1 Reynolds recently retired from the IRS. 

## In the 

# United States Court of Appeals

For the Seventh Circuit

____________

No. 00-2966

C HARLES R EYNOLDS and B EATRICE R EYNOLDS

, Petitioners-Appellants,

v.

C OMMISSIONER OF I NTERNAL R EVENUE

, Respondent-Appellee.

____________ Appeal from the United States Tax Court

No. 12112-97— John F. Dean

, Special Trial Judge

.

____________ ARGUED N OVEMBER 30, 2001—D ECIDED J ULY 18, 2002

____________

Before F LAUM

, Chief Judge

, C UDAHY

, and M ANION

, Circuit Judges

.

C UDAHY

, Circuit Judge . This dispute arises from certain tax deductions claimed by Ch arles and Beatrice Reynolds
on their 1993 and 1994 tax returns. The Internal RevenueService (IRS) challenged the deductibility of certain expenses related to a family farm business, rental properties and to Charles Reynolds’ private law practice, which is, for better or worse, a sideline from his full-time employment as an IRS supervisor. 1 During the pendency of this dispute, the Reynolds received two brief letters from the IRS2 No. 00-2966

stating that they had no outstanding liability for the 1993and 1994 tax years. The Reynolds asserted that these letters were binding admissions by the IRS, thus estopping the agency from pursuing any further action against them. The U.S. Tax Court rejected this argument and ruled on the merits, allowing some of the deductions and disallowing others. In addition, pursuant to 29 U.S.C. § 6662(a), the Tax Court upheld a 20% accuracy-related penalty because it found that some of the remaining errors were the result of negligence.

The Reynolds appeal the following: (1) the evidentiary weight given to the no-liability letters, (2) the classification of certain legal defense costs as personal costs rather than as business expenses related to Charles Reynolds’ private law practice, (3) the denial of various automobile and travelexpenses related to the private law practice, farming activity and the rental properties, and (4) the imposition of the accuracy-related penalties. We affirm the judgment of
the Tax Court.

I.

Charles Reynolds joined the IRS in 1976, where he
worked as a revenue officer in the Chicago office. Several years later, Reynolds graduated from law school and waspromoted to a supervisory position, which involved a caseload of taxpayer audits. In 1987 and 1988, Reynolds received permission from the IRS to practice law in addition to his primary employment with the IRS. However, in 1992,the IRS commenced an investigation of Reynolds springing from concerns that he may have been conducting his private law practice during hi s workday at the IRS. To defend himself, Reynolds hired a major Chicago law firm andincurred legal expenses. The investigation was officially terminated in 1995.

During 1993 and 1994, which is the time period relevant to this dispute, Charles Reynolds operated a small part-No. 00-2966 3

2 This case involves a discussion of various tax forms, or “Schedules,” used in the preparation of a federal tax return. Schedule C is used to calculate a profit or loss from a sole proprietorship— e.g., a law practice. Schedule A is used to itemize various personal expenses that are deductible under federal law. Schedule E is used to state supplemental income or loss from various other activities—e.g., rental income from real property. Schedule F is used to state a profit or loss from farming activity.

3 Neither party in this case provides an intelligible summary of precisely which automobile and travel deductions are now onappeal nor do they give us the total amount of the claimed deductions. Moreover, during the proceedings below, the Tax Court (continued...) time law practice. These effort s were limited to a few real estate closings and related activities. In 1993, Reynold’s Schedule C for this law prac tice reported gross receipts of only $700. 2 However, he claimed a net loss of $6,271. His deductions included $2,380 for legal fees related to theIRS investigation of certain questionable on-the-job activities. Similarly, in 1994, Reynold’s Schedule C reported gross receipts of $450 with a net loss of $10,255. This amountincluded $5,615 in legal fees related to the ongoing investigation. In a subsequent audit, the IRS disallowed the business deduction of the legal expenses, ruling that they should instead be categorized as itemized personal expenses on Schedule A and thus deductible to the extent they exceeded the 2% “floor” limitation of 26 U.S.C. § 67(a).

