                            T.C. Summary Opinion 2015-19



                            UNITED STATES TAX COURT



     ARUNAS SAVULIONIS AND ILONA R. SAVULIONIS, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 9144-12S.                             Filed March 17, 2015.



      Arunas Savulionis and Ilona R. Savulionis, pro se.

      Jayne Michele Wessels, for respondent.



                                 SUMMARY OPINION


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

provisions of section 7463 of the Internal Revenue Code in effect when the

petition was filed.1 Pursuant to section 7463(b), the decision to be entered is not


      1
          Unless otherwise indicated, section references are to the Internal Revenue
                                                                          (continued...)
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reviewable by any other court, and this opinion shall not be treated as precedent

for any other case.

      In a notice of deficiency dated January 25, 2012 (notice), respondent

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

respect to, petitioners’ Federal income tax:

                                                              Penalty
             Year                Deficiency                 sec. 6662(a)

             2009                 $10,463                    $2,092.60
             2010                   9,242                     1,848.40

      The issues for decision for each year are: (1) whether petitioners are

entitled to various deductions claimed on Schedule C, Profit or Loss From

Business; and (2) whether petitioners are liable for a section 6662(a)

accuracy-related penalty.

                                     Background

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

petition was filed and at all other times relevant here, petitioners resided in

Philadelphia.




      1
       (...continued)
Code of 1986, as amended, in effect for the years in issue. Rule references are to
the Tax Court Rules of Practice and Procedure.
                                         -3-

      Arunas Savulionis (petitioner) is a vascular ultrasound technologist. He is

the sole proprietor of a vascular ultrasound and technology business named

Arunas Savulionis Sole Proprietorship (sole proprietorship). Through the sole

proprietorship petitioner provided vascular ultrasound and technology services for

the patients of an outpatient clinic in Somers Point, New Jersey (clinic), during

each year in issue. In order to do so on the days he was on duty, petitioner

routinely commuted between his residence and the clinic in his personal car. The

clinic, rather than petitioner, billed and received payments from its patients for the

treatments they received from petitioner. Ilona R. Savulionis was employed as the

bookkeeper for the sole proprietorship for both years in issue.

      At all times relevant, petitioners and their daughter lived in a 1,000-square-

foot house (house). Individuals enter and leave the house through a door in the

340-square-foot living room. Access to the other rooms in the house is through

the living room. Petitioner used the living room for certain business-related

purposes, but he did not treat any patients there.

      During the years in issue petitioner considered opening a vascular

ultrasound and technology laboratory, and an ultrasound technologist staffing

agency to fill a demand he believed existed for such services in the Philadelphia

area; in the living room of his house he took some preliminary steps to do so. As
                                           -4-

of the close of 2010, however, he was not engaged in a trade or business of doing

either.

          Petitioners electronically filed their 2009 and 2010 joint Federal income tax

returns. They did not elect to itemize deductions for either year in issue. See sec.

63. Income and deductions attributable to the sole proprietorship are reported on a

Schedule C attached to each return. All of the income, $95,556 and $88,639 for

2009 and 2010, respectively, reported on the Schedules C is attributable to

services petitioner provided to the patients of the clinic through the sole

proprietorship. As relevant here, the following deductions are claimed on the

Schedules C:

                    Expense                      2009                  2010

            Business use of home              $6,854                  $7,683
            Meals                              6,405                   6,945
            Car and truck                     19,050                  17,534

          The deductions for business use of the home represent household costs

allocable to the living room on the basis of area. The deductions for meals are

attributable to meals consumed while petitioner was at work in Somers Point, New

Jersey. The deductions for car and truck expenses are attributable to driving

petitioners’ car between petitioner’s residence and the clinic.
                                        -5-

      In the notice and as relevant, respondent: (1) disallowed substantially all of

the deductions for the above-listed Schedule C expenses;2 and (2) imposed a

section 6662(a) accuracy-related penalty on several grounds, including

“negligence or disregard of rules or regulations” and “substantial understatement

of income tax”. Other adjustments made in the notice are computational and need

not be addressed.

