                  T.C. Summary Opinion 2010-151



                     UNITED STATES TAX COURT



                KELLY LYNN MADSEN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18467-08S.              Filed October 7, 2010.



     Kelly Lynn Madsen, pro se.

     Lisa M. Oshiro, for respondent.



     MORRISON, Judge:   This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

at the time the petition was filed.1   Pursuant to section

7463(b), the decision to be entered is not reviewable by any



     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the years at
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                              - 2 -

other court, and this opinion shall not be treated as precedent

for any other case.

     On April 23, 2008, respondent (the Commissioner of Internal

Revenue, whom we refer to here as the IRS) mailed petitioner

Kelly Lynn Madsen a notice of deficiency for the taxable years

2004 and 2005 determining the following deficiencies in income

taxes and accuracy-related penalties:

                                                   Penalty
         Year              Deficiency           Sec. 6662(a)
         2004                $4,166                  $833
         2005                 7,431                   964

Ms. Madsen filed a timely petition with this Court, and a trial

was held in Seattle, Washington, on June 23, 2009.   After

concessions by the IRS,2 the issues we must decide are, for both


     2
      The IRS has conceded that Madsen’s home was in Bellingham,
Washington, in 2004 and 2005 for purposes of determining travel
away from home. See sec. 274(d)(1) (providing that deductions
for traveling expenses, including meals and lodging while away
from home, are deductible only if the expenses are substantiated
by evidence other than the taxpayer’s own statements). The IRS
has also conceded that she is entitled to a vehicle mileage
deduction of $1,575 in 2004 and $6,175 in 2005. It also has
conceded that the following expenses Madsen incurred in 2004 are
deductible: Lodging expenses of $5,501 (allocable to work days
spent performing repairs and maintenance, described below), union
dues of $818, training expenses of $100 (including an EPA
Refrigeration Technician Certificate of $50), cell phone expenses
of $600, tool expenses of $90, rental car expenses of $61,
overweight baggage fees of $50, transportation expenses of $238,
and tax preparation fees of $100. The IRS has conceded that the
following expenses Madsen paid in 2005 are deductible: Lodging
expenses of $2,133 (allocable to work days spent performing
repairs and maintenance, described below), union dues of $908,
                                                   (continued...)
                              - 3 -

of the tax years 2004 and 2005: (1) whether Madsen is a

transportation industry worker, (2) the amounts of her deductions

for meals and incidental expenses for three categories of work

days (training, vaccinations, performing repairs and

maintenance), (3) for each day before the day her tugboat

departed on a voyage, the amount of the deduction allowed for

lodging expenses and meals and incidental expenses, (4) for days

spent in harbor and at sea, whether Madsen’s deductions for meals

and incidental travel expenses should be equal to her actual

grocery expenses or to the special daily rates for transportation

workers (and, if the special daily rates are used, whether the

special daily rate should be reduced to $3 per day because Madsen

received free meals on board the tugboats), (5) whether the

deduction for meals and incidental expenses for each day that

Madsen was partly at home and partly traveling (i.e., Madsen’s

first and last days of travel away from her home) should be

prorated by reducing the deduction to 75 percent, (6) whether the



     2
      (...continued)
licensing fees of $215, passport photo expenses of $24, parts
expenses of $1,069, transportation expenses of $904, safety
supply expenses of $446, postage expenses of $84, laundry
expenses of $182, and tax preparation fees of $70. Additionally,
as we explain below, we find that the IRS has conceded the
deductibility of lodging expenses of $1,198 for 2004 and $759 for
2005 for Madsen’s days spent in port before departure on work-
related voyages. Madsen has conceded that a $9,461 distribution
from a retirement fund in 2005 is includable in her income for
that year. The IRS concedes that the distribution is not subject
to the sec. 72(t) additional tax.
                                 - 4 -

increased allowable percentage for the deduction of food or

beverages consumed while away from home for individuals subject

to the federal hours-of-service limitations applies, (7) the

amounts of deductions for other expenses, and (8) whether Madsen

is liable for the section 6662(a) accuracy-related penalties.

                           Background

     The parties have stipulated some of the facts.    These

stipulated facts are adopted by the Court as factual findings.

Madsen resided in the State of Washington at the time she filed

her petition.

1.   Madsen’s Job and Her Duties Generally

     Madsen was employed by Foss Maritime Co. in 2004 and 2005 as

a chief engineer aboard its tugboats.    She was licensed by the

U.S. Coast Guard to perform duties as a master of steam or motor

vessels and as a chief engineer during both years.    She was also

certified to perform navigational and engineering watches3 under

the International Convention on Standards of Training,

Certification, and Watchkeeping for Seafarers, 1978, as amended,

during the tax years at issue.    On board Foss’s tugboats, her job

was to perform engineering watches, in shifts with other boat

employees, to ensure the proper running of the engine room.


     3
      The Coast Guard regulations define the term “watch” to mean
“the direct performance of vessel operations, whether deck or
engine, where such operations would routinely be controlled and
performed in a scheduled and fixed rotation.” 46 C.F.R. sec.
15.705(a) (2004); 46 C.F.R. sec. 15.705(a) (2005).
                                 - 5 -

2.   The Types of Work Days and the Frequency of Each Type

     Madsen lived in Bellingham, Washington.    During 2004 and

2005, all of Madsen’s work was done while she was traveling away

from her home.   We base our description of each of her days of

work on stipulated work schedules for 2004 and 2005 that classify

each day of work into one of various categories.    Some days were

spent performing repairs and maintenance on Foss’s ships while

they were docked at port, and a few days were spent in training

and receiving vaccinations.

     Other than these days, her work duties consisted of sailing

from one port to another before she returned home to Bellingham.

The ports to which she most often traveled to report for those

voyages, Everett and Seattle, Washington, were not more than a

90-minute drive from her home.    She also traveled once each to

the departure ports of (i) Tacoma, Washington, (ii) Brownsville,

Texas, (iii) Kodiak, Alaska, and (iv) Chayvo, Russia (the Chayvo

trip took 3 days).   Madsen would arrive in each port of departure

the day before her tugboat was to depart.    She would lodge at a

hotel to rest.   She classified the days she spent working on

trips among a series of ports in Washington State as “harbor”

days.   She classified trips among a series of ports at least one

of which was outside Washington State as days at “sea”.    She

classified the day of departure from the first port in a series

of ports and the day of arrival at each successive port,
                               - 6 -

including the last port, in the same manner as the intermediate

days of any particular trip.   Thus, if a series of departures and

arrivals from various ports were classified as harbor days, the

day of departure from the first port and the day of arrival at

the last port were also considered harbor days.

      Madsen’s work days in 2004 and 2005 were classified as

follows:4

            Days               2004                  2005
Repair and                      51                    19
  maintenance,
  vaccination, and
  training
Days of rest before             10                     9
  harbor and sea
  days
Harbor                          12                    29
Sea                            135                   171
  Total                        208                   228




      4
      For all days included in the totals below, the specific
dates are listed in Madsen’s work schedules, which were
stipulated by the parties to be her correct work schedules.
Although Madsen made an annual count of her work days on the
basis of Foss’ fiscal year (Dec. 1 to Nov. 30), she filed as a
calendar year taxpayer, and thus we count her work days on a
calendar-year basis.
                               - 7 -

3.   Who Paid for Madsen’s Lodging and Meals During Each Type of
     Work Day

     A.   Madsen’s Lodging and Meals While She Was in
          Training, Receiving Vaccinations, or Performing
          Repairs and Maintenance

     On the days in which she trained, was vaccinated, or

performed repairs and maintenance, Foss did not provide her with

any meals, nor did it reimburse her for any meal expenses.    The

record is unclear regarding Foss’s lodging reimbursement policy

for these days, but it is unnecessary for us to determine whether

Foss reimbursed Madsen for lodging expenses because (1) the IRS

has conceded that Madsen is entitled to deduct specific daily

lodging amounts for her days spent performing repairs and

maintenance and (2) Madsen did not claim lodging expenses for her

days spent in training or receiving vaccinations.

     B.   Madsen’s Lodging and Meals on Her Days Before She
          Departed From Port on Work-Related Voyages

     Foss did not reimburse Madsen for the lodging or meal

expenses she incurred on the days before she departed from port

on her work-related voyages.   She introduced, as evidence, a list

of her days of rest before departure from port.   The list did not

include the amounts she actually spent on lodging or meals.   As

discussed below, we conclude that the IRS’s statements at trial

amounted to a concession of the deductibility of these expenses.
                                 - 8 -

       C.   Madsen’s Lodging and Meals on Her Days Spent in Harbor

       Foss provided her with lodging on board the tugboats on the

harbor days.    The record is unclear regarding whether Foss

provided her with any meals or reimbursed her for any meals while

she was in harbor.     As explained below, we find that Foss did

provide her with free meals for these days, but we do not resolve

whether Foss reimbursed her for meal expenses.

