                                T.C. Memo. 2012-353


                          UNITED STATES TAX COURT



   RICHARD D. RASMUSSEN AND CHERYL RASMUSSEN, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 16189-11.                           Filed December 19, 2012.



      Richard D. Rasmussen and Cheryl Rasmussen, pro sese.

      Shaina E. Boatright, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


      KERRIGAN, Judge: Respondent determined the following deficiency,

addition to tax, and penalty with respect to petitioners’ Federal income tax for tax

year 2008:
                                            -2-

[*2]                                     Addition to Tax       Penalty
          Year         Deficiency         Sec. 6651(a)        Sec. 6662(a)

          2008          $10,740               $535               $2,148

          Unless otherwise indicated, all section references are to the Internal Revenue

Code (Code) in effect for the year at issue, and all Rule references are to the Tax

Court Rules of Practice and Procedure. We round all dollar amounts to the nearest

dollar.

          Petitioners have conceded that petitioner husband received taxable income

from an IRA distribution in 2008. The issues remaining for consideration are: (1)

whether petitioners may deduct mortgage interest expenses; (2) whether petitioners

may deduct car and truck expenses; (3) whether petitioners may deduct auto rental

expenses; (4) whether petitioners are liable for the addition to tax under section

6651(a)(1); and (5) whether petitioners are liable for the accuracy-related penalty

under section 6662(a).

                                    FINDINGS OF FACT

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

married and resided in Minnesota when they filed the petition.

          During the year at issue petitioner husband was the sole proprietor of a

window installation business named Traveling Window Repair & Installation.
                                        -3-

[*3] Petitioner wife worked as a cosmetologist, but she also ran errands for

Traveling Window Repair & Installation.

I. Mortgage Interest Expenses

      In 2008 petitioners owned three properties: their residence in Minnesota

(Minnesota residence), two vacant lots in Wisconsin (collectively, Wisconsin lots),

and a condominium in Florida (Florida condominium).

      Petitioners purchased their Minnesota residence in 1999. On July 9, 2004,

petitioners purchased the Wisconsin lots for approximately $190,000. The

Wisconsin lots are vacant and wooded; there are no buildings on the land. The

Wisconsin lots are approximately 85 miles from petitioners’ Minnesota residence.

      On November 4, 2005, petitioners refinanced with Countrywide Home Loans

their mortgage on their Minnesota residence for $575,000 (2005 mortgage). They

used the 2005 mortgage to pay off a prior mortgage of $168,587 with Wells Fargo

and a home equity line of credit of $191,608 with Lake Elmo Bank.

      On April 25, 2006, petitioners purchased the Florida condominium for

approximately $191,000. Petitioners went to Florida at least twice in 2008.

      In 2008 the only mortgage petitioners had was the 2005 mortgage with

Countrywide Home Loans, now Bank of America. Petitioners received from
                                        -4-

[*4] Countrywide Home Loans a Form 1098, Mortgage Interest Statement, showing

mortgage interest paid in 2008 of $25,647.

      Petitioners deducted portions of the interest expense from their 2005

mortgage in four places on their 2008 income tax return. On a Schedule C, Profit or

Loss From Business, relating to Traveling Window Repair & Installation (Schedule

C-1), petitioners deducted $10,258 of mortgage interest with respect to the

Wisconsin lots. On a Schedule C relating to “Florida Development” (Schedule C-2)

petitioners deducted $11,541 of mortgage interest with respect to the Florida

condominium. On a Schedule E, Supplemental Income and Loss, petitioners

deducted $4,702 of mortgage interest for the rental of their Minnesota residence.

On Form 8829, Expenses for Business Use of Your Home, petitioners deducted

$15,388 of mortgage interest for the business use of their Minnesota residence.

Petitioners did not include a Schedule A, Itemized Deductions, with their 2008

return. The amounts deducted exceed their mortgage interest for 2008. Petitioners

conceded that the amounts reported on their Schedules C-1 and C-2 should be

lower. Respondent did not disallow the mortgage interest deductions on petitioners’

Schedule E and Form 8829.
                                        -5-

[*5] II. Traveling Window Repair & Installation

      On Schedule C-1 for Traveling Window Repair & Installation petitioners

deducted car and truck expenses of $21,118 and rent or lease of vehicles,

machinery, or equipment expenses of $7,084. On a Schedule C relating to “Auto

Rental” (Schedule C-3) petitioners deducted car and truck expenses of $2,183.