                                     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). 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


      2
       In the notice respondent allowed deductions of $36.70 and $467 for car and
truck expenses for 2009 and 2010, respectively, which according to respondent
represents the portion of the car and truck expenses attributable to petitioner’s
attendance at continuing professional education conferences.
      3
      Petitioners do not claim that the provisions of sec. 7491(a) are applicable,
and we proceed as though they are not.
                                          -6-

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.

      Keeping these fundamental principles of Federal income taxation in mind,

we consider petitioners’ claims to the various deductions here in dispute.

I. Home Office Expenses

      Petitioners claim home office expense deductions of $6,854 and $7,683 for

2009 and 2010, respectively. These deductions relate to various expenses

(mortgage interest, utilities, etc.) allocable to a portion of petitioners’ house, that

is, the living room. Except as allowable in section 280A, no deduction is allowed

for expenses incurred by an individual in connection with the individual’s use of a

dwelling unit as a residence during the taxable year. See sec. 280A(a). The house

is a dwelling unit within the meaning of section 280A(a), see sec. 280A(f), which

petitioners used as a residence during both years in issue, see sec. 280A(d).

      There are several exceptions to this general rule, only one of which is

relevant here. An individual is allowed deductions for expenses attributable to the
                                         -7-

use of a portion of a dwelling unit which is exclusively used on a regular basis by

the individual as the principal place for any trade or business. See secs. 162(a),

280A(c)(1)(A). According to petitioners, the house was petitioner’s principal

place of business for the sole proprietorship for each year in issue, and the entire

living room of the house, to which the deductions here in dispute relate, was used

exclusively for business purposes. Respondent disagrees on both points, and so

do we.

      Entry to and exit from the house was through a door in the living room.

Access to all other rooms in the house was through the living room. Three

individuals lived in the house and no doubt congregated in the living room and

otherwise engaged in other family activities in that room. Petitioners’ claim that

the entire living room was used exclusively for business purposes is wholly

inconsistent with a commonsense notion of the everyday realities of family life of

a three-person family residing in a dwelling unit as described by petitioner.

Because we are not convinced that the entire living room was used exclusively for

business purposes during either year in issue, petitioners are not entitled to

deductions for the expenses attributable to that portion of the house. Furthermore,

our finding in that regard operates, in and of itself, to deny petitioners those
                                         -8-

deductions regardless of whether the house was the principal place of any of

petitioner’s businesses during either year in issue.

      Respondent’s disallowances of the deductions attributable to the use of

petitioners’ house in petitioner’s business are sustained.

II. Meals Expenses

      Petitioners claim deductions of $6,405 and $6,945 for 2009 and 2010,

respectively, attributable to meals that petitioner consumed during the days he

worked at the clinic in Somers Point, New Jersey.

      Section 162(a)(2) allows a taxpayer to deduct ordinary and necessary travel

expenses, including amounts for meals, paid or incurred during the taxable year if

such expenses are paid or incurred while away from home in pursuit of a trade or

business. Commissioner v. Flowers, 326 U.S. 465, 470 (1946); Cockrell v.

Commissioner, 38 T.C. 470 (1962), aff’d, 321 F.2d 504 (8th Cir. 1963). The

reference to “home” in section 162(a)(2) means the taxpayer’s “tax home”.

Mitchell v. Commissioner, 74 T.C. 578, 581 (1980); Kroll v. Commissioner, 49

T.C. 557, 561-562 (1968). As a general rule, a taxpayer’s tax home is in the

vicinity of his principal place of business, not where his personal residence is, if

different from his principal place of business. Mitchell v. Commissioner, 74 T.C.

at 581; Kroll v. Commissioner, 49 T.C. at 561-562.
                                           -9-

          We are satisfied from what has been presented that petitioner’s tax home,

and therefore his “home” for purposes of section 162(a), was the vicinity of the

clinic during both years in issue because the clinic was the principal place of

petitioner’s business during both years. The clinic’s facility in Somers Point, New

Jersey, is the only location where petitioner provided the necessary medical

services to the patients of the clinic, and his association with the clinic generated

all of the income shown on the Schedules C. Because the meals expenses were

not paid or incurred by petitioner while traveling away from home, petitioners are

not entitled to a deduction for those expenses for either year in issue.

