Rodger L. Gamblin & Kathleen J. Burch, Petitioners

T.C. Summary Opinion 2011-8 UNITED STATES TAX COURT RODGER L. GAMBLIN AND KATHLEEN J. BURCH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 21480-09S.

Filed January 31, 2011.

Rodger L. Gamblin and Kathleen J. Burch, pro sese.

Archana Ravindranath, for respondent.

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 was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and thise opinion shall not be treated as precedent for any other case. Unless otherwise indicated, subsequentesection references are to the Internal Revenue Code in effect for the years at

SERVED JAN 31 2011

issue, and Rule references are to the Tax Court Rules of Practice and Procedure .

Respondent .determined def iciencies in - petitioners' Federal income taxes of $15, 221 for 2004', $12, 886 for 2005, and $3, 859 for 2006. Respondent also determined that petitioners are liable for accuracy-related penalties under section 6662(a) of $3,044.20 for 2004 and $2,577.20 for 2005.

The parties agree that during the years 2004, 2005, and 2006, Rodger L. Gamblin (Dr. Gamblin) received gross Social Security benefits of $16,663, $17,108, and $17,809, respectively.

The parties also- agree that petitioners are not entitled to deduct:

(1) The $3, 764 advertising expense claimed on Kathleen J. Burch's (Dr. Burch) Schedule C, Profit or Loss From Business, for 2004; (2) Dr. Gamblin's Sâhedule' C legal and professional expenses of $1,077 for 2004; (3) Schedule C office expenses for Dr. Gamblin for 2004 in excess of those respondent allowed; and (4) Schedule C other expenses for Dr. Burch for 2004 and 2006 in excess of those respondent allowed.

Petitioners offered no evidence and made no argument~with respect to deductions claimed on their Schedules A, Itemized Deductions, and Schedules C for:

(a) Dr. Burch's legal and Adjustments to the taxable amount of Dr. Gamblin' s Social Security benefits and to petitioners' employment computational and will be resolved consistent with the Court' s deciéion.

itemized deductions, self- taxes -are tax deductions, and self-employment professional services expense for 2006 and (b) self-employed health insurance expenses for 2004 and 2006. Petitioners also failed to offer anya evidence or argument to contest respondent's determination that Dr. Gamblinshad no gross receipts or sales for 2006.

Thus, petitioners are deemed to have conceded these issues.

See, e.g., Bradley v Commiss'ioner, 100 T.C. 367, 370 (1993) ; Sundstrand Corp.

Ee Subs.cv. Commissioner, 96 T.C. 226, .

344 (1991); Rybak v. Commissioner, 91 T.C. 524, 566 n.¹⁹ (1988); Money v. Commissioner, 89 T.C. 46, 48 (1987);. Leahy v.

Commissioner, 87 T.C. 56, 73-74 (1986).

The parties further agree that petitioners are entitled to deduct on Dr. Burch's Schedule C:

$3,439.83 of expenses for legal and professional services for 2004, and an additional $739 for 2004 over the amount respondent allowed for insurance (other than health).

The issues remaining for decision are whether petitioners are entitledato deduct on their respective Schedules:C amounts in addition to those "respondent allowed,' and whether petitioners are liable for accuracy-related penalties for 2004 and 2Ó05.

Some of the facts have been stipulated and are so found.

The stipulation of facts, supplemental stipulation of.facts, and the exhibits received in evidence are incorporated herein by reference. Petitioners resided in Ohio when the petition was filed.

Background Dr. Gamblin.is, and*was, during the years at issue, an inventor and "tinkerer" who holds 36 U.S. patents. Dr. Gamblin is -currently working on a printing process involving "publication gravure inks".

This printing process uses a special ink which is designed for use in a high-speed and high-quality printing process and is especially suited for printing large squantities of the same item. Dr. Gamblin is working on a formulation of this special ink that is both biodegradable and cheaper to use than current ink types.

