                          T.C. Summary Opinion 2017-15



                         UNITED STATES TAX COURT



            DORIS GAINES AND GEORGE GAINES, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 6421-15S.                          Filed March 16, 2017.



      Nathan B. Kennedy, for petitioners.

      Michael T. Garrett, for respondent.



                              SUMMARY OPINION


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

provisions of section 74631 of the Internal Revenue Code in effect when the

petition was filed. Pursuant to section 7463(b), the decision to be entered is not


      1
        Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986, as amended and in effect for the years in issue. Rule references are
to the Tax Court Rules of Practice and Procedure.
                                         -2-

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 10, 2014 (notice), respondent

determined deficiencies in, and imposed section 6662(a) accuracy-related

penalties with respect to, petitioners’ Federal income tax as follows:

                                                             Penalty
               Year               Deficiency               sec. 6662(a)

               2011                $9,513                  $1,902.60
               2012                 6,544                   1,308.80
               2013                 6,360                   1,272.00

      After concessions,2 the issues for decision are whether petitioners are: (1)

entitled to trade or business expense deductions for each year in issue for car and

truck expenses; (2) entitled to an $18,000 itemized deduction for 2013 for

charitable contributions attributable to gifts other than cash; and (3) liable for

section 6662(a) accuracy-related penalties.




      2
        Petitioners concede that: (1) respondent properly increased their gross
receipts reported on Schedule C, Profit or Loss From Business, by $18,900 for
2011 to account for the $32,500 in nonemployee compensation Mrs. Gaines
received from Life Line Foster Care Agency and (2) all of the adjustments in the
notice related to the deductions claimed on a Schedule C other than the deductions
for car and truck expenses.
                                         -3-

                                     Background

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

petition was filed, petitioners resided in Colorado.

      Mrs. Gaines (petitioner) holds an undergraduate degree in social science and

a master’s degree in social work. From March 15 through October 25, 2011,

petitioner worked as an independent contractor for Life Line Foster Care Agency

(Life Line). During each year in issue petitioner also worked in the women’s

clothing department of Saks Fifth Avenue and Neiman Marcus.

      At all times relevant, petitioners owned a 1998 Lexus LS400 (Lexus).

Petitioner maintained mileage logs for the Lexus that show (1) beginning and

ending odometer readings and (2) mileage driven weekly.

      Petitioners’ 2011, 2012, and 2013 Federal income tax returns were prepared

by a paid income tax return preparer; but petitioner, who was the only witness

called on petitioners’ behalf at trial, could not recall the name of the return

preparer, and that information is not otherwise in the record. As relevant here,

each return includes a Schedule C relating to a business identified as Hope

Consultants (Hope). Petitioner is shown as the owner of Hope on each Schedule

C, but she could not recall whether Hope was actually engaged in any trade or

business during 2011, 2012, or 2013.
                                       -4-

      In any event, petitioners reported income and expenses on the Schedules C

relating to Hope as follows:

           Item                      2011          2012          2013

Income
  Gross receipts or sales          $13,600         -0-            -0-
  Gross income                      13,600         -0-            -0-
Expenses
  Car and truck                     13,845       $15,429       $21,640
  Depreciation and sec. 179          3,299         6,869         1,249
  Insurance                           -0-          -0-             588
  Legal and professional             1,450           450         1,800
  Office                             1,200         -0-            -0-
  Rent or lease of
    other business property           -0-         18,000         -0-
  Supplies                            -0-            395         -0-
  Meals and entertainment              600         -0-           -0-
  Utilities                          1,746         -0-           -0-
  Other                              4,806         1,500           798
    Total                           26,946        42,643        26,075

    Net profit (loss)              (13,346)       (42,643)      (26,075)

The gross income shown on the 2011 return is a portion of the income petitioner

received from Life Line. The net losses shown on the Schedules C are taken into

account in the adjusted gross incomes reported on petitioners’ 2011, 2012, and

2013 returns.

      Petitioners’ 2013 return also includes a Schedule A, Itemized Deductions,

and a Form 8283, Noncash Charitable Contributions. Petitioners claimed an
                                        -5-

$18,000 charitable contribution deduction for gifts other than cash on the

Schedule A. The Form 8283 indicates that this deduction is attributable to

clothing donations made to “Goodwill”. At trial petitioner testified that the

deduction related to donations of clothing that were made to a church that might or

might not be still in existence.

      As relevant here, in the notice respondent: (1) disallowed all of the

deductions claimed on the Schedule C for each year in issue; (2) disallowed the

deduction for noncash charitable contributions for 2013 for failure to substantiate

the amount claimed;3 and (3) imposed a section 6662(a) accuracy-related penalty

for each year in issue on several grounds, including “[n]egligence or disregard of

rules or regulations” and “substantial understatement of income tax.” Other

adjustments made in the notice need not be discussed because the adjustments are

computational, have no consequence to the deficiencies here in dispute, or as

noted, have been agreed to between the parties.




      3
       Because allowable itemized deductions were less than the standard
deduction, respondent disallowed otherwise allowable itemized deductions
claimed on the Schedule A and allowed petitioners the standard deduction.
                                        -6-

                                     Discussion

I. Disputed Deductions

      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.4 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). 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.




      4
       Petitioners do not claim and the record does not show that the provisions of
sec. 7491(a) are applicable, and we proceed as though they are not.
                                        -7-

      A. Car and Truck Expenses

      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. 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). To satisfy the requirements of section 274(d),

a taxpayer generally must maintain adequate records or produce sufficient

evidence corroborating his or her own statement, which, in combination, are

sufficient to establish the amount, date and time, and business purpose for each

expenditure for travel away from home or expenditure or business use of listed

property. Sec. 1.274-5T(b)(2), (6), (c)(1), Temporary Income Tax Regs., 50 Fed.

