T.C. Memo. 1998-390

UNITED STATES TAX COURT

MARIAN AND HALINA JANUSZEWSKI, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 18607-97. Filed November 3, 1998.

Marian Januszewski and Halina Januszewski, pro se.

Joan Casali and Jody Tancer, for respondent.

MEMORANDUM OPINION

PAJAK, Special Trial Judge: This case was heard pursuant to

section 7443A(b)(3) and Rules 180, 181, and 182. All section

references are to the Internal Revenue Code in effect for the

year in issue. All Rule references are to the Tax Court Rules of

Practice and Procedure.
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Respondent determined a deficiency in petitioners' 1994

Federal income tax in the amount of $3,595 and an accuracyrelated penalty under section 6662(a) in the amount of $719.

After concessions by the parties, the issues for decision

are: (1) Whether petitioners are entitled to Schedule C

deductions in excess of the amounts allowed by respondent, and

(2) whether petitioners are liable for an accuracy-related

penalty under section 6662(a).

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

Petitioners resided in Brooklyn, New York, at the time their

petition was filed.

During 1994, petitioner Marian Januszewski (petitioner)

worked as a limousine driver for the Excel Limousine Corporation

(Excel). Excel primarily served corporate clients in the

Manhattan area in New York City. Petitioner worked for Excel as

an independent contractor. Petitioner owned his own limousine, a

Mercury Grand Marquis.

On Schedule C, Profit or Loss From Business, of their 1994

Federal income tax return, petitioners claimed expenses in the

amount of $41,155 from petitioner's activity as a limousine

driver. On their 1994 return, petitioners reported, among other

things, taxable interest income in the amount of $98. 

On October 16, 1996, petitioners filed a Form 1040X, Amended

U.S. Individual Income Tax Return (amended return). Petitioners
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stated the reason they filed the amended return was because their

original "Schedule C was prepared so incompletely that [they] had

to prepare [a] new Schedule C." On a revised Schedule C

submitted with their amended return, petitioners claimed expenses

in the amount of $42,014 from petitioner's activity as a

limousine driver. On a revised Form 1040 also submitted with

their amended return, petitioners reported taxable interest

income in the amount of $375.

In the notice of deficiency, respondent disallowed $9,817 of

the claimed $41,155 in Schedule C expenses from petitioner's

activity as a limousine driver because petitioners failed to

establish that the business expense shown on their return was

paid or incurred or was ordinary and necessary to petitioner's

business. Respondent also increased petitioners' taxable

interest income in the amount of $277, made computational

adjustments to petitioners' self-employment tax and selfemployment tax deduction, and imposed an accuracy-related penalty

under section 6662(a).

Deductions are strictly a matter of legislative grace. 

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). 

Taxpayers must substantiate any deductions claimed. Hradesky v.

Commissioner, 65 T.C. 87 (1975), affd. per curiam 540 F.2d 821

(5th Cir. 1976). 
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Section 162(a) allows a deduction for the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business. Whether an expenditure is

ordinary and necessary is a question of fact. Commissioner v.

Heininger, 320 U.S. 467, 475 (1943). 

Section 274(d)(4) imposes stringent substantiation

requirements for the deduction of certain listed property as

defined under section 280F(d)(4), which includes a passenger

automobile. However, section 280F(d)(5)(B) provides that the

term "passenger automobile" does not include any vehicle used by

the taxpayer directly in the trade or business of transporting

persons or property for compensation or hire. Salami v.

Commissioner, T.C. Memo. 1997-347. Because petitioners' claimed

deductions are for petitioner's use of his Mercury Grand Marquis

as a limousine for hire, section 274(d)(4) is not applicable.

Nevertheless, a taxpayer must keep sufficient records to

establish the amount of the deductions. Meneguzzo v.

Commissioner, 43 T.C. 824, 831 (1965). When a taxpayer fails to

keep records but the Court is convinced that deductible

expenditures were incurred, the Court "should make as close an

approximation as it can, bearing heavily if it chooses upon the

taxpayer whose inexactitude is of his own making." Cohan v.

Commissioner, 39 F.2d 540, 544 (2d Cir. 1930). We cannot

estimate deductible expenses, however, unless the taxpayer
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presents evidence sufficient to provide some rational basis upon

which estimates may be made. Vanicek v. Commissioner, 85 T.C.

