TAX COURT OPINION

Case: Rey T. & Judith C. Baddo
Docket Number: 20936-06S
Judge: Colvin
Opinion Type: bench
Filed: 04/18/2008
Pages: 9

UNITED STATES TAX COURT Washington, D .C . 2021 7 RECORDED SERVICE REY T . AND JUDITH C . BADDO, Petitioners, v . COMMISSIONER OF INTERNAL REVENUE, Respondent . O R D E R Docket No . 20936-06S STAT . S .T . JUDGE FILE S Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it i s ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial of the above case before Special Trial Judge Lewis R . Carluzzo at Fresno, California, on March 26, 2008, containing his oral findings of fact and opinion rendered at the conclusion of trial . In accordance with the oral findings of fact and opinion, decision will be entered for respondent . (Signed) Lewis R . Carluzzo Special Trial Judg e (Signed) Lewis R. Carluzzo Special Trial Judg e Dated : Washington, D .C . April 18, 2008 SERVED APR 2 2 2008 3 1 Bench Opinion by Special Trial Judge Lewis R . Carluzzo 2 March 26, 200 8 3 Rey T . and Judith C . Baddo Docket No . 20936-06S 4 THE COURT : The Court has decided to render ora l 5 findings of fact and opinion in this case and the following 6 represents the Court's oral findings of fact and opinion . 7 The oral findings of fact and opinion shall not be relied 8 upon as precedent in any other case . 9 This proceeding for the redetermination of a 10 deficiency is a Small Tax Case conducted pursuant to the 11 provisions of section 7463 of the Internal Revenue Code of 12 1986, as amended, and Rules 170 through 175 of the Tax Court 13 Rules of Practice and Procedure . 14 This bench opinion is made pursuant to the 15 authority granted by section 7459(b) of the Internal Revenue 16 Code of 1986, as amended, and Rule 152 of the Tax Cour t 17 Rules of Practice and Procedure . 18 Hereinafter in this bench opinion, unless otherwise 19 indicated, section references are to the Internal Revenu e 20 Code of 1986, as amended, in effect for 2003 . Rule 21 references are to the Tax Court Rules of Practice and 22 Procedure . 23 Rey T . Baddo and Judith C . Baddo appeared pro sese . 24 Daniel W . Layton appeared on behalf of Respondent . 25 In a notice of deficiency dated July 25, 2006, Heritage Reporting Corporatio n (202) 628-4888 4 1 Respondent determined a $1,822 deficiency in Petitioners ' 2 2003 Federal income tax . The issues to be decided are : (1) 3 Whether Petitioners are entitled to certain deduction s 4 claimed on a Schedule C, Profit or Loss From Business, in 5 excess of amounts allowed by Respondent ; and (2) whether 6 Petitioners are entitled to an unreimbursed employe e 7 business expense deduction claimed on a Schedule A, Itemized 8 Deductions, in excess of the amount allowed by Respondent . 9 Some of the facts have been stipulated and are so 10 found . At the time the petition was filed, Petitioner s 11 resided in California . 12 Both Petitioners were employed during the year in 13 issue ; Mr . Baddo as a truck driver for Wal-Mart, and Mrs . 14 Baddo as a real estate salesperson/agent . As a truck driver 15 for Wal-Mart, Mr . Baddo was required to travel away fro m 16 home and he did so on 240 days during 2003 . 17 In May 2002, Petitioners agreed to lease a Mercedes 18 Benz automobile . Pursuant to the lease, they were obligated 19 to pay $626 per month, which they did throughout 2003 . Mrs . 20 Baddo used this car in connection with her employment as a 21 real estate agent . According to a calendar that sh e 22 maintained, the car was driven about 12,700 miles during 23 2003 . The calendar shows the odometer reading at th e 24 beginning and end of each month, but not the number of miles 25 driven on any particular day . To the extent that entries on Heritage Reporting Corporatio n (202) 628-4888 5 1 the calendar are legible, most of the days show an entry for 2 "Corchran" or "Porterville," but nothing on the calenda r 3 shows the connection of these entries to .Mrs . Baddo's 4 employment as a real estate agent . 