      A. Petitioner Husband

      Petitioner husband installs and repairs windows for his business, Traveling

Window Repair & Installation. He also stains, seals, and varnishes windows before

he installs or reinstalls them. Any parts he needs he has delivered to a warehouse in

Lake Elmo, Minnesota (Lake Elmo warehouse).

      Petitioner husband’s typical workday in 2008 involved driving from one job

to the next using a G.P.S., picking up supplies at the Lake Elmo warehouse when

necessary, and returning to finish jobs. Petitioner husband drove constantly for his

job. In 2008 he used two trucks in his work, a Chevy 1500 Silverado and a Chevy

S-10 pickup truck. Petitioner husband primarily used the Chevy Silverado.

Petitioner husband often used the Chevy S-10 to get construction materials for his

job and to run errands.

      When petitioner husband returned from work at night, he either wrote down

the jobs he had gone to that day or told petitioner wife where he had gone and she
                                         -6-

[*6] would write it down. At the end of every week or couple of weeks, petitioner

wife collected all of the job notes and sent them to petitioners’ tax preparer.

Mileage was not recorded separately for petitioner husband’s vehicles.

      B. Petitioner Wife

      Petitioner wife used her personal car to run errands for Traveling Window

Repair & Installation. Petitioner wife ran errands almost every day. On a typical

day she drove, for example, to the post office, Sam’s Club, and Office Max.

      Petitioner wife also kept a mileage log for all of the errands she ran. She used

pieces of paper to record where she had gone and then gave those papers to

petitioners’ tax preparer. Petitioner wife also gave all of her receipts from the

errands to the tax preparer.

      Petitioner wife was never compensated for running errands; she never

received any wages or payment for her time. Petitioner wife also never received

payment for the use of her personal vehicle.

III. Notice of Deficiency

      Petitioners mailed their Form 1040, U.S. Individual Income Tax Return, for

tax year 2008 on October 23, 2009. Respondent received petitioners’ 2008 tax

return on October 26, 2009. Petitioners’ income tax return was due on April 15,

2009, but petitioners had been granted an extension of time to file until October
                                         -7-

[*7] 15, 2009. With their Form 1040 petitioners provided the Schedule C-1 for

petitioner husband’s Traveling Window Repair & Installation business, the

Schedule C-2 for petitioner husband’s “Florida Development”, and the Schedule C-

3 for petitioner wife’s “Auto Rental”.

      On April 1, 2011, respondent issued petitioners a notice of deficiency for tax

year 2008, disallowing the following deductions:

                   Expense                                       Amount

      Mortgage interest, Schedule C-1
           Traveling Window Repair & Installation                 $10,259

      Mortgage interest, Schedule C-2
           “Florida Development”                                   11,541

       Car and truck, Schedule C-1
            Traveling Window Repair & Installation                 21,118

      Car and truck, Schedule C-3
            “Auto Rental”                                           2,183

      Rent/lease of vehicles/machinery/equipment
            Schedule C-1, Traveling Window Repair
            & Installation                                          7,084
                                         -8-

[*8]                                  OPINION

I. Business Expense Deductions

       A. Burden of Proof

       Generally, the Commissioner’s determinations in a notice of deficiency are

presumed correct, and a taxpayer bears the burden of proving those determinations

are erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). In

order to shift the burden, the taxpayer must comply with all substantiation and

recordkeeping requirements and cooperate with all reasonable requests by the

Commissioner for witnesses, information, documents, meetings, and interviews,

pursuant to section 7491(a)(2). See Blodgett v. Commissioner, 394 F.3d 1030,

1035 (8th Cir. 2005), aff’g T.C. Memo. 2003-212; Higbee v. Commissioner, 116

T.C. 438, 441 (2001). Petitioners have not claimed or shown that they meet the

specifications of section 7491(a) to shift the burden of proof to respondent as to any

relevant factual issue.

       B. Substantiation Generally

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

expenses paid or incurred in carrying on a trade or business. An ordinary expense is

one that commonly or frequently occurs in the taxpayer’s business, Deputy v. du

Pont, 308 U.S. 488, 495 (1940), and a necessary expense is one that is appropriate
                                         -9-

[*9] and helpful in carrying on the taxpayer’s business, Welch v. Helvering, 290

U.S. at 113. The expense must directly connect with or pertain to the taxpayer’s

business. Sec. 1.162-1(a), Income Tax Regs. A taxpayer may not deduct a

personal, living, or family expense unless the Code expressly provides otherwise.

