1Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

T.C. Summary Opinion 2010-42

UNITED STATES TAX COURT

ROGER R. AND BRENDA J. HOLMES, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9622-08S. Filed April 12, 2010.

Roger R. Holmes, pro se.

Archana Ravindranath, for respondent.

RUWE, Judge: This case was heard pursuant to the provisions

of section 74631 of the Internal Revenue Code in effect when the

petition was filed. Pursuant to section 7463(b), the decision to
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be entered is not reviewable by any other court, and this opinion

shall not be treated as precedent for any other case.

Respondent determined deficiencies of $8,791 and $11,532 in

petitioners’ Federal income taxes for taxable years 2005 and 2006

(years at issue), respectively. The issues for decision are: 

(1) Whether petitioners are entitled to the deductions claimed on

Schedule A, Itemized Deductions, and Schedules C, Profit or Loss

From Business (Sole Proprietorship), for the years at issue; and

(2) whether petitioners must include in gross income for the

years at issue a $13,000 annual housing allowance paid to

petitioner Roger R. Holmes (Mr. Holmes) as a pastor at Paul’s

Chapel Baptist Church (Paul’s Chapel).

Background

Some of the facts have been stipulated. The stipulation of

facts and the attached exhibits are incorporated herein by this

reference. At the time the petition was filed, petitioners

resided in Ohio.

During the years at issue Mr. Holmes was an ordained Baptist

pastor for Paul’s Chapel, and his wife, petitioner Brenda J.

Holmes, worked for Maytag Manufacturing, L.L.C. In addition to

spending his time as a pastor for Paul’s Chapel, Mr. Holmes

reported that he operated a computer servicing business, PC

Unlimited, from his home.
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For the years at issue Mr. Holmes prepared petitioners’

Federal income tax returns using TurboTax. Petitioners jointly

filed 2005 and 2006 Federal income tax returns, which included a

Schedule A and two Schedules C for each year. For each of the

years at issue petitioners filed one Schedule C for Mr. Holmes’

pastoral activities and one Schedule C for PC Unlimited. For

2005 petitioners reported total Form W-2, Wage and Tax Statement,

and substitute Form W-2 income of $61,797. For 2006 petitioners

reported total Form W-2 and substitute Form W-2 income of

$67,199.

Schedules A

On the respective 2005 and 2006 Schedules A, petitioners

claimed total itemized deductions of $26,581 and $16,198. The

respective total itemized deductions included unreimbursed jobrelated expenses and certain miscellaneous deductions of $15,257

for 2005 and $10,129 for 2006.

Schedules C

Pastoral Activities

On the respective 2005 and 2006 Schedules C, petitioners

reported gross receipts or sales of $13,535 and $13,530 from

pastoral activities. Petitioners claimed an annual parsonage

housing allowance of $13,000, thereby reducing their gross

profits from pastoral activities to $535 in 2005 and $530 in

2006. Petitioners state in their petition that “Paul’s Chapel is
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a small church with limited resources and revenue” and,

therefore, during the years at issue Mr. Holmes’ primary

compensation was a $250 weekly housing allowance (i.e., $13,000

per year). The claimed Schedule C expenses related to pastoral

activities were as follows:

 Tax Year

 Expenses 2005 2006

 Advertising $135 $85

 Car and truck expenses 4,961 4,542

 Commissions and fees 30 30

 Depreciation 0 0

 Interest: Other -- 1,500

 Legal and professional services 75 75

 Office expense 59 287

 Supplies 135 105

 Taxes and licenses 65 26

 Travel expenses 748 526

 Deductible meals and entertainment 216 68

 Utilities 2,409 3,095

 Other expenses 3,976 160

 Total 12,809 10,499

PC Unlimited

During 2005 and 2006 Mr. Holmes reported gross sales or

receipts from PC Unlimited of $1,856 and $13,812, respectively.

For PC Unlimited petitioners claimed Schedule C expenses as

follows:

 Tax Year

 Expenses 2005 2006

 Advertising $78 --

 Car and truck expenses 2,211 $4,295

 Depreciation 376 0

 Insurance 1,140 --

 Interest: other 765 3,896

 Legal and professional services 38 360

 Office expense 465 355
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 Taxes and licenses 0 240

 Travel expenses 376 656

 Deductible meals and entertainment 106 171

 Utilities 2,791 2,020

 Other expenses 1,355 275

 Total 9,701 12,268

In addition to the above Schedule C expenses, on their 2006

Schedule C for PC Unlimited petitioners claimed a $7,347 expense

for the business use of their home. The Forms 8829, Expenses for

Business Use of Your Home, indicate that petitioners claimed

147.24 percent of their home was used for business purposes,

47.24 percent for business related to Mr. Holmes’s pastoral

activities and 100 percent for business related to PC Unlimited. 

Mr. Holmes explained this inconsistency at trial as simply a

software defect (i.e., that TurboTax should not have allowed him

to claim more than 100 percent of the use of petitioners’ home as

a business expense) and that “Undoubtedly that is incorrect.”

In the notice of deficiency, which pertains to both 2005 and

2006, respondent denied deductions for all of the job expenses

and certain miscellaneous deductions claimed on Schedule A. 

