T.C. Summary Opinion 2010-109

UNITED STATES TAX COURT

ASIF HAFEEZ, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 17006-09S. Filed August 3, 2010.

Asif Hafeez, pro se.

Steven W. Ianacone, for respondent.

PANUTHOS, Chief 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
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1Respondent arrived at this amount by subtracting $5,261 as

tax shown on the return from $19,821 as total tax as determined

by respondent after disallowing selected Schedule C expenses. In

fact, the return shows a tax due of $5,231. Respondent has not

sought an increase in the deficiency; thus we will treat it as a

concession.

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

Tax Court Rules of Practice and Procedure.

Respondent determined a $14,5601 deficiency in petitioner’s

2006 Federal income tax as well as a $4,947.75 addition to tax

under section 6651(a)(1) and a $2,912 accuracy-related penalty

under section 6662(a). The issues for decision are: (1) Whether

petitioner is entitled to certain deductions claimed on Schedule

C, Profit or Loss From Business; (2) whether petitioner is liable

for the addition to tax under section 6651(a)(1); and (3) 

whether petitioner is liable for an accuracy-related penalty

under section 6662(a).

Background

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference. Petitioner resided in New

Jersey at the time the petition was filed.

Petitioner is a professional driver who worked as an

independent contractor for two different car service companies in

New York City in 2006. Petitioner worked as an independent

contractor for Crestwood Car and Limousine Services, Ltd.
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(Crestwood), from January through August of 2006 and TriLine 

Contracting (Triline) from September through December of 2006. 

Potential clients would contact the respective companies and

contract for car services in and around the New York City area. 

The car service would contact petitioner by telephone and provide

an assignment. Petitioner was not permitted to pick up

passengers without an assignment. Clients paid the car service a

fare which varied because of distance, duration, waiting time,

stops, and tolls and parking expenses incurred during the trip. 

Petitioner was paid each week by the respective car service

company. The amount he received depended upon gross fares

generated. 

When petitioner first began working as a professional

driver, he rented or leased a vehicle from the car service

company. On December 29, 2005, petitioner purchased a used

Lincoln Town Car (town car) for $23,590.30. The town car was

white, and Crestwood would permit only black vehicles to be used

to carry passengers for the car service. Petitioner was unable

to place the town car in service until approximately March 2006

after he had it painted black. Petitioner incurred costs for

gasoline, parking, tolls, and parking tickets with respect to the

town car.
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Petitioner was required to wear a suit whenever he drove the

town car for the car service company. The car service company

also required petitioner to clean and wash the vehicle regularly. 

Petitioner cleaned and washed his vehicle frequently, as he

understood that a clean vehicle would encourage repeat business

and ultimately increase his income. Petitioner was also required

to have a cellular telephone available so that the company could

reach him to assign him jobs. Occasionally, a client might use

his cell phone.

Petitioner hired an accountant to assist in the preparation

of the return, the Schedule C, and the Schedule SE, Self

Employment Tax. Petitioner filed his 2006 Form 1040, U.S.

Individual Income Tax Return, on September 10, 2007. 

Petitioner reported gross income of $86,549 and deducted

expenses on his 2006 Schedule C as follows:

Car and truck expenses $24,923

Insurance 7,603

Rent or lease of vehicles 8,106

Repairs and maintenance 4,528

Supplies 1,809

Taxes and licenses 1,390

Travel 3,315

Other expenses 10,281
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On April 10, 2009, respondent issued a notice of deficiency

to petitioner disallowing the following claimed deductions for

2006: Car and truck expenses of $24,923; rent or lease of

vehicle expenses of $8,106; and other expenses (which included

the cost of car washes, uniforms and dry cleaning, and cellular

telephone services) of $10,281. Respondent also determined a

late-filing addition to tax and an accuracy-related penalty

pursuant to sections 6651(a)(1) and 6662(a) respectively.

Discussion

In general, the Commissioner’s determination set forth in a

notice of deficiency is presumed correct, and the taxpayer bears

the burden of showing that the determination is in error. Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions

are a matter of legislative grace. Deputy v. du Pont, 308 U.S.

488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435,

440 (1934). A taxpayer bears the burden of proving entitlement

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

Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, supra;

Wilson v. Commissioner, T.C. Memo. 2001-139. A taxpayer is

required to maintain records sufficient to substantiate

deductions claimed on his or her income tax return. Sec. 6001;

sec. 1.6001-1(a), (e), Income Tax Regs. The fact that a taxpayer

reports a deduction on the taxpayer’s income tax return is not

sufficient to substantiate the claimed deduction. Wilkinson v.
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Commissioner, 71 T.C. 633, 639 (1979); Roberts v. Commissioner,

62 T.C. 834, 837 (1974). Rather, an income tax return is merely

a statement of the taxpayer’s claim; it is not presumed to be

correct. Wilkinson v. Commissioner, supra at 639; Roberts v.