»In the 1990s Dr. Gamblin developed a device called a "cyclobelt" or "cyclomill", which is a grindingedevice that is.

unique in that a relatively cheap grinding medium rather than the machine itself is degraded during the grinding sprocess.

The cyclomill is also capable of grinding things that are "very hard"; like diamonds, and it tgrinds them to "lower levels" than can be-reached by other means. According to*Dr. Gamblin, however, -the Russians developed a-process that "was a lot cheaper" tñan his process, ,and his "business kind of dried up."

Dr. Gamblin was able to rent a cyclomill to a company in Fairfield, Ohio,* afor $5, 000 contingent on a ireviews of its patent status: Dr." Gamblin retained a Cincinnati -law firmy Wood, Herridg, and Evans, to prepare a patent opinion document for the company's review.

He received a rental payment of $5,000 in, 2004~. Petitioners, however, failed to report the $5, 000 rental payment on their Federal income tax return for 2004.

- During the years at issue Dr. Gamblin worked primarily on the gravure'printing and other 'ink types.

He also developed a häir shampoo which is a isôap rather than a~detergent so it will not dryeout hair.

Bécause soaps do not work well in hard water, Dr. Gamblin added a chemical agent to remove calcium from hard water.

Dr. Burch holds a Ph.D.

in clinical psychology and was a sole practitioner from 1989 until her retirement in 2005. Dr.

Burch practiced psychotherapy but her main focus was psychologicál and neuropsychological assessment.

She did a- lots äf work for defense attorneys and has taught eneuropsychology at the University of Daytön. Dr. Burch maintained, for seeing - patients, an office suite separate from her home cons.isting of two looms, a waitiñg-room and a "consulting room" that contained:

(1) Two upholstered chairs; (2) one sofa; (3) a desk and chair set; (4) coffee and end tables; (5) a smallabookcase; -and (6) a ámall filing cabinet for current.patient clinical files.

Dry Burch san@atients at her office suite because she perceived it to be too dangerous to see patients in her home.

However, she did all of her administrative work, insurance claim filing, billing, and report writing at home on weekends.. The psychological assessments she prepared required lots of- paperwork and references.

Dri Gamblin and Dr. Burch used overlapping portions of the home for :their respective businesses.

Two bedrooms of the home were used for business.

The bedroom on-the third floor contained a bed, but the bed was used for laying out in-process insurance forms for Dr. Burch's practice; it,also contained a computer.

Outside of the third-floor bedroom in the hall were filing cabinets full of f iles .

In the "big" room on the second f loor , 2 which had no bed was Dr a Gamblin' s "mail place" for his business,' where there were a fax machine, a copier, lots of books and catalogs for his supplies, and references, as iwell as Dr.

Burchys technical-books.

In addition, «there were stacks of boxes f illed with insurance f,iles and f iling cabinets containing professional literature .

There .was also a garage apartment where Dr . Burch wrote her reports and kept a technical library.

The garage apartment was about 21 by 17sfeet-and contained a computer and a "big plotter" that Dr . Gamblin used in his engineering pursuits .

. The basement was used as Dr. Gamblin's "laboratory".

It hadca microscope, a 2While Dr.-Gamblin testified that the "big" bedroom was oh the second floor, Dr. Burch inconsistently testified that bedroom they used was on the third floor. Dr. Burch's testimony as having been given mistakenly.

The Court will treat the big - 7 "K-proofer" (a machin'e used to stest prints) ,: b'ottles of dyes,- 2.

colorants, i-eagents? and more boxes of files.

. Petitioners eaåh filed Schedules Cowith their Federal income tax retuins fons2004 2005, and 2006. Dr. Gamblin filed a Schedule C for sthe "Dayton Tinker Company" and Dr. Burch filed her Schedule C a's -"Kathleen J. Burch, Psy. D. " Discussion Geñeñálly, the Commissioner' si determinations in a notice dfr deficiency are presumed correct; and the taxpayer has"the burden of prövincj that those determinations are erroneous .

