Sandra Lee Bennett, Petitioner

Susm 1 -m-b- G S-T FSoe1 T .C . Memo . 2010-11 4 UNITED STATES TAX COUR T SANDRA LEE BENNETT, Petitioner v . COMMISSIONER OF INTERNAL REVENUE, Responder t Docket No . 5956-08 .

- Filed May 25, 1010 .

Sandra Lee Bennett, pro se .

Blaine Holiday , for respondent .

MEMORANDUM FINDINGS OF FACT AND OPINIO N GUSTAFSON, Judge : In December 2007 the Interna Revenue Service (IRS) issued to petitioner Sandra Lee Bennett a statutor y notice of deficiency pursuant to section 6212,1 shown ng the IRS' s 'Unless otherwise indicated, all citations of s ctions refer to the Internal Revenue Code of 1986 (Code ; 26 .U .S .C ), as amended, and all citations of Rules refer to the Tax Court Rules of Practice and Procedure .

SERVED May 25 2010 determination of a deficiency of $31,979 in income tax for 2005 and an accompanying accuracy-related penalty of $6,935 .80 under section 6662(a) . The issues for decision2 are (1) whethe r Ms . Bennett is entitled to deductions that she claimed for 2005 on her Form 1040, U .S . Individual Income Tax Return--i .e . , ,(a) $6,956 .25 that she claimed on Schedule A, Itemized ,Deductions ; (b) $96,325 .65 that she claimed as business expenses on Schedule C,,Profit or Loss From Business ; and (c) $29,137 .13 that she claimed as rental activity expenses on Schedule E , 'Supplemental Income and Loss ; and (2) whether Ms . Bennett is .liable for the accuracy-related penalty under section 6662(a) .

On the facts proved at trial, we hold (1) that Ms . Bennett is entitled to deduct $22,964 .25 on Schedule A, $2,321 .63 on Schedule C, and $0 on Schedule E, and (2) that Ms . Bennett's deficiency constitutes a "substantial understatement of income tax" incurring the accuracy-related penalty .

FINDINGS OF FACT Trial of this case was held in St . Paul, Minnesota, on .September 16, 2009 . The stipulation of facts filed that day and the attached exhibits are incorporated herein by this reference .

2The parties agree that Ms . Bennett's self-employment tax 'a'nd her deduction of half that tax from adjusted gross income are computational issues that depend on our resolution of the other issues in this case .

r At the time .she filed her petition, Ms . Bennett residEd i n Minnesota .

Personal expense s In 2005 Ms . Bennet owned a house with a mortgage In that year she paid a total of $17,048 .80 in-interest on th t mortgage, and she paid real estate-taxes of .$3,140 on that hous .3 In 2005 Ms . Bennett'also paid medical expenses of $2,710, and she mad e charitable contributions totaling $1,045 .

Real estate sales activit y In 2005 Ms . Bennett was a real estate sales agent, and o n her return she reported gross receipts of $94,331 .02 .

Ms . Bennett was a 5-percent partner in Real Estate an Mortgage Consultants (REMC),4_a firm of which her daughter and son-in-law owned 40 percent . REMC-had eleven partners and employed about 50 agents . Ms . Bennett used the REMC premises for s e purposes, but on her return she gave her residence address as er business address . The record does not show what if any porti n of her home she used as an office .for her real estate busin ss .

3Ms . Bennett claimed itemized deductions for t o interest on . Schedule A in smaller amounts because sh deductions on Schedules C and E for some of the tax on her house . Because we disallow those deductions Schedules C and E, we allow them in full on Schedul e 4On Schedule E to . her 2005 return, Ms . Bennet t non-passive loss of $5,172 from REMC, which she in t over to line 17 of her Form 1040 . The notice of def not make any adjustment to this loss from REMC, and do not disallow it .

eported a rn carried ciency did e therefore - :4 - REMC paid some expenses for the agents who worked through the firm, and the firm's practice was to recoup those expenses from commissions that the agents earned . "QuickReports" records printed out by REMC showed that it had paid various expenses o n , ;,iiMs . Bennett's behalf but did not show that her expenses had ever been recouped by REMC from her commissions . There is no evidence that Ms . Bennett kept books or records ..of her real estat e business, apart from her canceled checks, bank and credit card statements, and receipts that she kept in varying states of :, :illegibility and disarray .

In September-2004 Ms . Bennett joined with another . individual in acquiring property in White Bear Lake, Minnesota . She did not offer evidence of what she paid in 2004 .for her share in th e property nor of what expenses she bore in 2005 . Although she alleges that this property bears .some relation to her real estate sales business, the record does not show any such relation, and we find that there is no such relation .

In 2005_Ms Bennett and some of her relatives and other ',acquaintances traveled to Arizona, and she spent money there to .improve a house that she owned . However, Ms . Bennett was not licensed to sell real estate in Arizona, and did not make any sales in Arizona . The record includes no evidence of an y attempts to sell real estate in Arizona . We find that Ms . Bennett's Arizona-related activities in 2005 did of relate to her real estate sales business .

On the Schedule C to her 2005 return, Ms . Bennet reported business expenses totaling $96,325 .65 . We find that he substantiated that she actually paid business expense totaling $2,321 .63 .

Rental activit y Ms . Bennett claims that in 2005 she rented out a apartment in her residence . However, .the evidence in the recor does not substantiate that claim . Ms . Bennett .owns a house in Arizona, and she claims that she rented it out for three months of 2005 .