       D.   Madsen’s Lodging and Meals on Her Days Spent at Sea

       While Madsen was at sea, Foss provided her with lodging on

board the tugboat.     It also provided her with three meals per

day.    Madsen was unable to eat the meals provided on board the

tugboat vessels because they had caused her to gain weight and

experience unhealthy levels of cholesterol when she consumed them

over a period of time in the past.       Thus she purchased

vegetables, yogurt, tuna, water, rice, and other healthy food at

grocery stores to prepare on board for her meals.       The IRS does

not contest that Madsen incurred grocery expenses to prepare her

own food on board.     Foss did not reimburse its employees for

grocery purchases.

4.     Work Clothing

       In addition to spending money on food to take aboard the

tugboats, Madsen spent money on clothes that she used exclusively

at work.    Her employer did not impose any attire requirements.

The clothes she used at work quickly became smelly and torn.       As
                                - 9 -

a result, she did not wear them outside her working hours.    She

required special rain gear for her work on board the tugboats and

special cold weather clothes for travel above the Arctic Circle.

She purchased work gloves, rain boots, work boots, and cargo

pants--the latter because her overalls did not have enough

pockets to carry her work tools.    However, she purchased only the

rain gear and the gloves during the tax years at issue.    The rain

gear cost $120 per piece.    She purchased a personal flotation

device, but she did not purchase it during the tax years at

issue.

5.     Tax Returns, Worksheets Presented by Madsen at Trial, and
       IRS Concessions

       Madsen filed timely returns for the tax years 2004 and 2005.

We discuss here only the parts of her returns at issue.    On her

2004 return she claimed $18,337 of unreimbursed employee business

expenses on her Schedule A, Itemized Deductions, as follows (we

note here any expenses she claimed that the IRS has conceded are

deductible):

Type of Unreimbursed      Amount of Expense      Whether IRS Has
 Employee Business         Claimed on 2004     Conceded Deduction
      Expense                   Return
Mileage                        $1,575                             Yes
Incidentals                     5,748                              No
Work clothes                       749                             No
Rental car                          61                            Yes
Cabs                               238                            Yes
                                - 10 -

Overweight baggage                  50                         Yes
Hotels (i.e.,                      204          Yes, in the amount
  lodging)                                               of $5,501
Training                            50          Yes, in the amount
                                                           of $100
Cell phone                        600                          Yes
Outside U.S. $46 X              8,234                              No
  179
Inside U.S. $41 X 18              738           Yes, in the amount
                                                      of $1,072.51
Fluke meter                        90                          Yes
  Total                         18,337        Total IRS concession
                                              $9,287.51 (excluding
                                                concession of $100
                                               tax preparation fee
                                              not listed on return
                                                  or worksheet and
                                                concessions listed
                                                      again in the
                                                  worksheet below

Madsen submitted an expense worksheet to this Court in which she

listed the date, amount, location, vendor, and purpose of each

expense that she claims to have incurred in 2004.    The IRS has

conceded that some of the amounts she claims to have incurred as

expenses are deductible.    The 2004 expense subtotals listed on

her worksheet are:

Type of Unreimbursed       Amount Listed on      Whether IRS Has
 Employee Business          2004 Worksheet     Conceded Deduction
      Expense
Mileage                         $1,575                         Yes
Tools                               90                         Yes
Union dues                         818                         Yes
                             - 11 -

Cell phone                      600                          Yes
Overweight baggage               50                          Yes
Rental car                       61                          Yes
EPA certification                50                          Yes
  exam
Work clothes                    797                           No
Groceries                       955                           No
Laundry supplies                269                           No
Postage                          59                           No
Safety supplies                 284                           No
Transportation                1,526                           No
  Total                       7,134         Total IRS concession
                                                          $3,244

On her 2005 return, she claimed $26,108 of unreimbursed employee

business expenses on her Schedule A as follows:5

Type of Unreimbursed    Amount of Expense      Whether IRS Has
 Employee Business       Claimed on 2005     Conceded Deduction
      Expense                 Return
Mileage                      $6,175                          Yes
Incidentals                   5,304                           No
License                         160                          Yes
Union dues                      908                          Yes


     5
      Madsen filed an amended return for 2005 dated Mar. 10,
2007, in which she claimed a $132 reduction in adjusted gross
income. She explained the change as “changes due to IRS notice.”
The IRS stated in section 7(b) of the attachment to the notice of
deficiency entitled “Explanation of Adjustments” that it was
allowing an additional capital loss of $132 and decreasing its
calculation of Madsen’s income by the same amount. The IRS has
already taken into account this $132 reduction in income by
including it in its calculation of the deficiency, and thus we
need not address it.
                                - 12 -

Cell phone                         720                         Yes
Outside per diem $46             9,614                             No
  X 209
Inside per diem $41              3,227             Yes, but in the
  X 57                                           amount of $427.13
  Total                         26,108        Total IRS concession
                                               $8,388.13 (excludes
                                              concession of $2,133
                                               lodging expense and
                                               $70 tax preparation
                                                 fee not listed on
                                              return or worksheet,
                                                   and concessions
                                               listed again in the
                                                  worksheet below)

Madsen submitted an expense worksheet for 2005 that was identical

in format to the worksheet she submitted for 2004.   The IRS has

conceded that some of the amounts she claims to have incurred as

expenses are deductible.    The 2005 expense subtotals listed on

her worksheet are:

Type of Unreimbursed       Amount Listed on      Whether IRS Has
  Employee Business         2005 Worksheet     Conceded Deduction
      Expense
Visa photos/office               $214                          Yes
  supplies and
  licensing
Parts                             165              Yes, but in the
                                                  amount of $1,069
Safety supplies                   446                          Yes
Work clothes                    1,442                              No
Postage, copies,                   84                          Yes
  faxes, passport
  photos
Transportation                    904                          Yes
                             - 13 -

Groceries                    1,727                                  No
Laundry supplies               182                              Yes
Total                        5,164             Total IRS concession
                                                             $2,899

We now discuss whether Madsen incurred the expenses the IRS did

not concede and whether they are deductible.

                           Discussion

     Madsen has the burden of proving that the determinations of

deficiencies in the notice are incorrect.    See Rule 142(a); Welch

v. Helvering, 290 U.S. 111, 115 (1933).     We conclude that, for

the tax years at issue, (1) Madsen is a transportation industry

worker (addressed in section 2 below), (2) her deduction for

meals and incidental expenses for each work day spent in

training, being vaccinated, or performing repairs and maintenance

is equal to the applicable special daily rate for transportation

industry workers (addressed in section 3 below), (3) her

deduction for travel expenses for each day immediately preceding

the day of departure on a work-related voyage is (i) the maximum

amount for lodging permitted by the Federal Travel Regulations

and (ii) the applicable special daily rate for transportation

industry workers for her meals and incidental expenses (addressed

in section 4 below), (4) her deduction for each harbor day and

each sea day is a reduced amount for incidental expenses only,

not the unreduced special daily rate for transportation industry

workers or the actual amounts she spent on groceries for meals
                               - 14 -

consumed (addressed in section 5 below), (5) her meals and

incidental expense deduction for her first and last days of

travel away from home is limited to 75 percent of the applicable

special daily rate for transportation industry workers (addressed

in section 6 below), (6) Madsen’s hours of work were governed by

Department of Transportation (DOT) regulations and therefore her

meals and incidental expenses are limited to 70 percent, not 50

percent (addressed in section 7 below), and (7) her deduction for

the amounts she spent for work clothes is equal to those amounts

claimed in her worksheets but she may not deduct amounts she

describes as “incidental” expenses (addressed in section 8

below).    Finally, we conclude that she is liable for the section

6662(a) penalty for each year for the amount of her underpayment

attributable to her deduction for “incidentals” but that she had

reasonable cause for the amount of her underpayment attributable

to her claiming excess meals and incidental expenses as a

deduction (addressed in section 9 below).

1.   The Rules Governing the Deduction of Travel Expenses

     A taxpayer has the burden of proving he or she incurred the

amounts that support his or her claims for deductions.   See

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992) (citing

Interstate Transit Lines v. Commissioner, 319 U.S. 590, 593

(1943)).    A taxpayer must maintain records relating to his or her

expenses and must prove his or her entitlement to all claimed
                              - 15 -

deductions, credits, and expenses in controversy; the taxpayer’s

burden thus includes the burden of substantiation.    See sec.

6001; Rule 142(a); Hradesky v. Commissioner, 65 T.C. 87, 89-90

(1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976); sec.

1.6001-1(a), Income Tax Regs.6

     Section 162(a) permits taxpayers to deduct “all the ordinary

and necessary business expenses paid or incurred during the

taxable year”; and, in particular, section 162(a)(2) permits the

deduction of “traveling expenses (including amounts expended for

meals and lodging other than amounts that are lavish or

extravagant under the circumstances) while away from home in the

pursuit of a trade or business”.7   A trade or business includes

the performance of services as an employee.   See O’Malley v.