See Rule a 142 (a) ; "Welch -v Helvering, 290 U.:S. 111, 115 (1933) In some cases the burden of proof with respect to relevant'factual issues maÿ shift to the Commissioner under section 749I(à). Petitioners did -not 'argue ór present evidence that they sati'sfied the; requirements of'section 7491(a).

Therefore, the-burden of proof does not' shif t toerespondent .

Other Inconie Section 6001 requirés a taxpayer to maintain sufficient a , records to allow for the determination of the taxpayer's cörrect tax liability. Petzoldt v. Commissioner," 92 T.C. 661, 686 (1989) .

If a taxpayer fails 'to 'maintain or «does not produce adequate books and records, the Commissioner is authorized to reconstruct the taxpayer's income.

Sec. 446(b); Petzoldt v.

Commissioner; supra at 686-687.

Indirect methods may be used for this purpose. --Holland v. United States; 348 U.S. 121 (1954-).

The Commissioner's reconstruction need only -be reasonable in light of all the ,surrounding facts and circumstances. Petzoldt v. Commissioner, supra at 687; Giddio v. Commissioner, 54 T.C.

1530, 41533 (1970).

Respondent determined through a bank deposits analysis that petitioners had unreported income for 2004 of $8,405 and for 2006 of $3,774-. Bank.deposits constitute prima facie evidence of income. Tokarski v. Commissioner, 87-T.C. 74, 77 (1986).

The bank deposits method of determining :income assumes that all the money deposited into a taxpayer's bank account during a specific period constitutes taxable income. Price v. United states, 335 Fr2d 671, 677 (5th Cire 1964).

The Commissioner,-however, must take into account any nontaxable source or deductible expense of which he has knowledge.

Id.

The method employed.is-not invalidated even if the calculations of the Commissioner are not completely correct. DiLeo v. Commissioner,

Dr. Gamblin testified that he rented a cyclomill to a company in.Fairfield, Ohio, for $5,000 contingent on a review of its patent status. Dr. Gamblin testified that he received.his $5,000 payment in -2004. Petitioners, however, failed to report the rental earnings on their return for 2004.

Dr. Gamblin testified that "if yourtake that five thousand dollars out"",rand-"dependingson' which day:you ,closed it out * * * it is- going to vary from year to year by two or .three thousand dollars." Regarding 2005, Dr. Gamblin explained that "you know, there was more money that came outaof the account ethan went in, the whole thing-over the three yearaperiod- pretty much balances.

out." Petitioners, however,3offered the Courtañosother evidence:

to :show that respondent' s bank deposits analysis is incorrect .

Respondent's determination on this issue is sustained.

Trade ór Business Expenses i Section 162 generally allows a ideduction 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.e The tixpayer must therefore show that any claimed business expenses were incurred primarily for business rather than personal reasons.

See Rule 142(a); Walliser v. Commissioner,

T . C. 433,

'4137 (1979) sTo show that Ethe: expense was not personal, the taxpayer must establish that the expense was incurred primarily to benefit his business, 'and there must have been a proximate relationship .

between the claimedgexpensetand the business.

See Walliser v:

Commissioner, supra at 437.

Taxpayers are required to maintain sufficient records to establish the-amounts of their income and -- 10 - deductions.

Sec. 6001; Higbee v. Commissioner, 116 T..C. 438, 440 (2001) ; sec . 1. 6001-1 (a) , a Income Tax Regs . Petitioners, therefore, must produce evidence that they are entitled to the - deductions they claim.

Where,a taxpayer has established-that he has incurred a trade or business expense, failure to prove the exact amount of; the otherwise deductible item may, not always rule out a deduction.

. Generally, unless precluded by section 274, we may estimate the amount of such an expense and allow the deduction to that extent.

See Finley v. Commissioner, 255 F.2d 128, 133 (10th Cir. 1958), affg. 27 T.C.9413 (1956.)2; Cohan v: Commissioner, 39 F.2d 540, 544 (2d Cir. s1930) .