In addition to the reclassification of the legal expense,
IRS auditors also denied vari ous other deductions, including automobile and travel expe nses allegedly related to the law practice, to a family farm and to rental properties. Only the auto and travel expenses , however, are currently before us on appeal. From our own inspection of the record, we
estimate the total amount of the deductions now in dispute to be approximately $3,359. 3 Included in this amount4 No. 00-2966

3 (...continued)discovered that the disputed travel, meals and automobile expenses, including depreciation of various cars owned by the Reynolds, had been consolidated oneither Schedules C or E ratherthan spread across Schedules C, E and F to reflect the costs incurred in each activity (i.e., law practice, rental properties or farming). The Reynolds attempted to cure this problem by submitting additional documents that reflected a more precise breakdown. Although the Reynolds corre ctly point out that all expenses listed on Schedules C, E and F are “above-the-line” deductions, and thus their assignment to a particular Schedule has no effect

on their totaltax liability, Appellant’s Br. at 27, they seem to forget that “the taxpayer[ ] bears the burden of showing a right to
the business deduction.” A.E. Staley Mfg. Co. v. Commissioner

, 119 F.3d 482, 486 (7th Cir. 1997) (citing INDOPCO, Inc. v. Commissioner , 503 U.S. 79, 84 (1992)). It is astonishing that the Reynolds fail to make a clear statement on the amount of theautomobile and travel deductions they are entitled to, especially since these deductions were disallowed by the Tax Court because of inadequate substantiation under 26 U.S.C. § 274(d). The Reynolds apparently believe that, if their argument carries the day, the U.S. Court of Appeals will do the math for them.

4 According to tax returns filed bythe Reynolds, the family farm generated $50 in revenues in 1993 and $1,745 in 1994. In both years, the farm operated at a net loss. are travel and automobile expenses allegedly incurred by Charles Reynolds in the course of his law practice, including depreciation of a 1988 Toyota Camry. Similarly, the IRS denied travel and automobile expenses related to rental property owned by the Reynolds in Indiana, Kentucky and Virginia, and travel to Florida to evaluate a real estate development project that never materialized. Finally, the IRS denied travel and automobile expenses incurred in atrip to a family-owned farm in Kentucky, including the depreciation of a 1994 Ford van, which was supposedly used“to haul tillers, plows and farm tools from Virginia to Kentucky and for use in the operation of the farm.” 4Although the Reynolds did not keep a log of specific trips and theNo. 00-2966 5

mileage that corresponded with each money-making activity, Charles Reynolds retain ed various receipts for gas,maintenance and repairs, and during the subsequent audit, he attempted to categori ze each expense and to apportion it to the appropriate activities.

Nonetheless, the IRS denied the automobile and travel deductions on various grounds, including failure to comply with the substantiation requirements of 26 U.S.C. § 274(d). After the IRS had made several other adverse rulings thatare not pertinent to this appeal, the agency calculated deficiencies of $4,732 and $3,092 for the 1993 and 1994 tax years, respectively, together with corresponding accuracyrelated penalties of $946 and $618, respectively.

In August of 1997, the Reynolds petitioned the U.S. Tax
Court for a redetermination of their 1993 and 1994 taxliability. In March of 1998, while this matter was still pending before the Tax Court, the Reynolds apparently sent a letter of inquiry to the IRS prob lem resolution office in Kansas City, Missouri, with respect to their 1993 and 1994 tax liabilities. It is important to note that this inquiry was notdirected to the district counsel for the IRS, who was representing the respondent in the ongoing dispute before the Tax Court. A month later, the Reynolds received two short letters from the IRS, one pertaining to 1993 and theother to 1994, that were identically worded with the exception of the specific tax amounts peculiar to each. After listing credit adjustments for each year, both letters listed “the amount you now owe” as “none.”

In April 1999, the case went to trial, and the Reynolds asserted that the IRS correspondence was tantamount to a binding admission by the government that estopped it from litigating the present case. The Tax Court rejected this argument as contrary to well-established law. The court went on to consider various testimony and exhibits, issuing a decision in part for the Reynolds and in part for6 No. 00-2966

the IRS. The restated liability was $2,422 and $1,937 for the 1993 and 1994 tax years, respectively, together with corresponding accuracy-related penalties of $484.40 and $387.40, respectively. Although the amount in controversy in the case is relatively small, the Reynolds assert that this appeal is being brought “to purge the taint on [Charles Reynolds’] reputation arising from the negligence penalty assessed against him.” We agree that money is not the measure of all things worth fighting for, and the issues raised here are, for the most part, serious.