731, 743 (1985). 

At trial, the parties made their respective arguments and

concessions based on amounts reported in the revised Schedule C

which was submitted with petitioners' amended return. Thus, for

clarity and convenience, we address petitioners' claimed

deductions using the amounts reported in the revised Schedule C. 

Basically, this is a substantiation case. 

We note that although Excel reimbursed petitioner for dues,

radio, vouchers, tolls, and commissions, Excel nevertheless

included these amounts in petitioner's weekly pay statement under

"Gross Income". This is misleading and inaccurate because it

gives the appearance that petitioner earned more in gross income

than was the case. 

The president of Excel testified that the income after

reimbursements was $36,583.66. At trial, respondent conceded

that Excel reimbursed petitioner $14,694.49 for dues, radio,

vouchers, tolls, and commissions and that income after such

reimbursements was $36,583.66. This is the amount which we find

should have been reported as gross income on petitioners'

Schedule C. Although the parties stipulated that the notice of

deficiency allowed certain amounts for dues, radio, vouchers and

commissions as deductions, these reimbursed amounts are not

deductible as business expenses. Flower v. Commissioner, 61 T.C.
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140, 152 (1973), affd. without published opinion 505 F.2d 1302

(5th Cir. 1974). The $15,533.00 petitioner reported as

commissions and fees (which included dues, radio, vouchers,

tolls, and commissions) was improperly claimed as a deduction by

petitioners because $14,694.49 constituted a reimbursement and

the record is silent with respect to the remaining $838.51

($15,533.00 - $14,694.49). 

Car and Truck Expenses

Petitioners reported car and truck expenses for gasoline in

the amount of $7,680 on their amended return. Petitioner

contends that during 1994 he traveled at least 51,279 miles for

business purposes. Petitioner further contends that he averaged

10 miles per gallon of gasoline and that he paid at least $1.50

per gallon for gasoline. Thus, petitioner contends that he spent

$7,680 on gasoline during 1994 (our calculation shows this amount

to be $7,692). Respondent allowed petitioners expenses for

gasoline in the amount of $6,187.

Based on this record, we conclude that petitioners are not

entitled to car and truck expenses for gasoline in excess of the

amount allowed by respondent. Notwithstanding petitioner's

testimony that he paid $7,680 for gasoline in 1994, petitioners

provided no documentary evidence to support petitioner's

expenditures. Petitioners failed to offer any receipts, canceled

checks, or credit card statements to support those expenditures. 

We have stated on many occasions that this Court is not bound to
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accept petitioners' self-serving, unverified, and undocumented

testimony. Tokarski v. Commissioner, 87 T.C. 74, 77 (1986);

Hradesky v. Commissioner, 65 T.C. 87 (1975). 

Depreciation

Petitioners reported depreciation expense for their vehicle

in the amount of $2,865.20 on their amended return. Petitioner

contends that he purchased his vehicle for $14,345 and that he

determined the amount of his depreciation by using the 5-year

straight-line depreciation method. Respondent reduced this

amount by 15 percent because respondent contends that petitioners

also used the vehicle for personal use. Thus, respondent allowed

petitioners a depreciation deduction in the amount of $2,435 on

the grounds that petitioners used the automobile 15 percent for

personal use. Petitioners only had one automobile. Petitioner

testified that he traveled 51,279 miles in his limousine

business. At another point, he also stated that he had driven

60,000 miles. Dividing the 51,279 miles by the 60,000 miles

results in the rounded-off figure of 85 percent. On this record,

we agree with respondent that petitioner's use of his automobile

for personal use was 15 percent. Respondent is sustained on this

issue.

Insurance

Petitioners reported an insurance expense deduction in the

amount of $4,048 on their amended return. Respondent disallowed

$328 of the claimed amount on the grounds that it represented a
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premium refund. Thus, respondent allowed $3,721 in insurance

expenses. The record supports respondent's position.

Repairs and Maintenance

Petitioners reported repairs and maintenance expenses in the

amount of $6,987.80 on their amended return. However,

petitioners submitted into evidence receipts, including newly

discovered receipts for $703 and $243, which totaled $3,777.86. 

Respondent conceded this amount but reduced it by 15 percent

because respondent contends this represents petitioners' personal

use of the vehicle. Thus, respondent's position is that

petitioner should be allowed repairs and maintenance expenses in

the amount of $3,211.

