Martin & Marina Barajas, Petitioner

T.C. Summary Opinion 2011-2

UNITED STATES TAX COURT

MARTIN AND MARINA BARAJAS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 13954-095.

Filed January 5, 2011.

Martin and Marina Barajas, pro sese.

Andrew R. Moore, for respondent.

PANUTHOS, Chief Special Trial Jüdge:

This case was heard pursuant to the provisions of sectio 7463 of the Internal Revenue Code in effect at the time the petition was filed.

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, subsequent section references are to the Internal SEf!VED JAN -5 2011 Revenue Code (Code) in effect for the year in issue, and all Rule refere es are to the Tax Court Rules of Practice and Procedure.

Respondent determined a $6, 975 deficiency in petitioners' Federal income tax as well as a $1, 395 accuracy-related penalty ; under section 6662 (a) for 2006. After concessions, the issues fe-zMiee-i-s-ien-are:

(1) Whether petitioner husband is entitled to a dedudtion of $22, 460 for bùsiness use of h s two personal || vehicles; and (2) whether petitioners .are liable for an accuracy- relate penalty under section 6662(a).

Background Sóme of the facts have been stipulated and are so - found.

The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioners resided in California at the time the petition was filed. Petitioner wife worked for the Federal Government during 2006, ,and her income and deduct-lons are not at issue .

I 2006 as he had for many years before, petitioner husband (petitioner) used his knowledge of music industry production and his cr ative talents as a songwriter, photographer, and design artist to serve as a self-employed music producer.

He operated his business under the name Discos Barajas. Petitioner would meet wp.th a music group or band (group) and, depending on the group' s needs, he would negotiate one of various types of multiyear contracts or licerising agreements.

In main part, petitioner would agree to produce the group's music compact discs (CDs) and/or their digital video dises (DVDs) (collectively-CDs).

Petitioner was also available to help with lyrics, to compose photographs, and to create artwork for the group's posters, business cards, and CDs. Once a group finished recording 10 to 20 songs and had decided on the final artwork, petitioner would subcontract with manufacturers to produce the posters, business cards, and CDs.

The agreements geneŸallý called for petitioner to produce one or two CDs for a group for each year of the agreement.

In one typical arrangement petitioner would arrange the production of, and'give the group an agreed number of, completed CDs, business cards, and posters, for example in quantities of 1,000, 500, and 2,000, respectively. The'group was free to sell these items for their own profit or to give them away as promotional materials. Petitioner w s likewise entitled to attempt to sell for his own profit t e-overproduction he had ordered.

On Saturdays and Sund~ays p titioner, would attend flea markets and swap meets where he would offer the CDs for sale.

Petitioner maintained a permanent bo th at a flea market in Folsom, California, but he also traveled to Galt, Lodi, and Marysville, California, all within an hour's drive of Sacramento, California. Petitioner resided in Sacramento with petitioner wife and their three minor children.

He sold CDs from groups whose music he produced as well as from other artists.

Petitioner principally worked with Spanish-language Latin .

.

American music artists, but he also contracted with groups recording Cambodian, Korean, and Vietnamese music . During <2006 he ente ed into agreements ole was under continuing contract, with about .28 groups .

» Petitioner made most of his business telephone calls, faxes, and emails, from an office in his home, where he also kept his records.

He stored his inventory in a structure in his backyard.

On occ sion, petitioner would meet with a group in the Sacramento area o at his home.

P titioner also met with groups in Los Angeles. Most of ther music CD manufacturers and recording, studios with whom petitioner .l!

conduct ed business maintaineel their ,facilities in Los Angeles.

These onnections caused petitioner to drive one of his two person 1 vehicles, a 2001 Lincoln or a 1999 Suburban, sto Los Angeles during almost every week, specifically 48 round, trips in Î 2.006. Petitioner almost always drove to Los Angeles.on a Tuesday or Wednesday, worked 1 or 2 days in the city, and then drove home to Sacramento on Thursday or Friday. - Petitioner spent a total of 116 da s in Los Angeles during 2006.

Each round trip,- including mileag within Los Angeles, atotaled approximately 830 miles.

P titioner usually stayed at a Motel 6, or atethe Pueblo Motel, which were centrally located to his business contacts.

During 2006 petitioner paid almost a].1 of his travel expenses in cash.

The Court received into evidence copies of petitioner's bank statements for 2006 showing num rous gas purchases and automated teller machine (ATM) withdrawals in the Los Angeles area and along the route .