Commissioner, 91 T.C. 352, 363-364 (1988), affd. 972 F.2d 150

(7th Cir. 1992).   Thus, ordinary and necessary expenses generally

include amounts that an employee pays while traveling away from



     6
      Sec. 1.6001-1(a), Income Tax Regs., provides:

     any person subject to tax * * * [under the Code] shall
     keep such permanent books of account or records,
     including inventories, as are sufficient to establish
     the amount of gross income, deductions, credits, or
     other matters required to be shown by such person in
     any return of such tax or information.
     7
      Unreimbursed sec. 162(a)(2) expenses of an employee are
classified as a miscellaneous itemized deduction, and thus, in
total with all other miscellaneous itemized deductions, are
deductible only to the extent they exceed 2 percent of adjusted
gross income. See secs. 62(a)(1) and (2), 67.
                                - 16 -

home in connection with his or her employment.   A taxpayer may

not deduct travel expenses attributable to personal, living, or

family expenses.   See sec. 262.   And section 274(d) provides that

          SEC. 274(d). Substantiation Required.-- No
     deduction or credit shall be allowed--

               (1) under section 162 or 212 for any
          traveling expense (including meals and
          lodging while away from home),

                   *   *    *      *     *   *   *

     unless the taxpayer substantiates by adequate records
     or by sufficient evidence corroborating the taxpayer's
     own statement (A) the amount of such expense or other
     item, (B) the time and place of the travel, * * * (C)
     the business purpose of the expense or other item
     * * *. The Secretary may by regulations provide that
     some or all of the requirements of the preceding
     sentence shall not apply in the case of an expense
     which does not exceed an amount prescribed pursuant to
     such regulations. * * *

See also sec. 1.274-5(c)(2)(iii)(B), Income Tax Regs.; sec.

1.274-5T(b)(1) and (2), (c)(1) and (2)(i) and (ii), (3)(i),

Temporary Income Tax Regs., 50 Fed. Reg. 46014-46016 (Nov. 6,

1985).   The meaning of the phrase “by adequate records or by

sufficient evidence corroborating the taxpayer’s own statement”

is clarified by section 1.274-5T(c)(2)(i), Temporary Income Tax

Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985), which provides in part:

     To meet the “adequate records” requirements of section
     274(d), a taxpayer shall maintain an account book,
     diary, log, statement of expense, trip sheets, or
     similar record (as provided in paragraph (c)(2)(ii) of
     this section), and documentary evidence (as provided in
     paragraph (c)(2)(iii) of this section) which, in
     combination, are sufficient to establish each element
     of an expenditure or use specified in paragraph (b) of
                             - 17 -

     this section. It is not necessary to record information
     in an account book, diary, log, statement of expense,
     trip sheet, or similar record which duplicates
     information reflected on a receipt so long as the
     account book, etc. and receipt complement each other in
     an orderly manner.

and by section 1.274-5T(c)(2)(ii), Temporary Income Tax Regs., 50

Fed. Reg. 46017 (Nov. 6, 1985), which provides that

     An account book, diary, log, statement of expense, trip
     sheet, or similar record must be prepared or maintained
     in such manner that each recording of an element of an
     expenditure or use is made at or near the time of the
     expenditure or use.

and by section 1.274-5(c)(2)(iii), Income Tax Regs., which

provides that

          (A) Except as provided in paragraph
     (c)(2)(iii)(B), documentary evidence, such as receipts,
     paid bills, or similar evidence sufficient to support
     an expenditure is required for--

          (1) Any expenditure for lodging while traveling away
     from home, and

          (2) Any other expenditure of $75 or more except, for
     transportation charges, documentary evidence will not be
     required if not readily available.

          (B) The Commissioner, in his or her discretion, may
     prescribe rules waiving the documentary evidence
     requirements in circumstances where it is impracticable for
     such documentary evidence to be required. * * *

and by section 1.274-5T(c)(3)(i), Temporary Income Tax Regs., 50

Fed. Reg. 46020 (Nov. 6, 1985), which provides

     If a taxpayer fails to establish to the satisfaction of
     the district director that he has substantially
     complied with the “adequate records” requirements of
     paragraph (c)(2) of this section with respect to an
     element of an expenditure or use, then, except as
                              - 18 -

     otherwise provided in this paragraph, the taxpayer must
     establish such element--

          (A) By his own statement, whether written or oral,
     containing specific information in detail as to such
     element; and

          (B) By other corrobative evidence sufficient to
     establish such element.

     If such element is the description of a gift, or the
     cost or amount, time, place, or date of an expenditure
     or use, the corrobative evidence shall be direct
     evidence, such as a statement in writing or the oral
     testimony of persons entertained or other witnesses
     setting forth detailed information about such element,
     or the documentary evidence described in paragraph
     (c)(2) of this section. If such element is either the
     business relationship to the taxpayer of persons
     entertained, or the business purpose of an expenditure,
     the corrobative evidence may be circumstantial
     evidence.

A.   Requirements for Deducting Meal Expenses

     There are additional rules for how a taxpayer may

substantiate meal expenses incurred while traveling away from

home.   Section 1.274-5(j)(1), (3), Income Tax Regs., permits the

IRS to prescribe rules under which taxpayers may deduct a fixed

daily amount for meal expenses incurred while traveling away from

home and incidental travel expenses without substantiating the

actual amount of either the meal expenses or the incidental

expenses.   Under this regulatory authority, the IRS issued Rev.

Proc. 2003-80, 2003-2 C.B. 1037, applicable to travel from

November 1, 2003, through September 30, 2004 (which we refer to

as the 2003 revenue procedure), Rev. Proc. 2004-60, 2004-2 C.B.

682, applicable to travel from October 1 through December 31,
                             - 19 -

2004 (which we refer to as the 2004 revenue procedure), Rev.

Proc. 2005-10, 2005-1 C.B. 341, applicable to travel from January

1 through September 30, 2005 (which we refer to as the early 2005

revenue procedure), and Rev. Proc. 2005-67, 2005-2 C.B. 729,

applicable to travel from October 1, 2005, through September 30,

2006 (which we refer to as the late 2005 revenue procedure).    We

refer to the 2003, 2004, and early and late 2005 revenue

procedures collectively as the applicable revenue procedures.

Each revenue procedure restated the rules of the prior period’s

revenue procedure almost verbatim, with some changes, and

superseded the prior period’s revenue procedure until the

effective date of the subsequent revenue procedure.

     Under section 4.03 of the applicable revenue procedures,

taxpayers may elect to use an “Optional method for meal and

incidental expenses only deduction”, described as follows:

     In lieu of using actual expenses in computing the
     amount allowable as a deduction for ordinary and
     necessary meal and incidental expenses paid or incurred
     for travel away from home, employees and self-employed
     individuals who pay or incur meal expenses may use an
     amount computed at the federal M&IE rate for the
     locality of travel[8] for each calendar day (or partial
     day) the employee or self-employed individual is away
     from home. This amount will be deemed substantiated
     for purposes of * * * [the regulations], provided the
     employee or self-employed individual substantiates the
     elements of time, place, and business purposes of the


     8
      Locality of travel means “the locality where an employee
traveling away from home in connection with the performance of
services as an employee of the employer stops for sleep or rest.”
Sec. 3.02(2) of the applicable revenue procedures.
                              - 20 -

     travel for that day (or partial day) in accordance with
     those regulations. * * *

Thus, under section 4.03 of the applicable revenue procedures, an

employee or self-employed individual traveling away from home

may, instead of using the actual amounts he or she spent on meals

and incidental travel expenses,9 claim a deduction equal to the

“federal M&IE rate”.   The “federal M&IE rate” is meant by the

applicable revenue procedures to be the rate at which a Federal

employee is reimbursed on a per diem basis for meals and

incidental travel expenses.   See Bissonette v. Commissioner, 127

T.C. 124, 128 n.6 (2006) (citing Johnson v. Commissioner, 115

T.C. 210, 227 (2000)); sec. 3.02 of the applicable revenue

procedures.   This meaning is apparent from the definition of the

“federal per diem rate” as “equal to the sum of the applicable

lodging expense rate and the applicable federal meal and

incidental expense (M&IE) rate for the day and locality of




     9
      Incidental travel expenses are:

     fees and tips given to porters, baggage carriers,
     bellhops, hotel maids, stewards or stewardesses and
     others on ships, and hotel servants in foreign
     countries; transportation between places of lodging or
     business and places where meals are taken, if suitable
     meals cannot be obtained at the temporary duty site;
     and the mailing cost associated with filing travel
     vouchers and payment of employer-sponsored charge card
     billings.

Sec. 3.02(3) of the applicable revenue procedures.
                                - 21 -

travel.”10    Sec. 3.02(1) of the applicable revenue procedures.

Although the phrase “federal M&IE rate” is not defined in section

3.02(1), the language directly below section 3.02(1) provides

that the “rates” (a word that means, it is apparent, both the

“applicable federal lodging expense rate” and the “applicable

federal meal and incidental expense (M&IE) rate”) are to be found

in various places in the Federal Travel Regulations.    In

particular, for “rates” inside the continental United States, the

applicable revenue procedures direct the reader to appendix A of

41 C.F.R. chapter 301, which is the portion of the Federal Travel

Regulations that contains the rates of reimbursement for federal

employees who travel inside the United States (CONUS rates).

