T.C. Memo. 1996-145

UNITED STATES TAX COURT

JOHN ROBERT MAGUIRE, Petitioner v. COMMISSIONER OF 

INTERNAL REVENUE, Respondent

Docket No. 14654-93. Filed March 21, 1996.

Robert T. Maguire, for petitioner.

John Aletta, for respondent.

MEMORANDUM OPINION

CLAPP, Judge: Respondent determined a deficiency of $10,669

in petitioner's 1990 Federal income tax and a penalty of $2,134

pursuant to section 6662(a).

After concessions by the parties, the issues for decision

are:
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(1) Whether petitioner's expenditures related to

residential real property were paid or incurred in carrying on a

trade or business pursuant to section 162 or for the production

of income pursuant to section 212. We hold that most of these

expenditures are not deductible under either section.

(2) Whether petitioner is liable for a penalty pursuant to

section 6662(a) for negligence or disregard of rules or

regulations. We hold that petitioner is liable for the penalty.

All section references are to the Internal Revenue Code in

effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure, unless otherwise

indicated.

We have combined our findings of fact and opinion. Some of

the facts are stipulated and are so found. We incorporate by

reference the stipulation of facts and attached exhibits.

Petitioner resided in Wallingford, Connecticut, at the time

he filed the petition in this case. Petitioner was a cash basis

taxpayer for the taxable year 1990. He was employed full time as

a policeman in Wallingford, Connecticut.

In 1989, petitioner purchased a single-family home on Cape

Cod at Harwichport, Massachusetts, for $114,000. This was

petitioner's first real estate purchase. Petitioner never

occupied the home as a personal residence, and he never intended

to do so. Petitioner originally intended to profit by selling

the property as opposed to renting it. When petitioner purchased
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the property, portions of the kitchen and bathroom floors were

rotted due to water damage. Rainwater had leaked into the

kitchen and caused the plywood flooring to rot. Some of the

kitchen and bathroom faucets in the home worked while others did

not. The house was badly run down and uninhabitable. It needed

considerable work to put it in condition for sale.

Petitioner removed the rotted plywood floor base below the

tile and replaced it with new plywood. Petitioner removed the

kitchen counter top and cabinets and installed a new counter top

and new kitchen cabinets. Petitioner installed new tile in the

kitchen and the bathroom. Petitioner hired a contractor to

rewire portions of the property. Petitioner purchased new

appliances in Connecticut and used a rented Ryder truck to

deliver the appliances to the Harwichport property. Petitioner

installed the appliances and sealed vent outlets that were no

longer needed. Petitioner hired a contractor to adjust the

septic line from the home to the septic tank to comply with State

environmental regulations. Petitioner installed new gutters,

storm doors, and a toilet. Petitioner hired an electrician to

install a new electrical distribution box with circuit breakers

which replaced the home's fuse box.

Petitioner performed most of the work himself and sometimes

would spend several consecutive days working on the Harwichport

property. On these occasions, he stayed at the Harwichport

property instead of renting a room at a motel. Petitioner spent
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in excess of 59 days working on the Harwichport property,

excluding travel time between the Harwichport property and

petitioner's residence in Wallingford, Connecticut.

In the Boston Globe on October 28, 1990, petitioner

advertised the Harwichport property for sale, "completely

furnished", for $154,500. In November 1990, petitioner placed

similar advertisements in the Cape Codder, and the Providence

Journal. There were no advertisements in 1990 offering the

property for rent.

Petitioner's employment as a police officer included the use

of an unmarked police car. The only restriction on petitioner's

use of the police car was that he could not take that vehicle

outside the State of Connecticut. Petitioner owned a Lincoln

Continental (Lincoln) which he left parked at his father's house

located in Warren, Connecticut. When petitioner needed to travel

to the Harwichport property, he would park his police car at his

father's house. Petitioner would then drive the Lincoln to the

Harwichport property. On the Form 4562 attached to petitioner's

1990 Form 1040, petitioner indicated a business use percentage of

90 percent for the Lincoln. Petitioner did not respond to the

questions "Do you have evidence to support the business use

claimed?" and "If 'Yes,' is the evidence written?" that appear on

lines 22a and 22b, respectively, of Form 4562.
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Petitioner is a licensed real estate agent in the State of

Connecticut, but that license is not valid in the State of

Massachusetts.

