T.C. Summary Opinion 2004-93

UNITED STATES TAX COURT

MARCELO E. FERRADA AND GLORIA D. FERRADA, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 3084-03S. Filed July 19, 2004.

Marcelo E. and Gloria D. Ferrada, pro sese.

W. Lance Stodghill, for respondent.

 DEAN, Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed. Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the year in issue. The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority. 
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Respondent determined for 1998 a deficiency in petitioners'

Federal income tax of $10,338 and an addition to tax under

section 6651(a)(1) of $2,434.50. The issues for decision are: 

(1) Whether petitioners are entitled to deductions on Schedule C,

Profit or Loss From Business, in excess of those allowed by

respondent; and (2) whether petitioners are subject to an

addition to tax under section 6651(a)(1) for failure to file

timely their 1998 Federal income tax return.

Background

The stipulation of facts and the exhibits received into

evidence are incorporated herein by reference. Petitioners

resided in Houston, Texas, at the time the petition was filed.

During the year in issue, Mr. Ferrada was employed as a

contractor in the aviation industry. Petitioners also operated a

food stand. 

1. Mr. Ferrada's Employment

In October 1997 petitioners and their son lived in Tucson,

Arizona. At that time, Mr. Ferrada was hired by Global Technical

Services (GTS), an Air Force subcontractor, for a position of

indefinite length in Lake Charles, Louisiana. In December 1997

GTS was replaced as a subcontractor by Air Mate. Mr. Ferrada

continued to work in the same position for Air Mate. In February 

1998 Mr. Ferrada began working for Hi-Tec Associates, Inc. (HiTec). He continued working on the same project as before but in
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a different department. His position also changed from quality

control to manufacturing engineer. The terms of Mr. Ferrada's

employment remained open-ended.

At the end of 1997, Mr. Ferrada moved his wife and son to

Del Rio, Texas. Mrs. Ferrada and their son lived rent-free in a

mobile trailer owned by Mrs. Ferrada's parents. Mr. Ferrada

continued to work in Lake Charles. In December 1998,

anticipating long-term employment, Mr. Ferrada moved his family

to Lake Charles. He continued to work on the project through

1999. 

2. Concession Stand

In May 1998 petitioners purchased a concession stand for

approximately $4,000. During 1998, petitioners had gross

receipts of $710 from the concession stand which they did not

report on their tax return. They also incurred $2,315 of

expenses.

Petitioners' Individual Income Tax Return for 1998

On April 14, 2000, petitioners jointly filed with the

Internal Revenue Service a Form 1040, U.S. Individual Income Tax

Return, for tax year 1998. Attached to the return was a Schedule

A, Itemized Deductions, and a Schedule C. The Schedule C

reported zero business income, expenses of $48,612, and a net

loss of $48,612.
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Respondent issued a statutory notice of deficiency to

petitioners in which he disallowed certain deductions claimed on

the Schedule C for lack of substantiation. An automatic

computational adjustment was also made to petitioners' claimed

Schedule A medical expense deduction due solely to the increase

in adjusted gross income and a corresponding increase in the

threshold for the medical expense deduction. 

Petitioners' Schedule C Expenses

a. Advertising

Mr. Ferrada invented a flashlight holder. On their Schedule

C, petitioners claimed advertising expenses of $1,500 pertaining

to the flashlight holder. Petitioners did not have any receipts

for the advertising expenses.

b. Car and Truck Expenses

Petitioners deducted car and truck expenses of $6,037. 

This amount comprises $4,685 petitioners paid to purchase a 1987

Saab automobile and $1,352 they paid for auto repair and

maintenance for which they provided receipts. Mr. Ferrada

purchased the Saab because Mrs. Ferrada needed the use of their

Chevy Lumina.

c. Insurance

Petitioners deducted insurance expenses of $1,270. 

Petitioners' receipts show that $959 of this amount was paid for

insurance on the Saab petitioners purchased as well as the Chevy
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Lumina. It is unclear from the record on what the remaining $311

was spent. 

d. Office Expense

 Petitioners deducted office expenses of $2,099. Receipts

show that they purchased a computer on March 28, 1998, for

$1,917. Mr. Ferrada used it for his employment with Hi-Tec but

was not required by Hi-Tec to purchase it. He also used the

computer for his flashlight and concession stand activities. 

