T.C. Sum m ary Opi ni on 20 14 -2 5

UNITED STAT ES TAX COURT

JANET M. WE ISS AND FRANCI S E. W EISS, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 20 14 7- 12 S. Fil edMarc h 1 8, 2 01 4.

Ja ne t M . W ei ss an d F ran ci s E. W ei ss , pro ses e. Bryan Dot so n a ndBru ce M art in W il po n, fo r res po nd en t.

SUMM ARY OPINION GUY, Spec ia l Tri al Ju dg e: Thi s ca se was h eardpu rs uantto th e p ro vi si on s of sec ti on 74 63 of t he Int ern al Rev enue Co de ineffe ctwhenth e p et it io n was fil ed . Pur su an t t o s ect io n 7 46 3( b) , th e d eci si on to be en te redis no t re vi ewab le by 1 Unl es s o th erwi se in di cat ed , sec ti on refe ren ces are t o the Int ern al Rev enue 1 (co nt in ue d...)- 2 -

an y othe r co urt, an d thi s o pi ni on sh al l n otbe tre at edas p rece de ntforan y othe r cas e. Res po nd en t d et erm in eda de fic ie nc y of $ 14 ,25 2 i n p et it io ne rs ’ Fed eral in co m e ta x fo r 20 10 an d a n a ccu racy-rela te d p en al ty of $2 ,85 0 p ur su an t t o s ect io n 66 62 (a). Pet it io ne rs , hu sb an d a ndwife , fil eda ti m el y pe ti ti on forred et erm in at io n with the Co urt p ur su an t t o s ect io n 6 21 3( a). At the ti m e th e p et it io n was fil ed , pe ti ti on ers res id edinTexa s. Afte r co nc es si on s, th e is su es rem ai ni ng for de ci si on are wh ethe r pe ti ti on ers 2 (1 ) m ay ex cl ud e fro m

gro ss in co m e Mr. Weis s’ m il it ary ret ire d p ay an d (2 ) are en ti tl edto de du ct io ns for un rei m bu rs edem

pl oyee bu si ne ss ex pe ns es rep orte d o n Sch edul e A, Ite m iz edDedu ct io ns .

(...co nt inue d) 1 Co de (Co de ), as am en de d a ndineffe ctfor20 10 , andRu le refe ren ces are t o the Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e. Mo ne tary am ou nt s ar e ro un de d t o the ne ares t d ol lar. The pa rti es ag ree t ha t p et it io ne rs are en ti tl edto it em iz edde du ct io ns of 2 $9 ,50 6 a nd$6 ,19 0 fo r ch ari tabl e co nt rib ut io ns an d g am bl in g l os se s, re sp ect iv el y . Res po nd en t co nc ed es th atpe ti ti on ers are en ti tl edto anit em iz edde du ct io n o f $1 ,16 9 fo r ta xe s, p et it io ne rs ’ it em iz edde du ct io ns ex ceedth e st an da rdde du ct io n, an d p et it io ne rs are n otli ab le forth e acc ur acy-rela te d p en al ty und er s ec. 6 66 2( a). Oth er co nc es si on s ar e st ric tl y co m pu ta ti on al an d wi ll be res ol ve d i n R ul e 1 55 co m pu ta ti on s t o b e subm it te d i n a cco rd an ce wi th th is op in io n.- 3 - Bac kg ro un d So m e o f th e fac ts ha ve be enst ip ul at edan d a re s o fo un d. Th e st ip ul at io n o f fact s an d the acco m

pa nyin g e xh ib it s ar e in co rp or at edhe rei n b y th is refe ren ce. Mr. Weis s h as fou r ch il dr enfro m a pr io r m arri ag e an d thr ee ch il dr enwith Mrs . W ei ss . Peti ti on ers res id edinDenv er, Co lo rad o, b etweenJan ua ry 1 an d Aug us t 1 0, 2 01 0, an d i n S anAnt on io , Texa s, thr ou gh th e rem ai nd er o f th aty ear. I. Mr. Weiss A. Mil it ary Serv ic e Mr. Weis s jo in edth e U.S. Arm y (Arm y ) in 19 69 as acad etat t he U.S. Mi li tary Acad em y at WestPo in t, New Yo rk . He serv ed21 y ears inact iv e dut y an d 5 y ears inth e Arm

y Res erv e, with b reak s i n s erv ic e o f vary in g l en gths in19 73 an d 1 97 8. Dur in g h is m il it ary se rv ic e Mr. Weis s was di ag no se d wi th si x d is ab il it ie s rel at edto va rio us he al th is su es , in cl ud in g kne e in juri es in19 79 an d 1 99 6, a se rio us ba ckpro bl em

in19 80 , andde pr es si on in19 93 . Alth ou gh Arm y m ed ic al pe rs on ne l co un se le d M r. W ei ss to ret ire be cau se of am ed ic al di sabi li ty in 1 99 4, he de cl in edto do so be cau se he want edto ret ire with the en ha nc edbe ne fit s tha t wou ldco m e wit h 2 0 years o f act iv e se rv ic e.- 4 -

B. Ret ire m en t Fr om

Mi li tary Serv ic e Mr. Weis s re ti redfro m

th e Arm y on Aug us t 1 , 19 99 , andhe tes ti fie d tha t th e Dep art m en t o f Vet eran s Aff ai rs (VA) de te rm in edth athe was 6 0% d is ab le d a t th e ti m e o f hi s re ti rem en t. Sh ortl y aft er h is ret ire m en t, the Defen se Fin an ce an d Acco un ti ng Serv ic e (DFAS) s en t a l et te r to Mr. Weis s ex pl ai ni ng th atitha d co m pu te d h is ret ire d p ay

pu rs ua ntto a fo rm

ul a u si ng hi s ac ti ve du ty pay rat e o f $6 ,69 4 m ul ti pl ie d b y

a pe rcen ta ge rat e d eri ve d i n p artfro m hi s 2 1 years o f act iv e du ty serv ic e. Ther e is no in di cat io n tha t DFAS c on si de redMr. Weis s’ di sabi li ty rat in g i n c om

pu ti ng hi s re ti redpa y . 1. Re ti redPay The reco rdin cl ud es a co py of Mr . W ei ss ’ DFAS acc ountst at em en t fo r Decem be r 20 10 whi chsh ows th athi s g ro ss ret ire d p ay for20 10 was $ 56 ,52 0 a nd th atth e fo ll owi ng (no nt ax ab le ) am ou nt s wer e wit hh el d fr om hi s m on th ly pa ym en ts : $ 73 for

