T.C. Summary Opinion 2007-198

UNITED STATES TAX COURT

HOWARD K. HAGER, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7431-06S. Filed November 21, 2007. 

Howard K. Hager, pro se.

Erika B. Cormier, for respondent.

DEAN, 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. Pursuant to section 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. Unless otherwise indicated, subsequent section references

are to the Internal Revenue Code in effect for the year in issue,
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1 Respondent concedes that petitioner is not liable for

additions to tax under sec. 6654(a) or 6651(a)(2). Petitioner

concedes that he was required to file a Form 1040-SS.

and all Rule references are to the Tax Court Rules of Practice

and Procedure.

Respondent determined a $3,553 deficiency in petitioner’s

2002 Federal income tax and a section 6651(a) addition to tax for

failure to file timely a Form 1040-SS, U.S. Self-Employment Tax

Return, for 2002. The issues for decision are whether petitioner

is: (1) Entitled to claim business expense deductions; and

(2) liable for a section 6651(a)(1) addition to tax.1 

Background

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

The stipulation of facts and the exhibits received into evidence

are incorporated herein by reference. At the time the petition

was filed, petitioner resided in Holliston, Massachusetts.

Petitioner resided in Puerto Rico during 2002. For part of

2002, petitioner was employed by World Services Telephone, Inc.,

and he also worked as a consultant to Cortelco Systems Puerto

Rico (Cortelco). Cortelco was in San Juan, Puerto Rico, and

moved its operations to Caguas, Puerto Rico, sometime between

September 2002 and February 2003. Petitioner then began working

at home.

During 2002, petitioner shared with his wife a one-bedroom

apartment, which was about 500 square feet. Within the
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apartment, petitioner used for business a workbench and desk,

which were in the bedroom; an area for file storage, which was in

the living room; and areas in the dining room for files, storage,

chairs, and his computer, router, and terminals, which he stored

on top of the dining room table.

Petitioner filed a Form 482.0, Individual Income Tax Return,

with the Commonwealth of Puerto Rico for 2002. Petitioner failed

to file timely a Form 1040-SS with the Internal Revenue Service

for 2002. On January 24, 2006, respondent issued a notice of

deficiency to petitioner. Thereafter, petitioner submitted to

respondent a Form 1040-SS and a Form 4562, Depreciation and

Amortization (Including Information on Listed Property), on March

28, 2007. On his Form 1040-SS, petitioner claimed the following

deductions:

 Truck purchase (as a section 179 expense) $2,500

 Insurance (other than health) 3,552

 Legal and professional expenses 2,500

 Other business property (as a section 280A 6,300

 deduction for the business use of his residence) 

 Utilities (as a section 280A deduction for the 2,800

 business use of his residence) 

 Repairs and maintenance 800

 Supplies 1,000

 Taxes and licenses 7,798

 Meals and entertainment 5,000

 Parking 250 

 Tolls 100

 Oil and gas 480
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Discussion

The Commissioner’s determinations in a notice of deficiency

are presumed correct, and the taxpayer has the burden to prove

that the determinations are in error. See Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933). But the burden of proof on

factual issues that affect a taxpayer’s tax liability may be

shifted to the Commissioner where the “taxpayer introduces

credible evidence with respect to * * * such issue.” See sec.

7491(a)(1). The burden will shift only if the taxpayer has

complied with the substantiation requirements and has cooperated

with the Commissioner’s reasonable requests for witnesses,

information, documents, meetings, and interviews. See sec.

7491(a)(2). Petitioner has not proven or even alleged that

section 7491(a) applies; accordingly, the burden remains on him

to show that he is entitled to the claimed deductions. 

U.S. individuals are subject to Federal income taxation on

their taxable income on a worldwide basis. See sec. 1; Cook v.

Tait, 265 U.S. 47 (1924). But a U.S. individual who is a bona

fide resident of Puerto Rico for the entire taxable year is not

subject to Federal taxation with respect to his items of income

that are sourced within Puerto Rico except for amounts received

for services as an employee of the U.S. Government. See sec.

