Jeffrey Gunn, Petitioner

T . C . Summar Opinion 2011-133 UNITED STATES TAX COURT .

JEFFRE G , Petitioner v.

COMMISSIONER OR INTERNAL REVENÙE, Respondent Docket No. 15834-09S.

Filed November 28, 2011.

Jeffrey Gunn, pro se Daniel C. Munce, for e pondent.

DEAN, Special Trial Judge:

This case was heard pursuant to the provisions of section| 7463 of the Internal Revenue Code in effect when the petition 7as filed. Pursuant to section 7463(b), the decision to be entered ib not reviewable by any other court, and this opinion shall not b treated as precedent for 'any other case. . Unless otherwise indi ated, subsequent section references are to the Internal Reven e ode (Code) in effeát for the year at $8MED NOV 2 8 2011 issue, and Rule references ace to the Tax Court Rules of Practice and Procedure.

Respondent determined a deficiency in petitioner's Federal income tax of $21,613 for 2004. Respondent also determined an addition to tax for failure to file timely under section 6651(a) (1).of $2,271.50 and an accuracy-related penalty under section 6662(a) of $4,322.60 for 2004.

The issues for decision are whether petitioner:

(1) Had unreported capital gain income;2 2) is entitled to itemized deductions in excess of those respondent allowed; (3) is entitled to a deduction for a rent or lease expense on ?Schedule C, Profit or Loss From Business; (4) is entitled to deductions for supplies and repa.irs expenses on Schedule E, Supplemental Income and Loss (From rental real estate, royalties, partnerships, S corporations, estates, truste, REMICs, etc.); (5) is liable for the addition to tax under section 6651(a) (1) for failure. to file timely; and (6) is liable for the accuracy-related penalty under section 6662(a).

1Petitioner's liability for the alternative minimum tax is computational and should be resolved in accordance with the decision of the Court .

2Respondent's pretrial memorandum states that. petitioner failed to report $22,038 in capital gain rather than the $71,711 determined in the notice of deficiency. this as a concession by respondent of The Court will treat the $49,673 difference.

Some of the facts have ibeen stipula(ed and are so found.

The stipulation of facts and the exhibità received in evidence are incorporated herein b feference. Petitioner resided in Pennsylvania when the petition was filed Background Capital Gain During the taxable yea petitioner as employed as a mortgage application specialist for GMAC Mortga e Corp.

(GMAC) and Doherty Employment Grou , Inc., whic was d ing business as Superior Mortgage (Doherty Employment).3 Petitioner also sold and rented refurbished properties.

Petitioner "had acce s to distressed propeities" as a result of his employment. Petitio er's first acquisition in his pursuit of property rehabilitation a d sales was the Walker Street property (Walker Street). Petitioner pu chased Walker Street in 2000 for $43,000, financed b a loan fro CTX M rtgage.

He refinanced Walker Street in anuary 2001 with a other loan from CTX Mortgage of $58,000, of which $45,099.32 was used to pay the original mortgage and $12,900.68 was received by petitioner as a cash payment .

3The.nature of the rela ionship betw en the two entities is not clear from the record, the parties as a "PEO" issued petitioner a Form W-2, Wage and T x Stat ment, year.

t e former ha ing be n described by for S perior Mortgage. Doherty Employment for the Petitioner sold Walker Street- on October 15, 2004, ·for $108,000. After paying closïng costs that included taxes, .

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settlement costs, a "seller credit", a "payoff of first.Mortgage to Wachovia Bank" of $14,174 16,,and a "payoff of second Mortgage to Bank of America" of $49,329.23, petitioner received at settlement a cash payment of $37,575.74. Petitioner presented a statement from Chase Bank addressed- to him at his home address showing a payment to Chase B².nk of $20,000.on December 6, 2004.

Petitioner did.not attach to his return a Schedule D, Capital Gain or Loss, but reported or.

line 13 o the return a capital gain of $20,001.