Reg. 46014, 46016-46017 (Nov. 6, 1985).

      Petitioners claimed deductions for car and truck expenses for each year in

issue on a Schedule C related to Hope. Petitioner could not remember, and it is

not otherwise clear, how the deductions for car and truck expenses were
                                        -8-

calculated, i.e., whether by actual expenses or the standard mileage rate.5

Petitioners now take the position that they are entitled to deductions for car and

truck expenses using the standard mileage rate applied to the mileage shown on

petitioner’s mileage logs.

      Petitioner’s mileage logs are not sufficient to support the deductions. In

addition to other infirmities, the logs merely show weekly odometer readings; they

do not include the detailed information contemplated by the above-referenced

regulation. Petitioner claims to have mileage logs showing the necessary detail,

but she was unwilling to disclose those logs to respondent. According to

petitioner, to do so would violate confidentiality obligations owed to her clients.

Because petitioner would not allow respondent to review these logs, the Court

declined petitioners’ invitation to an ex parte, in camera review, and the logs were

not otherwise offered into evidence by petitioners.

      Needless to say, we cannot take into account materials not included in the

record. The evidence petitioners offered is insufficient to support their claim to

the car and truck expense deductions here in dispute, and respondent’s

disallowances of those deductions are sustained.


      5
       A taxpayer may deduct vehicle expenses using either actual cost or the
standard mileage rate. See sec. 1.274-5(j)(2), Income Tax Regs.
                                         -9-

      B. Charitable Contribution

      Generally, section 170(a) allows a deduction for any charitable contribution

made by the taxpayer. For a noncash contribution of property, in general, the

amount of the allowed deduction is the contributed property’s fair market value at

the time of contribution. Sec. 1.170A-1(c)(1), Income Tax Regs. The property’s

value also determines the applicable substantiation requirements.

      First, any contribution of $250 or more must satisfy the requirement of

section 1.170A-13(f)(1), Income Tax Regs., which provides that to be allowed a

charitable contribution deduction of $250 or more, the taxpayer must substantiate

the contribution with a contemporaneous written acknowledgment from the donee

organization.6

      Second, for noncash contributions in excess of $500, a taxpayer must

maintain reliable written records with respect to each donated item. Sec.

170(f)(11)(A) and (B); sec. 1.170A-13(b)(2) and (3), Income Tax Regs. These


      6
       An acknowledgment is contemporaneous if the donee provides it on or
before the earlier of the date on which the taxpayer files a return for the year of the
contribution or the due date, including extensions, for filing that return. Sec.
170(f)(8)(C). The acknowledgment must: (1) include “a description (but not
value) of any property other than cash contributed”; (2) state whether the donee
provided any goods or services in exchange for the gift; and (3) include a
description and good-faith estimate of the value of any goods or services the donee
provided. Sec. 170(f)(8)(B); sec. 1.170A-13(f)(2), Income Tax Regs.
                                        - 10 -

records must include, inter alia: (1) the approximate date and manner of the

property’s acquisition; (2) a description of the property in detail reasonable under

the circumstances; (3) the property’s cost or other basis; (4) the property’s fair

market value at the time of contribution; and (5) the method by which its fair

market value was determined. Sec. 1.170A-13(b)(2)(ii)(B), (C) and (D), (3)(i)(A)

and (B), Income Tax Regs.

      Third, for noncash contributions of property with a claimed value of $5,000

or more, a taxpayer must--in addition to satisfying both sets of requirements

described above--obtain a “qualified appraisal” of the donated item(s) and attach

to his tax return a fully completed appraisal summary on Form 8283. Sec.

170(f)(11)(C); Jorgenson v. Commissioner, T.C. Memo. 2000-38 (“The IRS has

prescribed Form 8283 to be used as the appraisal summary.”); sec. 1.170A-

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

      Petitioners claimed an $18,000 charitable contribution deduction on the

Schedule A for 2013. According to petitioners, the deduction relates to donations

of various items of petitioner’s clothing to a church.7 Other than generalized

references to various clothing designers and the quality of the items petitioners


      7
        Petitioners did not explain the discrepancy between the donee shown on
petitioners’ return and the donee referenced in petitioner’s testimony.
                                        - 11 -

claimed to have donated, no details as to the number of specific items donated or

the value of any specific item have been provided. Petitioners did not present any

written substantiation for the charitable contribution deduction, nor could

petitioner recall how the value of the donations was calculated. Petitioners have

failed to establish their entitlement to the charitable contribution deduction

claimed on their 2013 return, and respondent’s disallowance of the deduction is

sustained.

II. Section 6662(a) Accuracy-Related Penalty

      According to respondent, petitioners are liable for a section 6662(a)

accuracy-related penalty for each year in issue because, among other reasons, the

underpayment of tax required to be shown on their return for each year is a

substantial understatement of income tax.8 See sec. 6662(a) and (b)(2).

      Respondent bears the burden of production with respect to the imposition of

the penalty for each year, see sec. 7491(c), and that burden has been met because

the understatement of income tax exceeds the greater of 10% of the tax required to

be shown on the return or $5,000, see sec. 6662(d)(1)(A); sec. 1.6662-4(b),

Income Tax Regs.

      8
       For each year in issue, the deficiency, underpayment of tax, and
understatement of income tax are computed in the same manner. See secs. 6211,
6662(d)(2), 6664(a).
                                       - 12 -

      Petitioners have failed to show that they had reasonable cause and acted in

good faith with respect to the underpayment for any of the years in issue. See sec.

6664(c)(1); Higbee v. Commissioner, 116 T.C. 438 (2001). Petitioners are liable

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

      To reflect the foregoing,


                                                      Decision will be entered

                                                for respondent.
