T.C. Sum m ary Opi ni on 20 16 -1 1

UNITED STAT ES TAX COURT

DONA DEPRIM AVERA JACKSON AND JOSEPH DWIGHT JACKS ON, Pet it io ne rs v. COM MIS SIONER OF INTERNAL REVENUE , Res po nd en t

Doc ke t No . 25 73 0- 14 S. Fi le d M arch 9, 2 01 6.

Don a De Pri m av era J ack so n a ndJo se ph Dwig htJac ks on , pro ses e. Pet er T. McC ary, forres po nd en t.

SUMM ARY OPINION GUY, Spec ia l Tri al Ju dg e: Thi s ca se was h eardpu rs uantto th e p ro vi si on s of sec ti on 74 63 of t he Int ern al Rev enue Co de ineffe ctwhenth e p et it io n was fil ed . Pur su an t t o s ect io n 7 46 3( b) , th e d eci si on to be en te redis no t re vi ewab le by 1 Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o t he Int ern al 1 (co nt in ue d...)-2 -

an y othe r co urt, an d thi s o pi ni on sh al l n otbe tre at edas p rece de ntforan y ot he r cas e. Res po nd en t d et erm in eda de fic ie nc y of $ 4,1 98 inpe ti ti on ers ’ Fed eral in co m e ta x fo r 20 12 . The d efi ci en cy is att rib ut ab le so le ly to p et it io ne rs ’ fai lu re t o rep ort n on em

pl oyee co m

pe ns at io n o f $1 0,2 74 th atMr. J ack so n re cei ve d fr om Jo hn Down s So ut he rnCat tl e Co . (SCC) in20 12 . Peti ti on ers , hu sb an d a ndwife , fil eda ti m el y

pe ti ti on forred et erm in at io n wi th th e Co urt p ur su an t t o s ect io n 62 13 (a). At t he ti m e th e p et it io n was fil ed , pet it io ne rs res id edinFlo rid a. Pet it io ne rs co nc ed e th atMr. J ack so n’s n on em pl oyee co m

pe ns at io n i s pr op erl y in cl ud ab le intax ab le in co m e. They m ai nt ai n, h owe ve r, th atth ey are en ti tl edto de du ct io ns for bu si ne ss ex pe ns es rel at edto a sm al l-e ng in e rep ai r bu si ne ss an d M r. Ja ck so n’s wo rkas a n i nd ep en de ntco nt ract or . Bac kg ro un d So m e o f th e fac ts ha ve be enst ip ul at edan d a re s o fo un d. Th e st ip ul at io n o f fact s, the fir stsupp le m en ta l s ti pu la ti on of f act s, an d t he acco m

pa nyin g e xh ib it s ar e in co rp or at edhe rei n b y

th is refe ren ce. (...co nt inue d) 1 Rev enue Co de , as a m en de d a ndineffec t fo r 20 12 , andall Ru le refe ren ces are t o th e Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e. Mo ne tary am ou nt s ar e ro un de d t o th e n eare stdo ll ar.-3 -

I. Mr. J ack so n’s Em

pl oym en t an d B us in es s Act iv it ie s In20 12 Mr. J ack so n wo rk edas am ech an ic forsev eral em pl oyers i nc lu di ng Lan dr es s Au to (Ja nu ary to Marc h) an d S CC (Au gu stto Decem be r). Fro m

Marc h to Aug us t 2 01 2 M r. Ja ck so n o pe rat eda sm al l-e ng in e rep ai r bu si ne ss . A. Sm al l-En gi ne Rep ai r Bu si ne ss Inearl y 20 12 Mr. J ack so n d eci de d t o o pe n asm al l-e ng in e rep ai r bu si ne ss , an d t o tha t en d h e co ns tru ct eda sm al l wo rk sh op on hi s fa th er’s p ro pe rty. Mr. Ja ck so n t es ti fie d tha t the bu si ne ss ge ne rat edgro ss rece ip ts (in cas h) of ap pr ox im at el y