II.

Pursuant to 28 U.S.C. § 2072, decisions of U.S. Tax Court are reviewable by this court. See28 U.S.C. § 2072. The Reynolds present four issues for review: (1) Did the Tax
Court err when it refused to consider the written notices sent to the Reynolds in relation to their 1993 and 1994 tax liability? (2) Did the Tax Court err in classifying Charles Reynolds’ legal defense expenditures as § 67(a)itemized personal deductions rather than as § 162(a) business expenses? (3) Did the Tax Court err in ruling that the Reynolds had failed to adequately substantiate their automobile and travel-related expenses on Schedule C (law practice), Schedule E (rental properties) and Schedule F (farming business), as required by § 274(d)? (4) Did the Tax Court err in sustaining a § 6662(a) accuracy penalty against the Reynolds for negligent underpayments of their
1993 and 1994 taxes?

Before considering each issue in turn, we note that a decision of the Tax Court is subject to the same standards of review “that we apply to distri ct court determinations in a civil bench trial: We review factual determinations, as wellas applications of legal principles to those factual determinations, only for clear error.” Cline v. Commissioner , 34 F.3d 480, 484 (7th Cir. 1994); accord Toushin v. Commis-No. 00-2966 7

sioner , 223 F.3d 642, 645-46 (7th Cir. 2000); Fruit of the Loom, Inc. v. Commissioner , 72 F.3d 1338, 1343 (7th Cir.1996). However, deficiencies determined by the Commissioner are presumed to be correct and the taxpayer bears the burden of proving otherwise. Pittman v. Commissioner

, 100 F.3d 1308, 1313 (7th Cir. 1997).

A.

The first issue we address is whether the Tax Court erred when it refused to treat the two no-liability letters from theIRS (pertaining to the 1993 and 1994 tax years, respectively) as binding admissions. The Reynolds claim that these two documents are “uncontroverted binding admissionsof no deficiency,” thus mandating a judgment in their favor. However, the cases relied upon by the Reynolds in this regard all deal with “judicial admissions,” which enter the litigation either through the pleadings or under Rule 36 of
the Federal Rules of Civil Procedure. See

, e.g. , Kohler v. Leslie Hindman, Inc. , 80 F.3d 1181, 1185 (7th Cir. 1996) (“When a party in a lawsuit makes an admission in its pleadings or in its answer to a request for admissions, it makes a judicial admission that can determine the outcome of that lawsuit.” (citing Fed. R. Civ. P. 36(b))); Keller v.
United States , 58 F.3d 1194, 1199 n.8 (7th Cir. 1995) (“Judicial admissions are formal concessions in the pleadings, or stipulations by a pa rty or its counsel, that arebinding upon the party making them. They may not be controverted at trial or on appeal . . . . [They] have the effectof withdrawing a fact from contention.” (quotations omitted)).

Although a judicial admission has the effect of settling an issue of fact for the purposes of the current litigation, nothing of that exalted significance is present here. The alleged admissions in this case were not furnished by the IRS as part of the record before the Tax Court. In fact, the8 No. 00-2966

weight to be accorded these letters appears to be less than
leaden.

The story unfolds as follows. The Tax Court scheduled the matter before us now for a trial to commence on March 2, 1998. On the day of trial, the district counsel for the IRS learned that the Reynolds had been subject to a premature deficiency assessment for the 1993 and 1994 tax years and motioned the Tax Court to return the case to its general trial docket. According to the co urt transcript for that date, the parties appeared to be close to settlement. The Reynolds offered no objection to the government’s motion, and a continuance was granted. Shortly thereafter, the Reynolds apparently sent an inquiry to the IRS problem resolutionoffice in Kansas City, Missouri. On April 13, 1998, that office generated the two no-liability letters, which respectively credited the Reynolds’ 1993 and 1994 tax years in
the exact amount at issue before the Tax Court. Both of these very short letters cont ained the following sentence: “This [action] is the result of your correspondence of March 18, 1998.” However, a copy of the March 18, 1998 letter is not part of the record, presumably because it was sent to the IRS problem resolution office in Kansas City. If the Reynolds wanted the IRS to stipulate or to admit that the couple owed no taxes for 1993 and 1994, they should have directed their correspon dence to the district counsel for the IRS, who was based in Chicago and apparently was well known to the Reynolds through previous settlement negotiations and court appearances. The Reynolds cannot obtain a judicial admission on the cheap.

