                         T.C. Summary Opinion 2016-39



                         UNITED STATES TAX COURT



                    RUBEN JAUREGUI, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 7194-14S.                         Filed August 8, 2016.



      Ruben Jauregui, pro se.

      Catherine G. Chang and Daniel V. Triplett, Jr., for respondent.



                              SUMMARY OPINION


      VASQUEZ, Judge: This case was heard pursuant to the provisions of

section 74631 of the Internal Revenue Code in effect when the petition was filed.



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

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.

      Respondent determined a deficiency of $3,291.60 in petitioner’s Federal

income tax for 2010 and an accuracy-related penalty of $658.32 under section

6662(a). After concessions,2 the issues for decision are: (1) whether petitioner is

entitled to deduct business expenses of $22,783 on Schedule C, Profit or Loss

From Business; (2) whether petitioner is entitled to deduct tax return preparation

fees of $250; and (3) whether petitioner is liable for the accuracy-related penalty

under section 6662(a).

                                    Background

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

facts are incorporated herein by this reference. Petitioner resided in California

when he petitioned the Court.

      In 2010 petitioner was employed full time as a production manager at a

company that manufactures underwater welding equipment. Petitioner also

operated a carpentry business as a sole proprietor where he sold wooden parts used

in the construction of furniture.

      2
        Petitioner conceded that compensation of $4,570 that he received from A.
Rudin, Inc., should be reported as gross receipts on his Schedule C and not as
wages as originally reported on his return.
                                         -3-

      Petitioner timely filed a Form 1040, U.S. Individual Income Tax Return, for

2010, where he: (1) reported total wage income of $54,379;

(2) deducted unreimbursed employee expenses of $22,783; and (3) deducted tax

return preparation fees of $250. On February 18, 2014, respondent issued

petitioner a notice of deficiency for 2010 disallowing the unreimbursed employee

expense deduction and tax return preparation fee deduction and imposing an

accuracy-related penalty of $658.32 under section 6662(a). Petitioner timely filed

a petition with this Court in response to the notice of deficiency.

      On February 20, 2014, petitioner faxed to respondent an unsigned and

undated copy of a Form 1040X, Amended U.S. Individual Income Tax Return. On

the amended return petitioner reallocated items he had previously included in

wage income and unreimbursed employee expenses to a Schedule C.

                                     Discussion

I.    Burden of Proof

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

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

those determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S.

111, 115 (1933). There are exceptions to this rule. Section 7491(a) shifts the

burden of proof to the Commissioner as to any factual issue relevant to a
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taxpayer’s liability for tax if the taxpayer meets certain preliminary conditions.

Higbee v. Commissioner, 116 T.C. 438, 440-441 (2001). This case is decided on

the preponderance of the evidence and is not affected by the burden of proof or

section 7491(a).

II.   Deductions Generally

      Section 162(a) permits a taxpayer to deduct ordinary and necessary

expenses paid or incurred in carrying on a trade or business. See Commissioner v.

Lincoln Sav. & Loan Ass’n, 403 U.S. 345, 352 (1971). A trade or business

expense is ordinary if it is normal or customary within a particular trade, business,

or industry, and it is necessary if it is appropriate and helpful for the development

of the business. Commissioner v. Heininger, 320 U.S. 467, 471 (1943); Welch v.

Helvering, 290 U.S. at 113-114. The term “trade or business” in section 162(a)

includes the trade or business of being an employee. Primuth v. Commissioner, 54

T.C. 374, 377 (1970).

      A taxpayer ordinarily must maintain adequate records to substantiate the

amounts of his or her income and entitlement to any deductions or credits claimed.

See sec. 6001; sec. 1.6001-1(a), Income Tax Regs. If, however, a taxpayer with

inadequate or nonexistent business records is able to prove that he or she paid or

incurred a deductible business expense but does not prove the amount of the
                                        -5-

expense, we may estimate the amount allowable in some circumstances (Cohan

rule). See Cohan v. Commissioner, 39 F.2d 540, 542-544 (2d Cir. 1930). The

taxpayer must introduce sufficient evidence to permit us to conclude that the

taxpayer paid or incurred a deductible expense in at least the amount allowed. See

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

Commissioner, 85 T.C. 731, 743 (1985). In estimating the amount allowable, we

bear heavily upon the taxpayer who failed to maintain required records and to

substantiate expenses underlying deductions as the Code requires. See Cohan v.

Commissioner, 39 F.2d at 544.

