T.C. Summary Opinion 2021-38

UNITED STATES TAX COURT

HOWARD E. STEELE AND TRACY M. STEELE, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6646-19S. Filed November 17, 2021.

Howard E. Steele and Tracy M. Steele, pro sese.

Rubinder K. Bal, for respondent.

SUMMARY OPINION

COLVIN, Judge: This case was heard pursuant to the provisions of section 

74631 of the Code in effect when the petition was filed. Pursuant to section 

1 Petitioners resided in Georgia when they filed their petition. Section

references are to the Internal Revenue Code (Code) in effect at all relevant times. 

Rule references are to the Tax Court Rules of Practice and Procedure.

Served 11/17/21
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7463(b), the decision to be entered is not reviewable by any other court, and this 

opinion shall not be treated as precedent for any other case.

Respondent determined that petitioners have Federal income tax deficiencies 

of $37,093 and $29,669 and are liable for accuracy-related penalties under section 

6662 of $7,419 and $5,934 for 2015 and 2016 (years at issue), respectively. After 

concessions appearing in the record, we decide the following issues.

1. Whether or to what extent petitioners may deduct supply expenses for 

2015 and car and truck expenses (vehicle expenses) for 2015 and 2016 for 

petitioner husband’s job as a self-employed private investigator. We hold they 

may deduct those expenses to the extent stated below.

2. Whether petitioners may deduct expenses for repairs on a rental property 

for 2015 in amounts greater than respondent determined. We hold that they may 

not.

3. Whether petitioners have substantiated a greater amount of capital 

expenses for their rental property than respondent determined. We hold that they 

have to the extent stated below.
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Background

A. Petitioner Husband’s Work

Petitioner husband is a self-employed private investigator. His work for

clients includes activities such as surveillance and searching site surveys and court 

and asset records.

1. Petitioner Husband’s Travel

Petitioner husband drove a Nissan Altima to various locations during the 

years at issue while performing services for his clients. Before filing the petition 

with the Court, petitioner husband created sample mileage logs (at a time he did 

not recall) showing where he traveled for work during December 2015 and 2016. 

The sample logs provided city names but did not include addresses or dates other 

than “December 2015” and “December 2016”. 

In October 2020, after they filed the petition, petitioners provided 

respondent a 40-page, complete mileage log, which petitioner husband created by 

reviewing case files and emails. The complete logs provide detailed information 

including dates, location names, addresses of where petitioner husband left and 

arrived, and distance traveled. According to the log, he drove many times to and 

from a post office, client meetings, surveillance locations, courthouses, police 

stations, and his home. 
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The complete mileage logs contain accurate, obviously inaccurate, and 

vague entries. For example, some entries vaguely report “Atlanta Metro Area” or 

“Atlanta Area” as petitioner husband’s destination. Several entries inaccurately 

state that the distance traveled to and from the same locations varied significantly. 

For example, one entry states that petitioner husband traveled 13 miles to a 

destination and then 126 miles back to the starting point. There are also entries 

stating that he visited courthouses on Sundays when the buildings were closed. 

Lastly, petitioners included two entries to a location in Florida where petitioners 

anticipate building a home (and moving petitioner husband’s home office).

2. Petitioner Husband’s Home Office

Petitioner husband had an office in petitioners’ primary residence where he 

met with clients. Furnishings in the office include a desk, a computer, a printer, a 

fan, chairs, files, and shelves. Clients have access to a bathroom adjoining the 

office that is also used by petitioners and their personal guests. When petitioner 

husband buys office supplies and personal items at the same time on the same 

credit cards, he circles the business items on the receipt within 24 hours of the 

purchase. For example, a Target receipt dated June 21, 2015, shows that 

petitioners spent $149, but only one item, a $16 “organizer”, is circled. In a supply 
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expense spreadsheet provided by petitioners, only the $16 organizer is listed as an 

expense from that Target trip.

B. Petitioners’ Rental Property

Petitioners bought a residential property in Dacula, Georgia, for $140,000 

(rental property) in 2003. They began to rent out the property in 2008. At a time 

unspecified in the record, petitioners installed new countertops, carpet, and 

hardwood and updated the deck and patio in the rental property. Petitioners 

charged the costs of these items to a credit card, but they provided no credit card 

statements or bank statements substantiating these purchases. Petitioners sold the 

rental property on June 18, 2015, for $154,000.