To prepare the couple' s 2006 Federal income tax return, petitioner engaged Judy Shorten, an nrolled agent in Sacramento.

She had served as their preparer for more than 10 years and had been in practice f or - about 25 years . Petitioner reported his business activity on Schedule C, Prof it or Loss From Business.

He reported gross receipts of -$152, 061 and a net profit of $8,757. Pertinent here, among the business expenses, petitioner deducted car and truck expenses of $22, 460, overnight lodging expenses of $7,735, and business meal expenses:of $2,256.

Petitioner computed his vehicle exper se deduction using the 2006 Internal Revenue Service standard mileacje rate of 44.5 cents per mile.

He multiplied the rate times 50,472 business miles.

Re¯spondent selected petitioners' 2006 Federa]:

income tax return for examination. Respondent determined that Los Angeles, not Sacramento, was petitioner's tax home.¹ Consequently, in a Sec. 162(a) (2) permits aideduction for travelinc expenses that a taxpayer incurs "while away fr m home" in pursuit of a trade or business. Commissioner v. Flowers, 326 U.S. 465, 470 (1946) ; Nicholls v. Commissioner, T.C. Memo. 1995-291. This Court holds as a general rule that applies the term »means the vicinity of "home" as sec . 162 (a) (2) the taxpayer' s principal (continued. .

. ) notice f determination, respondent made the following three adjust nts:

(1), Disallowedä$15,4891 of petitioner's $22,460 car and tr k expense deduction; (2) disallowed al-1 of petitioner s $7, 735 eduction for overnigiit lodging:expenses; and (3) disallowed all of petitioner' s $2, 256 deduction for business meal expens Respondent ' s allonance of $6 ,'56 9 . ( $22 , 46 0 minus $15, 89 ) for car and truck expenses, consisted of petitioner' s busine s mileage around the Sacramento area and within the Los Angeles area, but not ,his imileage to and from Los Angeles.

Respondent listed two reasons for the disallowances: Petitioner lacked substantiation, and petitioner did not incur the expenses while ' away f rom home " .

T e sum of respondent' s adjustments caused computational adjustn ents to the couple' s ohild care credits and to petitioner's self-employment tax, resulting in a total deficiency of $6, 975. Respondent also etermined a 20-percent accuracy- relate penalty of $1, 395 .

P titioner and his enrolled agent, Ms. Shorten, testified at trial. Near the end of trial, respondent conceded that . cont inue d) place hfe employment and not /|the location of his, personal reside ce. Mitchell v. Commissioner, 74 T.C. 578, 581 (1980) ; Daly v. Commissioner, 72 T.d. 190, 195 (1979), affd. 662 -F.2d 253 (4th dir. 1981); Foote v. C0mmissioner, 67 T.C. 1, 4 Nicho] s v. Commissioner, sdpra; Wheeler v. Commissioner, T.C. Memo. 31984-502, affd. without published opinion 791 F.2d 168 (9th Cir . 1986) .

(1976); --7 - Sacramento, not Los Angeles, was petitioner's tax home.

Respondent further conceded that petitioner was entitled to all of the $2,256 business meal expense deduction that he had claimed.

Regarding overnight lodging, pegitioner was able to produce receipts totaling only $798.70.of- the $7,735 lodging expense deduction. Petitioner conceded that he is entitled-to a deduction of only $798.70, and respondent allowed that amount.

With respect to business mileage, the Court received into evidence a copy of a contemporaneous mileage log that petitioner maintained detailing his vehicle use for 2006.

The log showed the dates,-destinations, business contacts, and mileage for his business travel.

The Court also received into evidence copies of manufacturer invoices, petitioner's canceled checks, and other supporting evidence corroborating a business purpose for 37 of the 48 trips to Los Ange'les.

As of the close of the record, the parties were still unable to agree o petitioner's deductible business mileage.

Furthetmore, the--20-percent accuracy-related penalty is still in dispute.

Discussion In genefal, the Commissioner's determination set forth in a notice of deficiency is presumed corr ct, and the taxpayer bears the burden of showing that the determ nation is in error. Rule 142(a);2 Welch v. Helvering, 290 U.S. 111,- 115 (1933). Deductions | are a matter of legislative drace. Deputy v. du Pont, ,308 U.S 488, 4 (1940) ; New Colonial Ice Co. v. Helvering, 292 U.S. 435 440 (1 4) .