Sec. 262(a).

      Deductions are a matter of legislative grace, and a taxpayer must prove his or

her entitlement to a deduction. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). To that end,

taxpayers are required to substantiate each claimed deduction by maintaining

records sufficient to establish the amount of the deduction and to enable the

Commissioner to determine the correct tax liability. Sec. 6001; Higbee v.

Commissioner, 116 T.C. at 440.

      Normally, the Court may estimate the amount of a deductible expense if a

taxpayer establishes that an expense is deductible but is unable to substantiate the

precise amount. See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930);

Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). This is often referred to as

the Cohan rule. See, e.g., Estate of Reinke v. Commissioner, 46 F.3d 760, 764 (8th

Cir. 1995), aff’g T.C. Memo. 1993-197.
                                        - 10 -

[*10] C. Mortgage Interest Expenses

      Generally, a taxpayer may deduct interest paid or accrued within the tax year

on indebtedness. Sec. 163(a). This deduction is not allowed for “personal interest”,

which excludes both qualified residence interest, as defined by section 163(h)(3),

and interest paid or accrued on indebtedness properly allocable to a trade or

business, among other things. Sec. 163(h)(2).

             1. Wisconsin Lots

      Petitioners testified that Traveling Window Repair & Installation stored

lumber on the Wisconsin lots. Petitioners did not provide any further

documentation, such as receipts, paid bills, canceled checks, or invoices, in support

of this testimony.

      Petitioners have not provided evidence sufficient to indicate that the reported

mortgage interest expense on their Schedule C-1 was an ordinary and necessary

expense directly related to Traveling Window Repair & Installation. Moreover,

even if petitioners had proved that the Wisconsin lots were directly connected with

petitioner husband’s business, petitioners failed to offer any documentation that

links the 2005 mortgage with the Wisconsin lots. Petitioners provided a buyer

closing statement for the Wisconsin lots and proof that they paid down the 2005

mortgage, but they failed to prove how the two were connected.
                                         - 11 -

[*11] Accordingly, we sustain respondent’s determination with regard to

petitioners’ mortgage interest expense on their Schedule C-1 for Traveling Window

Repair & Installation.

             2. Florida Condominium

      Petitioners testified that they have been fixing up the Florida condominium to

sell and that petitioner husband has been renovating it himself. Petitioners testified

that they did not stay at the Florida condominium when they were in Florida in

2008. They contend that they do not plan on living in the Florida condominium

when the construction is complete.

      Petitioner husband’s mileage log for tax year 2008, discussed infra, mentions

that petitioner husband drove from Minnesota to a “Florida condo” in Naples,

Florida, to “develop to rent”. Petitioners did not provide any further documentation,

such as receipts, paid bills, canceled checks, or invoices, in support of their

testimony and petitioner husband’s mileage log. Therefore, petitioners have not

provided evidence sufficient to indicate that the reported mortgage interest expense

on the Schedule C-2 for “Florida Development” was an ordinary and necessary

expense directly related to a trade or business.

      Petitioners failed to argue that the Florida condominium was held for the

production of income pursuant to section 212. Ordinary and necessary business
                                         - 12 -

[*12] expenses are deductible for the management, conservation, or maintenance of

property held for the production of income. Sec. 212. Petitioners failed to show

that the property produced income.

      Moreover, petitioners failed to prove that their work on the Florida

condominium rose to the level of a trade or business. Section 1.183-2(b), Income

Tax Regs., provides a nonexhaustive list of the following nine factors used to

determine whether an activity is engaged in for profit: (1) whether the taxpayer

carries on the activity in a businesslike manner; (2) the expertise of the taxpayer and

his or her advisors; (3) the time and effort expanded by the taxpayer in carrying out

the activity; (4) whether the taxpayer expects that the assets used in the activity

might appreciate in value; (5) whether the taxpayer has had other success carrying

on similar activities; (6) the taxpayer’s history of income or losses with respect to

the activity; (7) the amount of occasional profits, if any, which are earned; (8) the

taxpayer’s financial status; and (9) elements of personal pleasure or recreation. If

an activity is not engaged in for profit, then the taxpayer may not deduct expenses

regarding that activity under section 162 or 212. Sec. 183(a), (c); see also Keanini

v. Commissioner, 94 T.C. 41, 45 (1990).

