1 Unless otherwise indicated, subsequent section

references are to the Internal Revenue Code in effect for the

year at issue. All Rule references are to the Tax Court Rules of

Practice and Procedure.

T.C. Summary Opinion 2002-16

UNITED STATES TAX COURT

WING YIU KWAN, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9761-00S. Filed February 25, 2002.

Wing Yiu Kwan, pro se.

Charlotte A. Mitchell, for respondent.

COUVILLION, Special Trial Judge: This case was heard

pursuant to section 7463 of the Internal Revenue Code in effect

at the time the petition was filed.1 The decision to be entered

is not reviewable by any other court, and this opinion should not

be cited as authority.
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2 Petitioner conceded that he is not entitled to claim

three dependency exemptions totaling $7,950 and that he failed to

report $43 in trade or business gross receipts. Respondent

conceded that petitioner is entitled to Schedule C, Profit or

Loss From Business, deductions for rent or lease expenses of

$1,400 and utilities expenses of $180. Respondent also made

partial concessions in connection with Schedule C car and truck

expenses and depreciation/section 179 expense deductions. These

concessions by respondent are detailed in the consideration of

the relevant issues.

Respondent determined a deficiency of $5,860 in petitioner's

Federal income tax for 1997 and an accuracy-related penalty under

section 6662(a) of $933.40.

Following concessions by the parties,2 the issues remaining

for decision are: (1) Whether petitioner is entitled to a

deduction for car and truck expenses in excess of that allowed by

respondent in connection with a trade or business activity of

petitioner known as Partners Travel; (2) whether petitioner is

entitled to a depreciation/section 179 expense deduction in

connection with Partners Travel in excess of that allowed by

respondent; (3) whether petitioner is entitled to a $1,950

deduction for travel, meals, and entertainment expenses in

connection with Partners Travel; and (4) whether petitioner is

liable for the accuracy-related penalty under section 6662(a) for

negligence or disregard of rules or regulations.

Some of the facts were stipulated, and those facts, with the

annexed exhibits, are so found and are incorporated herein by
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reference. At the time the petition was filed, petitioner's

legal residence was San Francisco, California.

Petitioner has a degree in electrical engineering from the

University of California at Berkeley. During the year at issue,

petitioner was employed as an electrical engineer by the

transportation department of the State of California known as

Caltrans. At that time, petitioner designed electrical lighting

systems for California freeways. At the time of trial,

petitioner was employed by Caltrans as an inspector of electrical

systems.

Petitioner also conducted a trade or business activity

during the year at issue known as Partners Travel (Partners). 

Under the Partners name, petitioner conducted three different

types of business activities: (1) A travel agency; (2) a

computer-assisted long-distance telecommunications service to

provide customers with low rate phone calls from Mainland China

to the United States; and (3) a silk import activity.

On his Federal income tax return for 1997, petitioner

reported wage income of $69,979 from the State of California and

claimed dependency exemption deductions for two brothers, one

sister, and one aunt, totaling four dependency exemptions. 

Petitioner also included with his return a Schedule C, Profit or

Loss From Business, in connection with Partners. On this
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Schedule C, petitioner reported, in pertinent part, the following

items of income and expense:

Income:

Gross receipts $ 150

Gross income 150

Expenses:

Car and truck $ 2,802

Depreciation/sec. 179 19,632

Rent or lease 2,100

Travel 1,800

Meals and entertainment1 300

Utilities 1,400

1 Petitioner reported meals and entertainment expenses of

 $300 but, pursuant to sec. 274(n)(1), claimed a

 deduction for only $150 of such expenses. Under

 sec. 274(n)(1), a deduction is allowable for only 50

 percent of meals and entertainment expenses incurred.

After deducting various other Schedule C expenses not at issue,

petitioner reported a net loss from Partners of $29,409.

In the notice of deficiency, respondent disallowed three of

the four dependency exemption deductions and determined that

petitioner failed to report gross receipts of $43 in connection

with Partners. Respondent also disallowed the following amounts

of the Schedule C expenses:

Car and truck $ 2,500

Depreciation/sec. 179 17,479

Rent or lease 1,400

Travel 1,800

Meals and entertainment 300

Utilities 180
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Respondent also determined that petitioner was liable for the

accuracy-related penalty under section 6662(a) for negligence or

disregard of rules or regulations in the amount of $933.40.

Petitioner conceded the adjustments to his dependency

exemption deductions and the Schedule C gross receipts. 

Respondent conceded the adjustments to petitioner's Schedule C

rent or lease expenses and utilities expenses. As detailed

below, respondent made partial concessions with respect to the

Schedule C car and truck expenses and depreciation/section 179

expense deduction.