A taxpayer bears the burden of proving entitlement to any deduction claimed. Rùle 142 (a) ;

INDOPCO,

Inc . v.

Commissioner; 503 U.S. 79, -84 (1992) ;s Welch v. Helvering, supra at 115 Wilson v. Commissioner, T.C. Memo. 2001-139.

Pursuant to section 7491(a) , the burden of. proof as to factua matters shifts to the Commissioner- under certain circum tances. Petitioner has neither alleged that section 7491(a applies nor established his compliance with the substa tiation and recordkeeþing requirements .

See sec 7491(a (2) (A) and- (B) .

: Petitioner therefore bears the, burden of proof .

See Rule 142 (a) .

I.

Pe itioner' s Deduction for Business Use of Personal Vehicles A taxpayer is required to maintain records sufficient to substantiate deductions claimed on a Federal income tax return.

Sec 6 01; sec. 1.6001-1(a), (e)-, Income iTax Regs.

In other:

words, the taxpayer bears the burden of proving entitlement to the de uctions he claimed, and this includes the burden of substantiation. Rule 142(a); Hradesky v. Commissioner, 65 T.C.

87, 90 (1975), affd.- per curiam 540 F.2d 821 (5th Cir. 1976) .

The f t that a taxpayer reports .a deduction on an income tax retur is not sufficient toisubstantiate the claimed deduction.

Wilkir on v . Commis s ioner , '-il T . C. 633 / 63 9 (1979) ; Roberts v .

Commissioner; 62 T.C. 834; 837 -(1974 . Rather, an income tax return is merely a statement of the taxpayer's claim;.it is not presumed to be correct. Wilkinson v Commissioner, supra at 639; Roberts v. Commissioner, supra at 837; see also Seaboard Commercial Corp. v. Commissioner, 28 T.C. 1034, 1051 (1957) (a taxpayer's income:tax return is a se..f-serving declaration that may not be accepted as proof for the claimed deduction or exclusion); Halle v. Commissioner,

Section 162(a) provides a deduction for certain business-related expenses.

To qualify for the deduction under section 162(a), "an item must (1) be 'paid or incurred during the taxable year,' (2) be for 'carrying on any trade or business,' (3) be an 'expense,' (4)- be a 'necessary' expense, and (5) be an 'ordinary' expense." Commissioner v. Lincoln Sav. & Loan Association, 403 U.S. 345, 352 (1971); Commissioner v. Flowers, 326 U.S. 465, 470 (1946); Deputy v. Lu Pont, supra at 495.

- An ordinary expense is "of common or frequent occurrence in the type of business involved." Deputy v. du Pont, supra at 495.

A necessary expense is appropriate and helpful in carrying on the trade or business. Commissioner v. Heininger, 320 U.S. 467, 471 (1943) ; Heineman v. Commissioner, 82 T.C. 538, 543 (1984) . Under section 262, however, no portion of the cost tof operating an automobile that is attributa le to personal use is deductible.

Michaels v. Commissioner, 53 T.C. 269, 275 (1969) .

, Similarly, ordinar commuting expenses are not deductible. Commissioner v.

Flowers supra at 472-473; Neal v. Commissioner, 681 F.2d 1157 (9th Cir. 1982), affg. T.C.

lylemo. 1981-407.

I a taxpayer establishes that he or she paid or incurred a deductible business expense but does:not establish the amount, of the expgnse, we generally may approximate the amount of athe allowa le deduction, bearing heavily against the taxpayer whose inexac itude is of his or her own making.

Cohan v. Commissioner,

See sec . 280F (d) (4 )e (A) ;, Sanf ord v. Comthissioner, 50 T.C. 823, 827-828 (1968)., affd. p r curiam 412 F.2d 201 (2d Cir. 1969).

T e expenses to which section 274 (d) applies include, among oEher types, expenses for listed property (e.g., automobiles, cellular-telephones, ,computer equipment, or any propei-ty of a type generally used for purposes of entertainment, -recreation, or amusem nt) and travel expenses (including meals and lodging -while away from home) .

Secs. 274 (d) (4) , 280F (d) (4) (A) .s i To substantiate a deduction attributable to listed property, a taxpayer must maintain adequate records or present corroborative evidence to show the following:

(1) The amount of the expense; (2) the time and place of use of the listed property; and (3) the business purpose of the use.

Sec. 1.274-5T(b) (6), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, ~1985).

