                          T.C. Summary Opinion 2012-49



                         UNITED STATES TAX COURT



                  KATHLEEN MURRAY, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 6484-07S.                         Filed May 23, 2012.



      Jon Harvey Lieberg, for petitioner.

      Monica D. Gingras, for respondent.



                              SUMMARY OPINION


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

provisions of section 7463.1 Pursuant to section 7463(b), the decision to be entered


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

is not reviewable by any other court, and this opinion shall not be treated as

precedent for any other case.

      In a notice of deficiency dated December 14, 2006 (notice), respondent

determined the following deficiencies in, and accuracy-related penalties with respect

to, petitioner’s Federal income taxes:

                                                          Penalty
                   Year           Deficiency            Sec. 6662(a)

                   2003             $8,547                 $1,709
                   2004              6,110                  1,222
                   2005              4,510                    902

      After concessions, the issues for decision are: (1) whether for each year in

issue petitioner is entitled to various trade or business expense deductions; if so, (2)

whether for any of those years any such deductions are properly reportable on a

Schedule C, Profit or Loss From Business, as petitioner claims, or whether such

deductions, if otherwise allowable, must be claimed as unreimbursed employee

business expense deductions on a Schedule A, Itemized Deductions; (3) whether for

2004 and 2005 petitioner is entitled to an itemized deduction for State and local

income taxes not claimed on her Federal income tax return for either of those years;

(4) whether for 2005 petitioner is entitled to a medical expense deduction not


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

claimed on her 2005 Federal income tax return; and (5) whether petitioner is liable

for a section 6662(a) accuracy-related penalty for any year in issue.

                                      Background

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

petition was filed, petitioner resided in California.

       Starting at a time not disclosed in the record and ending at a time before the

start of 1999, petitioner earned a living as a self-employed horse trainer. In

connection with this occupation she owned several vehicles and at least one horse

trailer.

       During the years in issue petitioner owned a variety of vehicles, including a

1997 Ford E-250 van (1997 Ford); a 2004 Dodge 3500 truck purchased in late 2003

for $47,793.51 (2004 Dodge); and two horse trailers, one used when she was

training horses, and a Sundowner Stampede 3HGN trailer purchased in mid-2004

(Stampede horse trailer). She also owned several horses during the years in issue;

however, she no longer offered her services as a horse trainer. Petitioner made

several permanent modifications to the cargo area of the 1997 Ford, including the

installation of shelving and a generator, leaving only the front bench for seating.

       During 1999 petitioner met Ernest Helm (Mr. Helm), a cable splicer

employed by Prime West Communications, Inc. (Prime West). Cable splicing is a
                                        -4-

process by which wires are physically added to an existing telephone line system in

order to accommodate new customers or new lines of service. Petitioner’s

association with Mr. Helm provided her with the skills and technical training that

resulted in her own employment opportunities with Prime West as a cable splicer,

and during each year in issue she provided services to that company as a cable

splicer/employee. As it turned out, she and Mr. Helm worked as a team, although

not necessarily at the same location, on many jobs for Prime West during the years

in issue.

       Prime West provides cable splicing services according to the specifications

and needs of various telephone companies. Depending upon the location of the

existing telephone line, cable splicing takes place underground, at ground level, and

above ground on utility poles. Which tools a cable splicer needs to bring to a

jobsite depends upon the location of the existing telephone line, the weather, and the

telephone company. The telephone companies do not necessarily use the same type

of equipment and/or materials in their respective telephone lines. Performing similar

cable splicing services for different telephone companies often requires the use of

different tools, depending upon the specific telephone line involved.
                                        -5-

      For any given cable splice procedure, and pursuant to the terms of a contract

entered into between them, the telephone company provided Prime West with

blueprints that indicated where and how the required cable splicing was to be

accomplished. Actual conditions at the jobsite often required changes to terms of

the contract between Prime West and the telephone company, which changes had to

be documented by the cable splicer and approved by the telephone company.

