess of those allowed by respondent.

     Meals

     Petitioner claimed he paid $3,484, $1,965, and $1,222 for

business meals in 1992, 1993, and 1994, respectively, of which he

deducted $2,787, $1,572, and $611 after applying the applicable

percentage limitation of section 274(n).    Because petitioner was
                              - 9 -

unable to substantiate the expenses claimed, respondent allowed

petitioner a $26 per diem amount for each night he was out of

town.

     The notice of deficiency allowed a deduction of $458 for

meals for 1992 after applying the section 274(n) limitation.

Because petitioner presented no records for 1993 or 1994 during

the audit, respondent allowed a comparable percentage (16.43

percent) of the claimed meal expenses for 1993 and 1994.   Based

on documentation submitted to respondent subsequent to trial,

respondent conceded on brief that petitioner was out of town on

business 65 nights in 1992 and 23 nights in 1993.   The total

amount conceded by respondent for 1992 meal expense is $1,612,

resulting in an allowable deduction for meals of $1,290 after the

20-percent limitation of section 274(n).   The total amount

conceded by respondent for 1993 meal expense is $598, resulting

in an allowable deduction for meals of $478 after the 20-percent

limitation.

     With respect to petitioner’s claimed meal expenses for 1994,

respondent has conceded that petitioner is entitled to a per diem

meal allowance of $26 per day for each night petitioner stayed

overnight at a motel during 1994.   Petitioner submitted motel

receipts at trial which demonstrate that petitioner occupied a

motel room in connection with his business 25 nights during
                              - 10 -

1994.2   Petitioner’s 1994 meal expense is $650, resulting in an

allowable deduction for meals of $325 after the 50-percent

limitation of section 274(n)(1).

     Our review of the record in this case confirms that

respondent’s concessions as to meals consumed by petitioner are

reasonable under the circumstances.    Respondent’s concessions,

however, do not cover petitioner’s drivers who, like petitioner,

incurred hotel and meal expenses in connection with petitioner’s

business, which petitioner claims he paid.    The documentation

reviewed and summarized by respondent in Appendix 1 to

respondent’s brief confirms that petitioner had motel receipts

reflecting that three of petitioner’s drivers stayed overnight at

a motel 44 nights during 1992 and 3 nights during 1993.

Unfortunately, petitioner introduced no evidence to show whether

and in what amount he reimbursed those drivers for their food

costs during 1992 and 1993.   Because we have no factual record

regarding petitioner’s possible reimbursement of his drivers’

meals during 1992 and 1993, we cannot determine whether

petitioner is entitled to additional deductions for meals in 1992


     2
      One of the motel receipts was indecipherable and,
consequently, is not taken into account in our calculation of the
number of nights petitioner stayed in a motel during 1994 on
business. Other receipts showed that one of petitioner’s
drivers, Raymond Whitmore, also rented a room on the same dates
and at the same motel as petitioner. Mr. Whitmore was reimbursed
by petitioner during 1994 for lodging and meals, and respondent
has conceded that petitioner is entitled to the deduction claimed
for the reimbursement.
                               - 11 -

and 1993.   Consequently, we sustain respondent’s determination as

modified.

     Repairs

     Petitioner claimed repair expenses of $28,903, $41,792, and

$30,917 for 1992, 1993, and 1994, respectively.     In his notice of

deficiency, respondent determined that the claimed amounts should

be reduced by $8,276, $4,748, and $12,041, respectively.

     Of the repair expenses disallowed for 1992, $203 was

disallowed for failure to substantiate either the payment of the

expense or its business purpose, and the balance was reclassified

by respondent as capital expenses.      The expenses reclassified as

capital expenses were for wheels and axles installed on

petitioner’s dump truck and related work billed to petitioner in

a 1992 invoice3 totaling $10,324.    Based on petitioner’s

posttrial submission, respondent has conceded that $4,143 of the

invoiced amount is deductible and that only $6,181 ($10,324 minus

$4,143) must be capitalized.

     Of the amount disallowed for 1993, respondent concedes on

brief that an additional $60 has been substantiated as to amount

and business purpose.   The balance of the adjustment is

attributable to a $3,800 downpayment made by petitioner in 1993


     3
      In his memorandum brief, respondent described this invoice
as a 1994 invoice. Although the invoice is not in evidence, we
have treated respondent’s position on brief as a concession with
respect to 1992, and we have assumed that the invoice documented
1992 repairs, consistent with respondent’s position on brief.
                              - 12 -

for a new box for his truck; the box was not delivered or placed

in service until 1994.   Petitioner has failed to prove that

respondent’s determination for 1993, as adjusted, is erroneous.