However, the evidence in the record does not substantiate that claim . We find that Ms . Bennett did not prove that he rented out these properties in 2005 .

Return, notice of deficiency, and petitio n To prepare her return for 2005, Ms . Bennett hir d Robert Wicker . Mr . Wicker has been convicted of-the-crime f aiding and abetting multiple clients in fraudulently preparing heir tax returns for multiple years .and for fraudulent prepay tion of his personal tax returns for multiple years . Ms . Bennet provided Mr . Wicker with receipts and various information and relied o n him to prepare her return . Mr . .Wicker composed a mi eage log that he used-forcomputing her car and truck expense, . and he composed a meal log that he used for computing .her ductible 6 - ,meals and entertainment . Ms . Bennett signed her 2005 return in July 2006 and submitted it to the IRS thereafter . - .

In December .2007 the IRS issued to Ms . Bennett a notice of deficiency, which disallowed all of her deductions on Schedules A, C, and E . Ms . Bennett timely filed her petition .

;The case was originally scheduled to be tried in February 2009 ; but when the case was called from the calendar, the Court continued the case to permit it to be better prepared for trial, and the case was tried seven months later in September 2009 .

; .I .

Burden of proof and substantiatio n

OPINION

At issue is Ms . Bennett's entitlement to deductions .

Deductions are a matter of legislative grace, and the taxpayer bears the burden of proving that she is entitled to any deduction she claims . Rule 142(a) . ; see also Deputy v . du Pont , 308 U .S .

488, .493 (1940) ; New Colonial Ice Co . v . Helverina , 292 U .S . 435, 440 (1934) . (Ms . Bennett makes no argument that the burde n should shift under section 7491(a), and the record shows no basis for such a contention .) When this case was originally called for trial on February 9, 2009, the Court observed that the evidence for the case was not in order, stated to Ms . Bennett that she bears the burden of proof, and then continued the case so that Ms . Bennett could be ready for trial . We are confident that she had every opportunity to prepare to meet her burden of proof .

A taxpayer ' s burden of proof should be understoo in th e context of what the Code requires for record - keeping nd- substantiation .

Section 6001 requires that-- Every person liable for any tax imposed by title, or for the collection thereof, shall keep records, render such statements, make such retur comply with such rules and regulations as the Se may from time to .time prescribe . * * * The regulations implementing-that .statute include 26 F .R .

section 1 .6001-1(a), Income Tax Regs .,5 which provide that "any person subject to tax" (such as Ms . Bennett) is requi ed t o keep such permanent books of account or record s as are sufficient to establish the amount of gross income, deductions, credits, or other matters re fire d .to be shown by such person in any return of suc tax * * * .

Ms . Bennett, however, offered into evidence no "perm nent books of account" for her businesses (nor did she testify that she eve n kept books of account) , The-Code's substantiation rules are subject to ome flexibility . When a taxpayer adequately establishes that she paid or incurred a deductible . expense but does not e tablish the precise amount, the Court may in some instances esti ate th e 5See also 26 C .F .R . sec . 1 .446-1(a)(4), Income ("Each taxpayer is required to make a return of his income for each taxable year and must maintain such records as will enable him to file a correct return . 6001 and the regulations thereunder . Accounting rec the taxpayer's regular books of account and such oth and data' as may be,necessary ,to support the entries, of account and on his return, as for example, a reco any differences between such books and his return") .

ax Regs . axable ccountin g See section rds include r record s n his books ciliation of 8 - allowable deduction, bearing heavily .against the'taxpayer whose inexactitude is of her own making .

. Cohan v . Commissioner , 39 F .2d .540, 543-544 (2d Cir . 1930) . There must, however, be sufficient evidence in the record to provide a basis upon which an estimate may be made and to permit the Court to conclude that a deductible expense, rather than a non-deductible personal expense, was incurred in at least the amount allowed .

Vanicek v .

Commissioner , 85 T .C . 731, 743 (1985) .

However, certain business expenses described in section 274(d) are subject to strict substantiation rules that supersede , .the Cohan doctrine .

Sanford v . Commissioner , 50 T .C . 823, 827- 828 (1968), affd . 412 F .2d 201 (2d Cir . 1969) ; sec . 1 .274-5T(a), Temporary Income Tax Regs ., 50 Fed . Reg . 46014 (Nov . 6, 1985) .

"Section 274(d) applies to : (1) any traveling expense, including meals and lodging while away from home ; (2) entertainment, amusement, and recreational expenses ; (3) any expense for gifts ; :,and (4) the use of-"listed property", as defined in section 280F(d)(4), including passenger automobiles . Some o f Ms . Bennett' s expenses are .in these categories . To deduct such expenses, 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, which includes mileage in the case of automobiles ; (2) the time and place of the travel, entertainment, or use ; (3) its business purpose ; and in the case of entertainment, (4) the business relationship to th taxpayer of each expenditure or use . Sec . 274(d) (flush langu ge) .

The documents Ms . Bennett did keep were largel y insufficient--even under the Cohan rule, and all the i ► ore unde r section 274(d), where it applies--to substantiate most of th e deductions she claims .

II .

Itemized deductions on Schedule A A .

Medical expense s On her Schedule A Ms . Bennett claimed deductions for medical expenses of $2,628 .53 . Respondent concedes that she incurred $1,168 .70 of such expenses--a total of amounts that a e substantiated by documents that reflect the medical provider, the date of treatment, the date of payment, the amount c vered by insurance, and Ms . Bennett'(cid:127)as the patient .- We find tha t Ms . Bennett also substantiated deductible medical ex enses by means of 13 checks payable to her doctors, . totaling 472 .25, and three premium payments to her health insurer totalin $1,069 .50 .