Petitioner routinely took photographs to document conditions that required any such

changes. After the completion of a cable splice procedure, and before the blueprints

were returned to Prime West, the cable splicer updated the blueprints to show the

changes made. Prime West did not provide petitioner with an office to update

blueprints or perform other necessary paperwork but compensated her for the time

she spent in doing so.

      Petitioner received her assignments and picked up necessary blueprints and

supplies at Prime West’s maintenance yard (maintenance yard). At the completion

of each assignment, petitioner was required to submit a timesheet showing the time

expended and work completed. In addition to date and time spent on any

assignment, the timesheets show the job number and the geographical area, but not a

specific location, where the work took place. When petitioner finished one job,
                                         -6-

which could last anywhere from a few hours to more than a month, she would return

to the maintenance yard, submit her timesheet for the assignment just completed,

and pick up her next assignment. During the years in issue all of petitioner’s

assignments were within the metropolitan area where she lived. Debris and trash

left over from an assignment could be disposed of in a dumpster at the maintenance

yard. For convenience and at her own expense, petitioner often used a dumpster

located on property that she owned.

      From time to time Prime West and petitioner entered into written truck and

tool lease agreements (equipment lease). Each equipment lease provides that Prime

West would reimburse petitioner at a rate of $10 per hour for a vehicle identified in

the lease and her tools used in connection with her employment as a Prime West

cable splicer. An equipment lease entered into in 2003 covers the use of petitioner’s

1997 Ford; an equipment lease entered into in 2004 covers her 2004 Dodge.

Nothing in the record suggests what the fair rental value of petitioner’s vehicles and

tools was during any of the years in issue. Prime West did not require petitioner to

substantiate the actual expenses incurred for the use of her vehicles or tools, and she

was not required to return to Prime West payments made pursuant to the equipment

lease that exceeded her costs.
                                         -7-

      Petitioner used a variety of vehicles in connection with her employment as a

cable splicer with Prime West during the years in issue. In addition to the trucks

and horse trailers listed above, petitioner also owned a 1990 Ford truck (1990 Ford),

which she used from time to time to tow the Stampede trailer. Because some of her

assignments required that she transport tools and supplies that would not fit in one

of her trucks, she loaded the Stampede trailer with the overflow and towed the

trailer to the jobsite behind the 1990 Ford or the 2004 Dodge. Petitioner equipped

her 1997 Ford and her 2004 Dodge differently to accommodate the specific needs of

different types of cable splicing jobs. In this way she did not repeatedly have to

load and unload her trucks depending upon the requirements of a specific

assignment.

      Petitioner did not keep a diary or journal showing which vehicle she used or

the distance traveled on any particular day for any particular assignment. She did,

however, retain numerous receipts for gasoline and diesel fuel purchases. She also

retained numerous receipts for repairs and other maintenance for the various

vehicles that she owned. Depending upon the circumstances, sometimes petitioner

left her residence and went first to the maintenance yard, sometimes she went first

to a specific jobsite, sometimes she went back and forth between a jobsite and the

maintenance yard, and sometimes she traveled from one jobsite to another on the
                                             -8-

same day. Sometimes petitioner went to the maintenance yard at the end of the

workday before she returned home, and sometimes she did not.

      Petitioner purchased various tools, supplies, clothing, and boots that she used

or wore in connection with her employment as a cable splicer/employee of Prime

West. She also purchased a desk, an office chair, a lamp, and pens that she kept at

her house that she used to update blueprints, prepare her timesheets, etc. For a

portion of 2003 she stored some of her work tools and supplies in a garage on

property that she owned. She sold that property in 2003, however, and from then on

stored the items in a rented storage unit.

