                         T.C. Summary Opinion 2017-28



                         UNITED STATES TAX COURT



          AGWU U. OKIYI AND CHINYERE A. OKIYI, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 7072-16S.                         Filed May 1, 2017.



      Agwu U. Okiyi and Chinyere A. Okiyi, pro sese.

      Elizabeth M. Shaner and Nancy M. Gilmore, for respondent.



                              SUMMARY OPINION


      LAUBER, Judge: This case was heard pursuant to the provisions of section

7463 of the Internal Revenue Code (Code) in effect when the petition was filed.1



      1
       All statutory references are to the Internal Revenue Code in effect at all
relevant times, and all Rule references are to the Tax Court Rules of Practice and
Procedure. We round all monetary amounts to the nearest dollar.
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Under 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.

      With respect to petitioners’ Federal income tax for 2013, the Internal Reve-

nue Service (IRS or respondent) determined a deficiency of $5,341 and an accura-

cy-related penalty of $1,058 under section 6662(a). The issues for decision are:

(1) whether petitioners are entitled to a claimed deduction for charitable contribu-

tions in excess of the amount the IRS allowed; (2) whether petitioners are entitled

to claimed but disallowed miscellaneous itemized deductions; and (3) whether

petitioners are liable for the accuracy-related penalty. We resolve all issues in

respondent’s favor.

                                    Background

      The parties filed a stipulation of facts with accompanying exhibits that is in-

corporated by this reference. During 2013 petitioners were both employed by the

State of Maryland. Mr. Okiyi was a case manager in the social services

administration, and Mrs. Okiyi was a social worker in the foster care services.

They resided in Maryland when they petitioned this Court.

      Petitioners timely filed a joint Federal income tax return for 2013. On that

return they claimed on Schedule A, Itemized Deductions, a cash charitable contri-

bution deduction of $9,471 and miscellaneous deductions of $32,061. The mis-
                                         -3-

cellaneous deductions comprised $31,750 of unreimbursed employee business ex-

penses and $311 of tax return preparation fees.

      Upon examination of petitioners’ 2013 return the IRS disallowed for lack of

substantiation $7,912 of the claimed charitable contribution deduction and all of

the claimed miscellaneous deductions. The IRS sent petitioners a timely notice of

deficiency, and they timely petitioned this Court. At trial Mr. Okiyi testified that

petitioners had made charitable contributions to their church or to an orphanage in

amounts exceeding the $1,559 that the IRS had allowed. But they provided no

substantiation of any kind for these additional gifts.

      Petitioners’ reported employee business expenses consisted primarily of

travel costs related to their two automobiles. Claiming that they had driven a total

of 42,023 business miles in their two cars, they reported an aggregate mileage al-

lowance of $23,743 and aggregate expenses of $1,722 for parking and tolls. They

also reported expenses of $1,583 for meals and entertainment. The balance of

their reported employee business expenses, or $4,702, was allegedly attributable to

a “job search.”

      Petitioners produced no documentation whatsoever to substantiate any of

the expenses underlying these claimed deductions. Mr. Okiyi testified that the

travel costs represented expenses incurred in transporting foster children to and
                                        -4-

from their foster homes and in visiting these children, plus meals consumed during

these trips. He testified that his wife had kept a contemporaneous mileage log for

this travel, but petitioners did not submit any such log into evidence. He testified

that he had incurred $4,702 of job search expenses in connection with his applica-

tion for a different position with his current employer.

        Mr. Okiyi testified that petitioners had documentation to substantiate some

of their expenses but had neglected to bring these documents with them to trial.

The Court accordingly left the record open for 30 days to allow petitioners to sub-

mit, through a supplemental stipulation, any relevant documentation that they had.

They did not submit anything, and we accordingly closed the record on March 1,

2017.

                                     Discussion

        The IRS’ determinations in a notice of deficiency are generally presumed

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

are a matter of legislative grace; the taxpayer bears the burden of proving his en-

titlement to deductions allowed by the Code and of substantiating the amounts of

expenses underlying claimed deductions. INDOPCO, Inc. v. Commissioner, 503

U.S. 79, 84 (1992); sec. 1.6001-1(a), Income Tax Regs. Petitioners do not con-
                                        -5-

tend, and they would have no basis for contending, that the burden of proof as to

any factual issue should shift to respondent under section 7491(a).

A.    Charitable Contributions

      Section 170(a) allows as a deduction contributions made within the taxable

year to churches, charities, and other specified entities. See sec. 170(c)(2). Chari-

table contributions are allowable as deductions “only if verified under regulations

prescribed by the Secretary.” Sec. 170(a)(1). For all contributions, taxpayers are

required to keep “reliable written records,” such as canceled checks or receipts,

establishing the identity of the donee and the date and amount of the contribution.

Sec. 1.170A-13(a)(1), Income Tax Regs. For contributions of $250 or more, the

taxpayer must obtain a “contemporaneous written acknowledgment” from the

donee. Sec. 170(f)(8)(A). Additional and more stringent substantiation require-

ments are imposed for contributions of property with a claimed value exceeding

$500. See sec. 170(f)(11)(B).

      Mr. Okiyi testified that petitioners had made contributions to their church in

excess of the $1,559 that the IRS found to have been substantiated and had also

made gifts to an unspecified orphanage. But they submitted no substantiation of

any kind for these alleged gifts. We accordingly sustain respondent’s
                                        -6-

determination that petitioners for 2013 are allowed a charitable contribution de-

duction of only $1,559.