Before trial, petitioners provided a spreadsheet and various receipts 

regarding the changes they made to the rental property. Some of the receipts, 

though, show that the items, such as a new washer and dryer, a toilet, a water 

heater, and a termite inspection, were all delivered to or performed at petitioners’ 

primary residence. Additionally, a receipt for an air conditioning unit shows the 

repair was made in December 2015, six months after petitioners sold the rental 

property.
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C. Petitioners’ 2015 and 2016 Tax Returns

For 2015 on their Schedule C, Profit or Loss From Business, for petitioner 

husband’s work as a private investigator, petitioners deducted $8,083 for supplies 

and $9,200 for vehicle expenses. Also for 2015 petitioners reported on their 

Schedule E, Supplemental Income and Loss, that they had repair expenses of 

$18,577 on the rental property and a loss of $765 on the sale of that property. 

Petitioners deducted $6,480 for vehicle expenses on their Schedule C for 2016.

Discussion

We will first discuss the burden of proof and then decide whether (or to what 

extent) petitioners may deduct: (1) 2015 supply expenses, (2) 2015 and 2016 

vehicle expenses, and (3) 2015 repair expenses. Lastly, we will decide whether 

petitioners have substantiated a greater amount of capital expenses for their rental 

property than respondent determined and the amount of that gain or loss. 

A. Burden of Proof

The Commissioner’s determination in a notice of deficiency is generally 

presumed correct, and the taxpayer bears the burden of proving otherwise. Rule 

142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v. 

Helvering, 290 U.S. 111, 115 (1933). However, the burden of proof may shift to 

the Commissioner if the taxpayer complies with all substantiation requirements in 
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the Code, introduces credible evidence with respect to factual issues relevant to 

ascertaining liability, and cooperates with reasonable requests by the 

Commissioner for information, documents, and meetings. Sec. 7491(a)(1) and (2). 

Petitioners do not contend that they have satisfied the requirements of section 7491 

for shifting the burden of proof. See Rule 142(a)(2). Thus, the burden of proof for 

all factual issues remains with petitioners.

B. Petitioners’ Substantiation

Petitioners contend that they are entitled to deduct various expenses reported

on their tax returns for the years at issue. A taxpayer is required to maintain 

records sufficient to enable the Commissioner to correctly determine the taxpayer’s 

tax liability. See sec. 6001; Higbee v. Commissioner, 116 T.C. 438, 440 (2001); 

sec. 1.6001-1(a), Income Tax Regs. In addition, the taxpayer bears the burden of 

substantiating the amount and purpose of the claimed deduction. Higbee v. 

Commissioner, 116 T.C. at 440; Hradesky v. Commissioner, 65 T.C. 87, 89-90 

(1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976).

Other than the instances mentioned below, petitioner husband’s testimony 

did not add additional substantiation for the amounts petitioners deducted on their 

2015 and 2016 tax returns because his testimony did not provide any specific 

amounts, dates, or details regarding items petitioners purchased. 
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1. Whether Petitioners May Deduct Supply Expenses for 2015

Petitioners deducted $8,083 for supplies on their 2015 tax return. 

Respondent contends that petitioners may deduct only $3,470. Petitioners appear 

to have conceded $1,313 of the amount they deducted and now contend that they 

may deduct $6,770. We conclude that petitioners may deduct $3,781 for supply 

expenses for 2015. 

Petitioners provided receipts and a corresponding spreadsheet listing the 

items purchased, the dates of purchase, the vendors, the business purpose, and the 

costs of the items. Respondent contends that the receipts and the spreadsheet are 

insufficient to establish that petitioners incurred expenses for supplies greater than 

$3,740. Respondent contends that many of the receipts are illegible, some of the 

supplies were not used exclusively for petitioner husband’s business, and 

petitioners comingled personal and business items by purchasing them at the same 

time with the same form of payment (i.e., the same credit card).

We agree with respondent that many of the receipts are illegible. 

Additionally, some receipts are listed on the spreadsheet twice, are undated, or do 

not identify either the items purchased or the vendor. As a result, $2,619 of the 

supply expenses are not sufficiently substantiated.
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Petitioners deducted $370 for a light fixture placed in the bathroom 

adjoining petitioner husband’s home office. Generally, under section 162(a), a 

taxpayer may deduct ordinary and necessary expenses incurred in carrying on a 

trade or business. Under section 262, however, items bought for personal, living, 

or family use generally cannot be deducted. Items bought for a business section of 

a residence cannot be deducted if that area is not exclusively used for the business 

(i.e., the area is for both personal and business use). See Sam Goldberger, Inc. v. 

Commissioner, 88 T.C. 1532, 1557 (1987). Petitioner husband testified that the 

bathroom was used not only by his clients but also by him when he was not 

working, his wife, and their personal guests. Thus, petitioners may not deduct the 

$370 they paid for the light fixture. See id. 

