Keith J. Fessey, Petitioner

JM P T .

Memo . 2010-191 i UNITED STATES TAX COURT KEITH J .1 FESSEY, Petitioner v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 368-09 .

Filed August .30, 2010 .

Keith J . Fessey, pro se .

Kimberly A . Kazda , for respondent .

MEMORANDUM FINDINGS OF FACT AND OPINIO N HAINES, Judge :

Keith J . Fessey petitioned the Court fo r redetermination of the following deficiencies in Federal income tax and additions to tax : ' 'Unless otherwise indicated , all section references are to the Internal Revenue Coder ( Code ), as amended , references are to the Tax Court - Rules of Practice and Procedure . Amounts are rounded to the nearest dollar .

. and all Rule SERVED Aug 30 2010 Additions to Tax Year Deficiency Sec . 6651 ( a)(1) Sec . 6651 ( a)(2) Sec . 665 4 2004 $10,994 $2,474 $2,144 2005 743 167 100 $31 5 The issues for decision after concessions2 are : (1) Whether petitioner is entitled to deduct business expenses of $34,534 fo r 2004 ; (2) whether petitioner may deduct charitable contributions for 2004 ; (3) whether petitioner is entitled to married filin g jointly filing status ; and (4) whether petitioner is liable fo r additions to tax under sections 6651(a)(1) and (2) and 6654 fo r 2004 and 2005 .

FINDINGS OF FAC T Some of the facts have been stipulated'~and are so found .

The stipulation of facts, together with the ;attached exhibits, is It incorporated herein by this reference . At the time petitioner filed his petitions, he resided in California .

During 2004 and 2005 petitioner was self-employed as a loa n consultant . Petitioner worked from home and from a separat e office in a commercial real estate building .

2Petitioner concedes that he received gross receipts of $73,874 for 2004, which is $30,403 more than the income respondent determined in the 2004 notice ofddeficiency . Petitioner concedes the deficiency for 2005 :

Respondent concedes that petitioner is entitled for 2004 to itemized deductions of $13,610, consisting of general sales taxes of $781, real estate taxes of $2,235, home mortgage interest of $9,760, and charitable'contributions of $1,615 . Respondent concedes that petitioner is entitled to exemptions for two dependents for 2004 .

Petitioner failed'to file tax returns for 2004 and 2005 .

Respondent prepared substtutes`for returns for petitioner for both years with a filing status of married filing separately . On September 22, 2008, respondent mailed notices of deficiency fo r 2004 and 2005 to petitioner using third-party,payor information .

On January 5, 2009, petitioner filed a timely petition wit h this Court with respect to both notices of deficiency . O n December 4, 2009, petitioner submitted to respondent a 2004 For m 1040, U .S . Individual IncEome Tax Return . Petitioner's return reported gross receipts of $73,8 .74 for 2004 . The Schedule C , Profit or Loss From Business, attached to the 2004 return reported the following expenses :

Expense 200 4 Advertising $2,335 Car and truck 5,539 Contract labor 17,525 Depreciation 94 2 .Legal and professional 3,96 3 Office 2,723 Supplies 2,343 Travel, meals, and entertainment 2,511 Utilities 3 5,048 Business use of home 83 0 Bank charge s Credit card due s 26 4 Software 3,915 Web site subscriptions 48,57 5 Total The 2004 Schedule-A, Itemized Deductions, reported charitable contributions of $1,765,home mortgage interest of $9,760, real estate taxes of $2,235, ~nd general sales taxes of $781 .

i .

k On December 8, 2009, a trial was held in San Francisco, California . On January 6, 2010, respondentlefiled a motion to amend his answer to increase . petitioner's gross receipts to $73,874 for 2004 . On January 25, 2010, theCourt grante d respondent's motion to amend his answer .

I .

Business Expense Deduction s

OPINION

Deductions are a matter of . legislative ;grace, and th e taxpayer must prove he or she is entitled to the deduction s claimed . Rule 142(a) ; New Colonial Ice Co . v . Helvering , 292 U .S . 435, 440 (1934) . The burden of proof may shift to th e Commissioner under section 7491( a) with respect to a factual issue relevant to the liability of the taxpayer for tax if the taxpayer introduces credible evidence regardfing the issue and establishes compliance with the requirements, of section I 7491(a)(2)(A) and (B) by substantiating items, maintaining required records, and fully cooperating with,jthe Secretary's reasonable requests . As discussed below, we!find that petitione r has failed to substantiate his claimed expenses and to maintain adequate records . The burden of proof, therefore, does not shif t to respondent under section 7491(a) .