5 Petitioners maintained a joint checking account 6 during 2003 . Both of their names are shown on the check s 7 used to draw funds from the account . Following the name of 8 Mrs . Baddo, the words "Real Estate Agent" are printed on the 9 checks . 10 Petitioners' joint 2003 Federal income tax return 11 was timely filed . On a Schedule A included with tha t 12 return, Petitioners claimed an $8,640 deduction fo r 13 unreimbursed employee business expenses . This deduction 14 relates to Mr . Baddo ' s employment as a truck driver and 15 apparently relates to meals expenses he claims to have 16 incurred traveling away from home in connection with hi s 17 employment . The manner in which the deduction was computed 18 is not entirely clear . Mr . Baddo maintained a log showing 19 the dates and places that he traveled, but he did not retain 20 any receipts or other documents showing the amounts actually 21 spent for meals while traveling . 22 As best as can be determined from the record, he 23 estimated that he spent about $35 per day and multiplie d 24 that amount by the 240 days that he was away from home . For 25 the sake of completeness, we note that $35 per da y Heritage Reporting Corporation (202) 628-4888 6 1 multiplied by 240 days equals $8,400, not $8,640 as shown on 2 Petitioners' return, but the lack of precision on the point 3 is easily ignored under the circumstances . 4 Petitioners' 2003 return also includes a Schedule C 5 showing the income and deductions related to Mrs . Baddo' s 6 employment as a real estate agent . Against the $10,82 9 7 income reported on that schedule, the following deductions 8 are claimed : (1) Commissions and fees - $1,520 ; (2 ) 9 depreciation - $10,880 ; (3) insurance - $1,311 ; (4) interest 10 - $2,910 ; (5) taxes and license - $185 ; (6) travel - $4,051 ; 11 and (7) utilities - $2,087 . Taking the above items int o 12 account, the Schedule C shows a net loss of $12,315 . Th e 13 deduction claimed for depreciation relates to the use of the 14 Mercedes Benz and apparently includes the monthly renta l 15 payments as well as the costs of repairs or maintenance . 16 The deduction for travel consists of Mrs . Baddo's estimate 17 of how much she spent on gasoline using an average of miles 18 per gallon times an average cost of gasoline . The insurance 19 deduction apparently also relates to the Mercedes Benz, as 20 does the interest deduction . Each of these deductions was 21 computed or estimated as though the Mercedes Benz was used 22 exclusively for business purposes . 23 In the notice of deficiency, Respondent : (1 ) 24 Allowed all but $2,631 of the unreimbursed employee business 25 expense deduction ; (2) disallowed $146 of the $185 deduction Heritage Reporting Corporatio n (202) 628-4888 7 1 claimed for taxes and licenses ; (3) allowed all but $2,351 2 of the deduction claimed for depreciation (recognizing that 3 the deduction had been mischaracterized) ; (4) disallowe d 4 $840 of the $1,520 deduction for commissions and fees ; (5) 5 allowed all but $488 of the $2,087 deduction for utilities ; 6 (6) completely disallowed the deductions for insurance , 7 interest, and travel ; and (7) allowed a deduction for other 8 expenses not claimed on Petitioners' return . 9 We begin by reciting some often repeated and well- 10 known principles of Federal income taxation applicable to 11 the deductions here in dispute . 12 Deductions are a matter of legislative grace, and 13 the taxpayer bears the burden of proof to establis h 14 entitlement to any deduction claimed . (Nothing in the 15 record suggests that the provisions of section 7491(a ) 16 apply, and we proceed as though they do not .) Rule 142(a) ; 17 18 INDOPCO, Inc . v . Commissioner , 503 U .S . 79, 84 (1992) ; New Colonial Ice Co . v . Helveriig , 292 U .S . 435, 440 (1934) . 