Itemized Deductions Petitioner.deducted on Schedule A, Itemized Deductions, unreimbursed employee business expenses of.$12,842, of,which $9,377 was for vehicle expenses and $3,465 was_for "other expenses, including meals and entertainment.

The parties stipulated a letter, computer-generated.spreadsheets, and copies of receipts, related to the deductions.

The letter the parties stipulated. was sent to -the Internal Revenue Service (IRS) by the chief financial officer of Superior Mortgage. According to the letter, the types of expenses identified on petitioner's Focm 2106, Employee Business Expenses, were a condition of his employment and "appear feasonable in amount and type (office supplies and postage)" The letter further explains that although petitioner was not reimbursed for the listed expenses, he w s reimbursed $2,100 >for business mileage driven between Ja uary and July 2004 .

Schedule C Loss Petitioner filed a S hedule C for G tFamily!Construction LLC (G Family), as a home rem deling contractor.

The Schedule C reported no gross receipt a d only one deduction of $14, 400 for the rental or . lease of other business property. Petitioner, on Schedule E, reported $14, 00 as rent received iñ respect of a single-family dwelling on Po uessing Avenue and deducted $17, 741 in total expenses .

The p rties stipulated a document titled "Residential Lease" namin J seph Gunn, petitioner' s brother, as lessor: and petitioner as lessee of the Poquessing Avenue property (Poquessing Avenue) .

Schedule E Supplies and Rèpa rs Petitioner deducted up lies and repairs expenses for three properties, Walker Street P quessing Avenue, and a property on South Maple Avenue .(South Ma le Avenue) . Petitioher provided as substantiation for the ex en es a computer listing for each category of expense for e ch property along with "copies of various receipts and invoa.ce , including those issued by his home remodeling company, G Fam ly and by his brothe¼, Joseph Gunn.

Discussion Generally, the Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer has the burden of proving that those determinations are erroneous.

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

In some cases the burden of proof with respect to relevant factual issues may shift to the Commissioner under section 7491(a).

As petitioner did not argue or prove that the requirements of section 7491(a) have been met, the burden of proof does not shift to respondent.

Capital Gain The gain from the sale or other disposition of property is the excess of the amount rea ized over the adjusted basis of the property.

Sec. 1001(a). Generally, a taxpayer's basis in property is the cost of the property.

Sec. 1012.

The amount realized on the sale or disposition is the amount of money received plus the fair.market value of any property received.

Sec. 1001(b). Petitioner's adjusted basis in Walker Street was $43,000 reduced by the amount of depreciation allowed or allowable under subtitle A.4 .Sec. 1016(a) (2).s The amount 4Petitioner deducted $992 of depreciation expense on Schedule E for 2004; basis reduction of $4,464 during petitioner's ownership of property.

respondent calculated depreciation and a the sAlthough sec. 1016(a) also provides for adjustments to (continued...)

petitioner realized upon he sale of the property was $108,000, resulting in a gain of ap ro imately $65,000.

Petitioner did not attach a Schedule D to his return but did report on line 13 a capital gain of $20,001. Petitioner deducted expenses on Schedule E fo W lker Street for reþairs of $1,265 for 2004 and alleges but has not shown that funds from the refinancing of the proper y ere used for "major repairs" to the property.

As an alternat ve petitioner alleges that he is entitled to. exclude the g in from the sale of Walker Street under section 121, exclusion of ga n from sale of a principal residence. But petit1one failed to present any evidence of the factual prerequisites for thb exclusion. !

Respondent concedes, it out explanation, however, that petitioner.failed. to repo t $22,038 in capital gain rather than the $71,711 determined in th notice of deficiency.

Because of respondent's concession, he Court holds fthat petitioner must include.in income additional capital gain of $22,038.

Itemized Deductions Petitioner deducted s iscellaneous expenses on Schedule A expenses related to his e pl yment as a mortgage application specialist for GMAC and D he ty Employment. Although the parties stipulated some items pet ti ner presented as substantiation'for s(...continued) basis for amounts chargea le to capital account, petitioner offered no evidence of su h expenditures.

his deductions, respondent argues that many of the items are illegible, that the letter from one employer shows that he was reimbursed for business mileage expenses, and that he failed to produce from the other employer any statement of its reimbursement policy.