     In 1994, one of petitioner’s drivers, Raymond Whitmore, was

in an accident with petitioner’s truck.   The truck rolled over

and required extensive repairs.   Also in 1994, petitioner paid

the balance of the cost of the new truck box ordered in 1993.

     Petitioner submitted documentation to respondent of $46,067

to substantiate repair expenses of $30,917 claimed on his 1994

return.   The documentation as to $1,863 of the expenses failed to

substantiate the business purpose of the expense.   Of the

remaining documentation, respondent determined that $25,328 was

for capital expenditures subject to depreciation; that is, the

remaining purchase price of the box ordered in 1993 and delivered

in 1994 and the cost of repairing petitioner’s truck after the

accident.4

     Petitioner offered no credible evidence to demonstrate that

respondent’s determination to capitalize the cost of the truck

box was in error.   Consequently, we sustain respondent on this

part of his adjustment to petitioner’s repair expense deduction.

We reach a different conclusion regarding respondent’s


     4
      According to respondent’s brief, the repair adjustment was
calculated as follows: $46,067 submitted, minus $1,863 not
substantiated, minus $25,328 capitalized, equals $18,876 allowed.
The $30,917 claimed on the return, minus $18,876 allowed, equals
an adjustment of $12,041.
                              - 13 -

determination that repairs to petitioner’s truck, necessitated by

an accident in 1994, must be capitalized.

     Expenses incurred to maintain property used in a trade or

business in efficient operating condition ordinarily are

deductible.   See sec. 162(a); Jacks v. Commissioner, T.C. Memo.

1988-237; Gilles Frozen Custard, Inc. v. Commissioner, T.C. Memo.

1970-73.   Likewise, the cost of repairs “which neither materially

add to the value of the property nor appreciably prolong its

life, but keep it in an ordinarily efficient operating condition,

may be deducted as an expense”.   Sec. 1.162-4, Income Tax Regs.;

see also sec. 1.263(a)-1(b), Income Tax Regs. (“Amounts paid or

incurred for incidental repairs and maintenance of property are

not capital expenditures”).

     Although it is not always easy to delineate when an

expenditure is a deductible repair or a capital expenditure that

permanently improves property and increases its value, see

section 263, the standard that we must use to evaluate a

particular expenditure is well established.   In Plainfield-Union

Water Co. v. Commissioner, 39 T.C. 333, 337 (1962), we described

the standard as follows:

     An expenditure which returns property to the state it
     was in before the situation prompting the expenditure
     arose, and which does not make the relevant property
     more valuable, more useful, or longer-lived, is usually
     deemed a deductible repair. A capital expenditure is
     generally considered to be a more permanent increment
     in the longevity, utility, or worth of the property.
                              - 14 -

That description of the standard is consistent with that

articulated by the Board of Tax Appeals in Estate of Manierre v.

Commissioner, 4 B.T.A. 103, 106 (1926):

     A repair is an expenditure for the purpose of keeping
     the property in an ordinarily efficient operating
     condition. It does not add to the value of the
     property, nor does it appreciably prolong its life. It
     merely keeps the property in an operating condition
     over its probable useful life for the uses for which it
     was acquired. Expenditures for that purpose are
     distinguishable from those for replacements,
     alterations, improvements or additions which prolong
     the life of the property, increase its value, or make
     it adaptable to a different use. * * *

     There is no dispute in this case that the expenditures in

question were necessitated by an accident that occurred in August

1994.   One of petitioner’s drivers was driving petitioner’s truck

when it jackknifed and slid into a ditch causing substantial

damage to the truck.   Petitioner, appearing pro se, testified at

trial, in response to a question from the Court, that the

expenditures were “to get [the truck] * * * to its original shape

before it was rolled.”   Petitioner further testified that he

consulted with his return preparer about the expenditure and was

informed that “as long as * * * [the truck] wasn’t better than it

was, just put * * * [the truck] back so it was in workable

shape”, the expenditure was deductible.   Respondent offered no

evidence to refute petitioner’s testimony, which we found to be

credible.
                               - 15 -

     We hold that the portion of petitioner’s repair expenses

paid in 1994 to repair the damage from the 1994 accident is

deductible under section 162(a).