Commissioner, supra at 837; see also Seaboard Commercial Corp. v.

Commissioner, 28 T.C. 1034, 1051 (1957) (a taxpayer’s income tax

return is a self-serving declaration that may not be accepted as

proof for the claimed deduction or exclusion); Halle v.

Commissioner, 7 T.C. 245 (1946) (a taxpayer’s income tax return

is not self-proving as to the truth of its contents), affd. 175

F.2d 500 (2d Cir. 1949).

Pursuant to section 7491(a), the burden of proof as to

factual matters shifts to the Commissioner under certain

circumstances. Petitioner has neither alleged that section

7491(a) applies nor established his compliance with the

substantiation and recordkeeping requirements. See sec.

7491(a)(2)(A) and (B). Petitioner therefore bears the burden of

proof. See Rule 142(a).

I. Schedule C Deductions

The taxpayer bears the burden of proving that he is entitled

to the deductions claimed, and this includes the burden of

substantiation. Rule 142(a); Hradesky v. Commissioner, 65 T.C.

87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976). A

taxpayer must substantiate amounts claimed as deductions by
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maintaining the records necessary to establish he or she is

entitled to the deductions. Sec. 6001. Section 162(a) provides

a deduction for certain business-related expenses. In order to

qualify for the deduction under section 162(a), “an item must (1)

be ‘paid or incurred during the taxable year,’ (2) be for

‘carrying on any trade or business,’ (3) be an ‘expense,’ (4) be

a ‘necessary’ expense, and (5) be an ‘ordinary’ expense.” 

Commissioner v. Lincoln Sav. & Loan Association, 403 U.S. 345,

352 (1971); Deputy v. du Pont, supra at 495 (to qualify as

“ordinary”, the expense must relate to a transaction “of common

or frequent occurrence in the type of business involved”). 

Whether an expense is ordinary is determined by time, place, and

circumstance. Welch v. Helvering, supra at 113-114.

If a taxpayer establishes that he or she paid or incurred a

deductible business expense but does not establish the amount of

the expense, we may approximate the amount of the allowable

deduction, bearing heavily against the taxpayer whose

inexactitude is of his or her own making. Cohan v. Commissioner,

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

to apply, there must be sufficient evidence in the record to

provide a basis for the estimate. Vanicek v. Commissioner, 85

T.C. 731, 743 (1985). Certain expenses may not be estimated

because of the strict substantiation requirements of section
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274(d). See sec. 280F(d)(4)(A); Sanford v. Commissioner, 50 T.C.

823, 827 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969).

The expenses to which section 274(d) applies include, among

other things, expenses for listed property (e.g., automobile

expenses, cellular telephones, computer equipment, or any

property of a type generally used for purposes of entertainment,

recreation, or amusement) and travel expenses (including meals

and lodging while away from home). Secs. 274(d)(4),

280F(d)(4)(A). To substantiate a deduction attributable to

listed property, a taxpayer must maintain adequate records or

present corroborative evidence to show the following: (1) The

amount of the expense; (2) the time and place of use of the

listed property; and (3) the business purpose of the use. Sec.

1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016

(Nov. 6, 1985). Petitioner provided some documentation for the

expenses. We discuss each type of claimed expense in turn.

A. Rent or Lease Expenses

Petitioner claimed $8,196 in rent or lease expenses. This

expense appears to relate to the town car purchased in December

of 2005. Petitioner used the town car in his capacity as a

driver, and petitioner provided the loan agreement and copies of

canceled checks to substantiate that he incurred and paid the

amount. While the return identified the payments as rent or
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2While there may have been an opportunity to expense the

cost of the town car under sec. 179, petitioner did not make such

an election on his Federal income tax return for 2006 and is

therefore not entitled to the benefits of that section. See

Visin v. Commissioner, T.C. Memo. 2003-246, affd. 122 Fed. Appx.

363 (9th Cir. 2005); see also sec. 179(c)(1)(B); sec. 1.179-5(a),

Income Tax Regs.

lease expenses, the amount claimed represents the repayment of a

loan to finance the purchase of the vehicle, not a lease or rent 

of the vehicle. Thus petitioner is not entitled to a deduction

for rental or lease expenses. However, this does not end the

matter. The purchase of the vehicle is properly characterized as

the purchase of a capital asset subject to depreciation under

section 167.