Regarding the purchases respondent contends were comingled, we conclude 

that petitioners provided sufficient information to identify business purchases. At 

trial petitioner husband testified that he drew a circle on each receipt around the 

items he used for business within 24 hours of the purchase. His testimony is 

supported by the spreadsheet and legible receipts that have items circled that are 

listed on the spreadsheet. For example, during the June 21, 2015, Target trip, 

petitioners spent $149 but only the $16 organizer is circled on the receipt and, 
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likewise, is the only item and amount appearing on the spreadsheet from that 

shopping trip.

Respondent points out that petitioners deducted the costs of shelving, a 

phone charger, and a fan, and argues that these items could have been bought for 

personal rather than business use. However, we find credible petitioner husband’s

testimony that he purchased these items for his business. On the basis of the

foregoing, we conclude that petitioners may deduct $3,781 in supply expenses for

2015.2

2. Whether Petitioners May Deduct Vehicle Expenses for 2015 and 2016

Petitioners deducted $9,200 and $6,480 for vehicle expenses, respectively, 

on their 2015 and 2016 Schedules C. Petitioners contend that these expenses 

resulted from petitioner husband’s travel to various locations to perform 

investigative services. Respondent contends that petitioners have not sufficiently 

substantiated petitioner husband’s vehicle expenses and the deductions for the

vehicle expenses reported on their Schedules C should be denied in full. 

Taxpayers are subject to heightened substantiation requirements for vehicle 

use expenses. See secs. 274(d)(4), 280F(d)(4)(A)(i). As applicable to vehicle 

2 Respondent raises an argument that an expense for chairs and a table must 

be capitalized per sec. 1.263(a)-2(d)(1), Income Tax Regs. We need not address 

this argument because the apparent receipt for the chairs and table was illegible.
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expenses, section 274(d) requires the taxpayer to substantiate the mileage, and the 

time, place, and business purpose of the use. In lieu of substantiating actual 

expenditures relating to the business use of a vehicle, a taxpayer may use a 

standard mileage rate established by the IRS. See sec. 1.274-5(j)(2), Income Tax 

Regs. A taxpayer who uses the standard mileage rate must still establish the actual 

business mileage, the time, and the business purpose of each use. Id.

The sample mileage logs provided by petitioners do not provide sufficient 

information to meet the requirements of section 274(d). The complete logs have 

some entries which sufficiently substantiate the mileage, time and place, and the 

business purpose for each trip. However, other entries in the complete logs contain 

errors such as vague descriptions of where petitioner husband drove and inaccurate 

distances. In addition the complete logs include mileage for petitioner husband’s 

drives to Florida, which were not solely for a business purpose.

We conclude that petitioners have sufficiently substantiated that petitioner 

husband drove 7,739 and 3,481 miles for business in 2015 and 2016, respectively. 

As a result, petitioners may deduct vehicle expenses of $4,450 for 2015 and $1,880 

for 2016. See Notice 2014-79, sec. 3, 2014-53 I.R.B. 1001, 1001 ($0.575 per mile 

for 2015); Notice 2016-1, sec. 3, 2016-2 I.R.B. 265, 265 ($0.54 per mile for 2016).
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3. Whether Petitioners May Deduct Repair Expenses for 2015

Petitioners deducted $18,577 in repair expenses on their rental property for 

2015. Petitioners now contend that they incurred repair expenses totaling $19,007. 

Respondent contends that petitioners may deduct only $2,806 for repair expenses 

and must capitalize $13,705 of the reported repair expenses. Because the record 

does not show that petitioners spent more than $2,806 in repair expenses in 2015, 

we agree with respondent that petitioners may deduct only $2,806 for repair 

expenses and must capitalize $13,705 of the reported expenses. 

To decide the amount of deductible expenses, we must decide: (1) the 

amount of claimed repair expenses petitioners have substantiated through 

documentation or testimony and (2) which of those expenses may be deducted as 

repairs. We hold that $13,705 of the substantiated, nondeductible expenses are 

capital expenses (and, thus, are included in basis for purposes of computing gain or 

loss when petitioners sold the property in 2015). See sec. 263; see also sec. 

1016(a); sec. 1.1016-2(a), Income Tax Regs.

a. Whether Petitioners’ Repair Expenses Were Sufficiently

Substantiated

To show the amount they spent on repairs, petitioners provided receipts with 

a corresponding spreadsheet, which listed the date of purchase, vendor, items 

purchased, and amount. Some of the receipts are illegible or undated, and several 
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of the items on the spreadsheet were listed twice, or no corresponding receipt or 

testimony was provided. Additionally, included in the receipts was an undated 

quote for patio work for $2,500. However, nothing in the record, including 

petitioner husband’s testimony, suggests petitioners hired the company or had the 

quoted work performed; consequently, the undated quote is insufficient to 

substantiate patio repairs for 2015.

Several of the listed expenses appear to be for items for petitioners’ primary 

residence and not for the rental property. For example, several items were 

delivered to or performed (not just billed) at petitioners’ personal residence,

including a new washer and dryer, a toilet, a water heater, and termite inspection. 