At most, the two no-liabilit y letters are extrajudicial admissions, which are admissible as evidence and may be weighed by the factfinder according to their probative value.
See Murrey v. United States , 73 F.3d 1448, 1455 (7th Cir. 1996) (distinguishing between a “judicial admission” and an “extrajudicial admission”); Keller , 58 F.3d at 1199 n.8 (distinguishing between “judicial admission” and other ad-No. 00-2966 9

missions which are treated as evidence). In the case before us, the letters have virtually no probative value. The letters appear to have been comput er generated and do not reference in any way the litigation that has been pending before the Tax Court. The letters state that the Reynolds’ “account” was “adjusted.” Beca use the Reynolds could not be lawfully assessed with a tax deficiency until the Tax Court issued a decision favorable to the IRS, see26 U.S.C. § 6213(a), these letters most likely reflect an adjustment for a premature deficiency assessment. Unfortunately, we
don’t know what information the IRS office in Kansas City was acting upon because the correspondence which prompted the IRS reply is not part of the record.

Further, the settlement or closure of a civil tax dispute with the IRS is a matter controlled by statute. See 26 U.S.C. §§ 7121 (closing agreements), 7122 (compromises). These provisions provide the exclusiv e method for settling civil tax disputes with finality. See Brooks v. United States , 833 F.2d 1136, 1145 (4th Cir. 1987) (holding that “[s]ection 7122 is the exclusive method by whic h tax cases may be compromised”); Whitney v. United States , 826 F.2d 896, 897-98 (9thCir. 1987) (holding that “section 7121 of the Internal Revenue Code is the exclusive means whereby tax disputes can be settled”); Hagadone v. Commissioner , 98 T.C.M. (RIA)352 (“It is well established that as a general rule the Commissioner is finally and conclusively bound by an agreement with a taxpayer only if the parties enter into a closing agreement under the provisions of section 7121.”). The Tax Court correctly observed that the record “is devoid of any evidence that petitioners and respondent entered into a valid closing or compromise agreement.” On the evidentiary weight to be given to the no-liability letters, we are in agreement with the Tax Court. The letters get the petitioners no closer to their goal.10 No. 00-2966

B.

The next issue before us is whether the Tax Court erred when it ruled that legal defense costs incurred by CharlesReynolds during the 1993 and 1994 tax years were miscellaneous itemized deductions, which are subject to the 2% floor contained in 26 U.S.C. § 67(a), rather than business expenses related to the private law practice, which are fullydeductible under 26 U.S.C. § 162(a). The legal costs at issue here are related to the IRS investigation of Charles Reynolds’ alleged on-the-job misconduct—i.e., that he may have been conducting his private law practice during his official hours of employment at the IRS.

The Reynolds’ primary argument is that Charles Reynolds’ ability to practice law on a part-time basis had to be approved through appropriate IRS channels. Thus, an adverse ruling could have led to the withdrawal of this approval and thus terminated his practice of law. The Reynolds also claim that an adverse ruling would have negatively affected Charles Reynolds’ legal reputation,
which would have caused him to lose law-related business. Following this logic, the Reynolds maintain that all of the legal defense costs for 1993 and 1994 ($5,615 and $2,380, respectively) were properly listed as Schedule C business expenses.

In response, the government correctly argues that this issue is governed by the “origin of the claim” doctrine, which was first articulated by the Supreme Court in United
States v. Gilmore , 372 U.S. 39 (1963). In Gilmore , the taxpayer attempted to deduct substantial legal expenses incurred in protracted divorce litigation with his estranged wife as a “business” expense related to income-producing property rather than as a “personal” expense. The taxpayer justified his position by arguing that the divorce litigation involved the disposition of three car dealerships owned by the taxpayer. He contended that the conservation ofNo. 00-2966 11

5 Gilmore addressed the deductibility of legal expenses related to the conservation of income-p roducing property under §§ 23(a), 24(a) of the 1939 Code, and its successor statutes, 26 U.S.C. §§ 212, 262, of the 1954 Code. See 372 U.S. at 40 & n.3. However, it is well settled in that the holding of Gilmore also applies to the deductibility of legal expenses under § 162(a). See Anchor Coupling Co., Inc. v. United States , 427 F.2d 429, 433 (7th Cir. 1970) (applying Gilmore to determine deductibility of legal expenses under § 162(a)); see also Dana Corp. v. United States , 174 F.3d 1344, 1350-51 (Fed. Cir. 1999) (same); Kopp’s Co. v. United States