$6 50 . B. SCC SCC o pe rat es an18 ,00 0- acre farm . Duri ng Aug us t thr ou gh Octo be r 20 12 Mr. J ack so n wo rk edat S CC as anin de pe nd en t co ntract or . For t he rem ai nd er o f th e y ear S CC treat edMr. J ack so n a s an em pl oyee. Mr. Ja ck so n n orm al ly w orke d 10 to 14 ho ur s a d ay

rep ai rin g tru ck s, tract or s, wat er l in es , andot he r equi pm en t at va rio us lo cat io ns onSCC’s p ro pe rty. Pet it io ne rs pro du cedanun da te d l et te r si gn edby L am on t En ni s, SC C’s ge ne ral m an ag er, wh ic h s ta te s tha t SC C’s co nt ractlab or ers were n otrei m bu rs ed fo r work t oo ls or s up pl ie s. As anSCC e m pl oyee, ho wev er, Mr . Jac ks on was-4 -

pr ov id eda ve hi cl e (an d fu el ) to tra ns po rt h im se lf a ro un d t he farm pro pe rty anda cel lu lar ph on e to st ay

inco nt actwith S CC’s m an ag ers . C. Bu si ne ss Exp en se s 1. Sm al l-En gi ne Rep ai r Bu si ne ss Mr. J ack so n t es ti fie d tha t h e p ur ch as edso m e b ui ld in g m at eri al s fr om a fri en d i n the ho m e co ns tru ct io n b us in es s t o c on st ru ctth e works ho p o n h is fathe r’s pr op erty , bu t h e h adno rece ip ts an d c ou ldno t re cal l h ow m uc h h e h adpa idforth e m at eri al s. Mr s. J ack so n c reat edbu si ne ss card s an d fl y ers to ass is t M r. Ja ck so n i n pr om ot in g the bu si ne ss . Bot h p et it io ne rs us edth ei r pe rs on al ve hi cl es an d c el lu lar ph on es inco nn ect io n wi th th e small- en gi ne rep ai r bu si ne ss .

2. SC C Mr. J ack so n ro ut in el y

us edhi s p ers on al cel lu lar ph on e to co m m un ic at e wit h SCC’s m an ag ers an d h is ownve hi cl e (a M azd a MPV) to m ov e aro un d t he farm pr op erty whi le work in g a s anin de pe nd en t co nt ract or forSCC. Mr . Jac ks on te st ifi edth athe rare ly use d h is cel lu lar ph on e fo r pe rs on al cal ls an d h e es ti m at ed th atap pr ox im at el y

90 % of h is cel lu lar ph on e u se was a ttrib ut ab le to hi s wo rkfor SCC. He t es ti fie d tha t h e m ay have pu rch as edso m e to ol s t o p erfo rm rep ai r work fo r SCC .-5 - 3. Bu si ne ss Reco rd s Pet it io ne rs pro du cedbankreco rd s s ho win g t ha t the y pa id$6 ,31 4 fo r ga so li ne in20 12 . Peti ti on ers di d n otm ai nt ai n l og s o r si mil ar re co rd s t o s ho w th e nu m be r of mil es th atth ey

dro ve th ei r ve hi cl es inco nn ect io n wi th th e small- en gi ne rep ai r bu si ne ss . Mr. Ja ck so n d idno t k eep reco rd s o f th e m il es th athe dro ve hi s ve hi cl e whi le work in g a s an in de pe nd en t co nt ract or for SCC. Pet it io ne rs pa idap pr ox im at el y $6 0 p er m on th in20 12 fortwo “pa y -as -y ou go ” cel lu lar se rv ic e p lans . They al so pa id$6 42 an d $ 48 4 fo r au to m ob il e in su ran ce fo r th e Ma zd a MPV anda Fo rdF-1 50 tru ck(dr iv enpri m ari ly by Mrs . Ja ck so n) , res pe ct iv el y , forth e o ne -y ear p eri odbe gi nn in g J anua ry 21 , 20 12 . Pet it io ne rs were u nabl e to pro vi de an y reco rd s o r rec ei pt s fo r pu rch as es of to ol s o r supp li es rel at edto Mr. J ack so n’s wo rk forSCC. II. Pet it io ne rs ’ Jo in t Tax Return Pet it io ne rs fil eda ti m el y