Petitioners also purchased a fax machine in January 1998,

for $144.99. Mr. Ferrada purchased the fax machine to receive

orders for the concession stand he purchased in May 1998. 

e. Rent/Lease: Vehicles, Machinery, Equipment

Petitioners reported an expense of $11,180 which they

classified as the rental or lease of vehicles, machinery, and

equipment. Petitioners actually paid the $11,180 for the rental

of an apartment in Lake Charles.

f. Repairs and Maintenance

Petitioners deducted $1,460 for repairs and maintenance

which was performed on their vehicles. Petitioners did not

provide any documentation of these expenditures. 

g. Supplies

Petitioners deducted $11,517 for supplies for their

concession stand. Petitioners did not provide any documentation

of these expenditures. 
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1The $1,790 reported as being incurred for meals and

entertainment expenses is one-half of the total amount reported

by petitioners as being expended for meals and entertainment

expenses for taxable year 1998.

h. Travel

Petitioners deducted $6,980 in travel expenses. Mr. Ferrada

incurred these expenses when he traveled between Lake Charles and

Del Rio. Petitioner also traveled to various sites in Louisiana

for his employment. Petitioner did not keep any records

pertaining to his travel. 

i. Meals and Entertainment

Petitioners reported that they incurred meals and

entertainment expenses of $1,790.1 Mr. Ferrada incurred these

expenses while traveling between Lake Charles and Del Rio and

while traveling to San Antonio and Houston, Texas. Several of

the receipts petitioners submitted show children's meals. 

Indeed, one receipt appears to show a birthday party for

petitioners' son at McDonald's. 

j. Utilities

Petitioners deducted utilities expenses of $4,779. They

provided receipts for a payment to the Del Rio Gas Company, Del

Rio, Texas, of $199, and a payment to the Central Power and

Light, Del Rio, Texas, for the account of Marciano E. Zamora in

the amount of $278. Mr. Zamora is Mrs. Ferrada's father. 
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Discussion

Generally, respondent's determinations are presumed correct,

and petitioners bear the burden of proving otherwise. Welch v.

Helvering, 290 U.S. 111, 115 (1933). Moreover, deductions are a

matter of legislative grace, and petitioners bear the burden of

proving that they are entitled to any deduction claimed. New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); Welch v.

Helvering, supra at 115. This includes the burden of 

substantiation. Hradesky v. Commissioner, 65 T.C. 87, 90 (1975),

affd. per curiam 540 F.2d 821 (5th Cir. 1976).

In some cases, however, the burden of proof may shift to the

Commissioner under section 7491(a). Because petitioners failed

to comply with the requirements of section 7491(a), section 7491

does not place the burden of proof on respondent with respect to

the claimed deductions. Under section 7491(c), respondent has

the burden of production only with respect to petitioner's

liability for the addition to tax. 

Section 162(a) allows a deduction for all ordinary and

necessary expenses incurred in carrying on a trade or business. 

Section 212 provides a deduction for all ordinary and necessary

expenses paid or incurred with respect to management,

conservation, and maintenance of property held for production of

income, including real property. Sec. 1.212-1(h), Income Tax

Regs. Generally, a taxpayer must establish that deductions
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claimed pursuant to sections 162 and 212 are ordinary and

necessary expenses and must maintain records sufficient to

substantiate the amounts of the deductions claimed. Sec. 6001;

Meneguzzo v. Commissioner, 43 T.C. 824, 831-832 (1965); sec.

1.6001-1(a), (e), Income Tax Regs.

With respect to certain business expenses specified in

section 274(d), however, more stringent substantiation

requirements apply. Section 274(d) disallows deductions for

traveling expenses, gifts, and meals and entertainment, as well

as for listed property, unless the taxpayer substantiates by

adequate records or by sufficient evidence corroborating the

taxpayer's own statement: (1) The amount of the expenses, 

(2) the time and place of the expense, (3) the business purpose

of the expense, and (4) the business relationship to the taxpayer

of the persons involved in the expense. The term "listed

property" is defined in section 280(F)(d) and includes passenger

vehicles and computers. See sec. 280F(d)(4)(i).