We cannot, however, -estimate deductible expenses unless the taxpayer presents evidence sufficient to provide some rational basis upon which estimates may be made.

See Vanicek v. Commissioner, 85.T.C., 731., 742-743 (1985) .

Office Expenses for Dr. Gamblin Dr. Gamblin testified that he "didn't have receipts for every little thi-ng" making up his office expenses.:. Dr. Gamblin supplied respondent with canceled checks, Quicken sheets, and credit card billing records showing various expenditures .

He offered, however, no receipts to show that the expenditures" were his office expenses for either 2004" or 2005.

-- 11 - Because there is insufficient evidence on which to base an estimate of Dr. Gamblin's office expenses, respondent's determination on this issue is sustained.

Of fice Expenses "for Dr . Burch a Dr.E Burch deducted on Schedule C $3,467 for 2004,' $3,341 for 2005, and $4,066 for 2006 as office expenses for-her psychology practice. Of those deductions respondent disallowed $488 for 2004, $784 for 2005,* and $2,460 for 2006. Petitioners provided canceled checks drawn to various payees but did not-offer any evidence other than their own testimony that they are entitled to office expense deductions in excess of those respondent allowed.

Expenses for Supplies for 2004 and 2006 Dr. Gamblin deducted $2, 945 as expenses for supplies on his 2004 Schedule C of which respondent disallowed $788.

For 2006, Dr. Gamblin deducted supplies expenses of $4,528 of which respondent disallowed $73. Dr. Burch deducted expenses for supplies of $4, 866 on her 2006 Schedule C all of which respondent disallowed. Petitioners offered as evidence their own testimony and canceled checks payable to credit card companies, MBNA, GE Money Bank Credit Card, and Discovery. Petitioners have not shown that they are entitled to deduct expenses for supplies in excess of those respondent allowed.

Expenses for Insurance (Other Than Health) Dr. Burch deducted $3,358 of expenses forginsurance (other than health) on her 2004 Schedule C.

.Respondent disallowed $2,860 of the deduction. Petitioners provided canceled checks, bank statements, and withdrawals for multiple lines of insurance totaling $3,357.88.4 Petitioners, :however, failed to provide « copies of the insurance policies. Respondent -agrees.that petitioners are entitled to an additional-deduction of $739 for 2004. Petitioners have not shown thatsthey are entitled to deduct insurance (other than health) expenses in excess of the.

amount respondent agreed to.

"Contract Labor" Expenses of Dr. Burch Treated as Schedule C "Income" of Dr. Gamblin Dr. Burch deducted on her 2005 Schedule C $67,000 of "contract labor" expenses from her $82,479 gross income. Dr.

Gamblin reported on his Schedule C'for 2005 gross receipts and gross income of $67,000. Respondent adjusted petitioners' tax return, disallowing the deduction on Dr. Burch's Schedule C and removing the income in the same amount from Dr. Gamblin's Schedule C.

Petitioners callege that Dr. Burch paid Dr. Gamblin for performing administrative duties for her business. Dr. Gamblin testified that the payment was related to his research and development for his inventions because he "would not be able to carry on except for the amount of money that was being furnished by Dr. Burch's practice; I mean, she financed my'operations".

Dr. Burch testified -that "we do work together.

I work for Roger- -well, r was a partner -in'his business, and he works for me."

There was no written contract for services between petitioners. Dr. Gamblin'helped Dr. Burch"witheadministrative duties in 2004 and assisted with "a few little things" -in 2006 but did not report gross income for those years from Dr. Burch, nor did she claim deductions. Petitioners kept no records of the work that Dr. Gamblin performedifor Dr Burch, and'Dr? Burch could not recall therrate at which she paid her husband.

She was vague in her testimony as to how she determined the total amount to be paid to him. Petitioners offered no.documentary evidence that Dr. Burch paid Dr. Gamblin $67,000 in 2005 or, if she did, that the amount-was compensation for Dr Gamblin's services.