With respect to the difference of $3,209.94 ($6,987.80 -

$3,777.86), petitioners introduced into evidence a reconstructed

summary sheet for service and parts from an auto repair service

station in the amount of $3,210. After a review of this invoice,

we are not satisfied that it is an accurate and credible

document. We note that many of the items listed in the

reconstructed summary sheet were also listed in other invoices

which respondent had allowed previously. Petitioners failed to

provide any reasonable explanation for the duplication. Further,

petitioners failed to provide any receipts, canceled checks, or

credit card statements to prove that those expenses listed in the

summary sheet were incurred and paid. Accordingly, we find that
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petitioners are entitled to deduct $3,211 for repairs and

maintenance.

Supplies

Petitioners reported a deduction for supplies in the amount

of $810 on their amended return. Respondent disallowed the

entire amount due to lack of substantiation. Petitioner contends

that he spent $810 on floor mats, maps, signs, seat covers,

jumper cables, headlamps, bulbs and fuses, tissues, paper towels,

hair brushes, flashlights, tape recorder and tapes, and other

replacement parts for his two-way radio and for other minor

repairs. However, aside from petitioner's testimony, petitioners

offered no documentary evidence to support their contention. 

Based on his testimony, we are satisfied that he incurred some

expenses for supplies. Accordingly, we allow petitioners a

deduction of $300 for supplies. Cohan v. Commissioner, 39 F.2d

at 544.

Taxes and Licenses

Petitioners reported taxes and licenses

expenses in the amount of $840 on their amended return. 

Respondent conceded this amount at trial.

Other Expenses

Petitioners reported other expenses in the total amount of

$3,250 on their amended return. Specifically, petitioners

claimed a deduction for tolls over the amounts reimbursed in the

amount of $800, parking in the amount of $1,200, uniforms and
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cleaners in the amount of $900, and car washes in the amount of

$350. Respondent disallowed the $800 for tolls and half of the

$1,200, or $600, for parking because respondent contends that

they were reimbursed by Excel. However, respondent allowed $500

for uniforms and cleaners. The parties stipulated that

petitioners are entitled to deduct the entire $350 for car

washes. 

On this record, we find that petitioners are not entitled to

deduct expenses for tolls, parking, and uniforms and cleaners in

excess of the amount allowed by respondent. In addition to

failing to provide any receipts to evidence the expenditures for

tolls and parking, we note that the president of Excel stated

that Excel reimburses its drivers for all tolls. Further,

petitioners failed to provide any receipts, canceled checks, or

credit card statements to evidence the claimed expenditures for

uniforms and cleaners in excess of those allowed by respondent. 

Accuracy-related penalty

Finally, we must decide whether petitioners are liable for

an accuracy-related penalty. Section 6662(a) imposes an

accuracy-related penalty in the amount of 20 percent of the

portion of an underpayment of tax attributable to negligence or

disregard of rules or regulations. Sec. 6662(a) and (b)(1). 

Negligence is any failure to make a reasonable attempt to comply

with the provisions of the Internal Revenue laws. Sec. 6662(c);

sec. 1.6662-3(b)(1), Income Tax Regs. Moreover, negligence is
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the failure to exercise due care or the failure to do what a

reasonable and prudent person would do under the circumstances. 

Neely v. Commissioner, 85 T.C. 934, 947 (1985). Disregard

includes any careless, reckless, or intentional disregard of

rules or regulations. Sec. 6662(c); sec. 1.6662-3(b)(2), Income

Tax Regs. No penalty will be imposed with respect to any portion

of any underpayment if it is shown that there was a reasonable

cause for such portion and that the taxpayer acted in good faith

with respect to such portion. Sec. 6664(c).

On the basis of this record, we conclude that petitioners

are liable for an accuracy-related penalty under section 6662(a). 

Petitioners claimed deductions for which they failed to maintain

adequate records. Moreover, petitioners failed to provide any

valid explanation or credible documentary evidence to support

their entitlement to those deductions. In this regard, we find

that petitioners' actions were not those of a reasonable and

prudent person under the circumstances. Accordingly, we sustain

respondent's determination on this issue.

We have considered all arguments made by petitioners and to

the extent not discussed, we find them to be irrelevant or

without merit.

To reflect the foregoing,

Decision will be entered

under Rule 155.