, 636 F.2d 59, 60-61 (4th Cir. 1980) (same); Nadiak v. Commissioner , 356 F.2d 911, 912 (2d Cir. 1966) (same); Berry Petroleum
Co. v. Commissioner , 104 T.C. 584, 618-22 (1995) (same). these income-producing assets depended upon his ability to retain a controlling stock interest in them. 5 Moreover, if certain scandalous allegations were proven to be true, the taxpayer’s franchisor might have grounds to cancel his dealerships. The Court rejected the taxpayer’s position, holding:

[T]he characterization, as “business” or “personal,” of the litigation costs of resisting a claim depends on

whether or not the claim arises in connection with the taxpayer’s profit-seeking activities. It does not depend

on the consequences that might result to a taxpayer’s income-producing proper ty from a failure to defeat the claim, for . . . “that would carry us too far” and would not be compatible with the basic lines of expense deductibility drawn by Congress.

372 U.S. at 48 (emphasis in original) (footnote omitted) (quoting Lykes v. United States , 343 U.S. 118, 125 (1952)).

In the case before us, the origin of the claim lies in Charles Reynold’s conduct as an IRS employee, not in his trade or business as a self-employed attorney. CharlesReynolds incurred these legal costs because an IRS investigation had been commenced to determine whether he was12 No. 00-2966

practicing law during his prescribed hours of employment
at the IRS. Under Gilmore , the business-related consequences that may flow from the IRS’s inquiry—that it may result in withdrawal of IRS approval for the part-time lawpractice or damage to Charles Reynolds’ professional reputation—do not control the question whether the fees are deductible as a business expense. Since the taxpayer bears the burden of showing that he has a right to a business deduction, A.E. Staley Mfg. Co. , 119 F.3d at 486, and no additional arguments have been advanced on this issue, the Reynolds cannot prevail. The disputed legal fees are properly classified as misce llaneous itemized deductions, which are subject to the 2% floor contained in § 67(a).

C.

The Reynolds next assert that the Tax Court erred when
it denied deductions for various automobile and travel expenses that were purporte dly made in connection with the law practice, the rental properties or farming activity. The Tax Court ruled that none of the expenses at issue were deductible because the Reynolds had failed to satisfy the substantiation requirements of 26 U.S.C. § 274(d). At the outset, we note that a determination that a taxpayerhas failed to come forward with sufficient evidence to support a deduction, including a failure to comply with the § 274(d) substantiation requirements, is generally viewed as a finding of fact that is reviewed for clear error. See

, e.g. , Yoon v. Commissioner , 135 F.3d 1007, 1012, 1016 (5th Cir. 1998) (reviewing § 274(d) ruling for clear error); Buelow v.
Commissioner , 970 F.2d 412, 415 (7th Cir. 1992) (“The tax court determination that a taxp ayer has failed to come forward with sufficient evidence to support a deduction is a factual finding subject to reversal only if found to be clearly erroneous.”). The tax code prec ludes a deduction for various enumerated items, including auto and travel expenses,No. 00-2966 13

6 The 1993 version governs the 1993 tax year and could have provided guidance to the Reynolds in their recordkeeping efforts. Based on our own brief review, however, the 2002 version of this regulation is substantially the sa me as the one in effect in 1993. unless a taxpayer substantiates “by [1] adequate records or [2] by sufficient evidence corroborating the taxpayer’s own statement” the following five elements: the amount, date, time, place and business purpose of the expense. 26 U.S.C. § 274(d); see also Dowell v. United States , 522 F.2d 708, 714 (5th Cir. 1975).