A taxpayer may be entitled to a depreciation deduction for

exhaustion, wear, and tear of property used in a trade or

business. Sec. 167(a)(1); INDOPCO, Inc. v. Commissioner, 503

U.S. 79 (1992). Automobiles are 5-year property under section

168(e)(3)(B)(i) and thus should be depreciated over 5 years. 

Sec. 167(b). Petitioner has provided the bill of sale for

purchase of the vehicle which shows petitioner’s cost basis in

the vehicle as $23,590.30. The applicable convention is the

half-year convention, and the applicable method is the 200-

percent declining balance method. Sec. 168(b), (d)(1). We leave

the calculation of the depreciation amount to the parties.2
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B. Car and Truck Expenses

1. In General

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

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business. Under that provision, an

employee or a self-employed individual may deduct the cost of

operating an automobile to the extent that it is used in a trade

or business. However, under section 262, no portion of the cost

of operating an automobile that is attributable to personal use

is deductible. Ordinary commuting expenses are not deductible. 

Neal v. Commissioner, 681 F.2d 1157 (9th Cir. 1982), affg. T.C.

Memo. 1981-407. 

A passenger vehicle is listed property under section

280F(d)(4) subject to strict substantiation under section 274(d).

The rule in Cohan does not apply to expenses relating to listed

property, which generally includes any passenger automobile. 

Secs. 274(d)(4), 280F(d)(4)(A)(i); Sanford v. Commissioner, supra

at 827-828; Seidel v. Commissioner, T.C. Memo. 2005-67. However,

the term “passenger automobile” does not include any vehicle used

by the taxpayer directly in the trade or business of transporting

persons for compensation or hire. Sec. 280F(d)(5)(B)(ii); sec.

1.280F-6(c)(3)(ii), Income Tax Regs. Therefore the town car that

petitioner purchased is not listed property, and the expenses

related thereto are subject to the Cohan rule.
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2. Gasoline

Petitioner claimed $16,245 in gasoline expenses and

submitted bank statements for the entire year with entries

reflecting gasoline purchases. The entries reflect debit and

credit card purchases as well as expenditures made by check. 

Petitioner did not provide individual receipts whereby the Court

could verify the cost of gasoline that was purchased separate

from any nondeductible personal items. Petitioner was required

to purchase fuel for his vehicle in order to carry on his trade

or business as a driver; and despite his lack of complete

records, we found petitioner’s testimony to be credible and will

allow him a portion of the amount claimed, correcting for the

inexactitude which is of his own making. See Cohan v.

Commissioner, 39 F.2d at 543-544. We therefore allow 75 percent

of the claimed fuel expenses, for a total gasoline expense of

$12,183.75.

3. Parking and Tolls

Petitioner also claimed a deduction for amounts expended for

parking and tolls. Petitioner did not provide a log and did not

provide receipts. He did provide bank statements which show

numerous charges for tolls. Petitioner claimed a deduction of

$2,920 which represented the cost of tolls to bring his vehicle

into New York City for work each day. While this amount might

otherwise be a nondeductible commuting expense, the nature of
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3This represents $2,920 for tolls to get into New York City

for work every day, $3,843.80 in tolls from January through

August 2006 when petitioner worked for Crestwood, and $897.40 in

tolls from September through December of 2006 when petitioner

worked for Triline.

petitioner’s profession requires further analysis. Petitioner

incurred the additional expense to transport the town car into

New York City in order to carry on his trade or business as a

professional driver. We are satisfied that the daily toll to

bring the town car into New York City is ordinary and necessary

and thus allowable as an expense. See Fryer v. Commissioner,

T.C. Memo. 1974-77; see also Fausner v. Commissioner, 413 U.S.

838 (1973). Petitioner claims he is entitled to a total of

$11,505 for parking and tolls. Petitioner arrived at this number

by adding the following three amounts: (1) The daily toll into

New York City, (2) the tolls he incurred with Triline, and (3)

twice the amount of tolls incurred with Crestwood. Petitioner is

entitled only to expenses incurred and paid and is not entitled

to claim twice that amount to correct a perceived unfairness. 

The Court is satisfied that he has shown the actual amount

incurred. We conclude, therefore, that petitioner is entitled to

$7,661.203 for tolls and parking.

4. Town Car Painting

Expenses incurred to maintain property used in a trade or

business in efficient operating condition ordinarily are

deductible. See sec. 162(a); Jacks v. Commissioner, T.C. Memo.
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1988-237; Gilles Frozen Custard, Inc. v. Commissioner, T.C. Memo.