On the other hand,- Dr. Gamblin's testimony that he received money from his- wife related to his tresearchiand development and that she "financed" his operations and Dr. Burch's testimony that she was "a partner in his business" leads the Court to conclude that any payments Dr. GBurch may have made to Dr. Gamblin in 2005 were in the nature of capital expenditures rather than compensation for services. Generally, no deduction is allowed for capital expenditures.

Sec. 263(a) . Taxpayers may not deduct the costs of creating an intangible, like a patent or trademark, or of acquiring an interest in a partnership unläs.s sbme exception applies . - Sec . 263 (a) (1) (B) ; sec . 1.,263 (a) -4 (b) , (d) (1) , (2) , (5) , Income Tax Regs . 3 "Capital expenditures are subsequently recovered through.depreciation, amortization, cost of goods sold, as an adjustment to basis, or otherwise, at such time as the property to which the amount relates", is used, sold, or disposed of by the taxpayer.

Sec. 1.263 (a)-1(b) , ,Income Tax Regs.

Because petitioners have not shown -that the contested $67,000 was aid, was paid as compensation to Dr. Gamblin,- or was expended for Dr. Gamblin's business, .respondent's determinations on these issues are sustained.

-Home Of f ice Expenses i Drs. Gamblin and Burch each filed Forms 88290 Expenses for - Business Use of -Your Home, and claimed on their respective Schedules C home office expense deductions for all 3 years at issue .

- Respondent edisallowed all of the home of f ice .expenses deducted by Dr. «Gamblin and almost all of the home office expenses deducted-by Dr. Burch.

Generally, section 280A(a) sprohibits a taxpayer from deducting expenses for the ,userof a dwelling unit that is the 3Sed. 174 (a) (1) Allows a taxpayer to dèdudt certain research and experimental expenditures without consent of for his first taxáble year beginning aftEi- Dec. 31, 1953, and ending after Aug.,16, 1954, or at any time with consent of Secretary. qualify for deduction under either provision.

the ' Petitioners' expehditures do not .

Sec-. 174 (a) (2) ".

the Secretary taxpayer's residence. "But the prohibition--on deductions does not apply sto an item of expense allocable to a portion of the - dwelling that is used "exclusively" and -"on a regular basis" as the principal place 'of business of the taxpayer'-s trade or business Sec. 280A (c) (1) (A) .

Assuming that à taxpayer has a qualifying trade or business, allowable home office deductions are strictly limited under the statute.

Home office expense deddctions are limi-ted to the amount of gross 'income from the use 'of-therdwelling for a trade or business, reduced by the sum of the.deductions allocablecto the dwelling regardless of its use as-the -location of-a trade or business and the allocable business expense deductions not related ato the use of the dwe:lling itsel'f.

See sec. 280A(c).(5).

Amounts not allowable on'account of the slimitation may be carried over to the succeeding taxable5year subject to the alimitation of that taxable year.

Id.

Dr. Gamblin The "Court has sustained respondent!s determination that Dr.

Gamblin did not-receive ýross:income -from his inventing activity reportable on Schedule- C forS2005, and he is deemed to have conceded that hechad norScheduleaC gross income for 2006.

Because Dr. Gamblin had no gross income from business in 2005 and 2006, his'home office expenge deduction for each of'those years is zero.

See id.

Although-Dr. Gamblin reported no gross income on.Schedule C for 2004, the- Court has found that he received-gross income from businêss of $5,000 for the rental of his cyclomill. But respondent-has allowed him as business ,deductions:

(1) Car and truck expenses of $1,280 ($3,690 deducted less aan adjustment of $2,410); (2) office expenses of $3,663 ($4,303 deducted less an adjustmènt óf .$640) ; (3) expenses for the rent sor lease of other business property sof .$3, 430 ,($3, 130 deducted plus an adjustment of $300); (4) supplies expensestof $2,157 ($2,945 deducted less an adjustment of $788); (5)ttravel expenses of $L,724 ($2,650 deducted less an adjustment of $926); and (6) meals and entertainment expenses of $140 After.reduction of Dr. Gamblin's gross ,income of $5,0004 for Schedule C expenses described in -section 280A(c) (5) (B)i,his allowable home office expense deduction is zero, ;and the Court ,so holds. Respondent s a determination on this issue is sustained..