The first issue is whether petitioner is entitled to a

deduction for car and truck expenses in excess of the amount

allowed by respondent. Petitioner claimed Schedule C car and

truck expenses of $2,802 for mileage during 1997; i.e.,

approximately 8,900 miles at 31.5 cents per mile. In the notice

of deficiency, respondent disallowed $2,500 of the claimed

amount; however, prior to trial, respondent conceded that

petitioner was entitled to deduct an additional $870 for car and

truck expenses. Thus, the remaining amount of car and truck

expenses in dispute is $1,630.

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

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business. To qualify for the deduction,
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3 The Internal Revenue Service Restructuring & Reform Act

of 1998, Pub. L. 105-206, sec. 3001, 112 Stat. 726, added

sec. 7491, which, under certain circumstances, places the burden

of production on the Secretary with respect to a taxpayer’s

liability for taxes, penalties, and additions to tax in court

proceedings arising in connection with examinations commencing

after July 22, 1998. The record is unclear as to whether the

examination of petitioner's return commenced before or after July

22, 1998. Nevertheless, the burden of proof with respect to the

items of deficiency did not shift to respondent because

petitioner did not provide substantiation and credible evidence

in connection therewith. Higbee v. Commissioner, 116 T.C. 438

(2001). Moreover, respondent has satisfied the burden of

production with respect to the accuracy-related penalty under

sec. 6662(a).

an expense must be both ordinary and necessary within the meaning

of section 162(a). Deputy v. duPont, 308 U.S. 488, 495 (1940).

Deductions are a matter of legislative grace, and the

taxpayer bears the burden of proving entitlement to any

deductions claimed. New Colonial Ice Co. v. Helvering, 292 U.S.

435, 440 (1934).3 Moreover, a taxpayer is required to maintain

records sufficient to establish the amount of his or her income

and deductions. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs. 

Under certain circumstances where a taxpayer establishes

entitlement to a deduction but does not establish the amount of

the deduction, the Court is allowed to estimate the amount

allowable. Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930). 

In the case of travel expenses, however, specifically including

meals and lodging while away from home, as well as in the case of

entertainment expenses and expenses with respect to listed
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property, section 274(d) overrides the so-called Cohan doctrine. 

Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd. per

curiam 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary

Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1995). Section

274(d) imposes stringent substantiation requirements for

deductions related to travel, entertainment, gifts, and "listed

property (as defined in section 280F(d)(4))". Passenger

automobiles are listed property under section 280F(d)(4)(i). 

Section 274(d) denies these deductions unless:

the taxpayer substantiates by adequate records or by

sufficient evidence corroborating the taxpayer's own

statement (A) the amount of such expense or other item,

(B) the time and place of the travel, entertainment,

amusement, recreation, or use of the facility or

property, or the date and description of the gift, (C)

the business purpose of the expense or other item, and

(D) the business relationship to the taxpayer of

persons entertained, using the facility or property, or

receiving the gift. * * *

Thus, under section 274(d), deductions for automobile expenses,

travel expenses, and meals and entertainment expenses may not be

estimated. Instead the taxpayer must provide adequate records or

corroborate testimony with other evidence.

The limited amount of evidence submitted by petitioner in

support of the remaining disputed car and truck expenses is

insufficient to satisfy the strict substantiation requirements of

section 274(d). Accordingly, on this record, the Court holds

that petitioner is not entitled to deduct car and truck expenses
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4 See following discussion of sec. 179(b)(1).

in connection with Partners in excess of the amount allowed by

respondent.

The second issue is whether petitioner is entitled to a

Schedule C depreciation/section 179 expense deduction in excess

of the amount allowed by respondent. Petitioner claimed a

depreciation/section 179 expense deduction of $19,632 on his

return. Although not entirely clear from the record, it appears

that petitioner claimed the subject deduction in connection with

10 or 11 computers purchased for use in the travel agency

activity of Partners, as well as for computer parts and related

equipment.

It appears that the cost of the computers totaled $23,085,

which exceeded the $18,000 limitation for a section 179 expense

deduction for the year at issue.4 Thus, petitioner claimed a

section 179 expense deduction of $18,000 and claimed depreciation

on the excess cost using the 5-year modified accelerated cost

recovery system (MACRS), which resulted in a 1997 depreciation

deduction of $1,348 with respect to the excess cost. Petitioner

also used the 7-year MACRS to depreciate computer repair tools,

resulting in a 1997 depreciation deduction of $284. These

amounts totaled $19,632, the depreciation/section 179 expense

deduction claimed on petitioner's 1997 return. 
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In the notice of deficiency, respondent disallowed $17,479

of the claimed deduction; however, prior to trial, respondent

conceded that petitioner was entitled to an additional $284

depreciation deduction in connection with the computer repair

tools. This reduced the depreciation/section 179 expense

deduction in dispute to $17,195.