joi ntFed eral in co m e ta x re tu rnfor20 12 . They cl ai m edtwo de pe nd en cy

ex em pt io n d educ ti on s an d ast an da rdde du ct io n o f $1 1,9 00 . They di d n otfil e a Sch edul e C, Pro fitor Lo ss Fro m Bu si ne ss , with t he ir ta x re turn . As pr ev io us ly m en ti on ed , pet it io ne rs co nc ed e th atth ey ne gl ect edto rep ort n on em

pl oyee co m

pe ns at io n t ha t M r. Ja ck so n re cei ve d fr om SCC. Mr .-6 -

Ja ck so n a dm it te d at tria l tha t p et it io ne rs ha d u nr ep orte d g ro ss rece ip ts of $ 65 0 fro m th e small- en gi ne rep ai r bu si ne ss . III. Tri al an d P os ttria l Dev el op m en ts Altho ug h p et it io ne rs ap pe aredat t ria l an d t es ti fie d, the y cam e to Co urt wi th ve ry few d oc um en ts or r eco rd s t o s ub st an ti at e an y expe ns es rel at edto Mr. Ja ck so n’s s m al l-e ng in e rep ai r bu si ne ss or h is workas an i nd ep en de ntco nt ract or fo r SCC . At the co nc lu si on of t he tri al th e Co urt l eftth e ev id en ti ary reco rdop enfora br ie f pe rio d t o p erm itth e p art ie s t o s ti pu la te , to th e ex te ntpo ss ib le , add it io na l do cu m en ts or r eco rd s tha t wo ul d t en d t o s ub st an ti at e Mr. J ack so n’s b us in es s ex pe ns es . The p art ie s s ub se qu en tl y fil edwith t he Co urt a f

irs t s up pl em en ta l st ip ul at io n o f fac ts , andth e Co urt cl os edth e ev id en ti ary reco rd . Dis cu ss io n As a g en eral rul e, th e Co m m is si on er’s d et erm in at io n o f a t ax pa y er’s l iabi li ty in a no ti ce o f de fic ie nc y

is pre su m edco rrec t, an d t he tax pay er b ears th e b ur de n o f pr ov in g tha t the de te rm in at io n i s i nc orrect . Rul e 1 42 (a); W el chv. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ). 2 Pet it io ne rs do no t co nt en d t ha t the bu rd enof p ro of sh ou ldbe sh ift edto 2 res po nd en t p ur su an t t o s ec. 7 49 1( a), an d t he re i s n o ju st ifi cat io n o n t hi s re co rdfor (co nt in ue d...)-7 -

Deduc ti on s ar e a m at te r of leg is la ti ve gra ce, an d t he tax pa y er g en eral ly be ars th e b ur de n o f pr ov in g e nt it le m en t t o a ny deduc ti on cla im ed . Rul e 1 42 (a); INDOPCO, In c. v. Co m