Dr. Burch Dr. Burch deducted as home,office expenses on her Schedule C $44c,514 for 2004, $2,'798.for-2005 and $11,3103 for 2006.

Respondent disallowed $44,097 for 2004, $2,211 for 2005, and $10,286 foi-2006. Respondent,"by allowing Dr.. Burch a portione 4Although respondent determined that petitioners had unreported incoèè of $8,405 för 2004 as determined by à bank deposits analysis, by Dr. Gamblin. 280A(c) (5) (B) (ii) expenses alone exceeds $12,000.

the total of Dr. Gamblin's sec.

there is no evidence that all of it was earned In any event, - 17~ albeït- small, òf the home office expenses that she>dedudted, has tacitly adm'itted that .she qúalifies for the deduction under section 280A and thit sonly the ainòunt is in question.

s - The Colirt finds thatt Dr. Burch's Förms 8829 overstate -the home of fice 'ekpense dedûcti'ons to which sheris entitled «Some of thesmofesprominent reasons"include her calculation, of home office ežpenåes - for -2004 to -include a $28, 346 "Carryover of operating 4 experises"from 2003" for which she offered no evidence. »Dr.

Gamblin testified ,that when he entéred Dr. Burch's home office e exp'enses for 200-4 into the t'ax return preparation softwarei,a the- software "immediitely took the accumulated back charges", and gave them to her . " ~ " Dr . Burch also inc luded in her cal culat ionsa $13,223 for "CarryoierMfaexcess dasualty-losses and depteciation froni'2003" for which she offered no evidence Dr . Burch' s claimed deduction 4 of $67, O O O of contract labor expenses for 2005 was disallòeediby-respondent,' and the disallowànce is suàtiained by thetCoùrt.

She' will therefore have no careyover lof òperating expenses ffom 2005 to -2006 Pétitiòners used oveflapping pontions of -theit home for - théir redpectiver businesses .' aAnd 'bothtDr . Burch and Dr .

- Gamblin deducted home officë expensesuori their Schedules C, claiming a combined use of 27.85 percent of their 6,570-square-foot home, or 1,83.0 square feet, for t heir respective businesses for 2004 2005, and 2006. Petitioners, as support for, their deduct-ions, -.18 - submittediphotographs of the.interior of their home (including the garage apartment), a diagram of the basement without dimensions, and diagrams with dimensions of the garagesapartment and the first, second, and thirc¹ floors pf thei home.

There is no evidence from which the Court can determine the areaN of the basement, most of which seems to have been used by Dr. Gamblin.

The area of the third-floor bedroom -is 104 square feet.

The Court ;has no.evidence on which to base a determination of the square footage of the hallway outside the third-floor bedroom that was used for file storage.⁴ According to the diagram that petitioners submitted, the area of the garage apartment is 367.5 square feet, and the area of.the large bedroom on the second.floorris 264 square feet.

The total area of the three rooms used by both petitioners for business for which the Court I has dimensions .is :735.5 square feet.

Dr. Burch, however, used only a portion of..each.of the.rooms for her business. Petitioners did not provide the Court with evidence sufficient to determine the area of their respective portions of, the rooms used -for their businesses The ,Court will estimate that Dr. Burch used 50 percent of the garage apartment and the two bedrooms, or 367.75 square feet for her business.

*Expenses attributable to use of a home office in conducting two or more separate businesses may be deductible where they each meet Commissioner, 94 T.C. 348 (1990).

the requirements of sec. 280A(c) (i). Hamacher v.

See Cohan v. -Commissioner, 39 F.2d at 544..