Section 162(a) provides that "There shall be allowed as a deduction all the ordinary and necessary expenses paid-or incurred during the taxable year in carrying!ion any trade or business" . The regulations specify that ordinary and necessary business expenses include "the ordinary and necessary expenditures directly-connected with or pertaining to th e taxpayer's trade or busi n ss" . Sec . 1 .162-1(a), Income Tax Regs .

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

Sec . 6001 ; Shea v . Commissioner , 11 2 T .C . 183, 186 ( 1999) .

As a general rule, i the trial record provides sufficien t evidence that the taxpayer has incurred a deductible expense, bu t the taxpayer is unable to substantiate adequately the precis e amount of the deduction to which he or she is otherwise entitled, the Court may estimate the amount of the deductible expense an d allow the deduction to that extent .

Cohan v . Commissioner , 3 9 F .2d 540, 543 - 544 (2d Cir 1930) ; Vanicek v . Commissioner , 85 T .C . 731, 742-743 (1985) ; Sanford v . Commissioner , 50 T .C . 823, 827-828 ( 1968 ), affd . per curiam 412 F .2d 201 (2d Cir . 1969) ; sec . 1 .274-5T(a), Temporary Income Tax Regs ., 50 Fed . Reg . 4601 4 (Nov . 6, 1985) . In these instances, the Court is permitted t o make as close an approximation of the allowable expense as i t can, bearing heavily against the taxpayer whose inexactitude i s of his or .her own making .

Cohan v . Commissioner , supra at 544 .

However, in order for the Court to estimate the amount of a n expense, the Court must h ave some basis upon which an estimate may be made .

Vanicek v . Commissioner , supra 'at 742-743 . Withou t II such a basis, any allowance would .amount to ,unguided largesse .

Williams v . United States , 245 F .2d 559, 560'-561 (5th Cir . 1957) A .

Advertising Petitioner's 2004 return lists advertising expenses of $2,335 . Petitioner concedes on brief he is claiming advertising expenses of only $2,085 . Respondent concedes on brief that petitioner is entitled to advertising expenses of $1,978 . Th e discrepancy of $107 is mainly attributable to a floral .arrangement that petitioner sent to a woman who worked at his business when her brother passed away and another floral ite m that petitioner sent to a client after closing the client's loa n file .

In general, advertising expenses to promote a taxpayer's trade or business are deductible pursuant toil section 162(a) .

See, e .g ., Brallier v . Commissioner , T .C . Memo . 1986-42 ; sec .

1 .162-1(a), Income Tax Regs . Petitioner has'not demonstrated II that the floral items were purchased to promote his loa n consultation business . Accordingly, we will . deny petitioner a deduction for advertising expenses beyond the $1,978 responden t conceded .

B .

Car and Truck Expense s Petitioner claims a deduction for car and truck expenses of .

$5,539 for 2004 . Respondent argues that petitioner is no t entitled to a deduction for car and truck expenses because o f lack of substantiation .

Pursuant to section 274(cid:127)(d), automobile expenses otherwise deductible as business expenses will be disallowed in full unless the taxpayer satisfies strict substantiation requirements . The taxpayer must substantiate the automobile expenses by adequate records or other corroborating evidence of items such'as,the amount of each expense, the timeland place of the automobile's use, and the business purpose of tits use . See Sanford v .

Commissioner , supra at 827-828 ; Maher v . Commissioner ,_T .C . Memo .

2003-85 .

To satisfy the adequate records requirement of section 274(d), a taxpayer must maintain`records and documentary evidence that in combination are sufficient to establish each element o f an expenditure, or use .