Other amounts reflected on EOBs (explanations of ben fits) from her insurer do not show evidence'of payment by Ms . B nnett . Her .deductible medical-expenses therefore total $2,710 .4 . (The tax benefit of this deduction will depend on the extent o which i t exceeds 7 . 5 percent of her adjusted gross income .

sec . 213(a) .)

B .

Taxe s On her Schedule A Ms . Bennett claimed deductions for taxes totaling $1,561 .60 . Of this total, $23 is designated as for "Auto Tabs", which she has evidently abandoned . The remainder i s 11~a portion of the $3,140 in real estate taxes that she paid on her ,, .residence, which is substantiated by an "Annual Tax and Interest Statement" issued to her by her mortgage lender . She claims the remainder as deductions on the Schedule C for her real estate ,'business and on the Schedule-E for her rental activity . Because we deny the deductions on Schedules C and E, we allow Ms . Bennett the entire $3,140 as .an itemized deduction for real estate taxes on Schedule A .

C .

Interes t On Schedule A Ms . Bennett claimed deductions for home mortgage interest totaling $1,000 .97 . This is a portion of the .

$17,048 .80 in interest that she paid on-her residence, which is substantiated by the "Annual Tax and Interest Statement" issued to her by .her mortgage lender . She claims the remainder a s ,deductions on the Schedule C for her real estate business and on ,the Schedule E for her rental activity . Because we deny the deductions on .Schedules C and E, we allow Ms . Bennett the entire $17,048 .80 as an itemized deduction for interest on Schedule A .

D .

Charitable contribution s On Schedule A Ms . Bennett claimed deductions for charitable contributions totaling $1,765 .15-. We find that she m de deductible contributions to three donees totaling $656 and that she made deductible contributions to a fourth donee t taling $980 .'

The amounts of itemized personal deductions that we allow compare, as follows to what Ms . Bennett claimed on Sch Jule A to her return:

Deductions on Deduction s Schedule A allowe d Medical, expenses $2,628 .53 Taxes 1,561 .60 Interest 1,000 .97 1,765 .1 5 Contributions Total 6,956 .25 $2,710 .45 3,140 .00 7,048 .80 .1 ,045 .0 0 ~3, 944 . 2 6A $65 deduction is substantiated by her checks Nos . 8108, 8218, and 8219 (as to which three checks respondent oncedes a deduction), and No . 8419 (as to which respondent doe not concede a deduction) .

7After trial respondent . . conceded a charitable c retribution deduction for a greater amount--$1,030--evidenced by 20 checks payable to "His Present Glory" and a receipt in that amount from "3rd Day Ministries" . However, one of the checks in her listing (check No . 8403) is, included as part of her,substant'ation for "cleaning and maintenance" expense . It is a check f r $50 payable to "His Present Glory", and on the "For" lin at .the bottom left-hand corner of the check is written "apt . cleaning" .r We therefore reduce the deduction by this amount, but we otherwise somewhat reluctantly accept respondent's concession .

12 - III . Business expense deductions on Schedule C Ms . Bennett was a real estate agent and did evidentl y conclude real estate transactions in 2005 that apparently generated commissions of $94,931 .02 that she reported as gross receipts on Schedule C . It is entirely plausible that she -incurred deductible expenses in the course of that activity .

,However, the Court cannot accept Ms . Bennett's unsubstantiated and unexplained allegations of the amounts of those expenses but ,rather can allow deductions only for the expenses that have been ;substantiated .

A .

General shortcomings of Ms . Bennett's Schedule C substantiation 1 .

REMC OuickReport s Some of Ms . Bennett's purported substantiation consists of statements from REMC . REMC kept separate accounts for the several dozen agents who worked for it, paid various expenses, deducted those expenses from commissions earned by each agent, and then provided the agent with financial information, including an "Agent Account QuickReport" for expenses incurred on the agent's behalf . Ms . Bennett relied solely on REMC QuickReports for substantiation of her advertising expenses, referral fees , and legal fees ; and she relied in part on the REMC QuickReport s for substantiation of her insurance and her office expenses .

However, the QuickReports printouts explicitly acknowledge in a footer on each page : "This is aprint out of only the expenses 13 - for the year . It does not show any payments or credits made to your account . This is just,a guide for you . to use wh le doing your taxes ."

.(Emphasis added .)' Thus,_the REMC Quick eports do not purport to show that Ms . Bennett actually paid th expenses ; they show only that REMC incurred the expenses and ma corresponding entries on Ms . Bennett's internal accou Moreover, Ms . Bennett did not produce records to sho w that REMC calculated Ms . Bennett's commissions for its own inte na l reporting purposes on a gross basis before any reduc t ion for the charges incurred on Ms . Bennett's behalf, or whether instead REM C reported only commissions due to Ms . .Bennett after h r expenses advanced by the firm had been recouped from commissi ns due her .

More important, Ms . Bennett did not show whether, as "Gros s receipts" on Schedule C, she reported gross commiss i ns or instead reported net commissions paid to her after r duction for her charges . If the .latter, then allowing deduction on th e basis of REMC's tallies of expenses on QuickReports ould allow Ms . Bennett a double deduction for expenses that she paid .

Therefore, the REMC QuickReports do not substantiate Ms . Bennett's entitlement to deductions for payment Of expenses .

2 .

