T.C. Summary Opinion 2019-6

UNITED STATES TAX COURT

HUIRONG ZHU AND TINA X. ZHOU, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 24875-16S. Filed April 2, 2019.

Huirong Zhu and Tina X. Zhou, pro sese.

Thomas R. Mackinson and Sandeep Singh, for respondent.

SUMMARY OPINION

LEYDEN, Special Trial Judge: This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect when the

petition was filed.

1

 Pursuant to section 7463(b), the decision to be entered is not

1All section references are to the Internal Revenue Code, as amended, in

(continued...)
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reviewable by any other court, and this opinion shall not be treated as precedent

for any other case.

In a notice of deficiency dated August 18, 2016, the Internal Revenue

Service (IRS)2

determined a deficiency in petitioners’ 2013 Federal income tax of

$5,753 and a section 6662(a) accuracy-related penalty of $1,150. The issues for

decision are whether petitioners are: (1) entitled to deduct $5,829 for

unreimbursed employee expenses with respect to Mr. Zhu’s job reported on

Schedule A, Itemized Deductions; (2) entitled to deduct $2,934 of other expenses

reported on the Schedule A; (3) entitled to deduct $16,598 of car expenses for

miles driven by Ms. Zhou with respect to either a website development business or

a consulting and property management business reported on a Schedule C, Profit

or Loss From Business; (4) entitled to deduct $1,896 for expenses related to the

use of petitioners’ home by Ms. Zhou with respect to either a website development

business or a consulting and property management business reported on a

1

(...continued)

effect at all relevant times, and all Rule references are to the Tax Court Rules of

Practice and Procedure, unless otherwise indicated.

2The Court uses the term “IRS” to refer to administrative actions taken

outside of these proceedings. The Court uses the term “respondent” to refer to the

Commissioner of Internal Revenue, who is the head of the IRS and is respondent

in this case, and to refer to actions taken in connection with this case.
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Schedule C or with respect to Mr. Zhu’s employment; (5) entitled to deduct

$14,416 for auto and travel expenses with respect to Ms. Zhou’s management of

petitioners’ investment properties reported on a Schedule E, Supplemental Income

and Loss; and (6) liable for the section 6662(a) accuracy-related penalty.

3

The Court holds that petitioners are: (1) not entitled to deduct $5,829 of

unreimbursed employee expenses with respect to Mr. Zhu’s job; (2) not entitled to

deduct $2,934 of other expenses; (3) not entitled to deduct $16,598 of car

expenses for miles driven by Ms. Zhou with respect to either a website

development business or a consulting and property management business; (4) not

entitled to deduct $1,896 for expenses related to the use of petitioners’ home by

Ms. Zhou with respect to either a website development business or a consulting

and property management business reported on a Schedule C or by Mr. Zhu with

3The other adjustments in the notice of deficiency to the retirement savings

credit, the child tax credit, and the additional child tax credit are computational. 

These adjustments will be resolved by the Court’s resolution of the issues for 2013

and will not be discussed further. The IRS also adjusted the deduction for

mortgage interest reported on the Schedule A, increasing it by $1,055, apparently

to reflect the disallowance of the mortgage interest deduction with respect to the

asserted business use of the home. The Court notes that the amount added to the

Schedule A deduction, however, is $14 less than the total amount of the mortgage

interest deduction listed on the Form 8829, Expenses for Business Use of Your

Home. Petitioners have not challenged the allowance of a mortgage interest

deduction of $10,801. Therefore, the issue is deemed conceded. See Rule

34(b)(4) (“Any issue not raised in the assignments of error shall be deemed to be

conceded.”).
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respect to his employment; (5) entitled to deduct $8,291.94 for auto and travel

expenses with respect to Ms. Zhou’s management of petitioners’ investment

properties; and (6) not liable for the section 6662(a) accuracy-related penalty.

Background

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

in California when they timely filed the petition.

I. Ms. Zhou’s Management of Petitioners’ Investment Properties

Ms. Zhou managed 11 investment properties that the petitioners owned.

