                               T.C. Memo. 2016-50



                         UNITED STATES TAX COURT



           JAMES L. AVERY AND MARIA T. AVERY, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 16870-14.                         Filed March 17, 2016.



      James L. Avery and Maria T. Avery, pro sese.

      William J. Gregg, Deborah Aloof, and Bartholomew Cirenza, for

respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


      JACOBS, Judge: Respondent determined a deficiency of $9,975 in income

tax and a section 6662(a) accuracy-related penalty of $1,995 for 2011. Petitioners,

husband and wife, timely filed a petition for redetermination in this Court. After

concessions by respondent, the issues for decision are whether petitioners are (1)
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[*2] entitled to a deduction for automobile expenses claimed on Schedule C, Profit

or Loss From Business (sole proprietorship), and if not, (2) liable for the section

6662(a) accuracy-related penalty. Unless otherwise indicated, all section

references are to the Internal Revenue Code (Code) in effect for the year at issue.

All Rule references are to the Tax Court Rules of Practice and Procedure.

                                FINDINGS OF FACT

      Some of the facts are stipulated and are so found. The stipulated facts and

the accompanying exhibits are incorporated herein by this reference. At the time

they filed their petition, petitioners resided in Virginia.

      PCB Technology Corp. (PCB) is an information technology (IT) company

which has been in business for many years. PCB filed a Form 1120, U.S.

Corporation Income Tax Return, for 2011.1 Petitioner wife is the sole shareholder

and president of PCB; petitioner husband is the executive vice president of PCB

and the company’s sole technician. PCB operated out of the basement of

petitioners’ house.




      1
       PCB’s 2011 Form 1120 was prepared by Paul L. Karstetter of Stitely &
Karstetter, certified public accountants.
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[*3] PCB’s clients consist of Federal Government agencies and commercial

companies. The General Services Administration (GSA) frequently audited

payments made by Government agencies to PCB.

      PCB provides onsite IT technical support services to its clients. During

2011 petitioner husband traveled daily by automobile to the worksites of PCB’s

clients. He performed most of his work on the client’s site but on occasions had to

return to PCB’s office to use equipment housed there. He also drove to stores to

purchase materials. PCB did not reimburse petitioner husband for his automobile

expenses.2 Petitioner husband claims he maintained a mileage log wherein he

recorded the dates, number, and mileage of trips he made to PCB’s clients’ sites.

      Petitioners engaged Max Taylor to prepare their 2011 Form 1040, U.S.

Individual Income Tax Return. Mr. Taylor was referred to petitioners by

acquaintances; petitioners were not familiar with Mr. Taylor’s qualifications as a

tax return preparer.3



      2
       Petitioner wife did not attend the trial. Petitioner husband (who
represented both petitioners) testified that petitioner wife did not want his
automobile mileage expenses reported on PCB’s Form 1120 because she worried
about the ramifications of such an inclusion upon audit of PCB by GSA.
      3
       Mr. Taylor is not a certified public accountant; petitioner husband did not
know whether Mr. Taylor was an enrolled agent. Petitioner husband believes Mr.
Taylor earned a Ph.D.; he did not know in what discipline the degree was earned.
                                         -4-

[*4]   Petitioner husband claims he gave his mileage log to Mr. Taylor, who

prepared a Schedule C for him. The Schedule C reflected automobile expenses of

$39,991. During 2011 petitioner husband was not self-employed and did not

operate a sole proprietorship.4 According to the Internal Revenue Service’s (IRS)

standard mileage rate for 2011, the reported $39,991 in automobile expenses

would indicate petitioner husband drove approximately 75,000 miles for business

in 2011.5

       Respondent selected petitioners’ 2011 Federal income tax return for

examination. The IRS agent sought substantiation of petitioner husband’s

automobile expenses. Petitioner husband was unable to satisfy the examining

agent, stating that he had lost his mileage log.