The documents submitted at trial constitute all of the

Harwichport property expense records for 1990. During the

taxable year 1990, petitioner incurred and paid mortgage interest

expense of $9,513.23 and real estate taxes of $1,248.39.

In the notice of deficiency, respondent determined that

petitioner's expenditures were not paid or incurred in carrying

on a trade or business pursuant to section 162 or for the

production of income pursuant to section 212. Respondent also

determined that the expenditures were not ordinary and necessary. 

Petitioner bears the burden of proving that respondent's

determination is not correct. Rule 142(a); Welch v. Helvering,

290 U.S. 111 (1933). Respondent filed an amended answer and

alleged that petitioner failed to substantiate the claimed

expenses as required by section 274(d), and that section 469

precludes petitioner from deducting the expenses. We conclude

that section 469 does not limit petitioner's deductions in 1990. 

Petitioner participated in the activity for more than 100 hours,

and this amounted to substantially all of the participation in

the activity. See sec. 1.469-5T(a)(2) and (3), Temporary Income

Tax Regs., 53 Fed. Reg. 5725-5726 (Feb. 25, 1988). The parties

also disagree whether the expenditures were capital in nature or

currently deductible.
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Petitioner argues that his activity on the Harwichport

property constituted a trade or business, or, in the alternative,

that the Harwichport property was held for the production of

income. In order to be engaged in carrying on a trade or

business pursuant to section 162, the taxpayer must be involved

in the activity with continuity and regularity, and the

taxpayer's primary purpose for engaging in the activity must be

for income or profit. Commissioner v. Groetzinger, 480 U.S. 23

(1987); Juda v. Commissioner, 90 T.C. 1263, 1287 (1988), affd.

877 F.2d 1075 (1st Cir. 1989). The term "property held for the

production of income" pursuant to section 212 includes income

from the disposition of the property. Mitchell v. Commissioner,

47 T.C. 120, 128 (1966). Petitioner was not in the trade or

business of reconditioning dilapidated structures for resale. 

This was petitioner's first real estate purchase. He worked on

the Harwichport property in his spare time while employed full

time as a police officer. Petitioner was not in the trade or

business of renting real estate in 1990. Petitioner testified

that he offered the property for rent in 1989, but we find that 

the property was not suitable for sale or rent until late 1990. 

He first tried to sell the Harwichport property on October 28,

1990, but when he could not sell it, he rented the property in

April 1991. Petitioner produced no advertisements indicating the

Harwichport property was available for rent in 1989 or 1990. 

During discovery, respondent requested the advertisements related
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to the sale or rental of the Harwichport property. Petitioner

responded with cancelled checks payable to various newspapers,

but he produced no advertisements. The only advertisements

produced at trial were obtained by respondent. We find that the

Harwichport property was not available for rent in 1990 and that

the property was not available for sale prior to October 28,

1990. We conclude that petitioner's activity on the Harwichport

property did not constitute a trade or business in 1990. 

Petitioner's level of activity and attempted disposition of the

Harwichport property indicate that petitioner prepared the

Harwichport property for resale during the year in issue. We

conclude that petitioner held the Harwichport property for the

production of income in 1990.