During 2013 Ms. Zhou drove two cars--a Toyota Camry and a Toyota Sienna--the

following number of miles to manage nine of the investment properties:

Property Mileage

4008 English Oaks, Tracy, Cal. 345

2254 Van Gogh Ln., Stockton, Cal. 855

2842 Niobrara Ave., Stockton, Cal. 2,184

406 S. Sutter St., Stockton, Cal. 3,436

1431 Mesa Creek Dr., Patterson, Cal. 1,932

152 Daylilly Ln., Patterson, Cal. 1,203

10 O St., Lathrop, Cal. 1,760

16860 Locust Ave., Patterson, Cal. 924

1025 N. California St., Stockton, Cal. 2,037

 Total 14,676
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Ms. Zhou collected rents, carried out evictions, made minor repairs

(including drywall repairs), and coordinated hiring workers for large repairs as

part of managing the properties. Sometimes Ms. Zhou would visit more than one

property during a trip. Other times she would travel from petitioners’ home in

Mountain House, California, to one property, return home, and later, in the same

day, visit another property.

Two or three times a week Ms. Zhou logged her travel, including the

purpose and time spent for the trip, with respect to managing the investment

properties. She used a computer program to calculate the miles between

petitioners’ home and the investment property or properties. When the IRS

examiner asked petitioners for documentation of the miles Ms. Zhou drove,

petitioners consolidated the various contemporaneous logs Ms. Zhou maintained

into one log, which the parties stipulated.

II. Mr. Zhu’s Employment

During 2013 Mr. Zhu worked for Broadcom Corp. as a senior engineer. His

responsibilities included development and maintenance of a number of missioncritical enterprises and engineering applications for which he was required to be

available for technical support 24/7. Since 2010 Broadcom Corp. had allowed Mr.

Zhu to telecommute from his home in Mountain House three days a week. 
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Broadcom Corp. did not reimburse Mr. Zhu for any of petitioners’ household

expenses.

III. Petitioners’ 2013 Tax Return

Petitioners used TurboTax software to prepare and timely file their 2013

joint Federal income tax return. As relevant here petitioners claimed deductions

on a Schedule A for: (1) home mortgage interest of $9,746; (2) other expenses of

$2,934, which consisted of (a) $1,560 for telephone expenses, (b) car expenses of

$82 for a smog check, $277 for brake repair, and $316 for oil changes, (c) $103

for AAA membership, and (d) $596 for umbrella insurance; and (3) unreimbursed

employee expenses of $5,829, which consisted of (a) $34 for 60 miles driven for

business, (b) $59 for parking, fees, tolls, and transportation, (c) $328 for travel

expenses while away from home overnight, (d) $5,343 for other business

expenses, and (e) $65 for meals and entertainment.

4

Petitioners attached a Schedule C to their 2013 tax return. Ms. Zhou was

listed as the proprietor, and petitioners listed two businesses--website development

and consulting and property management. Petitioners did not report on Part I,

Income, of the Schedule C any gross receipts from either of the two listed

4The total meals and entertainment expenses listed on the Form 2106-EZ,

Unreimbursed Employee Business Expenses, were $129 before the 50% limitation

prescribed in sec. 274(n)(1).
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businesses. On the Schedule C petitioners claimed a deduction of $16,598 for car

and truck expenses and reported miles driven in connection with the two listed

businesses for two vehicles--12,078 for one vehicle and 16,898 for the other.

Petitioners did not identify the make, model, or year of either vehicle on the

Schedule C.

Petitioners attached Form 8829 to their 2013 tax return. On the Form 8829

petitioners reported that, out of their home’s total area of 4,050 square feet, Ms.

Zhou used 400 square feet, or 9.880%,5 regularly and exclusively for her website

development and consulting and property management businesses. Using the

instructions for Form 8829, petitioners calculated their deduction to be $1,896 and

claimed that deduction on the Schedule C for Ms. Zhou’s two listed businesses.

Petitioners filed a Schedule E with their 2013 tax return and reported total

auto and travel expenses of $14,416 for 11 properties.

Petitioners’ first language is not English, and Ms. Zhou has limited English

proficiency.

5The Form 8829 lists a rounded percentage. The actual percentage of the

business use of home is 9.876%.
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Discussion

I. Burden of Proof

Generally, the Commissioner’s determination of a deficiency is presumed

correct, and the taxpayer bears the burden of proving it incorrect. See Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Under section 7491(a)(1),

the burden of proof may shift to the Commissioner if the taxpayer introduces

credible evidence with respect to any relevant factual issue and meets other

requirements. Petitioners have not established that the section 7491(a)

requirements are met. The burden of proof remains with them.