1970-73. Likewise, the cost of repairs “which neither materially

add to the value of the property nor appreciably prolong its

life, but keep it in an ordinarily efficient operating condition,

may be deducted as an expense”. Sec. 1.162-4, Income Tax Regs.;

see also sec. 1.263(a)-1(b), Income Tax Regs. On the other hand,

a capital expenditure permanently improves property and increases

its value. Sec. 263. The well-established standard that we must

use to evaluate a particular expenditure is as follows:

A repair is an expenditure for the purpose of keeping

the property in an ordinarily efficient operating

condition. It does not add to the value of the

property, nor does it appreciably prolong its life. It

merely keeps the property in an operating condition

over its probable useful life for the uses for which it

was acquired. Expenditures for that purpose are

distinguishable from those for replacements,

alterations, improvements or additions which prolong

the life of the property, increase its value, or make

it adaptable to a different use. * * * 

Ill. Merchs. Trust Co. v. Commissioner, 4 B.T.A. 103, 106 (1926);

see also INDOPCO, Inc. v. Commissioner, 503 U.S. at 85-88.

As indicated, petitioner purchased a white town car for use

in his profession. However, Crestwood required that all vehicles

be black. While the expenditure might be both an ordinary and

necessary business expenditure, it would appear that the painting

added to the value of the vehicle and made it adaptable to a

different use. We conclude therefore that the cost of painting

the town car is a capital expenditure. 
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4Petitioner claimed $2,903 in car wash expenses on his 2006

Federal income tax return. At trial he claimed the actual

expense was $2,920. Petitioner explained that, on average, he

paid $8 per car wash and that he washed his car at least once a

day. The larger amount represents one car wash per day for 365

days.

In the case of a capital expenditure, the capitalization

rules of section 263 take precedence over the deduction rules of

section 162, thereby preventing capital expenditures from being

deducted currently under section 162. Sec. 161; Commissioner v.

Idaho Power Co., 418 U.S. 1, 17 (1974). Petitioner has not

provided a receipt for the exact amount of the cost of painting

the vehicle but has provided credible testimony as to the

expense. Therefore we allow him one-half of the claimed expense,

or $750, which must be capitalized and depreciated over the life

of the vehicle.

5. Parking Tickets

Petitioner also claimed $690 for parking tickets as a

business expense. Such expenses are fines or penalties that are

nondeductible, even if related to business. See sec. 162(f).

C. Other Expenses

On petitioner’s 2006 Federal income tax return he claimed

$10,281 in “other expenses” comprising car washes, uniforms and

dry cleaning, and cell phone expenses.

Petitioner claimed $2,9034 in expenses for car washes. The

Court is satisfied that the claimed car washes were an ordinary
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and necessary expense for a professional driver who relied on the

appearance of his vehicle for repeat business. Petitioner

provided bank records which show approximately weekly entries for

car wash charges ranging from $5 to approximately $20. Without

other documentary evidence to substantiate more frequent car

washes, we approximate that petitioner incurred car wash expenses

about once per week at an average cost of $12.50. Therefore,

petitioner is entitled to a car wash business expense of $650.

Section 162 permits a deduction for work clothes or uniforms

required as a condition of employment when the clothing is not

suitable for general or personal wear and is not worn for general

or personal purposes. Yeomans v. Commissioner, 30 T.C. 757,

767-769 (1958). Petitioner provided bank records and handwritten

notations for clothing purchased in 2006. The type of clothing

petitioner purchased for use as a professional driver was

suitable for everyday wear. See Hynes v. Commissioner, 74 T.C.

1266, 1290 (1980). Petitioner’s clothing expenses are

nondeductible personal expenses under section 262, as are the

expenses incurred for laundering and drycleaning his clothing. 

See Boltinghouse v. Commissioner, T.C. Memo. 2007-324.

Petitioner claimed $2,961 in expenses for cellular telephone

service. Petitioner claimed to have paid approximately $250 per

month for unlimited calling and text messaging as required by the

car service company. Petitioner did not offer any receipts,
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5Sec. 7491(c) provides that the Commissioner has the burden

of production in any Court proceeding with respect to liability

for an addition to tax. Respondent has established that the tax

return for 2006 was not timely filed.

6Since we have allowed some deductions disallowed by

respondent, the amount of tax required to be shown on

petitioner’s 2006 return will be different from the amount shown

on the notice of deficiency, and the addition to tax, which is 25

percent of that amount, will also differ. We leave the

recalculation to the parties’ Rule 155 computations.

bills, or other documentary support for these expenses.