In general, deductions incurred for the production of income

under section 212 are subject to the same requirements and

restrictions that apply to a trade or business expense deduction

under section 162. Estate of Davis v. Commissioner, 79 T.C. 503,

507 (1982); Hubbart v. Commissioner, 4 T.C. 121, 124 (1944). In

order to be deductible, the expenditures must be ordinary and

necessary. Secs. 162(a), 212. Petitioner must prove a proximate

connection between the expenditure and the conduct of a profitseeking activity. Larrabee v. Commissioner, 33 T.C. 838, 841

(1960). In general, an expenditure made primarily to secure a

personal benefit is not deductible, sec. 262; whereas, a similar

expenditure may be deductible if made primarily for a profit-
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seeking purpose. See Interstate Drop Forge Co. v. Commissioner,

326 F.2d 743, 747 (7th Cir. 1964), affg. T.C. Memo. 1963-149.

Respondent argues that many of the expenditures deducted by

petitioner are not ordinary and necessary and are instead

personal expenses not related to the Harwichport property. The

taxpayer must prove that he is entitled to any claimed

deductions. Rule 142(a); New Colonial Ice Co. v. Helvering, 292

U.S. 435, 440 (1935); Welch v. Helvering, supra at 115. This

includes proof of the amount and purpose of the item claimed. 

Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam

540 F.2d 821 (5th Cir. 1976); sec. 1.6001-1(a), Income Tax Regs. 

A tax return is not proof of entitlement to a credit or deduction

claimed therein; a tax return merely sets forth the taxpayer's

claim. See Roberts v. Commissioner, 62 T.C. 834, 837 (1974);

Seaboard Commercial Corp. v. Commissioner, 28 T.C. 1034, 1051

(1957).

As a general rule, if the record provides sufficient

evidence that the taxpayer has incurred a deductible expense, but

the taxpayer is unable to substantiate adequately the amount, the

Court may estimate the amount of such expense and allow the

deduction to that extent bearing down heavily on the taxpayer

since the problem is of his own making. Cohan v. Commissioner,

39 F.2d 540, 543-544 (2d Cir. 1930). However, in order for the

Court to estimate the amount of an expense, we must have some

basis upon which an estimate may be made. Vanicek v.
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Commissioner, 85 T.C. 731, 743 (1985). Without such a basis, any

allowance would be unguided largesse. Williams v. United States,

245 F.2d 559, 560 (5th Cir. 1957).

Respondent argues that expenditures within the following

categories should be disallowed entirely, or in the alternative,

that the expenditures must be capitalized. Petitioner argues

that the same expenditures are currently deductible. The

disputed categories include: Travel expenses, utilities,

cellular phone service, cable service, advertisements, clock

repair, truck rental, real estate license, taxes, and

miscellaneous.

Travel Expenses

A deduction for travel expenses may be allowed where the

expenses are incurred while "away from home", are reasonable and

necessary, and bear a proximate relation to the profit-seeking

activity. Kinney v. Commissioner, 66 T.C. 122, 126 (1976);

McKinney v. Commissioner, T.C. Memo. 1981-181, affd. 732 F.2d 414

(10th Cir. 1983). Travel expenses must also be substantiated as

required by section 274(d).

Respondent disallowed an $832 deduction for meals, a $1,402

deduction for amounts paid to various oil companies, a $1,369

deduction for auto repairs, deductions of $119.50, $465, and $76

alleged to be for insurance on the Lincoln, and depreciation

deductions on the Lincoln.
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Petitioner testified that 90 percent of the Lincoln's use

related to the Harwichport property. He produced nothing to

corroborate that testimony, and he failed to explain how he

arrived at that figure. Petitioner produced a chart to show the

number of days he spent in Harwichport. Petitioner appears to

have constructed the chart using the receipts from purchases made

in Harwichport, assuming that he must have been in Harwichport

when he made the purchases. However, petitioner also appears to

contend that if there was no receipt, then he was not in

Harwichport, and he must have returned to Wallingford and

incurred travel expenses in doing so. Petitioner's contention is

a non sequitur that overstates the number of round trips from

Wallingford to Harwichport. It seems more likely that he was in

Harwichport on a number of days when he did not purchase

anything. As for meal expenses, petitioner used the number of

days shown on his chart along with a ballpark figure of $11 for

meals per day to calculate his meal expenses. Although it seems

clear that petitioner had some expenses for meals and travel

between Wallingford and Harwichport, he has failed to prove the

number of trips to Harwichport, the amount spent on meals and

travel, the percentage use of the Lincoln, and he failed to

maintain a log or other record as required by section 274(d). 