II. Deductions

As the Court has observed in countless opinions, deductions are a matter of

legislative grace, and a taxpayer generally bears the burden of proving entitlement

to any claimed deduction. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503

U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). 

The taxpayer claiming a deduction on a Federal income tax return must

demonstrate that the deduction is allowable pursuant to some statutory provision

and must further substantiate that the expense to which the deduction relates has

been paid or incurred. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90
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(1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); Meneguzzo v.

Commissioner, 43 T.C. 824, 831-832 (1965); sec. 1.6001-1(a), Income Tax Regs.

A taxpayer may deduct ordinary and necessary expenses paid in connection

with operating a trade or business. Sec. 162(a); Boyd v. Commissioner, 122 T.C.

305, 313 (2004). To be ordinary the expense must be of a common or frequent

occurrence in the type of business involved. Deputy v. du Pont, 308 U.S. 488, 495

(1940). To be necessary the expense must be appropriate and helpful to the

taxpayer’s business. Welch v. Helvering, 290 U.S. at 113. The expenditure must

be “directly connected with or pertaining to the taxpayer’s trade or business”. Sec.

1.162-1(a), Income Tax Regs. If an expense is connected with personal, living, or

family expenses, however, it is not allowed as a deduction. Sec. 262(a).

Generally, the performance of services as an employee constitutes a trade or

business. O’Malley v. Commissioner, 91 T.C. 352, 363-364 (1988); Primuth v.

Commissioner, 54 T.C. 374, 377 (1970). If as a condition of employment an

employee is required to incur certain expenses, then the employee is entitled to

deduct those expenses to the extent they are not subject to reimbursement. See

Lucas v. Commissioner, 79 T.C. 1, 6-7 (1982); Fountain v. Commissioner, 59 T.C.

696, 708 (1973); Podems v. Commissioner, 24 T.C. 21, 22-23 (1955).
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As a general rule, if a taxpayer establishes that he or she incurred a trade or

business expense contemplated by section 162(a) but is unable to adequately

substantiate the precise amount, the Court may estimate the amount and allow a

deduction to that extent. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.

1930). In order for the Court to estimate the amount of an expense there must be

some basis upon which an estimate may be made. Vanicek v. Commissioner, 85

T.C. 731, 742-743 (1985). Otherwise, an allowance would amount to unguided

largesse. Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957).

However, section 274 overrides the Cohan rule with regard to certain

expenses, including travel and certain listed property,

6

 which if otherwise

allowable are subject to strict substantiation rules. See sec. 274(d); Sanford v.

Commissioner, 50 T.C. 823, 827 (1968), aff’d per curiam, 412 F.2d 201 (2d Cir.

1969); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov.

6, 1985). For expenses relating to passenger automobiles, a taxpayer must

substantiate with adequate records or sufficient evidence corroborating his or her

own statement: (1) the amount of each separate expense; (2) the mileage for each

business use of the passenger automobile and the total mileage for all purposes

during the taxable period; (3) the date of the business use; and (4) the business

6Listed property includes any “passenger automobile”. Sec. 280F(d)(4).
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purpose of the use. See sec. 1.274-5T(b)(6), Temporary Income Tax Regs., 50

Fed. Reg. 46016 (Nov. 6, 1985). Substantiation by adequate records generally

requires the taxpayer to “maintain an account book, diary, log, statement of

expense, trip sheets, or similar record” prepared contemporaneously with the use

of the passenger automobile as well as documentary evidence of the individual,

actual expenses. Id. para. (c)(2), 50 Fed. Reg. 46017.

In lieu of substantiating actual passenger automobile expenses, a taxpayer

may calculate them by using the standard mileage rate established by the

Commissioner. See sec. 1.274-5(j)(2), Income Tax Regs. The taxpayer may base

the deduction on either actual expenses or standard mileage, not both. Nash v.

Commissioner, 60 T.C. 503, 520 (1973). If the taxpayer elects the actual expense

method, he must substantiate his business use percentage for the passenger

automobile. Larson v. Commissioner, T.C. Memo. 2008-187, 2008 Tax Ct. Memo

LEXIS 182, at *12; sec. 1.274-5T(d)(2)(i), Temporary Income Tax Regs., 50 Fed.