      Petitioners’ testimony and petitioner husband’s mileage log failed to prove

that any of the nine factors weighed in their favor. Petitioners failed to show that
                                        - 13 -

[*13] their work on the Florida condominium rose to the level of a trade or business.

Furthermore, even if petitioners had proved that the Florida condominium was

directly connected with a trade or business, they failed to offer any documentation

that links the 2005 mortgage and the Florida condominium. Petitioners provided a

settlement statement from the U.S. Department of Housing and Urban Development

for the Florida condominium and proof that they paid down the 2005 mortgage, but

they failed to prove how the two were connected. Accordingly, we sustain

respondent’s determination with regard to petitioners’ mortgage interest expense

reported on their Schedule C-2 for “Florida Development”.

      D. Car and Truck Expenses

      Certain expenses specified in section 274 are subject to strict substantiation

rules. No deductions under section 162 shall be allowed for “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”.

Sec. 274(d)(4). Listed property includes passenger automobiles and other property

used for transportation. Sec. 280F(d)(4)(A). To meet the heightened

substantiation requirements, a taxpayer must substantiate the amount, use, and

business purpose of the expense. Sec. 274(d). To substantiate by adequate
                                        - 14 -

[*14] records, the taxpayer must provide both an account book, log, or similar

record, as well as documentary evidence, which are together sufficient to establish

each element of an expenditure. Sec. 1.274-5T(c)(2)(i), Temporary Income Tax

Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). Documentary evidence includes

receipts, paid bills, or similar evidence. Sec. 1.274-5(c)(2)(iii), Income Tax Regs.

To substantiate by sufficient evidence corroborating the taxpayer’s own statement,

the taxpayer must establish each element by the taxpayer’s statement and by direct

evidence, such as documentary evidence. Sec. 1.274-5T(c)(3)(i), Temporary

Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985).

      Notably, section 274(d) overrides the Cohan rule. Boyd v. Commissioner,

122 T.C. 305, 320 (2004); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed.

Reg. 46014 (Nov. 6, 1985) (flush language) (noting that section 274 supersedes the

Cohan rule). Therefore, this Court is precluded from estimating any expenses that

are covered by section 274(d).

      Petitioners reported car and truck expense deductions on the Schedule C-1

for Traveling Window Repair & Installation and the Schedule C-3 for “Auto

Rental” of their 2008 income tax return. Car and truck expenses fall under the

heightened substantiation requirements of section 274(d). Petitioners must
                                        - 15 -

[*15] substantiate their car and truck expenses either by adequate records or by

sufficient evidence corroborating petitioners’ own statement.

             1. Petitioner Husband’s Traveling Window Repair & Installation

      Petitioner husband drove extensively for Traveling Window Repair &

Installation, sometimes returning to a jobsite multiple times in a week and often

picking up supplies at the Lake Elmo warehouse. He did not know what his total

mileage was for 2008. Petitioners produced a mileage log that detailed petitioner

husband’s car travel for tax year 2008 that was prepared by their tax preparer.

Petitioners did not submit into the record any of petitioner husband’s job notes or

any copies of the notes. Petitioners also failed to produce any client invoices or any

maintenance documents for petitioner husband’s two pickup trucks. We cannot

accept petitioners’ testimony without documentary corroboration. They did not

provide documentation in support of the mileage log. Petitioners have failed to

present records to show that they are entitled to deductions for expenses related to

Traveling Window Repair & Installation. See, e.g., Bennett v. Commissioner, T.C.

Memo. 2010-114; Clark v. Commissioner, T.C. Memo. 2002-32. Accordingly, we

sustain respondent’s determination regarding petitioners’ car and truck expenses

reported on their Schedule C-1 for Traveling Window Repair & Installation.
                                          - 16 -

[*16]         2. Petitioner Wife’s “Auto Rental”

        Petitioner wife frequently ran errands in her personal car for Traveling

Window Repair & Installation. Traveling Window Repair & Installation never

reimbursed her for the use of her car and never paid her for her errands. Thus, there

is no indication that petitioner wife engaged in an auto rental business. Petitioner

wife testified that Traveling Window Repair & Installation did not pay her for the

use of her vehicle. Petitioner wife did not produce any third-party records to verify

her car mileage for 2008.