Deductions are strictly a matter of legislative grace, and a taxpayer bears the burden of proving entitlement to any deduction claimed. Rule 142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934); Welch v. Helvering, supra at 115. Moreover, taxpayers are required.to maintain records that are sufficient to substantiate their deductions.

Sec. 6001.

Section 162 generally allows a deduction for ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Generally, no deduction is allowed for personal, living, or family expenses.

See sec. 262.

The taxpayer must show that.any claimed business expenses were incurred primarily for business rather than personal reasons.

See Rule 142(a); Walliser v. Commissioner, 72 T.C. 433, 437 (1979).

To show that the exp nse was not personal, the taxpayer must show that the expense was incurred primarily to benefit his business, and there must have been a proximate relationship between the claimed expense and the business.

See Walliser v.

Commissioner, supra at 437.

An employee' s performa ce of · services is a trade or bus ine s s . Primuth v . Commi s.s ioner , 54 T . C . 374 (1970 ) .

An expense, however, is not deciuctible as ofdinary and necessary to the extent that it was subject to reimbursement by the employer.

Podems v. Commissioner, 24 T.C. 21, 22-23 (1955); see also Orvis v. Commissioner, 788 F.2d 1406, 1408 (9tli Cir. 1986), affg. T.C.

Memo. 1984-533.

Petitioner provided copies of receiþts showing the purchase in 2004 of $210 . 76 of postag stamps . Ccipies of other receipts or documents were from such laces as Gelfand's, Sears, Burlington Coat Factory, Sta les, Walmart , Valu City, and others. Many of the receïpts were illeg ble an(cid:16)041the others were not, without further explanation, identifiable as relating to bus ine s s expense s .

The other expenses peti ioner deduct ed relgted to his employment were busine s s tra sportation expenses .

Pe ti tioner' s only substantiation for his ransportaticn expeÉses for the year was a computer printout listing dates, miles driven for business .

I or for personal purposes, and most often a truncated apparent destination point like Phila Delco, Montg-Delco 308 phila- trenton, or Phila-Bucs .

'The printout lists for every date zero personal miles driven even though his Form 106 shows 36, 010 tc tal miles driven and 25,005 business miles driven.

Certain business deduct:.ons as provided in section 274 are subject to strict rules of såbstantiation that supersede the doctrine in Cohan v. Comm1ssloner, 39 F.2d 540, 543-544 (2d' Cir.

1930), that allows the Court to estimate-expenses in"certain circumstances .

See sec . 1. 274 -5T (c) (2) y T Temporary Income Tax Regs .

, 50 Fed. Reg. 46017 (Nòv. . 6, 1985) , Section 274 (d) provides that no deduction shall be allowed with respect to:

(a) Any traveling expense, including meals and lodging away from home; ·(b) any item related t an activity.of a type considered to be entertainment, amusement, or recreation; or (c) the use of any "listed property", as definecl in section 280F(d) (4) (A) (i), including any passenger automobile, unless the taxpayer substantiates certain elements.

For an expense described in one of the above categories, the taxpayer must substantiate by .adequate records⁴ or sufficienti, evidence to corroborate the t xpayer's own testimony:

' (1) The amount of the expenditure, or. se; (2) the time and place of the expenditure or ,use; (3) the business. purpose of the expenditure or use; and in the case of entertainment, (4) the business relationship to the taxpayer of the persons entertained- · See sec. 274 (d) .

To meet the adequate records requirements of section 274, a taxpayer must maintain some form of records and documentary evidence that in combination re sufficient' to establish each I li element .of an expenditure o use .

See sec . 1. 2T/4 -5T (c) (2) , Temporary Income Tax Regs., supra.

A contemporáneous log is not required, but corroborative evidence to support a taxpayer' s reconstruction of the eleiner ts of an expenditure or use must have "a high degree of probative value to ele ate such statement" to the level of credibility of a contempora eous rÊcord.