     Depreciation

     Respondent determined that petitioner was entitled to

additional depreciation deductions of $1,630, $2,609, and $4,145

in 1992, 1993, and 1994, respectively.    The adjustments are

attributable to respondent’s determinations that certain of

petitioner’s repair expenses must be capitalized and depreciated.

In view of our holding regarding petitioner’s repair expenses,

petitioner’s depreciation deductions for the years in issue must

be decreased to reflect respondent’s concessions and our ruling

on the deductibility of the 1994 accident repairs to petitioner’s

truck.

     Utilities

     Petitioner claimed a utility expense deduction of $1,429 for

1994.    Petitioner lived with his parents when he was not

traveling on business, but he did not pay any rent or contribute

on any regular schedule to the family’s household expenses.

Petitioner testified that he occasionally paid his parents’

utility (phone, sewer, and water) bills in order to reimburse

them for the additional costs resulting from his use of their

electricity, water, and phones for his business.    Petitioner used

his parent’s water to wash his trucks.    He used their electricity
                                - 16 -

to run his steam cleaner, welder, and air compressor and to

charge his trucks in the winter.    Petitioner used their phone for

long-distance business calls.    Petitioner documented that he paid

$846 of his parents’ phone bills and $591 of his parents’ utility

bills.

     In the notice of deficiency, respondent allowed petitioner

some deductions for utilities.    Respondent calculated the

allowance for telephone costs by subtracting from the phone

expenses paid the estimated annual cost of basic residential

coverage ($110) and then allowing petitioner a deduction equal to

75 percent of the balance expended by petitioner.    Respondent

calculated the allowance for electricity and water by allowing

petitioner a deduction equal to 75 percent of the balance

expended by petitioner.5

     Under the circumstances, the amount allowed by respondent

for utilities is reasonable.    Petitioner did not keep precise

records of the utilities used by his business.    In fact, because

of the loose reimbursement arrangement petitioner had with his




     5
      On brief, respondent states that he determined the amount
to be disallowed as follows: Of the $2,755 of documentation
submitted, $1,318 reflected expenses paid by petitioner’s
parents, $110 was the cost of basic phone coverage, and $332 was
treated as allocable to personal use. The adjustment was
determined by subtracting from the amount claimed on petitioner’s
1994 return, $1,429, the amount respondent calculated was
allowed, $995, resulting in an adjustment of $434, rounded.
                              - 17 -

parents, it is impossible to reconstruct, with any reliability,

the cost of utilities used by petitioner’s business in 1994.

     We sustain respondent’s determination as to utilities.

     Accuracy-Related Penalties

     Respondent has proposed accuracy-related penalties against

petitioner for each of the years in issue.

     Section 6662(a) authorizes respondent to impose a penalty in

an amount equal to 20 percent of the underpayment attributable to

negligence or disregard of rules or regulations.    Negligence is

defined as “any failure to make a reasonable attempt to comply

with the provisions of * * * [the Internal Revenue Code]”.     Sec.

6662(c); see also Neely v. Commissioner, 85 T.C. 934, 947 (1985)

(negligence is lack of due care or failure to do what a

reasonable and prudent person would do under the circumstances).

Negligence also includes any failure by the taxpayer to keep

adequate books and records or to substantiate items properly.

See sec. 1.6662-3(b)(1), Income Tax Regs.    The term “disregard”

includes any careless, reckless, or intentional disregard.    Sec.

6662(c).   Disregard of rules or regulations is careless if the

taxpayer does not exercise reasonable diligence to determine the

correctness of a return position that is contrary to the rule or

regulation.   See sec. 1.6662-3(b)(2), Income Tax Regs.   A

taxpayer is not liable for the penalty if he shows that he had
                               - 18 -

reasonable cause for the underpayment and that he acted in good

faith.    See sec. 6664(c).

     Petitioner failed to maintain adequate records to

substantiate the deductions he claimed on his Schedules C for the

years at issue.    See sec. 6001; sec. 1.6001-1(a), Income Tax

Regs.    He offered no evidence at trial to explain this failure.

Accordingly, we hold that petitioner is liable for accuracy-

related penalties under section 6662(a) for any year in issue for

which he is liable for a deficiency, in amounts to be calculated

in accordance with this opinion.

     To reflect the foregoing,


                                          Decision will be entered

                                     under Rule 155.