Reg. 46025 (Nov. 6, 1985).

A. Unreimbursed Employee Expenses

Petitioners have proven that Mr. Zhu’s employer did not reimburse him for

certain expenses. Even assuming without finding that Mr. Zhu’s employer

required him to incur the reported expenses, petitioners have failed to provide the
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required documentation to substantiate the reported $5,829 of unreimbursed

employee expenses.

7

 The Court concludes that petitioners are not entitled to

deduct $5,829 for unreimbursed employee expenses.

B. Other Expenses

Petitioners did not provide any evidence to prove that the deduction claimed

for other expenses of $2,934 was for other than personal expenses.

8

 Further,

petitioners did not provide any documentation to substantiate these expenses. The

Court concludes that petitioners are not entitled to deduct $2,934 of other

expenses.

C. Schedule C Car and Truck Expenses

Ms. Zhou testified that she was not engaged in a website development

business during 2013. Ms. Zhou did not testify that she was engaged in a

consulting and property management business during 2013 or provide any other

evidence to prove she was engaged in that business during 2013. Ms. Zhou did

7These expenses consisted of: (a) $34 for 60 business miles driven; (b) $59

for parking, fees, tolls, and transportation; (c) $328 for travel expenses while away

from home overnight; (d) $5,343 for other business expenses; and (e) $65 for

meals and entertainment. 

8These expenses consisted of: (a) $1,560 for telephone expenses; (b) car

expenses consisting of $82 for a smog check, $277 for brake repair, and $316 for

oil changes; (c) $103 for AAA membership; and (d) $596 for umbrella insurance.
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not explain why she listed on the Schedule C two businesses in which she did not

engage during 2013.

Ms. Zhou testified that petitioners reported car and truck expenses on the

Schedule C for the two listed businesses because the TurboTax software

petitioners used to prepare the 2013 tax return would not allow her to report

mileage for two cars on her Schedule E. The record does not bear this out.

On Schedule E, as discussed below, petitioners were required only to report

a dollar figure for auto and travel expenses for each property. That schedule does

not require petitioners to delineate the make of car whose use generated that

expense. Neither the stipulations and exhibits nor the testimony of petitioners

proves that Ms. Zhou was engaged in the business of either website development

or consulting and property management during 2013. Further, the record does not

support the claimed deduction of $16,598 for car and truck expenses.

The Court concludes that the car and truck expenses reported on the

Schedule C were not paid or incurred for either of the two listed businesses.

Therefore, petitioners are not entitled to deduct those car and truck expenses

reported on Schedule C.
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D. Business Use of Home

Petitioners also claimed a deduction for business use of their home by Ms.

Zhou with respect to the Schedule C businesses. Section 280A(c)(1)(A) allows a

taxpayer to deduct expenses for the business use of his or her residence. The

expenses allocable to a home office may be deducted only if a portion of a

residence is regularly and exclusively used as the principal place of business for

any of the taxpayer’s trades or businesses. Id. Ms. Zhou was not engaged in

either of the two listed businesses--a website development business or a consulting

and property management business--during 2013.

At trial Mr. Zhu testified that he had a home office for his work as an

employee. However, an employee may not report the business use of home on

Form 8829. See 2013 Instructions for Form 8829 (“Do not use Form 8829 in the

following situations. * * * You are claiming expenses for business use of your

home as an employee[.]”); see also 2013 Pub. 587, Business Use of Your Home

21. Petitioners did not show that space in their home was used exclusively by Mr.

Zhu for his work other than as an employee. The Court concludes that petitioners

are not entitled to deduct $1,896 for the business use of their home.
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III. Auto and Travel Expense for Investment Properties

The parties do not dispute that the expenses reported by petitioners as to the

investment properties were subject to the passive loss rules. The only issue in

dispute is whether petitioners have substantiated the reported mileage driven by

Ms. Zhou in connection with the management of the properties.

Petitioners have proven that Ms. Zhou maintained contemporaneous records

of the miles she drove to and from the various investment properties. The log that

consolidates the various records meets the requirements of section 274. The Court

concludes that petitioners have proven that Ms. Zhou drove 14,676 miles in

connection with managing their investment properties. Applying the standard

mileage rate for 2013, 56.5 cents,

9

 the Court concludes that petitioners are entitled

to deduct $8,291.94 for auto and travel expenses with respect to their investment

properties for 2013.