       4
      Petitioners concede that claiming petitioner husband’s automobile expenses
on Schedule C was erroneous and that these expenses should have been reported
on Schedule A, Itemized Deductions, as unreimbursed employee expenses.
       5
       Sec. 1.274-5(g)(1), Income Tax Regs., provides that the Commissioner may
prescribe (in pronouncements of general applicability) a standard mileage rate that
a taxpayer may use in determining the amount of a deduction for business use of a
passenger automobile. This rate is determined annually by the IRS. See Rev.
Proc. 2010-51, 2010-51 I.R.B. 883. For January 1 through June 30, 2011, the rate
was 51 cents per mile. Notice 2010-88, 2010-51 I.R.B. 882. For the balance of
the year, the rate was 55.5 cents per mile. Announcement 2011-40, 2011-29 I.R.B.
56.
                                         -5-

[*5] Respondent mailed petitioners a notice of deficiency on April 28, 2014.

Attached to the notice of deficiency was a Form 4549, Income Tax Examination

Changes. On that form respondent disallowed the $39,991 deduction claimed for

automobile expenses. Because the $39,991 was claimed on Schedule C,

respondent assumed petitioner husband had operated a sole proprietorship and

determined that petitioners owed self-employment tax of $4,912. These

determinations resulted in a deficiency in income tax of $9,975. Respondent

further determined a section 6662(a) accuracy-related penalty of $1,995.

Respondent now concedes that (1) petitioner husband did not operate a sole

proprietorship during 2011 and thus petitioners are not liable for the self-

employment tax, and (2) to the extent petitioner husband can substantiate his

claimed automobile expenses, the automobile expenses may be deducted on

Schedule A.

      A trial in this matter was held on September 28, 2015. Petitioner husband

was petitioners’ only witness. Petitioner husband did not produce his mileage log.

Instead he introduced (1) a list of the names of PCB’s clients for which he

rendered services and invoices relating thereto, (2) receipts for the servicing and

repair of the automobile that he used for business travel, and (3) a list reflecting

his estimated business mileage from January through April 2011.
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[*6]                                 OPINION

I.     Petitioners’ Automobile Expenses

       As a general rule, the Commissioner’s determinations in the notice of

deficiency are presumed correct, and the taxpayer bears the burden of proving

error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions

are a matter of legislative grace and are allowable only as specifically provided by

statute. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). Taxpayers bear the

burden of proving that they are entitled to any deductions claimed. New Colonial

Ice Co. v. Helvering, 292 U.S. at 440.

       Section 162(a) allows a deduction from income for all ordinary and

necessary expenses for carrying on a trade or business, but a taxpayer is generally

required to keep records sufficient to establish the amounts of the items reported

on his/her tax return. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs.

       Automobile expense deductions are subject to the strict substantiation

requirements of section 274(d). Section 274(d)(4) provides, among other things,

that no deduction may be allowed with respect to any property listed in section

280F(d)(4) unless the taxpayer establishes: (A) the amount of the expense or other

item, (B) the time and place of the use of the property, (C) the business purpose of
                                        -7-

[*7] the expense, and (D) the business relationship to the taxpayer of the person

using the property. Sec. 274(d) (flush language); Kinney v. Commissioner, T.C.

Memo. 2008-287; sec. 1.274-5T(b)(6)(i)(B), Temporary Income Tax Regs., 50

Fed. Reg. 46016 (Nov. 6, 1985). Listed property includes passenger automobiles.

Sec. 280F(d)(4)(A)(i).

      Deductions arising from property subject to the strict substantiation

requirements of section 274(d) are disallowed in full unless the taxpayer satisfies

each element of those requirements. Sanford v. Commissioner, 50 T.C. 823, 827-

828 (1968), aff’d, 412 F.2d 201 (2d Cir. 1969); Fleming v. Commissioner, T.C.

Memo. 2010-60; sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg.

46014 (Nov. 6, 1985).