“ VA WAIVER”, $ 30 6 fo r “ SBP C OSTS”, an d $ 77 9 fo r

“ FORM ER SPOUSE DED”. The “ VA WAIVER” am ou ntrep res en ts th e p orti on of Mr. Weis s’ ret ire d p ay

th atwas wai ve d i n c on ne ct io n wi th hi s el ect io n t o rece iv e VA di sabi li ty com pe ns at io n. “ SBP C OSTS” ref ers to th e reduc ti on inMr. 3 Befo re 2 00 4 am il it ary ret ire e was no t p erm it te d t o re cei ve m il it ary ret ire d 3 pa y an d VA d is ab il ity

co m pe ns at io n c on cu rren tl y . See 1 0 U.S.C. s ec. 1 41 3 (co nt in ue d...)- 5 -

W ei ss ’ ret ire d p ay

to acco un t fo r hi s el ect io n t o p ro vi de su rv iv orbe ne fit s fo r Mrs . W ei ss an d the co up le ’s chi ldren . Fin al ly, “ FORM ER SPOUSE DED” rep res en ts 4 am ount s tha t DFAS wi th he ldfro m Mr. Weis s’ ret ire d p ay

an d re m it te d t o h is fo rm er s po us e co ns is te ntwith the term s o f th ei r di vo rce a gr eem en t.

2. Di sabi li ty Com

pe ns at io n The reco rdin cl ud es let te rs fro m th e VA to Mr. Weis s d at edJan ua ry 14 , 20 06 , Jan ua ry

26 , 20 10 , Decem

be r 2, 2 01 1, an d Oct ob er 6 , 20 12 , con firm in g tha t he was re cei vi ng servi ce-c on ne ct eddi sabi li ty com pe ns at io n dur in g tho se y ears . (...co nt inue d) 3 (2 00 0 & Supp . 20 01 -2 00 3) ; s ee al so 38 U.S.C. sec s. 5 30 4, 5 30 5 (2 00 0 & Supp . 20 01 -2 00 6) . In thi s re ga rd , a ret ire e was requi redto waiv e ret ire d p ay inan am ountequa l t o a ny VAdi sabi li ty com pe ns at io n re cei ve d (VA wai ve r). See S. Rep t. No . 10 8- 26 5, at39 (20 04 ). In t he Nati on al Defen se Autho riz at io n Actfor Fi sc al Year 2 00 4, Pub. L. No. 1 08 -1 36 , sec . 64 1( a)-( c), 1 17 Sta t. at15 11 -1 51 4, Co ng res s re pe al ed10 U.S.C. sec . 14 13 an d a m en de d 1 0 U.S.C. s ec. 1 41 4 t o el im in at e (o ve r a 1 0- y ear p eri odbe gi nn in g J anua ry 1, 2 00 4) th e co nc urren t re cei pt res tri ct io n o ut li ne d abo ve as app li edto m il it ary ret ire es with s erv ic e-co nn ect ed di sabi li ti es rat edby the VA at n otles s than 5 0%. See 10 U.S.C. sec . 14 14 (c) (2 00 0 & Supp . 20 01 -2 00 4) . In ac co rd an ce wi th 10 U.S.C. sec . 14 14 (c)( 7) , 93 .95 % of t he $1 5,1 98 th atMr. Weis s re cei ve d i n VA d is ab il ity co m pe ns at io n du rin g 2 01 0 (app ro xi m at el y $1 ,19 0 p er m on th ) was ex cl ud edinco m pu ti ng th e am ountof h is VA waiv er. Sec. 1 22 (a) p ro vi de s the ge ne ral rul e th at , inth e cas e o f a m em be r of th e 4 un ifo rm edservi ces of the Uni te d S ta te s, g ro ss in co m e d oe s n otin cl ud e th e am ou nt of an y reduc ti on inret ire d p ay

pu rs uantto th e p ro vi si on s o f 10 U.S.C. ch. 7 3 (An nu it ie s B as edon Ret ire d o r Ret ai ne r Pay) .- 6 -

His di sabi li ty rati ng s fr om 20 06 to 20 12 ran ge d fr om 50 % to 60 %. The rec or d do es no t re fle ctth e d at e th atMr. Weis s fi rs t ap pl ie d fo r VA di sabi li ty ben efi ts . Dur in g 2 01 0 M r. W ei ss rece iv eddi sabi li ty com pe ns at io n o f $1 5,1 98 fro m th e VA. The p art ie s ag ree t ha t M r. W ei ss ’ di sabi li ty com pe ns at io n i s ex cl ud ab le fro m pe ti ti on ers ’ gr os s i nc om e p ur su an t t o s ect io n 1 04 (a)( 4) . II. Mrs . W ei ss ’ Em

pl oym en t Mrs . W ei ss work s as a de st in at io n m an ag er as si st in g c li en ts by arran gi ng ho te l ac co m

m od at io ns , trans po rta ti on , anden te rta in m en t fo r la rg e g ro up s at te nd in g b us in es s co nv en ti on s an d s im il ar ev en ts . She was e m pl oyed i n thi s cap aci ty by

USA Hos ts inLas Veg as , Neva da , du rin g 2 00 9. Altho ug h the pa rti es st ip ul at edth atMrs . W ei ss was u ne m pl oyed fro m Ja nu ary to Sep te m

be r 20 10 , Mrs . W ei ss tes ti fie d tha t s he work edas a n in de pe nd en t co nt ract orfro m Marc h t o J ul y