A contemporaneous log has a high degree of credibility.

Sec. 1.274-5T(c) (1), Temporary Income Tax Regs., 50 Fed. Reg.

46016 (Nov. 6, 1985).- The log need not duplicate information on receipts so long as¯ the log and'receipts complement each other in an orderly manner.

Sec. 1.274-5T(á) (2), Temporary Income Tax Regs.i 50 Fed. Reg. 46017 (Nov. 6, 1 85). "If a taxpayer fails to establish to the-district director's satisfaction that his records are adequate, then the taxpayer must establish the adequacy by "his own statement~" and ty "other corroborative evidence".

Sec. 1.274-5T(c) (3) (i), Temporary Income Tax Regs.,

Respondent's continuing disallowance of car and truck expenses relating to petitioner's bu iness mileage to and from Los Angeles stems from petitioner's bility to provide supporting documentation for only 37 (or 77 per ent) of his 48 trips.

Respondent's insistence on 100 percent corroboration of the mileage log, however, contradicts the Secretary's own regulation.

A taxpayer may substantiate his consistent pattern of business .- 12 - use of 1.isted property for tl e entire year if he can establish by corroborative evidence that the periods for which, he has adequate records are representative of the whole year.

, Sec.

1.274-5 (c) (3) (ii) (A) , Temporary Income Tax Regs .

, 50 Fed. Reg.

46021 ( ov. 6, 1985) .

!

Tl e regulation provides three examples to illustrate this point.

The first two examples show acceptable support for a log, and the third example shows unacceptable support .

Sec .

1.274-5T (c) (3) (ii) -(C) , Temporary Income Tax Regs. , supra.

In the first example, the taxpayer thaintained adequate records for the first 3 months of the year, and- in the second example the taxpayer provided records for the first week of every month.

Id.

Thus, n.the first two examples, the taxpayers had corroborative record for only one-quarter of the year." Nonetheless, because the ta payers maintained consistent driving patterns throughout the year, . their partial substantiation was adequate to o corrobörate the log for the entire year.

The third example illust ates unsatisfactory sNbstantiation.

The third taxpayer similarly provided documentation for one-quarter of the year; the last w ek of every month.

Id.

The taxpayer's critical failure, however, was that the last week's business use patternswas not reflective of his driving pattern during the rest of, the month.² Il Therefore, the taxpayer's partial substantiation was "not repres ntative of use during other periods."

Id.

Petitioner's circumstance is far more Analogdus to the first two positive examples sand is highly dissimil'ar to the third unfavorable example. Petitioner mai tained a consistent pattern of business use of his personal vehicles throughout 2006. During almost every week (48 of 52 weeks), petitioner drove to Los Angeles on Tuesday or Wednesday and eturned to Sacramento on Thursday or Friday. Petitionet correborated this consistent pattern with supporting documentation- from 77 percent of his trips, not just the 25-percent that even the two successful examples supplied. Petitioner's cor oboration included his contemporaneous mileage log, his own testimony, and documentary evidence from ATM'withdrawals, gas purchases, subcontractor invoices, and canceled checks. Respondent, on the other hand, did not^ controvent or even attempt te controvert any of the entries in the log. Respondent gave no reason to question the validity of petitioner's business mileage, rand after examining the entire record, we find none.

For all of the foregoing reasons, petitioner has substantiated the business use of his personal vehicles in accordance with the heightened subst ntiation requirements for listed property under section"274(d)a⁴). Therefore, petitioner is entitled to a deduction for the full $22,460 of car and truck expenses that he claimed for 2006.

II; 5 Ac uracy-Related Penalty - -14 - Ta payers may be liable for a 20-percent penalty on the portiod of an underpayment of tax attributable to negligence, disregard of rules or regulations, or a -substantial || underst tement of income tax., Sec. 6662(a) and (b) (1) and s(2) .

T¹ e term "negligence" ir section 6662 (b) (1) includes any - failure to make a reasonable attempt to comply with the Code, and the term, "disregard" includes any careless, reckless,e or intenti nal disregard.

Sec. 6662(c). Negligence has also been definec as thé failure to exercise due- care or the failure to do what a easonable person wou].d ,do under the circumstances.

See Allen . Commissioner, 92 T.C. 1, 12 (1989), affd. 925 F.2d 3483 353 (9t Cir. 1991) ; Neely v Commissioner

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

An "under tatement of income tax" is substantial if it exceeds the greate of 10 percent of the tax required to be, shown on the return or $5:, 00 0 .