      A taxpayer may substantiate his/her deductions by adequate records or by

sufficient evidence that corroborates his/her own statements. Sec. 274(d) (flush

language). To satisfy the adequate records requirement, a taxpayer must maintain

records and documentary evidence that in combination sufficiently establishes

each element of an expenditure or use. Sec. 1.274-5T(c)(2)(i), Temporary Income

Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). A contemporaneous log is not

required, but
                                         -8-

[*8] corroborative evidence required to support a statement not made at or
     near the time of the expenditure or use must have a high degree of
     probative value to elevate such statement and evidence to the level of
     credibility reflected by a record made at or near the time of the
     expenditure or use supported by sufficient documentary evidence.
     The substantiation requirements of section 274(d) are designed to
     encourage taxpayers to maintain the records, together with
     documentary evidence, as provided in * * * [the regulations].

Id. para. (c)(1), 50 Fed. Reg. 46016-46017. In the absence of adequate records, a

taxpayer may alternatively establish an element by his own statement including

specific information in detail combined with other corroborative evidence

sufficient to establish the element. Id. subpara. (3).

      Petitioner husband did not produce his mileage log at trial. Instead, he

introduced several documents to substantiate his claimed business mileage. The

first of these documents was a worksheet listing the names and addresses of PCB’s

clients and an estimate of the total mileage driven with respect to each client.

However, this worksheet did not explain how he had calculated the mileage

driven. The second document introduced included a series of receipts for

expenses he incurred with respect to maintaining his automobile. Some of these

receipts included odometer readings, but they gave no indication of petitioner

husband’s business use of the automobile. The third document was a customer

transaction list detailing client invoicing and payment dates for each month of
                                              -9-

[*9] 2011. Attached to the list were worksheets on which petitioner husband (1)

reconstructed the dates he had visited PCB’s clients, (2) estimated the number of

daily visits he made to each client, and (3) estimated the mileage driven from

January through April 2011.6 Petitioner husband acknowledged that his

recollection as to the number of trips he made to the client sites was not reliable

and that the number of trips shown on a particular day might in fact reflect the

number of trips he made to the client site during the entire month. Petitioner


       6
        As an example, in the January 2001 worksheet, petitioner husband listed
clients he visited on 11 days, driving a total of 4,860 miles:

Date       Customer                   Round trip mileage   Visits     Total miles

 1/1   Service Neon Signs                     11             28           308
 1/1   Int. Broadcasting Bureau               21             26           546
 1/1   Adv. Pulmonary Critical Care           14             22           308
 1/1   Capital Womans Care                    14              8           112
 1/5   Apple Store                            13             12           156
 1/6   Capital Womans Care                    14             12           168
1/11   Cedar PC                               42             16           672
1/13   USIA State Dept.                       21              9           189
1/14   Annandale Balancing                     5             21           105
1/17   Annandale Balancing                     5             22           110
1/20   Capital Womans Care                    42             10           420
1/20   Misc 1 Time Cust.                      37             11           407
1/20   North VA Cardiology Assoc.             16              9           144
1/20   VA Medical Accute Care                 11             14           154
1/26   OSHA                                   23              9           207
1/28   Annandale Balancing                     5              9            45
1/28   Misc 1 Time Cust.                      11             16           176
1/28   VA Medical Accute Care                 11             12           132
1/28   Apple Store                            14             14           196
1/31   Annandale Balancing                     5             61           305

  Total mileage driven                                                  4,860
                                        - 10 -

[*10] husband further acknowledged that he did not keep records regarding the

number of daily site visits with respect to clients who had ongoing maintenance

contracts with PCB.

      We do not doubt that petitioner husband drove to the worksites of PCB’s

clients. But he failed to satisfy the adequate record requirements of section

274(d). Petitioner husband’s recollection of the number of client site trips and the

mileage involved does not reach the degree of probative value necessary for us to

accept his statements as credible. Consequently, we sustain respondent’s

disallowance of petitioners’ claimed deduction for automobile expenses.

