                     T.C. Summary Opinion 2010-49



                        UNITED STATES TAX COURT



                     AMANDA GENTRY, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 23501-08S.           Filed April 19, 2010.



        Amanda Gentry, pro se.

        Michael T. Shelton, for respondent.



     DEAN, 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.    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.     Unless otherwise indicated, subsequent section references

are to the Internal Revenue Code in effect for the year in issue,
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and all Rule references are to the Tax Court Rules of Practice

and Procedure.

     The issues for decision1 are whether for 2005:   (1)

Petitioner is entitled to a deduction for the business use of her

home in excess of respondent’s allowance; (2) she is entitled to

deduct car and truck expenses of $7,009; (3) she is entitled to

$37,879 of cost of goods sold (CGS) associated with her

manufacturing business; and (4) she is liable for the accuracy-

related penalty under section 6662(a).

                            Background

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

The stipulation of facts and the attached exhibits are

incorporated herein by reference.    When petitioner filed her

petition, she resided in Illinois.

     Petitioner timely filed her 2005 Federal income tax return.

For 2005 petitioner operated two separate businesses:    A graphic

design business and a manufacturing business producing “buddha

bags”.   On Schedule C, Profit or Loss From Business, petitioner

reported gross receipts of $103,551 for her graphic design

business.   She reported several expenses for her graphic design

business, including $7,009 of car and truck expenses and $15,737

of expenses for the business use of her home.    On a second


     1
      Petitioner’s eligibility for the education credit and the
amount of her self-employment tax are computational adjustments
to be determined consistent with this opinion.
                                 - 3 -

Schedule C petitioner reported $25,425 of gross receipts and

$59,244 of CGS for her manufacturing business.

      During 2005 petitioner maintained a home office for her

graphic design business and worked as a freelance graphic

designer for VSA Partners, Inc. (VSA).

      In the notice of deficiency respondent determined a tax

deficiency of $15,805, and an accuracy-related penalty of $3,161

under section 6662(a).   Respondent disallowed:   (1) $1,803 of

petitioner’s expenses related to the business use of her home;

and (2) car and truck expenses of $7,009.    Respondent further

determined that $37,879 of petitioner’s claimed CGS was

includable as an inventory cost and that she was subject to the

accuracy-related penalty under section 6662(a).

                            Discussion

I.   Burden of Proof

      Generally, the Commissioner’s determinations are presumed

correct, and the taxpayer bears the burden of proving that those

determinations are erroneous.2    Rule 142(a); see INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, 290

U.S. 111, 115 (1933).




      2
      Petitioner has not claimed or shown that she meets the
requirements under sec. 7491(a) to shift the burden of proof to
respondent as to any factual issue relating to her liability for
tax.
                                  - 4 -

II.   Claimed Business Expense Deductions

      Deductions are strictly a matter of legislative grace, and

taxpayers must satisfy the specific requirements for any

deduction claimed.    See INDOPCO, Inc. v. Commissioner, supra; New

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

Taxpayers bear the burden of substantiating the amount and

purpose of any claimed deduction.     See Hradesky v. Commissioner,

65 T.C. 87 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).

      A.   Business Use of Home

      Section 280A(c)(1)(A) permits the deduction of expenses

allocable to a portion of the dwelling unit that was used

exclusively and regularly as the principal place of business for

the taxpayer’s trade or business.     Respondent disallowed $1,803

of petitioner’s claimed $15,737 deduction for the business use of

her home.

      Petitioner did not testify as to the expenses or provide

documentation to substantiate the disallowed expenses.

Accordingly, respondent’s determination is sustained.

      B.   Car and Truck Expenses

      Generally, expenses that a taxpayer incurs in commuting

between his home and place of business are personal and

nondeductible.    Commissioner v. Flowers, 326 U.S. 465 (1946);

Heuer v. Commissioner, 32 T.C. 947, 951 (1959), affd. per curiam

283 F.2d 865 (5th Cir. 1960); secs. 1.162-2(e), 1.262-1(b)(5),
                                - 5 -

Income Tax Regs.    Expenses incurred, however, in going between

two or more places of business may be deductible as ordinary and

necessary business expenses under section 162 if incurred for

business reasons.    Steinhort v. Commissioner, 335 F.2d 496, 503-

504 (5th Cir. 1964), affg. T.C. Memo. 1962-233; Heuer v.

Commissioner, supra.    Where a taxpayer attempts to deduct the

expenses of transportation between two places of business, one of

which is an office in his home, such office must be the

taxpayer’s principal place of business for the trade or business

conducted by the taxpayer at those other work locations.     Curphey

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

     It is uncontested that petitioner’s home office was her

principal place of business for her graphic design business.