Here, the Reynolds fall far short of the necessary showing. Based on the regulations under § 274(d), the Reynolds cannot avail themselves of the “adequate records” language of § 274(d) because they did not maintain logs for each
vehicle in their household to reflect their use in the law practice, rental property mana gement or farming activities.
See 26 C.F.R. § 1.274(d)(2) (1993) (stating that substantiation by adequate records requires a taxpayer “to maintain an account book, diary, log, statement of expense, trip sheets, or similar record” that is made “at or near thetime of the expenditure or use”). Although Treasury regulations implementing § 274(d) clearly state that “adequate
records” are not the only method of establishing eligibility, alternative methods are disfavored—and for good reason. At the risk of the reader’s ey es glazing over, we will quote at length the “rules of substantiation” as they appeared in the 1993 Code of Federal Regulations, 6especially since they bear on the accuracy-related penalties that the Reynolds also appeal:

[A] taxpayer must substantiate each element of an expenditure or use . . . by [1] adequate records or [2]by sufficient evidence corroborating his own statement . . . . A contemporaneous log is not required, but a record of the elements of an expenditure or of a14 No. 00-2966

business use of listed property made at or near the time of the expenditure or use, supported by sufficient documentary evidence, has a high degree of credibilitynot present with respect to a statement prepared subsequent thereto when generally there is a lack of accurate recall. Thus, the corroborative evidence required to support a statement not made at or near the time of the expenditure or use must have a high degree of probative value to elevate such statement or evidence to the level of credibility reflected by a record made
at or near the time of th e expenditure or use supported by sufficient documentary evidence. The substantiationrequirements of section 274(d) are designed to encourage taxpayers to maintain the records, together with documentary evidence, as provided in paragraph (c)(2) of this section [entitled “Substantiation by adequate
records ”].

26 C.F.R. § 1.274-5T(c)(1) (1993) (emphasis added).

The implications of this passage are unmistakable. Complete, contemporaneous records are the preferred methodof substantiation. Taxpayers who pursue alternative methods will have to present evidence that is equally credible and probative, which will be difficult.

When a taxpayer cannot substantiate his deduction with “adequate records,” the Treasury Regulations specifically lay out the method for substantiation “by other sufficient evidence.” A taxpayer must establish each element of a § 274(d) business expense “(A) By his own statement, whether written or oral, containing specific information indetail as to such element; and (B) By other corroborative evidence sufficient to establish such element.” § 1.274- 5T(c)(3)(i) (1993).

This alternate method was utilized by the Reynolds at trial. Specifically, Charles Reynolds testified as to the business purpose of each deduction and attempted to sub-No. 00-2966 15

stantiate his account by presenting various documents that purported to reconstruct the date, amount and proper categorization of the claimed expenses. To prepare theseexhibits, Reynolds relied on voluminous receipts and cancelled checks from the 1993 and 1994 tax years; a “representative” sample of these receipts was made available for inspection and then submitted into the record.

The Tax Court ultimately found this testimony and evidence unconvincing. For example, Charles Reynolds createda two-page chart entitled “Reconstruction of Mileages Driven,” which categorizes his 1993 auto expenses by month and profit-making activity (i.e., law practice, farm or rental properties). At the bottom of the chart, 3,715 miles were attributed to the “farm” for trips on April 22, June 13, July 28 and October 11. However, the only elaboration of the business purpose of the trips was the term “crops,” which appears next to the dates. Charles Reynolds’ testimony on his farming activities also undermined his case, since the Tax Court found it “vague, confusing, and evasive.” But perhaps the most damaging detail was an admission by Reynolds that no crops were grown on his farm during the 1993 tax year.

Expenses attributed to the rental properties sufferedsimilar problems. For the 1993 tax year, the Reynolds attributed 3,646 miles and $995.30 in hotel bills to two trips to Virginia, where they own rental property. Yet, the only business explanation for this substantial deduction is theelliptical phrase “cleaning, leasing.” The corroborating evidence, in combination with Charles Reynolds’ testimony on the nature of these trips, simply does not have the “high degree of probative value” necessary to put it on a par with “adequate records” documentation. § 1.274-5T(c)(1); see also Masat v. Commissioner , 784 F.2d 573, 575 (5th Cir. 1986) (ruling that mere fact that taxpayer owns out-of-state property does not satisfy his or her burden of proving that16 No. 00-2966

7 The government emphasizes the fa ct that the Reynolds’ “representative” sample is both incomple te and arbitrary in what is does and does not support, but additional receipts would not have helped the Reynolds’ case. Rath er, the testimony and corroborating summaries, which were presented at trial, were insufficient to establish the required elements of § 274(d). See Dowell , 522 F.2d at 714 (holding that a “virtual blizzard of bills, chits and other papers” does not satisfy the “expenditure by expenditure determination” required by § 274(d)). the travel expenses were motivated by business rather personal reasons).

