                  T.C. Summary Opinion 2012-16



                 UNITED STATES TAX COURT



   THELMA L. MOORE AND WILLIE J. MOORE, Petitioners v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 19504-09S.                    Filed February 28, 2012.



Thelma L. Moore and Willie J. Moore, pro sese.

Adam P. Sweet and Randall G. Durfee, for respondent.
                                           -2-

                                 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

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 May 14, 2009, respondent: (1) determined an

$18,4722 deficiency in petitioners’ 2003 Federal income tax; (2) imposed a $3,611

section 6651(a)(1) addition to tax; and (3) imposed a $3,694 section 6662(a)

accuracy-related penalty.

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

trade or business expense deductions in excess of the amounts allowed by

respondent; (2) whether petitioners are liable for a section 6651(a)(1) addition to

tax; and (3) whether petitioners are liable for a section 6662(a) accuracy-related

penalty.




      1
       Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986, as amended, in effect for the relevant period. Rule references are to
the Tax Court Rules of Practice and Procedure.
      2
          All amounts are rounded to the nearest dollar.
                                        -3-

                                    Background

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

were at all times relevant here, married to each other. They resided in Texas when

the petition was filed.

      During 2003 Willie J. Moore (petitioner) was employed as a system support

analyst for the City of Houston, Texas. His normal work hours were 8 a.m. to 5

p.m., Monday through Friday of each week. In addition to his employment with the

City of Houston, petitioner was self-employed as a real estate broker and a

mortgage broker. The real estate brokerage business and the mortgage brokerage

business operated from two offices, one in La Marque, Texas (La Marque office),

and the other in Houston, Texas (Houston office). As of the close of 2003,

petitioner was in the process of opening a used car dealership.

      At all times relevant here, petitioners owned a Buick, a Hyundai, and a

Cadillac. According to petitioners, the Buick and the Hyundai were used for

business purposes by petitioner and Mrs. Moore, respectively. Petitioners

maintained two mileage logs--one for the Buick (petitioner’s mileage log), and one
                                         -4-

for the Hyundai (Mrs. Moore’s mileage log). Each mileage log consists of 12

pages, that is, one page for each month of the year. Each page contains an entry or

entries for each day of the month. Typically, entries in the mileage logs include: (1)

odometer readings; (2) miles driven (sometimes designated as “commuting” and

sometimes as “business”); (3) destinations; and (4) the purpose for the trip.

      According to petitioner’s mileage log, he typically drove more than 100

miles per day (and sometimes more than 200 miles per day) for business purposes.

According to petitioner, he routinely drove from his house first to the La Marque

office, then to one of the offices in Houston, then to the other Houston office, then

back to the La Marque office, and then back to his house. This sequence, shown as

“LM-Hou-Hou-LM” in petitioner’s mileage log, appears as an entry on virtually

every day of the year. The “business purpose” entries are stated in generalized

terms, such as “OPEN - Review Task Log - Close Office” or “OPEN - Review

Contract - Close”, or “Open - Update Website - Close”.

      On Mrs. Moore’s mileage log the entries for business miles driven average

approximately 100 miles per day, usually from La Marque to a surrounding town,

often Houston or Galveston.
                                       -5-

      Petitioners’ untimely 2003 joint Federal income tax return includes three

Schedules C, Profit or Loss From Business. Petitioners did not elect to itemize

deductions in computing the taxable income shown on that return.

      One Schedule C relates to petitioner’s real estate brokerage business. This

Schedule C shows the name of the business as “United Realty” and lists petitioner

as the proprietor (Realty Schedule C). The following items are reported on the

Realty Schedule C:

                                                       Amount

                     Income:

                      Gross receipts or sales          $24,360

                     Expenses:

                      Advertising                          683
                      Car and truck expenses            16,992
                      Commissions and fees                  61
                      Insurance                            220
                      Interest (mortgage)               10,907
                      Legal and professional
                       services                         21,864
                      Rent or lease of vehicle,
                       machinery, and equipment           4,808
                      Supplies                              165
                      Utilities                           1,618
                      Other expenses1                     3,733
                                                      2
                         Net loss                       (36,630)
                                        -6-
      1
         The Realty Schedule C reported other expenses of $3,733 composed of
$1,305 for donations and $2,428 for telephone expenses.
       2
         Due to a mathematical error, petitioners reported a net loss of $36,630
instead of the correct net loss of $36,691.