      Prime West compensated petitioner in two ways: (1) she was paid an hourly

wage reported on a Form W-2, Wage and Tax Statement, for each year; and (2)

she was paid amounts attributable to the equipment leases. The amounts paid

pursuant to an equipment lease were reported on a Form 1099-MISC,

Miscellaneous Income, for each year. For less than a month during 2005 petitioner

also worked as a cable splicer for West Coast Communications, Inc. (West Coast).

Other than the amounts shown on the Form W-2 and the Form 1099-MISC. West

Coast issued to petitioner for 2005, the record contains nothing that describes her

employment with that company.
                                         -9-

      Health reasons prevented petitioner from working for about one month during

2004. During that period repair/maintenance bills for the 2004 Dodge show that the

vehicle was driven approximately 1,000 miles, and receipts from various gas

stations show that petitioner spent $183.51 for diesel fuel.

      Petitioner was covered by health insurance during 2005, but her plan did not

include coverage for dental expenses. During that year she incurred and paid

expenses of at least $8,958 to various dentists for various services.

      Petitioner’s Federal income tax return for each year in issue was prepared by

a certified public accountant (C.P.A.). As relevant here, each return shows the

amounts reported on a Form W-2 as wages. The Forms W-2 issued to petitioner for

2004 and 2005 show State income tax withholdings of $406.31 and $1,154.20,

respectively. The taxable income and income tax liability reported on petitioner’s

2003 return are computed after taking into account itemized deductions claimed on

a Schedule A. The taxable income and income tax liabilities reported on

petitioner’s 2004 return and 2005 return are computed after taking into account the

standard deduction. See sec. 63. For each year the amount reported on a Form

1099-MISC. is shown as gross receipts on a Schedule C. The following deductions

are claimed on the Schedules C:
                                           - 10 -

      Deduction                    2003              2004               2005

Car and truck expenses           $10,019            $14,091             $8,330
Depreciation and section 179
 expense                           25,340            17,816              5,350
Legal and professional
 services                            -0-                260                250
Office expense                       -0-                303                290
Rent or lease of vehicles,
 machinery, and equipment            -0-              1,434                -0-
Supplies                            1,123             1,512                290
Utilities                             460               490                511
Other expenses 1                    4,316             3,588              4,869
      1
       These amounts include the cost of cell phone service, a dumpster, ice,
and equipment storage. For 2005 the amount also includes “other supplies”
not specifically identified.

      In the notice respondent: (1) recharacterized the amounts shown as “gross

receipts” on the Schedules C as “wages”; (2) disallowed all of the above-listed

deductions; and (3) imposed a section 6662(a) accuracy-related penalty for each

year in issue. According to the notice, the deductions were disallowed because

petitioner failed to establish that the underlying expenses were ordinary and

necessary trade or business expenses and/or because petitioner failed to substantiate

the amount paid or incurred for each expense. Other adjustments made in the notice

are computational and need not be addressed.
                                        - 11 -

                                      Discussion

      Respondent now agrees that petitioner is entitled to business expense

deductions for some or at least portions of some of the expenses listed above;

according to respondent, however, the deductions now allowed must be treated as

unreimbursed employee business expense deductions.2 We focus our attention first

on whether petitioner has properly substantiated the expenses that remain in dispute,

and to the extent that she has, whether the expense is ordinary and necessary within

the meaning of section 162. We then consider how allowable trade or business

expense deductions must be treated.

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

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

to any claimed deduction.3 Rule 142(a); INDOPCO, Inc. v. Commissioner, 503

U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).


      2
        As noted, petitioner did not elect to itemize deductions for 2004 and 2005.
Following the parties’ lead, we ignore the requirement that unreimbursed employee
business expenses, if otherwise deductible, must be deducted as a miscellaneous
itemized deduction pursuant to an election made on the taxpayer’s return. See sec.
63(e); see also Jahn v. Commissioner, T.C. Memo. 2008-141, aff’d, 392 Fed. Appx.
949 (3d Cir. 2010). Of course, itemized deductions allowed in this proceeding
would be in lieu of, rather than in addition to, the standard deductions claimed on
petitioner’s 2004 and 2005 Federal income tax returns.
      3
      Petitioner does not claim that the provisions of sec. 7491(a) are applicable,
and we proceed as though they are not.
                                        - 12 -

This burden requires the taxpayer to substantiate deductions claimed by keeping and

producing adequate records that enable the Commissioner to determine the

taxpayer’s correct tax liability. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87,

89-90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); Meneguzzo v.