II.   Section 6662(a) Accuracy-Related Penalty

      Respondent determined that petitioners were liable for an accuracy-related

penalty of $1,995 for 2011. Section 6662(a) imposes a 20% accuracy-related

penalty on any portion of an underpayment attributable to, inter alia, negligence or

disregard of rules or regulations, subsec. (b)(1), or a substantial understatement of

income tax, subsec. (b)(2). Negligence as used in section 6662(b)(1) is defined as

any failure to make a reasonable attempt to comply with the Code and any failure

to keep adequate books and records or to substantiate items properly. Sec.

6662(c); sec 1.6662-3(b)(1), Income Tax Regs.
                                       - 11 -

[*11] Section 7491(c) provides that the Commissioner bears the burden of

production with regard to penalties and must come forward with sufficient

evidence indicating that it is appropriate to impose the section 6662(a) accuracy-

related penalty. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001).

Respondent has met his burden of production with respect to petitioners’

negligence in that petitioners failed to provide any documentation to substantiate

petitioner husband’s claimed automobile expense deductions.

      A taxpayer may avoid liability for the accuracy-related penalty if the

taxpayer demonstrates that he/she had reasonable cause for the underpayment and

acted in good faith with respect to the underpayment. Sec. 6664(c)(1).

Reasonable cause and good faith are determined on a case-by-case basis, taking

into account all pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income

Tax Regs.

      Petitioners assert that they relied on Mr. Taylor in filing their 2011 income

tax return. Reliance on professional advice may constitute reasonable cause and

good faith, but “it must be established that the reliance was reasonable.” Freytag

v. Commissioner, 89 T.C. 849, 888 (1987), aff’d on another issue, 904 F.2d 1011

(5th Cir. 1990), aff’d, 501 U.S. 868 (1991); see also United States v. Boyle, 469
                                        - 12 -

[*12] U.S. 241, 251 (1985); sec. 1.6664-4(b)(1), Income Tax Regs. We have

defined “reasonable” as follows:

             In sum, for a taxpayer to rely reasonably upon advice so as
      possibly to negate a section 6662(a) accuracy-related penalty
      determined by the Commissioner, the taxpayer must prove by a
      preponderance of the evidence that the taxpayer meets each
      requirement of the following three-prong test: (1) The adviser was a
      competent professional who had sufficient expertise to justify
      reliance, (2) the taxpayer provided necessary and accurate
      information to the adviser, and (3) the taxpayer actually relied in good
      faith on the adviser’s judgment. * * *

Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299

F.3d 221 (3d Cir. 2002).

      Petitioners failed to provide any evidence to establish that they met the

three-prong test of Neonatology Assocs., P.A. As to the first prong of the test,

petitioners failed to present evidence to establish Mr. Taylor’s qualifications as a

tax return preparer. Mr. Taylor did not testify; and when asked, petitioner husband

was unable to state Mr. Taylor’s background or qualifications as a tax return

preparer. Indeed, Mr. Taylor’s improper use of Schedule C, making it appear that

petitioner husband was in business as a sole proprietor, is troublesome.

      As to the second prong of the test, petitioners did not establish that they

provided Mr. Taylor with all necessary and accurate information to prepare their

2011 tax return. Petitioner husband was unable to explain the loss of the mileage
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[*13] log or provide evidence that such a log was kept (for example by showing

logs from earlier and later years). We also question the accuracy of the number of

miles claimed to have been driven by petitioner husband for business. Petitioner

husband asserts he drove 4,860 miles in January and 1,125 miles on January 20

alone. See supra note 6. Without documentation to substantiate these claimed

mileage amounts, we cannot accept with any degree of certainty that petitioners

provided Mr. Taylor with accurate information.

      As to the third prong, we are mindful that PCB has been in business for

many years. Presumably, petitioners knew petitioner husband was an employee of

PCB. We believe petitioners should have questioned the reporting of petitioner

husband’s automobile expenses on Schedule C. We thus conclude that petitioners

failed to show that they acted with reasonable cause and in good faith.

      To reflect the concessions of respondent,


                                                     Decision will be entered under

                                                Rule 155.