Sec. 3.02(1)(a) of the applicable revenue procedures.    These

CONUS reimbursement rates, which vary by location, comprise two

components:    the maximum daily rate at which the federal

government will reimburse actual lodging expenses, and the rate

at which the federal government will reimburse meals and

incidental expenses in lieu of reimbursing actual expenses.      And

for “rates” outside the continental United States, the applicable


     10
      Sec. 4.01 of the applicable revenue procedures permits an
employer paying a per diem allowance in lieu of reimbursing
actual expenses for lodging, meal, and incidental expenses
incurred by an employee to deduct the lesser of the employer’s
per diem allowance for a particular day or the federal per diem
rate for the locality of travel for that day. The applicable
revenue procedures do not permit an employee or self-employed
individual to use the federal per diem rate or the applicable
lodging expense rate.
                               - 22 -

revenue procedures direct the reader to monthly publications that

update the Federal Travel Regulations with rates of reimbursement

for federal employees who travel outside the United States

(OCONUS rates).   Sec. 3.02(1)(b) of the applicable revenue

procedures.   These OCONUS reimbursement rates similarly comprise

both lodging and meals and incidental expense components, which

also vary by location.   The references to “rates” in the

applicable revenue procedures make it plain that the phrase

“federal M&IE rate” means the rates at which the federal

government calculates its expense reimbursements to its

employees.    This meaning is reinforced by section 6.01 of the

applicable revenue procedures, which provides that “The federal

per diem rate and the federal M&IE rate described in section 3.02

of this revenue procedure for the locality of travel will be

applied in the same manner as applied under Federal Travel

Regulations, 41 C.F.R. Part 301-11 * * *, except as provided in

sections 6.02 through 6.04”.    Thus, the federal M&IE rate varies

by locality of travel in the same manner as the reimbursement

rate for federal employees’ travel.

     Whereas section 4.03 allows a traveling employee or

self-employed individual to deduct daily rates for meals and

incidental travel expenses in lieu of actual expenses, there is

no similar provision for deducting lodging expenses.   Thus, an

employee or self-employed individual incurring a lodging expense
                             - 23 -

on business travel must deduct the actual amounts he or she spent

on the lodging, or deduct no amount at all.   As explained supra

note 10, an employee or self-employed individual may not use the

applicable lodging expense rate mentioned in the applicable

revenue procedures to substantiate the employee’s lodging

expenses.

     Section 4.04(2) of the 2003 revenue procedure and 4.04(3) of

the other applicable revenue procedures provide that an employee

or self-employed individual working in the transportation

industry may

     treat $41 [$52 for travel from October 1, 2005 to
     September 30, 2006] as the federal M&IE rate for any
     CONUS locality of travel, and $46 [$58 for travel from
     October 1, 2005 to September 30, 2006] as the federal
     M&IE rate for any OCONUS locality of travel. * * * [An]
     employee or self-employed individual that uses either
     (or both) of these special rates must use the special
     rate(s) for all amounts computed * * * for travel away
     from home within CONUS and/or OCONUS, as the case may
     be, during the calendar year.[11] * * *

We refer to the $41 rate ($52 for travel from October 1, 2005, to

September 30, 2006) for CONUS localities of travel and the $46

rate ($58 for travel from October 1, 2005, to September 30, 2006)

for OCONUS localities of travel as the special daily rates for

transportation industry workers.




     11
      A CONUS locality of travel means a port within the
continental United States. An OCONUS locality of travel means a
port outside the continental United States, whether foreign or
domestic.
                              - 24 -

     Thus, a transportation industry worker who incurred meal

expenses while traveling away from home during a particular tax

year has a choice when filing his or her income-tax return for

that tax year to (1) substantiate the actual amount of his or her

actual meals and incidental expenses, (2) use the federal M&IE

rates (which are equal to the rate at which the federal

government will reimburse meals and incidental expenses in lieu

of actual expenses), or (3) use the special daily rates for

transportation industry workers.   A transportation industry

worker choosing one of the two sets of daily rates (i.e., method

(2) or (3)) must consistently apply the set of rates chosen for

all meals and incidental expenditures the worker claims for the

entire calendar year.   Sec. 4.03 of the applicable revenue

procedures (stating that a taxpayer who chooses to use the

federal M&IE rate must consistently use it for all meals and

incidental expenses claimed during a calendar year); sec. 4.04(2)

of the 2003 revenue procedure and sec. 4.04(3) of the 2004 and

early and late 2005 revenue procedures (stating that a taxpayer

who chooses to use special daily rates for transportation

industry workers must consistently use it for all meals and

incidental expenses claimed during a calendar year).

     B.   Requirements for Deducting Lodging Expenses

     The regulations under section 274(d) impose the same

requirements for deducting lodging expenses as for deducting meal
                              - 25 -

expenses, with two exceptions.   First, when a taxpayer

substantiates his or her lodging expenses by adequate records (as

opposed to substantiating the taxpayer’s own statement of his or

her lodging expenses by corroborative evidence), the taxpayer

must have “documentary evidence”.   Sec. 1.274-5(c)(2)(iii)(A)

Income Tax Regs., sec. 1.274-5T(c)(2)(i), Temporary Income Tax

Regs., supra. (By contrast, the same regulations require

documentary evidence for most other expenses, including meal

expenses, only if the expense exceeds $75.)   Second, the

regulations under section 274(d) did not authorize the IRS to

include a provision in the applicable revenue procedures allowing

employees or self-employed individuals to deduct, in lieu of

actual expenses, the maximum amount the federal government allows

its employees to claim as reimbursement for actual lodging

expenses for business travel within or outside the United States.

Thus, for lodging expenses, the employee must deduct actual

expenses.

2.   Whether Madsen Is a Transportation Worker

     As stated above, a transportation industry worker may deduct

all of his or her meals and incidental expenses while traveling

away from home on business at special rates for a calendar year

provided that the worker consistently applies the rates

throughout that year.   Madsen chose to claim the special daily

rates for transportation industry workers for all of her days of
                                 - 26 -

travel away from home (i.e., for all days spent (1) performing

repairs and maintenance, (2) receiving vaccination, (3) receiving

training, (4) resting before departure from port, (5) at harbor,

and (6) at sea).     Thus for all six categories of days Madsen

claims that her deduction is $41 or $46 per day for her meals and

incidental travel expenses (she does not claim a deduction for

any days at the $52 or $58 rate).     The IRS has made a number of

challenges to the deductions that Madsen seeks, but it does not

expressly deny that Madsen is a transportation worker.     At the

audit level, the IRS took the position that Madsen was not a

transportation worker.     We consider Madsen a transportation

industry worker for purposes of the applicable revenue

procedures.12

3.   Travel Expense Deductions for Repair and Maintenance,
     Training, and Vaccination Days

     Madsen claimed her meals and incidental expenses at the

special rates for transportation industry workers for her days



     12
          The applicable revenue procedures provide:

     an employee or self-employed individual is in the
     transportation industry only if the employee’s or
     individual’s work (a) is of the type that directly
     involves moving people or goods by airplane, barge,
     bus, ship, train, or truck, and (b) regularly requires
     travel away from home, which during any single trip
     away from home, usually involves travel to localities
     with differing federal M&IE rates. * * *

Sec. 4.04(4) of the 2003 revenue procedure; sec. 4.04(2) of the
2004 and early and late 2005 revenue procedures.
                              - 27 -

spent performing repair and maintenance, in training, and

receiving vaccinations.   The IRS concedes that the federal M&IE

rate (the term we defined supra p. 22) should be used for the

days performing repairs and maintenance.   The IRS says she should

receive no meal deduction for her (1) days spent in training, and

(2) days being vaccinated.   As a factual matter, the IRS’s

argument rests upon the allegation that during these first two

categories of days Madsen received free meals from Foss.    The

record indicates that Foss did not provide her meals or reimburse

her for meal expenses while she was in training and being

vaccinated.   Furthermore, Madsen’s stipulated work schedules

satisfy the requirement of section 1.274-5T(b) and (c), Temporary

Income Tax Regs., 50 Fed. Reg. 46014, 46016 (Nov. 6, 1985), that

she substantiate the elements of time, place, and business

purposes of her travel for each day or partial day of travel.

Madsen is a transportation industry worker who claimed the use of

the special daily rates for transportation workers.   Thus, her

deduction for her meal expenses for the days she was training,

being vaccinated, or performing repair and maintenance is the

applicable special daily rate for transportation industry

workers.   The rate was $41 per day for CONUS localities of travel

applicable to 51 days of travel away from home in 2004, resulting

in a deduction of $2,091 for 2004, and $41 per day for 19 days of

travel away from home in 2005 (the $52 rate did not apply to any
                              - 28 -

of the days in 2005), resulting in a deduction of $779 in 2005.