Commissioner, 43 T.C. 824, 831-832 (1965). A taxpayer claiming a deduction on a

Federal income tax return must demonstrate that the deduction is allowable pursuant

to some statutory provision and must further substantiate that the expense to which

the deduction relates has been paid or incurred. See sec. 6001; Hradesky v.

Commissioner, 65 T.C. at 89-90; sec. 1.6001-1(a), Income Tax Regs.

      According to petitioner, the deductions disallowed in the notice are

allowable under section 162(a). That section generally allows a deduction for

ordinary and necessary expenses paid or incurred during the taxable year in

carrying on any trade or business. The term “trade or business” as used in section

162(a) includes the trade or business of being an employee. Primuth v.

Commissioner, 54 T.C. 374, 377-378 (1970); Christensen v. Commissioner, 17

T.C. 1456, 1457 (1952). The determination of whether an expenditure satisfies the

requirements for deductibility under section 162 is a question of fact. See
                                        - 13 -

Commissioner v. Heininger, 320 U.S. 467, 475 (1943). On the other hand, section

262(a) generally disallows a deduction for personal, living, or family expenses.

      As a general rule, if a taxpayer provides sufficient evidence that the taxpayer

has incurred an expense contemplated by section 162(a), but the taxpayer is unable

to adequately substantiate the amount of expense, then the Court may estimate the

amount of such expense and allow the section 162(a) deduction to that extent.

Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). However, in order

for the Court to estimate the amount of an expense, there must be some basis upon

which an estimate may be made. Vanicek v. Commissioner, 85 T.C. 731, 742-743

(1985). Otherwise, any allowance would amount to unguided largesse. Williams v.

United States, 245 F.2d 559, 560 (5th Cir. 1957).

      Against these fundamental principles of Federal income taxation, we turn our

attention to the deductions remaining in dispute.

I. Deductions Disallowed in the Notice

      A. Vehicle Expenses, Including Depreciation

      For each year in issue petitioner claimed a deduction for car and truck

expenses based on actual expenses associated with the use of her 1990 Ford, 1997

Ford, and 2004 Dodge. Routinely, petitioner drove one or the other of her vehicles

between her residence, the maintenance yard, and numerous jobsites. Although the
                                         - 14 -

record allows for a general determination of mileage driven for business purposes,

because petitioner did not keep a log or other contemporaneous documents we

cannot tell where she was, or drove to, or drove from, etc., on any given day. This

presents a problem because petitioner is entitled to a deduction for the costs of her

transportation expenses for driving between the jobsites, see Steinhort v.

Commissioner, 335 F.2d 496, 503-504 (5th Cir. 1964), aff’g and remanding T.C.

Memo. 1962-233; Heuer v. Commissioner, 32 T.C. 947, 953 (1959), aff’d per

curiam, 283 F.2d 865 (5th Cir. 1960), but some of her driving expenses were

incurred in commuting between her residence and her regular place of business, that

is, the maintenance yard. Normally, transportation expenses incurred between one’s

residence and one’s principal place of business are nondeductible personal

expenses. See sec. 262(a); Fausner v. Commissioner, 413 U.S. 838 (1973);