Ms . Bennett's return prepare r Ms . Bennett relies on the testimony of her retu n preparer Mr . Wicker, for various matters . However, Mr . Wicke has been convicted of tax crimes, and we did not find his to timony 14 - ,credible ; and to the extent Ms . Bennett relies on his testimony for any aspect of her proof, her proof fails to be convincing .

3 .

Payments to Ms . Bennett's son Some Schedule C deductions at issue involve payments for the benefit of Ms . Bennett's-adult son . During the years at issue he was a drug addict, and he sometimes came to her with requests for money with which to pay his child support and other expense s ,(including dental expenses) . Ms . Bennett declined to give him money but instead paid these expenses directly . The record in this case includes checks payable to Minnesota Child Support ; but although Ms . Bennett testified that she paid,$7,900 toward his dental expenses, the record does not seem to include documentation for those dental payments . Ms . Bennett claims that she made these payments on his behalf in return for work that her son performed for the business (an assertion for which her son gave corroborating testimony),8 and she therefore claimed .deductions for the payments as "commissions" expenses and a s "vehicle, equipment and rental" . However, Ms . Bennett provide d I8Ms . Bennett's son testified : "I would constantly be mowing grass at one of her open houses, or shoveling sidewalks, or delivering fliers, or numerous things, non-stop" . We find his testimony generally credible, but .taking-into account all the evidence we have no confidence that he performed business-related tasks in 2005 or that Ms . Bennett made payments in 2005 for business-related tasks . He assented to Ms . Bennett's leading question suggesting that his work and her payments occurred in 2005 ("this is kind of long ago, so I'm trying to remember what everything was . Q It was in 2005 . A Right") ; but we do not find that the testimony established the point .

_ .15 - no documentary evidence to show the amount or type of son performed, the date on which he .,performed .it, or connection with her real estate business . Her son to tified that she did not issue to him any Forms 1099 reporting th e amounts sh e had paid him .9 The record . includes no evidence as t hether h e reported these amounts as taxable income ., ., We hold th t payment s on behalf of Ms . Bennett's son have not-been substant ated a s ordinary and necessary expenses of her real estate bu iness .

4 .

.

Arizona real estate sales activity Some Schedule C deductions at issue consist of-o include alleged expenditures in connection with real estate s les in Arizona . However, Ms .-Bennett was not licensed to se 1 real estate in Arizona in 2005 (and does not allege that s e ever acquired .such a license), and she had no sales in Arizona,inn,2005 (and does not allege that she .,has ever had a sale In Arizona) .

Rather, she professes that it was her-intention some ay to sell real estate in Arizona . Apart .from her own'subjecti e, unrealized intention to someday sel,l,realfestate in Arizona, she offered no evidence inconsistent-.with vacationing in Arizona, establishing a vacation home for herself in-Arizona, or preparin g 9We disregard Ms . Bennett's statement in her brief that "Petitioner has filed a Form 1099 Miscellaneous Into e with the Internal Revenue Service, disclosing the payment of 7,900 to her son, Craig A . Bennett ." The statement has no suppor in the trial record, and it appears she may be describing a filing that she made after trial .

to retire in Arizona . We hold that she has not carried her .

''burden to prove that-she undertook activity in Arizona with a 'view toward making a profit by selling real estate .. there .

Her Arizona deductions, are also-problematic in that many of them appear to constitute, at best, capital expenditures . On brief she argues that much of her travel-expense was to pay .

workers (i .e ., her .own relatives) to "work on her real property" and that she incurred $7,661 :26 in Arizona-related supplie s expenses "to bring the Arizona house up to code" . The receipts indicate that the work included installing hardwood flooring and a skylight . The quantum of these supplies expenses suggests that .

they are unlikely to have been-ordinary and necessary expenses of an ongoing business but are more likely the capital expenses of a #'renovation--providing significant improvement and future benefi t the .property . Section 162(a) allows a deduction for "ordinar y and necessary" business expenses, and section 263(a) dis allows any deduction for "permanent improvements or betterments made to 'increase the value of any property or estate ." The regulations,, "tinder section 162 elaborateion this distinction, discussin g ;,"repairs" as follows :

The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as an expense * * * . Repairs in the nature of replacements, to the extent that they arrest deterioration and appreciably prolong the life of the property, shall either be capitalized and depreciated in accordance with section 167 or charged against the depreciatio n reserve if such an account is kept . [26 C .F .R . sec . 1 .162-4, Income Tax Regs . ] The regulations under section,263(a) are in .-harmony w:th tha t provision :

in general, * * * [non-deductible capital expend tures ] include amounts paid or incurred (1) to add to t e value, or substantially prolong the useful life, of property owned by the taxpayer, such as . plant o r equipment, or (2) to adapt property to a new o r different use . Amounts paid or incurred for incidental repairs and maintenance of property are not capi al expenditures within the meaning of subparagraphs (1 ) and (2Y-of-this paragraph . * * * [26 C .F .R . sec . 1 .263(a)-l(b), Income Tax Regs . ] Ms . Bennett did not show that her expenditures .. were f deductible "incidental repairs" rather than a substan ial capital renovation . See Subt v . Commissioner , T .C . Memo . 1991-429 . The extensive nature of her work on the Arizona property that she was conducting a substantial renovation .

Any Arizona-related Schedule C expenses will b e 5 .