m is si on er, 5 03 U.S. 79 , 84 (19 92 ); Ne w Col on ia l Ic e Co . v. Hel ve rin g, 2 92 U.S. 43 5, 4 40 (19 34 ). A tax pa y er m us t s ub st an ti at e d educ ti on s cl ai m edby keep in g a ndpro du ci ng ad equa te reco rd s tha t en ab le th e Co m m is si on er to de te rm in e th e ta xp ay er’s co rrec t t ax li ab il ity . Sec. 6 00 1; Hrad es ky v. Co m m is si on er, 6 5 T.C. 8 7, 8 9- 90 (19 75 ), aff’d p er cu ria m , 54 0 F .2d82 1 (5 th Cir . 19 76 ); M en eg uz zo v. Co m mis si on er, 4 3 T.C. 8 24 , 83 1- 83 2 (1 96 5) . A tax pa y er cl ai min g ade du ct io n o n aFed eral in co m e ta x re tu rnm us t d em on strat e th atth e de du ct io n i s al lo wab le pu rs ua ntto a st atut ory pro vi si on an d m

us t fu rth er subs tant ia te th atth e expe ns e to whi chth e d educ ti onrel at es ha s b eenpa idor in cu rred . Sec. 6 00 1; Hrad es ky v. Co m m is si on er, 6 5 T.C. at89 -9 0. Whe n atax pay er es tabl is he s tha t h e o r sh e p ai d o r in cu rreda de du ct ib le ex pe ns e b utfai ls to est ab li sh th e am ou ntof t he de du ct io n, the Co urt n orm al ly m ay es ti m at e th e am ou ntall owabl e as a de du ct io n. Co han v . Comm is si on er, 3 9 F .2d 54 0, 5 43 -5 44 (2dCir . 19 30 ); Vani cekv. Co m m is si on er, 8 5 T.C. 7 31 , 74 2- 74 3 (1 98 5) . There m

us t b e su ffi ci en t ev id en ce i n t he reco rd , ho wev er, t o p erm itth e (...co nt inue d) 2 do in g s o.-8 -

Co urt t o c on cl ud e th ata de du ct ib le ex pe ns e was pa idor i nc urredinat l eas t the am ountall owe d. Will ia m s v . Uni te d S ta te s, 2 45 F.2d55 9, 5 60 (5t h C ir. 1 95 7) . Und er s ect io n 1 62 (a), a d educ ti on is all owe d fo r or di na ry an d n eces sa ry ex pe ns es pa idor i nc urreddu rin g t he tax ab le y ear i n c arrying on an y tra de or bu si ne ss . A deduc ti on no rm al ly is n otall owe d, h owe ve r, fo r pe rs on al , li vi ng , or fam il y ex pe ns es . Sec. 2 62 (a). Whethe r anex pe nd itur e sa ti sf ie s the requi rem en ts fo r de du ct ib il ity

un de r se ct io n 1 62 is a qu es ti on of f act . See Co m

m is si on er v . Hein in ge r, 32 0 U.S. 4 67 , 47 5 (1 94 3) . Sect io n 2 74 (d ) pr es cri be s m or e strin ge ntsubs tant ia ti on requi rem en ts to be m etbe fo re a t ax pa y er m ay de du ctcert ai n c at eg or ie s o f ex pe ns es , in cl ud in g ex pe ns es rel at edto th e u se of l is te d p ro pe rty as d efi ne d i n s ect io n 2 80 F(d )(4 )(A). See S an fo rdv. Co m

m is si on er, 5 0 T.C. 8 23 , 82 7 (1 96 8) , aff’d, 4 12 F.2d20 1 (2 d Ci r. 19 69 ). The t erm

“ li st edpro pe rty” in cl ud es , in te r al ia , pas se ng er au to m ob il es . Sec. 2 80 F(d )(4 )(A)(i ). To s at is fy th e requi rem en ts of s ect io n 2 74 (d ), a ta xp ay er ge ne ral ly m

us t m ai nt ai n a de qu at e rec or ds or p ro du ce s uf fic ie ntev id en ce co rro bo rat in g h is or h er o wn s ta te m en t, wh ic h, i n c om bi na ti on , are s uf

fic ie ntto es tabl is h the am ou nt , dat e an d t im e, an d b us in es s p ur po se foreachex pe nd itur e o r bu si ne ss us e o f li st edpro pe rty. Sec. 1.2 74 -5 T(b) (2 ), (6 ), (c)( 1) , Tem po rary In co m e Tax Reg s., 5 0 F ed . Reg . 46 01 4, 4 60 16 -4 60 17 (Nov . 6, 1 98 5) .-9 -