None of the days were spent in OCONUS localities of travel.13

4.   Travel Expense Deductions for the Day Before Each Departure
     of the Tugboat From the Port at Which Madsen Joined the
     Tugboat

     Madsen arrived in the port of departure on the day before

her tugboat would depart from port.    Madsen claims that she did

so to comply with 46 U.S.C. sec. 8104(a) (2006), which requires

that engineering watchpersons be off duty for 6 hours during the

12 hours immediately before a boat’s departure from port.   In its

answer, the IRS contested the deductibility of lodging and meal

expenses allocable to each day before her departure at port.    But

at trial, the IRS stated that “Respondent concedes that

Petitioner’s tax home is in Bellingham, Washington.   In the

notice of deficiency Petitioner was not allowed travel expenses

to Seattle, Washington, nor was she allowed lodging or meals and

incidental per diem.”   After the trial, the Court ordered that

the IRS clarify in writing the concessions it made at trial.    The

IRS did not include amounts for lodging or meals and incidental

expenses allocable to each day before a work-related voyage in

its list of concessions.   The issues of meals and lodging expense

deductions for days before departure from port were not discussed


     13
      The IRS has conceded that the lodging expenses (in the
amounts of $5,501 for 2004 and $2,133 for 2005) that Madsen
incurred while performing repair and maintenance on Foss’ docked
ships are deductible. She did not claim lodging expenses for
days spent in training or receiving vaccinations.
                                 - 29 -

by either party in its brief.      As we explain below, we deem the

issue of Madsen’s claim for lodging and meals and incidental

expenses for her days before departure from port to be conceded

by the IRS.    Section A below discusses the meal expenses for

these days.    Section B below discusses the lodging expenses for

these days.

     A.     Meal Expense Deduction for Days Before Each Departure
            of the Tugboat From the Port at Which Madsen Joined the
            Tugboat

     For a taxpayer to be entitled to a deduction for traveling

away from home, three conditions must be met (in addition to the

substantiation requirements of section 274(d)):      (1) The expenses

must be ordinary and necessary; (2) the expenses must have been

incurred while the taxpayer was “away from home”; and (3) the

taxpayer must have incurred the expenses in pursuit of a trade or

business.     Sec. 162(a).   The Supreme Court interpreted the

predecessor to section 162(a) to impose these three requirements

in Commissioner v. Flowers, 326 U.S. 465, 470 (1946).        The

reference to a “home” means a tax home.      See Barone v.

Commissioner, 85 T.C. 462, 465 (1985), affd. without published

opinion 807 F.2d 177 (9th Cir. 1986).      As a general rule, the tax

home is the principal place of business.      If the taxpayer does

not have a principal place of business, the tax home is the

taxpayer’s permanent place of residence.      Id.   The IRS’s

statement at trial could be reasonably understood to concede that
                              - 30 -

Madsen had satisfied all three conditions of the Flowers test for

her meal expenses allocable to each day before a work-related

voyage.   The IRS stated that it conceded that Madsen’s tax home

was in Bellingham and then contrasted its concession with its

prior position to deny travel expenses to Seattle, which was one

of the primary ports of departure.     The contrast implies that the

IRS conceded Madsen’s right to deduct meal expenses on days

traveling to all ports of departure, such as Seattle.    This

interpretation explains why the issue of Madsen’s claim for meal

deductions on days before work-related voyages is not discussed

in the parties’ briefs.   We deem the IRS to have conceded the

issue, and we determine that Madsen’s deductions for her meals

and incidental expenses for each day before a work-related voyage

are equal to the amount of the applicable special daily rate for

transportation industry workers.   In 2004 she arrived in Seattle

before sailings seven times, Everett, Washington one time,

Brownsville, Texas one time, and Kodiak, Alaska one time.    Thus,

she is entitled to a meals and incidental expenses deduction of

$415 for 2004 (9 days in CONUS localities of travel at the $41

rate and 1 day in an OCONUS locality of travel at the $46 rate).

In 2005 she arrived in Seattle before voyages five times, Tacoma,

Washington, one time, and Seoul, South Korea, and Yuzno and

Chayvo, Russia, one time each over a 3-day journey.    Thus, she is

entitled to a meals and incidental expenses deduction of $384 for
                              - 31 -

2005 (6 days in CONUS localities of travel at the $41 rate and 3

days in OCONUS localities of travel at the $46 rate).

     B.   Lodging Expense Deduction for Days Before Each
          Departure of the Tugboat From the Port at Which Madsen
          Joined the Tugboat

     On the days before she boarded her tugboat, Madsen would

stay overnight at a hotel near the port of departure.    Foss did

not reimburse her for what she paid the hotels.    Madsen did not

produce receipts for what she paid the hotels.    The applicable

revenue procedures do not grant an employee an option to use, as

the amount of the deduction for lodging expenses, the maximum

amount that federal employees are reimbursed for actual lodging

expenses for business travel within or outside the United States.

Thus, there is no relief offered for the requirement under

section 274(d) that the taxpayer have adequate records proving

the actual lodging expenses incurred while traveling away from

home or evidence corroborating the taxpayer’s own statement of

the lodging expenses.   Madsen did not submit this evidence to

this Court, but she may not have done so because she reasonably

believed the IRS conceded her right to the lodging expenses in

its statement at the beginning of the trial.   Although the IRS

did not list amounts of any conceded lodging expenses in its

report to the Court, we believe the IRS’s statements at trial

could be reasonably construed as a concession of Madsen’s right

to claim lodging expenses for each day of travel before a
                                - 32 -

work-related voyage (as well as meals and incidental expenses for

such days).   While the law does not permit Madsen (or any other

taxpayer who is an employee) to apply the maximum lodging amounts

for reimbursement of federal employees’ travel in preparing her

tax return, we will use the maximum lodging amounts as an

estimate of Madsen’s lodging expenses, in the absence of receipts

for the actual lodging expenses in the record, because the IRS’s

statement at trial could have reasonably caused Madsen to believe

that the IRS had conceded that she need not submit documentary

evidence of her actual lodging expenses.14      (We do not use an

amount less than the maximum amount because we believe the

maximum amounts to approximate what Madsen actually spent.)         For

2004 the maximum amounts federal employees could be reimbursed

for lodging were: (1) $143 per day for six of her days spent in

Seattle before travel on work-related voyages and $136 for one

other day in Seattle (because of a seasonal change in the CONUS

rate), (2) $59 per day for one day in Everett, Washington, (3)

$55 per day for one day in Brownsville, Texas, and (4) $90 per

day for one day in Kodiak, Alaska.       Thus, in 2004, Madsen is

entitled to a lodging expense deduction of $1,198.       In 2005 the

maximum lodging amounts were:    (1) $136 per day for her five days


     14
      We do not mean to say that every vague concession by a
party should be deemed to be whatever the other party could have
reasonably believed the concession to be. Our rationale for
construing the concession the way we do in this case depends on
factors peculiar to this case.
                                   - 33 -

in Seattle and (2) $79 per day for one day in Tacoma, Washington.

Thus, in 2005 she is entitled to a lodging expense deduction of

$759.        Madsen is not entitled to a lodging deduction for the

three days she spent in Seoul, South Korea, and Yuzno and Chayvo,

Russia, in 2005 because she claimed no lodging expenses on her

worksheets for those days.

5.   Travel Expense Deductions for Days at Harbor and at Sea

        Madsen claimed a meals and incidental expenses deduction for

travel away from home while in harbor and at sea.15         Foss

provided her with three free meals per day while she was at sea.

The record is silent as to whether Foss provided free meals to

Madsen or reimbursed her for meals at harbor.          Because Madsen has

the burden of proof, see Rule 142(a), we find that Foss provided

her with three free meals per day at harbor.

        Madsen argues that she could not eat the food that Foss

provided because it was unhealthy.          Thus, she argues that her

deductions should be equal to the federal M&IE rate for her days

at sea, without any reduction in that rate for free meals, or, in

the alternative, the actual cost of the groceries, because she

purchased groceries to cook healthy food for herself.          Madsen did

not specifically make the same argument about harbor days; i.e.,

that she should deduct the federal M&IE rate for her days at



        15
      Madsen did not claim lodging expenses for her days spent
in harbor or at sea.
                              - 34 -

harbor without reduction for free meals, or in the alternative,

deduct the actual cost of the groceries.   We find that Foss

provided her with three free meals per day at harbor.   Thus, we

analyze both her harbor days and sea days together.   The IRS

argues that Madsen’s meals and incidental expense deduction

should be reduced to $3 per day to account for the three free

meals.

     We hold that Madsen’s deduction is equal to the special

daily rate for transportation workers, reduced to $3 per day.    It

does not matter that she did not actually consume the meals.    The

Federal Travel Regulations require that a federal employee’s

meals and incidental expenses reimbursement rate be reduced for

meals provided by the federal government by deducting fixed

amounts for each meal provided (listed in a table in the Federal

Travel Regulations), but not to less than the amount allowed for

incidental expenses ($3).   See 41 C.F.R. sec. 301-11.18 (2004);

41 C.F.R. sec. 301-11.18 (2005).16   Under the Federal Travel


     16
      Tit. 41 C.F.R. sec. 301-11.18 (2004) and 41 C.F.R. sec.
301-11.18 (2005) provide:

     What M&IE rate will I receive if a meal(s) is furnished
     at nominal or no cost by the Government or is included
     in the registration fee?

     Your M&IE rate must be adjusted for a meal(s) furnished
     to you (except as provided in § 301-11.17 [see infra
     note 16 for a discussion of this provision]), with or
     without cost, by deducting the appropriate amount shown
     in the chart in this section for CONUS travel,
                                                    (continued...)
                                 - 35 -

Regulations for the years at issue, if the federal government

provides an employee with all three meals per day, the

reimbursable amount of the federal M&IE rate is reduced to only

$3 per day.     The Federal Travel Regulations for the tax years at

issue do not contain an exception to the rule requiring daily

rate reduction for Government-provided meals when the employee

cannot or will not eat the food for health reasons, but they do

now.    See F.T.R. Amendment 2009-03, 74 Fed. Reg. 16328 (Apr. 10,

2009).      This change suggests that a health exception to the rate

reduction rule was not available during the tax years at issue.

