1 Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year at issue, and

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

Procedure.

T.C. Memo. 1997-185

UNITED STATES TAX COURT

KATHLEEN J. KELLY, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10304-94. Filed April 21, 1997.

Kathleen J. Kelly, pro se.

Veena Luthra, for respondent.

MEMORANDUM OPINION

GOLDBERG, Special Trial Judge: This case was heard pursuant

to section 7443A(b)(3) and Rules 180, 181, and 182.1 Respondent

determined a deficiency in petitioner's Federal income tax for

1989 in the amount of $4,511 and additions to tax pursuant to
2

2 Petitioner conceded that she had unreported wage income in

the amount of $29,848 for the tax year 1989.

sections 6651(a) and 6654(a) in the amounts of $685.75 and

$172.05, respectively. After a concession,2 the issues for

decision are whether petitioner is entitled to a Schedule A

deduction claimed for unreimbursed employee business expenses,

and whether petitioner is entitled to a Schedule C deduction

claimed for amounts paid in connection with petitioner's activity

carried on to create awareness and support for the country of

Haiti.

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 this reference. Petitioner resided in

Virginia Beach, Virginia, at the time her petition was filed.

During the tax year in question, petitioner was employed on

a full-time basis by Pitney Bowes as a carrier management

specialist, a customer service and sales position in the

Washington, D.C., area. Petitioner estimated that she worked 60

hours per week for Pitney Bowes.

Petitioner's job with Pitney Bowes required that she drive

to see customers. Petitioner leased a car during 1989. With

respect to automobile expenses incurred, petitioner completed

field travel reimbursement expense reports which she submitted to

Pitney Bowes, and she was reimbursed by her employer based on

these reports. The reimbursement expense reports show a date,
3

daily mileage, and parking expense reported in 2-week intervals. 

The record contains reimbursement expense reports for the months

of July, August, September, October, and December 1989. 

Petitioner did not keep other records of her business use of her

car. Petitioner's evidence shows that she paid automobile

insurance premiums totaling $1,740.61 during the year in issue.

Petitioner also worked for the Whitman-Walker Clinic in an

AIDS awareness program. She estimated that she devoted

approximately 20 hours each week to the clinic.

In May 1989, petitioner traveled to Haiti with a group on a

tour. The trip was petitioner's first to the country, and the

experience had a significant impact upon her. Petitioner became

interested in helping the people of Haiti and wanted to create a

group in Washington, D.C., to provide tours similar to the one

she had experienced. In June 1989, petitioner started to engage

in activities designed to create an interest in and provide

support for Haiti and, in doing so, she used the name Too Close

To Home. Petitioner carried on her activity during her lunch

hours and in the time between her other jobs. Petitioner hoped

to create a job for herself through her activity.

Sometime during the end of 1989, petitioner rented a portion

of a house located at 69 Observatory Circle, N.W., Washington,

D.C., at a cost of $375 a month. This was the address for Too

Close To Home.
4

In early fall of the year in issue, petitioner participated

in a festival held in Adams Morgan, an area of Washington, D.C. 

Petitioner had a booth for Too Close To Home where she handed out

balloons imprinted with messages. The record contains a receipt

for a $300 cash deposit petitioner paid for the order of the

imprinted balloons.

During the year in issue, petitioner organized a Haitian

tour for four people. In November 1989, petitioner traveled to

Haiti with the tour group. Petitioner charged each individual

$300 in addition to the cost of his or her airline ticket. 

Petitioner applied the $300 to the cost of room and board in

Haiti, and she distributed the remaining amount to various

charities that the group visited in Haiti.

On December 3, 1989, petitioner organized and cohosted an

art show for the benefit of the orphans of Haiti. Petitioner

estimated that the postcards announcing this event cost $800 to

produce.

Petitioner's records of the expenses paid for Too Close To

Home are virtually nonexistent. Petitioner maintained a bank

account in the name of Too Close To Home. Petitioner did not

keep any records detailing the purpose for which funds were

expended. The checking account records show that the following

amounts were paid from this account in 1989. In November, three

checks totaling $2,043 to Omega Travel for plane tickets were

paid. Petitioner wrote a check to 69 Observatory Circle in the
5

amount of $375 on December 5, 1989, for December rent. Two

checks were drawn on this account in the amounts of $704.70 and

$498 to pay petitioner's car insurance premiums. During the

latter part of 1989, petitioner deposited her paychecks from

Pitney Bowes into this account.