        Petitioners produced a mileage log that detailed petitioner wife’s car travel for

2008. Their tax return preparer prepared the mileage log, which lists the dates of

travel, starting and finishing location, distance, and purpose. Petitioner wife

presented only two receipts, one from Target and one from a drug store, for the

period covered by the mileage log. The Target receipt shows a mix of personal and

business expenses. Petitioner wife’s mileage log does not indicate that personal

items were purchased during that trip. Petitioners have failed to prove what portion

of petitioner wife’s mileage log relates to ordinary and necessary business expenses

and what portion relates to personal expenses. Petitioners did not produce any

further documentation in support of petitioner wife’s mileage log or petitioner wife’s

testimony.
                                        - 17 -

[*17] The Cohan rule does not apply to car and truck expenses pursuant to section

274(d). Accordingly, petitioners have not provided this Court with evidence

sufficient to indicate that the reported car and truck expense on the Schedule C-3

was an ordinary and necessary expense directly related to an auto rental business or

to Traveling Window Repair & Installation. See, e.g., Bennett v. Commissioner,

T.C. Memo. 2010-114; Clark v. Commissioner, T.C. Memo. 2002-32. Therefore,

we sustain respondent’s determination regarding petitioners’ car and truck expenses

on their Schedule C-3 for “Auto Rental”.

      E. Rent or Lease of Vehicles, Machinery, or Equipment Expense

      Petitioner husband testified that the vehicle rent expense relates to petitioners’

son’s running errands for Traveling Window Repair & Installation. Petitioner

husband testified that Traveling Window Repair & Installation did not pay his son

by check for his time.

      Petitioners did not provide a mileage log or any other documentation in

support of the reported vehicle rent expense. Accordingly, petitioners have not

provided evidence to show that the vehicle rent expense reported on the Schedule

C-1 was an ordinary and necessary expense directly related to Traveling Window

Repair & Installation. Consequently, we sustain respondent’s determination with
                                         - 18 -

[*18] regard to petitioners’ rent expenses on their Schedule C-1 for Traveling

Window Repair & Installation.

II. Addition to Tax Under Section 6651(a)(1)

      Under section 7491(c), the Commissioner bears the burden of producing

evidence with respect to the liability of the taxpayer for any addition to tax. See

Rule 142(a); Higbee v. Commissioner, 116 T.C. at 446-447. Once the

Commissioner meets this burden, the taxpayer must come forward with persuasive

evidence that the Commissioner’s determination is incorrect. Higbee v.

Commissioner, 116 T.C. at 446-447.

      Respondent determined that petitioners are liable for an addition to tax

pursuant to section 6651(a)(1) because petitioners did not timely file their 2008 tax

return. Section 6651(a)(1) provides for an addition to tax for failure to timely file a

Federal income tax return unless it is shown that such failure was due to reasonable

cause and not willful neglect. See also United States v. Boyle, 469 U.S. 241, 245

(1985). A failure to file a timely Federal income tax return is due to reasonable

cause if the taxpayer exercised ordinary business care and prudence but nevertheless

was unable to file the return within the prescribed time. See sec. 301.6651-1(c)(1),

Proced. & Admin. Regs.
                                         - 19 -

[*19] Petitioners’ 2008 tax return was due on October 15, 2009, but they did not

mail it until October 23, 2009. Respondent did not receive the return until October

26, 2009. Respondent has shown that petitioners failed to timely file their Federal

income tax return for 2008. Consequently, we conclude that respondent has

satisfied his burden of production under section 7491(c), and petitioners must come

forward with evidence to prove they are not liable for the addition to tax.

Petitioners did not introduce any evidence that they are not liable for the addition to

tax or that their failure to file was due to reasonable cause and not willful neglect.

Accordingly, we sustain respondent’s determination and hold petitioners liable for

the addition to tax pursuant to section 6651(a)(1).

III. Accuracy-Related Penalty Under Section 6662(a)

      Under section 7491(c), the Commissioner bears the burden of producing

evidence with respect to the liability of the taxpayer for any penalty. Higbee v.

Commissioner, 116 T.C. at 446-447. Once the Commissioner meets this burden,

the taxpayer must come forward with persuasive evidence that the Commissioner’s

determination is incorrect. See Rule 142(a); Higbee v. Commissioner, 116 T.C. at

446-447.