20 10 fora co m

pa ny call edCir ca Ariz on a. Mrs . W ei ss furth er t es ti fie d tha t s he work edou t o f anoff ic e inhe r ho m e in Denv er m ak in g t el ep ho ne cal ls to po te nt ia l cl ie nt s t o “ so li ci t v is it s fo r Ph oe ni x, Ariz on a, an d S anAnt on io , Texa s.” Pe ti ti on ers tes ti fie d tha t the y als o u se d the of fic e sp ace t o c on du ctpe rs on al bu si ne ss . Mrs . W ei ss tes ti fie d tha t s he to oktwo bu si ne ss tri ps fro m Denv er dur in g Ju ne an d Au gu st20 10 . On o ne tri p s he dro ve rou ndtri p fr om Denv er t o Ho us to n- 7 -

an d Dal la s, an d o n the othe r sh e dro ve rou ndtri p fr om Denv er t o S anAnt on io . Sh e te st ifi edth aton bo th tri ps sh e m etwith v ari ou s cl ie nt s t o p res erv e b us in es s rel at io ns hi ps . She di d n otm ai nt ai n aco nt em po ran eo us mil eag e lo g fo r th e two tri ps . Inm id -Au gu st20 10 pe ti ti on ers m ov edfro m Denv er t o S anAnt on io , and Mrs . W ei ss be ga n wo rk in g fo r Ken ne th R. Tho rn to n F un Fact ory Even ts (Fu n Fact ory ), pr ov id in g d es ti na ti on m an ag em en t s erv ic es forcli en ts tra ve li ng to Hou st on , Aus ti n, an d S anAnt on io . Mrs . W ei ss tes ti fie d tha t s he pu rch as edclo th in g t o wea r on ly for b us in es s m eet in gs . She co nc ed ed , ho wev er, tha t the clo th in g c ou ldbe us edforpe rs on al , ev eryday wear. Dur in g fa ll 20 10 Mrs . W ei ss to okpo te nt ia l cl ie nt s t o d in ne r in th e San Ant on io area . She ha d wo rk edwith the se cli en ts inth e p as t an d h op edth atth ey wou ldbe co m e Fu n F act ory cli en ts inth e fu tu re. Mrs . W ei ss tes ti fie d tha t Fu n Fact ory was “ ve ry

ti gh t o n re im

bu rs em en ts ” an d wo ul d n otrei m bu rs e em pl oyee ex pe ns es witho utpre ap pr ov al 30 da y s i n a dv an ce. The reco rddo es no t i nc lu de a co py of Fu n F act ory ’s or C irc a Ari zo na ’s em pl oyee rei m

bu rs em en t p ol ic y .- 8 -

III. Pet it io ne rs ’ 20 10 Tax R eturn A. W ag es Pet it io ne rs ti m el y

fil eda joi ntFed eral in co m e ta x re tu rnfor20 10 rep orti ng to ta l wag es of $ 91 ,39 3, co m pr is in g $ 69 ,73 6 tha t M r. W ei ss earn edwork in g fo r th e U.S. Cen su s B ur eauan d $ 20 ,74 9 a nd$8 th atMrs . W ei ss earn edwork in g fo r Fu n Fact ory an d USA Ho st s Lt d., re sp ect iv el y . Mrs . W ei ss als o re po rte d tha t s he rece iv edno ne m

pl oyee co m

pe ns at io n o f $9 00 fro m

Cir ca Ari zo na . B. Mr. Weis s’ Ret ire m en t In co m e DFAS is su edto Mr. Weis s a F orm 10 99 -R, Dis tri bu ti on s Fr om Pen si on s, Ann ui ti es , Ret ire m en t o r Pro fit -Sh ari ng Pla ns , IRAs, In su ran ce Co nt ract s, et c., rep orti ng th athe rece iv edtax ab le ret ire d p ay of $ 42 ,46 7 dur in g 2 01 0. Al th ou gh pe ti ti on ers rep orte d $ 42 ,46 7 o f “ Pen si on s an d a nn ui ti es ” in co m e o n l in es 16 a an d 16 b o f th ei r return, the y

ful ly offs etth atam ountby sub tra ct in g $ 42 ,46 7 fr om in co m e o n l in e 2 1, Othe r in co m e. C. Unre im

burs edEm

pl oyee Bu si ne ss Exp en se s Pet it io ne rs cla im edit em iz edde du ct io ns on Sch edul e A in cl ud in g a de du ct io n o f $8 ,49 1 fo r un rei m bu rs edem

pl oyee bu si ne ss ex pe ns es . Peti ti on ers at ta ch edto th ei r return F orm 21 06 , Em

pl oyee Bu si ne ss Exp en se s, l is ti ng ve hi cl e- 9 -

ex pe ns es of $ 3,0 75 , park in g fe es an d t ol ls of $ 52 0, trav el ex pe ns es whi le away 5 fro m ho m e o f $2 ,59 6, o th er b us in es s ex pe ns es of $ 1,1 00 , andm eal s an d en te rta in m en t ex pe nd itur es of $ 1,2 00 (aft er the ap pl ic at io n o f th e 5 0% l im it at io n pr es cri be d b y

sec ti on 27 4( n) ). IV. Not ic e o f Defi ci en cy Res po nd en t i ss ue d ano ti ce o f de fic ie nc y to pe ti ti on ers di sa ll owi ng (1) an ex cl us io n fr om

gro ss in co m e o f $3 6,2 77 rel at edto Mr. Weis s’ ret ire d p ay an d (2 ) th e d educ ti on pe ti ti on ers cla im edon Sch edul e A fo r un rei m bu rs edem

pl oyee bu si ne ss ex pe ns es . Peti ti on ers rai se d n o o bjec ti on at t ria l wh enres po nd en t cl ari fie d tha t the co rrec t am ou ntof t he di sa ll owe d e xc lu si on fro m gro ss in co m e sh ou ldha ve be en$4 2,4 67 --the en ti re am ountth atpe ti ti on ers rep orte d o n l in e 2 1 of th ei r return.