Any finexactitude in - the estimate b he tourt is öf petitioners' own making and due to their failure tò2maintain proper búsieness records. - See id.

As 367 . 75 square f eët 'repre sent s' 367 75[6 , 57 0 , or about 6 per cent of t e total a'rëa of the home," Dr. Buráh is entitled to 6 percent of her allo'wâble sexpenses :allócable td her use of a portion of hâr4hoine assanaöffice.'aSee seco 28ÓÄ(c) (1); see also Culp v.

Commissioner, T.C.

"Memö. 1993-290F Hefti v.

-Commissioner, T.C.

Memo. "1988-22, affd. without published opinion 894 F.,2d 1340 a(8th Cir . 1989) .

Cardnd Trtick- Expenses and Travel Meals Expenses and Entertainment Certain business deductions described in section 274 are subject to strict rules of substantiation that supersede the doctrine in Cohan v. Commissioner, supra at 543-544.

See sec; 1.274-5T(c), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. - 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 to an activity of a type considered to be entertainment, amusement, or recreation; or (c) the use of any "listed property", defined in 'It appears respondent' s adjustments to increase "home interest experise" deduction for each year will petitioners' result in an increase in Dr. Burch's allowable home office expense deductions for each year. calculation, for the Rule 155 computation.

leave the exact The Court will section 280F (d) (4) (A) (i) to include , any passengers automobile , unless the taxpayer substantiates certain elements For an expense described in one of thesabovescategories, the taxpayer must substantiate by adequate records -or sufficient .

evidence to corroborate the taxpayer' s own testimony (1) The amount of the expenditure or use; (2) ,the time and place sof the expenditure or use; (3) the business purpose of ythesexpenditure or muse; and in the-case of entertainment, (4) the businessa relationship to the taxpayer of each expenditure orruse.

See sec. 274(d).

To meet the adequate .records requirements: of .section 274, a taxpayer must maintain some form of records as well as documentary evidence that in combination are sufficient to establish each element of an expenditure or use .

See sec .

1 . 274 - ST(c) (2), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985) .

"Documentary evidence" includes receipts, paid bills, - or similar evidence.

Sec. 1.274-5(c) (2) (iii), Income Tax Regs.

A contemporaneous log is not required, but corroborative evidence to support a taxpayer's reconstruction of the elements of expenditure or use must have "a high degree of þrobative value to elevate such statement" to the level of credibility of a contemporaneous record supported by sufficient .documentary evidence .

Sec . 1. 274 -5T (c ) (1) , Temporary Income Tax Regs .

, 50 Fed. Reg. 46Ò16-46017 (Nov. 6, 1985) .

21 - Dr. Gamblin's car and truck,- traver, meal, and entertainment expense deductions indlüding meals and lodging away from-home, are subject to section 274(d) and the regulations thereunder.

The Court allowed petitioners to confer with respondent after trial in order to present any additional dócumentary evidence they might-haúè that would betsusceptible to stipulation.

- Dr. Ganiblin, iri prepa'ration afor thë posttrial meeting with respondént, created a travel log for this car and truck expenses and a log·for hisstravel, meal,. andsentertainment expenses-that herdeducted on~his ScheduÍes C for 2004, 2·005, and 2006. Dr.

Gamblin têsdïfied*at trial that he did not keep a 'logsof each individual±tripebudainstead at the end of the year he "would go off and check the mileage, and:write it down on a slip of paper in the glove dox." Nevertheless, the travel'log lists apparent depatture dates, destinàtions, a very brief "purpose of trip" and "nights" and "days", apparently away from- home.

Drt. Gamblin's log of travel, nealj and entertainment exèenses lists -an alleged check number and theccösts of three instances of -"air travel" and calculateå per diem~amounts based on the travel log.

Petitióners failed to provide copies of receipts, paid bilis, or"simialar evidence.