      Respondent determined that petitioners are liable for an accuracy-related

penalty pursuant to section 6662(a) for 2008. Section 6662(a) and (b)(1) and (2)
                                        - 20 -

[*20] imposes a penalty of 20% of any underpayment attributable to (1) a

substantial understatement of income tax or (2) negligence or disregard of rules and

regulations. Negligence includes any failure to make a reasonable attempt to

comply with the provisions of the internal revenue laws, to exercise due care, or to

do what a reasonable and prudent person would do under the circumstances. Sec.

6662(c); Neely v. Commissioner, 85 T.C. 934, 947 (1985); sec. 1.6662-3(b)(1),

Income Tax Regs. Negligence also includes any failure by a taxpayer to keep

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

Income Tax Regs.

      Respondent contends that petitioners are liable for a section 6662(a)

accuracy-related penalty attributable to a substantial understatement of income tax

or, alternatively, negligence. Petitioners failed to produce any documentary

evidence showing that the Wisconsin lots are directly connected with Traveling

Window Repair & Installation, and they failed to show a link between the 2005

mortgage and the Wisconsin lots. Petitioners likewise failed to produce any

documentary evidence showing that the Florida condominium was connected with

a trade or business or that “Florida Development” was a trade or business, and

they failed to show a link between the 2005 mortgage and the Florida

condominium. Petitioners failed to properly substantiate the mortgage interest
                                        - 21 -

[*21] expenses reported on the Schedule C-1 for Traveling Window Repair &

Installation and the Schedule C-2 for “Florida Development”.

      Petitioners also failed to produce any documentary evidence showing that the

reported vehicle rent expense was an ordinary and necessary expense connected

with Traveling Window Repair & Installation. Petitioners failed to properly

substantiate the vehicle rent expense reported on the Schedule C-1 for Traveling

Window Repair & Installation.

      Petitioner husband did not produce any receipts in support of his mileage log.

Petitioner wife provided only two receipts that supported her mileage log. Adequate

records were not kept to substantiate petitioners’ car and truck expenses. Petitioners

failed to properly substantiate the car and truck expenses reported on the Schedule

C-1 for Traveling Window Repair & Installation or the Schedule C-3 for “Auto

Rental”.

      Respondent carried the burden of production with respect to the section

6662(a) penalty for negligence regarding portions of the underpayment relating to

the mortgage interest expenses on Schedules C-1 and C-2; the vehicle rent

expense on the Schedule C-1; and the car and truck expenses on Schedules C-1

and C-3. We need not address the applicability of the penalty on the ground of
                                        - 22 -

[*22] substantial understatement of income tax for tax year 2008. See sec. 1.6662-

2(c), Income Tax Regs.

       Whether any portion of an underpayment is attributable to negligence or a

substantial understatement of income tax, no accuracy-related penalty is imposed on

any portion with respect to a taxpayer who had reasonable cause and acted in good

faith. See sec. 6664(c)(1). Whether the taxpayer acted with reasonable cause and

in good faith is determined on a case-by-case basis, taking into account all relevant

facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the

most important factor is the extent of the taxpayer’s effort to properly determine his

or her tax liability. Id.

       Petitioners provided no documentation to support the mortgage interest

deductions. Although petitioners testified credibly that they provided all of their car

and truck expense documentation, including receipts, to their tax return preparer so

that the preparer could make the mileage logs and prepare petitioners’ tax return,

petitioners failed to provide documentary evidence regarding the car and truck

expenses reported on the Schedule C-1 for Traveling Window Repair & Installation

or the Schedule C-3 for “Auto Rental”. We find that petitioners failed to comply

with recordkeeping requirements and failed to make a good-faith effort to act in

accordance with applicable tax law.
                                       - 23 -

[*23] Accordingly, petitioners are liable for section 6662(a) accuracy-related

penalty on portions of the underpayment pertaining to (1) the mortgage interest

expense of $10,259 on the Schedule C-1 for Traveling Window Repair &

Installation; (2) the mortgage interest expense of $11,541 on the Schedule C-2 for

“Florida Development”; (3) the car and truck expenses of $21,118 on the Schedule

C-1 for Traveling Window Repair & Installation; (4) the car and truck expenses of

$2,183 on the Schedule C-3 for “Auto Rental”; and (5) the vehicle rent expenses of

$7,084 on the Schedule C-1 for Traveling Window Repair & Installation.

      To reflect the foregoing,


                                                      Decision will be entered

                                                under Rule 155.