Accordingly, any substantiated driving expenses between her

business office in her home and VSA3 are business expenses.    See

Walker v. Commissioner, 101 T.C. 537, 545 (1993); Wicker v.

Commissioner, T.C. Memo. 1986-1.

     An expense is considered ordinary if commonly or frequently

incurred in the trade or business of the taxpayer.     Deputy v. du

Pont, 308 U.S. 488, 495-496 (1940).     An expense is necessary if

it is appropriate or helpful in carrying on a taxpayer’s trade or




     3
      Petitioner’s mileage logs indicate other destinations;
however, she did not explain the business purpose of trips to
those destinations.
                               - 6 -

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

Welch v. Helvering, supra at 113.

     A taxpayer must maintain records sufficient to substantiate

the amounts of the deductions claimed.    Sec. 1.6001-1(a), Income

Tax Regs.   With respect to certain business expenses subject to

section 274(d), more stringent substantiation requirements apply

than with respect to other ordinary and necessary business

expenses.   Section 274(d) imposes stringent substantiation

requirements for claimed deductions relating to the use of

“listed property”, which is defined under section 280F(d)(4)(A)

to include passenger automobiles.    Under this provision, any

deduction claimed with respect to the use of a passenger

automobile will be disallowed unless the taxpayer substantiates

specified elements of the use by adequate records or by

sufficient evidence corroborating the taxpayer’s own statement.

See sec. 274(d); sec. 1.274-5T(c)(1), Temporary Income Tax Regs.,

50 Fed. Reg. 46016 (Nov. 6, 1985).

     To meet the adequate records requirements of section 274(d),

a taxpayer must maintain some form of records and documentary

evidence that in combination are sufficient to establish each

element of an expenditure or use.    See sec. 1.274-5T(c)(2),

Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).     A

contemporaneous log is not required, but corroborative evidence

to support a taxpayer’s reconstruction of the elements of an
                               - 7 -

expenditure or use must have “a high degree of probative value to

elevate such statement” to the level of credibility of a

contemporaneous record.   Sec. 1.274-5T(c)(1), Temporary Income

Tax Regs., supra.

     The elements that must be substantiated to deduct expenses

for the business use of an automobile are:   (1) The amount of the

expenditure; (2) the mileage for each business use of the

automobile and the total mileage for all use of the automobile

during the taxable period; (3) the date of the business use; and

(4) the business purpose of the use of the automobile.   See sec.

1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016

(Nov. 6, 1985).

     Petitioner explained that in 2005 she drove frequently from

her home office to VSA to drop off files and check in as their

freelance graphic designer.   Petitioner substantiated her mileage

with a computerized log listing the date, destination, and total

mileage of each trip.   The Court is satisfied that petitioner

drove to VSA for business purposes and that she presented

sufficient evidence to satisfy the strict substantiation

requirements pursuant to section 274(d).
                                   - 8 -

       Petitioner’s trips to VSA in 2005 totaled 1,022 miles.

Accordingly, petitioner is entitled to a deduction of $435.194 for

car and truck expenses for 2005.

III.       Cost of Goods Sold

       In calculating gross income, taxpayers may offset gross

revenue with cost of goods sold.       B.C. Cook & Sons, Inc. v.

Commissioner, 65 T.C. 422, 428 (1975), affd. 584 F.2d 53 (5th

Cir. 1978).       The CGS is computed with reference to the value of a

taxpayer’s opening and closing inventory for the year.       The cost

of goods purchased for resale, with an adjustment for the

difference between opening and closing inventories for the year,

is then deducted from gross sales in computing gross income.

Sec. 1.162-1(a), Income Tax Regs.; see sec. 1.61-3, Income Tax

Regs.       Taxpayers are required to take “inventories at the

beginning and end of each taxable year” in which “the production,

purchase, or sale of merchandise is an income-producing factor.”

Sec. 1.471-1, Income Tax Regs.

       There is an exception to the inventory accounting

requirement for small business owners whose average annual gross




       4
      The mileage rate for January to August 2005 was 40.5 cents
per mile (756 miles driven x .405 mileage rate). See Rev. Proc.
2004-64, sec. 5.01, 2004-2 C.B. 898, 900. The mileage rate from
September to December 2005 was 48.5 cents per mile (266 miles
driven x .485 mileage rate). See Announcement 2005-71, 2005-2
C.B. 714.
                                 - 9 -

receipts do not exceed $1 million.       Rev. Proc. 2001-10, sec. 1,

2001-1 C.B. 272, 272.

       If the exception applies, the taxpayer may choose to treat

inventory in the same manner as nonincidental materials and

supplies under section 162.    See sec. 1.162-3, Income Tax Regs.

