Cristian & Gabriela Bureriu, Petitioner

T.C. Summary Opinion 2011-52 UNITED STATES TAX COURT CRISTIAN AND GABRIELA BURERIU, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 14064-09S.

Filed April 18, 2011.

Cristian and Gabriela Bureriu, pro sese.

Melanie E. Senick, for respondent.

HAINES, Judge:

This case was heard pursuant to section 7463 of the Internal Revenue Code in effect when the petition was filed.¹ 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, all section references are to the Internal Revenue Code of 1986, ås amended, and Rule references are to the Tax Court Rules of Practice and Procedure. Amounts are rounded to the nearest dollar.

SERVED APR £8 2011 The stipulation of facts and thelsupplemental stipulation of facts, together with the attached exhibits, are incorporated herein by this reference and are so found. At the time petitioners filed their petition, they gesided in Washington.

Respondent determined a deficiency|in petitioners' 2006 Federal income tax of $19,151 and a section 6662(a) penalty of $3,830.

The deficiency was the result of the denial of deductions claimed on petitioners' Så e ule C, Profit or Loss From Business, attached to their 2006 Fëderal income tax return.

Before trial respondent conceded that:

(1) Petitioners are entitled to their claimed $2,813 depteciation expense for property placed in service for taxable years beginning before 2006; (2) in 2006 petitioners paid $ ,801 of the $12,974 of other expenses listed on Schedule C but haie not proven that those expenses were ordinary and necessary (3) in 2006 petitioners paid mortgage interest, real estate a es, utilities expenses, $1,533 of other expenses, $3,312 of epair and maintenance expenses, and $2,282 of capital expe ditures but have not proven that those amounts relate to the reg l r and exclusive business use of their home; and (4) petitioneYs are entitled to depreciate their home using the 27.5-year reco r period for residential rental property.

We must decide whether petitioner⁴ are entitled to I deductions for 2006 for:

(1) Car a ruck expenses; (2) depreciation expenses for their four vehicles; (3) expenses related to the business use of their home; and (4) other Schedule C expenses.

We must further decide whether petitioners are subject to the section 6662(a) penalty.

Background During 2006 petitioner Gabriela Bureriu (Ms. Bureriu) ran an adult caregiver business, Gentle Care AFH, out of petitioners' home. Gentle Care AFH's clients lived full time with petitioners and their two children, ages 3 and 4.

The total square footage of petitioners' home was approximately 1,780 square feet and included four bedrooms, a living room, a dining room, a kitchen, a laundry room, and a recreation room.

Petitioners used the master bedroom and master bathroom in their home predominantly for personal purposes.

On occasion, petitioners and their children also used the kitchen and the laundry room for personal purposes.

The three other bedrooms were used exclusively for the occupancy and care of Gentle Care AFH's clients.

On petitioners' 2006 Form s1040, U.S.

Individual Income Tax Return, they claimed that 1,520 square feet, or 85.39 percent of their home, was used exclusively for business purposes. Petitioners provided a floor plan of their home but the dimensions of each room are not clear.

Petitioners owned four vehicles in 2006:

A 1999 Lexus GS300, a 1999 Toyota Camry, a 2001 Toyota Sequoia, and a 2003 Chevy Silverado. Petitioners claim t e used each of the four vehicles for business in 2006. Mile e logs petitioners kept for the Lexus, the Camry, and the Silver o listed the business miles driven in 2006 for each car.to be 3,109) 1,820, and 1,470, respectively. Ms. Bureriu estimated ihe mileage on the logs, and the logs did not include details or thelbusiness purpose for each trip.

A log was not kept for the Se uoia in 2006.

On petitioners' 2006 Federal in ome tax return they reported business use of 5,127, 3,127, and 4,996 miles for the Lexus, the Camry, and the Silverado, "respective . Petitioners did not report any business use for the Sequ ia The mileage amounts reported on petitioners' Federal incéme tax return in excess of those in the mileage logs were determined solely on the basis of petitioners' oral communications to their accountant.

