                          T.C. Summary Opinion 2012-85



                         UNITED STATES TAX COURT



                    JEREMY L. WADE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 28841-10S.                         Filed August 28, 2012.



      Jeremy L. Wade, pro se.

      Nhi T. Luu, for respondent.



                              SUMMARY OPINION


      GERBER, 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



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

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 in petitioner’s 2008 Federal income tax

of $8,024 and an accuracy-related penalty under section 6662(a) of $1,604.80. The

deficiency stems from respondent’s partial2 disallowance of deductions for expenses

claimed on Schedule A, Itemized Deductions, and Schedule C, Profit or Loss From

Business, of petitioner’s 2008 tax return. We consider here whether petitioner has

shown that he is entitled to deduct any amounts in excess of those respondent

allowed.

                                    Background

      Petitioner resided in the State of Washington at the time his petition was

filed. During the 2008 year petitioner was a sales consultant for eyewear

(glasses). For the first four months of 2008 petitioner worked as an employee for

Marcolin USA selling eyewear to optometrists and to other retail eyewear outlets.

For the remainder of 2008 petitioner worked as an independent sales consultant

for Aspex Eyewear, Inc., doing essentially the same thing. With respect




      2
       Respondent denied deductions for substantially all of the expenses in
question.
                                          -3-

to both jobs, petitioner’s travel, meals, and entertainment expenses were not

reimbursed by Marcolin or Aspex.

      It was petitioner’s practice to travel to certain cities and visit existing and

potential eyewear clients. Sometimes he was able to return home, and other times

he would remain in the location overnight. His sales territory was extensive and

included cities in three States, including the one in which he lived. Each day he

would record in his log the city to which he had driven. In each of those cities

petitioner visited the same existing and potential clients. Petitioner identified the

names of the establishments and the people with whom he had discussed the

eyewear products. Occasionally, petitioner would take a client or a potential client

to lunch or dinner, and for each occasion he identified the name of the person and

the nature of the discussions. Occasionally, petitioner also purchased meals for

himself when away from home on sales trips.

      In addition to his eyewear sales, petitioner was attempting to establish a

photography business, and during 2008 he photographed a few weddings and did

some promotional photo shoots for musicians. Although he incurred some expenses

for his activity, he performed it without charge in an attempt to introduce his

photography capability to the public. Petitioner did not incur any travel expenses in

connection with this activity, as he used his wife’s car.
                                        -4-

      On his 2008 income tax return petitioner claimed deductions for expenses on

a Schedule A and on two Schedules C. On his Schedule A petitioner claimed a

deduction for “employee expenses” of $13,344 which were detailed on a Form

2106-EZ, Unreimbursed Employee Business Expenses, attached to the 2008 return.

Respondent disallowed the $13,344 deduction in its entirety.

      On a Schedule C concerning his photography activity petitioner claimed a

deduction for “car and truck expenses” of $3,640, and respondent allowed $39. On

a Schedule C concerning his activity as an independent sales consultant, petitioner

claimed a deduction for “car and truck expenses” of $14,170, and respondent

allowed $925.

      During 2008 petitioner sold eyewear for the first four months of the year as

an employee and for the last eight months as an independent contractor. He drove

26,000 miles for business during 2008, and the distance traveled was similar each

month. Accordingly, he drove 8,667 miles for employee business and 17,333 miles

for his independent sales consultant business, none of the expenses for which were

reimbursed.
                                        -5-

                                    Discussion3

      Ordinary and necessary business expenses are deductible from gross income.

Sec. 162. Personal, living, or family expenses are not. Sec. 262. Unreimbursed

employee business expenses are deductible, subject to threshold limitations, as

itemized deductions. Sec. 67. The business expenses of an independent contractor,

however, may be deducible from gross income, whereas employee business

expenses are deductible from adjusted gross income subject to certain limitations.

Id. Certain expenses, such as those for travel, meals, and entertainment, are subject

to a higher standard of proof and must be substantiated by adequate records or

sufficient evidence corroborating the taxpayer’s oral testimony. Sec. 274.

      Petitioner is not entitled to deduct the travel expenses connected with his

photography activity because he used his wife’s automobile and did not bear any of

the expense of its operation. Nor did he reimburse her for its use. Accordingly, we

hold that petitioner is not entitled to more than the $39 respondent allowed with

respect to the $3,640 deduction claimed on his Schedule C involving the

photography activity.



      3
       There is no dispute between the parties concerning who bears the burden of
proof. Petitioner must show his entitlement to deduct the expenses he claimed. See
Rule 142.
                                         -6-

      Concerning the expenses he incurred in connection with his sales of eyewear,

there is no doubt that petitioner was engaged in the activity as an employee during

January through April and that he was an independent sales consultant during May

through December 2008. The standards for substantiation are the same, and,

accordingly, we consider all of the expenses for which petitioner provided

documentation and allocate any amounts allowable on the basis of the date each

expense was incurred.