White Bear Lake propert y Some Schedule C deductions at issue consist o expenditures in connection with property in White Be Minnesota . Ms . Bennett's name appears along with`th Brent Willenbring on the September 2004 Settlement S (HUD-1), but only Mr . Willenbring's name appears on that Ms . . .Bennett proffers, to substantiate payment o f expenses, such as mortgage interest . A "taxpaye r deduct only his own interest payments and not interest paid on 18 - behalf of another person or entity."

S . Pac . Transp . Co . v .

, . Commissioner , 75 T .C . 497, 565 ( 1980 ) .

Ms . Bennett introduced no canceled checks, receipts , bank statements , or other documentation to show that she actually paid any of the expenses for this property ;" and in the absence of any documentation or any corroboration of Ms . Bennett ' s share in the property , we hold that she has not carried her burden to prove that . she has made any deductible expenditures in connection with this property .

B .

Additional shortcomings of Ms . Bennett ' s proof regarding particular Schedule C expense s 1 .

Car and truck expense s "' As is stated above, section 274(d) imposes stringent -substantiation requirements for claimed deductions relating to the use of " listed property ", which is defined under section 280F(d)(4)(A)(i) to include passenger automobiles .

Under this provision , any deduction claimed with respect to the use of a ,passenger automobile will be disallowed unless the taxpayer substantiates specified elements of the use by adequate records or by sufficient evidence corroborating the taxpayer's own statement .

See sec . 274 ( d) . ; sec .

1 .274-5T(c)(1 ), Temporary 10Marks that she has made on the Form 1098, Mortgage Interest Statement, for her residence may suggest that she attributes some of the interest on her home mortgage to this White Bear Lake property . However, no testimonial or documentary evidence establishes any such connection, and-we therefore treat the entire $17,048 .80 reported on Form 1098 as home mortgage interest deductible on Schedule A .

Income Tax Regs ., 50 Fed . Reg . 46016 (Nov . 6,,198S) .

The elements that must be substantiated to deduct the business use of an automobile are : (i) the amount of the expenditure (ii) the .

mileage for each . business use of,the automobile and t e total mileage for all uses of the automobile during the tax ble period ; (iii) the date of the business use ; and (iv) the busi Less purpose of the use of .the automobile . See sec . 1 .274-5T(b)(6 , Temporary Income Tax Regs ., 50 Fed . Reg . 46016 (Nov . 6, 1985) .

Ms . Bennett's proof falls far short of this stan Lard . She .offered into .evidence a mileage log purporting to sub tantiate 21,129~miles traveled for her real estate, business (as compared to 30,186 claimed on her return) . But neither that mber nor any other has been substantiated . Her mileage log w s prepared by Mr . Wicker . Her brief states that she "was force to recreate her mileage log based on her date book" ; but at'tria she did not offer the date book nor present any_testimony .about n original log or any recreation of it . We find that she did not prove . the miles that she drove for,her real estate activity .

2 .

Commissions and fee s On Schedule C Ms . Bennett deducted $11,878 .33 i "Commissions and fees" . In her brief she claims a 1 sser amount--$8,701 .15--but her proof consists of : (a) a REMC QuickReport entry for $573 .75 (but see part III .A .1 Bove) ; (b) child support checks for her son`(but see part III .A .3 above) ; (c) a voided check for $200 ; and (d) unexplained checks to or for the benefit of individuals about . whom no testimony or written evidence was given at trial . Ms . Bennett has not, substantiated deductible payments for ."commissions and fees" in rany amount .

3 .

Depreciatio n On Schedule C Ms . Bennett deducted $5,531 .11 in "Depreciation" . Her substantiation for that deduction is a depreciation schedule and five checks dated 2005 . The ;depreciation schedule lists nineteen items, at least ten of which appear to be personal items (china, two pizza ovens, gas grill, ,.lawn edger, landscape equipment, tools, bike,' TV, dishwasher) ., .five of which might be personal or business-related (two ,,computers,- calculator, furniture, carpet) ., and . one of which-is ,unclear in its meaning ("2003 76 102 &-103") . Three of the 2005 checks bear no evident relation to any of the assets allegedly placed in. service in 2005,11 and no checks or other documents show Ms . Bennett's basis in any of the assets purchased before 2'005 . No testimony was given about any of the assets at trial .

"Two of the checks relate to a golf cart, and Ms . . Bennett's brief refers to a golf cart supposedly on the depreciation schedule ; but there does not in fact appear to be any entry for a golf cart on that'schedule . Receipts that mention golf carts also appear in support of her "Repairs" expense . for the Arizona property .

Ms . Bennett has not substantiated her :entitlement to 4ny 21 - depreciation deductions .

4 .

Insuranc e On Schedule C Ms .-Bennett deducted-$743 .85 for nsurance" .

This allegedly consists of : . (a) hazard insurance on rizona- property, which we disallow for the reasons explained above in part III .A .4, and (b) errors and omissions insurance ocumented solely by an REMC QuickReport print-out, .which we dis llow for the reasons explained above in part-III .A .l . . That is, all of the insurance expense is disallowed .

5 .

Interes t On Schedule C Ms .-Bennett deducted $28,822 .27 f r "Interest" . This allegedly consists of : (a) a portion of the interest on a mortgage loan for the Arizona property, which we disallow for the reasons explained above in part III .A .4, ; (b) mortgage interest and late-payment charges on th White Bear Lake property, which we disallow for the reasons exp ained above in part III .A .5 ; and (c) mortgage interest on Ms . Be nett' s residence, which we(cid:127)allowed .in full as a Schedule A temized deduction and therefore disallow on Schedule C .