Sect io n 1 .27 4- 5T(c )(2 ), Tem po rary Inco m e Tax Reg s., 5 0 F ed . Reg . 46 01 7- 46 01 8 (No v. 6 , 19 85 ), pr ov id es inrel ev an t p artth at“ ad equa te reco rd s” ge ne ral ly co ns is t o f anacco un t b oo k, a d iary , a lo g, a s ta te m en t o f ex pe ns e, tr ip sh eet s, o r a si mil ar re co rdm ad e ator n ear the ti m e o f th e expe nd itur e o r us e, al on g wi th supp orti ng do cum en tary

ev id en ce. The Co urt m ay no t ap pl y

th e ru le est ab li sh ed in Co ha n v . Comm is si on er, 3 9 F .2dat 5 43 -5 44 , to est im at e ex pe ns es co ve redby se ct io n 2 74 (d ). San fo rdv. Co m m is si on er, 5 0 T.C. at82 7; sec . 1.2 74 -5 T(a), Tem po rary Inco m e Tax Reg s., 5 0 F ed . Reg . 46 01 4 (No v. 6 , 19 85 ). Fo r ta xabl e y ears be gi nn in g a fte r Decem be r 31 , 20 09 , cel lu lar ph on es are n o lo ng er i nc lu de d i n the de fin it io n o f li st edpro pe rty in s ect io n 2 80 F(d )(4 ), whi ch was am en de d b y

th e Sm al l Bu si ne ss Jo bs Act o f 20 10 , Pub . L. No. 11 1- 24 0, s ec. 20 43 (a), 1 24 Sta t. at25 60 . As a res ul t o f th is ch an ge , cel lu lar ph on es are n o lo ng er s ub

ject t o the stric t s ub st an ti at io n re qu ire m en ts of s ect io n 2 74 (d ). I. Sm al l-En gi ne Rep ai r Bu si ne ss Pet it io ne rs co nt en d tha t the y are en ti tl edto de du ct io ns forva rio us ex pe ns es rel at edto th is bu si ne ss , in cl ud in g c on st ru ct io n c os ts , veh ic le ex pe ns es , and cel lu lar ph on e ch arg es . Mr. Ja ck so n t es ti fie d tha t h e co ns tru ct eda sm al l b ui ld in g o n h is fathe r’s pr op erty an d tha t h e p ur ch as edso m e b ui ld in g m at eri al s fr om a fri en d fo r th e-1 0-

pr ojec t. Pet it io ne rs were u nabl e to off er an y rece ip ts or o th er re co rd s tha t wo ul d sh ow the am ou nt , if an y , th atth ey pa idinco nn ect io n wi th th e co ns tru ct io n o f th e bu il di ng . Sect io n 2 63 (a)( 1) pro vi de s i n re le vantpa rt t ha t, as a ge ne ral rul e, no de du ct io n s ha ll be all owe d fo r an y am ou ntpa idou t fo r ne w bu il di ng s. Inan y ev en t, i n the ab se nc e o f an y ev id en ce tha t wo ul d p erm itth e Co urt t o c on cl ud e th at a d educ ti bl e ex pe ns e was pa idor i nc urred , we are o bl ig edto de ny a deduc ti on for th is it em . Pet it io ne rs pro vi de d e vi de nc e o f th e am ou nt s the y pa idforga so li ne an d au to m ob il e in su ran ce i n 2 01 2. Al th ou gh we do no t d oubtth atpe ti ti on ers us ed th ei r ve hi cl es inth e small- en gi ne rep ai r bu si ne ss , th ey fai le d t o m ai nt ai n amil eag e lo g o r a s im il ar re co rdth atwou ldrefl ectth e num be r of m il es th ey