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

      Furthermore, deductions for vehicle expenses paid or incurred in connection

with a taxpayer’s trade or business are subject to the strict substantiation

requirements of section 274(d). Sec. 1.274-5T(a), Temporary Income Tax Regs.,

50 Fed. Reg. 46014 (Nov. 6, 1985). If otherwise deductible, then expenses subject

to section 274(d) must be substantiated either by adequate records or by sufficient

evidence corroborating the taxpayer’s own statement showing: (A) the amount of
                                          - 15 -

the expense; (B) the time and place the expense was incurred; (C) the business

purpose of the expense; and (D) in the case of an entertainment or gift expense, the

business relationship to the taxpayer of each expense incurred. For “listed

property” expenses, such as automobiles, in addition to the recordkeeping

requirements in section 274(d), the taxpayer must establish the amount of business

use and the amount of total use for such property. See sec. 1.274-5T(b)(6)(i)(B),

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

      The “listed property” requirements do not apply to the 1997 Ford because

that vehicle is a qualified nonpersonal use vehicle. See sec. 1.274-5(k)(1), (2), (7),

Income Tax Regs. Nothing in the record, however, suggests that the 1990 Ford or

the 2004 Dodge is exempt from the strict substantiation requirements of section 274

and its corresponding regulation.

      Petitioner testified that the 1997 Ford was used 100% for business purposes

and the 2004 Dodge was used 80% for business purposes. Petitioner’s failure to

maintain a mileage log, however, constrains us to reject her testimony with respect

to both vehicles. One or more of her vehicles was obviously used for what would

have to be considered commuting purposes, although we cannot tell exactly which

one on any given date or to what extent. To allow for the commuter use of her

vehicles, for each year in issue petitioner is entitled to a deduction for vehicle
                                        - 16 -

expenses that includes only 80% of the expenses attributable to the 1997 Ford. See

Cohan v. Commissioner, 39 F.2d at 543-544.

      Furthermore, petitioner’s recollection of the extent to which the 2004 Dodge

was used for business purposes is obviously flawed. The receipts for diesel fuel

purchased while petitioner was not working show that the vehicle was used for

personal purposes far more than 20% of the time. Under the circumstances,

petitioner’s failure to maintain a mileage log for the use of her 2004 Dodge operates

to deny her any deduction for the use of that vehicle. See sec. 274(d). We

recognize that a taxpayer may satisfy the strict substantiation requirements of

section 274(d) through testimony and other evidence that expenses have been

incurred, see sec. 1.274-5T(c)(3), Temporary Income Tax Regs., 50 Fed. Reg.

46020 (Nov. 6, 1985), but petitioner’s overestimate of the extent to which that

vehicle was used for business purposes requires that we attribute no weight to her

testimony with respect to the business use of that vehicle.

      Petitioner provided no estimate of the extent to which the 1990 Ford or the

Stampede horse trailer was used for business purposes. Consequently, she is

entitled to no deduction for the expenses incurred for using either.
                                        - 17 -

      B. Office Expenses

      Petitioner claimed office expense deductions of $303 and $290 for 2004 and

2005, respectively. The office expense deductions include the cost of a computer,

printer and ink cartridges, a DVD player, a digital camera, and a GPS device, all

of which are listed property under section 280F(d)(4) subject to the strict

substantiation requirements of section 274(d). Petitioner provided receipts

adequately substantiating the purchase price of each of the aforementioned items.

Petitioner explained how the digital camera was used in connection with her

employment with Prime West, and the use of the GPS device in connection with her

employment is obvious. However, she failed to establish that the costs of the

computer, the printer and the ink cartridges, and the DVD player were ordinary and

necessary business expenses. See sec. 162(a). Only the costs of the digital camera

and the GPS device may be deducted.

      C. Rent or Lease of Vehicles, Machinery, and Equipment

      Petitioner claimed a $1,434 deduction for the rent or lease of vehicles,

machinery, and equipment for 2004. Petitioner did not present any evidence

regarding this expense. Accordingly, petitioner is not entitled to a deduction for rent

or lease of vehicles, machinery, and equipment for 2004.
                                           - 18 -

         D. Supplies

         Petitioner claimed a deduction for supplies expenses for each year in issue.