Respondent’s disallowances of those deductions are sustained.4

III. Car and Truck Expenses

          For each year in issue the deduction for car and truck expenses is

attributable to the use of petitioner’s car to travel between his residence and the

clinic.

          In general, expenses for traveling between a taxpayer’s residence and the

taxpayer’s regular place of business or employment constitute nondeductible

          4
        The result would be the same even if the evidence supported a finding that
the vicinity of petitioners’ house should be considered petitioner’s tax home.
After all, there was no need for him to stop and rest when traveling between his
residence and the clinic. See United States v. Correll, 389 U.S. 299 (1967);
Strohmaier v. Commissioner, 113 T.C. 106, 115 (1999).
                                         - 10 -

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

(1973); Commissioner v. Flowers, 326 U.S. 465; Feistman v. Commissioner, 63

T.C. 129, 134 (1974). Relying upon an exception to this general rule, petitioners

argue that the expenses are attributable to the cost of traveling (driving) between

two places of business, namely, petitioner’s home office and the clinic. See

Strohmaier v. Commissioner, 113 T.C. 106, 113-114 (1999); Wis. Psychiatric

Servs., Ltd. v. Commissioner, 76 T.C. 839, 849 (1981); Curphey v. Commissioner,

73 T.C. 766, 777-778 (1980).

      The exception that petitioners rely upon applies only if the taxpayer’s home

office constitutes the taxpayer’s principal place of business. Petitioner’s residence

was not the principal place of business with respect to his employment with the

clinic, and it was not a second place of business with respect to his activities in

connection with his plans to start a vascular ultrasound and technology laboratory

and/or an ultrasound technologist staffing agency, because those activities had not

matured to the level of a trade or business as of the close of either year in issue.

See Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987); 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).
                                         - 11 -

        The expenses that petitioner paid or incurred to travel between his residence

and the clinic are nondeductible personal expenses. See sec. 262(a).

Respondent’s disallowances of the deductions for those expenses are sustained.

IV. Section 6662(a) Accuracy-Related Penalty

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

accuracy-related penalty for either year in issue. Relying upon various grounds,

including a substantial understatement of income tax, respondent argues that they

are. See sec. 6662(a)-(d).

        Section 6662(a) imposes a penalty of 20% of the portion of an

underpayment of tax attributable to, among other things, a substantial

understatement of income tax. Sec. 6662(b)(2). An understatement of income tax

is substantial within the meaning of section 6662 if, as relevant here, the

understatement exceeds $5,000. See sec. 6662(d); sec. 1.6662-4(b), Income Tax

Regs.

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

the penalties imposed in the notice and here in dispute, see sec. 7491(c), and that

burden has been satisfied because the understatement of income tax for each year

in issue (here computed in the same manner as the deficiency) will exceed $5,000,

see secs. 6211, 6662(d)(2), 6664(a). That being so, it is petitioners’ burden to
                                        - 12 -

establish that the imposition of the penalty is not appropriate. See Higbee v.

Commissioner, 116 T.C. 438, 447 (2001); see also Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).

      Section 6664(c)(1) provides that the section 6662(a) accuracy-related

penalty does not apply to any portion of an underpayment if the taxpayer

establishes that there was reasonable cause for, and the taxpayer acted in good

faith with respect to, the underpayment. Sec. 1.6664-4(a), Income Tax Regs. The

determination of whether the taxpayer acted with reasonable cause and in good

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

circumstances. Id. para. (b)(1).

      Petitioners are not experienced in Federal tax matters; petitioner is an

ultrasound technologist, and Mrs. Savulionis is a bookkeeper for the sole

proprietorship.

       For all intents and purposes, the underpayment of tax required to be shown

on petitioners’ Federal income tax return for each year in issue results from their

treatment of their residence as petitioner’s: (1) principal place of business and (2)

tax home. As noted, they are incorrect on both points. Nevertheless, taking into

account the pertinent facts and circumstances, we are satisfied that they acted in
                                        - 13 -

good faith and had reasonable cause for their errors. Accordingly, petitioners are

not liable for a section 6662(a) accuracy-related penalty for either year in issue.

      To reflect the foregoing,


                                                      Decision will be entered

                                                 under Rule 155.