Because the denial of the job expenses and certain miscellaneous

deductions reduced petitioners’ itemized deductions to an amount

that was less than the standard deduction, respondent also

eliminated all other Schedule A expenses for each of the years at

issue and substituted the standard deduction. Respondent also

disallowed the $13,000 annual housing allowance as well as all of
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2Respondent also made adjustments to self-employment

adjusted gross income and self-employment tax. Although neither

party has contested these adjustments, they are computational and

will need to be addressed in the Rule 155 computations.

the claimed Schedule C expenses for both the pastoral activities

and PC Unlimited.2 

Discussion

In general, the Commissioner’s determinations in a notice of

deficiency are presumed correct, and the taxpayer bears the

burden of proving error in the Commissioner’s determinations. 

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). The

burden of proof may shift to the Commissioner in certain

circumstances if the taxpayer introduces credible evidence and

establishes that he substantiated items, maintained required

records, and fully cooperated with the Commissioner’s reasonable

requests. Sec. 7491(a)(1) and (2)(A) and (B). Petitioners have

neither asserted that the burden of proof has shifted to

respondent nor provided adequate substantiation of the expenses

claimed on their 2005 and 2006 Federal income tax returns;

therefore, the burden of proof remains with petitioners.

Disallowed Deductions

Deductions are a matter of legislative grace, and the

taxpayer bears the burden of proving he is entitled to the

deductions claimed. Rule 142(a); INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292
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U.S. 435, 440 (1934). A taxpayer must substantiate amounts

claimed as deductions by maintaining the records necessary to

establish that he is entitled to the deductions. Sec. 6001; sec.

1.6001-1(a), Income Tax Regs. 

Section 162(a) allows a taxpayer to deduct all the ordinary

and necessary expenses paid or incurred in carrying on a trade or

business. Personal expenses, however, generally are not

deductible. Sec. 262(a). Furthermore, in the case of expenses

for automobiles, traveling (including meals and lodging while

away from home), and entertainment, section 274(d) disallows any

deductions unless the taxpayer substantiates by adequate records

or by sufficient evidence corroborating the taxpayer’s own

statement: (1) The amount of the expense; (2) the time and place

of the expense; and (3) the business purpose of the expense. See

Oswandel v. Commissioner, T.C. Memo. 2007-183. Section 1.274-

5T(c)(5), Temporary Income Tax Regs., 50 Fed. Reg. 46022 (Nov. 6,

1985), provides: 

(5) Loss of records due to circumstances beyond

control of the taxpayer. Where the taxpayer

establishes that the failure to produce adequate

records is due to the loss of such records through

circumstances beyond the taxpayer’s control, such as

destruction by fire, flood, earthquake, or other

casualty, the taxpayer shall have a right to

substantiate a deduction by reasonable reconstruction

of his expenditures or use.

“Under these regulations, therefore, a taxpayer may be deemed to

meet the requirements of section 274(d) if he or she establishes
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the occurrence of a casualty causing the loss of records and has

adequately reconstructed the expenditures.” Oswandel v.

Commissioner, supra (citing section 1.274-5T(c)(5), Temporary

Income Tax Regs., supra).

At trial Mr. Holmes testified that he lacked the records

necessary to substantiate the deductions claimed on petitioners’

2005 and 2006 Federal income tax returns. Mr. Holmes testified

that during 2007 petitioners moved from Illinois to Ohio and in

the process his wife and daughter cleaned out his office

discarding many, if not all, of his business records, including

his mileage books for 2005 and 2006. In an effort to

substantiate his automobile and travel expenses for the years at

issue, Mr. Holmes testified that 3 days before trial he

reconstructed from memory a mileage log for both his pastoral

activities and his computer servicing business.

We find that petitioners have failed to substantiate any of

the disallowed deductions. They have certainly not met the

heightened substantiation requirements for automobile and travel

expenses under section 274(d) nor established that their business

records were lost through circumstances beyond their control. 

We, therefore, sustain respondent’s corresponding determinations.

Housing Allowance

During the years at issue Mr. Holmes received a parsonage

allowance of $250 per week, or $13,000 per year. In the notice
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of deficiency respondent disallowed the $13,000 parsonage

allowance, thereby increasing petitioners’ gross income by the

same amount. Respondent concedes that if petitioners used the

$13,000 housing allowance to provide a home, then the $13,000

allowance should be excludable from their gross income. 

Compensation for services is generally included in gross

income. Sec. 61(a)(1). Section 107, however, provides the

following exception:

SEC. 107. RENTAL VALUE OF PARSONAGES.

In the case of a minister of the gospel, gross

income does not include--

(1) the rental value of a home furnished

to him as part of his compensation; or

(2) the rental allowance paid to him as

part of his compensation, to the extent used

by him to rent or provide a home and to the

extent such allowance does not exceed the

fair rental value of the home, including

furnishings and appurtenances such as a

garage, plus the cost of utilities.

Respondent has acknowledged that petitioners provided

documentation from Paul’s Chapel establishing that Mr. Holmes

received $13,000 annually as a housing allowance. At trial Mr.

Holmes credibly testified that he did not receive any

compensation from Paul’s Chapel beyond the $13,000 annual housing

allowance. Mr. Holmes also credibly testified that the housing

allowance provided by Paul’s Chapel was insufficient to cover his

mortgage expenses and utilities. In this respect, Mr. Holmes
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testified that his mortgage payment alone was approximately

$1,000 per month before refinancing. Consequently, we find that

the $13,000 per year parsonage allowance petitioners received was

used to provide a home as defined in section 107(2). See sec.

1.107-1(c), Income Tax Regs. Accordingly, the $13,000 annual

housing allowance Paul’s Chapel paid to Mr. Holmes during the

years at issue is not includable in petitioners’ gross income.

To reflect the foregoing,

Decision will be entered

under Rule 155.