                               T.C. Memo. 2018-19



                         UNITED STATES TAX COURT



                     DUNCAN BASS, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 24071-16.                          Filed February 21, 2018.



      Duncan Bass, pro se.

      Tammie A. Geier, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      ASHFORD, Judge: Respondent determined a deficiency of $3,902 in

petitioner’s Federal income tax for the 2013 taxable year. The issue for decision is

whether petitioner is entitled to deduct certain expenses he reported on his
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[*2] Schedule C, Profit or Loss From Business.1 We resolve this issue in favor of

respondent.

                               FINDINGS OF FACT

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

facts and the attached exhibits are incorporated herein by this reference. Petitioner

resided in North Carolina at the time the petition was filed with the Court.

I.    Petitioner and His For-Profit and Nonprofit Activities

      During 2013 in addition to being a “W-2 wage earner” for three different

employers, petitioner owned and operated Bass & Co. Landscaping, an

unincorporated business. Bass & Co. Landscaping provided landscaping and

janitorial services. During 2013 petitioner owned three vehicles: a 2000 Dodge, a

2002 Ford, and a 2007 Suzuki. He used the 2000 Dodge in connection with Bass

& Co. Landscaping. He did not, however, contemporaneously keep a diary, a

mileage log, trip sheets, or similar records to document the business use of this

vehicle.

      During 2013 petitioner also owned and operated Lend-A-Hand, Inc., a

nonprofit North Carolina corporation that he incorporated on June 24, 2010.

      1
      Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the year at issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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[*3] Lend-A-Hand collects clothing and school supplies and donates these items

to disadvantaged individuals. Since at least 2013 petitioner, Bass & Co.

Landscaping, and Lend-A-Hand have maintained a single bank account at Summit

Credit Union.

II.   Petitioner’s Tax Reporting and the Notice of Deficiency

      Petitioner prepared and filed timely (with the assistance of a paid preparer) a

Form 1040, U.S. Individual Income Tax Return, for 2013 (2013 return). On the

2013 return petitioner reported wages totaling $77,956 from his three employers.

He also reported a $20,402 business loss from Bass & Co. Landscaping, which he

detailed on a Schedule C attached to the 2013 return.

      On the Schedule C petitioner reported gross receipts of $8,549 and total

expenses of $28,951. The expenses consisted of $10,239 for car and truck

expenses for driving the 2000 Dodge 18,123 miles; $530 for depreciation and

section 179 expenses; $2,181 for other interest; $840 for rent or lease of other

business property; $2,176 for supplies; $388 for meals and entertainment; and

$12,597 for other expenses, which included $1,377 for power tools, $408 for

uniforms, $9,360 for Lend-A-Hand, and $1,452 for a cell phone. The amount for

uniforms represented laundering expenses for Bass & Co. Landscaping uniforms,

while the amount for Lend-A-Hand represented cash payment by Bass & Co.
                                        -4-

[*4] Landscaping to Lend-A-Hand for advertising on Lend-A-Hand’s “Tax

Deductible Donation Acknowledgment” form and rental of a storage unit at a self-

storage facility.

      Following an examination of the 2013 return, respondent determined that

petitioner’s claimed Schedule C deductions for car and truck expenses of $10,239

and other expenses of $12,597 should be disallowed for lack of substantiation.

The notice of deficiency issued to petitioner on October 24, 2016, reflects that

determination. Petitioner timely petitioned this Court for redetermination of the

deficiency.

                                     OPINION

      In general, the Commissioner’s determination set forth in a notice of

deficiency is presumed correct, and the taxpayer bears the burden of proving

otherwise. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Tax

deductions are a matter of legislative grace, and the taxpayer bears the burden of

proving entitlement to any deduction claimed. Segel v. Commissioner, 89 T.C.

816, 842 (1987). This burden requires the taxpayer to demonstrate that the

claimed deductions are allowable pursuant to some statutory provision and to

substantiate the expenses giving rise to the claimed deductions by maintaining and

producing adequate records that enable the Commissioner to determine the
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[*5] taxpayer’s correct liability. Sec. 6001; Higbee v. Commissioner, 116 T.C.

438, 440 (2001); Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff’d per

curiam, 540 F.2d 821 (5th Cir. 1976). Petitioner does not contend that the burden

of proof should shift to respondent under section 7491(a), nor has he established

that the requirements for shifting the burden of proof have been met. Accordingly,

the burden of proof remains on petitioner. See sec. 7491(a)(2).