Petitioner quit her Too Close To Home activity at the end of

1989. Later, petitioner revived Too Close To Home as a

charitable corporation, but it remained active less than 1 year.

On March 1, 1994, respondent issued a notice of deficiency

to petitioner for the tax year 1989. Respondent determined that

petitioner had unreported wage income in the amount of $29,848. 

After allowing for the standard deduction, respondent determined

a deficiency in petitioner's Federal income tax for 1989 in the

amount of $4,511. Respondent further determined an addition to

tax in the amount of $685.75 pursuant to section 6651(a), for

failure to file a return within the prescribed time, and an

addition to tax pursuant to section 6654(a), for the underpayment

of estimated taxes.

After receiving the notice of deficiency, petitioner filed

her Federal income tax return for 1989. Petitioner reported wage

income of $29,848. On Schedule A of the Form 1040, petitioner

reported State and local taxes in the amount of $1,283 and a

deduction for unreimbursed employee business expenses for

automobile expense in the amount of $8,404 above the 2-percent

floor. Petitioner deducted only $8,404 as itemized deductions. 
6

On Schedule C of Form 1040 filed with respect to her activity,

Too Close To Home, petitioner reported gross receipts in the

amount of $1,200 less cost of goods sold and/or operations in the

amount of $1,200. In addition, petitioner claimed expenses

totaling $8,000 and deducted a loss from this activity in the

amount of $8,000. Respondent received petitioner's return for

the year in issue on September 1, 1995.

Respondent's determinations are presumed correct, and

petitioner has the burden of proving them erroneous. Rule

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

against income are allowed as a matter of legislative grace. New

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

Taxpayers must maintain adequate records to substantiate the

amount of any deductions. Sec. 6001; sec. 1.6001-1(a), Income

Tax Regs.

Generally, when evidence shows that a taxpayer incurred a

deductible expense but the exact amount cannot be determined, the

Court may approximate the amount. Cohan v. Commissioner, 39 F.2d

540 (2d Cir. 1930). An exception to the Cohan rule is section

274(d), which prohibits the estimation of expenses with respect

to certain listed property. Listed property includes automobiles

and computers. Sec. 280F(d)(4).

Section 274(d) requires substantiation of these expenses

either "by adequate records or by sufficient evidence

corroborating the taxpayer's own statement". Petitioner must
7

substantiate the amount of each separate expenditure, the amount

of business and total use of the property, the date of the

expenditure or use, and the business purpose for the expenditure

or use. Sec. 1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed.

Reg. 46016 (Nov. 6, 1985).

Based on the mileage reported on petitioner's reimbursement

expense reports, on brief respondent concedes that petitioner is

entitled to a deduction for automobile expenses in the amount of

$827.94 using the standard mileage rate. Respondent contends

that petitioner has failed to substantiate automobile expense in

excess of this amount. We agree.

It is clear that petitioner paid some automobile insurance

premiums during 1989. She provided evidence of insurance expense

in the amount of $1,740.61. Petitioner has not established any

amount paid for the lease of her car. Petitioner testified that

she claimed 95 percent of her automobile expense as attributable

to business usage of her car. However, petitioner maintained no

records which would indicate that the business usage of her car

was 95 percent. Petitioner has not met the requirements of

substantiation under section 274(d). Accordingly, she is not

entitled to a deduction for automobile expense in excess of the

amount conceded by respondent.

Petitioner contends that she is entitled to a deduction in

the amount of $1,155 for expense incurred with respect to the use

of a computer in her work for Pitney Bowes. Petitioner testified
8

that she leased a computer which she used to organize her

accounts. Petitioner introduced copies of two invoices for

monthly lease payments. There is no evidence in the record that

petitioner paid either of these bills. In addition, petitioner

did not maintain any records of her business use of the computer

as required by section 274(d). Thus, petitioner has not

established that she is entitled to any deduction for the

business use of the computer.