Sec.

1.274-5T(c) (1), Temporary Income Tax Regé., 50 Fed. Reg. 46016 (Nov. 6, 1985) .

Not only does petitioner' s evidence not meët the required standard; one of his employers confirmed that p titioner was reimbursed $2,100 for business mileage driven between January and July 2004. Petitioner failepl to produce the reimbursement policy of his other employer and is¡ therefore unable to show that he incurred ordinary and necessary business transpËrtation expenses for that employer.

See Podems v. Commissioner, supra at 22-23.

The Court finds thati petitioner had deductible postal expenses of $210.76. Except to the extent of petitioner's postal expenses, respondent's deter ination of etitio er's itemized deductions of unreimbursed employee business expenses is sustained.

Schedule C Loss Petitioner filed a Sche ule C for "Cy Famil Construction LLC" as a home remodeling contractor. Although the business includes the letters "LLC' i its name, the Court concludes that 12 - by reporting his business activities on Schedule C of his Federal income tax return, petitioner is treating the business as a sole proprietorship for Federal iucome tax purposes.. See sec.

301.7701-3(b) (1) (ii), Proced & Admin. Regs.

The Schedule C reported no gross receipts and only one deduction of $14,400 for the expense of the rental or lease of other business property.

Petitioner, on Schedule E; reported $14,400 as rent received in respect of Poquessing Avenue and deducted $17,741 in total expenses associated with the property.

The parties stipulated a document titled "Residential Lease" naming Joseph Gunn, petitioner's brother, as lessor and petitioner as lessee of Poquessing. Avenue.

.Petitioner took the position in a letter to the IRS, stipulated by the parties, .that his brother,'Joseph Gunn, lived at Poguessing Avenue rent free and in.return performed work there and elsewhere. Petitioner, cffering no evidence of fair rental value or the value of his brcther's services, valued both the rental of the house and the labor of his.brother, whose affiliation with G Family is unexplained, at $14,400.'

In the alternative petitioner argues that if the Schedule C rental expense is disallowed, there is nothing to "support" the 7Petitioner's brother's name is listed on some unsigned G Family correspondence as "General Manager" but indication on the Schedule C that G Family had any employees during the year at there is no issue.

equal amount of rental in o e reported for the property on Schedule E; it would be n investment property" according to petitioner.

The Court accepts pe itioner's invitation to treat the Schedule C loss and the P q ess1ng Avenue rental income as a nullity, and respondent's de ermination with respect to the Schedule C loss is sustaihed.

Schedule E Supplies and Repairs .

Petitioner deducted up lies and repairs expenses for his three properties, Walker tr et, South Maple Avenue, and Poguessing Avenue, and pr vi ed as substantiation a computer listing for each category of expense for each property, along with copies of receipts apd invoices.

-Some of the receipts are illegible, some receipts hi e, legible do not contain sufficient information to determine the type of or purpose for the purchase, and some of the invoices and receipts are from G Family, petitioner's proprietorsh p, or his brother. Although it is not apparent from the copies f he invoices.and receipts which expenditure was made for p rticular property, the putative totals can be "tied" to t e mounts deducted for each property'on the Schedule E.

Where a taxpayer has es ablished that he has incurred an expense, failure to prove th exact amount of the otherwise deductible.item may not b f tal. Generally, unless precluded by section 274, the Court may estimate the amount of such an expense and allow the deduction to t at extent.

See Finley v.

Commissioner, 255 F.2d 128, 133 (10th Cir. 1958), affg. 27 T.C.

413 (1956); Cohan v...Commlssloner, 39 F.2d at 543-544.

Any inexactitude in the estimate by the Court is of the taxpayer's own making because of this faílure to maintain proper business records.

See Cohan v. Commissioner, supra at 543-544.

The Court, having examined the documents petitioner submitted as evidence of his supplies and repairs expenses for the three properties on Schedule E, concludes ~that petitioner is entitled to deduct:

(1) Walker Street repairs expenses of $693 and supplies expenses of $3,163;'(2) South Maple Avenue repairs expenses of $2,250 and supplies expenses of $245; and (3) Poguessing Avenue repairs ex enses of $682 and supplies expenses of $140.