Section 6.01 of the applicable revenue procedures provides that

“the federal M&IE rate described in section 3.02 * * * for the

locality of travel will be applied in the same manner as applied




       16
        (...continued)
       reference Appendix B of this chapter for     OCONUS travel,
       or any method determined by your agency.     * * * The
       total amount of deductions made will not     cause you to
       receive less than the amount allowed for     incidental
       expenses.

            Total M&IE    $31   $35   $39     $43   $47    $51

            Breakfast      6      7       8     9     9     10
            Lunch          6      7       8     9     11    12
            Dinner        16     18    20      22     24    26
            Incidentals    3      3       3     3      3     3
                                - 36 -

under the Federal Travel Regulations, 41 C.F.R. Part 301-11”.

Thus, an employee’s federal M&IE rate must be reduced if the

employee receives free meals.    See Johnson v. Commissioner, 115

T.C. at 226 n.8 (“the fact that * * * [the Federal Travel

Regulations provide] explicitly that the M&IE rate must be

reduced when the Government provides an employee with meals at no

charge counters petitioner’s argument that we should not reduce

the M&IE rates to take into account his employer-provided

meals.”); Balla v. Commissioner, T.C. Memo. 2008-18.   Section

6.01 of the applicable revenue procedures does not specifically

mention the special daily rates for transportation industry

workers in section 4.04.   One could therefore argue that the

special daily rates should not be adjusted for employer-provided

meals (as the federal M&IE rates for nontransportation workers

must be adjusted).   But the applicable revenue procedures state

elsewhere that the special daily rates are a type of federal M&IE

rate.   Sec. 4.04(2) of the 2003 revenue procedure; sec. 4.04(3)

of the 2004 and early and late 2005 revenue procedures (“A * * *

[transportation industry worker] may treat $41 [$52 for the late

2005 revenue procedure] as the federal M&IE rate for any CONUS

locality of travel, and $46 [$58 for the late 2005 revenue

procedure] as the federal M&IE rate for any OCONUS locality of

travel.”).   Thus we hold that the reduction required in the

Federal Travel Regulations for free meals also results in a
                                - 37 -

reduction in the special daily rates for transportation workers.

As Foss provided Madsen with three meals per day, the reduction

leaves her an allowable deduction of $3 per day allocable to

incidental expenses.    See Johnson v. Commissioner, supra at

227-228; 41 C.F.R. sec. 301-11.18 (2004) and 41 C.F.R. sec.

301-11.18 (2005).17    She spent 147 days in harbor and at sea

during 2004 and 200 days in harbor and at sea in 2005, resulting

in a deduction of $441 in 2004 and $600 in 2005.18

      Madsen argues that, as an alternative to use of the special

daily rates for transportation industry workers, her deduction


     17
      Madsen also argues that she is entitled to the unreduced
meal and incidental expense deduction in harbor and at sea
because she believes she received meals from a common carrier.
She bases her argument on the Federal Travel Regulations, which
state that a meal provided by a common carrier or a complimentary
meal provided by a hotel or motel does not result in a reduction
of a federal employee’s allowable daily rate used for claiming
reimbursement of meal expenses. 41 C.F.R. sec. 301-11.17 (2004);
41 C.F.R. sec. 301-11.17 (2005). But Foss is not a common
carrier because a common carrier is open to the public and must
transport freight or passengers without refusal. See Balla v.
Commissioner, T.C. Memo. 2008-18 (holding that “Petitioner’s
tugboat is not a common carrier”); Black’s Law Dictionary 242
(9th ed. 2009). Therefore, the regulation is inapplicable to her
case.
     18
      Madsen asserted in her worksheets that she is entitled to
use the unreduced special daily rates for transportation industry
workers for her meals and incidental expenses for her last day of
her harbor and sea voyages. Madsen did not address at what time
during those days the boats typically docked and her employer
ceased to provide her with meals. As Madsen had the burden of
proof, we find that she was provided with three free meals during
these days. We therefore permit a deduction for these last days
of travel at the same rate of $3 per day applicable to other days
in harbor or at sea. This deduction is reflected in the
calculations above.
                              - 38 -

for meals should be equal to the actual cost of the groceries she

purchased for her meals at harbor and at sea ($955 in 2004 and

$1,727 in 2005).   She may not do so because she claimed the

special daily rates for transportation industry workers on her

return for all travel days during the year.   She must

consistently apply one method for all of her work days throughout

a calendar year.   She cannot choose one method for her days at

harbor and at sea and another method for her other work days

(i.e., her days spent training, being vaccinated, performing

repair and maintenance, or resting on days before work-related

voyages).   Sec. 4.04(2) of the 2003 revenue procedure; sec.

4.04(3) of the 2004 and early and late 2005 revenue procedures.

6.   Proration of Deduction for Meal and Incidental Expenses for
     First and Last Days of Travel Away From Home

     For all six categories of work days, a subset of those days

includes partial travel days; i.e., days that Madsen was partly

at home and partly traveling on business.   The IRS argues that

Madsen may claim only 75 percent of the meals and incidental

expenses that she is otherwise entitled to claim on those days.19


     19
      Madsen’s first and last days away from home in 2004 were:
Jan. 8 (last day at sea), Jan. 13 (single day of repairs and
maintenance (r&m)), Feb. 13 (first day of r&m), Feb. 17 (last day
of r&m), Mar. 2 (day before voyage), Apr. 9 (last day of r&m),
Apr. 22 (day before harbor voyage), Apr. 29 (last day at harbor),
May 11 (day before sea voyage), June 6 (last day at sea), June 6
(day before r&m), June 17 (last day of r&m), June 20 (day before
sea voyage), July 4 (last day at sea), July 18 (day before sea
voyage), Aug. 10 (last day at sea), Aug. 30 (first day of r&m),
                                                   (continued...)
                              - 39 -

We agree.   For any partial day of travel, section 6.04 of the

applicable revenue procedures states that under section 4.04

(applicable to those employing the special daily rates for

transportation industry workers), one of the following two

methods must be used to prorate the federal M&IE rate:

          (1) The rate may be prorated using the method
     prescribed by the Federal Travel Regulations.
     Currently the Federal Travel Regulations allow
     three-fourths of the applicable Federal M&IE rate for
     each partial day during which the employee or
     self-employed individual is traveling away from home in
     connection with the performance of services as an
     employee or self-employed individual. * * *; or

          (2) The rate may be prorated using any method that
     is consistently applied and in accordance with
     reasonable business practice. For example, if an
     employee travels away from home from 9 a.m. one day to
     5 p.m. the next day, a method of proration that results
     in an amount equal to two times the Federal M&IE rate
     will be treated as being in accordance with reasonable
     business practice (even though only one and a half
     times the Federal M&IE rate would be allowed under the
     Federal Travel Regulations).



     19
      (...continued)
Aug. 31 (last day of r&m), Sept. 1 (day before sea voyage), Oct.
14 (last day at sea), Nov. 10 (day before harbor voyage), Nov. 17
(last day of training), Nov. 20 (first day of r&m), Dec. 3 (last
day of r&m), Dec. 15 (first day of r&m), Dec. 17 (last day
of r&m), Dec. 20 (first day of r&m), Dec. 22 (last day of r&m),
Dec. 27 (first day of r&m), and Dec. 30 (last day of r&m). Her
first and last days away from home in 2005 were: Jan. 3 (single
day of r&m), Jan. 5 (day before harbor voyage), Jan. 30 (last day
at sea), Feb. 11 (day before harbor voyage), Feb. 19 (last day at
harbor), Mar. 2 (day before r&m), May 3 (last day at sea), May 4
(day before r&m), May 13 (last day at r&m), May 25 (day before
r&m), July 11 (last day at sea), July 15 (vaccination), Aug. 23
(single day of r&m before days at sea), Sept. 9 (last day at
sea), Sept. 21 (day before sea voyage), Nov. 3 (last day at sea),
and Nov. 15 (day before harbor voyage).
                              - 40 -

The taxpayer must use the first proration option above (75

percent) for partial days in which he or she may use only the

incidental-expenses-only rate.   Id.

     Madsen must prorate her days that were first and last days

of travel away from home because those days were partial work

days that required travel to and from her home in Bellingham,

Washington.   She is required to employ option 1 above for her

first and last days at harbor and at sea because she must use the

incidental-expenses-only rate on those days.   Regarding her other

first and last days of travel away from home, she has not

demonstrated to the Court that she “consistently applied” a

method “in accordance with reasonable business practice” (option

2 above) that would entitle her to a proration method other than

the general rule of deducting 75 percent of the allowable rate on

partial days of travel (option 1 above).   Cf. Bissonnette v.