Petitioner contends that she incurred an $8,000 loss in her

Too Close To Home activity in 1989, and she argues that she is

entitled to deduct the amount of this loss in that year. On

brief respondent requests that we find the following facts: 

"Petitioner carried on the Too Close To Home activity from June

1989 to December 1989. She incurred an $8,000 loss with respect

to this activity during the taxable year." We accept this as a

concession as to the amount of the loss incurred by petitioner. 

Respondent argues, however, that petitioner did not engage in

this activity for profit, and that she is therefore not entitled

to deduct this amount.

Section 162 allows deductions for ordinary and necessary

expenses paid or incurred in carrying on a trade or business. 

Section 183 generally limits allowable deductions to the extent

of gross income generated by "an activity not engaged in for

profit". Sec. 183(b). Whether petitioner was engaged in the

activity for profit depends on whether she undertook the activity
9

"with an 'actual and honest objective' of making a profit." 

Elliott v. Commissioner, 90 T.C. 960, 970 (1988), affd. without

published opinion 899 F.2d 18 (9th Cir. 1990). Whether

petitioner possessed the necessary intention of making a profit

is a question of fact to be determined on the basis of all the

facts and circumstances. Taube v. Commissioner, 88 T.C. 464, 480

(1987).

The regulations set forth the following nonexclusive factors

to consider in determining whether an activity is engaged in for

profit: (1) The manner in which the taxpayer carries on the

activity; (2) the expertise of the taxpayer or his advisers; (3)

the time and effort expended by the taxpayer in carrying on the

activity; (4) the expectation that assets used in the activity

may appreciate in value; (5) the success of the taxpayer in

carrying on other activities; (6) the taxpayer's history of

income or losses with respect to the activity; (7) the amount of

occasional profit, if any, which is earned; (8) the financial

status of the taxpayer; and (9) whether elements of personal

pleasure or recreation were involved. Sec. 1.183-2(b), Income

Tax Regs.

Considering the relevant factors contained in the

regulation, we conclude that petitioner did not engage in her Too

Close To Home activity for profit. Petitioner did not carry on

the activity in a businesslike manner. Although she maintained a

bank account for Too Close To Home, it was not used exclusively
10

for those purposes. Petitioner paid expenses not associated with

the activity, such as her insurance premiums, from the account. 

Petitioner had no business records for the activity. Petitioner

had no expertise in providing tours, nor did she have any special

knowledge of Haiti. Petitioner did not devote much of her time

to Too Close To Home. She worked 80 hours a week in her jobs and

carried on Too Close to Home during lunch and between jobs. 

Petitioner did not carry on Too Close To Home for profit during

the year in issue. Therefore, her deductions are limited to the

income derived from the activity, which was zero. Petitioner

offered no evidence to support a deduction for State and local

income taxes. Therefore, she is not entitled to a deduction.

Respondent determined an addition to tax as a result of

petitioner's failure to file a timely return. Section 6651(a)(1)

imposes an addition to tax for failure to file a timely tax

return. The addition to tax is equal to 5 percent of the amount

of the tax required to be shown on the return if the failure to

file is not more than 1 month. Sec. 6651(a)(1). An additional 5

percent is imposed for each month or fraction thereof in which

the failure to file continues, to a maximum of 25 percent of the

tax. Id. The addition to tax is applicable unless petitioner

establishes that the failure to file was due to reasonable cause

and not willful neglect. Id.

Petitioner's 1989 return was received by respondent on

September 1, 1995. Petitioner offered no testimony or evidence
11

3 Although respondent conceded that petitioner is entitled to

automobile expense in the amount of $827.94, a Rule 155

computation is unnecessary because this amount does not exceed

the standard deduction used by respondent in determining the

amount of the deficiency.

that the late filing was due to reasonable cause. Accordingly,

she has not established that the addition should not apply. The

determination of respondent is sustained.

Section 6654(a) imposes an addition to tax if the total tax

withheld, or the estimated tax payments made during the year, do

not equal the percentage of liability required under the statute

to be paid as estimated tax, subject to limited exceptions. Sec.

6654. Petitioner offered no testimony or evidence that an

exception applies. Accordingly, respondent's determination is

sustained.

To reflect the foregoing,

Decision will be entered

for respondent.

3