Pet it io ne rs us edth e st an da rdm il eag e rat e to co m pu te th e am ou ntof t he 5 de du ct io n the y

cla im edforve hi cl e ex pe ns es . The Co m m is si on er g en eral ly up da te s the op ti on al st an da rdm il eag e rat es annu al ly. See s ec. 1 .27 4- 5( j)(2) , In co m e Tax Reg s. Th e st an da rdm il eag e rat e o f 50 cen ts pe r m il e fo r 20 10 is set fo rth inRev . Pro c. 20 09 -5 4, s ec. 2 .01 , 20 09 -5 1 I.R .B. 93 0, 9 30 .- 10 -

V. Pet it io ne rs ’ Rec or ds A. Peti ti on ers ’ Rev is edFo rm 21 06 Inpre parat io n fo r tr ia l p et it io ne rs pre pareda rev is edFo rm 21 06 li st in g ve hi cl e ex pe ns es of $ 1,9 80 , m eal s an d e nt ert ai nm en t ex pe ns es of $ 1,2 45 , and un sp eci fie d m is cel lane ou s ex pe ns es of $ 5,2 65 . B. Vehi cl e Exp en se s Am on g p et it io ne rs ’ ta x re co rd s fo r 20 10 is a ha nd writ te n n ot e whi chst at es :

“ 11 0 d ay [s ] × 3 6 [miles ] × [$ 0].50 = $1 ,98 0” . The n ot e ap pa ren tl y rel at es to Mrs . W ei ss ’ da il y

co m m ut e to Fun F act ory ’s off

ic e in SanAnt on io du rin g the lat te r ha lf of 20 10 . Pet it io ne rs crea te d am il eag e lo g a ndpre se nt editto res po nd en t s ho rtl y be fo re tria l. The m il eag e lo g s ta te s tha t M rs . W ei ss dro ve a to ta l o f 3,9 60 m il es on ro un d trip s fr om

Denv er t o Ho us to n a ndDall as an d fr om Denv er t o S anAnt on io du rin g J un e an d Au gu st20 10 , res pe ct iv el y . 6 C. Mea ls an d En te rta in m en t an d Othe r Exp en se s Mrs . W ei ss pro ffer edco pi es of c red itcardst at em en ts an d i nd iv idua l rece ip ts fro m

va rio us res taur an ts , dep art m en t s to res , andpa rk in g a ndto ll ch arg es It app ears to be a co in ci de nc e th atMrs . W ei ss ’ two bu si ne ss tri ps fro m 6 Den ve r an d the m il es sh e ap pa ren tl y dro ve inSanAnt on io du rin g the sec on d h al f of th e y ear b ot h t ot al ed3,9 60 m il es .- 11 -

in aneffo rt t o s ub st an ti at e unr ei m bu rs edex pe ns es form eal s an d e nt ert ai nm en t, cl ot hi ng , andtrans po rta ti on . Mos t o f th e cre di t ca rdst at em en ts were i ll eg ib le , and m an y of the rece ip ts lac ke d a ny inf orm at io n re la te d t o the bu si ne ss pu rp os e un de rlyin g the ex pe nd itur e. A few of th e rec ei pt s i nc lu de d aha nd writ te n n ot at io n su chas “ cl ie nt ” o r “ cl ie ntgi ft” . Dis cu ss io n As a g en eral rul e, th e Co m m is si on er’s d et erm in at io n o f a t ax pa y er’s l iabi li ty in a no ti ce o f de fic ie nc y

is pre su m edco rrec t, an d the tax pay er b ears th e b ur de n o f pr ov in g tha t the de te rm in at io n i s i nc orrect . Rul e 1 42 (a)( 1) ; Welch v. Hel ve rin g, 29 0 U.S. 1 11 , 11 5 (1 93 3) . On the othe r hand , res po nd en t b ears th e b ur de n o f 7 pr oo f inres pe ctof i nc reas es inth e d efi ci en cy , see Ru le 14 2( a)(1 ), an d s pe ci fic al ly th e d efi ci en cy

am ou ntatt rib ut ab le to th e in crea se inth e am ou ntdi sa ll owe d a s an ex cl us io n fr om

in co m e fro m

$3 6,2 77 to $4 2,4 67 . 8 Pet it io ne rs be ar the bu rd enof p ro vi ng th atth ey were en ti tl edto th e 7 de du ct io n fo r un rei m

bu rs edem

pl oyee bu si ne ss ex pe ns es cla im edon Sch edul e A. As d is cu ss edinde ta il be lo w, ho wev er, the y di d n otco m

pl y with the Co de ’s subs tant ia ti on requi rem en ts an d h av e n otm ai nt ai ne d a ll requi redreco rd s. The refo re, the burd enof p ro of as t o a ny relev an t fa ctua l i ss ue do es no t s hi ft t o res po nd en t und er s ec. 7 49 1( a) i n re sp ectof t ha t m at te r. See s ec. 7 49 1( a)(1 ) an d (2 ); Hi gb ee v . Comm is si on er, 1 16 T.C. 43 8, 4 42 -4 43 (20 01 ). Bec au se we de ci de on th e p rep on de ran ce o f th e ev id en ce tha t n o a m ou ntof 8 Mr. Weis s’ ret ire d p ay

m ay be ex cl ud edfro m

in co m e, th e al lo cat io n o f th e b ur de n

(co nt in ue d...)- 12 -

I. Mr. Weiss ’ Ret ire d P ay Sect io n 6 1( a) p ro vi de s tha t g ro ss in co m e m ean s “ al l i nc om e fro m what ev er so ur ce d eri ve d” . Pen si on s an d re ti rem en t al lo wan ces co ns ti tu te gro ss in co m e un le ss ex cl ud edby law. Sec. 6 1( a)(1 1) ; s ec. 1 .61 -1 1( a), In co m e Tax Reg s. Mi li tary ret ire d p ay

is pe ns io n i nc om e withi n the m ean in g o f se ct io n 6 1( a)(1 1) . Whe el er v . Comm is si on er, 1 27 T.C. 20 0, 2 05 n.1 1 (2 00 6) , aff’d, 5 21 F.3d12 89 (1 0t h C ir. 2 00 8) . Sect io n 1 04 (a)( 4) pro vi de s an ex cl us io n fr om gro ss in co m e fo r am ou nt s rece iv edas ape ns io n, an nu ity , or s im il ar al lo wan ce fo r pe rs on al in juri es or si ckne ss res ul ti ng fro m

act iv e se rv ic e in th e arm edfor ces of any cou nt ry . As pr ev io us ly m en ti on ed , res po nd en t d oe s n otdi sp ut e th atMr. Weis s i s en ti tl edto ex cl ud e fro m