B.    Miscellaneous Itemized Deductions

      Section 162(a) allows a deduction for ordinary and necessary business ex-

penses paid or incurred during the taxable year in carrying on any trade or busi-

ness. The determination whether an expenditure satisfies the requirements for

deductibility is a question of fact. See Commissioner v. Heininger, 320 U.S. 467,

475 (1943). An individual may be in the trade or business of being an employee;

ordinary and necessary expenses incurred in that trade or business are deductible.

Kurkjian v. Commissioner, 65 T.C. 862, 869 (1976). Expenses incurred in search-

ing for new employment in the employee’s existing trade or business may also be

deductible business expenses. Cremona v. Commissioner, 58 T.C. 219 (1972);

Primuth v. Commissioner, 54 T.C. 374 (1970). Deductions are not allowed for

personal, living, or family expenses. Sec. 262(a).

      Section 274(d) prescribes more stringent substantiation requirements for

certain categories of expenses, such as “traveling expense[s] (including meals

* * * while away from home).” Sec. 274(d)(1). To satisfy the section 274(d)

requirements, a taxpayer generally must maintain records and documentary evi-

dence sufficient to establish the amount, date, and business purpose for an expen-
                                        -7-

diture. Sec. 1.274-5T(b)(2), (5), (6), Temporary Income Tax Regs., 50 Fed. Reg.

46014-46016 (Nov. 6, 1985). In the absence of adequate records, the substantia-

tion requirements can be met by other sufficient evidence corroborating the tax-

payer’s own statement. See id. para. (c)(3), 50 Fed. Reg. 46020.

       The substantiation requirements of section 274(d) apply to petitioners’ re-

ported expenses for travel, parking, and meals. Petitioners did not supply substan-

tiation of any kind for these expenses. Moreover, Mr. Okiyi admitted that his wife

may have been eligible for (and may in fact have received) reimbursement from

her employer, the State of Maryland, for some or all of the travel expenses she

incurred in connection with transportation of the foster care children. Expenses

eligible for reimbursement by the taxpayer’s employer are generally not

considered “necessary” under section 162(a) and thus do not qualify for deduction

as unreimbursed employee business expenses. See Orvis v. Commissioner, 788

F.2d 1406 (9th Cir. 1986), aff’g T.C. Memo. 1984-533.

      Petitioners produced no documentation to substantiate their claimed tax

return preparation expenses of $311 or Mr. Okiyi’s claimed job search expenses of

$4,702. And we did not find credible his testimony that he incurred expenses of

$4,702 in applying for a different position with the State of Maryland, his current
                                        -8-

employer. We accordingly sustain respondent’s determination that petitioners are

entitled to no miscellaneous itemized deductions.

C.    Accuracy-Related Penalty

      The Code imposes a 20% penalty upon the portion of any underpayment of

tax that is attributable to “[a]ny substantial understatement of income tax.” Sec.

6662(a), (b)(2). An understatement of income tax is “substantial” if it exceeds the

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

6662(d)(1)(A).

      Under section 7491(c) the Commissioner bears the burden of production

with respect to the liability of an individual for any penalty. See Higbee v. Com-

missioner, 116 T.C. 438, 446 (2001). The deficiency in petitioners’ 2013 income

tax, which we have sustained in full, is $5,341. There being no dispute over any

claimed refundable tax credits, that deficiency amount equals petitioners’ under-

statement of income tax. See generally Gassoway v. Commissioner, T.C. Memo.

2015-203. Moreover, because petitioners reported a tax of zero on their return,

that amount of $5,341 also equals the tax required to be shown on their return.

See sec. 1.6662-4(b)(2), Income Tax Regs. As a result, petitioners’ understate-

ment of income tax is substantial within the meaning of section 6662(d)(1)(A),

exceeding both $5,000 and 10% of itself. Respondent has thus satisfied section
                                           -9-

7491(c) by carrying his burden of production of demonstrating a “substantial

understatement of income tax” under section 6662(b)(2).2

      The section 6662 penalty does not apply to any portion of an underpayment

“if it is shown that there was a reasonable cause for such portion and that the tax-

payer acted in good faith” with respect to it. Sec. 6664(c)(1). The decision whe-

ther the taxpayer acted with reasonable cause and in good faith is made on a case-

by-case basis, taking into account all pertinent facts and circumstances. Sec.

1.6664-4(b)(1), Income Tax Regs. Generally, the most important factor is a tax-

payer’s effort to ascertain his or her correct tax liability.

      Petitioners offered no evidence that they attempted to ascertain their correct

2013 tax liability. They had no substantiation for their reported expenses, and

they claimed deductions for expenses that qualified for reimbursement (and may in

fact have been reimbursed) by their employer. Although a tax return preparation

service prepared their return, they do not contend that they relied on the advice of


      2
        Petitioners did not allege, in their petition or at trial, that the accuracy-
related penalty at issue was not “personally approved (in writing) by the imm-
ediate supervisor of the individual making * * * [the penalty] determination.” Sec.
6751(b)(1). That issue is therefore deemed conceded. See Rule 34(b)(4) (“Any
issue not raised in the assignments of error shall be deemed to be conceded.”); cf.
Lloyd v. Commissioner, T.C. Memo. 2017-60, at *7 n.3 (deeming similarly
conceded any section 6751(b)(1) challenge to assessable penalties in a section
6330 levy case).
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a competent tax professional in taking these positions. See sec. 1.6664-4(c)(1),

Income Tax Regs. We will accordingly sustain respondent’s determination of an

accuracy-related penalty.

      To reflect the foregoing,


                                                Decision will be entered

                                      for respondent.