19 This burden requires the taxpayer to substantiate deductions 20 claimed by keeping and producing adequate records tha t 21 enable the Commissioner to determine the taxpayer's correct 22 tax liability . Sec . 6001 ; Hradesky v . Commissioner , 65 T .C . 23 87, 90 (1975), affd . per curiam 540 F .2d 821 (5th Cir . 24 1976) ; Meneguzzo v . Commissioner , 43 T .C . 824, 831-832 25 (1965) . Heritage Reporting Corporation (202) 628-4888 8 1 Although without expressly making reference to it, 2 in support of the deductions here in dispute , Petitioners 3 rely upon section 162(a) . That section generally allows a 4 taxpayer to deduct ordinary and necessary expenses paid or 5 incurred in carrying on a trade or business , and applies to 6 taxpayers who are self - employed as well as taxpayers who are 7 employees . Primuth v . Commissioner , 54 T .C . 374, 37 7 8 (1970 ) ; Christensen v . Commissioner , 17 T .C . 1456 (1952) . 9 In this case , specific substantiax rues come int o 10 play as most deductions here in dispute, although of a type 11 generally allowable under section 162(a), are furthe r 12 described in and subject to section 274 . In general, among 13 other things, section 274 provides that no deduction shall 14 be allowed for any travel expense (including expenses for 15 meals) or expenses related to the use of an automobil e 16 unless the taxpayer substantiates by adequate records the 17 following items : (1) The amount of such expense ; (2) the 18 time and place of the travel or entertainment ; (3) th e 19 business purpose of the expense ; and (4) the busines s 20 relationship to the taxpayer of persons entertained . Sec . 21 274(a), (d) ; sec . 280(F) ; sec . 1 .274-5T(b)(2) and (3) , 22 Temporary Income Tax Regs ., 50 Fed . Reg . 46014-16015 (Nov . 23 6, 1985) . 24 Under the applicable regulations, to meet th e 25 "adequate records" requirement of section 274(d), a taxpayer Heritage Reporting Corporatio n (202) 628-4888 9 1 "shall maintain an account book, diary, statement of expense 2 or similar record * * * and documentary evidence * * * 3 which, in combination, are sufficient to establish each 4 element of an expenditure ." Sec . 1 .275-5T(c)(2)(I) , 5 Temporary Income Tax Regs ., 50 Fed . Reg . 46017 (Nov . 6, 6 1985) . 7 Petitioners kept no such records with respect to 8 the deductions claimed for unreimbursed employee busines s 9 expenses on the Schedule A or the various expense deductions 10 claimed on the Schedule C that relate to the use of the 11 Mercedes Benz . Mr . Baddo's travel log apparently does not 12 list expenses, and Mrs . Baddo's calendar hardly contains the 13 detail necessary to satisfy the recordkeeping requirements 14 described above . Nevertheless, in the absence of prope r 15 substantiating documents, Respondent has allowed deductions 16 for these expenses on the basis of estimates that can only 17 be considered more than fair . Petitioners have no t 18 established that they are entitled to deductions fo r 19 unreimbursed employee business expenses , depreciation (auto 20 expenses), insurance, interest, or travel in excess of the 21 amounts allowed by Respondent . 22 Turning our attention to the deductions for taxes 23 and licenses, utilities, and commissions and fees claimed on 24 the Schedule C, we note that Petitioners have already been 25 allowed deductions for these items in amounts substantiated . Heritage Reporting Corporation (202) 628-4888 1 0 1 They have not shown that they are entitled to a deductio n 2 for any of these expenses in an amount greater than already 3 allowed by Respondent . Respondent's disallowances related 4 to these deductions are sustained . 5 To reflect the foregoing , decision will be entered 6 for Respondent . 7 This concludes the Court ' s oral findings of fact 8 and opinion in this case . 9 (Whereupon , at 9 :50 a .m ., the bench opinion in the 10 above -entitled matter was concluded . ) 11 // 12 // 1 3 14 15 16 17 18 19 20 21 22 23 24 25 // Heritage Reporting Corporation (202) 628-4888