S 1 .274-5T(c)(2), Temporary Income Tax Regs ., 50 Fed . Reg . 46017 (Nov . 6, 1985 ) . Although a contemporaneous log is notl required, corroborative evidence to support a taxpayer's reconstruction "of the elements * * * of the expenditure or use must have a high degree of probative value to elevate such statement" tq the level of credibility of a contemporaneous record . Stec . 1 .274-5T(c)(1), Temporary Income Tax Regs ., 50 Fed . Reg . 461016 (Nov . 6, 1985) .

In the absence of adequate records to substantiate each element of an expense , a taxpayer may alternatively establish an element by "his own statement, whether written or oral, containing specific information in detail as to such element" , and by "other corroborative evidence sufficient to establish such element ." Sec . 1 .274-5T(c)(3), Temporary, Income Tax Regs ., 5 0 Fed . Reg . 46020 (Nov . 6 1985) . Section 274'1;(d) overrides the Cohan rule with respect to section 280F(d)(1 .) "listed property" and thus specifically precludes the Court from allowin g automobile expenses on the basis of any approximation or th e taxpayer's uncorroborated testimony .

Petitioner determined his car and truck expenses usin g a car and truck worksheet he filled out . The worksheet show s that petitioner drove a 2002 Honda Accord which was placed in service in 2003 . Petitioner claims that heFdrove the car 23,56 0 miles during the year and that 14,677 of those miles were fo r business . Petitioner did not recall how he!arrived at the mileage .

Petitioner has -failed to satisfy the adequate records requirement of section 274(d), and the record is devoid of corroborative evidence to support petitioner's reconstruction o f his mileage . See sec . 1 .274-5T(c)(1),. Temporary Income Tax Regs ., supra . Accordingly, we will deny petitioner a deductio n for car and truck expenses .

I!! '~i C .

Contract Labo r Petitioner's 2004 return lists contract labor expenses of $17,525 . Petitioner concedes onbrief he is claiming contrac t labor expenses of only $9,700 . Respondent argues that petitione r is. not entitled to a deduction for contract labor expenses .

Petitioner testified at trial that in 2004 he paid his 18- year-old son and 12-year-old daughter $12,675 and $4,850 in cash, respectively, to perform tasks for the business both at his hom e and his office . Petitioner did not produce records, such a s Forms W-2, Wage and Tax . Statement, to indicate that thes e payments were made or that they were made in the ordinary cours e of his loan consultation, usiness . . Accordingly, petitioner ha s failed to prove that these were necessary payments made in the ordinary course of his business, and we will deny petitioner a If deduction for labor and contract expenses .

D .

Depreciatio n Petitioner claims a deduction for depreciation of $942 for 2004 . Petitioner testified that the items he seeks to elect t o depreciate include a des k a matching credenza, two bookcases , and a lateral file cabine t . Petitioner provided no documentatio n as to how the depreciation expense was calculated .

When property is used in ..a trade or business or held for th e production of income, the taxpayer may be allowed a depreciatio n deduction for the exhaustion and wear and tear of the property .

Sec . 167 . As petitioner failed to produce evidence to support his claim for depreciation, we will deny the deduction .

E .

Legal and Professional Expense s Petitioner claims a deduction for legal and professional expenses of $3,963 for 2004 . Most of these expenses relate to compact discs .that petitioner testified he purchased as part of a "Brian Tracy" sales and marketing seminar in 2004 . Respondent { concedes that petitioner may deduct $803 for legal and professional expenses but argues that petitoner .has failed to prove that the seminar was related to his business .

Although petitioner submitted a printout of his American Express credit card purchases which includes, an entry . listed a s "Brian Tracy GTI Business", petitioner has failed to offer any probative evidence to support the business purpose of th e purchase . Accordingly, we will deny petitioner a deduction for legal and professional expenses beyond those respondent already conceded .

F .

Office Expenses Ib Petitioner's 2004 return lists office expenses of $2,723 .

Petitioner concedes on brief he is claiming ;office expenses o f only $2,525 . Respondent concedes on brief that petitioner is .

entitled to office expenses of $2,360 .

Petitioner provided the Court with a printout of a credit card statement showing charges .he incurred at stores includin g the Home Consignment Center, Ross , and Lowes . However , petitioner was unable to testify at trial with any specificity as to the exact nature of his, purchases or their ordinary and necessary purpose in the context of his business . As petitioner has failed to substantiate his office expenses, we will deny petitioner a deduction for office expenses beyond those respondent conceded .