Section 167(a) allows taxpayers a depreciation deduction for

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

business or held for the production of income. Property becomes

depreciable at the time it is placed in service. Piggly Wiggly

S., Inc., v. Commissioner, 84 T.C. 739, 745 (1985), affd. on

another issue 803 F.2d 1572 (11th Cir. 1986); Clemente v.

Commissioner, T.C. Memo. 1985-367; sec. 1.167(a)-10(b), Income

Tax Regs. Property is considered placed in service when it is

ready and available for a specifically assigned function. Piggly

Wiggly S., Inc., v. Commissioner, supra; Williams v.

Commissioner, T.C. Memo. 1987-308; sec. 1.167(a)-11(e)(1)(i),

Income Tax Regs.

Section 179 allows a taxpayer to elect to treat the cost of

section 179 property as a current expense in the year such

property is placed in service, within certain dollar limitations. 

Sec. 179(a). An election under section 179 must be made on the

taxpayer's original return for the taxable year or an amended

return filed timely. Sec. 179(c)(1)(B); sec. 1.179-5(a), Income
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Tax Regs. Once made, this election may not be revoked "except

with the consent of the Secretary." Sec. 179(c)(2); accord sec.

1.179-5(b), Income Tax Regs. Moreover, the taxpayer shall

maintain records that permit specific identification of each

piece of section 179 property and reflect how and from whom such

property was acquired and when such property was placed in

service. Sec. 1.179-5(a), Income Tax Regs.

The expense deduction under section 179(a) for any tax year

"shall not exceed the aggregate amount of taxable income of the

taxpayer for such taxable year which is derived from the active

conduct by the taxpayer of any trade or business during such

taxable year"; however, any amount so disallowed may be carried

forward to later taxable years. Sec. 179(b)(3)(A) and (B). 

Taxable income derived from a trade or business is computed

without taking into account any deduction allowable under section

179(a). Sec. 179(b)(3)(C). Additionally, for 1997, the

allowable deduction under section 179(a) was limited to $18,000. 

Sec. 179(b)(1).

Petitioner presented no documentary evidence to prove the

purchase, identity, or cost of the computers and other related

equipment for which he claimed a depreciation/section 179 expense

deduction for 1997. Moreover, petitioner had no taxable income

from a trade or business for the year at issue because his

allowable trade or business expenses (not including the section
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179 expense deduction) far exceeded his trade or business income. 

Therefore, petitioner is not entitled to any section 179 expense

deduction for 1997. Sec. 179(b)(3)(A). Additionally, petitioner

failed to produce any evidence to substantiate his entitlement to

a depreciation deduction greater than that allowed by respondent

in the notice of deficiency and conceded by respondent prior to

trial. Accordingly, the Court holds that petitioner is not

entitled to a depreciation/section 179 expense deduction in

connection with Partners in excess of the amount allowed by

respondent.

The third issue is whether petitioner is entitled to a

$1,950 deduction for travel, meals, and entertainment expenses in

connection with Partners. On Schedule C, petitioner claimed

travel expenses of $1,800 and meals and entertainment expenses of

$300. Because section 274(n)(1) limits a deduction for meals and

entertainment to 50 percent of expenses incurred, petitioner

claimed deductions of $1,800 for travel and $150 for meals and

entertainment, totaling $1,950. Petitioner contends that these

expenses were incurred in connection with two trips to China

during 1997. Respondent disallowed this deduction in full.

As stated previously, expenses for travel, meals, and

entertainment are subject to the strict substantiation

requirements of section 274(d). Moreover, section 1.162-2(b)(1),

Income Tax Regs., provides that, if travel expenses are incurred
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for both business and other purposes, such expenses are

deductible only if the travel is primarily related to the

taxpayer's trade or business. If a trip is primarily personal in

nature, expenses incurred are not deductible even if the taxpayer

engaged in some business activities at the destination. Id.

Whether travel is related primarily to the taxpayer's trade

or business or is primarily personal is a question of fact. Sec.

1.162-2(b)(2), Income Tax Regs.; see also Holswade v.

Commissioner, 82 T.C. 686, 698, 701 (1984). The amount of time

during the period of the trip that is devoted to personal

activity, compared to the amount of time devoted to activities

directly relating to the taxpayer's trade or business, is an

important factor in determining whether the trip is primarily

personal. Sec. 1.162-2(b)(2), Income Tax Regs. The taxpayer

must prove that the trip was primarily related to the trade or

business. Rule 142(a).