Petitioner provided receipts adequately substantiating the supplies expenses for each

year in issue; however, she failed to show how any of the expenses were related to

her trade or business. On the contrary, many of the claimed expenses were for

personal items, such as food, jewelry, stamps, and shipping. See sec. 262(a).

Accordingly, petitioner is not entitled to a deduction for supplies for any year in

issue.

         E. Utilities

         Petitioner claimed a deduction for utilities expenses for each year in issue.

Petitioner testified that the utilities expenses relate to the cost of water, electricity,

and telephone bills for the property she owned in 2003 on which she stored her

business equipment. Petitioner did not explain why she deducted utilities expenses

for 2004 or 2005 with respect to property that was sold at some point during 2003.

Petitioner adequately substantiated the utilities expense for 2003, and the expense

appears to be ordinary and necessary. Accordingly, petitioner is entitled to a

deduction for utilities expenses for 2003 but is not entitled to a deduction for utilities

expenses for 2004 or 2005 because she failed to demonstrate that she incurred such

expenses.
                                          - 19 -

      F. Other Expenses

      Petitioner claimed a deduction for “other expenses” for each year in issue.

As relevant here, “other expenses” includes the cost of a dumpster, ice, and

equipment storage. For 2005 the expense includes additionally the cost of “other

supplies” that petitioner did not identify.

      She provided monthly bills adequately substantiating the dumpster expense.

At trial she explained that Prime West provided a dumpster at the maintenance yard

for the waste generated at the jobsites. According to petitioner, the dumpster at the

maintenance yard was often full, and she found that it was more convenient to use

the dumpster at her residence than to drive to the dumpster at the maintenance yard.

Under the circumstances, we find that the dumpster expenses were not ordinary and

necessary within the meaning of section 162(a). Petitioner is not entitled to a

deduction for this expense for any year in issue.

      For each year in issue more than $400 for the cost of ice is included in the

deduction claimed for other expenses. Petitioner did not provide any receipts, other

substantiating documentation, or testimony regarding this expense. Petitioner has

failed to establish that the cost of ice was an ordinary and necessary
                                          - 20 -

business expense relating to her employment with Prime West. Accordingly,

petitioner is not entitled to a deduction for ice for any year in issue.

      Petitioner claimed deductions of $395, $660, and $660 for equipment storage

for 2003, 2004, and 2005, respectively. The storage fees have been substantiated

and were incurred in connection with tools petitioner used as a Prime West

employee. Accordingly, petitioner is entitled to a deduction for equipment storage

for each year in issue.

      Petitioner claimed a $1,327 deduction for “other supplies” for 2005.

Petitioner did not present any evidence regarding her other supplies expenses.

Accordingly, we hold that petitioner is not entitled to deduct other supplies expenses

for 2005.

      G. Tools

      Petitioner claimed a deduction for tools expenses for 2005. She provided

receipts, photographs, and testimony to substantiate the amount she expended on

tools. We find that the costs of the tools were ordinary and necessary business

expenses, see sec. 162(a), and that petitioner adequately substantiated those

expenses. Accordingly, petitioner is entitled to a deduction for tools for 2005.

      Having found the extent to which petitioner is entitled to deductions for trade

or business expenses, we turn our attention to the manner in which those deductions
                                        - 21 -

must be treated for Federal income tax purposes. According to petitioner, the

expenses are properly taken into account on a Schedule C in the computation of her

adjusted gross income; according to respondent, those deductions must be taken

into account on a Schedule A in the computation of her taxable income. For the

following reasons, we agree with respondent.

      Petitioner was not engaged in an equipment rental trade or business

independent of her employment with Prime West during any of the years in issue.