      With respect to petitioner’s auto expense, he used the standard mileage rate

approach for claiming a deduction for travel by car. Petitioner kept records

reflecting each city to which he traveled, and he was able to identify that the travel

was in pursuit of business activity. We have found that petitioner traveled 8,667

miles as an employee for business travel. For travel before July 1, 2008, the rate of

reimbursement was 50.5 cents per mile and, accordingly, petitioner is entitled to

$4,376.83 as an itemized deduction on Schedule A. Petitioner drove 17,333 miles

as an independent sales consultant for business travel. The reimbursement rate for

travel after June 30, 2008, was 58.5 cents per mile and, accordingly, petitioner is

entitled to deduct $9,793.14 as a business expense on Schedule C ($2,188.29 for
                                          -7-

May and June and $7,604.85 for the remaining six months). Petitioner is entitled to

the $9,793.14 as deduction from gross income.4

      With respect to expenses other than travel, petitioner provided receipts for

several categories of expenses. The receipts reflect the type of expenditure, the

date, the amount, and usually the location. Petitioner designated some of the

receipts as for “gifts”, but he did not identify the recipients or the business nature of

the gifts. Accordingly, we hold that the amounts for “gifts” are not allowable as

deductions for lack of adequate substantiation. With respect to meals, where it was

possible to identify that the meal took place “away from home” (Seattle area), the

cost of the meal was allowed as a deduction and was allocated to either the first four

months or last eight months of 2008. Where petitioner purchased a lunch or a

dinner for an identified customer or a potential customer, the expense amount was

allowed as a deduction and allocated according to the date of the expenditure. A

deduction for expenses associated with transportation, such as parking, tolls, etc.,

was allowed where the expense was connected with petitioner’s travel.



      4
        Because respondent allowed $925 of travel expenses on Schedule C with
respect to petitioner’s service performed as an independent sales consultant, the
additional amount allowable would be $8,868.14 ($9,793.14 less $925). We leave
to the parties the responsibility of making the appropriate calculations in a Rule 155
computation in accord with the holding of this opinion.
                                          -8-

Finally, a deduction for shipping and office expenses was allowed, and the expenses

were allocated by time of expenditure.

       On the basis of the Court’s analysis of petitioner’s documentary and

testimonial evidence, the deductible amounts for petitioner’s expenditures for 2008

are as follows:

              Expense               Jan.-Apr.                   May-Dec.

              Parking                 $28.25                       $39.15
              Tolls                     -0-                         20.00
              Ferry                    37.55                        52.00
              Lodging                   -0-                        168.26
              Shipping                 39.31                        50.35
              Supplies                133.58                        13.17
              Meals                   275.21                       269.51
                Total                 513.90                       612.44

Accordingly, with respect to expenses other than travel, petitioner is entitled to an

itemized deduction of $513.90 on Schedule A, subject to any limitations imposed,

and is entitled to $612.44 of deductions from gross income on Schedule C in

connection with his activity as an independent sales consultant.

      Respondent determined an accuracy-related penalty under section 6662(a) for

petitioner’s 2008 tax year. Section 6662(a) and (b)(1) and (2) provides for a 20%

penalty on an underpayment of tax due to negligence or disregard of rules or

regulations or a substantial understatement of income tax. Petitioner did maintain
                                          -9-

records that were sufficient to entitle him to the above-discussed deductions, and we

hold that he was not negligent or in disregard of rules or regulations. Petitioner may

nevertheless be liable for an accuracy-related penalty if his underpayment was due to

a “substantial understatement of income tax”. An understatement is substantial if it

exceeds the greater of 10% of the tax required to be shown on the return or $5,000.

Sec. 6662(d)(1)(A). We are unable to hold that petitioner had an understatement that

is “substantial” within the meaning of the statute without a computation of the

understatement.

      If the parties in their Rule 155 computations find that there is a substantial

understatement, then the accuracy-related penalty would apply unless petitioner

demonstrates that the underpayment was due to reasonable cause and that he acted in

good faith. See Neonatology Assocs., P.A. v. Commissioner, 299 F.3d 221 (3d Cir.

2002), aff’g 115 T.C. 43 (2000). Petitioner has not presented any evidence to

support a holding that any underpayment was due to reasonable cause and, if

a substantial understatement exists, petitioner is liable for an accuracy-related

penalty.
                            - 10 -

To reflect the foregoing,


                                           Decision will be entered

                                     under Rule 155.