gro ss in co m e th e d is ab il ity co m pe ns at io n tha t h e rec ei ve d fr om th e VA du rin g 2 01 0. Re sp on de ntde te rm in ed , ho wev er, tha t M r. W ei ss was n ot en ti tl edto ex cl ud e fro m

gro ss in co m e th e ret ire d p ay th athe rece iv edfro m

DFAS be cau se th os e p aym en ts were n otm ad e fo r pe rs on al in juri es or s ic kn es s. As a g en eral rul e, pr ov is io ns gra nt in g s pe ci al tax ex em pt io ns are s tri ct ly co ns tru ed . Helv eri ng v. Nw. Ste el Ro ll in g M il ls , Inc ., 31 1 U.S. 4 6, 4 9 (1 94 0) . In (...co nt inue d) 8 of pro of is im m at eri al . See Knud se n v . Comm is si on er, 1 31 T.C. 18 5, 1 89 (20 08 ).- 13 -

th is cas e, we co ns id er wh ethe r th e p aym en ts Mr. Weis s re cei ve d fr om DFAS qu al ify for ex cl us io n u nd er s ect io n 1 04 (a)( 4) or s om e o th er p ro vi si onof l aw. See Scar ce v . Comm is si on er, 1 7 T.C. 8 30 , 83 3 (1 95 1) . Mil it ary ret ire d p ay forlen gt h of servi ce n orm al ly is n otex em ptfro m tax at io n. Id .; Ho ltv. Co m m is si on er, T.C. Mem o. 1 99 9- 34 8. Mr. Weis s re li es on sec ti on 1.1 22 -1 , Inc om e Tax Reg s., an d s pe ci fic al ly Exa m pl e 4 of p arag rap h (d ) of

th e reg ul at io n, t o s up po rt h is co nt en ti on th athi s ret ire d p ay

is ex cl ud ab le fro m

gro ss in co m e. W e n ot e th atth e ret ire e inExam pl e 4 was rece iv in g “ di sabi li ty reti rem en t p ay un de r se ct io n 1 40 1 o f ti tl e 1 0” . Mr. W ei ss co nt en ds th at“ if youare d is ab le d o n the same day y ouret ire d, i t m ean s tha t y ouwere d is ab le d i n s erv ic e. Andth atis m y jus ti fic at io n fo r th e u se of the Treas ury reg ul at io n 1 .12 2- 1.” Altho ug h M r. W ei ss tes ti fie d tha t the VA det erm in edth athe was 6 0% di sabl edat t he ti m e h e ret ire d i n Au gu st19 99 , th ere i s n o d oc um en ta ti on sh owi ng th e d at e th athe fir stap pl ie d fo r di sabi li ty com pe ns at io n. Ag ai ns t tha t b ack dr op , we al so no te th atDFAS m ad e n o m en ti onof adi sabi li ty in i ts let te r to Mr. Weis s ex pl ai ni ng ho w itco m

pu te d h is ret ire d p ay . To th e co nt rary, D FAS co m pu te d h is ret ire d p ay

so le ly on the ba si s o f hi s ac ti ve du ty pay rat e an d years o f act iv e se rv ic e. Altho ug h the re i s n o d is pu te th atMr. Weis s s uf fere d fr om

servi ce-r el at ed- 14 -

di sabi li ti es , th ere i s n ot hi ng inth e rec or d t o s ho w th athe was i nc ap ab le of rem ai ni ng inact iv e dut y

or t ha t h e ret ire d a s a d ire ctres ul t o f hi s d is ab il it ie s. In de ed , he c on ti nu edto workforth e Cen su s B ur eaudu rin g 2 01 0. The Co urt h as pre vi ou sl y co ns id eredarg um en ts si mil ar t o M r. W ei ss ’ an d ha s h el d tha t m il it ary ret ire d p ay is in cl ud edingro ss in co m e reg ard le ss of aVA di sabi li ty det erm in at io n. Se e Lam be rt v . Comm is si on er, 4 9 T.C. 5 7 (1 96 7) ; Si do ranv. Co m

m is si on er, T.C. Mem o. 1 97 9- 56 , aff’d, 6 40 F.2d23 1 (9 th Cir . 19 81 ). In t he se cas es , we hel d tha t a VA d is ab il ity de te rm in at io n d oe s n ot es tabl is h tha t a p orti onof ape ns io n i s re cei ve d fo r in juri es su st ai ne d dur in g a ct iv e se rv ic e. Mo reo ve r, Mr. Weis s i s re cei vi ng di sabi li ty com pe ns at io n fr om

th e VA th atth e p art ie s ag ree i s ex cl ud ab le fro m pe ti ti on ers ’ gr os s i nc om e. See Ho ltv. Co m m is si on er, T.C. Mem o. 1 99 9- 34 8. Und er the cir cu m st an ces , Mr. W ei ss ’ rel ianc e o n s ect io n 1 .12 2- 1, In co m e Tax Reg s., i s m is pl aced . As is rel ev an t h ere, the reg ul at io n p ro vi de s ru le s fo r th e or de r in whi chex cl us io ns fro m di sabi li ty reti redpa y

are t ak enin to acco un t u nd er se ct io ns 12 2( a) an d 1 04 (a). Co nt rary to M r. W ei ss ’ un de rs tand in g, n ei th er the pr im ary te xtof t he reg ul at io n n orExam pl e 4 (whi chsp eak s t o a n i nd iv idua l wh o, un li ke Mr. Weis s, re cei ve d d is ab il ity ret ire d p ay

un de r 10 U.S.C. sec . 14 01- 15 -

(2 00 0) ) pr ov id es au th or ity forex cl ud in g h is ret ire d p ay fro m gro ss in co m e und er th e ci rcu m st an ces pre se nt edinth is cas e. The reg ul at io n a si de , Mr. W ei ss als o c it es a “No Ch an ge ” le tt er tha t h e rece iv edfol lo win g an IR S ex am in at io n o f pe ti ti on ers ’ joi nttax return fo r 20 09 as furth er ev id en ce co nf