      For certain kinds of business expenses, section 274(d) overrides the Cohan

rule. See Sanford v. Commissioner, 50 T.C. 823, 827 (1968), aff’d per curiam,

412 F.2d 201 (2d Cir. 1969). Section 274(d) provides that no deduction is allowed

with respect to travel, entertainment, and listed property (as defined in section

280F(d)(4)) unless the taxpayer substantiates by adequate records or by sufficient

evidence corroborating the taxpayer’s own statement (1) the amount of the

expense or item; (2) the time and place of the travel, entertainment, or expense;

(3) the business purpose of the entertainment or expense; and (4) the taxpayer’s

relationship to the person or persons entertained. Section 280F(d)(4) defines
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listed property as, inter alia, any passenger automobile or any other property used

as a means of transportation.

       Regulations interpreting the requirement under section 274(d) that travel

expenses be substantiated by adequate records generally provide that a taxpayer

must maintain an account book, a diary, a log, a statement of expense, trip sheets,

or a similar record prepared contemporaneously with the use or expenditure and

documentary evidence (e.g., receipts or bills) of the expenses. See sec. 1.274-

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

50 Fed. Reg. 46017 (Nov. 6, 1985). In the absence of adequate records to

substantiate an element of an expense, however, the regulations provide that a

taxpayer may establish an element by “his own statement, whether written or oral,

containing specific information in detail as to such element”. Sec. 1.274-

5T(c)(3)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985); see

also Furnish v. Commissioner, T.C. Memo. 2001-286, slip op. at 11 (citing

Watson v. Commissioner, T.C. Memo. 1988-29).

III.   Schedule C Deductions

       Petitioner initially claimed--presumably in relation to his job as a production

manager--several items of expense on his Schedule A, Itemized Deductions, as an

unreimbursed employee business expenses deduction. But petitioner later filed an
                                         -7-

amended return and argued at trial that the expenses should have been reported on

a Schedule C as business expenses related to his carpentry business. Respondent

argues that in either case petitioner has not substantiated the expenses underlying

the deductions.

      A.     Mileage Expense

      The first issue is whether petitioner is entitled to deduct $14,979 in mileage

expenses he reported on his return. A taxpayer’s cost of commuting between the

taxpayer’s residence and the taxpayer’s place of business or employment generally

is a nondeductible personal expense. Secs. 1.162-2(e), 1.262-1(b)(5), Income Tax

Regs. However, the cost of going between one business location and another is

generally deductible under section 162(a). See Heuer v. Commissioner, 32 T.C.

947, 951 (1959), aff’d per curiam, 283 F.2d 865 (5th Cir. 1960). Deductions for

vehicle expenses that are business expenses will be disallowed in full unless the

taxpayer satisfies the strict substantiation requirements in section 274(d). Sec.

280F(d)(4). Petitioner testified that he drove 100 miles per week the entire year in

connection with his carpentry business. Petitioner’s only evidence was a single

sheet of paper on which he performed a simple math calculation estimating his

total miles driven in 2010. Petitioner did not produce a mileage log detailing the

specific trips, distances, or purpose for each trip. Therefore, we find that
                                         -8-

petitioner has not satisfied the stricter substantiation requirements under section

274(d) and, accordingly, is not entitled to a deduction for mileage expenses.

      B.     Uniforms and Protective Clothing

      Petitioner argues that he is entitled to deduct an expense of $340 incurred in

purchasing uniforms and protective clothing. Expenses for uniforms are

deductible if (1) the uniforms are of a type specifically required as a condition of

employment, (2) the uniforms are not adaptable to general use as ordinary

clothing, and (3) the uniforms are not worn as ordinary clothing. Yeomans v.

Commissioner, 30 T.C. 757, 767-769 (1958); Wasik v. Commissioner, T.C.

Memo. 2007-148; Beckey v. Commissioner, T.C. Memo. 1994-514. Petitioner

provided no documentation substantiating his expenses for uniforms or protective

clothing. Additionally, there is no evidence in the record we can consult in

determining whether the alleged clothing was required for employment, adaptable

to general use as ordinary clothing, or worn as ordinary clothing. Accordingly, we

find that petitioner is not entitled to deduct the expense.

      C.     Tools

      Petitioner argues that he is entitled to deduct an expense of $1,598 for work

tools. Petitioner produced four receipts showing a total of $591.91 spent on tools

in 2010. We find the receipts sufficient to substantiate $591.91 in expenses.
                                         -9-

Accordingly, petitioner is entitled to a deduction of $591.91 but is not entitled to

deduct any excess amount he reported on his return.

      D.     Tires

      Petitioner argues that he is entitled to deduct an expense of $598 incurred in

purchasing tires for his vehicle. Petitioner did not produce any documentation to

substantiate the expense. Accordingly, we find that petitioner is not entitled to a

deduction for the cost of purchasing tires.

      E.     Contract Labor

      Petitioner argues that he is entitled to deduct $5,268 he allegedly paid to

third-party individuals in the operation of his carpentry business.

      Petitioner’s carpentry business was limited to the production of wooden legs

used in the construction of sofas. In the course of operating his business,

petitioner would first receive orders from a single furniture company for the

wooden legs. Petitioner would then outsource the initial manufacturing to two

individuals. Finally petitioner would apply the finishing touches to the wooden

legs before delivering them to the furniture company.