6 .

Legal and professional expense s On Schedule C Ms . Bennett deducted $1,460 for " egal and professional services" . However, her substantiation consists of an REMC QuickReports print-out, which we disallow for the reasons 22 - explained above in part III .A .1, and a photocopy of a check for' $1,100 payable to her return preparer . Only the front .side of .,.the check appears in the record, and the=check is date d "08-15-.04", whereas the year in issue is 2005 . We hold that Ms . Bennett has not carried-her burden-to prove deductible legal and professional fees incurred . in 2005 .

7 .

Office expens e On Schedule C Ms . Bennett deducted $1,014 .82 in "Office expense" . Her substantiation includes REMC QuickReports print- outs and some illegible receipts that do not prove deductible expenditures ; but we hold that she has proved, by legible checks and credit card statements, deductible postage expenses totaling $119 .90 .

8 .

Rental expense s On Schedule C Ms . Bennett deducted $10,673 .74 .in rental expenses, and she contends that at trial she substantiated $8,174 .80 . She argues that of that total, $7,900 allegedly consists of her payment of rental car expenses for her-son . The record includes no evidence of any payment of $7,900 to anyone, and any such payments made for the benefit of Ms . Bennett's son are not deductible, for the reasons we explained above i n part III .A .3 . The remainder of Ms . Bennett's evidence is difficult to read but may show payments of $32 .80 and $242 to ;`Buddy's Rental, Inc . ." for landscaping equipment and $170 for "winterizing boat storage" ; but because she offered to relate these expenditures -to her business of rea l sales, we hold-that sheis not entitled to any deduc t rental expenses .

9 .

Repair s On Schedule C Ms .-Bennett deducted $184 .70 for r trial she offered evidence of a check for $1,000 paya individual with the notation "Contract-I .G . Heights" offered no testimony either explaining who the paye e describing any repair work performed . We therefore h this check does not substantiate any deductible expen However, we"find that documents she mistakenly includ of her attempted proof of depreciation expenses do sh business-related computer repair expense of $169 .

10 . Supplie s On Schedule C Ms . .Bennett deducted $2,'038 .62 fo r supplies .

.

She offered into evidence checks and receipts total i $1,993 .32 , but she offered no testimony about them . Some are i t legible ; some explicitly pertain to a Fourth of July party (a out which she gave no testimony) ; some-are unexplained check s individuals ; some may be capital costs of the Arizon (see supra part III .A .4) ; and most show purchases at Target, Home Depot,-Sam's Club, Dollar Store, Party Goodwill--stores from which one might make deductibl 24 - purchases but from which one might also make non-deductible personal purchases . We hold that these documents do not carry Ms . Bennet's burden to prove deductions for supplies . However, Ms . Bennett's documentation for supplies also includes checks to the board of realtors (for $49 .73) and a key box servicing company (for $44 .73), which .justify a deduction totaling $94 .46 .

11 .

. Taxe s On Schedule C Ms . Bennett deducted $11,516 .84 in real estate taxes allegedly paid on the-White Bear Lake property and the Arizona property, for which her substantiation is Forms 1098, bearing amounts of taxes that she apportions in part t o .Schedule C . However, as we noted above in part III .A .5, the Form 1`098 for the White(cid:127) .Bear Lake property does not bear her name (and is not accompanied by any evidence of her bearing the expense) ; as we noted above in part III .A .4, the Arizona property has no demonstrated business connection . Ms . Bennett has no t ,.„proved a Schedule C deduction for taxes .

12 .

Travel, meals, and entertainmen t On Schedule C Ms . Bennett deducted $1,089 .20 in travel expenses ; and at trial she offered credit card statements that she argues show $2,470 .10 in payments to travel agents fo r .business-.related travel . A taxpayer may not deduct travel expenses (including meals,and lodging while away from home) unless she substantiates by adequate records or sufficient evidence corroborating her own statements :

:(A) the airount of th e 25 - expense, (B) the time and place of the travel ; and (C) the business purpose of the travel . Sec . 274(d) . Under h e regulations, to meet .the section 274(d) "adequate re c requirement, a taxpayer "shall maintain an account b o log, statement of expense, trip sheets, or similar re ord and documentary evidence * * * which, in combination, are sufficient to establish each . element of an expenditur ." 26 C .F .R . sec . 1 .274-5T(c)(2)(i) ;=Temporary Income Tax R gs ., 50 Fed . Reg . 46017 (Nov . 6, 1985) . The-elements she mus prove for each travel expense are the amount, time, place, and usiness purpose of-the travel, . 26 C .F .R . sec . 1 .274-5T(b)(2), Temporar y Income Tax Regs ., 50 Fed . Reg. . 46014 (Nov . 6, 1985) . .

The destinations evident on the statements are Cozume l exico) , Minneapolis, Treasure Island Resort in Wisconsin, an Florida (which Ms . Bennett's post-trial brief indicates refe s to Miami, Florida) . At trial .she offered no business justific tion for any travel other than to Arizona, and the evidence-submi ted reveal s no business purpose for those trips . (We disregard he .unsupported explanations given for the first time in her post- trial brief .) Arizona-related expenses are not dedu tible for the reasons we explain above in part III .A .4 . We ho d that Ms . Bennett has not substantiated deductible travel xpenses .

26 - On Schedule C Ms . Bennett deducted $937 .36 in meals and entertainment expenses . Meals and entertainment expenses claimed .as deductions under section 162 are, with limited exceptions , subject to the substantiation requirements of section 274(d) .