933(1). Notwithstanding the exemption provided by section

933(1), a U.S. individual residing in Puerto Rico is not exempt
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from self-employment tax. See sec. 1401; sec. 1.1402(a)-9,

Income Tax Regs. Residents of Puerto Rico are required to

compute net earnings from self-employment in the same manner as a

U.S. individual without regard to section 933. See sec.

1402(a)(6); sec. 1.1402(a)-9, Income Tax Regs.; see also sec.

1.1402(a)-1, Income Tax Regs. (defining the term “net earnings

from self-employment” to include the gross income derived in a

taxpayer’s trade or business less the deductions allowed by

chapter 1 that are attributable thereto).

I. Substantiation of Business Expense Deductions

In general, section 162 allows a deduction for all the

ordinary and necessary expenses paid or incurred during the

taxable year in carrying on any trade or business. Whether an

expenditure satisfies the requirements of section 162 is a

question of fact. Commissioner v. Heininger, 320 U.S. 467, 475

(1943). The taxpayer must keep records sufficient to establish

the amounts of the items required to be shown on his Federal

income tax return. See sec. 6001; sec. 1.6001-1(a), (e), Income

Tax Regs. 

When a taxpayer establishes that he has incurred a

deductible expense but is unable to substantiate the exact

amount, the Court may estimate the deductible amount in some

circumstances (the Cohan rule). See Cohan v. Commissioner, 39

F.2d 540, 543-544 (2d Cir. 1930). But the Court can estimate the
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2 With respect to his spreadsheet, petitioner testified

that he used his expenses from 2004 to generate “reasonable

expenses” for 2002 since his records for 2002 were allegedly

destroyed in a fire in 2006. 

amount of a deductible expense only when the taxpayer provides

evidence sufficient to establish a rational basis for making the

estimate. See Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).

A. Legal Expenses, Supplies, Insurance, Taxes and Licenses,

 Oil and Gas

With respect to the deductions claimed for legal expenses,

supplies, insurance, taxes and licenses, and oil and gas,

petitioner’s evidence consisted of a spreadsheet listing the

numbers he put on his return.2 Petitioner did not testify as to

these items nor submit any receipts to verify his payment of the

expenses in 2002. See secs. 446(a), (c), 461(a), 6001. Without

more, the Court finds that petitioner has not adequately

substantiated the deductions and that he has failed to provide

sufficient evidence for the Court to make a rational estimate. 

Therefore, the deductions are not allowable, and respondent’s

determinations are sustained.

B. Parking and Tolls

Generally, a taxpayer may deduct the cost of operating an

automobile to the extent that it is used in a trade or business. 

See Rev. Proc. 2002-61, 2002-2 C.B. 616. Parking fees and tolls

may be deducted as separate items. Id. Petitioner’s evidence

consisted of his spreadsheet. He failed to present any receipts
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to verify that the expenditures were made in 2002, and he did not

testify as to these claimed expenses. See secs. 446(a), (c),

461(a), 6001. Without more, the Court concludes that he has not

substantiated the deductions nor provided any sufficient evidence

for the Court to make a rational estimate. Therefore, he is not

entitled to the deductions, and respondent’s determinations are

sustained.

C. Expenses Subject to Section 274(d)

Section 274(d) supersedes the Cohan rule, and the Court

cannot estimate a taxpayer’s expenses with respect to certain

items. See Sanford v. Commissioner, 50 T.C. 823, 827, (1968),

affd. per curiam 412 F.2d 201 (2d Cir. 1969). Section 274(d)

provides that no deduction is allowable for expenses related to: 

(1) Travel; (2) amusement, recreation, or entertainment; 

(3) gifts; or (4) “listed property”, unless the taxpayer complies

with certain strict substantiation requirements. To satisfy the

strict substantiation requirements, the taxpayer must

substantiate the amount, the time and place of the travel or

entertainment, the use of the property or facility, the date and

description of the gift, the business purpose of an expense, and

the business relationship to the taxpayer of the persons

entertained or receiving the gift. See sec. 274(d); sec.