Furthermore, there is nothing in the record that remotely connects the rental fee

agreed upon in the equipment leases to the fair rental value of the equipment subject

to those leases. Although there is no specific evidence in the record on the point,

we think it unlikely that the 1997 Ford would command the same rental fee as the

2004 Dodge in leases that cover the same period. The form of the equipment leases

notwithstanding, in substance the equipment leases represent Prime West’s program

to reimburse its cable splicer/employees for expenses incurred in connection with

their employment. For Federal tax purposes, the substance of a transaction takes

precedence over the form of the transaction. See generally Commissioner v. Court

Holding Co., 324 U.S. 331 (1945); Gregory v. Helvering, 293 U.S. 465 (1935).
                                        - 22 -

      The treatment of payments received and expenses incurred by an employee

subject to the employer’s employee business expense reimbursement plan depends

upon whether the plan is an accountable plan or a nonaccountable plan.

      As relevant here, section 1.62-2(c)(4), Income Tax Regs., provides that

expenses reimbursed pursuant to an accountable plan “are excluded from the

employee’s gross income, are not reported as wages or other compensation on the

employee’s Form W-2, and are exempt from the withholding and payment of

employment taxes”. Payments made under an employee business expense

reimbursement arrangement that does not satisfy one or more of the requirements of

the accountable plan are treated as paid under a “nonaccountable plan”. Sec. 1.62-

2(c)(3), Income Tax Regs. Expenses reimbursed pursuant to a nonaccountable plan

are deductible by the employee as miscellaneous itemized deductions. Sec. 1.62-

2(c)(5), Income Tax Regs.

      Among other things, in order to qualify as an accountable plan under section

62(a)(2)(A), an employee business expense reimbursement plan must (1) require

that the employee substantiate the expenses incurred, and (2) return the amount

received that exceeds expenses incurred. Sec. 1.62-2(c)(1), Income Tax Regs. The

equipment leases fail to satisfy either requirement. Consequently, neither the

income petitioner received pursuant to those leases nor the deductible trade or
                                        - 23 -

business expenses she incurred as an employee of Prime West are properly

reportable on a Schedule C for any of the years in issue.

II. Additional Itemized Deductions

      A. State and Local Income Taxes

      Petitioner now claims entitlement to deductions for the amounts shown on her

2004 and 2005 Forms W-2 for State and local income taxes.4

      As relevant here, section 164(a)(3) provides that State and local income taxes

are allowed as a deduction for the taxable year within which they are paid or

accrued. Petitioner’s Forms W-2 for 2004 and 2005 show that petitioner paid the

amounts now claimed, and she is entitled to deductions for those amounts.

      B. Deduction for Dental Expenses

      Petitioner now claims entitlement to a deduction for dental expenses paid

in 2005.5

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

taxable year for medical care that are not compensated for by insurance or otherwise

and to the extent that such expenses exceed 7.5% of adjusted gross income. For

2005 petitioner paid dental expenses of $8,958 which were not covered by her


      4
          See supra note 2.
      5
          See supra note 2.
                                         - 24 -

health insurance plan. Accordingly, she is entitled to an itemized deduction in an

amount appropriately computed pursuant to that section.

III. Accuracy-Related Penalties

      Lastly, we consider whether petitioner is liable for a section 6662(a)

accuracy-related penalty for any of the years in issue. Relying upon various

grounds, respondent argues that she is liable for all of those years. See sec.

6662(a)-(d).

      Petitioner’s Federal income tax return for each year in issue was prepared by

a C.P.A. From her presentation at trial, we are satisfied that she reasonably relied

upon the C.P.A. to do what she paid him to do. Under the circumstances we find

that petitioner had reasonable cause for the underpayment of tax required to be

shown on her return for each year in issue and that she acted in good faith with

respect to those underpayments. See sec. 6664(c); Higbee v. Commissioner, 116

T.C. 438, 446-447 (2001). Petitioner is not liable for the section 6662(a) accuracy-

related penalty for any of the years in issue.

      To reflect the foregoing,


                                                        Decision will be entered

                                                  under Rule 155.