- ,27 - 13 . -Utilitie s On Schedule C Ms .Bennett . :deducted $1,459 .45 for "Utilities",'and at trial she offered bank statements canceled checks showing payments for telephone ,use .

expected that a real .-estate-agent would incur busines for telephone service . However, Ms . Bennett gave no explain her substantiating documents, and they are co They appear to show monthly payments ;,to Qwest through 2005 (totaling $1,272 .04), four payments to Cingula r (in April , May, November, and December),, five payments to AT&T w reless (in.

January, February, May, August, .-and November) ., and on payment t o "Lisa Wireless" (in March) : . Ms . Bennett .did not-exp l in how sh e could have incurred charges 'to all those companies , or how we can distinguish between' deductible payments for bus i ess phone use and non-deductible-payments for personal phone u e . .

Consequently, welallow no deduction for payments t o y of the companies other than ` Qwest, the only company to whi c she made regular payments for the entire year . Most of the est check s show that they'pay,for two different telephone numb e monthly charges to one of the numbers consistently $56 (i .e ., about $672' per year), and the charges t o number as somewhat less than that . Section 262(b) p taxpayer's"deducting the cost ofbasic local telepho e service for the first telephone line provided to her residence, because 28 - that expenditure is a personal expense . Ms . Bennett has not shown that she had a home telephone number-in addition to the two Quest numbers she claimed on Schedule C . . In view o f Ms . Bennett's having the burden of proof, we conclude that she has shown no more than that she incurred deductible business phone expense of $600 .04. (i .e .,,the $1,272 .04 paid to Qwest minus $672 as the presumed charge for a personal phone number) .

14 .

Other expense s On Schedule C Ms : .Bennett deducted $1,926 .83 as "Other expenses", broken down into customer costs, periodicals, security, education,, MLS dues, and client carpet cleaning . At trial she gaveno testimony-about these expenses, and we do not use her statements in her brief to make up what is lacking in her evidence . Her,$208 .periodicals expense is for her subscriptio n the local newspaper--a personal expense, absent proof of a business purpose . .Her $35 security expense is unexplained . Her education expense, substantiated by a $79 check to an individual marked "Cont . Ed", may pertain,to .a business education expense, but without more explanatory evidence we cannot say that she proved it is deductible . Multiple Listing Dues of $326 is a plausible expense for a real estate agent, but her only proof is an REMC QuickReports print-out that is inadequate for .the reason s we explain above in part III .A .1 . We find, however, that he r evidence does include, credible and self-explanatory evidence 2 9 showing a client carpet cleaning : expense o f $160 .73 and othe r customer costs of :$1,177 .50 ( for home inspections , de4d bol t repair, cleaning, and appraisals) . Her allowable "Other.

expenses" therefore total $1,338 .23 .

The expenses that Ms . Bennett substantiated, as ~ompared, t o the deductions she claimed on Schedule C, are as follows :

Expenses reporte d on Schedule C su xpense s bstantiate d Advertising $3,958 .84 Car and truck expense 13,030 .29 Commissions and fees 11,878 .33 Depreciation 5,531 .11 Insurance 743 .85 Interest 28,822 .27 Legal and professional 1,460 .00 Office expense 1,014 .82 Rent : 'Vehicles 10,588 .74 Rent : Other 85 .00 Repairs and maintenance 184 .70 Supplies . 2,038 .62 Taxes and licenses 11,516 .84 Travel 1,089 .20 Meals and entertainment 937 .36 Utilities 1,459 .45 1,986 .2 3 Other ex p enses Total 96,325 .65 - 0 $119 .9 0 169 .0 0 94 .4 6 600 .0 4 1,338 .2 3 2,321 .6 3 IV .

Rental expenses on Schedule E On Schedule E Ms . Bennett reported the rental of two properties--the Arizona property and an alleged apa tment in her principal residence . Although she reported rental eceipts of $4,500 for the apartment and $6,000 for the Arizona property," she claimed deductions in amounts that greatly exceeded the reported rental receipts, and she therefore reported losses of $6,944 .73 on the apartment and $11,692 .40 on the Arizona property, totaling $18,637, which she in turn included (as a loss) on line 17 of Form 1040 .

Ms . Bennett did not offer into evidence any lease or other documentary information showing that the properties had in fact been rented out in 2005 . She could not recall the name of the 2005 tenant in the apartment . She claims that the apartment constitutes 51 percent of the house in which she resides, and she therefore claims as deductions 51 percent of various household expenses (utilities, cleaning, supplies) ; but she presented no floor plan of the house showing a 51/49 allocation, and she gav e .no testimony about how she arrived at the allocation . Her return .preparer testified summarily that he had .measured the property himself and found those percentages, but we did not find his, ,testimony to be credible . Her deductions for the apartment o n 12Ms . Bennett did not contend in the alternative that, if her deductions were disallowed, then her income ought to be reduced by the amount of the rental receipts reported . Although we find that she failed to prove that she rented out the properties as she alleged, we do not find that .she did not receive the income that she reported on Schedule E . Ms . Bennett did not make any showing about the nature of those receipts, the identities of the payors, the accounts,into which she deposited them and thus did not assert or prove any theory under which her income should be reduced .

I - '31 - Schedule E included mortgage interest and real estate tax, and we disallow those as Schedule E expenses ; but, as we hav said, we allow them in full on Schedule A as itemized deductio s .