1.274-5T, Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6,

1985). If the amount is not substantiated by adequate records or
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sufficient corroborative evidence, then it is disallowed. See

sec. 274(d).

In order to substantiate amounts expended for travel, the

taxpayer must prove the: (1) Amount of each expenditure (i.e.,

lodging, meals, gas, and etc.); (2) time (i.e., dates of

departure and return trip and number of days spent on business);

(3) place; and (4) business purpose (i.e., the business reason

for the travel or the nature of the business benefit to be

derived). See sec. 1.274-5T(b)(2)(i) through (iv), Temporary

Income Tax Regs., supra. 

Similarly, in order to substantiate amounts expended for

entertainment, the taxpayer must prove the: (1) Amount of each

expenditure (except for incidental items such as taxi fares or

telephone calls that may be aggregated on a daily basis); 

(2) time, which means the date of the entertainment; (3) place

(i.e., the name, if any, address or location, and designation of

the type of entertainment, such as dinner or theater, if it is

not apparent from the designation of the place); (4) business

purpose (i.e., the business reason for the entertainment or the

nature of the business benefit to be derived and the nature of

the business discussion or activity); and (5) business

relationship (i.e., name, title, occupation, or similar

information of the persons entertained). See sec.
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1.274-5T(b)(3)(i) through (v), Temporary Income Tax Regs., 50

Fed. Reg. 46015 (Nov. 6, 1985). 

Petitioner’s evidence consisted of the spreadsheet listing

the numbers he put on his return. Petitioner did not testify as

to his expenses for travel and meals and entertainment nor submit

any receipts to verify his payment of the claimed expenses in

2002. See secs. 446(a), (c), 461(a). The Court finds that

petitioner has not satisfied the strict substantiation

requirements of section 274(d), and therefore, the expenses are

not deductible. Accordingly, respondent’s determinations are

sustained.

D. Truck Purchase as a Section 179 Expense

Section 179(a) generally allows a taxpayer to elect to treat

the cost of section 179 property as a current expense in the year

the property is placed in service, within certain dollar

limitations. If the property is used for both business and other

purposes, then the portion of the property’s cost that is

attributable to the business use is eligible for expensing under

section 179 but only if more than 50 percent of the property’s

use is for business purposes (the predominant use requirement). 

See sec. 1.179-1(d), Income Tax Reg.; see also Whalley v.

Commissioner, T.C. Memo. 1996-533. Moreover, in order to claim a

deduction for listed property, which is defined in section

280F(d)(4) to include a passenger automobile, the taxpayer must
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satisfy the strict substantiation requirements of section 274(d). 

See Whalley v. Commissioner, supra; see also sec. 280F(d)(1);

sec. 1.179-1(d)(3), Income Tax Regs. In order to substantiate

the amount of an automobile expense the taxpayer must prove the

following: (1) The amount of the expenditure (i.e., cost of

acquisition); (2) the amount of each business use and the amount

of its total use by establishing the amount of its business

mileage and total mileage; (3) time (i.e., the date of the

expenditure or use); and (4) the business purpose for the

expenditure or use. See sec. 1.274-5T(b)(6)(i) through (iii),

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

The taxpayer may substantiate the amount of mileage by adequate

records or sufficient evidence that corroborates his statements. 

See sec. 274(d). A record of the mileage made at or near the

time of the automobile’s use that is supported by documentary

evidence has a high degree of credibility not present with a

subsequently prepared statement. See sec. 1.274-5T(c)(1)-(3),

Temporary Income Tax Regs., supra. 

Petitioner’s evidence consisted of the spreadsheet listing

the numbers he put on his return and his testimony that he

purchased the Jeep from a bankruptcy trustee for $2,200 to use in

his business. Additionally, petitioner testified that the Jeep

was his only vehicle and that his wife did not own a vehicle. 