Petitioners' Schedule.C listed other expenses" totaling $12,974.

These expenses comprised b nk charges, computer expenses, decorations, disposal fees d es and subscriptions, first aid, food and groceries, laund y nd cleaning, licenses and fees, linens, medical supplies, post ge, printing, promotions and gifts, seminars, small tools, teleph ne, uniforms, videos, and tapes. Respondent has conceded, on h basis of petitioners' receipts, bank records, and credit càrd statements, that in 2006 petitioners paid $9,801 of the $12,974dof "other expenses" listed on their Schedule C but argues that petitioners have not proven they were ordinary and necessary.

Petitioners occasionally paid for the "other expenses" using the same credit card they used for personal expenses.

Additionally, petitioners used business accounts to pay personal expenses, and those expenses were not noted when incurred.

Petitioners' accountant relied on petitioners' bank statements and oral representations as the only evidence that the "other expenses" listed on Schedule C were attributable to ordinary and necessary business expenses.

On March 5, 2009, respondent issued a notice of deficiency.

Petitioners timely mailed and postmarked their petition to this Court on June 3, 2009.

I.

Burden of Proof Discussion Respondent's determinations in the notice of deficiency are presumed correct, and petitioners bear the burden of proving that respondent's determinations are incorrect.

See Rule 142(a) (1).

Petitioners do not argue that the burden of proof shifts to respondent pursuant to section 7491(a), nor have they shown that the threshold requirements of section 7491(a) have been met for any of the determinations at issue. Accordingly, the burden of proof remains on petitioners to prove that respondent's determination of a deficiency in their income tax is erroneous.

II. Business

Use of Home Deductions are a matter of legislative grace, and the taxpayers must prove they are entitled to the deductions claimed.

Rule 142(a); New Colonial Ice Co. v. Helüering, 292 U.S. 435, 440 (1934). Section 162(a) provides that "There shall be allowed as a deduction all the ordinary and necessaiy expenses paid or incurred during the taxable year in carrying on any trade or business".

Taxpayers are required to maintain records sufficient to establish the amounts of allowable deductions and to enable the Commissioner to determine the correct tax liability.

Sec.

6001; Shea v. Commissioner, 112 T.C. 183, 186 (1999).

If a factual basis exists to do so, the Court may in some circumstances approximate an allowable egpense, bearing heavily against the taxpayer who failed to maintain adequate records.

Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); see sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). However, in order for the Court to estimate the amount of an expense, the Court must have some basis upon which an estimate may be made. Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). Without such a basis, any allowance would amount to unguided largesse. Williams v. United States, 245 F.2d 559, 560-561 (5th Cir. 1957).

In addition to the requirements discussed above, section 280A(a) provides the general rule that deductions with respect to the use of the taxpayer's residence are not allowable unless an exception applies.

The exceptions are found in section 280A(c), which provides in relevant part:2 SEC. 280A(c). Exceptions for Certain Business or Rental Use; Limitation on Deductions for Such Use.-- (1) Certain business use.--Subsection (a) shall not apply to any item to the extent such item is allocable to a portion of exclusively used on a regular basis-- the dwelling unit which is (A) as the principal place of business for any trade or business of the taxpayer, (B) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of * his trade or business * * Because there are substantial business and personal motives for the expenses related to petitioners' residence, we must determine what portion of the residence was used regularly and exclusively for petitioners' business.

See Intl. Trading Co. v.

Commissioner, 275 F.2d 578, 584-587 (7th Cir. 1960), affg. T.C.

Memo. 1958-104; Deihl v. Commissioner, T.C. Memo. 2005-287.