IV. Accuracy-Related Penalty

Respondent determined an accuracy-related penalty for 2013 because

petitioners’ underpayment was due to a substantial understatement of income tax. 

See sec. 6662(a), (b)(2). A taxpayer may be liable for a 20% accuracy-related

penalty on the portion of an underpayment of income tax attributable to a

9See Notice 2012-72, sec. 2, 2012-50 I.R.B. 673, 673.
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substantial understatement of income tax. Id. The Commissioner bears the burden

of production with respect to a section 6662 accuracy-related penalty in any court

proceeding with respect to the liability of any individual. Sec. 7491(c).

Section 6751(b)(1) provides that, subject to certain exceptions in section

6751(b)(2), no penalty shall be assessed unless the initial determination of

assessment is personally approved in writing by the immediate supervisor of the

individual making the determination or such higher level official as the

Commissioner may designate. Written approval of the initial penalty

determination under section 6751(b)(1) must be obtained no later than the date the

notice of deficiency is issued or the date the Commissioner files an answer or

amended answer asserting the penalty. Chai v. Commissioner, 851 F.3d 190, 221

(2d Cir. 2017), aff’g in part, rev’g in part T.C. Memo. 2015-42; see also Graev v.

Commissioner, 149 T.C. 485, 493 (2017), supplementing and overruling in part

147 T.C. 460 (2016). Compliance with section 6751(b)(1) is part of the

Commissioner’s burden of production in any deficiency case in which a penalty

subject to section 6751(b)(1) is asserted. Chai v. Commissioner, 851 F.3d at 221.

The section 6662(a) accuracy-related penalty determined in the notice of

deficiency was properly approved as required by section 6751(b)(1). The record

includes a copy of a Civil Penalty Approval Form approving imposition of an
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accuracy-related penalty for a substantial understatement of income tax against

petitioners for 2013 and signed by the IRS tax examiner’s group manager. 

Respondent has proven sufficient facts to satisfy the burden of production as to

managerial approval for imposition of the accuracy-related penalty for a

substantial understatement.

Once the Commissioner meets his burden of production, the taxpayer must

produce persuasive evidence that the Commissioner’s determination is incorrect. 

Rule 142(a); see Higbee v. Commissioner, 116 T.C. 438, 447 (2001). The

taxpayer may meet this burden by proving that he or she acted with reasonable

cause and in good faith with respect to the underpayment. See sec. 6664(c)(1);

Higbee v. Commissioner, 116 T.C. at 447; sec. 1.6664-4(b)(1), Income Tax Regs. 

Petitioners provided persuasive evidence that they acted with reasonable cause and

in good faith with respect to the underpayment of tax for 2013.

A penalty will not be imposed under section 6662(a) if a taxpayer

establishes that he or she acted with reasonable cause and in good faith. Sec.

6664(c)(1). Circumstances that indicate reasonable cause and good faith include

reliance on the advice of a tax professional or an honest misunderstanding of the

law that is reasonable in the light of all the facts and circumstances. Sec. 1.6664-

4(b)(1), Income Tax Regs.; see Higbee v. Commissioner, 116 T.C. at 449. 
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Relevant facts and circumstances for the Court to consider include the knowledge

and experience of the taxpayer. Sec. 1.6664-4(b)(1), Income Tax Regs.

During the trial Mr. Zhu repeatedly spoke in Chinese to Ms. Zhou and

stated that she did not understand English. Although the Court was satisfied that

she understood its questions, the Court recognizes that Ms. Zhou is limited

English proficient and that English is not Mr. Zhu’s or Ms. Zhou’s first language. 

Both Mr. Zhu and Ms. Zhou credibly testified that they tried to fit their records

into the TurboTax software. The Court believed both petitioners made honest and

reasonable efforts to determine their 2013 Federal income tax liability and that the

understatement of income tax resulted from an honest misunderstanding of law

that is reasonable in the light of their limited English language proficiency. 

Therefore, the Court concludes that petitioners have proven they acted with

reasonable cause and in good faith and are not liable for the accuracy-related

penalty for 2013.

The Court has considered all of the parties’ arguments, and, to the extent not

addressed herein, the Court concludes that they are moot, irrelevant, or without

merit.
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To reflect the foregoing,

Decision will be entered under

Rule 155.