irming th atth e p os it io n h e as se rts inth is cas e is co rrec t. We un de rs tandMr. Weis s t o c on te ndth atres po nd en t i s es to pp edto tak e a co nt rary po si ti oninth is cas e. W e d is ag ree. Itis well set tl edth atth e acc ep tanc e o r acqui es cen ce i n re tu rn s fi le d b y a ta xp ay er i n p rev io us y ears crea te s n o e st op pe l ag ai ns t the Co m

m is si on er, n ordo es th e o ve rlo ok in g o f anerro r in a return upo n au di t cr eat e an y

su chest op pe l. See Dix on v. Un it edSta te s, 3 81 U.S. 68 , 72 -7 3 (1 96 5) ; Au to . Club o f Mi ch . v. Co m m is si on er, 3 53 U.S. 18 0, 1 83 -1 84 (19 57 ); McGu ire v. Co m

m is si on er, 7 7 T.C. 7 65 , 77 9- 78 0 (1 98 1) . In s ho rt, n ei th er the Co m m is si on er n orth e Co urt i s co ns tra in edinth is cas e b y th e “No Ch an ge ” le tt er is su edinres pe ctof p et it io ne rs ’ ta x re tu rnfor20 09 . See, e.g ., Gou ldv. Co m m is si on er, 1 39 T.C. 41 8, 4 45 (20 12 ), aff’d, _

__Fed . App x. _

__, 20 14 W L 27 98 63 (4t h C ir. J an . 27 , 20 14 ). Co ns is te ntwith the for eg oi ng , we agr ee wi th res po nd en t tha t p et it io ne rs are no t en ti tl edto ex cl ud e $ 42 ,46 7 fr om th ei r gr os s i nc om e fo r 20 10 .- 16 -

II. Unr ei m

bu rs edEm

pl oyee Bu si ne ss Exp en se s Deduc ti on s ar e a m at te r of leg is la ti ve gra ce, an d the tax pa y er g en eral ly be ars th e b ur de n o f pr ov in g e nt it le m en t t o a ny deduc ti on cla im ed . Rul e 1 42 (a); INDOPCO, In c. v. Co m

m is si on er, 5 03 U.S. 79 , 84 (19 92 ); Ne w Col on ia l Ic e Co . v. Hel ve rin g, 2 92 U.S. 43 5, 4 40 (19 34 ). A tax pa y er m us t s ub st an ti at e d educ ti on s cl ai m edby keep in g a ndpro du ci ng ad equa te reco rd s tha t en ab le th e Co m m is si on er to de te rm in e th e ta xp ay er’s co rrec t t ax li ab il ity . Sec. 6 00 1; Hrad es ky v. Co m m is si on er, 6 5 T.C. 8 7, 8 9- 90 (19 75 ), aff’d p er cu ria m , 54 0 F .2d82 1 (5 th Cir . 19 76 ); M en eg uz zo v. Co m mis si on er, 4 3 T.C. 8 24 , 83 1- 83 2 (1 96 5) . A tax pa y er cl ai min g ade du ct io n o n aFed eral in co m e ta x re tu rnm us t d em on strat e th atth e de du ct io n i s al lo wab le pu rs ua ntto a st atut ory pro vi si on an d m

us t fu rth er subs tant ia te th atth e expe ns e to whi chth e d educ ti onrel at es ha s b eenpa idor in cu rred . Sec. 6 00 1; Hrad es ky v. Co m m is si on er, 6 5 T.C. at89 -9 0. Whe n atax pay er es tabl is he s tha t h e o r sh e p ai d o r in cu rreda de du ct ib le ex pe ns e, bu t fa il s t o e st ab li shth e am ou ntof t he de du ct io n, the Co urt n orm al ly m ay est im at e th e am ou ntall owabl e as a de du ct io n. Co ha n v . Comm is si on er, 3 9 F.2 d 5 40 , 54 3- 54 4 (2 d C ir. 1 93 0) ; Van ic ekv. Co m mis si on er, 8 5 T.C. 7 31 , 74 2- 74 3 (1 98 5) . There m

us t b e su ffi ci en t ev id en ce i n the reco rd , ho wev er, t o p erm it- 17 -

th e Co urt t o c on cl ud e th ata de du ct ib le ex pe ns e was pa idor i nc urredinat l eas t the am ountall owe d. Will ia m s v . Uni te d S ta te s, 2 45 F.2d55 9, 5 60 (5t h C ir. 1 95 7) . Und er s ect io n 1 62 (a), a d educ ti on is all owe d fo r or di na ry an d n eces sa ry ex pe ns es pa idor i nc urreddu rin g the tax ab le y ear i n c arrying on an y tra de or bu si ne ss . A deduc ti on no rm al ly is n otall owe d, h owe ve r, fo r pe rs on al , li vi ng , or fam il y ex pe ns es . Sec. 2 62 (a). Whethe r anex pe nd itur e sa ti sf ie s the requi rem en ts fo r de du ct ib il ity

un de r se ct io n 1 62 is a qu es ti on of f act . See Co m

m is si on er v . Hein in ge r, 32 0 U.S. 4 67 , 47 5 (1 94 3) . The t erm “ tra de or b us in es s” in cl ud es pe rfo rm in g s erv ic es as a n e m pl oyee. Prim

ut h v . Comm is si on er, 5 4 T.C. 3 74 , 37 7- 37 8 (1 97 0) . Howev er, anem pl oyee bu si ne ss expe ns e is no t o rd in ary an d ne ces sa ry if the em pl oyee is en ti tl edto rei m bu rs em en t fr om

hi s o r he r em

pl oyer. See P od em s v . Commis si on er, 2 4 T.C. 2 1, 2 2- 23 (19 55 ); No z v . Comm is si on er, T.C. Mem o. 2 01 2- 27 2. Sect io n 2 74 (d ) pr es cri be s m or e strin ge ntsubs tant ia ti on requi rem en ts to be m etbe fo re a t ax pa y er m ay de du ctcert ai n c at eg or ie s o f ex pe ns es , in cl ud in g trav el ex pe ns es , m eal s an d e nt ert ai nm en t ex pe nd itur es , andex pe ns es rel at edto th e u se of li st edpro pe rty as d efi ne d i n s ect io n 2 80 F(d )(4 )(A). See San fo rdv. Co m m is si on er, 50 T.C. 82 3, 8 27 (19 68 ), aff’d, 4 12 F.2d20 1 (2 d C ir. 1 96 9) . As rel ev an t h ere, the te rm “ li st edpro pe rty” in cl ud es , in te r al ia , pas se ng er au to m ob il es . Sec.- 18 -