The Court finds that petitioners,did not offër corroborative evidence to support their reconstruction of the elements of expeniliture or use häving "a high degree of - probativeavalue to elevate- such*statement"*ofeeventse that e happened in 2004, 2005, ande2006 to the level of credibility of a contemporaneousi record supported - by suf f icient documentary evidencea 'Respondent'sædetermination on these issues is sustained.

Accuracy-Related Penalties Section3491(c) imposes on -the Commissioner the bur en of production in any court proceeding?with respect t örthe' liability of any individual for penalties and additi-ons to tax. >Iigbee v Cóniniisuioner, 116 T.C. ata446; Tronbridge v. Commissioner, T.C.

Memos12003:164.

Iri order to meet the burden of production sunder section 7491(c), the Commissionereneéd,only make a prima facie case that imposition of ithe penalty-orythe addji.tion to i ax is appropriate .

i GHighee av.: Commissioner,« supra sat 446 Respondent determined that for eboth 2004 ande2005 pettitioners'-:underpayments of portions < of their income taxes were due'to 'negligence or intentional disregard of rulessor regulátions . i SSections6662 (a) imposes a 20 -percent penalty on; the portiori of an underpayment óf tax;attributable toyany one of various -factors including anegligence ore disregard of rules,or regulátions and a substantial understatement- of income t ax.

See sec .- 66629(b) (1) and (2) .

"Negligence" . includes any, failure to make"a reasonable- áttempt to comply with the provisions of the Internal Revenué Code-, including any failure to-keepeadequates books and records- or to substantiate items- properly.

See sec.o 6662 (c )-; sec . 1. 6662-3 (b) (1) , Income Tax Regs .

A "substantial understatement" includes an understatement of tax that exceedse the greater of 10 percent 'of the tar required to be shown on the return or- $5, 00 0 .

See sec . 6662 (d) (1-) (A) ; sec . 1. 6662 -4 (b) -(1) , a Inc ome Tax Regs .

Section 6664*(c);(1) provides that the penalty under section a 6662 (a) shall not apply to any portion of an underpayment- if its is shown that there was reasonable cause for the. taxpayer' s position and thate the taxpayer acted ins good faith with respect to that-portion The determination of whether a taxpayer acted with reasonable cause and in good faith is made on atcaserby-case basis, taking into account all the -pertinent facts and circumstances .

Sec .

1 . 6664 -4 (b)s(1) ,-Incòme «Tax Regs .

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

Id.

Petitionefs tappear to haveusubstantial understatements ofe incomertax for 2005 and 2006 since theaunderstatement amounts wiill exceed the greater of 10apercent of the tax required4to be shown on the return or $5,000. Petitioners also. failedeto keep adequate books and records or to substantiate items properly, claimed itemizedadeductions and business expenses to which they were not entitled; and: failed to report portions of their income .

The Court concludes that respondent has produced sufficient evidence t·o shod that the máccuracy-related penalties under sectionM6662 are appropriateafor both years The raccuracy-related penalties - will apply unless spetitioners demoristrate that there was deasonable cause sfor the underpayments and thatt they acted in good faith with respect to t-he un~dàì aymen s.

See sec 6664 (c) . Section 1.6664 4t(b) (1) , ncome Tax à ga. specifically provides:

"Circumstances that may indicate3reasonabFe cause-ánd góodafaith include arishonest mi'sunderstanding of fact or law thatcis.reasonable in lightsof ala of the «facts and circumstances, including -the experience knowledge and education of; the taxpayer " Petitioners, both -of àhom are hiejhly educated, did not show thatatheir underrepärting of sincome and claiming of deductions a were-actions .taken twith reasonable cause and in goodifaith. 6 Respondent' s determinations- of the accuracy-felated penalties - e underesection 6662(a) for 2004 and 2005 are sustained.

, ThedCourt has considered the-other arguments of the parties and they areseither without merit or not necessary in viewoof our resolútion of- the issues infthis case To reflect the foregoing, Decision ,wil be entered under Rule 155.

96. T.C. 858, 868 , (1991)., affd. 959 F.2d 16 (2d Cir. 1992).