Of the four corroborating summaries presented at trial, the 1993 chart is the most comprehensive breakdown.Unfortunately, it does not contain the type of specific detail mandated by the Treasury Regulations; all of the traveland car maintenance expenses are listed by month rather than by specific trip. See§ 1.274-5T(c)(3)(i) (in the absence of contemporaneous written evidence, requiring “specific information in detail” as to each element of a § 274(d) deduction). The listed figures are presumably the sum of adding together the voluminous receipts, though only “representative” receipts were included in the record. 7 But as the Tax Court correctly observed, many of these receipts are for automobile repairs having no apparent relationship to any particular trip or business. Section § 274(d) requires the taxpayer to prove the amount, date, time, place and business purpose of each claimed expense. The existence of these elements simply cannot be discerned in any of the Reynolds’ reconstructed summaries.

The automobile and travel expenses for the Reynolds’ farming activities (Schedule F) and rental properties(Schedule E) clearly fail because of inadequate substantiation. See 26 C.F.R. § 1.274-5T(c)(1) (stating that non-contemporaneous evidence “must have a high degree of probative value” to establish eligibility for deduction). AlthoughNo. 00-2966 17

we believe that the auto and travel expenses attributed to the law practice (Schedule C) share similar defects, they also suffer the more fundamental problem of being nondeductible commuting expenses.

According to Reynolds, the mileage attributed to his law practice resulted from travel between his home and a title company, where he handled several real estate closings for his clients. In general, commuting expenses between home and work are personal and therefore nondeductible.
See Commissioner v. Flowers , 326 U.S. 465, 473-74 (1946);

accord H B & R, Inc. v. United States , 229 F.3d 688, 690 (8th Cir. 2000) (“Flowers established the general rule that an employee’s expenses in commuting from home to work are personal, not deductible business expenses.”); 26 C.F.R. § 1.262-1(b)(5) (“The taxpayer’s costs of commuting to his place of business or employment are personal expenses and do not qualify as deductible expenses.”). However, if a taxpayer maintains a home office as a principal place of business, and periodically travels to other sites to meet with clients or otherwise conduct their business, then these traveling costs are deductible as a business expense. That said, the taxpayer bears the burden of producing sufficient evidence to show that his “principal place of business” is, in fact, a home office. Browning v. Commissioner , 890 F.2d 1084, 1087 (9th Cir. 1989). Here, the Tax Court noted that during the 1993 and 1994 tax years, Charles Reynolds
failed to claim a home office deduction. While failure to
claim the deduction alone does not settle the issue of the traveling costs, the court also stated that Charles Reynolds“offered no evidence and made no argument that his ‘principal place of business’ was at his home.” Notwithstanding conclusory assertions containe d in the Reynolds’ brief, the record, as we read it, wholly supports this assessment. Therefore, we conclude that none of the Schedule C auto and travel expenses are deductible.18 No. 00-2966

D.

The final issue on appeal is whether the Tax Court erred in upholding an accuracy-related penalty under 26 U.S.C. § 6662 for the negligent underpayment of income taxes. The term “negligence” is defined by statute to include “any failure to make a reasonable attempt to comply with the provisions of this title.” § 6662(c). The 1993 implementing regulation states:

The term negligence includes any failure to make a reasonable attempt to comply with the provisions of theinternal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax return. “Negligence” also includes any failure by the taxpayer to keep adequate books and records or to substantiate items properly.

26 C.F.R. § 1.662-3(b)(1) (1993). At the outset, we note that a finding of negligence under § 6662 is a finding of fact that
we review for clear error. See Hayden v. Commissioner , 204 F.3d 772, 775 (7th Cir. 2000). In addition, determinations of negligence by the Commissioner “are presumed to be correct, and the taxpayer has the burden of proving that the penalties are erroneous.” Id. (citing Welch v. Helvering , 290 U.S. 111, 115 (1933); Forseth v. Commissioner , 845 F.2d 746, 749 (7th Cir. 1988)).