The Court has found above that there is no rental income for Poguessing Avenue for 2004.

Additions.to Tax and Penalties Section 7491(c) imposes on the Commissioner the burden of production in any courte proceeding with respect to the liability of any individual for penalties and additions to tax. Higbee v:

Commissioner, 116 T.C. 438, 446 (2001); Trowbridge v.

Commissioner, T.C. Memo. 2003-164, affd. 378 F.3d 432 (5th Cir.

2004).

In order to meet the burden of production under section 7491(c), the Commissioner need only make a prima facie case that imposition of the penalty of addition to tax is appropriate.

Higbee v. Commissioner, supra at 446.

Section 6651(a) (1) Addition to Tax The parties agree th t etitioner filed his 2004 Federal income tax return on Septemb r 25, 2007. Respondent has met his burden of production under section 7491(c) withd respect to imposing the addition to tax under secti$n 6651(a) (1).

It is petitioner's bur en to prove hat he had reasonable cause and lacked willful nedlect in not filing the return timely.

See United States v. Boyle, 469 U.S. 241) 245 (1985); Higbee v.

Commissioner, supra at 446; sec. 301.6651-1(a) (2), Proced. & Admin. Regs.

Because petiti ner failed to offer any evidence of reasonable cause and lack of willful neglect for his failure to file timely, respondent's determination that petitioner is liable for the addition^to tax under section 66 1(a) (1) is sustained.

.. Section 6662(a) Accurac -Related Penalty Respondent determined that for 2004 Apetitiòner underpaid a portion of his income tax because of negligence or disregard of rules or regulations and that there was a substantial understatement of income tax. Section 6662(a) and (b) (1) and (2) imposes a 20-percent penalt on the portion of an underpayment of tax attributable to any one f various factors, including negligence or disregard of r les or regulations and a substantial understatement of income tax.

"Negligence" inc udes any failure ,- 16 - to make a reasonable attempt to comply with the provisions of the Code, including any failure o keep adequate books and records or to substantiate items properly. See:sec. 6662(c); sec.

1.6662-3(b) (1), Income Tax Regs.

A "substantial understatement" includes an understatement of income,tax that exceeds the greater of 10 percent of the tax reg ired to be shown on the. return or $5,000. See'sec. 6662(d);isec. 1.6662-4 (b), Income Tax Regs.

Section 6664 (c) (1) providese that the penalty under section 6662 (a) shall not apply to a y,portion of an underpayment if it is shown that there was reasonable cause for the taxpayer's position and that the,taxpayer acted;in good faith. with respect to. that portion.

The;determ nation of whether.a.taxpayer acted with reasonable cause and in good faith is. made on.a case-by-case bqsis, taking into account all the pertinent facts and -.

...

circumstances.

Sec. 1.6664- (b) (1),--Income.Tax Regs.

The most important factor is the extent of the taxpayer's effort to assess his proper tax liability for the year.

s Id.

.

Petitioner may have a substantial understatement.of income- tax for 2004.that.would be determined by the computations of the.» parties.

The Court, however, concludes that.respondent has produced sufficient evidence of negligence to show that the accuracy-related penalty under section 6662 iss appropriate for 2004.

s Petitioner fai_led to report capital gain income and failed to keep adequate books and records or to substantiate properly items that he deducted.

The accuracy-related p nalty will apply unless petitioner demonstrates that there was reasonable cause for the underpayment and that he acted in good faith with respect to the underpayment.

See sec. 6664 (c). Section 1.6664-4 (b) (1), Income Tax Regs., specifically provides:

"bircumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of all the facts and circumstan es, including the experience, knowledge, and education of the taxpayer."

I!

Petitioner did not show that there gas reasonable cause for, and that he acted in good faith with respect to, the underpayment of tax for 2004.

Respondent's determina ion of the ccuracy-related penalty under section 6662(a) for 2004 is sustained.

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