      Section 162 allows a taxpayer to deduct all ordinary and necessary expenses

paid or incurred during the taxable year in carrying on a trade or business. Sec.

162(a); sec. 1.162-1(a), Income Tax Regs. A business expense is “ordinary” if it

is “normal, usual, or customary” in the taxpayer’s trade or business. See Deputy v.

du Pont, 308 U.S. 488, 495 (1940). An expense is “necessary” if it is “appropriate

and helpful” to the taxpayer’s business, but it need not be absolutely essential.

Commissioner v. Tellier, 383 U.S. 687, 689 (1966) (quoting Welch v. Helvering,

290 U.S. at 113). A taxpayer may not deduct a personal, living, or family expense

unless the Internal Revenue Code expressly provides otherwise. Sec. 262(a).

      Whether an expense is deductible under section 162 is a question of fact to

be decided on the basis of all the relevant facts and circumstances. Cloud v.

Commissioner, 97 T.C. 613, 618 (1991) (citing Commissioner v. Heininger, 320

U.S. 467, 473-475 (1943)). Under the Cohan rule, if a taxpayer establishes that an
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[*6] expense is deductible but is unable to substantiate the precise amount, the

Court may estimate the amount of the deductible expense, bearing heavily against

the taxpayer whose inexactitude is of his or her own making. See Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); see also Vanicek v.

Commissioner, 85 T.C. 731, 742-743 (1985). In order for the Court to estimate

the amount of a deductible expense, the taxpayer must establish some basis upon

which an estimate may be made. Norgaard v. Commissioner, 939 F.2d 874, 879

(9th Cir. 1991), aff’g in part, rev’g in part T.C. Memo. 1989-390; Vanicek v.

Commissioner, 85 T.C. at 742-743. Otherwise an allowance would amount to

“unguided largesse.” Norgaard v. Commissioner, 939 F.2d at 879 (quoting

Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957)).

      The Cohan rule, however, is superseded--that is, estimates are not

permitted--for certain expenses specified in section 274, such as “listed property”

(including passenger vehicle) expenses.2 Secs. 274(d), 280F(d)(4)(A)(i); sec.

1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985)

(flush language); see Boyd v. Commissioner, 122 T.C. 305, 320 (2004). Instead,


      2
        A taxpayer may deduct passenger vehicle expenses by using either actual
cost or the standard mileage rate, provided he substantiates the amount of business
mileage and the time and purpose of each use. See sec. 1.274-5(j)(2), Income Tax
Regs.; Rev. Proc. 2010-51, 2010-51 I.R.B. 883.
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[*7] these types of expenses are subject to strict substantiation rules. 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., supra. These strict

substantiation rules generally require the taxpayer to substantiate with adequate

records or by sufficient evidence corroborating the taxpayer’s own statement

(1) the amount of the expense; (2) the time and place the expense was incurred;

and (3) the business purpose of the expense. Balyan v. Commissioner, T.C.

Memo. 2017-140, at *7; sec. 1.274-5T(b), Temporary Income Tax Regs., 50 Fed.

Reg. 46014 (Nov. 6, 1985). For “listed property” expenses, in addition to the time

such expenses were incurred and their business purpose, the taxpayer must

establish the amount of business use and the total use of such property. Balyan v.

Commissioner, at *7-*8; sec. 1.274-5T(b)(6)(i)(B), Temporary Income Tax Regs.,

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

      Substantiation by adequate records requires the taxpayer to maintain (1) an

account book, diary, log, statement of expense, trip sheets, or similar record

prepared contemporaneously with the expenditure and (2) documentary evidence,

such as receipts or paid bills, which together prove each element of an

expenditure. Balyan v. Commissioner, at *8; sec. 1.274-5(c)(2)(iii), Income Tax
                                         -8-

[*8] Regs.; sec. 1.274-5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017

(Nov. 6, 1985).

       On the Schedule C attached to the 2013 return petitioner claimed a

deduction for the following expenses totaling $28,951: car and truck expenses;

depreciation and section 179 expenses; other interest; rent or lease of other

business property; supplies; meals and entertainment; and other expenses

consisting of expenses for power tools, uniforms, Lend-A-Hand, and a cell phone.