Sec . 46662 (d) (1) (A) .

T e section 6662 accuracy=related penalty does not apply where he ta;>cpayer shows that he acted in good faith and with reason ble cause.

Sec . 6664 (c) (1) .

The determination of whether a taxp yer acted in good faith and with reasonable cause depends on the facts and circumstances of each case and includes the knowledge= and experience of the taxpayer and the reliance on the advice of a professional, such -as an accountant.

Sec. 1.6664- 4(b) (1), Income Tax Regs.

For a taxpayër to rely reasonably upon the advice of a tax adviser, the taxpayer must, at a minimum, prove by a preponderance of the evidence that:

(1) The adviser was a competent professional with sufficient expertise to justify reliance, (2) the taxpayer provided necessary and accurate inforkation to the adviser, and (3) the taxpayer actually relied in good faith on- the adviser's judgeent Neonatology Associates, P.A. v. Commissioner, 115 TiC. 43, 99 (2000), affd. 299 F.3d 221 (3d Cir. 2002). Most important in t is determination is the extent of- the taxpayer's effort to d termine the proper tax - liability.

Id.; sec.,1;6664-4(b) (1) Income Tax Regs.

- The Commissioner has the burden ofsproduction unders section 7491(c) with respect to the accuracyprelated penalty under section 6662..

To satisfy that burden, -the'Commissioner must produce sufficient evidence showing that it is appropriate to impose the penalty. Higbee v. Commissioner, 116 T.C.- 438, 446 • (2001). Respondent has satisfied his burden by producing evidence that petitioner substantiated only $798.70 of his $7,735 deduction for overnight lodging expenses. Accordingly, because respondent has met his burden of production, petitioner must come forward with persuasive evidence that the accuracy-related penalty should not be imposed with respect to the portion of the !

16 - underpayment attributable to the overnight lodging expenses because he acted with reasonable cause and in good faith.

See sec . 6664 (c) (1) ; Rule 142 (a) ; Higbee v. Commissioner, supra at Pe itioner engaged Ms . Shorten, an enrolled agent, to prepare his 2006 Federal income tax return.

Ms . Shorten had been petitioner's preparer for 10 years.; and she had been in practice for 25 ears. Respondent did not dispute the competency-of -Ms.

Shorten Petitioner provideci Ms . Shorten with the necessary and accurat information to prepare his return, and Ms Shorten determined that petitioner' s a inf ormation was suf f ic ient to ' support a deduc tion of $7 , 73 f or overnight lodging s expenses .

Petitioner's deduction for lodging expenses,- even though,he did not ke p most of the- motel rèceipts, appears to be a reasonable amount A $7, 735 expense divided by 116 days in Los Angeles equals an average cost, including tax, of $67 per night, a e credib e figure for Los Angeles.

Furthermore, petitioner, though hardworking, apparently had no formal training .in taxation and worked in an unrelated field, music production., Therefore, he relied on Ms. -Shorten's judgment for accurately reporting his overni ht, lodging expenses .

In other words, - þetitiorier- has met each oi the requirements for good faith reliance - on a competent professional.

Moreover, respondent did not challenge the reporting of any of petitioner wife's income or deductions. Further, respondent has conceded or we have already decided that petitioner accurately reported all of his other business expense deductions for 2006. Consequently, on the basis of the entire record before us, we conclude that petitioners act d in good faith and with reasonable cause and made a good faith effort to determine their proper tax liability. Accordingly, we do not sustain respondent' s determination that the section 6662 accuracy-related penalty applies for 2006.

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

7. T.C. 245 (1946) (a taxpayer's income tax return is not aelf-proving as to the truth of its contents), affd. 175 F.2d 500 (2d Cirl 1949).
39. F.2d 540, 543-544 (2d Cir: 1930) .= .However, for the Cohan rule to app y, there must be sufficient evidence in the records to provide a basis for the estiinate. Vanicek v.a Commissioner; 85 T. C. 2731, 743 . (1985) . Certain expenses -may not be estimated under t he Cohan rule because of the strict substantiation requirements of section 274 (a) .
50. Fed. Reg. -46020 (Nov.- 6, 1985).
85. T.C. 934, 947 (1985) Negligence also .includes any failure by the taxpayer to keep ac equate books and recoi-ds or to - substantiate items properly.