The Reynolds attempt to rebut the presumption of correctness by claiming that they have satisfied the “good faith” affirmative defense, whic h is also provided by statute. The relevant provision states that no penalty shall be imposed for underpayment of taxes if the taxpayer can
demonstrate “that there was a reasonable cause for suchportion and that the taxpayer acted in good faith with respect to such portion.” 26 U.S.C. § 6664(c). The Treasury Regulation that implements this statute further elaborates:

The determination of whet her a taxpayer acted withreasonable cause and in good faith is made on a caseby-case basis, taking into account all pertinent factsNo. 00-2966 19

8 During cross-examination at trial, Charles Reynolds stated that he is a licensed CPA in the state of South Carolina. In addition, Reynolds is now retired from the IRS. and circumstances. The most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax liability. Circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of the experience, knowledge and education of the

taxpayer

. 26 C.F.R. § 1. 6664-4(b)(1 ) (1993) (emphasis added). Here, the “experience, knowledge and education” proviso is fatal for Charles Reynolds, who is a licensed attorney, certified public accountant and IRS audit supervisor. 8

As evidence of good faith, the Reynolds argue that they classified their 1993 and 1994 using the CCH Master TaxGuide, which is a treatise containing annotations to relevant statutes, regulations and case law. Assuming arguendo that reliance on an established secondary source can be the basis of a § 6664(c) good-faith defense, the Reynolds fail to direct us to the specific passages of the CCH Master Tax Guide upon which they reasonably relied.

The Reynolds next assert that their 1994 tax return was prepared using a commercial software program called Turbo Tax, which they claim is a “tax preparer” and is subject to IRS penalties. See Rev. Rul. 85-187, 1985-2 C.B. 338 (stating that a firm “that furnishes a computerized tax return preparation service to tax prac titioners is an income taxpreparer when the program used goes beyond mere mechanical assistance”). This argument, however, goes nowhere. In order to demonstrate an “honest misunderstanding of fact or law” under § 1.6664-4(b)(1), the Reynolds must at least make the threshold showing that reliance on
Turbo Tax caused them to make substantive errors in their20 No. 00-2966

9 The accuracy-related penalties are calculated in relation to specific underpayments. However, with the exception of an unfocused argument on auto and travel expenses, the Reynolds’s brief did not make good-faith defense arguments directed at any specific underpayment penalty. The fact that the Reynolds failed (continued...) tax preparation. Even then, the mere fact of reliance may not be enough. See § 1.6664-4(b)(1) (1993) (“Reliance on an information return or on the advice of a professional (such as an appraiser, attorney or accountant) does not necessarily demonstrate reasonable cause and good faith.”).

Finally, the Reynolds defend their failure to allocate theirautomobile expenses to Schedules C, E and F as the “considered judgment of a tax professional who recognized that absolutely NO tax impact flowed from the allocation itself.”The gist of the Reynolds’ argument is that no tax consequences flow from the apportionment of expenses between the Schedules since they all constitute “above-the line” deductions used to calculate adjusted gross income. Yet, the
fact that all the claimed deductions were above-the-line obscures the more fundamental problem that a more precise

allocation was not made be cause the Reynolds’ business records were not adequately organized and thorough. Attrial, Charles Reynolds stated that “[a] more rigorous application of the allocation gu idelines or the application of the mileage guidelines between Schedules C, Schedules E and Schedule F would have required a substantial amount of work, okay, in terms of . . . tying the receipts back to support the mileage in each of these items.” But withoutmaking these allocations, the required elements of substantiation under § 274(d) cannot be met. Because of his substantial education and experience in tax law and administration, we must impute basic knowledge of the elements of substantiation to Charles Reynolds. We therefore uphold the § 6662(a) accuracy-related penalties in their entirety. 9No. 00-2966 21

9 (...continued)to substantiate various travel expenses has no bearing on accuracy-related penalties for an underpayment resulting from other tax errors. For example, the Reynolds failed to make any argument that a good-faith defens e applied to Charles Reynolds’ legal defense fees, which were erroneously deducted during the1993 and 1994 tax years. Without a reasoned analysis, we cannot disturb the Commissioner’s negligence determination, which is presumptively correct. See Hayden , 204 F.3d at 775.

USCA-97-C-006—7-18-02 III.

For the forgoing reasoning, the judgment of the Tax Court
is A FFIRMED

.

A true Copy:

Teste:

________________________________ Clerk of the United States Court of

Appeals for the Seventh Circuit