Commissioner, 127 T.C. at 136 (taxpayer “consistently applied

* * * [100 percent of the] Federal M&IE rate to all

off-peak-season voyages requiring him to be away from home for 15

to 17 hours a day.”).   Thus, we hold that Madsen may deduct only

75 percent of the special daily rates for transportation workers

on all of her first and last days of travel away from home in

2004 and 2005.
                               - 41 -

7.   Whether the Increased Allowable Deduction for Meals and
     Incidental Expenses for Individuals Subject to Federal
     Hours-of-Service Limitations Applies to Madsen

     Section 274(n)(1)(A) provides that the amount allowable as a

deduction for “any expense for food or beverages” is reduced to

50 percent of the amount of the expense that would otherwise be

allowable under section 162.   The applicable revenue procedures

provide rules for applying the section 274(n)(1) 50-percent

limitation to the daily rate allowances.   A taxpayer who uses the

meals and incidental expenses rates under section 4.03 of the

applicable revenue procedures (or the special transportation

industry worker rates under section 4.04) is required to treat

that amount as an expense for food and beverages.   Sec. 6.05(1)

of the applicable revenue procedures.   The meals and incidental

expenses rate is thus subject to the reduction contained in

section 274(n)(1).   But the incidental-expenses-only rate of $3

per day is not.   Sec. 6.05(4) of the applicable revenue

procedures.

     Madsen is entitled to claim the special meals and incidental

expenses rates for transportation industry workers for her days

spent training, being vaccinated, performing repair and

maintenance, and resting in port before departure on work-related

voyages.   Therefore, her meals and incidental expenses incurred

on those days are subject to a reduction under section 274(n)(1).

But Madsen asserts that the percentage of the deduction allowed
                                   - 42 -

should be 70 percent, not 50 percent, because she was subject to

the hours-of-service limitations of the DOT.       Section 274(n)(3)

provides:

          (3) Special rule for individuals subject to
     federal hours of service.--

                 (A) In general.--In the case of any
            expenses for food or beverages consumed while
            away from home (within the meaning of section
            162(a)(2)) by an individual during, or
            incident to, the period of duty subject to
            the hours of service limitations of the
            Department of Transportation, paragraph (1)
            shall be applied by substituting “the
            applicable percentage” for “50 percent”.

                 (B) Applicable percentage.--For purposes
            of this paragraph, the term “applicable
            percentage” means the percentage determined
            under the following table:

            For taxable years beginning         The applicable
            in calendar year--                  percentage is--

                 1998   or   1999.....................    55
                 2000   or   2001.....................    60
                 2002   or   2003.....................    65
                 2004   or   2005.....................    70
                 2006   or   2007.....................    75
                 2008   or   thereafter...............    80

Thus if Madsen was subject to the DOT hours-of-service

limitations during 2004 and 2005, the deduction of her meals and

incidental expenses while training, being vaccinated, performing

repairs and maintenance, or resting before work-related voyages

would be increased from 50 percent to 70 percent.        (As we said

earlier, her incidental expense deduction of $3 per day for her

days in harbor or at sea would not be subject to any reduction.)
                              - 43 -

     The IRS argues that Madsen is not permitted to claim 70

percent of her meals and incidental expenses while she trained,

was vaccinated, or performed repairs and maintenance because, it

claims, the laws and regulations that impose hours-of-service

limitations govern only her days of work at sea.   We disagree.

Federal law and Coast Guard regulations permit a ship’s officer

to perform a deck or engineering watch on a boat immediately

after leaving port only if the officer has been off duty for at

least 6 hours within the 12 hours before the time of departure.

46 U.S.C. sec. 8104(a) (2006); 46 C.F.R. sec. 15.705(a) (2004);

46 C.F.R. sec. 15.705(a) (2005).   The law also forbids a licensed

individual working on a towing vessel that is at least 26 feet in

length from working for more than 12 hours in a

24-consecutive-hour period, except in an emergency.   46 U.S.C.

secs. 8104(h), 8904 (2006); see also 46 C.F.R. sec. 15.710

(2004); 46 C.F.R. sec. 15.710 (2005).   A licensed individual in

the deck or engine department of a towing vessel may not work

more than 8 hours in one day, more than 15 hours in any 24-hour

period, or more than 36 hours in any 72-hour period, except in an

emergency.   46 U.S.C. 8104(c) (2006); see also 46 C.F.R. 15.710

(2004); 46 C.F.R. 15.710 (2005).   These limitations constitute

DOT hours-of-service limitations,20 and Madsen was subject to


     20
      Madsen was a licensed merchant mariner and was certified
to perform navigational and engineering watches by the U.S.
                                                   (continued...)
                             - 44 -

these laws and regulations during the years at issue because she

was both a licensed merchant mariner and the chief engineering

officer on Foss’s tugboats, and she performed engineering watches

on board those vessels during those years.   The record is unclear

regarding whether she was directly subject to the

hours-of-service limitation “during” (within the meaning of

section 274(n)(3)(A)) each of her days of work spent training,

being vaccinated, and performing repair and maintenance.   But the

work (including her days of rest before sailing) was certainly

“incident to * * * the period of duty subject to the hours of

service limitations of the Department of Transportation”



     20
      (...continued)
Coast Guard during the years at issue. Although the U.S. Coast
Guard was transferred to the Department of Homeland Security in
2003 pursuant to the Homeland Security Act of 2002, Pub. L. 107-
296, sec. 888(b), 116 Stat. 2249, the Coast Guard was part of the
Department of Transportation when sec. 274(n)(3) was enacted in
1997 pursuant to the Taxpayer Relief Act of 1997, Pub. L. 105-34,
sec. 969(a), 111 Stat. 896. The Senate Finance Committee and
conference reports stated at the time of enactment of the
Taxpayer Relief Act of 1997 that “Individuals subject to the
hours of service limitations of the Department of Transportation
include * * * certain merchant mariners pursuant to Coast Guard
regulations.” S. Rept. 105-33, at 106 (1997), 1997-4 (Vol. 2)
C.B. 1067, 1186; H. Conf. Rept. 105-220, at 481 (1997), 1997-4
(Vol. 2) C.B. 1457, 1951. The IRS has not argued that the
transfer of the Coast Guard to the Department of Homeland
Security has legal significance in determining whether any
merchant mariner is subject to the DOT hours-of-service
limitations after the 2003 transfer occurred. Thus, we hold that
for the purposes of this case, Madsen, who is a merchant mariner
subject to Coast Guard regulations limiting merchant mariners’
hours of service, may qualify for the increased allowable
percentage on the deduction of food and beverages under sec.
274(n)(3).
                              - 45 -

(emphasis added) within the meaning of section 274(n)(3)(A)

because most of the work occurred immediately before or after

days when she was undoubtedly subject to hours-of-service

limitations; that is, her days in harbor or at sea.   We therefore

hold that the increased allowable percentage for her meals and

incidental expenses deductions applies to her days spent

training, being vaccinated, performing repair and maintenance,

and resting in port before work-related voyages.   The rate is 70

percent during the tax years at issue, 2004 and 2005.   Sec.

274(n)(3)(B).

8.   Other Business-Expense Deductions

     A.   Deduction for “Incidentals”

     Madsen claimed an unreimbursed employee business expense

deduction for “incidentals” of $5,748 on her 2004 return and

$5,304 on her 2005 return.   Madsen did not clarify at trial what

the deductions were for.   Madsen has the burden of proving that

she incurred each expense listed on her return and that each was

an ordinary and necessary business expense.   Sec. 1.162-17(d)(2),

Income Tax Regs.   Although she submitted to the Court two

itemized lists of expenses for which she asserted that she was

entitled to deductions, it is unclear whether these lists contain

the same expenses labeled “incidental” expenses on her returns.

We will consider the deductibility of all the worksheet expenses

anyway, but we disallow the deductions labeled “incidental”
                              - 46 -

expenses on her returns to the extent the term does not include

the worksheet expenses discussed below.

     B.   Other Worksheet Expenses

     The IRS concedes that all of the expenses listed on the two

worksheets are deductible except:    (1) grocery expenses of $955

purportedly incurred in 2004 and $1,727 purportedly incurred in

2005, (2) laundry supply expenses of $269 purportedly incurred in

2004, (3) postage expenses of $59 purportedly incurred in 2004,

(4) safety supplies of $284 purportedly incurred in 2004, (5)

transportation expenses of $1,526 purportedly incurred in 2004,

and (6) work clothes expenses of $797 purportedly incurred in

2004 and $1,442 purportedly incurred in 2005.   We have already

explained why the grocery expense deductions are not allowable.

The 2004 laundry supply, postage, safety-supply and

transportation expense deductions are not allowable because

Madsen did not present any evidence proving that she is entitled

to those deductions.   She did provide evidence regarding her work

clothes expenses, and thus we shall discuss the expenses.    First,

we must decide whether Madsen has satisfied the legal standard

for deducting her work clothes expenses under section 162.    Then

we must decide whether she has met her burden of substantiation

for the work clothes expense deduction.

     For their costs to be deductible as ordinary and necessary

business expenses under section 162, work clothes must be (1)
                                - 47 -

required or essential in the taxpayer’s employment, (2) not

suitable for general or personal wear, and (3) not actually worn

for general or personal wear.    Hynes v. Commissioner, 74 T.C.