28 0F (d )(4 )(A)(i ). To s at is fy th e requi rem en ts of s ect io n 2 74 (d ), a ta xp ay er ge ne ral ly m

us t m ai nt ai n a de qu at e rec or ds or p ro du ce s uf fic ie ntev id en ce co rro bo rat in g h is or h er o wn s ta te m en t, wh ic h, i n c om bi na ti on , are s uf

fic ie ntto es tabl is h the am ou nt , dat e an d t im e, an d b us in es s p ur po se foreachex pe nd itur e fo r tra ve l awa y

fro m ho m e o r ex pe nd itur e o r bu si ne ss us e o f li st edpro pe rty. Sec. 1.2 74 -5 T(b) (2 ), (6 ), (c)( 1) , Tem po rary Inco m e Tax Reg s., 5 0 F ed . Reg . 46 01 4, 46 01 6- 46 01 7 (No v. 6 , 19 85 ). Sect io n 1 .27 4- 5T(c )(2 ), Tem po rary Inco m e Tax Reg s., s up ra, p ro vi de s i n rel ev an t p artth at“ ad equa te reco rd s” ge ne ral ly con si stof a n a cco un t b oo k, a d iary , a lo g, a s ta te m en t o f expe ns e, tr ip sh eet s, o r a s im il ar re co rdm ad e ator n ear t he ti m e o f th e ex pe nd itur e o r us e, al on g wi th supp orti ng do cu m en tary ev id en ce. Sect io n 1 .27 4- 5(

j)(2) , Inc om e Tax Reg s., p ro vi de s tha t the stric t s ub st an ti at io n requi rem en ts of s ect io n 2 74 (d ) fo r ve hi cl e expe ns es m us t b e m etev enwher e th e op ti on al st an da rdm il eag e rat e is us ed . Mor eo ve r, th e Co urt m ay no t u se th e ru le es tabl is he d i n C oh anv. Co m mis si on er, 3 9 F .2dat 5 43 -5 44 , to est im at e ex pe ns es co ve redby sect io n 2 74 (d ). San fo rdv. Co m mis si on er, 5 0 T.C. at82 7; sec . 1.2 74 - 5T(a ), Tem

po rary Inco m e Tax Reg s., 5 0 F ed . Reg . 46 01 4 (No v. 6 , 19 85 ).- 19 -

A. Lack o f Evi de nc e o f Em pl oyer Rei m

bu rs em en t Po li cy Altho ug h the reco rdin di cat es th atMrs . W ei ss was e m pl oyed b y Cir ca Ariz on a an d F unFact ory du rin g 2 01 0, s he fai le d t o p ro du ce d ire ctev id en ce rel at edto eit he r co m

pa ny’ s emplo y ee re im

bu rs em en t p ol ic y . She tes ti fie d o nl y th atFun F act ory

was v ery “ ti gh t” with re im bu rs em en ts . Und er the cir cu m st an ces , we are u nabl e to de te rm in e th atth e ex pe ns es indi sp ut e co ns ti tu te ord in ary an d ne ces sa ry bu si ne ss expe ns es withi n the m ean in g o f se ct io n 1 62 . See Po de m s v . Co m m is si on er, 2 4 T.C. at22 -2 3; Reh m anv. Co m m is si on er, T.C. Mem o. 2 01 3- 71 , at*1 8. 9 B. Lackof S ub st an ti at io n 1. Veh ic le Exp en se s The reco rdin cl ud es a m il eag e lo g re late d t o trip s tha t M rs . W ei ss to okfro m Den ve r to va rio us cit ie s i n Tex as du rin g J un e an d Au gu st20 10 an d aha nd writ te n no te whi chap pe ars to rel at e to he r da il y co m m ut e to Fun F act ory

du rin g the lat te r ha lf o f 20 10 . Neithe r rec or d was crea te d c on te m po ran eo us ly in 2 01 0.

Altho ug h o urho ld in g o n thi s p oi ntwou ldbe su ffi ci en t t o s us ta in 9 res po nd en t’s d et erm in at io n d is al lo win g the de du ct io n p et it io ne rs cla im edfor un rei m bu rs edem

pl oyee bu si ne ss ex pe ns es , we als o c on cl ud e th atpe ti ti on ers fai le d t o a de qu at el y

subs tant ia te th e ex pe ns es un de rlyin g the de du ct io n.- 20 -

As a g en eral rul e, th e co st s o f co m m ut in g b etweena ta xp ay er’s res id en ce an d p la ce o f bu si ne ss or e m pl oym en t ar e n on de du ct ib le pe rs on al ex pe ns es . See Fau sn er v . Commis si on er, 4 13 U.S. 83 8, 8 39 (19 73 ); C ommis si on er v . Flo wers , 32 6 U.S. 4 65 , 47 3- 47 4 (1 94 6) ; s ec. 1 .26 2- 1( b) (5 ), In co m e Tax Reg s. Onth is reco rd , we con cl ud e th atth e m il eag e li st edinth e h an dwr it te n n ot e rep res en ts no nd educ ti bl e p ers on al co m m ut in g e xp en se s. See , e.g., Heu er v . Comm is si on er, 32 T.C. 94 7, 9 51 -9 53 (19 59 ), aff’d, 2 83 F.2d86 5 (5 th Cir . 19 60 ). Altho ug h the m il eag e lo g p ro vi de s d et ai le d i nf orm at io n re ga rd in g M rs . W ei ss ’ two rou ndtri ps fro m Denv er t o Tex as , th e lo g was no t cr eat ed co nt em po ran eo us ly butrathe r was crea te d s ho rtl y be fo re tria l i n 2 01 3. Co ns eque nt ly, itdo es no t qua li fy as a n a de qu at e rec or d wi th in th e m ean in g o f se ct io n 1 .27 4- 5T(c )(2 ), Tem po rary Inco m e Tax Reg s., s up ra. Mo reo ve r, Mrs . W ei ss fai le d t o p ro vi de othe r rel iabl e ev id en ce co rro bo rat in g h er o wn s ta te m en t su ffi ci en t t o e st ab li shth e am ount , dat e an d t im e, an d b us in es s p ur po se foreach ex pe nd itur e fo r tr av el away fro m ho m e o r bu si ne ss us e o f li st edpro pe rty. See sec . 1.2 74 -5 T(b) (2 ), (6 ), (c)( 1) , Tem po rary Inco m e Tax Reg s., s up ra. Insu m , Mrs . W ei ss fai le d t o s ho w th atth e v eh ic le ex pe ns es co ns ti tu te ord in ary an d n eces sa ry bu si ne ss ex pe ns es withi n the m ean in g o f se ct io n 1 62 . Con si st en t wi th th e- 21 -