Section 1.162-3, Income Tax Regs., provides:

       Taxpayers carrying materials and supplies on hand
       should include in expenses the charges for materials
       and supplies only in the amount that they are actually
       consumed and used in operation during the taxable year
       for which the return is made, provided that the costs
       of such materials and supplies have not been deducted
       in determining the net income or loss or taxable income
       for any previous year. * * *

       For a taxpayer using the exception under Rev. Proc. 2001-10,

supra, nonincidental materials and supplies are considered

consumed and used in the year in which the taxpayer sells the

merchandise or finished goods.    See id. sec. 4.02, 2001-1 C.B. at

273.    For a cash method taxpayer, the costs of such inventoriable

items are deductible only for the year of sale, or for the year

in which the taxpayer actually pays for the inventoriable items,

whichever is later.     Id.

       Any amount claimed as CGS must be substantiated, and

taxpayers are required to maintain records sufficient for this

purpose.    Sec. 6001; Nunn v. Commissioner, T.C. Memo. 2002-250;

Wright v. Commissioner, T.C. Memo. 1993-27; sec. 1.6001-1(a),

Income Tax Regs.
                                 - 10 -

      Notwithstanding whether petitioner qualified for the

exception to the inventory accounting requirements under Rev.

Proc. 2001-10, supra, she did not comply with the requirements of

section 162 for reporting nonincidental materials and supplies.

Petitioner believed that because she was excepted from the

inventory accounting requirements as a small business owner, she

was not required to track her inventory.5   Consequently, she

presented no evidence of her opening and closing inventories for

2005 or the amount of materials and supplies actually consumed

during the year.   Accordingly, the Court must sustain

respondent’s determination.

IV.   Accuracy-Related Penalty

      Respondent determined that petitioner is liable for an

accuracy-related penalty under section 6662(a).   In pertinent

part, section 6662(a) and (b)(1) and (2) imposes an accuracy-

related penalty equal to 20 percent of the underpayment that is

attributable to:   (1) Negligence or disregard of rules or

regulations; or (2) a substantial understatement of income tax.

A “substantial understatement” includes an understatement of


      5
      Respondent also cites Rev. Proc. 2002-28, 2002-1 C.B. 815,
as applicable to petitioner. Rev. Proc. 2002-28, supra, expands
the scope of Rev. Proc. 2001-10, 2001-1 C.B. 272, to additional
taxpayers not otherwise qualifying under Rev. Proc. 2001-10,
supra. Both revenue procedures require a qualifying small
business to follow the reporting requirements of sec. 162 for
reporting nonincidental materials and supplies. Accordingly, the
Court need not discuss petitioner’s eligibility under Rev. Proc.
2002-28, supra.
                              - 11 -

income tax that exceeds the greater of 10 percent 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.   The

Commissioner bears the burden of production.    Sec. 7491(c); see

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

     Petitioner had a substantial understatement of income tax

for 2005 since the understatement amount exceeded the greater of

10 percent of the tax required to be shown on the return or

$5,000.   The Court concludes that respondent has produced

sufficient evidence to show that the accuracy-related penalty

under section 6662 is appropriate.

     Section 6664(c)(1) provides an exception to the section

6662(a) penalty if it is shown that there was reasonable cause

for any portion of the underpayment and the taxpayer acted in

good faith.   The determination of whether a taxpayer acted with

reasonable cause and 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.    The most

important factor is the extent of the taxpayer’s effort to assess

his proper tax liability.   Id.   Circumstances that may indicate

reasonable cause and good faith include an honest

misunderstanding of fact or law that is reasonable in view of the

taxpayer’s experience, knowledge, and education.    Id.
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     Petitioner believed that as the owner of a qualifying small

business under Rev. Proc. 2001-10, supra, she was exempt from the

inventory accounting requirements and was allowed to deduct her

business expenses as they were paid.

     Given the complexity of the rules and exceptions regarding

the inventory reporting requirements, the Court finds that

petitioner had a reasonable belief that as a small business owner

she was exempt from the inventory reporting requirements and was

not required to track the amount of materials and supplies

actually consumed during the year.    Therefore, the Court finds

that petitioner is not subject to the accuracy-related penalty

with respect to her exclusion of CGS from inventory costs.

     With respect to the disallowed car expense and business use

of home deductions, petitioner has failed to present any evidence

or argument as to why she should not be subject to the accuracy-

related penalty for those claimed deductions.      Accordingly, she

will be subject to the accuracy-related penalty for those items.

     Other arguments made by the parties and not discussed herein

were considered and rejected as irrelevant, without merit, or

moot.

     To reflect the foregoing,


                                       Decision will be entered

                                 under Rule 155.