,, .As we noted above (in part'III .A .4), Ms . Bennett s brief= states that the Arizona ,property was not up .to code, nd her substantial repair . expenses ($1,409 .41) and supplies xpenses ($9,234 .58) claimed .for the Arizona property on Sched le E indicate that she was undertaking a capital renovatio of the property in 2005 rather than incurring "ordinary and necessary expenses" . 'Furthermore, the fact that the .work was eeded in order to bring the building up to code makes it unli ely that she had a tenant before those improvements had been comp eted .

Even if Ms . Bennett had proved that the propert es were actually rented out in 2005, she would need also to ubstantiate the specific expenses (and show that they were not c pital improvements) . We will not analyze in .detail her evidence for each category of expense, but we note that her proof for most of these items-,includes illegible and unexplained docum nts tha t sometimes raise more questions than they answer (e .

a receipt from a veterinarian for treatment of her dog "Benji" We hold that Ms . Bennett has not substantiated . any rental a tivity deductions claimed on Schedule E .

V .

Section 6662(a) accuracy-related penalt y The IRS determined that Ms . Bennett is liable for the accuracy-related penalty of section 6662(a) because her underpayment was a "substantial understatement of income tax" under section 6662(b)(2) .13 By definition, an understatement of income taxis substantial if it exceeds the greater of $5,000 or 10 percent of the tax required to be shown on the return . Sec .

6662(d)(1)(A) . Pursuant to section 7491(c), the Commissioner bears the burden of producing sufficient evidence showing the .imposition of the penalty is appropriate in a given case .

Higbee ',v . Commissioner , 116 T .C . 438, 446 (2001) . Once the Commissioner meets this burden,, the taxpayer must come forward with persuasive evidence that the Commissioner's determination is incorrect .

Rule 142(a) ; Higbee v . Commissioner , supra at 447 .

The parties will be instructed to recompute Ms . .Bennett's liability in accordance with this decision, but for purposes of section 6662(a) we can make a rough calculation of only one component of that liability--the Social Security portion of self- 13The notice of deficiency also supports the accuracy- related penalty on two alternate grounds : Unde r section 6662(b)(1), the accuracy-related penalty is also imposed where an underpayment is attributable to the taxpayer's negligence or disregard of rules or regulations ; and under section 6662(b)(3) the penalty is imposed where there is a "substantial valuation misstatement" . However, as we show below, respondent has demonstrated that Ms . Bennett substantially understated her income tax for 2005 for purposes o f section 6662(b)(2) . Thus, we need not consider whethe r Ms . Bennett might also be liable under section 6662(b)(1) or (3) .

- L³³ - employment tax--that shows that her understatement is substantial . Since Ms .'Bennett reported a tax liability of zero, any liability computedwi:lll be an understatement' and will be not just 10 percent but rather 100 percent of°the liability required to be shown on the return . Therefore, the question t b e answered is whether the liability will also be greate tha n $5,000, and it is easy to see that it will :

Ms . Bennett's Schedule C reported gross receipts of $94,931 .02, and when the deductions of $2,321 .63 that we allow are subtracted therefrom, her self-employment income quals $9.2,609 .39 . Section 1401(a) imposes a tax of 12 .4 pe cent on the first $90,000 of that self-employment income and yields a liability of $11,160--i .e ., greater than $5,000 . Her income tax and the hospital insurance component of self-employment tax will only increase that liability . Respondent has therefore carried the burden of production imposed by section 7491(c) .

Ms . Bennett states that she "leaves it to the discretion of the Court whether to apply the Accuracy Penalty in .t is matter ."

However, where an understatement of income tax is substantial, the accuracy-related penalty is not discretionary bu mandatory ; the statute provides that it-"shall be added" ., Sec . 6662(a)' - 3 4 Ms . Bennett bears the burden of proving any defenses,14 se e ; Higbee v . Commissioner , supra at 446, but she asserted none . We therefore sustain the accuracy-related penalty .

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

14A taxpayer who is otherwise liable for the accuracy- related penalty may avoid the liability if she successfully invokes one of three other provisions : Section 6662(d)(2)(B) "provides that an understatement may be reduced, first, where the taxpayer had substantial authority for herftreatment of any item giving rise to the understatement or, second, where the relevant facts affecting the item's treatment are adequately disclosed and the taxpayer had a reasonable basis for her treatment of that 'item . Third, section 6664(c)(1) provides that if the taxpayer shows that there was reasonable cause for a portion of an underpayment and that she acted'in good faith with respect t o .,such portion, no accuracy-related penalty shall be imposed with- respect to that portion . The record' suggests no basis for any of "these defenses .

26. C .F .R . section 1 .274-5T(c)(1)-, Temporary Income Tax Regs ., ,, : supra , requires a taxpayer to substantiate each element of an expenditure by adequate records or by sufficient evidenc e . ;.corroborating his own statements . At trial Ms . Bennett offered checks, receipts, and credit card statements that she argues show $2,085 .54 in payments for business related meals and entertainment . Some (but not all) of the checks and charges do ,bear the names of restaurants, but none of them reflects that the meal was business-related . Included among her receipts is a log--about which she offered no testimony at trial--that purports to total $1,879 .12 of meal expenses . The log was apparently written by Mr . Wicker, but the record . includes no information about what sources he used to compile the information . Some but not all of the entries include the name of an individual (presumably, the alleged guest for the meal), and a few include a phrase about a meeting . However, in the absence of explanatory and corroborating testimony, we find the log to be unreliable, and we hold that Ms . Bennett did not prove any amount of deductible expense for meals and . entertainment .