fo reg oi ng , we su st ai n re sp on de nt ’s det erm in at io n d is al lo win g the de du ct io n pe ti ti on ers ’ cl ai m edforve hi cl e ex pe ns es .

2. Me al s an d En te rta in m en t Ex pe ns es Pet it io ne rs cla im eda de du ct io n o f $1 ,24 5 fo r m eal s an d e nt ert ai nm en t ex pe ns es . Meal s an d e nt ert ai nm en t ex pe ns es are al so subjec t t o the stric t subs tant ia ti on requi rem en ts of s ect io n 2 74 (d ). Pet it io ne rs pro vi de d c op ie s o f se ve ral rece ip ts fro m

res taur an ts pu rp orte dl y

rel at edto Mrs . W ei ss ’ bu si ne ss m eet in gs with p ot en ti al cli en ts . Many of t he rece ip ts were i ll eg ib le , on ly thre e rece ip ts li st edcli en t n am es , andno ne de ta il eda bu si ne ss pu rp os e. Inad di ti on , so m e o f th e m eet in gs were wi th pe rs on al bu si ne ss co nt act s an d n otwith c li en ts of Fun F act ory . On th e rec or d p res en te d, p et it io ne rs ha ve fai le d t o m eetth e st ric t subs tant ia ti on requi rem en ts of s ect io n 2 74 (d ) fo r m eal s an d e nt ert ai nm en t ex pe ns es . Res po nd en t’s d et erm in at io n d is al lo win g the de du ct io n p et it io ne rs cl ai m edinres pe ctof t he se ex pe ns es is su st ai ne d.

3. Mi sc el lane ou s Ex pe ns es Pet it io ne rs li st edm is cel lane ou s emplo y ee b us in es s ex pe ns es of $ 5,2 65 on th e rev is edFo rm

21 06 . Mrs . W ei ss pro vi de d c op ie s o f rec ei pt s fr om de pa rtment st or es forclo th in g tha t s he pu rch as edto wear t o b us in es s m eet in gs . The co stof cl ot hi ng th atis “ requi redor e ss en ti al inanem pl oym en t, an d wh ic h * * * [is ] no t- 22 -

su it ab le for

ge ne ral or p ers on al wear an d [i s] no t s o wo rn ” is a de du ct ib le ex pe ns e. Yeo m an s v . Comm is si on er, 3 0 T.C. 7 57 , 76 7- 76 9 (1 95 8) ; s ee Wasi k v . Co m m is si on er, T.C. Mem o. 2 00 7- 14 8; Beck ey v. Co m m is si on er, T.C. Mem o. 19 94 -5 14 . Howev er, Mr s. Weis s was no t re qu ire d t o wea r a uni fo rm to work , and sh e admit te d a t tria l tha t the clo th es th atsh e p ur ch as edan d wo re fo r bu si ne ss m eet in gs were al so su it ab le forge ne ral or p ers on al wear. The refo re, p et it io ne rs are n oten ti tl edto a de du ct io n fo r th es e it em s. Pet it io ne rs als o p ro vi de d c op ie s o f rec ei pt s m ark ed“ cl ie nt ” o r “ cl ie ntgi fts ”, in vo ic es forto ll s an d v al etpa rk in g, an d c red itcardst at em en ts with h an dwr it te n no te s. Ho wev er, the se reco rd s wer e m os tl y il le gi bl e, an d the y

di d n otin di cat e th e cl ie ntna m e o r bu si ne ss pu rp os e o f th e p ur po rte d b us in es s ex pe ns e. Inth e ab se nc e of pro pe r subs tant ia ti on , res po nd en t’s d et erm in at io n d is al lo win g the de du ct io n pe ti ti on ers cla im edform is cel lane ou s emplo y ee b us in es s ex pe ns es is su st ai ne d. III. Bu si ne ss Use o f Hom e A tax pa y er g en eral ly is n oten ti tl edto de du ctany expe ns es rel at edto a dwe ll in g u ni t u se d a s a r es id en ce dur in g the tax ab le y ear. Se c. 28 0A( a). Exp en se s at tri bu tabl e to a ho m e o ffi ce ar e ex cep te d fr om th is ge ne ral rul e, ho wev er, i f th e ex pe ns es are al lo cab le to a po rti on of t he dwel li ng un itwhi chis ex cl us iv el y us ed on a reg ul ar b as is as the pri nc ip al pl ace o f bu si ne ss forth e ta xp ay er’s trad e o r- 23 -

bu si ne ss . Sec. 2 80 A(c)(1 ); S ee Lo fs tro m v. Co m m is si on er, 1 25 T.C. 27 1, 2 77 -2 78 (2 00 5) . Mrs . W ei ss tes ti fie d tha t s he us eda be dr oo m inpe ti ti on ers ’ ho m e to pe rfo rm workforCir ca Ari zo na . Peti ti on ers bo th tes ti fie d, h owe ve r, th atth ey us edth e ro om

for pe rs on al m at te rs . Con se qu en tl y , pet it io ne rs are n oten ti tl edto a de du ct io n fo r th e b us in es s u se of the ir h om e. See Lo fs tro m v. Co m m is si on er, 1 25 T.C. at 2 77 -2 78 . To re fle ctth e fo reg oi ng , Deci si on wil l b e en te red un de r Ru le 15 5.