      Another Schedule C relates to what petitioner described as his used car

dealership. That Schedule C shows the name of the business as “United Auto

Sales” and lists petitioner as the proprietor (Auto Schedule C). The following

items are reported on the Auto Schedule C:

                                                    Amount

                     Income:

                       Gross receipts or sales          -0-

                     Expenses:

                       Car and truck expenses      $1,000
                       Commissions and fees         1,882
                       Insurance                      326
                       Interest (mortgage)          6,112
                       Legal and professional
                        services                    6,202
                       Rent or lease of vehicles,
                        machinery, and equipment    8,465
                       Supplies                     3,401
                       Taxes and licenses              96
                       Utilities                    7,958
                          Net loss                (35,442)
                                       -7-

      The third Schedule C relates to the mortgage brokerage business. That

Schedule C shows the name of the business as “United Home Mortgage” and lists

Mrs. Moore as the proprietor (Home Schedule C). The following items are

reported on the Home Schedule C:

                                                  Amount

                    Income:

                      Gross receipts or sales      $16,921

                    Expenses:

                      Advertising                    956
                      Car and truck expenses      14,832
                      Legal and professional
                       services                    2,447
                      Office expense                 852
                      Rent or lease of vehicles,
                       machinery, and equipment    3,363
                                      1
                      Other expenses               6,498
                        Net Loss                 (12,027)
      1
       These other expenses consist of $2,123 for telephone expenses, $1,508 for
commission expenses, $1,049 for advantage credit, $56 for postage, $677 for
miscellaneous expenses, and $1,085 for dues.

      The deduction for car and truck expenses claimed on each Schedule C is

computed by applying the standard mileage rate to the mileage shown to be driven

for business purposes. The net losses shown on the Schedules C total $84,098,
                                         -8-

which completely offsets the $51,296 of income (mostly attributable to petitioner’s

wages from the City of Houston) reported on the return.

      In the above-referenced notice of deficiency, respondent disallowed all of the

deductions claimed on the Schedules C. According to the notice of deficiency,

petitioners failed to substantiate those deductions. After reviewing certain

substantiating records presented to respondent for the first time in connection with

the trial of this case, respondent now agrees that petitioners are entitled to some of

the deductions disallowed in the notice of deficiency.

                                     Discussion

      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).

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. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), aff’d per


      3
      Petitioners do not claim that the provisions of sec. 7491(a) are applicable,
and we proceed as though they are not.
                                         -9-

curiam, 540 F.2d 821 (5th Cir. 1976); Meneguzzo v. Commissioner, 43 T.C. 824,

831-832 (1965); sec. 1.6001-1(a), Income Tax Regs.

      Section 162 generally allows a deduction for ordinary and necessary

expenses paid or incurred during the taxable year in carrying on any trade or

business. In general, an expense is “ordinary” if it is considered normal, usual, or

customary in the context of the particular business out of which it arose, see

Deputy v. du Pont, 308 U.S. 488, 495 (1940), and the expense is “necessary” if it

is appropriate and helpful to the operation of the taxpayer’s trade or business, see

Commissioner v. Tellier, 383 U.S. 687, 689 (1966); Carbine v. Commissioner, 83

T.C. 356, 363 (1984), aff’d, 777 F.2d 662 (11th Cir. 1985). If deductible under

section 162(a) or otherwise, expenses described in section 274(d), namely, travel,

entertainment, gift, and “listed property” expenses, may not be deducted unless the

strict substantiation requirements of that section are satisfied. Sanford v.

Commissioner, 50 T.C. 823, 827 (1968), aff’d per curiam, 412 F.2d 201 (2d Cir.

1969); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov.

6, 1985). “Listed property” includes any passenger automobile. Sec.

280F(d)(4)(A)(i).
                                           - 10 -

I. Disallowed Deductions

      Keeping these fundamental principles of Federal income taxation in mind, we

turn our attention to each Schedule C. According to petitioners, all of the

deductions claimed on any of the Schedules C relate to expenses incurred in one or

the other of their trades or businesses.