Petitioner failed to establish his business use. Moreover, he
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3 Although proposed regulations carry no greater weight

than a position advanced on brief by the Commissioner, they may

be useful as guidelines where they closely follow the legislative

history of the act. Estate of Wallace v. Commissioner, 95 T.C.

525, 547 (1990), affd. 965 F.2d 1038 (11th Cir. 1992); Miller v.

Commissioner, 70 T.C. 448, 460 (1978); F.W. Woolworth Co. v.

Commissioner, 54 T.C. 1233, 1265-1266 (1970)).

did not maintain a mileage log, and he did not attempt to

reconstruct his auto expenses (i.e., by tying his clients’

business cards, which he did possess, to particular dates). The

Court finds that petitioner has satisfied neither the strict

substantiation requirements of section 274(d) nor the predominant

use requirement. Therefore, petitioner is not entitled to

expense the cost of the Jeep under section 179. Accordingly,

respondent’s determination is sustained.

E. Expenses for Business Use of the Home

Expenses for the business use of a taxpayer’s residence are

deductible only under very limited circumstances. The taxpayer

must show that a portion of the residence was exclusively used on

a regular basis as his principal place of business, and in the

case of an employee, the exclusive use must be for the employer’s

convenience. See sec. 280A(c)(1). The term “a portion of the

dwelling unit” refers to “a room or other separately identifiable

space;” a permanent partition marking off the area is not

necessary. Sec. 1.280A-2(g)(1), Proposed Income Tax Regs., 48

Fed. Reg. 33324 (July 21, 1983).3 When section 280A(c) was added

to the Internal Revenue Code by the Tax Reform Act of 1976, Pub.
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L. 94-455, sec. 601(a), 90 Stat. 1569, the Senate Finance

Committee report explained the exclusive use requirement as

follows:

Exclusive use of a portion of a taxpayer’s dwelling

unit means that the taxpayer must use a specific part

of a dwelling unit solely for the purpose of carrying

on his trade or business. The use of a portion of a

dwelling unit for both personal purposes and for the

carrying on of a trade or business does not meet the

exclusive use test. Thus, for example, a taxpayer who

uses a den in his dwelling unit to write legal briefs,

prepare tax returns, or engage in similar activities as

well for personal purposes, will be denied a deduction

for the expenses paid or incurred in connection with

the use of the residence which are allocable to these

activities. * * * [Emphasis added.]

S. Rept. 94-938, at 148 (1976), 1976-3 C.B. (Vol. 3) 49, 186; see

also H. Rept. 94-658, at 161 (1975), 1976-3 C.B. (Vol. 2) 695,

853; Staff of Joint Comm. on Taxation, General Explanation of the

Tax Reform Act of 1976, at 140 (1976), 1976-3 C.B. (Vol. 2) 1,

152. Similarly, the Court has declined to find that a specific

portion of a residence had been used exclusively for business

purposes where both business and personal activities permeate an

entire residence. Williams v. Commissioner, T.C. Memo. 1991-567;

Naggar v. Commissioner, T.C. Memo. 1983-559. 

The exclusive use requirement is an all-or-nothing standard. 

See Hamacher v. Commissioner, 94 T.C. 348, 356 (1990). When a

taxpayer uses a home office in conducting numerous business

activities, each use must be of a type described in section

280A(c)(1); otherwise, the exclusive use requirement is not
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satisfied. Id. And if only one of the uses qualifies, then the

expenses attributable to that use are not deductible even if the

other uses are business related. Id.

1. Other Business Property as a Section 280A Expense

Petitioner’s evidence consisted of the spreadsheet listing

the numbers he put on his return, three canceled checks for rent

paid for September through December at $1,050 per month, a

current photograph of some equipment, a diagram showing the

location of his equipment, furniture, files, and storage; a

letter from Cortelco’s vice president of finance and

administration and chief financial officer, and petitioner’s own

testimony.