Therefore, petitioner has failed to meet the strict

substantiation requirements of sections 274(d) and

280F(d)(4)(A)(v) for cellular telephone expenses. Respondent’s

disallowance of cellular telephone expenses is sustained.

II. Failure To File Addition to Tax

Section 6651(a)(1) imposes an addition to tax of 5 percent

per month of the amount of tax required to be shown on the

return, not to exceed 25 percent, for failure to timely file a

return. The addition to tax under section 6651(a)(1) is imposed

unless the taxpayer establishes that the failure was due to

reasonable cause and not willful neglect.5 The record does not

establish that petitioner’s failure to timely file his 2006

Federal income tax return was due to reasonable cause and not

willful neglect. Thus, petitioner is liable for the section

6651(a)(1) addition to tax.6
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III. Accuracy-Related Penalty

Section 6662(a) and (b)(1) and (2) imposes an accuracyrelated penalty of 20 percent on the portion of an underpayment

attributable to negligence, disregard of rules or regulations, or

a substantial understatement of income tax. Negligence includes

any failure to keep adequate books and records or to substantiate

items properly. Sec. 1.6662-3(b)(1), Income Tax Regs. An

understatement is substantial if it exceeds the greater of: 

(1) 10 percent of the tax required to be shown on the return for

the taxable year, or (2) $5,000. Sec. 6662(d)(1)(A).

A taxpayer may avoid the application of an accuracy-related

penalty by proving that he acted with reasonable cause and in

good faith. See sec. 6664(c)(1); see also Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001); sec. 1.6664-4(a),

Income Tax Regs. We analyze whether a taxpayer acted with

reasonable cause and in good faith by examining the relevant

facts and circumstances and, most importantly, the extent to

which the taxpayer attempted to assess his proper tax liability. 

See Neely v. Commissioner, 85 T.C. 934, 947 (1985); Stubblefield

v. Commissioner, T.C. Memo. 1996-537; sec 1.6664-4(b)(1), Income

Tax Regs. In order for the reasonable cause exception to apply,

the taxpayer must prove that he exercised ordinary business care

and prudence as to the disputed item. See Neonatology
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Associates, P.A. v. Commissioner, 115 T.C. 43, 98 (2000), affd.

299 F.3d 221 (3d Cir. 2002).

Reliance upon the advice of a tax professional may establish

reasonable cause and good faith for the purpose of avoiding

liability for the section 6662(a) penalty. See United States v.

Boyle, 469 U.S. 241, 250 (1985). Reliance on a tax professional

is not an “absolute defense” but merely “a factor to be

considered.” Freytag v. Commissioner, 89 T.C. 849, 888 (1987),

affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991).

As a general rule, a taxpayer cannot shift the responsibility of

filing an accurate return to a return preparer. Metra Chem Corp.

v. Commissioner, 88 T.C. 654, 662 (1987). However, we have held

that under certain circumstances the taxpayer may avoid the

imposition of a penalty if there was good faith reliance by the

taxpayer on the advice of a competent adviser. Jackson v.

Commissioner, 86 T.C. 492, 539-540 (1986), affd. 864 F.2d 1521

(10th Cir. 1989). The taxpayer claiming good faith reliance on a

competent adviser must demonstrate that: “(1) The adviser was a

competent professional who had sufficient expertise to justify

reliance, (2) the taxpayer provided necessary and accurate

information to the adviser, and (3) the taxpayer actually relied

in good faith on the adviser’s judgment.” Neonatology

Associates, P.A. v. Commissioner, supra at 99. 
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The record does not provide a sufficient basis for the Court

to permit petitioner to avoid the imposition of the 

penalty. Petitioner has not established that he acted with

reasonable cause in attempting to assess his proper tax

liability, nor has he established good faith reliance on his

preparer. Petitioner did not present to the Court required

documentation to substantiate some of the claimed expense

deductions. Petitioner did not assert that he maintained such

records as required by law or that he provided such required

records to his tax preparer. The record is further void of any

advice that the tax adviser provided to petitioner. Also, on the

basis of our findings (e.g. tolls claimed), petitioner clearly

claimed deductions for amounts greater than the amounts actually

expended for such items. Thus, we conclude that petitioner did

not act with reasonable cause, nor has he established that there

was good faith reliance on his tax adviser. Petitioner does not

qualify for the reasonable cause exception of section 6664. 

Therefore, petitioner is liable for the accuracy-related penalty

pursuant to section 6662(a) and (b)(1), in an amount to be

recalculated after computation of the deficiency.

To reflect the foregoing,

Decision will be entered under

Rule 155.