Accordingly, we sustain respondent's disallowance of the travel

expenses.
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Utilities, Cellular Phone Service, and Cable Service

Respondent has conceded some of the utility expenses but

argues that other utility expenses deducted by petitioner do not

relate to the Harwichport property. We conclude that the

payments to NE Tel, HarWater, Commonwealth Electric, and Hall Oil

relate to petitioner's income-producing activity and are either

capital expenditures or currently deductible as discussed below.

Respondent disallowed deductions for petitioner's cellular

phone and related service fees and charges. Petitioner merely

testified that he had the cellular phone installed in the

Lincoln. Petitioner deducted the cost of cable television

service at the Harwichport property, and respondent disallowed

that deduction. We find that the cellular phone and cable

television service were personal expenses and sustain

respondent's disallowance of these items.

Advertisements, Clock Repair, and Truck Rental

Petitioner deducted $262 for newspaper advertisements, and

respondent disallowed $114 of that deduction. The $114 in

dispute relates to advertisements allegedly placed prior to

October 28, 1990. Petitioner produced none of the alleged

newspaper advertisements placed prior to October 28, 1990. 

Petitioner testified that he advertised nothing but the

Harwichport property in newspapers during 1990, but respondent

produced an advertisement wherein petitioner had offered his

automobile for sale in the New York Times on October 28, 1990. 
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Petitioner has failed to prove that the $114 in dispute related

to advertisement of the Harwichport property. We sustain

respondent's disallowance of these items.

Respondent disallowed a $486 deduction for the overhaul of a

clock. Petitioner offered no evidence relating this item to the

Harwichport property. We sustain respondent's disallowance of

this item.

Respondent disallowed a $322 deduction for the rental of a

Ryder truck. Petitioner used the Ryder truck to deliver new

appliances to the Harwichport property. We find that the $322

truck rental expense must be capitalized as a preopening expense

as discussed below.

Real Estate License

Respondent disallowed the costs associated with the renewal

of petitioner's Connecticut real estate license. We find no

connection between petitioner's real estate license and his

activity on the Harwichport property. We sustain respondent's

disallowance of these items.

Taxes

 Respondent disallowed a $126 payment to the Town of Warren

for personal property tax on the value of the Lincoln; a $10

payment to the Wallingford Tax Office; and a $248 payment listed

under "90' Cap. Exp." Petitioner is entitled to deduct personal

property taxes associated with the Lincoln pursuant to section

164(a)(2). Petitioner offered no explanation for the $10 payment
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to the Wallingford Tax Office or the $248 payment, and we sustain

respondent's disallowance of these items.

Miscellaneous items

Respondent disallowed the following deductions that

petitioner characterized as supplies: $12 for books; $3,649 for

rugs; $883 for a television; $107 for furniture; $45 for sheets;

$90 for pillows; $658 for lamps; and $101 for linens. Petitioner

testified that he rented the Harwichport property furnished in

1991, but we do not consider this general testimony sufficient to

conclude that the items outlined above related to the production

of income from the Harwichport property in 1990. We sustain

respondent's disallowance of these items in 1990.

Depreciation of Capital Improvements

 Respondent disallowed depreciation deductions related to

$16,064 of capital improvements allegedly made in 1989. 

Petitioner argues that in 1989 he added $16,064 of capital

improvements to the Harwichport property, and he began

depreciating those improvements in 1990. The taxpayer must

establish the property's depreciable basis by showing the cost of

the property, its useful life, and the previously allowable

depreciation. E.g., Delsanter v. Commissioner, 28 T.C. 845, 863

(1957), affd. in part, revd. in part and remanded per curiam 267

F.2d 39 (6th Cir. 1959). Petitioner's father testified that the

cost of "some" of the 1989 improvements to the property was

"carried over" to 1990 and added to the depreciable basis of the
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Harwichport property. We have no way of sorting out petitioner's

1989 expenditures. We sustain respondent's determination.