G .

Travel, Meals, and Entertainmen t Petitioner claims a deduction for travel, meals, and l entertainment expenses of $2,511 for 2004 . Respondent argues that petitioner is not enttitled'to any deduction for travel , meals, and entertainment because of a lack of substantiation .

Section 274 ( d) places ` heightened substantiation requirements on taxpayers claiming deductions : under section 162 for any traveling expense, including meals and lodging while away fro m home . In order to be enti tled to a deduction-for an expense fo r travel, meals, and entertainment, the taxpayer must show that the item claimed is directly related to or .associated with the activ e conduct of the taxpayer's trade or business . Sec . 274(a) .

Additionally, the taxpayer must provide adequate records'showing the amount of the expense, the time and place of the expense, the business purpose of the expense, and the business relationship t o the taxpayer of the person Iskentertained . Sec . 274(d) ; sec .

1 .274-5T(c)(2)(i), Temporary Income Tax Regs ., supra .

Petitioner provided the Court with a printout he created 12 - from his credit card statement showing amounts paid to variou s II .

restaurants, grocery stores, and fast food outlets . Petitione r testified at trial that he would often take lireal estate agents to fast food venues and coffee shops to discuss : business and provid e the agents food purchased in grocery store s Petitioner's printout and testimony do! :not provide the leve l of substantiation required by section 274(d) At best, they can be used to satisfy the first prong of the test under section 1 .274-5T(c)(3), Temporary Income Tax Regs .,Isupra . However, that test "also requires corroborative evidence sufficient to establish each element ."

Tyler v . Commissioner , T .C . Memo . 1982- 160 . As petitioner failed to present testimony of a third-part y or submit documentary evidence such as .recepts, petitioner fails the second prong of the test under section 1 .274-5T(c)(3), Temporary Income Tax Regs ., supra .

We are also barred from estimating under the Cohan doctrine expenses that are subject to the requirements of section 274(d) .

Lang v .~ Commissioner , T .C .

Memo . 2010-152 . Accordingly, we will deny the deduction . for . , travel, meals, and entertainment expenses .

H .

Utilitie s

Utlity expenses may be deductible under section 162(a) i f the expenses incurred are ordinary and necessary in carrying on a trade or business .

Vanicek v . Commissioner , 85 T .C . at 742 .

Petitioner testified at trial that the expenses listed on hi s return were incurred in th' e course of his business . Petitioner also provided the Court wi jth a printout he created from hi s credit card statement showing amounts paid to various Interne t providers, Web site hosts, telephone companies, and a network satellite service provider However, petitioner failed to provide any documentation indicating whether the utility expenses listed on his return were necessary and were incurred in the ordinary-course of his bu s ness .

Most of the utilities petitioner listed on the printout , such as bills for telephon e' and Internet service, could have been used for either work or personal 'fuse . Without specific evidenc e to corroborate petitioner' testimony at trial, we are unable t o conclude that petitioner's utility expenses are greater tha n those respondent conceded .

I .

Credit Card Membership Due s Petitioner argues that he is'entitled to a deduction for credit card membership fees of $250 that he paid to use his American Express card in 2004 . Respondent argues that petitioner c has not shown that these dues were ordinary and necessary to hi s business .

Petitioner provided the Court with a printout he created from his credit card statement showing amounts paid to America n Express as membership dues . Petitioner testified at trial that most of the purchases made on his American Express card were fo r business . Petitioner also testified that he!used his America n Express card for personal travel .

Petitioner has failed to show that his dues payments were necessary and were made in the ordinary course of his business .

See sec . 1 .162-1( a), Income Tax Regs . It is ~, unclear whether petitioner ' s credit card was employed primarily for business purposes , and petitioner admitted that he Occasionally used the card for personal expenses such as travel .

Thus, we will den y petitioner a deduction for credit card membership dues .

II .

Charitable Contribution s Petitioner's 2004 return lists charitable contributions of $1,765 . On brief, petitioner claims that he is actually entitled he, to a charitable contribution deduction of $2,535 . Respondent .

concedes on brief that petitioner is entitled to a charitabl e contribution deduction of $1,615 .