1266, 1290 (1980); Yeomans v. Commissioner, 30 T.C. 757, 767

(1958).   Although Foss did not require Madsen to wear any

specific clothing, her cold weather and rain gear, cargo pants,

and other work clothes were essential for her employment.     Thus,

the first requirement for deducting work clothes expenses under

section 162 is satisfied.   We now address the second requirement,

whether Madsen’s clothes were suitable for general or personal

wear.   Her work clothes were not suitable for general wear

because they became torn quickly within the course of her

employment.   Meier v. Commissioner, 2 T.C. 458 (1943) (nurse

could deduct the cost of her uniform because once she wore the

uniform at her hospital, it was unsanitary for her to wear the

uniform outside the hospital).    Madsen testified credibly that

she did not actually wear her work clothes for general or

personal wear.   Thus, the third requirement is satisfied.    As all

three factors of the test have been satisfied, Madsen’s work

clothes costs qualify as ordinary and necessary business

expenses--but she must also prove that she incurred the expenses.

     Madsen testified that she bought work clothes, but when the

IRS pressed her to identify the items purchased during the tax

years at issue, she mentioned only the rain gear and the gloves.
                              - 48 -

She also submitted to this Court a detailed expense worksheet

each line of which identified the date, location, vendor, and

amount of each purchase of work clothes.   She did not identify

the specific type of work clothes purchased next to each line

item.   Instead she labeled each purchase “work clothes.”

     A taxpayer must maintain records relating to his or her

expenses and must prove his or her entitlement to all claimed

deductions.   See sec. 6001; Rule 142(a); Hradesky v.

Commissioner, 65 T.C. 87, 89-90 (1975), affd. per curiam 540 F.2d

821 (5th Cir. 1976); sec. 1.6001-1(a), Income Tax Regs.     The

relevant regulation explains that one method of substantiating an

ordinary and necessary business expense is through “preparation

of a daily diary or record of expenditures, maintained in

sufficient detail to enable * * * [the employee] to readily

identify the amount and nature of any expenditure, and the

preservation of supporting documents, especially in connection

with large or exceptional expenditures.”   Sec. 1.162-17(d)(2),

Income Tax Regs.   The regulations also provide that “Where

records are incomplete or documentary proof is unavailable, it

may be possible to establish the amount of the expenditures by

approximations based upon reliable secondary sources of

information and collateral evidence.”   Sec. 1.162-17(d)(3),

Income Tax Regs.   This provision reflects the rule in Cohan v.

Commissioner, 39 F.2d 540, 544 (2d Cir. 1930), which authorizes
                               - 49 -

the Court to make reasonable approximations of some undocumented

(or not fully documented) business expenses.     See Egner v.

Commissioner, T.C. Memo. 1984-473.      The regulations further state

that in making such an approximation,

     due consideration will be given to the reasonableness
     of the stated expenditures for the claimed purposes in
     relation to the taxpayer’s circumstances (such as his
     income and the nature of his occupation), to the
     reliability and accuracy of records in connection with
     other items more readily lending themselves to detailed
     record-keeping, and to all of the facts and
     circumstances in the particular case.

Sec. 1.162-17(d)(3), Income Tax Regs.

     Madsen provided the Court only with worksheets that listed

the amounts of work clothes expenses; she did not include any

receipts.   Her worksheets fail to identify the particular type of

each item of work clothing she purchased, and at trial she was

able to identify only two items of work clothing as purchased

during the tax years at issue.   Her testimony thus did not

clarify what the items of work clothing listed in the log

actually were.   But we find her worksheets contain reasonable

figures for work clothes expenses and also find her records for

the other expense items “more readily lending themselves to

detailed record-keeping” to be reliable and accurate within the

meaning of the regulation.21   Therefore, applying the Cohan rule



     21
      The IRS does not argue that the log was required to be
contemporaneous and that it was not so maintained. Thus, we do
not address the issue.
                                - 50 -

as reflected in the regulation, we hold that she is entitled to a

deduction for work clothes under section 162 in the amounts

reflected on her worksheets, $797 for 2004 and $1,442 for 2005.

9.   Section 6662(a) Penalties

     Section 6662 imposes an accuracy-related penalty equal to 20

percent of an underpayment of Federal income tax attributable to

a taxpayer’s substantial understatement of income tax or to a

taxpayer’s negligence or disregard of rules and regulations.

Sec. 6662(a) and (b)(1) and (2).    Section 6664(a) defines an

“underpayment” for relevant purposes as an excess of the correct

tax over the sum of (a) the amount shown as tax on the return and

(b) amounts not shown as tax on the return but previously

assessed or collected.   Section 6662(d)(1)(A) defines a

“substantial understatement of income tax” as the amount of the

understatement of tax exceeding the greater of 10 percent of the

tax required to be shown on the return or $5,000.    An

“understatement” of tax is the excess of the tax required to be

shown on the return over the amount of tax actually shown on the

return.22   Sec. 6662(d)(A).   Negligence “includes any failure to



     22
      Sec. 6662(d)(2)(B) provides that a portion of an
understatement attributable to a position which, although
ultimately determined to be erroneous, is or was supported by
“substantial authority”, or has a “reasonable basis” and was
adequately disclosed to the IRS, is not taken into account in
determining the existence of a “substantial understatement”.
Neither party argues that this rule is relevant, and we hold that
it does not apply under the facts of this case.
                              - 51 -

make a reasonable attempt to comply with [the tax laws]”.     Sec.

6662(c).   Negligence has also been defined as a failure to do

what a reasonable and prudent person would do under the

circumstances.   See Leuhsler v. Commissioner, 963 F.2d 907, 910

(6th Cir. 1992), affg. T.C. Memo. 1991-179; Antonides v.

Commissioner, 91 T.C. 686, 699 (1988), affd. 893 F.2d 656 (4th

Cir. 1990).   Negligence is strongly indicated by a taxpayer’s

failure “to make a reasonable attempt to ascertain the

correctness of a deduction, credit or exclusion on a return which

would seem to a reasonable and prudent person to be ‘too good to

be true’ under the circumstances”.     Sec. 1.6662-3(b)(1)(ii),

Income Tax Regs.

     The accuracy-related penalty under section 6662(a) is not

imposed with respect to any portion of the underpayment as to

which the taxpayer acted with reasonable cause and in good faith.

Sec. 6664(c)(1).   The determination of whether a taxpayer acted

with reasonable cause and in good faith is made on a case-by-case

basis, taking into account all of the pertinent facts and

circumstances.   Sec. 1.6664-4(b)(1), Income Tax Regs.    The most

important factor is the extent of the taxpayer’s effort to assess

his proper tax liability.   Id.

     Under section 7491(c), the IRS bears the burden of

production with regard to the section 6662(a) penalty and must

come forward with sufficient evidence that it is appropriate to
                                - 52 -

impose the penalty.     Higbee v. Commissioner, 116 T.C. 438, 446

(2001).   However, once the IRS has met the burden of production,

the burden of proof remains with the taxpayer, including the

burden of proving that the penalty is inappropriate because of

reasonable cause or good faith.    Rule 142(a).    Id. at 446-447.

     The IRS made substantial concessions before trial, and the

Court has allowed Madsen a deduction for work clothes.      The Court

finds that in the event the computations under Rule 155 establish

that there is an understatement of income tax for 2005 as a

result of the Court’s holding and the IRS’ concessions that is

greater than 10 percent of the tax required to be shown in

Madsen’s return or $5,000, see sec. 6662(d)(1)(A), then Madsen

has substantially understated her income tax for purposes of

section 6662(d)(1)(A) for that year.

     For purposes of determining whether Madsen had reasonable

cause with respect to any portion of the underpayment in this

case, the underpayment consists of two portions of disallowed

deductions which we must analyze separately:      (1) the meal

expense deduction attributable to Madsen’s days spent in harbor

and at sea, and (2) the amount Madsen deducted for what she

called “incidentals”.    Under the circumstances of this case, we

believe that the complexity of the applicable revenue procedures

and Federal Travel Regulations, and the lack of explicit guidance

in those regulations regarding an employee’s right to claim a
                              - 53 -

daily rate expense when her employer provided unhealthy meals,

led Madsen to an honest mistake of law for which it is

inappropriate to penalize her.   See, e.g., Van Wyk v.

Commissioner, 113 T.C. 440, 449 (1999); Metra Chem Corp. v.

Commissioner, 88 T.C. 654, 661 (1987); Yelencsics v.

Commissioner, 74 T.C. 1513, 1533 (1980); Belz Inv. Co. v.

Commissioner, 72 T.C. 1209, 1233-1234 (1979), affd. 661 F.2d 76

(6th Cir. 1981).   Accordingly, we find Madsen had reasonable

cause with respect to the portion of the underpayment

attributable to the disallowed meals and incidental expense rate

deduction for her days in harbor and at sea.   With respect to

this portion, we also believe Madsen was not negligent and

exercised reasonable care and prudence in attempting to determine

her proper tax liability.   But Madsen was negligent in reporting

the amount described as “incidentals” as a deduction on her

return.   Also, she had no reasonable cause for claiming such a

deduction.

     In reaching our holdings here, we have considered all

arguments made, and, to the extent not mentioned above, we

conclude they are moot, irrelevant, or without merit.

     To reflect the foregoing and respondent’s concessions,


                                         Decision will be entered

                                    under Rule 155.