Petitioners also included a receipt for repairs on an air conditioner; however the 

receipt is dated December 2015, six months after petitioners sold the rental 

property. Because we cannot confirm these expenses were incurred for the rental 

property in 2015, petitioners have not sufficiently substantiated them. 

b. Whether the Substantiated Expenses Are Deductible

While petitioners substantiated the remaining expenses listed on the 

spreadsheet through receipts or testimony, many were not for repairs. Generally, 

taxpayers may deduct ordinary and necessary expenses incurred for maintenance 

of property held to conduct a trade or business or for the production of income. 
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Secs. 162, 212. Repair expenses may be deducted if the repairs are made to restore 

property to a sound state or mend it, with the purpose of keeping the property in an 

ordinarily efficient operating condition. Ill. Merchs. Tr. Co. v. Commissioner, 4 

B.T.A. 103, 106 (1926). Expenses for replacements, alterations, improvements, or 

additions that prolong a property’s life, increase its value, or make it adaptable to a 

different use are treated as additions to capital (i.e., capital expenses) and may not 

be deducted. Sec. 263; Lychuk v. Commissioner, 116 T.C. 374, 385-386 (2001); 

Niv v. Commissioner, T.C. Memo. 2013-82, at *19.

We conclude from the record that many of the expenses are capital expenses 

rather than repair expenses. It appears that several expenses including new granite 

countertops, carpet, ceiling fans, a light fixture, paint supplies, and $5,000 spent on 

the patio to replace broken plywood, install synthetic roofing felt, new shingles, a 

vent, and a metal drip, alter and improve the property, and do not merely restore its 

prior condition. Thus, the above are not deductible as repair expenses. See

Lychuk v. Commissioner, 116 T.C. at 385-386; Niv v. Commissioner, at *19. In 

all, $13,705 of the expenses are not deductible but are capital expenses and 

includible in petitioners’ basis in their rental house.

Petitioners also included in the repairs spreadsheet expenses for insurance, 

homeowners associate fees, and utilities, which are neither deductible repair
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expenses nor capital expenses. The remaining items on the spreadsheet do not 

exceed $2,806 and, because respondent has conceded that petitioners may deduct 

this amount, petitioners may not deduct for repairs for 2015 more than the $2,806 

respondent conceded.

4. Whether Petitioners Have Capital Gains on the Rental Property

In their 2015 tax return petitioners reported that their adjusted basis in the 

rental property at the time of the sale was $154,765 and that they had a loss of 

$765. Petitioners now contend their adjusted basis was $164,387. Respondent 

contends that petitioners’ adjusted basis was $120,084 and that petitioners had a 

gain of $24,531.3

 Petitioners claim that they made several improvements to the 

property before 2015 which increased their basis to an amount in excess of what 

respondent contended. After a review of the record, including petitioner husband’s 

testimony, we conclude that petitioners substantiated $7,500 of their claimed pre2015 improvements.

Taxpayers must recognize gain when they sell property for more than its 

adjusted basis. Sec. 1001(a); sec. 1.61-6(a), Income Tax Regs. Taxpayers may 

3 In the notice of deficiency respondent determined that petitioners had

$24,346 in capital gains. Respondent now concedes a $185 depreciation 

adjustment in the notice. On the basis of that concession, respondent now contends 

petitioners had $24,531 ($24,346 plus $185) in capital gains from the sale of the 

rental property. 
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increase their adjusted basis in property for costs they incur to improve the 

property, see sec. 1016(a); sec. 1.1016-2(a), Income Tax Regs., but they generally 

bear the burden of proving basis increases they claim, Rule 142(a). Regarding 

capital expenses, the Tax Court may make an estimate of the total expenses, see

Cohan v. Commissioner, 39 F.2d 540, 544 (2nd Cir. 1930), but “we must have 

some basis upon which an estimate may be made”, see Polyak v. Commissioner, 

94 T.C. 337, 345-346 (1990). 

At trial petitioner husband testified that the costs for hardwood floors and 

the air conditioner were approximately $2,500 and $5,000, respectively. On the 

basis of this record petitioners may capitalize an additional $7,500 in capital 

expenses on the rental property.

Petitioner husband also testified about other tasks performed on the rental 

property before 2015, but he provided neither a price estimate for those items nor 

documentation. Thus, there is no basis upon which we can make an estimate, and 

petitioners cannot deduct further capital expenses on the rental property. Overall, 

the parties shall increase the adjusted basis calculations by $7,500 to account for 

the hardwood floor installation and the air conditioner and $13,705 for the 2015 

expenses respondent conceded. 
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To reflect the foregoing,

Decision will be entered under 

Rule 155.