Respondent argues that all of the 1990 expenditures must be

capitalized as preopening expenses. Startup expenses must be

capitalized pursuant to the preopening expense doctrine, and that

doctrine is applicable to section 212 activities as well as

section 162 activities. Hardy v. Commissioner, 93 T.C. 684, 688

(1989); Sorrell v. Commissioner, 882 F.2d 484 (11th Cir. 1989),

revg. T.C. Memo. 1987-351. Petitioner produced no advertisements

showing the Harwichport property for rent or sale. Respondent

produced newspaper advertisements published on or after October

28, 1990, showing the Harwichport property for sale. We have

found that the property was not available for sale prior to

October 28, 1990. We conclude that the expenses incurred prior

to October 28, 1990, are preopening expenses and must be

capitalized. Accordingly, they are not deductible currently

under section 212 but must be added to the basis of the property.

We next address the post-October 28, 1990, expenditures in

dispute. Capital expenditures add to the value or substantially

prolong the useful life of the property. Sec. 1.263(a)-1(b),

Income Tax Regs. Expenses for incidental repairs or maintenance

are deductible currently if they neither materially add to the

value of the property nor appreciably prolong the property's

useful life. Sec. 1.162-4, Income Tax Regs. The remaining

expenditures include: Plumbing expenses in the amounts of $12.56
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and $50.90 paid on November 5, 1990, and December 26, 1990,

respectively; and expenses for hardware items in the amounts of

$37.84 and $58.22 paid on November 5, 1990, and December 26,

1990, respectively. Petitioner paid $29 to the Town of

Harwichport on November 11, 1990, and we find that this payment

related to trash removal. We conclude that these remaining items

are deductible in 1990.

Respondent determined that petitioner is liable for a

penalty pursuant to section 6662(a). Section 6662(a) imposes a

penalty equal to 20 percent of the portion of the underpayment

which is attributable to negligence or disregard of rules or

regulations.

Negligence is defined as the lack of due care or the failure

to do what a prudent person would do under the circumstances. 

Marcello v. Commissioner, 380 F.2d 499, 506 (5th Cir. 1967),

affg. in part and remanding in part 43 T.C. 168 (1964); Neely v.

Commissioner, 85 T.C. 934, 937 (1985). Petitioner must prove

that the negligence penalty does not apply. Bixby v.

Commissioner, 58 T.C. 757, 791 (1972).

Petitioner contends that he and his father meticulously

prepared his Federal income tax return for 1990. Generally, the

duty of filing accurate returns cannot be avoided by placing

responsibility on an agent. Metra Chem. Corp. v. Commissioner,

88 T.C. 654, 662 (1987); Enoch v. Commissioner, 57 T.C. 781, 802

(1972). Petitioner cannot rely on the advice of his father to
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avoid the negligence penalty, because petitioner failed to show

that his father had any expertise in tax matters. See Allen v.

Commissioner, 925 F.2d 348, 353-354 (9th Cir. 1991), affg. 92

T.C. 1 (1989).

Failure to keep adequate records is some evidence of

negligence. Marcello v. Commissioner, supra at 507; Magnon v.

Commissioner, 73 T.C. 980, 1008 (1980). Petitioner's records

were incomplete and in disarray. At trial, petitioner offered

cancelled checks with few of the corresponding receipts. These

records provided very little, if any, indication of how the

cancelled checks related to the Harwichport property. For

example, the cancelled checks payable to the oil companies did

not indicate the items purchased, the dates of purchase, or where

the transactions took place.

The testimony of petitioner and his father gave the distinct

impression that petitioner kept no contemporaneous records of his

expenses. Petitioner's testimony that he advertised no property

in the New York Times other than the Harwichport property was

incorrect. Petitioner deducted items such as clock repair and

then offered nothing at trial that related the clock to the

Harwichport property. We conclude that the understatement is

attributable to negligence.

We have addressed the items still in dispute that we can

discern from the record. However, the record and the briefs in

this case leave much to be desired. If items remain, we expect
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the parties to resolve them in the context of a Rule 155

computation. To reflect the foregoing and the concessions by the

parties,

Decision will be entered

under Rule 155.