Of these expenses, respondent during the examination of the 2013 return allowed

deductions for depreciation and section 179 expenses, other interest, rent or lease

of other business property, meals and entertainment, and supplies; the remaining

deductions for car and truck expenses and other expenses respondent disallowed

in full.

       Contrary to what petitioner appears to believe, the car and truck expenses

are subject to the strict substantiation rules of section 274(d) and thus they cannot

be estimated.3 It is undisputed that petitioner did not contemporaneously maintain

       3
       At trial petitioner asserted that his car and truck expenses were exempt
from the strict substantiation rules of sec. 274(d), appearing to rely on a 1986
Internal Revenue Service revenue ruling establishing guidelines for determining
when certain modified pickup trucks or vans will be recognized as qualified
nonpersonal use vehicles and therefore exempt from the sec. 274(d) strict
substantiation rules. See Rev. Rul. 86-97, 1986-2 C.B. 42; see also sec. 1.274-
                                                                         (continued...)
                                         -9-

[*9] a diary, a mileage log, trip sheets, or similar records of his use of the 2000

Dodge in connection with Bass & Co. Landscaping during 2013. Neither did he

retain receipts or otherwise produce any documentary evidence relating to each job

that Bass & Co. Landscaping was hired to do in 2013 or establish the total

business miles driven in the 2000 Dodge during 2013. Instead, petitioner offered

general and uncorroborated testimony, along with three handwritten mileage

diagrams; two 2013 invoices from two different tire and automotive repairs shops

reflecting, among other things, the odometer reading of the 2000 Dodge; a State of

North Carolina vehicle emissions and safety receipt dated February 22, 2014, with

a handwritten notation on it by petitioner that this receipt shows the mileage of the

2000 Dodge at the end of 2013; and a State of North Carolina vehicle registration

card for the 2000 Dodge with a handwritten notation on it by petitioner that the

vehicle “was down in Dec. [and] couldn’t be driven or inspected”. Such evidence

does not have the “high degree of probative value to elevate” it to the level of

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

Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). Accordingly, we conclude that

      3
       (...continued)
5(k)(7), Income Tax Regs. However, petitioner’s assertion is without merit as the
record is devoid of any evidence that the 2000 Dodge he used in connection with
Bass & Co. Landscaping during 2013 had even been modified, let alone modified
within the meaning of this revenue ruling or the appurtenant regulation.
                                        - 10 -

[*10] petitioner has not established for 2013 that he is entitled to a deduction for

any amount of car and truck expenses under section 274(d).

      With respect to the other expenses, we similarly conclude on the basis of the

record that petitioner is not entitled to deductions for these expenses in any

amount for 2013. Petitioner offered only general and uncorroborated testimony to

substantiate the expenses for power tools, laundering Bass & Co. Landscaping

uniforms, a cell phone, and cash payments to Lend-A-Hand for advertising and

rental of a storage unit. It is undisputed that he did not maintain any receipts

pertaining to the expenses for power tools and uniforms. The documentary

evidence he produced--a statement payment stub dated July 20, 2013, from

Verizon Wireless reflecting an amount due of $312.31; a payment receipt for $215

from Verizon Wireless dated March 15, 2013; a statement handwritten by

petitioner dated July 30, 2017, that he used his cell phone in his business; receipts

handwritten by petitioner from Bass & Co. Landscaping to Lend-A-Hand; and a

bank record dated June 3, 2013, from an unknown account of $560 paid to “AFM

Storage”--is woefully inadequate under section 162 standards. The documentary

evidence pertaining to Lend-A-Hand, along with the fact that petitioner, Bass &

Co. Landscaping, and Lend-A-Hand maintained a single bank account in 2013, is

particularly unavailing because it shows, as petitioner even acknowledges, that he
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[*11] is attempting to take a deduction for paying himself. And thus, on the basis

of the record before us, the Court also is unable to make an estimate of deductible

other expenses for 2013 under the Cohan rule.

      In sum, petitioner has not established for 2013 that the car and truck

expenses and the other expenses were paid or incurred or that they were ordinary

and necessary. We sustain respondent’s determination that petitioner is not

entitled to Schedule C deductions for car and truck expenses of $10,239 and other

expenses of $12,597.

      To reflect the foregoing,


                                                Decision will be entered for

                                      respondent.