dro ve for bu si ne ss pu rp os es as o pp os edto pe rs on al tra ve l. Un de r th e ci rcu m st an ces , pe ti ti on ers ha ve fai le d t o s at is fy th e st ric t s ub st an ti at io n re qu ire m en ts of s ect io n 27 4( d) , and , th eref

or e, th ey are n oten ti tl edto a de du ct io n fo r ve hi cl e ex pe ns es . Pet it io ne rs tes ti fie d c red ib ly tha t the y us edth ei r pe rs on al cel lu lar ph on es ex te ns iv el y

inco nn ect io n wi th th e small- en gi ne rep ai r bu si ne ss . Con si de rin g tha t pe ti ti on ers co nduc te d the bu si ne ss forap pr ox im at el y si x m on th s, we co nc lu de th at th ey are en ti tl edto a de du ct io n o f $3 25 (ap pr ox im at el y 90 % of t he ir c om

bi ne d cel lu lar ph on e ch arg es for th e p eri od ).-1 1-

II. In de pe nd en t Co nt ract orExp en se s Pet it io ne rs co nt en d tha t the y are en ti tl edto de du ct io ns forex pe ns es at tri bu tabl e to Mr. J ack so n’s wo rkas a n i nd ep en de ntco ntract orforSCC i nc lu di ng th e co stof t oo ls , veh ic le ex pe ns es , andcel lu lar ph on e ch arg es . Mr. J ack so n t es ti fie d tha t h e m ay ha ve pu rch as edto ol s u se d t o p erfo rm rep ai r work fo r SCC . The rec or d i nc lu de s an un da te d l et te r si gn edby SCC’s ge ne ral m an ag er wh ic h s ta te s tha t SC C’s co ntractlab or ers were n otrei m burs edfor work t oo ls or s up pl ie s. Un fo rtu na te ly, pe ti ti on ers were u nabl e to off er an y rece ip ts or o th er re co rd s tha t wo ul d s ho w th e am ou nt , if an y , th atMr. J ack so n p ai d fo r to ol s o r supp li es . Becau se th ere i s n o e vi de nc e th atwou ldpe rm itth e Co urt t o co nc lu de th ata de du ct ib le ex pe ns e was pa idor i nc urred , we are unabl e to ap pl y th e Co ha n ru le to est im at e th e am ou ntof ade du ct io n fo r to ol s o r supp li es . As was th e cas e wit h the sm al l-e ng in e rep ai r bu si ne ss , pet it io ne rs pro vi de d ev id en ce o f th e am ou nt s the y pa idfor ga so li ne an d aut om ob il e in su ran ce i n 2 01 2. Aga in , ho wev er, Mr . Jac ks on fai le d t o m ai nt ai n am il eag e lo g o r a s im il ar re co rd th atwou ldrefl ectth e num be r of m il es th athe dro ve inco nn ect io n wi th hi s wo rk fo r SCC . Und er the cir cu m st an ces , pet it io ne rs ha ve fai le d t o s at is fy th e st ric t subs tant ia ti on requi rem en ts of s ect io n 2 74 (d ), an d, the refo re, the y are n oten ti tl ed to a de du ct io n fo r ve hi cl e ex pe ns es .-1 2-

Mr. J ack so n t es ti fie d c red ib ly that h e u se d h is cel lu lar ph on e p rimaril y for bu si ne ss pu rp os es whi le work in g a s an in de pe nd en t co nt ract orforSCC. Onth is reco rd , we con cl ud e th atMr. J ack so n m ay de du ct$8 1 o r 90 % of h is sh are o f m on th ly cell ul ar p ho ne ex pe ns es forth e p eri odth athe work edas a n i nd ep en de nt co nt ract or . To re fle ctth e fo reg oi ng , Deci si on wil l b e en te red un de r Ru le 15 5.