      A. Deductions Claimed on the Realty Schedule C and the Home
         Schedule C

      According to petitioners, they are entitled to deductions for expenses

incurred in the operation of United Realty and United Home Mortgage as shown on

the Schedule C for each of those businesses. In support of their position, they

submitted copies of canceled checks and the above-referenced mileage logs to

substantiate their business expenses.

             1. Expenses Other Than Car and Truck Expenses, and
                Charitable Contributions

      The Schedules C show various deductions for advertising expenses;

commissions and fees; insurance; interest (mortgage); legal and professional

services; office expenses; rent or lease of vehicles, machinery, and equipment;

supplies; utilities; and other expenses. With the exception of (1) expenditures that
                                         - 11 -

are clearly personal,4 or (2) contributions to charities,5 to the extent that a canceled

check substantiates one of the above-listed expenses, respondent has conceded that

petitioners are entitled to a section 162 deduction for that expense. Petitioners

have failed to establish that they are entitled to deductions in excess of the amounts

now conceded by respondent. Other than their own self-serving testimonies, which

we find unpersuasive, see Tokarski v. Commissioner, 87 T.C. 74, 77 (1986),

petitioners have provided no other evidence, e.g., canceled checks, receipts, lease

agreements, or mortgage interest statements, to substantiate their deductions

relating to these items. Consequently, petitioners are not entitled to deductions for

these expenses in excess of the amounts now conceded by respondent.

             2. Charitable Contributions

      On the Realty Schedule C petitioners claimed a $1,305 deduction for

charitable contributions. The canceled checks submitted by petitioners show that

they contributed $650 to various qualifying organizations. According to

petitioners, they are entitled to deduct the contributions as claimed (or at least as




      4
        Sec. 262(a) provides generally that no deduction is allowed for personal,
living, or family expenses.
      5
       In general, a contribution to a qualifying organization may be deducted as an
itemized deduction. See secs. 62, 170(a).
                                        - 12 -

substantiated) as business expenses. According to respondent, the contributions, if

allowable as a deduction, must be deducted as an itemized deduction.

      A contribution to a qualifying organization is not deductible under section

162 as a business expense unless it serves some legitimate business purpose. Gage

v. Commissioner, T.C. Memo. 2002-72; sec. 1.162-15(a), Income Tax Regs.

      According to petitioner, the charitable contributions were deducted as

business expenses because charitable contributions are “required as a realtor to be

visible within the community.” Petitioner’s general explanation, however, fails to

justify deducting the contributions made to a church, a cancer society and the

American Red Cross as business expenses. See Hartless Linen Serv. Co. v.

Commissioner, 32 T.C. 1026, 1029-31 (1959). Respondent’s disallowance of the

deduction for charitable contributions claimed on the Realty Schedule C is

sustained.6

              3. Car and Truck Expenses

      Petitioners’ claimed deductions for car and truck expenses of $16,992 and

$14,832 on their Realty and Home Schedules C, respectively. They rely primarily


      6
        Petitioners did not elect to itemize deductions on their 2003 return, and there
is no suggestion that the allowance of the substantiated charitable contributions, in
combination with other allowable itemized deductions, would exceed the standard
deduction.
                                        - 13 -

on the mileage logs to substantiate these deductions. Those mileage logs, however,

contain far too many errors, irregularities, and questionable entries to be considered

reliable.7 That being so, we do not treat the mileage logs as “adequate records”

within the meaning of section 274(d) and the regulations thereunder. See Tokarski

v. Commissioner, 87 T.C. at 77. Accordingly, respondent’s disallowances of the

deductions for car and truck expenses claimed on the Realty Schedule C and the

Home Schedule C are sustained.8

      B. Deductions Claimed on the Auto Schedule C

      According to petitioners, they are entitled to the deductions claimed on the

Auto Schedule C because those deductions represent expenses paid or incurred in

the operation of petitioner’s used car business. See sec. 162(a).

      A taxpayer has not “‘engaged in carrying on any trade or business’ within

the intendment of section 162(a) until such time as the business has begun to

function as a going concern and performed those activities for which it was

      7
        At trial petitioner admitted that the logs contained errors but described the
logs as “pretty accurate”.
      8
        Because these deductions are for expenses described in sec. 274, we may not
in the absence of adequate substantiating records allow any deductions based upon
estimates of those expenses even though it appears that petitioners would be entitled
to some deduction for mileage driven in connection with one or the other of their
Schedule C businesses. See Sanford v. Commissioner, 50 T.C. 823, 827-828
(1968), aff’d per curiam, 412 F.2d 201 (2d Cir. 1969) .
                                         - 14 -

organized.” Richmond Television Corp. v. United States, 345 F.2d 901, 907 (4th

Cir. 1965), vacated and remanded on other grounds, 382 U.S. 68 (1965).