Combined personal and business use of a section of the residence 2Sec. 280A(c) (4) generally provides an exception to sec. for items allocable to the use of any portion of a 280A(a) dwelling unit on a-regular basis in a taxpayer's trade or business of providing "day care" services for children, individuals who have attained the age of 65, and individuals who are physically or mentally incapable of themselves. because Gentle Care AFH was not a "day care" service in 2006, but rather, provided 24-hour care to its clients.

is not applicable to petitioners Sec. 280A(c) (4) taking care of precludes deductibility.

See general y Sam Goldberger, Inc. v.

Commissioner, 88 T.C. 1532, 1557 (1987) Petitioners argue that the persona use of their home was limited to the master bedroom and maste bathroom and, therefore, 1,520 square feet, or 85.39 percent of their home, was used exclusively for business purposes.

Pet tioners admit, however, that they occasionally used the kitchen and the laundry room for personal purposes. With respect to t e living room, dining room, and recreation room, petitioners have not presented any evidence outside of Ms. Bureriu's testimony t(support their contention that those rooms were exclusively use for business purposes.

Common sense tells us that petitione ' young children, ages 3 and 4, were not confined to the maste bedroom and master bathroom at all times while in petitigners' home. Accordingly, petitioners have failed to overcome their burden and are not entitled to deductions with respect to he kitchen, laundry room, living room, dining room, and recreagig room.

At trial respondent did not questi@n Ms. Bureriu as to whether the three bedrooms where Gentle Care AFH's clients resided were used exclusively for business purposes.

There is nothing in the record to indicate the etitioners used those bedrooms for any personal purpose in 2006. Accordingly, in accordance with Cohan v. Commissione upra at 543-544, and the floor plans of petitioners' home, we s imate that the three bedrooms, covering approximately 400 square feet of petitioners' home, were used exclusively for business purposes.

Any inexactitude in the estimate by the Court is of petitioners' own making and due to their failure to maintain proper business records.

See id.

As 400/1,780 represents about 22.47 percent of the total area of the home, petitioners are entitled to 22.47 percent of their allowable expenses allocable to the portion of their home used exclusively for business purposes.

III. Other Expenses

As noted above, respondent concedes that petitioners paid $9,801 of the $12,974 of "other expenses" listed on Schedule C.

Petitioners produced receipts, bank records, and credit card statements as proof of the $9,801 respondent conceded.

" However, petitioners have failed to-maintain adequate records or produce any evidence outside of Ms. Bureriu's testimony to prove that the $9,801 of "other expenses" paid in 2006 was incurred for ordinary and necessary business purposes.

The Cohan doctrine allows the Court to approximate allowable expenses, bearing heavily against the taxpayer who failed to maintain adequate records.

It is not disputed that Gentle Care AFH provided 24-hour care for three to four elderly clients throughout 2006 and such care required the payment of certain expenses.

An approximation weighing heavily against petitioners is therefore warranted under the Cohan doctrine 'because we are ,-10- satisfied that some of the "other expenses" were incurred for.

business purposes Accordingly, for 2006,- petitioners may deduct 50 percent of each other expense" that respondent has conceded as paid.

IV.

"Car Expenses - Passenger aut Mobiles -and any other property aused as a means of transportation are "listed property"sas defined by section 280F (d) (4) .

Secs. 27,4 (d) (4)", 280F (d),(4) (A), (i)-.

Expenses· for , items described in section 274 are subject to strict · sulSätântfation,rules e No deduction shall -be allowed -for, among other -things,-traveling.expenses, entertainment expenses, gifts, and.expenses with respect to listed property (including passenger automobiles) "unless the -taxpayer ,substantiates by adequate records or by -sufficient evidence corroborating-the taxpayer's own statement":

(1) The -amount of the expense or-other item; (2) the time.and place of-the travel, entertainment or use, or date and description of the gift; (3) the business purpose of the expense or-other-item; -and -(4) in the case of entertainment or gifts,, the businaes-relationship to the taxpayer of ;the a recipients or persons entertained.

Sec. 274(d).

We may not use the Cohan.doctrine to estimate sexpenses covered by section 274(d).

See Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd._per curiam 412. F;2d 201 (2d-Cir. 1969); sec. 1.274-5T(a); Temporary ·Income Tax 1Regs.,, supra.

Petitioners kept -logs to-track-busines's miles driven in -2006 for three ofotheir «four vehicles. Petitioners' mileage l-ogs do:

not include a de'scription of the business purpose of each trip a On their 2006 Federal income tax return, rpetitioners"claimed that the totalemiles driten for business purposes ein'each vehicle in 200 6 -f ar exceeded I the 'mileage reported - on the slogs . -.,At trial Ms .

Bureriu testified that this discrepancy was thearesult of emergency -mi-les driven to :care for her elderly clients.

Petitióners 'argue"that they were toorbusy with emergencies tós prope ly document their mileage:

- As a result, petitioners communicated'their afinal mi-leage calculations orally to their accountant for purposes sof preparing their 2006 Federal income tax return.

Petitioners', oral account of-mileage records with respect to the business usemof- their vehicles in 2006 is not sufficient to substantiate the associated deductions. Further, petitioners' mileage logs fail-to provide any detail regarding the business purpose of each entry. "Jus discussed above, we may not use the Cohan doctrine td'estimate section 274(d) expenses. Accordingly, petitionersehave failed ,to meet the heightened substantiation requirements of section 274, and we sustain respondent's Et determination withs-regard:to the car and-truck expenses.

-, a Petitioners aslso claimed depreciation deductions with :

respect.to their vehicles -for 2006.. Because petitioners.havene 12- .failed, to substantiate -the business iuse of the vehicles pursuant to. section 274 for 2006, we "sustain respondent's determinations with.respect to.petitioners' depreciation deductions.

V. Section 6662(a)

Penalty i Section.6662(a) and- (b) (2) -imposes- an accuracy-related , penalty upon any, uhderpayment of tax resulting from a substantial understatement of income tax." The.penalty is equal to 20 percent of the portion of any underpayment.attributable to a.substantial understatement of income tax.

Id.

The term '"substantial uddårstatement" is defined as exceeding the,greater-of:

(1) 10 percent of the tax required to be -shown on the return for -the- taxable year or (2) $5,000.

Sec. 6662(d) (1) (A). Section 6662(a) and (b) (1) also imposes a penalty equal to 20 percent of the amount of an underpayment attributable.to negligence or disregard of rules or.regulations. Negligence includes any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Coder including any failure to maintain.adequate books and records or to substantiate items properly.

Sec.

6662(c); -saec. 1.6'662-3(b) (1), Income Tax Regs.

.

, a Petitioners' failure to produce records substantiating..their Schedule Codeductions supports the imposition of the accuracy- related penalty for negligence for 2006.

The- applicability of section 6662(b) (2) willedepend on the magnitude of the understatement of income tax as calculated under Rulee155.

If petitioners' understatement of income tax as calculated under Rule 155 exceeds <the greater of $5,000 or 10 percent of the tax required to be shown on the return for 2006, respondent will have met his burden of production under 'section 7491(c).

If not, respondent will have\ ailed to meet his burden of production under section 7491 %).

An accuracy-related penalty is not imposed on any portion of the underpayment as to which the taxpayer acted with reasonable cause and in good faith.

Sec. 6664(c) (1).

The taxpayer bears th urdeh of proof with regard to those issues. Higbee v.

Commissioner, 116 T.C. 438, 446 (2001). Petitioners have failed to show reasonable cause, substantial authority, or any other basis for reducing the penalties. Accordingly, pending a final calculation of petitioners' understatement of income tax under Rule 155, we find petitioner liable for the section 6662 penalty for 2006 as commensurate with respondent's concessions and our holding.

See id.

In reaching our ho~ldings herein, we have considered all arguments made, ind, to the extent not mentioned above, we conclude they are moot, irrelevant, or without merit.

To reflect the foregoing, Decision will be entered under Rule 155.