      Petitioner alleges that he paid a total of $5,268 in cash to the two

individuals to whom he outsourced the initial manufacturing. Petitioner provided

the Court with two Forms 1099-MISC, Miscellaneous Income, showing the
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payments; however, the forms were never mailed to or otherwise filed with

respondent. Petitioner testified that amounts on one of the Forms 1099 may have

been overstated. Petitioner also provided copies of purchase orders which alleged

payments to the two individuals in a total amount of $2,268. We find that the

Forms 1099 are unreliable and inadequate records but that the purchase orders and

petitioner’s supporting testimony are sufficient to substantiate a total $2,268

deduction. Accordingly, petitioner is entitled to deduct $2,268 but not the excess

amount he claimed on his return.

IV.   Tax Return Preparation Fees

      Petitioner initially claimed a deduction of $250 on his return for tax return

preparation fees. Petitioner alleged at trial that he had incurred an expense of $60

in preparing his return. Respondent argues that petitioner is not entitled to a

deduction for tax return preparation fees because he has failed to provide adequate

substantiation, or alternatively, that petitioner is entitled to only a $60 deduction.

      A taxpayer may deduct ordinary and necessary expenses incurred in

connection with the determination, collection, and refund of taxes. See sec.

212(3). Such deductible expenses include expenses incurred in connection with

the preparation of tax returns. See sec. 1.212-1(a)(1), Income Tax Regs. We find

credible petitioner’s testimony that he incurred a $60 expense in preparing his tax
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return. Accordingly, we find that petitioner is entitled to deduct $60 in tax return

preparation fees but not the excess he reported on his return.

V.    Accuracy-Related Penalty

      We next determine whether petitioner is liable for an accuracy-related

penalty.3 Section 6662(a) and (b)(1) authorizes the Commissioner to impose a

20% penalty on the portion of an underpayment of tax that is attributable to

negligence or disregard of rules or regulations. The term “negligence” includes

any failure to make a reasonable attempt to comply with the provisions of the

internal revenue laws, and the term “disregard” includes any careless, reckless, or

intentional disregard. See sec. 6662(c); sec. 1.6662-3(b)(1) and (2), Income Tax

Regs. “‘Negligence’ also includes any failure by the taxpayer to keep adequate

books and records or to substantiate items properly.” Sec. 1.6662-3(b)(1), Income

Tax Regs.

      The accuracy-related penalty does not apply with respect to any portion of

the underpayment for which the taxpayer shows that there was reasonable cause

and that he or she acted in good faith. See sec. 6664(c)(1). The decision as to

whether a taxpayer acted with reasonable cause and in good faith is made on a


      3
         While petitioner did not address his liability for the accuracy-related
penalty in his petition, we find that it was tried by consent. See Rule 41(b).
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case-by-case basis, taking into account all of the pertinent facts and circumstances.

See sec. 1.6664-4(b)(1), Income Tax Regs. “Circumstances that may indicate

reasonable cause and good faith include an honest misunderstanding of fact or law

that is reasonable in light of all of the facts and circumstances, including the

experience, knowledge, and education of the taxpayer.” Id. Reliance on a tax

professional demonstrates reasonable cause when a taxpayer (1) selects a

competent tax adviser, (2) supplies the adviser with all relevant information, and

(3) relies in good faith on the adviser’s professional judgment. See Neonatology

Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d

Cir. 2002).

      The Commissioner bears the burden of production with respect to the

taxpayer’s liability for the section 6662(a) penalty and must produce sufficient

evidence indicating that it is appropriate to impose the penalty. See sec. 7491(c);

Higbee v. Commissioner, 116 T.C. at 446-447. Once the Commissioner meets his

burden of production, the taxpayer must come forward with persuasive evidence

that the Commissioner’s determination is incorrect or that the taxpayer had

reasonable cause or substantial authority for the position. See Higbee v.

Commissioner, 116 T.C. at 446-447.
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      Respondent met his burden of production in establishing the

appropriateness of the penalty. Petitioner did not maintain sufficient records to

substantiate most of the expenses underlying his deductions, and the disallowed

deductions in this case are directly attributable to petitioner’s failure to maintain

adequate records. Furthermore, petitioner has not proven he had reasonable cause

for his failure to maintain adequate business records. Although petitioner argues

that he relied on a return preparer, there is no evidence in the record that his return

preparer was competent and was provided all relevant information. We therefore

hold that petitioner is liable for a section 6662(a) accuracy-related penalty.

      We have considered the parties’ remaining arguments, and to the extent not

discussed above, conclude those arguments are irrelevant, moot, or without merit.

      To reflect the foregoing and the parties’ concessions,


                                                       Decision will be entered

                                                  under Rule 155.