Furthermore, section 195(a) generally provides that no deduction is allowed for

startup expenditures. See also Hardy v. Commissioner, 93 T.C. 684 (1989), aff’d

in part and remanded in part per order, (10th Cir. Oct. 29, 1990).

      At trial petitioner explained that he was in the process of establishing a

business and that it was still in its startup phase as of the end of 2003. His

testimony on the point, amplified by a review of the Auto Schedule C on which no

gross receipts are reported, demonstrates that petitioner was not engaged in a trade

or business of selling used automobiles as of the close of 2003. It follows that

petitioners are not entitled to the deductions shown on the Auto Schedule C, and

respondent’s disallowances of those deductions are sustained.

II. Section 6651(a)(1) Addition to Tax for Failure To File

      Section 6651(a)(1) imposes an addition to tax for failure to file a return by its

due date. The addition equals 5% of the amount required to be shown as tax on the

return for each month or fraction thereof that the return is late, not to exceed 25%.

Id. The burden of production with respect to the imposition of a section 6651(a)(1)

addition to tax rests with respondent.
                                        - 15 -

      In the absence of an extension, the last date for petitioners to have timely

filed their Federal income tax return for 2003 was Friday, April 15, 2004. See sec.

6072(a). There is no dispute that petitioners’ 2003 Federal income tax return was

not received by respondent and filed until December 31, 2007, more than 3-1/2

years after its due date.

      “A failure to file a tax return on the date prescribed leads to a mandatory

penalty unless the taxpayer shows that such failure was due to reasonable cause

and not due to willful neglect.” McMahan v. Commissioner, 114 F.3d 366, 368

(2d Cir. 1997), aff’g T.C. Memo. 1995-547. A showing of reasonable cause

requires a taxpayer to show that the taxpayer exercised “ordinary business care and

prudence” but was nevertheless unable to file the return within the prescribed time.

United States v. Boyle, 469 U.S. 241, 246 (1985); sec. 301.6651-1(c)(1), Proced.

& Admin. Regs.

      Petitioners have not offered any evidence to establish that the late filing of

their 2003 return was due to reasonable cause and not due to willful neglect.

Respondent’s burden of production, which has been met, does not require that

respondent establish the absence of reasonable cause. See Higbee v.

Commissioner, 116 T.C. 438, 449 (2001). Accordingly, petitioners are liable for a

section 6651(a)(1) addition to tax.
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III. Section 6662 Accuracy-Related Penalty

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

accuracy-related penalty. That section imposes an accuracy-related penalty equal

to 20% of the underpayment of tax that is attributable to negligence or other

specified grounds. A taxpayer’s failure to keep adequate records to substantiate

claimed deductions can support the imposition of the section 6662(a) accuracy-

related penalty on the ground of negligence. Sec. 1.6662-3(b)(1), Income Tax

Regs. As with the addition to tax under section 6651(a)(1), the burden of

production with respect to the imposition of the section 6662(a) penalty rests with

the Commissioner. Sec. 7491(c).

      Petitioners failed to maintain adequate substantiating records for many of the

deductions claimed on their 2003 return. According to respondent, that failure

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

ground of negligence. We agree.

      The accuracy-related penalty does not apply to any part of an underpayment

of tax if it is shown that the taxpayer acted with reasonable cause and in good faith.

Sec. 6664(c)(1). The determination of whether a taxpayer acted in good faith is

made on a case-by-case basis, taking into account all the pertinent facts and

circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Petitioners bear the burden
                                       - 17 -

of proving that they had reasonable cause and acted in good faith with respect to

the underpayment. See Higbee v. Commissioner, 116 T.C. at 449. This they have

failed to do. Respondent’s imposition of the section 6662(a) accuracy-related

penalty is sustained.

      To reflect the foregoing,


                                                      Decision will be entered

                                                under Rule 155.