Petitioner testified that he and his wife never dined in the

dining room because they had an outside deck to dine on. The

table was designed for dining, but it was not used for that

purpose, he testified. According to petitioner, they ate out

most of the time, and his wife never cooked in the kitchen. The

Court finds that this portion of petitioner’s testimony is

self-serving, and we simply do not accept it. See Geiger v.

Commissioner, 440 F.2d 688, 689 (9th Cir. 1971), affg. per curiam

T.C. Memo. 1969-159; Urban Redev. Corp. v. Commissioner, 294 F.2d

328, 332 (4th Cir. 1961), affg. 34 T.C. 845 (1960).

Petitioner also testified that both he and his wife slept in

the bedroom and that he used his computer equipment and his
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4 In view of our disposition of the deductions relating to 

petitioner’s business use of his residence, there is no need to

reach the parties’ arguments regarding the issue of whether his

employer had provided petitioner with an office at Cortelco,

which might have precluded the deduction pursuant to Bodzin v.

Commissioner, 509 F.2d 679 (4th Cir. 1975) (distinguishing

between situations where the taxpayer chooses to work from home

and thus the deduction for the business use of the home is not

allowable from the situations where an office is not available or

suitable for the work and the deduction is allowable), revg. 60

T.C. 820 (1973).

“records” to help a bankruptcy trustee in a lawsuit filed in his

personal capacity and on behalf of a company, of which he was the

chief executive officer. In view of this testimony, the Court

finds that petitioner has not satisfied the exclusive use

requirement since his business areas were used for both personal

and business reasons, they permeated the entire apartment, and

the uses are so intermingled that the Court cannot find that a

specific portion of the apartment was used exclusively for

business purposes. Moreover, merely testifying that “if I lived

there and I worked there and I did business there * * * I must

have had some reasonable expenses” is not sufficient to satisfy

the Code’s substantiation requirements. Accordingly,

respondent’s determination is sustained.4

2. Utilities

Utilities attributable to the taxpayer’s maintenance of a

home office may be deductible as a business expense. See 1.262-

1(b)(3), Income Tax Regs. 
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Petitioner’s evidence consisted of the spreadsheet listing

the numbers he put on his return, a water-sewer bill and an

electric bill, which were not for 2002; and a $75 receipt stapled

to a water bill, which was for 2005. Because we have determined

that petitioner is not entitled to a deduction for the business

use of his residence, it follows that he is not entitled to a

deduction for the corresponding utilities. Accordingly,

respondent’s determination is sustained. 

II. Section 6651(a)(1) Addition to Tax

Respondent determined an addition to tax under section

6651(a)(1) for 2002, asserting that petitioner failed to timely

file his Form 1040-SS. Initially, respondent has the burden of

production with respect to the addition to tax. See sec.

7491(c). Respondent satisfies his burden by coming forward with

sufficient evidence to indicate that it is appropriate to impose

the addition to tax. See Higbee v. Commissioner, 116 T.C. 438,

446 (2001). Once respondent satisfies his burden, petitioner

must persuade the Court that respondent’s determination is in

error by supplying sufficient evidence of reasonable cause,

substantial authority, or a similar justification. Id.

The parties agree that petitioner did not timely file a 

Form 1040-SS. Therefore, respondent has met his burden of

production. Petitioner merely testified that he was a resident

of Puerto Rico, he paid his taxes in Puerto Rico, and “everybody
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said you do not owe the IRS”. Petitioner introduced no other

evidence. Petitioner’s explanation was not a legally sufficient

reason for his failure to file timely; therefore, the Court finds

that petitioner did not have reasonable cause for his failure to

file timely. Accordingly, respondent’s determination is

sustained.

To reflect the foregoing,

Decision will be entered for 

respondent as to the deficiency and

the section 6651(a)(1) addition to

tax and for petitioner as to the

additions to tax under sections

6651(a)(2) and 6654.