The substantiation requirements of section 274(d) are

designed to encourage taxpayers to maintain records, together

with documentary evidence substantiating each element of the

expense sought to be deducted. Sec. 1.274-5T(c)(1), Temporary

Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).

Under section 274(d), substantiation by means of adequate

records requires a taxpayer to maintain a diary, a log, or a
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similar record, and documentary evidence that, in combination,

are sufficient to establish each element of each expenditure or

use. Sec. 1.274-5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed.

Reg. 46017 (Nov. 6, 1985). To be adequate, a record must

generally be written. Each element of an expenditure or use that

must be substantiated should be recorded at or near the time of

that expenditure or use. Sec. 1.274-5T(c)(2)(ii)(A), Temporary

Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). Thus, under

section 274(d) no deduction may be allowed for expenses incurred

for use of a passenger automobile on the basis of any

approximation or the unsupported testimony of the taxpayer. 

Bradley v. Commissioner, T.C. Memo. 1996-461; Golden v.

Commissioner, T.C. Memo. 1993-602.

Personal expenses are not deductible, unless expressly

provided for in chapter 1 of the Internal Revenue Code. Sec.

262. Section 162(a) expressly permits a deduction for "traveling

expenses * * * while away from home in the pursuit of a trade or

business". An individual's tax home under this provision

generally is the individual's principal place of business, not

the location of his personal residence. Mitchell v.

Commissioner, 74 T.C. 578, 581 (1980). An exception exists under

which an individual's tax home is his personal residence if his

principal place of business is temporary rather than indefinite. 

Peurifoy v. Commissioner, 358 U.S. 59, 60 (1958). The flush
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language following section 162(a)(3) provides that "the taxpayer

shall not be treated as being temporarily away from home during

any period of employment if such period exceeds 1 year." 

Mr. Ferrada testified that his employment as an Air Force

contractor was indefinite. Petitioner was employed at the same

project at Lake Charles for more than 1 year. Thus, his tax home

is at his principal place of business, Lake Charles, Louisiana,

not Del Rio, Texas. As such, the $11,180 petitioners paid to

rent an apartment in Lake Charles is a personal expense and

nondeductible under section 262(a).

Petitioners failed to keep records to substantiate the

deductions they claimed on their return. Additionally,

petitioners failed to prove that any of the expenditures they

reported on their Schedule C were ordinary and necessary business

expenses. Respondent's determination disallowing petitioners'

Schedule C deductions is sustained. 

Addition to Tax for Failure To File Timely

Under section 7491(c), the Commissioner has the burden of

production in any court proceeding with respect to the liability

of any individual for any penalty or addition to tax. Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001). In order to meet his

burden of production, respondent must come forward with

sufficient evidence indicating that it is appropriate to impose 

addition to tax for failure to file a timely return. Id. at 446. 
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Once respondent meets his burden of production, petitioners must

come forward with evidence sufficient to persuade the Court that

respondent's determination is incorrect. Id. at 447. 

Respondent contends that petitioners are liable for an

addition to tax pursuant to section 6651(a)(1). Section

6651(a)(1) imposes an addition to tax for failure to file a

Federal income tax return by its due date, determined with regard

to any extension of time for filing previously granted. The

addition equals 5 percent for each month that the return is late,

not to exceed 25 percent. Sec. 6651(a)(1). Additions to tax

under section 6651(a)(1) are imposed unless the taxpayer

establishes that the failure was due to reasonable cause and not

willful neglect. Sec. 6651(a)(1); Crocker v. Commissioner, 92

T.C. 899, 912 (1989). "Reasonable cause" requires the taxpayer

to demonstrate that he exercised ordinary business care and

prudence. United States v. Boyle, 469 U.S. 241, 246 (1985). 

"Willful neglect" is defined as a "conscious, intentional failure

or reckless indifference." Id. at 245.

Petitioners' 1998 return was filed on April 14, 2000. They

failed to prove they had reasonable cause for the delay or that

they lacked willful neglect in filing their return. Therefore,

the Court sustains respondent's determination as to the section

6651(a)(1) addition to tax.
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Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered

for respondent.