Petitioner alleges that he donated $920 in'cash in 2004 t o Capital Christian Center, a church, by way of $20 weekl y donations made to the church's Sunday service offering plate .

Section 170 allows a deduc tion for contributions made t o qualifying' charitable organizations throughout the tax year .

Petitioner provided the Coirt with a computer printout listing the date, amount, and recipient of charitable donation s petitioner claims to have made in 2004 . Petitioner also produce d receipts from several religious and charitable institutions showing that petitioner ha, given them donations totaling $1,615 for 2004 . However, petitioner did not produce a receipt or any- form of documentary evidence to substantiate his alleged weekl y offering plate donations .

Petitioner has failed to substantiate that he provided cas h donations to Capital Christian Center . Accordingly, we will deny petitioner a deduction for charitable contributions beyond those respondent conceded .

III . Filing Statu s Petitioner alleges that he is entitled to the filing status of married filing jointly for 2004 .

Respondent argues tha t petitioner is barred from hanging his filing status from married filing separately under section 6013(b)(2)-(B) .

.In general, section 6013(a) allows married taxpayers to fil e a joint income tax return .

Section 6013(b)(1) further provide s as a general rule that even where a taxpayer has filed a separat e return for a taxable year and the time prescribed for filing has expired, the taxpayer may nevertheless make a joint return wit h his or her spouse for such taxable year .

Section 6013(b)(2) specifies that the election under section 6013(b)(1) may not be made "after there has been mailed to eithe r spouse, with respect to such taxable year, a notice of . deficienc y under section 6212" . Respondent prepared a .substitute for retur n for petitioner for 2004 under section 6020(b ) in ; which respondent determined petitioner's filing status to be married filing separately . Respondent then mailed a notice of deficiency t o petitioner .

Respondent contends that his preparation of a substitute for return for petitioner under section 6020(b)'constitutes a separate return filed by the taxpayer underilsection 6013(b)(1) for purposes of triggering the section 6013(b)(2) limitation .

disagree . In Millsap v . Commissioner , 91 T .C . 926, 937 (1988), we determined as follows :

in situations where deficiency procedures are availed of and a taxpayer has not filed a return, the taxpayer may file a return and contest respondent's filin g status determination, even though respondent has "filed" a substitute return under section 6020(b), in which filing status has been "elected"k by respondent .

Accordingly, respondent's substitute for return does not bar petitioner from electing a different filing status on a retur n submitted after filing a petition with thisilCourt . As petitioner submitted a 2004 return electing the filing status of married filing jointly and has shown that he was legally married in 2004, petitioner is entitled to the filing status of married filing jointly .

IV .

Additions to Tax Respondent determined that petitioner is liable fo r additions to tax under section 6651 ( a)(1) for failure to file income tax returns for 2004 and 2005, under section 6651(a)(2) for failure to pay the amounts shown on income tax returns fo r 2004 and 2005, and under 6ection!6654(a) for failure to make estimated tax payments for 2004 and 2005 . Petitioner has not contested respondent's determinations regarding the additions t o tax in his petition, . at trial, or on brief .

In general, the Commissioner bears the burden of production with respect to a taxpayer's liability for additions to tax .

Sec . 7491(c) ; Higbee v . Commissioner , 116 T .C . 438, 446-44 7 i (2001) . However, where a taxpayer does not challenge an additio n to tax by assigning error to it,kthe taxpayer is deemed t o concede the addition to tax, and the Commissioner need not plead the addition to tax and has no obligation under section 7491(c) to produce evidence that the penalty is appropriate .

Swain v .

Commissioner , 118 T .C . 358, 364-365 (2002) ; see also Rule 34(b)(4) . Consequently, we hold that respondent's determination that petitioner is liable for additions to tax must be sustained, insofar as the calculation of petitioner's additions to tax ar e adjusted to take into account the concessions detailed above .

In reaching our holdings, we have considered all argument s made, and, to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit .

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

0. ' It Petitioner deducted utility ,expenses of $5,048 on his 2004(cid:127) - it return . Petitioner concedes on brief he islientitled to deduc t J utility expenses of only $ 3,927 .` Respondent concedes on brie f that petitioner is entitled to deduct utility expenses of $2,315 .