Petitioner submitted no documentary evidence to support the

claimed deduction for travel, meals, and entertainment expenses. 

Petitioner admitted that he both conducted business and visited

family on his trips to China. The evidence submitted by

petitioner in support of the travel, meals, and entertainment

expenses is insufficient to satisfy the strict substantiation

requirements of section 274(d). Furthermore, the Court is not

satisfied that petitioner's trips to China were primarily related
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to his trade or business rather than primarily personal in

nature. Accordingly, on this record, the Court holds that

petitioner is not entitled to the Schedule C deduction for

travel, meals, and entertainment expenses.

The final issue is whether petitioner is liable for the

accuracy-related penalty under section 6662(a) for negligence or

disregard of rules or regulations. Section 6662(a) provides

that, if it is applicable to any portion of an underpayment in

taxes, there shall be added to the tax an amount equal to 20

percent of the portion of the underpayment to which section 6662

applies. Section 6662(b)(1) provides that section 6662 shall

apply to any underpayment attributable to negligence or disregard

of rules or regulations.

Section 6662(c) provides that the term "negligence" includes

any failure to make a reasonable attempt to comply with the

provisions of the Internal Revenue laws, and the term "disregard"

includes any careless, reckless, or intentional disregard of

rules or regulations. Negligence is the lack of due care or

failure to do what a reasonable and ordinarily prudent person

would do under the circumstances and includes any failure to keep

adequate books and records or to substantiate items properly. 

Neely v. Commissioner, 85 T.C. 934, 947 (1985); sec. 1.6662-

3(b)(1), Income Tax Regs.

However, under section 6664(c), no penalty shall be imposed

under section 6662(a) with respect to any portion of an
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underpayment if it is shown that there was a reasonable cause for

such portion and that the taxpayer acted in good faith with

respect to such portion. The determination of whether a taxpayer

acted with reasonable cause and in good faith depends upon the

facts and circumstances of each particular case. Sec. 1.6664-

4(b)(1), Income Tax Regs. Relevant factors include the

taxpayer's efforts to assess his or her proper tax liability, the

knowledge and experience of the taxpayer, and reliance on the

advice of a professional, such as an accountant. Drummond v.

Commissioner, T.C. Memo. 1997-71. The most important factor is

the extent of the taxpayer's effort to determine the taxpayer's

proper tax liability. Sec. 1.6664-4(b)(1), Income Tax Regs. An

honest misunderstanding of fact or law that is reasonable in

light of the experience, knowledge, and education of the taxpayer

may indicate reasonable cause and good faith. Remy v.

Commissioner, T.C. Memo. 1997-72.

In the notice of deficiency, respondent applied the section

6662(a) penalty to all adjustments with the exception of the

adjustments to petitioner's dependency exemptions and Schedule C

gross receipts. The underpayment upon which the penalty was

computed resulted from respondent's partial disallowance of

petitioner's claimed Schedule C car and truck expenses,

depreciation/section 179 expense deduction, rent or lease

expenses, and utilities expenses, along with respondent's total
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disallowance of the claimed travel, meals, and entertainment

expenses.

As discussed above, respondent conceded in full the

adjustments to petitioner's claimed rent or lease expenses and

utilities expenses. Respondent also conceded $870 of the

adjustment to petitioner's claimed car and truck expenses and

$284 of the adjustment to petitioner's claimed

depreciation/section 179 expense deduction. The remaining

adjustments in the notice of deficiency, to petitioner's claimed

car and truck expenses, depreciation/section 179 expense

deduction, and travel, meals, and entertainment expenses have

been sustained by the Court. Petitioner's evidence fell short of

what was required to allow the bulk of the claimed car and truck

expenses and depreciation/section 179 expense deduction, or any

of the claimed travel, meals, and entertainment expenses. 

Furthermore, petitioner presented no evidence to show that he

used due care in claiming the disputed items on his 1997 return

that were subsequently adjusted in the notice of deficiency and

sustained by this Court in favor of respondent, nor did

petitioner present evidence to show that he had reasonable cause

to claim such items. Petitioner failed to maintain adequate

books and records to support the majority of the costs and

deductions at issue herein. Therefore, the Court finds that

petitioner negligently or intentionally disregarded rules or

regulations with regard to the adjustments in the notice of
- 16 -

deficiency that were sustained by this Court. Accordingly, the

accuracy-related penalty under section 6662(a) is sustained.

Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered

under Rule 155.